Randall v. Nelson & Kennard et al

Filing 32

ORDER that Pla Marvin Randall's Motion 15 to Dismiss Dft's Counterclaim, is GRANTED. Dft LVNV Funding's Counterclaim is hereby DISMISSED but this dismissal is without prejudice. Signed by Magistrate Judge Lawrence O Anderson on 8/25/09.(KMG)

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

Marvin Randall,

) ) Plaintiff, ) ) vs. ) ) ) Nelson & Kennard; LVNV Funding,) L.L.C., ) ) Defendants. ) _________________________________)

No. CV-09-387-PHX-LOA ORDER

This action arises on Plaintiff Marvin Randall's ("Plaintiff") Motion to Dismiss Defendant's Counterclaim pursuant to Fed.R.Civ.P. 12(b)(1). (docket # 15) After review of the parties' briefings and the relevant authorities, the Court will exercise its discretion to decline supplemental jurisdiction and will dismiss Defendant's counterclaim without prejudice. INTRODUCTION Plaintiff moves to dismiss Defendant LVNV Funding, L.L.C.'s ("LVNV

Funding") counterclaim on the grounds that this District Court lacks subject-matter
jurisdiction to adjudicate the counterclaim. (docket # 15) In particular, Plaintiff contends the counterclaim is permissive, not compulsory; there is no independent basis for federal jurisdiction for the Court to adjudicate the counterclaim; and, if subject-matter jurisdiction does exist, the Court should exercise its discretion to decline supplemental jurisdiction under

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28 U.S.C. § 1367. Plaintiff requests Defendant's counterclaim be dismissed with prejudice. BACKGROUND Based on the limited record presented to date, the Court discerns the facts as follows. On February 25, 2009, Plaintiff commenced this lawsuit, alleging a violation of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (the "Act" or "FDCPA") by Defendants' attempts "to unlawfully and abusively collect a debt allegedly owed by Plaintiff, and . . . cause[ing] Plaintiff damages." (docket # 1) Plaintiff contends Defendant LVNV

Funding, a Nevada limited liability collection agency, and its lawyers, Defendant Nelson & Kennard, a Sacramento, California law firm, are "debt collectors" within the meaning of
the Act.1 (docket ## 8, 10) Plaintiff alleges Defendants violated the Act by suing Plaintiff, an Arizona resident and "consumer"2 under the Act, for a credit card debt in the Riverside County Superior Court, a supposedly improper venue. (docket # 15 at 3) Plaintiff argues that Riverside County is a "judicial district . . . outside of where Plaintiff allegedly signed the contract sued upon and outside the judicial district . . . where Plaintiff resided at the commencement of the [debt collection] action." (Id.) Alleging violations of 15 U.S.C. §§ 1692i, 1692e and 1692e(10), Plaintiff claims "[D]efendants intended, through this conduct, to file their action in an inconvenient forum and to obtain a default judgment through deceptive practice." (Id.)

LVNV Funding claims that on or about May 9, 2002, Plaintiff was issued a
"Sears Gold Mastercard" credit card and a corresponding extension of credit by Sears National Bank, a non-party. (docket # 10 at 2) The Counterclaim alleges that after making

The FDCPA defines a "debt collector" as "any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another." 15 U.S.C. § 1692a(6). Debt collectors may include attorneys litigating cases on behalf of their clients. Heintz v. Jenkins, 514 U.S. 291, 297 (1995). The term "consumer" means any natural person obligated or allegedly obligated to pay any debt. 15 U.S.C. § 1692a(3). -22

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various purchases and payments on his credit card account, Plaintiff defaulted on his payment obligations with the last payment made on or about October 7, 2005. (Id. at 3) In 2006, Sears charged-off Plaintiff's account and assigned it to LVNV Funding. (Id.) Denying any wrongdoing, LVNV Funding argues the "true facts" reflect that on October 10, 2008, it "filed suit in the county of [Plaintiff's] last known residence but was unable to effect service of process . . . . [Because] it was unable to effect service of process, LVNV Funding LLC dismissed its state court action[]" on March 9, 2009. (docket # 23 at 2) In footnotes 2 and 3 of its Response, id., LVNV Funding requests the Court take judicial notice of the California Complaint, the process server's "Non-Service/Return" showing multiple attempts to serve Plaintiff, and LVNV Funding's voluntary dismissal of the lawsuit.3 (docket # 24, Exhibits ("Exh.") 1, 2, and 3). The amount of money sought in the California debt-collection suit was $4,124.00 plus interest at the rate of 7%, reasonable attorney's fees, and court costs. (Id., Exh. 1 at 8) RULE 12(B)(1) MOTION TO DISMISS STANDARD Federal Rule of Civil Procedure 12(b)(1) authorizes a motion to dismiss for lack of subject-matter jurisdiction. Tosco Corp. v. Communities For a Better Environment, 236 F.3d 495, 499 (9th Cir. 2001); Fed. R. Civ. P. 12(b)(1). Federal courts are courts of limited jurisdiction, and can only hear those cases that the Constitution and Congress have authorized them to adjudicate: namely, cases involving diversity of citizenship, a federal question, or cases to which the United States is a party. Arbaugh v. Y & H Corp., 546 U.S. 500, 513 (2006); Kokkonen v. Guardian Life Ins. Co., 511 U .S. 375, 377 (1994). "A federal court is presumed to lack jurisdiction in a particular case unless the contrary affirmatively appears." Stock West, Inc. v. Confederated Tribes, 873 F.2d 1221, 1225 (9th Cir. 1989).

A district court may properly take judicial notice pursuant to Fed. R. Evid. 201 of "matters of public record" without converting a motion to dismiss into a motion for summary judgment. Lee v. City of L.A., 250 F.3d 668, 689 (9th Cir. 2001) (citing Mack v. South Bay Beer Distrib., 789 F.2d 1279, 1282 (9th Cir. 1986) and MGIC Indemnity Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986)). -3-

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Because federal courts are courts of limited jurisdiction, the party invoking the jurisdiction of the court has the burden of proof. Kokkonen, 511 U.S. at 377; Thornhill Pub. Co., Inc. v. General Tel. & Electronics Corp., 594 F.2d 730, 733 (9th Cir. 1979). Federal Rule of Civil Procedure 12(b)(1)'s jurisdictional attacks may be facial or factual. "In a facial attack, the challenger asserts that the allegations contained in a complaint are insufficient on their face to invoke federal jurisdiction. By contrast, in a factual attack, the challenger disputes the truth of the allegations that, by themselves, would otherwise invoke federal jurisdiction." Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004); Larson v. Johnson, 2007 WL 4143082 (D.Ariz. 2007) (counterclaim dismissed without prejudice for failure to allege a connection to the subject matter of Plaintiff's claim for breach of contract against defendant). With these standards in mind, the Court turns to Plaintiff's jurisdictional challenges to Defendant's counterclaim. FAIR DEBT COLLECTION PRACTICES ACT "The FDCPA, 15 U.S.C. § 1692 et seq. , was enacted `to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.'" Rowe v. Educational Credit Management Corp., 559 F.3d 1028, 1031 (9th Cir. 2009) (citing 15 U.S.C. § 1692(e)). "The FDCPA regulates the collection of `debts' by `debt collectors' by regulating the number and type of contacts a debt collector may make with the debtor." Id. The FDCPA "broadly prohibits a debt collector from using any false, deceptive, or misleading representation or means in connection with the collection of any debt." Dunlap v. Credit Protection Ass'n, 419 F.3d 1011, 1012 (9th Cir. 2005) (citing 15 U.S.C. § 1692e) (internal punctuation removed). COUNTERCLAIM: COMPULSORY OR PERMISSIVE Federal Rule of Civil Procedure 13 defines two types of counterclaims: compulsory and permissive. Rule 13(a) states that "[a] pleading must state as a counterclaim

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any claim . . . the pleader has against any opposing party if the claim: (A) arises out of the transaction or occurrence that is the subject matter of the opposing party's claim; and (B) does not require adding another party over whom the court cannot acquire jurisdiction." By contrast, Rule 13(b) defines a permissive counterclaim as a claim against an opposing party "that is not compulsory," i.e., a counterclaim that does not arise out of the transaction or occurrence that is the subject matter of the opposing party's claim. Rule 13(a), (b), Fed. R. Civ. P. To determine if claims arise out of the same transaction or occurrence, courts in the Ninth Circuit consider whether "the essential facts of the various claims are so logically connected that considerations of judicial economy and fairness dictate that all of the issues be resolved in one lawsuit." Pochiro v. Prudential Ins. Co. of Amer., 827 F.2d 1246, 1249 (9th Cir.1987) (quoting Harris v. Steinem, 571 F.2d 119, 123 (2d Cir. 1978) (applying Fed.R.Civ.P. 13). Among the factors district courts consider in determining whether the test is met is whether "the facts necessary to prove the two claims substantially overlap, [and whether] the collateral estoppel effect of . . . the first action would preclude [the claims from being brought in a later action]." Pochiro, 827 F.2d at 1251. If a defendant fails to bring a compulsory counterclaim, he is barred from asserting that claim in a future proceeding. Id. (affirming dismissal of former employee's claims for defamation, abuse of process, breach of employment contract and intentional interference with business relationship because such claims were compulsory counterclaims which should have been raised in employer's prior state court action against employee for appropriating confidential consumer information.); Sams v. Beech Aircraft, 625 F.2d 273, 276 n. 4 (9th Cir. 1980) (citing Baker v. Gold Seal Liquors, 417 U.S. 467, 469, n. 1 (1974)). COUNTERCLAIM FOR DEBT OWED IN FDCPA ACTION "[A]lthough the Ninth Circuit has not specifically decided whether a counterclaim for the underlying debt in an FDCPA action is compulsory or permissive, most, if not all of the district courts within the Ninth Circuit . . . have determined that such a counterclaim is permissive." Marlin v. Chase Cardmember Services, 2009 WL 1405196, *

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3 (E.D. Cal. 2009); Koumarin v. Chase Bank USA, 2008 WL 5120053 (N.D. Cal. 2008); Witt v. Experian Information Solutions, Inc., 2008 WL 2489132, * 4 (E.D.Cal. 2008); Avery v. First Resolution Mgmt. Corp., 2007 WL 1560653 (D. Or. 2007), affirmed by, 568 F.3d 1018 (9th Cir. 2009) (in debtor's FDCPA action, Ninth Circuit affirms district court's refusal to exercise supplemental jurisdiction over debt collector's counterclaim on debt-owed and denial of plaintiff's claim for award of attorney's fees as a prevailing party); Moore v. Old Canal Financial Corp., 2006 WL 851114 (D. Idaho 2006); Sparrow v. Mazda American Credit, 385 F.Supp.2d 1063, 1068 (E.D.Cal. 2005); Campos v. Western Dental Srvs., Inc., 404 F.Supp.2d 1164 (N.D. Cal. 2005); Taylor v. Bryant, Inc., 275 F.Supp.2d 1305 (D.Nev. 2003); Hart v. Clayton-Parker and Associates, Inc., 869 F.Supp. 774, 776 (D. Ariz. 1994). In Peterson v. United Accounts, Inc., 638 F.2d 1134 (8th Cir. 1981), the Eighth Circuit, using analogies from Truth-in-Lending Act cases from other circuits, reversed the district court's dismissal of the FDCPA lawsuit and reinstated the complaint on grounds that FDCPA claim asserted is permissive, rather than a compulsory counterclaim, and stated that the purpose of the FDCPA can best be effectuated by holding a FDCPA counterclaim to be permissive, rendering it cognizable in either the state or federal court. 638 F.2d at 1137. It concluded the circumstances giving rise to the original debt are separate and distinct from the collection activities undertaken by the collection agency. The court provided this analysis: While the debt claim and the FDCPA counterclaim raised here may, in a technical sense, arise from the same loan transaction, the two claims bear no logical relation to one another. Although there is some overlap of issues raised in both cases as a result of the defenses raised in the state action, the suit on the debt brought in state court is not logically related to the federal action initiated to enforce federal policy regulating the practices for the collection of such debts. Defendants concede that "[i]t seems well-settled in the Ninth Circuit that counter-claims for the debt claimed by the creditor defending [a FDCPA] claim are considered permissive." (docket # 23 at 3) The Court agrees with the above authorities and finds that LVNV Funding's counterclaim is permissive.

Id.

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SUPPLEMENTAL JURISDICTION A. Whether Supplemental Jurisdiction Exists over Defendant's Counterclaim. In 1990, Congress enacted the supplemental jurisdiction statute, 28 U.S.C. § 1367. CV Partners Inc. v. Boben, 2009 WL 1331108, * 1 n.2 (N.D. Cal. 2009) (indicating "[t]he Ninth Circuit has not explicitly addressed the issue of whether courts should still engage in a compulsory/permissive counterclaim analysis in light of Section 1367.") Even if no independent basis for jurisdiction exists, section 1367(a) grants supplemental jurisdiction over state law counterclaims "that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution." Sparrow v. Mazda American Credit, 385 F.Supp.2d 1063, 1066 (E.D.Cal. 2005); Jones v. Ford Motor Credit Co., 358 F.3d 205, 213 (2d Cir. 2004). Thus, when a counterclaim meets the requirements of § 1367(a), a district court may exercise supplemental jurisdiction over such claim, even if no independent basis for jurisdiction exists. Koumarin, 2008 WL 5120053 at * 2 (citing Jones, 358 F.3d at 213 and Channell v. Citicorp Nat'l Servs., Inc., 89 F.3d 379, 385 (7th Cir. 1996)). The "case or controversy" test mentioned above asks whether a counterclaim is "so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution." Sparrow, 385 F.Supp.2d at 1070. Here, although LVNV Funding's Counterclaim did not "arise" from the same "transaction or occurrence" as Plaintiff's FDCPA claim, nonetheless it "derive[s] from a common nucleus of operative fact," in that both claims are technically related to a single debt allegedly owed by Plaintiff to LVNV Funding. Koumarin, 2008 WL 5120053 at 3 (citing United Mine Workers of Am. v. Gibbs, 383 U.S. 715, 725 (1966) that § 1367(a) is, at least, as broad as the pre-§ 1367 test which required that state and federal law claims "derive from a common nucleus of operative fact,"). In the numerous cases brought within the Ninth Circuit under the FDCPA since the passage of § 1367, all district courts have held supplemental jurisdiction exists over the defendant's counterclaim for the underlying debt.

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Koumarin, 2008 WL 5120053 at 3; Campos, 404 F.Supp.2d at 1169 (holding supplemental jurisdiction existed over counterclaim for underlying debt where counterclaim and FDCPA claim were "related to the single debt incurred by plaintiff"); Sparrow, 385 F.Supp.2d at 1070. As the District Judge in Campos explained, "there will be some permissive counterclaims over which the court has supplemental jurisdiction and some it does not. The reason is that the standard for supplemental jurisdiction is broader than the standard for a counterclaim to be compulsory." Campos, 404 F.Supp.2d at 1169 (citing Fed.R.Civ.P. 13(a) and 28 U.S.C. § 1367(a)). The Court rejects Plaintiff's argument that the Court should dismiss Defendant's Counterclaim because there is no independent basis for federal jurisdiction to adjudicate the Counterclaim. The Court has supplemental jurisdiction over LVNV Funding's Counterclaim. B. Whether to Exercise Supplemental Jurisdiction

A district court's exercise of supplemental jurisdiction is discretionary, and it may decline to exercise such jurisdiction. City of Chicago v. International College of Surgeons, 522 U.S. 156, 173 (1997). "`[D]istrict courts [should] deal with cases involving pendent [supplemental] claims in the manner that best serves the principles of economy, convenience, fairness, and comity which underlie the pendent jurisdiction doctrine.'" Id. (quoting Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 357 (1988)). Section 1367(c) provides: The district courts may decline to exercise supplemental jurisdiction over a claim under subsection (a) if(1) the claim raises a novel or complex issue of State law, (2) the claim substantially predominates over the claim or claims over which the district court has original jurisdiction, (3) the district court has dismissed all claims over which it has original jurisdiction, or (4) in exceptional circumstances, there are other compelling reasons for declining jurisdiction.

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Title 28 U.S.C. § 1367(c). In addition to the factors contained in § 1367(c), the Supreme Court identified "a host of factors" to consider when deciding whether to exercise supplemental jurisdiction: "the circumstances of the particular case, the nature of the state law claims, the character of the governing state law, and the relationship between the state and federal claims." Cohill, 484 U.S. at 357. Plaintiff identifies primarily two reasons why the Court should decline to exercise supplemental jurisdiction: 1) allowing counterclaims for the underlying debt in FDCPA suits "would undermine congressional efforts to protect consumers by discouraging victims [a "chilling effect"] from asserting their rights under the FDCPA," relying upon
Sparrow, 385 F.Supp.2d at 1071; and 2) "public policy reasons should dissuade federal

courts from hearing state-law based counterclaims brought by defendants against plaintiffs who have filed FDCPA suits against them[,]" citing Ballard v. Equifax Check Serv., Inc., 186 F.R.D. 589, 599 (E.D.Cal. 1999) ("The court finds that there are compelling reasons of public policy embodied in the FDCPA for declining jurisdiction in this case.") (docket # 15 at 8-9) On the other hand, LVNV Funding argues that exercising supplemental
jurisdiction would "(1) conserve the parties' monetary resources; (2) promote judicial

economy; (3) avoids litigation of duplicative claims, and (4) precludes the potential of inconsistent outcomes." (docket # 23 at 5) Relying on Koumarin, 2008 WL 5120053 at 3-4,
LVNV Funding claims "that the interests of judicial economy, efficiently and fairness

outweigh the potential chilling effect," given the relatively small amount of Plaintiff's alleged debt, $4,124.00, interest from July 28, 2006, attorneys' fees and court costs. (Id. at 6; docket # 24, Exh. 1 at 8) Rather, LVNV Funding argues, Plaintiff's FDCPA "claim was brought to `chill' the creditor from asserting its rights with respect to the collection of the debt." (Id. at 7) Whether to exercise supplemental jurisdiction in this case is a closer call than it initially appears. Here, the Court agrees with the District Judge in Koumarin, given the relatively small amount of Plaintiff's alleged credit card debt ($4,124.00), it seems unlikely -9-

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that the Court's exercise of supplemental jurisdiction over LVNV Funding's Counterclaim would have a "chilling effect" on Plaintiff's FDCPA claim or on potential analogous claims made by similarly situated individuals. Similarly, nor should any plaintiff expect a federal court to use the fact that case-by-case enforcement is expensive (perhaps too expensive to justify independent legal action in California) to bestow on plaintiff a legal right to avoid or delay collection, if the alleged credit card debt is in fact valid. Koumarin, 2008 WL 5120053
at 4. As LVNV Funding points out, the exercise of supplemental jurisdiction in this case

promotes most of the important goals, identified by the Supreme Court in City of Chicago, 522 U.S. at 173, of judicial economy, convenience, fairness and efficiency, as all claims related to Plaintiff's alleged credit card debt will be resolved in a single action. Accepting supplemental jurisdiction, however, will increase both the complexity and length of time to resolve Plaintiff's narrow and straightforward FDCPA claim. Although the Counterclaim issue is not novel (a debt allegedly owed), the Court, sitting in Arizona, will be required to determine choice-of-law questions and, if appropriate, apply California law to LVNV Funding's state claim. A California court is better suited to resolve California state law claims and disputes regarding state law. Declining supplemental
jurisdiction also reduces the risk of incorrect application of California law and furthers the

principle of comity. Accepting supplemental jurisdiction would also involve this District Court and its limited resources in legal questions of no federal significance and may substantially predominate over Plaintiff's FDCPA claim. Leatherwood v. Universal Business Service Co., 115 F.R.D. 48, 50 (W.D.N.Y. 1987). Finally, considering the purpose of the FDCPA is to give those harmed by an alleged FDCPA violation a remedy against a debt collector regardless of whether the underlying debt is valid, the Court is persuaded to follow the majority of the district courts in the Ninth Circuit that strong public policy reasons exist for declining to exercise jurisdiction over LVNV Funding's Counterclaim. Witt, 2008 WL 2489132 at * 5; Avery, 2007 WL 1560653 at * 8-9; Moore, 2006 WL 851114 at * 4; Campos, 404 F.Supp.2d 1171; Sparrow, 385 F.Supp.2d at 1071; Taylor, 275 F.Supp.2d at 1307. The Court finds compelling reasons to decline to exercise supplemental jurisdiction - 10 -

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over LVNV Funding's Counterclaim. Accordingly, IT IS ORDERED that Plaintiff Marvin Randall's Motion to Dismiss
Defendant's Counterclaim, docket # 15, is GRANTED. Defendant LVNV Funding's Counterclaim is hereby DISMISSED but this dismissal is without prejudice.

DATED this 25th day of August, 2009.

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