District Court (Cal.) Finds that Action on the Debt was Permissive to Rosenthal Act Claim, Declines Supplemental Jurisdiction to Hear It

In Marchand v. Chase Bank USA, N.A., 2011 WL 1296711 (C.D.Cal. 2011), Judge Pregerson found that a debt collection counter-claim in federal court was permissive to the underlying Rosenthal Act claim, and declined to exercise supplemental jurisdiction to hear it.  (See, e.g. Sparrow v. Mazda American Credit, 385 F.Supp.2d 1063, 1068 (“breach of contract counterclaims for the underlying debt are not ‘logically connected’ to the unfair-collection-practices claim, despite that they both relate to the same debt”).

On December 6, 2010, Plaintiff filed a First Amended Complaint (“FAC”) against Defendant Chase Bank USA, N.A. (“Chase”) in the Superior Court of California. (FAC at 1.) The FAC alleged that in September 2009, Chase began placing harassing and intimidating phone calls to Plaintiff in an attempt to collect on Plaintiff’s credit card debt. (FAC ¶¶ 9–41.) The FAC further alleged that in March 2010, the parties entered into several verbal agreements to settle the debt. (FAC ¶¶ 18–26).  ¶  The FAC alleged four causes of action: (1) violations of California’s Rosenthal Fair Debt Collection Practices Act (“California FDCPA”), California Civil Code § 1788, et. seq.; (2) invasion of privacy; (3) breach of the March 2010 oral contracts; and (4) breach of the covenant of good faith and fair dealing with respect to the March 2010 oral contracts. (FAC at 9–11.) ¶   Chase removed to this court on December 20, 2010. (Dkt. No. 1.) On December 27, Chase filed a counterclaim against Plaintiff, alleging breach of three credit card agreements made between 1999 and 2007, and seeking $5,321.03 in damages (“the under-lying debt”). (Dkt. No. 6.) Plaintiff now moves to dismiss the counterclaim for lack of subject-matter jurisdiction.A counterclaim may be either compulsory or permissive. Fed.R.Civ.P. 13. If a counterclaim “arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim,” the counterclaim is compulsory. Fed.R.Civ.P. 13(a)(1) (A). Because a compulsory counterclaim arises out of the same transaction as the related claim, the two can be viewed as part of the same case or controversy. Campos v. Western Dental Servs., Inc., 404 F.Supp.2d 1164, 1167 (N.D.Cal.2005). Thus, courts do have supplemental jurisdiction over compulsory counterclaims.

Judge Pregerson found that Chase’s debt collection counter-claim was permissive, not compulsory.

Here, Chase argues that its counterclaim is compulsory because it arises out of the same transactions at issue in the FAC’s third and fourth causes of action. (Opposition at 2.) To determine whether the claim and counterclaim arise out of the same transaction, the court applies a “logical relationship” test to “analyze whether the essential facts of the various claims are so logically connected that considerations of judicial economy and fairness dictate that all issues be resolved in one lawsuit.” Pochiro v. Prudential Ins. Co. of America, 827 F.2d 1246, 1249 (9th Cir.1987) (citation omitted). The claims and counterclaim at issue here are not so logically connected as to constitute a single transaction. Chase’s arguments conflate the underlying credit card holder agreements, upon which the counterclaim is based, with the March 2010 oral agreements that constitute the bases for counts three and four. Whether Plaintiff breached the credit card agreements, formed between 1999 and 2007, has no bearing on whether Chase breached the March 2010 agreements. In similar cases under the federal Fair Debt Collection Practices Act, courts in this circuit have regularly made similar conclusions. See, e.g., Campos, 404 F.Supp. at 1169 (“Whether a plaintiff in an unfair debt collection practices action actually has outstanding debt is irrelevant to the merits of the FDCPA claim”); Sparrow v. Mazda American Credit, 385 F.Supp.2d 1063, 1068 (Explaining cases holding that “breach of contract counterclaims for the underlying debt are not ‘logically connected’ to the unfair-collection-practices claim, despite that they both relate to the same debt”). Accordingly, Chase’s counterclaim is permissive, not compulsory.