The opinion of the court was delivered by: TEITELBAUM
The availability of a federal forum for trial of a counterclaim rooted in state law but arising out of the same transaction or occurrence that is the basis of plaintiff's federal cause of action is an increasingly difficult problem in this era of proliferating consumer class litigation.
On one hand, the language of Rule 13(a) of the Federal Rules of Civil Procedure
indicates that such counterclaims are compulsory and, as such, require no independent basis for the exercise of federal jurisdiction, but must be asserted by a defendant and heard by the Court as falling within its ancillary jurisdiction. On the other hand, important policy considerations -- stemming from a clear understanding that the federal judicial system rests on a concept of limited jurisdiction, the expansion of which necessarily diminishes the power of the states to adjudicate controversies governed by state law -- dictate that federal courts proceed cautiously in permitting the assertion of so-called " debt collection " counterclaims in suits originally brought to recover on an exclusively federal cause of action.
The case now before the Court, a purported class action under the Federal Truth-in-Lending Act (15 U.S.C. § 1601 et seq.), presents this problem by way of plaintiff's motion to dismiss, for lack of subject matter jurisdiction, defendant's counterclaim against him for the balance owing on his account with Carte Blanche. Both the initial claim and the counterclaim arise out of plaintiff's purchase of airline tickets under a deferred payment plan selected by him pursuant to arrangements available through the use of his Carte Blanche credit card. Plaintiff claims that this transaction resulted in a disclosure violation of the Truth-in-Lending Act; defendant counterclaims for payment of the balance of the purchase price with interest. There is no independent federal jurisdictional basis for the counterclaim.
The problem thus presented to the Court should be narrowly delineated. It quite obviously does not arise where a counterclaim rests on an independent basis of federal jurisdiction -- even if deemed permissive under F.R. Civ. P. 13(b), such counterclaims are of course assertable in a federal forum. Nor do I think a problem should exist in instances where a counterclaim arises out of the same transaction or occurrence that is the subject matter of an original claim controlled by state law.
If "logically related" to the opposing party's claim, see Great Lakes Rubber Corp. v. Herbert Cooper Co., 286 F.2d 631 (3d Cir. 1961), such counterclaims are properly characterized as compulsory and, falling within the bounds of ancillary federal jurisdiction, must be asserted in the federal court proceeding on the original claim.
Rather, the problem we now confront pertains only where, as here, the Court is asked by way of a defendant's counterclaim to try a cause of action amounting to no more than a state debt collection suit founded on the same transaction or occurrence that generated plaintiff's exclusively federal suit to enforce a right or duty conferred or imposed by federal statute. If such a counterclaim is deemed compulsory, it may be, indeed must be, asserted in the federal forum; if deemed permissive, it should be dismissed for lack of jurisdiction.
Thus, the Court's characterization of the counterclaim sub judice will control the disposition of the motion now before it.
In Great Lakes Rubber Corp. v. Herbert Cooper Co., supra at 634, the Court of Appeals for the Third Circuit stated the test for determining whether a counterclaim is compulsory vel non as follows:
". . . [A] counterclaim is compulsory if it bears a 'logical relationship' to an opposing party's claim. . . . The phrase 'logical relationship' is given meaning by the purpose of the rule which it was designed to implement. Thus, a counterclaim is logically related to the opposing party's claim where separate trials on each of their respective claims would involve a substantial duplication of effort and time by the parties and the courts. Where multiple claims involve many of the same factual issues, or the same factual and legal issues, or where they are offshoots of the same basic controversy between the parties, fairness and considerations of convenience and of economy require that the counter-claimant be permitted to maintain his cause of action. Indeed the doctrine of res judicata compels the counter-claimant to assert his claim in the same suit for it would be barred if asserted separately, subsequently." (citations omitted)
The Court's present inquiry, then, devolves into a question of whether defendant's debt collection counterclaim bears a "logical relationship" to plaintiff's claim under the Truth-in-Lending Act. On a purely transactional level, such a relationship obviously exists: both claim and counterclaim arise out of a singular occurrence, plaintiff's purchase of airline tickets through the use of his Carte Blanche card. But in these circumstances, I do not consider the presence of transactional identity alone sufficient to establish, for compulsory counterclaim purposes, a logical relationship between plaintiff's claim and defendant's counterclaim. Indeed, after careful consideration of this matter, I am persuaded that conventional analysis, undertaken and coupled with a due regard for the imperatives of federal judicial policy, supports the conclusion that the requisite logical relationship is lacking in this case.
Plaintiff brings this action exclusively under a federal statute, the Truth-in-Lending Act. At issue is whether Carte Blanche complied with the technical requirements of the Act, and the regulations promulgated thereunder, in terms of disclosure of required credit information in its periodic billings to plaintiff. The outcome would seem to turn upon an interpretation of federal law, as well as upon the resolution of disputed factual issues regarding the disclosures.
Defendant's counterclaim, however, bears no relationship to these matters, but is, rather, a debt collection suit rooted in and governed by state contract law. While the two claims stem from the same underlying business transaction, they involve entirely distinct legal issues: plaintiff's claim concerns the application of the Federal Truth-in-Lending Act; the counterclaim does not concern the Truth-in-Lending Act or any other federal law.
Moreover, the factual issues are distinct. Plaintiff's claim entails proof of a limited set of facts relating to the nature of the disclosures made by defendant. The counterclaim involves proof of a contract, its validity, the record of payments and plaintiff's default. In these circumstances, where claim and counterclaim lack even a close similarity of factual and legal issues, I find that the respective claims are "offshoots" of the same basic transaction, but not the "same basic controversy between the parties," and that separate trials on each distinct claim will not involve a "substantial duplication of effort and time by the parties and the courts." The two claims are thus not logically related in the Court's view of the standard enunciated in Great Lakes Rubber, supra. Accordingly, defendant's counterclaim is not compulsory, but permissive; as such, it will be dismissed.
We might at this point terminate our discussion of the instant question. However (having no wish to cloak the full extent of my thinking in this matter in the guise of a pure application of Great Lakes Rubber), I believe it is important to emphasize that corollary considerations shape and reinforce the Court's view that the above result is a proper application of the logical relationship test formulated in that leading case.
In this regard, the language of Roberts v. National School of Radio and Television Broadcasting, 374 F. Supp. 1266 (N.D. Ga. 1974), is apposite. That case involved plaintiff's claim that defendant failed to make certain credit disclosures in a financing agreement in accordance with Regulation Z disclosure requirements promulgated under the Truth-in-Lending Act, and defendant's counterclaim for the balance due under the note. After holding that the counterclaim met none of the four tests determinative of compulsoriness under Rule 13(a),
including the logical relationship test, the court dismissed it as permissive, stating as follows:
". . . Given the remedial nature of TIL [Truth-in-Lending] and the broad public policy which it serves, federal courts should be loath to become immersed in the debt collection suits of the target [sic] of the very legislation under which a TIL plaintiff states a cause of action.
The plaintiff's claim falls within the very narrow scope of a federal statute, the defendant's within the very broad range of state remedies. While both the plaintiff and the defendant state claims arising from the same transaction in the sense that each party is suing because of the other's obligations on the note, the plaintiff's claim is in furtherance of a stated federal legislative policy. The defendant contends simply that plaintiff is in default on a private duty. To permit the defendant to pursue its claim in federal court would unduly complicate the expeditious resolution of TIL litigation. The liability to which a violator of TIL is subject has been characterized as a penalty and a deterrent to activity prohibited by Congress. Mourning v. Family Publications Service, supra [411 U.S. 356, 93 S. Ct. 1652, 36 L. Ed. 2d 318 (1973)]. To permit the defendant in a TIL action to utilize the proceedings merely as a forum ...