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District Court Granted Plaintiff’s Motion to Dismiss Defendants’ Permissive Counterclaim for Lack of Independent Jurisdictional Basis

Ramirez v. Amazing Home Contractors, Inc., et al.
JKB—14—2168 (D. Md. November 25, 2014)

by Sarah M. Grago, Law Clerk
Semmes, Bowen & Semmes (www.semmes.com)

Available at: https://cases.justia.com/federal/district-courts/maryland/mddce/1:2014cv02168/283978/13/0.pdf?ts=1417008511

In Ramirez v. Amazing Home Contractors, Inc., the United States District Court for the District of Maryland granted Plaintiff’s Motion to Dismiss Defendants’ permissive counterclaim for lack of jurisdiction. Plaintiff, David Vasquez Ramirez (“Mr. Ramirez”), sued Defendants, Amazing Homes Contractors, Inc. and owner, James Ryder, Jr. (collectively “AHC”), for unpaid wages under the Fair Labor Standards Act (“FLSA”), the Maryland Wage and Hour Law (“MWHL”), and the Maryland Wage Payment and Collection Law (“MWPCL”). In response, AHC filed a counterclaim alleging that Mr. Ramirez fraudulently represented his eligibility to work in the United States. After finding the counterclaim to be permissive, the court granted Plaintiff’s Motion to Dismiss for lack of jurisdiction.

In February 2013, AHC, a roofing contractor, formed in the State of Maryland, hired Mr. Ramirez, a Maryland citizen, as a roofer after Mr. Ramirez attested that he was a lawful permanent resident and eligible to work in the United States. Thereafter, the Department of Homeland Security audited AHC’s labor force and determined that seven (7) of AHC’s employees, including Mr. Ramirez, had provided insufficient employment eligibility verification. As a result, AHC terminated Mr. Ramirez’s employment.

After termination, Mr. Ramirez filed a suit alleging that AHC violated the FLSA, the MWHL, and the MWPCL by failing to pay him wages owed. AHC filed an answer in conjunction with a counterclaim in which it contended that Mr. Ramirez committed fraud when he represented himself as eligible to work in the United States. In response, Mr. Ramirez filed a Motion to Dismiss AHC’s counterclaim for failure to state a claim, or, in the alternative, lack of jurisdiction.

The court found that the counterclaim lacked jurisdiction, and, as such, never reached Plaintiff’s failure to state a claim argument. In assessing whether the court had jurisdiction, the court first considered whether the counterclaim was compulsory or permissive.

Pursuant to Federal Rule of Civil Procedure 13(a), a compulsory counterclaim “arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim.” The court applied the four (4) factor test set forth by the Fourth Circuit to discern whether a counterclaim was compulsory.1 Although the four factors act as mere guidelines, rather than a conjunctive test, here, the court held that the counterclaim failed to meet a single factor and, therefore, was held to be permissive.

First, the court found that the issues of fact and law raised in the complaint and the counterclaim were not “largely the same” as they each sought relief under distinct laws and referred to different periods of time in the relationship between Mr. Ramirez and AHC. Specifically, the complaint sought relief for unpaid wages under statutory law for work already completed. In contrast, the counterclaim sought relief under common law fraud principles for Mr. Ramirez’s alleged misrepresentation prior to performing work as well as his failure to work after his employment had been terminated.

For additional guidance, the court looked to Williams v. Long, 558 F. Supp. 2d 601 (D. Md. 2008), wherein the court dismissed a similar counterclaim after finding that the factual and legal issues in the complaint and the counterclaim were not “largely the same.” There, an employee sued the employer for unpaid wages, and, in response, the employer alleged breach of contract, breach of fiduciary duty, and invasion of privacy. The court placed particular importance on which factual issues would be involved in each claim. It held that the employee’s complaint would require inquiry into the hours worked whereas the defendant’s counterclaim would mandate additional extensive factual investigation into allegations of false representation, reliance, and emotional distress. Similar to Williams, here, the complaint and counterclaim would require separate and distinct factual and legal investigation, and, thus, were not “largely the same.”

Second, the court found that res judicata would not bar a subsequent suit on AHC’s counterclaim for failure to meet all three elements required by Maryland law. Under Maryland law, a claim may be barred by res judicata if (1) the parties in the present litigation are the same or in privity with the parties to the earlier litigation; (2) the claim presented in the current action is identical to that determined or that which could have been determined in prior litigation; and (3) there was a final judgment on the merits in the prior litigation. While the court found that the counterclaim would most likely meet the first and third elements, it held that it failed to satisfy the second element and, therefore, would not be barred by res judicata under Maryland law.

Third, the court concluded that the complaint and the counterclaim would not be supported by substantially the same evidence for the same reasons the claims would not be considered “largely the same.” Specifically, Mr. Ramirez’s unpaid wages claim would involve time sheets and pay stubs, whereas the counterclaim for fraud would involve Mr. Ramirez’s I-9 form and his Permanent Resident Card.

Fourth, the court found that no logical relationship existed between Mr. Ramirez and AHC that would render the counterclaim compulsory. It opined that the parties’ employee-employer relationship alone could not justify labeling the counterclaim as compulsory. Here, the court considered public policy as an especially compelling factor weighing against a finding that AHC’s counterclaim is compulsory. It noted that “a plaintiff’s FLSA claim is intended to bring an employer into compliance with the Act by enforcing a public right and to permit the employer in such a proceeding to try its private claims, real or imagined, against its employees would delay and even subvert the whole process.” Donovan v. Pointon, 717 F. 2d 1320, 1323 (10th Cir. 1983) (internal quotations omitted) (emphasis added).

Upon application of the four factor test, the court found that the counterclaim was not compulsory, but permissive. The court, however, did not address whether the counterclaim could later become compulsory if Mr. Ramirez amended his complaint to allege retaliation under the FLSA.

The second and final issue that the court addressed was whether it could exercise supplemental jurisdiction over permissive counterclaims. It looked to 28 U.S.C. § 1367 that conferred supplemental jurisdiction upon courts to all claims related to the original action that “form part of the same case or controversy under Article III of the United States Constitution.”

While it noted that other Circuits, namely the First, Second, and Seventh, have interpreted the above language to extend supplemental jurisdiction to permissive counterclaims under some circumstances, the Fourth Circuit has not yet so ruled.

Traditionally, the Fourth Circuit has required a permissive counterclaim to have its own independent jurisdictional basis in order for it to be within a court’s supplemental jurisdiction. While the Fourth Circuit has not affirmed this stance since the passing of 28 U.S.C. § 136, this court held that until said decision is abrogated, courts may not exercise supplemental jurisdiction over permissive counterclaims.

The court found that AHC’s counterclaim was not subject to federal jurisdiction because there was no diversity of citizenship, nor was there a federal question as the counterclaim concerned common law fraud. As a result, the court granted Plaintiff’s Motion to Dismiss for Lack of Jurisdiction.

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1 Are the issues of fact and law raised in the claim and counterclaim “largely the same”? (2) Would res judicata bar a subsequent suit on the party’s counterclaim, absent the compulsory counterclaim rule? (3) Will substantially the same evidence support or refute the claim as well as the counterclaim? (4) Is there any logical relationship between the claim and the counterclaim?


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