Defendant Doesn’t Abandon Counterclaim By Failing to Replead It In Response to Amended Complaint – Ohio Fed. Court

I recently faced this procedural quandary: Plaintiff (that’s us) filed a complaint.  Defendant responded by filing an answer and counterclaim.  After receiving court leave, and before responding to the counterclaim, we amended the complaint.  Defendant answered the amended complaint and filed affirmative defenses but did not replead its counterclaim.

Defendant later threatened to default us if we didn’t answer its prior counterclaim.  I argued that the earlier counterclaim was extinguished by the amended complaint since the defendant didn’t file a counterclaim to it.  The defendant thought otherwise.  Ultimately, to avoid spending time and money on a collateral issue, I answered the counterclaim – even though I don’t think I had to.

My research revealed a definite split of authority on the issue.  Some courts hold that an amended pleading supersedes not only the original complaint (that’s obvious) but also an earlier counterclaim to the superseded complaint.  Others take the opposite tack and find that a counterclaim is separate from the answer and that even where a complaint is withdrawn and amended, the prior counterclaim still remains and must be answered.

Mathews v. Ohio Public Employees Retirement System, 2014 WL 4748472 reflects a court weighing the facts of a given case in deciding whether a defendant must replead its counterclaim or can stand on the one it previously filed.

The plaintiffs sued alleging their disability retirement benefits were wrongly denied.  The pension fund defendant filed an answer and counterclaim to recover overpaid benefits. The plaintiff later filed an Amended Complaint to which the defendant answered but did not re-assert a counterclaim.  Plaintiff moved for judgment on the pleadings based on the absence of a counterclaim with defendant’s answer to the amended pleading.  The defendant then moved for leave to file a counterclaim to the Amended Complaint.  Plaintiff opposed the motion.

Siding with the defendant, the Ohio Federal court looked to the interplay between Federal Rules 13 and 15 and noted that “courts are divided” on whether a party must replead a counterclaim in response to an amended complaint.

Federal Rule 13 requires a pleading to state compulsory counterclaims and allows it to allege permissive counterclaims.

Federal Rule 15(a)(3) provides that, “[u]nless the court orders otherwise, any required response to an amended pleading must be made within the time remaining to respond to the original pleading or within 14 days after service of the amended pleading, whichever is later.”

Some courts interpret this to mean that a defendant must replead a counterclaim in response to an amended complaint or it abandons or waives the right to pursue the counterclaim* while others do not require a defendant to replead a counterclaim with its response to an amended complaint.**

Still, a third line of cases decides the question on a case-by-case basis: it considers whether plaintiff received notice of the counterclaim, whether the defendant pursued the counterclaim and whether plaintiff will suffer unfair prejudice if the prior counterclaim proceeds.

The Court ultimately followed the latter case authorities; it weighed the equities to decide whether the defendant abandoned its counterclaim.  In allowing the defendant to file a counterclaim to the plaintiff’s Amended Complaint, the Court noted that Plaintiff had been on notice for several months that defendant intended to pursue its counterclaim and even replied to the counterclaim.

The Court also cited Plaintiff’s failure to establish prejudice if the Defendant was allowed to file a counterclaim. The Court rejected plaintiff’s judicial economy argument by noting that discovery was already closed when plaintiff moved for judgment on the pleadings and the proposed amended answer and counterclaim injected no new facts to the previously filed counterclaim.

Afterwords: When a complaint is amended it is treated as abandoned.  However, if a defendant filed a counterclaim along with its answer to the abandoned complaint, there is case authority (not just in Ohio but in other states, too) for the proposition that the counterclaim is not extinguished and the plaintiff still must answer it.

Mathews and cases like it demonstrate that the safe procedural play is for a defendant to replead its counterclaim with its answer to an amended pleading.  Otherwise, the defendant may have to defend against a claim that it waived its counterclaim by not refiling it in response to the amended pleading.

 

 


Gen. Mills, Inc. v. Kraft Foods Global, Inc., 487 F.3d 1368, 1376–77 (Fed.Cir.2007)Bremer Bank, Nat’l Ass’n, 2009 U.S. Dist. LEXIS 21055, at *40–41, 2009 WL 702009   Nat’l Mut. Cas. Ins. Co. v. Snider, 996 F.Supp.2d 1173, 1180 n. 8 (M.D.Ala.2014)

** Performance Sales & Mktg. LLC v. Lowe’s Cos., No. 5:07–cv–00140, 2013 U.S. Dist. LEXIS 117835, at *9 n. 2, 2013 WL 4494687 (W.D.N.C. Aug. 20, 2013)Ground Zero Museum Workshop v. Wilson, 813 F.Supp.2d 678, 705–06 (D.Md. Aug.24, 2011)

*** Davis v. Beard, 2014 U.S. Dist. LEXIS 30461, at *12–13, 2014 WL 916947 (E.D.Mo. Mar. 10, 2014) Hitachi Med. Sys. Am., Inc. v. Horizon Med. Grp., 2008 WL 5723531 (N.D.Ohio 2008) ; AVKO Educ. Research Found. v. Morrow, 2013 U.S. Dist. LEXIS 49463, at *30, 2013 WL 1395824 (E.D.Mich. Apr. 5, 2013); Cairo Marine Serv. v. Homeland Ins. Co., No. 4:09CV1492, 2010 U.S. Dist. LEXIS 117365, at *3–4, 2010 WL 4614693 (E.D.Mo. Nov. 4, 2010)

 

‘Domicile’ vs. ‘Residence’ vs. ‘Citizenship’ in Federal Court Jurisdiction – More Semantic Hairsplitting?

Strabala v. Zhang, 318 F.R.D. 81 (Ill. N.D. 2016), featured here for its detailed discussion of e-mail evidence, provides an equally thorough analysis of the differences between residence and domicile in the Federal court jurisdiction calculus.

In the Federal litigation scheme, the party asserting Federal court jurisdiction bears the burden of proving subject matter jurisdiction by a preponderance of the evidence.

The plaintiff here alleged that the Northern District had original jurisdiction based on 28 U.S.C. § 1332(a)(2) – the diversity of citizenship statute that vests Federal courts with jurisdiction over claims between “citizens of a State and citizens or subjects of a foreign state.”

The defendants were unquestionably Chinese citizens – a foreign state under Section 1332.  The plaintiff’s citizenship, though, was unclear.  While plaintiff claimed he was a citizen of Illinois, the defendants disputed this; they pointed to the plaintiff’s home in China as proof that he wasn’t really an Illinois citizen and so was stateless.  A “stateless” citizen can’t invoke Federal court diversity jurisdiction.

Though colloquially used interchangeably, under Federal law, the terms citizenship and residence have important differences.  Citizenship equals domicile, not residence.  The term residence denotes where a person lives while domicile carries both a physical and mental dimension.

Domicile is “the place where that individual has a true, fixed home and principal establishment” and the place where the person intends to eventually return.  A person can have multiple residences but only one domicile.

Objective factors a court considers to determine domicile include “current residence, voting registration and voting practices, location of personal and real property, location of financial accounts, membership in unions and other associations, place of employment, driver’s license and automobile registration, and tax payments.”  But no lone citizenship/domicile factor is conclusive; each case turns on its own facts.

Applying these factors, the Court noted that since plaintiff was based in Illinois from the late 1980s through 2006 (when plaintiff moved first to Houston, TX then to Shanghai), the Court required defendants to show that plaintiff not only currently lived outside of Illinois but also had no intention of returning to Illinois.

The Court credited the plaintiff’s declaration (sworn statement) of intent to keep an Illinois domicile.  Other factors weighing in favor of finding subject matter jurisdiction included (1) plaintiff and his wife never sold there Chicago condominium or removed furniture from it when they moved to Houston in 2006, (2) for several months they lived in corporate housing provided by plaintiff’s Houston employer (an architecture firm), (3) plaintiff’s wife divided her time equally between Chicago and Houston while plaintiff spent about 50% of his time in Shanghai, 40% in Houston and 10% in Chicago.

The plaintiff’s Texas drivers’ license and Houston condo purchase weren’t enough to tilt the citizenship question to the defendants (who, again, argued that the plaintiff wasn’t an Illinois citizen) since the plaintiff swore under oath that he intended to keep an Illinois domicile and defendant had no facts to refute this.

Rejecting the defendants’ argument that plaintiff’s domicile was Shanghai, the Court focused on the following facts: (1) plaintiff lived in a furnished hotel with a lease of one year or less and owned no real property or car in Shanghai, (2) plaintiff’s Chinese work permit had to be renewed annually; and (3) plaintiff’s wife spent six months out of the year in Chicago.

Other pro-Illinois domicile factors cited by the Court included the plaintiff’s testimony (via declaration) that he has had a landline telephone number with a Chicago area code for over two decades and plaintiff’s LinkedIn profile that listed his employment locations as Shanghai, Seoul, and Chicago.

Afterwords:

For Federal subject matter jurisdiction based on diversity of citizenship to attach, the plaintiff must be a citizen of a State (as opposed to a foreign country).  This case provides an exhaustive application of the various factors a court considers when deciding the site of a Federal plaintiff’s domicile in a complex fact pattern and emphasizes the differences between residence and domicile.

 

 

‘Bankruptcy Planning,’ Alone, Doesn’t Equal Fraudulent Intent to Evade Creditors – IL ND

A Northern District of Illinois bankruptcy judge recently rejected a creditor’s attempt to nix a debtor’s discharge for fraud.  The creditor alleged the debtor tried to escape his creditors by shedding assets before his bankruptcy filing and by not disclosing estate assets in his papers.  Finding for the debtor after a bench trial, the Court in Monty Titling Trust I v. Granrath, 15 AP 00826 illustrates the heavy burden a creditor must meet to successfully challenge a debtor’s discharge based on fraud.

The Court specifically examines the contours of the fraudulent conduct exception to discharge under Code Section 727(a)(2) and Code Section 727(a)(4)’s discharge exception for false statements under oath.

Vehicle Trade-In and Lease

The court found that the debtor’s conduct in trading in his old vehicle and leasing two new ones in his wife’s name in the weeks leading up to the bankruptcy filing was permissible bankruptcy planning (and not fraud).  Since bankruptcy aims to provide a fresh start to a debtor, a challenge to a discharge is construed strictly against the creditor opposing the discharge.  Under the Code, a court should grant a debtor’s discharge unless the debtor “with intent to hinder, delay or defraud a creditor” transfers, hides or destroys estate property.

Under the Code, a court should grant a debtor’s discharge unless the debtor “with intent to hinder, delay or defraud a creditor” transfers, hides or destroys property of the debtor within one year of its bankruptcy filing. 11 U.S.C. s. 727(a)(2)(A).  Another basis for the court to deny a discharge is Code Section 727(a)(4) which prevents a discharge where a debtor knowingly and fraudulently makes a false oath or account.

To defeat a discharge under Code Section 727(a)(2), a creditor must show (1) debtor transferred property belonging to the estate, (2) within one year of the filing of the petition, and (3) did so with the intent to hinder, delay or defraud a creditor of the estate.  A debtor’s intent is a question of fact and when deciding if a debtor had the requisite intent to defraud a creditor, the court should consider the debtor’s whole pattern of conduct.

To win on a discharge denial under Code Section 727(a)(4)’s false statement rule, the creditor must show (1) the debtor made a false statement under oath, (2) that debtor knew the statement was false, (3) the statement was made with fraudulent intent, and (4) the statement materially related to the bankruptcy case.

Rejecting the creditor’s arguments, the Court found that the debtor and his wife testified in a forthright manner and were credible witnesses.  The court also credited the debtor’s contributing his 401(k) funds in efforts to save his business as further evidence of his good faith conduct.  Looking to Seventh Circuit precedent for support, the Court found that “bankruptcy planning does not alone” satisfy Section 727’s requirement of intent.  As a result, the creditor failed to meet its burden of showing fraudulent conduct by a preponderance of the evidence.

Opening Bank Account Pre-Petition

The Court also rejected the creditor’s assertion that the debtor engaged in fraudulent conduct by opening a bank account in his wife’s name and then transferring his paychecks to that account in violation of a state court citation to discover assets.  

The court noted that the total amount of the challenged transfers was less than $2,000 (since the most that can be attached is 15% gross wages under Illinois’ wage deduction statute) and the debtor’s scheduled assets exceeded $4 million.  Such a disparity between the amount transferred and the estate assets coupled with the debtor’s plausible explanation for why he opened a new bank account in his wife’s name led the Court to find there was no fraudulent intent.

Lastly, the court found that the debtor’s omission of the bank account from his bankruptcy schedules didn’t rise to the level of fraudulent intent.  Where a debtor fails to include a possible asset (here, a bank account) in his bankruptcy papers, the creditor must show the debtor acted with specific intent to harm the bankruptcy estate.  Here, the debtor testified that his purpose in opening the bank account was at the suggestion of his bankruptcy lawyer and not done to thwart creditors.  The court found these bankruptcy planning efforts did not equal fraud.

Afterwords:

1/ Bankruptcy planning does not equate to fraudulent intent to avoid creditors.

2/ Where the amount of debtor’s challenged transfers is dwarfed by scheduled assets and liabilities, the Court is more likely to find that a debtor did not have a devious intent in pre-bankruptcy efforts to insulate debtor assets.