On Monday, the Ninth Circuit Court of Appeals issued an order certifying a question to the Nevada Supreme Court. What did the Ninth Circuit inquire about? Whether or not, under Nevada law, a Fair Debt Collection Practices Act (FDCPA) claim is a compulsory counterclaim in a collection lawsuit. If Nevada answers in the affirmative, debt collection law firms might see a drop in FDCPA suits, at least in Nevada.
Background: What Spurred the Question?
It all started with a medical debt owed by the consumer. In the agreement for medical services, the consumer agreed to be financially responsible for amounts not covered by insurance and, if the service provider needs to place the account with a collection agency, he would be responsible for any collection/legal fees.
Eventually, the consumer's debt became delinquent and the medical service provider placed the account with a debt collector. The debt collector filed a suit against the consumer in Nevada state court to collect the amount owed, including the collection/legal fees. The consumer failed to appear in the action so the court entered a default judgment against him.
Five months later, the consumer filed an FDCPA suit against both the debt collector and the doctor in federal court. The consumer alleged three violations of the statute: the addition of collection fees; that the affidavit submitted by the doctor misrepresented the amount due because it included the collection fees; and that the debt collector failed to provide him a compliant validation letter.
The district court dismissed the FDCPA suit, finding that the consumer's claims were barred by claim preclusion because they "bore a logical relationship to the transaction underlying the state court debt collection action, making them compulsory counterclaims in the state court action."
The consumer appealed and the Ninth Circuit stayed the matter to ask the Nevada Supreme Court if, under Nevada law, the FDCPA claim was a compulsory counterclaim.
So What, Exactly, is a Compulsory Counterclaim?
Before we discuss compulsory counterclaims, let's go back a little and discuss counterclaims in general. This is best explained with an example. Let's say John sues Jane. If Jane has any claims that she can bring against John, she can bring these claims within the same court case in order to get all of these matters resolved at once. This prevents Jane from having to file a separate lawsuit against John.
While not all counterclaims are compulsory, a compulsory counterclaim must be brought within that same action. This occurs when the two claims are so interweaved—arising from the same transaction or occurrence, meaning they share a lot of the same facts—that, for the sake of judicial economy, the courts require the parties to litigate both claims at the same time. If the defendant does not bring the compulsory counterclaim in the same action, it is deemed waived and the defendant will not be allowed to bring the claim again in a future lawsuit. This is a legal doctrine called claim preclusion, or res judicata.
What This Means for the ARM Industry
If Nevada finds that FDCPA claims are not compulsory counterclaims in a collection lawsuit, then everything goes on as usual. However, if Nevada states that an FDCPA claim is a compulsory counterclaim, this could restrict some litigation liability for debt collection firms. In other words, if the consumer does not bring the FDCPA issue as a counterclaim in the collection lawsuit, then that FDCPA claim would be barred by claim preclusion. Since this is state-specific, this decision will only impact Nevada. Depending on each state's civil litigation procedures for claim preclusion, this may or may not apply elsewhere as well.
Want to search for other cases where claim preclusion/res judicata applies for FDCPA suits? You can do so through iA's Case Law Tracker, which allows you to conduct incisive and quick legal research in less time than it takes to pour your morning cup of coffee.