7th Circuit Provides (No) Clarity on Compulsory Counterclaims

01 December 2014 Wisconsin Appellate Law Blog

Federal procedure requires a defendant to plead all counterclaims that arise out of the same transaction or occurrence as the plaintiff’s claim, or his claim may be barred in a later suit.  Fed. R. Civ. P. 13(a).  Although the “transaction or occurrence” language in the rule isn’t the model of clarity, the Seventh Circuit’s recent decision in Greene v. U.S. Dep’t of Educ., No. 13-3257 (7th Cir. Oct. 27, 2014), muddied the waters on compulsory counterclaims even further.

In his 2005 chapter 7 bankruptcy, Greene filed an adversary proceeding against the Department of Education to have his student loan debt discharged, based on undue hardship.  Despite Greene’s uncontested loan default, DOE did not file a counterclaim for judgment on the unpaid amounts.  Greene’s claim for discharge ultimately failed, leaving DOE free to collect the debt after Greene’s bankruptcy. 

In 2010, after DOE started an administrative wage garnishment (a collection tool available to DOE without a judgment), Greene filed a complaint to enjoin the garnishment.  This time, DOE counterclaimed, seeking judgment on the debt.  Greene argued that DOE could not assert counterclaim because it should have sought to collect the debt in the prior adversary proceeding.

The district court incorrectly held that DOE’s claim was saved by Fed. R. Bankr. P. 7013, which adopts Civil Rule 13(a) but exempts claims asserted by a trustee or debtor-in-possession from the compulsory counterclaim rule—Greene was neither.  The Seventh Circuit, having silently rejected that argument, acknowledged that Greene’s claim of undue hardship and DOE’s collection claim were both based on the Greene’s default, which could have barred DOE’s claim under the plain language of Rule 13(a).  Nevertheless, the court held that the claim was not a compulsory counterclaim in the earlier proceeding.

To keep DOE’s claim alive, the court turned to the purposes of the compulsory counterclaim rule, which, it said, are to prevent harassment and avoid duplicative litigation.  The collection claim violated neither purpose.  The claim was not harassing because in 2005 DOE “might have had realistic hopes of obtaining payment without further litigation.”  Slip Op. at 3.  After all, Greene’s other debts had been discharged, leaving him, theoretically, better able to pay.  Nor would filing the claim earlier have avoided duplicative litigation.  Greene’s undue hardship claim involved a complex determination of his ability to pay, and, while the amount of the debt was relevant to that determination, the ultimate calculation and adjudication of the debt involved a different factual inquiry.  So DOE was free to pursue its claim against Greene in the later case.

This may be one of those situations where a case decided on difficult facts has unintended consequences.  The court’s ruling makes perfect sense under the circumstances, for it would be burdensome (and potentially procedurally complicated after Stern v. Marshall) to require all student loan creditors to seek judgment on their claims in response to a debtor’s claim of undue hardship.  The problem is that the reasons for the result are completely divorced from the plain text of Rule 13.  After Greene, a counterclaim in the Seventh Circuit is mandatory only if a later claim would be sufficiently harassing or duplicative.  Of course, it’s often difficult to muster that level of retrospect at the outset of the first litigation.

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