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Smith v. Discover Bank

United States District Court, E.D. Kentucky, Southern Division, London

March 9, 2015

DERONDA M. SMITH, Plaintiff,


KAREN K. CALDWELL, Chief District Judge.

This matter is before the Court on the motions to dismiss (DE 4, 12) filed by both defendants in this matter - Discover Bank and the law firm of Mapother & Mapother, P.S.C.


Discover Bank issued a credit card to the plaintiff, Deronda Smith, when she was in college and, some time before March 2006, she charged various goods and services. There does not appear to be any dispute that she did not pay the debt so, in 2012, Discover filed a collection action against her in Perry Circuit Court. In that action, Discover was represented by defendants Mapother & Mapother, a law firm.

In this action, Smith asserts that both Discover and its law firm knew that the collection action against her was time barred when they filed it. She also asserts that they filed falsified documents in the Perry Circuit Court action to make it appear as if she had continuously lived in Kentucky since March 2006. She asserts that, with these actions, the law firm violated the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. and that Discover violated the Kentucky Consumer Protection Act, KRS 367.110, et seq. Smith asserts a civil conspiracy claim against both defendants.


Discover Bank and Mapother & Mapother both argue that Smith's claims must be dismissed because they were compulsory counterclaims in the state court action filed by Discover. As Smith points out, however, Mapother was not a party to the state court action. It merely acted as Discover's counsel. Because counterclaims are compulsory only against an "opposing party, " Smith's claims against Mapother in this action could not have been compulsory in the Perry Circuit Court action. See Ky. R. Civ. P. 13.01. In its reply brief, Mapother recognizes that this argument is not applicable to the claims against it. (DE 14, Reply at 2 n.2.)

Discover, in contrast, was a party to the Perry Circuit Court action. To determine if Smith's claims against Discover in this action are barred because they were compulsory in the state court action, Kentucky law governs. "The question whether the [plaintiff's] claims are compulsory counterclaims which should have been pleaded in the earlier... state court action is a question of state law." Pochiro v. Prudential Ins. Co. of America, 827 F.2d 1246, 1249 (9th Cir. 1987).

Kentucky Rule of Civil Procedure 13.01 states that a party must "state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim...." If a counterclaim is compulsory in a previous action pursuant to CR 13.01, then subsequent litigation of that same claim is barred by res judicata. DCI Properties-DKY, LLC v. Coppage Construction Company, Inc., No. 2013-CA-001932-MR, 2015 WL 832268, at *2 (Ky. App. Feb. 27, 2015).

The problem for the defendants is that "the principles of res judicata (claim preclusion) only apply to adjudications on the merits." Tyler v. DH Capital Management, Inc., 736 F.3d 455, 460 (6th Cir. 2013). Discover voluntarily dismissed its state court collection action against Smith under Kentucky Rule of Civil Procedure 41.01(1) and the state court then dismissed the action without prejudice. (DE 12-2, State Court Docket.) "Dismissals without prejudice are not treated as decisions on the merits." Id. Thus, just as a plaintiff is not barred from filing an action for a second time that has been dismissed without prejudice, the defendant in the original action is not barred from later asserting any counterclaims it may have had in that action. Id. "[A]fter a voluntary dismissal under Rule 41.01(1), neither the strict rules of res judicata nor the equitable principles of waiver and estoppel warrant barring an unraised counterclaim." Id. at 461.

Moreover, Smith's KCPA claim would not have been compulsory in the collection action. It does not appear that Kentucky courts have announced a test for determining whether a counterclaim is compulsory. Because the language of the Kentucky rule mirrors Federal Rule of Civil Procedure 13(a), the Court will employ the "logical relation test" applicable to the federal rule. Under that test, the court must consider "whether the issues of law and fact raised by the claims are largely the same and whether substantially the same evidence would support or refute both claims." Sanders v. First Nat'l Bank & Trust Co., 936 F.2d 273, 277 (6th Cir.1991).

The Court has not located any cases which analyze whether a counterclaim asserting violations of the KCPA is compulsory in a collection action. But Smith's KCPA claim is similar to a claim under the FDCPA. The KCPA prohibits "[u]nfair, false, misleading, or deceptive acts or practices in the conduct of any trade or commerce." KRS 367.170(1). The FDCPA is designed to prohibit "abusive, deceptive, and unfair debt collection practices." 15 U.S.C. § 1692e.

In Peterson v. United Accounts, Inc., 638 F.2d 1134 (8th Cir.1981), the Eighth Circuit held that, in a state court collection action against a debtor, the debtor's FDCPA claim was permissive rather than compulsory. The court noted that the FDCPA claim "involves not the loan itself, but the use of unfair methods to collect it." Id. at 1136. "The circumstances giving rise to the original debt are separate and distinct from the collection activities undertaken by [the lender]." Id. at 1137. See also Egge v. Healthspan Servs. Co., 115 F.Supp.2d 1126, 1130 (D. Minn. 2000) ("Plaintiff's FDCPA claim does not dispute the validity of the debt. Instead, it alleges that the Defendant tried to collect usurious interest on the debt, a collection activity. As a result, the FDCPA claim does not arise from the same transaction as the creation of the debt and is a permissive counterclaim.")

This holding is also consistent with the decisions of other district courts that have concluded that, where the debtor asserts claims under the FDCPA, the lender's counterclaim for collection of the underlying debt is permissive rather than compulsory. Jobe v. Alliance Collection Serv., Civil Action No. 1:11CV196-AS, 2012 WL 3985182, at *3 (N.D.Miss. Sept. 11, 2012); Marchand v. Chase Bank USA, N.A., No. CV 10-09805, 2011 WL 1296711, at *1-2 (C.D.Cal. Apr. 5, 2011); Randall v. Nelson & Kennard, No. CV-09-387-PHX, 2009 WL 2710141, at *3-4 (D. Ariz. 2009); Avery v. First Resolution ...

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