United States District Court, E.D. Virginia, Alexandria Division
LIAM O'GRADY, District Judge.
This matter comes before the Court on Plaintiff's Motion to Dismiss or Sever the Permissive Counterclaims against third party defendants. Dkt. No. 12. Defendant has also filed a motion, requesting that the Court abstain from exercising jurisdiction in the case in favor of a parallel action in D.C. Superior Court. Dkt. No. 18. The motions have been fully briefed by the parties and on July 10, 2015, the Court heard oral argument. For the reasons stated in open court, and those set forth below, the Court hereby denies Defendant's Motion to Abstain and grants Plaintiffs Motion to Dismiss and Sever the Permissive Counterclaims.
Because this matter is before the Court on a motion to dismiss, the following factual allegations have been drawn from the Complaint-as well as the Counterclaim-and are accepted as true. This controversy arises out of an employment dispute between Plaintiff Simor Moskowitz, an attorney licensed in the District of Columbia, and his former law firm Defendant Jacobson Holman, PLLC ("the Firm"). The Firm, located during the relevant period in Washington, DC, engages in the practice of intellectual property law and regularly represents clients before the United States Patent and Trademark Office located within the Eastern District of Virginia. Other equity members of the Firm included Harvey Jacobson, John Holman, Marsha Gentner, Allen Mesler, Jonathan Scherer, and George Lewis. For purposes of these motions, it should be noted that Moskowitz is a resident of Maryland, Gentner is a resident of the District of Columbia, and Scherer, Jacobson, and Holman are residents of Virginia.
On March 20, 2013, Jacobson and Holman sent a memorandum to the other equity members of the Firm "in which they (a) proposed to create a new law firm and dissolve defendant Jacobson Holman; (b) asked that any equity member... who wanted to join the new firm advise them within thirty days; and (c) stated that they assumed any equity member who did not commit to join the new firm within thirty days would leave defendant Jacobson Holman." Compl. ¶ 6. By July 31, 2013, all equity members except Jacobson and Holman gave their notices and ultimately withdrew from the Firm.
Moskowitz's claims involve the application of the following Firm documents: (1) the 1989 Partnership Agreement; (2) the 1996 Operating Agreement; (2) the 1997 Amendment to the Operating Agreement; and (4) the annual financial statements. Under the Partnership Agreement, the Firm must pay a withdrawing partner his or her equity interest, which is equal to that partner's accrual basis account. In calculating the payout, the Firm is entitled to assign to that partner any accounts receivable that are attributable to the clients of that partner, thereby reducing the Firm's payout obligation. The Operating Agreement in turn provides that the amount in a withdrawing partner's accrual basis account shall be the amount set forth in the last annual or monthly financial statement "with adjustments made for events occurring in the period between the closing date of such last financial statement and the withdrawal date." Id. ¶ 15. Moskowitz alleges that the last financial statement applicable to his withdrawal was the December 31, 2012 ("12/31/12") annual financial statement. He further alleges that no events occurred during the intervening period leading to his withdrawal from the Firm. He also alleges that the Amendment to the Operating Agreement, which assesses a financial penalty on withdrawing partners who take the Firm's clients with them, is unenforceable.
On June 28, 2013, Moskowitz gave the Firm notice of his withdrawal. According to the 12/31/12 annual financial statement, his accrual basis account-and thus his payout-was set at $300, 233. The Firm has refused to pay Moskowitz this amount. The Firm also assigned him $12, 231.37 worth of client accounts receivable, which it used to reduce its payout obligation to him. Moskowitz denies that these were proper accounts of any clients of his, and therefore alleges that the assignment breached the Firm's implied duty of good faith and fair dealing.
Based on the foregoing events, on March 17, 2015, Moskowitz filed suit in this Court, alleging two counts for breach of contract. On May 4, 2015, the Firm filed its Answer to the Complaint along with a six count Counterclaim. Pertinent here, the Firm alleges that its accountant revised the 12/31/12 annual financial statement to reflect bonuses and allowances that had not been previously disclosed. This "restated" 12/31/12 annual financial statement accordingly adjusted the accrual basis accounts for the equity members of the Firm. When five of the eight equity members withdrew, the Firm had its accountant prepare another financial statement to account for the seven month period ending on July 31, 2013. This statement reduced the accrual basis accounts of all eight equity members via a "write-off of uncollectable accounts receivable of the Firm in the amount of $550, 514." Counterclaim ¶ 20.
Counterclaim Count I seeks a judgment against Moskowitz and all third party defendants declaring that "(a) the adjustments made in the Accountant's Restated 12/31/12 JH Financial Statements and in the subsequent Accountant's 7/31/12 Financial Statements are correct and binding upon all equity members of Jacobson Holman as of July 31, 2013; (b) as a consequence thereof, the former equity partners (except Moskowitz) have negative capital accounts; and (c) Jacobson Holman is entitled to treat their negative capital as accounts receivables of the Firm and to seek collection of those receivables." Id. ¶ 26. Counterclaim Count II seeks $5, 788.80 from Moskowitz, which it alleges is the amount of its overpayment of his equity interest when he withdrew from the firm as well as his overdrawn business expense accounts. Counterclaim Counts III through VI similarly seek the amount of accounts receivable not previously credited and overdrawn business expense accounts from the other equity members who departed the Firm. These members have been named as third party defendants.
Of particular relevance to the instant motions, Gentner sued the Firm in D.C. Superior Court two days after Moskowitz filed the instant action in this Court. They are represented by joint counsel. In each case, the Firm has filed nearly identical counterclaims that join the five recently departed equity members.
Moskowitz has filed the instant motion to dismiss the counterclaims against third party defendants Gentner and Scherer for lack of subject matter jurisdiction. He has also moved to sever the counterclaims against the remaining third party defendants. The Firm has responded with its own motion, requesting that the Court abstain from exercising jurisdiction over the case in favor of a parallel action in D.C. Superior Court. The motions will be addressed in turn.
A. Motion to Dismiss Counterclaims Against Gentner and Scherer
The Firm has filed two counterclaims against third party defendants Gentner and Scherer, the first seeking the declaratory judgment described above and the second seeking payment of accounts receivable, overdrawn business expense accounts, and other monies owed. Moskowitz asserts that no subject matter jurisdiction exists over these counterclaims. Because the Court has neither federal question nor diversity jurisdiction over the counterclaims against Gentner and Scherer,  the supplemental jurisdiction statute, 28 U.S.C. § 1367, provides the only possible basis for subject matter jurisdiction.
Supplemental jurisdiction exists over "claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy...." 28 U.S.C. § 1367(a). Compulsory counterclaims are thus within the supplemental jurisdiction of the court. Painter v. Harvey, 863 F.2d 329, 331 (4th Cir. 1988) (holding that a compulsory counterclaim is "within the ancillary jurisdiction of the court to entertain and no independent basis of federal jurisdiction is required"); see also Williams v. Long, 558 F.Supp.2d 601, 603 (D. Md. 2008) (observing that the compulsory counterclaim standard is "equivalent" to the supplemental jurisdiction standard). Conversely, a permissive counterclaim that lacks an independent jurisdictional basis is not within the jurisdiction of the court. Painter, 863 F.2d at 331; Sue & Sam Mfg. Co. v. B-L-S Constr. Co., 538 F.2d 1048, 1051 (4th Cir. 1976). Accordingly, the Court will have jurisdiction over the counterclaims in this case if they are found to be compulsory.
A compulsory counterclaim "arises out of the transaction or occurrence that is the subject matter of the opposing party's claim, " while a permissive counterclaim does not. Fed.R.Civ.P. 13(a), (b). To aid the determination of whether a ...