Opinion
5-22-CV-01254-FB-RBF
03-24-2023
EDITH DE LA GARZA, Plaintiff, v. R & S DAIRY QUEENS, INC, Defendant.
To the Honorable Fred Biery, United States District Judge:
REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
RICHARD B. FARRER, UNITED STATES MAGISTRATE JUDGE.
This Report and Recommendation concerns Plaintiff Edith De La Garza's Motion to Dismiss Counterclaim. See Dkt. No. 25. All pretrial matters in this action have been referred for resolution pursuant to Rules CV-72 and 1 of Appendix C to the Local Rules for the United States District Court for the Western District of Texas. See Dkt. No. 8. Authority to enter this report and recommendation stems from 28 U.S.C. § 636(b)(1)(B).
For the reasons set forth below, the Motion to Dismiss Counterclaim, Dkt. No. 25, should be GRANTED.
Factual and Procedural Background
Plaintiff Edith De La Garza filed a Complaint on November 17, 2022, bringing claims against her former employer, Defendant R&S Dairy Queens, Inc. In it, De La Garza claims she is owed unpaid overtime compensation under the Fair Labor Standards Act (“FLSA”). Although De La Garza was employed as a salaried store manager by Dairy Queens, she alleges Dairy Queens made improper deductions from her payroll. These deductions, says De La Garza, caused Dairy Queens to lose the FLSA exemption protecting it from owing overtime compensation to salaried employees.
Dairy Queens responded to the Complaint with an Answer that included a counterclaim alleging theft in violation of the Texas Theft Liability Act. Dairy Queens later amended its Answer to additionally include the “window of correction” defense under 29 C.F.R. § 541.603(c). In the Answer, Dairy Queens admitted to making deductions from De La Garza's salary but urged the deductions were made to compensate Dairy Queens for missing cash receipts Dairy Queens believes De La Garza stole. According to Dairy Queens, De La Garza agreed to this arrangement. Dairy Queens alleges that De La Garza continued to steal cash receipts even after the alleged agreement, resulting in a total loss to Dairy Queens of $14,127.55.
De La Garza filed the present Motion to Dismiss Counterclaim. In her motion she argues the Court lacks jurisdiction over the state law theft counterclaim or, in the alternative, the Court should decline to exercise supplemental jurisdiction over the claim.
Analysis
Two issues require resolution to adjudicate the present motion. First is whether Defendant Dairy Queens' theft counterclaim is a compulsory or permissive counterclaim. Under Federal Rule of Civil Procedure 13, a compulsory counterclaim “arises out of the transaction or occurrence that is the subject matter of the opposing party's claim,” and it must be pled or else it is waived. Fed. R. Civ. Pro 13(a); Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Fed. Prac. & Proc. Civ. § 1403 (3d ed.). If a counterclaim is compulsory under Rule 13, then the Court has supplemental jurisdiction under 28 U.S.C. § 1367 and the motion should be denied. Cordero v. Voltaire, LLC, No. A-13-CA-253-LY, 2013 WL 6415667, at *3 (W.D. Tex. Dec. 6, 2013) (citations omitted); 13D Charles Alan Wright, Arthur R. Miller & Richard D. Freer, Fed.
Prac. & Proc. Civ. § 3567.1 (3d ed.). Second, and assuming the counterclaim is permissive, is whether the Court could and should exercise its discretion to consider a permissive counterclaim for theft in these circumstances.
A. Dairy Queens Fails to Demonstrate the Counterclaim Is Compulsory.
The Fifth Circuit utilizes the “logical relation” test to determine if a counterclaim is compulsory. Ormet Primary Aluminum Corp. v. Ballast Tech., Inc., 436 Fed.Appx. 297, 299 (5th Cir. 2011). This test is satisfied when “‘the same operative facts serve[] as the basis of both claims or the aggregate core of facts upon which the claim rests activates additional legal rights, otherwise dormant, in the defendant.'” Id. (quoting Plant v. Blazer Fin. Services, Inc. of Georgia, 598 F.2d 1357, 1361 (5th Cir. 1979)). Put another way, courts employing this test consider “(1) whether the issues of fact and law raised by the claim and counterclaim largely are the same; (2) whether res judicata would bar a subsequent suit on defendant's claim absent the compulsory counterclaim rule; (3) whether substantially the same evidence will support or refute plaintiff's claim as well as defendant's counterclaim; and (4) whether there is any logical relationship between the claim and the counterclaim.” Tank Insulation Intern., Inc. v. Insultherm, Inc., 104 F.3d 83, 85-86 (5th Cir. 1997) (quotation omitted); Poole v. Dhiru Hosp., LLC, No. SA-18-CV-636-XR, 2019 WL 3845454, at *8 (W.D. Tex. Aug. 15, 2019) (same). A counterclaim is compulsory if any of those questions can be answered in the affirmative. Tank, 104 F.3d at 86 (citation omitted).
1. The pertinent factors reflect that the counterclaim is permissive.
Looking first to the first, third, and fourth considerations listed above, it is apparent that Dairy Queens' theft counterclaim it is not based on the same set of operative facts as De La Garza's FLSA claim for unpaid overtime wages. Nor is the same evidence involved in the two claims. And there is likewise an insufficient logical relationship between the claims to support a conclusion that the theft counterclaim is compulsory.
To explain further, salaried employees like De La Garza are generally exempt from certain FLSA overtime requirements. See Helix Energy Sols. Group, Inc. v. Hewitt, 143 S.Ct. 677, 682 (2023). But if the employer makes “improper deductions” from an employee's salary, the employer can lose the exemption and owe overtime pay. 29 C.F.R. § 541.603(a). The pertinent regulations provide a list of seven specific exceptions to the general prohibition against salary deductions, i.e., a list of acceptable deductions. See 29 C.F.R. § 541.602(b). For example, an employer may deduct pay and retain the overtime exemption when an exempt employee takes unpaid medical leave under the Family and Medical Leave Act, or when an exempt employee is on an unpaid disciplinary suspension for violating written policies. Id. Notably, deductions to recoup stolen or allegedly stolen money is not a listed exception. Moreover, the regulations also provide the following non-exhaustive list of considerations for use when determining whether an employer has an “actual practice” of making “improper” deductions:
the number of improper deductions, particularly as compared to the number of employee infractions warranting discipline; the time period during which the employer made improper deductions; the number and geographic location of employees whose salary was improperly reduced; the number and geographic location of managers responsible for taking the improper deductions; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.29 C.F.R. § 541.603(a). As reflected in the applicable regulations, the facts and evidence related to the alleged theft have little bearing on whether the deductions were “improper” or whether Dairy Queens had an “actual practice” of making improper deductions. Proving theft would involve evidence such as bank deposits, deposit envelopes, and likely witness testimony. Such “theft” evidence would have little to nothing to do with whether De La Garza was an exempt employee and how much overtime she allegedly is due.
Nothing in this Report and Recommendation should be viewed as deciding what evidence may or may not be introduced later in this case, as it develops. Evidentiary questions will be addressed as they arise and are squarely presented.
Turning finally to the fourth consideration in evaluating whether a counterclaim is compulsory, there is no convincing reason to conclude here that res judicata would bar Dairy Queens from bringing a theft claim in state court. Indeed, De La Garza acknowledged at the March 17, 2023, status conference that no res judicata or similar bar would apply here if Dairy Queens were to pursue the theft allegation in state court.
2. The Court's conclusion is consistent with rulings in similar cases.
In keeping with the Court's conclusion, other decisions from this district and other courts within the Fifth Circuit similarly indicate that counterclaims for theft and other tortious conduct are often not compulsory in the FLSA context. See, e.g., Poole, 2019 WL 3845454, *9 (finding counterclaim relating to “receipts not deposited” not compulsory because they were unrelated to question of employment relationship and entitlement to minimum wage or overtime payments, and collecting similar cases); Cordero, 2013 WL 6415667, at *5 (finding counterclaims for theft and conversion not compulsory and collecting cases); Cortes v. Distribuidora Monterrey Corp., No. 3:08-CV-1077-M, 2008 WL 5203719, at *1 (N.D. Tex. Dec. 11, 2008) (finding counterclaims for conversion, theft, and breach of contract not compulsory).
3. Dairy Queens' invocation of good-faith and “window of correction” defenses doesn't alter the outcome.
Dairy Queens unsuccessfully argues that its “window of correction” and good-faith defenses to the FLSA action are based on the same facts as the theft counterclaim, thereby bringing the theft counterclaim more sharply into the context of the underlying FLSA action. To explain, “good faith” in this context relates to a good-faith interpretation of the FLSA, see 29 U.S.C. § 260, which would include the pertinent regulations, exemptions, and exceptions to exemptions-none of which, as explained above, address alleged employee theft from employers. And to establish the “window of correction” defense, Dairy Queens must show they did not have an “actual practice” of improper deductions, and that instead the deductions were “isolated or inadvertent.” 29 C.F.R. § 541.603. But as mentioned above, factors provided by the regulations for consideration in determining whether there was an “actual practice” of improper deductions include the number and time period of deductions, the number and location of employees affected, the number and location of managers responsible for making improper deductions, and whether there was a “clearly communicated policy permitting or prohibiting improper deductions.” Id. Although a non-exhaustive list, this list nonetheless demonstrates that the inquiry's focus lies with objective criteria, independent of the employer's subjective motivations for making deductions. Accordingly, this argument fails for the same reasons explained above-viewed in the context of the statute and regulations, the theft counterclaim and the affirmative defense are not based on the same set of operative facts, do not involve the same evidence, and are not logically connected to a sufficient extent to render the theft counterclaim compulsory.
B. Dairy Queens Fails to Demonstrate the Court Has Supplemental Jurisdiction Over the Counterclaim.
To the extent the counterclaim is permissive under Rule 13(b), it does not fall within the Court's supplemental jurisdiction under 28 U.S.C. § 1367. A permissive counterclaim must have independent grounds of federal jurisdiction, or otherwise fall within the court's supplemental jurisdiction under § 1367. As described above, the counterclaim and FLSA claim rely on related but separate facts, and so may not be part of the same “case or controversy” under Article III. See § 1367(a). This analysis is consistent with Fifth Circuit precedent, which disfavors counterclaims in FLSA cases that act as setoffs against allegedly unpaid wages. “‘[T]he only economic feud contemplated by the FLSA involves the employer's obedience to minimum wage and overtime standards. To clutter [FLSA] proceedings with the minutiae of other employer-employee relationships would be antithetical to the purpose of the Act.'” Martin v. PepsiAmericas, Inc, 628 F.3d 738, 741 (5th Cir. 2010) (quoting Brennan v. Heard, 491 F.2d 1, 4 (5th Cir. 1974), rev'd on other grounds, McLaughlin v. Richland Shoe Co., 486 U.S. 128 (1988)). See also id. at 740 (“Generally speaking, courts have been hesitant to permit an employer to file counterclaims in FLSA suits for money the employer claims the employee owes it, or for damages the employee's tortious conduct allegedly caused.”). The Fifth Circuit has only specifically recognized a few narrow exceptions to this general aversion to setoffs and those involve allegations of inflated hours and setoffs meant to counterbalance advance payments. The Fifth Circuit clarified the advance-payments exception in Martin, explaining it was a “narrow exception,” and that the Court “continue[s] to look with disfavor on set-offs unless the money being set-off can be considered wages that the employer pre-paid to the plaintiff-employee.” 628 F.3d at 742.
The counterclaim here does not fall into either of those exceptions. To the contrary, rather than making an advance payment to De La Garza, Dairy Queens deducted money from her salary and now argues more money should be deducted to fully recoup the allegedly stolen funds. Dairy Queens cannot convince the Court to exercise jurisdiction for its state law theft claim merely because it preemptively deducted part of the claimed offset. This is precisely the type of employer-employee dispute the Fifth Circuit directs courts to avoid. Accordingly, it is likely not part of the same “case or controversy” as the FLSA claim, as required for § 1367 supplemental jurisdiction, and even if it were, the Court should decline to exercise supplemental jurisdiction over the counterclaim in keeping with Fifth Circuit precedent. See 28 U.S.C. § 1367(c) (permitting courts to decline supplemental jurisdiction if the claim substantially predominates over the claim over which the court has original jurisdiction or in exceptional circumstances where there are other “compelling reasons” to decline jurisdiction).
Conclusion and Recommendation
For the reasons discussed above, it is recommended that the Motion to Dismiss Counterclaim, Dkt. No. 25, be GRANTED.
Instructions for Service and Notice of Right to Object/Appeal
The United States District Clerk shall serve a copy of this report and recommendation on all parties by either (1) electronic transmittal to all parties represented by attorneys registered as a “filing user” with the clerk of court, or (2) by mailing a copy by certified mail, return receipt requested, to those not registered. Written objections to this report and recommendation must be filed within fourteen (14) days after being served with a copy of same, unless this time period is modified by the district court. 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b). Objections, responses, and replies must comply with the same page limits as other filings, unless otherwise excused by the district court's standing orders. See Rule CV-7. The objecting party shall file the objections with the clerk of the court, and serve the objections on all other parties. A party filing objections must specifically identify those findings, conclusions, or recommendations to which objections are being made and the basis for such objections; the district court need not consider frivolous, conclusory, or general objections. A party's failure to file written objections to the proposed findings, conclusions, and recommendations contained in this report shall bar the party from a de novo determination by the district court. Thomas v. Arn, 474 U.S. 140, 149-52 (1985); Acuna v. Brown & Root, Inc., 200 F.3d 335, 340 (5th Cir. 2000). Additionally, failure to timely file written objections to the proposed findings, conclusions, and recommendations contained in this report and recommendation shall bar the aggrieved party, except upon grounds of plain error, from attacking on appeal the unobjected-to proposed factual findings and legal conclusions accepted by the district court. Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en banc).
IT IS SO ORDERED.