Commentary
The Doctrine of Derivative Jurisdiction Doesn’t Bar Exercise of Personal Jurisdiction in Removed Action By Paul A. Avron
Paul A. Avron is a partner with Berger Singerman LLP in Fort Lauderdale, Fla., and his practice includes corporate restructuring and appellate litigation in state and federal court.
In Reynolds v. Behrman Capital IV L.P., et al.,1 the Eleventh Circuit held that the doctrine of derivative jurisdiction did not apply to a removed cause of action with respect to the plaintiff bankruptcy trustee’s effort to cure a defect in personal jurisdiction in the state court action by using Bankruptcy Rule 7004(d), which provides for nationwide service of process, to establish personal jurisdiction.2 The specific issue before the court was whether the doctrine of derivative jurisdiction prevents the post-removal use of Bankruptcy Rule 7004(d) to establish personal jurisdiction over the defendants. Atherotech Inc. was owned by Atherotech Holdings, which was owned by Behrman Capital IV LP, Behrman Brothers LLC, and MidCap Financial Investment, LP.3 While under investigation by the Department of Justice regarding Medicare reimbursements, Atherotech borrowed approximately $40 million and then executed a dividend recapitalization under which it made dividend payments to Atherotech Holdings’ shareholders.4 Behrman Capital distributed its portion of the dividend to its limited partners and its general partner, Behrman Brothers, which, in turn, distributed its share of the dividends to its members, along with the portion it received from Behrman Capital as its general partner.5 Subsequently, Atherotech and Atherotech Holdings filed bankruptcy, and Thomas Reynolds was appointed Chapter 7 trustee.6 Reynolds filed suit in Alabama state court against numerous defendants arising from the dividends issued by Atherotech Holdings.7 The defendants removed the action to the district court, which concluded that removal was proper under 28 U.S.C. § 1452(a) because the claims asserted by Reynolds “arose under” the code or were matters “related to” the Artherotech bankruptcy proceedings.8 The defendants moved to dismiss for lack of personal jurisdiction, which the district court granted, having concluded that Bankruptcy Rule of Procedure 7004(d) did not apply because its jurisdiction was derivative of the state court and a lack of minimum
contacts precluded application of Alabama’s long-arm statute.9 The district court allowed Reynolds to file a motion seeking leave to file an amended complaint explaining why doing so would not be futile.10 In the amended complaint, Reynolds dismissed all defendants except for Behrman Capital and Behrman Brothers, which moved to dismiss for lack of personal jurisdiction.11 In response, Reynolds asserted Alabama’s long-arm statute or a transfer to the Southern District of New York.12 The district court granted the motion to dismiss, concluding that Alabama’s long-arm statute was unavailable, as was a transfer “because the derivative removal jurisdiction bars any federal court from acquiring personal jurisdiction over this suit after its removal from a state court that lacked such personal jurisdiction.”13 Reynolds appealed to the Eleventh Circuit from the dismissal of his initial and amended complaints, naming all the original defendants.14 The Eleventh Circuit first rejected the contention by MidCap that Reynolds’ failure to include it in the amended complaint waived any argument that the district court erred by initially dismissing it for lack of personal jurisdiction.15 The Eleventh Circuit explained that it previously held that a plaintiff does not waive a right to appeal the dismissal of a claim by failing to include that claim in an amended complaint.16 Turning to the central issue on appeal, the court recounted Reynolds’ argument that the doctrine of derivative jurisdiction, articulated in Lambert Run Coal Co. v. Baltimore & O.R. Co.,17 applied only to subject matter jurisdiction, while the Behrman entities argued that it applied to subject matter and personal jurisdiction.18 As explained by the Supreme Court, “[t]he jurisdiction of the federal court on removal is, in a limited sense, a derivative jurisdiction. If the state court lacks jurisdiction of the subject-matter or of the parties, the federal court acquires none, although it might in a like suit originally brought there have had jurisdiction.”19 The Eleventh Circuit noted that the doctrine had been applied over the years by the Supreme Court, July/August 2021 • THE FEDERAL LAWYER • 21
