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,

but it faced criticism, and it was “partially” abrogated by the addition of subsection (e) to 28 U.S.C. § 1441.20 The new subsection provided that the federal court on removal was “not precluded from hearing and determining any claim” simply “because the State court from which such civil action is removed did not have jurisdiction over that claim.”21 The court noted that it had stated that the amendment “abrogated the theory of derivative jurisdiction.”22 The court noted a further amendment in 2002, including redesignating subsection (e) to subsection (f), which clarified that the doctrine did not apply to removals under Section 1441.23 Later in its opinion the court appeared to explain its statement that the amendment “partially” abrogated the doctrine by noting that, in dictum, the Supreme Court had referenced the doctrine applying to both subject-matter and personal jurisdiction.24

Notwithstanding dictum from the Supreme Court and several circuit decisions to the contrary, the Eleventh Circuit stated that it was “choos[ing] to go in a different direction,” and held that “the doctrine of derivative jurisdiction does not apply in cases where the state court lacks personal jurisdiction over the defendants.”25 Regarding the reasons justifying its holding, the court explained that:

(i) The Supreme Court cases referencing that personal jurisdiction was within the scope of the doctrine of derivative jurisdiction “largely hinged on who the party was”;26 (ii) While Lambert Run Coal held that removal, in itself, did not cure the jurisdictional defect that existed in the state court, it did provide for the assertion of additional claims post-removal, meaning that the district court had the authority to establish personal jurisdiction, which would include applying

Bankruptcy Rule of Procedure 7004(d);27 (iii) Federal common law holds that federal procedure governs cases post-removal which, again, would mean the availability of nationwide service of process under Bankruptcy Rule of

Procedure 7004(d);28 (iv) It agreed with Third Circuit caselaw “reasoning that the doctrine of derivative jurisdiction requires dismissal only when the state court lacks subject-matter jurisdiction over the case, but holding that the plaintiff’s failure to comply with the applicable state statute of limitations could not be cured or remedied in federal court after removal;”29 (v) Leading federal court treatises, while not dispositive, have persuasively stated that the doctrine only applied to subject matter defects;30 and (vi) Unlike subject matter jurisdiction, personal jurisdiction can be waived.31

Providing guidance to the district court on remand, the Eleventh Circuit stated that it would need to ensure that the exercise of personal jurisdiction over the remaining defendants was “not unconstitutionally burdensome” under the Fifth Amendment.32 The court further stated that, under its decision in Aguacate Consolidated Mines, the district court could consider Reynolds’ alternative request for a transfer to the Southern District of New York under 28 U.S.C. § 1406, even if the district court could not exercise personal jurisdiction over the defendants under Alabama’s long-arm statute.33

The Eleventh Circuit’s opinion clarifies and confirms that, despite lack of personal jurisdiction over a defendant in a state court action, upon removal to federal court, the doctrine of derivative jurisdiction would not necessarily deprive a district court of exercising personal jurisdiction over the defendant if a procedural mechanism, applied consistent with the U.S. Constitution, allowed it to do so. 

Endnotes

1988 F.3d 1314 (11th Cir. 2021). 2“The summons and complaint and all other process except a subpoena may be served anywhere in the United States.” Fed. R. Bankr. P. 7004(d). 3Reynolds, 988 F.3d at 3. 4Id. at 1317. 5Id. at 1317-18. 6Id. at 1318. 7Id. 8Id. at 1318. 9Id. at 1318. 10Id. 11Id. 12Id. 13Id.at 1318-19 14Id. 15Id. at 1319-20. 16Id. at 1319. The court explained that ““[W]e do not require a party to replead a claim following a dismissal under Rule 12(b)(6) to preserve objections to the dismissal on appeal” where repleading “would have been futile and would have resulted in a second dismissal[.]”” Id. (quoting Dunn v. Air Line Pilots Ass’n, 193 F.3d 1185, 1191 n.5 (11th Cir. 1999)). 17258 U.S. 377 (1922). 18Id. at 1320. 19Id. (citing Lambert Run Coal Co., 258 U.S. at 382). The Supreme Court held that, because the state court lacked subject matter jurisdiction over the action brought to challenge an order of the ICC given that federal courts had exclusive jurisdiction over such claims, the district court upon removal also subject matter lacked jurisdiction. Id. 20Id.at 1320-21. 2128 U.S.C. § 1441(e) (1986). 22Reynolds, 988 F.3d at 1321 (citing Hollis v. Fla. State Univ., 259 F.3d 1295, 1298 (11th Cir. 2001)). 23Id. at 1321. 24 “These characterizations are dicta,” the court explained, “but Supreme Court dicta ‘is not something to be lightly cast aside.’” Id. at 1322 (quoting F.E.B. Corp. v. United States, 818 F.3d 681, 690 n.10 (11th Cir. 2016) (noting that “there is dicta ... and then there is Supreme Court dicta”)). 25Id. at 1322-23. 26Id. at 1323. 27Id. 28Id. at 1323-24. In support, the court noted that it had previously suggested that the “doctrine of derivative jurisdiction does not apply to defects in personal jurisdiction[.]” Id. at 18 (citing Aguacate Consol. Mines, Inc., of Costa Rica v. Deeprock, Inc., 566 F.2d 523, 525 (5th Cir. 1978) (“Although the jurisdiction of a federal court after removal is, in a limited sense, derivative, removed actions become subject to federal rather than state rules of procedure.”)). Decisions handed down by the former Fifth Circuit prior to October 1, 1981,

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