Creating a split of circuits, the Eleventh Circuit held that the doctrine of derivative jurisdiction only applies to the subject matter jurisdiction, not personal jurisdiction.
In substance overruling one of his circuit’s own precedents in light of an amendment to 28 U.S.C. § 1441(f), Circuit Judge Adalberto Jordan decided that a federal court after removal can have personal jurisdiction under 28 U.S.C. § 1334, even if the state court would not have long-arm jurisdiction over the defendant.
The Removed Lawsuit
A chapter 7 bankruptcy trustee sued the owners of a corporate debtor in state court to recover a $30 million dividend paid five years before bankruptcy. The defendants removed the suit to federal court under 28 U.S.C. § 1441, the statute allowing removal to federal court based on diversity or federal question jurisdiction.
After removal, the defendants filed a motion to dismiss, claiming they were not subject to jurisdiction in state court based on the state’s long-arm jurisdiction. The trustee countered by arguing that the defendants were subject to nationwide jurisdiction under Bankruptcy Rule 7004 because the federal court had “related to” bankruptcy jurisdiction under Section 1334.
Despite finding that it had bankruptcy jurisdiction under Section 1334, the district court dismissed the suit, reasoning that the doctrine of derivative jurisdiction required the federal court to dismiss because the state court lacked personal jurisdiction.
Derivative Jurisdiction Explained
Judge Jordan devoted pages to explaining the history of derivative jurisdiction. The doctrine was born in 1922 in Lambert Run Coal Co. v. Baltimore & O.R. Co., 258 U.S. 377, 382 (1922), where the Supreme Court ruled that the federal court lacked subject matter jurisdiction in a removed lawsuit because the state court did not have subject matter jurisdiction.
In dicta in later cases, Judge Jordan said, the Supreme Court said that derivative jurisdiction applied also to instances where the state court lacked personal jurisdiction. Several circuits, including the Eleventh Circuit, held that derivative jurisdiction applies to personal jurisdiction, not only to subject matter jurisdiction.
Judge Jordan explained how Congress ostensibly overruled Lambert years later in what now resides in Section 1441(f). In a removed action, the section says that a federal court “is not precluded from hearing and determining any claim in such civil action because the state court from which such civil action is removed did not have jurisdiction over that claim.”
The Split Regarding Personal Jurisdiction
Judge Jordan said that “a number of circuits have applied the doctrine of derivative jurisdiction to require dismissal in cases where the state court, prior to removal, lacked personal jurisdiction over the defendants (usually due to ineffective service of process).”
Even giving the Supreme Court’s dicta “the respect and consideration it is due,” Judge Jordan chose “to go in a different direction” by holding that “that the doctrine of derivative jurisdiction does not apply in cases where the state court lacks personal jurisdiction over the defendants.”
Prominently, Judge Jordan declined to follow high court dicta given the Supreme Court’s own pronouncements that federal law governs procedure once a case has been removed, citing Granny Goose Foods Inc. v. Brotherhood of Teamsters & Auto Truck Drivers Local No. 70, 415 U.S. 423, 438 (1974). He therefore could not understand “why a federal statute or rule governing personal jurisdiction (including one providing for nationwide service of process) would not control following the removal of a case from state court.”
Having ruled that the federal court did not lack personal jurisdiction under derivative jurisdiction, Judge Jordan remanded for the district court to determine whether there was personal jurisdiction under Bankruptcy Rule 7004(d).
If personal jurisdiction in the state would be “unconstitutionally burdensome,” Judge Jordan said that the district court could transfer venue under 28 U.S.C. § 1406 to a district where the defendants are located.
Creating a split of circuits, the Eleventh Circuit held that the doctrine of derivative jurisdiction only applies to the subject matter jurisdiction, not personal jurisdiction.
In substance overruling one of his circuit’s own precedents in light of an amendment to 28 U.S.C. § 1441(f), Circuit Judge Adalberto Jordan decided that a federal court after removal can have personal jurisdiction under 28 U.S.C. § 1334, even if the state court would not have long-arm jurisdiction over the defendant.
The Removed Lawsuit
A chapter 7 bankruptcy trustee sued the owners of a corporate debtor in state court to recover a $30 million dividend paid five years before bankruptcy. The defendants removed the suit to federal court under 28 U.S.C. § 1441, the statute allowing removal to federal court based on diversity or federal question jurisdiction.
After removal, the defendants filed a motion to dismiss, claiming they were not subject to jurisdiction in state court based on the state’s long-arm jurisdiction. The trustee countered by arguing that the defendants were subject to nationwide jurisdiction under Bankruptcy Rule 7004 because the federal court had “related to” bankruptcy jurisdiction under Section 1334.
Despite finding that it had bankruptcy jurisdiction under Section 1334, the district court dismissed the suit, reasoning that the doctrine of derivative jurisdiction required the federal court to dismiss because the state court lacked personal jurisdiction.