Circuits Split on Applying Derivative Jurisdiction to a Lack of Personal Jurisdiction

As recently reported by the American Bankruptcy Institute, an Eleventh Circuit decision regarding derivative jurisdiction, in relation to subject matter jurisdiction, has created a circuit split.

Circuit Judge Adalberto Jordan determined that a federal court can have personal jurisdiction under 28 U.S.C  § 1334, even when a state court would not have personal jurisdiction over a defendant. In essence, Judge Jordan stated that derivative jurisdiction only applies to subject matter jurisdiction, not personal jurisdiction.

Removed Lawsuit Details

In the removed lawsuit, a chapter 7 bankruptcy trustee sued the owners of a corporate debtor in state court with the aim of recovering a $30 million dividend, paid five years before bankruptcy. The defendants removed the suit to federal court under statute 28 U.S.C. § 1441, which allows removal to federal court based on diversity or federal question jurisdiction.

Once the removal had taken place, the defendants filed a motion to dismiss, claiming they were not subject to jurisdiction in state court based on the state’s statutory jurisdiction. The chapter 7 trustee argued that the defendants were actually subject to nationwide jurisdiction, as laid out in Bankruptcy Rule 7004. The federal court said the trustee, had “related to” bankruptcy jurisdiction under Section 1334.

While the district court found 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, as the state court lacked personal jurisdiction.

What Is Derivative Jurisdiction?

The derivative jurisdiction doctrine “holds that if the state court where an action is filed lacks subject matter jurisdiction, the federal court, upon removal, also lacks subject matter jurisdiction, even if the federal court would have had subject matter jurisdiction if the suit had originally been filed in federal court.” Graber v. Astrue, 2009 WL 728564

The concept of derivative jurisdiction was initially established in 1922 in Lambert Run Coal Co. v. Baltimore & O.R. Co., 258 U.S. 377, 382 (1922). In this case, the U.S. Supreme Court ruled that the federal court lacked subject matter jurisdiction in a removed case where the state court had no subject matter jurisdiction.

In later cases, the Supreme Court established that derivative jurisdiction also applied where state courts lacked personal jurisdiction. Multiple circuits (including the Eleventh), held that derivative jurisdiction does apply to personal jurisdiction, and not only to subject matter jurisdiction.

Congress ostensibly overruled Lambert later, as is now stated in Section 1441(f). In a removed action, the section states 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.”

Personal Jurisdiction Circuit Split

Judge Jordan argued that multiple circuits applied the derivative jurisdiction doctrine 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.)

Despite the Supreme Court’s dicta, Judge Jordan expressly stated that he was going in a different direction, holding that the doctrine of derivative jurisdiction “does not apply in cases where the state court lacks personal jurisdiction over the defendants.”

Judge Jordan declined to follow the Supreme Court’s pronouncements, specifically that federal law governs procedure when a case has been removed. Judge Jordan cites Granny Goose Foods Inc. v. Brotherhood of Teamsters & Auto Truck Drives Local No. 70, 415 U.S. 423, 438 (1974). He reasoned that it does not follow that 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 a state court.”

Deciding that the federal court did not lack personal jurisdiction under the doctrine of derivative jurisdiction, Judge Jordan remanded for the district court to assess whether there was personal jurisdiction under Bankruptcy Rule 7004(d).

Judge Jordan said that the district court could transfer venue under 28 U.S.C. § 1406 to a district where the defendants are located, should personal jurisdiction in the state prove to be “unconstitutionally burdensome.”