In re Thomas Reynolds

Case Type:
Case Status:
Reversed and Remanded
19-13537 (11th Circuit, Feb 23,2021) Published
The doctrine of derivative jurisdiction does not apply to removed cases where the state court lacked personal jurisdiction over the defendants. Under the doctrine, jurisdiction of the federal court on removal is derivative jurisdiction. If the state court lacks jurisdiction of the subject matter of the parties, the federal court acquires none. The case was remanded to the district court to apply Rule 7004(d) as a the basis for federal jurisdiction over the parties.
Procedural context:
Bankruptcy Trustee for the estates of the debtors (Atherotech and Atherotech Holdings) filed a complaint in Albama state court asserting several federal and state law claims stemming from the dividends issued by Atherotech Holdings to its shareholders. The defendants removed the case to federal court, and the district court ruled that while the case did not implicate a significant federal issue under 28 U.S.C. 1441, the trustee's claims "arose under" the Bankruptcy Code or were "related to" the debtors' bankruptcy proceedings. The district court then granted the defendants' motions to dismiss for lack of personal jurisdiction. The court concluded that Bankruptcy Rule 7004(d) that allows for nationwide service of process did not apply because jurisdiction in federal court was derivative of the Alabama state court. The Court also found that the defendants did not have sufficient minimum contacts with Alabama that would permit it to exercise personal jurisdiction over them. After the trustee filed an amended complaint where he only named Behrman Capital and Behrman Brothers as the sole defendants, the defendants again moved to dismiss for lack of personal jurisdiction. The district court dismissed the complaint with prejudice, and the trustee appealed the dismissal of both the original and amended complaint.
This case arises from the bankruptcy cases of Atherotech and Atherotech Holdings. Atherotech operated a lab that conducted testing on blood cholesterol levels and was wholly hold by Atherotech Holdings (who was owned by three shareholders Behrman Capital IV LP, Behrman Brothers LLC, and Midcap Financial Investment LP). Atherotech came under a DOJ investigation for payments of processing and handling fees (P&H fees). While the DOJ investigation was on-going, Atherotech borrowed $40.5 million under a credit agreement and executed a dividend recapitalization under which it paid its shareholders dividends of $31 million. When Atherotech could no longer pay the P&H fees, it filed for bankruptcy. Reynolds was appointed Chapter 7 trustee and eventually sold Atherotech's assets for $19.6 million. The Trustee filed suit in Alabama state court against the shareholders (including Behrman Capital IV LP, Behrman Brothers LLC, and Midcap Financial Investment LP).
Jordan, Lagoa and Brasher

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