“Derivative Jurisdiction” Is Procedural — Its Absence Is a Removal Defect — If Court Would Have Had Subject Matter Jurisdiction over Hypothetical Federal Complaint at Time of Filing, Federal Jurisdiction Exists

Rodas v. Seidlin, 656 F.3d 610 (7th Cir. 2011):

A. (Derivative) Jurisdiction

Before reaching the merits of this appeal, we must address a jurisdictional issue the United States has raised. When a case is removed from state to federal court, the jurisdiction of the latter is said "in a limited sense" to derive from the former. Edwards v. United States Dep't of Justice, 43 F.3d 312, 316 (7th Cir. 1994) (quoting Minnesota v. United States, 305 U.S. 382, 389, 59 S. Ct. 292, 83 L. Ed. 235 (1939)). Accordingly, "[w]here the state court lacks jurisdiction of the subject matter or of the parties, the federal court acquires none, although in a like suit originally brought in federal court it would have had jurisdiction." Id.; see also Gen. Inv. Co. v. Lake Shore & M.S. Ry. Co., 260 U.S. 261, 288, 43 S. Ct. 106, 67 L. Ed. 244, 1 Ohio Law Abs. 162 (1922) ("When a cause is removed from a state court into a federal court, the latter takes it as it stood in the former. A want of jurisdiction in the state court is not cured by the removal, but may be asserted after it is consummated."); Lambert Run Coal Co. v. Baltimore & O.R. Co., 258 U.S. 377, 382, 42 S. Ct. 349, 66 L. Ed. 671 (1922) (reciting the same language as appears in Edwards and Minnesota above). This doctrine has been referred to as the doctrine of derivative jurisdiction. E.g., Palmer v. City Nat'l Bank, of West Virginia, 498 F.3d 236, 239 (4th Cir. 2007). More than one commentator has observed that the justification for the rule is hardly obvious, but that makes it no less entrenched — or binding on us. Compare, e.g., Erwin Chemerinsky, Federal Jurisdiction § 5.5, at 288 (1989) ("This rule has little justification, but has long existed."), with Arizona v. Manypenny, 451 U.S. 232, 242 n.17, 101 S. Ct. 1657, 68 L. Ed. 2d 58 (1981) (characterizing the doctrine as "well settled").

The government's argument can be succinctly summarized: By its terms the doctrine of derivative jurisdiction applies to this case. Rodas commenced her action against the United States in state court, but federal sovereign immunity deprived the state court of subject matter jurisdiction. See Hercules, Inc. v. United States, 516 U.S. 417, 422, 116 S. Ct. 981, 134 L. Ed. 2d 47 (1996) ("The United States, as sovereign, is immune from suit save as it consents to be sued.") (alterations and quotation marks omitted). The United States has waived its sovereign immunity to tort liability only under the Federal Tort Claims Act, which vests exclusive jurisdiction over such claims in federal court. 28 U.S.C. § 1346(b)(1). Moreover, the doctrine of derivative jurisdiction has been abrogated in the general removal statute, see 28 U.S.C. § 1441(f), but not the federal officer removal statute, 28 U.S.C. § 1442(a)(1), which was invoked in this case. Contrary to the district court's ruling, removal under Section 1442(a)(1) was proper. Therefore, the doctrine of derivative jurisdiction deprived the district court of subject matter jurisdiction over the case, and we should vacate the judgment and instruct the district court to dismiss the United States and remand the claims against Soleanicov and Seidlin to state court. 16 Moore's Federal Practice § 107.15[1][b], at 107-130.21-130.22 (Matthew Bender 3d ed. 2009) (describing the proper procedure). The course is appropriate because pendent party supplemental jurisdiction, see 28 U.S.C. § 1367(a), provides the only basis for hearing the claims at issue in this appeal. Powerex Corp. v. Reliant Energy Servs., 551 U.S. 224, 234-35, 127 S. Ct. 2411, 168 L. Ed. 2d 112 (2007) (stating that it is "far from clear" that federal courts would have subject matter jurisdiction on these facts); Rifkin v. Bear Stearns & Co., Inc., 248 F.3d 628, 634 (7th Cir. 2001) (no subject matter jurisdiction over supplemental claims that were not attached to claims over which the federal court has original jurisdiction). Moreover, the judgment should not be spared by the Supreme Court's teachings in Grubbs and Caterpillar, because those cases do not apply to jurisdictional defects. See Grupo Dataflux v. Atlas Global Group, L.P., 541 U.S. 567, 574, 124 S. Ct. 1920, 158 L. Ed. 2d 866 (2004) ("The resulting holding of Caterpillar . . . is only that a statutory defect . . . did not require dismissal once there was no longer any jurisdictional defect.").

The government's argument has considerable surface appeal, and most of it is without flaw. For our purposes, the only questions are (1) whether removal was proper under Section 1442, such that the doctrine of derivative jurisdiction applies; and (2) whether the doctrine of derivative jurisdiction creates a defect in subject matter jurisdiction that evades the teachings of Grubbs and Caterpillar. We take up each question in turn.

1. Federal officer removal and the doctrine of derivative jurisdiction.

Removal under 28 U.S.C. § 1442(a)(1) was proper. Section 1442 is known as the federal officer removal statute. Section 1442(a)(1) provides that "[a] civil action commenced in a State court against . . . [t]he United States or any agency thereof or any officer (or any person acting under that officer) of the United States or of agency thereof, sued in an official or individual capacity for any act under color of such office" may be removed to federal court. ***

As to the doctrine of derivative jurisdiction, the parties agree that it applies to removals under this provision [28 U.S.C. § 1442] . The doctrine provides a background rule against which all of the removal statutes operate; it applies unless abrogated. See Palmer, 498 F.3d at 239. Congress has specifically abrogated the doctrine only with respect to removals under the general removal statute. See 28 U.S.C. § 1441(f).

Footnote 1. The provision provides: "The court to which a civil action is removed under this section 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."

***Given that Congress explicitly abrogated the doctrine of derivative jurisdiction only with respect to removals under Section 1441, it supports the notion that — for whatever reasons — Congress intended to keep the doctrine in place with regard to other removal provisions. See Bob Jones Univ. v. United States, 461 U.S. 574, 599, 103 S. Ct. 2017, 76 L. Ed. 2d 157 (1983) (failure of Congress to amend a statute, despite the fact that "adherents advocating contrary views [to an agency's interpretation of a statute had] ventilated the subject for well over three decades" supported the conclusion that Congress acquiesced to the agency's interpretation); Palmer, 498 F.3d at 245.

Having determined that the preconditions for removal under Section 1442(a)(1) were satisfied and that the doctrine of derivative jurisdiction applies to such removals, the next question is whether the doctrine is subject to limiting principles.

2. Limitations on the doctrine derivative jurisdiction.

The doctrine of derivative jurisdiction, despite its perhaps improvident name, is best understood as a procedural bar to the exercise of federal judicial power. That is, the doctrine creates a defect in removal, but is not an essential ingredient to federal subject matter jurisdiction. Because the district court would have had jurisdiction over a hypothetical complaint filed at the time it entered the judgment now under review, the fact that the state court lacked jurisdiction over the case when it was removed has no significance. To explain these conclusions, a word about the principles announced in Grubbs and Caterpillar is in order.

In Grubbs, the Supreme Court held that where a district court had "jurisdiction of the parties at the time it entered judgment . . . the validity of the removal procedure followed may not be raised for the first time on appeal." 405 U.S. at 700. The General Electric Credit Corp. had initiated suit against Grubbs in Texas state court, seeking recovery on a promissory note. Grubbs filed a "cross-action" against General Electric Credit Corp. and also brought the United States, which had a judgment lien against Grubbs, into the case by adding it as a party defendant. The United States removed the case to federal district court, relying on 28 U.S.C. § 1444, which provides for removal of certain foreclosure actions where the United States is a defendant, and added claims of its own. See also 28 U.S.C. § 2410(a) (providing that the United States may be named as a defendant in certain state-law property actions where the United States "has or claims a mortgage or other lien" on the property). All parties litigated the case as if jurisdiction in the district court were proper, and the case proceeded to a bench trial. At the conclusion of the trial, the district court ruled against General Electric Credit Corp. on the promissory note claim and in favor of Grubbs on his counter-claim. The district court dismissed the claims brought by and against the United States. Grubbs, 405 U.S. at 701-02.

On appeal, the Fifth Circuit held that the priority of the United States' judgment lien against Grubbs provided a "spurious" basis for removal under 28 U.S.C. § 1444. Because removal had not been authorized, the Fifth Circuit concluded that there was no other basis for the district court's jurisdiction over the action and the cause had to be remanded to state court. The Supreme Court reversed. It did not take issue with the appellate court's fix on the removal provision at issue but concluded that it had no bearing on the appeal. "Longstanding decisions of this Court make clear . . . that where after removal a case is tried on the merits without objection and the federal court enters judgment, the issue in subsequent proceedings on appeal is not whether the case was properly removed, but whether the federal district court would have had original jurisdiction of the case had it been filed in that court." Grubbs, 405 U.S. at 702. ***

The Supreme Court subsequently extended the rule in Grubbs to a situation in which the district court lacked subject matter jurisdiction at the time of removal because the parties were not completely diverse. Caterpillar Inc. v. Lewis, 519 U.S. 61, 117 S. Ct. 467, 136 L. Ed. 2d 437 (1996). In Caterpillar, the lower court would have had jurisdiction over a hypothetical suit filed at the time of judgment--the party who rendered diversity incomplete when the suit was first filed had dropped out of the case. The Court held that "a district court's error in failing to remand a case improperly removed is not fatal to the ensuing adjudication if federal jurisdictional requirements are met at the time judgment is entered." Caterpillar, 519 U.S. at 64. The result obtained even though the plaintiff opposed removal by filing a timely motion to remand. Id. at 70. Although the Court acknowledged that its ruling risked frustrating the rules Congress had imposed for removing cases, the argument ran "up against an overriding consideration." Id. at 75. "Once a diversity case has been tried in federal court, with the rules of decision supplied by state law . . . considerations of finality, efficiency, and economy become overwhelming." Id. ***

Put simply, if the doctrine of derivative jurisdiction constitutes a mere defect in the process by which a case reaches federal court, then this court may continue to exercise jurisdiction on appeal because the district court would have had original jurisdiction. If, on the other hand, the derivative jurisdiction doctrine creates a latent and persistent defect in the subject matter jurisdiction of federal courts, then the issue can be raised at any time by any one. E.g., Capron v. Van Noorden, 6 U.S. (2 Cranch) 126, 127, 2 L. Ed. 229 (1804).

Admittedly, grappling with the procedure-versus-subject-matter-jurisdiction question is challenging because the doctrine of derivative jurisdiction is itself difficult to explain as a matter of first principles. The argument is also difficult to evaluate because the doctrine does not fit cleanly into the classifications that Grubbs and Caterpillar discuss. Both cases anticipate that procedural defects will relate to statutory requirements for removal. See 405 U.S. at 702 (tacitly accepting the Fifth Circuit's determination that there was a statutory defect in the United States' removal petition); 519 U.S. at 73 (discussing the statutory flaw in Caterpillar's notice of removal). And while Caterpillar in particular phrases the jurisdictional inquiry as turning on whether original jurisdiction could have been exercised at the time of judgment, that does not answer the antecedent question of whether the doctrine of derivative jurisdiction is essential to a court's subject matter jurisdiction such that it cannot be cured. That notion brings us to the Supreme Court's decision in Grupo Dataflux, 541 U.S. 567, 124 S. Ct. 1920, 158 L. Ed. 2d 866. There, the parties on appeal were diverse at the time of judgment because the citizenship of one of the parties changed during the litigation, but were non-diverse at the time the suit was filed. The Supreme Court ruled that jurisdictional defect was not cured at the time of judgment, because the jurisdictional defect was that there was no diversity jurisdiction at the time of filing. The "time-of-filing rule . . . measures all challenges to subject-matter jurisdiction premised upon diversity of citizenship against the state of facts that existed at the time of filing" regardless of when raised. Id. at 570-71 (characterizing the rule as hornbook law).3 Implicit in the government's position is the argument that, like the time-of-filing rule that controls a party's citizenship for diversity purposes, the presence of subject matter jurisdiction in the state court simply is a prerequisite to federal subject matter jurisdiction over removed actions.

Footnote 3. In Caterpillar, too, the citizenship of the parties was determined at the time of filing. Although the parties were incompletely diverse at the time of removal, the party who created the defect in diversity dropped out of the case by the time of judgment. The feature is important, as it allows Caterpillar and Grupo Dataflux to be harmonized.

After examining the issue, we reject the argument that the doctrine of derivative jurisdiction constitutes an essential ingredient of federal subject matter jurisdiction over removed actions. To be sure, the argument enjoys superficial appeal based on the name and language of the doctrine, and at least a handful of authorities explicitly describe derivative jurisdiction in subject matter jurisdiction terms. Philadelphia & Reading Ry. Co. v. Sherman, 230 F. 814, 816 (2d Cir. 1916); Crowley v. S. Ry. Co., 139 F. 851, 853 (C.C. Ala. 1905); see also Nordlicht v. New York Telephone Co., 799 F.2d 859, 863 n.1 (2d Cir. 1986) (assuming that derivative jurisdiction presents a defect in subject matter jurisdiction that may be raised at any time, but concluding that the defect was not present); Daley v. Town of New Durham, 733 F.2d 4, 6-7 (1st Cir. 1984).

Nonetheless, it would be too easy to unquestioningly accept a handful of lower court authorities as conclusive merely because they incant the words "subject matter jurisdiction." The Supreme Court has long warned, even as it confesses occasional complicity, that courts are too quick to affix the "jurisdiction" label. Compare Henderson ex rel. Henderson v. Shinseki, 131 S. Ct. 1197, 1202, 179 L. Ed. 2d 159 (2011) ("Because the consequences that attach to the jurisdictional label may be so dramatic, we have tried in recent cases to bring some discipline to the use of this term."), with Ayers v. Watson, 113 U.S. 594, 599, 5 S. Ct. 641, 28 L. Ed. 1093 (1885) (courts have used the concept of jurisdiction upon removal "somewhat loosely"). As Judge Randolph of the D.C. Circuit has aptly observed, "'Jurisdiction' is a word of many, too many, meanings." United States v. Vanness, 85 F.3d 661, 663 n.2, 318 U.S. App. D.C. 95 (D.C. Cir. 1996). And "[n]ot all mandatory prescriptions, however emphatic, are . . . properly typed jurisdictional." Union Pacific R.R. Co. v. Bhd. of Locomotive Eng'rs & Trainmen Gen. Comm. of Adjustment, C. Region, 130 S. Ct. 584, 596, 175 L. Ed. 2d 428 (2009) (quotation marks omitted). Rather, "[s]ubject-matter jurisdiction properly comprehended . . . refers to a tribunal's 'power to hear a case,' a matter that 'can never be forfeited or waived.'" Id. (quoting Arbaugh v. Y & H Corp., 546 U.S. 500, 514, 126 S. Ct. 1235, 163 L. Ed. 2d 1097 (2006)).

The argument that the doctrine of derivative jurisdiction strikes at the heart of subject matter jurisdiction suffers from numerous flaws. At the outset, the textual allure of the jurisdictional argument is not so strong as it at first appears. While the doctrine says federal jurisdiction is derived from state courts, it in the same breath delivers its caveat that this is true only "in a limited sense." Lambert Run, 258 U.S. at 382. Moreover, the doctrine is expressly concerned with the acquisition of jurisdiction upon removal--"If the state court lacks jurisdiction of the subject-matter or of the parties, the federal court acquires none . . . ." Id. (emphasis added). The acquisition of jurisdiction upon removal speaks to so-called "removal jurisdiction," Kircher v. Putnam Funds Trust, 547 U.S. 633, 641, 126 S. Ct. 2145, 165 L. Ed. 2d 92 (2006); Wis. Dep't of Corrections v. Schacht, 524 U.S. 381, 385, 118 S. Ct. 2047, 141 L. Ed. 2d 364 (1998), not to the distinct concept of federal subject matter jurisdiction. Indeed, the modern instinct (in keeping with Henderson's call for discipline in the use of the word jurisdiction) is to eschew the term removal jurisdiction, "because removal is not a kind of jurisdiction—analogous to federal question jurisdiction and diversity of citizenship jurisdiction. Rather it is a means of bringing cases within federal courts' original jurisdiction into those courts." Wright, supra, § 3721, at 27 (emphasis added). See also Merrell Dow Pharm. Inc. v. Thompson, 478 U.S. 804, 808, 106 S. Ct. 3229, 92 L. Ed. 2d 650 (1986) (implicitly recognizing the distinction).

Therefore, it is not surprising that federal courts have regularly considered the doctrine of derivative jurisdiction as relating to "removal jurisdiction." Palmer, 498 F.3d at 248 ("removal jurisdiction is derivative of state court jurisdiction prior to removal"); In re Miles, 430 F.3d 1083, 1087 (9th Cir. 2005) (considering derivative jurisdiction in removal-jurisdiction terms); Hollis v. Florida State Univ., 259 F.3d 1295, 1298 (11th Cir. 2001) (same); North Dakota v. Fredericks, 940 F.2d 333, 337 (8th Cir. 1991) (same); Nishimoto v. Federman-Bachrach & Assocs., 903 F.2d 709, 714 n.11 (9th Cir. 1990) (same); Morda v. Klein, 865 F.2d 782, 784 (6th Cir. 1989) (same); W. & S. Life Ins. Co. v. Smith, 859 F.2d 407, 409 n.4 (6th Cir. 1988) (same); Patriot Cinemas, Inc. v. Gen. Cinemas Corp., 834 F.2d 208, 210 (1st Cir. 1987) (same); Sorosky v. Burroughs Corp., 826 F.2d 794, 801 (9th Cir. 1987) (same); Leach v. Fed. Crop Ins. Corp., 741 F.2d 200, 201 (8th Cir. 1984) (same); Witherow v. Firestone Tire & Rubber Co., 530 F.2d 160, 167-68 (3d Cir. 1976) (same); see also In re Dutile, 935 F.2d 61, 63 (5th Cir. 1991) (characterizing the doctrine as "a judicial gloss on the removal statutes"); Brandon v. Interfirst Corp., 858 F.2d 266, 269 n.* (5th Cir. 1988) (characterizing derivative jurisdiction as a bar to removal rather than a substantive limit on federal authority); Dep't of Revenue of State of Iowa v. Inv. Fin. Mgt. Co., 831 F.2d 790, 792 (8th Cir. 1987) (same); Chemerinksy, supra, § 5.5 at 288 (same). And the legislative history of Section 1441 indicates that Congress, too, has conceived of the doctrine merely as a "caselaw gloss" barring proper removal. See H.R. Rep. 99-423, at 8 (1985).

Thus, the received understanding of the doctrine seems to place it on the procedural side of the Grubbs line. "[A] 'procedural' defect is any defect that does not go to the question of whether the case originally could have been brought in federal district court." Baris v. Sulpicio Lines, Inc., 932 F.2d 1540, 1544 (5th Cir. 1991). Courts of Appeals should disregard procedural defects in the removal process, Grubbs and Caterpillar teach, so long as subject matter jurisdiction properly lies at the time the order of judgment under review was entered. Grupo Dataflux, 541 U.S. at 574 (distinguishing a requirement in the removal statute that a case "be fit for federal adjudication at the time the removal petition is filed" from the concept of subject matter jurisdiction). A procedural defect in removal is waivable. Baris, 932 F.2d at 1543-44.

More critically, subject matter jurisdiction is unyielding, Arbaugh, 546 U.S. at 514 (subject matter jurisdiction can never be waived), and the earliest cases confirm that the doctrine of derivative jurisdiction is not. The formulation of the rule cited in Lambert Run is an almost verbatim quotation from the Circuit Court of Ohio's decision in Fidelity Trust Co. v. Gill Car Co., 25 F. 737 (C.C. Ohio 1885). See also Lambert Run, 258 U.S. at 382 n.3 (citing Fidelity Trust). Indeed, the Fidelity Trust case provides the lengthiest, if at times tortured, exposition on derivative jurisdiction that we have located. In explaining the rule, the court was careful to specify that the rule is not without limits: "I do not mean to say that we measure our jurisdiction wholly by that of the state court, and that nothing can be adjudged here which could not have been adjudged there; for cases can be well imagined where this rule should be subject to qualification . . . ." 25 F. at 739; see also id. ("[A]nd it may be that we should, as the case required, extend or restrict our adjudication, as by our own rule of judgment we should be compelled to do"). If that sort of flexibility inheres in the rule, it is not a matter of subject matter jurisdiction—plain and simple. In that vein, it seems noteworthy that in every case we located in which the Supreme Court discussed the matter of derivative jurisdiction, the matter appears to have been raised promptly upon removal, prior to adjudication on the merits. See Minnesota, 305 U.S. at 384 (government filed motion to dismiss the action after removal); Gen. Inv. Co., 260 U.S. at 284-86, 288 (matter was raised after an initial appeal that did not involve a merits determination; dismissal should have been without prejudice); Lambert Run, 258 U.S. at 380, 382 (matter raised in a motion to dismiss the action after removal); Am. Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 258, 36 S. Ct. 585, 60 L. Ed. 987 (1916) (matter raised in a remand motion filed by the plaintiff); Cain v. Commercial Publ'g Co., 232 U.S. 124, 129, 132-34, 34 S. Ct. 284, 58 L. Ed. 534 (1914) (defect in personal jurisdiction in the state court raised upon removal, seemingly within 30 days); De Lima v. Bidwell, 182 U.S. 1, 1-2, 174, 21 S. Ct. 743, 45 L. Ed. 1041 (1901) (understanding a demurrer filed after removal to raise the matter of derivative jurisdiction).

The discussion in Fidelity Trust also shows that, unlike the time-of-filing rule at issue in Grupo Dataflux, the derivative jurisdiction rule is not based on the court's constitutional authority to adjudicate a claim. See also Bidwell, 182 U.S. at 174 (distinguishing the question of derivative jurisdiction from "the jurisdiction of the circuit court as a Federal court"). The Fidelity Trust Court roots its understanding of the doctrine based on whether a lawsuit, brought in the wrong forum, has been properly constructed. Fidelity Trust, 25 F. at 739-40; see also Note, The Supreme Court of the United States During the October Term, 1942: I, 43 Colum. L. Rev. 837, 868-69 (1943) (characterizing the principle as forum regit actum, or "the act of the forum rules"). Unwavering adherence to that notion, even once the case has been brought into the proper forum and judgment has been entered there, strikes us as akin to the common law forms of action, under which a person's effort to recover for a wrong might have been stymied if he invoked the incorrect writ. E.g., Guille v. Swan, 19 Johns 381 (N.Y. 1822) (action successfully characterized as trespass (direct injury), rather than trespass on the case (indirect injury), when a balloonist landed in plaintiff's land and was rescued by a crowd of onlookers who "beat[] down his vegetables and flowers"); Scott v. Shepherd, 96 E.R. 525 (K.B. 1773). But the key point is this: subject matter jurisdiction concerns the power of a court to hear a case; the doctrine of derivative jurisdiction is rooted in the idea that there is no case at all. The law has generally jettisoned such artificial notions, and in any event constitutional requirements are distinct from common law precepts, even old ones. E.g., Williams v. Florida, 399 U.S. 78, 86, 90 S. Ct. 1893, 26 L. Ed. 2d 446 (1970) (concluding that the 12-person jury requirement was "a historical accident" and finding no support for the notion that the Framers intended to preserve it).***

The foregoing analysis demonstrates that the doctrine of derivative jurisdiction, notwithstanding its perhaps improvident name, is a procedural bar to the exercise of federal judicial power. It is not an essential ingredient for a court's subject matter jurisdiction. Therefore the principles of Grubbs apply. ***

We conclude that because the district court would have had jurisdiction over a hypothetical complaint filed at the time it entered the judgment now under review, the fact that the state court lacked jurisdiction over the case when it was removed has no significance.

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