Nitel, Inc. v. Cerberus Business Finance, LLC

Background

Nitel became the sublessee of office space in Chicago, Illinois, beginning in 2016. It provided Rocket Fuel, Inc., the predecessor-in-interest to Sizmek DSP, Inc., with a $271,092.87 security deposit. Cerberus Business Finance, LLC and PEPI Capital, L.P. were secured lenders to Sizmek, which filed for Chapter 11 bankruptcy on March 29, 2019.

Nitel alleged that, shortly before Sizmek filed for bankruptcy, the defendants swept cash from Sizmek’s accounts, including some or all of Nitel’s security deposit. Nitel later filed a request for payment in Sizmek’s bankruptcy proceeding. On June 10, 2021, Nitel filed an adversary proceeding against the defendants in bankruptcy court, asserting Illinois-law claims for conversion and unjust enrichment.

Motions and Legal Standard

The defendants moved under 28 U.S.C. § 157(d) to withdraw the bankruptcy reference, meaning that the district court would take the adversary proceeding from the bankruptcy court. They also moved to consolidate the proceeding with another case that was then pending in the district court. The defendants later suspended the consolidation request after that other case was dismissed as to them without prejudice.

Under Second Circuit precedent, the court first considers whether the claims are core or non-core bankruptcy matters. It then weighs factors including judicial efficiency, consistency in bankruptcy administration, the parties’ jury-trial rights, and possible forum shopping. The party seeking withdrawal bears the burden of proof.

Court’s Analysis

The parties agreed that Nitel’s claims were non-core. The court explained that this factor weighs strongly toward withdrawal, although it does not automatically require withdrawal. The court also found that judicial economy favored withdrawal because the claims did not substantially overlap with the underlying bankruptcy case: Nitel was not pursuing claims against the debtor, and the debtor was not a party to the adversary proceeding.

The court did not decide whether Nitel had engaged in forum shopping. Because the other case was no longer pending, that issue was less relevant, and the other factors already supported withdrawal. The court did note that Nitel’s argument that it could not originally have brought its claims in district court because they would have been automatically referred to bankruptcy court was incorrect.

The court also addressed the defendants’ jury-trial argument. It stated that Illinois law provides a right to a jury trial on conversion claims, so it did not need to decide whether unjust-enrichment claims also carry that right. The court rejected the argument that efficiency required leaving the non-core proceeding in bankruptcy court until trial was ready, but it emphasized that the decision did not turn on the jury-trial factor because the other factors supported withdrawal.

Disposition

The court granted the motion to withdraw the bankruptcy reference. It denied the motion to consolidate as moot because the defendants had suspended that request. The order addressed where the proceeding should be heard and did not resolve the merits of Nitel’s conversion or unjust-enrichment claims.