Nitel, Inc. v. Cerberus Business Finance, LLC

Background

Network Innovations doing business as Nitel, Inc. subleased Chicago office space from Rocket Fuel, Inc., which Sizmek DSP, Inc. later acquired. Nitel paid a $271,092.87 security deposit under the sublease. Sizmek borrowed money from Cerberus Business Finance, LLC and PEPI Capital, L.P. (the secured lenders) and gave them liens on substantially all of its assets. Account-control agreements allowed the lenders to control and sweep Sizmek’s accounts.

Shortly before Sizmek filed for Chapter 11 bankruptcy on March 29, 2019, the secured lenders swept all cash from Sizmek’s accounts, allegedly including some or all of Nitel’s security deposit. After unsuccessful efforts to obtain the deposit, Nitel assigned its claims to 10FN, Inc., which filed an amended complaint against the secured lenders and Sizmek executives Ken Saunders, Andrew Bronstein, Sascha Wittler, and Mark Grether. The complaint asserted conversion and unjust enrichment against the secured lenders, and conversion and negligence against the executives.

The secured lenders and executives Saunders and Bronstein moved to dismiss. Wittler and Grether answered and asserted cross-claims against Cerberus for indemnity and contribution.

Jurisdiction and governing law

The court rejected Bronstein’s argument that it lacked subject-matter jurisdiction. Bankruptcy-related jurisdiction covers claims whose outcomes could have any conceivable effect on the bankruptcy estate. A recovery by 10FN could reduce its administrative claim against Sizmek’s estate and increase the secured lenders’ claim. The executives’ potential liability could also create indemnification or contribution claims against the estate. The court therefore held that it had subject-matter jurisdiction.

The court applied New York law to the conversion, negligence, and unjust-enrichment claims. It found no relevant conflict between New York and Illinois law for conversion or negligence. Although the sublease contained an Illinois choice-of-law provision, the court concluded that the provision was not broad enough to govern the tort claims.

Conversion claims

Under New York law, conversion requires a plaintiff to have a possessory right or interest in property and to show that the defendant exercised dominion over it or interfered with it. The court examined Illinois law to determine the nature of 10FN’s interest in the deposit under the sublease.

The sublease gave 10FN a right to have the deposit returned within 30 days after the sublease ended, assuming it was not in default, but it did not require Sizmek to segregate the deposit or hold it in trust. It also allowed Sizmek to draw on the deposit if 10FN defaulted. The court found that 10FN had not identified Chicago or Illinois law requiring commercial landlords to segregate commercial security deposits or hold them in trust. The court treated the deposit as an unsecured obligation that 10FN had to pursue in Sizmek’s bankruptcy case, rather than property that could support a conversion claim against the secured lenders or executives.

The court dismissed the conversion claims against both the secured lenders and the individual defendants for failure to state a claim.

Negligence claims

A negligence claim under New York law requires a duty owed by the defendant, a breach of that duty, and a resulting injury. 10FN alleged that Sizmek had a duty under Illinois law to segregate and preserve the deposit. Because the court found that Chicago or Illinois law imposed no such duty on Sizmek for this commercial sublease, it held that 10FN had not adequately alleged a duty supporting negligence claims against the executives. The court dismissed those claims for failure to state a claim.

Unjust-enrichment claim

An unjust-enrichment claim requires an allegation that the defendant was enriched at the plaintiff’s expense and that fairness requires restitution. The claim is generally unavailable when a valid contract governs the subject matter of the dispute.

The court held that the sublease governed the disposition of the security deposit, even though 10FN had no contract with the secured lenders. It therefore dismissed 10FN’s unjust-enrichment claim against the secured lenders for failure to state a claim.

Disposition

The court granted the defendants’ motions to dismiss in full. It also dismissed the cross-claims brought by the individual defendants as moot, directed the clerk to terminate the open motions, and closed the case. The opinion does not state that the dismissals were with or without prejudice.