10FN, Inc. v. Cerberus Bus. Fin.

• Decision Date: 18 October 2022
• Docket Number: 21-CV-5996 (VEC)
• Parties: 10FN, INC., Plaintiff, v. CERBERUS BUSINESS FINANCE, LLC, and PEPI CAPITAL, L.P., KEN SAUNDERS, ANDREW BRONSTEIN, SASCHA WITTLER, and MARK GRETHER, Defendants.
• Court: U.S. District Court — Southern District of New York

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10FN, INC., Plaintiff, v. CERBERUS BUSINESS FINANCE, LLC, and PEPI CAPITAL, L.P., KEN SAUNDERS, ANDREW BRONSTEIN, SASCHA WITTLER, and MARK GRETHER, Defendants.

No. 21-CV-5996 (VEC)

United States District Court, S.D. New York

October 18, 2022

OPINION AND ORDER

Valerie Caproni, United States District Judge

This case arises from the sublease of office space in Chicago from Sizmek DSP, Inc.(“Sizmek” or the “Debtor”).Network Innovations d/b/a Nitel, Inc.(hereafter “Nitel”), bringing this case through its assignee 10FN, Inc., has sued Sizmek's secured creditors, Cerberus Business Finance LLC(“Cerberus”) and PEPI Capital L.P.(“PEPI Capital”)(together, the “Secured Lenders”), for alleged conversion and unjust enrichment because the Secured Lenders swept Nitel's security deposit from Sizmek's accounts shortly before Sizmek filed for bankruptcy protection.For good measure, Nitel has also sued four of Sizmek's former or current executives (collectively, the “Executives” or “Individual Defendants”), in their individual capacities, for conversion and negligence.See generallyAm. Compl., Dkt. 28.The Secured Lenders and two of the Executives have moved to dismiss.^[1] For the following reasons, Defendants' motions to dismiss the Amended Complaint are GRANTED in full.

BACKGROUND^[2]

In 2016, Nitel subleased office space in Chicago, Illinois, from Rocket Fuel, Inc.(“Rocket Fuel”), the predecessor-in-interest to Sizmek.Amend.Compl.¶¶ 12-14, Exs. A-B.Nitel provided Rocket Fuel $271,092.87 as a security deposit (the “Security Deposit”) pursuant to a sublease (the “Sublease”); the Sublease is governed by Illinois law.Id.¶ 15;Agr., Dkt. 281, at 6, ¶ 21.

During the term of the Sublease, Sizmek acquired Rocket Fuel.In connection with that acquisition, Sizmek borrowed money from the Secured Lenders; Sizmek gave the lenders first-priority liens on “substantially all [of] the Debtor's assets ....”Amend. Compl. ¶ 17.Sizmek also executed account control agreements authorizing the Secured Lenders to “control and sweep the Debtor's accounts, including accounts that contained the Security Deposit.”Id.¶ 18.According to Plaintiff, the Secured Lenders and all of the Individual Defendants knew that Plaintiff's Security Deposit was being held in accounts that could be swept by the Secured Lenders.Id.¶¶ 25-26, 28-29.

Shortly before Sizmek filed for Chapter 11 bankruptcy on March 29 2019, ^[3] the Secured Lenders swept all cash from its accounts, including some or all of Nitel's Security Deposit.Id.¶¶ 19-20.

Effective June 27, 2019, Sizmek rejected its sublease with Nitel.Pl Mem. in Opp., Dkt. 73, at 3.After numerous unsuccessful attempts to obtain a refund of its Security Deposit,^[4] on June 10, 2021, Nitel filed a complaint against the Secured Lenders in the bankruptcy court asserting claims for conversion and unjust enrichment.See generallyEx. 1, Dkt. 5-2.This Court granted the Secured Lenders' motion to withdraw the bankruptcy reference as to Nitel's claim.Dkt. 17.On February 18, 2022, Plaintiff filed an Amended Complaint alleging conversion and unjust enrichment against the Secured Lenders and conversion and negligence against the Sizmek Executives.See generally Am. Compl.

The various motions to dismiss argue that the Court lacks subject-matter jurisdiction and that Plaintiff has failed to state a claim for conversion or negligence.The Court concludes that Plaintiff's Amended Complaint must be dismissed for failure to state a claim.^[5]

DISCUSSION

I.The Court Has Subject-Matter Jurisdiction Over Plaintiff's Action

The Court briefly addresses an Individual Defendant's argument that the Court lacks subject-matter jurisdiction over this adversary proceeding because Plaintiff has not alleged how its state law claims “could have any impact on” the Debtor's estate.Bronstein Mem. in Supp. of Mot., Dkt. 64, at 5.

Federal courts have subject-matter jurisdiction over all claims “arising under [the Bankruptcy Code], or arising in or related to cases under [the Bankruptcy Code].”28 U.S.C. § 1334(b).

For claims filed prior to a Chapter 11 plan confirmation, federal courts have “related to” jurisdiction “if the action's outcome might have any conceivable effect on the bankrupt estate.”SPV Osus Ltd. v. UBS AG, 882 F.3d 333, 339-40(2d Cir.2018);see alsoParmalat Capital Fin. Ltd. v. Bank of Am. Corp., 639 F.3d 572, 579(2d Cir.2011).An adversary proceeding has a “conceivable effect” on the estate if its outcome “could alter the debtor's rights, liabilities, options, or freedom of action” or could in any way have an “impact[ ] upon the handling and administration of the bankrupt estate.”SPV Osus Ltd., 882 F.3d at 340(quotingCelotex Corp. v. Edwards, 514 U.S. 300, 308 n.6(1995)).

Although the Supreme Court has stated in dicta that bankruptcy jurisdiction may be broader for Chapter 11 reorganizations than Chapter 7 liquidations, Celotex Corp., 514 U.S. at 310, there is currently “no distinct standard for ‘related to' jurisdiction under Chapter 7 . . . in the caselaw,”Allstate Ins. Co. v. Ace Secs. Corp., No. 11 Civ. 1914 (LBS), 2011 WL 3628852, at *6(S.D.N.Y.Aug. 17, 2011);see alsoIn re Penny Saver USA Publ'g, LLC, 587 B.R. 43, 51-52(Bankr. Del.2018)(noting the lack of a distinct standard for Chapter 7cases and applying the “conceivable effects” test to a Chapter 7 case because nothing about the adversary proceeding “implicate[d] characteristics unique to a Chapter 7 liquidation”).The Second Circuit has, however, applied the “conceivable effects” test to assess subject-matter jurisdiction over an adversary proceeding in a bankruptcy filed under the Securities Investor Protection Act that had been consolidated with a Chapter 7 proceeding.SeeSPV Osus Ltd., 882 F.3d at 341-42(concluding that the district court had jurisdiction over a lawsuit between third parties because of its “conceivable effect” on the estate);see alsoMcCord v. Papantoniou, 316 B.R. 113, 122 n.10(E.D.N.Y.2004)(noting that the distinction between Chapter 7 and Chapter 11cases for jurisdictional purposes is “immaterial”).The Court will, therefore, apply the “conceivable effects” test to this adversary proceeding.

Plaintiff's action falls squarely within this Court's subject-matter jurisdiction because if Plaintiff prevails against the Executives or the Secured Lenders, and recovers any of its Security Deposit, its administrative claim against the Debtor's estate will correspondingly diminish and the Secured Lenders' claim against the Debtor will correspondingly increase.SeeIn re Cuyahoga Equip. Corp., 980 F.2d 110, 114(2d Cir.1992)(concluding that disputes between third parties are sufficiently “related to” a bankruptcy if they“bring into question the very distribution of the estate's property”);In re Ampal-Am. Israel Corp., No. 12-13689 (SMB), 2015 WL 5176395, at *8(S.D.N.Y.Sept. 2, 2015)(“[C]ourts in this district have regularly held that if a resolution of an action between nondebtors would affect the amount of property available for distribution to the creditors of a bankruptcy estate . . . such civil proceeding will be regarded as related to the bankruptcy case.”)(cleaned up).In addition, Plaintiff accuses the Executives of participating in the Debtor's alleged tortious acts; if that claim is successful, it could give rise to an indemnification claim by the Executives against the Debtor's estate.SeeSPV Osus Ltd., 882 F.3d at 340(concluding that the district court had jurisdiction over an adversary proceeding because, inter alia, the plaintiff alleged that defendants were joint tortfeasors with the debtors; “if proven, [the claim] would provide defendants with a putative contribution claim, to be asserted in the bankruptcy proceedings”).

Finally, when determining whether it has subject matter jurisdiction, the Court need not conclude that Plaintiff is likely to succeed in its action; even the “potential alteration of the liabilities of the estate” is sufficient for jurisdiction to attach.In re WorldCom, Inc. Sec. Litig., 293 B.R. 308, 323(S.D.N.Y.2003)(concluding that court had jurisdiction over litigation among non-debtors because the dispute's outcome would potentially affect “the amount [in the estate] available for distribution to other creditors”).

In short, the Court has subject matter jurisdiction over this adversary proceeding.

II.New York Law Applies to Plaintiff's Claims

Although several of the parties, including Plaintiff,^[6] argue that New York law applies to Plaintiff's claims for conversion and negligence, one Individual Defendant argues that Illinois law applies.SeeSaunders Mem. in Supp. of Mot., Dkt. 68, at 6, 13-14(applying Illinois law);Saunders Reply, Dkt. 75, at 8-10(arguing that Illinois law applies).^[7]

Federal courts ordinarily apply a forum state's choice-of-law rules when determining which law applies to claims in an adversary proceeding.SeeIn re Coudert Bros. LLP, 673 F.3d 180, 188(2d Cir.2012)(citingIn re Gaston & Snow, 243 F.3d 599, 608(2d Cir.2001)(holding that the forum state's choice-of-law rules apply absent a “significant federal policy . . . calling for the imposition of a federal conflicts rule”)).Under New York law, courts must first determine whether there is any “actual conflict” between the laws of the relevant jurisdictions.Kinsey v. N.Y. Times Co., 991 F.3d 171, 176(2d Cir.2021).If so, in tort cases, New York “applies the law of the state with the most significant interest in the litigation.”Id.(cleaned up).

There is no conflict of law between New York and Illinois with respect to Plaintiff's conversion claim, as both jurisdictions require a plaintiff to allege unauthorized control over property in which the plaintiff...