Baliga v. Link Motion Inc.

Background

The court had appointed Robert W. Seiden as Link Motion’s temporary receiver in 2019. Seiden appointed Lilin “Francis” Guo as his agent in China. The court later approved a Convertible Note Agreement under which Guo would lend Link Motion the Renminbi equivalent of $1.5 million to help fund operations in China and Hong Kong. The agreement allowed Guo to convert the loan, plus accrued interest, into Class B shares at $0.10 per American Depository Share equivalent, with one American Depository Share equal to five Class B shares.

After the agreement was made public, Vincent Wenyong Shi sought relief under Federal Rule of Civil Procedure 60. He asked the court to vacate its earlier approval of the agreement, arguing that the receiver had made false statements to the court and that the agreement was criminally usurious under New York law. Alternatively, Shi asked the court to reduce the number of shares Guo received through conversion.

Fraud-on-the-court claim

The court treated Shi’s allegations about false statements as a request for relief under Rule 60(d)(3), which permits a court to set aside a judgment for fraud on the court. The court said Shi had to prove, by clear and convincing evidence, that the alleged conduct interfered with the judicial system’s ability to decide the matter impartially and that the nonmoving party acted in bad faith.

Shi identified three allegedly false statements: that Guo was a “large original Link Motion shareholder”; that the agreement’s conversion terms were “ADS equivalent”; and that the loan proceeds would be held in a Link Motion wholly foreign-owned enterprise bank account in China.

The court rejected the claim as to all three statements. It said it knew Guo held more than 3 million Link Motion American Depository Shares, worth more than $10 million, before February 2018, and therefore understood that Guo had a significant financial stake in Link Motion. Although the meaning of “original” shareholder was unclear and Guo was not a registered shareholder, Shi did not show by clear and convincing evidence that the description affected the integrity of the approval process.

The court also found that the receiver had submitted the agreement itself, including its conversion terms, so the court was not misled about the agreement’s contents. Finally, the court concluded that the receiver’s accounting did not establish fraud because the loan was intended to fund operations and would not properly be treated as money recovered for purposes of the receivership accounting.

Usury claim

The court treated Shi’s usury argument as a request under Rule 60(b)(6), which allows relief only in extraordinary circumstances or when refusing relief would cause extreme hardship. Shi relied on New York law and argued that the agreement’s 25 percent interest rate had to be combined with the value of the share-conversion option. He asserted that this produced an effective annual rate of 86.6 percent and made the agreement void from the outset.

The court did not decide whether Shi was permitted to raise criminal usury in this procedural setting, calling that issue novel. Instead, it held that Shi had not met his burden of proving by clear and convincing evidence that the agreement was usurious when it was made. Valuing the conversion option was a complicated factual issue that generally required reliable valuation methods and possibly expert testimony. The court found that Shi’s appendix did not adequately explain its methodology, relied on a prior listed share price, did not account for the likely loss in value after Link Motion was delisted, and did not reliably value the option in 2019, when the agreement was executed.

Because Shi had not reliably established the value of the shares or the conversion option at the time of the bargain, the court could not determine that the option was even a discount, much less a usurious one. The court therefore found no extraordinary circumstances warranting relief under Rule 60(b)(6). It also rejected Shi’s related argument that the agreement was a fraudulent conveyance for lack of fair consideration.

Request to reduce Guo’s shares

Shi separately asked the court to cancel at least 34,124,500 of the 86,272,750 Class B shares Guo had received. Shi based this request on a difference between the amount converted into shares and the expenses ultimately approved in the receivership accounting.

The court declined to reduce the shares at that time. It explained that the accounting proceedings had concerned the receiver’s accounting and the propriety of Guo’s expenses. The court had approved a $207,000 salary for Guo and approved $45,597 in vendor expenses that the magistrate judge had recommended denying. The court said the remaining discrepancy was for the parties to resolve and retained jurisdiction over matters related to implementing the accounting and discharging the receiver if necessary.

Disposition

Judge Marrero ordered that Shi’s motion to vacate or otherwise modify the prior order approving the Convertible Note Agreement was DENIED. The prior approval remained in place, and the court did not reduce the shares converted under the agreement.