Baliga v. Link Motion Inc.

Background

Wayne Baliga sued derivatively on behalf of Link Motion Inc. A derivative action is one in which a shareholder seeks to assert claims belonging to the company. Baliga alleged that Vincent Wenyong Shi and other individual defendants engaged in gross mismanagement, self-dealing, fraud, theft of company assets, breaches of fiduciary duty, unjust enrichment, and violations of Sections 10(b) and 20(b) of the Securities Exchange Act.

On February 1, 2019, Judge Victor Marrero issued a preliminary injunction and appointed Robert W. Seiden as the company’s temporary receiver. The order authorized the receiver to remove directors, officers, employees, contractors, or agents from control of or participation in the company’s affairs. The receiver later removed Shi as a director.

Judge Marrero previously dismissed Baliga’s claims against Shi without prejudice because Baliga had not properly served him. Judge Marrero allowed Baliga to seek permission for alternative service after making the required showing. Judge Marrero also previously rejected arguments challenging the receiver’s appointment, explaining that Shi lacked standing to raise those issues while the court lacked personal jurisdiction over him, although the court considered some of his arguments as if submitted by a friend of the court.

Alternative Service on Shi

Baliga renewed his request to serve Shi by means other than the Hague Convention, an international agreement governing service of court papers abroad. Baliga submitted evidence that investigators had tried to locate Shi in China, that Shi appeared to move among different locations, and that service under the Hague Convention could take many months or might not succeed. Baliga also asserted that investigators had personally located and served Shi on one occasion.

Shi opposed the request, arguing that Baliga had not attempted service under the Hague Convention and had provided insufficient evidence that Shi was avoiding service. Shi’s counsel supplied a possible address in China, but Shi did not personally confirm that the address was accurate or agree to accept service there.

Judge Freeman found that Baliga had made significant efforts to locate Shi, that the circumstances supported court intervention, and that Shi had actual notice of the lawsuit. The court therefore granted Baliga’s renewed request for alternative service. Service of an amended summons and the amended complaint by mail or email to Michael James Maloney, Shi’s counsel, was deemed sufficient. Baliga was directed to complete service and file proof of service.

Shi had offered to accept service only on conditions, including limits on the effective date of service, protection from contempt for earlier conduct, additional time to respond, and payment or advancement of legal expenses. Judge Freeman found that Shi had not shown a legal basis for conditioning his consent in that manner, so the court analyzed and granted Baliga’s alternative-service request instead.

Challenge to the Receiver’s Authority

Shi argued that the receiver lacked authority to remove him as a director. Judge Freeman treated the challenge as, at least in substance, a request for reconsideration of the earlier receivership order. Under Local Civil Rule 6.3, a reconsideration motion generally must be filed within 14 days and must identify controlling law or facts the court overlooked.

Judge Freeman stated that most of Shi’s arguments were untimely and largely meritless because they either had been or could have been raised earlier. However, the receiver had obtained a February 3, 2020 order from the Grand Court of the Cayman Islands that recognized the receivership order but did not recognize the receiver’s authority to appoint or replace company directors. Judge Freeman found that the record did not explain why the receiver sought that order or what its effect was.

The court therefore deferred making a recommendation to Judge Marrero about whether the receivership order should be reconsidered as to the receiver’s authority to remove or appoint directors. Baliga was directed to provide the memorandum and order to the receiver. The receiver was directed to submit an explanation, supporting papers, and legal analysis about the Cayman Islands order by October 9, 2020.

China AI’s Motion to Intervene

China AI Capital Limited, which claimed to be a company shareholder, moved to intervene as of right under Federal Rule of Civil Procedure 24(a)(2). It sought to assert derivative claims challenging Baliga’s lawsuit and the receivership, including claims for declarations, injunctive relief, tortious interference with business relations, and conspiracy to commit that interference.

China AI argued that Baliga held American Depository Shares rather than registered company shares and therefore lacked standing under Cayman Islands law to bring derivative claims. It also argued that the receiver prevented the company’s board from acting independently. Baliga opposed intervention, argued that the motion was late, disputed the standing arguments, and asserted that China AI and Shi were closely related or colluding. Shi did not oppose China AI’s intervention motion.

Rule 24(a)(2) requires a proposed intervenor to show four things: a timely motion, an interest related to the case, a risk that the interest will be impaired without intervention, and inadequate representation by the existing parties. Judge Freeman held that China AI failed to satisfy these requirements.

First, the motion was untimely. China AI had notice of the action for at least 10 and a half months, and possibly 15 months, before the motion was accepted for filing. The court found that China AI offered no compelling explanation for waiting. Second, China AI’s proposed claims would create a substantially different lawsuit focused on Baliga’s conduct in bringing the case, rather than the alleged misconduct by Shi and the other individual defendants. Third, China AI had not shown that its interests would be impaired without intervention. Fourth, China AI had not made the required showing that the company’s interests could not be adequately represented by existing parties, particularly Shi, whose stated objectives appeared aligned with China AI’s proposed objectives.

The court therefore denied China AI’s motion to intervene as of right. The court did not decide the ultimate merits of China AI’s standing arguments or determine whether Baliga could maintain all of his claims.

Standing and Further Pleading

Judge Freeman noted that standing—the requirement that a plaintiff have the legally required connection to assert a claim—could affect the court’s subject-matter jurisdiction. But the court could not resolve the issue from the existing amended complaint because Baliga had not identified which claims were derivative and which were direct. The court also noted unresolved questions about the law governing his derivative claims and the effect of his federal securities claims.

Baliga was ordered to file a second amended complaint by October 5, 2020, separating his derivative and direct claims and allowing additional material factual allegations. Shi was permitted until November 4, 2020, to move, answer, or otherwise respond. The parties were also directed to propose a discovery schedule, and the court scheduled a telephone case-management conference for October 15, 2020.

Disposition

The court granted Baliga’s renewed request for alternative service on Shi; denied China AI Capital Limited’s motion to intervene as of right; ordered Baliga to file a second amended complaint; deferred a recommendation about reconsidering the receiver’s authority; and entered additional directions concerning the receiver, discovery, and case management.