Baliga v. Link Motion Inc.

Background

The dispute concerned a meeting held by the board of directors of Link Motion, Inc. on or about September 1, 2022. The board voted on whether to hire legal counsel to take control of a related malpractice lawsuit brought by Link Motion investor China AI Capital Limited against DLA Piper LLP, Link Motion’s original counsel in this action. The parties asked the court to restrain the board from taking further action.

Earlier orders had appointed Robert Seiden as a temporary receiver and authorized him to assume full control of Link Motion. Those orders prohibited Link Motion’s directors, officers, agents, and certain other individuals from controlling, managing, or participating in the company’s affairs. The receiver also had authority to commence, continue, join, or control litigation in the company’s name.

Link Motion and China AI argued that the board became free to act when the court dissolved the preliminary injunction on August 25, 2022. Wayne Baliga, the receiver, and DLA Piper argued that the board remained subject to the receiver’s control until the receiver was formally discharged. China AI also argued that disputes about the board’s operations belonged in the courts of the Cayman Islands under the internal-affairs doctrine.

Jurisdiction

The court found that it had ancillary jurisdiction. Ancillary jurisdiction allows a federal court to decide matters factually connected to another matter before it when doing so helps the court manage its proceedings, enforce its orders, and carry out its judgments.

The court concluded that deciding whether the board complied with the receiver-related orders was directly connected to interpreting and enforcing those orders. It rejected China AI’s argument that the internal-affairs doctrine required the issue to be decided under Cayman Islands law. The court stated that it was not choosing between competing corporate laws; it was deciding whether the board complied with this court’s orders. The Cayman Islands court had approved the receiver order and its grant of authority to the federal court.

Board’s Authority

The court held that the preliminary-injunction order and the receiver order were separate. The preliminary injunction had both forward-looking and backward-looking provisions. Dissolving the injunction removed some restraints, including restraints concerning certain existing matters, but did not end the receiver’s authority or restore the board’s power to take new actions.

The court interpreted the provision concerning litigation and arbitration as addressing corrective actions for matters that were already pending when the injunction was entered. It did not authorize the board to vote to begin or assume control over new litigation. The receiver order, by contrast, expressly gave the receiver forward-looking authority over litigation. The court also relied on an earlier recommendation that the board would be free to take business actions only after the receiver’s discharge.

Because the receiver had not yet been discharged, the court concluded that only the receiver retained the power to commence new litigation or direct the company’s new litigation-related actions. It therefore found that the board’s decision to assume control of the China AI suit violated the court’s orders.

Disposition

The court ordered that the board’s September 1, 2022 meeting and the specified votes taken at that meeting violated orders issued in the action. It further ordered that the board could not convene and vote to take any action not directed by the receiver until after the receiver was fully discharged upon the court’s approval of the receiver’s final accounting.

The court declined Baliga’s additional requests to stay the state-court proceedings and declare that the meeting and vote were a nullity with no legal effect. The court explained that the malpractice suit had already been removed to federal court, formally related to this action, and was pending before the court.