Opinion
18cv11642 (VM) (DF)
03-09-2022
WAYNE BALIGA, Plaintiff, v. LINK MOTION INC. F/K/A NQ MOBILE INC., VINCENT WENYONG SHI, ROLAND WU, and ZEMIN XU, Defendants.
HONORABLE VICTOR MARRERO, U.S.D.J.
REPORT AND RECOMMENDATION
DEBRA FREEMAN UNITED STATES MAGISTRATE JUDGE
Currently before this Court is a motion by defendant Vincent Wenyong Shi (“Shi”) to vacate the Court's Order of February 1, 2019, which, at the request of plaintiff Wayne Baliga (“Baliga”) had put in place a preliminary injunction and appointed a temporary receiver to safeguard the assets of defendant Link Motion, Inc. (the “Company”). For the reasons discussed below, I recommend that Shi's motion (Dkt. 227) be granted in part and denied in part. Specifically, while I recommend that the preliminary injunction be dissolved and that Robert W. Seiden, Esq. (“Seiden”), who was appointed Temporary Receiver for the Company (the “Receiver”) be discharged, I do not recommend that the Court's prior Order be found to be void ab initio, nor do I recommend that the Receiver be discharged immediately. Rather, I recommend that the Court find that (1) its prior Order was duly authorized when made; (2) it would now be appropriate to dissolve the preliminary injunction; and (3) the receivership should be terminated after an accounting by the Receiver and a determination by the Court as to whether the costs of the receivership should all be borne by the Company, or a portion borne by Baliga.
This Court notes that also pending before the Court is a motion by Shi and the Company to dismiss Baliga's Second Amended Complaint. (Dkt. 261.) This Report and Recommendation is not intended to address the arguments raised in that motion.
BACKGROUND
This Court has written extensively about the factual and procedural history of this action, and familiarity with its prior opinions is assumed. Nonetheless, for ease of reference and to provide context for the issues now before it (which flow directly from issues previously addressed), this Court finds it worth repeating some of the background facts it has previously described. Accordingly, Sections A through C, below, are largely taken from the Court's Memorandum and Order of May 26, 2021 (“5/26/21 Order”) (Dkt. 221).
A. Baliga's Original Complaint, and the Court's Issuance of a Preliminary Injunction and Appointment of the Receiver
On December 13, 2018, Baliga commenced this action by filing a “Verified Shareholder Derivative Complaint,” naming the Company as a nominal defendant, and asserting claims against its Chairman of the Board and Chief Operating Officer (Shi), its acting Chief Executive Officer (Jia Lian (“Lian”)), and one of its Directors (Xiao Yu (“Yu”)) (collectively, the “Individual Defendants,” and, together with the Company, “Defendants”). (See Verified Shareholder Derivative Complaint, dated Dec. 13, 2018 (“Compl.”) (Dkt. 1).) The core of Baliga's allegations was that defendant Shi, aided by Lian and Yu, had engaged in “gross mismanagement” of the Company, including by “egregious self-dealing”; had made false and misleading statements and omissions to the Company's Board, its shareholders, and the investing public; and had engaged in “outright fraud and theft of [Company] assets” over the period leading up to the filing of the Complaint. (Id. ¶ 2; see generally id.)
In his Complaint, Baliga, a holder of American Depositary Shares (“ADSs”) appeared to plead solely derivative claims against the Individual Defendants for breaches of fiduciary duty (see id. ¶¶ 38-41; see also id. ¶ 16 (alleging that, “[i]n their recent rampage to destroy the Company and extract as much value for themselves as possible, the Individual Defendants have breached their fiduciary duties to the Company, the Board, and its shareholders . . .”)) and unjust enrichment (see id. ¶¶ 42-45), and against all Defendants for securities law violations (see id. ¶¶ 46-49 (alleging violations of Section 10(b) of The Exchange Act and Rule 10b-5), ¶¶ 50-54 (alleging violations of Section 20(a) of The Exchange Act)). As one of his stated claims, Baliga also asserted that a receiver should be appointed for the Company (see id. ¶¶ 36-37), specifically to:
An American Depositary Receipt (“ADR”) “is a security that represents shares of non-U.S. companies that are held by a U.S. depositary bank outside the United States [].” Investor Bulletin: American Depositary Receipts, U.S. SECURITIES AND EXCHANGE COMMISSION (“SEC”), https://www.sec.gov/investor/alerts/adr-bulletin.pdf (last accessed Mar. 3, 2022). “An ADR is a negotiable certificate that evidences an ownership interest in [ADSs] which, in turn, represent an interest in the shares of a non-U.S. company that have been deposited with a U.S. bank.” Id. This Court notes that, at various points in their submissions the parties use the abbreviation “ADS” or “ADR” interchangeably.
(a) prevent the further dissipation of the Company and its assets; (b) take the necessary steps in China to claw back the assets that were wrongfully transferred out of the ownership of the Company; and (c) manage the Company's operations, prevent the Company from being delisted from the [New York Stock Exchange (“NYSE”)], and restore value to the Company and its shareholders(id. ¶ 37).
At the outset of the case, based principally on the allegations in the Complaint that Shi and the other Individual Defendants were effectively looting the Company of its assets, Baliga moved before the Honorable Victor Marrero, U.S.D.J., for a temporary restraining order, as well as an order to show cause for a preliminary injunction and the appointment of a temporary receiver to protect the Company's assets. (See ex parte application filed on Dec. 14, 2018 and docketed on June 10, 2019 (Dkt. 63).) Specifically, Baliga's request for this preliminary equitable relief was grounded in his assertion that he was likely to prevail on the merits of his breach-of-fiduciary-duty claim. In fact, at the time, he argued that the Court need not even consider his likelihood of success on his other claims, stating:
Here, in deciding whether the Plaintiff is likely to succeed on the merits, it is unnecessary for the Court to address each of the claims in the Complaint. While a clear reading of the facts, circumstances, and evidence surrounding this action unquestionably shows that the Individual Defendants are liable for the entirety of the action and all of the counts therein, it is undisputable that the Individual Defendants have unambiguously breached their fiduciary duties to [the Company] and its shareholders by inter alia: (a) grossly mismanaging the Company, and (b) transferring ownership of [the Company's] assets to third-parties without approval from the Board and for the personal gain of the Individual Defendants. These unquestionable breaches are far and away enough to satisfy likelihood of success on the merits.(Plaintiff's Memorandum of Law in Support of Temporary Restraining Order, Preliminary Injunction, and Temporary Receiver, dated Dec. 14, 2018 (Dkt. 63-3), at ECF 4.)
As the pages of this filed document are not numbered, this Court has cited to the page numbers affixed to the document by the Court's Electronic Case Filing (“ECF”) system.
In light of Baliga's representations, Judge Marrero granted the proposed temporary restraining order on December 14, 2018 (Dkt. 7), and - without opposition by the Company (see Dkt. 23) - he proceeded to grant the proposed preliminary injunction and to appoint Seiden as Temporary Receiver on February 1, 2019 (see Order Granting Preliminary Injunction and Appointing Temporary Receiver, dated Feb. 1, 2019 (“Preliminary Injunction and Receivership Order”) (Dkt. 26)). The preliminary injunction was largely geared to enjoining the Individual Defendants from stripping assets from the Company (see id., at § I(1)), and the receivership portion of the Order authorized Seiden, in the capacity of Temporary Receiver for the Company, “to protect the status quo of the Company, to prevent waste, dissipation, or theft of assets to the detriment of investors, and to assure timely and objective analysis of the financial condition of the Company” (id., at § II(2)).
B. Baliga's First Amended Complaint
On June 11, 2019, Judge Marrero issued a Decision and Order (Dkt. 64), by which, inter alia, the Court dismissed Baliga's securities claims, with leave to amend to correct a pleading defect (i.e., Baliga's initial failure to plead, as a necessary element of his claims, that he had actually purchased or sold Company ADSs). On June 21, 2019, Baliga then filed an Amended Complaint (see First Amended Shareholder Derivative Complaint, dated June 20, 2019 (“Am. Compl”) (Dkt. 68)), which was identical in all material respects to his original Shareholder Derivative Complaint, except that it added allegations regarding his ADS purchases (see id. ¶ 32).
C. The Raising of Issues Regarding Baliga's Standing, and His Filing of a Second Amended Complaint
By motion that this Court deemed filed as of March 26, 2020 (see Dkt. 137), non-party China AI Capital Limited (“China AI”) sought leave to intervene in this action (see Dkts. 111, 122, 127, 130, 131). By Memorandum and Order dated September 4, 2020 (Dkt. 163), this Court denied that motion for a number of reasons, not all of which are relevant here. What is important to note in connection with Baliga's now-pending motion is that China AI contended that, while it - as a registered shareholder in the Company - would have standing to assert derivative claims in this action under the governing law, Baliga - as a beneficial shareholder (i.e., the owner of ADSs) - had, in fact, lacked standing to bring such claims. (See generally China AI Mem.)
China AI asserted that, as the Company was incorporated in the Cayman Islands, the law of that jurisdiction would control on the issue of standing. (See Memorandum of Law of Intervenor Plaintiff China AI Capital Limited in Support of Motion To Intervene as of Right, dated Mar. 5, 2020 (“China AI Mem.”) (Dkt. 129), at 7-8 (arguing that, for Baliga's asserted claims, this choice-of-law issue was dictated by New York's “internal affairs doctrine,” under which “‘the rights of shareholders of a foreign company (including the right to sue derivatively) are determined by the law of the place where the company is incorporated'” (quoting Howe v. Bank of N.Y. Mellon, 783 F.Supp.2d 466, 475 (S.D.N.Y. 2001))).)
In response to China AI's motion, Baliga argued, inter alia, that, even if he lacked standing to assert his derivative claims (a point he did not concede), his Amended Complaint included both derivative and direct claims, and he contended that he certainly had standing to assert the latter. (See Plaintiff's Memorandum of Law in Opposition to China AI Capital Limited's Motion to Intervene, dated May 4, 2020 (Dkt. 141), at 13 (“Although the Complaint is styled as a derivative action, the [First Amended Complaint] asserts numerous direct claims under common law and the federal securities laws....[Baliga] has standing to bring these claims in New York and China AI has failed to demonstrate otherwise.”).) He also requested that, should the Court find that he lacked standing to maintain his derivative claims, he be permitted to file a second amended complaint, to “remove any derivative claims and allege direct claims only.” (Id., at 16.)
Although it denied China AI's motion to intervene, this Court nonetheless noted that a question as to Baliga's standing had been raised. (See Dkt. 163, at 51.) This Court pointed out that, as a plaintiff's lack of standing will deprive a court of subject-matter jurisdiction, a judicial inquiry regarding standing may be made even absent a motion. (See id. (noting that, “because a federal court must satisfy itself that it has subject-matter jurisdiction over a case before it may act, it may consider the issue of standing sua sponte at any time” (citing Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., Div. of Ace Young Inc., 109 F.3d 105, 107 (2d Cir. 1997)).) At that point, however, this Court did not reach the question of Baliga's standing because, upon its review of the Amended Complaint, it was unable, as a threshold matter, to discern which of Baliga's claims he had supposedly intended to assert derivatively, and which directly. Accordingly, this Court directed Baliga to file a second amended pleading, for the purpose of “clarifying which of his asserted claims [were] derivative claims, and which [were] direct claims.” (Id., at 53.)
On October 5, 2020, Baliga proceeded to file his Second Amended Complaint. (Second Amended Complaint, dated Oct. 5, 2020 (“2d Am. Compl.”) (Dkt. 166).) Baliga, however, did not adhere to this Court's instructions to file an amended pleading so as to “clarify” which of his previously asserted claims were meant to be derivative and which direct; rather, his second amended pleading altered his prior pleading obviously and substantially.
Most importantly, in seeming acceptance of China AI's assertion that he had lacked standing to assert derivative claims, Baliga no longer captioned his pleading as a “Shareholder Derivative Complaint,” and he removed all prior characterizations of this case as a derivative action. (See generally id.) Critically, he dropped his breach-of-fiduciary-duty claim against the Individual Defendants - the claim that had served as the focal point of his derivative claims and the basis for his initial request that the Court grant a preliminary injunction and appoint a receiver. Further, although Baliga again asserted a claim against Shi for unjust enrichment (id. ¶¶ 156-59 (Count IV)), he modified that claim to allege that Shi was unjustly enriched not only “at the expense of and to the detriment of” the Company, but also at Baliga's own expense and to his own detriment (compare Am. Compl. ¶ 44, with 2d Am. Compl. ¶ 157).
Overall, Baliga transformed his pleading to make securities-fraud claims its centerpiece, asserting those claims directly against the Company as well as against the Individual Defendants (see 2d Am. Compl. ¶¶ 140-44 (Count I), 145-50 (Count II)), and devoting nearly 30 pages to laying out Defendants' allegedly false and misleading statements and omissions, as well as the facts purportedly showing scienter, loss causation, and reliance (see id. ¶¶ 25-126). He also added two common-law claims against all Defendants (including the Company) for fraud and negligent misrepresentation (see id. ¶¶ 160-64 (Count V), 165-76 (Count VI)).
Finally, in his Second Amended Complaint, Baliga asserted a claim for “Maintaining Or Re-Appointing The Receiver” (id. ¶¶ 151-55 (Count III)), which he described as a “claim for relief in equity as provided for in the Exchange Act and separately in connection with Plaintiff's equitable claims” (id. ¶ 152). Baliga, however, neither acknowledged nor addressed, in any filing, the fact that, in initially obtaining the Preliminary Injunction and Receivership Order, he had relied primarily on the fiduciary-duty claim that he had now abandoned.
In a telephone conference with counsel on October 15, 2020, counsel for Baliga confirmed that his client had intended to strip all of his derivative claims from his pleading, stating, at the outset of that conference: “In the Second Amended Complaint, we have asserted direct claims only, claims under the Exchange Act of 1934 and common law claims, both in law and in equity.” (Telephonic Case Management Conference, conducted Oct. 15, 2020 (“10/15/20 Conf.”).) When pressed by this Court to explain the nature of Baliga's modified unjust- enrichment claim (which, while referencing Baliga's own supposed losses, still referred to Shi's alleged “gain[ing] the benefit of ownership of certain assets belonging to [the Company] at the expense of [the Company's] losing said assets” (2d Am. Compl. ¶ 158), Baliga's counsel conceded that he “[thought] this claim [could] and should be alleged both directly and derivatively” (1/15/20 Conf.). Nonetheless, it was apparent from counsel's statements at the conference that this was not what Baliga had intended to do at that juncture. Rather, it was clear that the Court now had before it a lawsuit in which Baliga only sought to advance direct claims, such that he was no longer nominally adverse to the Company, but actually adverse.
Both the October 2020 telephone conference and a later telephone conference conducted by this Court on December 3, 2020 (“12/3/20 Conf.”) were recorded through the AT&T teleconference service that has been utilized by the Court during the period of the COVID-19 pandemic, and the recordings can be made available by the Court for transcription, should any party wish to order a transcript.
Baliga was the one who had originally proposed to the Court that Seiden - a partner in the law firm that was representing Baliga in this action - be appointed as Receiver for the Company. Once Baliga amended his Complaint to make it clear that he wished to sue the Company directly, that law firm was placed in a conflicted position, which apparently then led to Baliga's retention of new counsel to represent him.
D. Despite Baliga's Expressed Desire To Convert His Shares and Reassert Derivative Claims, the Second Amended Complaint Remains the Operative Pleading in This Case.
As discussed at length in this Court's May 26, 2021 Memorandum and Order, Baliga apparently had little desire to pursue this case as a direct action, despite the extensive repleading in his Second Amended Complaint. Rather, as explained at a conference held by this Court on December 3, 2020, the attorney whom Baliga had, at that time, newly retained, informed this Court that her firm had determined that, in fact, it would be more appropriate to frame Baliga's claims as derivative claims. Counsel indicated that Baliga was seeking to convert his ADSs to common shares in the Company (supposedly to cure any standing issues associated with his having only owned ADSs), and that, once the conversion was effectuated, he would seek leave to amend his pleading for a third time, so as again to assert derivative claims.
Baliga, however, was unable to secure the conversion of his shares, and, for reasons set out in its May 26, 2021 Order, this Court denied his motion to compel the Receiver to effect that conversion. (See generally 5/26/21 Order.) Over objection by Baliga, this Court's denial of that motion was upheld by Judge Marreo, by Decision and Order dated August 16, 2021. (Dkt. 252.) Accordingly, the Second Amended Complaint - a direct suit principally asserting securities-fraud claims - remains the operative pleading in this action.
E. Shi's Motion Requesting That the Court Dissolve the Preliminary Injunction and Discharge the Receiver
The parties have extensively briefed the motion currently before the Court (Dkt. 227), by which Shi has sought an order voiding, ab initio, the Order of the Court that instated the preliminary injunction and appointed the Receiver. Effectively, Shi's motion requests that the Court require all of the Receiver's activities to be unwound from inception, that it order Baliga to bear all of the costs of the receivership, and that it direct that Shi be immediately restored to his original position as Chairman and Chief Operating Officer of the Company. The arguments of the parties on Shi's motion are summarized below:
1. Shi's Opening Arguments on His Motion
Shi filed his moving papers on June 11, 2021. (See 227; see also Vincent Wenyong Shi's Memorandum of Law in Support of Motion to Dissolve the Preliminary Injunction and Discharge the Receiver, dated June 11, 2021 (“Shi Mem.”) (Dkt. 230).) In his papers, Shi argued that, as an “initial matter,” the receivership needed to be terminated because Baliga “did not have standing for such equitable relief” at the time the Receiver was appointed or at any point in this litigation thereafter. (Shi Mem., at 16.) More particularly, Shi argued that:
[A]t the time the Court appointed the Receiver, the Court lacked jurisdiction because [Baliga] lacked standing to request such relief derivatively on behalf of the Company. [Baliga] was not, and is not, a shareholder of the Company. Without proper jurisdiction at the time it was entered, the receivership order is void ab initio.... [Accordingly, t]he Court does not have jurisdiction to continue the receivership now, because [Baliga] lacks standing for this equitable relief, having dismissed all his derivative claims when the Court asked him to clarify which claims were derivative and which were direct.(Id., at 16-17 (further contending that “[t]he law of the Cayman Islands, where the Company is incorporated, does not allow beneficial owners to sue derivatively and, therefore, [Baliga] never had standing.”).)
Next, Shi contended that, even if the Court had subject-matter jurisdiction at the time it appointed the Receiver, the relevant factors now “weigh strongly in favor of discharge of the [R]eceiver,” as a substantive matter. (Id., at 18.) Along with suggesting that the Receiver had taken actions that were “destroying the value of the Company” (id., at 19), Shi pointed out that Baliga was now only seeking monetary damages in his Second Amended Complaint, such that he could only be entitled to “legal,” and not “equitable” remedies (id., at 20). Further, Shi noted that Baliga had “no likelihood of success whatsoever on his derivative claims because he ha[d] now voluntarily dismissed all such claims.” (Id.)
Shi also argued that the previously issued preliminary injunction should be dissolved because (1) Baliga's current request for monetary damages did not reflect a risk of “irreparable harm”; (2) Baliga had no “likelihood of success on the merits on any derivative claim because there [were] none” in the Second Amended Complaint; (3) Baliga had dropped his breach-of-fiduciary-duty claim, which, Shi contended, had provided “the basis for the Court's entry of the preliminary injunction and Receiver Order”; (4) Baliga had no likelihood of success on any of the claims currently pleaded in the Second Amended Complaint; (5) Baliga had “fail[ed] to allege any harm to the Company's interest”; and (6) “the balance of the hardships weigh[ed] heavily in favor of the Company and its Board of Directors status quo ante.” (Id., at 21-22.)
Lastly, Shi maintained that, upon discharging the Receiver and dissolving the preliminary injunction, the Court should return all property, rights, and claims to the Company and its Board of Directors, and direct an accounting. (See id., at 23.)
2. Baliga's Opposition
On July 20, 2021, Baliga filed a memorandum of law in opposition to Shi's motion (see Plaintiff's Opposition to Defendant Vincent Wenyong Shi's Motion to Dissolve the Preliminary Injunction and Discharge the Receiver, dated July 20, 2021 (“Baliga Mem.”) (Dkt. 241)). In his opposition, Baliga first asserted that all of Shi's arguments were untimely, as “[t]he fact that Baliga held [ADSs] instead of registered shares was, at all times, within the knowledge of [the Company],” and, as such, neither the Company, nor Shi, was “entitled to reconsideration of the [Preliminary Injunction and] Receivership Order” on the basis of standing-related arguments that “could have been raised in a timely motion, but [were] not.” (Id., at 8.) On the issue of standing, Baliga further maintained that, even putting aside his derivative breach-of-fiduciary duty claim, the Court still had subject-matter jurisdiction to enter the Preliminary Injunction and Receivership Order when it did, because Baliga had asserted “Securities Exchange Act claims” in his original Complaint, which gave the Court an independent basis for it to utilize its “general equity powers” to appoint a receiver. (See id., at 14-15.)
Next, Baliga argued that, at the time the Preliminary Injunction and Receivership Order was entered, he had “satisfied the traditional prerequisites of equitable relief,” by providing evidence that (1) the Company had transferred “substantial assets without notice to the Board”; (2) the Company had “failed to make required filings with the SEC”; (3) the Company's employees had “gone without pay”; and (4) Shi had “fired employees and ordered documents removed.” (Id., at 11 (noting that, in the Preliminary Injunction and Receivership Order, the Court had specifically found that “[t]hese behaviors [were] precisely the kind of actions that warrant[ed] the appointment of a receiver”).) Baliga also contended that, in the “two years” since that Order was entered, additional “substantial evidence ha[d] come to light of Shi actively working to loot the [C]ompany and further defraud the [C]ourt and investors,” and, as such, it was appropriate for the Court, under these specific circumstances, to continue to utilize its “general equity powers” to maintain the “extraordinary remedy” of a receivership where it was still needed to “protect against dissipation of assets in which [Baliga] [held] a valid interest.” (Id., at 13-14 (citing, inter alia, Burnright Coal Briquette Co. v. Riggs, 274 U.S. 208, 212 (1927)).)
Finally, Baliga argued that, if the Court were to rule that “holders of [ADSs] cannot maintain a temporary receivership in equity,” then that result “would harm both [the Company] and the investing public.” (Id., at 22.) On this last point, Baliga emphasized that “where, as here, there [was] clear evidence of dissipation of assets, a temporary receivership must remain a tool in the [court's] toolkit - regardless of whether the investor holds common shares or [ADSs].” (Id., at 24.)
3. Shi's Reply
On August 2, 2021, Shi filed a reply brief in further support of his motion (see Vincent Wenyong Shi's Reply Brief in Further Support of His Motion to Dissolve the Preliminary Injunction and Discharge the Receiver, dated Aug. 2, 2021 (“Shi Reply”) (Dkt. 246)). In addition to repeating his principal arguments, Shi contended, inter alia, that: (1) Baliga's direct claims in the Second Amended Complaint did not support the continuation of the receivership; (2) Baliga's supposed lack of derivative standing, at both the time the Preliminary Injunction and Receivership Order was entered and in this current phase of the litigation, was not a “mere technicality” that could be retroactively remedied; and (3) contrary to Baliga's voiced concerns, ADS holders could still obtain equitable relief from federal courts, as long as they followed the applicable rules. (See id., at 3-9, 11-13.)
4. The Parties' Supplemental Submissions
In addition to the filing of the above-mentioned briefs, Shi and Baliga - at this Court's request - each submitted supplemental letters to this Court (see Letter to the Court from Michael James Maloney, Esq, dated Aug. 25, 2021 (“Shi Suppl.”) (Dkt. 254); Letter to the Court from Toby S. Soli, Esq., dated Sept. 15, 2021 (“Baliga Suppl.”) (Dkt. 258)), providing additional authority to address an issue raised by this Court - the date on which any potential discharge of the Receiver should be deemed effective (assuming there were grounds for discharge), and the practical ramifications of a retroactive discharge.
As relevant here, in his supplemental letter, Shi again argued that Baliga never had standing to seek the equitable remedy of a receivership because “he did not own shares of the company; he was merely an ADS holder, making him a beneficial holder without standing to assert derivative claims.” (Shi Suppl., at 1.) Relying on EMI Entm't World, Inc. v. Karen Records, Inc., No. 05cv390 (LAP), 2013 WL 2480212 (S.D.N.Y. June 10, 2013) - a copyright infringement case in which the court held that its prior grant of partial summary judgment needed to be vacated on the grounds that the plaintiff had lacked standing to bring the lawsuit -Shi maintained that, in this action, the Preliminary Injunction and Receivership Order must be deemed “void, not merely voidable,” as the “parties and the Court [had been] mistaken that Baliga had standing to bring claims derivatively.” (Id., at 2.) Shi stressed that, in addition to “voiding” the receivership, the Court should order that all of the expenses and costs of the receivership should be charged to Baliga and restitution be awarded to the Company. (See id., at 3-4 (“The damage that resulted to the Company from the [r]eceivership, including the amounts paid to the Receiver and other amounts paid from Company assets ‘ought not equitably be saddled on [the Company] but on the part[y] for whose supposed benefit the restraint was imposed,' i.e., Plaintiff Baliga.” (quoting In re N.Y., N.H. & H.R. Co., 147 F.2d 40, 48 (2d Cir. 1945)).) Lastly, Shi set forth a plan to address the “practical ramifications” of voiding the receivership ab initio, which included, inter alia, restoring Shi as Chairman of the Board and Chief Operating Officer and any other Directors who had been in place in December 2019; ordering that the Receiver transfer control of all Company bank accounts to a corporate officer selected by the Company's Directors; and requiring the Receiver to fully account for his term. (See id., at 4-5.)
In critique of Shi's letter, Baliga noted, in his own supplemental submission, that Shi had “failed to point to a single case in which a [c]ourt ruled that a [r]eceivership it ordered was void ab initio.” (Baliga Suppl., at 1.) In addition, Baliga observed that Shi had also “fail[ed] to cite even a single case establishing that claims under the Exchange Act are insufficient to support the appointment of a [r]eceiver.” (Id.) Baliga maintained that there had never been a judicial finding in this case that he could not assert a derivative complaint, and he noted that he had “always asserted multiple bases for equitable relief, including a claim under Section 10(b) of the Exchange Act.” (Id.) According to Baliga, the Court had always had subject-matter jurisdiction over this action, and with it, authority to order the receivership. (See id.) As for the practical ramifications of the Court's potential voiding of the receivership Order, Baliga asserted that, over the past few years, the Receiver had taken a series of steps “to improve the position of the [C]ompany,” and that, if the receivership were voided ab initio, there would be “no value left for stakeholders (including Baliga) - whether they hold registered shares or [ADSs] - to recover from [the Company].” (Id., at 4-5.)
The Receiver has also filed a short response to Shi's motion to dissolve the preliminary injunction and discharge the Receiver, but that response does not focus on Shi's arguments related to Baliga's standing to seek the receivership, or the Court's subject-matter jurisdiction; rather, the Receiver's submission centers on describing the work the Receiver has done on behalf of the Company and Shi's alleged misconduct, including his purported taking of Company funds. (See generally Receiver's Response to [Shi's] Motion to Dissolve the Preliminary Injunction and Discharge the Receiver, dated July 19, 2021 (Dkt. 239) (“Receiver Mem.”).)
5. Oral Argument and Follow-Up Submissions
After reviewing the parties' submissions, this Court informed the parties that it wished to hear oral argument on a particular legal issue: the question of whether, at the time he commenced this action, Baliga had standing to assert his federal securities claims, as originally pleaded. On March 7, 2022, this Court held oral argument. (See Dkt. (Minute Entry dated Mar. 7, 2022).) At that time, Shi's counsel maintained that, under Supreme Court precedent, specifically Burks v. Lasker, 441 U.S. 471, 477 (1979), and Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 98 (1991), Baliga, in commencing the suit, had lacked standing to assert shareholder derivative claims not only under the common law, but also under Sections 10(b) and 20(a) of the Exchange Act. More particularly, Shi's counsel argued that, in those cases, the Supreme Court had recognized a general principle that, in cases involving issues of corporate governance - including cases brought under the Investment Company Act of 1940 (the “ICA”), 15 U.S.C. § 80-1 et seq., which was directly implicated in those cases, and, by analogy, cases brought under the Exchange Act, such as the instant case - federal courts, while obligated to apply federal law to the plaintiff's federal claims, should nonetheless incorporate, into that law, state-law principles of derivative standing. Under that principle, Shi's counsel argued that this Court was required to “look to Cayman Islands law” in this case, and to accordingly find that Baliga did not have derivative standing to bring his federal securities claims. Although Shi's counsel cited no case from within this Circuit that particularly applied Burks and Kamen to a standing analysis for a derivatively asserted Exchange Act claim, he also directed this Court to the Ninth Circuit case of Batchelder v. Kawamoto, 147 F.3d 915 (9th Cir. 1998), as amended (July 15, 1998), which, he contended, was precisely on point and demonstrated the propriety of the analysis he urged this Court to adopt.
Baliga's counsel, on the other hand, argued that Burks, Kamen, and Batchelder were inapposite to this case, and that, instead, the Second Circuit's decision in Drachman v. Harvey, 453 F.2d 722, 727-30 (2d Cir. 1971) - which stands for the proposition that federal law confers standing on beneficial shareholders of a corporation to sue derivatively under the Exchange Act - should be seen as controlling here. According to Baliga's counsel, under Drachman, even if Baliga did not have standing to assert derivative common-law claims when this action was commenced, he did, at all times, have standing under federal law to assert his federal securities claims - whether directly or derivatively.
Given that, at the oral argument, either the parties or this Court made note of several judicial decisions that were not referenced in the parties' prior briefing, this Court gave the parties an opportunity to file follow-up letters addressing those cases in more detail. Shi and Baliga then each submitted such a letter, the contents of which will be addressed further below. (See Letter to the Court from Michael James Maloney, Esq., dated Mar. 7, 2022 (“3/7/22 Shi Ltr.”) (Dkt. 272); Letter to the Court from Toby S. Soli, Esq., dated Mar. 7, 2022 (“3/7/22 Baliga Ltr.”) (Dkt. 273).)
DISCUSSION
I. WHETHER THE COURT LACKED SUBJECT-MATTER JURISDICTION TO ISSUE THE PRELIMINARY INJUCTION AND RECEIVERSHIP ORDER
As jurisdiction is a threshold question, this Court first turns to the primary question raised by Shi in his motion - whether, at the commencement of this action, the Court lacked subjectmatter jurisdiction over the action, such that it lacked the authority to issue the Preliminary Injunction and Receivership Order in the first place. If the Court did lack jurisdiction to act, then Shi's argument that the Court's Order should now be vacated ab initio could have some force. For the reasons discussed below, however, this Court finds that, even if Baliga lacked standing to bring certain of his original claims, he at least had standing to bring the securities-law claims that he seemingly sought to plead derivatively in his initial Complaint, and that this afforded the Court subject-matter jurisdiction to issue the challenged Order.
A. Applicable Legal Standards
It is beyond cavil that a federal court must have subject-matter jurisdiction over an action before it can exercise authority over the parties. See Steel Co. v. Citizens for Better Env't, 523 U.S. 83, 94 (1998) (“Without jurisdiction the court cannot proceed at all in any cause.” (internal quotation marks and citation omitted)). In order to establish federal jurisdiction, a plaintiff must be able to demonstrate that he has “standing” to sue. See id. at 109-110 (finding that where a party lacks standing to maintain his suit, the district court will “lack jurisdiction to maintain it”). Standing is an essential component of the case-or-controversy requirement of Article III of the Constitution. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992), and, Steel, 523 U.S. at 109-110. To satisfy Article III's standing requirements, a plaintiff must show an injury in fact (1) that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) that is fairly traceable to the challenged action of the defendant; and (3) that is likely to be redressed by a favorable decision. Id. Standing is separately required “for each claim and form of relief sought.” Carver v. City of N.Y., 621 F.3d 221, 225 (2d Cir. 2010) (quoting Baur v. Veneman, 352 F.3d 625, 642 n.15 (2d Cir. 2003)); see Lujan, 504 U.S. at 561.
A court must have jurisdiction over a case (and thus a plaintiff must have standing to sue) before a court may issue any form of equitable relief in the case, including preliminary injunctive relief. See Tait v. Powell, 241 F.Supp.3d 372, 376 (E.D.N.Y. 2017) (noting that, “of course, the court must have subject matter jurisdiction over the controversy” in order to grant “a preliminary injunction”); see also, e.g., Truck Drivers Local Union No. 807, Int'l Broth. of Teamsters v. Bohack Corp., 541 F.2d 312, 317-18 (2d Cir. 1976) (reversing district court's grant of a preliminary injunction for lack of subject-matter jurisdiction); New York State Nurses Assoc. v. Montefiore Med. Ctr., 457 F.Supp.3d 430, 432-33 (S.D.N.Y. 2020) (declining to grant plaintiff's request for an injunction where the court lacked subject-matter jurisdiction). Where a court issues a preliminary injunction without having had jurisdiction over the case, the injunction will be considered void. See Bohack, 541 F.2d at 317-318.
The same is true for the appointment of a receiver. See 12 Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, FEDERAL PRACTICE AND PROCEDURE § 2983 (2d ed. 2008) (“Jurisdiction is a prerequisite to the appointment of a receiver and therefore any receivership ordered by a court that lacks subject matter jurisdiction is void.” (citing id. § 2985 (“When the federal court is without jurisdiction of the action, the receivership necessarily is improper; the appointment of the receiver is a nullity and the receiver has no power to act.”)); see also, e.g., Connecticut Hous. Fin. Auth. v. Eno Farms Ltd. P'ship, No. 3:07cv319, 2007 WL 1670130, *5 (D. Conn. June 6, 2007) (rejecting the argument that “the court did not require subject matter jurisdiction over the parties before it could appoint a temporary receiver” because “[w]ithout jurisdiction, the court has no power over the parties, and thus the lack of subject matter jurisdiction would have rendered a receivership order void” (internal citation omitted)).
Apart from the plaintiff's standing, the exercise of subject-matter jurisdiction by a federal court requires the presentation of a federal question, diversity of the parties, or another jurisdictional basis grounded in a specific statute. See, e.g., Conn. Hous. Fin. Auth., 2007 WL 1670130, at *5. Absent one of these bases for the exercise of federal jurisdiction, a court may not order even interim equitable relief in a case, including the appointment of a receiver. See id.
B. Even If, When This Action Was Commenced, Baliga Lacked Standing To Assert His State-Law Claims, He Still Had Standing To Assert His Securities Claims, and Thus the Court Did Not Lack Jurisdiction Over the Action.
As noted above, Shi's principal argument in support of his motion to discharge the Receiver and dissolve the preliminary injunction is that the Court, at the time when the Preliminary Injunction and Receivership Order was entered, lacked subject-matter jurisdiction over the action, as Baliga purportedly lacked standing, under Cayman Islands law, to bring derivative claims on behalf of the Company. (See generally Shi Mem.; Shi Reply.) Although, on this point, Baliga attempts to cast Shi's motion as an untimely motion for reconsideration (see Baliga Mem., at 8 (arguing that Shi should have been aware of the standing issue at the time the Preliminary Injunction and Receivership Order was issued, and that he failed to raise the issue on a reconsideration motion)), the Court must consider any colorable challenges to its jurisdiction whenever it becomes aware of them, and, for this reason, it should not reject Baliga's motion as procedurally improper. Nonetheless, even though it appears that Shi is correct that Baliga lacked standing to bring certain of his initial claims (specifically, his claims for breach of fiduciary duty and unjust enrichment), ultimately, the Court need not reach that issue here, as, even if Baliga lacked standing to assert his state common-law claims, he at least had standing to assert his federal securities claims, thereby providing the Court with subject-matter jurisdiction to act.
Under Local Civil Rule 6.3 of this Court, “a notice of motion for reconsideration or reargument of a court order determining a motion shall be served within fourteen (14) days after the entry of the Court's determination of the original motion.”
1. It Appears That Baliga Lacked Standing To Assert His Initial, Derivatively Pleaded Common-Law Claims.
As China AI first argued in its unsuccessful motion to intervene, and now Shi points out, Cayman Islands law applied to at least certain of Baliga's originally asserted derivative claims, including his state-law claims for breach of fiduciary duty and unjust enrichment, and it appears to be uncontested that, under Cayman Islands law, Baliga - as a beneficial shareholder in the Company (i.e., a holder of ADSs), but not a registered shareholder - lacked standing to bring those claims.
As noted above, under New York law (which the parties agree governed Baliga's originally pleaded common-law claims), claims related to corporate affairs are governed by the so-called “internal affairs doctrine.” Howe, 783 F.Supp.2d at 475. Under this doctrine, “[t]he right of a shareholder to object to conduct occurring in the operation of the corporate enterprise is determined by the law of the state of incorporation.” Hausman v. Buckley, 299 F.2d 696, 702 (2d Cir. 1962). This doctrine covers the situation where, as here, a plaintiff's state-law claims are asserted against a foreign company. See Howe, 783 F.Supp.2d at 475; see also In re BP p.l.c. Derivative Litig., 507 F.Supp.2d 302, 309-11 (S.D.N.Y. 2007) (applying British law to common-law claims, including a claim for breach of fiduciary duty, brough derivatively on behalf of a British company); Winn v. Schafer, 499 F.Supp.2d 390, 393 (S.D.N.Y. 2007) (holding that under New York choice-of-law rules, the law of the Cayman Islands applied to a derivative claim for breach of fiduciary duty made on behalf of a Cayman corporation); Feiner Family Trust v. VBI Corp., No. 07cv1914 (RPP), 2007 WL 2615448, at *5 (S.D.N.Y. Sept. 11, 2007) (applying law of the Cayman Islands to a breach-of-fiduciary-duty claim asserted derivatively on behalf of a Cayman Islands company).
Shi contends (and Baliga does not seriously contest) that, under Cayman Islands law, only a registered shareholder in the Company would have standing to assert derivative claims on the Company's behalf. (See Shi Mem., at 7; Shi Suppl., at 1; 3/7/22 Shi Ltr., at 1-6.) As Baliga was not a registered shareholder, it would therefore appear that he lacked standing to assert, derivatively, any claims as to which the internal-affairs doctrine applied. That doctrine would certainly have applied to the New York state-law claims that Baliga pleaded in his original Complaint, including his breach-of-fiduciary-duty and unjust-enrichment claims. Thus, it appears that the Court lacked subject-matter jurisdiction over those claims.
This Court has not independently researched Cayman Islands law in order to determine whether, under the law of that jurisdiction, a beneficial shareholder, in fact, lacks standing to assert common-law claims derivatively. For the reasons discussed below, it is not necessary for the Court to make that determination, as, even assuming the correctness of this proposition, it would ultimately be immaterial to the outcome of Shi's pending motion.
2. Nonetheless, the Court Had Jurisdiction Over Baliga's Securities-Law Claims, Even If, As It Appears, He Sought To Assert Those Claims Derivatively.
As Baliga correctly observes, however (see Baliga Mem., at 16; Baliga Suppl., at 2-3), Baliga also pleaded federal securities claims in his original Complaint, seemingly on a derivative basis. (See Compl. ¶¶ 46-49 (alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5), ¶¶ 50-54 (alleging violations of Section 20(a) of the Exchange Act)). If Baliga had standing to assert those claims, then the Court would have had subject-matter jurisdiction over the action, even if it lacked jurisdiction over Baliga's common-law claims. And, as long as the Court had jurisdiction over the action, it would have had the general equitable power to have issued interim equitable relief, including the appointment of a receiver, regardless of whether Baliga's request for such relief had been primarily premised on a claim as to which he lacked standing. See Burnrite Coal Briquette, 274 U.S. at 212 (noting that a federal court may, under its general equity powers, appoint a temporary receiver over a foreign corporation “to prevent threatened diversion or loss of assets through gross fraud and mismanagement of its officers”); Adelman v. CGS Sci. Corp., 332 F.Supp. 137, 145 (E.D. Pa. 1971) (finding the existence of “jurisdiction to grant equitable relief” under the complaint based upon “the inherent equitable power” of the court “to fashion effective and appropriate remedies for violations of the Securities and Exchange Act of 1934 . . . and for violations of the Securities Act of 1933”). Thus, in order to determine whether the Preliminary Injunction and Receivership Order was void (or, to the contrary, duly authorized) at the time of its issuance, the Court must examine whether, at the time that Order was issued, Baliga had standing to assert his securities claims.
Critically, unlike Baliga's breach-of-fiduciary-duty and unjust enrichment claims, as to which, under New York's internal-affairs doctrine, the Court would have needed to look to the law of the Cayman Islands to determine Baliga's standing, the question of whether Baliga had standing to assert his Exchange Act claims was governed by federal law, and, under federal law, this Court finds that Baliga, in fact, had standing to assert his Section 10(b), Rule 10b-(5), and Section 20(a) claims, even assuming they were intended to be asserted derivatively.
Shi does not contest that, even as a beneficial shareholder, Baliga would have had standing to assert direct securities claims, but rather proceeds on the apparent understanding that Baliga's initial Complaint was intended to encompass only derivative claims, which accords with this Court's current understanding, based on the procedural history described above. The separate question of whether Baliga's initial securities claims were properly pleaded on a derivative basis is not before the Court, and thus need not be addressed, although this Court notes that “[f]ederal law governing the determination of whether a § 10(b) claim must be pled derivatively is not well-developed.” In re Smith Barney Transfer Agent Litig., 765 F.Supp.2d 391, 397-98 (S.D.N.Y. 2011). In general, the essential inquiry is whether the damages sought arose “from an injury to the corporation.” Id. (emphasis added); see also Perlman v. Salomon Inc., No. 92cv5208 (RPP), 1995 WL 110076, at *2 (S.D.N.Y. Mar. 14, 1995) (framing question as whether the plaintiff “suffered an individual injury distinct from the injury to the corporation”).
As a general matter, it is well established that, “[t]o determine whether a party has standing to raise a claim under [Section] 10(b), [a] court [generally] looks to federal rather than state law.” Frankel v. Slotkin, 795 F.Supp. 76, 79 (E.D.N.Y. 1992); see also Drachman, 453 F.2d at 727-30 (holding that “the applicable state law of standing should be applied to claims arising under state statutes or common law,” while “[f]ederal law must be consulted to decide whether there is standing to sue under the Exchange Act.”); Farey-Jones v. Buckingham, 132 F.Supp.2d 92, 99 (E.D.N.Y. 2001) (relying on federal law to determine whether a shareholder had standing to bring a § 10(b) claim as a derivative action); Glusband v. Fittin Cunningham Lauzon, Inc., 582 F.Supp. 145, 148-49 (S.D.N.Y. 1984) (“[W]ith respect to the federal law claims, [including those under §10(b), Rule 10b-5, and § 20(a),] plaintiffs['] capacity to sue under state law is irrelevant.”); cf. United States v. Martoma, No. 12cv973 (PGG), 2013 WL 6632676, at *3-4 (S.D.N.Y. Dec. 17, 2013) (holding that Section 10(b) applies to claims involving transactions in ADSs that are listed and traded on a domestic exchange).
Shi's reliance on the Supreme Court cases of Burks and Kamen to support his contention that, in determining a plaintiff's standing to bring a derivative Exchange Act claim, the court must incorporate state law into the federal common law (see 3/7/22 Shi Ltr., at 2) is misplaced, as is his reliance on the Ninth Circuit decision in Batchelder (see id.). According to Shi, in both Burks and Kamen, the Supreme Court “reaffirm[ed] the basic teaching . . . [that,] where a gap in the federal securities laws must be bridged by a rule that bears on the allocation of governing powers within the corporation, federal courts should incorporate state law into federal common law.” (Id. (emphasis in original).) Shi further contends that Batchelder as well illustrates the proper application of the Supreme Court's teaching in the type of context presented here. Closely read, however, the Supreme Court authority on which Shi's argument rests is inapplicable, and Shi has mischaracterized the holding of Batchelder.
First, as noted above, neither Burks nor Kamen involved the Exchange Act (rather, they each involved the ICA), and, although Shi has stated that the circumstances presented in those cases were closely analogous to those underlying Baliga's claims, they were not. At issue in Burks was the question of whether to allow a corporation's independent directors to discontinue a derivative action brought under the ICA, and, on that question, the Supreme Court held that courts should apply the law of the state of incorporation. See Burks, 441 U.S. at 486. The decision, however, did not reach as broadly as Shi would suggest. As one court has noted:
Burks teaches that courts should presume that state law, the source of most corporate law and a background for congressional legislation, governs judicial review of directors' challenged actions. However, federal courts must be on guard against state law threats to “any identifiable federal policy or interest,” and should apply state corporate law only where it is consistent with federal securities law.In re Westinghouse Sec. Litig., 832 F.Supp. 989, 997 (W.D. Pa. 1993) (citing Burks, 441 U.S. at 478-80). This principle was echoed in Kamen, in which the Supreme Court examined the necessity of pre-suit demand in derivative cases under the ICA - and the powers of corporate directors in addressing those demands. Kamen, 500 U.S. at 90-108. In Kamen, the Supreme Court discussed generally when a court should consider state law, versus when it would be necessary for a court to implement uniform federal rules (or a nationwide federal standard). See id. at 98 (noting that federal courts should, for example, incorporate state “commercial law,” “property law,” and “family law” into their federal analyses, as those topics are of “primary state responsibility” (internal citations omitted).) The Kamen Court then explained that, while corporate law is an area of law “in which private parties have entered legal relationships with the expectation that their rights and obligations would be governed by state-law standards,” id., “uniform federal rules” would nonetheless be needed “when the scheme in question evidences a distinct need for nationwide legal standards,” id., or where “express provisions” in federal statutory schemes “embody congressional policy choices readily applicable to the matter at hand,” id.
Importantly, Burks and Kamen each centered on determining the scope of the duties and powers of corporate directors, in contrast to the types of issues implicated by Baliga's securities claims, by which he charged the Company's directors with defrauding investors. As in Westinghouse, this is not a case where the plaintiff was, for example, challenging a decision by a corporation's directors “to terminate an action alleging violation of federal securities laws”; rather, in his initial pleading, Baliga challenged “the alleged willful violation itself of federal securities laws.” In re Westinghouse Sec. Litig., 832 F.Supp. at 997 (emphasis in original). In the securities-fraud situation, state-law principles, such as the internal affairs doctrine or the business judgment rule, “become inapplicable,” see id., and, when it comes to standing - even on derivative claims - federal law must control, see Drachman, 453 F.2d at 728.
Baliga contends that this matter is settled in this Circuit, as “the Second Circuit [] enunciated [its] understanding of the federal policy underlying a Section 10(b) claim in the Drachman case and found that ‘the policy of uniformity within the federal system at least with respect to the issue at bar [i.e., derivative standing of beneficial shareholders] [was] paramount to any interests to be served by conformity with the variousness of state rules.'” (3/7/22 Baliga Ltr., at 3 (quoting Drachman, 453 F.2d at 728).) In Drachman, the Circuit did conclude that, under federal law, beneficial stockholders who held stock in “street name” at the time of the alleged transactions had standing to maintain a derivative action for violations of provisions of the Exchange Act relating to the use of manipulative or deceptive practices in the sale of securities. Drachman, 453 F.2d at 728-30. In light of this, Baliga argues that “the Second Circuit . . . found [that determining] the standards for asserting a section 10(b) derivative claim is a ‘situation where federal policy requires uniformity' or ‘a distinct need for nationwide legal standards'” (3/7/22 Baliga Ltr., at 3), and that, seen in this light, the Second Circuit's decision to look to federal, rather than state law in determining the plaintiff's standing to assert a derivative Exchange Act claim was supported - and not undermined - by Burks and Kamen (see id.).
According to Baliga, Drachman compels the conclusion that state law should not guide the determination of whether he had standing to assert derivative securities claims, and he further argues that, based on Drachman, he did have standing, under federal law, to assert such claims. (See id.) To underscore the point that precedent favors his position on this point, Baliga also notes that Shi has not identified any case in which a court has read Burks or Kamen to require that state-law be invoked to determine whether a plaintiff had standing to raise a derivative Section 10(b) claim. (See id., at 4 n.3.)
This Court finds Baliga's explanation of the legal landscape compelling, especially given that the one Exchange Act case to which Shi has particularly directed the Court's attention - the Ninth Circuit's decision in Batchelder - did not actually involve the type of derivative Exchange Act claims at issue here. To this Court's understanding (based on the underlying briefs, which are available online), that case did not involve Section 10(b) or 20(a) claims. Moreover, although Shi states that Batchelder involved a “Section 13” securities-fraud claim, it did not. See Batchelder, 147 F.3d at 917. Rather, the briefing reveals that, in addition to derivative commonlaw claims, the plaintiffs in Batchelder had brought a single Section 14(a) “proxy” claim against the defendants. See id. at 917-20. In any event, nowhere in the Batchelder decision is there any suggestion that the Ninth Circuit applied state law (which, in the circumstances of that case, would have looked to Japanese law) to determine the plaintiffs' standing on their Section 14 claim. See 147 F.3d at 919-20. To the contrary, the structure of the decision suggests that, first, the Ninth Circuit applied the relevant state-law to determine whether the plaintiffs had standing to raise derivative common-law claims, and second, in a separate section of the analysis, the court considered the merits of the plaintiffs' Section 14 federal claim. See id. If anything, Batchelder appears to support Baliga's position that standing for derivative common-law claims, such as claims for breach-of-fiduciary duty, should be analyzed differently than standing for federal securities claims, whether direct or derivative.
See Plaintiff-Appellant's Opening Brief, Batchelder v. Kawamoto, No. 96-56565, 1997 WL 33545444 (9th Cir. Jan. 21, 1997).
Moreover, this Court notes that other case authority within this Circuit, in addition to Drachman, supports the proposition that the Court should engage in separate standing analyses for derivative claims brought under state common law and under the federal securities laws. See, e.g., Int'l Bhd. of Elec. Workers Local 98 Pension Fund v. Hann, No. 06cv14312 (DAB), 2008 WL 11515992, at *1 n.1 (S.D.N.Y. June 10, 2008) (“Second Circuit law favors Plaintiff's position, that the Court must analyze standing for the state and federal claims separately.”). In a number of cases, courts have specifically looked to state law to consider the plaintiffs' standing to assert their derivative state-law claims, but have not similarly done so when considering the viability of the plaintiffs' federal securities claims. See, e.g., Walsh v. Rigas, No. 17cv4089 (NRB), 2019 WL 294798, at *1, 5, 13 (S.D.N.Y. Jan. 23, 2019) (in one section of the decision, finding that the law of the Cayman Islands, as the jurisdiction of the company's incorporation, applied to the court's determination of whether plaintiff had standing to bring common-law derivative claims, but then, in a separate section, analyzing the viability of plaintiff's Section 10(b) and 20(a) “direct and/or derivative” claims with no reference to state-law standing principles); see also Holzman v. Guoqiang Xin, No. 12cv8405 (AJN), 2015 WL 5544357, at *10 (S.D.N.Y. Sept. 18, 2015) (holding that, where the plaintiff had not brought “suit under any federal securities statutes,” but, instead, only asserted derivative common-law claims, such as breach of fiduciary duty, all of the plaintiff's claims “sound[ed] under Cayman Islands corporate law”). Shi has not adequately explained why, if his reading of Burks and Kamen is correct, courts have still continued, in the years since those cases were decided, to engage in the type of separate standing analyses that Shi seems to suggest should be conflated, whenever shareholder derivative claims are asserted against a corporation.
Shi's final arguments regarding Baliga's supposed lack of standing to have asserted his initial Exchange Act claims are no more convincing. Without any applicable case authority, Shi tries to argue that Rule 17(b)(2) of the Federal Rules of Civil Procedure - which states that “[c]apacity to sue or be sued is determined . . . for a corporation, by the law under which it is organized” - means that state law should be used to determine a plaintiff's standing to bring shareholder derivative claims, of any type, against a corporation. (See 3/7/22 Shi Ltr., at 1-3.) In the absence of any controlling or even instructive authority that interprets Rule 17(b)(2) in this manner, and where caselaw such as Drachman would be inconsistent with such an interpretation, this Court will not afford the Rule the construction that Shi proposes. Lastly, Shi contends that, regardless of whether federal law generally afforded Baliga standing to bring derivative claims under Sections 10(b) and 20(a) of the Exchange Act, Baliga lacked standing to raise those claims in this particular instance, because, in connection with those claims, he failed to allege the necessary “injury in fact.” (3/7/22 Shi Ltr., at 3-4.) Although establishing “injury in fact” is an element of Article III standing (see Discussion, supra, Section I(A)), in looking at the actual argument that Shi has articulated on this point, it is plain that he is not raising a subject-matter jurisdiction question, but rather a merits question regarding the sufficiency of Baliga's original pleading of the elements of his claims (see id., at 4 (essentially arguing that Baliga had not adequately pleaded the elements of his Section 10(b) claim)) - a matter that would have been more appropriately raised on a motion to dismiss under Rule 12(b)(6).
With respect to Rule 17, Shi cites to only one case, Marsh v. Rosenbloom, 499 F.3d 165, 176-77 (2d Cir. 2007), for the general proposition that “[t]he Federal Rules of Civil Procedure provide that state law governs a corporation's capacity to be sued,” id. Marsh, however, is inapplicable to this case, as it did not involve any alleged securities violations or address the parties' derivative standing in the securities context; rather, it centered on whether the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) preempted Delaware's statutes concerning the capacity of dissolved Delaware corporations to be sued. See id. at 170-71.
For all of these reasons, this Court finds that, even assuming that, when he commenced this action, Baliga lacked standing to assert derivative state-law claims, he still had standing to assert his derivative federal securities claims. Accordingly, to the extent Shi is arguing in his motion that the Preliminary Injunction and Receivership Order should be vacated ab initio because the Court was without power to have issued it, the motion should be denied.
II. WHETHER THE DULY AUTHORIZED PRELIMINARY INJUCTION AND RECEIVERSHIP ORDER SHOULD BE VACATED BASED ON CHANGED CIRCUMSTANCES
Despite the fact that this Court finds that the Preliminary Injunction and Receivership Orde was duly authorized when issued, Shi has raised another issue in his motion that must be considered - whether the revised nature of Baliga's Second Amended Complaint constitutes a materially changed circumstance that warrants dissolution of the preliminary injunction and discharge of the Receiver. On this issue, this Court finds Shi's arguments persuasive, although, as set forth below, I recommend that the discharge of the Receiver not be effectuated until after the Receiver has performed a full accounting.
A. Applicable Legal Standards
While, under the Federal Rules of Civil Procedure, a court has the inherent power to reconsider any of its own decisions prior to the entry of a judgment adjudicating all the claims in a case, see Fed.R.Civ.P. 54(b), the Second Circuit has “limited district courts' reconsideration of earlier decisions under Rule 54(b) by treating those decisions as law of the case,” Official Comm. of Unsecured Creditors of the Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147, 167 (2d Cir. 2003). The “law of the case” doctrine “gives a district court discretion to revisit earlier rulings in the same case, subject to the caveat that ‘where litigants have once battled for the court's decision, they should neither be required, nor without good reason permitted, to battle for it again.'” Id. (quoting Zdanok v. Glidden Co., 327 F.2d 944, 953 (2d Cir. 1964)).
As a general matter, decisions resolving aspects of a case “may not usually be changed unless there is ‘an intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent a manifest injustice.'” Id. (quoting Virgin Atl. Airways, Ltd. v. Nat'l Mediation Bd., 956 F.2d 1245, 1255 (2d Cir. 1992) (internal quotation marks omitted)); see also Johnson v. Holder, 564 F.3d 95, 99 (2d Cir. 2009) (holding that, “when a court has ruled on an issue, that decision should generally be adhered to by that court in subsequent stages in the same case”); Choi v. Tower Rsch. Cap. LLC, 2 F.4th 10, 21 (2d Cir. 2021) (noting that, while the law-of-the-case doctrine does not “rigidly bind [a court] to [its] former decisions,” courts generally “adhere to prior decisions in subsequent stages of the same case unless cogent and compelling reasons militate otherwise” (internal quotation marks and citation omitted)).
With respect to orders granting interim equitable relief, Rule 65 of the Federal Rules specifically allows for the dissolution of preliminary injunctions. See Fed.R.Civ.P. 65(4). It has been held that, under Rule 65, a preliminary injunction may be dissolved or modified “if the moving party demonstrates that a material change in circumstances justifies the [dissolution or] alteration.” International Equ. Invest., Inc. v. Opportunity Equity Partners, Ltd., 427 F.Supp.2d 491, 501 (S.D.N.Y. 2006) (citations omitted). In particular, modification or dissolution of an injunction is warranted where “the changed circumstances demonstrate that ‘continuance of the injunction is no longer justified and/or will work oppressively against the enjoined parties.'” Id. (quoting Am. Optical Co. v. Rayex Corp., 291 F.Supp. 502, 510 (S.D.N.Y. 1967)). Certainly, where a preliminary injunction has been issued based on the plaintiff's demonstration that he is likely to suffer irreparable harm in the absence of an injunction, but it later becomes evident that the plaintiff cannot demonstrate irreparable harm, the preliminary injunction should be vacated. See, e.g., Bayoh v. Afropunk LLC, No. 18cv5820 (DLC), 2020 WL 7482994, at *1 (S.D.N.Y. Dec. 18, 2020) (where there was “no longer any basis to conclude[] that [plaintiff was] likely to suffer any irreparable injury,” holding it was “both necessary and appropriate to vacate the preliminary injunction” (internal quotation marks omitted)).
As for the discharge of a receiver appointed under Rule 66, the decision as to whether to terminate the receivership is a matter within the district court's discretion. See United States v. Amodeo, 44 F.3d 141, 146 (2d Cir. 1995); see generally FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS (“FLETCHER-CYC”) § 7770 (“The power to terminate a receivership is a necessary incident of the power to appoint, and whether a particular receiver should be removed is ordinarily largely in the discretion of the court.”). While the decision on whether to discharge “‘a receivership turns on the facts and circumstances of each case[,] . . . [i]t is generally held that a receivership should be dismissed when the reason for the receivership ceases to exist.'” S.E.C. v. Kirkland, No. 6:06-CV-183-ORL-28, 2012 WL 3871922, at *1-2 (M.D. Fla. Aug. 6, 2012) (quoting 65 Am. Jur. 2d Receivers § 146 (2012)), report and recommendation adopted, 2012 WL 3871917 (Sept. 6, 2012); see also FLETCHER-CYC § 7770 (stating that “it is elementary that a receivership should be terminated as soon as it has accomplished its purpose[, and s]o, whenever the reason or necessity for a receiver ceases to exist, the property should be discharged from the receivership”); United States Dep't of Agric. v. Hous. Auth. of City of Sterling, Colo., No. 18-cv-01472-PAB-KLM, 2021 WL 4197441, at *1 (D. Colo. Sept. 15, 2021) (noting that where the necessity for a receivership has ceased to exist, the receiver should be discharged).
Rule 66 “contemplates the appointment of receivers by federal courts.” U.S. Bank Nat'l Assoc. v. Nesbitt Bellevue Prop. LLC, 866 F.Supp.2d 247, 254 (S.D.N.Y. 2012) (citing Fed.R.Civ.P. 66). “The adoption of Rule 66 in 1938 did not revise existing receivership practice; rather the Federal Rules ‘provided that federal receiverships should continue to be governed as they had been before.'” Id. (quoting Bicknell v. Lloyd-Smith, 109 F.2d 527, 529 (2d Cir. 1940)).
B. In Light of His Changed Pleading, Baliga Can No Longer Show Grounds For the Preliminary Injunction and the Appointment of the Receiver.
In order to determine whether a preliminary injunction or a receivership order should be terminated, this Court first reviews the circumstances in which such an order would be justified in the first instance - and then considers whether that justification no longer exists.
Before a court may issue a preliminary injunction, the plaintiff “must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.” Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20 (2008). The Second Circuit has more specifically articulated the preliminary injunction standard as requiring the moving party to show: “(a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief.” Citigroup Glob. Mkts., Inc. v. VCG Special Opportunities Master Fund Ltd., 598 F.3d 30, 35-38 (2d Cir. 2010) (internal citations omitted) (confirming the continued vitality of this standard, after Winter). Where a plaintiff can be made whole on his claims by money damages, he will not be able to show that, absent an injunction, he would suffer “irreparable harm,” and, in that circumstance, no injunction should issue. See Stallworth v. Joshi, No. 17cv7119 (RJS), 2017 WL 8777378, at *3 (S.D.N.Y. Nov. 22, 2017) (“‘[W]hen a party can be fully compensated for financial loss by a money judgment, there is simply no compelling reason why the extraordinary equitable remedy of a preliminary injunction should be granted.”' (quoting Borey v. Nat'l Union Fire Ins. Co., 934 F.2d 30, 34 (2d Cir. 1991))).
In determining whether to appoint a receiver, courts consider the following factors: ‘[f]raudulent conduct on the part of defendant; the imminent danger of the property being lost, concealed, injured, diminished in value, or squandered; the inadequacy of the available legal remedies; the probability that harm to plaintiff by denial of the appointment would be greater than the injury to the parties opposing appointment; and, in more general terms, plaintiff's probable success in the action and the possibility of irreparable injury to his interests in the property.' Ramgoolie v. Ramgoolie, No. 16cv3345 (VEC) (SN), 2016 WL 11281385, at *7 (S.D.N.Y. Dec. 20, 2016) (quoting U.S. Bank Nat'l Ass'n, 859 F.Supp.2d at 610), report and recommendation adopted, 2017 WL 564680 (Feb. 10, 2017). “[T]he appointment of a receiver is not a matter of positive right but rather lies in the discretion of the court.” 12 Wright, Miller & Marcus, FEDERAL PRACTICE AND PROCEDURE § 2983 (2d ed. 2008). Yet, despite the discretionary nature of the appointment decision, installing a receiver to oversee any aspect of a private company's operations is considered “a “drastic remedy usually imposed only where no lesser relief will be effective.” Ferguson v. Tabah, 288 F.2d 665, 674 (2d Cir. 1961).
A district court has the authority to appoint a receiver in a securities action, where the court deems it necessary to prevent the dissipation of corporate assets that may be required to provide shareholders with relief. See S.E.C. v. Malek, 397 Fed. App'x 711, 712 (2d Cir. 2010) (“Although neither the Securities Act of 1933 nor the Securities Exchange Act of 1934 expressly vests the power to appoint receivers in the district courts, courts have consistently held that such power exists, where necessary to prevent the dissipation of a defendant's assets pending further action by the court.” (internal quotation marks and citation omitted)). In a civil suit commenced by the SEC, a court may appoint a receiver requested by the SEC to “protect[] those who already have been injured by a violator's actions from further despoliation of their property or rights,” Esbitt v. Dutch-Am. Mercantile Corp., 335 F.2d 141, 143 (2d Cir. 1964), or “to restore to a defrauded entity or defrauded persons that which was fraudulently diverted from its or their custody and control,” S.E.C. v. Shiv, 379 F.Supp.2d 609, 618 (S.D.N.Y. 2005). Similarly, “[a] federal district court may, under its general equity powers independently of any state statute, entertain a bill of a stockholder against the corporation for the appointment of at least a temporary receiver in order to prevent threatened diversion or loss of assets through gross fraud and mismanagement of its officers.” Burnrite Coal Briquette, 274 U.S. at 212.
As noted above, however, the appointment of a receiver is considered a “drastic” remedy, Ferguson, 288 F.2d at 674, and this is particularly so in the context of private securities litigation, see Brick v. Dominion Mortg. & Realty Tr., 442 F.Supp. 283, 308 (W.D.N.Y. 1977) (noting that “the appointment of a receiver is an extraordinary form of equitable relief in a private securities fraud action”). Not only should the remedy be considered “only where no lesser relief will be effective,” Ferguson, 288 F.2d at 674, but, “[r]ecognizing that appointment of a temporary receiver is an extraordinary remedy which results in the taking and withholding of possession of property from a party without an adjudication on the merits, the courts have required the party seeking the remedy to make a clear showing that the appointment is necessary to prevent irreparable injury to the property interests at stake,” Altissima Ltd. v. One Niagara, LLC, No. 08-CV-756-JTC, 2009 WL 1322319, at *1 (W.D.N.Y. May 8, 2009) (internal citations omitted); see also Gordon v. Washington, 295 U.S. 30, 39 (1935) (appointment of a receiver is a remedy that “should be resorted to only on a plain showing of some threatened loss or injury to the property, which the receivership would avoid”). A plaintiff thus bears a “heavy burden” to justify the appointment of a receiver, S.E.C. v. Rep. Nat. Life Ins. Co., 378 F.Supp. 430, 438 (S.D.N.Y. 1974) (noting that “the applicant bears a heavy burden to establish an actual need therefor”); Wickes v. Belgian Am. Educ. Found., Inc., 266 F.Supp. 38, 40 (S.D.N.Y. 1967) (declining to appoint a receiver because the plaintiff did not meet the “heavy burden” of proving a receiver was necessary), and, generally, that burden can only be met where the plaintiff is able to demonstrate a need to prevent “irreparable injury to the property” that is the subject of his claims, see Altissima, 2009 WL 1322319, at *1.
In this case, even though this Court has found that the Preliminary Injunction and Receivership Order was duly authorized when entered, the issuance of that Order was based on a Complaint that is no longer the operative pleading in this case, and Baliga's current pleading is substantially different, in ways meaningful to the analysis of whether it would be appropriate for the Court to continue the injunction and receivership at this time.
Most importantly, Baliga's original pleading, which framed the action as a “shareholder derivative” suit, sought relief on behalf of the Company. In contrast, based on representations made by his counsel, Baliga now only seeks to maintain claims on his own behalf. Further, this Court notes that, as Baliga cannot recover damages under the Exchange Act for losses resulting from decisions to hold (or refrain from trading) his ADSs, but only for losses resulting from actual decisions to buy or sell, see Gurgary v. Winehouse, 235 F.3d 792, 799 (2d Cir. 2000), his potential damages in this action may be fairly limited. Additionally, as Shi observes, any injury suffered by Baliga as a result of the ADS transactions at issue could be remedied by money damages. (See Shi Mem., at 2, 20.) It should also be pointed out that, since the time of his appointment, the Receiver seems to have recovered substantial Company assets that were allegedly wrongfully diverted, and to have directed them back into the Company (see Receiver Mem.; see also Dkts. 43, 74, 173, 186, 210, 220), making it difficult for Baliga to maintain that there is any real likelihood that, absent a continued receivership, he would not be able to be made whole if successful on his current claims.
Given that, in his opposition to Shi's motion, Baliga has made no showing that money damages would be insufficient to compensate him for the losses he allegedly suffered directly from Defendants' claimed securities fraud, he simply no longer has a basis to argue that, absent an injunction, he would suffer “irreparable harm.” For this reason, there can be little question that the preliminary injunction should now be dissolved. See Bayoh, 2020 WL 7482994, at *1. And, as to the Receiver, while Baliga has contended (correctly) that courts have the discretion to appoint - or continue the appointment of - a receiver in securities cases (see Baliga Mem., at 23; see also Burnrite Coal Briquette, 274 U.S. at 212), he has failed to make any compelling argument as to why that “drastic” remedy should now be continued in this particular case, where he is no longer seeking to protect the interests of the Company itself.
It is of no moment that the Company originally consented to the Receiver's temporary appointment. Baliga still had the burden to demonstrate the original need for the receivership, see Sterling Sav. Bank v. Citadel Dev. Co., 656 F.Supp.2d 1248, 1262 (D. Or. 2009) (finding that, as “consent to a receiver does not affect the court's need to weigh the [relevant] factors in determining whether a receiver is necessary, . . . this consent does not reduce the burden on . . . the party seeking a receiver, to produce evidence of these factors), and he thus retains the burden of demonstrating its continued propriety now. At this juncture, even assuming that Baliga could prove his allegations regarding Defendants' wrongful conduct, Baliga has not even come close to meeting the rigorous standard necessary for such extraordinary relief.
This is because, even if Baliga were able to show that the Company and the Individual Defendants had engaged in fraud, and that Defendants had - and, in the future, would be likely to - divert, conceal, or squander the Company's assets, he can no longer satisfy the remainder of the relevant factors set out in cases like Ramgoolie, 2016 WL 11281385, at *7, cited above. Specifically, given the nature of his currently pleaded, direct securities-fraud claims, Baliga can no longer show that available legal remedies would be inadequate to afford him relief on his claims; that he (as the real party-in-interest in the case) would be likely to suffer harm in the absence of a receivership; or, more generally, that the “drastic” remedy of a continued receivership would be necessary to prevent him from suffering irreparable harm. For these reasons, he cannot meet his “heavy” burden of demonstrating any continued need for the receivership. See, e.g., Altissima, 2009 WL 1322319, at *2 (denying remedy of receiver upon consideration of the relevant factors, as plaintiff had “not made a showing sufficient to convince the court . . . that the appointment of a receiver [was] necessary to prevent irreparable injury to the property [at stake]”); Leighton v. One William Street Fund, Inc., 343 F.2d 565, 568 (2d Cir. 1965) (“Considering the extraordinary nature of the relief sought and the fact that any waste would be compensable in damages, and in view of the court's finding that there was no danger of irreparable injury, the ruling [to deny the request for a receivership] was proper.”).
Under the circumstances, I recommend that, at this time, the preliminary injunction be dissolved, and that the Receiver be discharged, subject to the conditions discussed below.
C. The Receiver Should Be Discharged After an Accounting.
For the reasons set out above, this Court finds that Baliga's repleading of his claims, in his Second Amended Complaint, constitutes a materially changed circumstance that warrants the Court's dissolution of the preliminary injunction and discharge of the Receiver. As to the Receiver, however, it should be noted that, just because discharge may now be appropriate does not mean that the Court must require the Receiver to halt all activities at once. See 75 C.J.S. Receivers § 80 (Mar. 2022) (“Interested parties may move the discharge of a receiver. However, the fact that the parties request a termination of a receivership in the midst of the proceedings does not compel the court to cease all matters instantly.”).
Indeed, a final accounting by a receiver (something actually requested here by Shi (see Shi Mem., at 23-24; Shi Suppl., at 4-5)) ordinarily precedes the receiver's discharge. See 65 Am. Jur. 2d Receivers § 146 (2012); see also WB Music Corp. v. Royce Int'l Broad. Corp., No. EDCV-16-600 JGB (SPx), 2021 WL 3721342, at *2 (C.D. Cal. Mar. 18, 2021) (“[C]ourts normally do not terminate receiverships until the [r]eceiver prepares a final accounting. This makes logical sense: a court must ensure that a receiver will be compensated for his time managing the property of one of the parties.”); Kirkland, 2012 WL 3871922, at *2 (terminating the receivership where “the purpose of the [r]eceivership ha[d] ended and the [r]eciever ha[d] provided a final accounting to the Court”); Bruser v. Bank of Hawaii, No. CV 14-00387 LEK-RLP, 2020 WL 5845713, at *5 (D. Haw. Sept. 30, 2020) (in considering a disputed question of terminating a receivership, requiring the receiver to “file a final accounting with the Court” and “perform any other action necessary to wind up the receivership” by a specified date before the parties could file a motion to determine the receivership). I therefore recommend that, prior to his discharge (and by a date certain to be set by the Court), the Receiver be required to provide a full accounting of the activities performed during the period of his appointment and the costs thereof.
On the question of who should be directed to pay the costs of the receivership, while I recommend that the Company be required to pay the reasonable costs incurred by the Receiver in the performance of the duties duly authorized by the Court up to October 5, 2020 (the date when Baliga filed his Second Amended Complaint), I recommend that the parties be given the opportunity to brief the question of whether, for activities performed by the Receiver after that date, such costs should be borne by Baliga. See Pioche Mines Consol., Inc. v. Dolman, 333 F.2d 257, 273-76 (9th Cir. 1964) (holding that, even though the appointment of the receiver was erroneous, the court maintained the “discretion to charge the receiver's expenses either to the corporation or to the party who wrongfully obtained the receiver's appointment”). On this issue, I recommend that the Court essentially adopt the reasoning of the Ninth Circuit, as set out in Pioche Mines - that any costs of the receivership that “would not have arisen but for [the continuation of the Receiver's appointment after October 5, 2020] should be charged against the party invoking the receivership” (here, Baliga), but that, even as to the period after October 5, 2020, “expenses that the corporation would have had to incur had there been no receiver, and expenses that confer[red] a genuine benefit upon the corporation, should be charged to it.” Id.
Finally, as for any retroactive effect that should be accorded to an order discharging the Receiver, I recommend that, in light of the fact that the receivership Order was properly authorized in the first instance, and as Shi has not persuasively shown that the actions of the Receiver, taken as a whole, have been detrimental to the Company (as opposed to detrimental to Shi, himself), none of the actions taken by the Receiver should be required by the Court to be unwound, as Shi proposes. Nor do I recommend that the Court direct that Shi be reinstated to his prior positions of Chairman of the Board and Chief Operation Officer of the Company, or that any other former Directors of the Company who may have been removed by the Receiver be ordered reinstalled. I do recommend, however, that the Receiver be directed not to seek any extraordinary actions from the Company's Board, during the remaining period of the receivership, as the Receiver's work, during this time, should instead be focused on maintaining the Company's status quo and providing the accounting described above. Once the Receiver's discharge is effective, the current Board should be free to take whatever business actions it deems in the Company's interest, consistent with the present Board members' fiduciary duties.
CONCLUSION
For all of the foregoing reasons, I respectfully recommend that Shi's motion to dissolve the preliminary injunction and discharge the Receiver (Dkt. 227) be granted in part and denied in part. In particular, I recommend that the Court:
(1) find that it had subject-matter jurisdiction over this action when filed, and that the Preliminary Injunction and Receivership Order (Dkt. 26) was therefore duly authorized when issued;
(2) find that the filing of Baliga's Second Amended Complaint on October 5, 2020, by which Baliga abandoned his prior derivative claims and instead chose to plead direct claims against the Company, constituted a material change in these proceedings that warrants the dissolution of the preliminary injunction and the discharge of the Receiver;
(3) dissolve the preliminary injunction, effective immediately;
(4) discharge the Receiver, after the Receiver submits, by a date certain, a full and final accounting that shows the activities performed during the period of his appointment and the costs thereof;
(5) require the Company to pay the reasonable costs incurred by the Receiver in the performance of the duties authorized by the Court up to October 5, 2020, and give the parties the opportunity to brief the question of whether the cost of the Receiver's activities after that date should be borne by the Company or Baliga; and
(6) direct that the Receiver not be required to unwind any activities that have already been taken on the Company's behalf, but, at the same time, direct that the Receiver not seek any extraordinary actions from the Company's Board, during the remaining period of the receivership.
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6 (allowing three (3) additional days for service by mail). Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the Chambers of the Honorable Victor Marrero, United States Courthouse, 500 Pearl Street, Room 1610, New York, New York 10007, if required by his Individual Practices. Any requests for an extension of time for filing objections must be directed to Judge Marrero. FAILURE TO FILE OBJECTIONS WITHIN FOURTEEN (14) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See Thomas v. Arn, 474 U.S. 140, 155 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 58 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).
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