Judge: Curtis A. Kin, Case: 23STCV19050, Date: 2023-12-12 Tentative Ruling

Case Number: 23STCV19050    Hearing Date: December 12, 2023    Dept: 82

MOTION TO APPOINT TEMPORARY RECEIVER

Date:               12/12/23 (9:30 AM)

Case:                           McKenna Capital, LLC et al. v. Eng Taing et al. (23STCV19050)

TENTATIVE RULING:

Plaintiffs’ Motion to Appoint Temporary Receiver is DENIED.

Pursuant to CCP § 564(b)(1) and (b)(9), plaintiffs seek the appointment of a receiver with respect to defendants (a) Touzi Capital, LLC; (b) Touzi Data Center Inv, LLC; (c) Touzi DC Invest, LLC; (d) Touzi Data Technology, LLC; (e) Touzi Gem Inv, LLC; (f) Touzi Mining Inv, LLC; (g) Touzi Mining Inv II LLC; (h) Touzi Mine Invest, LLC; (i) Teracel Blockchain Fund, LLC; and (j) Teracel Blockchain Fund II LLC. As proposed by plaintiffs, the Receiver would have the powers and responsibilities to: (a) determine the status and create an inventory of all bitcoin miners owned or operated by defendants or by third parties on defendants’ behalf; (b) take immediate steps to make the miners operational so the miners generate income; (c) locate and create an inventory of all existing liquid assets belonging to the defendants; (d) locate and create an inventory of all hard assets belonging to the defendants; (e) safeguard any of the defendants’ assets which are in jeopardy of being lost; (f) report the status of the investments to the Court; and (g) take possession of all records and data concerning defendants’ assets.

Under CCP § 564(b), a receiver may be appointed by the court in which an action is pending where “any party whose right to or interest in the property or fund, or the proceeds of the property or fund, is probable” and “where it is shown that the property or fund is in danger of being lost, removed or materially injured.” (CCP § 564(b)(1).) Additionally, a court may appoint a receiver “in all other cases where necessary to preserve the property or rights of any party.” (CCP § 564(b)(9).)

A receiver should not be appointed unless absolutely essential, because no other remedy will suffice. (City & County of San Francisco v. Daley (1993) 16 Cal.App.4th 734, 745.) This is so because the appointment of a receiver is recognized as a drastic, time consuming, expensive, and potentially unjust remedy to be used as a final resort. (See Weil & Brown, Civ. Proc. Before Trial § 9:743 et seq.; see also Alhambra-Shumway Mines v. Alhambra Gold Mine Corp. (1953) 116 Cal.App.2d 869, 873.) “The appointment of a receiver is a drastic remedy and is one which should not be invoked unless there is an actual or threatened cessation or diminution of the business.” (In re Jamison Steel Corp. (1958) 158 Cal.App.2d 27, 35.)

Defendant Touzi Capital, LLC, the manager of the other entity defendants, has purportedly purchased bitcoin machines in bulk and sold them to the other entity defendants for a profit. (McKenna Decl. ¶¶ 6, 25.) Plaintiffs also have not received distributions to which they are purportedly entitled under the private placement memoranda pursuant to which plaintiffs invested with defendants. (McKenna Decl. ¶¶ 4, 25, 26.) Defendants also allegedly have bitcoin wallets worth $3.9 million. (McKenna Decl. ¶ 28.) Plaintiffs also argue that defendants are not providing access to their account information on the online investor portal or to company records. (McKenna Decl. ¶¶ 20, 22, 24, 31.) These averments do not demonstrate that defendants’ assets are in danger of dissipation. There is no indication what defendants will do with any monetary proceeds from the sale of machines or bitcoins or with distributions that they are purportedly withholding from plaintiffs.  

With its original motion papers, plaintiffs submitted some evidence that Touzi Capital purportedly posted 10,000 bitcoin mining machines as security in favor of the companies hosting the bitcoin miners. (McKenna Decl. ¶¶ 27, 29.) Plaintiffs contend that the hosting companies can foreclose on and sell the machines, as well as take the bitcoin, to recover the fees that are owed by defendant Eng Taing, the sole manager of Touzi Capital. (McKenna Decl. ¶¶ 6, 29.) Plaintiffs, however, did not state the amount of fees Touzi Capital owes to the hosting companies. (McKenna Decl. ¶ 29.)  In a subsequent declaration by counsel for the hosting companies, which was untimely submitted four days prior the hearing, plaintiffs provided some additional evidence related to the mining machines.  According to Jerrold Bregman, who represents entities collectively referred to as GC Data Centers, the GC Data Centers entered into agreements with defendants to host their bitcoin mining machines at two physical locations. (Bregman Decl. ¶ 2.)  GC Data Centers currently possesses and controls 10,313 of those machines, which sit idle and are not producing bitcoin. (Bregman Decl. ¶ 2.)  Defendants have purportedly breached the hosting agreements with GC Data Centers, which led to the termination of the agreements and defendants in arrears approximately $5.1 million to GC Data Centers under the agreements.  (Bregman Decl. ¶ 3.)  Bregman does not confirm the suggestion by plaintiff that GC Data Centers has the right to foreclose on the bitcoin mining machines.

Nonetheless, even if the hosting companies have a right to foreclose, they would only be entitled to recover from any such sale of the assets the amount of the unpaid fees, meaning that any leftover funds from the sale would be available to satisfy other debts, including any judgment that plaintiffs may recover. It is thus unclear whether a receiver is necessary to preserve defendants’ assets.  The Court notes, however, that, on this scant record, it is not possible to determine whether the value of the machines exceeds any amount they secure or is inadequate.  Regardless, the Court does not find on this record that a creditor collecting on debts legally owed by the defendants amounts to the type of waste, fraud, abuse, or diminution of assets for which the extreme remedy of appointing a receiver is appropriate.

Through the submission of the Bregman declaration, plaintiffs also attempt to bolster their contention that the Court should appoint a receiver so that such receiver could get the idle bitcoin mining machines up and running.  According to Bregman, the “best and highest use” of the machines would be to get them online to generate income.  (Bregman Decl. ¶ 4.)  He further posits his belief that it is “anticipated” and “reasonably so” that the machines are more likely to produce positive revenue than their cost of operation.  (Bregman Decl. ¶ 4.)  It is hard to credit these vague predictions of good fortune when Bregman fails to provide any foundation, relevant background and experience, or reasoned basis for making them.  In any event, the applicable standard for appointing a receiver is not whether the receiver might run a business better than the current management team.  Rather, the Court may appoint a receiver when doing so may prevent harm to the business or its assets, which, as noted, plaintiffs have not shown.

Plaintiff also contend that Taing’s counsel purportedly stated that the “cryptocurrency business in general is precarious.” (McKenna Decl. ¶¶ 20, 23.) That may be entirely true, but such a generalized statement is insufficient to demonstrate that defendants are at risk of ceasing operations or having the assets dissipate. Plaintiffs also contend that Taing has “disappeared,” having “abandoned his duties as manager of the entities and the investments.” (McKenna Decl. ¶ 22.) The basis for making this averment is Taing’s lack of status updates and lack of response to plaintiffs’ requests to review company documents or for mediation. (McKenna Decl. ¶¶ 19, 21, 22.) Taing’s lack of response does not necessarily mean that the entity defendants are in danger of ceasing operations or having their assets dissipate. Moreover, insofar as Taing has disappeared, there has been no showing by plaintiffs that he took or will spirit away the assets.  Indeed, according to plaintiffs, over $3.9 million has been located in bitcoin wallets, which neither Taing nor the defendants have looted. (McKenna Decl. ¶ 28.)

Plaintiffs do assert that, according to a former employee of Touzi Capital, Taing “likely transferred” funds from defendants to another distressed investment that is the subject of litigation in Orange County. (McKenna Decl. ¶ 30.) The basis for the assertion, including the identity of the former employee and how such employee would know about transfers that Taing made, is not set forth in the declarations in support of the motion. Plaintiffs’ speculation is insufficient to demonstrate that a receiver is necessary to preserve defendants’ assets for any judgment that plaintiffs may recover.

In sum, there is an insufficient showing that assets of defendants are in danger of dissipation, such that a receiver is necessary to preserve their assets.

Further, it is unclear what a receiver would do to make the bitcoin miners operational and safeguard defendants’ assets, as proposed by plaintiffs, and whether doing so would even be profitable or helpful. Even if the Court were to appoint the proposed receivers, plaintiffs do not propose a plan that meaningfully demonstrates that the proposed receivership is essential to protect plaintiffs’ rights at this time.

The motion is DENIED.