This post was prepared by Frank Reynolds, who has been following Delaware law and writing about it in various publications for over 30 years.

The Chancery Court recently ruled Carvana Company’s controlling family must prove their  stock deal was entirely fair to the on-line used car dealer’s investors after finding the long, dependent business relationships two directors had with the CEO excused the plaintiffs’ pre-suit demand on the board in  In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ch. June 30, 2022).

In her June 30 opinion, Chancellor Kathaleen McCormick declined to dismiss breach of duty charges against Carvana CEO, President and Chairman of the Board Ernest Garcia III for allegedly profiting by orchestrating an allegedly unfairly-priced $600 million stock offering while Carvana’s share price was depressed by the pandemic.  She found that even under the new universal pre-suit demand standards affirmed by the Delaware Supreme Court in a failed challenge to Mark Zuckerberg’s Facebook stock dealings, the pension fund plaintiffs showed that two Carvana directors owed their careers, fortunes and livelihoods to Ernest Garcia III and his father, Ernest Garcia II.

Her decision — that those two directors could not make an objective decision as to whether the company should press charges against the Garcias over the stock deal – meant that counting Garcia III, half of the six-member board was compromised; therefore, pre-suit demand was excused and the derivative suit could go forward.

The Chancellor’s June ruling sets out a clear though demanding heavily fact-supported standard to satisfy what has been dubbed the third of three prongs of the Zuckerberg opinion, which was initially penned by Vice Chancellor J. Travis Laster and endorsed by the Supreme Court.  United Food & Com. Workers Union & Participating Food Indus. Empls. Tri-State Pension Fund v. Zuckerberg, 250 A.3d 862, 876 (Del. Ch. 2020), aff’d, 262 A.3d 1034 (Del. 2021).

It sets out a new universal three-part, director-by-director test for a plaintiff bringing suit on behalf of all shareholders to avoid letting the board decide whether the company should take up the action:

  • whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
  • whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
  • whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.


The Garcias founded several companies that bought and sold or rented cars, including Carvana in 2012.  Carvana had a unique dual class stock structure with a common stock carrying one vote per share and a Class B which had 10 votes per share—but only when owned by the Garcias, who controlled 88 million shares of the company.

Following the pandemic in 2020, the stock price dropped dramatically but as an e-commerce company it was uniquely situated to weather the economic storm.  Nevertheless, even though Carvana did not need the funds to operate, Garcia III orchestrated a $600 million stock sale while the stock price was depressed.  It was available only to hand-picked investors, the court said.

Three pension funds filed breach of duty allegations that were consolidated in January 2021.  Carvana and Garcia moved to dismiss for lack of pre-suit demand and failure to state a complaint.  Garcia Senior moved to dismiss for lack of personal jurisdiction, but the Court said it would rule on that later.

Garcia Junior’s motion to dismiss focused on whether two of the six Carvana directors — Gregory Sullivan and Ira Platt — both of whom allegedly had a long and tangled relationship with the Garcias — could render an objective opinion on the charges against the Garcias.

Sullivan — Thick-as-thieves?

Sullivan’s business relationship allegedly dates back to Garcia Senior’s founding of his used-car empire after pleading guilty in 1990, to a felony bank fraud related to Charles Keating’s Lincoln Savings & Loan scandal. In 1992, Senior consented to a censure and permanent bar from “membership or employment or association with any New York Stock Exchange member or member organization.”

Sullivan was censured by the government for his role in the Garcias’ companies in connection with the Garcias wrongdoing, but they provided him with positions that supplied him with a career, a livelihood and a fortune during that time, the Chancellor said.

“Put succinctly, it is reasonably conceivable that Sullivan might be incapable of impartially considering a demand to sue the man who allegedly saved his career, helped generate his personal wealth, and financially shores his current livelihood,” he said.

This closeness creates a reasonable doubt about Sullivan’s ability to objectively consider a demand to pursue litigation against Garcia Senior’s son, particularly litigation for the same wrongdoing alleged against Garcia Senior, the court said.

“Mere allegations of payment of director fees are insufficient to create a reasonable doubt as to the director’s independence,” the Chancellor said, but she added that, “Indeed, the fee allegations are eclipsed entirely by Plaintiffs’ unusual thick-as-thieves narrative concerning Sullivan and Garcia Senior.”

Platt — Reasonable doubt?

“Although the allegations regarding the large stock gift and exclusive investment opportunities shine brightest in Platt’s constellation of facts raising a reasonable doubt as to his independence from the Garcias, there are other stars as well,” the court said.   These include:

  • Platt securing a position for Garcia Junior and Garcia Junior securing a position for Platt’s son;
  • Platt’s appointment to the boards of numerous Garcia-controlled entities and accompanying director compensation; and
  • the historical relationship between Platt and Garcia Senior while Platt was DriveTime’s primary relationship banker at Greenwich Capital.

States a claim
The Chancellor also declined to dismiss for failure to state a claim because although Garcia Junior abstained from the vote on the stock deal, plaintiffs allege that Garcia Junior “shepherded the [Direct] Offering” from “conception to its execution over the course of a few hurried days.”