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’s chief judge recently ruled Carvana Corp. controller Ernest Garcia ll stated only one of eight needed factors for a quick appeal of her June decision that he and his son, CEO Ernest Garcia III, must prove their stock deal was entirely fair to the on-line used car dealer’s investors in In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ch) Oct. 3, 2022.
Chancellor Kathaleen McCormick’s detailed Oct. 3 order denied Garcia II’s bid for an interlocutory appeal of her June 30 opinion that declined to dismiss derivative breach-of-duty charges that the Garcias profited by orchestrating an allegedly unfairly-priced $600 million stock offering while Carvana’s share price was depressed by the pandemic. In that earlier ruling, she found the long, dependent business relationships two directors had with the CEO excused the plaintiffs’ pre-suit demand on the board. In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ch) June 30, 2022.
In the Oct. 3 ruling, the Chancellor examined and rejected in turn four of the five reasons Garcia II offered in support of his Delaware Supreme Court appeal under Rule 42—which establishes a two-step test for determining whether to certify interlocutory appeal. She said:
The court must first determine whether “the order of the trial court decides a substantial issue of material importance that merits appellate review before a final judgment.”
If the substantial-issue requirement is met, this court will then analyze eight factors concerning whether “there are substantial benefits that will outweigh the certain costs that accompany an interlocutory appeal.”
She acknowledged as to the first step that although the substantial-issue requirement is met when a decision speaks to the merits of the case, in practice, the state supreme court has accepted appeals of non-merits-based questions that implicate significant issues under Delaware law. Recently, the Delaware high court has granted interlocutory appeals “concerning the exercise of personal jurisdiction over non-resident fiduciaries,” she wrote.
But the Chancellor said although the Opinion addresses a substantial issue, it does not follow that the issue must be resolved by Delaware’s Supreme Court at an interlocutory as opposed to final stage. The second step under Rule 42 is to consider whether eight factors provide sufficient support when conducting a balancing analysis.
Here, she said, Garcia presents only five factors and of them, “only one provides clear support. The others weigh against interlocutory appeal or are neutral.”
Factor A considers whether the Opinion involves a novel question of law in the state’s jurisprudence. Although Garcia Senior contends that personal jurisdiction has not previously been asserted on the exact facts present here, his narrow view ignores the well-settled rule of law that implicit consent can serve as a basis for personal jurisdiction. “The mere application of long-held precedent to new facts does not make an order worthy of appeal.” the court said in finding Factor A does not support Garcia Senior’s application.
Factor B asks the court to consider whether the Opinion conflicts with other trial court decisions. Garcia Senior contends that the Opinion is inconsistent with the “longstanding Delaware precedent which holds that purchasing or owning shares of stock in a Delaware corporation, standing alone, is not enough to enable a Delaware court to exercise personal jurisdiction over a non-consenting party, even in cases of sole ownership.” But the court said jurisdiction was not the result of Garcia’s majority ownership of shares but his use of that position to force the adoption of a bylaw requiring breach of duty suits to be filed in Delaware–which is consistent with most Delaware decisions.
Factor D looks to whether the Opinion sustains the controverted jurisdiction of the trial court. The Opinion held that this court’s exercise of personal jurisdiction over Garcia Senior is appropriate. This factor is accordingly satisfied. Although Factor D is satisfied, it is not dispositive, the Chancellor said.
Factor G considers whether interlocutory appeal may terminate the litigation. Without citing any case law, Garcia Senior contends that this factor has been satisfied because reversal of the Opinion would terminate the litigation in this Court “as to him.” This is true, but to the extent Factor G looks to judicial and administrative efficiency, it is irrelevant, the court said.
Factor H concerned whether interlocutory review would eliminate litigation, but the court said even if it eliminated charges against Garcia ll, the litigation would continue against the other defendants.