In re Carvana Co. Stockholders Litig.

• Decision Date: 03 October 2022
• Docket Number: 2020-0415-KSJM
• Parties: IN RE CARVANA CO. STOCKHOLDERS LITIGATION
• Court: Court of Chancery of Delaware

IN RE CARVANA CO. STOCKHOLDERS LITIGATION

No. 2020-0415-KSJM

Court of Chancery of Delaware

October 3, 2022

ORDER DENYING APPLICATION OF ERNEST GARCIA II FOR CERTIFICATION OF INTERLOCUTORY APPEAL

Kathaleen St. J. McCormick Chancellor

1. Defendant Ernest Garcia II ("Garcia Senior") is the co-founder and controlling shareholder of Carvana Co. ("Carvana" or the "Company"). In this action, a Carvana stockholder alleges that Garcia Senior and his son, Company CEO Ernest Garcia III ("Garcia Junior"), breached their fiduciary duties in connection with a $600 million sale of common stock at $45 per share to investors whom the Garcias handpicked (the "Direct Offering"). The Garcias purchased $50 million of common stock in the Direct Offering. The public stockholders were excluded from the Direct Offering.

2. Garcia Senior moved to dismiss the claims against him for lack of personal jurisdiction. The court denied Garcia Senior's motion in a Memorandum Opinion dated August 31, 2022 (the "Opinion"),^[1] holding that Garcia impliedly consented to jurisdiction when he, as Carvana's controlling shareholder, caused Carvana to adopt a Delaware forum selection provision in Carvana's certificate of incorporation.^[2]

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3. Garcia Senior seeks certification of interlocutory appeal of the Opinion Pursuant to Supreme Court Rule 42 (the "Application").^[3]

4. Supreme Court Rule 42 established a two-step test for determining whether to certify interlocutory appeal. 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."^[4] 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."^[5] Rule 42 cautions that "[i]nterlocutory appeals should be exceptional, not routine, because they disrupt the normal procession of litigation, cause delay, and can threaten to exhaust scarce party and judicial resources."^[6] This language of Rule 42 serves as an interpretive principle, requiring that the court interpret the factors such that interlocutory appeals are the exception and not routine.^[7]

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5. As commonly articulated, the substantial-issue requirement is met when a decision speaks to the merits of the case.^[8] In practice, however, the Supreme Court has accepted interlocutory appeals of non-merits-based questions that implicate significant issues under Delaware law.^[9] This practice suggests that the definition of a "substantial" issue extends more broadly than the definition of a "merits" issue. Put differently, a merits issue is necessarily a substantial issue; a substantial issue is not necessarily a merits issue.

6. It is true, as the plaintiff argues, that multiple Delaware courts have held that denying a motion to dismiss for lack of personal jurisdiction is not a "substantial issue" per

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Rule 42(b)(i) because the exercise of personal jurisdiction does not affect the merits of the case.^[10] And Delaware courts have reached this conclusion where the basis for personal jurisdiction is a forum selection clause.^[11]

7. Still, multiple decisions of the Delaware Supreme Court have granted interlocutory appeal of decisions concerning the exercise of personal jurisdiction over nonresident fiduciaries of Delaware entities. In Armstrong v. Pomerance, for example, the Supreme Court accepted interlocutory appeal to determine the constitutionality of Delaware's implied consent statute, codified at 10 Del. C. § 3114, which conferred personal jurisdiction over individuals serving as directors of a Delaware corporation.^[12] In Hazout v. Tsang Mun Ting, the defendant challenged the constitutionality of the trial court's holding that § 3114 could be used to assert personal jurisdiction even in cases that did not allege breach of fiduciary duty.^[13] In granting the interlocutory appeal, the Supreme Court noted that the trial court's novel interpretation of § 3114 constituted a "substantial issue."^[14]

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8. Like Armstrong and Shaffer, the Opinion addresses this court's exercise of personal jurisdiction over non-resident fiduciaries of Delaware entities-here, controllers. The Opinion, therefore, raises a substantial issue sufficient to meet the threshold inquiry of Rule 42.

9. Because the substantial-issue requirement is satisfied, the analysis...