In Re Carvana Co. Stockholders Litigation
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE CARVANA CO. ) CONSOLIDATED STOCKHOLDERS LITIGATION ) C.A. No. 2020-0415-KSJM
MEMORANDUM OPINION
Date Submitted: March 14, 2022 Date Decided: June 30, 2022
Nathan A. Cook, BLOCK & LEVITON LLP, Wilmington, Delaware; Christine M. Mackintosh, Rebecca A. Musarra, GRANT & EISENHOFER P.A., Wilmington, Delaware; Ned Weinberger, LABATON SUCHAROW LLP, Wilmington, Delaware; Jason M. Leviton, Joel A. Fleming, Lauren Godles Milgroom, Amanda R. Crawford, BLOCK & LEVITON LLP, Boston, Massachusetts; Domenico Minerva, John Vielandi, David MacIsaac, LABATON SUCHAROW LLP, New York, New York; Counsel for Co- Lead Plaintiffs Anthony Franchi, Construction Industry and Laborers Joint Pension Trust for Southern Nevada, St. Paul Electrical Construction Pension Plan, St. Paul Electrical Construction Workers Supplemental Pension Plan (2014 Restatement), and Retirement Medical Funding Plan for the St. Paul Electrical Workers.
David E. Ross, Adam D. Gold, R. Garrett Rice, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Brian M. Lutz, GIBSON, DUNN & CRUTCHER LLP, San Francisco, California; Colin B. Davis, Katie Beaudin, GIBSON, DUNN & CRUTCHER LLP, Irvine, California; Counsel for Nominal Defendant Carvana Co.
John L. Reed, Ronald N. Brown, III, Peter H. Kyle, Kelly L. Freund, DLA PIPER LLP (US), Wilmington, Delaware; Counsel for Defendants Ernest Garcia III and Ernest Garcia II.
McCORMICK, C. Carvana Co. (“Carvana” or the “Company”) operates an e-commerce platform for
buying and selling used cars. Ernest Garcia II (“Garcia Senior”) and his son, Ernest Garcia
III (“Garcia Junior”),1 collectively control Carvana through their control of the majority of
Carvana’s voting stock. Garcia Junior is also Carvana’s CEO, President, and Chairman.
The trading price of Carvana stock fell from $110 in February 2020 to less than $30
in March 2020 due to pandemic-related market volatility. While the trading price of
Carvana’s stock was depressed, Garcia Junior orchestrated a $600 million sale of common
stock at $45 per share to investors whom he 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.
The stockholder plaintiffs brought derivative claims alleging that the Garcias
breached their fiduciary duties to Carvana in orchestrating the Direct Offering at a price
that was below fair value. Garcia Junior and the Company moved to dismiss for failure to
plead demand futility and failure to state a claim. Garcia Senior joined in those motions
and separately moved to dismiss for lack of personal jurisdiction. Garcia Senior’s motions
will be addressed in a separate decision. This decision denies Carvana and Garcia Junior’s
motions to dismiss for failure to plead demand futility and failure to state a claim.
1 This decision refers to the individual Garcia defendants as Garcia Senior and Garcia Junior for clarity purposes. The court intends no disrespect. I. FACTUAL BACKGROUND
Unless otherwise stated, the facts are drawn from the Verified Amended Derivative
and Class Action Complaint (the “Amended Complaint”).2
A. Carvana, Its Founder, And Its Board.
Nominal Defendant Carvana is a publicly traded Delaware corporation formed by
the Garcias, which operates an e-commerce platform for buying and selling used cars
through its subsidiary, Carvana Group, LLC.
Garcia Senior began his used-car empire after pleading guilty, in 1990, to felony
bank fraud related to Charles Keating’s Lincoln Savings & Loan scandal. In 1992, he
consented to a censure and permanent bar from “membership or employment or association
with any New York Stock Exchange member or member organization.”3
After a personal bankruptcy, Garcia Senior purchased the assets of a rental car
company named Ugly Duckling Rent-a-Car System. That entity was later reorganized into
an entity called Ugly Duckling Corporation, which went public in 1996. In 2002, Ugly
Duckling changed its name to DriveTime Automotive Group, Inc (“DriveTime”). For
convenience, this decision will refer to Ugly Duckling/DriveTime by its ultimate name,
DriveTime. Garcia Senior controlled DriveTime at all relevant times.
The Garcias formed Carvana in 2012 as a wholly owned subsidiary of DriveTime.
Garcia Junior has served as Carvana’s CEO, President, and Chairman since its formation.
2 C.A. No. 2020-0415-KSJM, Docket (“Dkt.”) 66, Verified Am. Deriv. & Class Action Compl. (“Am. Compl.”). 3 Id. ¶ 22.
2 DriveTime spun off Carvana in 2017 through an “Up-C structure,” which created a
publicly traded holding company that owns LLC units in the operating entity, Carvana
Group, LLC.
Carvana has a dual-class capital structure. Its Class A shares are publicly traded
and carry one vote per share. Its Class B shares carry ten votes per share, but only when
held by the Garcias. The Garcias control 92% of Carvana’s voting power through direct
and indirect ownership of approximately 88.4 million shares of Carvana’s Class B stock.
Carvana has a six-member board of directors (the “Board”) comprising Garcia
Junior, Gregory Sullivan, Ira Platt, Michael Maroone, Neha Parikh, and James “Dan”
Quayle.
Relevant to this decision, the plaintiffs allege that Sullivan and Platt share
particularly close ties with the Garcias, which are discussed in detail below in the legal
analysis. The plaintiffs also allege that Sullivan and Platt each received over $1 million in
director fees over the four years before the plaintiffs filed this lawsuit.
B. The Direct Offering
Beginning in February 2020, stock markets throughout the world crashed after
growing instability due to the COVID-19 pandemic. The trading price of Carvana’s stock
declined from a high of $110 on February 21, 2020, to a low of less than $30 on March 20,
2020.
Carvana’s e-commerce model made it well-situated to weather the pandemic-fueled
market volatility. Internal Carvana communications in early March suggest that Carvana
did not need to raise capital with any urgency. On March 10, 2020, Garcia Junior rejected
3 a Goldman Sachs pitch to issue convertible debt. On March 13, 2020, Carvana’s CFO,
Mark Jenkins, sent a “Coronavirus and Macroeconomic Response Plan” to Board
members.4 The plan did not involve raising new capital but instead suggested cutting costs
and streamlining operations in response to the market volatility. An update to that plan
sent on March 20 was to the same effect.
Carvana provided good news to the market on March 24, 2020, announcing that it
had secured a $2 billion finance agreement with Ally Financial (“Ally”), Carvana’s most
significant lender, allowing it to double its loan purchase program. In reaction, the trading
price of Carvana stock rose 43%, from $35.80 at close on March 23 to $51.21 at close on
March 24.
Carvana’s communications with Ally further suggested that Carvana did not need
to raise capital. On the morning of March 24, 2020, Carvana emailed Ally a “High Level
Carvana Action Plan Overview” outlining a capital plan. That document noted that the
Company had a “Survival Plan” previously sent to Ally as a downside case, reflecting that
Carvana could operate for a year without raising equity or high-yield capital even in a
severely challenging environment.5
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE CARVANA CO. ) CONSOLIDATED STOCKHOLDERS LITIGATION ) C.A. No. 2020-0415-KSJM
MEMORANDUM OPINION
Date Submitted: March 14, 2022 Date Decided: June 30, 2022
Nathan A. Cook, BLOCK & LEVITON LLP, Wilmington, Delaware; Christine M. Mackintosh, Rebecca A. Musarra, GRANT & EISENHOFER P.A., Wilmington, Delaware; Ned Weinberger, LABATON SUCHAROW LLP, Wilmington, Delaware; Jason M. Leviton, Joel A. Fleming, Lauren Godles Milgroom, Amanda R. Crawford, BLOCK & LEVITON LLP, Boston, Massachusetts; Domenico Minerva, John Vielandi, David MacIsaac, LABATON SUCHAROW LLP, New York, New York; Counsel for Co- Lead Plaintiffs Anthony Franchi, Construction Industry and Laborers Joint Pension Trust for Southern Nevada, St. Paul Electrical Construction Pension Plan, St. Paul Electrical Construction Workers Supplemental Pension Plan (2014 Restatement), and Retirement Medical Funding Plan for the St. Paul Electrical Workers.
David E. Ross, Adam D. Gold, R. Garrett Rice, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Brian M. Lutz, GIBSON, DUNN & CRUTCHER LLP, San Francisco, California; Colin B. Davis, Katie Beaudin, GIBSON, DUNN & CRUTCHER LLP, Irvine, California; Counsel for Nominal Defendant Carvana Co.
John L. Reed, Ronald N. Brown, III, Peter H. Kyle, Kelly L. Freund, DLA PIPER LLP (US), Wilmington, Delaware; Counsel for Defendants Ernest Garcia III and Ernest Garcia II.
McCORMICK, C. Carvana Co. (“Carvana” or the “Company”) operates an e-commerce platform for
buying and selling used cars. Ernest Garcia II (“Garcia Senior”) and his son, Ernest Garcia
III (“Garcia Junior”),1 collectively control Carvana through their control of the majority of
Carvana’s voting stock. Garcia Junior is also Carvana’s CEO, President, and Chairman.
The trading price of Carvana stock fell from $110 in February 2020 to less than $30
in March 2020 due to pandemic-related market volatility. While the trading price of
Carvana’s stock was depressed, Garcia Junior orchestrated a $600 million sale of common
stock at $45 per share to investors whom he 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.
The stockholder plaintiffs brought derivative claims alleging that the Garcias
breached their fiduciary duties to Carvana in orchestrating the Direct Offering at a price
that was below fair value. Garcia Junior and the Company moved to dismiss for failure to
plead demand futility and failure to state a claim. Garcia Senior joined in those motions
and separately moved to dismiss for lack of personal jurisdiction. Garcia Senior’s motions
will be addressed in a separate decision. This decision denies Carvana and Garcia Junior’s
motions to dismiss for failure to plead demand futility and failure to state a claim.
1 This decision refers to the individual Garcia defendants as Garcia Senior and Garcia Junior for clarity purposes. The court intends no disrespect. I. FACTUAL BACKGROUND
Unless otherwise stated, the facts are drawn from the Verified Amended Derivative
and Class Action Complaint (the “Amended Complaint”).2
A. Carvana, Its Founder, And Its Board.
Nominal Defendant Carvana is a publicly traded Delaware corporation formed by
the Garcias, which operates an e-commerce platform for buying and selling used cars
through its subsidiary, Carvana Group, LLC.
Garcia Senior began his used-car empire after pleading guilty, in 1990, to felony
bank fraud related to Charles Keating’s Lincoln Savings & Loan scandal. In 1992, he
consented to a censure and permanent bar from “membership or employment or association
with any New York Stock Exchange member or member organization.”3
After a personal bankruptcy, Garcia Senior purchased the assets of a rental car
company named Ugly Duckling Rent-a-Car System. That entity was later reorganized into
an entity called Ugly Duckling Corporation, which went public in 1996. In 2002, Ugly
Duckling changed its name to DriveTime Automotive Group, Inc (“DriveTime”). For
convenience, this decision will refer to Ugly Duckling/DriveTime by its ultimate name,
DriveTime. Garcia Senior controlled DriveTime at all relevant times.
The Garcias formed Carvana in 2012 as a wholly owned subsidiary of DriveTime.
Garcia Junior has served as Carvana’s CEO, President, and Chairman since its formation.
2 C.A. No. 2020-0415-KSJM, Docket (“Dkt.”) 66, Verified Am. Deriv. & Class Action Compl. (“Am. Compl.”). 3 Id. ¶ 22.
2 DriveTime spun off Carvana in 2017 through an “Up-C structure,” which created a
publicly traded holding company that owns LLC units in the operating entity, Carvana
Group, LLC.
Carvana has a dual-class capital structure. Its Class A shares are publicly traded
and carry one vote per share. Its Class B shares carry ten votes per share, but only when
held by the Garcias. The Garcias control 92% of Carvana’s voting power through direct
and indirect ownership of approximately 88.4 million shares of Carvana’s Class B stock.
Carvana has a six-member board of directors (the “Board”) comprising Garcia
Junior, Gregory Sullivan, Ira Platt, Michael Maroone, Neha Parikh, and James “Dan”
Quayle.
Relevant to this decision, the plaintiffs allege that Sullivan and Platt share
particularly close ties with the Garcias, which are discussed in detail below in the legal
analysis. The plaintiffs also allege that Sullivan and Platt each received over $1 million in
director fees over the four years before the plaintiffs filed this lawsuit.
B. The Direct Offering
Beginning in February 2020, stock markets throughout the world crashed after
growing instability due to the COVID-19 pandemic. The trading price of Carvana’s stock
declined from a high of $110 on February 21, 2020, to a low of less than $30 on March 20,
2020.
Carvana’s e-commerce model made it well-situated to weather the pandemic-fueled
market volatility. Internal Carvana communications in early March suggest that Carvana
did not need to raise capital with any urgency. On March 10, 2020, Garcia Junior rejected
3 a Goldman Sachs pitch to issue convertible debt. On March 13, 2020, Carvana’s CFO,
Mark Jenkins, sent a “Coronavirus and Macroeconomic Response Plan” to Board
members.4 The plan did not involve raising new capital but instead suggested cutting costs
and streamlining operations in response to the market volatility. An update to that plan
sent on March 20 was to the same effect.
Carvana provided good news to the market on March 24, 2020, announcing that it
had secured a $2 billion finance agreement with Ally Financial (“Ally”), Carvana’s most
significant lender, allowing it to double its loan purchase program. In reaction, the trading
price of Carvana stock rose 43%, from $35.80 at close on March 23 to $51.21 at close on
March 24.
Carvana’s communications with Ally further suggested that Carvana did not need
to raise capital. On the morning of March 24, 2020, Carvana emailed Ally a “High Level
Carvana Action Plan Overview” outlining a capital plan. That document noted that the
Company had a “Survival Plan” previously sent to Ally as a downside case, reflecting that
Carvana could operate for a year without raising equity or high-yield capital even in a
severely challenging environment.5
Despite Carvana’s seemingly sound financial position, Garcia Junior orchestrated a
capital raise while the Company’s stock was trading down. On the same day that Carvana
announced the Ally agreement, March 24, Carvana began discussions with Greenoaks
4 Id. ¶ 112. 5 Id. ¶ 114.
4 Capital (“Greenoaks”) and existing Carvana investors about a potential capital raise.
Garcia Junior and Greenoaks initially discussed a convertible preferred stock issuance by
Carvana in which Greenoaks would commit $200 million and the Garcias would commit a
minimum of $50 million.
Garcia Junior played a central role in the effort by handpicking investors who would
be permitted to participate in the non-public direct offering. As part of that process, Garcia
Junior reviewed lists of “Holder Targets” with notes about their potential participation at
$50 per share.6
Later that day, Carvana’s management called an urgent Board meeting on less than
an hour’s notice. The Board met by phone that night for thirty-five minutes to discuss the
potential capital raise. The Board was informed about a contemplated “preferred stock
issuance to a ‘potential new equity investor’ who was ‘seeking either 50% of this round of
the transaction or $300–$500 million.’”7 The Board planned to meet again in less than
twelve hours, before the market opened, to vote on the transaction. Those plans were
abandoned, however, once it became clear that a deal could not be approved before the
market opened.
Garcia Junior and Carvana’s General Counsel, Paul Breaux, continued working to
advance a potential capital raise, actively negotiating with potential investors. On March
25, the Board met telephonically for an hour beginning around 11 a.m. and for twenty
6 Id. ¶ 122. 7 Id. ¶ 124 (quoting the Board minutes).
5 minutes later that evening. During each call, Garcia Junior updated the Board on a potential
capital raise transaction, various alternatives being discussed, and steps to move forward.
The minutes of these meetings do not indicate whether the Board discussed why a capital
raise was necessary.
At Garcia Junior’s instruction, Breaux and Carvana Vice President for Investor
Relations, Mike Levin, worked through the night of March 25, 2020, to have a conceptual
agreement in place by 7 a.m. on March 26.
The Board met twice telephonically on March 26, 2020. Neither Garcia Junior nor
Quayle attended the first meeting, which lasted approximately 40 minutes. Breaux and
Jenkins provided an update during that meeting regarding a potential equity transaction to
raise capital.
Immediately after the first March 26 meeting, Jenkins circulated a slide deck of
Carvana’s COVID-19 response plan to the Board, stating that the business was prepared to
handle an 80% reduction in sales volume for up to twelve months without requiring non-
asset-based financing because the Company was implementing significant cost-cutting
measures. The plan did not expressly reference a need for any additional capital, despite
the efforts of the prior few days. The plan also noted that the Company would have $430
million in liquid assets as of the end of the quarter and that, even in a “Deep Stress
Scenario,” the Company expected to lose slightly less than that through the end of the first
6 quarter of 2021, indicating that the Company believed its cash on-hand was sufficient for
the foreseeable future.8
The Board held the second March 26 meeting approximately 40 minutes after
Jenkins circulated the plan. Garcia Junior, Breaux, and Jenkins attended this meeting;
Quayle was again absent. During the meeting, Garcia Junior updated the Board on the
potential equity transaction to raise capital, including “the various negotiations and
different transaction structures and partners he had explored recently, as well as prospects
for each.”9
That evening, Breaux distributed resolutions to the directors, informing them that
he would request approval of the resolutions if Carvana successfully completed a common
stock offering rather than the preferred stock offering initially discussed. The plaintiffs
argue that the switch to a common stock offering came about because indentures in the
Company’s senior notes limited the amount of common stock into which preferred stock
could convert; a preferred stock offering would thus reduce the Garcias’ ability to acquire
more common equity. This is a reasonable inference. Neither the resolutions nor the other
materials sent to the Board indicated that the Company urgently needed to raise capital.
On March 26, 2020, Carvana’s Class A common stock closed at $56.55 per share.
Early in the morning on Friday, March 27, 2020, the Board held a 40-minute
telephonic meeting to approve the Direct Offering. Garcia Junior led the Board in a
8 Id. ¶ 137. 9 Id. ¶ 138.
7 discussion of “the timing, strategy, and progress of the Company’s potential equity
transaction to raise capital,” and Garcia Junior “summarized . . . the various negotiations
and different transaction structures and partners he had explored recently.”10 Garcia Junior
then exited the meeting and did not participate in the vote. Platt was also absent from the
meeting.
The remaining Board members in attendance, Maroone, Parikh, Quayle, and
Sullivan, discussed that multiple investors had reached out to the Company expressing
willingness to participate in a capital raise. Despite this discussion, the Board voted to
approve the Direct Offering in substantially the same form described in the resolutions that
Breaux had sent earlier. Those resolutions contemplated an investment agreement between
the Company and the Garcias, a price range of $45 to $55, and a deal upsize of
approximately $600 million. Later that day, Carvana’s Class A common stock closed at
$49.04 per share.
The resolutions approved by the participating Board members delegated to
management the authority to negotiate the terms and provisions of the investment
agreements entered into by Direct Offering participants. Thus, Garcia Junior, as the CEO,
had the power to determine the terms of a transaction that the Company would enter into
with him and his father. While the resolutions state that certain terms of the investment
agreements would be subject to Board approval, the Company produced no Section 220
10 Id. ¶ 146.
8 documents indicating that the Board reviewed or approved any of the investment
agreements.
Investor response to the Direct Offering was robust and the deal became
“significantly oversubscribed,” causing investors to take a smaller allotment than they
expected.11 However, the Garcias were each able to invest $25 million, the full $50 million
they had originally been allotted. Garcia Senior and Garcia Junior each purchased 555,556
Class A shares in the Direct Offering.
Garcia Senior “participated behind the scenes in the planning and execution of the
very abbreviated process that led up to the Direct Offering.”12 On Saturday, March 28,
2020, Garcia Junior forwarded the stock issuance allocations list to Garcia Senior, referring
to the list as “Pretty solid” and stating that they had to “figure out plan on your money.” 13
On March 29, 2020, Garcia Junior informed the Board that Carvana management
had decided to sell $600 million worth of stock in the Direct Offering for $45 per share,
the lowest price authorized by the Board. The Direct Offering was announced on Monday,
March 30, and closed the same day. On March 31, Carvana registered the shares sold in
the Direct Offering by filing a prospectus which stated that the capital raised would be used
for “general corporate purposes” and that Carvana had “not specifically identified a
material single use for which [it] intend[ed] to use the net proceeds.”14 In an April 5th
11 Id. ¶¶ 148, 150. 12 Id. ¶ 166. 13 Id. ¶ 167. 14 Id. ¶ 156.
9 update from management, Carvana stated that “in a world with significant national health
and macroeconomic uncertainty” the Direct Offering “position[ed] the business
defensively for a period of extended stress.”15
C. Post-Offering Developments
On May 6, 2020, Carvana released excellent first quarter earnings for 2020,
including a “43% year-over-year increase in car sales and a 45% increase in year-over-year
revenue.”16 Garcia Junior noted on an analyst call that he believed that Carvana would
ultimately benefit from the COVID-19 pandemic since “e-commerce will be a relative
outperformer during this time and coming out of this time.”17 On May 7, the day after first
quarter earnings, Carvana’s stock price closed at $97.67, more than double the price of the
Direct Offering that occurred less than two months earlier. Carvana’s strong first quarter
performance would have been known to the Garcias before the Direct Offering.
On May 18, 2020, Carvana announced a public offering of five million Class A
shares at a price of $92 per share. The Board approved this transaction in a 14-minute
meeting featuring a presentation from Garcia Junior as to the size and price of the
transaction.
On June 15, Garcia Senior entered into a Rule 10b5-1 trading plan whereby he
would be able to realize profits from Carvana stock purchased in the Direct Offering.
15 Id. ¶ 158. 16 Id. ¶ 168. 17 Id.
10 On August 6, 2020, Carvana announced strong earnings for the second quarter,
including “25% year-over-year increase in retail units sold, a 13% year-over-year increase
in revenue, and a 9% year-over-year increase in total gross profits.”18 Carvana also
reported strong growth late in the quarter and expected its sales strength to continue into
July. Garcia Junior noted the increased demand for Carvana’s cars as part of a letter to
shareholders, highlighting that 60% of survey respondents were “open to buying a car
online,” up from 32% in a prior survey.19 The day after the positive second quarter earnings
announcement, Carvana’s stock price rose 28% to $222.99.
Under the Securities and Exchange Act of 1934, the Garcias were required to
disgorge any profits from the sale of Carvana stock that took place within the “short-swing”
period, or six months from the Direct Offering. The short-swing period expired on
September 30, 2020. Following this period, Garcia Senior sold millions of shares on the
open market between October 2 and December 31, 2020, pursuant to his trading plan.
Additionally, Garcia Senior sold 2 million shares on December 2, for a total of $478.4
million. Garcia Senior has since modified his trading plan twice and he continued to sell
Carvana shares throughout 2021 while remaining Carvana’s controlling stockholder.
D. This Litigation
On May 28, 2020, Plaintiffs St. Paul Electrical Construction Pension Plan, St. Paul
Electrical Construction Workers Supplemental Pension Plan (2014 Restatement), and
18 Id. ¶ 173. 19 Id. ¶ 174.
11 Retirement Medical Funding Plan for the St. Paul Electrical Workers (collectively, “St.
Paul”) filed the original complaint against Carvana challenging the Direct Offering.20 St.
Paul amended their plenary complaint on August 17, 2020.21
On July 27, 2020, City of Hallandale Beach Police Officers’ and Firefighters’
Personnel Retirement Trust (“Hallandale”), served a demand for books and records on the
Company pursuant to Section 220 of the Delaware General Corporation Law.22 Carvana
agreed to produce certain documents in response, which Hallandale used to file a plenary
complaint on October 13, 2020.23
On May 18, 2020, Anthony Franchi served a demand to inspect books and records
on the company, and on June 18, 2020, stockholder Construction Industry and Laborers
Joint Pension Trust for Southern Nevada (“Laborers”) did the same.24 After negotiating
the scope of production but failing to reach a resolution, Franchi and Laborers filed a
Section 220 complaint on August 17, 2020.25 That action settled on November 16, 2020,26
and Franchi and Laborers filed their own plenary complaint on December 3, 2020.27
20 Dkt. 1. 21 Dkt. 15. 22 C.A. No. 2020-0887-KSJM, Dkt. 1 ¶ 9. 23 Dkt. 24, Mot. to Consol. ¶¶ 3, 5. 24 C.A. No. 2020-0676-AGB, Dkt. 1 ¶¶ 86, 88. 25 Id. ¶¶ 90–91. 26 C.A. No. 2020-0676-AGB, Dkt. 15. 27 C.A. No. 2020-1028-KSJM, Dkt. 1.
12 The court consolidated the three plenary actions on January 4, 2021.28 On May 13,
2021, St. Paul, Franchi, and Laborers (collectively, “Plaintiffs”) were appointed as Co-
Lead Plaintiffs.29
Plaintiffs filed the Amended Complaint, which is the operative complaint in this
action, on August 20, 2021, asserting two causes of action. In Count I, Plaintiffs asserted
a direct claim for breach of fiduciary duty against all Defendants. In Count II, Plaintiffs
assert a derivative claim for breach of fiduciary duty against all Defendants. On September
27, 2021, the parties stipulated to dismissal of the direct claim in Count I30 based on the
Delaware Supreme Court’s decision in Brookfield Asset Management, Inc. v. Rosson.31
Defendants each moved to dismiss the remaining count.32 The motions were fully
briefed,33 and the court heard oral argument on March 14, 2022.34
II. LEGAL ANALYSIS
Carvana and Garcia Junior have moved to dismiss pursuant to Court of Chancery
Rule 23.1 for failure to plead demand futility and for failure to state a claim under Court
of Chancery Rule 12(b)(6). Garcia Senior joins in the other Defendants’ motions and has
28 Dkt. 27. 29 Dkt. 53. 30 Dkt. 71 31 261 A.3d 1251 (Del. 2021). 32 Dkt. 73 (“Carvana’s Opening Br.”); Dtk. 74 (“Garcias’ Opening Br.”). 33 Dkt. 78 (“Pls.’ Answering Br.”); Dkt. 80 (“Carvana’s Reply Br.”); Dkt. 81 (“Garcias’ Reply Br.”). 34 Dkt. 91, Oral Arg. Tr.
13 separately moved to dismiss pursuant to Court of Chancery Rule 12(b)(2) for lack of
personal jurisdiction. Garcia Senior’s arguments will be addressed in a separate decision.
This decision addresses only Carvana and Garcia Junior’s Rule 23.1 and Rule 12(b)(6)
arguments.
A. Demand Is Excused.
“A cardinal precept of [Delaware law] is that directors, rather than shareholders,
manage the business and affairs of the corporation.”35 “In a derivative suit, a stockholder
seeks to displace the board’s authority over a litigation asset and assert the corporation’s
claim.”36 Because derivative litigation impinges on the managerial freedom of directors in
this way, “a stockholder only can pursue a cause of action belonging to the corporation if
(i) the stockholder demanded that the directors pursue the corporate claim and they
wrongfully refused to do so or (ii) demand is excused because the directors are incapable
of making an impartial decision regarding the litigation.”37 The demand requirement is a
substantive principle under Delaware law.38 Rule 23.1 is the “procedural embodiment of
this substantive principle.”39
35 Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141(a)), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 36 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). 37 Id. 38 Id.; see Ct. Ch. R. 23.1(a). 39 Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).
14 Under Rule 23.1, stockholder plaintiffs must “allege with particularity the efforts,
if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or
comparable authority and the reasons for the plaintiff’s failure to obtain the action or for
not making the effort.”40 Stockholders choosing to allege demand futility must meet
“heightened pleading requirements,”41 alleging “particularized factual statements that are
essential to the claim.”42 “Plaintiffs are entitled to all reasonable factual inferences that
logically flow from the particularized facts alleged, but conclusory allegations are not
considered as expressly pleaded facts or factual inferences.”43
Recently, the Delaware Supreme Court affirmed Zuckerberg and thereby adopted
Vice Chancellor Laster’s “universal test” for demand futility that blends elements of the
two precursor tests: Aronson v. Lewis44 and Rales v. Blasband.45 When conducting a
demand futility analysis under Zuckerberg, Delaware courts ask, on a director-by-director
basis:
(i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
(ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
40 Ct. Ch. R. 23.1(a). 41 Zuckerberg, 250 A.3d at 876. 42 Brehm, 746 A.2d at 254. 43 Id. at 255. 44 473 A.2d 805 (Del. 1984). 45 634 A.2d 927 (Del. 1993).
15 (iii) 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.46
“If the answer to any of the questions is ‘yes’ for at least half of the members of the demand
board, then demand is excused as futile.”47 While the Zuckerberg test displaced the prior
tests from Aronson and Rales, cases properly applying Aronson and Rales remain good
law.48
This court evaluates demand futility on a director-by-director basis, determining
whether a majority of the board of directors could consider a demand by “count[ing]
heads.”49
In this case, the parties agree that the relevant directors for assessing demand futility
as to the Direct Offering were those on the Board when the Amended Complaint was
filed.50 At that time, the Board comprised Garcia Junior, Maroone, Parikh, Platt, Quayle,
and Sullivan. Where, as here, a board is even numbered, a plaintiff only needs to
demonstrate conflicts as to half of the board.51
46 United Food & Com. Workers Union & Participating Food Indus. Empls. Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034, 1059 (Del. 2021). 47 Id. 48 Id. 49 In re EZcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *34 (Del. Ch. Jan. 25, 2016). 50 See Carvana’s Opening Br. at 23; Garcias’ Opening Br. at 9–10; Pls.’ Answering Br. at 32. 51 See Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *26 (Del. Ch. Apr. 24, 2017) (citing Gentile v. Rossette, 2010 WL 2171613, at *7 n.36 (Del. Ch. May 28,
16 Defendants concede, for the purpose of the demand futility analysis, that Garcia
Junior is conflicted with respect to the Direct Offering.52 And Plaintiffs do not challenge
the independence or disinterestedness of directors Maroone, Parikh, or Quayle.53 The
parties’ dispute thus centers on Sullivan and Platt. Plaintiffs do not allege that Sullivan
and Platt were interested in the Direct Offering or that they face a substantial likelihood of
liability for approving it. Two of the three Zuckerberg inquiries, therefore, are not at issue.
Plaintiffs instead argue that there is reason to doubt the independence of Sullivan
and Platt from the Garcias, who received a material personal benefit from the alleged
misconduct that would be the subject of the litigation.54 As discussed more fully below in
connection with Garcia Junior’s Rule 12(b)(6) argument, it is reasonably conceivable that
each of the Garcias received a material personal benefit from the alleged misconduct that
would be the subject of a litigation demand. This demand futility analysis thus focuses on
the allegations impugning Sullivan’s and Platt’s independence from the Garcias.
To demonstrate that Sullivan and Platt lacked independence from the Garcias,
Plaintiffs must plead “facts from which the director’s ability to act impartially on a matter
important to the interested party can be doubted because that director may feel either
2010)); see also Beam v. Stewart, 845 A.2d 1040, 1046 n.8 (Del. 2004) (noting for demand futility purposes that a board evenly divided between interested and disinterested directors could not exercise business judgment on a demand) (citing Beneville v. York, 769 A.2d 80, 85–86 (Del. Ch. 2000)). 52 Carvana’s Opening Br. at 24 n.12. 53 See Am. Compl. ¶ 202. 54 See Pls.’ Answering Br. at 33–44.
17 subject to the interested party’s dominion or beholden to that interested party.” 55 Doubts
about a director’s independence may arise “because of financial ties, familial affinity, a
particularly close or intimate personal or business affinity or because of evidence that in
the past the relationship caused the director to act non-independently vis à vis an interested
director.”56
1. Sullivan
Plaintiffs allege that a history of personal and professional ties between Sullivan and
Garcia Senior, along with Carvana director fees, raise a reasonable doubt as to Sullivan’s
independence from Garcia Senior.
“In order to establish lack of independence, the complaint must create a reasonable
doubt that a director is so beholden to an interested director that his or her discretion would
be sterilized.”57 Generally, “[t]he naked assertion of a previous business relationship is not
enough to overcome the presumption of a director’s independence.”58 The same is true of
personal relationships. “[S]ome professional or personal friendships, which may border
55 Sandys v. Pincus, 152 A.3d 124, 128 (Del. 2016). 56 Beam, 845 A.2d at 1051. 57 Highland Legacy Ltd. v. Singer, 2006 WL 741939, at *5 (Del. Ch. Mar. 17, 2006). 58 Orman v. Cullman, 794 A.2d 5, 26–27 (Del. Ch. 2002); Owens v. Mayleben, 2020 WL 748023, at *11 (Del. Ch. Feb. 13, 2020) (“These allegations are precisely the kind of ‘naked assertion[s] of a previous business relationship’ that this court routinely deems insufficient to meet Rule 23.1’s particularity standard.”) (citing Orman), aff’d, 241 A.3d 218 (Del. 2020); see also Highland, 2006 WL 741939, at *5 (holding that serving with a director on an unaffiliated company’s board was insufficient to cast a reasonable doubt on the defendant’s independence from that director); Jacobs v. Yang, 2004 WL 1728521, at *7 n.33 (Del. Ch. Aug. 2, 2004) (same), aff’d, 867 A.2d 902 (Del. 2005).
18 on or even exceed familial loyalty and closeness, may raise a reasonable doubt whether a
director can appropriately consider demand,” but those friendships are not enough to raise
a reasonable inference of dependence “without specific factual allegations.”59 “[T]he
heightened strength of relationship required to” raise a reasonable doubt as to a director’s
independence “renders allegations concerning most ordinary relationships of limited value,
at most.”60
The inquiry is similarly exacting when the independence-impugning allegation
concerns director fees. “Mere allegations of payment of director fees are insufficient to
create a reasonable doubt as to the director’s independence.”61 Much more must be shown
where director fees alone supply the plaintiffs’ challenge.
In this case, the director fees Sullivan received for his service on the Board are far
from Plaintiffs’ only challenge to Sullivan’s independence. Indeed, the fee allegations are
eclipsed entirely by Plaintiffs’ unusual thick-as-thieves narrative concerning Sullivan and
Garcia Senior.
As the factual basis for their arguments challenging Sullivan’s independence,
Plaintiffs allege that Sullivan was an employee of Garcia Senior in the 1980s, the same
period in which Garcia Senior engaged in the conduct that led to his felony conviction.
According to Garcia Senior’s testimony during the congressional investigation of the
59 Beam, 845 A.2d at 1050 (citation omitted). 60 Khanna v. McMinn, 2006 WL 1388744, at *16 (Del. Ch. May 9, 2006). 61 Simons v. Brookfield Asset Mgmt. Inc., 2022 WL 223464, at *15 (Del. Ch. Jan. 21, 2022) (citing In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 360 (Del. Ch. 1998)).
19 Lincoln Savings & Loan scandal, Sullivan was one of just four people who attended the
initial meeting between Garcia Senior and Charles Keating, the central figure in the
scandal.62
Separately, Sullivan was censured by the NYSE due to actions he took on behalf of
Garcia Senior during this period. In 1987, Garcia Senior purchased a regional brokerage
company called Young Smith & Peacock, Inc. (“YS&P”) and brought on Sullivan as its
managing director and executive vice president.63 After YS&P incurred substantial losses
during the October 1987 “Black Monday” crash, it borrowed $2.5 million from another
Garcia-controlled entity. Although the NYSE expressly forbade YS&P from repaying this
loan due to the firm’s poor financial situation, Sullivan did so indirectly by purchasing a
$2.4 million note from the same Garcia entity in January 1988. As a result of this conduct,
Sullivan was censured by the NYSE in 1993 and suspended from holding any supervisory
role with any NYSE member for six months.
The NYSE censure could have been career-ending for Sullivan, but it was not. In
1995, Garcia Senior hired Sullivan as a consultant for DriveTime. Garcia Senior later
named Sullivan President of DriveTime, and Sullivan served in that capacity from 1996 to
2004. When Garcia Senior stepped down as CEO of DriveTime in 1999, Sullivan stepped
into that role. Sullivan also served as Vice Chairman of the DriveTime board from 2004
to 2007.
62 Am. Compl. ¶ 48. 63 Id. ¶ 49.
20 In 2001, during the market dislocation following the tragic events of September 11,
2001, Garcia Senior and Sullivan launched a tender offer to take DriveTime private. The
tender offer closed in January 2002 and was followed by a short-form merger in March
2002. Immediately following the short-form merger, Garcia Senior and Sullivan were the
sole owners of DriveTime.
After Sullivan stepped down as DriveTime’s Vice Chairman in 2007, he launched
a travel media company called AFAR Media LLC (“AFAR”). Sullivan invested about $10
million of his own funds in AFAR. It is reasonable to infer that Sullivan tied up much of
his net worth in the investment because Sullivan stated during a 2009 television interview
that he was “all in” and “counting on [AFAR] working.”64 Sullivan continues to lead
AFAR as its CEO.
It is reasonable to infer that Garcia Senior made a significant investment in AFAR.
In 2012, Folio Magazine reported that Garcia Senior was a “primary investor” in the
enterprise.65 In 2016, Garcia Senior was one of just three board members of AFAR. The
travel media company struggled financially during the pandemic, rendering it reasonably
conceivable that Garcia Senior’s support of AFAR is of continued importance to Sullivan.
Also, in a Carvana director independence questionnaire dated January 2, 2020, Sullivan
wrote that he was “a friend of [Garcia Senior], and he is an investor in AFAR Media.”66
64 Id. ¶ 59. 65 Id. ¶ 54. 66 Id. ¶ 56.
21 These allegations collectively demonstrate the “heightened strength of relationship
required to find that”67 Sullivan’s “discretion would be sterilized” when considering a
demand to pursue action against Garcia Senior.68 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.
The facts of this case are similar to those of Marchand v. Barnhill, where the
Delaware Supreme Court found that a plaintiff had adequately alleged that a director,
Rankin, lacked independence from a controller, Kruse, due to personal and professional
ties.69 The court in Marchand based this conclusion on three allegations: (i) “Rankin
started as [Kruse’s father’s] administrative assistant and, over the course of a 28-year career
with the company, rose to the high managerial position of CFO;” (ii) “Rankin was added
to Blue Bell’s board in 2004, which one can reasonably infer was due to the support of the
Kruse family;” and (iii) “the Kruse family spearheaded charitable efforts that led to a
$450,000 donation to a key local college, resulting in Rankin being honored by having
Blinn College’s new agricultural facility named after him.”70
The allegations in Marchand largely track the allegations here: (i) Sullivan received
his first post-NYSE censure job from Garcia Senior at DriveTime and rose through the
67 Khanna, 2006 WL 1388744, at *16. 68 Rales, 634 A.2d at 936. 69 Marchand v. Barnhill, 212 A.3d 805 (Del. 2019). 70 Id. at 818–19.
22 ranks to eventually become CEO, President, and a director of the company over a twelve-
year period; (ii) Sullivan was added to the Board which, like in Marchand, reasonably
implies that such an appointment was due to support from Garcia Senior; and (iii) Sullivan
received a large, potentially multi-million-dollar investment from Garcia Senior into
Sullivan’s AFAR media company, which is perhaps a greater connection than the
charitable contribution at issue in Marchand. This is without even considering Sullivan’s
censure by the NYSE for actions he took to benefit Garcia Senior or the taking private of
DriveTime after 9/11.
As was the case in Marchand, Plaintiffs’ allegations “support a reasonable inference
that there are very warm and thick personal ties of respect, loyalty, and affection” between
Sullivan and Garcia Senior.71
Plaintiffs’ allegations stand in contrast with the allegations of Zimmerman v.
Crothall,72 on which Defendants rely. In Zimmerman, a unitholder of Adhezion
Biomedical LLC challenged the Adhezion board’s decision to approve a series of
convertible note issuances in which certain insiders, including the company’s CEO and
chairman, participated.73 The court analyzed the plaintiff’s allegations challenging director
independence to determine whether the entire fairness standard of review should apply.74
The court rejected the argument that one of the directors lacked independence from the
71 Id. at 819. 72 2012 WL 707238 (Del. Ch. Mar. 27, 2012). 73 Id. at *3–4. 74 Id. at *12.
23 CEO/chairman based on allegations that the two “were good friends, that their families
socialized, and that the two had worked closely together on previous occasions, including
in founding a start-up company.”75
The Company argues Plaintiffs’ allegations as to Sullivan are as makeweight as
those deemed insufficient in Zimmerman.76 Not so. Sullivan is alleged to have a much
closer relationship to Garcia Senior than mere friendship; Sullivan once violated NYSE
rules and received censure on Garcia Senior’s behalf. It is reasonably conceivable that
Garcia Senior later saved his career, indirectly generated a majority of Sullivan’s personal
wealth, and invested in and sits on the board of Sullivan’s new company. The extent of
this relationship is far greater than the one discussed in Zimmerman, and it is reasonable to
conclude that Sullivan is not independent from Garcia Senior for demand futility purposes.
In search of a contrary outcome, Defendants argue that individual portions of
Plaintiffs’ narrative fail to impugn Sullivan’s independence. Because the allegations fail
to impugn Sullivan’s independence when analogized to other cases individually, they
cannot suffice when analyzed as a whole, Defendants say. Defendants’ divide-and-conquer
approach is legally untenable, as this court “must consider plaintiff’s allegations ‘in their
totality and not in isolation from each other.’”77 This court looks at whether the
75 Id. at *13. 76 Carvana’s Opening Br. at 41. 77 In re BGC P’rs, Inc., 2019 WL 4745121, at *9 (Del. Ch. Sept. 30, 2019) (quoting Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1019 (Del. 2015)).
24 “constellation of facts,” taken together, create a reasonable doubt about a director’s ability
to objectively consider a demand.78
Defendants’ efforts to minimize the force of Plaintiffs’ allegations when viewed in
isolation from one another are unpersuasive in any event. For example, Defendants argue
that Garcia Senior’s AFAR investment does not render Sullivan beholden to Garcia Senior
by analogizing to In re Goldman Sachs Group, Inc. Shareholder Litigation79 and Flannery
v. Genomic Health, Inc.80 Both cases are distinguishable.
In Goldman Sachs Group, the plaintiff argued that a director lacked independence
from Goldman Sachs Group (“Goldman”) because Goldman Sachs provided “billions of
euros in financing” to an established company where the director was Chairman and
CEO.81 The court rejected this argument, holding that the plaintiff failed “to plead facts
that show anything other than a series of market transactions occurred between [the
director’s company] and Goldman.”82 The court highlighted that the plaintiffs did not plead
that the director’s company “receiv[ed] a discounted interest rate on the loans from
Goldman, that [the director] was unable to receive financing from any other lender, or that
loans from Goldman compose a substantial part of [the director company’s] funding.”83
78 Id. (quoting In re Oracle Corp. Deriv. Litig., 2018 WL 1381331, at *18 (Del. Ch. Mar. 19, 2018)). 79 2011 WL 4826104 (Del. Ch. Oct. 12, 2011). 80 2021 WL 3615540 (Del. Ch. Aug. 16, 2021). 81 Goldman Sachs Gp., 2011 WL 4826104, at *12. 82 Id. 83 Id.
25 Defendants argue that, like in Goldman Sachs, Garcia Senior made an “unspecified
investment” in AFAR that does not destroy Sullivan’s independence. But in Goldman
Sachs, a large investment bank invested in an established institution with which it had no
personal ties. By contrast, here, Garcia Senior individually invested in a fledgling media
company due to pre-existing personal ties with the founder. Moreover, it is reasonably
conceivable that Garcia Senior’s portion of the investment was a “substantial part” of
AFAR’s funding, which was not the case in Goldman Sachs.84
In Flannery, the plaintiff alleged that two directors, Parker and Fuchs, lacked
independence from the controller entities due to relationships between the controller
entities and the directors’ primary employers. As to Parker, the plaintiffs alleged that the
controller entities were significant stockholders of a company, Tricida, where Parker
served as an executive, and significant investors in other companies where Parker was a
director.85 The court rejected this argument, holding that the allegations failed to raise a
reasonable doubt as to Parker’s independence because there was “no indication the
[controller entities] had substantial say in [Parker’s] compensation or job prospects at
Tricida and the mere fact he served with or was appointed by the [controller entities] as a
director at companies in which they invest does not, alone, move the needle.”86 As to
Fuchs, the plaintiff alleged that the controller entities invested in Fuchs’ primary employer
84 Id. 85 Flannery, 2021 WL 3615540, at *16. 86 Id.
26 and appointed Fuchs to various board seats.87 The court rejected this argument as well,
noting that the plaintiff failed to allege facts about how the controller entities had
“unilateral power” or “substantial sway[] over Fuchs’ compensation or future job
prospects,” and that appointment to a board seat did not support a reasonable inference that
Fuchs was beholden.88
Defendants argue that, like in Flannery, “Plaintiffs plead no facts demonstrating
that, by virtue of his prior investment, Garcia Senior has substantial sway over . . . Sullivan
or AFAR.”89 Defendants contend that Flannery stands for the proposition that “there is no
basis to find that the director is beholden to the controller” in the absence of “any indication
that a controller has substantial say in a director’s compensation or job prospects.” 90 In
Flannery, however, the controller entities lacked the personal ties alleged here. Garcia
Senior is not a stockholder or mere investor in AFAR, but rather, one of two initial investors
in AFAR and one of three directors on the board; Sullivan is not a mere executive, but
rather, the founder who risked much of his net worth by investing into AFAR. Thus, Garcia
Senior has greater, and arguably “substantial” say over Sullivan by virtue of his investment
and role in AFAR. More to the point, the analysis in Flannery looked solely at whether
the controller’s investment created the inference of a disabling influence. Here, the
87 Id. at *15. 88 Id. 89 Carvana’s Opening Br. at 40. 90 Carvana’s Reply Br. at 22.
27 controller’s investment is coupled with other facts suggesting a lack of independence such
as significant personal and business ties.
Defendants further argue that Sullivan’s past employment by Garcia Senior is
inconsequential to the analysis. They observe that Sullivan’s “employment with
DriveTime ended over ten years before he joined the Carvana Board . . . [and] five years
before Carvana was even formed.”91 Defendants cite two cases for the proposition that
previous employment with a controller is not a disabling conflict, In re Western National
Corp. Shareholders Litigation92 and Teamsters Union 25 Health Services & Insurance
Plan v. Baiera.93 Both are distinguishable.
In Western National, the plaintiff argued that a director lacked independence from
the controlling stockholder, American General, where the director had a “twenty-three-
year career at American General” and “maintained close social and professional ties with
his colleagues there.”94 The Western National court reasoned that these facts, standing
alone, “do not warrant the inference that [the director] favored the fortunes of American
General over those of a company in which he holds substantial equity and has served as
executive chairman for its entire existence as a publicly-held entity.”95
91 Carvana’s Opening Br. at 38. 92 2000 WL 710192 (Del. Ch. May 22, 2000). 93 119 A.3d 44 (Del. Ch. 2015). 94 W. Nat’l, 2000 WL 710192, at *12. 95 Id.
28 In Baiera, the plaintiff argued that a director lacked independence from a controlling
stockholder, Travelport, where the director was an executive of Travelport for 16 years,
including four years as CEO and President, and was named a director of the company
controlled by Travelport within three months after his employment ended.96 The Baiera
court rejected this argument, holding that “an employment relationship that ended . . .
almost three years before [the] action was filed” and a “loyalty appointment” to a board
seat by a controller were not sufficient to overcome a director’s presumption of
independence.97
Neither Western National nor Baiera involved the facts alleged here. While the
length of the employment relationships discussed in those cases is similar and compares
favorably to the allegations in this case, the substance of the alleged relationship between
Garcia Senior and Sullivan is far deeper than mere former employment for all of the reasons
discussed above.98
96 Baiera, 119 A.3d at 59. 97 Id. at 60. 98 See also In re Freeport-McMoran Sulphur, Inc. S’holder Litig., 2005 WL 1653923, at *12 (Del. Ch. June 30, 2005) (“Latiolais had worked for the Common Directors for almost twenty years and had become a wealthy individual in their employ. To argue that Latiolais was independent of the Common Directors because he formally severed ties with some Freeport entities does not take into account the nature and extent of his overwhelming, career-long involvement with Freeport entities, including the entire span of MOXY’s life. Delaware law recognizes that such extensive ties can operate as an exception to the general rule that past relationships do not call into question a director’s independence.”). Defendants also cite Owens, 2020 WL 748023, at *11, but that case is similarly inapposite. In Owens, a stockholder-plaintiff argued that a director was not independent of two other board members, the president/CEO and scientific advisor, for demand futility purposes because he had served with those board members at another company the president/CEO co-founded, and he received $839,700 when the other company was sold. The court found
29 In sum, Plaintiffs have pled a constellation of facts that, taken together, create a
reasonable doubt about Sullivan’s ability to objectively consider a demand to pursue
litigation against Garcia Senior.
The logic extends to Garcia Junior, who controls Carvana with Garcia Senior. The
particularized facts suggest that the Garcias are close—they own Carvana together and
communicated regarding the Direct Offering. 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.
Plaintiffs have therefore adequately pled that Sullivan is not capable of impartially
considering a demand to pursue litigation in connection with the Direct Offering against
either Garcia.
2. Platt
Plaintiffs allege that personal and professional ties between Platt and the Garcias,
although a degree less significant than Sullivan’s alleged ties to Garcia Senior, nevertheless
raise a reasonable doubt as to Platt’s independence from the Garcias,
As to personal and professional ties, Plaintiffs allege that Platt was Managing
Director of Greenwich Capital and its relationship banker for Greenwich Capital’s
engagement with the Garcias and DriveTime in the late 1990s and early 2000s. That
that those allegations were “precisely the kind of ‘naked assertion[s] of a previous business relationship’ that this court routinely deems insufficient to meet Rule 23.1’s particularity standard.” Id. at *11 (citing Orman, 794 A.2d at 26–27). As discussed above, Sullivan’s alleged relationship with Garcia Senior is far more extensive and substantial than the relationship alleged in Owens.
30 relationship appears to have been lucrative; in the course of a few years, Greenwich Capital
and DriveTime entered into financing arrangements totaling hundreds of millions of dollars
in value. It is fair to infer that these activities would have generated significant fees for
Greenwich Capital and, in turn, would have inured to Platt’s benefit.
Plaintiffs allege that Platt gave Garcia Junior his first post-college job in 2005,
employing him as an associate at Greenwich Capital in the same area of consumer credit-
based investments as Platt. Garcia Junior allegedly returned the favor when Platt’s son was
a college freshman, hiring him for an internship at Carvana in 2015. During this internship,
Platt’s son was given the opportunity to make presentations to Carvana executives. Platt’s
son could have been a particularly impressive intern who earned his spot and the
opportunities that followed. But the procedural posture requires the court to draw plaintiff-
friendly inferences. Drawing such inferences here, it is reasonable to infer that, but for
Platt’s relationship with the Garcias, Platt’s son would not have been given the same
opportunities as an intern.
Garcia Senior appointed Platt as a director for three different Garcia-controlled
entities. First, Garcia Senior appointed Platt as a DriveTime director in February 2014.
The same year, he placed Platt on the board of DriveTime’s sister corporation, DT
Acceptance Corporation. When Carvana went public in 2017, Garcia Senior moved Platt
over from the DriveTime board to Carvana’s board. As a director on the Carvana Board,
Platt has earned more than $1 million in compensation over the last four years.
Platt’s relationship with the Garcias has given Platt access to investment
opportunities not available to the general public, from which Platt has made tens of millions
31 of dollars. In 2015, the Garcias caused Carvana Group, LLC to grant Platt 200,000 Class
B common units, each of which can be converted to 0.8 shares of Carvana’s Class A
common stock, under an equity incentive plan. The Garcias did not extend this benefit to
any other Carvana director. Indeed, only six people—all Company employees—other than
the Garcias and Platt hold Class B units. In the last two years alone, Platt has pocketed
more than $24 million from the sale of Class A shares he converted from his Class B units.
Platt still owns at least 76,876 Class B common units, convertible into 61,500 Class A
shares currently worth more than $16.5 million.
Similarly, the Garcias allowed Platt’s investment entity—GV Auto Group I LLC—
to invest in Carvana Group, LLC by purchasing 1,672,179 Class C preferred units. The
Garcias invited only two other people—both close allies—to purchase such units. In
connection with the Company’s 2017 IPO, all of the Class C preferred units converted into
Class A common units on a one-to-one basis, and for each Class A common unit then held,
members were issued 0.8 Class B common shares of Carvana. The Class A common units
are exchangeable for 0.8 shares of Carvana Class A common stock. On numerous
occasions, Platt has exchanged many of these Class A common units for Carvana Class A
common stock and then sold them for millions of dollars. Also in connection with the IPO,
Platt and GV Auto I, LLC entered into a tax receivable agreement with Carvana whereby
they, along with other LLC unitholders, receive 85% of the benefits that Carvana realizes
under certain circumstances.
These allegations, in the aggregate, raise a reasonable doubt as to Platt’s
independence from the Garcias. The most significant supporting allegations for this
32 conclusion are the grant of Class B units to Platt, two-thirds of which he has converted and
sold for $24 million, and the preferential investment opportunities he has received to invest
in Carvana Group, LLC.
This court has long recognized that “past benefits conferred by [a controller] . . .
may establish an obligation or debt (a sense of ‘owingness’) upon which a reasonable doubt
as to a director’s loyalty to a corporation may be premised.”99 For example, in In re The
Limited, Inc., the court found that a director could not impartially consider a demand to sue
the controller where, when the director was a university president several years earlier, the
director successfully solicited a $25 million donation from the controller for the
university.100 The court held that “a gift of that magnitude can reasonably be considered
as instilling in [the director] a sense of ‘owingness’ to” the controller, despite the fact that
the funds were not given to the director personally.101
Here, Platt is alleged to have already made more than $24 million by selling
converted Class B units that he was directly granted by the Garcias, and he still has nearly
a third of those granted Class B units remaining. This is in addition to his director
compensation and the benefits that he received from being given an exclusive opportunity
to invest in Carvana Group, LLC. These allegations, standing alone, are sufficient to raise
a reasonable doubt as to Platt’s independence from the Garcias under this court’s holding
99 In re Ply Gem Indus., Inc. S’holders Litig., 2001 WL 1192206, at *1 (Del. Ch. Oct. 3, 2001). 100 2002 WL 537692, at *7 (Del. Ch. Mar. 27, 2002). 101 Id.
33 in The Limited and numerous other cases in which extraordinary gifts sufficed to impugn
a director’s independence.102
Defendants argue that “Plaintiffs’ allegations establish, at most, that . . . Platt has
received ordinary equity incentive compensation in exchange for his service to Carvana
and invested an undisclosed sum of money in Carvana on behalf of himself and others in
exchange for stock and LLC units.”103 Yet Defendants offer no explanation for why the
other Board members have never received this “ordinary equity incentive compensation,”
nor why they were not also invited to participate in an exclusive opportunity to purchase
Class C preferred units of Carvana Group, LLC.
Instead, Defendants rely on numerous decisions of this court establishing that
directors owning stock in the companies they serve have “skin in the game,” beneficially
aligning their interests with other company stockholders to maximize corporate value and
incentivizing compliance with fiduciary duty over loyalty to a third party. For instance,
they point to In re Walt Disney Co. Derivative Litig., in which this court held that a highly
paid officer and director, with stock worth $2.1 billion, was independent of the
102 See, e.g., Marchand, 212 A.3d at 820 (finding lack of independence where controller and his family spearheaded a campaign to name a building after the director, which supported the director’s “important debt of gratitude and friendship to the” controller); In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *17–18 (Del. Ch. Mar. 28, 2018) (holding director not independent after being gifted by the controlling stockholder the first Tesla Model S and the second Tesla Model X ever made); Off v. Ross, 2008 WL 5053448, at *11 (Del. Ch. Nov. 26, 2008) (finding director beholden to controller for past acts including donation of a prodigious sum to the university where the director was dean, coupled with the fact that the controller who made the donation became the eponym of the benefiting institution). 103 Carvana’s Reply Br. at 14–15 (citations omitted).
34 chairman/CEO because “[t]he only reasonable inference that I can draw about [the director]
is that he is an economically rational individual whose priority is to protect the value of his
Disney shares, not someone who would intentionally risk his own and his family’s interests
in order to placate [the chairman/CEO].”104 That case is inapposite because Platt is alleged
to have received millions of dollars in stock as a gift from the Garcias that other directors
did not receive, not merely to own a large stake in the Company. The rest of the cases
Defendants cite for this point are distinguishable on the same grounds.105
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. These include: (i) Platt
securing a position for Garcia Junior and Garcia Junior securing a position for Platt’s son;
(ii) Platt’s appointment to the boards of numerous Garcia-controlled entities and
accompanying director compensation; and (iii) the historical relationship between Platt and
Garcia Senior while Platt was DriveTime’s primary relationship banker at Greenwich
Capital. These allegations all heighten the doubts raised by Plaintiffs’ primary argument.
Defendants argue that the allegations about the circumstances of Garcia Junior’s
hiring at Greenwich Capital and Platt’s son’s hiring at Carvana are insufficiently specific,
104 731 A.2d 342, 356 (Del. Ch. 1998). 105 See Zuckerberg, 250 A.3d at 897 (finding that a director who invested in the company early was independent of the founder in circumstances where there was no allegation that he had received a large gift of stock); Owens, 2020 WL 748023, at *10 (finding that directors’ stock ownership was insufficient to establish lack of independence from the president/CEO and scientific advisor in circumstances where there was no allegation that they had received a large gift of stock).
35 recent, or material to support a reasonable doubt as to Platt’s ability to consider a demand
to sue the Garcias. As this court has held, however, while “the actual extent of these
relationships is not altogether clear at this point in the litigation, the existence of these
interests and relationships is enough to defeat a motion to dismiss.”106
Defendants also argue, correctly, that allegations about board appointments,107
director compensation,108 and historical business transactions109 are often insufficient,
standing alone and without specific reference to materiality, to rebut the presumption of
director independence at the pleading stage. As the court has repeated in this decision,
however, none of the allegations about Platt’s relationship with the Garcias stands alone;
106 In re New Valley Corp., 2001 WL 50212, at *8 (Del. Ch. Jan. 11, 2001) (footnote omitted). 107 See Carvana’s Reply Br. at 7 (citing Aronson, 473 A.2d at 816 (“[I]t is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election. That is the usual way a person becomes a corporate director.”) and Friedman v. Dolan, 2015 WL 4040806, at *6 (Del. Ch. June 30, 2015) (noting that “the mere fact that one was appointed by a controller” does not overcome a director’s presumption of independence”)). 108 See Carvana’s Opening Br. at 33–34 (citing Teamsters Local 237 Additional Sec. Benefit Fund v. Caruso, 2021 WL 3883932, at *16 (Del. Ch. Aug. 31, 2021) (refusing to find lack of independence where the plaintiffs did not allege that a director drew a material percentage of her income based on her relationship with the chairman/CEO or that her director fees were material to her)); Carvana’s Reply Br. at 12 (citing Robotti & Co., LLC v. Liddell, 2010 WL 157474, at *15 (Del. Ch. Jan. 14, 2010) (“[D]irector compensation alone cannot create a reasonable basis to doubt a director’s impartiality.”)). 109 See Carvana’s Reply Br. at 11 (citing The Ltd., 2002 WL 537692, at *5 (“The Complaint is devoid of any allegations asserting (or from which an inference can reasonably be drawn, for that matter) that the $400,000 annual revenue that Audio receives from its dealings with The Limited and its affiliates was material to Audio’s business. Moreover, the Complaint does not allege how Kollat, as ‘a principal,’ may have benefited from any portion of those revenues. Accordingly, the plaintiffs have also failed to plead particularized facts raising a reasonable doubt as to Kollat’s independence.”)).
36 it is together that they establish a reasonable doubt that he can impartially consider a
demand to pursue litigation against them.
In sum, Plaintiffs have pled particularized facts raising a reasonable doubt as to
Platt’s independence from the Garcias.
Having shown that both Platt and Sullivan are incapable of impartially considering
a litigation demand, Plaintiffs satisfy the third prong of Zuckerberg. Accordingly,
Defendants’ motion to dismiss Count II pursuant to Rule 23.1 is denied.
B. The Complaint States A Claim.
The Garcias moved to dismiss the Amended Complaint under Rule 12(b)(6) for
failure to state a claim. Given that Garcia Senior’s motions will be discussed in a separate
decision, this portion of the decision analyzes only whether the Amended Complaint states
a claim against Garcia Junior.
“[T]he governing pleading standard in Delaware to survive a motion to dismiss is
reasonable ‘conceivability.’”110 On a Rule 12(b)(6) motion, the court accepts “all well-
pleaded factual allegations in the Complaint as true, [and] accept[s] even vague allegations
in the Complaint as ‘well-pleaded’ if they provide the defendant notice of the claim.”111
The court “is not, however, required to accept as true conclusory allegations ‘without
specific supporting factual allegations.’”112 The court draws “all reasonable inferences in
110 Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 537 (Del. 2011) (citation omitted). 111 Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)). 112 In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (quoting In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 65–66 (Del. 1995)).
37 favor of the plaintiff, and den[ies] the motion unless the plaintiff could not recover under
any reasonably conceivable set of circumstances susceptible of proof.”113
Garcia Junior advances two arguments for dismissal under Rule 12(b)(6). First, he
argues that he “recused himself and did not participate in the approval of the Direct
Offering.”114 Although briefing frames Garcia Junior’s action as “recusal,” the facts
suggest it was merely abstention.115 This decision thus describes Garcia Junior’s first
argument in terms of abstention. Second, Defendants argue that the Direct Offering is
subject to the business judgment standard of review rather than entire fairness, and that the
Amended Complaint fails to state a claim under the business judgment standard.116
1. Garcia Junior’s Abstention Does Not Result In Dismissal.
Generally, “a director who plays no role in the process of deciding whether to
approve a challenged transaction cannot be held liable on a claim that the board’s decision
to approve that transaction was wrongful.”117 This principle has been articulated to mean
113 Cent. Mortg., 27 A.3d at 536 (citing Savor, 812 A.2d at 896–97). 114 Garcias’ Opening Br. at 20. 115 The term “recusal” connotes withdrawal from the entire process, whereas “abstention” connotes withdrawing from the final decision. Compare Recusal, BLACK’S LAW DICTIONARY (11th ed. 2019) (“Removal of oneself as judge or policy-maker in a particular matter, esp. because of a conflict of interest.”), with Abstention, BLACK’S LAW DICTIONARY (11th ed. 2019) (“The act of not voting for or against something.”). 116 Garcias’ Opening Br. at 20. 117 In re Tri-Star Pictures, Inc., Litig., 1995 WL 106520, at *2 (Del. Ch. Mar. 9, 1995) (citing Citron v. E.I. du Pont de Nemours & Co., 584 A.2d 490, 499 (Del. Ch. 1990)).
38 that “a ‘director can avoid liability for an interested transaction by totally abstaining from
any participation in the transaction.’”118
Abstaining from a vote, however, does not provide a defendant with a get-out-of-
jail-free card that can be played at the motion to dismiss stage. This court has explained
that “no per se rule unqualifiedly and categorically relieves a director from liability solely
because that director refrains from voting on the challenged transaction.”119 The abstention
doctrine “often implicates factual questions that cannot be resolved on the pleadings.”120
Decisions of this court have enumerated a non-exhaustive list of scenarios that
preclude the application of the abstention doctrine. For example, a court may hold a
director liable, even if the director abstained from the formal vote to approve the
transaction, if the director (i) was “closely involved with the challenged [transaction] from
the very beginning and the transaction was rendered unfair based, in large part, on the
director’s involvement;”121 (ii) “play[ed] a role in the negotiation, structuring, or approval
of the proposal;”122 or (iii) was “deliberately absent . . . from the directors’ meeting at
118 In re Coty Inc. S’holder Litig., 2020 WL 4743515, at *9 (Del. Ch. Aug. 17, 2020) (emphasis omitted) (quoting In re Pilgrim’s Pride Corp. Deriv. Litig., 2019 WL 1224556, at *15 (Del. Ch. Mar. 15, 2019)). 119 Tri-Star, 1995 WL 106520, at *3. 120 Coty, 2020 WL 4743515, at *9. 121 Voigt v. Metcalf, 2020 WL 614999, at *27 (Del. Ch. Feb. 10, 2020) (cleaned up). 122 Valeant Pharms. Int’l v. Jerney, 921 A.2d 732, 753 (Del. Ch. 2007).
39 which the proposal is to be voted upon, specifically to shield themselves from any exposure
to liability.”123
“Given the factual nuances underlying [the abstention doctrine], it is no surprise that
the leading cases have not addressed the issue at the pleadings stage, but rather in post-trial
rulings or on a motion for summary judgment.”124
Plaintiffs have sufficiently alleged that Garcia Junior played a role in the
negotiation, structuring, and approval of the Direct Offering such that his abstention
supplies no automatic victory at the pleadings stage. Plaintiffs allege that Garcia Junior
“shepherded the [Direct] Offering” from “conception to its execution over the course of a
few hurried days.”125 Specifically, Garcia Junior participated in early discussions with
partners about a capital raise, “reviewed lists of selected holders to be invited to participate
in the Direct Offering,” “led the discussions of the Direct Offering at every single board
meeting,” and set the price of the Direct Offering within the range of prices provided by
the Board.126 Any one of these facts by itself would be enough to give this court pause in
applying the abstention principle. The sum of these allegations makes it inappropriate to
dismiss the complaint against Garcia Junior due to his abstention.127
123 Tri-Star, 1995 WL 106520, at *3. 124 Voigt, 2020 WL 614999, at *27 (quoting Pilgrim’s Pride, 2019 WL 1224556, at *17). 125 Pls.’ Answering Br. at 51. 126 Id.; see also Am. Compl. ¶¶ 120, 122–46, 147 n.21. 127 Valeant, 921 A.2d at 753.
40 2. It Is Reasonably Conceivable That The Appropriate Standard Of Review Is Entire Fairness.
“[I]n nearly all pleadings stage challenges to the viability of a breach of fiduciary
duty claim in the corporate context, deciding the proper standard of review . . . will be
outcome determinative.”128
Plaintiffs ask the court to consider the Direct Offering through the lens of entire
fairness.129 Entire fairness, Delaware’s most onerous standard, applies when a controlling
stockholder engages in a conflicted transaction, or “there were not enough independent and
disinterested individuals among the directors making the challenged decision to comprise
a board majority.”130 “If a board is evenly divided between compromised and non-
compromised directors, then the plaintiff has succeeded in rebutting the business judgment
rule.”131 Because the entire fairness analysis “is fact intensive, it is rare the court will
dismiss a fiduciary duty claim on a Rule 12(b)(6) motion when entire fairness is the
governing standard of review.”132
This decision already determined that Plaintiffs are entitled to a pleading stage
inference that Sullivan and Platt are beholden to the Garcias. With Garcia Junior, the
conflicted directors total half the Board. Garcia Junior argues, however, that the business
judgment standard, rather than entire fairness, governs because he was not conflicted with
128 Tornetta v. Musk, 250 A.3d 793, 805 (Del. Ch. 2019). 129 Pls.’ Answering Br. at 4. 130 In re Trados Inc. S’holder Litig., 73 A.3d 17, 44 (Del. Ch. 2013). 131 Frederick Hsu Living Tr., 2017 WL 1437308, at *26. 132 Musk, 250 A.3d at 812.
41 respect to the Direct Offering. According to Defendants, Garcia Junior suffered voting and
economic dilution as a result of the Direct Offering.133 The Garcias owned a majority of
the economic value of Carvana yet obtained only 8.3% of the stock in the Direct Offering.
Thus, they had every incentive to maximize the price of the Direct Offering.
At the pleading stage, drawing all reasonable inferences in Plaintiffs’ favor, it is
reasonably conceivable that the Garcias received a non-ratable benefit not shared by the
public stockholders, and that this benefit was material to them. The big picture here is that,
as alleged in the Amended Complaint, the Garcias pushed forward in two-and-a-half days
a capital raise that the Company might not have needed. Garcia Junior chose who
participated in the deal. The Garcias were able to participate. The public was excluded.
The deal was executed at a per share price that was less than the market value of Carvana
common stock on the day it was consummated. Although Defendants argue that the
Garcias were diluted as a result of the Direct Offering, it is reasonably conceivable that
they were diluted less than the public stockholders. Defendants may ultimately succeed in
proving their factual narrative at trial. For present purposes, plaintiff-friendly inferences
foreclose it.
Having determined that half of the Carvana Board lacks independence from the
Garcias, who received a non-ratable benefit from the Direct Offering not shared by the
public stockholders, the entire fairness standard presumptively applies. Given the fact-
intensive nature of the entire fairness inquiry, dismissal is inappropriate.
133 Garcias’ Reply Br. at 16.
42 Accordingly, Garcia Junior’s motion to dismiss pursuant to Rule 12(b)(6) is denied.
III. CONCLUSION
Carvana and Garcia Junior’s motion to dismiss under Court of Chancery Rule 23.1
is DENIED. Carvana and Garcia Junior’s motion to dismiss under Court of Chancery Rule
12(b)(6) is DENIED.
Related
Cite This Page — Counsel Stack
In Re Carvana Co. Stockholders Litigation, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-carvana-co-stockholders-litigation-delch-2022.