Background
This action arises from two coordinated suits filed by plaintiff Dlayal Holdings, LLC (Dlayal), which is the sole member and owner of Oasis Direct Seven LLC (Oasis). In the first action (No. 2020-1067), Dlayal asserted that defendant, Marwan Al-Bawardi, breached his fiduciary duties to Oasis. In turn, Al-Bawardi filed a third-party complaint against Rodger, Betty, and Marnie Gracey (the Graceys) for indemnification. In the second action (No. 2020-1070), Dlayal alleged that it was the sole member of Oasis and sought declaratory judgment against the Graceys.
According to the complaint and the third-party complaint, Oasis was formed in 1998 with the primary purpose “to own and manage real property in various states.” In 2000 or 2001, Rodger Gracey purchased a ranch in Kansas, and under a power of attorney from Al-Bawardi, assigned the purchase of the ranch to Oasis. In 2015, the property adjacent to the ranch was purchased by Owl Creek Ranch LLC, an entity whose sole member is also Oasis.
From the time each ranch was purchased and until June 2019, Rodger Gracey managed the day-to-day operations of the ranches, Betty Gracey handled the accounting and bookkeeping for the ranches, and Marnie Gracey assisted with other ministerial responsibilities. The Graceys were at all times (and continue to be) residents of Kansas.
In response to both the complaint and third-party complaint, the Graceys moved to dismiss for lack of personal jurisdiction. Both Dlayal and Al-Bawardi (together, the plaintiffs) argued that the court could assert personal jurisdiction over the Graceys under 6 Del. C. section 18-109(a), because those defendants “materially participated in the management” of Oasis. Specifically, the plaintiffs claimed that Rodger Gracey exercised authority over the ranches from 2001 through 2019, which was evidenced by multiple powers of attorney appointing him as the property administrator and manager (but not an officer) of one of the ranches. The plaintiffs also claimed that Betty and Marnie Gracey’s activities as bookkeeper and their assistance in purchasing the second ranch amounted to material participation, which would allow the court to exercise personal jurisdiction over them as well.
Analysis
The court began its analysis by observing that the plain meaning of the phrase “participates materially” has been interpreted as “taking part in or playing a role in an activity or event. Further, when modifying the word ‘participate,’ the word ‘materially’ introduces a level of significance. It requires meaningful participation, rather than minor participation.” Therefore, the court held that based on that interpretation, section 18-109(a) required that an individual take a meaningful part or play a significant role in the management of a limited liability company in order to qualify as an acting manager.
The Court of Chancery determined that the application of a statute of repose is procedural in nature and must be decided by the arbitrator, not the court. This decision also underscores the fact that Delaware is a freedom-of-contract jurisdiction, and will often enforce contracts entered into by sophisticated parties as they are written, even if that means that an arbitrator deciding the issues is an employee of one of the parties in the arbitration.
Regarding Rodger Gracey, the court observed that he was not an officer of Oasis Direct Seven. The complaints did not allege that he participated in the management of Oasis Direct Seven’s portfolio, that he held decision-making authority over its assets, or that he performed any actions with the exclusive purview of a manager. Instead, the court held that simply overseeing the day-to-day operations of the Kansas ranches “is not equivalent to materially participating in the management of” Oasis Direct Seven.
Similarly, the court found that there were no allegations that Betty and Marnie Gracey’s work as bookkeeper and assistance with purchasing one of the two ranches subjected them to personal jurisdiction in Delaware. The court noted that there were no allegations that either Betty or Marnie Gracey controlled Oasis Direct Seven’s management or business, and that the limited responsibilities those defendants did have with regard to the ranches could not support any inference that they materially participated in the management of the company.
Key takeaways
Non-Delaware residents may be subject to personal jurisdiction in Delaware courts when those defendants materially participate in the management of a Delaware entity. However, “material participation” requires more than managing the day-to-day operations of the entity. Instead, a non-Delaware defendant must materially participate in the management of the entity’s business.
Client Alert 2022-072
