The recent Delaware Court of Chancery decision in Dlayal Holdings, Inc. v. Al-Bawardi; Dlayal Holdings, Inc. v. Rodger Gracey, et al.; COORD: 2020-1067-LWW, 2020-1070-LWW (Del. Ch. Dec. 27, 2021) examines whether three Kansas residents’ day-to-day management of two ranches in Kansas amounted to “material participation” in the management of a Delaware entity sufficient for purposes of personal jurisdiction under 6 Del. C. §18-109(a).
The decision comes from two coordinated actions, both commenced by Plaintiff Dlayal Holdings, LLC, Oasis Direct Seven LLC’s (“Oasis Direct Seven”) sole member and owner. In the first action (C.A. No. 2020-1067), Dlayal asserted that Defendant, Marwan Al-Bawardi, breached his fiduciary duties to Oasis Direct Seven. In turn, Al-Bawardi filed a third-party complaint against Rodger, Betty and Marnie Gracey (the “Graceys”) for indemnification. In the second action (Case No. 2020-1070), Dlayal sought a declaratory judgment against the Graceys that it was the sole member of Oasis.
Both cases arise from the same facts: Oasis Direct Seven was formed in 1998 “primarily 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 Direct Seven. In 2015, the property adjacent to the ranch was purchased by Owl Creek Ranch LLC, an entity with Oasis Direct Seven as its sole member. 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 the Complaint and Third-Party Complaint, the Graceys moved to dismiss on the basis that the Court lacked personal jurisdiction. Both Dlayal and Al-Bawardi asserted that the Court had personal jurisdiction pursuant to 6 Del. C. §18-109(a) because the Graceys “participated materially in the management” of Oasis Direct Seven.
In deciding whether the Gracey’s management of the Ranches amounted to “material participation” in the management of Oasis Direct Seven, the Court recognized 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. When modifying the word ‘participate,’ the word ‘materially’ introduces a level of significance. It requires meaningful participation, rather than minor participation.” Based on that interpretation, Section 18-109(a) requires that an individual take a meaningful part or play a significant role in management of a limited liability company in order to qualify as an acting manager.
Ultimately, the Court held that the Complaints did not allege material participation in the management of Oasis by the Graceys. Specifically, the Court found that Rodger Gracey’s management of the ranches did not amount to materially participating in the management of Oasis Direct Seven Therefore, the Court held that he “cannot be deemed a manager [ ] as defined by Section 18-109 for purposes of personal jurisdiction.” With regard to personal jurisdiction over Betty and Marnie Gracey, the court found Plaintiff’s and Third-Party Plaintiff’s’ arguments “even more strained” and found no facts to support the contention Betty and Marnie participated materially in the management of Oasis.