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Chur v. Eighth Judicial Dist. Court

Supreme Court of Nevada
458 P.3d 336 (Nev. 2020) (2020)
ELI5:

Rule of Law:

Under Nevada statute NRS 78.138(7), corporate directors and officers may only be held individually liable for damages resulting from a breach of fiduciary duties if the breach involves intentional misconduct, fraud, or a knowing violation of law; allegations of gross negligence alone are insufficient.


Facts:

  • Petitioners (the Directors) served as directors for Lewis & Clark LTC Risk Retention Group, Inc., a Nevada-based insurance company.
  • Lewis & Clark provided insurance for long-term care facilities and home health providers across the country.
  • The Commissioner of Insurance alleged that the Directors failed to properly inform themselves of the status of Lewis & Clark.
  • The Commissioner further alleged that the Directors' inaction and failure to take corrective action prolonged the company's operations while it was insolvent, thereby increasing its insolvency.
  • These alleged failures by the Directors were characterized by the Commissioner as gross negligence.

Procedural Posture:

  • The Nevada Division of Insurance initiated a receivership action concerning Lewis & Clark in the Eighth Judicial District Court of Nevada.
  • The district court appointed the Commissioner of Insurance as the receiver for Lewis & Clark.
  • The Commissioner, as receiver, filed a complaint against the former directors (the Directors), alleging claims including gross negligence.
  • The Directors filed a motion to dismiss, which the district court denied.
  • The Directors subsequently filed a motion for judgment on the pleadings, which the district court also denied, relying on precedent from Shoen v. SAC Holding Corp.
  • The Directors' motion for reconsideration was also denied by the district court.
  • The Directors then petitioned the Supreme Court of Nevada for a writ of mandamus, asking it to order the district court to grant their motion for judgment on the pleadings.

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Issue:

Does Nevada law, specifically NRS 78.138(7), permit holding corporate directors or officers individually liable for damages based solely on allegations of gross negligence?


Opinions:

Majority - Hardesty, J.

No. Nevada's statute, NRS 78.138(7), provides the sole and exclusive basis for holding directors and officers individually liable, and it requires a showing of intentional misconduct, fraud, or a knowing violation of law, which is a higher standard than gross negligence. The court clarifies that its prior dicta in Shoen v. SAC Holding Corp. was misinterpreted by lower courts and did not create a separate liability standard for duty-of-care claims based on gross negligence. The plain text of the statute controls, establishing a two-part test for liability: 1) the presumptions of the business judgment rule must be rebutted, and 2) the breach of fiduciary duty must involve intentional misconduct, fraud, or a knowing violation of law. Adopting the reasoning from In re ZAGG, the court defines a 'knowing violation of law' as requiring proof that the director had knowledge that their conduct was wrongful. Because the Commissioner's complaint only alleged gross negligence, it failed to meet the higher statutory requirement of knowing misconduct, and therefore failed to state an actionable claim for individual liability.



Analysis:

This decision significantly clarifies Nevada corporate law by resolving confusion created by the court's prior dicta in Shoen. It establishes a high, director-friendly standard for personal liability, requiring plaintiffs to plead facts demonstrating a director's actual knowledge of wrongdoing, not just recklessness or severe incompetence. This holding strengthens the protections afforded by Nevada's business judgment rule and exculpatory statutes, making it more difficult for plaintiffs, such as receivers or shareholders, to pursue claims against individual directors and officers. The ruling solidifies Nevada's position as a state with strong protections for corporate fiduciaries, potentially influencing corporate decisions on where to incorporate.

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