Johnson v. Steel, Inc.
1984 Nev. LEXIS 349, 100 Nev. 181, 678 P.2d 676 (1984)
Rule of Law:
A district court errs in granting summary judgment when genuine issues of material fact exist or when it misapplies the doctrine of res judicata, and a shareholder plaintiff in a derivative action is excused from the demand requirement if the demand would be futile due to director involvement in the alleged wrongdoing or conflicting interests.
Facts:
- Joyce Johnson held 42.95 percent of the stock in Steel, Incorporated, as a minority shareholder.
- Joyce Johnson claimed that the corporation's directors and officers, including Stanley Johnson (CEO, director, and shareholder) and his wife Constance Johnson (director), misappropriated substantial corporate funds.
- Specifically, Joyce Johnson contended that Stanley Johnson received over $650,000 in excess of his authorized 8.17 percent of gross revenues salary.
- Joyce Johnson alleged that Constance Johnson, Stanley's wife and a director, knew of and acquiesced in Stanley's unauthorized overpayments.
- Joyce Johnson further claimed that the defendant directors and officers allowed corporate assets and equipment of Steel, Inc. to be used without payment by another corporation privately owned and operated by them.
- Sophie Weiner, a director and shareholder of Steel, Inc., was also an officer of the competing corporation that allegedly used Steel, Inc.'s equipment without paying for its use.
Procedural Posture:
- Joyce Johnson (minority shareholder) filed a lawsuit in district court seeking dissolution of Steel, Incorporated (first count of an amended complaint) and relief in a shareholder’s derivative suit (third count of an amended complaint).
- Johnson also filed a motion for the appointment of a receiver pendente lite during the proceedings, which the district court denied.
- The district court entered summary judgment against Johnson in the dissolution suit (first count).
- Defendants moved to dismiss the derivative suit (third count) under NRCP 12(b)(5) on the ground that Johnson had failed to make a demand upon the board for relief.
- The district court granted the defendants' motion and dismissed the derivative suit (third count).
- Johnson appealed the summary judgment in the dissolution suit and the dismissal of the derivative suit to the Supreme Court of Nevada.
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Issue:
1) Does a district court err in granting summary judgment against a minority shareholder when material issues of fact exist regarding corporate misappropriation and improper application of res judicata from a prior receiver motion? 2) Is a plaintiff in a shareholder's derivative suit excused from making a demand on the board of directors when all directors are alleged to have participated in or acquiesced in the wrongful acts or have conflicting interests, rendering a demand futile?
Opinions:
Majority - Per Curiam
Yes, the district court erred in granting summary judgment and dismissing the derivative suit because material issues of fact existed, res judicata was improperly applied, and demand on the board would have been futile. The Supreme Court of Nevada first determined that summary judgment was improperly granted in the dissolution suit. Summary judgment is appropriate only when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law, and here, Johnson's affidavit raised material factual issues regarding misappropriation of funds and improper use of corporate assets. The court also clarified that the prior denial of Johnson’s motion for a receiver pendente lite was merely an ancillary remedy to preserve assets and did not determine substantive rights, thus the doctrine of res judicata was incorrectly applied to bar Johnson’s claims. Second, the court found that the district court erred in dismissing the derivative action for failure to make a demand on the board. NRCP 23.1 requires a plaintiff to allege efforts to obtain action from directors or reasons for not making such an effort. The court recognized a well-established exception to this demand requirement when demand would be futile. In this case, all current directors (Stanley Johnson, Constance Johnson, and Sophie Weiner) were named as defendants. Stanley Johnson, as CEO and a director, was alleged to have misappropriated funds. Constance Johnson, Stanley’s wife and a director, was alleged to have known of and acquiesced in the overpayments, suggesting she would not vigorously pursue action against her husband. Sophie Weiner, another director, had conflicting business relationships with Stanley Johnson and the competing corporation that allegedly used Steel, Inc.’s assets without payment. Given these circumstances, a quorum of disinterested directors could not be assembled to fairly appraise the merits of Johnson’s claims, rendering a demand futile.
Analysis:
This case is significant for clarifying the stringent standard for granting summary judgment, emphasizing that genuine disputes of material fact preclude such a ruling. It also reinforces the 'futility exception' to the demand requirement in shareholder derivative suits, particularly relevant for closely held corporations where directors may have intertwined interests or be implicated in the alleged wrongdoing. The ruling also provides an important distinction regarding the application of res judicata, ensuring that ancillary remedies like the appointment of a receiver pendente lite do not prematurely bar substantive claims, thereby protecting minority shareholder rights to pursue corporate remedies.
