A Nevada Supreme Court ruling last week further narrows the scope of Nevada officer and director liability for violations of their duty of care.
In Robert Chur, et al. v. the Eighth Judicial District Court of the State of Nevada, 135 Nev. Adv. Op. 7 (Case No. 78301), the court unanimously rejected “gross negligence” as a basis to impose individual duty–of-care liability. In doing so, the court clarified its prior language in Shoen v. SAC Holding Corp., where it stated that “with regard to the duty of care, the business judgment rule does not protect the gross negligence of uninformed directors and officers.” [122 Nev. 621, 640, 137 P.3d 1171, 1184 (2006)]
In the district court case, the Nevada Commissioner of Insurance, as receiver, had alleged claims of gross negligence and deepening insolvency against the directors of Lewis & Clark LTC Risk Retention Group, Inc., which had been liquidated by court order. The Commissioner claimed that the directors had acted in a grossly negligent manner by failing to properly inform themselves of the company’s status and take appropriate corrective action, leading to the company’s initial insolvency, which later deepened. Although NRS 78.138(7) expressly limits individual director liability to fiduciary breaches involving “intentional misconduct, fraud, or knowing violation of law,” the district court allowed the gross negligence claim to proceed on the basis of Shoen.
The Nevada Supreme Court took the original writ proceeding as an opportunity to clarify Shoen, explaining that it does not provide a separate breach-of-the-duty-of-care claim apart from the confines of NRS 78.138. In order to even state a claim against directors individually, the court reiterated, the claimant must allege facts that both 1) rebut the presumptions of the business judgment rule codified at NRS 78.138(3); and 2) constitute a breach of the director’s fiduciary duties of care or loyalty that involves intentional misconduct, fraud, or a knowing violation of law in accordance with NRS 78.138(7). The court’s decision leaves no question that “gross negligence” no longer has a place in Nevada corporate governance law when trying to impose director and officer liability, even though it may still serve as a basis for finding breach of fiduciary duty outside the individual liability context.
Importantly, in applying the clarified test to the Commissioner’s allegations, the Nevada Supreme Court defined—for the first time—what constitutes “intentional misconduct” and a “knowing violation of the law” under NRS 78.138(7). The Court rejected the Commissioner’s argument that allegations of gross negligence rise to the level of scienter required for intentional or knowing conduct, accepting that gross negligence demands only a “reckless disregard,” while intent and knowledge require an “awareness or understanding.” Relying on the 10th Circuit’s Nevada-law based opinion In re ZAGG Inc. S’holder Derivative Action, 826 F.3d 1222, 1232 (10th Cir. 2016), the state Supreme Court held that a “claimant must establish that the director or officer had knowledge that the alleged conduct was wrongful in order to show a ‘knowing violation of Law’ or ‘intentional misconduct’ pursuant to NRS 78.138(7)(b).” (emphasis added).
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