Chur v. Eighth Judicial Dist. Court of Nev.

• Decision Date: 27 February 2020
• Docket Number: No. 78301,78301
• Citation: 458 P.3d 336
• Parties: Robert CHUR; Steve Fogg ; Mark Garber; Carol Harter; Robert Hurlbut; Barbara Lumpkin; Jeff Marshall ; and Eric Stickels, Petitioners, v. The EIGHTH JUDICIAL DISTRICT COURT of the State of Nevada, IN AND FOR the COUNTY OF CLARK; and the Honorable Nancy L. Allf, District Judge, Respondents, and Commissioner of Insurance for the State of Nevada as Receiver of Lewis and Clark LTC Rick Retention Group, Inc., Real Party in Interest.
• Court: Nevada Supreme Court

458 P.3d 336

Robert CHUR; Steve Fogg ; Mark Garber; Carol Harter; Robert Hurlbut; Barbara Lumpkin; Jeff Marshall ; and Eric Stickels, Petitioners,

v. The EIGHTH JUDICIAL DISTRICT COURT of the State of Nevada, IN AND FOR the COUNTY OF CLARK; and the Honorable Nancy L. Allf, District Judge, Respondents,andCommissioner of Insurance for the State of Nevada as Receiver of Lewis and Clark LTC Rick Retention Group, Inc., Real Party in Interest.

No. 78301

Supreme Court of Nevada.

FILED FEBRUARY 27, 2020

Holland & Hart LLP and J. Stephen Peek, Ryan A. Semerad, and Jessica E. Whelan, Las Vegas; Lipson Neilson P.C. and Joseph P. Garin and Angela T. Nakamura Ochoa, Las Vegas, for Petitioners.

Fennemore Craig, P.C., and James L. Wadhams and Christopher H. Byrd, Las Vegas; Kolesar & Leatham and Brenoch R. Wirthlin, Las Vegas, for Real Party in Interest.

BEFORE THE COURT EN BANC.

OPINION

By the Court, HARDESTY, J.:

This case requires us to consider whether a corporate director or officer may be held individually liable for breaching his or her fiduciary duty of care through gross negligence. Statutorily, a director or officer is not individually liable for harm resulting from official actions unless the director or officer engages in "intentional misconduct, fraud or a knowing violation of law." NRS 78.138(7)(a)-(b). In Shoen v. SAC Holding Corp ., 122 Nev. 621, 640, 137 P.3d 1171, 1184 (2006), however, we stated that "[w]ith regard to the duty of care, the business judgment rule does not protect the gross negligence of uninformed directors and officers." As a result, some courts, including the district court here, have allowed claims against individual directors and officers to proceed based only on allegations of gross negligence.

We now clarify that, based on the plain text of the statute, NRS 78.138(7) applies to all claims of individual liability against directors and officers, precluding the imposition of liability for grossly negligent breaches of fiduciary duties. We further conclude that the gross negligence-based allegations in the operative complaint below fail to state an actionable claim under NRS 78.138.

FACTS AND PROCEDURAL HISTORY

Petitioners (collectively, the Directors) formerly served as directors of Lewis & Clark LTC Risk Retention Group, Inc. Lewis & Clark operated as a Nevada risk retention group that insured long-term care facilities and home health providers across the country, but in 2012, the Nevada Division of Insurance filed a receivership action related to Lewis & Clark, and the district court entered a liquidation order. In the liquidation order, the court appointed real party in interest, the Commissioner of Insurance for the State of Nevada, as receiver. In addition, the liquidation order granted the receiver the power to "[p]rosecute any action which may exist on behalf of the policyholders, members, or shareholders of [Lewis & Clark] against any officer of [Lewis & Clark] or any other person."

As receiver of Lewis & Clark, the Commissioner filed the operative complaint against the Directors, amongst others, alleging claims of gross negligence and deepening insolvency. As to the gross negligence claim, the Commissioner claimed that the Directors "fail[ed] to properly inform [themselves] of [the] status of [Lewis & Clark]" and take appropriate corrective action. Regarding the deepening insolvency claim, the Commissioner alleged that the Directors' "inaction severely prolonged the insurance actions of [Lewis & Clark] that led to its initial insolvency and that then also increased its insolvency." The Directors sought to dismiss the claims pursuant to NRCP 12(b)(5), maintaining that the Commissioner failed to state a viable claim. The district court denied the Directors’ motion.

Thereafter, the Directors filed an NRCP 12(c) motion for judgment on the pleadings. The Directors argued that, even accepting the Commissioner’s allegations as true, gross negligence cannot support a claim for personal liability against the Directors pursuant to NRS 78.138. The district court denied the Directors’ motion, relying on Shoen.

Following the district court’s denial of the Directors’ motion for judgment on the pleadings, the Directors filed a motion for reconsideration. The Directors argued that the district court’s order improperly relied on Shoen and ignored the clear standard required to hold directors individually liable under NRS 78.138(7). The district court denied the Directors’ motion for reconsideration and found that the Commissioner stated a claim for breach of the fiduciary duty of care pursuant to Shoen , as well as a claim for deepening insolvency.¹ In doing so, the district court announced and applied a bifurcated approach to evaluate allegations for claims seeking to hold directors and officers individually liable, requiring a showing of at least gross negligence to state a duty-of-care claim or "intentional misconduct, fraud, or a knowing violation of the law to state a duty-of-loyalty claim."

The Directors now petition this court for a writ of mandamus directing the district court to apply the plain text of NRS 78.138 and to grant the motion for judgment on the pleadings.

DISCUSSION

We elect to consider the petition for a writ of mandamus

Because a writ petition seeks extraordinary relief, the consideration of the petition is within our sole discretion. Okada v. Eighth Judicial Dist. Court , 134 Nev. 6, 8, 408 P.3d 566, 569 (2018). Where there is no plain, speedy, and adequate remedy in the ordinary course of law, extraordinary relief may be available. NRS 34.170 ; Smith v . Eighth Judicial Dist Court , 107 Nev. 674, 677, 818 P.2d 849, 851 (1991). "A writ of mandamus is available to compel the performance of an act that the law requires ... or to control an arbitrary or capricious exercise of discretion." Int’l Game Tech., Inc. v. Second Judicial Dist. Court , 124 Nev. 193, 197, 179 P.3d 556, 558 (2008) ; see also NRS 34.160.

We generally decline to entertain writ petitions challenging the denial of a motion to dismiss. State v. Eighth Judicial Dist. Court (Anzalone ), 118 Nev. 140, 147, 42 P.3d 233, 238 (2002). This rule applies equally to orders denying a motion for judgment on the pleadings, as we consider them under the same standard as motions to dismiss. See, e.g ., Sadler v. PacifiCare of Nev., Inc., 130 Nev. 990, 993-94, 340 P.3d 1264, 1266-67 (2014) (reviewing an order granting an NRCP 12(c) motion under the same standard as an order dismissing a complaint pursuant to NRCP 12(b)(5) ). However, we may nevertheless review an order denying a motion to dismiss, and by extension an order denying a motion for judgment on the pleadings, when: "(1) no factual dispute exists and the district court is obligated to dismiss an action pursuant to clear authority under a statute or rule; or (2) an important issue of law needs clarification and considerations of sound judicial economy and administration militate in favor of granting the petition." Anzalone , 118 Nev. at 147, 42 P.3d at 238.

Here, the district court denied the Directors’ motion for reconsideration after determining that our dicta from Shoen, and federal cases citing to the same, controlled in this case. The district court found that the Commissioner stated a cause of action for the breach of the fiduciary duty of care. The Directors maintain that the district court misinterpreted and misapplied Shoen and argue that the plain language of NRS 78.138 governs this case. Because federal courts in Nevada, as well as the district court in the case at bar, have relied on Shoen to imply a bifurcated tract for establishing breaches of the fiduciary duties of care and loyalty—in contravention of NRS 78.138 ’s plain language—the Directors argue that this writ petition presents a purely legal question in need of clarification. We agree.

We are concerned that our language in Shoen has misled lower courts about the law surrounding individual liability for directors and officers in Nevada, and that this confusion risks imposing inconsistent results for different litigants. To clarify the governing law in actions against directors or officers for breaches of fiduciary duties, and in the interest of judicial economy, we exercise our discretion to consider this petition for writ of mandamus.

NRS 78.138 provides the sole mechanism to hold directors and officers individually liable for damages in Nevada

This court reviews questions of statutory construction de novo. Zohar v. Zbiegien , 130 Nev. 733, 737, 334 P.3d 402, 405 (2014). "If the plain meaning of a statute is clear on its face, then [this court] will not go beyond the language of the statute to determine its meaning." Beazer Homes Nev., Inc. v. Eighth Judicial Dist. Court , 120 Nev. 575, 579-80, 97 P.3d 1132, 1135 (2004) (alteration in original) (internal quotation marks omitted).

NRS 78.138(3) (2017) provides that "[a] director or officer is not individually liable for damages as a result of an act or failure to act in his or her capacity as a director or officer except under circumstances described in subsection 7. "² (Emphasis added.) NRS 78.138(7) requires a two-step analysis to impose individual liability on a director or officer. First, the presumptions of the business judgment rule, codified in NRS 78.138, must be rebutted. NRS 78.138(7)(a) ; Wynn Resorts, Ltd. v. Eighth Judicial Dist. Court , 133 Nev. 369, 375, 399 P.3d 334, 342 (2017) ("Nevada’s business judgment rule is codified at NRS 78.138 ...."). The business judgment rule states that "directors and officers, in deciding upon matters of business, are presumed to act in good faith, on an informed basis and with a view to the interests of the corporation." NRS 78.138(3). Second, the "director’s or officer’s act or failure to act" must constitute "a breach of his or her fiduciary duties," and that breach must further involve "intentional misconduct, fraud or a knowing violation of law." NRS 78.138(7)(b)(1)-(2) (emphasis added). In Nevada,...