The business judgment rule exists in all states and generally prevents courts from holding corporate directors or officers personally liable for harm resulting from actions taken in their corporate capacities as long as they “acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” E.g. Wynn Resorts, Ltd. v. Eighth Judicial Dist. Court in & for Cty. of Clark, 399 P.3d 334, 344 (Nev. 2017) (citations omitted). In Nevada, the business judgment rule is codified by statute providing that directors or officers will not be held individually liable unless they engage in “intentional misconduct, fraud or a knowing violation of law.” NRS 78.138(7)(a)-(b). Thus, the Nevada rule does not permit suit against a director or officer for negligence, whether gross or otherwise. Despite this, the Supreme Court of Nevada, in Shoen v. SAC Holding Corp., appeared to contradict the statute when it held: “[w]ith regard to the duty of care, the business judgment rule does not protect the gross negligence of uninformed directors and officers.” 137 P.3d 1171, 1184 (Nev. 2006) (emphasis added). This caused some Nevada courts to allow duty-of-care claims against individual directors and officers for gross negligence, in contravention of the statutory text.
The Supreme Court of Nevada resolved this discrepancy in Chur v. Eighth Judicial District Court in and for County of Clark, where it clarified that the statute alone provides the basis for director and officer liability. 458 P.3d 336, 338 (Nev. 2020). There, the Petitioners (“Directors”) were former directors of Lewis & Clark LTC Risk Retention Group, Inc. (“Lewis & Clark”). Lewis & Clark went into liquidation in 2012 after the Nevada Division of Insurance filed a receivership action, and the state Commissioner of Insurance was appointed receiver (“Commissioner”). The Commissioner sued the Directors on claims of gross negligence and deepening insolvency. The Directors moved to dismiss, for judgment on the pleadings, and then for reconsideration. They argued that the Commissioner was seeking to hold them liable for grossly negligent conduct alone, which was not permitted by Nevada’s statutory business judgment rule. Relying on the gross negligence language from Schoen, the district court denied all three motions.
The Directors petitioned the Supreme Court of Nevada for a writ of mandamus directing the district court to apply the plain language of NRS 78.138 and to grant the motion for judgment on the pleadings. The Court agreed to hear the petition because it felt that Shoen may have “misled lower courts about the law surrounding individual liability for directors and officers in Nevada” which “risks imposing inconsistent results for different litigants.” Id. at 339.
NRS 78.138(3) 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 as described in subsection 7.” Subsection 7 of the statute then requires a two-step analysis for imposing individual liability on a director or officer. First, a plaintiff must rebut the presumption of the business judgment rule, 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(7)(a). 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).
This, the Chur court explained, provides the “sole circumstance under which a director or officer may be held individually liable for damages stemming from the director’s or officer’s conduct in an official capacity.” Chur, 458 P.3d at 340 (emphasis added). Thus, the Supreme Court “disavow[ed]” Shoen to the extent it implied that allegations of gross negligence could, without more, state a breach of duty of care claim. Id.
The Court then considered the Commissioner’s allegations. The Court assumed that the allegations met the first requirement of NRS 78.138 -- that the Commissioner rebutted the good-faith presumption. It was left with whether the Commissioner’s allegations of gross negligence could constitute a breach of fiduciary duty involving “intentional misconduct” or a “knowing violation” of the law.
The Court considered and adopted the Tenth Circuit Court of Appeals’ definition of “intentional” and “knowing” under NRS 78.138, a question it had not previously considered. Chur, 458 P.3d at 342 (citing In re ZAGG Inc. Shareholder Derivative Action, 826 F.3d 1222, 1232-33 (10th Cir. 2016)). Under that definition, 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).” Chur, 458 P.3d at 342. Because knowledge of wrongdoing “is an appreciably higher standard than gross negligence -- defined by Black’s Law Dictionary (11th ed. 2019) as ‘reckless disregard of a legal duty,’” the Court held that the Commissioner’s allegations could not meet that standard. Id. Thus, the Court ordered that the Directors’ motion for judgment on the pleadings be granted.
News of Chur should come as a relief to corporate directors and officers subject to Nevada jurisdiction. It confirms the core principle of the business judgment rule that had been called into question in Shoen: that courts cannot interfere with the business judgments of officers and directors based on gross negligence alone.