In an earlier post, I flagged the launch of a pilot program for the Nevada Business Court. Recent significant decisions can now be found on the pilot program’s webpage, making the application 0f Nevada law more readily observable. There are now three decisions available, all drafted by Judge Gall. Many thanks to Boyd Law Student Amanda Vaskov for reviewing the decisions and drafting short summaries. I’ve placed the summaries after the jump below.

The three cases involve different issues. Passley v. Ameritek Ventures shows a plaintiff successfully rebutting Nevada’s statutory business judgment rule and the Court voiding transactions. David Corbett v. Gary Rhea Ins. Agency features the Court denying a motion for a preliminary injunction to preserve records and assets because the parties were already under a preservation obligation and the plaintiff made no showing that there was any imminent risk of asset dissipation. In Hanchil Kim and Hyunju Lee v. Yoon-Sik Kim and Olden Star, Inc., the Court dismissed a suit for lack of personal jurisdiction after “Plaintiffs’ counsel conceded that there are no derivative claims in the first amended complaint, and that the entirety of Plaintiffs’ claims” were against a defendant directly.

I was surprised by the outcome in Olden Star because it involved some claims that defendants “deprived Plaintiffs of their Nevada-law stockholder rights under NRS Chapter 78[.]”

So I looked a bit deeper. Sometimes cases come out in surprising ways because of how the parties argue them and because courts let them argue their own cases under party presentation principles. The decision makes sense given what the parties presented to the Court. The plaintiff has the burden to establish personal jurisdiction. After the defendant moved to dismiss for lack of personal jurisdiction, the Plaintiffs’ opposition never cited NRS 75.160, which I read to mean that the directors of Nevada corporations consent to claims involving duties owed on account of their director position. Like Delaware, Nevada has a director consent statute. It provides that:

1.  Every nonresident of this State who, on or after October 1, 2013, accepts election or appointment, including reelection or reappointment, as a management person of an entity, or who, on or after October 1, 2014, serves in such capacity, and every resident of this State who accepts election or appointment or serves in such capacity and thereafter removes residence from this State shall be deemed, by the acceptance or by the service, to have consented to the appointment of the registered agent of the entity as an agent upon whom service of process may be made in all civil actions or proceedings brought in this State by, on behalf of or against the entity in which the management person is a necessary or proper party, or in any action or proceeding against the management person for a violation of a duty in such capacity, whether or not the person continues to serve as the management person at the time the action or proceeding is commenced. The acceptance or the service by the management person shall be deemed to be signification of the consent of the management person that any process so served has the same legal force and validity as if served upon the management person within this State.

The parties didn’t raise the statute and the Court didn’t discuss it. The case was not litigated by lawyers specializing in corporate law. The parties built their argument around Consipio Holding, BV v. Carlberg, 128 Nev. 454, 459 (2012) which followed the U.S. Supreme Court’s decision in Shaffer v. Heitner, 433 U.S. 186 (1977) . Nevada’s consent statute was passed in 2013. As the plaintiffs didn’t argue that the defendants consented to the jurisdiction in Nevada under the statute, I wouldn’t read Olden Star as indicating that plaintiffs cannot establish personal jurisdiction over the directors of Nevada corporations for similar claims.

Passley v. Ameritek Ventures

THE COURT VOIDS A CUSTODIAN’S SELF-DEALING TRANSACTIONS

Summary

The court voided Shaun Passley’s related-party transactions and removed him as Ameritek Ventures, Inc.’s custodian, officer, and director.  Ameritek, a Nevada corporation, acquired fiber-optic technology assets but lost its capital investors, failed to complete the production line or generate revenue, and became unable to pay rent on one of its facilities.  After Ameritek’s directors resigned, Ameritek stockholder Passley petitioned for appointment as custodian under NRS 78.347.  The court appointed him and required a stockholder meeting and quarterly reports. Passley appointed himself sole director and officer, caused Ameritek to enter numerous transactions with companies he controlled, and issued shares to himself, family members, and related entities.  He failed to submit nearly all required reports.  Clinton Stokes and Meridian Pacific Holdings brought derivative claims on Ameritek’s behalf seeking to void the transactions and remove Passley.  In light of the case, the court underscored its concerns with Nevada corporate custodianships, stating they are “ripe for misuse and abuse” and “cry for legislative reform.”  It then concluded that Passley undertook transactions for his own benefit without meaningful oversight or transparency, and voided his related-party transactions.

Discussion

1. The court rejected any distinction between Passley’s custodial and corporate roles.

The court expressed concern when a custodian assumes control of an abandoned corporation, appoints himself as its sole officer and director, and operates without the transparency expected of a court-appointed fiduciary.  The court rejected Passley’s attempt to distinguish actions taken as custodian from those taken as Ameritek’s officer and director, finding that he “acted as custodian while concurrently serving as an officer and director.” The court removed him from all three positions and concluded that he had no judicial immunity because he had not faithfully served the purpose of the custodianship.

2. Passley’s self-interested transactions rebutted the business judgment rule.

The court found Passley had a personal financial interest in each challenged related-party transaction.  Though his self-interest rebutted the business judgment rule’s presumption, the court did not impose monetary damages.  The court noted that Stokes and Meridian appeared not to seek a monetary award, but instead sought to void the related-party transactions and remove Passley as custodian.

3. The court voided Passley’s related-party transactions. 

NRS 78.140 identifies the circumstances under which an interested-director transaction is not void or voidable solely because of a director’s financial interest.  The court found no evidence of any circumstance contemplated by NRS 78.140(2) that would protect the challenged related-party transactions from being voided.  Passley approved each challenged transaction while holding a financial interest in them, and the record did not show informed approval or ratification by disinterested decisionmakers.

The court also cited Kendall v. Henry Mountains Mines, Inc., which recognized that a director who acts for himself and the corporation without the principal’s “full knowledge and free assent” enters transactions that are voidable by the corporation or its stockholders.  Because Passley’s related-party transactions lacked the protections contemplated by NRS 78.140(2), the court voided them.

Practice Takeaway

Passley distinguishes personal damages from equitable relief for a fiduciary breach.  Self-interested transactions lacking NRS 78.140’s protections remain subject to rescission, even without personal damages against the fiduciary.

David Corbett v. Gary Rhea Ins. Agency

ASSET DISSIPATION TO FRUSTRATE A JUDGMENT SUPPORTS A FINDING OF IRREPARABLE HARM FOR A PRELIMINARY INJUNCTION

Summary

The court denied David Corbett’s motion for a preliminary injunction because he failed to show actual or imminent asset dissipation or spoliation.  Corbett sold his insurance agency’s book of business, customer relationships, commissions, renewal rights, and related assets to Gary Rhea Insurance Agency.  He alleged that the Rhea agency defaulted on payments but continued operating despite an agreement provision restoring his rights to the Rhea agency’s commissions, termination payments, and receivables upon default.  He sought an accounting, record preservation, segregation of disputed revenues, a freeze order, a constructive trust, or leave to seek an equity receiver.  The court denied the requested injunction and constructive trust.  It did not address the receiver request because no leave was required.

Discussion 

The court did not consider the Rhea agency’s opposition because it was filed four days past the deadline without any motion to extend time.  Although failure to oppose permits treating a motion as conceded, the court did not treat the opposition’s absence as consent because of “the extraordinary relief requested.”  It instead addressed whether Corbett established a real risk of irreparable harm.

The court presumed Corbett’s apparent security interest in the Rhea agency’s income stream was valid and enforceable.  Corbett argued his rights to the Rhea agency included its revenue streams and entitled him to control those assets.  Without equitable relief, he argued, he was unable to determine whether the Rhea agency’s management violated the agreement.

Dissipation of assets supports a finding of irreparable harm when undertaken to frustrate a judgment against a debtor.  But Corbett failed to establish actual or imminent dissipation of the Rhea agency’s assets. Because his asserted harm was speculative, the court denied the preliminary injunction.  It also denied his request to preserve the Rhea agency’s books and records because both parties already had an obligation to preserve relevant evidence and the court found no actual or imminent spoliation.

Practice Takeaway

Asset dissipation undertaken to frustrate a future judgment supports a finding of irreparable harm if the dissipation is actual or imminent.  Speculative concerns about collateral or revenue streams will not suffice. 

Hanchil Kim and Hyunju Lee v. Yoon-Sik Kim and Olden Star, Inc.

OFFICER OR DIRECTOR STATUS ALONE DOES NOT ESTABLISH PERSONAL JURISDICTION

Summary

The court dismissed this case for lack of personal jurisdiction.  The dispute involved a director and a former director of Olden Star, Inc. Hanchil Kim, a former director and officer, and his wife, Hyunju Lee, sued director Yoon-Sik Kim and also named Olden Star, a Nevada corporation, as a nominal defendant.  The couple held a 10% beneficial interest in Olden Star whose Uzbek subsidiary owns Tashkent Golf Club.  Their investment in the golf club included unlimited VIP access to the club.

The couple alleged that Yoon-Sik defamed them among their shared communities and Olden Star’s stockholders, removed Hanchil as board president, deprived them of their financial stake, and barred them from the club.  They also challenged Yoon-Sik’s stockholder and board actions as illegal and procedurally defective.  The court dismissed for lack of personal jurisdiction and denied leave to amend because the couple had already amended their complaint and identified no way to cure the jurisdictional defects.  It did not reach the alternative forum non conveniens argument.

Discussion 

The court tested for two types of personal jurisdiction: general and specific.  The court found general jurisdiction over Olden Star because it is a Nevada corporation.  But “Plaintiffs’ counsel conceded that there were no derivative claims.”  So although the court could exercise general jurisdiction over Olden Star, that finding did not cure the jurisdictional defect.

Yoon-Sik lived in Seoul, Korea.  The couple identified no Nevada contacts beyond his role as an Olden Star director.  Under Consipio Holding BV v. Carlberg, director status alone does not establish personal jurisdiction.  Directing harm toward a Nevada corporation might establish sufficient contacts, but the complaint supplied no details connecting Yoon-Sik’s conduct sufficient to establish a more general nexus to Nevada.

Practice Takeaway

A nonresident defendant’s status as the director or officer of a Nevada corporation, without more, is insufficient to establish general personal jurisdiction.  Directing harm toward a Nevada corporation may establish contacts sufficient for specific jurisdiction.

[BPE Note: The Plaintiffs in Olden Star did not argue that defendants consented to personal jurisdiction under NRS 75.160 and similar claims may not come out the same way.]