Nevada, unlike either California or Delaware, exculpates corporate officers from liability to the corporation for any damages as a result of “any act or failure to act” in his or her capacity as an officer unless it is proven that (i) the officer’s action or failure to act constituted a breach of his or her fiduciary duties as an officer; and (ii) the breach involved intentional misconduct, fraud or a knowing violation of the law. NRS 78.138.
In Clayton v. Automated Gaming Techn., Inc., 2013 U.S. Dist. LEXIS 169517 (E.D. Cal. Nov. 27, 2013), Judge John A. Mendez dismissed a counterclaim by a Nevada corporation against a former officer for breach of a written employment agreement. The corporation argued that the former officer had simultaneously worked for another employer and thus failed to develop and test software for the corporation. Judge Mendez found that this “failure to act” is “clearly controlled” by NRS 78.138 and the corporation had failed to allege facts showing intentional misconduct, fraud or a knowing violation of the law. Therefore, he dismissed the claim.
The corporation also alleged that the officer’s unauthorized employment with another company was contrary to the interests of the corporation. Judge Mendez also tossed this claim, finding that the corporation had alleged nothing more than the officer had a second job.
The corporation was also unsuccessful in its negligence claim against the officer. While acknowledging the broad scope of NRS 78.138, Judge Mendez’ ruled that this claim was barred by the “economic loss doctrine” which bars unintentional tort action when the plaintiff seeks to recover purely economic losses, unless there is a legal duty independent of a contract. Interestingly, Judge Mendez found that “the duty arose from the parties’ contractual employment relationship”. It’s not clear to me why the Court did not consider whether an independent duty arose from the officer’s status as an officer. After all, an officer may or may not be an employee. However, even if status as an officer did supply the requisite independent duty, the corporation would still need to overcome NRS 78.138.
For more on Nevada corporate law, see my book Bishop & Zucker on Nevada Corporations and Limited Liability Companies.