Title: Cotter v. Kane

State: nevada

Issuer: Nevada Supreme Court

Document:

436 Nev., Advance Opinion GB
IN THE SUPREME COURT OF THE STATE OF NEVADA

JAMES J. COTTER, JR.,
DERIVATIVELY ON BEHALF OF
READING INTERNATIONAL, INC.,
Appellant,

vs.
EDWARD KANE; DOUGLAS
MCEACHERN; MARY ANN GOULD;
JUDY CODDING; MICHAEL
WROTNIAK; AND READING
INTERNATIONAL, INC., A NEVADA
CORPORATION,

Respondents.

‘JAMES J. COTTER,
DERIVATIVELY ON BEHALF OF
READING INTERNATIONAL, INC.,
Appellant,

vs.

EDWARD KANE; DOUGLAS
MCEACHERN; MARY ANN GOULD;
JUDY CODDING; MICHAEL
WROTNIAK; AND READING
INTERNATIONAL, INC., A NEVADA
CORPORATION,

Respondents.

 

JAMES J. COTTER, JR.
DERIVATIVELY ON BEHALF OF
READING INTERNATIONAL, INC.,
Appellant,

vs.

EDWARD KANE; DOUGLAS
‘MCEACHERN; JUDY CODDING;

 

 

No. 75053

FILED

ok.

No. 77648

20- 35453

 

 

EEE
‘MICHAEL WROTNIAK; AND READING
INTERNATIONAL, INC., A NEVADA.
CORPORATION,

Respondents.

READING INTERNATIONAL, INC., A No. 77733,
NEVADA CORPORATION; MARGARET
COTTER; ELLEN COTTER; GUY
ADAMS; EDWARD KANE; DOUGLAS
MCEACHERN; JUDY CODDING; AND
MICHAEL WROTNIAK,

Appellants,

vs.

JAMES J. COTTER, JR.,
DERIVATIVELY ON BEHALF OF
READING INTERNATIONAL, INC.,
Respondent.

 

Consolidated appeals from district court orders granting
summary judgment, awarding costs, and denying attorney fees. Eighth
Judicial District Court, Clark County; Elizabeth Gonzalez, Judge.

Reversed in part, vacated in part, and remanded in Docket Nos.

75053 & 76981; affirmed in part, reversed in part, and remanded in Docket
No. 77648; and affirmed in Docket No. 77733.

Morris Law Group and Steve L. Morris, Las Vegas,
for Appellant/Respondent James J. Cotter, Jr.

Greenberg Traurig, LLP, and Tami D. Cowden, Mark E. Ferrario, and Kara
B, Hendricks, Las Vegas,
for Respondent/Appellant Reading International, Inc.

 

 
Cohen Johnson Parker Edwards and H. Stan Johnson, Las Vegas; Quinn
Emanuel Urquhart & Sullivan, LLP, and Marshall M. Searcy and
Christopher Tayback, Los Angeles, California,

for Respondents/Appellants Guy Adams, Judy Coding, Ellen Cotter,
Margaret Cotter, Mary Ann Gould, Edward Kane, Douglas McEachern, and
Michael Wrotniak.

BEFORE THE COURT EN BANC.

OPINION
By the Court, GIBBONS, J.:

James Cotter, Jr. (Cotter Jr.) filed a derivative action on behalf
of Reading International, Inc. (RDI), challenging conduct by RDI’s board of
directors. Both RDI and the directors moved to dismiss the action and later
challenged the merits of the action. We conclude that a corporation, as a
nominal defendant, is precluded from challenging the merits of a derivative
action, but may challenge a shareholder plaintiff's standing in such action.
Additionally, we adopt the factors set forth by the Ninth Circuit Court of
Appeals in Larson v. Dumke, 900 F.2d 1363, 1367 (9th Cir. 1990), for
determining whether a shareholder plaintiff in a derivative action fairly
and adequately represents the interests of the shareholders under NRCP
23.1. Because Cotter Jr. lacks standing as an adequate representative of
shareholders, we reverse the district court's summary judgment orders,
vacate the orders denying the motions to dismiss, and remand. Further, we
affirm in part, reverse in part, and remand the district court's award of costs

 

*The Honorable Kristina Pickering, Chief Justice, voluntarily recused
herself from participation in the decision of this matter.

 

 
in Docket No. 77648 and affirm the denial of attorney fees in Docket No.
‘77733.
FACTS AND PROCEDURAL HISTORY

RDI is a publicly traded Nevada corporation engaged in the
development, ownership, and operation of multi-complex cinemas and other
retail and commercial real estate in the United States, Australia, and New
Zealand. James Cotter, Sr. (Cotter Sr.) was RDI’s controlling stockholder,
controlling approximately 70% of RDI’s Class B voting stock. Cotter Srs
children—Cotter Jr., Ellen Cotter (EC), and Margaret Cotter (MC)—all
served on RDI's board of directors? In August 2014, Cotter Sr. resigned
from his positions with RDI due to health reasons and Cotter Jr. was
appointed CEO. Cotter Sr. passed away one month after his resignation.

Shortly after Cotter Sr. passed away, tensions amongst the
Cotter siblings began to arise, stemming from the Cotter Sr. trust and estate
litigation, which would determine control over RDI, as the majority of the

"The remaining directors included Edward Kane, a longtime friend of
Cotter Sr. and a quasi-member of the Cotter family referred to as “Uncle
Ed”; Guy Adams, a registered investment advisor; Douglas McEachern, a
former partner at the accounting firm of Deloitte & Touche; and William
Gould, a corporate attorney. In 2015, after Cotter Jr. filed the underlying
derivative action, and during the ongoing proceedings, two other directors
were appointed: Judy Codding, a friend of Cotter Sr.’s wife who resides with
EC; and Michael Wrotniak, husband of MC's best friend. ‘Timothy Storey
was originally a director and a named defendant in the derivative action,
but after Storey resigned as a director, Cotter Jr. agreed to dismiss the
action against him.

 

 
Class B voting stock was at issue* In June 2015, the Board terminated
Cotter Jr. as CEO and president. Thereafter, the Board appointed EC as
CEO and president.
Derivative litigation

On the same day Cotter Jr. was terminated, he filed his initial
complaint in the district court. RDI and the directors moved to dismiss
Cotter Jr.’s derivative claims on grounds that Cotter Jr. (1) failed to
adequately plead demand futility; (2) lacked standing and was not an
appropriate plaintiff under NRCP 23.1; and (3) failed to adequately plead
damages. The district court denied the motion in part but granted it in part,
finding that Cotter Jr. failed to adequately plead damages. The district
court did not specifically address the challenge to Cotter Jr's standing as
an adequate representative of shareholders under NRCP 23.1.

In the second amended complaint, the operative complaint in
this action, Cotter Jr. sought a finding that his termination was void and
requested reinstatement to his positions as president and CEO. Further,
in addition to asserting the directors were interested and/or lacked
independence, Cotter Jr. specifically challenged five courses of Board
conduct: (1) his termination; (2) the Board's failure to accept a third party's
offer to purchase RDI; (3) the revitalization of the Board’s hiring executive
committee; (4) the appointment of EC as CEO and MC as the senior
executive responsible for RDI's New York real estate holdings and their

8As the factual background surrounding the Board’s challenged
conduct is contested, we set forth these facts as Cotter Jr. alleges. We also
note that because these appeals have a complex procedural history, we
provide that history only as necessary to this disposition.

 

 
‘compensation packages; and (5) the approval of the EC and MC's exercise
of an option held by Cotter Sr’s estate to purchase 100,000 shares of Class
B voting stock, which was purchased with Class A nonvoting stock.

The district court granted summary judgment

‘The district court granted partial summary judgment, finding
that there was no genuine issue of material fact as to the disinterestedness
of Kane, McEachern, Gould, Codding, and Wrotniak. Thus, the district
court dismissed the action against those directors on the ground they were
protected by the Business Judgment Rule (BJR), leaving only EC, MC, and
Adams in the case. The district court order was certified as final, and Cotter
Jr. appealed that decision in Docket No. 75053.

Shortly thereafter, the Board ratified the remaining challenged
board conduct. The district court granted the directors’ motion for summary
judgment, concluding Cotter Jr. had no remaining actionable claims, as all
challenged board conduct had been ratified by disinterested directors and
was protected by the BJR. Cotter Jr. appealed this ruling in Docket No.
76981.

 

After judgment was entered, RDI sought costs on behalf of itself
and the directors, which it had a duty to indemnify. The district court
awarded RDI $1,554,319.74 in costs, which included $853,000 for the
directors’ expert witness fees. Cotter Jr. appealed that ruling in Docket No.
77648. RDI also sought attorney fees for itself and the directors. ‘The
district court denied the motion, concluding that Cotter Jr’s claims were
not vexatious. RDI challenges that ruling in Docket No. 77733.

 

 
DISCUSSION
Docket Nos. 75053 and 76981
Before we can consider Cotter Jr.’s challenges to the district
court's summary judgment, we must initially consider whether RDI, as a
nominal defendant, can oppose the underlying action or present argument
on appeal. Then we must consider whether Cotter Jr. represents the
shareholders adequately enough to have standing under NRCP 23.1.

Nominal defendant RDI cannot challenge the merits of the underlying
derivative action but can challenge Cotter Jr.’s standing in bringing
this suit

Cotter Jr. argues that RDI, as a nominal defendant, does not
have standing to oppose these appeals, and since RDI lacks standing, this
court need not consider RDI's arguments. We have not previously
addressed a corporation's standing as a nominal defendant in a derivative
action.*

When a derivative action is brought, it is brought on behalf of
the corporation. Ross v. Bernhard, 396 U.S. 531, 538-39 (1970). If the suing
shareholder obtains any recovery, that recovery goes to the corporation.
Bell Atl. Corp. v. Bolger, 2 F.3d 1304, 1307 n.4 (3d Cir. 1993). “Although
the corporation is named in the complaint as a defendant, its interests are
not necessarily adverse to those of the plaintiff since it will be the

‘In In re Amerco Derivative Litigation, 127 Nev. 196, 218, 252 P.3d
681, 697 (2011), this court noted that the corporation in that matter filed a
motion to dismiss the action in the district court, but this court did not
address whether the corporation, as a nominal defendant, had standing to
do so.

 

 
beneficiary of any recovery.” Sobba v. Elmen, 462 F. Supp. 2d 944, 947 (E.D.
Ark, 2006)

 

sternal quotations omitted).

Because of the nature of a derivation action, where it is the
corporation that stands to benefit, other jurisdictions have concluded that a
corporation is required to take a neutral position in a derivative action and
cannot oppose or defend such action on the merits. See Swenson v. Thibaut,
250 S.E.2d 279, 293-94 (N.C. App. 1978) (providing that a corporation in a
derivative action “is required to take and maintain a wholly neutral position
taking sides neither with the complainant nor with the defending director”);
Rowen v. Le Mars Mut. Ins. Co. of Iowa, 282 N.W.2d 639, 645 (Iowa 1979)

 

(providing that a corporation in a derivative action is required to maintain
a role of neutrality); Patrick v. Alacer Corp., 84 Cal. Rptr. 3d 642, 652 (Ct.
App. 2008) (“(T]he corporation has no ground to challenge the merits of a
derivative claim filed on its behalf and from which it stands to benefit.”). In
fact, “the overwhelming weight of authority supports this rule of corporate
neutrality,” which precludes a corporation from defending a derivative
action on the merits. Sobba, 462 F. Supp. 2d at 947-48 & n.
the majority of jurisdictions, we conclude that a nominal corporate

In line with

 

defendant cannot oppose a derivative action on the merits.

Nevertheless, while a corporation cannot oppose the merits of a
derivative action, it may still challenge a shareholder plaintiff's ability to
bring the underlying derivative action. California permits a corporation to
assert certain defenses, such as the shareholder plaintiff's lack of standing.
Patrick, 84 Cal. Rptr. 3d at 652 (stating that while a nominal defendant
corporation generally may not defend a derivative action filed on its behalf,

it “may assert defenses contesting the plaintiff's right or decision to bring

 

 
suit, such as asserting the shareholder plaintiff's lack of standing... ..”)
California courts have noted a corporation cannot file the underlying action
because its directors disagree with the necessity of bringing the action. Id.
at 651-52. Thus, “liln a real sense, the only claim a shareholder plaintiff
asserts against the nominal defendant corporation in a derivative action is
gation.” Id. Therefore,
if the nominal defendant corporation has a valid reason for not pursuing the
litigation, such as when the shareholder plaintiff lacks standing, the
corporation should be permitted to raise such a defense.

 

the claim the corporation has failed to pursue the li

We determine California’s precedent is persuasive, and we
conclude a corporation should be able to defend itself from an erroneously
brought derivative action. If a corporation may have to later indemnify
directors who defend against the derivative action, the corporation should
have the ability to stop an unlawfully brought action before excessive costs
and attorney fees are incurred. Thus, we hold that a nominal defendant
corporation in a derivative action may not challenge or defend the merits of
such action, but may challenge a shareholder's standing in bringing a
derivative action.

Based on the foregoing, we conclude that to the extent RDI
challenges Cotter Jr.'s standing to bring the underlying action or presents
arguments on appeal about Cotter Jr.’s standing, it is permitted to do so
and we will consider such arguments on appeal. RDI, however, may not
challenge the underlying merits of the derivative action either below or on
appeal.

9

 

 

 

Ea A Pe
Cotter Jr. lacks standing to bring the derivative suit because he does
not adequately represent shareholders

‘The Directors argue that the district court abused its discretion
in denying their motion to dismiss the derivative action because Cotter Jr.
did not have standing, as he does not adequately represent the shareholders,
as required under NRCP 23.1. Cotter Jr. contends the district court did not
abuse its discretion in concluding that he had standing to bring the suit
because many factors weighed in favor of Cotter Jr. being able to adequately
represent the shareholders’ interest.

Because Cotter Jr.’s standing to bring the underlying claims
affects the district court's jurisdiction over this matter, and accordingly this
court's jurisdiction, we must address this issue before we can consider the
challenges to the order granting summary judgment. Heller v. Legislature
of State of Nev., 120 Nev. 456, 460, 98 P.3d 746, 749 (2004) (providing that
“{s|tanding is the legal right to set judicial machinery in motion” and

 

recognizing that this court can sue sponte address standing). “Standing is
a question of law reviewed de novo.” Logan v. Abe, 131 Nev. 260, 263, 350
P.3d 1129, 1141 (2015), When standing arises out of a statute or rule, like
it does here, this court will examine the language of the statute or rule to
determine if that language provides the plaintiff with standing to sue.
Citizens for Cold Springs v. City of Reno, 125 Nev. 625, 630, 218 P.3d 847,
850 (2009). NRCP 23.1 provides, in relevant part, “[t]he derivative action
‘may not be maintained if it appears that the plaintiff does not fairly and
adequately represent the interests of the shareholders or members
similarly situated in enforeing the right of the corporation or association.”
In order for a shareholder plaintiff to be an adequate

representative of shareholders in a derivative action, the shareholder

 

 
plaintiff “must have the capacity to vigorously and conscientiously
prosecute a derivative suit and be free from economic interests that are
antagonistic to the interests of the class.” Larson, 900 F.2d at 1367. We
take this opportunity to clarify what a district court must consider in
evaluating a challenge to a plaintiff's standing to bring a derivative suit on
the ground that he or she does not adequately represent shareholders.

‘The Ninth Circuit has set forth eight factors for determining
adequacy of representation:

() indications that the plaintiff is not the true

party in interest; (2) the plaintiff's unfamiliarity

with the litigation and unwillingness to learn about

the suit; (3) the degree of control exercised by the

attorneys over the litigation; (4) the degree of

support received by the plaintiff from other

shareholders;...(5) the lack of _ personal

commitment to the action on the part of the

representative plaintiff; (6) the remedy sought by

plaintiff in the derivative action; (7) the relative

magnitude of plaintiff's personal interests as

compared to his interest in the derivative action

itself; and (8) plaintiff's vindictiveness toward the

defendants.
Id. (citing to factors enumerated in Rothenberg v. Sec. Mgmt. Co., 667 F.2d
958, 961 (11th Cir. 1982), and Davis v. Comed, Inc., 619 F.2d 588, 593-94
(6th Cir. 1980)). The Ninth Circuit further provided that because these

factors are intertwined, “it is frequently a combination of factors which

 

 

leads a court to conclude that the plaintiff does not” adequately represent
shareholders.® Id. We adopt the Larson factors. Accordingly, we hold that

‘For example, the Larson court notes that while a court should
consider whether other shareholders support the plaintiff shareholder's

 

 
a district court evaluating a challenge regarding a plaintiffs standing to
bring a derivative suit on the ground that he or she does not adequately
represent shareholders must consider the Larson factors.

Some of the Larson factors weigh in favor of Cotter Jr. as an
adequate representative of shareholders. Cotter Jr. is familiar with the
litigation, is a true party of interest, is personally committed to the action,
and does not appear to be under the control of an attorney pursuing this
litigation, However, the remaining Larson factors weigh against Cotter Jr.
as an adequate shareholder representative. For example, while Cotter Jr.
initially received some support from shareholders, that support was
withdrawn after discovery. Further, because one of the main remedies
Cotter Jr. is seeking is his reinstatement as CEO, his interests are
divergent from the shareholders’ interests. See, eg., Berman v. Physical
Med. Assocs., Ltd., 225 F.3d 429, 433 (4th Cir. 2000) (explaining that
employment disputes are personal and do not create causes of action
regarding directors’ fiduciary duties). Cotter Jr. very clearly has significant
personal interests in this matter as he alleges he was pushed out of the
company as a result of a family feud with his sisters. Even Cotter Jr.
acknowledged that the family feud regarding Cotter Sr.’s estate led to the
underlying issues. Further, Cotter Jr.’s action appears to be vindictively
sought in response to his termination as CEO, as evidenced by the timing
ofhis action. Cotter Jr’s assertion at oral argument that he is an adequate

shareholder representative because the shareholders had an interest in the

action, a single shareholder is not prevented from bringing a derivative suit,
and thus, this factor on its own would not be determinative of the
shareholder's adequate representation. Id. at 1368.

 

 
preservation of the succession plan Cotter Sr. put in place before his death,
which provided Cotter Jr. would be CEO, is unpersuasive. Ifthat succession
plan became unworkable or not in the best interest of the company after
Cotter Sr’ death, as was alleged by the directors, the plan would no longer
be in the shareholders’ interest, and once again, only Cotter Jr.’s personal
interest would be served by the underlying action. For these reasons, there
is substantial evidence that Cotter Jr. does not adequately represent the
shareholders because his personal interests far outweigh the shareholders’
interests. Accordingly, the district court erred when it denied RDI and the
directors’ motions to dismiss for lack of standing. Thus, we reverse the
district court's summary judgment orders in Docket Nos. 75053 and 76981,
vacate the district court’s orders denying the motions to dismiss, and
remand.®

Docket No. 77648

The district court abused its discretion by awarding expert witness fees
in excess of the statutory maximum

Cotter Jr. argues the district court abused its discretion by
awarding $853,000 to RDI for the directors’ expert witness fees because the
experts did not testify in court. RDI relies on this court's decision in Logan
v, Abe, 131 Nev. 260, 350 P.3d 1139 (2015), to argue that the circumstances
of why an expert does not testify may be sufficient to overcome the testifying
requirement for a party to receive more than $1,500 in expert witness fees.

"Accordingly, we do not reach the merits of the district court’s orders
granting summary judgment and dismissing the directors from the case.
Nor do we reach the merits of the challenge to Cotter Jr.’s asserted futility
of making a demand.

 

 

 
Under NRS 18.005(5), a district court may award “[rleasonable
fees of not more than five expert witnesses in an amount of not more than
$1,500 for each witness, unless the court allows a larger fee after
determining that the circumstances surrounding the expert's testimony
were of such necessity as to require the larger fee.” The Court of Appeals
adopted factors the district court must consider when determining if an
expert witness's testimony warrants a larger fee. Frazier v. Drake, 131 Nev.
632, 650-51, 357 P.3d 365, 377-78 (Ct. App. 2015). This court reviews an
award of costs for an abuse of discretion. Jd. at 644, 357 P.3d at 373;
LVMPD v. Blackjack Bonding, Inc., 131 Nev. 80, 89, 343 P.3d 608, 614
(2018).

In 2016, this court considered “the circumstances surrounding
the expert's testimony, or in this case, the lack thereof, . .. [in determining
the costs} were of such necessity as to require the larger fee.” Logan, 131
Nev. at 268, 350 P.3d at 1144 (internal quotations omitted). However, in
2017, this court concluded an “expert must testify to recover more than
{$1,500 in expert fees.” Pub. Emps.’ Ret. Sys. of Nev. v. Gitter, 133 Nev. 126,
134, 393 P.3d 673, 681 (2017) (citing Khoury v. Seastrand, 132 Nev. 520,
540, 377 P.3d 81, 95 (2016) (implying that the expert must testify to be paid
more than $1,500 because NRS 18.005(5) uses the phrase “the
circumstances surrounding the expert's testimony were of such necessity as
to require the larger fee”). While there may be some extraordinary
circumstances where an award of expert witness fees in excess of $1,500 for

an expert who did not testify may be warranted, those circumstances are
not present here. Unlike in Logan where the rebuttal expert did not testify
solely because the opposing party did not call his expert, this matter never

 

 
went to trial and nothing Cotter Jr. did prevented the directors’ experts
from testifying. Because the underlying matter was resolved at the
summary judgment stage, without the district court relying on the directors’
expert reports, the experts’ testimony was not of such a necessity as to
warrant the larger fee. Thus, the district court abused its discretion in
awarding more than $1,500 per expert.
The district court did not abuse its discretion by awarding RDI costs
Cotter Jr. contends the district court also abused its discretion
in awarding RDI $581,718.69 in costs when RDI was a nominal defendant.’
NRS 18.020(3) provides that a prevailing party is entitled, as a matter of
course, to all costs against an adverse party where the recovery sought was
‘more than $2,500, Even though a corporation is a nominal defendant in a
derivative action, it is not precluded from recovering expenses it incurred
‘as a result of the action, including those costs it incurred through any
agreement it may have had to indemnify its directors. Nothing in the record
demonstrates the district court abused its discretion by awarding RDI costs.
LVMPD, 131 Nev. at 89, 343 P.3d at 614. Accordingly, we reverse the award
of expert witness fees that exceeded $1,500 per expert, affirm the remainder
of the cost award to RDI challenged in Docket No, 77648, and remand.

“In addition to the amount awarded for expert witness fees discussed
above, the district court awarded RDI a total of $701,319.74 in costs. Cotter
Jr. only challenges $581,718.69 of that amount, which appears to be the
amount the district court awarded RDI for its filing fees, deposition fees and
costs, Westlaw costs, and electronic discovery costs. Thus, Cotter Jr. does
not challenge the remainder of the amount the district court awarded RDI
for costs the directors had incurred, outside of the expert witness fees.

 

 
Docket No. 77733

RDI argues the district court abused its discretion by denying
RDI’s motion for attorney fees. We review a decision regarding attorney
fees for an abuse of discretion. Gunderson v. D.R. Horton, Inc., 130 Nev. 67,
80, 319 P.3d 606, 615 (2014). The district court found that “this case does
not meet the standards of NRS 18.010 to support an award of attorneys’
fees” and that Cotter Jr.'s claims were not vexatious. Nothing in the record
demonstrates the district court abused its discretion. Accordingly, we
affirm the district court order challenged in Docket No. 77733.

CONCLUSION

Today, we resolve two matters of first impression in the context
of corporate law. First, we hold that a corporate nominal defendant in a
derivative action cannot challenge or defend the underlying merits of that
action, but may challenge a shareholder plaintiff's standing to bring a
derivative suit. Second, we adopt an eight-factor test for determining
whether a shareholder plaintiff adequately represents shareholders, and
thus has standing to bring a derivative action. Because Cotter Jr. lacked
standing as an adequate representative of the shareholders in Docket Nos.
75053 and 76981, we reverse the summary judgments, vacate the orders
denying respondents’ motions to dismiss, and remand this matter for the
district court to enter an order granting the motion to dismiss challenging
Cotter Jr's standing. We also reverse the district court's order awarding
RDI costs to the extent it awarded RDI costs in excess of $1,500 for each

RDI also challenges the district court order denying its request for
judgment to be entered in its favor. As discussed above, because RDI was
‘a nominal defendant, judgment could not be entered in its favor.

 

 
ss

 

expert retained by the directors, but affirm the remainder of the cost award,
and remand for the district court to enter a revised cost order in Docket No.
77648. Lastly, we affirm the district court's denial of RDI's request for
attorney fees in Docket No. 77733.

 

 

Gibbons
We concur:
LNs haa, J.
Hardesty

F

Parrkguirre
ALG Er , J.
Stiglich
Ges
Cadish
Qiged _ J.
Siver

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