Derivative Nature of Shareholder Fiduciary Duty Claims in Bankruptcy: BLACK v. DIST. CT.

Introduction

In BLACK v. DIST. CT. (GOODCHILD), 141 Nev., Advance Opinion 18 (Apr. 17, 2025), the Supreme Court of Nevada addressed whether certain shareholders could maintain a direct action for breach of fiduciary duty against former directors of the now-defunct Globe Photos, Inc. Globe, a Delaware corporation owning a multimillion-dollar portfolio of celebrity images, had entered Chapter 7 bankruptcy in 2020. Its secured creditors were paid in full, but unsecured creditors and shareholders received nothing. In 2023, four shareholders sued Globe’s ex-directors—Scott Black, George Smith, and Jerome Nadal—alleging mismanagement, waste of corporate assets, and approval of a “sham bankruptcy,” on the theory that the directors owed them a direct fiduciary duty. The district court denied the directors’ motion to dismiss for lack of standing. The directors then petitioned this court for a writ of prohibition or mandamus.

Key issues:

Whether the shareholders’ breach-of-fiduciary-duty claim is “direct” (shareholders sue in their own right) or “derivative” (a claim belonging to Globe itself).
If derivative, whether the claim belongs to Globe’s bankruptcy estate and is thus outside the shareholders’ standing.
Whether Nevada courts must apply Delaware law (Tooley v. Donaldson, Lufkin & Jenrette) to classify the action in this interstate context.

Summary of the Judgment

The Nevada Supreme Court, applying Delaware law as the state of incorporation, held that:

The shareholders’ sole claim—breach of fiduciary duty/duty of loyalty—attacks the directors’ alleged mismanagement and waste of corporate assets, classic derivative injuries under the Tooley framework.
Under Delaware’s two-pronged Tooley test, the harm alleged was to Globe itself, and any recovery would inure to Globe (and thus to its bankruptcy estate), not directly to the plaintiff-shareholders.
Because Globe’s Chapter 7 bankruptcy estate owns all derivative claims, only the bankruptcy trustee has standing to pursue them. The shareholders therefore lack standing, and the district court exceeded its jurisdiction by denying the motion to dismiss.

The petition for extraordinary writ relief was granted. The Court directed the district court to vacate its order denying dismissal and to grant the directors’ motion.

Analysis

Precedents Cited

Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004): Establishes the two-part test for distinguishing direct versus derivative shareholder claims. A claim is derivative if (1) the corporation suffered the injury, and (2) the corporation—not the shareholders—would receive the remedy.
Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251 (Del. 2021): Reaffirmed and clarified Tooley, overruled Gentile’s suggestion that a special-injury stockholder could proceed directly, and stressed avoidance of double recovery.
Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024): U.S. Supreme Court discussion on derivative claims in bankruptcy being property of the estate.
Estate of Spirtos v. One San Bernardino County Superior Court Case, 443 F.3d 1172 (9th Cir. 2006): Confirms that the bankruptcy trustee has exclusive standing to pursue derivative claims.
Brunk v. Eighth Judicial District Court, No. 76052 (Nev. Oct. 11, 2019) (unpublished): Nevada prohibition writ where shareholder lacked standing for a foreign corporation’s derivative claim in bankruptcy.

Legal Reasoning

1. Choice of Law. Globe Photos, Inc. was a Delaware corporation. Nevada courts apply the law of the state of incorporation to characterize shareholder suits as direct or derivative (Kennedy v. Venrock Associates, 348 F.3d 584, 589 (7th Cir. 2003)).

2. Tooley Two-Part Test:

Who suffered the alleged harm? Here, Globe’s corporate assets were wasted and liquidated in bankruptcy. Shareholders allege injury only as a byproduct of harm to the corporation.
Who would receive the benefit of any recovery? Any recovery by a money judgment against the directors would flow into Globe’s estate, not directly to the plaintiff-shareholders. They would benefit only indirectly through restoration of corporate value.

The shareholders disclaimed claims of intentional misconduct, relying solely on allegations of mismanagement and waste—prototypical derivative complaints (Parnes v. Bally Entertainment, 722 A.2d 1243, 1245 (Del. 1999)).

3. Bankruptcy Estate and Exclusive Standing. Upon filing a Chapter 7 petition, all of Globe’s “interests” in litigation became property of the bankruptcy estate (11 U.S.C. § 541). The trustee alone may pursue derivative claims (11 U.S.C. §§ 323, 363; Spirtos, 443 F.3d at 1176). The shareholders’ attempt to proceed in state court violated this exclusivity.

4. Extraordinary Writ Relief. A writ of prohibition issues when a lower court exceeds its jurisdiction. Here, because the district court lacked jurisdiction over a derivative claim in bankruptcy, the court granted the petition and ordered dismissal.

Impact

This decision clarifies in Nevada that:

Claims by shareholders for mismanagement or waste against directors of a bankrupt corporation are derivative if filed by the bankruptcy’s equity holders, not by the trustee.
Only the bankruptcy trustee (or a properly authorized party) may maintain such claims when they are part of the bankruptcy estate.
Nevada courts will apply Delaware’s Tooley standard when the corporation is incorporated in Delaware.

Going forward, shareholder-plaintiffs must carefully analyze whether their claimed injuries are direct or derivative, particularly in insolvency contexts, to avoid dismissal for lack of standing.

Complex Concepts Simplified

Direct vs. Derivative Claims:
- Direct: The shareholder individually suffers a unique harm and pursues recovery for personal injury (e.g., voting rights violation).
- Derivative: The corporation suffers the harm, and shareholders sue on the corporation’s behalf to protect its interests.
Bankruptcy Estate: Upon filing bankruptcy, all of the debtor-corporation’s assets and legal claims become part of the “estate,” managed by the trustee.
Standing: The legal right to bring a lawsuit. Only parties with a concrete, personal stake in the outcome have standing.
Writ of Prohibition or Mandamus:
- Prohibition: Ordered when a lower court acts beyond its jurisdiction.
- Mandamus: Compels a lower court or official to perform a legal duty.

Conclusion

BLACK v. DIST. CT. reaffirms that shareholder claims for breach of fiduciary duty based on corporate mismanagement and waste are derivative—and thus belong to the corporation and its bankruptcy estate, not to individual shareholders. Under Delaware’s Tooley test, shareholders must show a direct injury and entitlement to a direct remedy to maintain a direct suit. This ruling underscores the need for careful pre-suit analysis of standing, especially in insolvency scenarios, and protects the integrity of the bankruptcy process by reserving derivative claims for the trustee.