© Neal A. Klegerman
A recent federal appeals court opinion is the latest to address whether and in what manner the alter ego doctrine applies to Nevada LLCs.
The alter ego or piercing the corporate veil doctrine has been codified as to corporations as follows.
Liability of stockholder, director or officer for debt or liability of corporation.
- Except as otherwise provided by specific statute, no stockholder, director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the stockholder, director or officer acts as the alter ego of the corporation.
- A stockholder, director or officer acts as the alter ego of a corporation if:
(a) The corporation is influenced and governed by the stockholder, director or officer;
(b) There is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other; and
(c) Adherence to the corporate fiction of a separate entity would sanction fraud or promote a manifest injustice.
- The question of whether a stockholder, director or officer acts as the alter ego of a corporation must be determined by the court as a matter of law.
The codification appears to be based on the language of Nevada Supreme Court opinion. Frank McCleary Cattle Co. v. Sewell, 317 P.2d 957 115 (Nev. 1957)
There is no parallel provision in NRS chapter 86 which governs limited liability companies. In a recent opinion the U.S. Court of Appeals for the Ninth Circuit addressed whether NRS 78.747 applies to LLCs. Volvo Constr. Equip. Rents, Inc. v. NRL Rentals, LLC, 2015 U.S. App. LEXIS 9791, n.1 (9th Cir. Nev. June 11, 2015).
The court assumed without deciding that the corporate statute applies to Nevada LLCs. The court essentially followed the same approach as the Nevada Supreme Court in a recent case. Webb v. Shull, 270 P.3d 1266, 1271 n.3 (Nev. 2012). The Ninth Circuit quoted the following text from the Nevada Supreme Court opinion: “The parties assume that NRS 78.747, which is part of the statutory chapter governing corporations, applies to the alter ego assertion against Shull and Celebrate, an LLC. Accordingly, for purposes of this appeal, we likewise assume, without deciding, that the statute applies and analyze their alter ego arguments under that standard.” The Ninth Circuit followed the same course in applying the corporate alter ego formulation to a Nevada LLC. See also, JSA, LLC v. Golden Gaming, Inc., 2013 Nev. Unpub. LEXIS 1449, 2013 WL 5437333 (Nev. 2013).
It makes sense that the Ninth Circuit would not decide any issue unless clearly required to predict how the Nevada Supreme Court would rule. It is a little puzzling why the Nevada Supreme Court reserved the issue in 2012.
Nonetheless, it seems likely that if and when the issue is decided, the corporate alter ego formulation will be applied to Nevada LLCs. As early as 2004, the U.S. Bankruptcy Court addressed the issue in some detail and concluded it highly likely that the Nevada Supreme Court would extend the corporate alter ego doctrine to LLCs. In re Giampietro, 317 B.R. 841 (Bankr. D. Nev. 2004). The court examined the legislative history of NRS 78.747 and did not find any intent to make the alter ego doctrine inapplicable to LLCs by enacting the legislation only as to corporations. The court found that as an equitable doctrine intended to prevent abuse, courts would apply the doctrine to LLCs. This makes sense in that notwithstanding the statutory codification, the codified rules were initially judicially created in the McCleary Cattle opinion. See also, Montgomery v. Etreppid Techs., LLC, 548 F. Supp. 2d 1175 (D. Nev. 2008).
Consistent with the likelihood that the corporate alter ego doctrine will be applied to LLCs is the recent case of Excellence Cmty. Mgmt., LLC v. Gilmore, 131 Nev. Adv. Rep. 38 (Nev. 2015) which is the subject of our recent article. http://www.ekcounsel.com/non-competition-agreements-in-sale-of-nevada-llcs/
In that opinion, the Nevada Supreme Court decided that its previous opinion on the enforceability of employee non-competition agreements after a sale of 100% of the stock of a corporation also applies to a sale of 100% of the membership interest of a LLC.