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The Current
State of "Piercing
the Corporate Veil" in Nevada
SUBSTANTIVE LAW IN NEVADA
As a general rule, "corporations are recognized
as legal entities separate from their shareholders, officers, and directors.
... 'Piercing the corporate veil' refers to the judicially imposed exception
to this principle by which courts disregard the separateness of the
corporation and hold a shareholder responsible for the corporation's
action as if it were the shareholder's own." Robert B. Thompson,
"Piercing The Corporate Veil: An Empirical Study," 76 Cornell
L. Rev. 1036, 1036 (1991). In the absence of the judicial exception,
corporate liability is limited to the assets of the corporation. This
is a longstanding rule. "The concept of limited liability through
corporate organization and investment has been legally recognized in
Nevada since before the granting of its statehood." In re Twin
Lakes Village, Inc., 2 B.R. 532, 545 (D. Nev. 1980).
NEVADA CASE LAW
ADOPTION OF THE DOCTRINE
"Piercing the corporate veil" exists in Nevada.
Its adoption by the state supreme court came "well into this century." Bishop, supra, § 6.17[B] at 6-39. The fairly late adoption of
the doctrine may be attributed to the fact that Nevada courts traditionally
hesitate to engage in "judicial legislation." Bishop, supra, § 6.17[B] at 6-39 (citing In re Twin Lakes Village, Inc., 2 B.R.
532, 540 (D. Nev. 1980)). The fact that "piercing the corporate
veil" exists indicates that the reluctance to judicially legislate
can be overcome to the detriment of principles.
The doctrine first appeared as dictum in a 1957
case, Nevada Tax Comm'n v. Hicks, 73 Nev. 115, 310 P.2d 852 (1957).
See In re Twin Lakes Village, Inc., supra, 2 B.R. at 538. Later
the same year, the Nevada Supreme Court adopted the doctrine in McCleary
Cattle Co. v. Sewell, 73 Nev. 317 P.2d 957 (1957). See Bishop,
supra, § 6.17[B] at 6-40; In re Twin Lakes Village, Inc.,
supra, 2 B.R. at 538.
In adopting the doctrine in McCleary, the court
for the first time "pierced the corporate veil." The facts
indicated that Frank McCleary and Catherine McCleary owned the Henry
McCleary Timber Company The Sewells brought suit against the timber
company and obtained a judgment which was affirmed on appeal. The suit
arose out of an agreement between the Sewells and the timber company.
Approximately one year after this agreement, the McClearys incorporated
a cattle company. About four years later, the charter of the timber
company was revoked by official state action both in Washington, the
state of its domicil, and in Nevada. Prior to the revocation's completion,
all of the assets of the timber company were transferred to the cattle
company. The assets amounted to several million dollars, and the transfer
was done for tax purposes. All of the stock in both corporations was
owned by Frank and Catherine McCleary, and each held the same number
of shares in the cattle company as each held in the timber company Frank
McCleary was also the president of both corporations.
On these facts, the trial court found that the cattle
company was the alter ego of the timber company, "pierced the corporate
veil," and held the cattle company liable for the Sewell's judgment
against the timber company. In affirming this ruling, the Nevada Supreme
Court adopted a three-part test for applying the doctrine of "piercing
the corporate veil":
(1) The corporation must be influenced and governed
by the person asserted to be its alter ego; (2) there must be such
unity of interest and ownership that one is inseparable from the other;
and (3) the facts must be such that adherence to the fiction of separate
entity would, under the circumstances, sanction a fraud or promote
injustice.
McCleary, 73 Nev. at 282, 317 P.2d at 959. These
requirements were borrowed from a California decision, Minifie v.
Rowley, 187 Cal. 481, 202 P. 673 (1921). The court added, "it
is not necessary that the plaintiff prove actual fraud. It is enough
if the recognition of the two entities would result in an injustice."
McCleary, 73 Nev. at 282, 317 P. at 959 (quoting Gordon v.
Aztec Brewing Co., 33 Cal.2d 514, 522, 203 P.2d 522, 527 (1949).
The Nevada Supreme Court's analysis of the facts to
the three-part test was conclusory: "There can be no question but
that, under these circumstances, the trial court was justified in disregarding
the corporate fiction and in holding the cattle company to be the alter
ego of the timber company." McCleary, 73 Nev. at 282, 317
P.2d at 959. As recognized by Chief Judge George, "[o]ne major
difficulty which has developed with this test . . . is that it lends
itself over to descriptive, rather than causational, analysis,"
In re Twin Lakes Village, Inc., supra, 2 B.R. at 539, which "often
leaves the court to make a determination in largely an ad hoc manner."
Id. at 540. Ultimately, the basis for such a test is the concept
of equity, under which courts refuse to sanction the use of statutory
limitations for the purpose of perpetrating fraud or an otherwise illegal
act. Id. at 541-542. Subsequent decisions of the Nevada Supreme
Court leave little doubt that Judge George's analysis is absolutely
correct.
APPLICATION OF THE DOCTRINE
Through the intervening years, the court has issued
more than a dozen published opinions on the issue of '"piercing
the corporate veil." While the McCleary three-part test
nominally remains intact, subtle shifts in emphasis indicate that it
is becoming less likely as time goes on that the court will "pierce
the corporate veil," as the court has done this only once in the
last twenty years.
Significantly, the court. in North Arlington Medical
Building, Inc. v. Sanchez Constr. Co., 86 Nev. 515, 471 P.2d 240
(1970), rejected the argument that undercapitalization, by itself, is
a valid reason for "piercing the corporate veil ":
Undercapitalization, where it is clearly shown, is
an important factor in determining whether the doctrine of alter ego
should be applied. However, in the absence of fraud or injustice to
the aggrieved party, it is not an absolute ground for disregarding
a corporate entity. In any event it is incumbent upon the one seeking
to pierce the corporate veil, to show by a preponderance of the evidence,
that the financial setup of the corporation is only a sham and caused
an injustice.
In Lipshie v. Tracy Investment Co., 93 Nev. 370,
2d 819 (1977), again, the court refused to "pierce the corporate
veil." The facts indicated that Bonanza No. 2, a corporation, had
a financial obligation to Norman Lipshie, upon which it defaulted After
Bonanza No. 2 went through a bankruptcy proceeding, the Tracy Investment
Co. assumed management and control of Bonanza's assets. The officers
of Tracy were essentially the same officers of Bonanza; the officers
of Tracy were the directors of Bonanza; the sole stockholder of Tracy,
Kirk Kekorian, was the chairman of the board and director of both Tracy
and Bonanza; and the principle place of business and registered agent
for Tracy and Bonanza were the same. Yet, despite these facts, Tracy
was deemed not to be Bonanza's alter ego.
The court stated that there was no evidence presented
that Tracy and Bonanza were other than valid, separate, and independent
corporate entities. The fact that Tracy owned all of the shares of Bonanza
and that the officers of Tracy and Bonanza were identical was not sufficient
cause to overcome the separateness of the two corporations. Furthermore,
there was a lack of evidence of fraud or injustice, as the facts revealed
that it was always Tracy's intent to have the obligation owed by Bonanza
to continue as Bonanza's indebtedness. The fact that Bonanza defaulted
did not represent an injustice on the part of Tracy. The court concluded
that Lipshie received exactly he had bargained for.
In Deal v. 999 Lakeshore Assoc., 94 Nev. 301
579 P.2d 775 (1978), the court "pierced the corporate veil." Like previous cases where this was done, the facts are rather egregious.
I.C. was the owner-developer of a condominium development, which was
constructed by the Kindred Construction Co. Suit was brought by various
condominium owners for negligent construction, defective manufacture
and breach of warranty. The suit was brought against Deal individually,
since his corporation, Incline Properties, Inc., dissolved immediately
after construction was completed. The condominium owners obtained a
judgment against Deal, and the supreme court affirmed.
The facts revealed that Deal controlled all corporate
activities of Incline Properties; mixed his business activity with that
of the corporation; never held a board of directors meeting; capitalized
the multimillion dollar corporation with $1,000; and took all of the
corporate assets after liquidation. It would have been highly unjust
to allow the person controlling the corporation to take all of the assets
of the corporation as his own, while leaving innocent creditors holding
the bag.
A very similar set of facts led the court to once again
pierce the corporate veil" in Mosa v. Wilson-Bates Furniture
Co., 94 Nev. 521, 583 P.2d 453 (1978). Ralph Mosa was the sole contributing
stockholder of Mobel, Inc. Once Mosa took control of the corporation,
no corporate formalities were observed; the corporate bank account was
disregarded and all receipts and expenditures were made from an account
in Mosa's name; and the corporation's liquor license was changed from
the corporate name and placed in Mosa's name. The court held Mosa personally
liable for the debts of Mobel, Inc.
ABANDONMENT OF THE DOCTRINE
As can be seen from these cases to this point in which
the "corporate veil" was "pierced," the corporation
was a mere "sham" of the individual controlling it. When this
was combined with the unjustness of a creditor not recovering their
debt, the court would not allow the corporate entity to shield the controlling
party from liability. Mosa was decided 23 years ago. Since
that time, the Nevada Supreme Court has "pierced the corporate
veil" two times.
The first case decided was Bonanza Hotel Gift Shop,
Inc. v. Bonanza No. 2, 95 Nev. 463 596 P.2d 227 (1979). Here, the
court held that the alter ego doctrine was not applicable to hold a
corporation liable for the obligations of its subsidiary. The court
focused on the separate nature of the corporations Citing Lipshie,
the court stated that a mere showing that one corporation is owned by
another, or that the two share interlocking officers or directors, is
insufficient to support a finding of alter ego. What needs also to be
shown is that the subsidiary is a "mere instrumentality" of
another corporation. Furthermore, mere mutuality of interest does not
prove the subsidiary is a "mere instrumentality" of the parent
corporation without evidence of a commingling of funds or property interests
of the two corporations, or of prejudice to creditors.
Since the facts showed that separate corporate books
and accounts were kept; separate directors meetings were held with full
corporate formalities observed; and the corporations had independent
headquarters, business responsibilities and operations, it was clear
that the subsidiary was not a "mere instrumentality" of the
parent, and thus the alter ego doctrine was not applicable.
The next case decided was Rowland v. LePire,
99 Nev. 308, 662 P.2d 1332 (1983). Here, the Rowland Corporation contracted
to build a house for Eugene and Judy Lepire. Following problems on the
project, the Lepires filed a breach of contract suit against the Rowland
Corporation, which also counter claimed for breach of contract. The
Lepires won at trial, and the trial court awarded them $65,000. Further,
the court found that the Rowland Corporation was the alter ego of Glen
Rowland and Martin Rowland and entered a personal judgment against them.
The supreme court reversed this personal judgment.
Initially, the court noted that a "legitimate business
dispute" arose between the parties. This fact takes on importance
given the rest of the facts. The total capitalization of the corporation
was $1,100. No formal directors or shareholders meetings were ever held,
no dividends were ever paid, and neither the officers nor directors
were paid. Also, the corporation had no minute book. However, it did
have a contractor's license and a corporate checking account. It also
obtained workers' compensation insurance and transacted business with
the state Employment Security Division.
The court concluded that the corporation was, indeed,
undercapitalized and that there was little existence separate and apart
from Martin and Glen Rowland. Yet, the court failed to "pierce
the corporate veil." Why? Although unstated, the fact of a "legitimate
business dispute" is the key. A finding of a "legitimate"
dispute precludes a finding of fraud or unjustness. Thus, with this
case, the court has downplayed the significance of factors such as corporate
formalities, personal influence, unity of interest, and undercapitalization.
Instead, fraud seems to be the linchpin. In egregious situations, the
"corporate veil" will be "pierced," but in normal
business disputes, it will not.
The next case supports this view, and also added some
new wrinkles. It also represents the only case in the last 20 years
where the "corporate veil" was "pierced." This case
was Polaris Indus. Corp. v. Kaplan,103 Nev. 598 747 P.2d 884
(1987). Here, Polaris advanced goods to a corporation National Marketing
Services, in excess of $50,000. National Marketing issued a promissory
note to Polaris for this amount. The note was assumed by Commercial
Resources, Inc., the successor of National Marketing. Both National
Marketing and Commercial Resources were formed and owned by Bob Davis
and Michael Kaplan. They were the sole shareholders and officers of
corporations. Both corporations did business at the same location and
used the same bank..
Evidence at trial indicated that Kaplan and Davis did
not always follow corporate procedures, and that they often used corporate
money for personal expenses. After Commercial Resources defaulted on
the note, Polaris brought suit, alleging that Davis, Michael Kaplan,
and Jerome Kaplan, Michael's brother and a salesman for Commercial Resources,
were the alter ego of the corporation and were personally responsible
for the debt. The trial court entered judgment for Polaris against the
corporation for the amount of the note, but declined to hold either
Michael Kaplan or Jerome Kaplan personally liable. (Bob Davis had defaulted
prior to trial, and was not a party to the appeal.) The supreme court
affirmed as to Jerome Kaplan and reversed as to Michael Kaplan.
One commentator, Stephen Presser, stated that "the
Polaris court seems to read this test to require that the party to be
charged 'wholly owned and controlled’ the corporation whose veil
is sought to be pierced." Stephen Presser, Piercing the Corporate
Veil (1993), § 2.29 at 2-256 quoted in Bishop, supra, § 6.17[B][1]
at 6-41 n. 168.) If Presser's view is correct, Polaris further
reduces the likelihood of the "corporate veil" being "pierced" against a certain group on individuals, such as Jerome Kaplan.
As regards Michael Kaplan, the court explicitly stated,
for the first time, that there is no litmus test for determining when
the corporate fiction should be disregarded. Rather, the result depends
on the circumstances of each case. The various factors were listed,
as usual, but none is conclusive. The court then pointed to the facts
which indicated a lack of formal corporate formalities and the use by
Michael Kaplan of corporate funds for his personal use. While these
facts pointed to a unity of interest between Michael Kaplan and the
corporation, this itself was not enough to "pierce the corporate
veil." Such actions must also be the cause of the plaintiff's injury,
and must sanction a fraud or promote an injustice before the "corporate
veil" can be "pierced." The court held that the failure
to observe proper corporate formalities and the corporation's payment
of Michael Kaplan's personal debts did not sanction a fraud or promote
an injustice to Polaris.
The causal connection was met, however, by the fact
of Kaplan's numerous withdrawals of corporate funds for his personal
benefit. The evidence indicated that the corporation could have paid
its debt to Polaris if these withdrawals had not been made Thus, Michael
Kaplan's actions were the direct cause of Polaris' injury and it would
have been unjust to allow Kaplan's actions to go unpunished.
The court indicated that the essence of the alter ego
doctrine is to do justice. Thus, equitable considerations now appear
to be at the heart of decisions involving the alter ego doctrine. Although
equity is an amorphous concept, the facts of recent cases indicate that
the "corporate veil" will not be "pierced" absent
a significant amount of fraud or injustice being shown.
As pointed out by Keith Paul Bishop, the Nevada Supreme
Court has been wise in not making under capitalization a determinative
factor in imposing alter ego liability. Since the state legislature
has not imposed a minimum required level for corporations, the court
should not act on its behalf. Bishop, supra, § 6.17[B][3 at 6-45
to 6-46.
SUMMARY
The run of cases indicates that the court will not "pierce
the corporate veil" in the absence of a great deal of fraud. The
court in recent cases has downplayed the other factors and focused on
fraud and injustice, and now even places a duty on those dealing with
corporations to obtain personal guarantees from the corporation's owners.
Further, if there is a legitimate business reason for undercapitalizing
a corporation, this is proof that the corporation is not a "sham."
If this is so, "piercing" becomes quite difficult in this
state.
"PIERCING" IN OTHER STATES
As stated by Robert B. Thompson:
Resolution of a piercing question is almost always
left to a judge's determination of corporate illegitimacy. Almost
all state corporation statutes simply ignore the whole idea of piercing
the corporate veil. Thompson, supra, 76 Cornell L..Rev. at
1041.
Do all of these facts mean that there is no advantage
to incorporating in Nevada? Not at all. Thompson's conclusion shows
that while courts "do not appear" to be allowing "piercing"
in more situations, they certainly are not ''piercing" in less
cases, either. In fact, the percentage of cases where "piercing" is allowed has remained constant for several decades. Id. at
1049. If Barber's conclusion is correct, courts nationwide are increasingly "piercing the corporate veil." However, as Part I clearly
indicates, the Nevada Supreme court is reducing the instances
wherein the "corporate veil" is "pierced," and has
done this only once in the last 20 years. Thus, if Nevada law is applied,
there is a lesser likelihood of the "corporate veil" being
"pierced" than if the law of the "average" state
is applied. Fortunately, if a corporation is formed under Nevada law,
the great weight of legal authority indicates that Nevada law will be
applied to it, no matter the state in which it operates.
CONCLUSION
Furthermore, if traditional choice of law principles*
are followed, Nevada law will follow a Nevada corporation wherever it
conducts business. Thus, incorporating in Nevada makes a lot of sense.
*choice of law principles will be covered in another
section.
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