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In Nevada, the elements for a claim of alter ego or piercing the corporate veil are:

  1. Corporation must be influenced and governed by the person asserted to be its alter ego;
  2. There must be a unity of interest and ownership such that the corporation and person are inseparable from another;
  3. Facts are such that adherence to the corporate fiction of a separate entity under the circumstances would sanction a fraud or promote injustice;
  4. There is no litmus test for determining when the corporate fiction should be disregarded (there are as many as 14 factors that courts may consider, including undercapitalization, comingling of funds, failure to observe corporate formalities, loans to or from the corporation without sufficient consideration, and generally treating the assets of the corporation as the assets of the person); and
  5. A showing that recognizing separate corporate existence, would bring about an inequitable result is sufficient for the claim to lie.

Brown v. Kinross Gold U.S.A., Inc., 531 F. Supp. 2d 1234 (D. Nev. 2008); In re Nat’l Audit Defense Network, 367 B.R. 207 (Bankr. D. Nev. 2007); LFC Mktg. Grp. v. Loomis, 116 Nev. 896, 8 P.3d 841 (2000); Polaris Indus. Corp. v. Kaplan, 103 Nev. 598, 601-02, 747 P.2d 884, 887 (1987); Ecklund v. Nevada Wholesale Lumber Co., 93 Nev. 196, 197, 562 P.2d 479, 479-80 (1977) (quoting McCleary Cattle Co. v. Sewell, 73 Nev. 279, 282, 317 P.2d 957, 959 (1957)); accord Lorenz v. Beltio, Ltd., 114 Nev. 795, 807, 963 P.2d 488, 496 (1998). “Each of these requirements must be present before the alter ego doctrine can be applied.” N. Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 520-21, 471 P.2d 240, 243 (1970) (emphasis added). The party asserting the alter ego theory and attempting to pierce the corporate veil bears the burden of proving each of these elements by a preponderance of the evidence. LFC Mktg. Grp. v. Loomis, 8 P.3d 841, 846 (Nev. 2000).

The Nevada Supreme Court has held that, though generally “[t]he corporate cloak is not lightly thrown aside,” nevertheless there are some situations in which blind “adherence to the fiction of a separate entity [of the corporation] [would] sanction a fraud or promote injustice.” Baer v. Amos J. Walker, Inc., 85 Nev. 219, 220, 452 P.2d 916, 916 (1969). The court has therefore carved out an exception to the general rule of faithfully respecting the corporate form and corporate independence, i.e., the so-called “alter ego” exception, by which the corporate veil can be pierced.  Id.  The Supreme Court of Nevada, in the matter of McCleary Cattle Co. v. Sewell, adopted a three prong test for ignoring the separate existence of a corporation in determining “alter ego liability.” McCleary, 73 Nev. 279 at 282, 317 P.2d 957 (1957). This test has since been codified in by Nevada Statute, NRS 78.747:

  1. 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.
  2. 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.

NRS 78.747(l)-(2). The elements of an alter ego claim must be proven by a preponderance of the evidence.  Truck Ins. Exch. v. Palmer J. Swanson. Inc., 124 629, 635, 189 P.3d 656, 660 (2008).

In determining whether there is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other, courts will consider whether there was:

  1. Majority ownership and pervasive control of the affairs of the corporation. McCleary Cattle Co. v. C.A. Sewell, 73 Nev. 279, 281, 317 P.2d 957, 959 (1957) overruled on other grounds by Callie v. Bowling, 123 Nev. 181, 160 P.3d 878 (2007)(holding that an order adding president as a party to domesticated foreign judgment violated president’s due process rights)); Carson Meadows Inc. v. Pease, 91 Nev. 187, 191,533 P.2d 458, 460-61 (1975); Ecklund v. Nevada Wholesale Lumber Co., 93 Nev. 196, 197-99, 562 P.2d 479, 479-81 (1977); Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
  2. Thin capitalization. Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
  3. Nonobservance of corporate formalities or absence of corporate records. Ecklund v. Nevada Wholesale Lumber Co., 93 Nev. 196, 197-99, 562 P.2d 479, 479-81 (1977); Roland v. Lepire, 99 Nev. 308, 316-18, 662 P.2d 1332, 1337-38 (1983) (no alter ego because of lack of fraud/injustice); Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
  4. No payment of dividends. Roland v. Lepire, 99 Nev. 308, 316-18, 662 P.2d 1332, 1337-38 (1983) (no alter ego because of lack of fraud/injustice).
  5. Nonfunctioning of officers and directors. SEC v. Elmas Trading Corp., 620 F. Supp 231, 233-34 (D. Nev. 1985); DeWitt Truck Brokers. Inc. v. W. Ray Flemming Fruit Co., 540 F. 2d 681, 686-87 (4th Cir. 1976); Nat’l. Elevator Indus. Pension Health Benefit and Educ. Funds v. Lutvk, 332 F.3d 188, 194 (3rd Cir. 2003); Hildreth v. Tidewater Equip. Co., Inc., 378 Md. 724, 735-736, 838 A.2d 1204, 1210 (Md. 2003); Yankee Microwave, Inc. v. Petricca Commc’n Sys., Inc., 53 Mass. App. Ct. 497, 521, 760 N.E.2d 739, 758 (Mass. App. Ct. 2002); Pepsi-Cola Metro Bottling Co. v. Checkers. Inc., 754 F.2d 10, 14-16 (1st Cir.1985); 1 W. FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 41.30 at 430 (rev. vol. 1983) (cited by Wilcor Constr. and Dev. Corp. v. Hemphill, 872 F.2d 432 (9th Cir. 1989)).
  6. Insolvency of the corporation at the time of the litigated transaction; Roland v. Lepire, 99 Nev. 308, 316-18, 662 P.2d 1332, 1337-38 (1983) (no alter ego because of lack of fraud/injustice).
  7. Siphoning of corporate funds or intermingling of corporate and personal funds by the dominant shareholder(s). Carson Meadows, Inc. v. Pease, 91 Nev. 187, 191,533 P.2d 458, 460-61 (1975) Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
  8. Use of the corporation in promoting fraud. Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
  9. The authorized diversion of an entity’s funds;
  10. Ownership of the entity by one person or one family. Roland v. Lepire, 99 Nev. 308, 316-18, 662 P.2d 1332, 1337-38 (1983)(no alter ego because of lack of fraud/injustice); Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
  11. The use of the same address for the individual and entity. Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).
  12. Employment of the same attorneys and employees.
  13. Formation or use of the entity to transfer to it the existing liability of another person or entity.
  14. The failure to maintain arm’s length relationship between related entities. McCleary Cattle Co. v. C.A. Sewell, 73 Nev. 279, 317 P.2d 957 (1957) (overruled on other grounds by Callie v. Bowling, 123 Nev. 181, 160 P.3d 878 (2007)(holding that an order adding president as a party to domesticated foreign judgment violated president’s due process rights)); Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 522-23, 471 P.2d 240, 244-45, n.3 (1970).

It is not necessary that the plaintiff prove actual fraud in order to recover against a corporate alter ego. It is enough if the recognition of the two entities as separate would result [in an injustice. In determining whether adherence to the corporate fiction of a separate corporate entity would sanction a fraud or promote an injustice, courts consider whether: (1) the facts are such that adherence to the fiction of a separate corporate entity would sanction a fraud or promote an injustice; (2) the family of controlling officers benefits from the controlling officer’s/entity’s actions; (3) the plaintiff will be able to recover damages against the corporate defendant or whether the corporate defendant is insolvent; because the entity cannot pay, will support the finding of injustice; and (4) the corporate entity was undercapitalized. Finally, alter ego recovery has been granted specifically because the corporation obtained a loan, did not use the loan for its specified purpose, and was unable to repay the loan.  See In re Erdman, 236 B.R. 904 (Bankr. N.D. 1999).

About the Author

Jay Young is a Las Vegas, Nevada attorney. His practice focuses on business law, business litigation, and acting as an Arbitrator and Mediator. Peers have named him an AV-Rated Lawyer, Best Lawyers, a Top 100 Super Lawyers in the Mountain States multiple years, and to the Legal Elite and Top Lawyers lists for many years. Mr. Young has been appointed a part time Judge, a Special Master to the Clark County, Nevada Business Court, as an arbitrator by the Nevada Supreme Court. He has been appointed as an arbitrator or mediator of well over 250 legal disputes from business disputes to personal injury matters. He has been named Best Lawyers for Arbitration. Mr. Young is a respected author of ten books, including A Litigator’s Guide to Federal Evidentiary Objections, A Litigator’s Guide to the Federal Rules of Evidence, and the Federal Court Civil Litigation Checklist.
Mr. Young can be reached at 702.667.4868 or at jay@h2law.com.