Nevada’s Supreme Court Confirms That Limited Liability Companies Are Subject To The Alter-Ego Doctrine & Corporate Veil-Piercing Claims
-By J. Malcolm DeVoy, Esq. & Erica A. Bobak, Esq.
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Nevada has long been regarded as a business haven because of its favorable laws regarding corporate governance and strong protections for business owners’ assets. These protections, however, are not limitless. One area of interest for transactional attorneys and litigators alike has been whether and how the alter-ego doctrine—the idea that corporate formality should be disregarded in favor of finding that a company and its owners are one and the same—should apply to Nevada limited liability companies. For years, the Nevada Supreme Court avoided directly addressing the question, but finally was forced to do so in Gardner v. Henderson Water Park, 133 Nev. Adv. Op. 89.
1. Understanding the Alter-Ego Doctrine in Nevada.
Alter-ego liability for business entities such as corporations and limited liability companies has been around for decades, colloquially referred to as “piercing the corporate veil.” Under common law, this remedy was available to prevent injustice in the event of an entity being created to enrich its owners and protect them from liability, while leaving those harmed by the company or corporation without an adequate remedy. Some of the hallmarks of cases justifying a finding that the business entity was merely the alter-ego of its owner or owners, and designed solely to avoid liability, are facts indicating fraud, undercapitalization, and commingling of personal and business funds.
In 2001, the Nevada Legislature codified Nevada’s alter-ego doctrine as it applied to corporations in NRS 78.747. This legislation wrote Nevada’s alter-ego doctrine into the State’s corporate law. This provision did not, however, find an analogue enacted in NRS Chapter 86, which governs the existence of limited liability companies. The argument then arose that the omission of this provision from Chapter 86 was intentional, and that limited liability companies were intended to be exempt from the alter-ego doctrine. Indeed, prior Nevada law confirmed that “omissions of subject matters from statutory provisions are presumed to have been intentional.”1
But like many things in life, the law also abhors that which appears too good to be true, or that would lead to an absurd result. Without directly deciding the issue, Nevada’s courts assumed for years that the alter-ego doctrine codified in NRS 78.747 would apply to limited liability companies as well.2 The Nevada Legislature’s enactment of NRS Chapter 86 in 1991 also contemplated that limited liability companies would be subject to the same doctrine of alter ego as corporations, which at that time was applied by the courts, rather than embodied within a statute.3 Although the Nevada Supreme Court had not directly spoken on whether the alter-ego doctrine would apply to limited liability companies, whether before or after the 2001 enactment of NRS 78.747, cautious transactional attorneys and intrepid litigators assumed that it would.
2. The Facts of the Gardner Case Required the Nevada Supreme Court to Confront the Alter-Ego Doctrine.
The Gardner case arose from the non-fatal drowning of a six-year-old boy at Cowabunga Bay Water Park in Henderson, which is operated by Henderson Water Park LLC. The injured youth’s parents brought suit against Henderson Water Park LLC, and ultimately wished to pursue its members and managers. Henderson Water Park LLC’s members—the company’s owners—consisted of two other limited liability companies, a strategy regularly used by attorneys to further shield individual clients from personal liability.4 In that arrangement, one or more individuals or entities create a special purpose limited liability company to hold their interest in a company such as Henderson Water Park LLC, which does business with the outside world, and faces the prospects of on-site accidents, injured patrons, and other risks.
During the course of litigation, Gardners’ counsel conducted discovery on Henderson Water Park LLC and its two managing members, West Coast Water Parks, LLC and Double Ott Water Holdings, LLC (the “Member LLCs”). In turn, seven individuals were owners or managers of the Member LLCs, and these individuals also served on a committee to manage Henderson Water Park LLC. Based on their findings in discovery, the Gardners’ counsel moved to amend their complaint to name the Member LLCs and the seven individuals who owned or managed the Member LLCs, and managed Henderson Water Park LLC, as individual defendants in the lawsuit. Within the proposed amended complaint, the Gardners intended to assert claims for alter-ego against Henderson Water Park LLC and the Member LLCs to reach the personal assets of the seven individuals who managed the businesses.
The district court denied the motion for leave to amend the complaint, finding that Nevada law did not allow for alter-ego liability against Henderson Water Park LLC and its members or managers. The Gardners’ counsel petitioned the Nevada Supreme Court for an emergency writ of mandamus, ordering the district court to allow the Gardners to file their amended complaint. The Nevada Supreme court granted the petition and ordered that the district court should allow the Gardners to file their amended complaint.
First, the Nevada Supreme Court held that the proposed amended complaint alleged negligence claims against the individual managers based on their personal duties, rather than Henderson Water Park LLC’s duties to the injured minor. This portion of the Gardner opinion reaffirmed the protection of managers under NRS 86.371 extended to claims against the company, but not to them personally. The Nevada Supreme Court drew this distinction between Henderson Water Park LLC and its individual members by noting that “the Gardners’ proposed amended complaint contained multiple allegations of individual negligence by the [m]anagers concerning their direct knowledge and actions that threatened physical injury to patrons,” including the injured youth in that case. Based on these allegations, Henderson Water Park LLC’s managers were pulled outside the protections of NRS 86.371—for the purposes of pleading—and could be named as defendants.
Most significantly, the Nevada Supreme Court reversed the district court and unequivocally stated “the alter-ego doctrine applies to LLCs.” Recognizing that this was the norm across several states to have considered the issue, the Nevada Supreme Court analyzed authority that subjected limited liability companies to the alter-ego theory of liability, whether based on express statutory requirements under common law. Noting that the Nevada Legislature’s creation of NRS 78.747 in 2001 merely “codified” a “judicially created doctrine,” the Nevada Supreme Court rejected any argument that the creation of NRS 78.747 was intended to negatively imply limited liability companies were not subject to the alter-ego doctrine. Yielding to concerns about fraud, abuse, and inequitable results, the Nevada Supreme Court wrote: “As recognized by courts across the country, LLCs provide the same sort of possibilities for abuse as corporations, and creditors of LLCs need the same ability to pierce the LLCs’ veil when such abuse exists.”
Thus, any remaining question about whether and how the alter-ego doctrine would apply to Nevada limited liability companies was resolved by the Gardner decision.
3. Implications for the Future: The Nevada Supreme Court Confirms the Expectations of Litigators and Transactional Attorneys Alike.
While Gardner provides an important confirmation of what many had long suspected, and crushes any wiggle room that might have existed about the alter-ego doctrine’s application, it is more of a confirmation than a new declaration of law. The decision’s holdings as to the personal liability of managers and members draw new attention to the importance of determining what acts, if any, a company will indemnify its managers or members for taking. While Gardner itself may lead to a rise in alter-ego claims, the pleading standards for bringing such claims, including the need to allege acts constituting an abuse of the corporate form leading to injustice, remain a barrier to drive-by allegations of alter-ego.
As criminal defense attorneys have balked that prosecutors could indict a ham sandwich, it remains true that, subject to Rule 11, a plaintiff can allege what he or she pleases. Proving alter-ego, however, is a different matter. For attorneys that do not practice litigation, this decision re-emphasizes the importance of having clients document their operations with bylaws, operating agreements, minutes of meetings and significant activities, and reasonable internal controls to maintain strong borders between or among the entity, its management, and its ownership. Although Gardner does not change the law or necessarily change the expectations of attorneys, it brings several issues to the fore that can be costly for businesses to remedy and even more painful to litigate.
J. Malcolm (“Jay”) DeVoy is the owner of DeVoy Law P.C., and Erica A. Bobak is an associate attorney with the firm, joining upon completing her clerkship for Department 30 of the Eighth Judicial District Court. DeVoy Law focuses on providing representation to clients in significant business disputes, serious personal matters, and advising medical professionals and practices about issues including licensure, HIPAA, Stark Law, and the Anti-Kickback Statute.
1Dep’t of Taxation v. DaimlerChrysler, 121 Nev. 541, 548, 119 P.3d 135, 139 (2005); Galloway v. Truesdell, 83 Nev. 13, 26, 422 P.2d 237, 246 (1967).
2 Webb v. Shull, 270 P.3d 1266, 1271 n.3 (Nev. 2012) (citing Montgomery v. eTreppid Technologies, LLC, 548 F. Supp. 2d 1175, 1180-81 (D. Nev. 2008) (recognizing that federal and state courts have consistently applied to LLCs corporate laws for piercing the corporate veil under the alter ego doctrine); see Volvo Constr. Equip. Rents, Inc. v. NRL Rentals, LLC, 614 F. Appx. 876, 878 n.1, 880 (9th Cir. 2015); see also In re Giampietro, 317 B.R. 841, 845-46 (Bankr. D. Nev. 2004) (Wherein the court first noted its belief that Nevada courts would apply the same common law standards for alter ego liability to members of limited liability companies that they had placed upon shareholders of corporations).
3 See Hearing on A.B. 655 Before the Assembly Judiciary Comm., 66th Leg. (Nev., May 21, 1991).
4 The Gardner case has generated at least one other reported Nevada Supreme Court decision that is closely related to this issue, but distinct enough that succinctly discussing it here risks complicating the alter-ego issues discussed in this article. For that reason, this article will not address the other Nevada Supreme Court decision relating to Gardner, although the authors recommend reading it.