- The corporation must be influenced and governed by the person asserted to be its alter ego[;]
- There must be such unity of interest and ownership that one is inseparable from the other; and
- The facts must be such that adherence to the fiction of separate entity would, under the circumstances, sanction a fraud or promote injustice.
“In determining whether a unity of interest exists between the individual and the corporation, courts have looked to factors like
- commingling of funds;
- unauthorized diversion of funds;
- treatment of corporate assets as the individual’s own; and
- failure to observe corporate formalities.
These factors may indicate the existence of an alter ego relationship, but are notconclusive. There is no litmus test for determining when the corporate fiction should be disregarded; the result depends on the circumstances of each case.
Undercapitalization, where it is clearly shown, is an important factor in determining whether doctrine of alterego should be applied, but, in absence of fraud or injustice to aggrieved party, it is not absolute ground for disregarding corporate entity, and it is incumbent upon the one seeking to pierce the corporate veil to show by preponderance of the evidence that the financial setup of the corporation is only a sham and caused injustice.
[Note from TruCounsel editor: Although the Nevada Supreme Court stated in N. Arlington that “sham” and “injustice” must be proven by a proponderance of the evidence and LFC Mktg. Group seems to blanketly expanded that ruling, we have serious doubts as to how that standard should be extended in the “fraud” context.]
- No specific test
There is no litmus test for determining when the corporate fiction should be disregarded; the result depends on the circumstances of each case.
Polaris Industrial Corp. v. Kaplan, 103 Nev. 598, 601, 747 P.2d 884, 886 (1987).
- Determined on a case-by-case basis
Although ownership of corporate shares is a strong factor favoring unity of ownership and interest, the absence of corporate ownership is not automatically a controlling event. Instead, the “circumstances of each case” and the interests of justice should control. This is especially true when considering the ease with which corporations may be formed and shares issued in names other than the controlling individual.
LFC Marketing Group, Inc. v. Loomis, 116 Nev. 896, 8 P.3d 841, 847 (2000)(citations omitted).
- Governed or Influenced
Here, while at all times relevant Chianti Café was a separate entity, there is no question that Mr. Giampietro “influenced and governed” the activities and actions of Chianti Café. Chianti Café was a one-person limited liability company, formed to acquire the Portabello restaurant. It did whatever James Giampietro wanted, because he was the sole flesh-and-blood person who was connected with it. See Lorenz v. Beltio, Ltd., 114 Nev. 795, 808, 963 P.2d 488, 496 (Nev.1998) (clear that two shareholders, being the only individuals involved with the corporations, had requisite control and influence); Mosa v. Wilson–Bates Furniture Co., 94 Nev. 521, 523, 583 P.2d 453, 454 (Nev.1978); Caple v. Raynel Campers, Inc., 90 Nev. 341, 344, 526 P.2d 334, 336 (Nev.1974). Cf. Carson Meadows Inc. v. Pease, 91 Nev. 187, 191, 533 P.2d 458, 461 (Nev.1975) (although *852 wife of corporate president was vice president, secretary and stockholder in corporate entity, she essentially acted as a “office manager and secretary” despite titles, and thus did not exert required influence and control); Plotkin v. National Lead Co., 87 Nev. 51, 52, 482 P.2d 323, 324 (Nev.1971) (writing letter requesting extension of time to pay “debt we owe you through American Paint” insufficient to show control and influence of writer over American Paint).
Although ownership of corporate shares is a strong factor favoring unity of ownership and interest, the absence of corporate ownership is not automatically a controlling event. Instead, the “circumstances of each case” and the interests of justice should control. Id. This is especially true when considering the ease with which corporations may be formed and shares issued in names other than the controlling individual.
Unity of Interest [Actual Alter Ego Activity]
- The corporate cloak is not lightly thrown aside’ and that the alter ego doctrine is an exception to the general rule recognizing corporate independence.”
LFC Mktg. Group, Inc. v. Loomis, 116 Nev. 896, 903-04, 8 P.3d 841, 846 (2000) (quoting Baer v. Amos J. Walker, Inc., 85 Nev. 219, 220, 452 P.2d 916, 916 (1969)).
- Indeed, the ” essence” of the alter ego doctrine is to “do justice” whenever it appears that the protections provided by the corporate form are being abused.
LFC Marketing Group, Inc. v. Loomis, 116 Nev. 896, 903, 8 P.3d 841, 845-46 (2000).
- While the classic alter ego situation involves a creditor reaching the personal assets of a controlling individual to satisfy a corporation’s debt, the “reverse” piercing situation involves a creditor reaching the assets of a corporation to satisfy the debt of a corporate insider based on a showing that the corporate entity is really the alter ego of the individual.
LFC Marketing Group, Inc. v. Loomis, 116 Nev. 896, 903, 8 P.3d 841, 845-46 (2000).
- “[i]t is particularly appropriate to apply the alter ego doctrine in ‘reverse’ when the controlling party uses the controlled entity to hide assets or secretly to conduct business to avoid the preexisting liability of the controlling party.”
LFC Marketing Group, Inc. v. Loomis, 116 Nev. 896, 903, 8 P.3d 841, 846 (2000) (quoting Select Creations, 852 F.Supp. at 774).
Nevada cases decided after Twin Lakes confirm Judge George’s reading. In Rowland v. Lepire, 99 Nev. 308, 318, 662 P.2d 1332, 1338 (Nev.1983), for example, the Lepires had contracted with the Rowland Corporation to build a house. Rowland’s stock was owned by Glen and Martin Rowland; all dealings with respect to the construction contract were with one of these two individuals. When dealings on the construction went sour, the parties sued each other and, after trial, the court not only found Rowland Corporation liable for $65,000, but also found that Glen and Martin were personally liable for that amount as alter egos of Rowland Corporation.
The Nevada Supreme Court disagreed. After finding that Glen and Martin (and some miscellaneous family members) were the only stockholders, it reviewed the trial court’s findings that total capitalization in the four years Rowland had been in existence was only $1,100. It also reviewed the findings that while Rowland Corporation had a corporate checking account, it had a negative net worth at trial, and apparently never followed any corporate formalities. Despite affirming that Rowland Corporation was undercapitalized “and that there was little existence separate and apart from Martin and Glen,” Rowland, 99 Nev. at 318, 662 P.2d at 1338, the court did not find that Lepire had proved its alter ego case, supporting its reasoning by citing to North Arlington Med. Bldg., Inc. v. Sanchez Const. Co., 86 Nev. 515, 471 P.2d 240 (Nev.1970). In that case, the Nevada Supreme Court had also found inadequate capitalization, but had found that the aggrieved party had “failed to show any causal connection between the [lack of] financing and the inability to pay [the aggrieved party], or how it sanctioned a fraud or promoted an injustice.” This statement was based in part on the fact that the aggrieved party had never relied on the interchangeability between the corporation involved and its owners.
Similarly, in Polaris Indus. Corp. v. Kaplan, 103 Nev. 598, 602, 747 P.2d 884, 887 (Nev.1987), the court affirmed a finding that a salesman was not the alter ego of a corporate defendant, even though the salesman had demonstrated a “unity of interest” with the corporation by regularly withdrawing funds from the corporation without following corporate formalities. More was required, however. As the trial court found, and the Supreme Court affirmed, the withdrawals were not the cause of the nonpayment of the aggrieved party’s damage, and were not fraudulent or unjust on their face; indeed, the court accepted testimony that such withdrawals were “in lieu of salary.” Polaris, 103 Nev. at 602, 747 P.2d at 887.
In re Giampietro, 317 B.R. 841, 854 (Bankr. D. Nev. 2004)