Piercing the Nevada Corporate Veil

In Nevada, “piercing the corporate veil” is now the subject of a statute, NRS 78.747. Under section 2 of this statute, to establish an “alter ego,” three things must be proven:

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.

This statute is a codification of the test enunciated in prior case law. See, e.g., Ecklund v. Nevada Wholesale Lumber Co., 93 Nev. 196, 562 P.2d 479 (1977), where it was also held that all three elements must be proven to pierce the corporate veil. In any case, as the Court stated in Baer v. Amos J Walker, Inc., 85 Nev. 219, 220, 452 P.2d 916, 916 (1969), “The corporate cloak is not lightly thrown aside.”

Turning to other relevant considerations, in North Arlington Medical Building, Inc. v. Sanchez Construction Co., 86 Nev. 515, 471 P.2d 240 (1970), where this Court listed, in footnote 3 to its opinion, some 22 factors tending to establish the second element of NRS 78.747(2). In Polaris, however, this Court noted that “[t]hese factors may indicate the existence of an alter ego relationship, but are not conclusive.” Id., at 747 P.2d 887. Thus, as other courts have done, this Court made the point that each veil-piercing case is sui generis. “There is no litmus test for determining when the corporate fiction should be disregarded; the result depends on the circumstances of each case.” Id.

In re Blatstein, 192 F.3d 88, 101 (3rd Cir. 1999). Furthermore, regarding shareholder loans to a corporation, the Colorado Court of Appeals has held, in Hill v. Dearmin, 609 P.2d 127, 128 (Colo.App. 1980):

“It would frustrate the purposes of the corporate law to expose directors, officers, and shareholders to personal liability for the obligations of a corporation when they, in their individual capacities, contribute funds to, or on behalf of, a corporation for the purpose of assisting the corporation to meet its financial obligations, and not for the purposes of perpetrating a fraud or promoting their personal affairs.”

Thus, intercompany loans and loans from shareholders do not, per se, establish either commingling of assets or the existence of an alter ego.

As the law has developed in this Court’s decisions, the “injustice” which might result from recognition of the corporate fiction must more than merely fortuitous. It must be accompanied by some sort of wrongdoing by the purported alter ego. In Polaris, for example, when the shareholders learned that a creditor had a legitimate claim against the corporation, they withdrew or siphoned off corporate funds for their personal use. But “undercapitalization” or “siphoning” alone will not serve to fulfill the third element of the alter ego test. As the Court stated in North Arlington:

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.

Id., at 471 P.2d 244. See also, Rowland v. Lepire, 99 Nev. 308, 662 P.2d 1332 (1983), where the corporation was clearly undercapitalized, having a negative net worth at the time of trial, corporate formalities had been ignored, no dividends were paid to shareholders, and the directors and officers receive no salaries. On the other hand, the corporation had a separate bank account and a contractor’s license in its own name. Under those facts, the Court held, at 662 P.2d 1338:

“Although the evidence does show that the corporation was undercapitalized and that there was little existence separate from… the evidence was insufficient to support a finding that appellants were the alter ego of the… corporation.”

The holding in Rowland is somewhat surprising, given that so many of the North Arlington factors had been established. But the Court gave no indication in its opinion that there was any evidence of inequity, unfairness, or fraud. The Court did remark, however, that the matters which gave rise to the litigation were “a legitimate business dispute.” Id., at 662 P.2d 1336. In such a case, therefore, there is not an abuse of the corporate form that would merit a piercing of the corporate veil. To be sure, this Court has been very conservative in its application of veil-piercing principles. And, after all, use of the corporate form to shield the shareholders from liability is precisely what the corporate form is supposed to do.

Last, NRS 78.747(2)(c) expressly requires a showing that a manifest injustice would result from recognizing the corporation as a separate entity.