Generally, the law treats an entity, such as an LLC, as distinct from its owners. Normally, a person cannot be held directly responsible for an LLC’s debt and the LLC’s assets cannot be taken to satisfy any debts that its members, owners, or controllers may have.
There are exceptions though. Nevada is one of several states that recognizes an ability, in some limited circumstances, to force a business such as an LLC to pay the debts of one of its owners or an insider with control. This is sometimes called reverse veil piercing.
In one prominent Nevada case, William Lange owed a debt of $25,000 to the Loomises due to a prior lawsuit. The Loomises had failed to collect despite consistent efforts over nearly three years. Eventually, the Loomises learned that LFC Marketing Group had substantial assets. Although, LFC Marketing was owned by William’s brother, Robert Lange, it was controlled virtually entirely by and almost solely benefitted William. Through the district court, the Loomises attached some of the assets of LFC Marketing in order to satisfy the judgment. William appealed to the Nevada Supreme Court.
In LFC Marketing Group v. Loomis, the Nevada Supreme Court found in favor of the Loomises finding that the reverse veil piercing was entirely appropriate. It allowed the attachment of the LLCs assets to stand in order to help satisfy Mr. Lange’s debt. The Court looked at several elements to support this reverse veil piercing, which are essentially the same ones looked at in a traditional piercing of the corporate veil. Namely:
- the corporation must be influenced and governed by the person asserted to be the alter ego;
- there must be such unity of interest and ownership that one is inseparable from the other; and
- the facts must be such at adherence to the corporate fiction of separate entity would, under the circumstances, sanction a fraud or promote injustice.
The Court also identified several other factors which could help to indicate the necessary alter ego relationship, including:
- commingling of funds;
- undercapitalization;
- unauthorized diversion of funds;
- treatment of corporate assets as the individual’s own; and
- failure to see corporate formalities.
Although the law will normally treat a person and a corporation as separate entities, courts can make exceptions to that, in both directions when the circumstances support it. A reverse veil piercing is one way a court can make an exception, and it exists alongside other options such as charging orders or a traditional veil piercing depending on the case.
By :Timothy Wiseman
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