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Nevada Corporations

Reprint permission for this article given by Riser Adkisson LLP
http://www.assetprotectionbook.com/nevada_corporations.htm

Many groups sell Nevada corporations as the “ultimate” asset protection device. Indeed, some groups even sell franchises that allow the average Joe with no experience or training to become an “asset protection consultant” nd start selling Nevada incorporation services to their buddies.

The Pitch

The pitch of these groups is usually the same and focuses on Nevada allowing bearer shares and having a higher degree of secrecy and privacy. The claim is made that since the corporation has bearer shares that nobody can know who owns it. This is enhanced by the fact that Nevada gives some protection to the identities of the ownership of the corporation.

The Truth

While all this sounds good, it does not mean that the owners of the corporation can be kept hidden or that the corporation will offer special protections to either the owners of the corporation or the assets held within it. Indeed, as will be shown there are absolutely no advantages to using a Nevada corporation for somebody living outside of Nevada, or who get sued in federal court. Even within Nevada, the special benefits offered by the Nevada corporation are highly questionable.

Additionally, those who sell Nevada corporations do not fully disclose the tax effects of what they are selling – which is not surprising since they usually do not understand those tax consequences themselves (and have no education or worthwhile training on these subjects). Thus, somebody who purchases a Nevada corporation from one of these so-called “asset protection consultant” groups is probably putting themselves at risk of doing something that will unnecessarily cause them taxes down the road.

Bearer Shares

Contrary to popular misconception, the Nevada corporation statutes do not specifically authorize bearer shares. Thus, whether Nevada law even currently allows the issuance of bearer shares is a mystery, but certainly the lack of specific statutory authorization means that there is no strong public policy in favor of allowing bearer shares which are widely regarded with disrepute in nearly all other jurisdictions. Since subsequent court decisions may determine that Nevada does not allow bearer shares, and since the Nevada legislature may soon clarify the issue by disallowing bearer shares, they should be avoided. Indeed, the laws of other states that specifically disallow bearer shares may operate to disregard Nevada bearer share corporation in those states. Bearer shares should also be avoided for the other reasons which follow.

Bearer shares simply do not offer the level of secrecy claimed by the promoters. First, creditors will ask at a debtor’s examination a question like “In the last three years, have you ever held shares in any corporation?” If you ever held bearer shares during this time, you would have to answer “Yes” or else you would subject yourself to perjury.

Second, if the court cannot determine who holds the bearer shares it can simply impute ownership to the person or persons most directly involved with the corporation. Thus, if a person signs on a corporation’s bank account, that person can simply be deemed to be the owner of the corporation whether or not the bearer shares can be found.

Also, if the bearer shares cannot be located, the court may be able to simply deem the corporation to be dissolved.

If the bearer shares are located, then the court can allow questioning to determine the chain of ownership, and whether any transfer of shares amounted to a fraudulent transfer.

Then, there is this nasty little secret about bearer shares: Every time that bearer shares change hands, it is either a sale or a gift giving rise to tax consequences! So, let’s assume that a corporation has $100,000 in assets, and that the federal gift tax rate is 50%. If Dave gives his shares to his friend Bill, then Dave just triggered the federal gift tax and now owes the IRS taxes for $50,000. If Bill later gives the shares back to Dave, then another $50,000 is due.

If the bearer shares are sold instead of gifted, then there might be capital gains or losses. But however the transaction is characterized, there is now an IRS reporting requirement, meaning that IRS forms are due, and further meaning that a creditor can track those forms.

The upshot is that bearer shares are not a good thing, but a bad thing that should be avoided. Indeed, ALL of the top asset protection planners warn that bearer shares are a bad thing and should be avoided. Indeed, even most of the better offshore jurisdictions have eliminated bearer shares because people mess up with their misuse so badly.

Qualification to Do Business

No corporation can do business in a state unless (1) it is formed there, or (2) it is qualified to do business there. Thus, if a Nevada corporation seeks to do business in Oregon, it must qualify to do business in Oregon, by filing a registration statement with the Oregon Secretary of State. This is especially true if real property is involved, as it is absolutely impermissible for a corporation that is not qualified to do business in a state to hold real property there.

If the Nevada corporation does not qualify to do business in the state where it does business or holds property, then the state will simply ignore it as if it never existed and impute ownership to the owners.

However, once the Nevada corporation qualifies to do business in a state, then it is governed by that state’s corporation laws, and not Nevada’s. Thus, none of the secrecy or privacy provisions of Nevada law will apply out of state!

What are the costs of qualifying a Nevada corporation to do business in another state? Usually, the same costs that it would be to just form a completely new corporation in that state anyhow. So, the only real effect of using a Nevada corporation outside of Nevada is that you have doubled your annual registration fees, as well as your resident agent fees, without gaining any advantage at all over just filing a corporation in your own state in the first place!

Not surprisingly, almost none of the “asset protection consultant” groups tell their “consultants” this little tidbit of information, and thus they never pass it on to their customers. Usually, only a couple of years down the road to the clients figure out that all they have done is to impose an additional layer of fees over what they would have just paid in their own state anyway, without any increase in asset protection.

Is a state outside of Nevada required to apply Nevada law to resolve the case. NO! Some Nevada corporation agents falsely imply that if the Nevada corporation gets sued outside of Nevada, that the other state will have to apply Nevada law. This is simply not true. While the court's of most states will give comity to the choice of law as to internal disputes of the corporation between shareholders or officers, the courts of non-Nevada states are simply not required to apply Nevada law to the lawsuits of third persons outside of Nevada and who did not consent to be bound by Nevada law. It is for this reason that Nevada law will almost never apply to tort and negligence claims outside of Nevada.

Federal Courts

The federal courts are governed by the Federal Rules of Civil Procedure, and really couldn’t give a flip about contrary state law (and don’t have to under the Supremacy Clause of the U.S. Constitution). Thus, if you get sued in federal court don’t expect much help from Nevada law.

Full Faith & Credit

Nevada is bound to recognize the judgment of other states, and so therefore if a judgment is entered against the owner of a corporation in Utah, the judgment would be enforceable against the owner’s stock in a Nevada corporation.

Avoiding State Taxes

Another sales pitch of Nevada corporations is that they can be used to avoid state taxes. First, see the “Qualification to Do Business” problem, above. Second, the states are wise to arrangements where somebody living in, say, California attempts to avoid taxes by using a Nevada corporation. These states are now requiring disclosure of these arrangements, and if you get caught the interest and penalties will be bad.

The amazingly misleading – and sometimes fraudulent – claims made to sell Nevada corporations:

Claim	Reality
No corporate income tax	Most states don’t impose a corporate income tax either. Also, this only helps if the corporation is doing business in Nevada. If the business is doing business in, say, California, then the business must report its income to California or else the business owner has committed felony tax evasion as to the California taxes.
No information sharing with the IRS	So what? For the corporation to open a bank or financial account, it will have to have an EIN which is issued by the IRS. Once this number is issued, then the IRS is aware of the existence of the corporation and will demand annual tax returns. Also, nothing prevents the IRS from raiding the corporate offices of your corporation services provider to gather information on tax evaders, as happened in the U.S. v. Terry Neal, et al., case where the offices of Laughlin & Associates were raided.
No Franchise Tax	Other states have no franchise taxes. However, this is only an advantage if the corporation is only doing business in Nevada. If the corporation is doing business in a state that has franchise taxes, then the corporation will have to qualify to do business in that state and pay franchise taxes anyway.
Information relating to owners of corporations not listed in Nevada public records	Not aware of any state that gathers and publicly lists such information. While some states publish the names of corporate officers or directors, most states don’t.
Liability protection for owners of business against liabilities of business	Every state’s laws offer this protection too.

THE B.S. BEHIND NEVADA BEARER SHARES
by Randall Edwards, J.D.

Spend about an hour listening to talk radio and you can't miss it – that radio ad touting Nevada corporations as the bulletproof Asset Protection shelter that can keep you from getting sued and losing your fortune to those greedy personal injury lawyers who are laying in wait to put your name on the defendant line of a meritless lawsuit.

There's no question that Asset Protection is a good idea – just as you'd be irresponsible to drive your car without insurance, you'd be crazy not to shield yourself and your money from a lawsuit. But are Nevada corporations the one-size-fits-all answer? As a lawyer who has practiced in Nevada since 1983, I have to tell you that the answer is a resounding “no.”

The marketing of Nevada corporations takes many forms – from Internet sites promising to incorporate you cheap cheap cheap to a network of sales representatives pushing a Las Vegas-based program. Nonetheless, the legal theory behind the craze is always the same: Because Nevada is the only state that approves “bearer shares” – as negotiable and easy to transfer as cash – no one can really ever know who owns a corporation at any time, because at any time anyone might have the “bearer shares” in their pocket.

The theory appears to go something like this:

Because Nevada's corporate statute differs from the Revised Model Business Corporation Act as developed by the Committee on Corporate Laws of the American Bar Association in that NRS does not require that a stock certificate state the name of the person to whom the stock is issued, somehow the stock certificate can be made out simply to “bearer” and thus, just like cash, whoever happens to be hanging onto the shares at any given time is the “owner” for Asset Protection purposes. Thus, when a creditor hauls the person who has been running the corporation up until the morning of his testimony into court, that person can look the judge in the eye and state truthfully, “Gee, I don't know who owns the corporation, sir, since I just don't know where the ‘bearer' shares are right now, or who's got ‘em today. And whoever's got ‘em is the owner – at least right now.”

Accordingly, the judge will shrug his shoulders, throw his hands in the air and confess, “Well, I guess that's the end of that. We just can't figure it out, so … CASE DISMISSED! Next?”

The debtor then scurries home, where his grandma, or whoever happens to be holding the stock certificates, says, “Welcome home, Sonny … here are those pesky papers you gave me this morning,” after which life goes on unabated, since the debtor now has the stock (and thus ownership of the corporation) back in his hands, with the frustrated creditor stamping his feet in the background, muttering, “Curses! Foiled again by that darned Nevada ‘bearer shares' law!”

That's the theory, at least. Unfortunately, this structure appears to be built on a pretty shaky foundation. Here's why:

First, there is no statutory or case authority that stands for the proposition that such a thing as “bearer shares” exists in Nevada - at least not in the form pushed by the “Asset Protection” promoters. There are no Supreme Court opinions dealing with the concept, no Attorney General's opinions, no federal cases and, as far as I've been able to ascertain, no district court opinions upholding such a concept.

In fact, the whole “bearer share” idea stems from this language, in NRS 78.235(1):

“Except as otherwise provided in subsection 4, every stockholder is entitled to have a certificate, signed by officers or agents designated by the corporation for the purpose, certifying the number of shares owned by him in the corporation.” That's it. There's not a word in Nevada statute that says “bearer,” no indication that the owner of a corporation can scam a creditor by claiming that he doesn't know who owns the corporation, and no provision that entitlement to a certificate equates to entitlement to hide from a valid debt.

In fact, Nevada case law appears to stand for just the opposite conclusion. As far back as 1942, the Nevada Supreme Court held that “a transfer of stock between individuals, in order to receive recognition by the corporation, must be registered upon its books.” See Petition of Simrak , 61 Nev. 431, 132 P.2d 605. This concept has been upheld as recently as 1986, in the case of Schwabacher v. Zobrist, 102 Nev. 55, 714 P.2d 1003, which again confirmed that an ownership interest in a corporation is not valid as to the corporation until that interest is registered with the corporation. In fact, the case went on to say that when a stock transfer isn't registered on the corporate books, the person transferring the stock stands as a trustee for the person receiving the stock. Doesn't sound much like the idea that there somehow exists a provision under Nevada law that authorizes “bearer shares” that can be transferred like cash. To the contrary, it appears that Nevada case law stands for just the opposite proposition.

Second, under Nevada law, the holding of the stock certificate doesn't necessarily mean anything. In 1921, the Nevada Attorney General's Office issued an opinion that the stock certificate does not equate to the stock itself, but is merely a piece of paper evidencing ownership. See AGO 38 (6-7-1921). In all the intervening years, the Attorney General's Office has never modified or rescinded this opinion. In fact, because Nevada does not necessarily require that corporations issue certificates at all, it makes no sense to assume that possession of a stock certificate equals ownership of the shares anyway.

Along that same line, Nevada law provides that stock shares are personal property. NRS 78.240. All rules, regulations and taxes that would otherwise apply to transfers of personal property would also apply to transfers of “bearer shares,” if indeed such an animal exists. For example, my car is also my personal property. Handing my buddy the keys until I got back from court wouldn't equate to transferring ownership, nor could I get away with telling a judge, “Gosh, your honor, I don't know who's driving the jalopy right now, so I couldn't really tell you who owns the old clunker.”

Thus, even if such a concept as “bearer shares” did somehow exist under Nevada law, and even if the transfer of ownership of a corporation could somehow be accomplished with such ease, there would still be all sorts of estate, gift and capital gains tax issues. Furthermore, there is also the possibility that the transferee of the bearer shares would also be hit with any judgment that had been levied against the transferor since, as the Schwabacher case stated, when an unregistered transfer of stock has occurred, the transferee of that stock is “responsible for the burdens and liabilities growing out of its ownership,” at least as against the transferor of the stock. Presumably, this would carry with it any court order relative to the stock arising from the transferor's liabilities.

Finally, does anyone seriously believe that any judge would fall for this sham? I've been practicing law in Nevada since 1983, and I know or have practiced before an awful lot of the judges on the Nevada bench, including the Nevada Supreme Court. Now, even granting that not everyone who's ever been appointed or elected to the bench (that's right, in Nevada, judges are elected) is the brightest lamp on the casino marquee, I don't believe that even the dimmest of Nevada's legal luminaries would fall for the idea that a corporate ledger book that makes out the owner of stock shares to “Bearer,” coupled with a befuddled-looking debtor defendant smugly saying, “Yup, I think I might've had some of them stock certificates, but I don't have any now,” would somehow leave the judge without any ability to fashion a legal remedy other than dismissal of a case against a debtor.

I think that the most tame thing that a judge would do under such circumstances would be to declare the debtor to be in constructive, if not actual, ownership of the shares and order the corporation to be liquidated to satisfy a creditor's claim. Most of the judges I know wouldn't sit still for just that, though; somehow, the phrase “contempt of court” keeps springing to mind.

So, when you hear that radio ad that promises untold Asset Protection by merely filing articles of incorporation in Nevada, I have this work of advice: RUN! Actually, a few more words: AS FAST AS YOU CAN. THE OTHER WAY!

Randall Edwards practices law in California, Nevada, Arizona and Utah with his primary office in Salt Lake City.

 

LFC Marketing Group, Inc. v. Loomis
116 Nev. 896; 8 P.3d 841 (09/19/2000)

LFC MARKETING GROUP, INC., Appellant, vs. CEBE W. LOOMIS, ANDREW F. LOOMIS, CHRISTIAN W. LOOMIS AND JUST C. LOOMIS, Respondents.

No. 31608

SUPREME COURT OF NEVADA

116 Nev. 896; 8 P.3d 841; 2000 Nev. LEXIS 108; 116 Nev. Adv. Rep. 97

September 19, 2000, Decided

PRIOR HISTORY: [***1] Appeal from an order granting a writ of attachment and denying a third-party claim to the attached property. Second Judicial District Court, Washoe County; Brent T. Adams, Judge.

DISPOSITION: Affirmed.

COUNSEL: Skinner Sutton Watson & Rounds and Philip A. Olsen, Incline Village, for Appellant.

Richard G. Hill and William Patterson, Cashill, Reno, for Respondents.

JUDGES: BEFORE ROSE, C.J., YOUNG and LEAVITT, JJ.

OPINION: [*898] [**843]

PER CURIAM:

SUMMARY

This case presents us with two issues: (1) whether a writ of attachment may be used to secure property after a judgment has already been obtained; and (2) whether a judgment creditor can pierce the corporate veil using a reverse alter ego analysis to reach the assets of a corporation that is allegedly controlled by the judgment debtor. Since 1996, Cebe, Andrew, Christian and Just Loomis (the "Loomises") have been trying to recover a $ 25,000.00 judgment from William Lange ("William") concerning a failed real estate transaction with William's brokerage firm Lange Financial Corporation ("LFC"). Unable to satisfy their judgment, the Loomises obtained a writ of attachment on commissions payable to LFC Marketing Group, Inc. ("LFC Marketing") held in escrow by [***2] a Nevada title company. LFC Marketing, whose sole shareholder is William's brother Robert Lange ("Robert"), disputed that William was entitled to any of the commissions and requested a hearing on the writ to settle title to the deposited monies. The district court determined that LFC Marketing was the alter ego of William, and thus ordered that the Loomises' judgment be satisfied out of the attached commissions.

We first conclude that the procedure employed by the Loomises -- using a writ of attachment to aid in post-judgment recovery -- is allowable under our statutes. Further, we conclude that in certain limited circumstances, the alter ego doctrine may be applied to recover an individual debt from the assets of a corporation determined to be the alter ego of the individual debtor. [*899] Finally, we conclude that there was substantial evidence in this case to support the district court's finding.

STATEMENT OF FACTS

The underlying facts of the transaction that ultimately resulted in a judgment in favor of the Loomises against William are recited in Loomis v. Lange Financial Corp., 109 Nev. 1121, 865 P.2d 1161 (1993). The relevant judgment in that case was the district [***3] court order requiring William to pay the Loomises $ 25,000.00 in attorney fees.

This case involves the Loomises' attempts to collect the judgment owed by William, a California resident and sole shareholder of LFC, who currently does not have a Nevada real estate license.

LFC, a California brokerage firm with whom the Loomises contracted to market and sell property owned by the Loomises in downtown Reno, is associated with a consortium of smaller companies, collectively known as the LFC Real Estate Network. Included in this network is LFC Marketing, a Nevada corporation performing real estate brokering services whose sole shareholder and president is William's brother Robert. A month after LFC Marketing's incorporation, William was elected vice president "for the purpose of conducting related activities," but was not authorized to conduct any activity on behalf of LFC Marketing that required a real estate license. Also included in the network is LFC Communications Limited ("LFC Communications"), a California entity performing advertising services whose sole shareholder is William's wife and whose president is William.

Importantly, the Nevada Land and Resources Company ("NLRC") hired [***4] LFC Marketing and LFC Communications to assist in selling its substantial Nevada real estate holdings. As a result of services provided by LFC Marketing, NLRC deposited funds in excess of $ 25,000.00 with a local Nevada title company to be paid to LFC Marketing. Having learned of the NLRC deposit, the Loomises filed an ex parte motion for a writ of attachment n1 on August 4, 1997, which requested the seizure of the deposited monies in the amount of $ 25,000.00 plus interest to satisfy William's judgment debt.

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n1 The motion was made pursuant to the writ of attachment procedure of NRS 31.010. However, the motion recognizes that the attachment requested is post-judgment, in contravention to the ordinary case where attachment is a pre-judgment action.

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Believing that the attached funds did not belong to William in any way, LFC Marketing filed a third-party claim asserting sole ownership of the attached funds. Pursuant to NRS 31.070(5), n2 a [*900] hearing was scheduled and held to settle the ownership of the property. [***5]

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n2 HN1 NRS 31.070(5) provides that a third party -- after service of a written, verified claim -- is entitled to a hearing to determine title to the property levied on.

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At the hearing, which was not attended by William, the Loomises argued that LFC Marketing was the alter ego of William, and thus sought to pierce the corporate veil in reverse to reach the deposited funds. In support of their contention, the Loomises presented the following: (1) Robert's testimony that William wrote ninety percent of LFC Marketing's correspondence to NLRC; (2) evidence that William negotiated and signed early drafts of the marketing agreement between LFC Marketing and NLRC; (3) testimony from one of LFC Marketing's brokers that William drafted the final marketing agreement but asked that the broker sign the final version on LFC Marketing's behalf; (4) evidence that William hired and supervised LFC Marketing's brokers; (5) testimony from NLRC's accountant that he dealt exclusively with William and believed William to be the ultimate [***6] authority for all of LFC Marketing's dealings; (6) documentation indicating that William was holding himself out to be the "president and CEO" and the "primary owner" of LFC Marketing; (7) evidence that LFC Communications paid LFC Marketing's bills and that checks written to LFC Marketing should be made out only to "LFC"; (8) evidence that William was being personally compensated for LFC Marketing's work; and (9) evidence that William had negotiated a settlement agreement between the LFC entities and NLRC, and determined how the proceeds were to be divided.

LFC Marketing presented the following evidence supporting its claim that William's participation in LFC Marketing's activities was minimal: (1) testimony from Robert that he made LFC Marketing's decisions; (2) testimony from the president of NLRC that he consulted Robert for marketing decisions and William for advertising decisions, but also had joint meetings with the two; (3) testimony that the only reason William dealt more with NLRC was because the parties had agreed that there should be only one point person; and (4) testimony that inter-company checks were only used to pay "incidental expenses."

At the conclusion of the [***7] hearing, the district court made an oral ruling concluding that LFC Marketing was the alter ego of William, and thus granted the motion for writ of attachment. Further, the district court ordered that the attached funds be released to the Loomises in satisfaction of the debt owed by William.

LFC Marketing appeals this order, claiming that the post-judgment writ of attachment procedure employed by the Loomises was improper and that the district court erred in allowing the corporate veil to be pierced in reverse.

[*901] DISCUSSION

Whether a writ of attachment may be used post-judgment to secure property to satisfy the judgment

LFC Marketing argues that the unusual procedure utilized by the Loomises here -- using a writ of attachment in the post-judgment context -- was unprecedented and improper. Specifically, LFC Marketing contends that the statutes governing the satisfaction of judgments required the Loomises to obtain a writ of execution, not attachment, and to then issue a writ of garnishment, as the funds were in the hands of a third party, namely LFC Marketing.

HN2 Typically, a writ of attachment is used as a pre-judgment remedy by which a plaintiff requests the court to secure the [***8] property of the defendant so that it may be used in satisfaction of any judgment obtained. See 6 Am. Jur. 2d Attachment and Garnishment § 1 (1999). In contrast, a writ of execution is a post-judgment remedy by which a successful plaintiff requests the court to enforce the judgment by seizing and delivering property [**845] owned by the defendant in satisfaction of the debt. See 30 Am. Jur. 2d Executions and Enforcement of Judgments §§ 43, 51 (1994). However, because attachment procedures are provided by statute, the issue of whether a writ of attachment may be issued post-judgment is controlled by the terms of these statutes. We have often stated that "& # 8219;" where the language of a statute is plain and unambiguous, and its meaning clear and unmistakable, there is no room for construction, and the courts are not permitted to search for its meaning beyond the statute itself."'" Erwin v. State of Nevada, 111 Nev. 1535, 1538-39, 908 P.2d 1367, 1369 (1995) (quoting Charlie Brown Constr. Co. v. Boulder City, 106 Nev. 497, 503, 797 P.2d 946, 949 (1990) (quoting State v. Jepsen, 46 Nev. 193, 196, 209 P. 501, 502 (1922))).

The Nevada provisions [***9] regulating writs of attachment are contained in sections 31.010 through 31.220 of the Nevada Revised Statutes. In particular, HN3 NRS 31.010 provides the general rule for when such writs may issue:

The plaintiff at the time of issuing the summons, or at any time thereafter, may apply to the court for an order directing the clerk to issue a writ of attachment and thereby cause the property of the defendant to be attached as security for the satisfaction of any judgment that may be recovered, unless the defendant gives security to pay such judgment as provided in this chapter.

[*902] (Emphasis added.) We conclude that HN4 the plain language of this provision allows the unusual procedure of using a writ of attachment post-judgment.

LFC Marketing argues that other language in the statute -- namely, that a writ of attachment causes the defendant's property "to be attached as security for the satisfaction of any judgment that may be recovered" -- suggests that the writ is a pre-judgment remedy only. However, we conclude that the language relied upon by LFC Marketing is ambiguous and unpersuasive in light of the plain and unambiguous provision allowing a plaintiff to apply for a writ of attachment [***10] at the time of issuance of the summons or "at any time thereafter."

We further note that HN5 under both attachment and execution procedures, the rights of third parties claiming title to the property levied upon is identical. n3 Specifically, a third party is entitled to a hearing within ten days of service of the third party's written, verified claim to resolve title to the property. See NRS 31.070 (providing third-party hearing in writ of attachment context); NRS 21.120(2) (providing that identical hearing procedure is used for third parties in writ of execution context).

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n3 We also note that in this case the Loomises are particularly benefited by those provisions allowing a writ of attachment to issue without notice under certain circumstances. See NRS 31.017. Such circumstances include when the debtor resides in another state or when the property sought to be attached is in danger of being removed from the state. See id.

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Therefore, we conclude that the Loomises' use of a writ of attachment to recover [***11] a post-judgment debt is allowed under Nevada's existing statutory framework.

Whether the district court erred in allowing the corporate veil to be pierced in reverse

LFC Marketing first contends that the district court erred when it allowed the Loomises to satisfy their judgment against William out of property belonging to LFC Marketing by piercing the corporate veil in reverse. Specifically, LFC Marketing argues that there is no precedent in Nevada for such a remedy and contends that the court's ruling resulted in fundamental unfairness to LFC Marketing by favoring the Loomises over other parties who may have an interest in the money.

Nevada has long recognized that HN6 although corporations are generally to be treated as separate legal entities, the equitable remedy of "piercing the corporate veil" may be available to a plaintiff in circumstances where it appears that the corporation is acting as the alter ego of a controlling individual. See McCleary Cattle Co. v. Sewell, 73 Nev. 279, 317 P.2d 957 (1957) (early [*903] application of alter ego doctrine). Indeed, the "essence" of the alter ego doctrine is to "do justice" whenever it appears that the [**846] protections provided [***12] by the corporate form are being abused. See Polaris Industrial Corp. v. Kaplan, 103 Nev. 598, 603, 747 P.2d 884, 888 (1987).

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. See generally Gregory S. Crespi, The Reverse Piercing Doctrine: Applying Appropriate Standards, 16 J. Corp. L. 33, 55-69 (1990) (reviewing the case law on outsider reverse piercing). Although our case law has never directly addressed reverse piercing, most courts considering the issue have allowed such piercing. n4 See, e.g., McCall Stock Farms, Inc. v. United States, 14 F.3d 1562, 1568 (Fed. Cir. 1993); Towe Antique Ford Foundation v. I.R.S., 999 F.2d 1387, 1390-94 (9th Cir. 1993); Zahra Spiritual Trust v. United States, 910 F.2d 240, 243-45 (5th Cir. 1990); Select Creations, Inc. v. Paliafito Am., Inc., 852 F. Supp. 740, 773-74 (E.D. Wis. 1994); [***13] Taylor v. Newton, 117 Cal. App. 2d 752, 257 P.2d 68, 72-73 (Cal. Ct. App. 1953); Cargill, Inc. v. Hedge, 375 N.W.2d 477, 478-80 (Minn. 1985); State v. Easton, 169 Misc. 2d 282, 647 N.Y.S.2d 904, 908-910 (App. Div. 1995); cf. Floyd v. I.R.S., 151 F.3d 1295, 1298-1300 (10th Cir. 1998) (criticizing reverse piercing theory because practice may unfairly prejudice innocent shareholders and harm a corporation's ability to raise credit).

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n4 LFC Marketing contends that this court has considered the issue in Baer v. Amos J. Walker, Inc., 85 Nev. 219, 452 P.2d 916 (1969), where we denied recovery from a creditor trying to collect an individual debt from a corporation controlled by the debtor. However, the decision in Baer was based on this court's conclusion that there was no evidence of the individual debtor's control over the corporation or of fraud. See 85 Nev. at 220-21, 452 P.2d at 917. Thus, although the Baer court recognized that the creditor was seeking to use the alter ego doctrine in reverse, it did not expressly disapprove of such use. Accordingly, the holding in Baer does not control our analysis here.

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Conceptually, we conclude that HN7 reverse piercing is not inconsistent with traditional piercing in its goal of preventing abuse of the corporate form. Indeed, "it 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 pre-existing liability of the controlling party." Select Creations, 852 F. Supp. at 774. However, it should be emphasized that "the corporate cloak is not lightly thrown aside" and that the alter ego doctrine is an exception to the general [*904] rule recognizing corporate independence. Baer v. Amos J. Walker, Inc., 85 Nev. 219, 220, 452 P.2d 916, 916 (1969). Accordingly, we conclude that reverse piercing is appropriate in those limited instances where the particular facts and equities show the existence of an alter ego relationship and require that the corporate fiction be ignored so that justice may be promoted.

Whether there was substantial evidence to support the district court's finding

LFC Marketing next argues that the district court erred in finding it to be the alter ego of William because two of the [***15] requisite three elements of the doctrine were not demonstrated by substantial evidence.

HN8 This court has stated that it will uphold a district court's determination with regard to the alter ego doctrine if substantial evidence exists to support the decision. See Lorenz v. Beltio, Ltd., 114 Nev. 795, 807, 963 P.2d 488, 496 (1998). However, there is an exception to this deferential standard where it is clear that a wrong conclusion has been reached. See Polaris Industrial Corp. v. Kaplan, 103 Nev. 598, 601, 747 P.2d 884, 886 (1987).

HN9 The elements for finding an alter ego, which must be established by a preponderance of the evidence, are:

(1) the corporation must be influenced and governed by the person asserted to be the alter ego; (2) there must be such unity of interest and ownership that one is inseparable from the other; and (3) the facts must be such that adherence to the corporate fiction of a separate entity would, [**847] under the circumstances, sanction [a] fraud or promote injustice.

Id. at 601, 747 P.2d at 886. HN10 Further, the following factors, though not conclusive, may indicate the existence of an alter ego relationship: (1) [***16] commingling of funds; (2) undercapitalization; (3) unauthorized diversion of funds; (4) treatment of corporate assets as the individual's own; and (5) failure to observe corporate formalities. See id. at 601, 747 P.2d at 887. We have emphasized, however, that "there is no litmus test for determining when the corporate fiction should be disregarded; the result depends on the circumstances of each case." Id. at 602, 747 P.2d at 887.

First, LFC Marketing argues that the district court blurred the second element -- unity of ownership and interest -- with the first -- influence and control. LFC Marketing underscores the fact that [*905] William does not own a single share of LFC Marketing, and thus argues that this element cannot be found. We disagree. HN11 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 [***17] individual. See State v. Easton, 169 Misc. 2d 282, 647 N.Y.S.2d 904, 909 (App. Div. 1995) (allowing a corporation's assets to be reached through reverse piercing where the debtor did not own a single share of the corporation's stock).

In this case, there was evidence that William acted as the ultimate authority for all of LFC Marketing's dealings, had negotiated the marketing agreement with NLRC personally, and did not distinguish his interest from the various Lange entities. Further, there was evidence that William considered himself to be the "president and CEO" and the "primary owner" of LFC Marketing. Additionally, there was evidence that LFC Communications paid LFC Marketing's bills and that a common account was used among the LFC entities. Finally, there was testimony that William alone negotiated a settlement agreement with NLRC over a billing dispute and determined which of the LFC entities received the proceeds. We conclude that this evidence is adequate to support the district court's conclusion that there was a unity of interest and ownership.

Next, LFC Marketing alleges that the Loomises failed to show that adherence to the corporate entity would sanction [***18] a fraud or promote injustice. We disagree. The record reveals that the Loomises were unable to recover their judgment against William for over three years, despite William's being the dominating force behind a Nevada corporation. Indeed, the evidence supports the district court's conclusion that the carefully designed business arrangements between the LFC entities, William, and NLRC contributed to the Loomises' inability to collect their judgment.

We recognize, however, as the district court also did, that HN12 there are other equities to be considered in the reverse piercing situation -- namely, whether the rights of innocent shareholders or creditors are harmed by the pierce. See Floyd v. I.R.S., 151 F.3d 1295, 1300 (10th Cir. 1998) (recognizing potential harm to innocent shareholders or creditors when the corporate veil is pierced in reverse); Cargill, Inc. v. Hedge, 375 N.W.2d 477, 479 (Minn. 1985). In this case, the district court found that Robert, the sole [*906] shareholder of LFC Marketing, would not be harmed by the attachment and that the pierce was otherwise just. We therefore conclude that the district court's conclusion that adherence to the corporate [***19] fiction would sanction a fraud or promote injustice was supported by substantial evidence and proper under the circumstances.

CONCLUSION

We first conclude that the procedure of utilizing a writ of attachment in the post-judgment context is allowable under Nevada's statutes. Next, we conclude that there are limited circumstances where the alter ego doctrine may be applied "in reverse" in order to reach a corporation's assets to satisfy a controlling individual's debt. Finally, we [**848] conclude that there was substantial evidence to support the district court's ruling that LFC Marketing was the alter ego of William.

Accordingly, the district court's order granting and issuing the Loomises' writ of attachment is affirmed.

 

Summary

Despite what the promoters say, Nevada corporations are not a panacea and indeed may cause more problems and expenses than if a corporation was just formed in the state of the owner’s residence. Indeed, most of the time people who need corporations (or limited partnerships or LLCs to which all this same analysis applies) should just form one in their own state and say “No Thanks” to Nevada corporations – unless of course you live there.

Other Resources

Website of well-respected Nevada attorney Steve Oshins.
See http://www.oshins.com

Our book gives alternatives to Nevada corporations for those persons living outside of Nevada and who might not benefit by them, buy at Amazon or Barnes & Noble

Terms

Nevada Corporation
A corporation formed in Nevada pursuant to Nevada’s corporation act, which provides debtors some advantages not typically found in the corporation laws of other states. Unfortunately, the advantages are usually grossly overstated by promoters who arrange structured based on Nevada corporations that have very serious flaws from the asset protection perspective. Nevada corporations are usually the primary part of the “Asset Protection Consultants” scam that is run from Nevada.