Alter Ego Theory

Generally, members and managers of a limited liability corporation or company are not individually liable in a negligence-based tort action against the limited liability corporation/company simply because they are a member or manager of the limited liability corporation/company.[1] 

While members and managers are protected from individual liability resulting from the liabilities of the limited liability corporation/company, members and managers are not protected from liabilities resulting from individual acts. A plaintiff must prove that the negligent acts were done outside one’s capacity as a member. If done while in one’s capacity as a member,  whether or not the member is acting on behalf of the limited liability corporation/company, a plaintiff must prove that the negligent acts violated a personal duty owed by the member or manager to the plaintiff.

To prevail on an alter ego theory of liability, the moving party must show by a preponderance of the evidence that[2]:

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

A plaintiff does not need to prove actual fraud to prevails on an alter ego theory of liability. It is enough if a plaintiff can show that identifying the member or manager and the limited liability corporation or company as two separate entities would promote injustice. Some factors courts will consider in determining whether the member or manager is inseparable from the limited liability corporation/company are (1) majority ownership and pervasive control of the affairs; (2) commingling of funds; (3) undercapitalization; (4) treatment of corporate assets as the individual’s own; and (5) the use of the same address for the individual and the entity.[3]

Case Example

The case of Gardner v. Eighth Judicial Dist. Court of State (Gardner II) explains how a member of a limited liability company can be individually liable if the member violates a personal duty owed to a plaintiff. In Gardner II, the petitioners wanted to amend their complaint to bring a direct negligence claim against seven managers of a limited liability company, as individual defendants, or under an alter ego theory of liability. Gardner v. Eighth Judicial Dist. Court of State, 405 P.3d 651, 653 (Nev. November 22, 2017) (Gardner II). The Nevada Supreme Court determined that NRS 86.371 did not apply to the members because the petitioners’ proposed amended complaint contained multiple allegations of individual negligence by the managers concerning their direct knowledge and actions that threatened physical injury to patrons. Id. at 655. The petitioners’ allegations that the members had authority and control over the limited liability company and, as such, owed personal duties to their patrons, which they intentionally and willfully breached, was enough to adequately state a negligence claim against the managers in their individual capacities. Id.

Thanks to our friends at Eglet Adams for their insight on the alter ego theory of liability. To get more knowledge in this area and other areas of the law reaching out to mass torts lawyers at the law firm Eglet Adams could help you get a clearer picture of it all. 

[1] NRS 86.371

[2] Frank McCleary Cattle Co. v. Sewell, 73 Nev. 279, 282, 317 P.2d 957, 959 (1957); LFC Mktg. Group, Inc. v. Loomis, 116 Nev. 896, 904, 8 P. 3d 841, 846-847 (2000).

[3] Frank McCleary Cattle Co. v. Sewell, 73 Nev. 279, 282, 317 P.2d 957, 959 (1957); Polaris Indus. Corp. v. Kaplan, 103 Nev. 598, 601 747 P. 2d 884, 887 (1987); Arlington Med. Bldg., Inc. v. Sanchez Constr. Co., 86 Nev. 515, 22-23, 471 P.2d 240, 244-45 (1970).

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