Piercing the Corporate Veil in Nebraska

• Publication year: 2022

51 Creighton L. Rev. 247. PIERCING THE CORPORATE VEIL IN NEBRASKA

PIERCING THE CORPORATE VEIL IN NEBRASKA

CHRISTOPHER W. PETERSON(fn*)

I. INTRODUCTION......................................................................247

II. PIERCING THE CORPORATE VEIL IN NEBRASKA: GENERALLY..................................................249

A. NEBRASKA'S FOUR-FACTOR TEST....................................251

B. FRAUD ....................................................................................253

1. Fraud and the Four Factors....................................255

2. Actual or Constructive Fraud? ..............................256

C. TOTALITY OF THE CIRCUMSTANCES................................257

III. INDEPENDENT GROUNDS................................................259

A. DIVERSION OF CORPORATE ASSETS................................260

B. ALTER EGO............................................................................261

IV. COLLATERAL ISSUES OF NEBRASKA VEIL-PIERCING LAW........................................................................265

A. REVERSE VEIL PIERCING....................................................265

B. HORIZONTAL VEIL PIERCING............................................268

C. EQUITABLE ESTOPPEL........................................................269

D. VEIL-PIERCING PROCEDURE..............................................271

E. PIERCING THE LLC VEIL..................................................273

F. TORT CREDITORS..................................................................275

V. CONCLUSION ..................................... 278

I. INTRODUCTION

The "fiction" of the modern limited liability entity was primarily meant to benefit shareholders at the expense of creditors.(fn1) Shareholders safely invest their capital in the business entity without concern for the investment's effect on their personal assets. Nonshareholding directors, officers, and agents are shielded from personal liability by normal principles of agency law.(fn2) But for the typical close corporation, management and risk bearing is more closely connected.(fn3) Consequently, in their dual roles as manager and owner, shareholders of closed corporations have greater incentive to undertake overly risky projects.(fn4)

The overwhelming majority of Nebraska businesses are small, closely-held operations. As of 2017, approximately 99.1% of Nebraska businesses were considered small with 47.1% of all Nebraska employees employed by such businesses.(fn5) These figures appear fairly consistent throughout the country. Because of the extent of the closely-held business presence in our economy, it should come as no surprise that the doctrine of piercing the corporate veil is litigated more than any other issue in corporate law.(fn6)

Piercing the corporate veil is an equitable remedy(fn7) that allows creditors to circumvent the corporate fiction to reach the assets of its owners. The remedy has been long criticized as being conclusory, vac-uous,(fn8) vague, and shrouded in misperception and confusion.(fn9) The oft-cited Judge Cardozo once characterized the remedy as being "enveloped in the mists of metaphor" and noted that "logical consistency" is sacrificed "when the sacrifice is essential to the end that some accepted public policy may be defended or upheld."(fn10)

In Nebraska, logical consistency has been sacrificed on the altar of protecting innocent third parties,(fn11) circumventing fraud and preventing injustice and other wrongs in contravention of the plaintiffs rights.(fn12) Unfortunately, such consistency has been sacrificed to a greater degree in Nebraska than perhaps in any other state.(fn13) As such, parties are less able to accurately gauge a shareholder's liabilities for corporate debt, which means creditors are without a disincentive to sue while defendants do not have as much incentive to settle.(fn14) Without more clearly-defined guidance from Nebraska courts, business owners will remain in confusion regarding the actual costs of running a small business in the state.

The primary purpose of this Article is to provide practitioners, judges, and business owners with a comprehensive analysis of Nebraska veil-piercing law to dissipate much of the confusion surrounding the doctrine. The analysis is based on a review of over 120 published and unpublished Nebraska cases from 1891 until 2017 relating to piercing the corporate veil.(fn15) This Article is unique in that it analyzes the major veil-piercing precedent in the context of the cases that existed at the time of such holdings. By providing historical context, important trends were found with respect to the role that fraud plays in Nebraska's veil-piercing jurisprudence, as well as two parallel avenues for disregarding the corporate entity. Additionally, this comprehensive analysis would be incomplete without a discussion of collateral issues, including reverse and horizontal veil piercing, veil-piercing procedure, piercing the LLC veil, the defense of estoppel, and the different standards applied to tort and contract creditors.

Section II of the Article discusses Nebraska's four-factor veil-piercing test and the role fraud plays in that test. Section III discusses two independent avenues for piercing the veil-diverting corporate assets and holding the shareholder as the alter ego of the corporation. Section IV discusses collateral issues, and Section V concludes.

II. PIERCING THE CORPORATE VEIL IN NEBRASKA: GENERALLY

The primary social benefit advocated by proponents of limited liability is that it incentivizes more business owners to invest-and risk-greater amounts of capital,(fn16) increasing business activity, employment, and tax revenue. Nebraska's legislature has long protected shareholders of Nebraska corporations from being individually liable for the debts of such corporations.(fn17) By doing so, the legislature made the judgment that the social benefits outweighed the costs associated with certain creditors' claims going unpaid.

But by allowing this limited liability to go unchecked, shareholders would have an incentive to change their behavior toward creditors in a socially-negative way in an effort to protect such shareholders' personal assets and pass on the costs associated with their overly-risky behavior to creditors. This behavior might include producing harmful consumer products,(fn18) causing toxic waste spills,(fn19) diverting assets from corporations to shareholders to prevent payment to credi-tors,(fn20) or misrepresenting the identities of ownership, management, or financial conditions of corporations so a creditor does business with the corporation without adequate security.(fn21)

Consequently, courts use their equitable authority to "look through the form" of a transaction "to its substance" to hold the owner liable for the debts of the corporation.(fn22) Most jurisdictions require creditors to satisfy two prongs in order to pierce the corporate veil: a "formalities" prong and a "fairness" prong.(fn23) The formalities prong, also referred to as the control, alter ego, or unity of interest prong, requires of the plaintiff to show such unity of interest and ownership that the separate personalities of the business entity and of the individual owner no longer exist.(fn24) A court will usually establish this prong by analyzing a number of factors to determine the extent of a shareholder's separation from and control over the corporation.(fn25) The fairness prong generally requires a showing of fraud, illegality, injustice, or some other wrongdoing by the entity.(fn26) The prong asks whether, under the facts and circumstances of the case, an inequitable result will occur if the business entity is not pierced.(fn27)

Furthermore, veil-piercing decisions are governed by established principles of equity jurisprudence where courts seek to "do justice" in a particular case by exercising discretion to mitigate the rigidity of strict legal rules.(fn28) These established principles include the following maxims of equity: (1) equitable relief is available only where there is no adequate remedy at law; (2) equity regards as done which ought to be done; (3) equity looks to the intent, rather than to the form; (4) equitable relief is extraordinary, not ordinary; and (5) equity only helps those who have done everything to help themselves.(fn29) As applied to veil piercing, this equitable relief helps to reduce the harsh consequences of limited liability.

A. NEBRASKA'S FOUR-FACTOR TEST

Nebraska corporations, limited liability companies, and other limited liability organizations are deemed separate from their inves-tors.(fn30) However, in equity, such entities may be disregarded and held to be the mere alter ego of the investor in various circumstances where necessary to prevent fraud or other injustice.(fn31) In the 1980 case of United States National Bank of Omaha v. Rupe,(fn32) the Nebraska Supreme Court enumerated for the first time four factors that are "[s]ome of the factors which are relevant in determining to disregard the corporate entity."(fn33) Those four factors included: (1) grossly inadequate capitalization; (2) insolvency of the debtor entity at the time the debt is incurred; (3) diversion by the investor or investors of company funds or assets to their own or other improper uses; and (4) the fact that the entity is a...