2. Application by Nebraska Courts Nebraska courts, consistent with courts around the country, view a corporation as a legal entity separate from its shareholders unless the legal entity is used for improper purposes.5 A plaintiff seeking to pierce the corporate veil in Nebraska must allege and prove the corporation was under the actual control of the shareholder and that the shareholder exercised such control to commit wrongdoing in contravention of the plaintiff’s rights.6 Nebraska courts use a fact-intensive analysis when analyzing corporate veil piercing claims for corporations and limited liability companies, including in the case of a parent-subsidiary relationship. Courts are hesitant to pierce the corporate veil simply because a parent and subsidiary share assets or services. In Global Credit Services v. AMISUB, the Nebraska Supreme Court clarified the doctrine of separate corporate existence does not break down simply because a subsidiary is wholly owned by its parent; nor is ownership of all the stock by one person a sufficient basis to disregard corporate form. For the plaintiff to succeed on its claim, according to the court, it must show that the parent dominated the subsidiary such that the subsidiary had no separate existence and functioned solely to achieve purposes of its parent entity.7 Nebraska courts use similar methods when deciding veil piercing claims in the LLC context. Like a corporation, the corporate veil of an LLC can be pierced to prevent fraud or injustice.8 In E&A Consulting Group Inc. v. World Baseball Village Management LLC, the plaintiff sought to pierce the subsidiary’s corporate veil to recover from its member. The court described four factors to weigh when determining whether to pierce the corporate veil: A.Inadequate Capitalization (or very small in relation to the nature of the business of the entity). The capitalization is measured at the time of incorporation, and undercapitalization presents a question of fact that turns on the nature of the business. B. Insolvency. Whether a corporation was insolvent at the time the debt was incurred. C. Diversion of Funds for Improper Uses. When a principal shareholder appropriates and uses corporate funds and property for personal purposes and thereby defrauds and causes damages to creditors, the shareholder can be held individually liable for corporate debt. D. Subsidiary Is a Facade or Shell. Whether the corporation is a facade for the personal dealings of the shareholder and operations of the corporation are carried on by the shareholder in disregard of the corporate entity. The separate entity concept may be disregarded where the corporation is a mere shell, serving no legitimate business purpose, and is used as an intermediary to perpetuate fraud on the creditors. Notably, this exact four-factor test has not yet been applied to a Nebraska LLC in any reported Nebraska appellate decision,9 though the four-factor test has been used in two unreported decisions.10 Although these factors are not new to Nebraska case law, they are relatively new to the LLC veil piercing context. Accordingly, it is unclear whether Nebraska courts will continue to use these four specific factors. 3. Key Takeaways In sum, Nebraska courts will address veil-piercing claims on a case-by-case basis. Corporate entities should maintain clear boundaries between parent and subsidiary entities to avoid potential liability resulting from veil piercing claims. Best practices to avoid liability include: Properly capitalizing and insuring the subsidiary; creating a separate and independent bank account for the subsidiary; maintaining separate books and records for the subsidiary; and ensuring all financial transactions with the subsidiary are on an arm’s length basis, including any loan to or from the parent. With these suggestions in mind, practitioners can assist their clients in setting up and maintaining parent-subsidiary structures in a manner that will better withstand a piercing the corporate veil claim. Hannah Fischer Frey is a partner and Katie L. Kalkowski is an associate at Baird Holm LLP. Fischer Frey focuses her law practice in the areas of federal and state income tax law and business succession planning. Kalkowski’s practice focuses on corporate transactions and general corporate matters, including entity formation, corporate governance, strategic transactions, and regulatory compliance. For more information, contact Fischer Frey or Kalkowski at hfrey@bairdholm.com or kkalkowski@bairdholm.com, respectively. ENDNOTES 1 See Christian v. Smith, 759 N.W.2d 447 (Neb. 2008). 2 Neb. Rev. Stat. section 21-104(a). 3 See Christian, 759 N.W.2d at 447. 4 See Philip D. Robben & Kelley Drye, Piercing the Corporate Veil, PRACTICAL LAW CORPORATE & SECURITIES (last visited April 11, 2023). 5 Global Credit Servs., Inc. v. AMISUB, 508 N.W.2d 836 (Neb. 1993); Hayes v. Sanitary & Improvement Dist. No. 194, 244 N.W.2d 505, 511 (Neb. 1976). 6 See Global Credit Servs., 508 N.W.2d at 842. 7 See Global Credit Servs., 508 N.W.2d at 843. 8 See E & A Consulting Group, Inc. v. World Baseball Village Management, LLC, 2013 WL 4437312 (Ct. App. Neb. 2013) (declining to pierce the corporate veil on a technical finding that WB Holdings was not yet a member of WB Management at the time of the conflict). 9 See Christopher W. Peterson, Piercing the Corporate Veil in Nebraska, 51 CREIGHTON L. REV. 247, 274 (2018). 10 See E & A Consulting Group, Inc. v. World Baseball Village Management, LLC, 2013 WL 4437312 (Ct. App. Neb. 2013); TFF, Inc. v. St. Ellen 100 LLC, 2014 WL 3421485 (Ct. App. Neb. 2014). 25 www.nescpa.org
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