How to Attack a Series LLC - Morris Law Center

How to Attack a Series LLC

What is a Series LLC?

In Nevada a series limited liability company, or series LLC, is a form of a limited liability company that provides liability protection across multiple “series” each of which is theoretically protected from liability arising from the other series. For both a traditional LLC and a series LLC, the total cost to renew each year is about $600 including registered agent fees, etc… This is where the advantage comes in.

For example, in a traditional LLC, it would take three LLCs to protect three rental properties. This is $1,800/year to renew. However, with the series LLC, the properties can theoretically all be protected by placing them in separate series within one series LLC. This saves $1,200/year even on this scale, so just image the benefits of dozens or even hundreds of properties in one series LLC.

For the purposes of this article, we will use a taxicab company as an example. However, the concepts for attacking a series LLC apply just the same to other industries.

Taxicab Companies Attempts to Avoid Personal Injury Liability

There appears to be a trend where taxicab companies are creating a master series LLC and then placing each taxicab in a separate series. Their idea being, only the one vehicle is on the hook for causing an accident instead of the entire taxicab company being subject to a lawsuit. For an injured party, the question is, can we get around the series LLC?

This article considers steps needed to conduct effective discovery aimed at obtaining a judgment against an LLC as a whole instead of just one series. We anticipate defenses that the driver was not an employee, but an independent contractor, and/or that the entire LLC cannot be liable for the series LLC’s judgment obligations. As explored below, there are certain steps you can take during the discovery process to make an argument that judgment can be obtained against the driver, the entire LLC, and the series within the LLC.

One difficulty is that there is not a lot of case law interpreting the requirements of a series LLC organized under Nevada law.  For example, a thorough search has revealed almost no case law interpreting the ability to collect a judgment against a series LLC from the master LLC in Nevada, or in any other state where a series LLC is permitted. This lack of developed law is likely due to the limited number of jurisdictions which allow for series LLC’s, as well as the fairly recent development of the series LLC in general.

Two Fronts of Attack

There appear to be two fronts in seeking to hold the Master LLC liable for the Series LLC’s debts/reach the Master LLC’s assets: one is to attack any defects in the statutory requirements which create internal liability shields in a Nevada series LLC, and the second is to apply traditional analysis of veil piercing, arguing that the Series LLC is the alter ego of the Master LLC.

Summary of Discovery Needed

Internal Liability Shield

  1. Ensure the Articles of Organization for the Master LLC authorizes creation of series. (NRS 86.296(2)).
  2. Ensure that the Series LLC’s members adopted an operating agreement. (NRS 86.296(2)).
  3. Ensure maintenance of separate records for the Series LLC’s assets and liabilities from those of the Master LLC. (NRS 86.296(3)(a)). (Some of the items sought for the alter ego below are applicable here as well).
  4. Ensure that either the Articles or the operating agreement creates an internal liability shield (adequately defines the separations). (NRS 86.296(3)(b)).

Alter Ego

  1. Obtain information on the members and/or managers of the Master LLC and the Series LLC.
  2. Obtain information on the employees and/or contractors who maintain financial records for the Master LLC and the Series LLC.
  3. Obtain information from the Articles, Operating Agreement, and/or Bylaws regarding the policies and procedures for operation of the Series LLC and determining if those procedures are followed on issues such as:
    1. Entering contracts or incurring liabilities;
    2. Expending resources/making payments;
    3. Accounting or reporting information to members/managers.
  4. Obtain information about the initial capitalization of the Series LLC.
  5. Obtain information about how and when assets of the Series LLC are used.
  6. Obtain information regarding any payments made from the Series LLC, and if those are paid towards obligations of the Master LLC and/or members/managers.
  7. Obtain minutes and meeting notes for the Master LLC and the Series LLC, and analyze for compliance with requirements under the governing documents and sufficient separation between the organizations.
  8. Seek the tax ID numbers for the Master LLC and Series LLC.
  9. Seek the business/office location for the Master LLC and the Series LLC.
  10. Seek the banking/account numbers and records for the Master LLC and the Series LLC.

Respondeat Superior

  1. Seek information regarding the hiring process, e.g. who does the hiring, and what organization are they a part of.
  2. Seek information regarding scheduling routes, reporting requirements, and who defines those obligations.
  3. Seek information regarding any rules or guidance on behavior, and who enforces those rules.
  4. Seek information about the ability of a driver to reject a cab fare, or select his own cab fares.
  5. Seek information about the ability of a driver to work for competitors.
  6. Seek information about any contractual assignments or assumption of liability for injury between the driver and the organizations.
  7. Obtain tax reporting information.
  8. Establish that Myers was operating the vehicle at the time of the accident as part of his work for Nellis Cab.
  9. Affirmatively disclose US Census bureau records for Clark County, Nevada.

Piercing the Veil in a Series LLC

There is a lack of developed case law on the issues of reaching assets of a Series LLC. In at least one case, judgment was taken against assets in a Nevada series LLC, which the judgment debtors then claimed was improper, however, there was no substantive ruling because it was not raised before the trial court. Flaten v. Couture, 2018 ND 136, 912 N.W.2d 330 (2018). Ultimately, the issue does not seem to have been brought before Nevada courts.

The statutes, and available case law, suggest that there is a two-pronged approach to prevent limitation of judgment to only the assets of the Series LLC, and thereby seek satisfaction from the Master LLC. The first step is to seek information/argue that the internal liability shields of the Series LLC were never created and/or were ineffective for failure to comply with the statutory creation and separation of assets/liabilities requirements. This would be an argument that, essentially, no limits between the Series LLC and the Master LLC exist because they failed to follow the statutory requirements, and therefore they are all part of the Master LLC. The statute can be read in a way that requires multiple steps to create the liability shields, wherein a failure to execute even one of the steps creates liability. The second step is to seek information and then argue traditional corporate veil piercing analysis should apply to show that the Series LLC is merely the alter ego of the Master LLC. Nevada has long applied alter ego analysis to allow an injured party to ignore the corporate form and seek recovery.

When states started adopting Series LLC creation by statute, academic research expressed the following concerns:

Another major area of uncertainty with the Series LLC concerns the actual strength of the internal liability shields. There is absolutely no case law on the effectiveness of the internal liability shields in domestic cases, let alone outside of the jurisdiction of formation. A very real fear, however, is that the internal shields of a Series LLC may be easily subject to “piercing.” Disregarding the corporate entity and holding shareholders liable (often referred to as “piercing the corporate veil”) is an extreme equitable remedy, reserved for radical cases when a court feels it is “necessary to impose shareholder liability despite corporate law’s promise of limited liability.” The policies underlying the doctrine of veil piercing justify its extension to other limited liability entities, such as the LLC. One of the most commonly cited reasons for piercing a veil of limited liability is that the corporate entity (or the limited liability entity, as the case may be) is but a mere “alter ego” of the shareholder. Series LLC statutes typically require the maintenance of separate records for each series, and the failure to comply could show a treatment of one series as a mere alter ego of the LLC as a whole. One fear is that the requirement of separate record maintenance may be lost on an insufficiently cautious manager. This concern results from the fact that the Series LLC is supposed to be a singular entity. Whether such improper record maintenance would then lead to veil piercing (defeating the entire purpose of the internal shields) is, at best, unclear.

Michael E. Fink, The Series LLC: Suggestions for Surviving Some Serious Uncertainties, 72 Univ. of Pittsburgh L. Rev. 597, 602-03 (2011). Series LLCs “may be more susceptible to courts piercing the corporate veil,” Jennifer Avery et al., Series LLCs: Nuts and Bolts, Benefits and Risks, and the Uncertainties That Remain, 45 Tex. J. Bus. L. 9, 15 (Fall 2012). It appears likely that Nevada courts will be receptive to the concept of applying traditional corporate veil piercing to a series LLC where there is justification in the record to do so.

Statutory Formation Requirements

The key parts of Nevada’s series LLC legislation involve the creation of the series LLC, and the continued separation of the series. This leaves multiple angles to analyze and potentially attack the claimed separation of a series and a master LLC. It is important to consider that this may be less difficult than establishing a traditional veil-piercing argument – the argument here would be that no separation of assets or liabilities exists between the master LLC and the series LLC because it was either never properly created in the first place, or the plain statutory requirements were not followed, and therefore there is no statutory protection. Put another way, this is an argument that is based in statute, and not the equitable remedy of piercing the corporate veil.

In Nevada, to obtain a series LLC, the following steps must be taken:

  1. Validly creating an LLC which authorizes the creation of one or more series in either the articles of organization or operating agreement. NRS 86.296 (2).
  2. Each series must adopt an operating agreement.

A validly created series has many abilities independent of the master LLC, including the ability to make contracts in its own name, hold property, convey interests, have separate business purposes, and sue and be sued in its own name. Id. The precise statutory language is that the series LLC “may” do these things. The statutory language is flexible enough to argue that for the series LLC to have a certain power, such as the ability to own property or operate independently of the master LLC, the operating agreement needs to sufficiently define these powers. On the other hand, these powers might be seen as automatically granted. (However, the allocation of assets/liabilities must appear in the operation agreement, see below).

Once a series LLC is created, statutory requirements must be followed to limit internal liability. If a series LLC fails to observe these requirements, there may be no way to prevent seeking assets of the Master LLC in fulfilling obligations of the Series LLC. The formalities are found in NRS 86.296(3). First, the series must have “separate and distinct records” from the other parts of the company. Id. at (3)(a). Additionally, the liability of the series must be provided for in the articles of organization or the operating agreement. Id. at (3)(b).

While there is no Nevada case law on this issue, it appears that if either of these prerequisites are not met, there is no further need to pierce the corporate veil, and the liabilities of the series automatically become the liabilities of the master LLC. These issues could be decided on summary judgment as a matter of law if any are clearly present.

Alter Ego

To establish a claim of alter ego, “(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, under the circumstances, sanction a fraud or promote injustice.” LFC Mktg. Group, Inc. v. Loomis, 116 Nev. 896, 904, 8 P.3d 841, 846 (2000), quoting Polaris Industrial Corp. v. Kaplan, 103 Nev. 598, 601, 747 P.2d 884, 886 (1987). The injured party must evidence an alter ego claim by a preponderance of evidence threshold. Id. So long as “substantial evidence” supports the decision, the district court will normally not be overturned. Id., citing Lorenz v. Beltio, Ltd., 114 Nev. 795, 807, 963 P.2d 488, 496 (1998).

Nevada has recognized explicit factors in evaluating an alter ego claim. The factors are: “(1) 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.” Id., citing Polaris, 103 Nev. at 601. While these factors have been recognized, the circumstances of each case may be considered, and the recognized factors are not exclusive. Certain v. Sunridge Builders, Inc., 431 P.3d 38, 2018 Nev. Unpub. LEXIS 1078, *3-*4 (Nev. Nov. 28, 2018) (unpublished disposition), quoting Polaris, 103 Nev. at 602.

Respondeat Superior

Avoiding Application of NRS 706.473

Cab companies in Nevada have sometimes attempted to avoid a respondeat superior claim by claiming that the driver is an independent contractor because the company leased the cab to the driver under NRS 706.473. See Yellow Cab of Reno, Inc. v. Second Jud. Dist. Ct., 262 P.3d 699 (Nev. 2011) (“Yellow Cab I”); see also Doud v. Yellow Cab of Reno, 96 F. Supp. 3d 1076 (D. Nev. Mar. 13, 2015) (“Yellow Cab II”). Nevada courts have not ruled definitively if a lease under NRS 706.473 is dispositive as to a respondeat superior claim. Id. However, the Nevada Supreme Court in Yellow Cab I suggests that it may be dispositive.

NRS 706.473 allows cab companies to lease cabs with independent contractors in counties with a population under 700,000. Yellow Cab I determined that NRS 706.473’s population limitation is defined by NRS 0.050, which uses records from the decennial United States Census for statutory definitions of “population.” Therefore, to avoid application of a potentially dispositive lease under NRS 706.473, it is a good practice for a Plaintiff to produce United States Census Bureau records showing the population of Clark County from the 2010 census. These records already indicate that Clark County’s population was far above the 700,000 resident limitation for application of NRS 706.473.

Establishing a Respondeat Superior claim in Nevada

            Nevada law generally looks to the degree of control exercised over the other party. Amezcua v. Jordan Transp., Inc., 2015 U.S. Dist. Lexis 170815 (Dec. 18, 2015 D. Nev.) quoting Yellow Cab I. Courts applying Nevada law have rejected analysis of factors beyond degree of control and ability to select the servant. Id. Generally, Nevada treats the question of whether a defendant is an employee or an independent contractor as a question of fact for the jury. Yellow Cab I; see also Murillo v. Goad, 2017 U.S. Dist. LEXIS 204738 (Dec. 12, 2017 D. Nev). However, summary judgment can still be appropriate if there is no dispute of fact on the issue of control. Amezcua, 2015 U.S. Dist Lexis 170815 (Dec. 18, 2015 D. Nev.); see also Yellow Cab I (suggesting the trial court may wish to reconsider its denial of summary judgment on remand); Rockwell v. Sun Harbor Budget Suites, 112 Nev. 1217 (1996) (employer-employee relationship existed as a matter of law).

In determining the degree of control, Nevada courts have looked to the following evidence:

  • Rules/guidance of behavior (Murillo v. Goad)
  • Provision of salary, benefits (Amezcua v. Jordan Transp., Inc.)
  • Tax forms (1099 vs. W-2) (Amezcua v. Jordan Transp., Inc.)
  • Requiring certain working hours (Amezcua v. Jordan Transp., Inc.)
  • Ability to reject deliveries (Amezcua v. Jordan Transp., Inc.)
  • Ability to work for competitors (Amezcua v. Jordan Transp., Inc.)
  • Right to supervise/manage conduct of persons carrying out the work (Wells, Inc. v. Shoemake)
  • Contractually assigning responsibility/assuming liability. (Thomas v. Riverside Resort and Casino, 110 Nev. 1283, 885 P.2d 575 (1994))

Finally, we will have to establish that the accident occurred while the driver was within the course and scope of his duty. In most cases, establishing this fact will require minimal discovery.

Conclusion

In sum, a taxicab within a series LLC is the type of situation that calls for personal injury counsel that you trust will take the fight to the taxicab companies. We offer complimentary consultations here at MLC, so please reach out at any time to discuss further.

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