Nebraska Supreme Court: Lack of Control Over Corporation at Relevant Times Prevents Corporate Veil Piercing
407 N 117 Street v. Harper, 314 Neb. 843 (2023).
407 N 117 Street, LLC (“407”) leased property to Planet Group for a 7-year term. Planet Group later exercised a lease option for an additional 5-year term. Eventually Planet Group stopped making lease payments to 407. 407 sued Planet Group for nonpayment of rent and won.
However, Planet Group did not pay the judgment. Accordingly, 407 sued Marc Harper, the corporate president of Planet Group, and Art McGill, a former director of Planet Group.
Neither Harper nor McGill were part of Planet Group when it was incorporated, when it entered into the lease with 407, or when it exercised the lease option and neither has been a shareholder of or received a salary from Planet Group. Thus, they argued they had no liability to pay the judgment
The district court granted summary judgment in favor of Harper and McGill. 407 appealed. The Nebraska Supreme Court took the case and affirmed the district court’s judgment in favor of Harper and McGill.
A court generally views a corporation as a complete and separate entity from its shareholders and officers and will not hold such shareholders and officers personally liable for the debts of a corporation. A court will disregard a corporation’s identity where shareholders have used the corporation to commit fraud. This is known as “piercing the corporate veil.” To pierce the corporate veil using fraud, a plaintiff must allege and prove that the corporation was under actual control by the shareholder and that the shareholder exercised such control to commit a fraud. The court did not reach the issue of whether the corporate veil may be pierced against nonshareholders, because the record did not otherwise support veil piercing.
In the case at hand, the court considered the following factors when deciding whether to pierce the corporate veil on the basis of fraud: (1) grossly inadequate capitalization, (2) insolvency of the debtor corporation at the time the debt is incurred, (3) diversion by the shareholder or shareholders of corporate funds or assets to their own or other improper uses, and (4) the fact that the corporation is a mere façade for the personal dealings of the shareholder and that the operations of the corporation are carried on by the shareholder in disregard of the corporate entity. These are the typical factors that decide a case of this type.
A court measures inadequate capitalization at the time of incorporation. Harper and McGill were not a part of Planet Group at the time of incorporation. Harper and McGill were also not a part of Planet Group at the time the corporation incurred the debt and they did not receive any property or compensation from Planet Group. Finally, Planet Group is a legitimate business. Therefore, none of the factors weighed in favor of veil piercing.