Current Developments: May 2024 Review

May 17, 2024 10:00:00 AM


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From a new Internal Revenue Service (IRS) notice that extends relief for some beneficiaries of inherited individual retirement accounts (IRAs) to the release of a final rule by the Social Security Administration (SSA) omitting food from Supplemental Security Income (SSI) in-kind support and maintenance calculations and a US Supreme Court case clarifying the harm that must be shown for employees to make a Title VII discrimination claim, we have recently seen significant legal developments. To ensure that you stay abreast of these changes, we have highlighted some noteworthy developments and analyzed how they may impact your estate planning, elder and special needs law, and business law practices.

Estate Planning

IRS Extends Relief for Certain Beneficiaries of Inherited IRAs

I.R.S. Notice 2024-35, I.R.B. 2024-19 (Apr. 16, 2024)

Under the 2019 SECURE Act, when an employee with a qualified retirement account dies, most nonspouse beneficiaries—called designated beneficiaries—of the qualified retirement account are no longer permitted to stretch postdeath distributions over their life expectancy; rather, the deceased employee’s entire interest must be distributed to those beneficiaries within 10 years after the employee’s death, known as the 10-year rule. Certain beneficiaries, called eligible designated beneficiaries, can still use the life expectancy rule, sometimes called stretch, for distributions.

The 2022 proposed regulations on required minimum distributions (RMDs) provide that if the employee dies on or after their required beginning date, designated beneficiaries must take annual RMDs through the end of the 10-year period instead of waiting until the tenth year to take a distribution of the entire account. 

On April 16, 2024, the IRS released Notice 2024-35, which extended temporary relief through a waiver of the steep excise tax for beneficiaries subject to the SECURE Act’s 10-year rule who fail to take RMDs for 2024. Notices 2022-53 and 2023-54 waived the excise tax for beneficiaries subject to the 10-year rule who did not take RMDs for 2021, 2022, and 2023. Notice 2024-35 also announced that the IRS intends to issue final regulations on RMDs that will apply to determine RMDs for calendar years beginning on or after January 1, 2025.

Takeaways: Only the excise tax, not the RMD, has been waived. Therefore, the entire interest must still be distributed to the affected beneficiaries within 10 years after the employee’s death. Although there is no penalty for failure to take RMDs during the years for which relief is available, it may still be advantageous for some beneficiaries to take them, particularly if they prefer smaller annual distributions rather than having a larger distribution included in their income at a later date, which could increase their income tax liability. 

IRS Issues Final Rule Regarding Extensions of Time to Make Allocations of GST Exemption and Certain GST Elections

Relief Provisions Respecting Timely Allocation of GST Exemption and Certain GST Elections, 26 C.F.R. pts. 26, 301, and 602 (May 3, 2024)

On May 3, 2024, the Treasury Department and the IRS released a final rule 16 years after the issuance of their proposed rule, addressing the circumstances and procedures under which an extension of time will be granted to make certain exemption allocations and elections related to the generation-skipping transfer (GST) tax. The final rule differs from the proposed rule, which stated that relief would not be granted to revoke elections under Internal Revenue Code §§ 2632(c)(3) and 2632(c)(5), for example, to opt out of or into the automatic allocation rules. The final rule eliminated that statement, indicating that those elections are not irrevocable and relief is available provided the requirements set forth in the final rule are met.

With limited exceptions, the relief is provided by requesting a private letter ruling from the IRS supported by detailed affidavits by the transferor or executor and specified other individuals with relevant knowledge describing the events that led to a failure to allocate the GST exemption or make a timely election; other related writings; and dated declarations by the transferor or executor that the relevant facts have been included and all facts are true, correct, and complete. The final rule differs from the proposed rule in that it reduces the amount of information that must be included in the affidavits and, thus, the burden it imposes on those seeking relief.

The final rule states that requests for relief will be granted if the transferor or the executor of the transferor’s estate provides evidence, including affidavits, establishing that they acted reasonably and in good faith and that the grant of relief will not prejudice the government's interests. The final rule provides the following nonexhaustive list of factors, none of which will be determinative in all cases, for determining whether the transferor or executor acted in good faith:  

  • The intent of the transferor or executor to timely allocate the GST exemption or make an election
  • Intervening events beyond the control of the transferor or executor that caused the failure to timely allocate or make an election
  • Lack of awareness of the need to timely allocate or make an election
  • Consistency by the transferor in allocating the GST exemption to one or more trusts or skip persons
  • Reasonable reliance on the advice of a qualified tax professional

In addition, the IRS will consider other factors to determine whether the government's interests have been prejudiced if relief is granted.

The final rule became effective May 6, 2024.

Takeaways: The GST tax is a flat 40 percent tax on transfers of assets to beneficiaries two or more generations younger than the donor and is designed to prevent donors from avoiding transfer taxes on the next generation by transferring assets directly to grandchildren or great-grandchildren. The tax applies when the amount transferred exceeds the federal estate and GST lifetime exemption amount, which is $13.6 million for individuals and $27.22 million for married couples for 2024. Because the current exemption amount is scheduled to expire on December 31, 2025, in the absence of congressional action, wealthy clients will benefit from planning aimed at taking advantage of the higher exemption amount now. If the current law expires, the exemption amount will be reduced by about half, possibly to around $7.5 million for individuals and $14.5 million for married couples, depending on the adjustment for inflation. The result would be more clients who need to implement strategies to reduce estate, gift, and GST taxes.

Ninth Circuit Court of Appeals: Tax Court Did Not Err in Finding Mother’s Payments to Son Were Gifts Instead of Loans

In re Estate of Bolles v. Comm’r, No. 22-70192, 2024 WL 1364177 (9th Cir., April 1, 2024)

The estate of Mary Bolles appealed the tax court’s orders that had found an estate tax deficiency and had declined to award the estate administrative or litigation costs. On appeal, the Ninth Circuit Court of Appeals reviewed the tax court’s determination of questions of fact for clear error and its conclusions of law de novo.

Mary Bolles made numerous payments of money to her son Peter between 1985 and 2007. Peter had run his father’s architecture firm since the early 1970s, and it had many financial fluctuations over the years. Mary had also previously loaned money to her husband to support the business, which he had always repaid. The tax court found evidence that a bona fide creditor-debtor relationship existed between Mary and Peter from 1985 to 1989. The Ninth Circuit found it reasonable for the tax court to conclude that Mary had a reasonable expectation that Peter would use the payments to benefit the architect firm and repay her the amounts she had advanced to him.

The Ninth Circuit also agreed with the tax court’s finding that the payments Mary made to Peter from 1990 to 2007 were made under different factual circumstances because there was no evidence that Peter made any repayments during that period. In addition, Mary created a revocable trust in 1989 that excluded Peter from any distribution of her estate upon her death. Peter also signed an acknowledgment that he could not repay any of the amounts Mary had previously loaned. Consequently, the Ninth Circuit determined that it was reasonable for the tax court to determine that no bona fide creditor-debtor relationships existed during that period and that the payments were gifts rather than loans.

Because the tax court did not clearly err in calculating the estate tax deficiency based on its determination that the 1985 to 1989 payments were loans and the 1990 to 2007 payments were gifts, the Ninth Circuit affirmed.

Takeaways: Wealthier family members often make low-interest loans to younger, less affluent family members, providing them with liquidity and allowing them to benefit from appreciation on the borrowed amount that is greater than the interest rate. To avoid a loan being treated as a transfer subject to gift tax, it is crucial for lenders to not only treat such advances as loans consistently (for example, through the execution of a promissory note, charging interest, and providing security) but also to steadfastly demonstrate their intentions by documenting their expectation of repayment and by enforcing the terms of the loan.

Full-Time Residence Not Required Where Will Provided Life Estate in House Would Terminate if it Was Not Used as Personal Residence

Brown v. Johnson, No. 0491-23-4, 2024 WL 1624672 (Va. Ct. App. Apr. 16, 2024)

Mary Puttman executed a will in 1998 stating that if her sister, Anna; Anna’s husband, Clarence; and their daughter Sharon survived her, she devised her house to them until (1) “their death” or (2) they failed to use it as their personal residence for 90 days. The will further specified that during the period of their “determinable life estate,” Anna, Clarence, and Sharon would have to pay costs associated with the maintenance of the property, including taxes, repairs, and homeowner’s insurance policy premiums. Brown v. Johnson, No. 0491-23-4, 2024 WL 1624672, at *1 (Va. Ct. App. Apr. 16, 2024). In addition, the will provided that if Anna, Clarence, and Sharon did not survive Mary for at least 30 days, the house would be devised and bequeathed “absolutely and in fee simple” to Mary’s nieces, LaVonnia and Sylvia. Id.

Clarence died before Mary, who passed away in 2010. Mary was survived by Anna, Sharon, LaVonnia, and Sylvia. Anna’s two other children, Magaera and Reginald, also survived Mary. When an earlier will dated 1992 was admitted to probate, Anna, Magaera, and Reginald lived in the house. Anna died in 2018, and Reginald died in 2020. Magaera continued to live in the house. Sharon testified that although she had an apartment in another location, she stayed at the house in a room she maintained for her own use two or three times a week after Reginald’s death, made repairs to the house, and allowed Magaera to live there. In 2021, she moved into the house as her full-time residence.

In 2020, Mary’s 1998 will, which revoked the 1992 will, was admitted to probate. LaVonnia and Sylvia filed a complaint in 2021 seeking a declaratory judgment that (1) Sharon’s life estate had terminated because she had not used the house as her personal residence, and (2) LaVonnia and Sylvia had a remainder interest in the house. The trial court determined that Sharon’s life estate had not terminated because she had used the house as her personal residence and that LaVonnia and Sylvia did not take under the 1998 will because the condition precedent that Clarence, Anna, and Sharon all die within 30 days of Mary’s death did not occur.

On appeal, the Virginia Court of Appeals affirmed the trial court’s judgment. The court reviewed the trial court’s interpretation of the will’s legal effect de novo to examine the whole will, determine the intention of the testator from the language used, and give effect to the meaning of that language if its meaning was plain.

The court rejected LaVonnia and Sylvia’s assertion that Mary’s will created a life estate for Sharon only if all the individuals named—Anna, Clarence, and Sharon—survived Mary, and that because Clarence died before Mary, no life estate came into being for any of them. The court noted that the will stated “the singular shall include the plural and vice versa,” and therefore, the use of the word “and” between Anna, Clarence, and Sharon’s names did not “require [the court] to hold that she intended that they all must have survived her to create a life estate.” Id. at *3. Further, the “dominant intention gathered from the four corners of the will” indicated that termination of the life estate upon “their death” did not refer to the simultaneous deaths of Anna, Clarence, and Sharon but to the death of each of them. Id. Thus, the will created a determinable life estate in each named individual who survived Mary. No life estate came into being for Clarence because he died before Mary. Anna received a life estate that terminated at her death in 2018. Sharon received a life estate, subject to the residency condition.

The court also rejected LaVonnia and Sylvia’s argument that the clause in the will that provided that if Anna, Clarence, and Sharon did not survive Mary for at least 30 days the house would be devised and bequeathed “absolutely and in fee simple” to LaVonnia and Sylvia created a remainder interest in them. Rather, the part of the will providing for the determinable life estates for Anna, Clarence, and Sharon did not identify any remaindermen but created a reversion in Mary’s estate that vested on her death and became possessory upon the termination of the life estate. The part of the will in which LaVonnia and Sylvia were named did not create a remainder; rather, it created “a contingent fee simple subject to the condition precedent that Anna, Clarence, and Sharon not survive Mary by at least 30 days.” Id. at *4.

In addition, the court disagreed with LaVonnia and Sylvia’s argument that Sharon’s life estate had terminated because she had not used the house as her personal residence. In accordance with the rule that the testator’s intent controls and that intent must be determined from the language used in the will, given its ordinary meaning, the court held that personal residence refers to “a dwelling place or home used by an individual in her personal capacity or not used commercially.” Id. at *5. Further, the court noted that domicile, which refers to someone’s usual place of abode, is not synonymous with personal residence, which is not necessarily one’s primary or principal home. Therefore, Sharon was not required to use the house as her sole or exclusive residence to avoid terminating her life estate.

Takeaways: The Brown case provides a reminder of the care that must be exercised in drafting estate planning documents, especially when drafting complicated and highly customized provisions such as providing for a life estate in real property. Attorneys must strive to understand their clients’ wishes regarding their property so they can clearly and succinctly draft the estate planning documents to reflect these wishes. Attorneys should also strive to discover the clients’ desired contingencies, backup plans, and remainder beneficiaries. Wealth Docx includes information designed to help avoid ambiguities related to life estate provisions that could lead to litigation. 


Elder Law and Special Needs Law

SSA Issues Final Rule Omitting Food from In-Kind Support and Maintenance Calculations

Omitting Food From In-Kind Support and Maintenance Calculations, 20 C.F.R. §416 (March 27, 2024)

The SSI program provides monthly payments to disabled children and adults and adults aged 65 and older who meet eligibility requirements, including income and resource limits, to help them pay for basic needs such as rent, food, clothing, and medicine. Under the current rules, a person’s in-kind support and maintenance (ISM)—the provision of or payment by another person, organization, or trust of shelter and food expenses—may affect their eligibility for SSI benefits or reduce the amount of their monthly payment.

On March 27, 2024, the SSA released a final rule updating its regulations to exclude food from its ISM calculations. Under the final rule, which will take effect on September 30, 2024, the SSA will consider only shelter expenses, including room, rent, and mortgage payments; real property taxes; heating fuel; gas; electricity; water; sewerage; and garbage collection services, in its ISM calculations. Although the SSA will omit food expenses from its ISM calculations, it will ask applicants or recipients who live in another person’s household whether others pay for or provide them with all of their meals for the sole purpose of determining whether to apply the One-Third Reduction rule or the Presumed Maximum Value rule to value their shelter (click here for more information).

Takeaways: The final rule will ensure that food assistance provided by family and friends is treated the same as food support provided by charitable and government sources, which is not the case under the current rules. The rule is also designed to make ISM calculations easier for applicants, recipients, and agency employees to understand and apply. It will reduce the amount of information applicants and recipients must report, decrease the variability and increase the accuracy of monthly payments, and reduce the government’s administrative burden, resulting in savings. In addition, the final rule promotes greater equity by increasing the financial security of SSI recipients who, by definition, have low income and resources and are more likely to be food insecure. 

CMS Releases Final Rule Setting Minimum Staffing Standards for Long-Term Care Facilities

Medicare and Medicaid Programs; Minimum Staffing Standards for Long-Term Care Facilities and Medicaid Institutional Payment Transparency Reporting, 42 C.F.R. pts. 438, 442, and 483 (Apr. 22, 2024)

On April 22, 2024, the Centers for Medicare and Medicaid Services (CMS) issued a final rule establishing minimum staffing standards for long-term care facilities and requiring states to report the percentage of Medicaid payments for certain Medicaid-covered institutional services spent on compensation for direct-care workers and support staff. 

The rule requires a registered nurse to be on site 24 hours a day, seven days a week, with exemptions for certain circumstances. In addition, nursing facilities must provide a total of 3.48 nurse staffing hours per resident day (HPRD) of nursing care. This minimum staffing requirement must include at least 0.55 HPRD of direct care by a registered nurse and 2.45 HPRD of direct nurse aide care. Any combination of nursing staff may provide the remaining 0.48 HPRD. However, a higher staffing level will likely be required if the residents in a facility require a higher level of care due to the severity of their needs or illness.

The final rule provides for a staggered implementation of the requirements: rural facilities will be given up to five years to comply, and nonrural facilities will be given three years. There are exemptions from compliance with the final rule under the following limited circumstances:

(1) the workforce is unavailable as measured by having a nursing workforce per labor category that is a minimum of 20 percent below the national average for the applicable nurse staffing type, as calculated by CMS, by using the Bureau of Labor Statistics and Census Bureau data;

(2) the facility is making a good faith effort to hire and retain staff; 

(3) the facility provides documentation of its financial commitment to staffing; 

(4) the facility posts a notice of its exemption status in a prominent and publicly viewable location in each resident facility; and 

(5) the facility provides individual notice of its exemption status and the degree to which it is not in compliance with the HPRD requirements to each current and prospective resident and sends a copy of the notice to a representative of the Office of the State Long-Term Care Ombudsman.

Medicare and Medicaid Programs; Minimum Staffing Standards for Long-Term Care Facilities and Medicaid Institutional Payment Transparency Reporting, at 7–8 (Apr. 22, 2024).

The final rule is effective June 21, 2024. Long-term care facilities must implement facility assessment requirements to document the necessary resources and staff to provide ongoing care within 90 days of the rule’s publication in the Federal Register on May 10, 2024. 

Takeaways: Although the goal set forth in the final rule is to ensure safe and quality care at long-term care facilities, many in the long-term care industry are concerned that the unintended consequences may be that nursing facilities will have to reduce the number of beds available or even close due to their inability to hire adequate numbers of nurses to meet the mandates. There is currently a shortage of nurses, and many available nurses do not choose careers in long-term care facilities, making it difficult for long-term care facilities to comply with the mandate. Advocates for the change, however, argue that these long-needed patient care considerations will result in better outcomes in an industry often prone to cutting corners in search of profit maximization.


Business Law

US Supreme Court: Employee Must Show Some—Not Significant—Harm for Title VII Discrimination Claim

Muldrow v. City of St. Louis, Missouri, 144 S. Ct. 967 (Apr. 17, 2024)

Sergeant Jatonya Muldrow worked as a plainclothes officer for the St. Louis Police Department in its specialized Intelligence Division from 2008 to 2017. She investigated public corruption, human trafficking, and gangs and was head of the gun crimes unit. In addition, she was deputized as a Task Force Officer with the Federal Bureau of Investigation, which provided additional perks and privileges including the use of an unmarked take-home vehicle. However, in 2017, she was transferred out of the Intelligence Division against her wishes by a new commander and replaced with a male officer. Sergeant Muldrow’s pay and rank remained the same, but her responsibilities and schedule changed. In her new position as a uniformed officer, she supervised neighborhood patrol officers instead of working with high-ranking officials in the Intelligence Division. In addition, she was no longer allowed to use the unmarked take-home vehicle, and her schedule included weekend shifts.

Sergeant Muldrow brought a Title VII suit against the City of St. Louis alleging that her transfer out of the Intelligence Division was due to discrimination based on sex with respect to the terms and conditions of her employment (see 42 U.S.C. § 2000e-2(a)(1)). The federal district court granted the City’s motion for summary judgment, and the Eighth Circuit Court of Appeals affirmed on the basis that the transfer did not result in a materially significant disadvantage to Sergeant Muldrow. 

The US Supreme Court vacated and remanded in a unanimous decision. Title VII makes it unlawful for an employer “to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s . . . sex.” 42 U.S.C. § 2000e-2(a)(1). The court determined that although the words “discriminate against” did require Sergeant Muldrow to show a difference in treatment that injured or was disadvantageous to her concerning an identifiable term or condition of her employment, she did not have to show that the harm was significant. Further, the court found that “[t]o demand ‘significance’ is to add words—and significant words, as it were—to the statute Congress enacted. It is to impose a new requirement on a Title VII claimant so that the law as applied demands something more of her than the law as written.” Muldrow v. City of St. Louis, Missouri, 144 S. Ct. 967, 974 (Apr. 27, 2024). Therefore, the transfer must have left Sergeant Muldrow worse off, but it did not need to leave her significantly worse off; it was immaterial that her rank and pay remained the same if she could prove her allegations that she had been moved to a less prestigious position with fewer perks and less regular hours. As a result, the court vacated the Eighth Circuit’s opinion and remanded the case for further proceedings consistent with its opinion.

Takeaways: The court’s decision in Muldrow abrogates case law in several circuits that have required showing that a forced transfer resulted in significant harm and where workers’ claims were rejected “solely because courts rewrote Title VII, compelling workers to make a showing that the statutory text does not require.” Id. at 972. The decision is likely to make it easier for plaintiffs who allege employment discrimination based on “race, color, religion, sex, or national origin,” 42 U.S.C. § 2000e–2(a)(1), to make the initial showing necessary to overcome motions to dismiss or for summary judgment. Employers should carefully evaluate whether there are sound business reasons for all job transfers or other employment decisions that could result in “some harm” to affected employees.

FTC Issues Final Rule Adopting a Comprehensive Ban on New Noncompete Clauses for All Workers

Non-Compete Clause Rule, 16 C.F.R. pts. 910 and 912 (Apr. 23, 2024)

On April 23, 2024, the Federal Trade Commission (FTC) issued its final Non-Compete Clause Rule, which provides that it is a violation of section 5 of the FTC Act, 15 U.S.C. § 45, which prohibits “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce,” for persons to enter into noncompete clauses with workers after the effective date of the final rule. Unless it is delayed or enjoined by a court order in one of numerous lawsuits already commenced, the final rule will be effective September 4, 2024.

The final rule treats existing noncompete clauses differently depending upon whether they are with senior executives or other workers. Existing noncompete clauses with senior executives may remain in effect after the rule’s effective date because senior executives are less likely to be subject to “acute, ongoing” harms that other workers may experience if their noncompete clauses remain enforceable. This exception also reflects concerns raised during the comment period about the practical impact of making existing noncompete clauses with senior executives unenforceable. In contrast, existing noncompete clauses with other workers will no longer be enforceable after the final rule goes into effect. After the final rule is effective, it is an unfair method of competition to enter into or attempt to enter into, enforce or attempt to enforce, or represent that workers are subject to new noncompete clauses, regardless of whether the affected workers are senior executives or other workers.

For all current and past workers whose noncompete clauses will be invalidated by the final rule, employers must provide “clear and conspicuous notice to the worker by the effective date that the worker’s noncompete clause will not be, and cannot legally be enforced against the worker” unless the worker’s contact information is unavailable. Non-Compete Clause Rule, 16 C.F.R. § 910.2 (Apr. 23, 2024). The notice must be delivered as specified in the final rule, and the person who entered into the noncompete with the worker must be identified. The final rule includes model language for the notice it requires.

A worker protected by the rule includes an “employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person,” regardless of whether they are paid or unpaid. Id

A noncompete clause is defined as a term or condition of employment that penalizes or prohibits a worker from

(1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or

(2) operating a business in the United States after the conclusion of the employment that includes the term or condition.

Id. Whether a contractual provision is a noncompetition clause depends not upon what it is called but upon how it functions. Although nondisclosure and nonsolicitation provisions would not typically fall within this scope, they will be prohibited under the final rule if they are so broad that they function as a noncompete clause. Nondisclosure and nonsolicitation agreements would generally not be prohibited under the final rule, however, because they do not prohibit a worker from working for another employer or starting their own business after they leave their prior employer. 

The final rule does not apply to noncompetition agreements entered into in connection with the bona fide sale of a business entity. In addition, it does not prohibit the pursuance of cause of actions related to a noncompete that accrued before the final rule became effective.

Takeaways: As the FTC notes in the final rule, one in five—around 30 million—American workers are currently bound by noncompete clauses. Consequently, the implementation of this rule will have a significant impact on employees and businesses. The final rule states that it preempts state laws that conflict with it but does not affect or limit state laws that do not conflict with it. At present, only California (Cal. Bus. and Prof. Code §§ 16600, 16600.1), Minnesota (Minn. Stat. § 181.987), North Dakota (N.D. Cen. Code § 9-08-06), and Oklahoma (15 Okla. Stat.§ 219A) have enacted statutes completely banning noncompete clauses in the employment context, so the final rule will preempt the vast majority of state laws. In addition, although California’s law requires notice of the ban to be provided to employees previously subject to noncompete agreements—similar to the FTC final rule, other states that do not currently require notice must comply with the notice requirements. As mentioned, the final rule requires that employees and former employees must be provided notice of the unenforceability of noncompete clauses by the rule’s effective date of September 4, 2024. The final rule also applies retroactively for most workers, which is not the case for statutory bans in states other than California. 

The final rule has already been challenged in federal district court by the US Chamber of Commerce, which seeks declaratory and injunctive relief on multiple grounds, including that the FTC lacks the constitutional and statutory authority to issue the rule and that the retroactive application of the final rule violates the due process principle of fairness. Ryan, LLC, a global tax services firm, also filed a lawsuit against the FTC on similar grounds.

Nevada Supreme Court: Owner of Single-Member LLC Not Alter Ego of LLC and Thus Not Personally Liable for Negligence

Ene v. Graham, No. 84800, 2024 WL 1686052 (Nev. Apr. 18, 2024)

Laura Graham was injured when she tripped on a sprinkler box and fell on property owned by International Property Holdings, LLC (IPH), a single-member limited liability company (LLC) whose sole member was Ovidiu Ene. Laura filed a complaint alleging negligence and seeking damages against both IPH and Ovidiu.

Although Laura’s complaint did not assert that Ovidiu was liable based on a theory that he was the alter ego of IPH, she moved to amend her complaint during the trial. Although the trial court did not resolve her motion, it included jury instructions related to corporate liability protections and the alter ego theory of liability. Ovidiu ultimately moved the trial court to determine if he was the alter ego of IPH; the court determined that he was the alter ego of IPH because he was the sole member of the LLC, there was a unity of interest and ownership, and that adherence to the corporate fiction would result in injustice. The jury’s verdict was that both Ovidiu and IPH were partially liable. 

On appeal, the Nevada Supreme Court determined that the alter ego theory of liability was not impliedly tried with Ovidiu’s express or implied consent, which would have made it permissible to treat that issue as if it had been raised in the pleadings. Therefore, the issue should not have been entertained by the trial court.

In addition, the court determined that even if Ovidiu had consented to trying the issue, substantial evidence did not support the trial court’s ruling that he was the alter ego of IPH. In interpreting Nev. Rev. Stat. § 86.376, which sets forth corporate liability protections and alter ego exceptions for LLCs, the court noted for the first time that it mirrored the language and elements of Nev. Rev. Stat. § 78.747, which sets forth the corporate veil protections and alter ego exceptions for corporations. As a result, case law interpreting the statute applicable to corporations was instructive in interpreting Nev. Rev. Stat. § 86.376 in the context of LLCs. 

Nev. Rev. Stat. § 86.376 requires a court to determine as a matter of law whether a person is the alter ego of an LLC. In its examination, the court must consider whether the following three elements are present: 

(a) the LLC is influenced and governed by the person,

(b) there is a unity of interest and ownership such that the person and LLC are inseparable, and 

(c) adherence to the notion of separate entities would sanction fraud or promote injustice.

Ene v. Graham, No. 84800, 2024 WL 1686052, at *3 (Nev. Apr. 18, 2024). The court agreed with the trial court’s finding that there was substantial evidence establishing the first element: IPH was influenced and governed by Ovidiu because IPH was a “one-person” LLC with Ovidiu as its only member. Nevertheless, the court emphasized that “the mere fact that ownership and management of the LLC are accomplished by the supposed alter ego is insufficient by itself to support veil piercing without further findings.” Id. at *4.

However, the court found that substantial evidence did not support the trial court’s finding of the second element, i.e., a unity of interest and ownership. Although Ovidiu occasionally used the property for his own enjoyment, there was no evidence of a failure to observe corporate formalities, maintain the LLC’s records, commingling of IPH’s and Ovidiu’s funds, or prejudice to creditors. In addition, the court emphasized that the trial court did not find a causal connection between Ovidiu’s use of the property and Laura’s injury.

The court also determined that substantial evidence did not support the trial court’s finding that injustice would result from the recognition of IPH and Ovidiu as legally separate. There was no misuse of the corporate form to the detriment of creditors, such as undercapitalization or assurances by the owner that the owner would be personally responsible for the debt. The court determined that the trial court had failed to make findings specific to the injustice element but instead had merely relied on its findings regarding the first and second elements. Without any findings regarding the third element, “it is unclear how recognition of IPH as a separate entity would result in an injustice to [Laura].” Id. at *5. 

Because the court determined that substantial evidence did not support the trial court’s ruling that Ovidiu was the alter ego of IPH, Ovidiu was not personally liable for IPH’s negligence. The court reversed the trial court’s alter ego determination and remanded the case for further proceedings consistent with its opinion.

Takeaways: The court’s ruling is relevant to all Nevada LLCs because the court clarified that the alter ego analysis for LLCs under Nev. Rev. Stat. § 86.376 is the same analysis that applies to corporations under Nev. Rev. Stat. § 78.747. However, the court’s decision reinforces the vulnerability of single-member LLCs to claims by the member’s personal creditors. Its ruling implies that all single-member LLCs will meet the first element in the statutory alter ego test. Even in situations in which there is no evidence of alter ego liability, in many states, single-member LLCs are generally more vulnerable than multimember LLCs to claims by their members’ personal creditors. Except for a small number of states in which a charging order is a creditor’s exclusive remedy against a single-member LLC, a court may be able to force a distribution by a single member LLC to satisfy a creditor’s claim against the member. 

To prevent an LLC’s creditors from piercing the entity veil, members should observe all formalities required by state law, including paying annual fees and submitting annual reports, establish separate bank accounts and credit cards that are used only for the LLC’s expenses, and use the LLC’s assets and funds only for business purposes. In addition, to avoid a finding that an LLC has been undercapitalized, it is important for its members to provide it with sufficient capital to carry out its business activities and meet its expected obligations at the time of its formation.


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