On November 22, 2017 the Nevada Supreme Court held that managers of a limited liability corporation (LLC) may be subject to suit for personal negligence as tortfeasors under an alter ego theory of liability.
In the case of Gardner v. Henderson Water Park, LLC dba Cowabunga Bay Water Park, 133 Nev. Adv. Op 89, the Gardners’ minor child suffered injuries resulting from a near-drowning at Cowabunga Bay Water Park in Henderson, Nevada. The Gardners filed suit against Henderson Water Park, LLC dba Cowabunga Bay Water Park and its two managing members, West Coast Water Parks, LLC and Double Ott Water Holdings, LLC. The 7 managers of West Coast and Double Ott LLCs have an ownership interest in, or manage, the member-LLCs and also serve on the management committee governing the water park itself.
After taking depositions, the Gardners moved for leave to amend their complaint to add the 7 managers of the water park as individual defendants. This was based on testimony that the managers were not operating with 17 lifeguards at the wave pool as required by the Sothern Nevada Health District.
The district court denied the Gardners’ motion under the belief the amendment would be futile because the managers were improper defendants. The court relied on NRS 86.371 and concluded it protected the managers from any liabilities incurred by the various LLCs and granted summary judgment dismissing the member-LLCs. The Nevada Supreme Court initially affirmed this order because the original complaint did not allege any conduct by the member-LLCs other than being members of the water park’s LLC. The amended complaint, however, sought to bring the member-LLCs back into the litigation to assert tort claims against the managers in their individual capacities.
LLCs are typically created to provide a corporate-like shield with the pass through tax benefits of a partnership. The statutes governing LLCs provide that a member of a limited liability company cannot be held vicariously liable for the obligations of an LLC solely by reason of being a member of manager. However, the protection afforded members and managers of an LLC from induvial liability for the debts or liabilities of the LLC does not include allegations of individual negligence for their direct knowledge and actions which threaten physical injury to patrons such as the Gardners’ child, particularly when their duties to patrons were intentionally and willfully breached.
The court went further and clarified, as recognized by courts across the country, LLCs provide the same possibilities for abuse as corporations, and creditors of LLCs need the same ability to pierce an LLC’s veil when such abuse exists. Thus, the court held the alter ego doctrine applies to LLCs and allowed the plaintiffs to amend their complaint to allege the managers were subject to liability through the alter ego doctrine.
Needless to say, this case has important ramifications for how we prepare manager/members of LLCs for deposition. It is imperative they understand that by acknowledging their awareness of a failure to follow state laws and/or local codes, they may be exposing themselves to individual liability and may not be able to hide behind the shield created by the formation of an LLC.