Posted: March 3rd, 2014

how the legal concepts in the selected case can be applied within a business managerial setting.

CASE 37.1 Piercing the Corporate Veil

Northeast Iowa Ethanol, LLC v. Drizin Web 2006 U. S. Dist. Lexis 4828 (2006) United States District Court for the Northern District of Iowa

“If capital is illusory or trifling compared with the business to be done and the risk of loss, this is a ground for denying the separate entity privilege.” — Jarvey, District Judge Facts Local farmers in Manchester, Iowa, decided to build an ethanol plant. The farmers and other investors invested $ 3,865,000 and formed Northeast Iowa Ethanol, LLC (Northeast Iowa) to hold the money and develop the project. The project needed another $ 20 million, for which financing needed to be secured. Jerry Drizin formed Global Syndicate International, Inc. (GSI), a Nevada corporation, with $ 250 capi-tal. Drizin formed GSI for the purpose of assisting Northeast Iowa to raise the additional financing for the project. Drizin talked Northeast Iowa into trans-ferring its money to GSI and the money was placed in a bank in south Florida to serve as security for a possible loan. Drizin commingled those funds with his own personal funds. Through an array of complex transfers by GSI, the funds of Northeast Iowa were stolen. Some funds were invested in a worthless gold mine and other worthless investments.

Plaintiff Northeast Iowa sued Drizin for civil fraud to recover its funds. Drizin defended, arguing that GSI, the corporation, was liable but that he was not personally liable because he was but a shareholder of GSI. The plaintiffs alleged that the doctrine of pierc-ing the corporate veil applied and that Drizin was therefore personally liable for the funds. Issue Does the doctrine of piercing the corporate veil apply in this case, thus allowing the plaintiffs to pierce the corporate veil of GSI and reach shareholder Drizin for liability for civil fraud? Language of the Court Generally a corporation is a distinct entity from its shareholders. This distinction usually insulates shareholders from personal liabil-ity for corporate debts. However, this protec-tion is not absolute. Personal liability may be imposed upon shareholders in “exceptional circumstances.”

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Without question, this case presents the “exceptional circumstance” warranting the piercing of GSI’s corporate veil and findingMr. Drizin personally liable for GSI’s mis-deeds, as the sole purpose of establishing GSI was to perpetuate fraud. GSI engaged in no legitimate business transactions whatsoever. The $ 250 initial capitalization of GSI is, in fact, trifling compared with the business to be done and the risk of loss. And now, GSI is a defunct corporation. Justice and equity call for piercing the corporate veil. Decision The U. S. District Court held that the corporate veil of GSI could be pierced to reach its shareholder Drizin. The court awarded the plaintiff compensatory dam-ages of $ 3.8 million and punitive damages of $ 7.6 million against Drizin.

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