BU2760: Week 6 Ethics and Corporate Responsibility Essay 6.1 1 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.” —Judge Jarvey Facts Local farmers in Manchester, Iowa, decided to build an ethanol plant in the Manchester area. An ethanol plant produces ethanol and feed grain, which can be sold at a profit exceeding that of the sale of grain. After many meetings, the local farmers invested $2,365,000 for the project. The farmers formed Northeast Iowa Ethanol, LLC (Northeast Iowa), to hold the money and develop the project. William Ethanol Service agreed to invest $1 million, and North Central Construction agreed to invest $500,000. In all, $3,865,000 was raised for the construction of the ethanol plant. The funds were placed in an escrow account. 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 capital. GSI was formed for the purpose of assisting Northeast Iowa raise the additional financing for the project. Traditional financing from banks was not available for such a project, so Drizin looked for other sources of money. Drizin talked Northeast Iowa into transferring money to 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 orchestrated by Drizin, all of the funds of Northeast Iowa were stolen. Drizin invested some funds in a worthless gold mine and lost the rest of the money in other worthless investments. Plaintiff Northeast Iowa sued Drizin for civil fraud to recover its funds. Drizin defended, arguing that GSI was liable but that he was not liable because he was but a shareholder of GSI. The plaintiffs alleged that the doctrine of piercing 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? BU2760: Week 6 Ethics and Corporate Responsibility Essay 6.1 2 Language of the Court In every financial scam like that perpetrated on the plaintiff here, there comes a point at which the victim must make an exceedingly quick decision and seemingly, the entire fate of the project depends on taking that leap of faith. From that point on, very bad things follow and only time will tell what they are. Generally a corporation is a distinct entity from its shareholders. This distinction usually insulates shareholders f ...

1. BU2760: Week 6 Ethics and Corporate Responsibility
Essay 6.1
1
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.”
—Judge Jarvey
Facts
Local farmers in Manchester, Iowa, decided to build an ethanol
plant in the Manchester area. An ethanol plant
produces ethanol and feed grain, which can be sold at a profit
exceeding that of the sale of grain. After many

2. meetings, the local farmers invested $2,365,000 for the project.
The farmers formed Northeast Iowa Ethanol, LLC
(Northeast Iowa), to hold the money and develop the project.
William Ethanol Service agreed to invest $1 million,
and North Central Construction agreed to invest $500,000. In
all, $3,865,000 was raised for the construction of the
ethanol plant. The funds were placed in an escrow account. 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 capital. GSI was
formed for the purpose of assisting Northeast Iowa raise the
additional financing for the project. Traditional
financing from banks was not available for such a project, so
Drizin looked for other sources of money. Drizin
talked Northeast Iowa into transferring money to 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 orchestrated
by Drizin, all of the funds of Northeast Iowa were stolen. Drizin
invested some funds in a worthless gold mine and
lost the rest of the money in other worthless investments.
Plaintiff Northeast Iowa sued Drizin for civil fraud to recover

3. its funds. Drizin defended, arguing that GSI was liable
but that he was not liable because he was but a shareholder of
GSI. The plaintiffs alleged that the doctrine of
piercing 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?
BU2760: Week 6 Ethics and Corporate Responsibility
Essay 6.1
2
Language of the Court
In every financial scam like that perpetrated on the plaintiff
here, there comes a point at which the victim must
make an exceedingly quick decision and seemingly, the entire
fate of the project depends on taking that leap of

4. faith. From that point on, very bad things follow and only time
will tell what they are. Generally a corporation is a
distinct entity from its shareholders. This distinction usually
insulates shareholders from personal liability for
corporate debts. However, this protection is not absolute.
Personal liability may be imposed upon shareholders in
“exceptional circumstances.” The corporate veil may be pierced,
for example, where the corporation is a mere shell,
serving no legitimate business purpose, and used primarily as an
intermediary to perpetuate fraud or promote
injustice.
If a corporation lacks substantial capital such that it would not
be able to meet its debts, this is a ground for
denying the privilege of separate entity. 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. Secondly, if corporate funds are not
segregated, there is a strong inference that they are being used
by the shareholders for their individual purposes. A
major corporate officer cannot avoid liability be emulating the
three fabled monkeys, “hearing, seeing and speaking
no evil.”

5. Without question, this case presents the “exceptional
circumstance” warranting the piercing of GSI’s corporate veil
and finding Mr. Drizin personally liable for GSI’s misdeeds, as
the sole purpose of establishing GSI was to perpetuate
fraud. GSI engaged in no legitimate business transactions
whatsoever. The $250.00 initial capitalization of GSI is, in
fact, “trifling compared with the business to be done and the
risk of loss.” GSI had no errors and omissions
insurance. Mr. Drizin used GSI’s accounts as his own,
constantly transferring money from the GSI escrow account to
his personal accounts for “reimbursement” and to other accounts
for “safe keeping” and “diversification.” And now,
GSI is a defunct corporation. Justice and equity call for piercing
the corporate veil.
Drizin’s actions with respect to plaintiff’s money were both
outrageous and malicious. As a result of Drizin’s tortious
conduct, good people were hurt. The evidence is clear,
convincing, and satisfactory that punitive damages are
appropriate in this case to punish Drizin and to deter others
from engaging in similar conduct.
Decision
The U.S. District Court held that the corporate veil of GSI could

6. be pierced to reach its shareholder Drizin. The
Court awarded the plaintiff compensatory damage of $3.8
million and punitive damages of $7.6 million against
Drizin.