Summary Essay Example
Northeast Iowa Ethanol, LLC v. Drizin
Local farmers in Manchester, Iowa founded the Northeast Iowa Ethanol, LLC to safeguard their investment so that they could develop an ethanol plant to produce ethanol and feed grain. They anticipated that the project could generate profits from the sale of their products. The farmers had over $2.3million invested in the project. Two more investors, William Ethanol Services and North Central Construction agreed to invest $ 1million and $500,000 respectively. However, the project required about $20 million as a result, they directed $3.8 million in an escrow account.
Jerry Drizin formed Global Syndicate International GSI in Nevada with a capital of $250. Drizin formed the corporation to help Northeast Iowa Ethanol, LLC raise funding for their project. Northeast Iowa Ethanol LLC then transferred all the money to a bank in south Florida on the advice of Drizin as a security to obtain a loan. However, through a variety of complicated transfers carried out by Drizin, all the money belonging to the company was stolen or lost. According to Drizin, some of the funds were invested in a worthless gold mine and the rest in worthless investments.
The plaintiff, Northeast Iowa Ethanol, LLC sued the defendant, Jerry Drizin, for civil fraud so that it could recover its funds. However, the defendant argued that his liability was limited as a shareholder and it is only GSI that should be sued for civil fraud and compensation to the plaintiff. The plaintiff argued that the doctrine of piercing the corporate veil applied to the case and that the defendant was personally liable for the loss of funds belonging to the organization.
To examine whether the doctrine of piercing the corporate veil is applicable in the case so that the plaintiff can pierce the veil of the company (GSI) and sue the shareholder; Jerry Drizin, for personal liability for civil fraud.
Language of the Court
The court argued that while a corporate is a distinct entity from the shareholders, the protection is not absolute for personal liability of the shareholders. Such liability can be imposed on shareholders in exceptional situations. The court noted that the corporate veil can be broken, for instance, where such corporations are a mere shell and do not serve any legitimate business purposes.
The court posited that where such companies are used as intermediaries to perpetuate fraud or promote injustices, the corporate veil must be pierced. The court noted that a corporation that lacks substantial capital such that it cannot meet its debts, as GSI in the case, constitutes the ground for declining the privileges of separate legal entity. Again, evidence showed that Drizin was using the corporation’s funds for personal purposes and thus he cannot enjoy the doctrine of separate legal entity of a shareholder.
The court noted that the case presented exceptional situations to warrant the piercing of GSI’s corporate veil and find Mr. Drizin personally culpable for the organization’s misdeeds and the company was primarily established to carry out fraud. The court held that GSI had no legitimate business to transact. Its capital was too little compared to the amount of business that it intended to transact in the implementation of the Northeast Iowa Ethanol, LLC’s ethanol project.
Drizin’s actions in respect to the plaintiff’s funds were outrageous and malicious. His conduct hurt so many good people. The court noted that the evidence was overwhelming, convincing and enough that punitive damages were appropriate.
The court ruled that the doctrine of piercing the corporate veil applied to the case so that it could reach Drizin as a shareholder. The District Court awarded the plaintiff compensation in damages of $3.8 million and additional punitive damages amounting to $7.6 million against the defendant, Jerry Drizin.
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.
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