Many business owners choose corporations as their business form because they want to enjoy the limited personal liability corporate status offers. Because a corporation is considered a separate entity, shareholders enjoy limited personal liability from the debts of the corporation.

However, in some cases, courts will deny limited liability to a corporation that would normally have de jure or de facto status because shareholders have used the corporation to engage in illegal or wrongful acts. In these cases, courts pierce the corporate veil, or impose personal liability on shareholders. Courts are likely to pierce the corporate veil when:

1. A corporation lacked adequate capital when it initially formed.
2. A corporation did not follow statutory mandates regarding corporate business (e.g. hold meetings and maintain corporate records).
3. Shareholders' personal interests and corporate interests are commingled such that the corporation has no separate identity.
4. Shareholders attempt to commit fraud through a corporation.

Consider this scenario: Local farmers in Manchester, Iowa decided to build an ethanol plant. They formed Northeast Iowa Ethanol, LLC to raise additional financing to develop the ethanol plant. The project needed another $20 million. Drizin formed GSI, Inc. with $250 capital.Drizin talked Northeast Iowa Ethanol, LLC into transferring its money to his company, GSI. Drizin commingled Northeast Iowa's funds with his own personal funds. 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 "safekeeping" and "diversification." Through an array of transfers by GSI, Northeast Iowa's funds were stolen or put in worthless investments. Northeast Iowa sued Drizin for civil fraud to recover its funds. Drizin argued that he was shielded from personal liability because he was a shareholder.

1. 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?

2. What factors did you consider in reaching your decision?