Commingling
Encyclopedia
Commingling literally means "mixing together". Used in a legal context it is a breach of trust
in which a fiduciary mixes funds that he holds in the care of a client with his own funds, making it difficult to determine which funds belong to the fiduciary and which belong to the client. This raises particular concerns where the funds are invested, and gains or losses from the investments must be allocated. In such circumstances, the law usually presumes that any gains run to the client and any losses run to the fiduciary who is guilty of commingling.
Commingling is particularly an issue in case of bankruptcy
of the fiduciary. Funds held in care are not the fiduciary's property, and the client is not a creditor, so in case of bankruptcy, if the funds have been properly kept separate, they can easily be returned to the client. If, however, the funds have been commingled, the client is potentially subject to becoming entangled in the bankruptcy proceedings, and there may not be sufficient funds to pay the client back.
.
are strictly prohibited from commingling their clients' funds with their own, and such activity is grounds for disbarment
in virtually every jurisdiction, because of the ease of embezzlement
and the difficulty of detection. Similar rules apply for licensed real estate broker
s handling earnest money and other professionals who hold deposits as agents for clients in absentia.
" of a sham corporation, where a person shields himself from personal liability through "incorporation", yet fails to observe strict separation of corporate and personal property or accounts, among other improprieties.
For small business
, strict separation of corporate and personal property is a particular issue, notably in tax and divorce law.
states of the United States
, "commingling" non-marital property with marital property can make it community property. For example, depositing money received by an individual through inheritance
– ordinarily considered non-marital, individual property – into a joint bank account
may transform the money into community property. Most community property states apply a presumption
of community property; where there is any commingling the burden of proof is on the party disputing the classification to "trace" the property back to individual property, and demonstrate an intent to keep it separated.
Breach of Trust
Breach of Trust is a Canadian alternative rock band originally from La Ronge, Saskatchewan. The band currently consists of vocalist Marty Ballentyne, guitarist Donovan Bruyere, bass guitarist Colin Cheechoo and drummer William Aubut...
in which a fiduciary mixes funds that he holds in the care of a client with his own funds, making it difficult to determine which funds belong to the fiduciary and which belong to the client. This raises particular concerns where the funds are invested, and gains or losses from the investments must be allocated. In such circumstances, the law usually presumes that any gains run to the client and any losses run to the fiduciary who is guilty of commingling.
Commingling is particularly an issue in case of bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
of the fiduciary. Funds held in care are not the fiduciary's property, and the client is not a creditor, so in case of bankruptcy, if the funds have been properly kept separate, they can easily be returned to the client. If, however, the funds have been commingled, the client is potentially subject to becoming entangled in the bankruptcy proceedings, and there may not be sufficient funds to pay the client back.
Tenant deposits
For example, a tenant who deposits money with a landlord has not lent money to the landlord – the tenant is not a creditor – and is entitled to their deposit back even in case that the landlord declares bankruptcy, assuming property is in good condition – the tenant is responsible for the property, but is not undertaking credit riskCredit risk
Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk....
.
Investment funds
Similarly, a client who invests with a fund or broker is investing, not lending, so the fiduciary must keep the client money separate and not use it for their own purposes, but only for approved investment purposes: the client is subject to investment risk on their money, but not credit risk regarding the fiduciary.Lawyers and brokers
The problem of commingling is of particular concern in the legal profession. AttorneysLawyer
A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...
are strictly prohibited from commingling their clients' funds with their own, and such activity is grounds for disbarment
Disbarment
Disbarment is the removal of a lawyer from a bar association or the practice of law, thus revoking his or her law license or admission to practice law...
in virtually every jurisdiction, because of the ease of embezzlement
Embezzlement
Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted....
and the difficulty of detection. Similar rules apply for licensed real estate broker
Real estate broker
A real estate broker, real estate agent or realtor is a party who acts as an intermediary between sellers and buyers of real estate/real property and attempts to find sellers who wish to sell and buyers who wish to buy...
s handling earnest money and other professionals who hold deposits as agents for clients in absentia.
Corporations
Commingling is also evidence that may be used in "piercing the corporate veilPiercing the corporate veil
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it...
" of a sham corporation, where a person shields himself from personal liability through "incorporation", yet fails to observe strict separation of corporate and personal property or accounts, among other improprieties.
For small business
Small business
A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships...
, strict separation of corporate and personal property is a particular issue, notably in tax and divorce law.
Community property
In community propertyCommunity property
Community property is a marital property regime that originated in civil law jurisdictions and is now also found in some common law jurisdictions...
states of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, "commingling" non-marital property with marital property can make it community property. For example, depositing money received by an individual through inheritance
Inheritance
Inheritance is the practice of passing on property, titles, debts, rights and obligations upon the death of an individual. It has long played an important role in human societies...
– ordinarily considered non-marital, individual property – into a joint bank account
Bank account
A Bank account is a financial account recording the financial transactions between the customer and the bank and the resulting financial position of the customer with the bank .-Account types:...
may transform the money into community property. Most community property states apply a presumption
Presumption
In the law of evidence, a presumption of a particular fact can be made without the aid of proof in some situations. The types of presumption includes a rebuttable discretionary presumption, a rebuttable mandatory presumption, and an irrebuttable or conclusive presumption. The invocation of a...
of community property; where there is any commingling the burden of proof is on the party disputing the classification to "trace" the property back to individual property, and demonstrate an intent to keep it separated.