In law, commingling is a breach of trust in which a fiduciary mixes funds held in care for a client with their 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. As one source puts it, "in a pejorative sense, commingling is the special vice of fiduciaries (trustee, agents, lawyers, etc.) in failing to keep a beneficiary's money separate from the fiduciary's own money".[David Mellinkoff, Mellinkoff's Dictionary of American Legal Usage (2009), p. 95.]
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.
Examples
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 risk.
[John W. Reilly, The Language of Real Estate (2000), p. 75.]
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 his money, but not credit risk regarding the fiduciary.
[Alfred M. Pollard and Joseph P. Daly, Banking Law in the United States - Fourth Edition (2014), 14-58 to 14-59.]
Lawyers and brokers
The problem of commingling is of particular concern in the legal profession.
Lawyer 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.
[Cynthia Traina Donnes, Practical Law Office Management (2016), p. 318.] Similar rules apply for licensed real estate brokers handling
earnest money and other professionals who hold deposits as agents for clients
in absentia.
[Stephen Mettling, David Cusic, Principles of Real Estate Practice (2014), p. 177.]
Corporations
Commingling is also evidence that may be used in "piercing the corporate veil" of a sham corporation, where a person shields themself 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.
Community property
In community property states of the
United States, "commingling" non-marital property with marital property can make it community property.
[William H. Pivar, Robert Bruss, California Real Estate Law (2002), p. 251.] 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.
See also
