In law, commingling is a breach of trust in which a

fiduciary A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...

mixes funds held in care for 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. As one source puts it, " 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". Commingling is particularly an issue in case of

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. 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.

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 his 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 A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...

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.

Lawyers and brokers

The problem of commingling is of particular concern in the legal profession. Attorneys are strictly prohibited from commingling their clients' funds with their own, and such activity is grounds for

disbarment Disbarment, also known as striking off, is the removal of a lawyer from a bar association or the practice of law, thus revoking their law license or admission to practice law. Disbarment is usually a punishment for unethical or criminal con ...

in virtually every jurisdiction, because of the ease of embezzlement and the difficulty of detection. Similar rules apply for licensed real estate brokers handling

earnest money An earnest payment or earnest money is a specific form of security deposit made in some major transactions such as real estate dealings or required by some official procurement processes to demonstrate that the applicant is serious and willing to ...

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 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. Usually a corporation is treated as a separate legal person, which is s ...

" 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.

Community property

In community property states of the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...

, "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 Inheritance is the practice of receiving private property, Title (property), titles, debts, entitlements, Privilege (law), privileges, rights, and Law of obligations, obligations upon the death of an individual. The rules of inheritance differ ...

– ordinarily considered non-marital, individual property – into a joint

bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded. Each financial institution sets the terms and conditions for each type of ...

may transform the money into community property. Most community property states apply a

presumption In the law of evidence, a presumption of a particular fact can be made without the aid of proof in some situations. The invocation of a presumption shifts the Legal burden of proof, burden of proof from one party to the opposing party in a court t ...

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.

References

{{Authority control Legal ethics