In law,commingling is abreach of trust in which afiduciary 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, "[i]n 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".[1]
Commingling is particularly an issue in case ofbankruptcy 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.
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 theproperty, but is not undertakingcredit risk.[2]
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 toinvestment risk on his money, but not credit risk regarding the fiduciary.[3]
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 fordisbarment in virtually every jurisdiction, because of the ease ofembezzlement and the difficulty of detection.[4] Similar rules apply for licensedreal estate brokers handlingearnest money and other professionals who hold deposits as agents for clientsin absentia.[5]
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.
Forsmall business, strict separation of corporate and personal property is a particular issue, notably in tax and divorce law.
Incommunity property states of theUnited States, "commingling" non-marital property with marital property can make it community property.[6] For example, depositing money received by an individual throughinheritance – ordinarily considered non-marital, individual property – into a jointbank account may transform the money into community property. Most community property states apply apresumption of community property; where there is any commingling, theburden 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.