Commingling of funds frequently occurs in fraud cases and is notably common in Ponzi scheme cases. It occurs when funds belonging to one party are deposited into the same bank account as funds that belong to a different party. Because money is fungible, it is not possible to trace exactly which dollars belong to which party if they reside in the same bank account.

Consider an instance where funds that are derived from a fraud scheme are commingled with other nonfraud funds in the same bank account, and part of the commingled funds are subsequently used to purchase assets while the balance of funds remains in the bank account when the fraud is uncovered. 

When the trustee of a bankrupt company sues to avoid allegedly fraudulent transfers, one threshold element that he or she must generally show is that the transfer left the debtor with “unreasonably small capital.” Recent appeals in the SemCrude and Adelphia bankruptcy cases demonstrate that this a tough showing to make.

In re SemCrude L.P.

At one time the “fifth-largest privately held company in the United States,” SemGroup, L.P. provided transportation, storage and distribution services to oil and gas producers and refiners. It also traded options on oil-based commodities.

SemGroup funded operations through credit facilities, including a significant line of credit lent by a “syndicate of over 100 different” banks (the “bank group”) and secured by a credit agreement. One term of the credit agreement prohibited SemGroup from trading “naked options” — i.e., “trades where the security is neither offset by other trades nor backed by physical inventory.”

Midland Files Claim for 10-Year-Old Debt

In March 2014, Aleida Johnson filed for chapter 13 bankruptcy relief. Midland Funding, LLC, filed a proof of claim asserting that Johnson owed Midland a credit card debt of $1,879.71. On its face, however, Midland’s claim asserted that the last time Johnson made any charge on the account was in May 2003, 10 years before Johnson filed for bankruptcy.

Section 544(b)(1) of the Code enables a trustee to “avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502....” Pursuant to § 544(b), a trustee steps into the shoes of an unsecured creditor (the “triggering creditor” or “golden creditor”) to pursue the avoidance of fraudulent transfers utilizing the substantive law applicable to the triggering creditor. Depending on the state, the statute of limitations for fraudulent transfers is generally three to six years from the date of transfer. Under federal law, the Internal Revenue Service (IRS) has a 10-year look-back period to collect tax liability. When the IRS is the triggering creditor, the law is split on whether a trustee may seek to recover transfers made within 10 years of the petition date. Although there are few opinions, in the last five years conflicting decisions have resulted in a split of authority as to whether the longer limitations period applies. This article briefly summarizes the conflicting law and the recent decision in In re CVAH Inc.