In Re Advent Management Corporation, Debtor. Taylor Associates v. Lawrence A. Diamant, Chapter 7 Trustee

This case presents the issue whether a creditor claiming a constructive trust over commingled funds from a debtor’s general account must trace the funds back to the illegal transfer giving rise to the trust. Appellant contends that strict tracing is unnecessary in light of this court’s decision in Mitsui Mfrs. Bank v. Unicom Computer Corp. (In re Unicom Computer Corp.), 13 F.3d 321 (9th Cir.1994). The Bankruptcy Appellate Panel of the Ninth Circuit disagreed, holding that bankruptcy precedent and policy continue to require strict tracing of commingled funds. Taylor Assocs. v. Diamant (In re Advent Mgt. Corp.), 178 B.R. 480 (9th Cir.BAP 1995). We affirm.

FACTS

This case involves a three-sided transfer. Appellant Taylor Associates (“Taylor”) provided temporary personnel and other services to Coastal Insurance Company (“Coastal”). Coastal transferred most of its income to its parent company, Advent Management Corporation (“Advent”). Some of Coastal’s transfers to Advent were legitimate compensation and sales commissions for Advent’s administrative and sales support of Coastal. Other transfers were illegal diversions of Coastal funds. Advent commingled all of its receipts from…