667 B.R. 495
Bankr. D. Conn.2025Background
- The dispute arises from bankruptcy proceedings involving Servicom, LLC and affiliates, focusing on the claims of Coral Capital Solutions LLC (Coral) as a creditor, particularly regarding $1,400,000 provided as "Side Collateral" under a Secured Term Note.
- Coral asserted it was owed over $3.1 million in pre- and post-petition claims, which was contested by the Chapter 7 Trustee and other interested parties (Movants: VFI, J&C).
- All parties agreed that by December 24, 2018, Coral possessed no more than $82,181.42 of the Side Collateral; the rest had been spent or dissipated.
- The Movants filed Motions in Limine to exclude testimony from Ryan Freedman, Coral's "preferred member," about his ability to provide additional funding or explain Coral's handling of collateral.
- The court had planned an evidentiary hearing on the amount of Coral's claim, but the math underpinning Coral's calculation was undisputed if entitlement was established.
- The main substantive dispute involved whether Coral's use and commingling of cash collateral violated the contract or U.C.C., and whether tracing of specific funds was necessary.
Issues
| Issue | Movants' Argument | Coral's Argument | Held |
|---|---|---|---|
| Relevance of Freedman's testimony | Testimony on Freedman’s ability to provide cash is irrelevant as Side Collateral already used | Testimony is relevant to Coral’s ongoing cash availability | Court precludes Freedman's testimony as irrelevant |
| Meaning of "Use" vs. "Commingling" under NY UCC § 9-207(b)(3) | Use and commingling are distinct; use violates contract, commingling is permissible | Use is akin to commingling; permitted by UCC and contract | Court agrees use means actual spending; Coral's theory unpersuasive |
| Need for tracing specific cash collateral | Tracing unnecessary due to fungibility of cash and use of Lowest Intermediate Balance Test | Tracing or proof of specific dollar usage is required | Court applies Lowest Intermediate Balance Test; tracing unnecessary |
| Amount of Side Collateral "used" under L.I.B.T. | All Side Collateral except $82,181.42 was spent as of Dec. 24, 2018 | Amount used cannot be determined absent further evidence | Court finds $1,317,818.58 used, adopting Movants’ calculation |
Key Cases Cited
- United States v. Banco Cafetero Panama, 797 F.2d 1154 (2d Cir. 1986) (explains the Lowest Intermediate Balance Test for tracing commingled funds in bank accounts)
- In re Connecticut General Life Ins. Co., 838 F.2d 612 (1st Cir. 1988) (describes the effect of commingling and using trust funds and the irrelevance of subsequent deposits)
- In re Columbia Gas Sys., 997 F.2d 1039 (3d Cir. 1993) (affirms Lowest Intermediate Balance Test and no replenishment rule for commingled funds)
- Old Republic National Title Ins. Co. v. Tyler (In re Dameron), 155 F.3d 718 (4th Cir. 1998) (reaffirms that subsequent deposits do not replenish trust funds under the Lowest Intermediate Balance Test)
- In re MJK Clearing, Inc., 371 F.3d 397 (8th Cir. 2004) (applies the Lowest Intermediate Balance Test for trust accounting in bankruptcy)