Zhenghan Law Firm represented a private equity asset management company acting as the fund manager for two tranches of accounts receivable investment private equity funds. In a complex context involving overlapping criminal and civil proceedings where the policyholder committed contract fraud by forging underlying assets, the firm spent eight years successfully completing a 100-million-yuan insurance claim lawsuit against a major property insurance company (winning across all three levels: first instance, second instance, and retrial review by the Supreme People’s Court). Furthermore, after the 124 million RMB settlement was erroneously transferred into the manager’s frozen basic account, the firm won a series of seven lawsuits involving objections to enforcement. This case successfully broke the traditional principle of “possession of currency equals ownership,” confirming that the settlement funds constitute independent fund property and excluding them from all compulsory enforcement, thereby safeguarding the legal rights of the fund unit holders.
Keywords: Private Equity Disputes, Insurance Claims, Action of Objection to Enforcement, Independence of Fund Property, Overlapping Criminal and Civil Cases, Cases Exceeding 100 Million RMB, Supreme People’s Court Retrial Review, Breakthrough Judgment
Case Background
In 2016, an internet technology company entered into a two-tranche Business Cooperation Agreement with a private equity asset management company and a major property insurance company. It was agreed that the tech company would transfer its accounts receivable from downstream internet cafes to the private equity fund for financing, with a total scale of 90 million RMB. To ensure investment security, the tech company took out Commercial Contract Performance Guarantee Insurance with the insurance company, naming the fund management company as the first beneficiary. The two tranches of accounts receivable investment private equity funds were raised from 62 individual investors, with a well-known securities firm serving as the fund custodian.
In early 2017, internet cafes began to experience widespread delays in rent payments, and the tech company failed to fulfill its repurchase obligations as agreed. The fund management company immediately issued a Notice of Loss to the insurance company requesting a claim, but the insurance company refused to pay. Subsequently, a criminal case surfaced—the actual controller of the tech company had forged Computer Equipment Leasing Agreements with multiple internet cafes and fabricated accounts receivable to defraud 90 million RMB in financing. The individual was ultimately convicted and sentenced for contract fraud. The insurance company persisted in its refusal to pay, citing the policyholder’s criminal conduct.
In 2021, the fund management company, representing the two funds, filed a lawsuit in the Shanghai Financial Court, demanding that the insurance company pay approximately 100 million RMB in insurance claims plus interest. The case went through the first instance, second instance (Shanghai High People’s Court), and a retrial review by the Supreme People’s Court. All three levels of the judiciary supported all the fund management company’s claims, ordering the insurance company to pay 100,387,804 RMB in insurance claims and overdue interest, totaling approximately 124 million RMB including litigation costs.
However, after the judgment took effect, the insurance company refused to pay the settlement into the fund’s custodial account, citing risks of the management company being filed for bankruptcy and concerns over fund transfers. Instead, they transferred the full 124 million RMB into the management company’s basic deposit account, which had already been frozen due to multiple other cases. At that time, the account was subject to successive freezing orders from dozens of investor creditors (accumulating over 24 instances), with the total frozen amount exceeding 127 million RMB. The 124 million RMB in fund settlement faced the dire prospect of being distributed entirely to the management company’s personal creditors, which would have completely wiped out the rights of the fund unit holders.
Represented by the legal team from Zhenghan Law Firm, the fund management company filed eight successive lawsuits of objection to enforcement (one was later withdrawn as a defendant failed to renew a freeze), requesting the court to confirm that the funds involved were fund property and to exclude them from compulsory enforcement.
Key Points and Difficulties
This case faced an extremely complex situation where multiple legal and practical difficulties were intertwined: first, the dilemma of overlapping criminal and civil cases—whether the policyholder’s criminal acts rendered the insurance contract void and whether the insurer was thus exempt from liability (under traditional judicial thinking, such cases are easily dismissed as insurance fraud); second, the conflict between insurance law and contract law—as the insurance contract had been signed for over two years, there was legal dispute over the application of the insurer’s right to terminate versus the right to rescind; third, the traditional principle of “possession of currency equals ownership” meant that after the settlement was erroneously paid into the manager’s frozen account, the massive sum would be treated as the manager’s own property and distributed to personal creditors; fourth, in the series of enforcement objection lawsuits, multiple applicants for enforcement challenged the case from various angles, including currency ownership rules, the scope of the Fund Law, the relationship between the manager and fund unit holders, and the standing of the litigants; fifth, the case involved coordinating enforcement procedures across multiple courts and over 24 successive freezing orders, making litigation management exceptionally difficult.
Case Highlights
The legal team at Zhenghan Law Firm demonstrated exceptional strategic vision and precise legal reasoning. First, in the insurance claim litigation, the team accurately argued that unilateral fraud by the policyholder does not render the contract void and invoked the “incontestability clause” of the Insurance Law (stating that an insurer may not terminate a contract after it has been in force for two years), effectively blocking the insurance company’s path to denial. They also demonstrated that the triggering conditions for the insurance event—the internet cafes’ failure to pay rent on time and the tech company’s overdue repurchase—had been objectively met, regardless of the specific reasons for the rent delinquency. Second, after the settlement was erroneously transferred, the team adapted quickly, explicitly asserting during the enforcement phase that the funds belonged to the fund property, laying the foundation for subsequent litigation. Most critically, in the enforcement objection lawsuits, the team creatively argued for a breakthrough of the “possession equals ownership” rule from multiple dimensions: emphasizing that the nominal account holder never intended to receive the funds as their own property; arguing that the “possession equals ownership” rule for cash does not automatically apply to funds in bank accounts; utilizing the objective condition that the account was judicially frozen and funds were not commingled to prove the source was distinguishable and refundable; and arguing from the legislative intent that currency in a frozen account has temporarily lost its circulation function, thus raising no issues regarding the protection of third-party reliance interests. The team also employed an efficient strategy of “model case + parallel litigation,” securing a model judgment in the Pudong Court before proceeding with the remaining cases, which saved judicial resources and reduced the client’s litigation costs.
Key Points of the Judgment
The case established important judicial points at three levels: First, regarding insurance claims, the Shanghai Financial Court, the Shanghai High People’s Court, and the Supreme People’s Court all determined that unilateral fraud by the policyholder does not void the insurance contract, and the insurer loses the right to deny the claim if it fails to exercise its right to terminate within two years. The determination of an insurance event is based on the objective conditions agreed upon in the contract and does not depend on the actual existence of the rent. The payout amount is determined by the calculation method in the contract, not limited by the loss amount identified in criminal proceedings. Second, regarding the objection to enforcement, the Shanghai Financial Court systematically argued that funds in bank accounts do not automatically follow the “possession equals ownership” rule. It clarified that where the nominal account holder does not subjectively possess the funds as the owner, is objectively unable to effectively possess or control them due to judicial freezing, and the source of funds is distinguishable and refundable, the court should conduct a substantive review rather than relying solely on the appearance of registration. Third, the court confirmed that a fund manager has the right to file an enforcement objection in its own name on behalf of the fund without the need for fund unit holders to participate separately, and that the legal relationship of fund unit transfers does not affect the identification of fund property.
Case Insights
This case holds significant practical value across several dimensions. For the private equity industry, it reaffirms the core status of the principle of fund property independence—even if the fund manager faces a severe debt crisis or bankruptcy risk, fund property remains legally protected and independent from the manager’s own assets. For the insurance industry, it clarifies that when a policyholder commits fraud, the application of the Insurance Law takes precedence over general contract law, and insurers must exercise their right to terminate within the statutory period or lose the right to deny claims. For enforcement practice, the case breaks the rigid application of the traditional “possession equals ownership” rule, providing a new judicial approach for determining ownership of funds in frozen accounts, which is expected to serve as an important reference for similar cases. Additionally, it serves as a reminder to fund managers to designate fund custodial accounts as the receiving accounts for settlements during the contract design phase to avoid disputes arising from settlements being paid into the manager’s own accounts.
