The Auctioneer's Trust Account and the Slow Consignor
Hollis runs a small auction house. In one month he conducts three sales and holds proceeds for 22 consignors. His bookkeeper, new to the role, deposits all sale proceeds into the company operating account, pays expenses from it, and writes consignor checks from it as consignors call in. One consignor, Vance, is owed $14,200 but has not called. Hollis's operating account dips to $2,100 on a Friday, and Vance's check is requested Monday. The bank statement shows the $14,200 was never segregated. Hollis's written policy says consignor funds are held in trust until disbursed, and his license requires faithful accounting. A consignor also disputes a $600 commission, claiming the rate was 8%, not the 12% Hollis charged.
1. Identify the trust-account violations and explain why the operating-account practice is a problem even if every consignor eventually gets paid.
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The core violation is commingling: consignor proceeds were deposited into the operating account and used to pay company expenses, rather than being held in a separate trust account. Even if all consignors are ultimately paid, the arrangement is unlawful and unsafe because trust funds are not segregated, are exposed to the business's creditors, and can be depleted by operating losses-exactly the risk when the account dips to $2,100 while $14,200 is owed to Vance. Hollis also cannot show a clean ledger tracing each consignor's funds. The fix is to establish a dedicated trust account, deposit sale proceeds there, disburse promptly per the consignment terms, and keep a per-consignor ledger. The bookkeeper's practice must stop immediately, and Hollis should reconcile and restore any shortfall.
2. How should Hollis handle Vance's $14,200 and the $600 commission dispute?
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Vance's $14,200 must be paid promptly from restored funds; Hollis cannot wait for Vance to call. Hollis should move the owed amount into the trust account, pay Vance, and document the transaction. On the commission dispute, Hollis should produce the signed consignment agreement. If it states 12%, he should show it to the consignor and explain the calculation; if it states 8% or is ambiguous, he should refund the $600 difference and correct his records. The dispute is a reminder that commission terms must be clear and disclosed in writing before the sale. Hollis should also review the other 21 consignor ledgers for similar errors, reconcile the trust account monthly, and retain records of every deposit, disbursement, and commission so an examiner can trace each dollar.