The Check in the Desk Drawer
You are the employing broker of a four-agent firm in Grand Junction. On Friday, March 7, broker associate Dana takes a $15,000 earnest money check for a resale purchase. It is made payable to your brokerage. Dana places it in her desk drawer and plans to deliver it to the title company the following Monday. On Monday the buyer's lender reports the appraisal is delayed, and the seller's agent emails demanding that the $15,000 be released to the seller because the buyer has missed a contract deadline. Separately, Dana manages a rental for an out-of-state owner; when the owner's funds had not arrived, she used $1,500 of the tenant's $2,500 security deposit to pay a plumber and gave the tenant a receipt.
1. Where should the $15,000 be right now, and by what date? Identify the violations in Dana's handling.
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Conclusion: The funds belong in a trust account (yours or the title company's escrow) no later than Wednesday, March 12.
Reasoning:
- Earnest money received on behalf of a buyer is trust money. Colorado trust account rules require deposit within three business days of receipt.
- Count business days from receipt: Friday, March 7 → Monday (1), Tuesday (2), Wednesday (3). Delivery to the title company's escrow also satisfies the deposit requirement, but it must actually happen by that third business day.
- A desk drawer is not a trust account. Holding client money outside a trust account, even briefly and even without loss, is a recordkeeping and trust-account violation.
- Dana is a broker associate; you, the employing broker, are responsible for the acts of licensees under your supervision and for the firm's written trust-account procedures. A finding against Dana is a finding against your supervision.
- A receipt should have been issued to the buyer, and the transaction should be entered on the firm's trust ledger the day funds were received.
2. The seller's agent demands release of the earnest money. May you disburse? Outline your next steps.
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Conclusion: No. A demand letter is not authority to disburse.
Reasoning:
- Earnest money is disputed the moment the parties disagree about entitlement. Disputed trust funds may not be paid to either party.
- Lawful release requires either (a) a written agreement signed by all parties directing disbursement, or (b) a court order (or an interpleader action turning the funds over to the court).
- Read the contract first. Some disputes are resolved by the contract's own terms (e.g., a failure to object by a stated deadline), but you are not the decision-maker on a contested deadline - the parties or their counsel are.
- Practical steps: send a written notice to both parties and both brokers stating that funds are being held and why; state the amount and where it is held; offer the contract's mediation/arbitration/dispute-resolution provisions; set a date after which you will interplead if no signed release arrives.
- Never disburse to the party who complains loudest, and never offset the earnest money against a commission claim.
3. Was Dana's $1,500 payment from the tenant's security deposit proper? What should have happened?
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Conclusion: No. That was a misapplication of client funds.
Reasoning:
- A tenant's security deposit is trust money held for the tenant; it is not owner money and it is not firm money. It may only be applied at move-out for amounts the tenant legitimately owes.
- A plumbing repair is an owner expense. Owner expenses are paid from the owner's own funds - typically rents collected and held on the owner's ledger, or money the owner remits.
- When the owner failed to fund, Dana's options were: notify the owner in writing of the shortfall and the need for funds; use available owner funds in trust if any; or, if firm policy permits, advance the firm's own operating money and recover it from the owner. Diverting tenant money was not an option.
- Records should have shown a separate ledger per owner and per tenant, so that a shortfall would be visible before a wrongful payment occurred.
- The receipt given to the tenant documents the error rather than curing it; the $1,500 must be restored to the tenant's deposit account immediately and the matter reported and corrected in the firm's records.