Earnest Money, a Failed Sale, and a Commission Grab
Delta Ridge Realty holds a $15,000 earnest-money check on a $465,000 resale. The contract makes the deposit trust funds, applies it to the price at closing, and lets the buyer terminate during a 10-day due-diligence period. The buyer terminates on day 8 after an inspection reveals foundation cracks. The seller refuses to sign a release, claiming the buyer's inspector damaged a crawlspace door. The broker is owed a $9,300 commission under the listing agreement and has not been paid. The firm's trust-account checkbook is temporarily unavailable, and the broker's office manager suggests depositing the earnest-money check into the operating account, paying the $9,300 commission from it, and sorting out the rest later. Separately, the firm's property-management trust account holds $22,000 in owner rents. The broker also wants to use $4,000 of that money for office payroll because a commission check is late.
1. Identify each trust-account violation the proposed actions would create and state how the $15,000 should be handled while the dispute is unresolved.
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The proposal creates several violations. Earnest money is trust funds, not operating money. Depositing it into the operating account is commingling; paying the broker's commission from it is conversion. The firm must deposit the $15,000 into its real estate trust account within the time required by Georgia rules and keep it there. Because the buyer terminated and the seller disputes the release, the broker cannot decide who is right. The funds should stay in trust until the buyer and seller sign a written release or a court orders disbursement. The broker can notify both parties in writing and, if they will not agree, file an interpleader and let the court decide. Using the $22,000 property-management trust money for payroll is also conversion and commingling. Trust funds may not be used to solve the brokerage's cash-flow problem.
2. What records, reconciliation, and notification steps should the broker follow, and how should the commission claim be pursued?
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The broker should keep a separate ledger for each trust transaction, including the $15,000 receipt, deposit date, and any disbursement; retain bank statements, cancelled checks, and reconciliations; and reconcile the trust account monthly. Georgia records should be kept for the required retention period and made available to GREC on request. The commission claim should be pursued under the listing agreement, not by self-help from escrow. The broker should send a written demand, use any contractual arbitration clause, or sue for the commission. If the broker cannot resolve the escrow dispute, written notice to the parties and an interpleader protect the broker. The broker should also correct the property-management account immediately and document the correction.
3. Assume the broker later deposits the $15,000 and pays the commission after the seller signs a release, but the buyer never signs. Is the broker safe?
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No. A release signed only by the seller does not protect the broker if the buyer still claims the deposit. The buyer terminated during due diligence and may have a contractual right to return of the earnest money. The broker is a stakeholder, not a judge. Disbursing to the seller on a one-sided release could expose the broker to a claim by the buyer, a GREC complaint, and liability for conversion. The safer course is to obtain a release signed by both buyer and seller or a court order. If the buyer will not sign, the broker should hold the funds and interplead them. The commission should be resolved separately.