Deposit Deposited Into the Operating Account
Michael is the broker-owner of Harbor Realty. On Tuesday, March 4, he receives a $15,000 deposit check from buyer client Dana for a purchase and sale agreement on a $540,000 duplex; the P&S identifies Harbor Realty as escrow agent. Michael deposits the check into Harbor Realty's business operating account on Friday, March 7. The following week he uses $4,000 of that balance to pay a salesperson's commission and $1,200 for office rent. The sale is scheduled to close April 30, but on April 10 the buyer's financing falls through and Dana demands return of the deposit. The seller, meanwhile, sends a letter claiming the deposit for breach. Michael has not created a separate ledger for the file and has not notified either party that he used the funds. His escrow account at a Massachusetts bank has a $0 balance.
1. Identify the escrow-account violations in Michael's handling of the $15,000.
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The core violation is commingling: Michael put client trust funds into the brokerage's business operating account instead of a separate escrow account. Massachusetts escrow rules under 254 CMR 3.00 require a broker to maintain a separate escrow account for client funds, typically at a federally insured bank in Massachusetts, and prohibit mixing trust funds with the broker's own money. Using $4,000 for a commission and $1,200 for rent is worse than commingling; it is conversion of client funds for the broker's benefit. The recordkeeping is also deficient because Michael did not open a file ledger showing receipt, deposit, and disbursement. Even if Friday was the third business day after Tuesday receipt, the deposit went to the wrong account. The fact that the escrow account has a $0 balance confirms that the $15,000 was never properly held.
2. Dana and the seller both demand the $15,000. What must Michael do now, and can he decide who is entitled to it?
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Michael must immediately restore the full $15,000 to a proper escrow account using his own or the brokerage's funds; he cannot wait for the dispute to resolve. He should notify both Dana and the seller in writing that the funds are back in escrow and that he will not release them without a written agreement signed by both parties or a court order. A broker is a stakeholder, not a judge. Michael should not pay the seller simply because the seller demands it, and he should not return the money to Dana simply because she asks. If the parties will not agree, he may need to consult counsel about an interpleader or other judicial resolution. He must also correct the file ledger and preserve all records. The underlying commission dispute does not excuse his escrow obligations.
3. What records and account practices should Michael have followed from the start?
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Michael should have deposited the $15,000 into a dedicated escrow account within the required three business days of receipt and kept it separate from all brokerage operating funds. He should have created a file-specific ledger showing the date received, amount, payor, property, deposit date, and any disbursement. He should have issued a receipt and maintained bank statements, deposit slips, and reconciliation records. Massachusetts rules require brokers to keep escrow records available for inspection for the required retention period, generally three years. If the escrow account is interest-bearing, the interest must be handled according to the parties' written agreement. Michael also should have a written office policy prohibiting any use of escrow funds for commissions, payroll, rent, or other business expenses. The record should make it impossible to confuse client funds with brokerage funds.