Earnest Money in the Operating Account
On Friday, May 3, broker Dana Cole of Harborline Realty receives a $15,000 earnest money check for a $500,000 sale and a $2,200 security deposit for a rental managed by her firm. She deposits both into the firm's general operating account because the trust-account reconciliation is not due until month-end. On Monday she uses $1,100 of the rental deposit to pay a plumber for a repair at a different property. The sale falls through on Wednesday; the buyer demands return of the $15,000. Dana writes a check from the operating account, but the balance is short because payroll cleared. She also receives a $21,000 commission check for a separate closing and deposits it into the same operating account. The firm's trust account has a $4,300 balance from another tenant deposit. Dana asks her office manager to "move money around" and record the $15,000 as a "deposit held." The office manager is unlicensed and handles bookkeeping only.
1. Identify each fund in the scenario as trust or non-trust, and list the specific trust-account violations Dana committed.
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The $15,000 earnest money, the $2,200 rental security deposit, and the existing $4,300 tenant deposit are trust funds because they belong to others and are held in connection with a real estate transaction or property management. The $21,000 commission check is the broker's own money once earned and may go into an operating account.
Dana's violations include: (1) depositing trust funds into the general operating account, which is commingling; (2) using a tenant's security deposit to pay a plumber at a different property, which is conversion; (3) writing a trust refund from an operating account without sufficient funds, creating a trust shortfall; (4) commingling the separate $21,000 commission with operating funds after the trust problem arose; and (5) attempting to relabel the shortfall instead of restoring it. The fact that the sale failed does not make the earnest money the broker's funds. Until a valid disbursement is authorized, it remains trust money. The security deposit remains trust money subject to the lease and Maryland security-deposit rules.
2. What should Dana have done from receipt through the failed sale, and what must she do now to cure the shortfall?
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On receipt, Dana should have deposited each trust fund into the firm's real estate trust account within the required deposit period-generally five banking days under Maryland rules-and recorded it in a separate ledger for that transaction or tenant. She should not have used any trust money for payroll, general operating expenses, or repairs at another property. The plumber bill for another property should have been paid from the owner's funds or the operating account, subject to the management agreement.
When the sale failed, Dana should have followed the contract's disbursement terms. If the buyer and seller disputed entitlement, she should have held the $15,000 in trust and sought a written release or an interpleader rather than deciding who was right. To cure the shortfall now, she must restore the full $15,000 with broker or personal funds immediately. She cannot take it from the $4,300 belonging to another tenant, because that would deepen the conversion. She should also reconstruct the ledger, notify her errors-and-omissions carrier and legal counsel, and consider self-reporting to the Commission. "Moving money around" is not a cure; it is evidence of a cover-up.
3. What records and reconciliation practices must the firm maintain, and what are the consequences of the conduct described?
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The firm must keep a ledger for each transaction and each tenant, bank statements, deposit slips, cancelled checks or electronic disbursement records, receipts, contracts, leases, and monthly trust-account reconciliations showing the book balance, bank balance, and outstanding items. The unlicensed office manager may perform bookkeeping, but the broker remains responsible for supervision and for ensuring that trust funds are handled correctly. The broker should review reconciliations and sign off.
The consequences are serious: Commission discipline, including license suspension or revocation, is possible; the conduct may constitute conversion or misappropriation; and the broker faces civil liability to the buyer and tenants. Because the firm cannot cover the trust shortfall from operating funds, the broker must inject funds. Relabeling the $15,000 as a "deposit held" does not change the legal character of the money. If a Commission audit finds a shortage, the broker must be able to show that it was cured and that controls were put in place.