The Commingled Settlement
You conduct a consignment auction for a single seller. Hammer totals $62,000. Your contract adds a 12% buyer's premium, retains an 18% commission on the hammer, and charges the seller $2,300 for advertising. All buyers pay by check or card; total collected is $69,440. You deposit all funds in your business operating account. Before the checks clear, you use $5,000 to pay rent and send the seller $40,000. Three days later, one buyer's $9,000 check bounces. The seller has already spent the money and demands the full balance. Your trust ledger shows no separate client ledger, only the operating account register. You have not sent the seller a settlement statement, and you plan to delete the sale files after 12 months.
1. Identify the trust-account, settlement, and recordkeeping violations.
Read the worked answer
Trust-account violations. Auction proceeds and buyer's premiums held for others must go into a trust/escrow account, not the operating account. Using $5,000 of sale money for rent is commingling and conversion. Paying the seller $40,000 before checks cleared is a premature distribution.
Recordkeeping. There is no separate client ledger, no reconciliation, and no settlement statement. The plan to delete files after 12 months is likely shorter than the Board's retention rule; confirm the current period and retain at least that long. The auctioneer must be able to trace each consignor's gross, fees, expenses, and net.
2. Compute the proper settlement if all funds had cleared, then explain how the $9,000 bad check changes it.
Read the worked answer
With all funds collected: hammer $62,000; buyer's premium 12% = $7,440; total $69,440. Commission 18% of hammer = $11,160. Seller advertising = $2,300. Seller net = $62,000 - $11,160 - $2,300 = $48,540. The auctioneer retains $18,600 in commission/premium plus $2,300 advertising reimbursement = $20,900; $48,540 + $20,900 = $69,440.
The $9,000 bad check means the full $48,540 is not yet payable. If that check represented a hammer price of $8,035.71 plus 12% premium, the seller's net from that sale is about $6,589 ($8,035.71 less 18% commission). The seller's provisional net becomes about $41,951, not $48,540. The $40,000 already paid is within that provisional figure but was still premature. Hold the remaining funds and pursue the buyer; do not use another client's trust money to fill the gap.
3. What immediate corrective steps should you take, and how should you handle the seller's demand for the full balance?
Read the worked answer
Stop using the operating account for sale funds. Open or designate a proper trust account, reconstruct a client ledger from bank records and auction records, and prepare a provisional settlement statement for the seller showing the uncollected $9,000 as a holdback. Send the buyer a written demand and follow the contract's remedies; if the buyer does not pay, the auctioneer and seller must decide whether to resell or write off the sale under the contract. Do not pay the seller the full balance until the funds clear or the loss is allocated. Notify the Board or counsel if the commingling cannot be corrected promptly; self-reporting and restitution are better than concealment.