The Escrow Deposit in the Operating Account
Notary R also runs a small settlement agency. On Monday he receives $48,500 in earnest money from a buyer for a closing scheduled ten days later. Because his trust account 'isn't set up yet,' he deposits the check into his business operating account. Over the next week he pays $1,200 of office rent and transfers $300 to himself as his notarial fee for two acknowledgments he expects to perform at closing. The closing falls through because the seller's title is defective. The buyer demands return of the $48,500. R says the money is 'in the business' and he will refund 'when cash flow allows.' R's state sets a maximum notary fee of $10 per acknowledgment and requires client funds to be held in a separate trust account. R's operating account balance is $9,100. R has not given the buyer a written accounting.
1. Identify the fiduciary and fee violations.
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Multiple violations. The $48,500 is client trust funds, not business revenue. R had a duty to deposit it promptly into a separate trust account, keep it segregated, and disburse only as authorized. Depositing it into the operating account commingled it with business funds.
Paying $1,200 of office rent from it was conversion. Transferring $300 to himself before the closing was an unearned fee and also exceeded the statutory maximum: two acknowledgments at $10 each is $20, not $300. Taking a fee before performing the act is improper even if the later act would have been authorized.
On failure of the closing, R had no claim to the earnest money except any earned fee. He should have refunded promptly with a written accounting. His 'cash flow' excuse confirms the funds are not available. Consequences include discipline, restitution, civil liability, and possible criminal referral.
2. What should R have done from receipt through failure of the closing?
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R should have opened the trust account before receiving funds. If he could not, he should have used an existing compliant trust account or declined to hold the funds.
On receipt:
- deposit the check into the trust account;
- issue a receipt;
- enter the funds in a client ledger;
- keep the funds untouched.
At closing:
- disburse only according to a written settlement statement;
- pay himself only the allowed notary fee after performing the acts;
- record the fee and the disbursement.
On failure:
- return the full amount minus only fees actually earned and authorized;
- provide a written accounting;
- document the refund.
He should never use trust funds for rent, payroll, or personal transfers. The notary fee and the escrow function are separate; the stricter fiduciary rule controls the client money.
3. What are R's immediate remediation steps and likely consequences?
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Immediate steps:
- stop using the operating account for client money;
- reconstruct the client ledger;
- replace the $48,500 from personal or business funds;
- refund the buyer with a written accounting;
- correct the fee entry and return the unearned $300;
- preserve records;
- notify the buyer and, if required, the notary commission and any escrow regulator;
- cooperate with any investigation.
R should not notarize documents to paper over the problem. Likely consequences include suspension or revocation of the notary commission, restitution, a civil suit by the buyer, criminal charges for conversion, and loss of authority to handle client funds. A notary who also acts as a settlement agent must separate the two roles and follow the stricter fiduciary rules. The fact that the closing failed does not excuse the earlier commingling.