The earnest money that went to advertising
You are the principal broker of a 14-agent independent brokerage in Dayton. On a Friday your office manager reports that a salesperson, Dana, received a $12,500 earnest money check from a buyer client on a $310,000 purchase contract, deposited it into the brokerage's general operating account 'to keep it simple,' and spent $3,000 of that balance on a digital ad campaign. Dana says she will repay the money out of her commission when the sale closes in three weeks. Separately, a $5,000 earnest money check on another transaction has sat in the office manager's desk drawer for nine days because no one knew the escrow account number. You also discover the brokerage has not reconciled its escrow account in four months, and Dana's transaction file contains no ledger showing receipt of either deposit. The brokerage's written policy manual, which Dana signed at hire, says all trust funds go to the escrow account within three business days.
1. Identify every trust-fund violation in this fact pattern and state the correct handling for each of the two deposits.
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Deposit #1 - the $12,500 check. Funds belonging to a buyer under a purchase contract are trust funds. They must be held in a dedicated brokerage trust/escrow account and may not be placed in the general operating account, which is commingling. Spending $3,000 of the balance on advertising is worse than commingling: it is conversion of other people's money to the broker's use. The correct handling was to deposit the check to the escrow account promptly (within the three business days set by the brokerage's own written policy, which is the benchmark a regulator will apply), record the receipt in a transaction ledger, and disburse only as the contract directs.
Deposit #2 - the $5,000 check. A check sitting in a desk drawer is not deposited at all, so the prompt-deposit rule is broken on its face. A check is not a substitute for escrow deposit; the licensee must get it into the trust account and obtain a receipt.
Records. Ohio requires a broker to account for trust funds. That means a ledger for each transaction showing date, payer, payee, amount, and running balance, plus periodic reconciliation of the book balance to the bank statement. Four months with no reconciliation is a recordkeeping failure independent of the missing money.
2. Assess your personal exposure as principal broker, and list the corrective steps you take this week.
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Exposure. As principal broker you are responsible for supervising the licensed activity conducted under your brokerage. A salesperson's mishandling of client money is not hers alone; the failure to have a working escrow account number, to deposit checks, and to reconcile monthly are supervisory failures that point at you. Expect potential discipline ranging from reprimand and fines through suspension, with revocation possible if conversion is proven, plus civil liability to the buyer and a possible criminal referral if the $3,000 is not restored.
Corrective steps. (1) Restore the full $12,500 to the trust account from brokerage funds immediately - do not wait for closing or a commission. (2) Deposit the $5,000 check the same day and issue the parties a written receipt. (3) Reconstruct ledgers for both files and perform a full reconciliation through the current bank statement. (4) Suspend Dana's authority to handle trust funds pending review. (5) Notify your E&O carrier and consult counsel about self-reporting to the Division of Real Estate and Professional Licensing. (6) Amend the policy manual, retrain all agents on escrow handling, and assign one named person to reconcile monthly.
3. Dana argues that nobody lost anything because the money would have been restored at closing. Evaluate that defense.
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The defense fails. The violation is complete when trust funds are commingled or used for the brokerage's own purposes, not when a consumer suffers a measurable loss. Three independent reasons:
- The duty is custody, not repayment. A broker holds other people's money in a fiduciary capacity. A licensee who can spend escrow money at will has already breached that duty, even if the balance is later restored.
- The risk is real, not theoretical. If the $310,000 sale falls through - failed inspection, financing denial, cold feet - Dana has no commission and the buyer's $12,500 is gone. The buyer is the owner of the funds and has an immediate right to them.
- Records hide the problem. With no ledger, no one can prove what was received or disbursed, which is exactly the harm the accounting rules exist to prevent.
In mitigation, prompt restoration and cooperation may reduce the penalty. It does not convert the conduct into compliance.