DRE Hot Seat: Trust funds are held “in trust” and belong to another

This article is part of an ongoing series covering violations of real estate law. Here, the Department of Real Estate (DRE) revoked the California real estate license of a broker who failed to disburse trust funds to the owner of the funds.

In April 2022, the California Department of Real Estate (DRE) decided by default decision to revoke the license of Marissa Nicole Hudson, a broker since 2018 operating out of Morro Bay, California. The decision became effective May 2022.

Marissa Nicole Hudson was the designated officer (DO) of Seaside Real Estate, Inc., a real estate corporation engaging in property management activities.

Seaside Real Estate entered into a property management agreement to manage a three-unit property in Morro Bay, California in April 2017. [See RPI Form 590]

Seaside Real Estate collected rents from each of the three units in February and March 2019 for a combined total of $13,800. However, Hudson failed to disburse those funds to the property owner. Instead, Hudson and Seaside Real Estate commingled then converted the funds to their own general account.

Because the property owner did not receive their funds, they terminated the property management agreement in March 2019. After the termination of the agreement, the property owner requested the return of security deposits collected for the three units — a total of $8,400.

Hudson and Seaside Real Estate failed to return any of the funds belonging to the owner.

Consequently, the DRE found Hudson had committed violations of real estate law, including:

• commingling money belonging to others with her own money [Calif. Business and Professions Code §10176(e)]; and
• conduct involving fraud or dishonest dealing. [Bus & P C §10176(i)]

These violations subjected Hudson to the revocation of her real estate broker license, as she:

• willfully disregarded real estate laws [Bus & P C §10177(d)]; and
• demonstrated negligence or incompetence as a licensee. [Bus & P C §10177(g)]

Trust fund fundamentals

Brokers who receive, transfer or disburse trust funds need to comply with strict recordkeeping requirements.

Related article:

Word-of-the-Week: Trust accounts

These requirements are not to be treated casually. Trust fund violations are one of the most common problem areas which result in DRE disciplinary action, according to the DRE.

To avoid trust fund violations, all real estate brokers are to be familiar with the following laws and regulations governing the handling of trust funds:

• the general statute governing the handling of trust funds [Bus & P C §10145];
• maintaining columnar records of trust funds received [DRE Regulations §2831];
• maintaining separate records for each beneficiary [DRE Regs. §2831.1];
• performing monthly reconciliation of trust fund accounts [DRE Regs. §2831.2]; and
• prohibiting unlicensed and unbonded signatories on a trust account. [DRE Regs. §2834]

The real estate law has specific guidelines and requirements for real estate brokers to abide by when handling trust funds. Any real estate broker who handles trust funds needs to be informed on these requirements and adhere to them stringently.

The DRE publishes an informational booklet, which is a good starting point for brokers not yet well versed on the handling of trust funds.

Editor’s note — For a deeper study, RPI (Realty Publications, Inc.) provides free access to our Office Management & Supervision, Agency, Fair Housing, Trust Funds, Ethics, and Risk Management e-book.

An even greater concern for the DRE is licensees who deliberately convert

trust funds to their personal accounts for their own personal use. The DRE assures brokers who intentionally convert trust funds for their own use will have disciplinary action taken against their license, with a further possibility for criminal prosecution.

Brokers are to be vigilant over trust fund operations and recordkeeping. They also need to be knowledgeable on proper trust fund management. [See RPI e-book Real Estate Principles, Chapter 6]

Brokers who are not keeping accurate transaction records and balances will soon have a DRE audit on their hands — and possibly, a disciplinary action taken against their license.

Related article:

Brokerage Reminder: Trust fund(amentals)