This article is part of an ongoing series covering violations of real estate law. Here, the Department of Real Estate (DRE) revoked the real estate license of a broker who did not properly maintain trust fund records, and allowed the unauthorized withdrawal of trust funds.

In September 2022, the California Department of Real Estate (DRE) decided by order hearing to revoke the license of Michelle Marie Schneck, a broker since 2000 operating out of Carlsbad, California. The decision became effective February 2023.

In July 2020, the DRE conducted an audit of Schneck’s books and records. The audit period spanned from June 2017 through March 2020.

The audit examinations revealed numerous violations of real estate law and regulations, including:

  • a trust fund shortage of $1,863 [Business & Professions Code §10145; DRE Regulations §2832.1];
  • failure to maintain a complete and accurate control record or general ledger of all trust funds received and disbursed [Bus & P C §10145; DRE Regs. §2831];
  • failure to maintain a complete and accurate separate record of all trust funds received and disbursed for each individual beneficiary [Bus & P C §10145; DRE Regs. §2831.1];
  • failure to perform and maintain a monthly reconciliation of all the separate records with the control record of trust funds received and disbursed [Bus & P C §10145; DRE Regs. §2831.2];
  • the bank account used for trust funds was not designated as a trust account with Schneck as the trustee [Bus & P C §10145; DRE Regs. §2832];
  • Schneck’s unauthorized family member improperly made withdrawals from a trust account [Bus & P C §10145; DRE Regs. §2834]; and
  • Schneck used the unlicensed fictitious business names “Snappy Realty Trust,” “Snappy Realty and Management Real Estate” and “Snappy Realty and Management.” [Bus & P C §10159.5; DRE Regs. §2731]

These violations constitute cause for the suspension or revocation of Schneck’s license, license endorsements and license rights. The license was revoked by the DRE.  [Bus & P C §§10177(d), 10177(g), 10177(h)]

Related article:

Dear Broker: Handling trust funds is like playing with fire

Trust account integrity

Trust funds

are held by brokers for safekeeping and may not be treated casually. Trust fund violations are the most common form of licensee misconduct and DRE disciplinary action, and need to be managed following DRE requirements, behaving as a trustee of other’s funds. Thus, recordkeeping and accounting requirements are imposed on brokers when they receive, transfer or disburse trust funds. When strict recording keeping requirements are not properly adhered do, the broker is exposed to the action of the DRE initiated by a complaint or a DRE audit. [See RPI e-book Trust Funds, Chapter 1]

When a broker receives trust funds, they take on the role of trustee. The trust account

opened for the deposit of cash and items payable to the broker will be in the name of the broker, as trustee, at a bank or a state-recognized depository. [Calif. Bus & P C §10145]

The assurance all trust funds are correctly deposited, credited and disbursed is accomplished by maintaining a written journal or digital accounting system.

However, even the best of accounting procedures does not protect against deliberate diversion of trust funds by others.

The broker named as trustee on a trust fund account is ultimately responsible for funds held in the account. Thus, the broker is liable even when others sign on the account with the written authorization to make withdrawals from the account, as occurred in this case. [DRE Regs. §2834(c)]

Occasionally, it is unfeasible for the broker to personally enter and maintain each accounting transaction and conduct by themselves the reconciliation required by the DRE. Banks and other depositories send a monthly statement of the account to each account holder for the purpose of verifying the validity of the deposits, withdrawals and charges on the account. The broker can best protect the trust funds from unauthorized withdrawals by personally receiving and reviewing bank statements first before anyone else.

The broker, to maintain the integrity of the trust account, is to make sure the statement is:

  • mailed to the broker’s office and handed to them unopened;
  • held by the bank and personally picked up by the broker; or
  • sent to the broker’s residence instead of the office.

When unauthorized withdrawals occur, the broker will discover them by reviewing the bank statement and the accompanying deposit tickets and paid checks before anyone else has access to the statement.

In the event the broker discovers an unauthorized withdrawal due to forgeries or improper endorsements, the broker is to notify the bank within 30 days of receiving the statement. The notice of improper payment of checks by the bank will enable the broker to recover the amount of the unauthorized payment. [Calif. Commercial Code §4406]

Any loss from the trust account not covered by the bank will be covered by the broker. Thus, to protect the broker from uncovered losses, business insurance coverage for employee theft is necessary .

Related Video: Maintaining Trust Account Integrity

Click here for more information on trust account management.

Simply, fully compliant handling and accounting of trust funds is integral to proper brokerage practice. Without a business routine of constant adherence to the rules controlling trust fund handling, a broker accepting trust funds is not long for the world of agency in real estate.

Want to learn more about handling trust funds? Click the image below to download the RPI book cited in this article.