Improper commingling and limited authorized situations
If a broker deposits trust funds into an account used to receive and disburse personal or business funds, the broker has improperly commingled the funds. Similarly, improper commingling occurs when the broker places or leaves personal funds in a trust account. [Stillman Pond, Inc. v. Watson (1953) 115 CA2d 440]
Except to the limited extent authorized by the California Department of Real Estate (DRE), commingling is always improper.
A broker is only permitted to commingle personal or business funds with trust funds in the following two authorized situations:
- The broker may maintain a deposit of up to $200 of their own funds in the trust account to cover bank service charges on the account; and
- Fees or reimbursement for costs due the broker from the trust funds may remain in the trust account for up to 25 days before being disbursed to the broker. [Department of Real Estate Regulation 2835]
The improper commingling of trust funds exposes the broker to a complaint and revocation or suspension of their license. [Calif. Business and Professions Code §10176(e)]
For example, a broker prepares a purchase agreement for a buyer. The offer includes the broker’s receipt of a check for the buyer’s good faith deposit. Instructions are not included in the purchase agreement authorizing the broker to hold the check undeposited until acceptance of the offer. [See RPI Form 150 through 159]
The buyer signs the offer and issues a check payable to the broker for the good faith deposit. The broker deposits the buyer’s check into their trust account.
The offer is not accepted by the seller. The broker then withdraws the buyer’s good faith deposit from the trust account and deposits the funds in their personal account. From their personal account, the broker writes checks using the buyer’s funds to pay personal expenses.
Is the broker’s personal use of the buyer’s funds cause for revocation or suspension of their license?
Yes! Not only has the broker violated the rule against commingling trust funds and personal funds, the broker also converted the buyer’s funds to their own use. Both violations are separate grounds for revocation or suspension of the broker’s license. [Brown v. Gordon (1966) 240 CA2d 659]
Proper record keeping protection from unauthorized withdrawals
Records maintained by the broker for their trust accounts document and track the broker’s receipt and disbursement of trust funds. However, recordkeeping alone will not protect the broker against dishonest employees.
The assurance all trust funds are correctly deposited, credited and disbursed is best accomplished by maintaining a written journal or digital accounting system. However, even the best of accounting procedures do not protect against deliberate diversion of trust funds by others.
The broker named as trustee on a trust fund account is responsible for funds held in the account. The broker is liable even if others sign on the account with authorization to make withdrawals from the account. [DRE Reg. §2834(c)]
Occasionally, it is unfeasible for the broker to personally enter and maintain each accounting transaction and conduct 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 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.
If 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 unrecoverable losses, business insurance is to include coverage for employee theft.
