The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)
STATE OF MICHIGAN
JENNIFER M. GRANHOLM, ATTORNEY GENERAL
LICENSING AND REGULATION:
Real estate broker's duty to deposit and control earnest money deposits
Under the Occupational Code, a real estate broker may not accept from a buyer an earnest money deposit check payable to a title insurance company.
Opinion No. 7064
October 27, 2000
Honorable Andy Neumann
You have asked whether under the Occupational Code, a real estate broker may accept from a buyer an earnest money deposit check payable to a title insurance company.
Your request supposes that a prospective buyer and seller of real property agree that the buyer deliver to the real estate broker an earnest money deposit in the form of a check payable to a title insurance company. The parties further agree that the broker shall deliver the check to the title company to hold in trust until the consummation or termination of the transaction. Under this scenario, the buyer and seller agree that the title insurance company, rather than the broker, act as the escrow agent for the earnest money deposit.
The Occupational Code, 1980 PA 299, MCL 339.101 et seq; MSA 18.425(101) et seq, regulates certain occupations and establishes rights, relationships, and remedies of certain persons. Article 25 regulates real estate brokers and salespersons. Section 2512, which governs a broker's handling of deposit monies, provides as follows:
A licensee who commits 1 or more of the following is subject to the penalties set forth in article 61:
(j) Except in the case of property management accounts, fails to deposit in a custodial trust or escrow account money belonging to others coming into the hands of the licensee in compliance with the following:
(i) A real estate broker shall retain a deposit or other money accepted by a person, partnership, corporation or association holding a real estate broker's license under this article pending consummation or termination of the transaction involved and shall account for the full amount of the money at the time of consummation or termination of the transaction.
(iv) A real estate broker shall deposit, within 2 banking days after the broker has received notice that an offer to purchase is accepted by all parties, money belonging to others in a separate custodial trust or escrow account maintained by the real estate broker with a bank, savings and loan association, credit union, or recognized depository until the transaction involved is consummated or terminated, at which time the real estate broker shall account for the full amount received.
The legislative purpose for requiring a real estate broker to maintain a separate custodial trust or escrow account in the broker's own name and to deposit money belonging to others into such account, can be ascertained by studying the legislative history of two amendatory acts. The first act, 1979 PA 202, amended the predecessor act (1919 PA 306) to permit a real estate broker to hold deposit money for a maximum of 5 days following the signing of a purchase agreement before depositing it in a separate account maintained by the broker so as not to "tie[ ] up the buyer's capital which might otherwise be used as a deposit on another piece of property." House Legislative Analysis, HB 4642, October 8, 1979. This analysis recognized the broker as the agent of the seller and the need for the broker to promptly return the buyer's deposit money in the event the transaction is not completed. Id.
The second act, 1996 PA 430, amended section 2512(j)(iv) of article 25 of the Code to delete the "not later than 5 days" authority and to instead require the broker to place the deposit in the broker's separate trust or escrow account within two banking days of the seller's acceptance of the offer. House Legislative Analysis, HB 5643, March 14, 1996, recognized that the Code establishes penalties for real estate brokers who engage in certain prohibited activities, including failing to place deposit money in a qualified custodial trust or escrow account maintained by the broker so as to permit its early return by the broker to the buyer in event the transaction is not completed. Id.
The first criterion in determining legislative intent is the specific language of the statute. People v Grayer, 235 Mich App 737, 739; 599 NW2d 527 (1999). Here, the Legislature has imposed an obligation on a broker to timely deposit earnest money "coming into the hands" of the broker into a separate custodial or escrow account maintained by the broker in a recognized depository in order to safeguard the funds and make them accessible in the event the funds need to be returned to a buyer. This responsibility is similar to that required by the Legislature of other recipients of monies to promptly and accurately account for the funds. See, for example, MCL 41.77; MSA 5.69, requiring township treasurers to account for "all money that comes into the treasurer's hands;" MCL 28.9; MSA 4.439, requiring the director of the Department of State Police to honestly and correctly account for "all public money coming into his hands;" and MCL 51.69; MSA 5.862, requiring a sheriff to obtain a bond to cover "all money that may come into his or her hands as sheriff."
Where a statute creates and regulates an activity, and prescribes the mode for the exercise of its authority, that mode and none other should be followed. Sutherland Stat Const § 47.23, (6th ed), pp 308-313; Feld v Robert & Charles Beauty Salon, 435 Mich 352, 362-363; 459 NW2d 279 (1990) (Opinion of Riley, CJ). The licensure of brokers to sell real estate is a privilege granted by the state and is "conditioned upon proper observance of the law and rules relating to such business." Ranke v Corp and Securities Comm, 317 Mich 304, 310; 26 NW2d 898 (1947). A salient "purpose of a broker's custodial trust or escrow account is to protect the purchasers' moneys while the transitory phase of the transaction is pending." OAG, 1973-1974, No 4757, pp 99, 104 (October 19, 1973.)
If a broker accepts from a prospective buyer an earnest money deposit in the form of a check payable to a third party, here a title insurance company2, the broker cannot negotiate the check. Since the broker cannot negotiate the check, he likewise cannot obey his legal obligation to deposit the check in a separate custodial or escrow account maintained by the broker in the broker's name. The broker should, therefore, decline to accept such a deposit, and instead direct the buyer to provide a deposit check made payable to the broker, who in turn can process it in accordance with section 2512 of the Code. A contrary conclusion would prevent the broker from complying with the Code's requirements, and thereby deny the buyer and seller the protection contemplated in section 2512. The Occupational Code does not, however, prohibit a seller and buyer of real property from agreeing that an earnest money deposit be held in an escrow account maintained with a title insurance company, provided that a real estate broker is not involved in facilitating or handling the deposit.
It is my opinion, therefore, that under the Occupational Code, a real estate broker may not accept from a buyer an earnest money deposit check payable to a title insurance company.
JENNIFER M. GRANHOLM
1 Penalties include censure, suspension or revocation of license, probation and/or restitution. Code, section 602.
2 Materials supplied with your request suggest that a title insurance company constitutes a "recognized depository" within the meaning of article 25, section 2512(j)(iv), of the Occupational Code. However, title insurance companies are regulated by the Commissioner of the Office of Financial and Insurance Services. See section 7303 of the Insurance Code of 1956, 1956 PA 218, MCL 500.100 et seq; MSA 24.1100 et seq. These companies may issue title insurance policies, and act as escrow agent in any transaction involving the issuance of a title insurance policy. Section 7304. Depository institutions, on the other hand, are defined in the Banking Code of 1999, 1999 PA 276, MCL 487.11101 et seq; MSA 23.710(11101) et seq, to mean banks, foreign and domestic, associations, savings bank or credit unions, subject to regulation by the Division of Financial Institutions. Section 11201(s). Title insurance companies are not listed within the Banking Code's definition of depository institutions.