Broker James in Minneapolis receives a $12,000 earnest money deposit check made payable to 'James Wilson, Broker.' The purchase agreement specifies that the earnest money should be held in escrow. James endorses the check and deposits it into his trust account. Three days later, the buyer's lender discovers a title defect and the buyer exercises a contingency to cancel the transaction. The seller refuses to authorize return of the earnest money, claiming the buyer had no valid basis to cancel. James is contacted by the MN DOC regarding the disputed funds. Under Minnesota law, which action would constitute a violation for Broker James?

Correct Answer

C) Unilaterally releasing the earnest money to the buyer based on his personal assessment that the title contingency was validly exercised

Under Minn. Stat. Ch. 82, a broker may NOT unilaterally release disputed trust funds to either party based on the broker's own judgment about which party is entitled to the funds. When a dispute exists over earnest money, the broker must hold the funds in trust until the dispute is resolved by written mutual agreement of the parties, a court order, or another legally recognized process. Unilaterally releasing funds — even to the party the broker believes is entitled — exposes the broker to liability and constitutes a violation of trust account rules.