California Financial Institutions. As provided for in Civil Code § 5380, managing agents, either persons or entities, who for compensation or, in expectation of compensation, exercise control over the assets of the association who receive funds belonging to an association must deposit them into:
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An escrow account with a bank, savings association, or credit union in California, which is insured by the federal government, or
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An account under the control of the association, or
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A trust fund account maintained by the managing agent in a bank, savings association, or credit union in California.
A "managing agent" does not include a full-time employee of the association or a regulated financial institution operating within the normal course of business, or an attorney at law acting within the scope of his or her license.
Separate Accounts. Associations must set up bank accounts that are separate and distinct from their managing agent's funds and must separate their operating and reserve funds into separate accounts. Funds must be kept separate, distinct, and apart from the funds belonging to the managing agent or to any other person or entity for whom the managing agent holds funds in trust. The managing agent must maintain a separate record of the receipt and disposition of all funds, including any interest earned on the funds. With a limited exception, the managing agent may not commingle the funds of the association with his or her own money or with the money of others.
Operating Account. All monies received by the association are deposited into an operating account established in the association's name with signature cards. Allocated reserve contributions are then transferred monthly from the operating account to the reserve account. Allocation of reserve interest depends on the association's funding plan.
Reserve Account. A "Reserve Account" refers to money the association has set aside to defray the future repair or replacement of, or additions to, those major components which the association is obligated to maintain. (Civ. Code § 4177.) Except for temporary borrowing, boards may not expend funds designated as reserve funds for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain and for which the reserve fund was established. (Civ. Code § 5510(b).) There are also signature requirements for transfers and prudent investment policies that boards need to follow. Boards also need to establish a policy for handling interest on the reserve accounts.
Interest. No interest earned on funds in the account shall inure directly or indirectly to the benefit of the managing agent or his or her employees.
Attorneys' Fees. The prevailing party in an action to enforce this section shall be entitled to recover reasonable legal fees and court costs.
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