Adams Stirling PLC
Menu

ASSOCIATION BANK ACCOUNTS

ACCOUNT REQUIREMENTS

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:

  • An escrow account with a bank, savings association, or credit union in California, which is insured by the federal government, or
  • An account under the control of the association, or
  • 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 may inure directly or indirectly to the benefit of the managing agent or his or her employees.

FUND TRANSFER REQUIREMENTS

Starting January 1, 2019, boards of directors were required to provide prior written authorization for large transfers of funds. Effective January 1, 2022, the legislature established a two-tiered system based on the size of the association. Pursuant to Civil Code § 5502, transfers from reserve or operating accounts cannot be made without prior written approval from the board unless the amount of the transfer is less than the following:

The lesser of five thousand dollars ($5,000) or 5 percent of the estimated income in the annual operating budget, for associations with 50 or less separate interests.

The lesser of ten thousand dollars ($10,000) or 5 percent of the estimated income in the annual operating budget, for associations with 51 or more separate interests.

Such changes were also made with respect to funds accepted or received by a managing agent on behalf of an association at the association's request. Such funds must be deposited into an account in a bank, savings association, or credit union in California that is insured by the Federal Deposit Insurance Corporation, National Credit Union Administration Insurance Fund, or a guaranty corporation subject to Section 14858 of the Financial Code and additional requirements must be met, including:

Transfers of funds out of the association's reserve or operating accounts shall not be authorized without prior written approval from the board of the association unless the amount of the transfer is less than the following( Civ. Code § 5380(b)(6)):

(A) The lesser of five thousand dollars ($5,000) or 5 percent of the estimated income in the annual operating budget, for associations with 50 or less separate interests.

(B) The lesser of ten thousand dollars ($10,000) or 5 percent of estimated income in the annual operating budget, for associations with 51 or more separate interests.

Transfer Defined. As initially written, the Assembly bill expressly referenced “electronic transfers.” The word “electronic” was removed as the bill made its way through the Senate. The Digest from the Senate Floor Analysis still referred to the purpose of the bill as to prohibiting “electronic transfers from homeowner association accounts without prior board approval.” Other types of transfers likely include wire transfers, telephone transfers, etc., which may explain the omission of the word “electronic.” However, "transfer" is broadly defined as the movement of funds from one place to another. While it may not be strictly required, the more conservative approach is to require board approval of any transfer of funds, including by checks.

Recurring Expenses. If there are routine budgeted transfers on a recurring basis requiring approval (e.g., property taxes, water bills, power bills, contributions to reserves), a board could approve those transfers in advance. For example, the board could approve all budgeted utility transfers at the beginning of each year, for the entire year.

Reserve Transfers. The same solution can be used for monthly transfers into reserves that exceed $10,000. Boards can approve a resolution or motion in the minutes giving written approval to the management company to make such transfers into the reserves.

Delegable Duty? Can the approval requirement be delegated to management? The language in Civil Code § 5380(b)(6) and § 5502 expressly state prior written "board" approval. Civil Code § 4085 defines "board" as the board of directors of the association. Accordingly, approval authority cannot be delegated to management. It could, however, be delegated to an "Executive Committee" composed entirely of directors. Any act or decision by a majority of the directors on the Committee is deemed an act of the board. (Corp. Code § 7212.)

INSURING THE ASSOCIATION'S FUNDS

Federal Deposit Insurance. The Federal Deposit Insurance Corporation (FDIC) insures the safety of checking and savings deposits in member banks up to $250,000 per depositor per banking institution (not per bank branch). That means an association can have a dozen $250,000 CDs from twelve different banks, thereby having $3 million covered by FDIC insurance. If a board places $500,000 in a single bank (for a jumbo CD to receive a greater return on its money) and the bank fails, the association loses $250,000.

Recommendation: Boards should not exceed $250,000 per financial institution (unless the bank has private insurance to cover the monies). Instead, they should spread their association's money across various FDIC insured institutions. One way to conveniently spread the monies is to use brokerage firms or use banks who are part of the CDARS program. See the FDIC website for more information about deposit insurance.

Private Insurance. Even if an association's governing documents do not require FDIC insured investments, boards should still make sure their monies are insured.Some banks carry private insurance to cover deposits, including deposits that exceed FDIC limits. Other banks use surety bonds that insure the bank rather than individual accounts. While this reduces the association's risk, it is not risk-free. There are two problems with the bond: (i) the bank is the named insured, not the association, and (ii) the insurance is limited to a specific dollar amount--if the bank fails, the insurance will only pay to its policy limits regardless of the aggregate amount in depositor accounts. This means any gap in coverage falls to the depositors, who may be paid only pennies on the dollar.

RecommendationIf boards elect to use non-FDIC insured accounts, they should first make sure their governing documents allow them to place funds in non-FDIC insured institutions.

Crime Insurance. Beginning January 1, 2019, associations are required to purchase what the statute refers to as a "Fidelity Bond."

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC