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.)
Recommendation: Because some of these matters are unsettled, boards should rely on their association's legal counsel on how best to proceed.
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