Starting January 1, 2019, boards of directors are required to provide written authorization for large transfers of funds.
Transfers of greater than ten thousand dollars ($10,000) or 5 percent of an association’s total combined reserve and operating account deposits, whichever is lower, shall not be authorized from the account without prior written approval from the board of the association. (Civ. Code §5380(b)(6).)
Notwithstanding any other law, transfers of greater than ten thousand dollars ($10,000) or 5 percent of an association’s total combine reserve and operating account deposits, whichever is lower, shall not be authorized from the association’s reserve or operating accounts without prior written board approval. This section shall apply in addition to any other applicable requirements of this part. (Civ. Code §5502.)
Transfer Defined. "Transfer" is broadly defined as the movement of funds from one place to another. Unfortunately, the above statutes do not specify where or how funds are being transferred that require board approval. Are they referring to the transfer of funds between accounts controlled by the association or transfers to third parties or both? There is disagreement in the legal community as to the intent of the statutes. The transfer referred to appears to be transfers between accounts. Checks written on the accounts are disbursements rather than transfers.
Utility Bills. To be safe, associations with large regular payments over $10,000, such as those to utility companies, can pass a board resolution recorded in the minutes at the beginning of their fiscal year approving such transfers. That way they are not burdened with approving the bill each month. Monthly approvals are problematic because the "written approval" does not take effect for another 30 days when the minutes are approved by the board at their next meeting.
Transfers Into Reserves. 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? Another point of disagreement is whether boards can delegate the approval requirement to an executive committee. Attorneys who believe the duty cannot be delegated point to the language in Civil Code §5380(b)(6) and §5502. Both expressly state prior written "board" approval. Civil Code §4085 defines "board" as the board of directors of the association.
Attorneys who believe the approval requirement can be delegated, cite Corporations Code 7212 which allows the appointment of 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. Accordingly, an Executive Committee could approve transfers on behalf of the board.
Recommendation: Because these matters are unsettled, boards should rely on their association's legal counsel on how best to proceed.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.