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TWO SIGNATURE RULE

QUESTION: I am informed that reserve funds must be deposited in a "Two Signature Required" account. I am unable to find a bank that still offers this type of account. Are there any that you know of?? Also, our management company would like to make an electronic transfer from our reserve account into a bill paying account once bills are approved by the board. Is that legal?

ANSWER: There has never been a requirement that all checks be signed by two directors. It has, however, been the practice that all reserve transfers be done by checks signed by two directors. That standard is steadily changing with the advent of electronic banking. There was a time when bank employees compared signatures against a signature card before processing a check. Because all banks now use bulk filing, inclearings and automated processing, two-signature accounts are no longer feasible.

Inclearings & Automation. Unlike over-the-counter checks, which are deposited at the same bank they are drawn against, "inclearing" checks are deposited at other financial institutions and processed by those institutions through a clearing house such as the Federal Reserve before returning the check to the bank of origin. Once checks enter the system, they are scanned and processed in bulk using high-speed automation instead of being processed one check at a time by a live person. It saves banks time and money and speeds the transfer of money. It also means banks can no longer compare checks against signature cards.

Banks Held Harmless. Banks can still place an alert on accounts if so requested. Arguably, it means a lone board member cannot walk into a branch and clean out a two-signature account. Even so, language in the signature card and bank disclosure documents hold the bank harmless if a one-signature check is honored by the bank. That means an association cannot go after the bank if a board member absconds with the money. Instead, the HOA must go after the director.

Electronic Signatures. Whether by design or not, the Davis-Stirling Act does not require signatures on a check. Rather, the Act requires a more nebulous requirement of two signatures to withdraw funds without specifying where or how the signatures are employed:

The signatures of at least two persons, who shall be members of the association's board of directors, or one officer who is not a member of the board of directors and a member of the board of directors, shall be required for the withdrawal of moneys from the association's reserve accounts. (Civ. Code §5510(a).)

The intent of the statute is to make sure two directors or a director and an officer know about and authorize the withdrawal of reserve funds. If two directors issue written instructions to the association's management company to make a transfer, it appears the statutory requirement is satisfied.

Email Approval. Since electronic signatures are now recognized to be the same as signatures on a piece of paper, they can be used to authorize the transfer of reserve funds. Accordingly, email authorizations from two directors to the management company also satisfy the requirement. Management companies should be careful to preserve those instructions so they have a paper trail showing each transfer was authorized. Otherwise, the management company could find itself in hot water if the transfers were ever challenged.


Governing Documents. Despite the above analysis, associations should first review their governing documents before changing how they handle reserve transfers. Their CC&Rs or bylaws may contain more stringent requirements for handling reserve funds. If so, those procedures must be followed.

Recommendation. Because the two signature rule applies to associations and not banks, boards cannot rely on banks to monitor checks for them. Instead, boards must adopt internal controls and carefully monitor their reserve accounts for any unusual activity. There need to be safeguards on the withdrawal of both reserve and operational funds. An additional safeguard is for boards NOT to authorize debit cards, credit cards, or ATM withdrawals on reserve accounts. In addition, boards still have the option of requiring all transfers from reserves be done by check and requiring all reserve checks be signed by two directors. Boards should consult legal counsel, their CPA, and their management company before deciding on a particular policy.

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