5 minute read
Banking with Homeowners Associations: A Legal Slant
By Maria C. Kao, Esq.
Homeowners’ associations function like quasi-municipalities and to render the services and operate the project, they need strong financials. The membership assessment money must be deposited somewhere; however, how the law impacts how the money should be treated is worth investigating. This article explores the complex financial responsibilities of associations, the critical role banks play in supporting associations, challenges that may arise, and best practices for a successful collaboration, with a special focus on the provisions under California Commercial Code §4403 regarding account closure.
Foundational Banking Relationships for Associations
The initiation of a banking relationship is a crucial first step for any association. This may begin with the association’s manager or bookkeeping vendor opening an account and completing a master signature card, designating authorized individuals to conduct financial transactions on behalf of the association. This level of accountability is fundamental to ensuring integrity and transparency in the association’s financial affairs.
As one can imagine, sometimes disputes arise when there is a change on the board of directors or when the vendor’s contract or actions interfere with the relationship between the association and its accounts. Boards should regularly and routinely investigate the banking agreement with its banking vendor. Some banks appear to be empowered to hold the money indefinitely and without repercussions if the bank alone is not satisfied with the instructions provided to release the funds. That means if an association needs to change the account authorizations on the signature card or otherwise change accounts and a dispute arises, the bank can lock up membership assessment money until it alone is satisfied with the instructions.
Legal Financial Responsibilities Under Scrutiny
Associations are in charge of managing membership assessment funds and it is a statutory obligation. The following Civil Code provisions are found in the body of law that our industry is the most familiar with:
The Davis Stirling Common Interest Development Act (“DSA”). Civil Code §5500 requires monthly financial statement reviews, enabling early discrepancy identification and ensuring ongoing financial stability. Civil Code §§5502 & 5510 highlight the need for meticulous oversight in monetary transfers and reserve account transactions, introducing checks and balances such as transaction thresholds and dual signature requirements to prevent unauthorized fund usage.
Given these responsibilities imposed on an association, it makes sense that the focus is on the assessment deposits and who handles them. Outside of the DSA, we have laws that govern banks, generally. Specifically, we look at the legal banking obligations as they hold assessment deposits and the association’s rights under the various laws concerning them. The California Commercial Code §4403 governs account closure. This may be important because if deposits need to be transferred, banks are obligated to respect the association’s request to close their accounts.
This statute provides master account holders, including associations, the authority to order the closure of an account, provided the account is described with reasonable certainty. In scenarios where an account necessitates multiple board member signatures for transactions, any of these members can request the account’s closure, given that the bank is afforded a reasonable opportunity to act on this request. This may seem like a mundane requirement, but there have been disputes with some banking relationships that will only respect the request of a former management company or board members who are no longer even on the board. It’s important to keep records updated and to properly investigate vendor contracts that handle association assessment deposits thoroughly with counsel prior to entering into these complex financial relationships.
Should an association encounter damages due to a bank’s failure to timely close an account, the burden of proof for the loss and its extent falls on the association. The above cited code underscores the necessity for clear communication and procedural adherence in managing banking relationships, ensuring both parties are protected, and financial operations are smoothly executed.
Navigating Challenges
Challenges in the association-bank dynamic, such as disagreements within the board or regulatory compliance, can test the partnership’s resilience, and the following serve to assist with avoiding any problems that may arise:
Board and Manager Disagreements
Clear roles and regular, transparent communication can mitigate conflicts.
Board Member Disagreements
Conflict resolution policies are crucial for maintaining harmony and decision-making efficacy.
Account Termination
Understanding the rights and procedures under Ca. Coml. Code §4403 is essential for handling account closures effectively and legally.
Best Practices for a Flourishing Partnership
For a productive banking relationship, associations should engage in regular financial reviews, maintain open communication with their bank, ensure stakeholders are educated on financial and legal responsibilities, and implement strong internal controls. It also helps to ask the manager or bookkeeper who opened the account how the association’s account was opened and ask for a copy of the banking agreement.
The partnership between associations and their banks is foundational to its success. By understanding their financial responsibilities, including the nuances of account management and closure under California law, associations can avoid conflict, or worse, assessment money being held.
