Two Signature Reserves

Source: Adrian J. Adams Esq.

  

QUESTION: With all the changes in banking, are we still required to have two directors sign all checks? Our management company makes 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. Banks no longer offer two-signature accounts nor do they monitor signatures–something I addressed in a newsletter two years ago.

Reserve Transfers. 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. To protect reserve funds, boards cannot rely on banks to monitor transfers. Instead, boards must adopt internal controls and carefully monitor their reserve accounts for any unusual activity. Boards still have the option of requiring all transfers be done by checks signed by two directors. Boards should consult legal counsel, their CPA, and their management company before adopting a particular policy.