The Law Journal, Summer 2024

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Summer 2024 Law Journal Editorial Committee

Chief Editor

Attorney Guest Editor

Fred Whitney, Esq. Whitney | Petchul

Jasmine F. Hale, Esq. Berding | Weil LLP

Summer 2024 Law Journal Committee Members

Allison Andersen, Esq. Angius & Terry LLP

Dyanne Peters, Esq. Delphi Law Group, LLP

Garrett Wait, Esq. Kriger Law Firm

Jill Morgan, CCAM Allure Total Management

Lorena Sterling, CAFM Community Association Financial Services

Hamlet Vazquez, MCAM-HR Wilshire Terrace Co-Op

An archive of past issues can be found under Member Resources at

The CACM Law Journal is a digital publication distributed four times per year to all members, in addition to supporters of the California Association of Community Managers.

DISCLAIMER: CACM does not assume responsibility for the accuracy of articles, events or announcements listed. Please be advised that the opinions of the authors who contribute to the Law Journal are those of the author only, and do not necessarily reflect the opinions of CACM and other industry attorneys. Please note that in a constantly evolving industry there are frequently multiple interpretations of the controlling statutes and case law. The information contained in these articles is of a general nature and not intended as legal advice. If you have any questions, please discuss them with your association’s legal counsel.

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Summer 2024
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Letter from the Guest Editor

While the weather outside is warm, and it’s time for the pool, summer vacation, or to hit the beach, the wheels of managing a common interest development never stop!

It can be easy to overlook some of the more “routine” aspects of managing a community association and assume you know what they are. Still, experience shows they are often anything but easy. Managers deal with issues from complying with the financial requirements to navigating the various state and statutory regulations on a daily basis, and yet much of it is not often discussed or taught.

This issue of the Law Journal seeks to illuminate the myriad and complex requirements that managers encounter in their day-to-day jobs with articles covering financial and banking requirements, corporate status, balcony bill lessons, director indemnification, and annual disclosure tips. We also help you unpack the ever-changing election laws.

With all the fun in the sun, I hope this edition provides a useful and ongoing resource for some of the trickier, anything-but-routine issues you run into in your day-to-day jobs. I wish you all a wonderful summer and a stress-free start to your budget season.

Jasmine F. Hale, Esq., is a Partner at Berding & Weil, LLP, and oversees the firm’s corporate counsel practice group, with 20 years of experience working with community association boards of directors and their management teams. | The Law Journal Summer 2024 3



Community associations must periodically file informational and tax forms with the California Secretary of State (SOS) and California Franchise Tax Board (FTB). Failing to file the forms in a timely way could result in suspension of the association’s corporate and tax-exempt status with the State, financial penalties, and unbudgeted expenses for legal or CPA assistance.

A suspension is a serious matter that should not be taken lightly. It means the association’s corporate powers, rights, and privileges are suspended in California. While actions taken by a suspended corporation may be retroactively validated after the suspension has been lifted and the corporate status has been reinstated, there is no guarantee that the negative consequences of suspension can be reversed entirely.

For instance, contracts a suspended corporation entered during suspension may be voided at the option of the other party to the contract. Moreover, a suspended corporation cannot appear before courts, which can have significant implications for an association involved in a legal proceeding (either as the plaintiff or the defendant).

Suspension may also lead to the FTB revoking the association’s tax-exempt status, requiring the association to submit a new Exemption Application form (Form 3500) along with the required tax forms to obtain active status.


Every two years, California non-profit mutual benefit corporations must file a Statement of Information (Form SI-100) with the SOS. This form includes crucial information about the corporation’s addresses, officers, and agent for service of process. The filing deadline is based on the date the corporation’s articles of incorporation were filed with the SOS, and any delay in filing can have serious implications.

If any information on a previously filed Form SI-100 changes, an updated form should be filed. An updated form must be filed if the name or agent of the corporation’s agent for service of process changes. Forms, address changes, and other filings can be made via the SOS’s online business portal at

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Community associations, both incorporated and unincorporated, must file a Statement of Common Interest Development (CID) form with the SOS every two years. The form must include, among other things, information about the association’s name, addresses, managing agent, and type of development. Civil Code §5405 lists all the information required on the form. Incorporated associations must file a CID form with the Form SI-100.

Unincorporated associations must file a CID form every two years from July 2003.

Community associations must notify the SOS of any change in the street address of the association’s onsite office or the responsible officer or managing agent within 60 days of the change. Thus, an updated CID form must be filed with the SOS whenever an association changes management companies.


Associations must also file annual information returns with the FTB. Consult with a CPA or tax professional to confirm the correct forms and filing deadline. Resolving a suspended corporate status due to FTB violations is often more complex. As such, it can take more time to reinstate the status.


Check an association’s SOS status on the SOS website at https://bizfileonline.sos. In the “search” field, enter the association’s name. From the results list, click on the matching name. Information for the association will appear on the right side, including the initial filing date, entity status, and due date for Form SI-100. Warning: If the status states “Suspended” instead of “FTB Suspended,” it does not necessarily mean the association is not suspended by the FTB.

You can check an association’s FTB status by requesting an entity status letter on the FTB website at help/business/entity-status-letter.asp. Click “Check Status,” then enter the association’s

name and click “Perform Search.” On the results page, click on the entity ID. The next page allows you to generate a formal letter showing the association’s status.


If the association is SOS suspended, contact the SOS to confirm:

1. What must be done to reinstate the association as “Active” with the SOS?

2. Are the association’s forms with the SOS current?

3. Are there any outstanding fees or penalties?

If the SOS imposes a penalty, the association can request a penalty waiver in writing through the SOS’s website. The request must show reasonable cause or unusual circumstances for the association’s failure to file the required form timely. However, the delinquent form should be filed before submitting the waiver request.

If the association is FTB suspended, contact the FTB’s Exempt Unit (contact information can be found at Be ready to provide the association’s full name, entity number (this can be obtained on the SOS’s website), and the name and address of the association’s agent for service of process. If the FTB states that the association must file an Exemption Application, ask for an extension. If they refuse, confirm how long the FTB will take to process Exemption Applications. For more information about FTB suspensions, see https://www.


1.Don’t wait to receive an SOS reminder notice. Neither the failure of the SOS to send a reminder notice nor the failure of the association to receive the notice is an excuse to file the required forms timely.

2.Update the association’s address. SOS notices are sent to the last address on record. If the address with the SOS is not current, the association will not receive the SOS’s notices.

3.Check the association’s statuses with the SOS and FTB annually to ensure its information is up to date and its forms are current.

4.Calendar the biennial deadline for the Form SI-100 and CID form.

5.Timely file required annual tax forms and pay the appropriate fees/taxes.

6.Ask for help.

Ask the association’s attorney and CPA for help on what forms must be filed, the filing deadlines, and addressing any penalties or suspensions. In a time crunch, some services can help, for an additional fee, to potentially expedite the reinstatement of an association’s corporate status to active.

Kyle Lakin, Esq. is an attorney representing common interests developments for Delphi Law Group, LLP, based in Carlsbad. Of his 25 years as an attorney, 15 were spent advising HOAs.

What Have We Learned So Far?

With the January 1, 2025 deadline for compliance with Civil Code (CC) §5551 rapidly approaching, California condo property managers are feeling the pressure. Also known as Senate Bill 326, or the Balcony Inspection Bill, Civil Code §5551 has significant implications for condominium associations across the state. As we approach this critical juncture, it is essential to reflect on what we have learned thus far and how best to navigate the challenges ahead.


Enacted in 2019, the bill was introduced in response to a tragic incident in Berkeley, where a balcony collapse led to multiple fatalities and injuries. It mandates the inspection of exterior elevated wood framed elements, such as balconies, decks, and walkways, in buildings with three or more multi-family units by a licensed structural engineer or architect every nine years. Additionally, it requires associations to maintain detailed inspection records and disclose inspection findings to residents.


Since its enactment, the balcony inspection bill has presented numerous challenges for property managers. Here is what we have learned along the way:


Achieving compliance with CC §5551 is not a straightforward task. It involves coordinating with inspectors, scheduling inspections, and ensuring thorough documentation of findings. Managers must navigate complex logistical issues while balancing the needs of residents. There are many options when considering who to hire to implement the requirements of the law. Many general contractors have affiliated or hired architects with little or no forensic experience in conducting the type of inspections required. Conducting a thorough due diligence review prior to making the decision is recommended,

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Compliance with CC §5551 comes with financial implications. The costs associated with inspections, repairs, and ongoing maintenance can strain association budgets. Managers have learned the importance of budgeting and financial planning to meet these obligations, including through special and/or emergency assessments where applicable. Properties less than 10 years old may have additional avenues to absorb the financial costs of the required inspections through the construction defect process.


Effective communication has emerged as a critical lesson in the balcony inspection bill compliance journey. Managers must communicate clearly and transparently with residents about the inspection process, findings, and any necessary repairs. Building trust and cooperation among residents is essential for smooth compliance. Some ways to accomplish this may be through an association newsletter, holding a Town Hall meeting, sending email updates to all owners, or hiring a construction manager to help facilitate the process and communications.


Civil Code §5551 underscores the paramount importance of safety in condominium living. Managers have learned to identify and address potential safety hazards promptly. However, regular property condition assessments by qualified consultants, compliance with the developer’s and manufacturer’s maintenance recommendations, and timely repairs are crucial for maintaining the structural integrity of buildings and ensuring resident safety.


Compliance necessitates a thorough understanding of legal requirements and obligations included in the code. Property managers have had to educate themselves on the intricacies of the law to ensure full compliance and avoid potential legal repercussions, which include potential enforcement measures by local authorities, loss of insurance, and/or lending challenges. Working closely with legal counsel is essential in navigating the legal aspects of §5551.


Throughout the balcony inspection process, a range of issues affecting exterior elevated elements in condominium buildings have been uncovered. Common findings include:


Inspectors have identified instances of structural degradation in balconies, decks, and walkways. This includes signs of wood rot, corrosion of metal components, and deterioration of concrete or masonry. Such issues compromise the integrity of these elements and pose safety risks to residents.


Many buildings have exhibited signs of waterproofing failures, particularly in areas exposed to moisture, such as balconies and decks. Inspections have revealed cracks in waterproofing membranes, inadequate sealing around penetrations, and insufficient drainage systems. These deficiencies can lead to water intrusion, causing damage to the building envelope and underlying structures.


In some cases, inspections have uncovered instances of deferred maintenance, where routine upkeep and repairs have been neglected over time. This includes missing or damaged railings, deteriorated decking materials, and unaddressed signs of wear and tear. Addressing deferred maintenance is essential for preventing further deterioration and ensuring the long-term safety and durability of exterior elevated elements.


Inspections have identified code violations related to building standards and safety regulations. These include non-compliance with structural load requirements, inadequate fire protection measures, and insufficient egress pathways. Bringing buildings into compliance with applicable codes and standards is essential for mitigating safety risks and avoiding potential legal liabilities.


As the deadline for compliance looms, managers must address the findings of inspections promptly and comprehensively. Financial planning, prioritizing necessary repairs, implementing proactive maintenance measures, and maintaining open communication with residents are key strategies for ensuring a safe and secure living environment. By leveraging the lessons learned from the §5551 compliance journey, managers can navigate the final stages of compliance successfully and uphold the highest standards of safety and quality in condominium living. | The Law Journal Summer 2024 7
Ritchie Lipson, Esq., is a construction defect attorney with Kasdan Turner Thomson Booth, LLP, with over 24 years in the industry.

When a Director is Sued, Who Pays the Bill?

Must an association indemnify a current or prior director sued for conduct taken on the association’s behalf – in other words, pay for the director’s legal fees, settlements, or judgments?
The answer is “sometimes and assuming certain conditions are met.”

Is indemnification mandatory?

California Corporations Code §7237 says a director is entitled to mandatory indemnification only if the director prevails “on the merits” of a claim based on conduct as the association’s agent. Thus, the right to indemnity is decided on a case-by-case basis and cannot be determined until the case concludes. There is no obligation to indemnify until the director wins.

Did the director prevail “on the merits” in the underlying claim?

Whether a director prevailed is not always obvious. If the director won the case because the plaintiff waited too long to sue (violating the statute of limitations), was it on the merits? What if the director prevailed on some but not all parts of the claim? Or what if there was a settlement and no resolution on the merits?

Sometimes, in the case against the director, the court will determine whether the director is entitled to indemnity. However, if not, the board must evaluate whether the director prevailed. All indemnification decisions should be made at an executive session meeting. The minutes should detail the board’s basis for agreeing or not agreeing to indemnify. Only

directors who are not seeking indemnity should participate in the meeting. If the number of directors participating is less than a quorum, the indemnity question should be put to a membership vote.

Can the board indemnify a director who lost or settled the underlying claim? Can the Bylaws mandate indemnification when the director does not prevail?

Yes, if the board determines that the losing director acted in good faith and association’s best interest, the disinterested directors (or the membership) can authorize indemnification. The Bylaws can be amended to provide for this “discretionary indemnity.”

Can the director be indemnified even if the Bylaws are silent?

Yes. CC §7237 vests the board with discretion to indemnify the director irrespective of express authority to do so in the Bylaws so long as the director acts in good faith.

•The statute’s subjective good faith requirement provides the board with broad discretion to indemnify, or to refuse to indemnify, a director who fails to prevail, or who has not yet prevailed

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Can litigation defense costs be advanced before the director prevails?

While a final decision on the director’s mandatory right to indemnity cannot be made until the claim concludes, a board can but is not required to agree to advance legal expenses to defend the claim. To do so, the director provides the association with an “undertaking” to repay the association if it ultimately turns out the director was not entitled to indemnity. An undertaking could be a bond or other financial instrument. In California, a promise from the director that they will repay the association for expenses advanced if they are ultimately denied indemnity might be acceptable. Each situation must be separately analyzed.

What if there is insurance?

There is an exception to the rule limiting indemnification until the conclusion of the claims, and this concerns insurance. Generally, an insurer must immediately defend directors and prior directors when they are sued, regardless of whether the association has a duty to indemnify, even over the board’s objection. Such defense and indemnity rights depend on timely reporting and other insurance conditions. But even this protection has a wrinkle: if the insurance policy has a “self-insured retention” (“SIR”) (basically like a deductible) that must be paid before the insurer’s obligation to pay defense costs “kicks in,” the director may yet be faced with having to pay this retention “up front” before insurance is triggered. The director likely will ask the association to advance this cost. If the association itself has also been sued, the “SIR” may be satisfied by the association’s payment for itself.


is the manager’s role?

Management should recommend that the board obtain the broadest possible liability coverage with the smallest SIR. Having an insurance broker explain defense and indemnity coverages to the board is advisable. To maximize insurance coverage, claims against directors must be reported timely. Management should involve counsel quickly to assist in communicating with the director(s) that are the target of a claim. Management should work with counsel to draft the notices, assist in the indemnity voting process, and communicate with the director concerning their indemnity requests.

Steven S. Weil, Esq., is Founding Principal of Berding & Weil, LLP and has practiced community association law since 1984.

Thomas M. Ware, II, Esq., is Partner in the law firm of Kulik Gottesman Siegel & Ware LLP. He has focused on the representation of HOAs, their directors, officers and community managers since 1989.

Are You Ready For Your MCAM?

Be at the pinnacle of success by earning the Master of Community Association Management (MCAM) certification.

Becoming an MCAM sends a powerful and prestigious message not only about your depth of experience, but also your commitment to higher education and your career.

Individuals who undergo its rigorous requirements are taking responsibility to advance their own qualifications and elevate the broader community management profession.

What’s involved?

Successfully complete the following courses within three years of applying*:

• Fundamentals of Effective Governance

• Human Resource Management

• Ethics Mastery

• Advanced Insurance Principles

• Risk Management

• Strategic Financial Planning

Submit the MCAM application and successfully complete a comprehensive assessment comprised of a 100-question multiple-choice exam, written paper and oral presentation.

*You must have held your CCAM for five years before applying. | The Law Journal Summer 2024 9

The Increasingly Complex Board Election Process

The Davis-Stirling Common Interest Development Act (California Civil Code (“CC”) §§5100-5145) mandates the following board election process for incorporated and unincorporated associations. Failing to comply with this process can lead to owner challenges of the election results and litigation, which in turn can lead to the election being voided, the association paying the challenging owner’s attorney’s fees and court costs, and civil penalties of up to $500 for each violation of the law.

STEP 1: Notify members of the nominating procedure

The first step in the election process is to notify the members, via general delivery, of the procedure and deadline for submitting nominations for board election. This notice must be given at least 30 days before the nomination deadline and 90 days before the election.

STEP 2: Handle unqualified nominees

If persons who do not meet the association’s candidate qualifications are nominated, the board must offer these persons internal dispute resolution before disqualifying them. The purpose of this meeting is to allow these nominees to qualify or prove they are qualified to run.

STEP 3: Appoint/hire inspectors of elections

The board must appoint or hire one or three independent parties to oversee the election (“inspectors”). Inspectors can be association members who are not board members, candidates, or family members of board members or candidates. They can also be professional inspectors or other professionals, provided they, the entity they work for, and any parent entity are not performing any other compensable services for the association.

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Notify members of the election; create candidate and voter lists

At least 30 days before the ballot mailing, the association must notify members of the following via general delivery:

1)The date and time ballots must be received by mail or handed to the inspector(s);

2)The mailing address for returning ballots;

3)The date, time, and location of the election; and

4)The list of all qualified candidates who will appear on the ballot.

For associations that require a quorum to conduct elections, this notice must also include a statement that the board may call a subsequent meeting at least 20 days after the election date if a quorum is not reached. At that time the quorum will be 20% of the members unless the governing documents provide for a lower quorum.

At least 30 days before the ballots are mailed, the association must also prepare voter and candidate lists. The voter list must contain the name, voting power, address of the separate interest or parcel number, and mailing address for the ballot (if different) for all members. The candidate list must contain the names and addresses of all candidates.

Members are allowed to verify the accuracy of their information on these lists. The inspector(s) must correct errors on these lists within two business days of receiving notice of the mistakes.

STEP 5: Ballot mailing

At least 30 days before the voting deadline, a ballot, two balloting envelopes, and the election rules must be delivered to all members. If the election rules are posted on the association’s website, the election rules can be omitted if the ballot includes the following statement in at least 12-point type “The rules governing this election may be found here:___.”

An association can but is not required to include candidate statements in the ballot mailing (unless the bylaws or election rules mandate their inclusion).

Step 6: The election

If a quorum is established, the inspector of elections must open ballots in public at a noticed meeting, and members must be permitted to witness the opening and counting of the votes.

If a quorum is required but not achieved at this meeting, the association may adjourn the meeting to a date at least 20 days after the adjourned meeting, at which time the quorum will be 20% of the members under CC §5115(d)(2). To take this action, the association must notify members via general delivery, at least 15 days prior to the reconvened meeting, of the date, time, and location of the meeting; the names of the candidates; that 20% of the members present, or voting by ballot or proxy (if permitted), will constitute a quorum, and that ballots will be counted if a quorum is reached. | The Law Journal Summer 2024 11 Continues on page 12

Complex Board Election Process

Continued from page 11

Associations with adjourned quorum requirements lower than 20% should refer to their governing documents for any requirements.

STEP 7: Announce election results

The election results must be recorded in the minutes of the next board meeting and provided to the members via general delivery within 15 days of the election.


If an association meets the requirements of CC §5103 and wants to elect board members by acclamation, the required election process changes in the following ways:

•The notice of the nominating procedure must be provided to members via individual notice at least 90 days before the nominating deadline. It must include the number of positions to be elected, the procedure and deadline for nominations, and a statement that if, at the close of the nominating period, the number of qualified candidates is the same or less than the positions to be filled, the board may elect the candidates by acclamation without a member vote.

•A reminder notice must be provided to members via individual delivery between seven and 30 days before the nomination deadline. This notice must include the same information as the original notice and a list of the names of all qualified candidates as of the notice date.

•Within seven business days of receiving a nomination, the association must send a written or electronic acknowledgment of the nomination to the submitter, and a written or electronic communication to the nominee confirming whether the nominee is qualified to be a candidate. These notices can be combined when a member nominates themself

•The board votes to seat the candidates at an opensession Board meeting. The agenda for this meeting must include the names of all qualified candidates who will be seated by acclamation.


A Include the candidate qualifications in the notice of nominating procedures to reduce the likelihood of unqualified persons being nominated.

A Send out the notice of nominating procedures more than 90 days before the election so you have time to conduct IDR before the notice of the election and the names of the candidates must be provided to the members.

A Remember the inspector(s) determine where the ballots are returned and kept until the election. This location can be the association’s management office, but only if the inspector(s) authorizes it.

A While notices required as part of the election process can generally be provided to members by “general delivery” as defined by CC §4045, the association must provide these notices by “individual delivery” to any members who request individual delivery.

A Check the bylaws and election rules to determine whether proxies are permitted and, if so, consult with the association’s legal counsel to ensure compliance with any requirements about the use of proxies.

A Remember that the election rules are required and cannot be amended within 90 days of an election.

A Provide equal access to the common area, without a charge, to members who want to campaign for or against candidates. If the association allows any candidate or member to use any association media, such as a newsletter or website, to campaign, all members must be given the same opportunity to use that media for campaign purposes.

A If the association’s bylaws or election rules allow nominations from the floor at the annual meeting or write-in candidates, check with the association’s legal counsel before the election for guidance on what to do if someone who does not meet the qualifications to run for board election is nominated from the floor or as a write-in candidate.

A It is just as important that the ballot mailing contains all of the information required by California law as it is that the association follows the mandated election process. Please consult with the association’s legal counsel if you are unsure what information must be provided.

Karyn Larko, Esq., serves as Community Association Counsel at Epsten, APC in San Diego. She has 16 years of experience advising HOAs.

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A review of Civil Code requirements and tips on how to navigate them.


What does the Davis-Stirling Act require for annual disclosures, financial reviews, and large money transfer approvals? This article will go into financial compliance and offer best practices and red flags.


Certain financial disclosures must be made to all homeowners, while others are made to only members of the board. Civil Code §5300(b)(1) requires that an annual operating budget be distributed to the membership annually. The law requires associations to prepare pro forma operating budgets that include all estimated expenses and revenues using the accrual basis method of accounting.

The accrual basis of accounting is vital, ensuring a more accurate depiction of the association’s financial status and enabling direct comparisons between actual and budgeted figures. The annual budget report is a consolidated disclosure statement that

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must include all basic financial information and any additional requirements under the association’s governing documents. Financial disclosures must be provided 30 to 90 days before the start of the association’s fiscal year. They must include all the requisite documents enumerated in Civil Code §5300(b)(1), (i.e., the entire budget or a summary of the pro forma budget, a summary of reserves and the reserve funding plan, outstanding loans, a summary of the association’s insurance, etc.).

The annual budget report must be distributed to all members by individual delivery. It can be distributed as either the whole annual budget report or as a summary (Civil Code §5320). The summary must include a general description of the content of the annual budget report, and instructions on how the member may request a complete copy of the complete budget report. Those instructions must be printed on the first page of the summary. Upon written request under §5260, an additional copy of those notices must be delivered to a member’s secondary address (Civil Code §4040).

To meet these requirements, managers need to maintain detailed records of financial transactions, board meetings, and budgetrelated decisions. Accurate and transparent record-keeping is good governance and essential for demonstrating compliance with California law during audits or inspections.


Property managers must set up association bank accounts separate from their own funds and separate operating and reserve funds into different accounts (Civil Code §5380(b)(3)). Boards may not expend funds designated as reserve funds for any purpose other than those enumerated in Civil Code §5510(b). However, without a membership vote, boards are allowed to borrow from reserves to meet short-term cash flow problems or other expenses (Civil Code §5515(a)).

If a board intends to borrow from its reserves, it must list it as an agenda item in its board meeting notice. The meeting notice or discussion must include the reasons the reserve transfer is needed, options for repayment, and whether a special assessment may be considered. If the board authorizes the transfer, it must issue a written finding, recorded in the minutes, explaining the reasons for the transfer, and describing when and how the money will be repaid to the reserve fund (Civil Code §5515(c)). Borrowed monies must be repaid to the reserves within one year of the date of the transfer, except that the board may, after giving the same notice required for considering a transfer, and, upon making a finding supported by documentation that a temporary delay would be in the best interests of the association, temporarily delay the repayment (Civil Code §5515(d)).

Managers should also note that pursuant to Civil Code §5502, transfers from reserve or operating accounts shall not be authorized without prior written approval from the board unless the amount of the transfer is less than the statutory requirements of Civil Code §5380(b)(6). This section of the code provides that no approval is necessary if the amount transferred is the lessor of $5,000 or 5 percent of the estimated income in the annual operating budget for associations with 50 or less separate interests, or the lesser of $10,000 or 5 percent of estimated income in the annual operating budget for associations with 51 or more separate interests. It is important to note that this approval requirement cannot be delegated to management.


An association must have a financial review if its gross income exceeds $75,000 (Civil Code §5305). This review shall be prepared following generally accepted accounting principles by a licensee of the California Board of Accountancy. It is based in part on management representations, includes disclosures regarding litigation that could have an unfavorable outcome for an association, and is done on an accrual basis.

A copy of the annual financial statement review shall be distributed to the members within 120 days after the close of each fiscal year, by individual delivery according to §4040 (Civil Code §5305).

REVIEW OF ASSOCIATION FINANCES Managers must ensure that the board regularly reviews the budget and financial documents. Periodic reviews help identify potential issues early on, allowing the board to make informed decisions and adjustments. Further, Civil Code §5500 requires a monthly review of the association’s financial documents by all board members or a subcommittee consisting of the treasurer and at least one other board member. This review is then ratified at a subsequent board meeting and noted in the board minutes (Civil Code §5501).

The monthly review must include a reconciliation of the operating and reserve accounts, actual operating revenues and expenses compared to the budget, operating and reserve account bank statements, an income and expense statement for the association’s accounts, and the check register, monthly general ledger, and delinquent assessment receivable reports.


A number of the above statutory requirements necessitate that documents be distributed by individual delivery which means “Firstclass mail, postage prepaid, registered or certified mail, express mail, or overnight delivery by an express service carrier” (Civil Code §4040). This “individual delivery” can cost associations significant money and burden the management office with the copying and mailing of documents. To avoid this burden, associations can distribute these documents and disclosures electronically if provided with written consent. Managers should solicit written consent from members to deliver documents to them electronically. A simple form should be prepared and sent out in a separate mailing a few months before sending out the Annual Financial Packet and Policy Statement. This simple action can save associations significant money and make them appreciate their manager even more.

Stephen M. Levine, Esq., of The Judge Law Firm in Irvine has 25 years of experience in community association and real estate law. | The Law Journal Summer 2024 15



Homeowners’ associations function like quasimunicipalities 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

16 The Law Journal Summer 2024 |

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 abovecited 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.

Maria C. Kao, Esq., is a Partner at Briscoe Ivester & Bazel LLP. She has worked for common interest developments since 2009. | The Law Journal Summer 2024 17




Assessment Collection & Judgment Recovery Services

Stefan Murphy

Serving All of California For Over 30 Years 990 Reserve Dr., Ste. 208 Roseville, CA 95678 (800) 220-5454


Assessment Collection Services

Steven J. Tinnelly Esq., President Advanced, Efficient, Effective HOA Assessment Recovery 27101 Puerta Real, Ste. 250 Mission Viejo, CA 92691 (888) 818-5949


General Counsel & Assessment Collections

Mark Guithues, Esq., Laurie Masotto, Esq., Jeffrey Speights, Esq. Inland Empire, Orange County, San Diego 509 N. Coast Hwy., Oceanside, CA 92054 (760) 529-5211 • Fax (760) 453-2194

18 The Law Journal Summer 2024 |



General Counsel, Community Association Law

Stanley Feldsott, Martin Lee, and Austin Nichter

Laguna Hills, California 23161 Mill Creek Dr., Ste. 300 Laguna Hills, CA 92653 (949) 729-8002 • Fax (949) 729-8012


Trusted Partners In Assessment Collections

Lisa E. Chapman

HOA Assessment Collection Services 696 San Ramon Valley Blvd., Ste. 353 Danville, CA 94526 (925) 855-8554 • Fax (925) 855-8559



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Jeffrey A. Beaumont and Lisa A. Tashjian

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Mark Guithues, Esq., Laurie Masotto, Esq., Jeffrey Speights, Esq.

Inland Empire | Orange County | San Diego 509 N. Coast Hwy. Oceanside, CA 92054 (760) 529-5211 • Fax (760) 453-2194



Association Counsel, Civil Litigation, Litigation, Commercial CID Counsel, Senior Housing & Assessment Recovery Collection

Jon Epsten, Esq. & Susan Hawks McClintic, Esq. San Diego | Inland Empire | Coachella Valley 3111 Camino del Rio North, Ste. 560 San Diego, CA 92108 (858) 527-0111 • Fax (858) 527-1531



Community Association Law and Assessment Collections

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Association Law, Assessment Collections, General Counsel

Wayne S. Guralnick, Robert J. Gilliland Jr. Serving Community Associations for Over 30 Years

40004 Cook St., Ste. 3 Palm Desert, CA 92211 (760) 340-1515 • Fax (760) 568-3053


Community Association Law

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Community Association & Construction Defect Law

John P. Gill, Esq. l Amy K. Tinetti, Esq. 2820 Shadelands Dr., Ste. 160 Walnut Creek, CA 94598 (925) 926-1200 • Fax (925) 926-1202



James Judge, Esq. Providing General Counsel & Collection Services Throughout CA for Over 20 Years 18650 MacArthur Blvd., Ste. 450 Irvine, CA 92612 (949) 833-8633 • Fax (949) 833-0154


Community Association Law and Assessment Recovery

Bradley Schuber

Serving Community Associations for Over 30 Years 8220 University Ave., Ste. 100 La Mesa, CA 91942 (619) 589-8800 • Fax (619) 589-2680


Construction Defect Litigation

David Loewenthal I Robert Hillshafer Los Angeles, Ventura & Surrounding Counties 5700 Canoga Ave., Ste. 160 Woodland Hills, CA 91367 (866) 474-5529 • Fax (818) 905-6372

Continues on page 20 | The Law Journal Summer 2024 19

Continued from page 19


Construction Defect Litigation

Construction Defect Analysis

William H. Naumann


10200 Willow Creek Rd., Ste. 150 San Diego, CA 92131 (844) 492-7474 • Fax (858) 564-9300


Community Association Law

Sharon Glenn Pratt Los Gatos, CA 634 North Santa Cruz Ave., Ste. 204 Los Gatos, CA 95030 (408) 369-0800 • Fax (408) 369-0752


Community Association Law

Construction Defects & Mediation

David F. Feingold, Esq.

Matthew A. Haulk, Esq.

Serving Bay Area Communities Since 1986 1101 Fifth Ave., Ste. 100 San Rafael, CA 94901 (415) 453-9433 • Fax (415) 453-8269


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Kelly G. Richardson, Matt D. Ober Throughout California 234 E. Colorado Blvd., Ste. 800 Pasadena, CA 91101 (877) 446-2529 • Fax (415) 453-8269


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David C. Swedelson, Esq.

Sandra L. Gottlieb, Esq.

Los Angeles | Orange County | Palm Desert | San Francisco l Ventura 11900 W. Olympic Blvd., Ste. 700 Los Angeles, CA 90064 (800) 372-2207 • Fax (310) 207-2115


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Steven J. Tinnelly, Managing Partner & Richard A. Tinnelly, Senior Partner Orange County | Los Angeles | San Diego | Coachella Valley | Northern CA 27101 Puerta Real, Ste. 250 Mission Viejo, CA 92691 (949) 588-0866



Steven M. White, Esq., James P. Hillman, Esq. COST EFFECTIVE SOLUTIONS BASED ON EXPERIENCE 1530 The Alameda, Ste. 215 San Jose, CA 95126 (408) 345-4000 • Fax (408) 345-4020


Community Association Attorneys Fred T. Whitney, Esq. / Dirk E. Petchul, Esq. From Inception To Build-Out And Beyond 27 Orchard Rd. Lake Forest, CA 92630 (949) 766-4700 • Fax (949) 766-4712


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Michael W. Rabkin, Esq. 11400 W. Olympic Blvd., 9th Floor Los Angeles, CA 90064 (310) 744-4100 • Fax (310) 479-1422



Construction Defect Litigation

Steven Weil, Tyler Berding, Chad Thomas, Daniel Rottinghaus, Andrew Baugh, Paul Windust

Walnut Creek, San Diego, Orange County, Sacramento 2175 North California Blvd., Ste. 500 Walnut Creek, CA 94596 (800) 838-2090 • Fax (925) 820-5592


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John W. Chapman, Esq. & Mark G. Intrieri, Esq. Alameda l Roseville l Orange County l San Diego 2236 Mariner Square Dr., Ste. 300 Alameda, CA 94501 (510) 864-3600 • Fax (510) 864-3601


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Charles R. Fenton, Esq. & Joseph Kaneda, Esq.

Servicing California & Nevada Communities for Over 25 Years 2030 Main Street, Ste. 550 Irvine, CA 92614 (877) 520-3455 • Fax (949) 435-3801

20 The Law Journal Summer 2024 | 2023-24 LEGAL DIRECTORY


Construction Defect Analysis & Litigation

Thomas E. Miller, Esq. & Rachel M. Miller, Esq.

The Authority in California Construction Defect Claims for 40 Years 19 Corporate Plaza Dr. Newport Beach, CA 92660 (800) 403-3332 • Fax (929) 442-0646


Construction Defect Resolution & Construction Defect Analysis Attorneys

Rick Riley, Melissa Pasek, Kevin Canty

Representing Community Associations

Throughout the State of California 780 San Ramon Valley Blvd. Danville, CA 94526 (844) 775-5000



Election Administration

Denise La Fond Because Accuracy Matters 18336 Soledad Canyon Rd., Ste. 3125 Canyon Country, CA 91386 (661) 310-8828


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Kurtis Peterson

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We Make Association Voting Management Easy 1900 Camden Ave. San Jose, CA 95124 (408) 482-9659



Reserve Study Firm

Ryan Leptien

Serving All of California 4000 Executive Pkwy., Ste. 100 San Ramon, CA 94583 (925) 355-2100 • Fax (925) 355-9600



Vendor Compliance

David Jeranko

Vendor Compliance & Risk Management 24000 Alicia Pkwy., Ste. 17-442 Mission Viejo, CA 92691 (949) 300-3702 • Fax (877) 404-2008 | The Law Journal Summer 2024 21
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