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ZERO
RESERVE FUNDING
 QUESTION:
As a manager, I find that reserve funding continues to be an issue with
my boards. It seems to me that 100% funding is the goal but there is no
real law requiring any money in the reserves. If an association chooses
to have no reserves and pay for everything by special
assessment, it may not be prudent but it is not illegal. Is that correct?
ANSWER:
It is not yet "illegal" to have zero funding as long as everything is fully
and clearly disclosed to the membership. Even so, disclosure will not
insulate the board from being sued for mismanagement and breach of
fiduciary duties. As a manager, you should make sure that you are on
record either in the minutes or with a letter to the board urging them
to fund their reserves. That way when lawsuits start flying, you can
show that you were not negligent as the managing agent.
QUESTION: An additional and
related question, if the fund is at a very low percentage is the board
liable in any way? As always, thank you for your help!
ANSWER:
Sometimes there are temporary swings that take reserves to low levels.
If, however, the reserves are at dangerously low levels through board
inaction, it is entirely possible that a jury could find a board liable for
acting outside of industry standards. If the board has proper
D&O insurance in place, the directors will probably not be
personally liable. Even so, the risk is not worth it. It is much better
to put a funding plan in place and stick to it.
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Sincerely
yours,
Adrian
J. Adams, Esq.
Adams Kessler PLC |
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