Beneficial Owner Information Report Requirement Remains on Hold

A federal law named the Corporate Transparency Act was recently ruled to be applicable to incorporated community associations. This ruling imposes new reporting obligations on those associations and their directors.

 

Incorporated community association boards must file a Beneficial Owner Information (BOI) report with the U.S. Treasury by January 13, 2025. The BOI report requires certain information to be disclosed about property owners who have substantial ownership or management interests in the association, including the current members of its board of directors. Each director must first obtain what is called a FinCEN number. A designated director must then complete a BOI Report listing the name of the association, its tax ID number, and the FinCEN numbers of its current directors. Associations are required to update their BOI Report within 30 days the date that they appoint a new director or a director resigns.

Incorporated community associations should consult the FinCEN guidelines, their accountants, and their legal counsel if they have questions about this new reporting requirement. 

UPDATE: As of January 24, 2025, an injunction remains in place against the above statute, so associations are not required to file BOI reports for the time being.  

New Laws Apply to Washington State Community Associations

The Washington State Legislature recently approved several new laws that affect existing community associations. The first new law prohibits community associations from prohibiting, unreasonably restricting, or limiting the use of properties for licensed family home child care or as licensed child daycare centers. An association may require properties being used in that manner to: 1) provide direct customer access from the outside of the buildings or through publicly accessible common areas, 2) be licensed by the state, 3) indemnify the association against all claims related to that use except for claims that arise in common elements that the association is solely responsible for maintaining under the governing documents, 4) obtain daycare insurance or provide self-insurance, and 5) provide the association with signed waivers from the guardians of each child being cared for that release them from legal claims related to that use. An association may impose reasonable rules pertaining to family home child care and licensed child daycare centers, but those rules must apply equally to all other association members. This law took effect on May 1, 2023.

The second new law permits community associations to require owners who lease their properties to use a tenant screening service or obtain background information, including criminal history, pertaining to their prospective tenants at the owners’ sole cost and expense before executing leases and to require proof that this has been done. However, associations may not require that tenant screening reports or any background information pertaining to tenants be furnished to them. This law takes effect on July 23, 2023. 

The third new law requires community associations to keep and maintain the following records: 1) the current budget, detailed records of receipts and expenditures affecting the operation and administration of the association, and other appropriate accounting records within the last seven years, 2) minutes of all meetings of its owners and board other than executive sessions, a record of all actions taken by its owners or board without a meeting, and a record of all actions taken by a committee in place of the board on behalf of the association, 3) the names of current owners, addresses used by the association to communicate with them, and the number of votes allocated to each property, 4) its organizational and governing documents, including all amendments, 5) all financial statements and tax returns of the association for the past seven years, 6) a list of the names and addresses of its current board members and officers, 7) its most recent annual report delivered to the Secretary of State, if any, 8) copies of contracts to which it is or was a party within the last seven years, 9) materials relied upon by the board or any committee to approve or deny any requests for design or architectural approval for a period of seven years after the decision is made, 10) materials relied upon by the board or any committee concerning a decision to enforce the governing documents for a period of seven years after the decision is made, 11) copies of insurance policies under which the association is a named insured, 12) any current warranties provided to the association, 13) copies of all notices provided to the owners or the association in accordance with state law or the governing documents, and 14) ballots, proxies, absentee ballots, and other records related to voting by owners for one year after the election, action, or vote to which they relate.

Community associations’ records must generally be made available for examination and copying by all owners, holders of mortgages on the properties, and their respective authorized agents during reasonable business hours or at a mutually convenient time and location and at the offices of the association or its managing agent. However, records retained by associations must have the following information redacted or otherwise removed prior to disclosure: 1) personnel and medical records relating to specific individuals, 2) contracts, leases, and other commercial transactions to purchase or provide goods or services currently being negotiated, 3) existing or potential litigation or mediation, arbitration, or administrative proceedings, 4) existing or potential matters involving federal, state, or local administrative or other formal proceedings before a governmental tribunal for enforcement of the governing documents, 5) legal advice or communications that are otherwise protected by the attorney-client privilege or the attorney work product doctrine, including communications with the managing agent or other agent of the association, 6) information the disclosure of which would violate a court order or law, 7) records of an executive session of the board, 8) individual property files other than those of the requesting owner, 9) unlisted telephone number or electronic address of any owner or resident, 10) security access information provided to the association for emergency purposes, and 11) agreements that for good cause prohibit disclosure to the owners. Prior to disclosure of the list of owners, an association must also redact or otherwise remove the address of any owner or resident who is known to the association to be a participant in an address confidentiality program.

Community associations may charge a reasonable fee for producing and providing copies of any records and for supervising an owner's inspection of records, but an owner is entitled to receive a free annual electronic or paper copy of the list of owners from the association. The right to copy records includes the right to receive copies by photocopying or other means, including through an electronic transmission, if available, upon request by an owner. Associations are not obligated to compile or synthesize information for an owner who requests to review or receive records. This law takes effect on July 23, 2023.

The fourth new law imposes additional requirements on community associations related to the collection of past due assessments. Associations must mail a specified pre-foreclosure notice to delinquent owners along with the first notice of delinquency for past due assessments and the same notice again before beginning a foreclosure action against those owners’ properties. The second notice may not be mailed sooner than sixty days after the first notice is mailed. Associations may not begin foreclosure actions against delinquent owners’ properties unless they owe a sum greater than: 1) three months or more of assessments, not including fines, late charges, interest, attorneys' fees, or costs incurred by the association in connection with the collection of the delinquent owner's account, or 2) $2,000 of assessments, not including fines, late charges, interest, attorneys' fees, or costs incurred by the association in connection with the collection of a delinquent owner's account. This law takes effect on July 23, 2023.

The laws that apply to community associations grow more numerous and complex every year. It has unfortunately become virtually impossible for associations to comply with all of those laws without legal guidance. Community association boards should strongly consider consulting with an attorney who specializes in this area on a periodic basis.

Court Upholds Huge Penalty on State Agency for Failing to Disclose Records

The Washington Court of Appeals issued a published decision last week in the matter of Ken Bricker v. Washington State Department of Labor & Industries. In this case, Mr. Bricker sued a state agency after it failed to release public records to him. The trial court imposed a $90 per day penalty for the untimely disclosure of sixteen documents and a $15 per day penalty for the untimely disclosure of three additional documents based on the Washington Public Records Act. The total penalty was $29,445. It was upheld on appeal.

While the Washington Public Records Act does not apply to Washington condominium and homeowners associations, those entities are similarly required by other state laws (and frequently their own governing documents) to make their records reasonably accessible to owners. If those associations fail to promptly disclose records, then they are subject to court-imposed financial penalties. The Bricker decision demonstrates why boards should take owners’ requests to review association records seriously.

New Law Limits Scope of Red Flags Rule

A new federal law has significantly limited the scope of the Red Flags Rule, a federal law that requires many businesses and organizations to implement a written identity theft prevention program. There has recently been a substantial amount of confusion about whether the Rule imposes new obligations on various persons and organizations (including community associations), and this new law clarifies who must comply with the Rule. The Red Flags Rule now applies to financial institutions and creditors that:

1) obtain and use consumer reports in connection with a credit transaction,

2) furnish information to consumer reporting agencies in connection with a credit transaction, or

3) advance funds to or on behalf of a person, based on an obligation of the person to repay the funds or repayable from specific property pledged by or on behalf of the person.

The third category is apparently intended to cover businesses like payday loan companies that sometimes lend without using consumer reports. Creditors who advance funds on behalf of a person for expenses incidental to a service provided by the creditor to that person are specifically exempted from the Red Flags Rule. Other types of creditors may be required to comply with the Rule if an agency determines that they offer or maintain accounts that pose a reasonably foreseeable risk of identity theft.

The Red Flags Rule does not appear to apply to condominium and homeowners associations under the new law. However, such associations may still choose to adjust their record-keeping procedures to comply with the Rule if they are concerned that it might be interpreted or amended to apply to them or if they want to obtain a heightened measure of protection against identity theft. More information about the Red Flags Rule is available here.

Illinois Court Favors Owner in Dispute Over Access to Association Records

Requests to review association records should be taken seriously. In the recent case of Palm v. 2800 Lake Shore Drive Condominium Association, a condominium unit owner in Illinois believed that the board president and the board as a whole were exceeding their authority. The owner asked the association to provide him with records relating to those allegations. The association refused, and the owner responded with a lawsuit. The trial and appellate courts ordered the association to produce the records immediately and to pay the substantial attorney fees incurred by the owner.

Washington law imposes a broad requirement on condominium and homeowners associations to make their records reasonably available to owners and their agents. Homeowners associations also must provide their records to mortgage holders and their agents and avoid releasing the unlisted telephone numbers of owners. If you think that an owner’s request for records goes too far, contact the association’s attorney before refusing to grant it.

Electronic Media and Association Business

Electronic media like email, Facebook, and Twitter are becoming the primary way for condominium and homeowners association board members to communicate with one another. Board members should be careful when using those types of media to discuss association business. Electronic messages may eventually be considered association records subject to review by the owners.

According to the Washington Condominium Act, association records must be made reasonably available to owners for examination and copying. This law applies to older condominiums as well. According to the Washington Homeowners’ Associations Act, all records of the association, including the names and addresses of owners and other occupants of the lots, must be made available to owners for examination at the office of the association or its manager. Homeowners associations are prohibited from releasing the unlisted telephone number of any owner in response to a request to review association records. Those associations may impose a reasonable charge for copies and costs incurred in providing access to association records.

Washington courts have not yet decided if electronic communications between community association board members about official business are records of the association, and the relevant state statutes are also silent regarding this issue. It is a good practice for board members to assume that electronic messages are potentially subject to review by the owners and strive to communicate about sensitive matters over the phone or in person. This will reduce the odds that a rash message from a board member will come back to haunt the association in future litigation.

Association Records – The What, the When, and the Audit

A former Florida condominium association bookkeeper was arrested earlier this month on charges of stealing almost $500,000 from the association since 2005. The individual allegedly wrote checks to herself, transferred association funds into her personal account, and submitted fraudulent invoices. It was reported last week that an audit of a Virginia community association discovered nearly $700,000 missing from its accounts. The association’s treasurer disappeared at the end of June. Proper maintenance and evaluation of association records can help boards avoid problems of this magnitude.

The state laws that govern Washington condominium and homeowners associations do not specify what records should be maintained or how long they should be kept. It can be inferred that financial documents like bills and receipts should be kept at least the length of time necessary for them to be reviewed during the annual CPA audit (mandatory for Washington condominiums consisting of more than 50 units and mandatory subject to annual waiver for all other Washington condominiums and also Washington homeowners associations with annual assessments of $50,000 or more).

The state law governing Washington nonprofit corporations requires them to maintain, among other documents, financial statements and meeting minutes at their registered offices. Washington condominium and homeowners associations that are nonprofit corporations should comply with this law. The state law governing Washington profit corporations requires them to maintain meeting minutes on a permanent basis and states that they must keep, among other documents, shareholder meeting minutes, annual financial statements, and communications to shareholders at their registered offices for at least three years. Boards could decide to comply with those standards as an added safeguard. The governing documents of many associations contain specific record-keeping requirements that must be followed as well.

Diligent maintenance and evaluation of association records can help boards make more informed financial decisions, defend against owners’ claims of misconduct, and spot theft of association funds more quickly. Boards should ensure that their association records policies allow them to take advantage of those benefits.