Let’s say you are the owner of a 100-unit condominium complex, and you enter into a management agreement with a company to act as operator and property manager for the complex. As part of the complex’s management responsibilities, the property manager is required to establish a bank account for the deposit of all funds received from the operation of the property.
In such an arrangement, the account established by the operator is typically designated as a trust account for the benefit of the owner or developer, with the funds in the account solely used for purposes of operating the property. The account should contain no funds other than the money collected from or intended for use in connection with the operation of the property. Most importantly, all funds deposited in the account are the property of the owner or developer and are held in trust by the operator or manager. When establishing the account, the operator or manager must indicate to the bank that the account is a trust account and not a normal operating account.
Usually, in such an arrangement, the operator must submit copies of monthly bank statements to the owner to account for all deposits and expenditures made on the account. It is imperative that the owner diligently review each statement to ensure that all transactions are proper and that a bank reconciliation is done each month.
Now let’s say a hold is suddenly placed on your account one day out of the blue. After contacting your bank, you find out that the hold has been placed by a third-party creditor of your operator or property manager. It turns out that they owed funds to the third-party creditor and the creditor obtained a judgment against the operator or property manager. A hold was subsequently placed on the account to satisfy those debts. What are your remedies?
Understanding Your Options
First, before the third-party creditor is able to send a marshal or sheriff to levy on the held assets, the property owner’s attorney should immediately file an order to show cause with a temporary injunction with an affidavit demonstrating that the account is not that of the operator or property manager, but that of the property owner. This would stay all enforcement efforts against the account and would give the owner’s counsel time to either speak with the third-party creditor’s attorney to negotiate release of the account, or if that is unsuccessful, wait for the judge to issue a decision to grant the owner’s application to release the funds. This is the priority because the property owner will want access to their funds to pay outstanding obligations and expenses necessary to operate as soon as possible.
If a third-party creditor was in fact able to restrain the account, then the account was not set up as a trust account. This will be grounds for a suit against the manager by the owner for violation of the terms of the management agreement.
It is important to go over all bank statements to confirm that the operator or property manager did not co-mingle any of its funds with the owners in the company account. If the property manager did in fact co-mingle any funds, it would be detrimental to the owner’s order to show cause in that the funds in question were not solely that of the owner or developer. It would also be grounds for suit against the manager by the owner for violation of the terms of the management agreement.
It goes without saying that it is prudent from the start of the management agreement to check each monthly bank statement to ensure no co-mingling of funds. The owner must be diligent when reviewing the account and also ensure with the account’s financial institution that it was established as a trust account.
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