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Courts tend to side with HOAs on disputes

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Indiana Lawyer Focus

No one disputes that Country Squire Lakes Community in Jennings County has decayed from a pleasant welcoming place to live into a mess of broken down mobile homes where there is fear of crime.

They disagree if the change is radical enough to excuse homeowners from paying dues and assessments to their homeowners association.

In August, the Indiana Court of Appeals found a trial court had erred when it abrogated CSL resident Clarence Ray Meador’s obligation to pay the Country Squire Lakes Community Association Inc. dues that he owed. However it was not a unanimous ruling and Judge Terry Crone dissented, arguing the changes have been “far more radical than a mere ‘lack of recreational facilities.’”

bomberger Bomberger

The decision is not surprising since the courts often rule in favor of homeowners associations on appeal. Scott Tanner, the attorney representing CSL, does not expect that to change despite those times the trial courts have sided with the homeowners.

“I think it’s just because at the trial court level, a sympathetic judge is trying to give somebody a break and the homeowners association says that’s not the law,” he said.

A sad demise

CSL was founded in the 1970s as a gated residential vacation and retirement community on 1,400 acres dotted with woods and lakes. Early on, the community offered residents an array of recreational amenities such as an Olympic-sized swimming pool, tennis courts, playgrounds, beaches and a campground.

Today, the swimming pool has been filled in, the tennis court is rubble, the pavilion was burned down by arsonists and, according to Meador’s attorney John Gay, the main lake is contaminated with raw sewage and is so shallow a boat dock is resting on dry land about 20 feet from the water.

“I suppose if you could get out to (the lake’s water), you could fish on it if you wanted to fish in sewer-infested water,” Gay said.

Financial troubles are at the heart of the demise. The community has changed from owner-occupied to tenant-occupied and an estimated 60 to 65 percent of owners are not paying fees and assessments, leaving a $3 million to $4 million hole in the association’s budget. In addition, a budget shortfall of $450,000 was discovered in 2005, the association borrowed $950,000 in 2008 to repair deteriorating roads, and insurance money for repairing the pool was used for a different purpose.

Fifteen-year resident Meador stopped paying his annual dues and assessments of $375 and asked the trial court abrogate his obligation to pay on the grounds that the association had not maintained the amenities.

Reversing the trial court’s order, the COA agreed with the homeowners association’s claim that the absence of recreational facilities is not such a radical change that would justify the abrogation of a private contractual property covenant.

In court

The courts’ reluctance to rule against homeowners associations comes from its view that the covenant between the association and the property owner is a private contract, said Jon Bomberger, partner at Faegre Baker Daniels LLP. Therefore the courts are hesitant to interfere with these contracts unless the circumstances have drastically changed and defeated the entire purpose of the association.

Instances of a growing commercial development surrounding a subdivision and limiting access or of a hospital expanding to become a medical center and transforming the nature of the neighborhood are examples of radical changes.

Bomberger leads the real estate practice at the firm’s Fort Wayne office, and he has been the president of his homeowners association for 20 years.

Homeowners associations are commonly established when a developer transfers control of a subdivision over to the residents. The primary purpose of these associations is to take care of the common areas, like the parks and streets in the subdivision, and to maintain the property values.

Even without a radical change, tensions can develop. Homeowners associations are about people and their homes, Bomberger said, so disagreements get personal.

Gay has concerns about these associations, seeing a risk they pose to taxpayers. Specifically, the organization collects fees, which Gay described as a “private tax,” but no one is watching how much money is collected or where the money goes. If the association fails, the taxpayers pick up the tab.

Recently, Jennings County agreed to take over the maintenance of the main road in CSL so school buses and emergency vehicles will have access.

“A lot of government money, taxpayer dollars, have gone into trying to fix that place,” he said.

In the CSL case, the court found the property owners were still in a position to benefit from paying dues and assessments since funds could be used to make payments on the $950,000 loan or to make repairs to a dam.

Moreover, Bomberger pointed out, while the court acknowledged the revenue shortfall and the deterioration of recreational amenities, it concluded that removing homeowners’ obligation to pay the association would not remedy the problems. In a footnote, the court offered potential alternatives that Meador and the CSL could investigate including putting the association in receivership or filing for bankruptcy.

Summing up the COA’s ruling, Tanner said, “You don’t get out of paying dues just because you’re not getting the services you think you should be getting.”

A new law

beller Beller

Homeowners can turn to the courts, but until July 2011, the Office of the Indiana Attorney General had no ability to regulate homeowners associations.

Although complaints from property owners kept the office examining the statutes, little could be done because the nonprofit statute does not include homeowners associations, according to Jennie Beller, assistant deputy director of licensing enforcement and homeowner protection unit.

A new state law enacted in mid-2011 gives the attorney general very narrow authority. The state can bring an action against an association’s board or individual board members when there has been an intentional misappropriation of funds or a board member has used his or her position on the board to commit fraud or a criminal act against the association.

“We don’t want to be involved in the things that we can’t fix like (disputes over) the color of curtains or the acts of day-to-day management,” Beller said. “We’re looking for the instances where there’s actual fraud.”

In August, the attorney general filed the first lawsuit under the new law. The case was filed in Clark Circuit Court against The Harbours Condominiums Association in Jeffersonville. The allegations include board members paying a former manager of the association without verifying the time she spent on the job. Also, a board member is accused of not having a building permit when he combined two units into a large one and then, when he re-separated them, constructing a substandard wall that ran through the middle of the shared kitchen sink.

The Harbours is a particularly egregious situation and Beller said other cases would not have to rise to that level. Even one violation is enough to attract the attorney general office’s attention.

Going forward

Tanner believes the COA ruling will greatly help Country Squire Lakes. In particular, other court actions on delinquent homeowners, many for $1,000 or less, have been on hold, waiting for this decision.

“If we could just get people to pay their dues and assessments like they’re supposed to, a lot of those amenities would come back,” Tanner said.

Gay, meanwhile, is drafting an appeal, although he is not sure if he will try to have the case transferred to the Indiana Supreme Court or ask for a rehearing. In his view, the community has failed to maintain property values and failed to provide recreational facilities.

“It is a mess out there,” he said.•
 

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