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By Stephen R. Buschmann, Esq.

Each year, homeowners in subdivisions and condominiums throughout Indiana complain to their state legislators regarding real and perceived problems with their neighborhood associations.  Those elected officials respond each year by introducing a variety of legislation designed to solve the problems of their constituents.  This year was no different.  There were a number of legislative initiatives, some potentially catastrophic, that were introduced into the 2011 Session of the Indiana General Assembly. Fortunately only a few became law.  However, those bills will have an impact on the operation of homeowners associations in Indiana. This article will discuss the 2011 initiatives that became law.

House Enrolled Act Bill 1058

The Indiana Attorney General is granted certain authority in cases where non-profit corporations do not act within their guidelines or where government officials misspend public funds.  Current law exempts homeowners associations from this regulation.

House Enrolled Act 1058 allows the Indiana Attorney General to bring a legal action against an HOA board of directors or an individual director, if the Attorney General finds that :

(1) the association’s funds have been knowingly or intentionally misappropriated or diverted by a board member; or

(2) a board member has knowingly or intentionally used the board member’s position on the board to commit fraud or a criminal act against the association or the association’s members.

This legislation will not allow the Attorney General to become involved in assessment collection actions or in disputes regarding covenant enforcement or maintenance responsibilities.  However, in cases where one or more of the board members knowingly or intentionally misappropriate or divert funds or commit fraud or criminal acts, the Attorney General may step in.

Legislative committees heard testimony about instances where board members paid themselves exorbitant sums to perform work in the neighborhood; where board members appropriated significant sums of money for projects that benefited only themselves; and in one case where a board loaned significant sums of association money to a friend of the board members. These are the types of conduct where the Attorney General may become involved.

Under the Act, a Court could enjoin the improper conduct or could order a board member to make restitution; to be removed from the board and/or to reimburse the State for the reasonable costs of the attorney general’s investigation and prosecution of the violation.

This Act will not impact board members acting within the scope of the covenants and in the best interests of the neighborhood.  However, in those cases where the conduct of a board or a board member is clearly outside the scope of reasonable behavior, the Attorney General may become involved.

House Enrolled Act 1541

This act prohibits “transfer fee covenants”.  The use of Transfer Fee Covenants has not yet reached Indiana, but has become prevalent in some western states.  In those states, finance companies will enter agreements with developers where the finance company pays an up front  lump sum to the developer in exchange for a “transfer fee covenant” that will impose a transfer fee, usually in the 1% range, every time a residence in the neighborhood is sold, for the next 100 years. The finance company assumes it will make a profit over time on each sale.  The fee provides no benefit to the neighborhood or the Association.  Several states, now including Indiana, have outlawed this practice.

The Act has been written so that it does not prohibit standard charges by homeowners associations or their management companies, for processing the paperwork for transfers of homes within the subdivision.

Senate Enrolled Act 155

This legislation initially dealt with tax warrants, but was amended to impact the collection of homeowner’s association assessment liens.

Under current Indiana law, a homeowner’s association can file a lien against a property if the owner fails to pay his/her assessments.  The current law provides that the association cannot foreclose that lien until at least one year after it is recorded.  This Act shortens the time period from one year to ninety days.  The waiting period is waived if someone else files a foreclosure action against the property or if the property owner issues a written demand that the association bring suit sooner.  This legislation will help homeowners associations in collection cases. .  .

The catastrophe that did not pass.

Senate Bill 144 was introduced to address the problem of children and drivers who drown in neighborhood retention ponds.

Many neighborhoods in Indiana have retention ponds, that were mandated by government authorities to deal with drainage issues.  Unfortunately, there have been a number of instances where vehicles have been driven into these ponds and/or where children have wandered into the ponds causing injuries and death.  Senate Bill 144 would have allowed local government entities to construct whatever types of barriers they deemed appropriate to prevent vehicles from driving into the ponds and to “child proof:” the ponds.  No input from the residents in the neighborhood was required.  The bill also provided that when the construction was completed, the government authority could then assess some or all of the residents in the neighborhood, at the sole discretion of the government authority, to pay the costs of work.

While the cause is noble, the implementation of the bill could have been catastrophic. The ponds were installed by developers at the request of and with the approval of local governing authorities. The homeowners were never part of the equation. The bill however, put the entire economic burden on the homeowners.

The issue should be addressed, but the method and the cost of addressing the issue needs significant further study.  Look for future legislation.

The Indiana General Assembly has passed legislation affecting the way homeowners associations conduct their business in each of the last several sessions.  You should expect more of the same in future sessions.

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