Original OAG Settlement Offer

Approximately three months after their lawsuit was filed, the Indiana Office of the Attorney General (OAG) drafted terms of a settlement agreement that they would support.  The agreement comprised fifteen items that had to be accepted by the Defendants AND the homeowners association (HOA).  The OAG forwarded copies of the draft agreement to Harbours complainants which was thereafter uploaded to internet websites and into the public domain.  The complete document is also linked here:

OAG December 2012 Settlement Offer

Even though the Defendants were individually sued, they had no authority to respond to items 6, 7, 9, 11, 12, 13, 14, and 15.  Thus, less than half of the proposed settlement was within the Defendants’ power to implement or agree.

The Board had the authority to accept 6, 7, 9, 13, and 15.  Item 14 may have been within the Board’s authority if the statute did not run contrary to the Harbours Bylaws.  That section of Indiana code was likely enacted after The Harbours was incorporated; but as a statute, it may have been compulsory if it was retroactive.

Items 11 and 12 were clearly outside of the Board’s power to act since the changes would have involved amendments to the Harbours Declarations.  Amendments require the approval of at least two-thirds of eligible homeowners.  And the Board at most could have put these changes to a vote and recommended adoption.  So, the OAG proposed a settlement that was not entirely actionable by the HOA and the Defendants and, arguably, was not in good faith.

It’s also worth noting that the OAG demanded a change from a voting system that is legally allowed in Indiana–and to one that may not be!  Item 11 would have required the HOA to change from a system that assigns voting rights on a square footage basis to a one-vote-per-condo basis.  (Either is allowable in Indiana along with a third approach that assigns voting on the basis of property value.  See IC 32-25-4-3.)  The Harbours has condos that span a range of 813 to 3,806 sq. ft., and condo owners both vote and pay common expenses proportional to the square footage of their units.  Item 11 from the OAG would have significantly shifted voting power from larger to smaller condo units while leaving the responsibility for expenses proportional to square footage.  In a modern-day attempt at “taxation without representation”, homeowners of large Harbours condos would have had to pay much more for common expenses while having no more voting rights than the smallest units.  Such a hybrid of one system for voting and another for paying expenses exists with no other condo association anywhere.

To settle at the outset, the OAG made the above list of demands while trying to keep open the issue of financial damages imposed upon the Defendants.  The “not satisfy” provisions on the last page, in essence, meant that the OAG would have had an indefinite amount of time to investigate and assign damages as part of the settlement agreement.

Derivative Lawsuit

Shortly after the filing of the OAG lawsuit, a group of Harbours homeowners comprised mostly of OAG complainants filed a derivative suit to remove the Defendants from the Board of Directors pending litigation of the OAG suit.  That was not an action immediately sought by the OAG.  Generally, a derivative action is taken by a member of a corporation for the benefit of the corporation against a third-party because the corporation fails to take action against the third-party.

Here are the documents filed by the Plaintiffs to accomplish that:

Derivative Lawsuit Documents Filed by Plaintiffs

Allegations in the derivative action were largely the same as in the OAG suit.  And among the remedies sought by the OAG was the removal–and banning–of the Defendants from the Board.  The complainants simply didn’t want to wait for the OAG suit to be litigated.  Plaintiffs asked for their costs to be reimbursed by the Court, but these funds were out-of-pocket for them unless and until a presiding judge ruled in their favor.

The derivative suit was filed against the Harbours Homeowners Association (HOA), and costs were to be paid by the HOA’s insurer.  The Board of Directors did not support the action.

In a few months, Plaintiff support for the derivative lawsuit diminished, and several of the Plaintiffs formally withdrew from the suit.  Here was their notice of withdrawal:

Withdrawal of Plaintiffs

At that point, the percentage of ownership represented by the Plaintiffs dropped from 12.3% to 8.1%.  This was below the 10% threshold necessary for the derivative suit to continue.  Shortly thereafter, the derivative lawsuit was dismissed with prejudice.  Here is the public record of the parties, actions, and key dates:

Chronological Case Summary