PAGANO v. KROHN
97 Daily Journal D.A.R. 15195
4 Civ. DO22946, 12/17/97

Action for rescission, and for damages for fraud, breach of fiduciary duty, and negligence.

Defendant, Helga Krohn, owned a home in Blackhorse Farms, a 121-unit condominium project in La Jolla. In 1993 Krohn listed her property for sale with Peggy Chodorow of Coldwell Banker Residential Real Estate ("Chodorow"). Chodorow herself had purchased a unit in Blackhorse Farms in 1988, and as a homeowner had received newsletters from the Blackhorse Farms HOA, and copies of minutes of meetings of its board of directors. Periodically there was mention in the newsletters and minutes of water intrusion problems experienced by owners of units in the project.

In early 1991 the HOA hired Nasland Engineering to investigate owners' complaints of excessive moisture and water intrusion. Nasland's report, authored by its chief engineer, was attached to the April 1991 newsletter sent to all members of the Association. The report concluded:

"As a result of my investigation to date, I have formed the following tentative conclusions:

1. Internal moisture problems at Blackhorse Farms result from a shallow, probably perched, groundwater condition.

2. The problem is general in nature, not confined to a single home or row of homes.

3. The situation will probably get much worse next time the area receives any significant rainfall.

4. Further investigation is necessary to determine the source of the groundwater, its location and depth, and to propose corrective measures. The scope of the investigation should include the entire Blackhorse Farms community, and be conducted by an expert in subsurface water migration, such as Mr. Steussy.

5. Repairs may involve subsurface (french) drains across multiple lots, as well as common areas. Attempts to deal with the problem on a house-by-house basis would probably be wasteful and might not be effective.

6. The subslab moisture barriers should also be investigated. There is a possibility that they are not adequate, in which case additional repairs may be necessary to individual homes."

In April, 1993, Raymond and Lillian Pagano (the "Paganos") made an offer to purchase Krohn's unit for $320,000. A few days after acceptance of the offer, Krohn and Chodorow completed a transfer disclosure statement. On the TDS Krohn stated that she was unaware of any flooding, drainage, or grading problems with her property. On her portion of the TDS Chodorow stated: "I know nothing to contradict the owner's statements above. This development is on leased land. Some units have experienced moisture intrusion but not this unit according to owner."

Tom Lawson, the Paganos' agent, wrote on the TDS: "This home seems to be in good shape. I recommend that [the Paganos] have the property inspected prior to close of escrow."

On April 27, a day or two after delivery of the TDS, the Paganos canceled the transaction "due to family problems". Approximately two weeks later the board of directors of the HOA sent a letter to all homeowners to give them an update "on the water intrusion problem at Blackhorse". The letter disclosed that a representative of the developer had spoken at the last homeowners' meeting, and had discussed the installation of gutters and downspouts which would be tied into the project's drainage system. The letter concluded:

"To get the insurance carriers and [the developer] to resolve their dispute so that our interests are addressed and appropriate remedies and fixes are obtained, Blackhorse Owners Association filed suit on May 3. The case is designated as San Diego Superior Court Case No. 664041. If we did not take this action our rights could have been lost. Our attorney will be attempting to guide the case back to the same mediation process which the board and [the developer] had been pursuing for several months. We're advised that we are in far better condition than most homeowners associations in similar circumstances. It is expected that the case will be resolved sooner than most."

Lawson received a copy of the letter (from Krohn or Chodorow) in late May. Although no offer was then pending, Lawson sent a copy of the letter to the Paganos, and read it to them over the telephone. The Paganos did not ask Lawson for additional information about the lawsuit.

On May 29, 1993, the Paganos submitted a new offer to Krohn. The new offer -- for $315,000 -- stated under "Additional Terms": "Buyer is aware of the ongoing lawsuit, and the offer reflects that knowledge." The offer was made on a standard C.A.R. (DLF-14) form, whose preprinted terms included the following statement: "LEGAL AND TAX ADVICE. Buyer and Seller are advised to seek legal and tax counsel concerning questions regarding legal and tax matters. The Broker will not provide legal or tax advice in this transaction."

Lawson had told the Paganos, after delivering the HOA's May 1993 letter to them, that he had been told by Krohn and Chodorow that the litigation related to "gutters and downspouts". The difference between the Paganos' initial offer ($320,000) and their May 29 offer ($315,000) was due to the litigation. Mr. Pagano later stated in a declaration: "I thought the $5,000 was fair, considering that it would cover both the additional downspouts and gutters."

Before cancellation of the first purchase and sale agreement the Paganos hired California Home Inspection, Inc., to inspect the property. The Paganos were present during the inspection, which took approximately 4 hours. Mr. Pagano looked for evidence of water damage, but found none. The inspector did not find any indications of water intrusion, but made a general recommendation that gutters and downspouts be installed to facilitate site drainage.

The Paganos did not conduct any other inspections of Krohn's unit, or of other parts of the Blackhorse project.

No water intrusion or water-related problems were noted by Mrs. Krohn in the TDS. However, in a declaration filed in the litigation Mrs. Krohn stated:

"On one occasion, I noticed a white chalky substance on an interior garage wall and some mold on an exterior walkway along the same wall. I did not consider this to be a flooding, drainage or grading problem. I believe these conditions were not present after the sprinklers along this wall were adjusted so as not to spray on those areas. These conditions were not present when I sold the property to Mr. Pagano, and had been remedied long before."

Escrow closed on June 15, 1993. The Paganos, who paid the entire purchase price in cash, moved into the unit immediately. They then hired "The Sound Company" to install a stereo system. The carpet was pulled up during installation of the system, and workers noticed water stains under the carpet, and dry rot in some of the wood. Water stains and dry rot were also found underneath a bay window. Subsequently the Paganos learned that one of the Association's experts in the litigation had estimated the total cost of repairs to the project to be $30,627,033 -- the equivalent of $253,198 for each of the 121 units. This litigation followed.

Krohn, Lawson (Century 21) and Chodorow moved for summary judgment. In granting the motion the trial court commented during oral argument, "Did anyone know of specific damage to this unit before the drywall was taken down and the carpet was pulled up?" According to the trial court, the declarations filed in support of and in opposition to the motion did not reveal that any of the defendants were aware of water-related damage to the unit. The trial court found that the defendants had disclosed "what they were required to disclose".

On appeal by the Paganos, HELD, affirmed.

1. Brokers; Residential Sales: Inspection and Disclosure Duties of Seller's Agents.

In affirming the summary judgment in favor of Krohn's agent, Chodorow, the Court of Appeal (4th Dist., Div. 1) held that Chodorow's disclosures to the Paganos were legally sufficient.

In the TDS Chodorow disclosed that some of the units at Blackhorse Farms had experienced water intrusion problems -- a correct statement. Chodorow also disclosed, correctly, that she was unaware of any water intrusion problem affecting Krohn's unit. Chodorow's statement in the TDS was supplemented by the Association's May 7 letter which, in its opening sentence, stated that its purpose was to "update [owners] on the water intrusion problem" at the project. Before the Paganos made their second offer they were aware of the "essential facts" -- (1) that there was a water intrusion problem at the project which affected some of the units; and (2) the problem had resulted in litigation against the developer.

The Court rejected the Paganos' argument that Chodorow had a duty to disclose to them the specific facts of which she was aware relative to water intrusion at the project, and the content of the Association's complaint against the developer.

[D]isclosure of these additional facts would have served only as elaboration on the basic disclosed fact that there was a water intrusion problem in the development affecting some of the units and resulting in a lawsuit against the developer. There is no evidence in the record that at the time the Paganos purchased their unit Chodorow had reason to believe the problem would affect every unit in the development. None of the Association's newsletters or minutes in the record indicates that all or even most of the 121 units at Blackhorse were directly affected by the water intrusion problem. Chodorow was not obligated to disclose the details of water intrusion affecting other specific units in the development absent some reason to believe the Paganos' unit would likely suffer the same fate.

The Association's complaint against the developer does not add significant information to the basic facts disclosed to Pagano. The complaint alleges generally that various construction errors resulted "in water and moisture intrusion into the condominiums. . . ."At the time the complaint was filed Pagano already knew there was moisture intrusion into some of the condominiums. The complaint's reference to "the condominiums" could not reasonably be construed as meaning all of the condominiums because most of the condominiums were unaffected by water intrusion at the time the complaint was filed.

The basic facts were disclosed to the Paganos. Under CC § 2079.5 the Paganos had a duty to exercise reasonable care to protect themselves with respect to facts which were known by them, or were within their diligent attention and observation. The water-intrusion problem affecting Blackhorse Farms was known to the Paganos, as was the fact of the litigation. Additional details concerning these matters were "within their own diligent attention".

2. Brokers; Residential Sales: Inspection and Disclosure Duties of Buyer's Agent.

The Court rejected the Paganos' argument that their agent, Lawson, had breached his fiduciary duty to them by failing to obtain a copy of the Association's complaint against the developer, or to otherwise verify the information which he received from Krohn and/or Chodorow.

The Court distinguished this case from Salahutdin v. Valley of California, Inc., 24 Cal.App.4th 555 (1994). In Salahutdin, the First District held that a buyer's agent has a duty to either verify material information which is furnished by the seller (or the seller's agent), or to disclose to the buyer that the information has not been verified . Id., at 562-563. However, if the buyer understands that his/her agent is relaying unverified information, there is no further duty on the broker's part with respect to that information.

[I]n his deposition, Pagano testified he knew Lawson was passing along information he had received from Chodorow and Krohn when he told Pagano the lawsuit was about gutters and downspouts. Pagano also testified he had no knowledge that Lawson did any further investigation into the lawsuit or knew in May 1993 that the lawsuit concerned a greater problem than gutters and rainspouts. Since Pagano knew Lawson was merely passing on unverified information from the seller and her agent, Lawson was not required to verify that information.

In any event, the actual content of the Association's complaint against the developer was a matter of public record within the Paganos' diligent attention. Therefore, the Paganos had their own duty to ascertain the precise nature and scope of the Association's claims against the developer if these were material to their decision to purchase Krohn's unit (§ 2079.5.)

The Court also rejected the Paganos' argument that, as their agent, Lawson had a duty to advise them on the value-depressing effect of the Association's litigation, i.e., that the Association's litigation against the developer would tend to diminish the value of the units in the project generally, and the value of Krohn's unit in particular. The legal or practical effect of a fact is not itself a fact. Id., at_________; Sweat v. Hollister, 37 Cal.App.4th 603, 608-609 (1995).

3. Residential Sales; Seller's Duty of Disclosure: Duty to Disclose Condition Which No Longer Exists.

Krohn's disclosure -- through Chodorow's statement on the TDS that some units at Blackhorse Farms had experienced water-intrusion problems -- was legally sufficient. There was no evidence that Krohn's unit showed signs of water intrusion, and the fact that a year before the sale Krohn had noticed algae or efflorescence did not require disclosure of that condition to the Paganos where it no longer existed.

[W]e conclude the past occurrence of algae or efflorescence at Krohn's unit was not a material fact Krohn was required to disclose because there is no evidence the algae or efflorescence was related to the general water intrusion problem at Blackhorse. In a declaration in support of her summary judgment motion, Krohn stated the algae and efflorescence disappeared after certain sprinklers were adjusted so as not to spray on the affected areas, and the problem had been remedied long before she sold the property to the Paganos. Pagano testified in his deposition that he inspected the garage and noticed no sign of efflorescence at the time he purchased the property.

Because Pagano was apprised of the general water intrusion problem at Blackhorse and there is no evidence Krohn failed to disclose any material fact within her knowledge concerning her particular unit, the court properly granted summary judgment in favor of the Krohns.

COMMENT.

This case -- a significantly helpful decision for real estate brokers -- clearly stands for the proposition that once a residential broker clearly discloses a material fact or circumstance to the buyer, the burden shifts to the buyer to elicit additional details or information concerning the fact or circumstance. It is not the duty of a broker under the Easton legislation, or common law principles -- to "quantify" or spell out the seriousness, legal effect, or practical impact of a fact which is known to the buyer, or within the buyer's diligent attention.

This case was decided under the Easton legislation as it existed before the 1994 amendments to CC § 2079.3. As of 1998 the text of section 2079.3 read:

§ 2079.3. Inspection of inaccessible areas; Inspection of unit in planned development, condominium, or stock cooperative. The inspection to be performed pursuant to this article does not include or involve an inspection of areas that are reasonably and normally inaccessible to such an inspection, nor an affirmative inspection of areas off the site of the subject property or public records or permits concerning the title or use of the property, and, if the property comprises a unit in a planned development as defined in Section 11003 of the Business and Professions Code, a condominium as defined in Section 783, or a stock cooperative as defined in Section 11003.2 of the Business and Professions Code, does not include an inspection of more than the unit offered for sale, if the seller or the broker complies with the provisions of Section 1368.

Accordingly, under current law Chodorow and Lawson would have had no duty to inspect any part of the condominium project other than Krohn's unit. Difficulties affecting other units would not have to be evaluated or, presumably, disclosed.

No mention was made by the Court of Padgett v. Phariss, 54 Cal.App.4th 1270 (1997), also a decision of Division 1 of the 4th District. In Padgett the Court held, in litigation arising out of the sale of a condominium, that brokers did not have a duty to investigate and disclose litigation which was pending at the time of sale between the homeowners association and the developer. 54 Cal.App.4th at 1281-1282.

Under 1994 amendments to CC § 1102.6, a seller of a unit in a common interest subdivision is required to disclose facts known to him/her about litigation affecting the project. However, section 1102.6 does not impose that duty on the seller's agent.

Although the TDS in this case did not mention the HOA's litigation with the developer, the Paganos were made aware of the suit by their agent, Lawson. In this case, unlike Padgett, the issue was not whether the brokers had a duty to disclose but, once a material fact was disclosed, whether the scope and content of the disclosure were sufficient.