97 Daily Journal D.A.R. 15195
4 Civ. DO22946, 12/17/97
rescission, and for damages for fraud, breach of fiduciary
duty, and negligence.
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:
result of my investigation to date, I have formed the
following tentative conclusions:
moisture problems at Blackhorse Farms result from a
shallow, probably perched, groundwater condition.
problem is general in nature, not confined to a single
home or row of homes.
situation will probably get much worse next time the
area receives any significant rainfall.
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.
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.
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
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."
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:
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."
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."
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."
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.
did not conduct any other inspections of Krohn's unit, or of
other parts of the Blackhorse project.
intrusion or water-related problems were noted by Mrs. Krohn
in the TDS. However, in a declaration filed in the
litigation Mrs. Krohn stated:
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
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.
(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
On appeal by
the Paganos, HELD, affirmed.
Brokers; Residential Sales: Inspection and Disclosure Duties
of Seller's Agents.
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
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.
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
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".
Brokers; Residential Sales: Inspection and Disclosure Duties
of Buyer's Agent.
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.
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
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.
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.)
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
Residential Sales; Seller's Duty of Disclosure: Duty to
Disclose Condition Which No Longer Exists.
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
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.
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.
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
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.
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.
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.
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.