Raymond and Lillian Pagano, who were represented by Jim Lawson (the "Buyer’s Representative") made an offer to purchase a condominium unit in
the Black Horse Ranch, California, which was owned by Helga Krohn and listed for sale with Peggy Chodorow (the "Listing Broker"). Krohn
completed a real estate disclosure statement, stating that she was unaware of any flooding, drainage or grading problems. The Listing
Broker added that while some units have experienced problems with moisture, she knew of nothing to contradict the seller’s statement. The
Buyer’s Representative was told that some units in the development had water problems, but not Krohn’s unit. The transaction fell apart due to an unrelated issue.
A few weeks later, the Black Horse Homeowners Association informed all of the owners by letter that it had filed a lawsuit against the
condominium developer in connection with the "water intrusion problem," and the Buyer’s Representative gave the Paganos a copy of the letter. Shortly thereafter, the Paganos made a second offer to purchase Krohn’s unit. This offer was for $5,000 less than their prior offer, and
specifically stated that they were aware of the lawsuit and that this knowledge was reflected in their offer. They had the property inspected
and no water problem was detected. The transaction closed and the Paganos subsequently discovered water damage.
They sued the seller, the Listing Broker, their Buyer’s Representative and the respective brokerages, claiming among other things, negligent
misrepresentation and violation of a real estate broker’s duties as prescribed by California statute. The relevant portion of the California
statute states that a real estate licensee has a duty to "conduct a reasonably competent and diligent visual inspection of the property
offered for sale and to disclose to the prospective purchaser all facts materially affecting the value or desirability of the property that an
investigation would reveal..."
The trial court granted the summary judgment motions of the seller and the brokers, observing that the Paganos’ offer indicated they had
knowledge of the lawsuit and had adjusted their offering price accordingly. That court stated that "As a matter of law...real estate
brokers are only required to disclose problems with a unit that could have been discovered through a visual inspection."
On appeal, the California Court of Appeals ruled that the disclosure made by the Listing Broker to the Paganos was sufficient; she did not
have a duty to disclose more facts about the water intrusion problem in general or about the litigation. The court stated that unless there was
some reason to believe that the subject unit would be affected, she had no duty to tell them more about the water problem of the development
in general. The court also found that the seller’s disclosure was sufficient.
As far as the Buyer’s Representative, the Paganos claimed that he breached his fiduciary duty to them by not obtaining a copy of the complaint against the developer or independently verifying the information he received from the Listing Broker and the seller. The court stated that a buyer’s
agent is not required to verify information which is received from the seller and passed along to the buyer if the buyer understands that the
information has not been verified. Here, the Buyer’s Representative had informed the Paganos of the lawsuit and they knew that he was passing
along information from the seller and the Listing Broker and that he had not personally investigated the matter.
The Paganos further argued that the Buyer’s Representative had the duty to disclose to them his general knowledge that such a lawsuit has a
detrimental effect on sales prices. The court held that "Conclusions as to how the legal or practical ramifications of disclosed facts adversely
impact value are not ’facts’ subject to an agent’s duty of disclosure." The Buyer’s Representative had fulfilled his duty to the Paganos under California law by informing them of the existence and nature of the lawsuit; he did not have a duty to tell them that it might adversely affect the value of the
Pagano v. Krohn, 60 Cal. App. 4th 1, 70 Cal. Rptr. 2d 1 (Cal. Ct. App. 1997).