The Condominium’s Water Intrusion Problems.
In February 1983, Samuelson and his wife became the initial owners of a three-story condominium in Woodland Hills, California. Samuelson resided in the condominium until July 2002 when he sold it to Larry and Camille Calemine.
Between 1983 and 1999, Samuelson personally observed intermittent incidents of water intrusion and flooding in the lower level of the condominium. In 1986, the Homeowners Association (HOA) and individual unit owners, including Samuelson, brought a lawsuit against the developer alleging design and construction defects in the units and common areas (developer lawsuit). In 1992, the HOA hired Westar Flooring (Westar) to repair and waterproof the affected areas. However, Westar’s repairs were not effective throughout the affected areas, and Samuelson knew that the HOA filed a lawsuit against Westar in 1996 (Westar lawsuit).
The Westar lawsuit settled in 1998. In the course of doing further repairs, a subsequent contractor notified the HOA including Samuelson that there was no way to guarantee that there would be no further problems related to the water intrusion. Furthermore, suffice it to say that there was plenty of information in the courts’ files of the developer lawsuit and Westar lawsuit that would have given many potential buyers cause for concern.
The Sale of the Condominium to Appellants.
During the fall of 2001, Samuelson and the Calemines began negotiations for the sale of the condominium. While Samuelson fully disclosed to the Calemines the water intrusion and related damage, he did not disclose the developer lawsuit or the Westar lawsuit. Not surprisingly, various inspections and reports reflected the existence of the water intrusion. The Calemines contacted Samuelson for an explanation. Samuelson described the water intrusion and related damage but said the damage had been repaired and “problem solved.” Samuelson still did not disclose the developer lawsuit or the Westar lawsuit.
The Calemines moved into the condominium in July 2002 when escrow closed. In January 2005, the condominium garage flooded. At that time, the Calemines first learned of the developer lawsuit and the Westar lawsuit. Samuelson had not disclosed the litigation in the transfer disclosure because he believed he was obligated only to disclose pending actions. Nor did Samuelson ever mention the lawsuits during the course of two or three conversations he had with the Calemines during the transaction. The flooding recurred in March 2005 and January and April 2006.
At trial, the Calemines contended that Samuelson’s disclosures concerning the condominium’s water intrusion were inadequate. While the evidence was undisputed that Samuelson sufficiently disclosed the existence of the water intrusion itself, the Calemines contended that of the prior lawsuits would have been material to their decision to purchase the condominium and therefore should have been disclosed. The Calemines lost the argument in the trial court and appealed.
The Duty to Disclose.
The appellate court rejected Samuelson’s contention that the only essential fact required to be disclosed was the existence of the water intrusion itself. The appellate court found that while the details of a lawsuit alleging defects in the property need not be disclosed, a seller’s duty of disclosure encompasses disclosure of the existence of such a lawsuit. In other words, once the seller had satisfied its duty of disclosure by informing the buyer of the existence of the litigation and its settlement, “the details of the suit were certainly within the diligent attention of the buyer, who could have examined the file in its entirety to learn all the details of the suit and its settlement.”
The appellate court noted that notwithstanding Samuelson’s admitted knowledge of the developer lawsuit and the Westar lawsuit, he failed to disclose the existence of either action to the Calemines. Disclosure of the litigation would have enabled the Calemines to examine the details of those actions and evaluate their purchase in light of the information available from the prior lawsuits. Without Samuelson’s disclosure of the existence of the lawsuits, these matters were not within the Calemines’ diligent attention. The materiality of the existence of the lawsuits was also shown by Calemine’s declaration, in which he stated that the Calemines would not have purchased the condominium had they known about the prior lawsuits.