Submitted: June 7, 2013
Richard E. Berl, Jr. Smith Feinberg McCarney & Berl LLP
Craig A. Karsnitz Young Conaway Stargatt & Taylor LLP
The Plaintiffs bought a Rehoboth Beach townhouse condominium unit from the Defendant in 2006, for $569, 000. In the two years after the sale, necessary repairs of leaks in other units caused by shoddy construction required the condominium board to collect special assessments totaling $65, 000 from each unit holder, including the Plaintiffs. Although recoupment from the builder ultimately offset this sum, the Plaintiffs remain out-of-pocket over $40, 000. The question before me is whether this loss should be borne by the buyer or the seller. The Plaintiffs allege fraud and equitable fraud as a result of the Defendant's allegedly insufficient disclosures made to the buyers prior to the sale. They seek rescission—their preferred remedy, having bought at the height of the now-weakened real estate market—or, in the alternative, damages.
A. Background Facts
Defendant Mary Tracy inherited a townhouse from her mother in Canal Landing, a 70-unit condominium project developed in the early 2000s. Tracy's mother had purchased the unit when new. Neither Tracy's mother nor Tracy herself lived in the townhouse full-time. Tracy began noticing leaks around the kitchen and bathroom windows of the townhouse in 2003 and 2004. Problems with leaks persisted until the fall of 2005, when the condominium's property manager had to perform extensive repairs to the Defendant's unit, which required reconstructing the exterior of the unit3 Ultimately, the leaks were satisfactorily fixed. Tracy was generally not present for the repairs,  and she was not aware that her unit required extensive repairs at the time they were made. Since the unit was under warranty and the repair costs therefore not her responsibility, Tracy was generally unconcerned with how much the repairs had cost or what had been done to fix the leaks; she cared only that the leaks had been fixed. Other units also experienced leaks. The Plaintiffs submitted evidence that the homeowners may have paid a special assessment of S500 to the homeowner's association in 2005 related to leaks and trash services, but Tracy testified, credibly, that she did not recall such an assessment.
In December 2005, the Defendant briefly became a member of the Canal Landing Board of Directors. During meetings that Tracy attended, widespread leaks throughout the condominium were discussed, as is evidenced from the minutes of those meetings. The minutes of the first meeting reflect that $36, 000 in leak repair expenses had been incurred in 2005, and that half of the seventy units in Canal Landing had reported problems with leaks. Tracy testified that the reported leaks did not concern her because she was informed that many of those leaks were minor in nature. Tracy resigned from the Board after three months' service in February 2006.
According to a disinterested former member of the Canal Landing board, Edward M. Barberic, in 2006 the board projected that the expenses for leaks would be similar to those incurred in 2005, around $36, 000, representing about $500 per unit. By mid-2006, however, $50, 000 had already been expended to repair leaks during the year. The Board had not adequately budgeted for these leak repairs.Still, according to the property manager, the board considered the problems to be "manageable" at that point.
According to Mr. Barberic's testimony, the Canal Landing board was not aware of the extent of the leak problem in 2005 or 2006. For example, the board conducted a special assessment in fall 2006 of $1, 000 per unit, or $70, 000, to cover the additional expenses of the leaks in 2006. According to Mr. Barberic, the board "felt that would cover it through the end of 2006" and Canal Landing's management company "believed that would end the problem." Mr. Barberic's testimony indicates that it was not until spring or summer of 2007, after the board received an engineer's report, that that board realized the true magnitude of the problem. This testimony was corroborated by a representative of the property manager, Mr. Baldo, who testified that the problems "evolved" over the years.
In February 2006, the Defendant accepted a job in California, and decided to sell her townhouse. She resigned from the Canal Landing Board on February 25, 2006 and listed her unit for sale. As part of the sales process, the Defendant completed a Seller's Disclosure of Real Property Condition Report (the "Disclosure Report"), mandated by the Buyer Property Protection Act, 6 Del. C. § 2570, et seq. Question 51 of the Disclosure Report sought information related to leaks. In answering the question, Tracy disclosed a "window leak in kitchen & main level bathroom, reported to Excel fully repaired. Tracy also included the name and phone number of the management company, Excel, which could be contacted with questions. At trial, when she was asked why she did not elaborate about the extent of the repair work or the dampness that had been found in the walls, Tracy testified that she believed, correctly, that the problems had been fixed. Question 11 on the form asked whether she knew of any conditions or claims related to the property which might result in an increase in assessments. The Defendant responded to this question by checking a box marked "unknown." When asked why she did not call the management company to ask if special assessments were forthcoming, Ms. Tracy explained that she had no recollection of any special assessment, and therefore she "wouldn't call to verify something that [she] had no knowledge of."
Finally, Question 20 of on the form sought information regarding "anything else" that might "materially and adversely" affect the property. The Defendant answered this question "no." Tracy testified that it did not occur to her to disclose that 50% of the condominium units had reported leaks.  She did not believe that the "minor leaks" in other units were something that a prospective purchaser might want to know about prior to entering into a $500, 000 transaction.
In early 2006, the Plaintiffs were looking to buy a replacement second home and had looked at several properties. Before purchasing the Canal Landing townhouse, the Plaintiffs received only the disclosures contained in Tracy's Disclosure Report, discussed above. No one informed the Plaintiffs, prior to the sale, about the widespread problems with leaks in the community. The Plaintiffs agreed to purchase the townhouse from the Defendant in March 2006. The Plaintiffs testified that they relied on the representations in the Defendant's disclosures in deciding to purchase the property. Prior to the sale, the Plaintiffs hired an inspector to perform a home inspection. During the inspection, the Plaintiffs did not inform the inspector that the unit had been subject to leaks in the past. The Plaintiffs also did not call the management company to inquire if there had been any issues with the unit or the community, or whether special assessments were contemplated, despite having an "unknown" response to the question about potential special assessments
The parties settled on June 9, 2006. In the fall of 2006, the Board approved the above-described special assessment in the amount of $1, 000 per townhouse. In the following years, the problems with leaks continued, ultimately resulting in the need for a significant reconstruction, costing over $4 million. To pay for the renovation, the board collected $65, 000 in special assessments from each unit in the condominium.
The homeowners of Canal Landing sued the developer and architect of the condominium to pay for the necessary repairs. As a result of a settlement of that lawsuit, the Plaintiffs recouped around $20, 000 of the $65, 000 they were required to pay in special assessments. ...