Monday, January 7, 2013

Pennsylvania Appeals Court: OK To Screw Over Unwitting Homebuyers By Knowingly Failing To Disclose House Was Site Of Ex-Owner's Bloody Murder-Suicide; Economic Loss To Purchaser Of Nearly $100K Of No Consequence

Courthouse News Service reports:

  • Pennsylvania realtors have no obligation to warn buyers if a murder occurred in the property they are selling, the state superior court ruled.

    In February 2006, 50-year-old Konstantinos Koumboulis allegedly shot his 34-year-old wife and then killed himself in his West Chester, Pa., home. The house was sold at a real estate auction to the Jacono family, who in turn commissioned local Re/Max agents to sell it.

    The Jaconos and Re/Max confirmed with both the Pennsylvania Real Estate Commission and the Pennsylvania Association of Realtors that they were not obligated to report the murder-suicide to buyers.

    One year later, a woman named Janet Milliken purchased the home for $600,000. Unaware of the Koumboulis history, Milliken believed that the home had gone into foreclosure. She learned of the tragedy three weeks after moving in and sued the Jaconos, Re/Max and her own realtor for fraud and misrepresentation.

    The trial judge granted summary judgment to the defendants, finding that Pennsylvania law does not require realtors to disclose that a murder occurred in the home.

    A divided panel of the appeals court affirmed last week.

    "If the murder/suicide cannot be considered a defect legally, or if the Sellers were under no legal obligation to reveal this alleged defect, there can be no liability predicated upon the failure to so inform," President Judge Emeritus Kate Ford Elliott wrote for the six-member majority.

    "Today, we find that psychological damage to a property cannot be considered a material defect in the property which must be revealed by the seller to the buyer. Thus, each of Buyer's issues on appeal must fail."

    Though the state Legislature requires realtors to disclose any material defects of the property to buyers, they do not have to report "psychological damage" to the property or its reputation, according to the ruling.

    Ford Elliott pointed out three main concerns with requiring such disclosure.

    First, "this sort of psychological damage to a house will obviously decrease over time as the memory of the murder recedes from public knowledge," Elliott wrote. "Requiring a seller to reveal this information may force the seller to sell the house under market value and allow the buyer to realize a windfall when the house is resold 10 years later and memories have faded."

    Such a result would be nonsensical, she argued.

    "Second, how can a monetary value possibly be assigned to the psychological damage to a house caused by a murder?" Elliott asked. "The psychological effect will vary greatly from person to person. There are persons for whom no amount of money would induce them to live in such a house, while others may not care at all, or even find it adventurous."

    And finally, requiring disclosure of nonmaterial damage could lead to a slippery slope, the court found.

    "If psychological defects must be disclosed then we are not far from requiring sellers to reveal that a next-door neighbor is loud and obnoxious, or on some days you can smell a nearby sewage plant, or that the house was built on an old Indian burial ground," Elliott wrote. "Indeed, one could identify numerous psychological problems with any house."

    The state Legislature, rather than the courts, must decide whether such an extension would be appropriate, according to the ruling.

    Milliken also failed to allege negligent representation because the seller did not owe her special duty.

    "Sellers simply did not engage in any deceptive conduct. Sellers merely declined to inform Buyer about a factor of which they were under no obligation to disclose," Elliott wrote.

    Judge John Bender penned a dissenting opinion joined by Judges Sallie Mundy and David Wecht.

    "The single certainty that permeates every aspect of this case is that Janet Milliken, who has now suffered a six-figure economic loss (and untold aggravation), was destined to discern the occurrence of a murder/suicide in her new home either before consummating her purchase or - as fate would have it - afterward," Bender wrote.(1)

    "The majority's ruling, which deprives Milliken of any legal remedy, rewards those sellers and short-circuits the legislative intent of the Real Estate Seller Disclosure Law." ["ie. RESDL](2)

    The definition of a "material defect" under RESDL could be read to include psychological damage, Bender pointed out.

    "A 'material defect' is 'a problem with a residential real property or any portion of it that would have a significant adverse impact on the value of the property or that involves an unreasonable risk to people on the property,'" he quoted.

    "Whereas the majority would consign the stigma of murder/suicide to the ethereal realm of 'psychological damage,' the statute recognizes it for what it is - documented economic loss - and a 'material defect' that must be disclosed."

    The dissent pointed to a ruling by the California Court of Appeals, which held that undisclosed information must be analyzed to determine the "gravity of the harm inflicted by nondisclosure; the fairness of imposing a duty of discovery on the buyer ... and its impact on the stability of contracts if rescission is permitted."(3)
Source: Realtors Can Keep Mum on Home's Bloody Past.

For the ruling, see Milliken v. Jacono, 2011 PA Super 254 (November 29, 2012).

(1) The dissenting judges added:
  • [T]he financial penalty Mrs. Milliken has suffered was entirely avoidable had the sellers from whom she bought her home merely exercised a little more integrity and a little less greed.
(2) The dissenting judges highlight the problem of possible big losses by unwitting homebuyers if sellers are not required to disclose facts that, while not affecting the physical structure of the premises, can nevertheless impact on a buyer's wallet (RESDL refers to the Pennsylvania Real Estate Seller Disclosure Law):
  • Not surprisingly, it also truncates the ability of homebuyers across this Commonwealth to avoid potentially catastrophic losses in purchasing a home. The RESDL-on its face—does not countenance such an untoward result, notwithstanding the Majority's speculation about unproven consequences in scenarios not before us. In my opinion, the circumstances of record in this case, considered through the prism of the RESDL and the causes of action Mrs. Milliken avers, raise questions of fact that must be resolved at trial.

  • In this case, the adverse impact of the murder/ suicide on the value of Milliken's home is documented in the reports of two expert real estate appraisers, one of whom opined that the attendant stigma reduced the value of the property by ten to fifteen percent of its $610,000 sale price, and the other of whom attested that the value of the home did not exceed $525,000. To the extent that a reduction of almost $100,000 in value can be deemed a “significant adverse impact on the value of the property,” the RRETL, considered in conjunction with RESDL, mandates that the cause of the stigma be disclosed. Thus, whereas the Majority would consign the stigma of murder/suicide to the ethereal realm of “psychological damage,” Majority Slip Op. at 9, the statute recognizes it for what it is—documented economic loss—and a “material defect” that must be disclosed.
(3) See Reed v. King, (1983) 145 Cal.App.3d 261, 193 Cal. Rptr. 130. The dissenting judges quoted from the California appellate court in this excerpt:
  • The murder of innocents is highly unusual in its potential for so disturbing buyers they may be unable to reside in a home where it has occurred. This fact may foreseeably deprive a buyer of the intended use of the purchase. Murder is not such a common occurrence that buyers should be charged with anticipating and discovering this disquieting possibility. Accordingly, the fact is not one for which a duty of inquiry and discovery can sensibly be imposed upon the buyer.
  • If information known or accessible only to the seller has a significant and measureable effect on market value and, as is alleged here, the seller is aware of this effect, we see no principled basis for making the duty to disclose turn upon the character of the information. Physical usefulness is not and never has been the sole criterion of valuation. Stamp collections and gold speculation would be insane activities if utilitarian considerations were the sole measure of value.

    Reputation and history can have a significant effect on the value of realty. “George Washington slept here” is worth something, however physically inconsequential that consideration may be. Ill-repute or “bad will” conversely may depress the value of property.
The diseenting judges then added:
  • Of course, the Court's decision in Reed does not bind us.

    Nevertheless, its analysis offers a valuable perspective that should cause the Majority pause in its insistence that pragmatic considerations militate against the conclusion that damage to the reputation of a property poses a quantifiable economic loss. As the Court in Reed has amply demonstrated, the truth is quite the contrary.

    Moreover, to the extent that the cause of loss can be proven by expert testimony, it imposes “significant adverse impact on the value of the property,” and must be recognized as a “material defect” under the RESDL. Pursuant to the language of RESDL section 7303, disclosure of such defects by the seller should be deemed mandatory, and a seller who fails in this regard should answer for his conduct in damages.

    Consistent with this rationale, I would vacate the trial court's award of summary judgment and remand this matter for trial. Inasmuch as the Majority declines this course, I must respectfully dissent.

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