In-character, everyone seems to believe Montezzi killed everyone in lower including the kids. When in fact it was monsters from a quest area (according to one post) and thus , a semi - OOC event? What is realistic for our characters to believe about this?

Those NPCs are quite obviously alive right now, aren't they?

The rumour-mill!

"What is realistic for our characters to believe about this?"

Whatever your particular character would believe, given the evidence you have now (primarily, that many of those NPCs are not actually dead).

I know I'm not supposed to post in DM Q&A....but I simply can't resist. One phrase.

Conspiracy theorist.

Vlaid, you've been around long enough to know not to do this, regardless of severity!

Whatever you want to believe is fine to believe in character.

+1