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Explore professional negligence claims against appraisers, including a recent case involving inflated valuations and legal duties. Learn about liability prevention and key negligence elements.
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Hot Topics and Myths in Appraiser Liability New Orleans, LA Appraisal Insitute Peter Christensen, General Counsel LIA Administrators & Insurance Services www.liability.com Santa Barbara, CA 800-334-0652 peter@liability.com
Where Are We Going This Morning? • Overview of appraiser professional liability claims: • Basic liability prevention suggestions • Understand key elements of negligence claims against appraisers from a very recent appellate case involving and MAI • Cover some hot issues and dispel a few myths • Reminder: liability for appraisers in general is not out of control
Appraiser Liability ClaimsWhat Is a Professional Negligence Claim? Duty owed by the defendant to the plaintiff to conform his or her conduct to a standard of care. Breach of that duty – e.g., providing an inflated valuation or failing to produce a USPAP-compliant appraisal. Reliance by the plaintiff. Actual damages to the plaintiff.
Very Recent Commercial Appraiser Liability Case:RockRock Group v. Value Logic, WA Court of AppealsOpinion Published July 7, 2016 • In mid-2006, a real estate developer had two adjacent properties near Spokane under contract for $475,000 and $300,000. • One property was 51 acres; the other was 39 acres. • Both were zoned partially “light industrial” and partially “rural traditional” (a classification permitting minimal use). • The developer was seeking to flip the properties to other investors. • LLCs were formed through which the purchases would be made with financing from RiverBank. • RiverBank engaged Value Logic to appraise the properties – the fees paid were $3,000 and $2,000. • The appraisals, delivered in October 2006, valued the properties at $4,500,000 and $4,250,000.
RockRock Group v. Value Logic, WA Court of AppealOpinion Published July 7, 2016 • The reports contained the following limitations:
RockRock Group v. Value Logic, WA Court of Appeal Opinion Published July 7, 2016 • The reports contained the following limitations:
RockRock Group v. Value Logic, WA Court of Appeal Opinion Published July 7, 2016 • The developer received copies of the appraisals and showed them to a few prospective investors or told investors what the appraised values were during investor meetings. • Some of the investors received copies from a closing agent. • The developer’s pitch was that the investor LLCs would be able to flip their interests quickly – the investors purportedly did not know that the developer had the properties under contract for far less than they were paying. • Statements were made by the developer to investors such as: “with the appraisals I got . . . an idiot could get into these properties and make a quarter million dollars.”
RockRock Group v. Value Logic, WA Court of Appeal Opinion Published July 7, 2016 • The investor LLCs – one named RockRock Group and the other RussellRock Group – purchased 75% interests in the properties. • RockRock paid $1.8m for its interest in the 53-acre property; RussellRock paid $1.63m for its interest in the smaller property. • RiverBank financed the purchases based on the appraisals and with personal guarantees from the investors in each LLC. • After acquiring their interests, RockRock and RussellRock were not successful in re-flipping the properties themselves. The market tanked almost immediately after the purchases were complete. • In 2009, payments came due on the loans, defaults occurred, and the investors were called on their guarantees.
RockRock Group v. Value Logic, WA Court of Appeal Opinion Published July 7, 2016 • In 2009, a review appraiser for the bank found the original appraiser had overvalued the properties by applying a value per square to the entire properties based on “light commercial” zoning. • Another appraiser valued the properties at $1,220,000 and $520,000. • In 2011, RockRock and RussellRock sued Value Logic and its two appraisers. • The gravamen of the complaint was that Value Logic negligently overvalued the properties in 2006 and that the LLCs would not have completed the purchases but for the overstated values. • The primary theory was negligent misrepresentation. • The damages demanded by the plaintiffs exceeded $5,000,000.
RockRock Group v. Value Logic, WA Court of Appeal Opinion Published July 7, 2016 • A primary key to any claim for professional negligence or negligent misrepresentation is the concept of duty – the plaintiff must establish that the appraiser owed the plaintiff a “legal duty.” • For the client who hired the appraiser, establishing duty is easy. • Whether an appraiser may be found to have owed a duty to non-clients become fuzzier and, in most states, subject to a test described in what is called the Restatement Second of Torts, §552. • This is how the WA Court of Appeals applied the test – the duty element:
RockRock Group v. Value Logic, WA Court of Appeal Opinion Published July 7, 2016 • Value Logic moved for summary judgment, which was granted by the trial court on the basis that Value Logic did not owe the investor LLCs (or individual investors in the LLCs) a legal duty. The WA Court of Appeals affirmed the judgment. • Why? All that good language in the appraisal reports (not contradicted by anything in the engagement agreements or by other evidence).
“Wait . . . What About the Statute of Limitations? That appraisal was 9 years old.” • Myth: “I can’t be sued over an appraiser that I did more than 5 years ago.” • Statutes of limitation for claims against appraisers: • Have no relationship to USPAP’s 5-year recordkeeping requirement • May be subject to the “discovery rule” • Are extended for the FDIC and some others • Vary by the type of claim • Vary by state • So how long is it here in this state? How does it compare with law in other states?
So Who Can Sue an Appraiser for Negligence?Or, To Whom Does an AppraiserOwe a Legal Duty? • In most states, the key legal question is . . . Did the appraiser know or reasonably expect that the non-client would use or rely on the appraisal?
Wells Fargo Bank Reliance Language Report Reliance Instructions and Language The following Reliance Language must be included in the body (and not in any addenda) of the Report: "RELIANCE PROVISIONS In connection with a proposed extension of credit in the form of (or a proposed investment in) a loan, debt issuance or other financing to be secured, in whole or in part, directly or indirectly, by the real property ("Property") which is the subject of this report ("Report"), or by pledges of direct or indirect ownership interests in the Property owner, or in the form of preferred equity ownership interests in the Property owner (in any such case, the "Financing"), or the proposed issuance of any securities secured or otherwise backed, in whole or in part, directly or indirectly by the Property or the Financing (the "Securities"), this Report, and the information contained therein, may be used and relied upon by the addressee(s) of this Report, their affiliates, successors and assigns, and:
Wells Fargo Bank Reliance Language Wells Fargo Bank, N.A. (“Bank”), as Administrative Agent for the benefit of any lenders, from time to time, party to the Financing; any actual or prospective purchaser of, or investor in, the Financing (or any portion thereof or interest therein by way of participation, syndication or otherwise); any actual or prospective financing source for any such purchaser or investor; any servicer of the Financing or the Securities; any trustee of the Financing or the Securities; any rating agency actually or prospectively rating the Financing or the Securities; any underwriter of, or placement agent for, the Financing or the Securities; any institutional provider of any liquidity facility or credit support for the Financing or the Securities; the respective affiliates of each entity referenced in clauses (a)-(g) above; the respective officers, directors, employees, agents, advisors and counsel, acting in such capacity on behalf of any person or entity referenced in clauses (a)-(i) above; and the respective successors and assigns of any person or entity referenced in clauses (a) through (i) above.
Wells Fargo Bank Reliance Language This Report and its preparer may be referred to, and this Report may be included in whole or in part, summarized or quoted (provided any such partial inclusion, summary, or quote is not misleading), in any term sheet, offering circular, private placement memorandum, registration statement, prospectus or prospectus supplement relating to the Financing or the Securities (or any portion thereof) and the preparer of this Report agrees to cooperate reasonably in answering questions by any of the persons or entities referenced in clauses (a)-(j) above during the three (3) year period following the date of this Report.
Wells Fargo Bank Reliance Language All the terms, conditions and provisions set forth in this Section entitled “Reliance Provisions,” as well as those contained in the Global Limited Agreement and the applicable (Appraisal, Environmental, or Construction) General Requirements, all of which the preparer agreed to when accepting the award of the assignment to prepare the Report on the Bank’s Application system, shall control and supersede any contrary or inconsistent terms, conditions or provisions otherwise set forth in this Report (collectively “Contrary Terms”), unless an authorized officer of the Bank expressly agrees in writing to such Contrary Terms and expressly states that such particular Contrary Terms “supersede the terms of the ‘Reliance Provisions’ set forth in the General Requirements with which the preparer of the Report agreed to when accepting the award of the assignment to prepare the Report on the Bank’s Application system.”
Wells Fargo Bank Reliance Language • No good solutions. • Appraisers in other major firms acquiescing (not sure if their in-house legal counsel know). • Be very explicit in the description of intended use of your report and state that the intended use is (assuming the appraisal is for a loan) for Wells Fargo Bank’s consideration of a mortgage loan funded or arranged by Wells Fargo Bank to the specifically named borrower, • Include language in the report following the reliance language along the following lines: • “Under no circumstances, shall any of the following parties be entitled to use or rely on the appraisal or this appraisal report: (i) the borrower(s) on any loans or financing relating to or secured by the subject property, (ii) any guarantor(s) of such loans or financing, or (iii) principals, shareholders, investors, members or partners in such borrower(s) or guarantor(s).”
Let’s Consider Another AppraiserClaim Situation Review appraiser retained by lender prepares review that is highly critical of another appraiser’s work and also opines to a significantly lower value. Lender drops the appraiser from panel, costing the appraiser tens of thousands of dollars in lost work. Other lenders learn of the “blacklisting” and more work is lost. Reviewer on his own reports the appraiser to the state for USPAP violations and submits the review. However, the state finds no errors and actually disciplines the reviewer for a poorly supported review. In sum, the reviewer’s review was negligent. Can the damaged appraiser who lost tens of thousands in income because of the negligent review sue the reviewer for damages? For negligence? For defamation?
What To Do if It Happens to You? • Don’t ignore it • Get legal assistance • Handle the lawsuit appropriately if you are served
Mass Litigation Phenomenon • Spoken about a phenomenon the last several years that has been evolving: litigation investors suing appraisers for profit. • All goes back to brothers in Texas, Chris and Ben Ganter. • First Heritage Pacific Financial, then Mutual First LLC, then First Mutual Group LLC and Carrington Capital. • Now, it’s mostly Llano Financing Group LLC.
450+ cases overall300+ filed by Llano in 12 months200 in Florida50+ in Illinois37 in Las Vegas600+ appraisers sued overall by the entities
Common Reasons Why Appraisers Don’t Have Coverage for Claim Under Their E&O • No current policy or no “tail” coverage. • The “prior acts” or “retroactive” date on the appraiser’s E&O policy does not cover the time when the appraisal was performed.
Common Reasons Why Appraisers Don’t Have Coverage for Claim Under Their E&O • The appraiser is sued for an appraisal he or she signed as a supervisor, or • The appraiser is sued for an appraisal by an employee or subcontractor, • And, the appraiser has an “individual only” policy:
Hot Topic: Square Footage Claims • Number #1 claim issue after pure value claim • Get the measurement right • Double check your calculations and sketches • Proof for typos • Don’t trust borrowers, sellers, MLS, public records • Use plain English for special situations: • Example language: Appraiser notes that public building records, tax records and information supplied by the owner differ with respect to the square footage of the building structure. Floor plan is unique and difficult to measure. Appraiser’s measurement is approximate.
“Hot” Topic: Septic Tanks • Example plain English disclosure: • Appraiser is unable to verify whether property is serviced by sewer or septic due to inconsistent information provided in public records/data sources and the property owner. Owner advises he thinks property is connected to public sewer; however, connection cannot be confirmed in available public records. Further inspection is recommended if the issue is material to the client’s decision making.
Use Plain English Disclosures Marijuana Issue: “The appraiser observed approximately 60 plants believed to be marijuana growing in basement under lighting strung from bare wires suspended from ceiling. See photo.”
How to Turn a Potential Claim into an Actual Claim Part 1 – Chase “Quality Review” Letter
How to Turn a Potential Claim into an Actual Claim Part 2 – Appraiser’s Appeal “Dear Appraisal Panel, I would like to appeal your previous decision to place me on your Exclusionary list. The appraisal in question was admittedly sketchy and very lacking in detail and clarity of presentation. I was truly appalled myself preparing the rebuttal to your review and I acknowledge that it did not meet the appropriate standards of reporting that it should have. However, this was truly not representative of my work in 2007, nor does it have any similarity at all to the work that I do currently . . .”
How to Turn a Potential Claim into an Actual Claim Part 3 – Chase Form Letter Demanding Indemnification
Client(s) of the Appraiser. Examples: Taxpayer who hired appraiser to provide value for return Divorcing spouse who hired appraiser Party to condemnation suit who hired appraiser as expert Parties who jointly engaged appraiser to determine purchase price or a rental rate for a lease renewal Opposing Parties. Examples: Divorcing spouse on the other side of the case Opposing party who lost in litigation Other Appraisers Defamation, malicious prosecution, etc. Myth: “Only Appraisers who work for lenders get sued.”So, Who Sues Appraisers Engaged as “Experts” or Who Perform Other Non-Lending Work?
Quick Liability Prevention Tips “Appraise” clients, parties and assignments for unreasonable risk – follow your gut instinct. Focus on precise, narrow descriptions of intended use and intended user – can a party who you really don’t intend to rely on your report (like a borrower) twist your language? Watch out for “reliance” laguage. Proofread your reports. Get square footage right. Disclose special conditions in clear plain English.
