WHOSE FAULT IS IT?

23 Sep

Few pictures in sports are more recognized than the ground ball going through the legs of Red Sox first baseman Bill Buckner in the 1986 World Series.  Most average observers would conclude that the error cost the Red Sox the World Series to the New York Mets.  But, in actuality, that error occurred in Game 6 and the Mets still had to win Game 7, which they eventually did 8-5.  In addition, in Game 6 itself the Sox had a two run lead going into the bottom of the 10th but that was lost by two separate Sox pitchers.  However, in the eyes of the world, Bill Buckner is to blame for the team’s loss.  This stroll down baseball memory lane was intended to illustrate that fault is shared by many, but unfortunately, the recognition can be selective.

We have seen an unprecedented number of defaults and foreclosures in the real estate market.  Lenders have suffered tremendous losses and they are taking legal action to recoup some of those losses.  Their focus is not on their own errors, but on the errors of others.  A handy target is the appraiser.  Like Bill Buckner, appraisers may have blame, but they are not necessarily the cause of the losses.

A recent Minnesota federal district court decision may provide some defenses to appraisers who are under attack by lenders seeking to recoup the huge losses caused by defaulting borrowers.  An appraiser’s defense that the appraisal is an “opinion” of value and not an exact measurement of a property’s market value got a boost from a federal district court judge in the United States District Court for the District of Minnesota.  The court dismissed a significant portion of a bank’s fraud claim against an appraiser.  In dismissing the claim, Judge Patrick J. Schiltz stated that the allegation that the appraiser’s opinion of value was a fraudulent statement is incorrect as the appraiser was only providing an “opinion” of value and a fraud claim cannot be predicated on the expression of an opinion. 

The Minnesota federal district court’s finding that the bank cannot proceed with a fraud claim based on the appraiser’s opinion of a property’s market value is premised on several factors.  The court noted that the appraisal form indicated that the market value established by the appraiser was simply an opinion.  The court cited to the appraisal report itself which states “my opinion of market value.”  The court was also motivated by the definition of market value contained within the appraisal report, which defines it as “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and the seller, each acting prudently, knowledgably and assuming the price is not affected by undue stimulus.”  The court felt that the set of criteria within the definition demonstrates that an opinion regarding the value is based upon events in which the appraiser had no control and could not anticipate.  Therefore, the court held an appraisal value is an opinion that cannot be a basis for a fraud claim under Minnesota law.[1]  

The court’s ruling on the issue of fraud is important because a fraud claim has wide ranging implications.  Under many insurance policies, fraud is an exclusion.  This could potentially prevent an appraiser from having the benefit of insurance coverage to provide a defense if the appraiser is sued.  In addition, fraud allegations can have implications on the dischargeability of debts in bankruptcy.  For these reasons, an allegation or finding of fraud is something that most appraisers would like to avoid.

The court also held in its recent decision that a jury should be able to consider the bank’s underwriting failures when determining the true cause of the bank’s losses and assessing the bank’s comparative fault in relation to those losses.  The court’s finding that the bank’s underwriting standards are relevant and should be considered by the jury in apportioning fault is less a surprise based on Minnesota’s view of comparative fault.  Some attorneys have tried to argue that appraisal malpractice claims are not subject to a comparative fault analysis utilizing underwriting failures.  A federal court decision in Michigan provided support for this theory because it barred a defendant’s attempt to place other “non-parties’” fault before the jury.  Judge Patrick J. Schiltz declined to follow this Michigan case because Minnesota has a more expansive definition of comparative fault.  In many cases, comparative fault is actually a determination of “comparative causes.”  Therefore, defendants are allowed to raise issues regarding other causes of the injury and not just ones based on the claim that a plaintiff has asserted.   

Since Minnesota courts look at comparative fault more broadly, an appraiser can raise a lender’s failure to investigate a borrower’s ability to pay or its use of high risk loans and flawed loan policies (i.e. stated income or no income loans), as the action that caused the lender’s damages.  A lender may try to argue that the appraiser’s inaccurate valuation of the property caused the lender to loan money at an amount higher than it otherwise would have.  However, the application of underwriting failures in a comparative fault analysis allows the jury to assess if the lender should have ever loaned the money to the borrower to begin with and whether an appraiser should be liable for the losses suffered in relation to the loan when the appraiser had no involvement in the loan approval process with the borrower.

In many cases, a lender may not have understood the nature of the appraisal it ordered or is simply trying to pass on its losses from its own underwriting failures.  While there is no silver bullet when defending appraisal cases, this recent Minnesota federal district court decision provides at least some ammunition for appraisers to defend against the onslaught of claims being made by lenders to recover the wide-spread losses in the banking and financial industry. Maybe appraisers can avoid the fate of Bill Buckner.

This article is written by Dave McGee and Deb Newel.  Dave is a Shareholder and Deb is an Associate at the law firm of Thomsen & Nybeck, P.A.  They both practice in the litigation area of the firm with a primary focus on General Civil Litigation, Real Estate Litigation, Insurance Litigation, Construction Litigation and Townhome and Condominium Law.  Dave and Deb frequently represent individuals or companies in litigation in the State of Minnesota that involves appraisals or other real estate-related matters.  They also represent various individuals and entities in the real estate field in connection with licensing issues.  For more information about Thomsen & Nybeck, P.A. or to contact Dave or Deb, please visit: http://www.tn-law.com.


[1] Although the court found that an appraiser’s determination of value is an opinion and therefore not actionable in fraud, the court did state that the appraiser’s opinion of value can still be actionable under negligence.  In other words, the appraiser could still face liability under a negligence theory if the appraiser is found to have determined a property’s value inappropriately.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: