Appraiser Confidentiality: USPAP Absurdity
Appraiser Confidentiality: Loose Lips, Big Claims, USPAP Absurdity, and Subpoenas
Allegedly “Loose Lips” Cause a Big Claim.
A recent and relatively big appraiser liability claim involved a commercial appraiser’s alleged breach of confidentiality. The damages paid to the plaintiff were significant. According to the plaintiff’s complaint (my recounting of the facts here is simplified), a lender had engaged the appraiser to perform an appraisal for a construction loan to the developer of a shopping center. Some of the information received by the appraiser included lease commitments from prospective tenants. The anchor tenant was a well-known retailer. The appraiser completed the assignment, but for reasons unrelated to the appraisal, the lender declined to make the loan.
At this point, the appraiser made his alleged transgression. Without authorization, he mentioned the project to a different lender-client and asked if that bank would be interested in funding the developer’s loan. He also emailed a copy of the appraisal, which included information about the anchor tenant. Word spread about the project and the retailer’s future move to that location. The retailer, however, was sensitive about that move and allegedly became so upset about the disclosure of that information that it terminated its lease commitment. The developer was thus left without the key tenant and allegedly could not obtain other funding for the project.
The developer filed a lawsuit against the appraiser, asserting that his alleged failures to keep the assignment information confidential constituted professional negligence and a breach of fiduciary duty. Blaming failure of the project on the appraiser, the developer demanded damages well beyond the limit of the appraiser’s insurance policy. The appraiser’s alleged confidentiality breaches were difficult to defend. Although arguments in favor of the appraiser certainly existed, the appraiser was quite anxious to settle because of the risk of a judgment beyond the limit of his insurance coverage for which he would be personally liable. Accordingly, the case settled before trial for several hundred thousand dollars. A damages payment of that size will usually have a long-lasting impact on an appraiser’s ability to secure affordable professional liability insurance.
There’s an obvious lesson from this appraiser’s case about the importance of respecting the confidential nature of appraisal work. Breaches of confidentiality can and do result in lawsuits for damages just like an appraiser’s valuation error. Don’t blab appraisal information to third parties.
Basic Appraisal Confidentiality Obligations.
The principal source of an appraiser’s confidentiality responsibilities, of course, is found in USPAP’s Ethics Rule:
“An appraiser must not disclose: (1) confidential information; or (2) assignment results to anyone other than: the client; persons specifically authorized by the client; state appraiser regulatory agencies; third parties as may be authorized by due process of law; or a duly authorized professional peer review committee …”
An appraiser may also have other confidentiality obligations. For consumer-related transactions, for example, the appraiser has a duty to safeguard nonpublic personal information under the Gramm-Leach-Bliley Act and its state law counterparts. An appraiser also may have contractual responsibilities for handling confidential information under engagement agreements or in vendor agreements with lenders, government agencies or AMCs.
Members of some professional appraiser organizations have additional confidentiality obligations under their ethics rules. An Appraisal Institute member has responsibility under Ethical Rule 4-1:
“It is unethical to disclose confidential information or an analysis, opinion, or conclusion specific to a service . . . to anyone other than: (a) the client and those persons specifically authorized by the client; and (b) third parties, when and to the extent that the Member is legally required to do so by statute, ordinance, or court order; and (c) the duly authorized committees of the Appraisal Institute.”
Likewise, NAIFA has a rule which provides that it is unethical for a member to: “Reveal in any way the substance of any appraisal without permission of the client or due process of law.”
USPAP Absurdity: Does USPAP Prohibit an Appraiser from Disclosing Confidential Appraisal Information to Defense Counsel?
Some appraisers and commentators, but not this lawyer, believe that USPAP’s confidentiality rule and also the Appraisal Institute’s rule as well bar an appraiser from providing confidential appraisal information to the appraiser’s own legal defense counsel without specific client authorization. That position would leave the appraiser in the absurd position of having to ask for a client’s authorization to provide information to defense counsel while being threatened or sued by that very same client. Even more absurdly, it would prohibit the appraiser from ever providing such information to defense counsel when the client no longer exists and the appraiser is being sued by a third party.
These absurd propositions come about because the ASB has chosen so few and vague words to address confidentiality in USPAP. More detailed professional responsibility and ethics rules applying to other professions like medicine and law generally recognize explicitly the professional’s right to disclose confidential information for the professional’s own defense — and recognize this right in contexts where the information at stake (such as a patient’s diagnosis or a criminal defendant’s communication with an attorney) is usually more sensitive than information contained in an appraisal report. On this issue, the key words in USPAP state only that an appraiser may disclose confidential information to “third parties as may be authorized by due process of law.” So, the question is then: in the absence of client authorization, does the right of an appraiser to disclose confidential appraisal information to defense counsel fall under the ASB’s chosen words “as may be authorized by due process of law?”
Unfortunately, USPAP doesn’t define what “authorized by due process of law” means for purposes of USPAP, and the ASB has never provided any specific guidance — other than suggesting, for example, in a 2008 Q&A that “it may be necessary to seek legal counsel to determine what constitutes ‘due process’.” Now, personal opinion would be that the generalized notion of “due process of law” as used in USPAP includes within it a right to consult with defense counsel when threatened with legal action, whether civil, criminal or administrative, and that this right includes an ability to provide information deemed confidential by USPAP. That’s my personal opinion only — and one that is partly the result of a desire to avoid the absurd results that would otherwise occur. But I will add, however, that out of thousands of claims and disciplinary matters, I have never seen any appraiser regulator in any state seek to discipline an appraiser for providing any information to his or her own defense counsel.
Suggested language for your engagement agreements. To avoid tangling with this confidentiality issue in USPAP altogether, I would suggest that appraisers confirm their client’s consent to these necessary types of disclosures in their engagement agreements – it is not good enough to put language such as this only in an addendum to a report. Appraisers can include a provision such as:
“Client specifically consents to and authorizes Appraiser to disclose information relating to the appraisal assignment(s), including information which may be considered confidential, to third persons for the purpose of Appraiser’s response to or defense of threatened or actual legal or regulatory actions and for the purpose of seeking insurance coverage.”
Including the above language should also help the appraiser stay in compliance with rules like those adopted by the Appraisal Institute and NAIFA. In particular, it should be noted that the Appraisal Institute’s confidentiality rule contains no exception relating to “due process of law” and instead only permits disclosure without client consent “when and to the extent that the Member is legally required to do so by statute, ordinance, or court order.” That is more restrictive than USPAP and — and if applied literally — leaves the appraiser is the position of breaking the rule if he or she needs to supply appraisal information to his or her own counsel. NAIFA’s rule is similarly restrictive — but the problem here is that NAIFA’s rule just doesn’t make sense: an appraiser must not “[r]eveal in any way the substance of any appraisal without permission of the client or due process of law.” What does it mean to reveal something “without… due process of law?” Check with your respective organizations, but the above language is intended to fix these idiosyncrasies within their rules and preserve your normally expected rights.
Subpoenas Pose More Common Confidentiality Questions.
The preceding case of alleged “loose lips” and big damages is fortunately a rare situation, avoidable with good judgment. Confidentially questions arise more commonly with subpoenas, which may require testimony in a deposition, arbitration or trial, or may require the appraiser to produce documents such as reports and work files. In a typical subpoena situation, the appraiser has performed an appraisal for a lender regarding a property owned by a business partnership (or perhaps by a married couple). The next year, the partners are fighting in court about the value of the property in a dissolution proceeding. To obtain evidence of the value, one partner’s attorney serves a subpoena on the appraiser for deposition testimony and the work file.
We hear from many appraisers in this position, and their first query to us is often “I don’t have to respond to the subpoena because of USPAP’s confidentiality rule, right?” Our reply is usually “no, you probably do have to comply with the subpoena’s demand and probably will have to provide testimony as a percipient witness and produce the file.” The appraiser’s next question is “well, my appraisal report contains a statement that my services do not include testimony, so the attorney has to pay me, right?” Our response is usually “the attorney probably only has to pay you as percipient witness whatever the normal daily witness fee is in your state (in California, that would be $35), plus mileage. Your limiting conditions don’t form a contract that attorney to pay you.”
The basic reason for these answers is that, as a general matter, the legal effect of a valid subpoena trumps USPAP’s confidentiality rule. In the words of one federal court, “[t]he law does not afford an evidentiary privilege to professional appraisers. Moreover, the USPAP rules themselves explicitly contemplate the production of such documents to ‘third parties as may be authorized by due process of law.’” U.S. v. 2,091.712 Acres of Land, Case No. 4:09-CV-88-BO, E.D. North Carolina (2010). Accordingly, if an appraiser has been served with a valid subpoena, the appraiser generally will have to comply, unless the appraiser or another party in the case files a motion to quash the subpoena or limit the appraiser’s obligations on a stronger basis than USPAP’s confidentiality rule. For example, the appraiser may have valid ground to limit the subpoena if the appraisal documents contain “trade secrets” or when an attorney’s work product protection applies to the work of a non-testifying expert appraiser. Nevertheless, even though it may not be the prevailing view, individual judges can sometimes be persuaded that an appraisal for one client is simply not the business of an unrelated third party and might still excuse an appraiser from compliance. The bottom line is still that the appraiser can’t simply ignore a subpoena: the appraiser either needs to comply or respond with a motion or objections in a procedurally correct matter (and probably with the assistance of an attorney).
Unless you’ve agreed to provide expert witness testimony (for which you should be paid), any obligations you have for testimony under a regular subpoena are limited to percipient (or factual) witness testimony in court, arbitration or deposition — this means two things: (1) you still have the duty of confidentiality under USPAP outside those settings and should not talk about confidential appraisal matters outside of your testimony; and (2) you should only have to answer factual questions — such as what your prior opinion of value was in the appraisal report or what you saw at a site visit. As a percipient witness, you shouldn’t be asked to give a new opinion of value or to guesstimate what the property might be worth now. Those are the province of “expert testimony” and further would require that you comply with USPAP in developing and reporting them.
Some Practical Advice about Subpoenas:
As a practical matter, I usually advise appraisers who’ve received subpoenas to first inform their client and then call the attorney responsible for the subpoena and find out why the attorney wants your testimony or documents (without disclosing anything confidential to the attorney). Based on what the attorney says, if you desire, you might be able to dissuade the attorney from wanting to call you as a witness. For example, if the attorney appears to be planning to call you to bolster value based on your prior lending appraisal, I’ve found attorneys to be dissuaded from calling the appraiser when told something like: “I don’t think my testimony will be very helpful to your client because the copy of the report that you are looking at is more than a year old and was prepared solely for my client’s lending use. If I testify, I’m going to have to make it really clear to the court that my report shouldn’t be considered because of its age, because the market has changed and because the report was prepared only for that prior purpose.” If you are really professional in explaining this, your might just turn the call into a business development opportunity: “would you like me to perform a current, credible appraisal for your intended use?”