By Peter Christensen
The FDIC is now contending that independent contractor appraisers are the legal agents of appraisal management companies (AMCs) in both of its cases against LSI Appraisal and CoreLogic. Based on this contention, the FDIC asserts that the AMCs should be liable for all damages attributable to the alleged negligence of their panel appraisers. The FDIC first asserted this argument in a brief filed in its case against Lender Processing Services and its AMC LSI Appraisal (see the update on that case here). It is now making the same argument in its case against CoreLogic, parent of the AMC formerly known as eAppraiseIT. In sum, the FDIC’s contention is that an AMC “is vicariously ‘responsible and liable’ for the torts committed by the individual appraisers it retain[s] as a matter of black letter principal/agency law.” While this is just one of many claims by the FDIC against the AMCs, this issue that would have the most wide-ranging impact on the appraisal industry, if the FDIC prevails on it.
The FDIC failed to make this claim in its original complaint filed against each AMC on May 9, 2011 and also failed to make the argument in its opposition brief to each company’s motion to dismiss. While the FDIC’s arguments are being raised for the first time in “sur-replies” which do not have to be considered by the Court, it is still apparent that the FDIC will try to pursue liability of the AMCs on the basis that appraisers are the legal agents of AMCs (among other theories). As mentioned earlier this week in the update regarding the LSI Appraisal case, this is a potential “nuclear” threat to AMC liability and, if accepted by the Court, could set a precedent exposing these and similar AMCs to other large-scale mortgage litigation.
The notion of “we’re not the appraiser, so we’re not liable for an individual appraiser’s negligence” is one of the most common frameworks under which AMCs avoid liability in cases filed by lenders and borrowers. If the FDIC succeeds with its aggressive agency position, AMCs will face exposure to potential liability in the same situations and to the same extent as their panel appraisers. More troublesome for AMCs, however, is the fact that unlike individual appraisers, they deliver appraisals to the same lenders in bulk and, thus, present easier targets for actions by investors in or holders of worthless mortgage loans. That potential risk is highlighted by the FHFA’s references to several large AMCs in some of the 17 separate lawsuits that it filed against mortgage securitizers on September 2, 2011.
Like LSI Appraisal, CoreLogic argued in its motion to dismiss the FDIC’s complaint that the gross negligence claim relating to faulty appraisals delivered to WaMu should be dismissed because, among other things, its AMC eAppraiseIT did not have the same duties of care that appraisers have. This is the expected and common argument that should be made by any AMC facing claims about allegedly faulty appraisal work by individual appraisers. CoreLogic specifically argued in its reply brief:
In its sur-reply, the FDIC now for the first time against CoreLogic raises its contention about appraisers being the alleged agents of AMCs:
At this time, I doubt that the present motion to dismiss in this case will be decided based on the FDIC’s agency argument (or the FDIC’s failure to plead it in the complaint) because there are many other matters at issue. The FDIC’s lawsuit against CoreLogic will likely withstand this first round motion for other reasons, and even if the Court grants part or all of this first motion to dismiss, the Court will likely permit the FDIC to amend its complaint. Accordingly, we will likely see more from the FDIC about the principal/agent issue in this case.
Many parties — not only AMCs but also appraisers and lenders — need to follow this issue closely because if, as according to the FDIC, appraisers really are the legal agents of AMCs (who are themselves the agents of lenders), there will be significant new liability challenges and defense opportunities.