Court of Appeal New Ruling on Appraisal Fraud
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- Observations of a Review Appraiser - April 21, 2016
New Ruling on Appraisal Fraud by California Court of Appeal
On May 23, 2014, the Court of Appeal for the Fourth Appellate District, Division One, State of California, issued a very interesting decision on whether a plaintiff can successfully plead and argue fraud based on comments made about the concluded value of real estate that was appraised. The case is Graham V. Bank of America, N.A., et al. Although this ruling is unquestionably useful for an appraiser being accused of appraisal fraud, it probably is not the magic elixir many will proclaim it to be. This is because the appraiser involved in the lending transaction, which was the subject of the lawsuit, was not named as a party to the lawsuit. Nonetheless, much of what the Court of Appeal said about appraisals and fraud is worth examining and understanding because it may provide a road map for the defense of an appraiser who is sued and must respond to allegations of fraudulent conduct.
The essential facts in Graham are as follows: In 2004, Graham borrowed a total of $489,000 to purchase a home in Vista, CA. The amount borrowed equaled the purchase price of the home (100% LTC) and Graham borrowed $391,200 under a first trust deed and the balance of $97,800 under a second trust deed. At the time, the lender involved had an appraisal report done and the appraiser concluded the value of the home was $525,000. Graham alleged there was some discussion about the appraisal and the future value of the home, but no problems with the loans or the appraisal were asserted until 2011 when Graham fell behind in making his payments and was issued a notice of default and notice the trustee intended to sell the property at auction. This caused Graham to file suit against several parties involved in making the original loan as well as several parties who acquired an interest in the loan after the fact.
The allegation of most interest to the appraisal community is Graham’s claim the appraised value of $525,000 was used to fraudulently induce him to close the purchase and to borrow more money than he could really afford. According to Graham, one of the fraudulent statements made was that it would be easy to refinance or sell the home at a profit later due to the “equity” ($525,000 appraised value less $489,000 total loans/purchase price) he would have at closing. He went on to claim the defendants knew the appraised value was speculative and false because the value derived came from a market bubble engineered by the defendants and others to the detriment of Graham and the borrowing public.
The trial court ruled there was no basis for an allegation of fraud or deceit involving the appraisal in question because Graham was not the intended user and he failed to plead and show justifiable reliance on the appraisal. The trial court further ruled an appraisal itself is merely an opinion and not a statement of fact and thus cannot be the basis for a fraudulent misrepresentation, which is an essential element in pleading and proving fraud. On appeal, the Fourth Appellate District agreed and said, “Statements regarding the appraised value of the property are not actionable fraudulent misrepresentations. Representations of opinion, particularly involving matters of value, are ordinarily not actionable representations of fact.” The Court of Appeal concluded that an appraisal is typically prepared for the benefit of the lender and assists the lender in determining if the property is adequate security for the loan being made. Accordingly, the Court stated, “Since the appraisal is a value opinion performed for the benefit of the lender, there is no representation of fact upon which a buyer may reasonably rely.” Based on this reasoning, the Court of Appeal upheld the ruling of the trial court on the issue of appraisal fraud or deceit.
So, how can this help an appraiser in the future? Unless this decision is overturned or another court rules differently given a similar fact pattern, the Court of Appeal makes it pretty clear there is little chance for a homeowner to pursue a claim against an appraiser based on an allegation the homeowner borrowed money or acquired property due to detrimental reliance on the concluded value in an appraisal report. Beyond that, this decision may open the door for appraisers to use a similar theory of defense when confronted with a claim of loss by a subsequent buyer of a loan, especially if the loan was performing and seasoned when it was acquired by the now claimant. The rationale behind this defense is that the subsequent buyer could not have relied to its detriment on what was merely an opinion of value, especially if the opinion of value in question was expressed years before the loan ever went into default. This could effectively shut the door on some of the blanket claims of reliance being raised today based solely on the standard representation language in a residential appraisal report that states the appraisal may be relied on by a subsequent lender/purchaser of the loan. Not only would this block claims of fraud, it could also block claims of negligent appraisal since presumably subsequent reliance on an old opinion of value will be harder to sell to the court.
As more cases filed as a result of the real estate market collapsing in 2007/2008 get through the legal system, we will likely see more rulings like this where the courts look lenders and borrowers squarely in the eye and say, “Tough luck, but this appraiser is no more responsible for your losses from making or buying this loan than he is for global warming. You loaned money to a poor credit risk in an overheated market and your losses are just that…your losses. Nobody forced you to make the loan in question, least of all the appraiser.”
Fourth paragraph may also have a limiting key to any perceived protections for us. That is ‘intended user’. I think it is a valid reminder to all of us to keep the stated identified users to a minimum. If the client only identifies their self as the intended user-even though we know there are others, we should avoid stating them.
Maybe even put a sunset clause in the report stating that holders in due course, including assignees may not rely on the stated conclusion for value on the effective date longer than one year after any loan originates as an outgrowth of the appraisal.
Another weak spot in the plaintiff’s case was the claimed cause of action. B of A with others CONSPIRED to create a market wide bubble to induce the guy to borrow? Pretty weak on the surface, I think.
In any event, yet another reminder that we need to be careful out there.
I’m still looking for appropriate language to put a time cap on how long my appraisal ‘may be relied on’ by subsequent users; and / or limiting any potential liability to the original client only.