An Arizona appellate court addressed the purely legal issue of whether a trial court correctly ruled that an appraiser did not owe a duty of care to a lender as a matter of law, after the lender filed a complaint against the appraisal company for negligent misrepresentation. The appraiser had countered that he owed no duty to the lender because the appraisals were intended specifically for someone else’s use alone. Read on for the details.
An Arizona appellate court reversed the dismissal of a negligent misrepresentation case against an appraisal company, saying the allegations in the complaint alleged sufficient facts to state a claim upon which relief can be granted and effectively put the appraiser on notice of the nature and basis of the claim against him.
The case is Belen Loan Investors LLC and Los Lunas Investors LLC v. James Bradley and Karen Bradley and KB Real Estate Appraisers Inc. (Court of Appeals of Arizona, No. 2 CA–CV 2011–0153)
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Belen Loan Investors and Los Lunas Investors had challenged the trial court’s dismissal of their complaint for failure to state a claim against James and Karen Bradley and KB Real Estate Appraisers Inc. for negligent misrepresentation and conspiring in or aiding the tortious conduct of others.
In September 2006, BLI loaned Los Lunas Highlands LLC and Belen 368 LLC $2,600,000 and $2,950,000, respectively, for the purchase and development of various unimproved residential lots in Valencia County, N.M., in exchange for two promissory notes, security interest in the property, and the personal guarantee of Michael Myers, an officer of The Myers Group and agent affiliated with the borrowers.
According to BLI, the borrowers made false representations of the property value to induce BLI to provide excess loan funds which then were transferred to the borrowers’ personal profit sharing plans. The borrowers hired Bradley, an Arizona appraiser, to provide appraisals for Myers’s use in obtaining the loans.
When the borrowers defaulted on their loans, BLI initiated a judicial foreclosure action in New Mexico and sued Myers, the borrowers, and their associated entities, corporate officers, and trustees for various causes of action. Bradley moved to dismiss BLI’s claims against him for conspiring in or aiding the tortious conduct of others and negligent misrepresentation, which were based on allegations that he intentionally or negligently had provided “falsely inflated appraisals” upon which BLI relied to fund “excessive loans.” Bradley asserted BLI had failed to state a claim upon which relief could be granted.
The trial court dismissed both claims against Bradley on the ground he owed BLI no duty. The court determined that Sage v. Blagg Appraisal Co. “specifically limited [an appraiser’s duty to third parties] to the ‘traditional home-purchase transaction” and concluded that because the instant case involved “speculative large-tract real estate investments,” BLI was “not in the narrow class of persons entitled to rely on the appraisal[s],” citing Kuehn v. Stanley and Hoffman v. Greenberg.
BLI appealed, asserting that, contrary to the court’s analysis, an appraiser owes a professional duty to any third party the appraiser “knows will receive the appraisal for purposes of influencing the specific transaction.” BLI acknowledged Bradley was hired by Myers to prepare appraisals for Myers’s use but maintained that, because Bradley knew Myers would provide appraisals to BLI, Bradley could be held liable to BLI for negligent misrepresentation.
Bradley countered that it owed no duty to BLI because the appraisals were intended specifically for Myers’s use alone and that the Sage holding is inapplicable because that case is factually distinguishable from the situation at hand.
Duty of care
Section 552, Restatement (Second) of Torts (1977), states that an appraiser’s liability is limited to loss suffered “by the person or one of a limited group of persons for whose benefit and guidance [the appraiser] intends to supply the information or knows that the recipient intends to supply it” and extends only to those transactions “that he intends the information to influence or knows that the recipient so intends.” Further, the appraiser need not know the identity of the third-party recipient at the time he supplies the information, as long as the third party falls within a distinct group or class of persons the appraiser intends to reach and influence with the information. On the other hand, the appraiser has no duty to a third party who is merely a member of the larger class who might reasonably be expected sooner or later to have access to the information and foreseeably to take some action in reliance upon it.
The Court of Appeals of Arizona clarified § 552 in Sage, holding that “an appraiser retained by a lender to appraise a home in connection with the granting of a purchase-money mortgage may be liable to the prospective buyer for failure to exercise reasonable care in performing the appraisal.”
“In Sage, we distinguished earlier decisions in which we had declined to recognize any duty owed by an appraiser to a third party,” the court said. “For example, in Kuehn an appraiser was hired by a lender to determine the value of a residential parcel ‘for use by [the lender] for a mortgage finance transaction only.’ That the appraiser owed the home purchasers no duty was evidenced by the type of appraisal: a ‘-short form for lending purposes, which was not prepared for the guidance of the homebuyers.”
In Hoffman the court held that an appraiser hired by the seller of parcels of vacant land owed no duty to the third-party purchaser of the property. The seller in that case had refused to inform the appraiser how he intended to use the report.
“Given the contours of an appraiser’s duty as outlined in these cases, we agree with BLI that the trial court incorrectly interpreted Sage, insofar as it appears to have concluded Sage imposes more stringent limits on an appraiser’s duty to third parties than does the Restatement,” the court said. “Just as in Sage, Kuehn and Hoffman, to ascertain whether a duty exists, the circumstances and relationships between the parties will determine whether BLI was an entity ‘for whose benefit and guidance Bradley intended to supply the information or knew that Myers intended to supply it.’”
“In sum, if Bradley intended to supply his appraisals to BLI, or knew Myers intended to supply them to BLI specifically or to a limited class of persons including BLI, Myers owed a duty to BLI,” the court said. “Alternatively, if Bradley and Myers regarded the recipient’s identity as ‘important and material’ and, thus, Bradley understood that his liability was to be restricted to Myers alone, he owed no duty to BLI.”
Motion to dismiss
With the above scope of duty in mind, the court considered whether BLI’s complaint sufficiently alleged a claim for relief based on negligent misrepresentation.
“Bradley asserts that BLI’s complaint failed to state a claim upon which relief can be granted because it contained conclusory allegations,” the court said.
But, the court noted, BLI contended specifically that 1)Bradley intentionally and/or negligently provided falsely inflated appraisals for Myers’s use in the business transaction; 2) that Bradley knew that the appraisals were to be relied upon by lenders and that they had a right to rely on the appraisals; and 3) that Bradley failed to exercise reasonable care in communicating the representations to BLI by neglecting to obtain comparable sales data and using incomplete or inappropriate valuation methodology.
Based on this, the court concluded BLI’s complaint alleged sufficient facts to put Bradley on notice of the specific nature of the claim.
Bradley contends BLI’s acknowledgement that the appraisals were prepared for Myers’s use constitutes an admission they were not intended for BLI’s use.
However, the court disagreed, saying BLI’s acknowledgement does not preclude finding a duty based on Bradley’s alleged knowledge that Myers would give the reports to third-party BLI, despite the provision that they were “not intended to be used, transferred or relied upon by any person other than those noted.”
“Notwithstanding the limitations in the appraisals, the complaint, if proven, might entitle BLI to relief on the theory that Bradley intended to supply false appraisals to BLI or knew Myers intended to do so,” the court concluded.
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