by David Brnilovich, Jennings, Strouss & Salmon, P.L.C.
Whether a real estate appraiser has a duty to your client depends upon the circumstances and relationships between the parties. Recently, a limited liability company (LLC) needed financing for the purchase and development of unimproved residential lots. One of the individuals involved with the LLC was going to personally guarantee the debt of the LLC. The LLC hired an appraiser to provide appraisals for the use of the guarantor. Belen Loan Investors (BLI) agreed to finance the project. When the loan went into default, BLI sued the LLC, guarantor and appraiser. Belen Loan Investors, LLC v. Bradley, 650 Ariz. Adv. Rep. 8.
The claims against the appraiser were for negligent misrepresentation, and aiding and abetting. The appraiser moved to dismiss the complaint on the grounds that he had no duty to BLI. The Court of Appeals reversed the dismissal, reaffirming the general rule that appraisers have no duty to third parties who might reasonably be expected, sooner or later, to have access to the information contained in the appraisal; however, the court then discussed the factors to be considered in order to determine whether the appraiser might have a duty to a third person.
Among the factors considered is the type of transaction or whether the appraiser’s client intended to use the appraisal for the benefit and guidance of others. Another factor is the appraiser’s knowledge. If he was aware that his client intended to supply the information contained in the appraisal to a specific group of persons, then the appraiser does owe a duty to the individuals of that group.
The limitations in the appraiser’s engagement letter are an important factor to be considered when evaluating the potential liability of an appraiser; however, the limitations of the engagement letter can be overcome by the knowledge of the appraiser, the intent of the appraiser’s client, and by other facts and circumstances. The facts and circumstances underlying the loan process should be investigated if your client faces a potential loss from a defaulted real estate loan.
David Brnilovich is a member with the law firm of Jennings, Strouss & Salmon, PLC. His practice includes real estate, construction, corporate governance, small business formation, dissolution, purchases and asset sales, estate planning and estate planning litigation. Mr. Brnilovich can be contacted at email@example.com or 602.262.5898.