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As a Lender, Can I Sue an Appraiser or His/Her Appraisal Management Company?

Mortgage & Lending Law

Lenders often contact our office when a loan has taken a turn for the worse:  the borrower has defaulted, the borrower has no money, and the property securing the loan is substantially “underwater.”  While we advise the lenders regarding their options for recovery against the borrower, often our client meeting focuses on the appraised value of the property.

After reviewing the appraisal and seeing grievous errors, the next question arises: should the lender sue the appraiser?   This is a complicated question that requires analysis.

A lender typically can raise three different causes of action against an appraiser.  They are negligence, misrepresentation, and breach of contract.

Negligence
Courts have recognized that an appraiser only owes a duty to his/her client or intended user.  (Bily v. Arthur Young & Co.; Nymark v. Heart Fed. Sav. & Loan Ass’n).  On appraisal reports, the “client” or “intended user” should be and usually is identified.  Thus, if a lender’s name is not listed as the appraiser’s client or intended user, a claim for negligence, which has breach of a duty as a required element, against an appraiser will most likely be unsuccessful.

Misrepresentation
A lender can claim that an appraiser made a misrepresentation to the lender.  In order to make this claim, a lender must establish that the appraiser intended for the lender to rely on the appraisal report or that the lender belonged to a particular group or class that the appraisal report was intended to benefit (Soderberg v. McKinney; Bily v. Arthur Young & Co.).  For a lender, even if the lender is not listed as the client/intended user of the appraisal, this threshold can usually be met.  However, showing that a lender belonged to “a particular group or class,” is one of the more hotly-contested portions of lender versus appraiser litigation.

Breach of Contract
Another claim that a lender can allege is breach of contract.  This claim can be based on one of two scenarios.  The first scenario is that the lender contracted with the appraiser to perform an accurate appraisal and/or comply with the regulations contained in the Uniform Standards of Professional Appraisal Practice (USPAP).  Under this scenario, the lender may sue for breach of contract based on the appraiser’s failure to meet the contractual obligations.

The second scenario is that the appraiser contracts with another party (e.g. a broker).  If that contract was created for the lender’s benefit (either expressly stated or implied by the fact that the lender is a member of a class/group for whose benefit the contract was created), then the lender may sue for breach of contract as a third party beneficiary.

Conclusion

If you are lender and believe you may have a claim against an appraiser, please contact us immediately.  We recommend you contact us immediately because there are time deadlines for filing lawsuits based on the negligent or intentional actions of an appraiser.

If you are an appraiser who has been sued by or received a demand letter from a lender, we cannot emphasize enough the importance of contacting us promptly.

The attorneys at Brewer Offord & Pedersen LLP look forward to answering any legal questions you may have relating to appraisals and lending practices in general.  We defend appraisers and represent lenders and brokers throughout Northern California.  Some of our recent appraisal cases involve properties in San Jose, San Mateo, San Francisco, Tiburon, and the Central Valley.

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