Daily Development for Tuesday, September 22, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

APPRAISERS; DUTY OF CARE; DUTY TO HOME BUYERS: Arizona court holds that appraiser is liable to home buyer when appraiser is negligent in preparing appraisal that appraiser delivers to lender.  Sage v. Blagg Appraisal Co. Ltd., 221 Ariz. 33, 209 P.3d 169 (2009)

This case contains a number of facts that may distinguish it from the more “typical” lender/appraiser situation, but before anyone dances around the room in relief, the editor recommends studying the complete holding, which appears to reach much broader than these somewhat narrow facts.

Sage made a written offer to purchase a home for $605,200.  The broker’s form contract that she used provided that the buyer’s obligation to complete the purchase was “contingent upon an appraisal of the Premises by an appraiser acceptable to the lender for at least the sales price.”  (The editor has not seen such language in any form agreements he has seen in his neighborhood.)  The contract provided that Sage would reimburse the cost of the appraisal.

On the advice of her real estate agent, Sage asked the lender, Security, to retain Blagg to perform the appraisal.  In performing the appraisal, Blagg spoke to Security, but not to Sage, and submitted the appraisal only to Security.  But Sage had signed a request for the appraisal, and she did receive it.  The appraisal set the value of the home at $620,000, and Sage bought the home.

Eighteen months later, Sage sought to refinance the home and obtained another appraisal.  This appraiser fixed the size of the home at over 500 feet less than Blagg had set forth in his appraisal, a shortfall of around 20%.  At the time of the refinancing, this being the “hot times,” the home, even in reduced size, was appraised at $700,000.  Nonetheless, Sage sued Blagg, alleging that she would not have purchased the home had she known its true size and value at the time of her purchase.  Sage alleged that at the time she purchased, the home would have been worth only about $350,000.        

The trial court followed a “straight Restatement” approach, evaluating whether the case fits with Restatement Section 552, relating to the duty of professionals to third parties relying upon their work.  Liability claims under the section are limited (in relevant part) to losses suffered [in relevant part]:

(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it;

(b) through reliance upon it in a transactions that he intends the information to influence or knows that the recipient so intends.

Citing these provisions, and a wide array of prior cases around the country denying appraisal liability in similar situations, the trial court granted summary judgment to the appraiser.

The trial court noted that it was clear to Sage that the purpose of the appraisal was to satisfy the lender, and that the expectation was that the appraisal meet the lender’s requirements.    The court noted that the appraisal itself recited that it was given only to the “lender/client” for a mortgage finance transaction and that it could not be used for any other purpose. 

The Court of Appeals reversed: 

The court first agreed that Blagg did not deliver the appraisal report to Sage and did not intend that the lender so deliver it.  So liability did not lie under subsection 552(a) of the Restatement.  But the court did indicate that Blagg knew or should have known that Sage had the right to request a copy of the appraisal report and did have a copy of the contract that made the sale “contingent on appraisal.”

But the court then elected to go beyond the restrictions of the Restatement, citing a number of recent cases in which the courts held that the appraiser’s knowledge of the overall significance   of the appraisal in the purchase process - as the key information upon which the lender basis its decision on the amount of the loan - placed the buyer within the group of target beneficiaries of the appraiser’s work. 

7"We reject Blagg’s argument that an appraiser owes no duty to the buyer/borrower pursuant to Restatement 522 because the loan transaction by which the buyer/borrower acquires the funds to puchase the home is distinct from the purchase transaction. . . . the appraisal the lender orders typically is the foundation of the home purchase transaction.  Although Blagg argues that, as the appraiser, he served only the mortgage/lending transaction and not the separate transaction by whi8ch Sage purchaser her home, we believe that distinction is without difference.  A lender it Security’s position will not finance the buyer’s purchase if it appraiser concludes the home is not worth the financed amount.”

The court went on to emphasize that this particular contract gave the buyer an “out” if the appraisal fell short.  But the editor believes that the above language goes beyond cases involving that feature and applies to ordinary contracts where the sole contingency is loan approval. 

It notes:

“A buyer in Sages’s position necessarily learns from the lender at least the bare fact of whether the appraiser estimated value met the lender’s value requirement.  If the appraiser’s estimate falls short, the loan will not be made while, if the loan is made the buyer learns at least by inference that the home has appraised at least the required amount.

As the editor reads the opinion, this transfer of information about the appraiser’s conclusion renders the appraiser liable for negligence in the preparation of that conclusion. 

Comment 1: The opinion cites a number of other recent cases discussing this issues, and it is therefore difficult to say that there is anything here that is unprecedented or “cutting edge.”  But it certainly represents a trend expanding the scope of appraisal duty to home purchasers.  Will this lead to other extensions?  Stay tuned.

Comment 2: Note that, based upon the alleged facts, the negligence in the appraisal appears to be pretty obvious.  But there will be many more cases in which negligence will be far more difficult to prove.  Unfortunately for appraisers, the fact of negligence typically is a question of law that survives summary judgment and leads the appraiser to a choice of settlement or trial. 

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