We all know how a residential real estate loan goes. You apply to a Bank for the loan; the Bank orders an appraisal of the property; maybe you get a copy of the appraisal; maybe you don’t; the Bank makes the loan taking a Deed of Trust on the property as security. What if the appraiser flubs the appraisal? Do you have a claim against him or her?
Judge Murphy answered a number of questions about appraiser liability yesterday, in Cabrera v. Hensley, 2012 NCBC 41. By the end of the 26 page opinion, summary judgment was granted for the appraisers on all of the claims that they had overvalued the lots purchased by the Plaintiffs at "Wild Ridges," an upscale gated community in the North Carolina mountains which was never completed by the developer.
The primary issues addressed by Judge Murphy were whether the appraisers owed a duty to the Plaintiffs in preparing their appraisals, and whether the Plaintiffs could show that they relied on the appraisals.
The answer to both issues was found in Section 552 of the Restatement (Second) of Torts, which is the governing standard for negligent misrepresentation claims against appraisers (and accountants)..
The Duty Of An Appraiser
As Judge Murphy put it:
Stated plainly, an appraiser owes a duty to those who he intends to be the recipients of an appraisal and those to whom he knows the intended recipient also intends to supply the appraisal.
The Cabrera Plaintiffs argued that they, as prospective buyers of the properties, were reasonably forseeable plaintiffs who should have been known to the appraisers and that they met the requirements of Section 552. There is some authority for that proposition in an old NC Court of Appeals decision, Alva v. Cloninger, 51 N.C. App. 602, 277 S.E.2d 535 (1981)(holding that an appraiser’s duty to third parties include[s] a prospective buyer who reasonably relies upon the outcome of the appraisal.),
But the Restatement represents a "more limited standard of liability than a test of forseeability" Op. ¶43. Judge Murphy rejected the Plaintiffs’ argument, holding that:
Taken to its logical conclusion, Plaintiffs’ argument—that those who are reasonably foreseeable to the maker of a representation are also known to the maker—would eviscerate the limits on liability enunciated by the Court in [Raritan River Steel Co. v. Cherry, Bekaert & Holland, 322 N.C. 200, 367 S.E.2d 609 (1988)]. A Defendant would not have to ‘know that the recipient intends’ to supply another with the information, rather, liability would be extended to all reasonably foreseeable individuals that the intended recipient, unbeknownst to the Defendant,intended to supply the information. This interpretation would effectively write out the knowledge requirement from section 552.
Op. ¶51 (emphasis added).
Reliance On The Actual Appraisal Is A Must
The Plaintiffs had an even more difficult argument to accept on how they met the reliance requirement. That was particularly so because they had never seen the appraisals before committing to buy the lots.
They said that "at the most fundamental level of intuition," lenders didn’t lend money without supporting appraisals and that they had relied on the banks’ decisions to approve financing in taking out their loans.
That was at best indirect reliance on the appraisals, which is insufficient under Section 552. Plaintiffs had to show that they relied on the actual appraisals themselves to have a valid claim.