The implosion of the real estate bubble reverberated across the American landscape. Neither residential nor commercial markets were spared. This implosion not only had a very palpable effect on the economy, but on the political debate of this nation as well. That political debate—as it seems is often the case—has turned to finger-pointing. Those fingers have now curled up into a fist, and that fist is now knocking on the doors of appraisers across the country.
In the aftermath of the economic downturn, many banks were taken over by the Federal Deposit Insurance Corporation (FDIC) after their balance sheets dived into the red and a determination of insolvency was rendered. Thereafter, the FDIC assumed the role of receiver in order to oversee the orderly liquidation and distribution of the failed bank’s assets. This happened to over 200 banks. As receiver, the FDIC acquired the rights and powers of the failed bank. Included in these powers is the ability to bring forth lawsuits which the failed bank would be able to bring, and as an added sweetener, the statute of limitations is extended for the FDIC (3 additional years for tort claims and 6 additional years for breach of contract claims). Thus, the FDIC can now go back several years and file a lawsuit that would have otherwise been untimely had the bank itself filed it. Couple this ability with the political desire to place the blame of the economic downfall at the feet of anybody with a pulse, and you have a situation where the FDIC is going on a lawsuit binge against appraisers.
The FDIC is filing suits—across the country—against appraisers alleging that they failed to comport with professional appraisal standards and thus provided inflated appraisals. The FDIC is arguing that these allegedly inflated appraisals caused the banks to make bad loans, and they are now seeking millions of dollars in damages. These lawsuits are primarily based upon theories of breach of contract, negligent misrepresentation and gross negligence by the appraiser. Often times the banks were not even the entities that the appraiser contracted with in order to provide the appraisal. Nonetheless, under current tort and contract theory, the FDIC is moving forward with litigation.
These legal theories have developed over several years. For example, in Soderberg v. McKinney 44 Cal.App.4th 1760 (1996), an appraiser, under contract with a mortgage-broker, provided an appraisal for a piece of property. An investor solicited by the mortgage-broker invested money in the property. Shortly thereafter, the investment turned sour and the value of the property came out to be significantly less than the appraisal amount, with no equity remaining in the property for the investor to recoup their investment. The investor sued the appraiser alleging negligent misrepresentation and breach of contract, even though there was no contract between the appraiser and the investor. The court found that the investor could move forward with their lawsuit against the appraiser. The court basically determined that an appraiser may be liable for negligent misrepresentation so long as the appraiser acted negligently and intended to supply the appraisal report for the benefit of a third party in a type of transaction contemplated by the appraiser. Negligence is proven by demonstrating that the appraiser failed to exercise the appropriate standard of care incumbent upon real estate appraisers. The Uniform Standards of Professional Appraisal Practice (USPAP) provides a basis for the required care. Further, the court found that a breach of contract claim is viable as well, so long as the contract was made expressly for the benefit of the third party. The third party need not even be named in the contract.
Federal court dockets throughout the nation are filling up with these lawsuits. For instance, two large actions were filed by the FDIC in May 2011 against CoreLogic (and various affiliated companies) and LSI Appraisal (and various affiliated companies) seeking approximately $129 million and $154 million in damages respectively. The FDIC is also going after the little guys, with several lawsuits alleging damages against individual appraisers.
It matters not that in the heyday of the real estate boom banks were issuing so called NINJA (No Income No Job or Asset) loans to unqualified buyers and that essentially everybody was drinking the Kool-Aid—including the regulators. The extension of the statute of limitations allows the FDIC to dig up appraisals from the boom years when property valuations went up on a nearly daily basis, and to pursue related claims against appraisers.
There are defenses at the disposal of appraisers against this onslaught. Depending on the facts of each case, in addition to the standard defenses against these types of claims, defenses may be raised centered on the intended beneficiary of the appraiser’s work and whether the bank was an express beneficiary of the contractual arrangement,.
Unfortunately in the blame-game right and wrong are not as relevant as they should be. The FDIC, enabled with the powers of receivership, is knocking on doors looking to point fingers.
By Sanjay Bansal, Esq. & Jonathan Yee, Esq.
Sanjay Bansal & Jonathan Yee are associates at Kaufman, Dolowich & Voluck LLP where they focus their practice on real estate matters, professional liability defense and employment defense.