Allegedly “Loose Lips” Cause a Big Claim.
At this point, the appraiser made his alleged transgression. Without authorization, he mentioned the project to a different lender-client and asked if that bank would be interested in funding the developer’s loan. He also emailed a copy of the appraisal, which included information about the anchor tenant. Word spread about the project and the retailer’s future move to that location. The retailer, however, was sensitive about that move and allegedly became so upset about the disclosure of that information that it terminated its lease commitment. The developer was thus left without the key tenant and allegedly could not obtain other funding for the project.
There’s an obvious lesson from this appraiser’s case about the importance of respecting the confidential nature of appraisal work. Breaches of confidentiality can and do result in lawsuits for damages just like an appraiser’s valuation error. Don’t blab appraisal information to third parties.
Basic Appraisal Confidentiality Obligations.
The principal source of an appraiser’s confidentiality responsibilities, of course, is found in USPAP’s Ethics Rule:
“An appraiser must not disclose: (1) confidential information; or (2) assignment results to anyone other than: the client; persons specifically authorized by the client; state appraiser regulatory agencies; third parties as may be authorized by due process of law; or a duly authorized professional peer review committee …”
Members of some professional appraiser organizations have additional confidentiality obligations under their ethics rules. An Appraisal Institute member has responsibility under Ethical Rule 4-1:
“It is unethical to disclose confidential information or an analysis, opinion, or conclusion specific to a service . . . to anyone other than: (a) the client and those persons specifically authorized by the client; and (b) third parties, when and to the extent that the Member is legally required to do so by statute, ordinance, or court order; and (c) the duly authorized committees of the Appraisal Institute.”
Likewise, NAIFA has a rule which provides that it is unethical for a member to: “Reveal in any way the substance of any appraisal without permission of the client or due process of law.”
USPAP Absurdity: Does USPAP Prohibit an Appraiser from Disclosing Confidential Appraisal Information to Defense Counsel?
Some appraisers and commentators, but not this lawyer, believe that USPAP’s confidentiality rule bars an appraiser from providing confidential appraisal information to the appraiser’s own legal defense counsel without specific client authorization. That position would leave the appraiser in the absurd position of having to ask for a client’s authorization to provide information to defense counsel while being threatened or sued by that very same client. Even more absurdly, it would prohibit the appraiser from ever providing such information to defense counsel when the client no longer exists and the appraiser is being sued by a third party.
These absurd propositions come about because the ASB has chosen so few and vague words to address confidentiality in USPAP. More detailed professional responsibility and ethics rules applying to other professions like medicine and law generally recognize explicitly the professional’s right to disclose confidential information for the professional’s own defense — and recognize this right in contexts where the information at stake (such as a patient’s diagnosis or a criminal defendant’s communication with an attorney) is usually more sensitive than information contained in an appraisal report. On this issue, the key words in USPAP state only that an appraiser may disclose confidential information to “third parties as may be authorized by due process of law.” So, the question is then: in the absence of client authorization, does the right of an appraiser to disclose confidential appraisal information to defense counsel fall under the ASB’s chosen words “as may be authorized by due process of law?”
Unfortunately, USPAP doesn’t define what “authorized by due process of law” means for purposes of USPAP, and the ASB has never provided any specific guidance — other than suggesting, for example, in a 2008 Q&A that “it may be necessary to seek legal counsel to determine what constitutes ‘due process’.” Now, my personal opinion would be that the generalized notion of “due process of law” as used in USPAP includes within it a right to consult with defense counsel when threatened with legal action, whether civil, criminal or administrative, and that this right includes an ability to provide information deemed confidential by USPAP. That’s my personal opinion only — and one that is partly the result of a desire to avoid the absurd results that would otherwise occur. But I will add, however, that out of thousands of claims and disciplinary matters, I have never seen any appraiser regulator in any state seek to discipline an appraiser for providing any information to his or her own defense counsel.
Suggested language for your engagement agreements. To avoid tangling with this confidentiality issue in USPAP altogether, I would suggest that appraisers confirm their client’s consent to these necessary types of disclosures in their engagement agreements – it is not good enough to put language such as this only in an addendum to a report. Appraisers can include a provision such as:
“Client specifically consents to and authorizes Appraiser to disclose information relating to the appraisal assignment(s), including information which may be considered confidential, to third persons for the purpose of Appraiser’s response to or defense of threatened or actual legal or regulatory actions and for the purpose of seeking insurance coverage.”
Including the above language should also help the appraiser stay in compliance with rules like those adopted by the Appraisal Institute and NAIFA. In particular, it should be noted that the Appraisal Institute’s confidentiality rule contains no exception relating to “due process of law” and instead only permits disclosure without client consent “when and to the extent that the Member is legally required to do so by statute, ordinance, or court order.” That is more restrictive than USPAP and — and if applied literally — leaves the appraiser in the position of breaking the rule if he or she needs to supply appraisal information to his or her own counsel. NAIFA’s rule is similarly restrictive — but the problem here is that NAIFA’s rule just doesn’t make sense: an appraiser must not “[r]eveal in any way the substance of any appraisal without permission of the client or due process of law.” What does it mean to “reveal … without … due process of law?” Check with your respective organizations, but the above language is intended to fix these idiosyncrasies within their rules and preserve your normally expected rights.
The preceding case of alleged “loose lips” and big damages is fortunately a rare situation and avoidable with good judgment. Confidentially questions arise more commonly with subpoenas, which may require testimony in a deposition, arbitration or trial, or may require the appraiser to produce documents such as reports and work files. In a typical subpoena situation, the appraiser has performed an appraisal for a lender regarding a property owned by a business partnership (or perhaps by a married couple). The next year, the partners are fighting in court about the value of the property in a dissolution proceeding. To obtain evidence of the value, one partner’s attorney serves a subpoena on the appraiser for deposition testimony and the work file.
The basic reason for these answers is that, as a general matter, the legal effect of a valid subpoena trumps USPAP’s confidentiality rule. In the words of one federal court, “[t]he law does not afford an evidentiary privilege to professional appraisers. Moreover, the USPAP rules themselves explicitly contemplate the production of such documents to ‘third parties as may be authorized by due process of law.’” U.S. v. 2,091.712 Acres of Land, Case No. 4:09-CV-88-BO, E.D. North Carolina (2010). Accordingly, if an appraiser has been served with a valid subpoena, the appraiser generally will have to comply, unless the appraiser or another party in the case files a motion to quash the subpoena or limit the appraiser’s obligations on a stronger basis than USPAP’s confidentiality rule. For example, the appraiser may have valid ground to limit the subpoena if the appraisal documents contain “trade secrets” or when an attorney’s work product protection applies to the work of a non-testifying expert appraiser. Nevertheless, even though it may not be the prevailing view, individual judges can sometimes be persuaded that an appraisal for one client is simply not the business of an unrelated third party and might still excuse an appraiser from compliance. The bottom line is still that the appraiser can’t simply ignore a subpoena: the appraiser either needs to comply or respond with a motion or objections in a procedurally correct matter (and probably with the assistance of an attorney).
Some Practical Advice about Subpoenas:
Peter Christensen is an attorney who advises professionals and businesses about legal and regulatory issues concerning valuation and insurance. He also serves as general counsel to LIA Administrators & Insurance Services. He can be reached at firstname.lastname@example.org.