“Wow. I did not go into the basement on my last visit.” I’ll explain why an appraiser wrote that in a moment.
Are appraisers being sued for errors relating to the COVID-19 pandemic?
My short answer is “no” – there’s no pattern of appraisers being sued for errors that specifically relate to COVID-19 issues, but I have observed an overall increase in litigation against appraisers during the pandemic.
One of the services that I provide to my legal clients is tracking lawsuits and legislation that relate to valuation services. I locate and follow cases of all types to spot emerging issues and decipher patterns, so that my clients stay ahead of the ball. Most of the cases don’t involve professional liability but rather concern issues like employment law, independent contractors or property data ownership. However, during the COVID-19 pandemic, I have, in fact, noticed an increase in the number of professional negligence cases being asserted against appraisers, appraisal firms and AMCs, but the increase is not due to any observable pattern of appraisers being sued specifically for errors attributable to the pandemic itself or any effects it may be having on property values (whether positive or negative).
To provide a flavor of what appraisers are being sued for during the pandemic and why, I’ve summarized two recent cases below. They are very typical of the cases that I’m observing. And, here are the overarching takeaways, not just from these cases but in general from what I’m seeing in the courts:
- Professional negligence cases against appraisers filed during the pandemic relate more to the financial difficulties that some lenders and borrowers are facing because of the economic and business problems caused by the pandemic. I’ve not yet personally seen a case that specifically concerns an alleged deficiency in an appraisal stemming from an error relating to the pandemic itself.
- The alleged errors in appraisals that parties are suing appraisers over during the pandemic are the same types of errors that appraisers usually get sued over – it’s just that there are a few more cases being filed now (in my observation) because more lenders and borrowers are facing loan losses and financial problems.
- Because appraisers – both residential and commercial – have been very busy for the last several years, I’ve seen instances in recent lawsuits where appraisers became complacent in their work, forgetting that deficient appraisal work can have legal consequences. It’s the appraisals performed at or near the top of markets, when appraisers are often at their busiest, that most often become the subject of later legal claims.
Case #1. The Inadequate Inspection by Commercial Appraisers.
According to a lawsuit complaint filed in May 2020 in Louisiana, two commercial appraisers with a national appraisal firm (not my clients) travelled from Dallas, Texas to Shreveport, Louisiana in 2019 to appraise a 7-story office building formerly known as Harry Patterson Tower. The appraisers previously had appraised the property for the same client – East West Bank. The borrower had defaulted on its loan, and the bank was now determining how much to bid in a foreclosure sale.
East West Bank alleges in its complaint that the engagement letter was clear: the appraisers were required to complete a full inspection of the property for the new appraisal assignment and should not rely on any earlier inspection or report. There was no electrical power to the building at the time of the re-appraisal that occurred in May 2019. After receiving the new appraisal and acquiring the property in the foreclosure, the bank says it discovered that the basement had flooded, causing extensive damage and also a severe mold infestation. The bank contends this flooding occurred before the appraisers’ last visit to the property and that because of the damage and mold, the building was worth much less than the appraisers’ valuation the bank relied on in setting its foreclosure bid. When the bank asked the appraisers in an email if they had looked in the basement and noticed the flooding, one of the appraisers wrote back: “Wow. I did not go into the basement on my last visit.” Yet, in the 2019 appraisal report at issue in the lawsuit, there was allegedly a photo of the basement – the photo was from a prior inspection and taken with the lights on (even though the 2019 report indicated there was no power to the building).
East West Bank is suing the appraisal firm and its two appraisers for negligence for allegedly failing to complete a full inspection and breach of contract for allegedly not complying with the scope of work set forth in the engagement letter. The bank seeks an unspecified amount of monetary damages.
Case #2. The higher risk posed by alternative lenders.
In Los Angeles Superior Court, an asset-based lender named ACF FinCo I LP has filed a professional liability action against an appraisal firm (not my client) for alleged negligence in connection with appraisals of approximately 500,000 gallons of wine. Yes, for a change, this is not a real estate appraiser case. It’s a personal property appraiser case. The lender alleges that it extended a credit line secured by the wine to a winemaker in Santa Barbara County based on appraisals of the bulk wine that ranged as high as $18 million, but that the lender later suffered a $6.8 million loss on the loan following a default. The full story about the alleged problem with the appraisals and a copy of the complaint are in my article here: Lender Blames $6.8 Million Loan Loss on Allegedly Botched Appraisal.
There is an additional, specific takeway from this case: alternative, “hard-money” or “asset-based” lenders pose a much higher risk to appraisers than traditional bank and mortgage lenders. While this case involves personal property appraisers, I could have cited several cases filed during the pandemic against real property appraisers and AMCs by alternative lenders with names like “Sharestates” and “Fix & Flip Financing.” Alternative lenders are presently making more claims against appraisers in the challenging hit-or-miss business environment during the COVID-19 pandemic. “Appraise” your clients and assignments for risk. Follow your instincts.