EAANA Annual Meeting January 26, 2013 Appraiser Liability and Risk Management Eric D. Kaplan, Esq. Kaplan Papadakis & Gournis, P.C. Chicago, Illinois

Topics of Discussion Professional Liability Actions Against Appraisers : Trends Nature of Claims Against Appraisers Identity of Plaintiffs USPAP Applicability Hypothetical Fact Pattern How to Avoid / Minimize Claims Engagement and Appraisal Language Question and Answer Session Kaplan Papadakis & Gournis, P.C.

Professional Liability Actions Against Appraisers : Trends Suits Against Appraisers on the Rise Banks and Customers Holding Appraisers Accountable Appraisers as “Guarantors” of Loans Misunderstanding the Nature of an Appraisal Potentially catastrophic exposure Kaplan Papadakis & Gournis, P.C.

Nature of Claims Against Appraisers Negligence Negligent Misrepresentation Fraudulent Misrepresentation Conspiracy Breach of Contract Direct Actions Third Party Beneficiary Claims Kaplan Papadakis & Gournis, P.C.

Identity of Plaintiffs Clients Banks and Lending Institutions Owners of Equipment Purchasers of Equipment Client or Bank Customer Intended Users (Correct or Incorrect) Third Parties Kaplan Papadakis & Gournis, P.C.

Identity of Plaintiffs USPAP Definitions “Client” The party or parties that engage an appraiser “Intended User” Client or any other party, as identified, by name or type, as users of the appraisal, appraisal review, or appraisal consulting report, by the appraiser on the basis of communication with the client at the time of the assignment Kaplan Papadakis & Gournis, P.C.

USPAP Intended User Client of Appraiser Must Provide Report to Others for Disclosure Requirements Auditors IRS Are they “Intended Users?” USPAP Parties who receive a copy of an appraisal, appraisal review, or appraisal consulting report as a consequence of disclosure requirements applicable to an appraiser’s client do not become intended users of the report unless they were specifically identified by the appraiser at the time of the assignment. (USPAP Statement on Appraisal Standards No. 9)

Identity of Plaintiffs “Intended Users” : Examples Borrowers USPAP Answer Court Answer Lenders Received Report from Appraiser Received Report from a Customer Courts: Key: Foreseeability of the Plaintiff Kaplan Papadakis & Gournis, P.C.

USPAP Applicability USPAP a Guideline Misuse of USPAP to Establish Negligence Attorney Confusion / Trickery Real Issue: Reasonableness of Value Determination Court Interpretation / Use of USPAP USPAP Does not Create an Independent Duty Relevant in determining a breach of standard of care Does the USPAP violation go to value? Kaplan Papadakis & Gournis, P.C.

Hypothetical Fact Pattern Bank of the World v. Home Town Appraisal Service Home Town engaged by Big Bank to perform an equipment appraisal for lending purposes Home Town not an expert in equipment type, subcontracts with expert appraiser Expert and Home Town physically inspect equipment and Expert arrives at value determination (OLV : $9M and FLV $7M) Appraisal prepared by Home Town, fails to refer to Expert Expert does not sign appraisal Kaplan Papadakis & Gournis, P.C.

Bank of the World v. Home Town Home Town Appraisal contains all of the standard exculpatory language Big Bank lends based on Appraisal Big Bank offers entire loan portfolio six months after Appraisal Bank of the World purchases the loan Claims to have reviewed the Appraisal Market for equipment plummets Customer files bankruptcy Equipment sold at a $5M loss Bank of the World Files suit against Home Town for over $5M Kaplan Papadakis & Gournis, P.C.

Bank of the World v. Home Town Primary Issues in Lawsuit Can Home Town be liable to Bank of the World? How relevant are Home Town’s USPAP violations? Did Home Town correctly provide OLV and FLV? Did Bank of the World Reasonably Rely on Home Town’s Appraisal? What are the damages allowed by law? Kaplan Papadakis & Gournis, P.C.

Bank of the World v. Home Town Reliance Bank of the World must show actual reliance Cannot be based solely on custom and practice Did bank have ability to verify the alleged misrepresentation? Sophistication of the parties a key factor Kaplan Papadakis & Gournis, P.C.

Bank of the World v. Home Town Damages Two theories of damages Expectancy” or “Benefit of the Bargain” Damages “Out-of Pocket” Damages Universal Acceptance of Out-of-Pocket Losses Rationale: Restores victim to position prior to reliance on negligent misrepresentation Kaplan Papadakis & Gournis, P.C.

Bank of the World Case Takes on Life of its Own Alleged Mistaken Appraisal in 2001 Complaint Filed in 2002 Venue Transfer Motion Takes 1 year Discovery of 50+ Witnesses in U.S. and England Two Rounds of Mediations Two Separate Motions for Summary Judgment Trial Scheduled for April of 2012 Settled in March of 2012 Defense Costs over $1M

Settlement of Bank of the World Egos kept the Case from Settling for Years Bank Shake-up Makes Settlement Possible Bank demand starts at $6M in 2001 Lowered to $4.5M in 2007 Defense Evaluation of case Closer to $300,000 due to Costs of Litigation Motion for Summary Judgment Fixes Damages at no more than $1.1M (out-of-pocket damages) With Trial Looming, case Settles for $295,000.00.

Additional Case Studies The “I wish I was never born” case Appraiser Inspection and Reliance on Information Supplied by Client Lender Request for Inapplicable Value Definition Appraiser Fails to Deliver all Items Promised in Engagement Letter Pictures / Video as Example Appraiser and Lender / Finance Company Conspire to Inflate Appraisal Kaplan Papadakis & Gournis, P.C.

How to Avoid / Minimize Claims Engagement Letters Clearly Delineate Scope of Engagement Signed Prior to Starting Project Avoid Conflicting Engagement Letters Do not Write Over Old Appraisals Maintain Records Be Prepared to Defend Value Conclusions Supplement Appraisal Files After Appraisal Identify Contributors in Appraisal Re-Read Signed Engagement Before Delivering Appraisal Consider Errors and Omissions Insurance Kaplan Papadakis & Gournis, P.C.

How to Avoid / Minimize Claims (continued) Useful Language in the Event of Litigation Effective Date of Appraisal No Third Party Beneficiaries Clearly Set Forth the Client and Intended Users Identify Factors that Affect Value Limitation of Liability (Engagement and Appraisal) Kaplan Papadakis & Gournis, P.C.

Engagement and Appraisal Language No Guarantee and Effective Date: “Nothing contained in this Appraisal Report shall be considered a warranty or guarantee as to actual sales results…The values stated herein reflect our unbiased professional opinion of value as of the appraisal date and does not apply to any past or future dates.” Kaplan Papadakis & Gournis, P.C.

Engagement and Appraisal Language No Third Parties “This Appraisal Report is intended solely for use by the client. No third party may rely on the opinions stated herein.” Limitation of Damages “The maximum liability for breach of any obligation pursuant to the appraisal engagement or the Appraisal Report and any and all damages of any type…shall be limited to the fee actually paid to the Appraiser for this Report.” Kaplan Papadakis & Gournis, P.C.

Kaplan Papadakis & Gournis, P.C. Questions? Eric D. Kaplan, Esq. Kaplan Papadakis & Gournis, P.C. Chicago, Illinois Ekaplan@kpglaw.com