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

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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)

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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

16. 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,

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. Kaplan Papadakis & Gournis, P.C.
Questions?
Eric D. Kaplan, Esq.
Kaplan Papadakis & Gournis, P.C.
Chicago, Illinois