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JOINING THE CIRCLE OF CARE: UNINVITED GUESTSEarlier this year the Arizona Court of Appeals ruled that an appraiser hired by a lender owes a duty to the borrower in the transaction regardless of the protective language of the engagement. Suddenly, for the appraiser industry, the term “scope of duty” now brings to mind a scope of a different kind, attached to a barrel, aimed at them – high-powered. The case is Sage v. Blagg, 555 Ariz. Adv. Rep. 22 (App. Div. 1, April 30, 2009), and it has commentators, well, commenting. The borrower, Shari Sage, sued the Blagg Appraisal Company after Blagg over-calculated the square footage of her residence by nearly 30%. At the time of her purchase, she paid $605,200 for a house that she realized later, when she refinanced, was worth considerably less. Sage’s lender hired an appraiser but the language of the engagement contained those familiar terms that provided that the appraisal was usable only by the lender and only for underwriting purposes. Sage had submitted a form asking that the lender provide her with a copy of the appraisal – she received it prior to closing. She sued Blagg alleging she would never have purchased the home, had she known its value was so much less. The Court held that a duty may be created when the maker of a statement knows that his information may benefit a limited group or class of persons. The court noted that Sage still had a right to cancel the transaction when the appraisal became available, and that the appraiser knew Sage had a right to request the appraisal. From this, the court infers that those concerned with the transaction were owed a duty of care by the appraiser, who knew that, if requested, the lender was under a legal duty to furnish the appraisal to the buyer. The last several pages of the Court’s opinion defend its “recognition of this duty” as “consistent with evolving industry standards that acknowledge that a buyer/borrower in fact relies on an appraisal prepared at the request of the lender.” As the Court rationalizes its holding and minimizes the new boundaries of this duty in its final pages, those of us who have practiced commercial litigation for years are left with the after-taste of one more refuge from the normal risks of commercial lawsuits that has come a tumblin’ down. There is nothing new in the Court’s opinion – except who it is now applied to. I had a chance to discuss the case with Ms. Daphne Reaume, the attorney with Berk & Moskowitz who represented the borrower and whose arguments helped to generate the opinion. She finds some of the greatest significance in the opinion in what it does not say as well as the holding it declines to make. Though the Court discusses the certification that the borrower “may rely” upon the opinion (what appraisers call “cert 23”) the Court didn’t rely solely on the language of Freddie Mac and Fannie Mae loans, or the “cert 23” rationale for its result, for example. As Ms. Reaume notes, the Court eliminated a “little cubbyhole’ of protection for appraisers, tossing them into the broader-class of general commercial litigants who face allegations of commercial torts. Intent, she noted, will now be inferred, as is the norm in commercial claims. In Sage, the plaintiff had the contractual right to cancel the sale, if the property did not appraise equal to the price and the appraiser had reviewed the contract and acknowledged that he knew the buyer had a right to request the appraisal. Thus, as one large Eastern law firm has already noted, Sage is ripe for extension to appraisers in connection with commercial loans. Indeed, the Court’s process of reasoning its way to the Sage opinion contains not one iota of language that confines Sage to its facts. The tests are those of conventional commercial torts, with logical inferences applied, and a healthy dose of reality reflecting what does occur in the lending/real estate marketplace. How far Sage extends will not depend upon the facts of the case, but on the extension of the legal propositions it relies upon. In the short-term, two things are fairly predictable: (1) lawsuits against appraisers will increase; and (2) appraisers who were routinely hired by lenders and were heavily protected by the lender’s language in engagement letters will, in greater numbers, be seeking E&O insurance for their protection in the future. By Frank L. Murray See Summer, 2009 Newsletter of Pullman & Comley, LLC article on Sage case, which concludes: “[i]n the future, other tribunals may apply [the] court’s reasoning to commercial property appraisal reports.”
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