Pandemic Liability
Is there an uptick in lawsuits against appraisers for errors related to the COVID-19 pandemic?
Are appraisers being sued for errors relating to the COVID-19 pandemic? The short answer is no. There doesn’t appear to be any pattern where appraisers are being sued for alleged errors attributable to the pandemic itself or for failing to properly determine any positive or negative effect it may have on property valuations.
However, it appears that professional negligence claims against appraisers in general have slightly increased during the pandemic. Why are appraisers being sued? Below are two recent cases.
Struggling hotel investor lashes out at commercial appraisers
A hotel investment company in 2013 acquired a 70-room hotel in an urban setting in the Northeast for approximately $25 million. About 77% of the purchase price was financed with a mortgage loan. As further security for the loan, the investor was required to post $2 million in cash collateral to secure a letter of credit. This letter of credit could be released if certain performance criteria were met and if the loan-to-value ratio of the mortgage fell below 65% based on an appraisal for the loan servicer.
The investor requested an appraisal of the hotel in the fall of 2019, and the assignment was handled by a large commercial appraisal firm. The opinion of value for the property was approximately the same as its purchase price six years earlier. The loan servicer refused to release the collateralized letter of credit because the LTV had not reached 65%.
The hotel investment company filed its lawsuit against the large commercial appraisal firm this past September, alleging, among other claims, that the appraised valuation was negligently low. The company demands damages “that will justly and fairly compensate [the company] for all losses resulting from the injuries it sustained, including, but not limited to, the collateral of $2 million for the [letter of credit] and all losses incurred by [the company] which are attributable to the deprivation of that $2 million.”
Local real estate media has reported that the principal behind the hotel investment company is experiencing other financial difficulties during the pandemic, including a struggling high-priced condo project in the same city. This might explain the real impetus behind the lawsuit against the appraisal firm.
Be thorough and thoughtful
Complacency, not COVID-19, is one reason why lawsuits against appraisers are increasing.
When appraisers are busy, as many have been for the past several years, they can become complacent in their work, and I’ve seen instances where that can have dire legal consequences. Remember, the appraisals that most often become the subject of later legal claims are those performed at or near the top of the market.
Peter T. Christensen
Higher risks posed by alternative lenders
A self-described “asset-based lender” in September filed a professional liability action against an appraisal firm for alleged negligence in connection with the appraisal of approximately 500,000 gallons of wine. Yes, this is a personal property appraiser case, not a real estate appraiser case, but perhaps real property appraisers can take solace in the fact that other appraisal disciplines also receive their fair share of claims.
In this case, the asset-based lender alleges that it extended a credit line to a California winemaker and used the bulk wine to secure the loan based on the valuation of the collateral at more than $17 million. The lender contends that after the winemaker defaulted on the loan, it became apparent that the valuation of the wine was erroneously high, and the lender claims it suffered an almost $7 million loss on the sale of the loan. The complaint alleges that the appraisal firm erred in its assumption that the 500,000 gallons of bulk wine could be converted into case goods within a one-month period and sold over a six-month period.
While this case involves personal property appraisers, there are fair number of similar cases involving real property appraisers — all filed during the pandemic by similar types of alternative and “hard-money” lenders who made real estate loans. Alternative lenders with names akin to “Sharestates” and “Fix & Flip Financing” have recently sued both commercial and residential appraisers, and lenders in this segment appear to be making more claims against appraisers because of the challenges many borrowers are facing due to the coronavirus pandemic.
Key observations from the increase in cases
The cases discussed here are typical of those now being filed, and the primary reasons for what I observe to be an increase in lawsuits relate to financial difficulties faced by borrowers and lenders due to economic and business hardships wrought by the coronavirus pandemic. It’s little comfort, but the alleged errors for which appraisers are being sued are the same types of errors for which they’ve always been sued. I have yet to personally observe a case — even a threatened case — that specifically concerns an alleged deficiency in an appraisal stemming from an error relating to the pandemic itself.
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This article originally appeared in, and is reprinted from, the Appraisal Institute's Valuation (3/4 Quarter, 2020). © 2020 by the Appraisal Institute, Chicago, Illinois. Archives of Valuation magazine, including Peter's past columns, are available at http://www.appraisalinstitute.org/publications/valuation-magazine/