Today, the California Court of Appeal, Third Appellate District certified for publication its recent decision in a case entitled Tindell v. Murphy. The case involved mortgage borrowers who sued a real estate appraiser blaming the appraiser for a purchase they made in 2005 at the peak of the real estate bubble. The trial court had dismissed the borrowers’ suit because they were not intended by the appraiser to use the appraisal, as the appraisal was prepared for the lender, and the Court of Appeal upheld that decision in a straightforward opinion. However, the opinion was not originally slated for publication, meaning that it would not serve as precedent for cases involving other appraisers.
The individual appraiser in the case was not an insured of my company (LIA Administrators & Insurance Services) nor a member of the Appraisal Institute or NAA. She was defended by Peter Catalanotti, now of the firm Freeman Mathis & Gary, LLP. I appreciate that he brought the unpublished decision to our attention, so that the appraiser groups could work to get it published and create meaningful precedent for appraisers. The decision is significant for appraisers in California because it gives greater legal meaning and effect to appraisers’ identification of intended users in appraisal reports when courts are considering whether a borrower (who is not an intended user in appraisal assignments for mortgage lenders) or other similar parties may sue an appraiser for negligent misrepresentation.
We ask that the Court publish its Opinion because the decision fills a gap in existing California law by clarifying the boundaries of residential appraiser liability to non-clients and third parties who are not identified as an “intended user” of the appraisal work product. This is a vital concern in the proper use and understanding of residential appraisals performed for mortgage lenders in connection with their loan decision-making.An appraiser’s identification of his or her client and the intended user(s) of his or her appraisals is a key issue in the performance and reporting of appraisals under the Uniform Standards of Professional Appraisal Practice (USPAP). Promulgated by the Appraisal Standards Board, these standards set forth the primary minimum professional standards that licensed and certified appraisers must follow under California law.USPAP Standards Rule 1-2 sets forth requirements for how appraisers develop their appraisal opinions and states that “[i]n developing a real property appraisal, an appraiser must: (a) identify the client and other intended users . . .” USPAP Standards Rule 2-2 addresses the specific content of appraisal reports and requires that an appraisal report “state the identity of any intended users by name or type.” These two requirements are fundamental to what an appraiser does because an appraiser under other parts of USPAP is responsible for providing an appraisal that is appropriate for his or her intended users. The intended user identification requirements were first adopted into USPAP by the Appraisal Standards Board in the 1997 edition of USPAP and have remained a key part of the standards ever since.Despite the clear requirements under USPAP with respect to identification of clients and intended users, however, these fundamental appraisal concepts are often lost from consideration at the trial court level when negligence and negligent misrepresentation claims are asserted by non-clients against appraisers in California courts (whether such third parties are identified as intended users or not). One reason for this is the lack of clear appellate guidance in our state’s case law applicable to such claims against appraisers. Publication of the Court’s Opinion will help fill that void and avoid further misunderstanding.In particular, the Opinion here relates to an appraisal performed by the defendant appraiser for a mortgage lender’s use in deciding whether to extend a mortgage secured by the appraised property. The plaintiffs in the case were the borrowers and were not identified as the client or intended users in the report. Yet, several years after the appraisal was performed, they sued the appraiser alleging damages stemming from the appraiser’s alleged misreporting that the home on the property was “modular” home rather than “manufactured” home.In analyzing the two key legal claims – professional negligence and negligent misrepresentation – at issue against the appraiser in the Opinion, the Court looked to the two published decisions that are most often cited in relation to such appraiser claims: Willemsen v. Mitrosilis (2014) 230 Cal.App.4th 622 (Willemsen) and Soderberg v. McKinney (1996) 44 Cal.App.4th 1760 (Soderberg).The Court’s Opinion here gives needed guidance not provided in Willemsen or Soderberg because:
- The Court’s Opinion extends the general reasoning of Willemsen (which concerned a commercial appraisal) to appraisals in the residential lending context – which is a needed clarification in this legal area.
- The Court’s Opinion gives clear recognition to the importance of an appraiser’s identification of intended users – as the Court wrote: “We are not convinced by the Tindells’ efforts to distinguish Willemsen. As the trial court noted, the appraisal was prepared for the lender, not the Tindells.”
- While Soderberg does provide some guidance in assessing negligent misrepresentation claims and whether an appraiser owes a legal duty to a party other than his or her client, Soderberg is of limited actual relevance to considering current appraisal work (after the 1997 edition of USPAP) because it was written before the adoption of the intender user identification requirement that appraisers now follow. (Soderberg actually causes unfortunate confusion in the analysis because it was decided before the modern appraisal practices.)