Verdict on Lehman Bros vs. Passarelli & Potts

[Terrel L. Shields]

Who's fault would it be then that the judge applied the "reasonable forseeability" standard?

Why would they be more prone to apply that over privity of contract in this case? The fact I can reasonably expect my client to use the report to make a loan decision doesn't automatically mean that just because my appraisal meets some lender target doesn't mean that I know the borrower would 'rely" upon it. [and a good case for not allowing an appraisal to be used to "set" value in a transaction.]

What I'm not reading from you guys is what good is the 'intended user' in our reports good for?

That's my point. If we are given a federally mandated "rule book" and we are quoting Statement 9 - which is part of USPAP... why does a judge consider it null and void or perhaps more correctly, disregarding it altogether and holding appraisers to some unspoken and unpublished standard of conduct? If the borrower has read the appraisal then they have read the section that STATES who the client is, who are the intended users are, and mine EXPLICITLY SAYS the borrower is NOT an intended user and recommends they use an outside appraiser to value the property. How can you argue a borrower who RELIED upon an appraisal is not responsible as a matter of due diligence to READ the appraisal and encountering that language WHY would they therefore RELY upon it????

It would be like an engineer being told that he must build a bridge to stand up to a certain load and then being held liable because someone drove past the sign saying "limit 10 tons" with a 30 T. load and breaking the bridge. Sure, the engineer could have built a bridge that would hold 100 Ton...but that was not what he was asked to do..but he's held liable anyway???? dontinkso.

By ruling the way it was ruled, the borrower is an oyster unable to fend off anything apparently. In other words, the judge is saying that the borrower has no due diligence requirement. By the fact an appraisal exists, the court has assumed that the borrower is 'protected' and that the borrower somehow "relied" upon the report. In most cases I have seen where the appraiser is accused, the plaintiff has never even seen the report. In the suit against me and a bank, the plaintiff argued that the bank provided the appraisal value "orally" prior to closing (never mind I didn't sit foot on the place until 4 days after the closing and I had a copy of the deed in the report{{how do you have a recorded deed in it if the report was prepared before closing?}} therefore they could not have relied upon my report.) Not that it stopped them from arguing that they didn't need a copy nor had they seen a copy of the appraisal. They even argued that I had appraised the property to the amount of the current mortgage. The judge said that they were allowed to speculate about such matters but that he was within his right to reject such statements when the plaintiff had no supporting evidence except a vague accusation that the bank was such a powerful interest in the small town that people were afraid to talk...talk about conspiracy theorists.

Clearly, the legal system is tying the appraiser to the client and is in effect accusing all appraisers of being shills for the client. We are joined at the hip with the bank?

We have rules that are not law...and judges not ruled by USPAP nor law apparently.

 

[Fred]

RE: reasonable forseeability

Why would they be more prone to apply that over privity of contract in this case?

Privity was a common law idea. It had a few exceptions. It started to be pierced in the Ultamares v Touche case in 1931 by then NY judge Oliver Wendell Holmes, who decided third party who relied on a CPA's audit report was owed a duty of care. Over the last 10-15 years courts have begun using these cases against accountants as precendents for cases against appraisers.

While the law varies somewhat from state to state, the trend has been against privity both in case law and statutory law. I think there was a TAJ article, 10 or 20 years ago with a title something like "the death of privity."

That's my point. If we are given a federally mandated "rule book" and we are quoting Statement 9 - which is part of USPAP... why does a judge consider it null and void or perhaps more correctly, disregarding it altogether and holding appraisers to some unspoken and unpublished standard of conduct?

We have rules that are not law...and judges not ruled by USPAP nor law apparently

I don't agree that the judge is going against SMT-9 (whichever edition is relevant). USPAP requires, and I'd say correctly so, identifying and stating user "by type" and not necessarily "by name." It is the type of user that is relevant to the scope determination, not the name of the user. So, if a report that this is for someone to make decisions about mortgages...what is it in the SMT that stands contrary to reasonable foreseeability.

In other words, the judge is saying that the borrower has no due diligence requirement.

Pretty much. The licensed professional with the obligation to protect the public trust is the one with the duty of care, the trusting public has no duty.

 

[Doug Smith SRA]

Future Shock

The first rule about going to court is that persons go to a judge not for justice but for a decision.

The second thing to understand about USPAP is that the the ASB doesn't do public relations. USPAP remains an arcane and remote document and terms and definitions that seem so obvious and apparent to appraisers are not so apparent to those outside the system.

"The Intended Use" and "Intended User" have not only a specific meaning but also a specific context in USPAP. In both cases they identified by the appraiser on the basis of communication with the client at the time of the assignment. USPAP requires that both be identified in the context of the scope of work of the assignment.

Here is what the judge said:

The Court rejects this argument and concludes that there was substantial evidence for the jury to conclude that the Passarelli Defendants knew that a lender would rely on the appraisals for mortgage-lending purposes. Although the appraisal reports did not identify Plaintiff as the
“intended user,” the appraisals clearly stated that they were for “mortgage-lending purposes,” and Passarelli testified that he knew the appraisals would be used for mortgage financing.

The judge is saying that the "use" determines the "users" If the report is for "mortgage lending purposes." anyone down the line in the future is an intended user. USPAP is saying, it seems to me, that the identification of the Intended User at the time of the assignment is only a step in correctly identifying the scope of work.

I learned my lesson when I along with the bank and homeowner were sued because I did not identify that the insulation in the home had tremulite which is a form of asbestos. The judge ruled that the homeowner was an intended user despite all the boiler plate in my appraisal.

No, USPAP does not set up any privity.

Doug

 

[Pamela Crowley (Florida)]

Hence, the fees are no where near enough for the far extending liability.

 

[Carnivore]

Hence, the fees are no where near enough for the far extending liability.

That really is the issue for appraisers. Do any of you recall the lengthy threads about 'Re-Assigning". Frankly this makes the New assignment thing a dead horse. You have the same liability wether you do this or not.

The only defense I see is to argue the appraisal was not the cause of the harm(assuming it was not)!

I have a current on-going assignment that goes straight to this very issue. In fact the plaintiffs attorney is focusing on the "intended use" and the "may rely on" as the legal standing.

This whole Potts case raises a much more serious argument and I think I will start a new thread, just to see if I am on the right track in my thinking.

 

[Joyce Potts]

As usual Joyce, you neglected to cite, and the Court's pdf does not state, which FANNIE form (or narrative) was used. As it was done on a Fannie Form, did your addendum cite the Intended Use was for a FRT? or further define "mortgage lending" ?? Did the report include the Multi-purpose addendum???

This Multi-Purpose Supplemental Addendum for Federally Related Transactions was designed to provide the appraiser with a convenient​

way to comply with the current appraisal standards and requirements of the Federal Deposit Insurance Corporation (FDIC),
the Office of the Controller of Currency (OCC), The Office of Thrift Supervision (OTS), the Resolution Trust Corporation (RTC)
and the Federal Reserve.​

This Multi-Purpose Supplement Addendum is for use with any appraisal. Only those
statements which have been checked by the appraiser apply to the property being appraised.
MULTI-PURPOSE SUPPLEMENTAL ADDENDUM
FOR FEDERALLY RELATED TRANSACTIONS
PURPOSE & FUNCTION OF APPRAISAL
EXTENT OF APPRAISAL PROCESS
SUBJECT PROPERTY OFFERING INFORMATION​

No, Mike--there was no multi-purpose addendum. Any other straws you like to grasp at?

 

[Joyce Potts]

RE: reasonable forseeabilityPrivity was a common law idea. It had a few exceptions. It started to be pierced in the Ultamares v Touche case in 1931 by then NY judge Oliver Wendell Holmes, who decided third party who relied on a CPA's audit report was owed a duty of care. Over the last 10-15 years courts have begun using these cases against accountants as precendents for cases against appraisers.

While the law varies somewhat from state to state, the trend has been against privity both in case law and statutory law. I think there was a TAJ article, 10 or 20 years ago with a title something like "the death of privity."

I don't agree that the judge is going against SMT-9 (whichever edition is relevant). USPAP requires, and I'd say correctly so, identifying and stating user "by type" and not necessarily "by name." It is the type of user that is relevant to the scope determination, not the name of the user. So, if a report that this is for someone to make decisions about mortgages...what is it in the SMT that stands contrary to reasonable foreseeability.

Pretty much. The licensed professional with the obligation to protect the public trust is the one with the duty of care, the trusting public has no duty.

Doesn't every appraiser also know that every borrower also relies on the appraisal, if not directly, then indirectly? Isn't it reasonable for a borrower to assume that if his lender is relying on the appraisal, he's somewhat protected as well? Again, what then is the purpose of identifying the intended user? And, where does the chain of liability stop, or does it?

 

[Kevin Mc]

Again, what then is the purpose of identifying the intended user? And, where does the chain of liability stop, or does it?

Unfortunately Joyce I don't know if the chain stops anywhere in the court system. At the end of the day we will be held accountable for our reports no matter what any included certifications may state.

 

[Ken B]

This whole Potts case raises a much more serious argument and I think I will start a new thread, just to see if I am on the right track in my thinking.

I think any meaningful discussion of pertinent topics is worthwhile.

 

[Marcia Langley]

Again, what then is the purpose of identifying the intended user? And, where does the chain of liability stop, or does it?

Joyce,

The conflict arises when one tries to equate compliance with USPAP with the vagaries of lawsuit courts. They are simply two different things.

The point of identifying the intended user/use as per USPAP is to be able to demonstrate that one has properly identified the parameters of the assignment which would lead to a credible result. And those are just steps one and two in that lengthy scope of work process.

USPAP does not claim to protect us from lawsuits. It only provides a uniform set of standards intended to protect the public trust.

It is true, however, that failure to comply with any part of USPAP would put the appraiser at more risk of losing a lawsuit. That would give the suing party more amunition. It would also put one at risk of losing a license.