In Willemsen v. Mitrosilis (DJDAR 13957, Oct. 16, 2014), the California Court of Appeal, Fourth Appellate District, Division Three held that a third party purchaser of real estate (purchaser) was unable to maintain a claim for negligent misrepresentation against the lender’s real estate appraiser (appraiser) since the appraiser did not intend to supply the purchaser with information to influence his decision to purchase the appraised property. This decision lessens the reach and holding of Soderberg v. McKinney (1996) 44 Cal.App.4th 1760 wherein the court allowed a negligent misrepresentation claim to be maintained against an appraiser as long as the third party seeking to rely on the appraisal was within the class of persons that the appraiser knew would rely on the appraisal.
The Willemsen decision also highlights the importance of an appraiser using precise limiting and disclaimer language in an appraisal report to specifically and unambiguously identify the client and the intended use of the appraisal. If the appraiser uses very clear and specific disclaimer language, the court will likely preclude a third party from relying on the appraisal to support a claim of negligent misrepresentation.
In Willemsen, the appraiser was hired by the lender to appraise vacant land in San Bernardino, California in connection with the lender’s decision whether to provide financing to the purchaser. The purchaser obtained the necessary financing, and after escrow closed, he discovered the land was not suitable for his intended purpose. The purchaser sued various parties involved in the transaction. In his cause of action against the appraiser, the purchaser alleged: 1) his lender hired the appraiser to appraise the property to be purchased; 2) the appraiser knew that the purchaser, or someone in the class of persons to which the purchaser belonged would rely on the appraisal; and 3) the appraiser intended for the purchaser to rely on the appraisal in obtaining financing from the lender.
In a motion for summary judgment, the appraiser argued that he did not intend to influence the purchaser’s decision to purchase the property because: 1) the purchaser’s inspection contingencies expired prior to the retention of the appraiser by the lender; 2) after the contingencies expired, the lender retained the appraiser to perform the appraisal in connection with the lender’s underwriting of the loan; and 3) neither the appraiser nor the lender intended for the purchaser to rely on the appraisal to influence the purchaser’s decision to buy the appraised property. In support of the motion, the appraiser cited the following evidence: 1) the lender’s appraisal request form listed the purchaser on the first page, but on the last page the form identified the lender as the client and the intended user of the appraisal; and 2) the appraisal report identified the purchaser as the borrower (and not the client). Most importantly, the appraisal contained the following very clear and unambiguous language identifying the client and the intended user of the appraisal:
“The function of this appraisal report is to provide the [lender] with a Summary Appraisal Report . . . . The intended use of this appraisal is to assist the [lender] in analyzing a new loan for the subject property. The intended use of this appraisal is to assist the [lender] and/or its designated representatives.”
The appraisal report further provided:
“The report may not be used for any purpose by any person other [than] the party to whom it is addressed without the written consent of the appraiser and the appraiser specifically disclaims any liability to such unauthorized third parties.”
The Court of Appeal in Willemsen concluded there was no indication the appraiser was aware that the purchaser hoped to use the appraisal report as an investigational tool upon which to base his decision to approve or reject the property since the purchase contract did not include an appraisal contingency. Further, based on the disclaimers contained in the appraisal report, the court held that the appraiser did not manifest an intent to supply information for the purchaser’s use in determining whether the property was suitable for his purposes. Rather, the appraisal report specifically limited its intended use to that of the lender. Moreover, the purpose of the appraisal was to aid the lender in determining whether to provide financing to the purchaser, which he received. This is distinguishable from a situation in which an appraiser performs an appraisal for a mortgage broker and the appraiser knows or should know that the appraisal will be given to third party investors to rely on in determining whether to invest in a real estate loan secured by the appraised property.
The lesson to be learned from Willemsen is that if the appraiser takes the time and makes the effort to prepare an appraisal report for a lender with specific language identifying the lender as the client and the sole intended user of the appraisal report, the courts will likely preclude a third party borrower from relying on the appraisal to support a claim of negligent misrepresentation.
The moral of this article is:
USE NARROWLY TAILORED DISCLAIMER LANGUAGE IN YOUR APPRAISALS AND YOU WILL BE REWARDED BY THE COURT.
Guest article written by:
Jeffrey S. Kaplan, Esq.
Gaglione, Dolan & Kaplan
11377 W. Olympic Boulevard, 10th Floor
Los Angeles, CA 90064