It is common practice for a banking or lending institution to retain an independent appraiser to inspect, evaluate, and appraise residential or commercial real property that will serve as collateral before committing to a new loan or a modification of an existing loan. Indeed, subject to specific exemptions, federal agencies such as the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) require regulated institutions to obtain appraisal reports in conjunction with real estate-related financial transactions, including commercial and residential real estate mortgage operations, capital markets groups, and asset securitization and sales units.
Even though appraisals are typically part of the loan underwriting process, it is common knowledge that the practice of real estate appraising is more art than science. Valuations are predicated upon the unique conditions of the property, the location of the particular property, ever-changing market conditions, assumptions, unpredictable micro and macro economic and political factors, pertinent conditions that are only known at the time of the appraisal, and a multitude of other variables that can all be weighted differently. In other words, the work of an appraiser is complicated and fraught with potential problems.
Not surprisingly, appraisers sometimes find themselves the subject of litigation for providing a faulty, negligent appraisal.
If appraisers can be sued for providing negligent appraisals, when does such a claim arise? The recent case of Llano Financing Group, LLC v. Petit, 42 Fla. L. Weekly D2071 (Fla. 1st DCA September 27, 2017) examined the issue of when the statute of limitations begins to run against an appraiser for professional negligence.
Theodore Petit was an appraiser who prepared an appraisal on a residential home in the Jacksonville area. Based upon that appraisal, SunTrust Mortgage loaned money to the borrower to purchase the home in 2004. SunTrust later sold the loan to an investment trust, which eventually transferred interests in the loan to Llano Financing Group. The borrower defaulted on the loan. In 2011, the investment trust filed a foreclosure lawsuit, which resulted in the investment trust acquiring title to the property in 2014. Later that year, the property was sold at a loss.
Approximately 11 years after the loan closed, in 2015, Llano, as a successor in interest, filed a lawsuit against Petit for professional negligence, claiming that:
- Petit had undervalued the property.
- SunTrust would have never agreed to the loan but for the negligent appraisal.
- The investment trust would have never acquired the loan but for the negligent appraisal.
In response, Petit contended that the expiration of the statute of limitation barred Llano’s claims and moved to dismiss the lawsuit. The trial court agreed with Petit and dismissed the action.
On appeal, the court first identified the proper statute of limitations and found that the claim for negligence against the appraiser was governed by the four year statute of limitations found in Fla. Stat. § 95.11(3)(a). The court found that the two year statute of limitations for professional malpractice set forth in Fla. Stat. 95.11(4) was inapplicable because there was no direct contractual privity between Llanos and Petit. After establishing that the claim was governed by the four year statute of limitations, the court then addressed the more important issue of when the statute of limitations began. Llano argued that the statute of limitations began to run upon the occurrence of the last element constituting the cause of action. In the negligence based claims asserted by Llano, the last element to the causes of action was damages. Llano argued that the cause of action was not ripe until damages were sustained upon the sale of the property at a loss in 2015. The court recognized that jurisprudence from other states supported Llano’s position; however, the court found that Florida law compelled a different result. Instead, the court concluded that the original lender, SunTrust, sustained damages when it funded the loan in 2004, not when the property was sold at a loss in 2015. Specifically, the court stated, “[i]f SunTrust made the loan relying on an undervalued appraisal, it was harmed when the loan closed: SunTrust essentially spent more on its new assets (the note and mortgage) that it should have.”
In reaching this holding and affirming the trial court’s dismissal of the action, the court distinguished the facts from two other seminal Florida cases on accrual of statutes of limitations, to wit: Peat, Marwick, Mitchell and Company v. Lane, 565 So. 2d 1323 (Fla. 1990) and Blumberg v. USAA Casualty Insurance Company, 790 So. 2d 1061 (Fla. 2001). In the context of accounting malpractice (Peat, Marwick) or negligence of an insurance agent (Blumberg), damages to the party who relied upon the professional did not occur (thus the cause of action for professional malpractice did not accrue) until an adverse judgment was entered in an underlying proceeding. Stated differently, there were no damages in Peat, Marwick arising from faulty tax advice rendered by the accountants until a tax court entered an adverse ruling against the client, and there were no damages in Blumberg arising from the insurance agent’s failure to properly procure insurance until a court determined that there was no coverage for the claim. Unlike accounting malpractice or negligence of an insurance agent, the court reasoned that no underlying judicial ruling was necessary to determine whether the appraiser had undervalued the property.
The court also rejected Llano’s public policy arguments. Specifically, Llano argued that using the date of funding as the triggering event for appraisal malpractice would “encourage the filing of premature, unripe, and unnecessary lawsuits against appraisers” and “will inexorably shield truly negligent appraisers” from claims. However, the court deferred to the state legislature to change the language of the statute of limitations. The court also hinted that there were practical considerations for not allowing the statute of limitations to accrue at some indefinite point in the future against appraisers. “Llano’s preferred rule would leave appraisers potentially on the hook for decades (imagine a foreclosure suit twenty-nine years into a thirty-year mortgage).”
A reality of litigation is that over time the memories of witnesses fade, witnesses move away, witnesses die or become incapacitated, and crucial documents and data are misplaced, lost, or destroyed. Although not cited in the opinion, an appraiser licensed in Florida is only required to retain his or her work file “for 5 years or the period specified in the Uniform Standards of Professional Appraisal Practice [USPAP], whichever is greater.” Fla. Stat. § 475.629. Similarly, the records retention requirement under USPAP is five years “or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last.” USPAP 2016-2017 Edition, p. 11, lines 324-26. The community of appraisers might argue that allowing a lawsuit for professional malpractice against an appraiser to be brought at some point beyond the records retention requirements would be empirically unfair because the appraisers may no longer have access to the materials that formed the basis of their opinions or that could be used to exonerate them.
While licensed appraisers in Florida may hail the Llano Financing Group case as a victory, banks and lending institutions are left wondering why disparate treatment exists between appraisers and other professionals in terms of accrual of the statute of limitations, particularly because banks and lending institutions have to rely upon the expertise of the appraisers like any other consumer of professional services. Because the Llano Financing Group case holds that a bank negligence claim against its appraiser accrues when the bank funds the loan, banks and lending institutions need to be aware of its holding.
It is impossible to create fail-safe internal protocols, but banks and lending institutions can limit their credit risk to varying degrees depending upon the type of loan transaction and the amount of the loan by:
- Carefully vetting the licensed appraisers before adding the appraisers to any approved lists.
- Periodically reevaluating approved lists of appraisers.
- Instituting an appraisal review/second opinion process whereby another independent, licensed appraiser examines the appraisal report and provides a report containing his or her comments and thoughts, particularly on larger credit facilities.
- Identifying other collateral or sources of repayment that could be used to satisfy the loan.
- Monitoring and reevaluating the condition of the collateral during the life of the loan.
- Monitoring the performance of the loan.
 See Interagency Appraisal and Evaluation Guidelines, Federal Register, Vol. 75, No. 237, December 10, 2010; 12 CFR § 34.43 (“An appraisal performed by a State certified or licensed appraiser is required for all real estate-related financial transactions” with certain enumerated exceptions, including, but not limited to, when the transaction value is less than $250,000 or when the transaction value on a business loan is $1 million or less and the primary source of repayment is neither the sale of the property nor rental income derived from the property.).