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The requirement of expert testimony in appraisal litigation.

Litigation against appraisers by disappointed investors, parties to commercial transactions, and representatives of failed financial institutions appears to be increasing. [1] Such litigation may occur when the value of a commercial property decreases, or when it can be argued that a loan secured by real estate in the past was based on what appears to be an optimistic valuation. Plaintiffs increasingly hold appraisers accountable for these losses in addition to the other professionals involved. [2]

Despite the complexity of the appraisal process, many claimants still regard a lawsuit against an appraiser as a self-evident claim. When the appraised value of a property is indisputably less than it was when originally appraised, plaintiffs generally contend that such a property was overvalued as a result of material omitted from or improperly considered in the appraisal.

Many plaintiffs are unaware of the need for expert testimony to establish claims against appraisers. An appraiser-defendant and his or her counsel should realize that claims against an appraiser can be disposed of or narrowed considerably when plaintiffs are unwilling or unable to provide unaware of the need to obtain expert testimony to support their claims.

THE REQUIREMENT OF

EXPERT TESTIMONY

Expert testimony is required to support claims against professionals unless the alleged negligence is so simple and clear that a trier of fact would have no difficulty in ascertaining the applicable standard of care.(3) In most cases, however, the alleged negligence is not a matter of common knowledge and the trier of fact (whether a jury or a judge) thus cannot determine professional negligence without the assistance of experts. To properly present such testimony, a plaintiff should at least be able to establish two things; 1) that the alleged acts or omissions did not meet the prevailing community-wide standard of appraisal practice at the time the alleged negligence occurred,(4) and 2) that the alleged negligence contributed to a deficient valuation of the property.(5) Without such testimony, a trier of fact can only speculate whether an erroneous valuation occurred.

PRETRIAL USE OF

EXPERTS

An appraiser faced with litigation is almost always accused of breach of contract, negligence, and perhaps negligent misrepresentation.(6) Each claim's core assertion is that the appraiser negligently performed the appraisal and as a result either overvalued or undervalued the property in question. To prevail a plaintiff will almost certainly be required to prove both allegations with the use of expert testimony.

If a plaintiff has not retained an expert to support a claim, the claim can be reduced or eliminated before the trial. If a complaint against an appraiser is vague and only the most elementary allegations of negligence are made, it is likely that an expert has not been consulted. Such a vaguely worded complaint frequently is made when plaintiffs are investors who have been disappointed by a subsequent decline in overall market values and claim that an appraiser overvalued the property involved.(7) Often, such investors retain a lawyer but give little thought to retaining an appraiser. Additional clues may appear during pretrial discovery, when the appraiser's attorney seeks to elicit from the plaintiff a written description of the reasons the plaintiff contends that the appraisal was negligently performed.(8) When these reasons are superficial, convoluted, or elementary, it is almost certain that the plaintiff has failed to retain an appraiser to assist in prosecution of the claim. In such cases, the appraiser's lawyer should file an appropriate motion generally known as a "motion for summary judgment and/or for summary adjudication of issues."(9)

When possible, it is preferable to ask an independent reviewing appraiser to provide expert assistance. An appriaser's errors and omissions insurer will almost always be willing to underwrite the cost of such an independent expert. An independent opinion not only will facilitate an early evaluation of the case, but will increase chances of an early motion to dismiss as well.

USING AN EXPERT TO

DISPUTE THE CLAIM

A motion can be based on the appraiser-defendant's own declaration or on the declaration of an appraiser independently retained. This declaration is made under oath, and should include the information that the appraiser has reviewed the appraisal in question, conducted necessary investigation and research, and that it is the reviewing appraiser's opinion that the appraisal in question was performed in accordance with all appropriate standards. More preferably, the reviewing appraiser can avoid addressing the alleged deficiencies and simply state that the valuation reached was within the range of valuations that an appraiser would have reached at the time the original appraisal was performed. It is seldom necessary or even desirable that the reviewing appraiser attempt to validate the exact valuation provided by the original appraiser. Generally, the opinion of a reviewing appraiser that the questioned valuation falls within a reasonable range for the time at which it was conducted should be sufficient.

A plaintiff's counsel must oppose such a motion.(10) According to statutes that govern pretrial motions in most states, it is not sufficient that a plaintiff merely repeat the allegations of the complaint or refer to the possibility that an expert opinion will be offered at trial.(11) The plaintiff must produce evidence in opposition to the motion so that the court can determine whether the case should proceed to trial. Further, the plaintiff's counsel cannot oppose the motion by referring to the wrongdoing of other defendants or reciting a litany of the deficiencies believed to constitute the appraiser's negligence. Except in rare situations in which the appraiser's negligence is so obvious that no expert testimony will be required, the plaintiff's failure to counter with his or her own expert testimony will cause the court to dismiss the case. The absence of expert testimony to establish negligence or damages indicates that a plaintiff has no claim against an appraiser.

PROVIDING THAT PLAINTIFF

CANNOT PROVE

PROFESSIONAL

NEGLIGENCE

It may be possible to seek dismissal of the claim without offering expert testimony in support of the motion to dismiss. In federal courts and some state courts, such a motion can be made by establishing that the plaintiff has no proof in support of one or more elements of the claim.(12) In such case, establishing that the plaintiff has no expert testimony to prove negligent or defective performance of an appraisal is generally sufficient to dismiss the claim. Such a motion may be based simply on an admission made by the plaintiff or the plaintiff's lawyer that no expert has yet been retained to verify the alleged negligence of the appraiser-defendant.

In a relatively recent case filed against an appraiser by the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC), (13) the appraiser was sued for "grossly overstating" the value of six apartment properties between 1981 and 1983. (14)

The properties were located in the then economically robust regions of Dallas, Houston, and Tyler, Texas, as well as in Shreveport, Louisiana. At the instructions of the client, the appraiser elected not to obtain certain data. Unfortunately, the appraiser did not confirm these instructions in writing. The FDIC claimed the appraiser was liable for millions of dollars in promissory note assumed when the properties were purchased. In response to pretrial discovery requests, the FDIC provided a lengthy list of alleged deficiencies in each of the appraisals. Investigation eventually revealed four of the projects were purchased before the appraisals had been submitted. An order was requested from the court to establish that the appraiser had no liability for the acquisition costs of the four properties, which constituted several million dollars in cash and assumed obligations. The FDIC opposed the motion, contending that even if the appraisals had not been submitted prior to the acquisition date, the appraiser had provided the subsidiary with certain market studies for the projects on which the acquisition might have been based.

The FDIC maintained that the deficiencies in the appraisals and the market studies were so obvious that negligence was "evident" on the face of the market studies. (15) The FDIC also maintained that it was not required to produce proof of the appraiser's negligence at a pretrial hearing, but could reserve that matter for proof at trial. The FDIC's lawyers asserted that it was reasonable to infer that the appraisals were performed negligently because they contained a prediction of rental increases of 8% to 12% without any supporting data and that the defendant failed to perform absorption studies. (16)

As the court pointed out, proof "of professional negligence requires expert testimony as to the standard of care in the relevant community unless defendant's negligence is so clear that a trier of fact may find professional negligence unassisted by expert testimony." (17) The court stated that it was unable to reach the conclusion proposed by the FDIC unassisted. "The court cannot say whether the defendant . . . performed negligently based solely upon the skeletal assertions by plaintiffs' counsel." (18) Noting that the FDIC was "required to provide expert testimony which demonstrates that defendant . . . negligently performed his appraisal services," (19) and had not done so, the court granted the motion.

TIMING

Because of the possibility that a trial court will allow a plaintiff additional time to secure an expert with which to oppose an appraiser's motion to dismiss, the appraiser and his or her lawyer should carefully consider when a motion to dismiss the case against the appraiser should be filed. Such a motion should generally not be filed early in the case because judges are often reluctant to dismiss claims without providing plaintiffs an adequate opportunity to develop the facts in support of their claims. (20)

Nor is it generally appropriate to wait until just before trial to file such a motion. Although seemingly one of the more logical times, many courts illogically view motions filed too close to trial as harassment of the other side's trial preparation and deny them. (21) Further, state statutes and loca rules that require parties to designate experts will alert plaintiff's counsel to the previous failure to designate an expert, prompting him or her to obtain one just before trial. (22)

Careful counsel may allow several months to a year or more to elapse between the time the lawsuit is first served and the time a motion to dismiss is filed. During that time, the evidentiary record on the case will solidify and the justification presented by the plaintiff's counsel for not obtaining an expert will become less persuasive. The appraiser's lawyer should file such a motion immediately after the time alloted to conduct discovery of the other party's case has expired. It can then be argued that no additional time is available to take depositions and conduct discovery, and that therefore all parties should be ready to present their evidence. Cost considerations and other matters may dictate the filing of a motion at an earlier time, however.

(1) See Ahlswede v. Sentra Securities Corporation, et al, (Superior Court, San Diego, Case No. 87-1886E) (overvaluation claim by limited partners); FDIC v. Baker, et al, (C.D. Cal. filed June 9, 1989) (litigation against former officers, directors, and outside appraisers in failed savings and loan case); Coniglio v. Mid-Atlantic Residential, et al, (C.D. Cal. March 1991) (litigation by limited partners alleging overvaluation). See also an informal study by the author for presentation before the Los Angeles County Bar Association, Real Estate Section, "Liability of Real Estate Appraisers," July 1989.

(2) As noted in "Liability of Real Estate Appraisers," several factors militate in favor of adding the appraiser as a defendant. First, the defunct or undercapitalized status of the general partner, holding company, or other defendant may make it desirable to add as many other potentially solvent defendants as possible. Second, appraisers are frequently insured for errors and omissions and their liability policies provide an attractive source of funds to contribute to any settlement or judgment. Finally, lawyers representing disappointed investors, representatives of failed savings and loans such as the FDIC, and other clients must be concerned about failing to add any potentially solvent party to the list of party defendants lest they in turn be accused of negligently allowing the potentially culpable insolvent defendant to escape liability and contribution.

(3) See Goebel v. Lauderdale, 214 Cal. App.3d 1502, 1508 (1989) and Wilinson v. Rives, 116 Cal. App.3d 641, 647 (1981) (lawyers); FDIC v. Baker, (U.S.D.C. Cal. Jan. 23, 1991, No. SA CV 89-386) (recognizing principle as applicable to appraiser); First National Bank of Sikerton v. Goodnight, 721 S. W. 2d 122 (Mo. App. 1976); Costa v. Neimon, 123 Wis. 2d 410, 366 N. W. 2d 896 (1985) (finding adequate evidence of standard care for appraisers). When an appraiser has failed to account for patent problems, such as construction defects, mismarked boundaries, or the existence of a value-reducing situation such as a nearby waste plant, courts will generally find negligence without the need for expert testimony. See Larsen v. United Federal S & L Ass'n., 300 N.W. 2d 281 (1981) (construction defects).

(4) FDIC v. Baker; Costa v. Neiman, (finding fully adequate the testimony of another appraiser regarding the standard of care).

(5) Christiansen v. Roddy, 186 Cal.App.3d 780, 231 Cal. Rptr. 72, 75 (1986) ("the plaintiff must have sustained damage.").

(6) These are the basic claims that can be alleged against an appraiser rising out of a deficient valuation. This certainly does not stop plaintiff's counsel from alleging more exotic claims. See Ahlswede v. Sentra Securities Corp., (U.S.D.C., S.C. Cal. 1987) (limited partners alleged appraiser, along with other defendants, was liable for damages for violations of Section 10(b) of the 1934 Securities and Exchange Act and Rule 106-5, for conspiracy and negligent infliction of emotional distress).

(7) See Ahlswede v. Sentra Securities Corp. (alleging that the defendants prepared a "false and misleading appraisal"); FDIC v. Baker (alleging that the appraiser had "grossly overvalued" the Texas properties involved).

(8) Defendants in civil litigation always have an opportunity to discover the facts and legal bases for the claims against them. See Cal. Code Civ. Proc. [section] 2016 and Fed. Rules Civ. Proc. [sections] 26-37. An arbitration agreement may provide for a lesser number of such opportunities unless they are provided for in the agreement.

(9) See Cal. Code Civ. Proc. # 437c (motions to dismiss or resolve issues may be file within 60 days after defendant is served); Fed. Rules Civ. Proc. 56.

(10) See citations in note 9. Failure to oppose such a motion may be deemed consent by the plaintiff.

(11) See note 9.

(12) The plaintiff has the burden of proving the appraiser's negligence at trial. Smith v. Lewis, 13 Cal. 3d 349, 356 (1975). In a federal court, therefore, the appraiser need not prove that he or she was not negligent and may prove that there is an absence of evidence to support the non-moving party's case. Celotex v. Catrett, 477 U. S. 317, 325, 106 S. Ct. 2548 (1986); Fed. Rule Civ. Proc. 56(c).

(13) FDIC v. Baker.

(14) [Corrected] Second Amendment and Supplemental Complaint, filed November 8, 1989, in FDIC v. Baker.

(15) See transcript of hearing in FDIC v. Baker, November 5, 1990; see also Opinion dated January 23, 1991 (Stotler, J.). The claim against the appraiser was dismissed on July 15, 1991, as a result of the FDIC's inability to authenticate the alleged appraisals. The FDIC has appealed the dismissal.

(16) Opinion of Stotler, J., (noting that FDIC's lawyers had claimed "it was reasonable to infer that the appraissals were performed negligently" because of unsupported predictions of rental increases and the absence of absorption studies).

(17) See Opinion, note 15.

(18) Ibid.

(19) Ibid.

(20) A judge will almost always allow a plaintiff additional time to develop facts and if necessary, expert testimony with which to resist a motion to dismiss filed too early in the case. See "Law and Discovery Policy Manual," para. 212, noting that when a motion to dismiss "is made within a short time after commencement of the action, the court normally on request will allow the party against whom the motion is made a reasonable time before deciding the motion." The Law and Discovery Policy Manual governs law and motion proceeding in the Los Angeles County Superior Court system.

(21) See "Law and Discovery Policy Manual," para. 212, noting that "motions must be heard more than 30 days before trial," and motions set close to this cutoff date "are disfavored."

(22) Indeed, several local rules provide for status conferences held just before the close of discovery or just after at which material issues concerning how the trial will proceed are addressed. These issues include whether the case will be a jury or non-jury trial, how many days of expert testimony will be required, and how much time is required for expert depositions. Most counsel will be alerted by these conferences to previously ignored duties to designate experts.

Timothy J. Harris is a litigation partner with the Los Angeles law firm of Charlston, Revich & Williams. He received a BA from the University of Washington and a JD from the University of California, Los Angeles.
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Author:Harris, Timothy J.
Publication:Appraisal Journal
Date:Jan 1, 1992
Words:2850
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