Despite express language in an appraisal of commercial property disclaiming the right of third parties to rely, the Arizona Court of Appeals has found that where an appraiser knows his report will be given to third parties, the appraiser owes the third parties a duty of care. The appraiser in the case argued that as a matter of law, he owed no duty to a third party lender who had received the appraisal from its borrower. The appraisal had been prepared for the borrower specifically and stated that it was prepared for the borrower’s use alone. The court examined the circumstances and relationships between the lender, the appraiser, and the borrower to determine whether the lender was an entity for whose benefit and guidance the appraiser intended to supply the information or whether the appraiser knew that the borrower intended to supply it. The court concluded that if the borrower intended to supply the appraisal to the lender or if the appraiser knew the borrower intended to supply the appraisal to the lender or to a limited class of persons that included the lender, then the appraiser owed the lender a duty of care and could be held liable for negligent misrepresentation.

The issues in the case, Belen Loan Investors, LLC v. Bradley, decided by the court of appeals, is consistent with the results Dale Zeitlin has obtained at the trial court level. In all of the appraiser malpractice cases Dale has handled or tried, the issue of the right of a lender to rely on an appraisal obtained by a borrower has arisen. Appraiser’s attorneys have consistently relied on language in appraisal disclaiming the right of any third parties to rely on the appraisal. The trial courts, relying on Arizona law, have consistently found a duty of care owed to the lender by the borrower’s appraiser where the lender was not specifically authorized to rely on the appraisal by its own language.

When a lawsuit ends and an attorney for the prevailing party seeks attorney’s fees, the burden of proving that the fees are reasonable lies with the party seeking fees. Reasonableness must be established by clear and convincing evidence. The attorney seeking fees must keep records in sufficient detail that a neutral judge can make a fair evaluation of the time expended on the matter, nature and need for the service and the reasonableness of the fees requested. Uncertainty arising from poor record keeping is resolved against the party seeking fees. For an award of fees, Arizona law requires that the attorney seeking the award record time spent on work contemporaneously with the work done in sufficient detail to enable evaluation of the time by the judge. Arizona law also requires that attorneys present a court with detailed, accurate and current records of legal work done and time spent. According to a recent Arizona Court of Appeals ruling, overbilling, which may include failure to keep accurate time, block or summary billing that omits detail as to tasks performed and time spent, and billing for joint tasks, may support claims for both breach of fiduciary duty and legal malpractice for billing practices.

In appraisal malpractice cases, a lender’s direct compensatory damages are the difference between what the lender loaned against property in reliance on an appraisal that overvalued the property at the time the loan was made, and what the lender would have loaned had the appraisal accurately stated the value of the property. In deciding how much money to loan to an owner or purchaser of real property, a lender bases the amount of the loan on the value of property as established by an appraisal. Where an appraiser overvalues the property at the time the loan is made, the result is the lender, in reliance on the appraisal, loans more than it would have had the appraisal accurately shown the value of the property. If a lender later suffers a loss after the property is foreclosed or sold at trustee’s sale, the measure of damages consists of two components. First the lender is entitled to out of pocket damages, which is the difference between the value of what was received in the transaction and the value given for it. Second, the lender is entitled to damages for the monetary loss suffered as a consequence of the lender’s reliance on the faulty appraisal. The lender’s direct conmpensatory damages are the difference between what the lender loaned and what it would have loaned had the appraisal been accurate. This can only be established following foreclosure or trustee’s sale. Following the sale, the lender’s damages should be calculated by deducting from the amount of the loan made in reliance on the appraisal, the value of the property at trustee’s sale less expenses.