National Business Institute Inc. Presents a National Teleconference on November 7, 2013 FORECLOSURE: APPRAISAL REVIEW
Section IV: USING APPRAISAL NEGLIGENCE/FRAUD AS A FORECLOSURE DEFENSE By: William J. Amann, Esq.
I. APPRAISAL FRAUD:
Black’s Law Dictionary (5thEd. 1979) defines fraud as an, “intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right” and, “a generic term, embracing all multifarious means by which human ingenuity can devise, and which are resorted to by one to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling and any unfair way by which another is cheated.”
In the most extreme foreclosure cases then, fraud may be an element in play. Yet, it is difficult to establish and must be plead with particularity pursuant to Federal Rule of Civil Procedure 9(b) which provides, “Fraud or Mistake; Conditions of Mind. In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.”
The particularity requirement of Federal Rule of Civil Procedure 9(b) applies to claims of mail and wire fraud. That rule provides specifically, "In all averments of fraudor mistake, the circumstances constitutingfraudor mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed. R. Civ. P. 9(b). "Thus, a complaint alleging fraudmust set forth the time, place and contents of the false representation, the identity of the party making the false statements and the consequences thereof." Tal v. Hogan, 453 F.3d 1244 (10th Cir. Okla. 2006).
In Wood v. Wells Fargo Bank, N.A., 2013 U.S. Dist. LEXIS 152196 (D. Colo. Oct. 2, 2013)the court found thatmail fraudis not committed simply by sending false statements through the mail. Instead, the mails must have been used to further a scheme to defraud or obtain money or property through false pretenses. Atlas Pile Driving Co. v. DiCon Financial Co., 886 F.2d 986, 991 (8th Cir. 1989). General allegations that the mails were used in connection and in furtherance of the enterprise are insufficient to meet the particularity requirements of Rule 9(b). In Re Sattler's, 73 B.R. at 786. "[A] plaintiff asserting fraudmust also identify the purpose of the mailing within the defendant's fraudulent scheme and allege facts that give rise to a strong inference of fraudulent intent." Kashelkar v. Rubin & Rothman, 97 F. Supp.2d 383, 393 (S.D.N.Y. 2000).
However, all is not lost. There are cases where claims of fraud have survived. In the context of allegations concerning fraud of asset-back securities for example, Courts construing claims under the Fed. R. Civ. P. 8(a) (general rules of pleading requiring a pleading state, among other things, a short and plain statement of the claim showing that the pleader is entitled to relief) pleading standard have found similar allegations of appraisal fraudto be adequately tied to the securities at issue. In Plumbers' & Pipefitters' Local No. 562 Supplemental Plan & Trust v. J.P. Morgan Acceptance Corp. I, No. 08-1713, 2012 U.S. Dist. LEXIS 24106, 2012 WL 601448 (E.D.N.Y. Feb. 23, 2012), the plaintiff relied upon statements from confidential informants and a survey of appraisers. The district court acknowledged that the allegations were "not tied to specific individual loans underlying the Certificates" and characterized them as "not strong." Yet, it nonetheless held that the complaint "describes sufficiently widespread conduct to plausibly infer that Certificates at issue were affected." Id.
And in Capital Ventures International v. J.P. Morgan Mortgage Acquisition Corp., No. 12-10085, 2013 U.S. Dist. LEXIS 19227, 2013 WL 535320 (D. Mass. Feb. 13, 2013), the plaintiff performed an independent appraisal. The court found that while "general allegations about the [appraisal] industry would not state a claim on their own," the plaintiff had "supported its claims with specific allegations about the originators and loans at issue. Those allegations make its claim plausible." Recently, a New Jersey state court upheld a common-law fraudclaim concerning appraisal fraudbrought by Prudential, in part based on Prudential's similar "data analysis." See Prudential Ins. Co. of Am. v. J.P. Morgan, 242 N.J. Super. 638, 577 A.2d 1300 (N.J. Super. Ct. Law Div., 2013) [D.E. 60-1]. Moreover, in the Second Circuit a court has held that "loan-sampling results . . . are sufficiently suggestive of widespread inaccuracies in appraisalvalue to render plausible [plaintiffs'] claim that the LTV information reported in the offering materials was 'objectively false.'"Fed. Hous. Fin. Agency v. UBS Ams., Inc., 858 F. Supp. 2d 306, 328 (S.D.N.Y. 2012), aff'd, 712 F.3d 136 (2d Cir. 2013).
In Nevada, twenty-nine (29) residents alleged that Bank of America and other defendants including mortgage servicing companies, trustees and appraisal companies engaged in a scheme to inflate property values in Nevada through obtaining intentionally inaccurate appraisalsto increase the amount borrowers would need to borrow to purchase property. According to the Complaint, Defendants artificially inflated property values so Defendants could underwrite more loans at higher amounts, resulting in both greater fees and profits in originating the loan, as well as raising the secondary market value of the loans, which Defendants sold soon after the loans were originated. Plaintiffs allege that because Defendants sold the loans soon after origination, Defendants did not care whether the borrower could afford the loan because Defendants would pass the risk to investors who purchased the loans bundled into securities.
SeeGarner v. Bank of Am. Corp., 2013 U.S. Dist. LEXIS 140810 (D. Nev. Sept. 28, 2013). In that case, the Plaintiffs also claimed violations of appraiser independence under 15 U.S.C. §1639eand 12 C.F.R. § 225.65. Appraisal independence requirements under 15 U.S.C. § 1639egenerally make it unlawful in extending credit or in providing any services for a consumer credit transaction secured by the principal dwelling of the consumer, to engage in any act or practice that violates appraisal independence as described in or pursuant to regulations prescribed under the law. Acts or practices that violate appraisal independence shall include--
(1) any appraisal of a property offered as security for repayment of the consumer credit transaction that is conducted in connection with such transaction in which a person with an interest in the underlying transaction compensates, coerces, extorts, colludes, instructs, induces, bribes, or intimidates a person, appraisal management company, firm, or other entity conducting or involved in an appraisal, or attempts, to compensate, coerce, extort, collude, instruct, induce, bribe, or intimidate such a person, for the purpose of causing the appraised value assigned, under the appraisal, to the property to be based on any factor other than the independent judgment of the appraiser;
(2) mischaracterizing, or suborning any mischaracterization of, the appraised value of the property securing the extension of the credit;
(3) seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of the transaction; and
(4) withholding or threatening to withhold timely payment for an appraisal report or for appraisal services rendered when the appraisal report or services are provided for in accordance with the contract between the parties.
The Garner court in Nevada stated that Nevada has not specifically addressed whether a borrower could pursue such a claim against an appraiser or lender for knowingly and intentionally providing a false appraisalto the borrower to induce the borrower to take out a larger loan than otherwise would be required to purchase the property. However, the court went on to state that Nevada follows the Restatement (Second) of Torts § 552, which sets forth a claim for negligent misrepresentation:
One who, in the course of his business, profession or employment, or in any other action in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. Barmettler v. Reno Air, Inc., 114 Nev. 441, 956 P.2d 1382, 1387 (Nev. 1998).
So, the Garner court concluded, at least in the context of Bank of America’s motion to dismiss, that there is no basis to conclude that Nevada would hold that negligently providing misinformation would subject a defendant to liability, but knowingly and intentionally providing misinformation would. The Court denied the Defendants' Motion to Dismiss to the extent Defendants argue that a false appraisalnever may form the basis of a fraudor misrepresentation claim under Nevada law.
In West Virginia, a consumer sued Quicken Loans concerning a ten (10) year interest only loan and, among other things, claimed that the loan appraisal was intentionally inflated and not rationally tied to the then market prices. SeeHeavener v. Quicken Loans, Inc., 2013 U.S.Dist. LEXIS 79006, 18-20 (N.D. W. Va. June 5, 2013). The court found that the plaintiff did not meet the rule 9 standard for specificity and further found that when a plaintiff seeks to establish a claim of fraudunder West Virginia law, the plaintiff must prove (1) the alleged fraudulent act is that of the defendant, (2) the act was material, false, and the plaintiff justifiably relied upon it, and (3) the plaintiff suffered injury as a result of the act. Ashworth v. Albers Med., Inc., 410 F. Supp. 2d 471, 477 (S.D.W. Va. 2005) (citing Lengyel v. Lint, 167 W. Va. 272, 280 S.E.2d 66, 67 (W. Va. 1981)). In the Heavenercase, the Plaintiff alleged that the defendants obtained an appraisalindicating that the market value of the Plaintiff's property was approximately $193,000. Multiple defendants were involved and the Plaintiff failed to specify the defendants’ role in the alleged fraudulent appraisal.Plaintiff did not say which Defendant ordered a fraudulent appraisal, and the allegations are insufficient to provide a defendant with fair notice of the claim. SeeHarrison, 176 F.3d at 789 ("The 'clear intent of Rule 9(b) is to eliminate fraudactions in which all the facts are learned through discovery after the complaint is filed.'") (citation omitted); see alsoJuntii, 993 F.2d 228, [published in full-text format at 1993 U.S. App. LEXIS 10345, at *5] (stating that aggregation of defendants "is insufficient either to provide a defendant with fair notice of the claim against him or to protect a defendant from harm to his reputation or good will."). The court also found that the Plaintiff stated that the misrepresentation of the market value of the home were intentional and material; however, Plaintiff did not allege what the property's actual market value was at the time of the fraudulent appraisalor plead facts otherwise indicating that the misrepresentation was intentional and material. Finally, Plaintiff did not state when the fraudulent activity took place. Plaintiff alleged that Defendant [Advanced Mortgage Company] arranged for the Defendant [Orth Appraisals]to conduct an appraisalof the Plaintiff's property; however, Plaintiff fails to allege which loan the appraisalwas obtained for, the 2005 loan or the 2007 loan. Additionally, Plaintiff failed to allege an approximate date or time period that the appraisalwas performed.
Conversely, the Sixth Circuit Court of Appeals reversed (in part) an order from the District Court for the Eastern Division of Kentucky where it found that the district court erred by granting summary judgment in favor of the lender (Midwest Fin. & Mortg. Services) based upon a lack of proximate cause in connection with alleged harm stemming from an appraisal in the context of a RICO claim. See Wallace v. Midwest Fin. & Mortg. Servs., 714 F.3d 414 (6th Cir. Ky. 2013).
II. APPRAISAL NEGLIGENCE:
The basic elements of negligence(under California law and in all districts of which I’m aware) are "duty, breach of duty, causation, and damages." Marlene F. v. Affiliated Psychiatric Med. Clinic, Inc.,48 Cal. 3d 583, 588, 257 Cal. Rptr. 98, 770 P.2d 278 (1989). Liability for negligent conduct may only be imposed where there is a duty of care owed by the defendant to the plaintiff or to a class of which the plaintiff is a member. A duty of care may arise through statute or by contract. Alternatively, a duty may be premised upon the general character of the activity in which the defendant engaged, the relationship between the parties or even the interdependent nature of human society. Whether a duty is owed is simply a shorthand way of phrasing what is the essential question—whether the plaintiff's interests are entitled to legal protection against the defendant's conduct. J'Aire Corp. v. Gregory,24 Cal. 3d 799, 803, 157 Cal. Rptr. 407, 598 P.2d 60 (1979).
In McGarvey v. JP Morgan Chase Bank, N.A., 2013 U.S. Dist. LEXIS 147542 (E.D. Cal. Oct. 10, 2013) the Court discussed the Nymarkrule (In re Nymark,231 Cal. App. 3d at 1093) which holds that a defendant bank owes no duty of care when that defendant's interactions with a plaintiff fall within the scope of a bank's conventional role as a lender of money, does not apply here. In Nymark,the plaintiff alleged the defendant's appraisalof his residence, undertaken as part of the defendant's loan process, was negligent because the plaintiff relied upon the appraisal'sinaccurate conclusion that the residence contained no serious construction defects. 231 Cal. App. 3d at 1093. In holding that the defendant owed the plaintiff no duty of care, the court reasoned that "defendant performed the appraisalof plaintiff's property in the usual course and scope of its loan processing procedures to protect defendant's interest by satisfying it that the property provided adequate security for the loan." Id.at 1096. Defendant did not conduct the appraisalto induce plaintiff to enter into the loan transaction; rather, defendant was simply "acting in its conventional role as a lender of money to ascertain the sufficiency of the collateral as security for the loan.
However, Nevada recognizes a claim for appraiser negligence in the context of a lender suing the appraiser it has hired and relied on to fund its transaction. Goodrich & Pennington Mortgage Fund, Inc. v. J.R. Woolard, Inc.,120 Nev. 777, 101 P.3d 792 (Nev. 2004). Nevada courts have not specifically dealt claims brought by a borrower against an appraiser that was hired by the lender. Courts in other jurisdictions are split on the issue. For example, in Decatur Ventures, LLC v. Daniel,485 F.3d 387, 390 (7th Cir. 2007), the court held that the appraiser owed no duty to the borrower, only to the lender. Some courts recognized economic realities and consider whether a buyer was aware of the appraisal when it purchased the property and whether a purchase agreement is contingent upon the appraisal, and permit borrowers who knew and or actually relied on an appraisal to file suit. See Sage v. Blagg Appraisal Co.,221 Ariz. 33, 209 P.3d 169, 170-176 (Ariz. Ct. App. 2009)(appraiser retained by a lender in connection with a purchase-money mortgage transaction owes a duty of care to the borrower/buyer);compare with Kuehn v. Stanley,208 Ariz. 124, 91 P.3d 346, 350 (Ariz. Ct. App. 2004)(Plaintiffs could not demonstrate reliance because they were contractually bound to purchase the property, contingent upon qualifying for funding, before they received the appraisal. Therefore, Plaintiffs have no claim.) Other courts, applying the foreseeability rules of the Restatement (Second) of Torts §522 (1977) hold that appraisers owe a duty to borrowers if the appraiser knew the information was intended to benefit the third party borrowers. See Soderberg v. McKinney,44 Cal.App.4th 1760, 52 Cal.Rptr.2d 635, 639-42 (1996)(a negligent misrepresentation claim was sufficient if the third party belongs to a particular group or class which the information was intended to benefit); see also Stotlar v. Hester,92 N.M. 26, 582 P.2d 403 (N.M. App. 1978)(same).
Generally, if there is no evidence of reliance by the Plaintiffs on theappraisals, then the negligenceand negligent misrepresentation claims fail. SeeWilliams v. United Community Bank,724 S.E.2d 543, at *6, 2012 N.C. App. LEXIS 209 (N.C.App. 2012)(summary judgment on negligence and negligent misrepresentation claims was affirmed because plaintiffs failed to show that they relied on the appraisals). Florida seems to follow the Nymarkrule, recently holding, “that Plaintiffs cannot show that they relied on the appraisalor that Regions Bank intended to induce them to do so. Meyers requested the cash-out refinance before the appraisalwas obtained and he did not see the appraisaluntil after the cash-out refinance was completed. Thus, his actions were not affected by the appraisal. Furthermore, the purpose of the appraisalwas to protect the interests of Regions Bank in extending the loan. The court agrees with the general rule, recognized in Nymark v. Heart Fed. Savs. & Loan Ass'n,231 Cal. App. 3d 1089, 283 Cal. Rptr. 53, 57 (Cal. 3d Dist. Ct. App. 1991), that a lender owes no duty of care to its borrower in appraising the borrower's collateral to determine if it is adequate security for the loan. "[A] financial institution owes no duty of care to a borrower when the institution's involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money." Id.This rule is consistent with Florida law, which imposes no duty upon a bank in an arms length transaction to act for the benefit or protection of the borrower or to disclose facts that the borrower could discover by due diligence. Barnett Bank of W. Fla. v. Hooper, 498 So. 2d 923, 925 (Fla. 1986). Because the appraisalin this case was obtained within the scope of Regions Bank's role as a lender, not as a fiduciary, Plaintiffs cannot sustain a claim against Regions Bank based on the appraisal.
So it seems as though a fiduciary or special relationship between a borrower and bank needs to be established in order for a negligent appraisal count to survive a motion to dismiss. In Minnesota for example, courts have recognized a special relationship giving rise to a fiduciary relationship between a bank and its customers when (1) the bank knows or has reason to know the customer is placing trust and confidence in the bank and relying on the bank to counsel and inform him, see Klein v. First Edina Nat'l Bank, 293 Minn. 418, 196 N.W.2d 619, 623 (Minn. 1972); (2) confidence is placed on the bank which results in superiority and influence over the customer, see Midland Nat'l Bank of Minneapolis v. Perranoski, 299 N.W.2d 404, 413 (Minn. 1980); (3) combined with a confidential relationship, the bank has greater access to facts and legal resources, see May v. First Nat'l Bank of Grand Forks, 427 N.W.2d 285, 289 (Minn. Ct. App. 1988); or (4) the bank and the customer have disparate levels of business experience and the bank invites the customer to place his confidence in the bank, see Murphy v. Country House, Inc., 307 Minn. 344, 240 N.W.2d 507, 512 (Minn. 1976).
In Massachusetts (I practice in NH and MA) To prove a negligenceclaim, a plaintiff must show that a defendant owed him a duty, breached that duty, and that the defendant's breach was the but-for and proximate causation of some resulting harm to the plaintiff. Brown v. United States, 557 F.3d 1, 3-4 (1st Cir. 2009).
Under the so-called "economic loss" rule, when a party seeks to recover pecuniary or economic loss the party must have had a contractual relationship with the defendant. See Aldrich v. ADD Inc., 437 Mass. 213, 770 N.E.2d 447, 454 (Mass. 2002) ("It has been a long-standing rule in this Commonwealth, in accordance with the majority of jurisdictions that have considered this issue, that 'purely economic losses are unrecoverable in tort and strict liability actions in the absence of personal injury or property damage.'" (citation omitted)). But there is an exception to the economic loss rule fro losses stemming from negligent misrepresentation. Nota Constr. Corp. v. Keyes Assocs. Inc., 45 Mass.App.Ct 15 (1998).Although a pure negligenceclaim fails under the economic loss doctrine when it seeks recovery of pecuniary losses in the absence of a contractual relationship, courts have held that the tort of negligent misrepresentation may be used to recover economic losses by analogy to Restatement (Second) of Torts § 552. See, e.g., Nycal Corp. v. KPMG Peat Marwick LLP, 426 Mass. 491, 688 N.E.2d 1368, 1371-72 (Mass. 1998) (adopting the test from § 552 for claim of negligent misrepresentation brought against professional accountants). The Restatement notes that for liability to arise on the basis of information supplied for the guidance of others, there must be (1) justifiable reliance upon the information by a limited group of persons, (2) for whose benefit and guidance the appraiser (a) intends to supply the information, or (b) knows that the recipient intends to supply it. Restatement (Second) of Torts § 552.
Perhaps surprisingly, it seems harder to bring a successful claim for negligent appraisal, due to the need of establishing a fiduciary or special relationship between the borrower and the appraiser than it is to bring a successful claim for fraud. All of these cases turn to the state’s statutory and case law concerning fraud and negligence so it is critical to first understand and analyze any possible claims along these lines under your state’s controlling case law and statutes. If you get that far then the next step is to test the claims under Rule 9(b) and the prevailing federal case law in your district.