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APPRAISER NOT REQUIRED TO VERIFY FACTS, BUT CLIENT SHOULD BE NOTIFIED
Issue Arises in Recent Case
The subject arose as a result of a case Olympic Coast Investment, Inc. (OCI) v. Gadini. OCI had hired Paul Iverson to appraise a gasoline station and convenience store, Toppenish Texaco Food Mart (TTFM), for the purpose of making a loan in connection with the sale of the business.
Iverson valued the business in 1998 at $800,000 based on sales and gallonage records provided to him by Louis Gadini, one of the sellers. OCI made the loan based on Iverson's appraisal. The buyer defaulted on the loan, and the investigation revealed that Gadini had presented highly inflated sales and gallonage records, which Iverson relied on in his appraisal.
Perpetrator of Fraud Claims Appraiser Negligent
OCI sued Gadini for misrepresentation. Although Gadini acknowledged the misrepresentation, he used as his defense the theory that the appraiser was the proximate cause of the damages because he was negligent in not verifying the records presented. Therefore, OCI should be suing the appraiser instead of Gadini.
In support of his theory, Gadini presented an affidavit by J. L. Haney, a certified general real estate appraiser in the State of Washington. Haney's affidavit alleged that Iverson's failure to independently verify the records presented to him by the seller's management constituted negligence under USPAP Standards Rules 1-4(b), 2-2(b)(vi) and 1-1 (b) and (c).
Content of USPAP Relied on
Rule 1-4(b) deals with collecting, verifying, analyzing, and reconciling data. Rule 1-1(b) (1998 version) states that: In performing appraisal services an appraiser must be certain that the gathering of factual information is conducted in a manner that is sufficiently diligent to ensure that the data that would have a material or significant impact on the resulting opinions or conclusions are considered. Rule 1-1(c) says that the appraiser must "not render appraisal services in a careless or negligent manner..." Rule 2-2(b)(vi) (1998 version) requires that the report: state the extent of the process of collecting, confirming and reporting data. This requirement is designed to inform the client and intended user whose expected reliance on an appraisal report may be affected by the extent of the appraiser's investigation.
Few Would Interpret USPAP to Require Independent Verification of Facts Presented
Few, if any, of us would interpret the foregoing language in USPAP (or its more current counterpart) to imply that the appraiser had a duty to independently verify information presented to him by management as facts. In fact, I spoke with Mr. Iverson, and he told me that he included in his statement of limiting conditions that "information is assumed to be accurate but not guaranteed."
However, on the basis of Haney's affidavit, the trial court dismissed the suit by OCI against Gadini. Fortunately, OCI did not act on the trial court's implication that they should sue Iverson rather than Gadini, but instead appealed.
Appellate Court Reverses
The appellate court reversed the trial court. The appellate court quoted a prior case: A party to whom a positive distinct and definite representation has been made is entitled to rely on that representation and need not make further inquiry concerning the particular facts involved...When applying this rule, it is immaterial that the means of knowledge are open to the complaining party, or easily available to him, and that he may ascertain the truth by proper inquiry or investigation.
To Protect Appraiser Have Disclaimer in Engagement Letter
Although the appraiser was not the defendant in this case, the court intimated that OCI could have a case against him for negligence/malpractice. This is contrary to appraisal practice because appraisers commonly rely on managements' representations and include language in their reports that an investigation into the veracity of such representations is beyond the scope of normal business valuation work.
My suggestion to protect the appraiser is to have a disclaimer to the effect of accepting management's representation without further verification not only in the report but also as an attachment to the engagement letter.
Best wishes,
Shannon Pratt
Vir: ASA BV E Letter. Distributed by the Business Valuation Committee of the American Society of Appraisers. Editor, Terry J. Allen, CPA/ABV, ASA. Issue 9-15 April 27, 2005
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