Monday, August 6, 2012

Class Action Nightmare for an AMC and Its Panel Appraisers in West Virginia

Update note 8/14/12: this case, particularly the plaintiffs' attempt to create a defendant class of appraisers, presents significant new liability issues for appraisal management and appraisers.  I will address the liability issues in this case and in other current AMC litigation (including the FDIC's actions against two national AMCs) in a webinar hosted by the Appraisal Institute on September 12, 2012.  The details and registration information are on the Appraisal Institute's webinar page at this link

West Virginia has been among the riskiest states in which to be a residential appraiser for several years.  Currently, residential appraisers are more likely (per capita) to be sued in West Virginia than in any other state.  A plaintiffs' law firm has elevated that level of risk to a higher level for one particular AMC and its panel appraisers in West Virginia who performed appraisals for certain loans by the AMC's primary client.


At the end of June, the law firm filed an alleged class action on behalf of residential borrowers residing in West Virginia against Title Source, Inc., which operates TSI Appraisal; Quicken Loans, which is the AMC's corporate affiliate and primary client; two of the AMC's panel appraisers; and all other appraisers in the state who performed appraisals for loans by Quicken "after receiving an appraisal request form with an estimate of value on it."  Among the legal claims asserted against the appraiser defendants are alleged causes of action for unfair business practices, negligence and fraud, as well as alleged violation of West Virginia's unique statute prohibiting residential property loans in excess of fair market value.  The complaint does not specify the total damages demanded but does seek an order voiding all of the class borrowers' loans, as well as compensatory and punitive damages.

Prior to the current mortgage crisis, it was a fairly normal practice among lenders and AMCs when ordering an appraisal to provide the appraiser with an estimated value. Most of the appraisals performed by the alleged appraiser class for which estimated values were provided will likely date to 2004 through 2007 -- as is the case with most current appraisal litigation.  Thus, this case typifies what we see in general in the current litigation environment: appraisers and appraisal firms being put to task for appraisal work that is now 5 to 8 years old (any relevant statutes of limitation have nothing to do with USPAP's minimum 5-year record-keeping period) and which was performed in accordance with common industry practices accepted by lenders and acquiesced to by regulators during that period.

This case, however, is anything but typical. Borrower class actions are nothing new, and lawsuits against AMCs and individual appraisers are commonplace too.  What is new here and what makes this case a nightmare for the AMC and its panel appraisers is the plaintiffs' attempt to turn the case into a "defendant class action" -- that is a lawsuit against all appraisers in West Virginia who performed appraisals through the AMC after receiving an assignment with an "estimate of value."  Defendant class actions are procedurally unusual but can be powerful legal weapons if a defendant class is certified.  For example, if a class of appraiser defendants is certified, the liability of all included panel appraisers conceivably would be established without their ever having defended themselves because it is the two named appraiser defendants who are tasked with defending all the class members. And, as explained below, the two appraisers named as defendant representatives are hardly the ones any appraisers would hope to lead the defense -- with one of them having been sued six times, likely having no current insurance coverage to cover this new case, and having filed for bankruptcy.  To be sure, there are big procedural hurdles for the plaintiffs to clear before a class of defendant appraisers can be certified, but will there be anyone to make the good arguments against class certification for the unnamed appraisers?

Here is the proposed definition of the class of appraiser defendants from the first amended complaint:



What makes the lawsuit more scary for the AMC and its appraisers is that the same law firm previously sued Quicken and one of the two named appraisers -- Dewey Guida -- in 2008.  That earlier case concerned a 2006 appraisal for a borrower's $144,000 loan.  In that situation, appraiser Guida had received an assignment sheet with an estimated value of $262,500 for the subject property.  The homeowner herself had submitted an estimate that the value was $250,000.  Notwithstanding the high estimate on the assignment sheet, appraiser Guida opined in his report that the value was only $181,700.  Yet, following a bench trial in 2009, the trial court judge concluded the value was still inflated, forgave the borrower's mortgage, and then awarded the borrower $17,500 in compensatory damages.  In a later phase of the case, the judge awarded over $2.1 million in punitive damages and almost $600,000 in attorneys' fees and costs.  On top of that, appraiser Guida settled the claims against him by that borrower (and possibly other borrowers) for an additional $700,000.  In all, appraiser Guida has now been sued in at least six cases about appraisals he performed for Quicken and TSI.  The limits of his insurance likely have been or will soon be exhausted by the prior cases; he has no current coverage to defend this new case because -- according to one of the lawsuits he is involved in -- his policy lapsed for nonpayment; and he has filed for bankruptcy.  Coincidentally, in a 2011 article in Valuation magazine, I wrote that an earlier case involving this same appraiser and lender could be a harbinger of future liability issues facing appraisers and AMCs, but I never imagined the nightmare that has unfolded in West Virginia.  Here is a link to that article: "Full Court Pressure: Several Recent Lawsuits Could Affect Appraiser Liability."
 
A full copy of the complaint in this case and related court documents can be found on www.appraiserlaw.com at this link.   The case has been removed from state court to federal court.

Peter Christensen is an attorney who advises professionals and businesses about legal and regulatory issues concerning valuation and insurance.  He serves as general counsel to LIA Administrators & Insurance ServicesHe can be reached at peter@liability.com.