Tuesday, January 29, 2013

Evaluation Solutions: The Anatomy of an AMC's Failure and Why Lenders Should Care

Updated 1-30-13 to add information about subsidiary ES Appraisal Services.

$9,349,612.97 + $1,698,799 = $11,048,411.97.   That's how much failed Evaluation Solutions and its subsidiary entity ES Appraisal Services have left in combined unpaid appraisal and BPO fees owed to appraisers and agents/brokers -- according to their respective bankruptcy filings on January 25, 2013.

Last week, I had the opportunity to speak together with Tony Pistilli to the Collateral Risk Network about the subject of lender oversight of appraisal management companies.  With that exciting topic as the theme, I focused on the specific issue of AMCs failing to pay independent contractor appraisers (and also failing to pay agents/brokers) and why that should concern lenders in terms of regulatory and liability risk.  Of course, the issue already is a concern for many appraisers and their bank accounts because of the recent failure of not only Evaluation Solutions but also National Real Estate Information Services (NREIS). 

The failure of Evaluation Solutions and its subsidiary ES Appraisal Services (I refer below to both companies as "ES"), in particular, provides a good look at the anatomy of an AMC's downfall and bankruptcy.  ES filed its Chapter 7 Bankruptcy Petition on January 25, 2013 in Florida.  The AMC had signaled that it would file for bankruptcy in December, when it was widely reported to have lost its biggest client JPMorgan Chase Bank.

Here are some of the interesting points I gleaned from reading ES' 231-page bankruptcy petition and its subsidiary's 87-page petition:
  • The biggest asset listed by ES (other than an intercompany accounting entry between the parent and subsidiary) is an "accounts receivable due from JPMorgan Chase Bank" in the amount of $2,372,648 as of 1/8/13.  (Here's my personal opinion: the receivable due to ES from Chase is small compared to ES's unpaid debts to appraisers and agents/brokers -- as explained below, it appears from the bankruptcy filing that ES was about 6 months behind in paying vendors and this apparent situation was not Chase's fault.)
  • Hinting at a threatened legal action against the bank, ES lists a contingent claim as an asset that is described as "potential claim against JPMorgan Chase Bank, N.A. for breach of contract, unfair business practices."  The value is listed as "unkown."  Here's the description of that potential claim in the petition:

  • Other than the receivable from JPMorgan Chase Bank and potential legal claim, this bankruptcy case is essentially a "no asset" bankruptcy filing -- meaning there will be no substantial assets to satisfy any creditors and almost certainly no assets left over to pay the unsecured claims of appraisers.
  • Further, even if there were substantial assets available, a secured lender named Summit Financial Resources is identified as having a lien on the company's assets, including the receivable from JPMorgan Chase Bank.  The amount of Summit's lien is $2,213,826.  Summit is not a regular bank lender, however.  It specializes in high risk asset-based lending and accounts receivable factoring.  Here is the description of that debt and lien:

  • As for unpaid appraisers and unpaid agents/brokers, the total of unpaid fees listed by ES in the bankruptcy is $9,349,612.97 (owed by Evaluation Solutions) and $1,698,799 (owed by ES Appraisal Services).  Thus, $11,048,411.97 is the grand total owed to vendors by this AMC operation.  It is important to note that these debts are unsecured -- to put it bluntly, if you are owed money by ES as an appraiser, I would not expect any funds to come your way as a result of the bankruptcy liquidation process.  The more likely route for recovery will be from the lender you identified in your report as the client and on whose behalf the appraisal was ordered.  The $11 million debt to appraisers and agents/brokers is a remarkable sum because it represents about how much money ES owes for appraisal and BPO services for a six-month period -- yet, ES says in its filing that it only had $2.3 million in accounts receivable, or approximately one month's of appraisal and BPO fees outstanding.  So, it sounds like ES collected roughly 5 months worth of fees that it never passed on to appraisers or agents/brokers. Clearly, Chase paid millions to ES and the money went somewhere -- but not to appraisers or other vendors.
  • Each and every appraiser (and agent/broker) owed money is listed alphabetically by name and amount owed in a schedule to the bankruptcy petition.   Here is a page from the middle of the 192-page schedule of unpaid vendors:

  • Another interesting fact from the petition: ES listed its gross income (before payments to subcontractors and other expenses) for 2012 as $24,046,294.
  • Finally, one thing that many unpaid appraisers would never expect is the potential impact of something called a "preference" under bankruptcy law.  A "preference" is a transfer of money by the bankrupt company to a creditor shortly before the filing of a bankruptcy case.  For regular creditors, the period is 90 days before the petition is filed.  The creditor receiving money in that period is assumed to have been given preferential treatment by the debtor because that creditor got paid, but others did not.  Thus, to promote fair bankruptcy distributions among all creditors, bankruptcy law allows the bankruptcy trustee to recover preferential transfers from those creditors to bring that money back into the bankruptcy estate to spread among all creditors in order of their legal priority.  What does this mean for appraisers?  If you received more than $5,000 in payment from ES in the 90 days before it filed for bankruptcy (there is a schedule of such recipients attached to the petition), you might be demanded by a bankruptcy trustee to repay that money or be sued for it. There are defenses to such claims, but it is always a shock to vendors like appraisers to be demanded to repay money they received from a bankrupt lender or company -- and I have seen it happen to appraisers in other cases.
That brings me to the main point of my presentation to Joan Trice's CRN group. Why should a lender care about appraisers not being paid by an AMC?  There is an obvious moral reason -- the managers and owners of any business should care that the vendors of services to that business are paid for the services they provide.  Leaving that big reason aside, I explained to the group that there are practical reasons why lenders should care and pay more attention to whether the AMCs they use are actually paying their panel appraisers on a timely basis -- namely, lenders should care because the potential consequences to them from AMC non-payment include:
  • Thousands of panel appraisers demanding millions in unpaid fees from the lender.
  • Difficulties caused with borrower relationships when some of the unpaid appraisers begin contacting borrowers (and/or, in a few cases, actually filing liens against the borrowers' properties -- which is a practice that I do not advise appraisers should take).
  • Administrative complaints filed by unpaid appraisers to regulators such as the OCC.
  • Legal actions by appraisers to collect from the lender -- and, sooner or later, an entrepreneurial attorney is going to realize that the subject of unpaid appraiser fees for appraisals delivered to a large lender-client could make a fruitful claim for a class action.
  • The lender being forced to pay twice for appraisals -- once to the AMC and then again to the appraisers.
  • Loss of goodwill with appraisers at a time when appraisal fees appear to be increasing and when some lenders/AMCs are challenged to retain good appraisers in some areas of the country.
And, I did bring up the specter that under Dodd-Frank, it is the lenders' duty to "compensate fee appraisers at a rate that is customary and reasonable" and that a regulator or attorney general might well agree that zero compensation received by the appraiser cannot be justified under either presumption under Dodd-Frank rules for establishing customary and reasonable fees.

A few lenders are starting to get smarter about the risk of AMCs failing to pay appraisers.  I am seeing this firsthand in some of the service agreements I review between lenders and AMCs.  I have started seeing contractual provisions implementing periodic reporting by the AMC to the lender of the payment status to independent contractor appraisers.  I am also seeing provisions by which the lender requires payment to appraisers within a certain number of days of the lender's payment to the AMC and, in one case, a requirement for a segregated payment account.

Copies of the full bankruptcy petitions are here.

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.