Tuesday, November 26, 2013

Recent Tax Court Decision Provides Another Warning for Appraisers Performing Conservation Easement Appraisals

Gorra v. Commissioner, U.S. Tax Court, T.C. Memo 2013-254.

On November 12, 2013, the U.S. Tax Court decided a petition challenging the IRS' disallowance of a tax deduction for a donated conservation/preservation easement.  The donated easement was for the ostensible purpose of preserving a building fa├žade and other historical characteristics of a property located in New York City. The gist of the decision is that the Tax Court found that the taxpayers were entitled to a deduction for the easement and that the appraisal submitted with their return was a "qualified" appraisal, but that a "gross valuation misstatement" had been made.  The original appraisal submitted by the taxpayers with their return had valued the donated easement at $605,000.  A different appraiser hired by the taxpayers to provide a valuation as an expert witness in the tax court proceeding valued the easement at $465,000 -- in other words, the taxpayers' own expert witness would not support the original appraiser's valuation submitted with the tax return.  The IRS' expert opined that the easement had no value because of the local historic preservation laws already restricting development of the eased property.  In the end, the Tax Court concluded that the value was $104,000.  As a result, the Tax Court also concluded that the taxpayers were liable for a 40% penalty for  a "gross valuation misstatement."

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Thursday, November 21, 2013

Federal Court Rules on USPAP Confidentiality Issue in FDIC Lawsuit Against Appraisers in Colorado

Updated from an earlier post.  On September 5, 2013, in a professional negligence case against two Colorado appraisers by the FDIC, a federal court ruled on an issue concerning USPAP confidentiality.  It was a simple issue, but it's one of the very few court decisions relating to USPAP's poorly written confidentiality rule (this previous post here explains why the rule is poorly written).  This is the rule:
An appraiser must not disclose: (1) confidential information; or (2) assignment results to anyone other than: the client; persons specifically authorized by the client; state appraiser regulatory agencies; third parties as may be authorized by due process of law; or a duly authorized professional peer review committee ...
The question for the court was: in response to a discovery demand in the case, did one of the defendant appraisers have to handover appraisals of the same property that were for different clients and unrelated to the loan at issue despite the confidentiality rule in USPAP?  The court's answer was an easy "yes."

The FDIC Lawsuit.  The FDIC's negligence claims in the lawsuit stem from two appraisals of a single family residence in Grand Junction, Colorado.  The FDIC filed the case as the receiver for failed lender Amtrust Bank. 

The following facts are alleged by the FDIC in its complaint: In January 2008, defendant appraiser Broom prepared an appraisal of the home for a proposed cash-out refinance being arranged by Clarion Mortgage and funded by Amtrust.  He appraised the property for $1,900,000.  The underwriting rules for a large-cash out loan required that Clarion obtain two appraisals and, thus, according to the FDIC, Clarion obtained a second appraisal from defendant appraiser Pace.  He also appraised the property for $1,900,000 according to the FDIC.  The FDIC alleges that the "two appraisals were not independent valuations of the Property" and that both appraisers erred by overstating the square footage of the home by counting a "detached theater room as part of the main dwelling's living area."  The FDIC alleges both appraisals misstated the "gross living area was 5,053 square feet, when it was actually 4,523 square feet."  What's not clear from the FDIC's vaguely written complaint is whether the second appraisal was a really a review that merely concurred with the first appraisal or whether it truly was an entirely separate non-review assignment.  The FDIC has misleadingly pleaded other complaints with regard to this issue. 

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Tuesday, November 19, 2013

Navigators Responds to Attention Focused on Its Recent Lawsuits Against Appraisers

Navigators Insurance Company has released a statement about its recent lawsuits against four appraisers it insured for E&O and about the attention the lawsuits have brought to coverage for "regulatory claims" in some of its E&O policies.  Navigators' lawsuits against the appraisers have been discussed in earlier posts on the Appraiser Law Blog.  This is Navigators' statement:


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Sunday, November 17, 2013

Navigators Sues More Appraisers to Deny Coverage under "Regulatory Claims" Exclusion

Updated on 11/22/13.  On November 14 and 18, Navigators Insurance Company sued three more appraisers to enforce "regulatory claims" exclusions in the E&O policies they purchased. These appraisers are in California and Nevada. Like the appraiser sued by Navigators in Florida on November 6, the new appraisers are being sued by the FDIC for professional negligence in separate cases filed about a year ago.  The objective of Navigators' lawsuits is to seek court confirmation of Navigators' legal position that there is no coverage under Navigators' policy for damages awarded against the appraisers to the FDIC, which is demanding about $500,000 from each appraiser, or any coverage for attorneys' fees and costs to defend the cases beyond $100,000.  The FDIC's lawsuits against the California and Nevada appraisers are scheduled to be ready for trial within the next few months; as a result, the appraisers now each have two lawsuits they must defend: the FDIC's case and Navigators' case regarding the insurance coverage.  The latest lawsuits can be found at this link on www.appraiserlaw.com.  Accompanying each lawsuit as an exhibit is the relevant appraiser's E&O policy from the Navigators program.

Navigators' lawsuits to deny the appraisers coverage again relate to the "regulatory claims" exclusion in many Navigators' policies -- a similar version of which can be found in some policies from General Star.  I've warned appraisers and also lenders and AMCs on this blog about the relevance of these types of exclusions in E&O policies for the last several years.  One of my first warnings came in 2011 when "regulatory claims" exclusions first started appearing in policies sold by General Star: "Some Appraiser E&O Policies Now Exclude FDIC or Other Regulatory Agency Claims," April 8, 2011 (that earlier also post provides detail about how to identify "regulatory exclusions" and where/when they may apply in specific policies).  We are now seeing those exclusions come home to roost in actual cases.

In my opinion, Navigators is technically correct in its legal position in each lawsuit about the wording of its exclusions for FDIC and similar claims in its policy.  Navigators' "regulatory claims" endorsement in each case says what it says: (1) the policy does not cover damages in any claim by the FDIC, (2) Navigators has no duty to defend an appraiser against an FDIC claim, and (3) the appraiser is limited to payment of $100,000 for attorneys' fees and costs in defending him or herself against the FDIC.  However, there are still big issues that the appraisers or FDIC may argue. First, Navigators has chosen an extremely distressing time for the appraisers to sue them over this insurance issue -- each of the appraisers is only weeks away from needing to be ready for trial with the FDIC.  The appraisers are facing these lawsuits by Navigators to deny insurance coverage right when they have the FDIC trials looming over them.  Navigators' legal battle about this issue crosses over a number of cases and, to a large extent, the appraisers unfortunately are pawns in Navigators' bigger battle with the FDIC, which is being coordinated across the country by high-powered Washington, DC law firm Wiley Rein LLP.

Second, the coverage problem with the policies for these appraisers relates to a bigger issue which goes back to when "regulatory claims" exclusions were first introduced by some appraiser E&O programs.  In 2010 and 2011, a popular E&O program for appraisers by insurer General Star was discontinued with the program administrator.  The General Star policies in that program did not have “regulatory claims” exclusions, but General Star undoubtedly realized that the FDIC and other regulatory agencies were more frequently suing over appraisal problems.  When that program was discontinued, most of the appraisers with old General Star policies were moved to new policies from both Navigators and General Star.  Some of these new polices (depending on the state with Navigators and depending on the date of coverage with General Star) now included "regulatory claims" exclusions for the first time.  Some appraisers have told me that they did not realize the change in their E&O because they never expected a policy for appraisal work would exclude coverage for claims by a banking regulator like the FDIC which is known to sue appraisers.  It is possible that the FDIC or appraisers have realized these issues and will now be raising them in response to the lawsuits filed by Navigators.

Navigators has released a statement about its coverage lawsuits against the appraisers.  That statement is included in a later post here.

"Regulatory Claims" Exclusions Are a Problem for Appraisers Beyond FDIC Lawsuits.

Appraisers and the clients that hire them need to know that "regulatory claims" exclusions are not just a problem for appraisers being sued by the FDIC about appraisals at the peak of the real estate bubble.  "Regulatory claims" exclusions are a problem relating to current appraisal work as well. For example, a popular appraiser E&O policy from General Star includes the following exclusion in policies sold to appraisers (if the "prior acts" date on the appraiser's policy is before 8/1/08):

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Thursday, November 7, 2013

Navigators Insurance Company Sues Appraiser to Deny Coverage Under "Regulatory Claims"/FDIC Exclusion


Update: Navigators has sued three more appraisers to deny coverage under the same "regulatory claims" exclusion discussed in the post below.  The more recent lawsuits are discussed in this later post

Yesterday, appraiser E&O provider Navigators Insurance Company filed a lawsuit in Florida against one of its own insured appraisers.  In its complaint, Navigators seeks to enforce a "regulatory claims" exclusion in the E&O policy purchased by the appraiser.  That appraiser is currently being sued by the FDIC in a separate lawsuit scheduled for trial next month. If Navigators prevails in its legal action against the appraiser, the appraiser will not have coverage under her E&O policy for any damages for which she is found liable to the FDIC at the upcoming trial and will also receive no further payment of defense costs.

The two cases provide an important look at current FDIC lawsuits against appraisers and at a significant hole in some E&O policies marketed to appraisers by some insurers.

The FDIC's Underlying Lawsuit Against the Appraiser.  In February 2007, the defendant appraiser allegedly appraised a condominium unit in Holmes Beach, Florida for $950,000.  The appraisal was for a $570,000 refinance loan arranged by defunct mortgage lender Taylor, Bean & Whitaker (TBW).  The funds for the loan came from a wholesale line of credit provided by Colonial Bank.  TBW allegedly assigned the mortgage to Colonial Bank upon origination.  Colonial Bank failed in 2009, and the FDIC is now serving as its receiver.  As a receiver, the FDIC has the right and ability to pursue losses it contends resulted from the negligence or other alleged wrongdoing of professionals or service providers to the failed lender, including appraisers.

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Wednesday, November 6, 2013

FDIC Guidance about New Exclusions in Liability Insurance Policies

I have written on this blog about the recurring issue of FDIC-related exclusions in appraiser professional liability (or E&O) insurance policies.  Today, an appraiser in Florida was sued by her E&O insurer to deny coverage for damages in an FDIC lawsuit against her based on such an exclusion in her policy.  I will write about that case in a future post (update: the post about that case is here).  The FDIC itself recently weighed in on the appearance of these types of exclusions in insurance policies.  That guidance is discussed below.

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