A federal appeals court has considered whether a participant in a mortgage fraud scheme could recover from an appraiser for damages suffered when he also became a victim of the scheme.
Michael Stapleton (“Stapleton”) allegedly approached Trent Decatur (“Decatur”) with the following proposal: Stapleton would locate “under-valued” homes, arrange to borrow more money than the homes were worth, and the additional remaining loan amounts would be used to repair and improve the property. Decatur’s role would be to commit to paying the mortgage loans and in exchange for agreeing to repay the loans, Decatur would receive all of the rental income from the properties. Stapleton would make the downpayment, undertake the property renovations, and locate the tenants.
The other participants in the mortgage fraud scheme were Courtenay Stocker (“Mortgage Broker”) of NovaStar Home Mortgage, Inc. (“NovaStar”) and Lisa Phillips (“Apprentice”). The Apprentice would appraise the property for approximately double its sale price, and the Mortgage Broker would arrange the loans. When the loan funded, Stapleton would receive his deposit, the Apprentice would collect $300, and then Stapleton and the Mortgage Broker would divide up the remaining amount of the loan. The Apprentice was a “licensed trainee appraiser” and so needed supervision by Kimberly Daniel (“Appraiser”), a licensed appraiser who signed all of the appraisals prepared by the Apprentice. The Apprentice received $300/appraisal, paying $50 of this amount to the Appraiser. While the Appraiser was supposed to accompany the Apprentice during her appraisals and check her work to see if it met the proper standards, the Appraiser allegedly did not do this and simply signed off on the Apprentice’s appraisals.
After initially receiving rental income from the properties, the payments allegedly stopped coming to Decatur from Stapleton. Decatur filed a lawsuit, seeking to recover for the damages he suffered. He made RICO, fraud, and negligence claims against Stapleton, the Mortgage Broker, and NovaStar. Decatur dropped the Apprentice from the lawsuit because Decatur determined that she didn’t have sufficient assets to cover a judgment against her. However, the Appraiser did have insurance and so Decatur sought damages from her for fraud. The trial court dismissed the Appraiser from the lawsuit, finding that appraisers in Indiana do not owe a duty to borrowers, only lenders. Decatur appealed that ruling.
The United State Court of Appeals for the Seventh Circuit affirmed the ruling of the trial court. The rule in Indiana is that professionals like accountants and lawyers are not liable to third parties who rely upon information which the professional did not prepare for them. This rule limits the professional’s liability only to their clients plus anyone else whom the professional knows will rely upon the information. There is an exception to this rule if the information provided is fraudulent. Since the Appraiser’s client was either Stapleton or the Mortgage Broker and there was no indication that the Apprentice and the Appraiser knew that Decatur would be relying upon the appraisal, Indiana law barred Decatur from recovering from the Appraiser.
Decatur argued that Stapleton or the Mortgage Broker acted as his agent during the fraud scheme and also that he was a third-party beneficiary of the appraisals. The court first termed the idea that Stapleton or the Mortgage Broker was Decatur’s agent as “loopy”, since the two of them were conspiring to defraud Decatur. The court also rejected the third-party beneficiary argument because the court did not believe Indiana law would hold a professional liable to an individual who was unknown to them.
Next, Decatur argued that the Apprentice prepared her appraisal fraudulently and so the fraud exception to the general rule applied in this case. The trial court had determined that because appraisals are opinions, there could be no fraud unless the speaker disbelieves his/her own words. Decatur produced testimony showing that the value of the properties was significantly lower than the loan amounts. Since the Appraiser signed off on the Apprentice’s appraisals and Indiana law requires appraisers to take “full responsibility” for trainee’s reports, Decatur argued that she was vicariously liable for the Apprentice’s fraud.
The court determined that the Appraiser would only be liable for the Apprentice’s fraud if she had knowledge of it. While no court in Indiana has interpreted the state’s appraiser regulations to determine what “full responsibility” encompasses, the court found that the Uniform Standards of Appraisal Practice contain a knowledge requirement for fraud liability for another’s actions, as do the “Model Rules for Professional Conduct”, which govern lawyers. Believing that Indiana courts would find a similar requirement existed for appraisers, the court affirmed the ruling of the trial court.
Decatur Ventures, LLC v. Daniel, 485 F.3d 387 (7th Cir. 2007).