No Liability for Bad Draft Appraisal

READ THE FULL DECISION: Virginia Oak Venture, LLC v. O.D. Fought, Jr.

A Texas court has determined that a commercial property purchaser’s reliance on a draft appraisal provided to the originating lender was unjustifiable.

Jane Tang and her company, Virginia Oak Venture, LLC (“Purchaser”), bought an apartment complex (“Property”) as an investment property.  Shortly thereafter, the housing market plummeted, and, having never realized a profit from the Property, Purchaser filed for bankruptcy.  She then sued a number of parties, including the sellers of the Property (“Sellers”), the real estate broker who had represented Sellers (“Broker”), Broker’s salesperson (“Salesperson”), the originating lender (“Lender”), and the appraiser who had provided a draft appraisal to Lender (“Appraiser”).

In her lawsuit, Purchaser claimed that Broker and Salesperson had grossly misrepresented the earning potential of Property, had fraudulently supplied false information about the Property to Appraiser, and had violated state licensing laws by acting as Purchaser’s agent as well as that of Sellers.  She also claimed that Appraiser had engaged in fraud and misrepresentation in creating the draft appraisal based on false and incomplete information.  Finally, she claimed that all of the defendants had, in various combinations with one another, engaged in civil conspiracy to ensure that Purchaser would obtain – and ultimately spend – a loan for much more money than Property was actually worth.

The trial court granted summary judgment in favor of Appraiser, Lender, and Broker.  The questions of whether Salesperson had acted as an agent for Purchaser in contravention of state agency law and whether Salesperson had fraudulently misrepresented the Property’s earning capacity went to a jury trial.  The jury found in favor of Salesperson on both issues.  Purchaser appealed, and the appellate court affirmed on all counts.

In upholding summary judgment in favor of Appraiser, the appellate court pointed to the fact that Appraiser never issued a final, signed appraisal to anyone.  While Appraiser had supplied a draft appraisal to Lenders, it was stamped prominently on virtually every page with the word “Draft” and contained a disclaimer stating that the borrower should not rely on its accuracy “or for any purpose in connection with the loan.”  Furthermore, the record showed that Purchaser did not receive a copy of the draft appraisal until after the purchase had closed.  While Purchaser tried to overcome this fact by arguing that her claim was based not on her reliance on the appraisal itself but on “her reliance of the Lender’s reliance on the appraisal,” the court found this convoluted argument to be without merit.  Under Texas law, a plaintiff must show “actual and justifiable reliance” on false statements of fact in order to prove fraud or negligent misrepresentation, and “stretching reliance through another party is not supported by law.”

In order for the appellate court to overturn the jury verdict in favor of Salesperson, Purchaser was required to show that the evidence presented to the jury established that Salesperson had in fact violated state license law.

On the question of whether Salesperson had acted as a “double agent” to both Sellers and Purchaser, the court found that Salesperson’s acts of picking Purchaser up from the airport, agreeing to be named as Purchaser’s Texas resident agent for service of process, and giving her personal tours of the Property could all be reasonably construed as “representative of a dedicated salesman tracking the spoor of a very healthy commission.”  The court said that while there was some behavior on Salesperson’s part that could support the contention that Salesperson had been acting as Purchaser’s agent, it was also reasonable for the jury to interpret Salesperson’s actions as simply “greasing the wheels” of the deal.  In short, held the court, Purchaser’s belief that “a salesman hired by the seller, and whose compensation would be derived solely from a commission on the sale of the property” was in actuality working in Purchaser’s best interest “was not a judicious belief for her to adopt.”

As to the question of whether Salesperson had supplied false and misleading information regarding the earning potential of the Property, the appellate court upheld the jury’s determination in favor of Salesperson in spite of the fact that some evidence did exist that Salesperson had provided inaccurate “or perhaps accurate but misleading” information to Lender and/or Appraiser.  In doing so, the court cited evidence that the faulty information was simply “routed through” Salesperson from Seller to Lender, and that, in any event, the information was “mostly” accurate.  In addition, in order to prove fraud on the part of Salesperson for providing false information, Purchaser would have needed to show that she had not had “an equal opportunity to discover the truth.”  The appellate court found that Purchaser could have conducted her own independent investigation into the Property’s earning potential, but that instead she had made no effort to obtain information from any “outside, unrelated sources that did not have an agenda.”

Virginia Oak Venture, LLC v. O.D. Fought, Jr. et al., 448 S.W.3d 179 (Tex. Ct. App. 2014).

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