Private Mortgage Inv. Serv., Inc. v. Hotel & Club Assoc., Inc.: Appraiser Liable to Third Party for Negligently Prepared Report

A federal appellate court has considered whether an appraiser could be sued for negligent misrepresentation by the purchaser of a mortgage.

Cypress Creek Enterprises, Inc. ("Seller") sold a three acre lot with a house that it owned to Burley Smith ("Buyer") for $389,000. The Buyer was a corporate officer of the Seller, and the Seller helped to finance the transaction through a $330,650 purchase money note and mortgage ("Mortgage").

The Seller hired the appraisal firm Hotel and Club Associates, Incorporated ("Appraiser") to conduct an appraisal of the property and write a report summarizing the appraisal ("Report"). The Report stated that the appraisal was a "limited appraisal," meaning that the appraisal did not take into account all three accepted methods of property valuation. The Report also stated that the appraisal was for the property "as is," but also noted that the property's greatest value was as a bed and breakfast and would need approximately $50,000 in improvements in order to make the conversion into a bed and breakfast. The Report placed the "as is" value of the property at $400,000 in September 1997.

In November 1997, Private Mortgage Investment Services, Incorporated ("Mortgage Purchaser") purchased the Mortgage from the Seller for $200,000 and paid a $12,000 commission to the individual who brokered the transaction. The Mortgage Purchaser relied upon the Report in making its decision to buy the Mortgage. The Buyer never made any payments on the Mortgage. The Mortgage Purchaser foreclosed the property and purchased it at a foreclosure sale for $125,000. In 1999, the Mortgage Purchaser sold the property for $60,000, which was the best offer it received for the property.

The Mortgage Purchaser brought a lawsuit against the Appraiser. The lawsuit alleged professional negligence and negligent misrepresentation against the Appraiser. A jury found the Appraiser liable for negligent misrepresentation and determined the damages that the Mortgage Purchaser suffered were $57,500. South Carolina has a comparative fault statute, and so the jury was asked to determine culpability of each party. The jury found both the Appraiser and the Mortgage Purchaser were equally culpable in causing the Mortgage Purchaser's loss, and so the Mortgage Purchaser was awarded $28,750. The Appraiser appealed.

The United States Court of Appeals for the Fourth Circuit affirmed the award of the trial court. To succeed in a negligent misrepresentation action, the Mortgage Purchaser would need to show: the Appraiser made a false representation to the Mortgage Purchaser; the Appraiser had an economic interest in making the statements; the Appraiser owed a duty of care to the Mortgage Purchaser; the Appraiser breached that duty by failing to exercise such care; the Mortgage Purchaser justifiably relied upon the Appraiser's representations; and the Mortgage Purchaser suffered a financial loss because of its reliance on the Report.

The issue for the court to decide is whether South Carolina law would impose liability upon an appraiser for a negligent misrepresentation. The trial court had ruled that the Appraiser could be liable because it was a professional who was in the business of providing information used to guide the actions of others, and the Mortgage Purchaser relied upon the Report to its detriment. South Carolina's highest court has not indicated whether or not it would adopt such a rule in the state, and so the court had to predict whether or not a South Carolina court would impose such a duty upon the Appraiser. The court found that South Carolina had imposed a similar duty upon an accounting firm for negligently supplying factual information used to guide third parties, and so the court found that South Carolina courts would hold the Appraiser liable for negligently supplying a negligently prepared appraisal report that the Mortgage Purchaser justifiably relied upon to its detriment. Thus, the court affirmed the jury award to the Mortgage Purchaser.

Private Mortgage Inv. Serv., Inc. v. Hotel & Club Assoc., Inc., 296 F.3d 308 (4th Cir. 2002).

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