No Contract-No Duty: Appraiser Firm Owes No Professional Duty To Developer Absent Contract

By David S. Fried

In a June 2014 ruling, the Georgia Court of Appeals ruled that a real estate appraisal firm owed no professional duty to a real estate developer with whom it had no contract. Adams v. Dewitt, 2014 WL 2609974.The appeal arose from a trial court grant of summary judgment to the appraisal firm.

Adams and his firm, North Beach, were real estate developers. DeWitt and his firm, Cook & DeWitt, were real estate appraisers.   In March 2008, First National Bank contacted Adams about an available property on Tybee Island, Georgia. The property consisted of 25 residential lots. The owners did not wish to continue developing the lots. After visiting the property, Adams formed North Beach and North Beach borrowed millions of dollars from First National Bank to purchase the property.

In April 2008, First National retained DeWitt to appraise the property. DeWitt valued the property at $5,000,000.00. The valuation report stated, “This report is intended for use by . . . [First National]. Use of this report by others is not intended by the appraiser. This report is intended only for use in providing data upon which the client may analyze the property as collateral for a mortgage loan.” Because no environmental assessment was provided to the appraiser, the report also assumed the site was free of contamination and/or that all environmental issues had been or would be resolved.

In May 2008, North Beach completed its purchase of the property. But North Beach was unable to develop the property as intended because of buried trash on the site and the cost of clean-up. So, North Beach was left with a substantial debt to First National Bank and a property it could not use.

Adams sued DeWitt complaining that DeWitt breached the professional standard of care applicable to real estate appraisers. The trial court granted summary judgment to DeWitt. The Court of Appealsaffirmed the trial court’s ruling. It essentially held that, because there was no contract between Adams and Dewitt, and because Dewitt’s appraisal report limited its use by anyone besides First National Bank,Adams could not establish that DeWitt owed him any legal duty or that he could reasonably rely on the findings of the report.

The appellate court relied on the Georgia Supreme Court’s decision in Roberts& Co. Assoc. v. Rhodes-Haverty Partnership, which established the following rule:

[O]ne who supplies information during the course of his business, profession, [or] employmenthas a duty of reasonable care and competence to parties who rely upon the information in circumstances in which the maker was manifestly aware of the use to which the information was to be put and intended that it be so used. This liability is limited to a foreseeable person or limited class of persons for whom the information was intended, either directly or indirectly. In making a determination of whether the reliance by the third party is justifiable, we will look to the purpose for which the report or representation was made. If it can be shown that the representation was made for the purpose of inducing third parties to rely and act upon the reliance, then liability to the third party can attach․ The additional duty that this rule imposes may be, of course, limited by appropriate disclaimers which would alert those not in privity with the supplier of information that they may rely upon it only at their peril.

The court also cited to Badishe Corp. v. Caylor, the Georgia Supreme Court case which clarified that Robert Assoc. & Co. did not expand professional liability to an unlimited class of persons whose presence is merely foreseeable, but only to “those persons, or the limited class of persons who the professional is actually aware will rely on the information prepared.”

In Adams, the evidence established that DeWitt knew a borrower (Adams) existed, but Adams could not establish that DeWitt knew that hereceived or relied on the appraisal. The evidence also failed to support the inference that DeWitt intended for Adams to rely on the report. On the contrary, the report’s limitation on intended use, on its face, negated any intention that the report be used or relied upon by anyone but First National. Such language constituted “an appropriate disclaimer” which should have alerted Adams that he was not in privity with DeWitt and could rely on the appraisal only at his peril. Finally, no evidence existed to support an inference that DeWitt conducted the appraisal to induce Adams to justifiable rely and act upon the appraisal – both prima facie elements of Adams’ claim.

Comment

There is no comment on this post. Be the first one.

Leave a comment