An alarming precedent has just been set for real estate appraisers in the bankruptcy case of Evaluation Solutions/ES Appraisal Services (ESA). Despite numerous objections from appraisers and agent/brokers alike, a Florida bankruptcy judge has ruled in favor of JPMorgan Chase in granting a Bar Order which absolves Chase of any liability on future claims from appraisers, agents, and brokers for unpaid fees for valuation services that were delivered to Chase through ESA.
Specifically, the Order “shall be deemed to have released Summit and JPMorgan Chase and each of their current and former…agents…from any and all known or unknown claims, causes of action, suits, debts, obligations, liabilities, demands, losses, costs and expenses (including attorney’s fees).”
ESA declared bankruptcy in January 2013 with over 11 million dollars in unpaid debt, with an estimated 5 million in unpaid fees to appraisers, agents, and brokers. JPMorgan Chase was the client for 98% of ESA’s valuation business and was listed as the client on all of the appraisal reports that appraisers submitted to Chase through ESA. Read Stiffed Appraisers Go After Chase and Chase Denies Responsibility for Bankrupt AMC Debt.
Within the appraisal community, the widely held understanding of the relationship between a lender and its appraisal management company (AMC) has been that of an agency relationship, wherein the AMC serves as the lender’s agent, with the lender being responsible for the actions and obligations of its agent. This is due to the fact that federal regulations, including FIRREA and the Interagency Appraisal Guidelines, require a lender to engage appraisers either directly or through “its agent.”
NOLO’s Plain English Law Dictionary defines agency as: “The relationship of a person (called the agent) who acts on behalf of another person, company, or government, known as the principal. The principal is responsible for the acts of the agent, and the agent’s acts bind the principal.”
However, the Court notes that “Agency” is nowhere defined in the federal regulations and, consequently, the Court must revert to a common law definition of agency. Using a common law definition of agency, wherein “the essential element of agency is control,” the Court has ruled that no agency relationship existed between Chase and ESA. The Court cites Section 14.8 of the Master Service Agreement between Chase and ESA where it states that at all times ESA was to remain “an independent contractor.” In short, the Bar Order has been approved, in part, because ESA was not Chase’s agent.
In its Glossary of Terms the Interagency Appraisal and Evaluation Guidelines admits that the regulations do not define the term, but states: The Agencies’ appraisal regulations do not specifically define the term “agent.” However, the term is generally intended to refer to one who undertakes transacting business or managing business affairs for another.
Who’s the Client?
Richard Hagar, SRA points out that The 2010 Interagency Appraisal Guidelines specifically state: “An institution or its agent must directly select and engage appraisers.”
“This is very clear cut,” says Hagar, “It means that lenders are prohibited from engaging non-appraisers for appraisal services. They must do it either directly or through their agent.”
“In my opinion, it appears that Chase has knowingly violated numerous Federal Regulations and statements by the banking agencies and ordered appraisals through prohibited parties,” says Hagar.
Besides a potential violation of federal regulations, Hagar also says that this may be a case of false representation. “Appraisers are consistently and repeatedly told, by AMCs, that the AMC is acting as the agent on behalf of the lender; and consequently, appraisers are required to place the lender’s name on the appraisal as the ‘client,’” says Hagar. “For example, Chase was listed as the client on all of the appraisal reports it received from appraisers through ESA.”
Hagar, who has been involved in many high profile fraud cases as an expert witness, says that there are arguably elements of fraud in a case like this. Hagar points out that the general rule for fraud is that if there is a misrepresentation and it alters an outcome, and that outcome causes financial loss, then “fraud” has likely occurred. “If the appraiser had known that the AMC was not the agent for Chase, then the appraiser would have placed the AMCs name on the appraisal, not Chase’s. If the appraiser knew that the AMC was the client, then they would have made alternate business decisions regarding payment (which they never received). To me, appraisers may have an argument that Chase has conspired with an AMC to misrepresent facts to the appraiser,” says Hagar.
Hagar points to Section 5 of the Federal Trade Commission Act (FTC Act) (15 USC 45) which prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce.’’ These acts include:
A representation, omission, or practice misleads or is likely to mislead the consumer;
A consumer’s interpretation of the representation, omission, or practice is considered reasonable under the circumstances; and
The misleading representation, omission, or practice is material.
AMC Master Service Agreements
An argument that was used by Chase and the bankruptcy judge in denying appraisers’ and agents’ claims against Chase is that because Chase and ESA entered into a Master Service Agreement (MSA) that specifically defined ESA as an “independent contractor,” ESA was consequently not Chase’s agent and that Chase is not responsible or liable for ESA’s actions.
However, if this is true, it begs the question about Chase’s other MSAs, and the agreements and arrangements that exist between lenders and AMCs across the country.
Are AMCS, in fact, the agents of lenders? Who is the client?
The answers to these questions will hopefully be clarified by regulators or another court ruling shortly. Sources close to the case say that appraisers and agents are planning to appeal the bankruptcy judge’s decision and advance this case to an Appellate Court.
This is a developing story.
About the Author
Isaac Peck is the Associate Editor of Working RE Magazine and Marketing Coordinator at OREP.org, a leading provider of E&O Insurance for appraisers, inspectors, and other real estate professionals in 49 states. He received his Bachelors in Business Management at San Diego State University. He can be contacted at Isaac@orep.org or (888) 347-5273.