Lenders loaned Borrowers $5.55 million to purchase and develop unimproved residential lots in Valencia County, New Mexico. Borrowers defaulted on the loan. Lenders initiated a judicial foreclosure action and sued numerous defendants on a variety of claims.
Lenders alleged that Borrowers had made false representations of property value to induce Lenders to provide “excess” loans funds, which were then transferred to the Borrowers’ personal profit sharing plans. Lenders alleged that Appraiser, hired by Borrowers, had conspired in or aided the tortious conduct of others and had intentionally or negligently provided “falsely inflated appraisals” upon which Lenders had relied.
The trial court granted Appraiser’s motion to dismiss, finding as a matter of law that Lenders were not within the narrow class of persons entitled to rely on the appraisal. Lenders appealed. The Court of Appeals reversed in part and remanded for further proceedings.
The Court of Appeals found the trial court had erred by ruling as a matter of law that Appraiser owed Lenders no duty. This was true despite that one appraisal stated it was “not intended to be used, transferred or relied upon by any person other than” its specified recipient. That language did not preclude a claim that Appraiser knew the appraisal would be supplied to and relied upon by others.
Arizona follows the Restatement (Second) of Torts (“Restatement”) to determine when an appraiser owes a duty to third parties. An appraiser’s liability is limited to loss suffered “by the person or one of a limited group of persons for whose benefit and guidance [the appraiser] intends to supply the information or knows that the recipient intends to supply it” and extends only to those transactions “that he intends the information to influence or knows that the recipient so intends.” Restatement § 552(2). The appraiser need not know the identity of the third-party recipient at the time he supplies the information, as long as the third party falls within a distinct group or class of persons the appraiser intends to reach and influence with the information. Restatement § 552 cmt. h.
If, on the other hand, the appraiser and the named recipient of the information regard the identity of the recipient as “important and material” and the appraiser “understands that his liability is to be restricted to the named person” only, then the appraiser owes a duty to the named recipient only. Restatement § 552 cmt. h.
Whether a duty exists depends on the specific circumstances and relationships between the parties. If Appraiser intended to supply his appraisal to Lenders, or knew that Borrowers intended to supply it to Lenders, then Appraiser owed a duty to Lenders.
The Court of Appeals affirmed the dismissal of the aiding and abetting claim (as waived on appeal), reversed the dismissal of the negligent misrepresentation claim, and remanded for further proceedings.
Judge Espinosa authored the opinion; Presiding Judge Vásquez and Judge Kelly concurred.
Posted by: Mark Hummels