Utah Court of Appeals Limits Third-Party Beneficiary Contract Claims Against Appraisers, but Recognizes Tort Based Third-Party Claims

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Author: David Leta, Snell & Wilmer

In Lilley v. JPMorgan Chase, et al, 748 UT Adv. Rpt. 48, 213 Utah App. 285, Nov. 20, 2013, the Utah Court of Appeals affirmed an order of the District Court dismissing the Plaintiffs’ breach of contract action against an appraiser who had prepared an appraisal report for the Plaintiffs’ lender in connection with a construction-to-permanent financing loan for a single family, owner occupied home. The appraisal was ordered by the lender prior to approving and funding the loan. After Plaintiffs’ defaulted on the loan, they sued the lender and the appraiser alleging that the appraiser breached his contract and was negligent in preparing an inflated appraisal, which, in turn, induced them to borrow too much for the construction of the residence.

In affirming the lower court’s dismissal of the breach of contract claim, the Court held that the Plaintiffs could not establish status as a “third-party beneficiary” under either the bank’s contract with the appraiser or under the appraisal itself. Relying upon prior Utah precedent, the Court held that “the existence of a third-party beneficiary’s status is determined by examining a written contract. … The written contract must show that the contracting parties clearly intended to confer a separate and distinct benefit upon the third party. … It is not enough that the parties to the contract know, expect or even intend that others will benefit from the [contract]. … The written contract must show that the contracting parties clearly intended to confer a separate and distinct benefit upon the third party. … The contract must be undertaken for the plaintiffs’ direct benefit and the contract itself must affirmatively make this intention clear. … [O]nly if the written contract’s clear intent is to confer rights upon a third party may that third party enforce rights and obligations of the contract. … A third party who benefits only incidentally from the performance of a contract has no right to recover under the contract.” The Court also looked carefully at the appraisal report which contained standard disclaimer language limiting the preparation, intent and use of the report solely for the lender’s benefit. Finally, the Court held that the appraiser’s knowledge that the Plaintiffs would subsequently use the appraisal report was insufficient to create third-party beneficiary status because the appraisal was not “undertaken for [plaintiffs’] direct benefit.”

Notwithstanding this holding, the Court also held that “[a] third party may bring a tort action against an appraiser for negligent preparation of an appraisal report, regardless of third party beneficiary status.” In this case, however, the Court found that the Plaintiffs “failed to bring their action within the applicable four year statute of limitations specified in Utah Code Anno. § 78B-2-307(1)(a) for initiating a negligence claim not founded upon an instrument in writing.”

The impacts of this decision are mixed. On the one hand, absent special circumstances, appraisers do not have contract liability to third parties who may look to or rely upon their appraisals. On the other hand, the opinion validates a third-party negligence claim against appraisers, notwithstanding the third-party disclaimer language that is often included in appraisal reports. One might expect debtors, trustees and creditor committees to rely on this case in asserting tort-based claims against appraisers as a way to cover losses incurred in failed real estate projects. Lenders also might be wise to take a security interest in any such tort claims as additional collateral when they make loans that are based on such appraisals.