As the home mortgage crisis continues into another year, Ohio courts are dealing with newer sets of defendants as plaintiffs and parties attempt to extend a wider net of liability to recoup damages from mortgages that are now in default. Property appraisers are increasingly finding their way into courts upon the allegation of negligent appraisal and over-inflated values for properties. These claims are meeting mixed results and the trend leads toward restricting any ability of a party to recover for a faulty appraisal without contractual privity with the appraiser.

In the early 1990’s, the Ohio courts began to recognize claims against appraisers for negligence and negligent misrepresentation. See Perpetual Federal Savings & Loan Assn. v. Porter & Peck, Inc., (10th Dist. 1992) 80 Ohio App. 3d 569, 609 N.E.2d 1324 (recognizing lender’s cause of action against appraiser); Washington Mut. Bank v. Smith, (11th Dist. 2002) 2002-Ohio-6910 (recognizing home buyer’s cause of action against appraiser). These cases typically held that, even when a lender or home buyer has no direct contract with an appraiser, the reliance upon the appraisal by these parties was foreseeable by the appraiser.

Beginning in 2006, these precedents began to be called into question on a number of grounds. Intervening decisions by the Ohio Supreme Court on the doctrine of economic loss have undermined most tort causes of action for damages that do not arise from personal injury or actual physical property damage. See e.g. Corporex Dev. & Constr. Mgt., Inc. v. Shook, (Ohio 2005) 106 Ohio St. 3d 412, 835 N.E.2d 701 (no tort recovery for economic loss). In nearly every case of an alleged faulty appraisal, the losses are solely economic under this definition.

Following Corporex, an intermediate Ohio court of appeal held that the economic loss doctrine precludes negligent misrepresentation claims against property appraisers. See Trustcorp Mortgage Co. v. Zajac, (1st Dist 2006) 2006-Ohio-6621 (“in the absence of privity of contract, the appraisers were entitled to judgment as a matter of law on the negligent misrepresentation claim”). That same year, the federal Sixth Circuit Court of Appeals likewise applied economic loss to preclude claims against a bank for failure to administer trust assets or safe keep investments. See Pavlovich v. National City Bank, (6th Cir. 2006) 435 F.3d 560.

In 2008, another intermediate Ohio court has denied a borrower’s claim against an appraiser for lack of contractual privity, holding that the only duty owed by the appraiser ran to the lender who retained the appraiser. See Tracht v. American Property Analysts, Inc., (6th Dist. 2008) 2008-Ohio-244 (“there was no relationship or privity from which a duty could be imputed”). Two other appellate courts also have dismissed appraiser claims without evidence of specific reliance upon the appraisal report. See Urbanek v. All State Home Mortgage Co., (8th Dist. 2008) 2008-Ohio-4871; Rece v. Dominion Homes, (10th Dist. 2008) 2008-Ohio-24.

Taken together, these decisions cover all federal courts applying Ohio law to economic loss claims and include the state appellate courts overseeing appeals from Cincinnati, Columbus, Cleveland, and Toledo.

The overall trend in this area is to restrict remedies against appraisers to breach of contract damages. The Ohio courts are increasingly reluctant to recognize tort claims for negligence or negligent misrepresentation, instead dismissing these claims where the plaintiff has no contractual privity with the appraiser. Where the parties have no contract, the plaintiffs increasingly have no claims.

Attorneys at Frost Brown Todd advise and defend banks and mortgage professionals from numerous types of customer lawsuits. We routinely advise these parties how to structure their contracts to avoid future liability and minimize legal risks. In light of the favorable precedents in this area, all banks and mortgage professionals should examine their engagement contracts to determine how best to eliminate future claims. In that regard, please feel free to contact the author to discuss the recent developments in this area, David Walulik (513) 651-6877 dwalulik@fbtlaw.com.