By Robert M. Steeg

When a business transaction goes bad, can the person who has suffered a loss sue other persons involved in the transaction even though the injured person had no contractual relationship with those other persons? A recent case by the Louisiana First Circuit Court of Appeal, Dufrene vs. Murphy Appraisal Services, LLC, demonstrates that the answer is yes, but there are important limits on this ability.

The Facts

The basic facts of the case in question are that the plaintiff purchased a piece of property for use as a maintenance yard for his fleet of concrete trucks. He did not independently verify the zoning, and it turned out that the property was zoned single-family residential. The property was essentially worthless to the buyer, who had paid $87,500.00 for it.

Needless to say, the buyer sued everyone in sight. The prime defendants were the parties whom you would expect to see – the seller, the seller’s real estate agent, and the buyer’s real estate agent.

The buyer went further and sued the appraisal company who had appraised the property for the buyer’s lender. The appraisal performed by the appraisal company contained an error whereby the appraisal company indicated that the property was in fact zoned for commercial use that would have permitted the buyer’s truck maintenance yard.

The Proceedings

At an early stage in the proceedings, the appraisal company asked the court to dismiss it from the case. The appraisal company argued that its sole involvement was its contract with the lender. It had entered into a contract with the lender for the delivery of an appraisal. The appraisal was to be used by the lender exclusively for the purposes of deciding whether or not to make a loan to the plaintiff. The appraisal report was issued directly to the lender, and no one else.

This absence of a contractual relationship was conceded. The issue was whether or not the appraisal company could nevertheless be found liable to the buyer if it were determined that the appraisal company had been negligent stating in its report that the property enjoyed commercial zoning suitable for the plaintiff’s intended use.

The Ruling

The answer is that in theory, the appraisal company could be found liable to the buyer, but based upon the facts of the case, such a claim would not be upheld in this particular instance.

The legal theory was that of “negligent misrepresentation.” This legal theory does not require a contract. Every person is liable for the consequences of his or her own negligence, (1) if it was reasonably foreseeable that another person would be injured as a result of that negligence and (2) if the injured person was in fact harmed by the negligent conduct.

The first prong of the theory is very important to anyone involved in a business transaction. Who might you be liable to, beyond the person with whom you have a direct contract? Conversely, whom might you sue if the business transaction goes bad? In the Dufrene case, the court held that it was reasonably foreseeable to a property appraiser that persons other than its lender client could come into possession of the appraisal and rely on it, so that those persons could have a right to sue if the appraisal report negligently misled them to an injury or loss. So, in theory the appraiser could have been found liable to the buyer.

On the facts of the case, however, the court found that there was no possible way for the buyer to prove that its loss was caused by a mistake in the appraisal report, and for this reason the appraisal company was dismissed from the case at an early stage. The buyer admitted that it had never seen the appraisal report prior to its purchase of the property, and that it had not relied upon the erroneous zoning designation in the appraisal report. In addition, none of the other parties who provided information to the buyer (such as the real estate agents) had reviewed or relied upon the appraisal report either.

Thus, the court concluded, the buyer’s loss was not caused in any possible way by the error in the appraisal report.

The facts of each case are different, so this is a cautionary tale for everyone involved in a business transaction. If, for example, the lender had furnished the appraisal report to the buyer, and the buyer had foregone an independent examination of the zoning because that subject was already covered in the appraisal report, the result might well have been different. The lesson: a provider of goods or services in a business deal could have liability to persons well beyond the persons with whom it executed a contract.

Filed under: Commercial and Business Litigation, Development, Zoning and Land Use, Industry News, Purchase and Sale, Real Estate Litigation
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