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December 05, 2018

Massachusetts Supreme Court Rules on Applicability of Appraiser Bias

The Massachusetts Supreme Judicial Court on Nov. 26 ruled that the prohibition on appraiser bias contained in the Uniform Standards of Professional Appraisal Practice and the Appraisal Institute’s Code of Ethics and Certification Standard, or the appearance of bias, applies only to individuals and not to an appraiser’s employer.
 
The case is Buffalo-Water 1, LLC v. Fidelity Real Estate Company, LLC (SJC 12487) (Nov. 26, 2018).
 
The Court’s ruling is consistent with the position advanced in the amici curiae brief submitted by the Appraisal Institute and the Massachusetts Board of Real Estate Appraisers. At stake was the ability of appraisers who perform services in Massachusetts to engage in the valuation of properties when the appraisers’ employers provide other services, such as brokerage, leasing and asset management.
 
The case stems from the attempted repurchase of a commercial property in Boston by Fidelity Real Estate Company, LLC, from Buffalo-Water I, LLC, a subsidiary of a national real estate company. Fidelity sold the property to Buffalo-Water in 2004, but leased back the building and maintained an option to repurchase it during the final year of its lease. In 2016, Fidelity exercised its right to repurchase the property. 
 
Fidelity and Buffalo-Water were unable to agree upon the purchase price, and each party retained an appraiser who held the MAI designation from the Appraisal Institute and had at least a decade of experience valuing Boston commercial properties, as required in the option agreement. Since the parties’ own appraisals differed by more than 5 percent, they were required to retain a third, independent appraiser with the MAI designation to establish the property’s fair market value. The parties agreed to engage Cushman & Wakefield and outlined terms of the appraisal services in an engagement agreement signed by the parties and the Cushman appraiser selected to perform the appraisal. Compliance with both USPAP and the AI Code of Ethics and Certification Standard was required because the appraisal was performed by a state-certified appraiser holding the MAI designation. 
 
The Cushman appraiser in April 2017 submitted an appraisal establishing the fair market value of the property. The appraisal contained a “Certification of Appraisal” stating, “We have no present or prospective interest in the property that is the subject of this report ... no personal interest with respect to the parties involved,” and “no bias with respect to the property that is the subject of this report or to the parties involved with this assignment.”
 
Following transmittal of the appraisal, Buffalo-Water discovered that in December 2016, before Cushman was engaged to conduct the appraisal, Fidelity had retained the firm for a national representation contract. Buffalo-Water communicated this information to Fidelity and claimed that Fidelity’s pre-existing relationship with Cushman should have been disclosed and created an impermissible conflict of interest that invalidated the appraisal. 
 
Buffalo-Water filed a verified complaint against Fidelity requesting declaratory judgment that the appearance of bias on the part of Cushman in favor of Fidelity rendered the appraisal invalid and non-binding, and that Fidelity breached a covenant of good faith and fair dealing. 
 
Well-settled case law in Massachusetts — the “Eliot Rule” — establishes that when parties agree that the fair value of a property will be determined by an appraiser, a judge may not invalidate the appraiser’s determination unless the appraisal process or decision was tainted by fraud, corruption, dishonesty or bad faith. Eliot v. Coulter, 322 Mass. 86, 91, 76 N.E.2d 19 (1947). The Eliot Rule was reaffirmed in a 1985 opinion that stated that a judge may not invalidate “the determination of appraisers selected by agreement to resolve a dispute” unless the appraisal process or decision was tainted on one of these four grounds. Nelson v. Maiorana, 395 Mass. 87, 89, 478 N.E.2d 945 (1985).
 
The trial court dismissed the complaint, concluding that the facts alleged by Buffalo-Water “do not amount to the kind of bad faith, fraud or corruption required for a court to invalidate an independent appraisal agreed to by the parties.” 
 
Buffalo-Water appealed the Superior Court’s decision, and the Supreme Judicial Court agreed to consider the case. 
 
The Court stated in its opinion, “The issue on appeal is whether we should modify this common-law rule and allow a judge to invalidate an appraisal intended by the parties to provide a final, binding valuation of a property where there is the appearance of bias, not on the part of the individual who conducted the appraisal, but on the part of the entity that employed the individual appraiser.”
 
AI and MBREA stated in their amici brief, “The relevant standards and ethics rules governing appraisers have always prohibited bias in appraisals, and have never required disclosures related to an individual appraiser's employer, let alone the employer's parent company and/or affiliates.” The amici brief further stated, “Standards and ethics rules consistently focus on the potential conflicts of the individual appraiser, who is bound to act independently, objectively and without bias.”
 
The Court stated in its opinion, which agreed with the argument advanced by AI and MBREA, that “In determining whether to invalidate an appraisal, we look to the conduct of the individual appraiser or appraisers responsible for the valuation, not to the conduct of their employer. This rule is in keeping with the USPAP and the Code of Ethics.”
 
The opinion goes on to say that the parties “…could have required disclosure of any information concerning Cushman’s business dealings with Buffalo-Water or Fidelity that might create an appearance of bias, and agreed to invalidate the appraisal if such a disclosure was not made.” However, no such provision was included in any agreement between the parties. 
 
Importantly, the Court found that any purported appearance of bias arising from Cushman’s national representation contract with Fidelity did not fall within the rubric of “fraud, corruption, dishonesty or bad faith” that would result in a court invalidating an appraisal. The Court separately declined to modify the Eliot Rule to add “appearance of bias” as a common-law ground for the invalidation of an appraisal. 
 

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