Commercial Division Blog

Posted: May 25, 2020 / Categories Commercial, Fraud/Misrepresentation, Negligence

Court Analyzes Negligence and Fraud Claims Against Appraiser

On May 5, 2020, Justice Cohen of the New York County Commercial Division issued a decision in Shavolian v. Donegan, 2020 NY Slip Op. 31181(U), analyzing negligence and fraud claims against an appraiser:

To establish a cause of action sounding in negligence, Shavolian must establish the existence of a duty on Defendants' part to Shavolian, in addition to an actual breach of the duty and damages. Similarly, a viable cause of action for negligent misrepresentation requires that the underlying relationship between the parties be one of contract, or the bond between them be so close as to be the functional equivalent of contractual privity.

For almost one hundred years, the New York Court of Appeals has been a leading jurisprudential voice in setting forth the grounds upon which a defendant owes a duty of care to a plaintiff with which, as in this case, it is not in contractual privity. In Glanzer v. Shepard, 233 NY 236 [1922] (Cardozo, J.), the Court found that a public weigher of beans owed a duty of care to a plaintiff with which it had no prior relationship. The bean weigher was retained by the bean seller, but knew that the result of the weighing would be relied upon by the bean buyer (who received a copy of the weighing certificate). On those facts, the buyer's reliance was the end and aim of the transaction, and therefore assumption of the task of weighing was the assumption of a duty to weigh carefully for the benefit of all whose conduct was to be governed. Diligence was owing, not only to him who ordered, but to him also who relied.

Nine years later, in Ultramares Corp. v. Touche, 255 NY 170 [1931] [Cardozo, J.], the Court rejected a cause of action in negligence against a public accounting firm for preparing inaccurate financial statements which were relied upon by a plaintiff who had no contractual privity with the accountants. The Court distinguished Glanzer on the ground that the service rendered by the public weigher in Glanzer was primarily for the information of a third person, in effect, and only incidentally for that of the formal promisee. In other words, in Glanzer, the allegedly negligent party owed a duty of care to a specific party for a specific purpose, compared to Ultramares, where the defendant could not be liable for negligent misrepresentation to a broad and undefined class of persons unknown to the defendant. Notably, the Court made clear that its holding does not emancipate accountants from the consequences of fraud.

In Credit All. Corp. v Arthur Andersen & Co., 65 NY2d 536, 545-46 [1985], the Court reaffirmed Ultramares, and set forth a three-part test for determining when an accountant may be held liable in negligence to noncontractual third parties who relied to their detriment on inaccurate financial reports: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties' reliance.

Although this rule first developed in the context of accountant liability, it has applied equally in cases involving other professions, such as lawyers and engineering consultants.

Consistent with that approach, Glanzer, Ultamares and their progeny have been applied to appraisers.

The negligence and negligent misrepresentation claims against Defendants do not fit neatly within the confines of the above cases. On the one hand, as in Glanzer et al., Defendants allegedly were aware that their appraisal was to be provided to Shavolian, albeit indirectly, for a narrow purpose that specifically implicated Shavolian' s interests. Thus, this case does not present the risk of exposing Defendants to liability from a large and indeterminate group. On the other hand, this case differs from the above line of cases in that Shavolian cannot be said to have relied on Defendants' appraisal in making a commercial decision. Instead, the appraisal was relied upon by the arbitrator. Unlike the insurers and lenders in the appraisal cases noted above, Shavolian does not claim to have been fooled or misled by the appraisal, which on its face conflicted with the report of his own appraiser. His only claim is that he was harmed by the appraisal because it skewed the result of a rigid valuation process - which apparently gave the arbitrator no discretion to do anything other than blindly accept the parties' appraisals and average them - to which he voluntarily agreed.

On balance, the Court finds that Defendants did not undertake a duty of care to Shavolian. They were engaged by Mokhtar as part of an arbitration process. Shavolian was affected by the appraisal, but he did not rely upon it.

Accordingly, Defendants' motion to dismiss Counts 1 and 2 is granted.

To state a legally cognizable claim of fraudulent misrepresentation, Shavolian must allege that Defendants made material misrepresentations of fact; that the misrepresentations were made intentionally in order to defraud or mislead Shavolian; that Shavolian reasonably relied on the misrepresentations; and that Shavolian suffered damages as a result of his reliance on the Defendants' misrepresentations.

Here, Shavolian sufficiently alleges facts to support his fraud claim. 2 Shavolian alleges that Defendants, acting in concert with Mokhtar, made misrepresentations of fact in their Appraisal, intending to overvalue the Property for the arbitrator to Shavolian's detriment. Moreover, he alleges that Defendants had no genuine belief in the adequacy of their appraisal. To be sure, there is case law suggesting that appraisals ordinarily cannot support a claim for fraud, because an appraisal is a form of non-actionable opinion. However, even an opinion, may be found to be fraudulent if the grounds supporting it are so flimsy as to lead to the conclusion that there was no genuine belief back of it.

Here, Shavolian alleges that Defendants' Appraisal is based on misrepresented facts and does not reflect Defendants' honest opinion. Shavolian alleges, for example, that Defendants intentionally used an incorrect percent capitalization rate, undertook no rental comparisons, and failed to account for a wide arrange of expenses, including taxes, utilities, used water, all as part of a scheme to harm Shavolian.

Accordingly, Defendants' motion to dismiss Count 3 is denied.

(Internal quotations and citations omitted).

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