When making a loan secured by a mortgage on residential real property, lenders typically order an appraisal and rely upon the value provided by that appraisal. How quickly must a lender sue an appraiser if the appraisal was negligently performed and the property was worth less than the appraised value? It seems logical that a lender would first have to wait for the borrower to default, foreclose on the property, and sell the property for a loss. However, Florida’s First District Court of Appeal recently ruled that the statute of limitations begins to run as soon as the loan is funded, even if a default doesn’t occur until years later.
In Llano Financing Group, LLC v. Petit, Fla. 1st DCA Case No. 1D16-3168 (Fla. 1st DCA Sep. 27, 2017), a lender made a $172,000 loan in reliance upon an appraisal that valued the collateral at $216,000. Seven years later, the borrower defaulted and the successor in interest to the lender filed a foreclosure action. Three years after that, the successor to the lender acquired a certificate of title and sold the property at a loss. A year later, eleven years after the loan closed, the successor to the lender sued the appraiser for negligently conducting the appraisal, claiming that the original lender would not have made the loan and the successor to the lender would not have acquired the loan if not for the bad appraisal. The trial court granted the appraiser’s motion to dismiss based upon the expiration of the statute of limitations and the successor to the lender appealed.
The appellate court first ruled that the four-year statute of limitations for an action founded on negligence applied, rather than the two-year professional malpractice statute of limitations, because the successor lender and the appraiser were not in privity. The court then addressed when the limitations period started to run. The court determined that the last element of the cause of action (damages) existed not at the time that the property was sold at a loss, but as soon as the original lender funded the loan that was secured by collateral that was worth less than the appraised value. The court dismissed concerns that the precise amount of damages may not be known at the time and suggested that it was the Legislature’s job to address whether the ruling might result in bad policy. The First DCA concluded:
The statute of limitations began to run when [the original lender] relied on the appraisal to fund the loan. That was 2004, so [the successor lender’s] 2015 suit was far too late. The trial court correctly dismissed it.
This case is a cautionary tale to lenders who rely upon appraisals when making loans. In Florida, any concerns about the validity of an appraisal must generally be addressed within four years of funding the loan, even if the borrower has not yet defaulted and the property has not yet been sold for a loss.