If you’ve taken out a mortgage, you know the importance of an appraisal. An appraisal below the property value, in particular, can spell trouble for a borrower.

But what if a lender orders an appraisal that mistakenly, and substantially, exceeds the property’s real value, and the borrower goes forward with the loan? Who gets caught holding the bag? Can the borrower assert a claim violation of N.C. Gen. Stat. 75-1.1?

You might think that the borrower, if anyone, should be the safest of the crowd. The borrower didn’t order the appraisal. The borrower might also have relied on the appraisal to buy the property.

A recent decision gives pause to these thoughts.

Cordaro v. Harrington Bank, a decision from the North Carolina Court of Appeals, concerns an erroneous appraisal. A bank ordered the appraisal based on an application for a construction loan. The application came from Vince Cordaro, who planned to build a home in Chatham County.

Mr. Cordaro spoke with a loan officer when he applied for the loan. He told the officer that if the bank’s appraisal of his planned home was less than what he paid for the lot plus the cost of construction, he wouldn’t go forward with the loan or the construction.

The appraisal came back about $5000 over the land and construction cost. Mr. Cordaro went forward with the construction.

As construction neared completion, Mr. Cordaro worked with the bank to refinance his construction loan and obtain a permanent mortgage. The bank ordered a new appraisal for the mortgage loan. The same appraiser who did the first appraisal also performed the second appraisal. He appraised the property even higher the second time.

The bank then checked his work. The check came from a system that performs independent automated risk assessments of appraisals. That system flagged ten separate flaws with the appraisal.

A different lender—one that sought to purchase the mortgage once it was finalized—did its own analysis of the appraisal. This analysis valued the home at one-half of the appraisal.

Because of these analyses, the bank didn’t extend to Mr. Cordaro the full mortgage that he sought. He covered the shortfall between the mortgage loan and the amount due on the construction loan by selling off personal assets.

He then sued the bank. His claims included an alleged violation of section 75-1.1 based on a misrepresentation.

This fact pattern would appear to be favorable to that claim. A misrepresentation-based claim requires reliance, but Mr. Cordaro told the bank that he was relying on the appraisal. Mr. Cordaro then relied on the appraisal—an appraisal that the bank itself used to justify its construction loan to Mr. Cordaro.

The trial court, however, granted the bank’s motion to dismiss. The Court of Appeals affirmed.

The Court of Appeals acknowledged Mr. Cordaro’s reliance, but it concluded that the reliance was unreasonable—even at the pleadings stage. Why?

The complaint did not allege that Mr. Cordaro made or conducted any inquiries about the accuracy of the appraisal. Within an hour of receiving the appraisal, he took steps to inform his builder that construction could get going.

The Court of Appeals cited recent precedent, including the North Carolina Supreme Court’s decision in Arnesen v. Rivers Edge Golf Club & Plantation, Inc., to explain its reasoning In Arnesen, the Supreme Court rejected a section 75-1.1 claim by real estate investors about faulty appraisal information because the plaintiffs never reviewed or required the information before they decided to buy.

Given that reasonable reliance is traditionally perceived to be a fact-specific inquiry, Cordaro is a worthy read. It reminds attorneys and litigants alike that, even under North Carolina’s notice-pleading regime, some actual facts are needed to show why reliance was justifiable.

So, if you’re drafting allegations about your client’s actual reliance on a statement, you might ask yourself, “Why exactly did my client rely on that statement?”

The answer to that “why” question could be the difference between trial and dismissal.

Author: Stephen Feldman