By Amy McCallen
On November 28,
2018, the Massachusetts Supreme Judicial Court declined to extend the grounds
to invalidate an appraisal under
The SJC emphasized
that parties are free to define the contractual terms regarding the appraiser’s
obligations and the grounds for invalidating the appraisal.
The case is Buffalo-Water
1, LLC v. Fidelity Real Estate Company LLC (SJC 12487) (Nov. 26, 2018).
The underlying dispute arose in connection with a repurchase option, which
granted Fidelity the option to buy back a piece of commercial real estate that
it had sold to Buffalo-Water in 2004. Fidelity exercised its option, but the
parties could not come to an agreement regarding the property’s fair market
value. Buffalo-Water’s appraiser valued the property at $36 million, while
Fidelity’s appraiser valued it at $17 million. Therefore, the parties agreed to
retain Cushman & Wakefield as a third appraiser. The Cushman &
Wakefield appraiser submitted a valuation of $22.9 million accompanied by a
Certification which the SJC noted said “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.”
After the Cushman
& Wakefield appraiser submitted his valuation report, Buffalo-Water learned
that before the parties engaged the appraiser, Fidelity had retained Cushman
& Wakefield for a national representation contract. Buffalo-Water filed a
complaint seeking to invalidate the appraisal, which was dismissed by the Trial
Court. On appeal, the SJC transferred the case on its own motion and solicited
amicus briefs, which were submitted by the Appraisal Institute and
Massachusetts Board of Real Estate Appraisers, and by the Greater Boston Real
Estate Board.
The well-settled
rule set forth in Eliot v. Colter, 322
Mass. 86, 91 (1947) permits a
court to modify an appraisal only if the principles and methods of valuation
are found to be tainted by fraud, corruption, dishonesty or bad faith. The SJC,
relying in large part on the absence of any allegation that the appraiser knew
of the national contract, found no suggestion of such conduct. Therefore, the
SJC considered whether to modify this common-law rule and allow the court to
invalidate an appraisal where there is the appearance of bias on the part of
the entity that employed the appraiser. The SJC declined to do so and concluded
that an appearance of bias alone is insufficient to invalidate an appraisal.
The SJC emphasized
that parties are free to define the contractual terms regarding the appraiser’s
obligations and the grounds for invalidating the appraisal. Here the Court
found that the neither the engagement agreement nor the option agreement
required the disclosure of the national agreement between Cushman &
Wakefield and Fidelity. In particular, the conflict of interest provision in the
engagement agreement was drafted only to protect Cushman & Wakefield should
it withdraw from an assignment because of a conflict of interest. The Court
also rejected Buffalo-Water’s argument that disclosure was required because the
appraisal was to be conducted in accordance with the Uniform Standards of
Professional Appraisal Practice and the Code of Ethics and Certification
Standards of the Appraisal Institute. The Court found that these rules only
referenced the individual appraiser, not the appraiser’s employer. The SJC
suggested “just as the parties required the individual appraisers to have at
least 10 years experience valuing greater Boston property, they 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.” If the
parties decline to include such provisions in their agreements, however, in
light of this SJC ruling, any challenge to the valuation is unlikely to be
successful absent allegations sufficient to plausibly suggest fraud,
corruption, dishonesty or bad faith.
This article was
originally post January 31, 2019 at:
Should you have
any questions regarding this article, please contact Amy McCallen at
781-817-4900 or by email at amccallen@lawmtm.com.
