Medina County Courthouse

Thursday, April 28, 2011

Four-Year Time Limit to File Suit Claiming Negligent Property Appraisal Runs from Date of Appraisal

Flagstar Bank, F.S.B. v. Airline Union's Mtge. Co., Slip Opinion No. 2011-Ohio-1961.
Hamilton App. No. C-090166. Certified question answered, and judgment of the court of appeals affirmed.
O'Connor, C.J., and Lundberg Stratton, Lanzinger, Cupp, and McGee Brown, JJ., concur.
Pfeifer and O'Donnell, JJ., concur in judgment only.

(April 27, 2011) The Supreme Court of Ohio held today that the four-year statute of limitations (time limit) for filing a professional negligence lawsuit against a property appraiser under R.C. 2305.09(D) commences to run on the date that the negligent act is committed, not on the date the plaintiff suffers an actual loss arising from the appraiser’s alleged negligence.

Applying that holding to a Hamilton County case, the Court affirmed lower court decisions that dismissed as untimely a lawsuit filed by a mortgage lender in 2008 against a property appraiser based on appraisals that were performed in 2001 and 2002.

The Court’s 7-0 decision was authored by Justice Judith Ann Lanzinger.

In 2001 and 2002, real estate appraiser John Reinhold performed appraisals on three properties that served as collateral for separate mortgage loans made by Airline Union’s Mortgage Company (AUM). The last of these appraisals was completed on June 12, 2002. In various transactions in 2001 and 2002, Flagstar Bank, FSB (Flagstar) purchased the mortgage loans from AUM after having received and reviewed Reinhold’s appraisals of the three properties. Flagstar subsequently re-sold on the secondary market two of the mortgage loans on properties that Reinhold had appraised, and retained the third loan in Flagstar’s own asset portfolio. The two mortgages that had been resold were later subjected to foreclosure after the owners defaulted, leaving deficiency balances on both loans. Under the terms of their purchase agreements, the secondary creditors sought reimbursement from Flagstar, which paid the deficiencies on the two loans. The property securing the mortgage Flagstar had retained in its own portfolio burned down. The owner defaulted on the loan, and the insurance proceeds from the fire left a deficiency balance on the third loan.

On April 28, 2008, Flagstar filed suit against AUM and Reinhold, alleging that the property appraisals on the three defaulted properties were materially inaccurate and that the actual fair market value of each property was significantly less than the appraised value set by Reinhold, on which Flagstar had relied in purchasing those properties from AUM. Reinhold denied any negligence and filed a motion for summary judgment. He argued that the bank’s claims were barred by the statute of limitations for professional negligence set forth in R.C. 2305.09, because Flagstar’s complaint was filed more than four years after the appraisals were performed.
Flagstar responded that the statute of limitations did not begin to run until after the bank sustained a compensable injury. The bank contended that it did not suffer any actual loss, and therefore did not have a cause of action to sue for damages, until the properties were sold at foreclosure and there was a deficiency balance or until the receipt of the insurance proceeds that were insufficient to cover the balance of the loan. Because their complaint against Reinhold and AUM had been filed within four years of those events, Flagstar maintained that the complaint was timely.

The trial court granted summary judgment to Reinhold. Flagstar appealed. On review, the First District Court of Appeals affirmed the trial court’s grant of summary judgment based on the running of the statute of limitations, but certified that its ruling on that issue was in conflict with decisions by two other court of appeals districts. The Supreme Court agreed to review the case to resolve the conflict among appellate districts.

In today’s decision affirming the judgment of the 1st District, Justice Lanzinger pointed to a 1989 Supreme Court of Ohio decision, Investors REIT One v. Jacobs, in which “[w]e determined that claims for accountant negligence were governed by R.C. 2305.09(D), the statute generally granting four years to file an action for tort claims not specifically covered in other sections of the Ohio Revised Code. ... We also noted that R.C. 2305.09 expressly includes its own limited discovery rule: ‘If the action is for trespassing under ground or injury to mines, or for the wrongful taking of personal property, the causes thereof shall not accrue until the wrongdoer is discovered; nor, if it is for fraud, until the fraud is discovered. ...’ Because the General Assembly had not included general negligence claims within this limited discovery exception, we held that ‘[t]he discovery rule is not available to claims of professional negligence brought against accountants.’ We later reaffirmed this holding in Grant Thornton v. Windsor House (1991).”

Justice Lanzinger noted that in a 1995 decision, Hater v. Gradison Div. of McDonald & Co. Securities, Inc., the 1st District extended the reasoning of Investors REIT One to negligence claims brought against other financial professionals including brokers, dealers and appraisers. In this case, she wrote, “Because Flagstar’s complaint alleged negligence of an appraiser, a type of professional negligence similar to these cases, the court of appeals relied on Investors REIT One and Hater and held that the complaint was untimely, not having been filed within four years of any of the appraisals performed by Reinhold.”

“ ... We continue to adhere to the rule of law established in Investors REIT One. A cause of action for professional negligence accrues when the act is committed. Just as accountants do, appraisers perform services that for four years may subject them to negligence suits for the consequences of their professional acts. In this case, accepting any suggestion that the statute of limitations be reset for each purchase of a mortgage loan because the purchaser’s damages may be delayed until some point in the future could lead to an unending statute of limitations. Given the volatile nature of the housing market in recent years, we believe that that position is inconsistent with the purposes of statutes of limitations: ‘(1) ensuring fairness to the defendant, (2) encouraging prompt prosecution of causes of action, (3) suppressing stale and fraudulent claims, and (4) avoiding the inconveniences engendered by delay − specifically, the difficulties of proof present in older cases.’”

“ ... Any alleged negligence by Reinhold in his property appraisals would have caused the loans to be less secure immediately. As acknowledged during oral argument, but for the appraisal, the loan would not have been made on the same terms that it was. Any cause of action for negligence accrued on the date of the appraisal, and the four-year statute of limitations began to run then. Because Flagstar’s complaint was not filed within four years of the completed appraisals, its claims were barred by the statute of limitations in R.C. 2305.09.”

Scott A. King, 937.443.6560, for Flagstar Bank.

Robert J. Gehring, 513.784.1525, for John Reinhold.

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