Chapman v. Westerner, 2 CA-CV 2008-023
Arizona Court of Appeals Division Two
September 22, 2008
The full opinion can be found here.
The Arizona Court of Appeals recently clarified some apparent confusion over the finality of property appraisals in the context of business agreements. The Court held that an appraiser has leeway to revise their appraisals in order to prevent mistakes that could impact the reliability of the results.
The decision came after two parties, Swain Chapman and The Westerner Partnership, agreed to rely on an appraisal to determine the price at which Westerner would purchase Chapman’s interest in its assets. When the initial appraisal by KB Real Estate Appraisers valued the assets at $520,000, Chapman questioned the accuracy of KB’s methodology. KB agreed to conduct a second appraisal and apparently identified some rather substantial mistakes--the second appraisal valued the assets at between $1.2 and $1.4 million.
When Chapman sought in court to enforce the purchase based on the revised appraisal, Westerner moved to have the court enforce the purchase based on the much cheaper original appraisal.
The majority of the legal dispute was how Hirt v. Hervey, an Arizona Court of Appeals case from 1978, should be interpreted. According to Hirt, "once parties have agreed to value an asset by appraisal, judicial review of appraisals should be no broader than that which applies to arbitration awards, which are entitled to finality in all but narrowly defined circumstances such as fraud, corruption, or other prejudicial misconduct." Parties must stick to their own agreement to abide by an appraisal and cannot seek "a new determination from the courts."
Westerner’s position was that this meant that the law of arbitration applied when parties agreed to abide by an appraisal, and thus the appraiser’s original conclusion must be binding and final. But the Court rejected this interpretation, finding an important distinction between seeking "a new determination from the courts" and requesting that an appraiser correct mistakes in the appraisal. The law of arbitration does not apply to independent appraisals; it merely "limit[s] the scope of judicial review of an appraisal when the appraisal, rather than judicial review, was the parties’ intended method for determining contractual liability."
Furthermore, when parties agree to value an asset by appraisal, they implicitly agree that the appraiser will abide by the standard practices of the profession. The Code of Profession Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute provides that appraisers avoid any mistakes or omissions that could affect the credibility of the results of an appraisal. By agreeing to have the assets appraised, the parties implicitly agree to give the appraiser the flexibility necessary to ensure conformance with professional standards of appraisal by correcting errors and omissions that affect the credibility of the results.
/CJO
