Trial of Property Appraiser’s Liability to Bank Allowed to Proceed

An Ontario Court has allowed for a dispute between a bank and a property appraiser to proceed to trial, in a situation where the fraud of the bank’s own lawyer caused it almost $300,000 in losses.

In 2004, the Bank of Montreal was asked to provide residential mortgage financing to a buyer on certain property being purchased for $360,000.  It retained Reliable Appraisal Services to furnish a property appraisal. That appraiser valued the property at $360,000.

Based on that appraisal, the bank agreed to advance 75% of the property’s value, i.e. $270,000.

The bank’s own lawyer advised that he had registered a first mortgage for $270,000 in the bank’s favour.  In reality, the lawyer acted fraudulently and registered only a second mortgage.  This meant that when the mortgage later went into default and the property was sold in 2007 for $347,000 under a power of sale, the bank suffered a total loss, since it held merely a second mortgage rather than a first mortgage.

Realizing that it would be unable to recover from the lawyer who fraudulently certified the second mortgage, the bank sued the appraisers for damages on the basis that they had overvalued the property by $100,000.

Both the bank and the appraiser filed motions for summary judgment, and the court was asked to rule on them.  In support of its motion, the bank filed evidence of an expert appraiser to the effect that the property was actually worth $260,000, not $360,000.  That expert also gave evidence that if the bank had known of the much lower appraisal (and the unusually-large discrepancy between appraisal and sale values), in all likelihood it would not have proceeded with the decision to advance the funds.

For the purposes of the summary judgment motion, the court assumed that the appraiser was negligent, but still had to determine whether that negligence actually caused the bank’s $270,000 loss in full.   The appraiser countered with the assertion, among other things, that it was the fraudulent lawyer who was the sole cause of the bank’s loss:  absent the lawyer’s fraudulent misdeed, the bank would have had a first mortgage as it expected, and (after the power of sale proceedings) would have been able to recover the full amount of the funds it had advanced.

While the court admitted that it might be a “close call” on the facts, it ultimately accepted the evidence of the bank’s expert to the effect that the bank would not have entered into this transaction in the face of a $260,000 appraisal on a property selling for $360,000. Using the well-established legal test, it found the bank would not have advanced funds “but for” the negligent appraisal.

As a result, the appraiser’s motion for summary judgment was dismissed, and the matter was allowed to proceed to a full trial.  See Bank of Montreal v. 1576998 Ontario Inc., (c.o.b. as Reliable Appraisal Services, 2010 (ONSC)