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Bankruptcy Court Absolves Chase of All Liability

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An alarming precedent has just been set for real estate appraisers and agent/brokers in the bankruptcy case of Evaluation Solutions/ES Appraisal Services (ESA). Despite numerous objections from appraisers and agent/brokers alike, a Florida bankruptcy judge has ruled in favor of JPMorgan Chase in granting a Bar Order which absolves Chase of any liability on future claims from appraisers, agents, and brokers for unpaid fees for valuation services that were delivered to Chase through ESA.

Specifically, the Order “shall be deemed to have released Summit and JPMorgan Chase and each of their current and former…agents…from any and all known or unknown claims, causes of action, suits, debts, obligations, liabilities, demands, losses, costs and expenses (including attorney’s fees).”

ESA declared bankruptcy in January 2013 with over 11 million dollars in unpaid debt, with an estimated 5 million in unpaid fees to appraisers, agents, and brokers. JPMorgan Chase was the client for 98% of ESA’s valuation business and was listed as the client on all of the appraisal reports that appraisers submitted to Chase through ESA.  Read Stiffed Appraisers Go After Chase and Chase Denies Responsibility for Bankrupt AMC Debt.

Agency Relationship
Within the appraisal community, the widely held understanding of the relationship between a lender and its appraisal management company (AMC) has been that of an agency relationship, wherein the AMC serves as the lender’s agent, with the lender being responsible for the actions and obligations of its agent.  This is due to the fact that federal regulations, including FIRREA and the Interagency Appraisal Guidelines, require a lender to engage appraisers either directly or through “its agent.”

NOLO’s Plain English Law Dictionary defines agency as: “The relationship of a person (called the agent) who acts on behalf of another person, company, or government, known as the principal. The principal is responsible for the acts of the agent, and the agent's acts bind the principal.”

However, the Court notes that “Agency” is nowhere defined in the federal regulations and, consequently, the Court must revert to a common law definition of agency. Using a common law definition of agency, wherein “the essential element of agency is control,” the Court has ruled that no agency relationship existed between Chase and ESA. The Court cites Section 14.8 of the Master Service Agreement between Chase and ESA where it states that at all times ESA was to remain “an independent contractor.”  In short, the Bar Order has been approved, in part, because ESA was not Chase’s agent. 

In its Glossary of Terms the Interagency Appraisal and Evaluation Guidelines admits that the regulations do not define the term, but states:The Agencies' appraisal regulations do not specifically define the term "agent." However, the term is generally intended to refer to one who undertakes transacting business or managing business affairs for another.

Who’s the Client?
Richard Hagar, SRA points out that The 2010 Interagency Appraisal Guidelines specifically state: “An institution or its agent must directly select and engage appraisers.”

“This is very clear cut,” says Hagar, “It means that lenders are prohibited from engaging non-appraisers for appraisal services. They must do it either directly or through their agent.”

“In my opinion, it appears that Chase has knowingly violated numerous Federal Regulations and statements by the banking agencies and ordered appraisals through prohibited parties,” says Hagar.

Besides a potential violation of federal regulations, Hagar also says that this may be a case of false representation. “Appraisers are consistently and repeatedly told, by AMCs, that the AMC is acting as the agent on behalf of the lender; and consequently, appraisers are required to place the lender’s name on the appraisal as the ‘client,’” says Hagar. "For example, Chase was listed as the client on all of the appraisal reports it received from appraisers through ESA."

Hagar, who has been involved in many high profile fraud cases as an expert witness, says that there are arguably elements of fraud in a case like this. Hagar points out that the general rule for fraud is that if there is a misrepresentation and it alters an outcome, and that outcome causes financial loss, then “fraud” has likely occurred. “If the appraiser had known that the AMC was not the agent for Chase, then the appraiser would have placed the AMCs name on the appraisal, not Chase’s. If the appraiser knew that the AMC was the client, then they would have made alternate business decisions regarding payment (which they never received). To me, appraisers may have an argument that Chase has conspired with an AMC to misrepresent facts to the appraiser,” says Hagar.

Hagar points to Section 5 of the Federal Trade Commission Act (FTC Act) (15 USC 45) which prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce.’’  These acts include:
·    A representation, omission, or practice misleads or is likely to mislead the consumer;

·    A consumer’s interpretation of the representation, omission, or practice is considered reasonable under the circumstances;

·    The misleading representation, omission, or practice is material.

AMC Master Service Agreements
An argument that was used by Chase and the bankruptcy judge in denying appraisers' and agents’ claims against Chase is that because Chase and ESA entered into a Master Service Agreement (MSA) that specifically defined ESA as an “independent contractor,” ESA was consequently not Chase’s agent and that Chase is not responsible or liable for ESA’s actions.

However, if this is true, it begs the question about Chase’s other MSAs, and the agreements and arrangements that exist between lenders and AMCs across the country.

Are AMCS, in fact, the agents of lenders? Who is the client?

The answers to these questions will hopefully be clarified by regulators or another court ruling shortly.  Sources close to the case say that appraisers and agents are planning to appeal the bankruptcy judge’s decision and advance this case to an Appellate Court.

This is a developing story.

About the Author
Isaac Peck is the Associate Editor of Working RE Magazine and Marketing Coordinator at OREP.org, a leading provider of E&O Insurance for appraisers, inspectors, and other real estate professionals in 49 states. He received his Bachelors in Business Management at San Diego State University. He can be contacted at Isaac@orep.org or (888) 347-5273.

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Gary Frimann, CRS, GRI, SRES
Eagle Ridge Realty / Signature Homes & Estates - Gilroy, CA
REALTOR and Broker

More people getting screwed over by Chase and it's "affiliates".  They contracted their way out of any financial responsibility.

Jul 17, 2013 02:21 AM
Jordon Wheeler
The Jordon Wheeler Group - Fairburn, GA
J W Group Real Estate Sales and Service

Wow!  I am so glad and thankful that I got paid for my work and cut ties with Evaluation Solutions when I did.  What a mess.  So sad for the agents/brokers who are owed thousands of dollars.

Jul 17, 2013 02:40 AM
Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

Tsk tsk . . . and the ruling came out of Florida, ya don't say!  It is an awful precendent but as the old saying goes "consider the source."  I'm not sure why this doesn't surprise me.  Judges are inept and if I was on the bench I would have summed it up as:  "You guys used these guys to conduct your business.  Someone ordered the apprasisers, and the appraisers supplied you with information for you to conduct your business. Okay, so now you owe them, PAY THEM!"  Judge Judy style!!  

Jul 17, 2013 03:06 AM
Gerard Gilbers
Higher Authority Markeing - Asheboro, NC
Your Marketing Master

While they should be "independent contractors" and not employees, they were still acting as their agent. This is an unfortunate way to absolve JPMorgan Chase of their obligations.

Jul 17, 2013 03:16 AM
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Interesting info.  I'd not seen this ruling talked about elsewhere yet.  As a former appraiser I find this alarming.  As a Lender now, I'm not surprised that yet again ... a ruling went Chase's way.  And as Carla points out, in Florida too.  What's in the water down there???


Jul 17, 2013 04:37 AM
Nancy Laswick
United Real Estate - Phoenix, AZ
Your REALTORĀ® For The Valley Of The Sun

I have to agree with Carla... send it to Judge Judy's courtroom... this decision seems to carefully avoid any contact with common sense.

Jul 17, 2013 05:46 AM
Jay & Michelle Lieberman
Keller Williams World Class - Agoura Hills, CA
Creating Calm in the Buying and Selling Chaos

What an incredible mess.  Thanks very much for posting this.  I am making my team read it.

Jul 17, 2013 07:36 AM
Edward & Celia Maddox
The Celtic Connection Realty - Queen Creek, AZ

Sounds like a really bad decision that has major consequences.

Jul 17, 2013 08:58 AM
Jane Chaulklin-Schott
TEAMCONNECT REALTY - (407) 394-9766 - Orlando, FL
TeamConnect Luxury Homes - Orlando, Florida, 32836

I personally never watch Judge Judy - dislike her style. But right now I wish she had been the judge on the scene. What a disgraceful mess! Definitely need immediate clarification of regulations, new court rulings, and hopefully this case goes to and succeeds in Appellate Court.

Jul 17, 2013 10:30 AM
Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

I'm a bit surprised to read this due to the climate of anti-bank. But up is down these days. 

Jul 17, 2013 12:04 PM
Jimmy Faulkner
Florida. Homes Realty & Mortgage - Wantagh, NY
The Best Of St. Augustine

In 1987 the real estate industry rolled over when the congress blamed all the problems of the real estate colapse on the Appraisers. They were very bad people who were the ruination of the country. Well you let that happen & now they figured out you were WEAK so they will always come after you. BLAME yourselves for where we are today. Congress is corrupt, and doing an outstanding job  for themselves. Realtors have done just the opposite for themselves.

Jul 17, 2013 12:10 PM
Kristin Hamilton CA REALTOR
Berkshire Hathaway California Realty - Beaumont, CA
(909) 557-6966- Specialize 55+ Communties Banning

We need Judge Carla above to sit and make fair rulings; pay the apprasiers and real estate agents since you asked for the job. Terrible that Chase got away with this. What is next?

Jul 17, 2013 03:10 PM
MichelleCherie Carr Crowe .Just Call. 408-252-8900
Get Results Team...Just Call (408) 252-8900! . DRE #00901962 . Licensed to Sell since 1985 . Altas Realty - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years
How sad for all of the agents and appraisers that did evaluations think good faith and now will never be paid.
Jul 17, 2013 04:23 PM
Michele Peterson
Sellstate Realty First - Roseville, CA
Sellstate Realty First

Shocked that it was Chase... In our market place, Bank of America and Wells Fargo are still the worst at reimbursing and can be years behind in payments to agents.

Jul 17, 2013 05:15 PM
Andrew Mooers | 207.532.6573
Northern Maine Real Estate-Aroostook County Broker

Checking out the ruling... thanks.

Jul 17, 2013 09:28 PM