Legal Blog

Appraisals

A borrower decides to buy a business. He goes to the bank for financing. The bank, before deciding whether to advance funds, wants the assets appraised and either accepts the borrower’s appraisal or arranges its own. The bank lends, the borrower buys, the business does poorly, the borrower cannot repay the loan, and the bank sues. On what basis does the borrower defend? Expect the usual defences, but also expect that the borrower will claim that the appraisal was higher than the actual value of the assets and that, therefore, the bank should not be repaid because the bank somehow is liable for the allegedly incorrect valuation. This was the case in TD Canada Trust v. 2086122 Ontario Inc., a 2009 Ontario Superior Court of Justice decision.

One Side 

The borrower asserted that the bank had referred the borrower to an appraiser (the “Appraiser”). The borrower retained the Appraiser, who appraised the business assets at approximately $628,000. The receiver sold the business for an amount that was not specified in the reasons for decision. However, one of the appraisals of the receiver came in at only $86,000.

The borrower also found that the Appraiser had appraised the assets of the business one year earlier at approximately $184,000 and that this appraisal (the “First Appraisal”) had been given to the bank at that time.

Accordingly, the borrower alleged that the Appraiser was the bank’s agent and negligently gave the borrower an inflated appraisal (the “Second Appraisal”) of the business assets. This negligence, the borrower claimed, would result in the borrower’s guarantee being invalidated and would make the bank liable for all of the borrower’s losses.

Other Side 

The bank, of course, countered that the Appraiser was not its agent. The bank denied that it had referred the borrower to the Appraiser and pointed out that the First Appraisal had been delivered to a different department of the bank for a financing, which was never completed, involving someone other than the borrower. The actual lending arm that underwrote the borrower’s loan knew nothing of the First Appraisal and the earlier aborted financing.  

More importantly, the list of assets dealt with in the two appraisals was different and, upon analysis of the assets common to both appraisals, the difference in amounts appraised was only $3,000. The borrower conceded this fact.

Further, the appraisal that the receiver obtained also dealt with a different group of assets than those in the Second Appraisal. Again, the difference in appraisals of the assets in common was not material.

Secondary

The borrower had one more argument to make. The borrower had signed a separate application by which he guaranteed all debts of the corporate borrower. However, it seems that the original loan document had a space for a guarantee, which was not completed. The borrower claimed that there was a discrepancy between the two documents and that, therefore, he was not personally liable.

Findings

The judge threw out the appraisal argument because it was apparent that there were no material discrepancies between the various appraisals. The judge also stated that, even had there been a material discrepancy, there was no real evidence that the Appraiser was the agent of the bank. The borrower’s evidence was unsubstantiated by any documents and was supported only by the borrower’s own assertions. This, the judge held, was not enough.

The judge also dismissed the argument regarding the wording of the guarantee. In interpreting a document, the court must construe words in their ordinary sense except if a modification is necessary to avoid an absurdity. The court must also assume that each document signed has a purpose. Before a borrower can rely on ambiguity, the ambiguity must be present within the same document, not between two documents. Further, the documents were not ambiguous and they were not in conflict. The bank used one document to show liability for the loan and the other to evidence liability on the guarantee.

The judge granted judgment, by way of a summary judgment motion, for the full amount that the bank claimed.

Variation 

What would the result have been if the bank had referred the Appraiser to the borrower and if there had been a material difference in the two appraisals? We suggest that a simple referral is not sufficient for the bank to become liable for an appraiser’s negligence. The bank must do something more than simply protect its investment by way of an appraisal; the bank’s actions must demonstrate that the bank became an investment adviser for the borrower.