Appraisal commissioned to resolve purchase-price dispute must conform to professional standards.(Recent Court Decisions)

When parties agree to base a purchase price on a professional appraisal, they will be bound only by an appraisal that conforms to professional standards, according to the Court of Appeals of Arizona.

Swain Chapman owns 12.57% of a partnership whose primary asset is a leasehold interest in a building called The Westerner. In 2003, the partnership agreed to buy Chapman's interest, and the parties retained an appraiser to determine the value of the Westerner leasehold, which would serve as the basis for valuing Chapman's partnership share.

After examining the appraisal, which estimated a value of $520,000, Chapman notified the appraiser of his concerns regarding the method and data used in the valuation. The appraiser reviewed the appraisal, agreed that it contained incorrect data, and submitted a second appraisal valuing the leasehold between $1.2 and $1.4 million.

Despite the appraiser's assertion that the second appraisal was the most accurate, the partnership refused to buy Chapman's share based on the higher valuation. Chapman then filed suit to enforce the parties' agreement in accordance with the second appraisal. The trial court ruled in favor of the partnership, finding that Chapman was not entitled to a second appraisal and setting the buy-out price at $26,041, based on the first valuation. Chapman appealed.

On appeal, the partnership argued that the parties had agreed to be bound by the first appraisal and also that Chapman had secured the second appraisal by fraud and undue influence. The appellate court first noted that the appraiser's letter of engagement provided that, in valuing the leasehold, the appraiser would follow the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute. The court thus held that the parties had agreed to abide by an appraisal that conformed to standard appraisal practices.

The court noted that the appraiser complied with professional standards by conducting a second appraisal to address calculation errors affecting the first appraisal's credibility. However, because the standards also require unbiased valuations, the purchase price could not be based on the second appraisal if it was secured by improper influence, according to the court. The court therefore remanded the case to the trial court to determine whether the partnership had sufficient evidence of fraud or undue influence to nullify the second appraisal. The trial court decision was reversed.

Chapman v. The Westerner

Court of Appeals of Arizona

September 22, 2008

2008 WL 4307198

(Ariz. App. Div. 2 2008)

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