In this week’s Alabama Law Weekly Update, we present for your review a case brought before the Supreme Court of Alabama and a notable decision by the U.S. Consumer Financial Protection Bureau ordering RealtySouth to pay a $500,000.

Bryant Bank v. Talmage Kirkland & Company, Inc., d/b/a Kirkland & Company, et al.No. 1130080 (May 23, 2014) (holding that an appraisal can serve as a basis for a negligent misrepresentation claim).

Bryant Bank (“Bryant”) brought a lawsuit against Talmage Kirkland & Company, Inc. (“TKC”), and Quentin Ball and Jason Stoutamire, two appraisers for TKC (the “defendants”) for, among other things, negligent misrepresentation in connection with an appraisal of real property.  Bryant obtained an appraisal from TKC in late 2007 – signed by Ball and Stoutamire – in the course of considering making a loan to the prospective purchaser of the property.  TKC appraised the property at $1.7 million, which certain employees of Bryant suspected to be overvalued.  Nevertheless, Bryant approved the loan, with the property serving as collateral.  In October, 2008, the debtor defaulted on the loan and Bryant obtained another appraisal that valued the property at $250,000.  In July, 2010, Bryant filed its lawsuit against the defendants.  The Circuit Court granted the defendants’ motion for partial summary judgment as to the negligent misrepresentation claim on the basis that it was barred by the applicable two-year statute of limitations.  The defendants further argued that an appraisal, as an “opinion” and not a statement of fact, could not serve as the basis of a negligent misrepresentation claim.

Before addressing the merits of Bryant’s negligent misrepresentation claim, the Supreme Court of Alabama first considered the point at which the two-year statute of limitations for a claim of negligent misrepresentation (a “legal fraud”) begins to run.  Citing to prior opinions, the Supreme Court noted that when a plaintiff should have discovered fraud is a question of law where the plaintiff had actual knowledge of facts that would have put a reasonable person on notice of fraud.  At the same time, however, the question of when a person of reasonable prudence would have discovered the alleged fraud is generally a question of fact for the jury (i.e., when the plaintiff became privy to facts that would provoke inquiry in the mind of a person of reasonable prudence, and, if followed up, would have led to the discovery of the fraud).  Since there was no evidence that Bryant had actual knowledge that the appraisal was conducted negligently, the claim accrued when a reasonable person would have discovered the fraud – a question for a jury, not summary judgment.

The Supreme Court of Alabama next turned to the merits of the negligent misrepresentation claim.  In particular, the Court addressed whether an appraisal (as an opinion of value) could serve as a basis for such a claim.  While noting that negligent misrepresentation requires a misrepresentation of material fact, and acknowledging that a real estate appraisal is an opinion of value, the Supreme Court found that an appraisal could still serve as a basis for a negligent misrepresentation claim in certain circumstances.  Citing the Restatement (Second) of Torts and Alabama precedent, the Supreme Court found that Alabama will treat a statement of opinion as one of fact where the recipient states his ignorance and invites the opinion, and the speaker understands that the recipient will rely on the speaker’s so that a confidential relationship results, causing the recipient to forebear independent inquiry.  This is particularly true in circumstances in which the speaker has a pecuniary interest in making the statement and possesses special knowledge that would ordinarily make it reasonable for a person to rely on his/her judgment.  As such, the Supreme Court found that the real estate appraisal could serve as a basis for Bryant’s negligent misrepresentation claim.  Furthermore, since Bryant presented evidence that it relied on the misrepresentation to its detriment (i.e., it issued the loan based on the appraisal), the Supreme Court found that Bryant had presented substantial evidence to defeat the defendant’s motion for summary judgment.  The Supreme Court reversed the trial court and remanded the case for further proceedings.

In Matter of JRHBW Realty, Inc. d/b/a RealtySouth; TitleSouth, LLC, File No. 2014-CFPB-0005 (May 28, 2014).

On May 28, 2014, the U.S. Consumer Financial Protection Bureau (“CFPB”) announced that it ordered RealtySouth, the largest real estate firm located in Alabama, to pay a $500,000 fine in connection with improper disclosures to consumers in connection with real estate transactions.  The CFPB charged that RealtySouth violated the Real Estate Settlement & Practices Act (RESPA) by either explicitly directing or suggesting that prospective homebuyers utilize title and closing services conducted by an affiliate of RealtySouth, TitleSouth, LLC.

While allowing referrals to affiliates, RESPA requires real estate companies making such referrals to provide specific disclosures to consumers (“Affiliated Business Arrangement”) disclosures), which clearly set forth that the consumer is not required to use the services of the affiliate and may seek better priced offerings from other service providers.  According to the CFPB, RealtySouth failed to communicate these rights in its contracts, and only buried it within a portion of the document that also served as marketing section for its prices.

In addition to the civil penalty of $500,000, RealtySouth was ordered to ensure that all disclosures comply with RESPA, and that its agent training materials emphasize that RealtySouth and its agents cannot direct or require consumers to utilize the services of affiliates.