On 9 December 2016, the Supreme Court of Lithuania ruled on the property appraiser’s civil liability for losses incurred by the bank as a result of an improperly drawn up valuation report.
The bank requested the court to declare that the real estate–land–property valuation report drafted by the property appraiser is incorrect and to order both the property appraiser and the insurer to indemnify damages. The bank noted that upon the initiation of the forced recovery of the debt from the mortgaged property, it turned out that the property market value and the residual value specified in the property appraiser’s valuation report do not correspond with reality. The fair market value and the residual value of the land plot are several tens of times less than the ones indicated in the property appraiser’s valuation report. On the basis of the false property valuation report, the bank granted a person a loan exceeding EUR 136.000, the outstanding amount of which is nearly EUR 134,000. According to the bank, the bank is unable to recover this amount from the debtor due to the property appraiser’s fault.
The Court of First Instance dismissed the action, while the Court of Appeal overturned the ruling of the court of first instance and recognized the property valuation report as false; however, it failed to award damages from the property appraiser and the property appraiser’s insurer in favour of the bank. The court of appeal held that, on the one hand, a civil liability should arise in respect of the property appraiser and, on the other hand, operations carried out by the bank cannot be ignored as well. The Bank is a professional in the field of specialisation; therefore, a special nature of its business results in the duty of great diligence and care. The bank should have checked the property valuation report, but due to its negligence and inadvertence it unreasonably relied on a wrong property valuation report. In addition, the bank failed to take further actions to recover the debt from the principal debtor. After assessing all the circumstances, the court concluded that the property appraiser and the property appraiser’s insurer are subject to the exemption from the civil liability.
The Supreme Court of Lithuania overturned the ruling of the court of appeal and referred the case back to the court of appeal, stating that the bank’s illegal actions determined in this case form the basis to, not completely, but only partially, exempt the property appraiser and the property appraiser’s insurer from the liability.
The Supreme Court of Lithuania upheld the ruling of the court of appeal that the provision of credits fall within the bank's commercial activity wherein the bank acts as a professional in its field of specialisation; therefore, it is subject to a greater degree of diligence and care. In order to avoid potential risks, the bank must carry out a legal and economic analysis of the situation before entering into any transaction.
In addition, in this case the bank, when entering into a credit agreement with a borrower, already had information about the improper estimates made by the property appraiser, who was served with the bank’s notification of the termination of the cooperation agreement; therefore, the bank was obliged to consider more closely the legal situation, to check and make sure whether the established property value corresponded to the actual price, and only in this case, to decide on the granting of credit.
However, higher standards of care and diligence, according to the court, are applicable not only to the bank, but also to the property appraiser, who is a professional in its field of specialisation. As a result, the property appraiser cannot be fully released from the civil liability even if it is found out that the bank acted in an inadvertent and negligent manner. The ruling recognized that the bank’s illegal actions form the basis for only a partial exemption of the property appraiser from his liability. The court did not speak on the extent of exempting the property appraiser from the civil liability.
The ruling further drew attention to the fact that the bank’s losses in this case form only the outstanding part of the loan, which was granted according to the excessive price for mortgaged property that was determined by the property appraiser, i.e. which would not have been granted if one would have established a fair market price.
In summary, when reconsidering the case under appeal, the court shall determine the amount of losses incurred by the bank, assess the relation of both the bank and the property appraiser with the resulting damage and decide what specific amount of damages should be awarded in favour of the bank. The extent of the reduction of the loss incurred by the bank, taking into account the actions taken by the bank itself, shall be determined exclusively at the discretion of the court.
More: Ruling of the panel of judges of the Civil Division of the Supreme Court of Lithuania dated 9 December 2016, as adopted in the civil case No 3K-3-507-611/2016.
By Renata Jankutė, Senior Associate, Attorney-at-Law at law firm GLIMSTEDT