Thanks to DJ Scholl (www.notebuyer.com) for this article.
By Peter Christensen
Some appraisers are now being targeted in lawsuits by an entity named “Mutual First, LLC.” It has filed about 40 lawsuits within the last year — 17 within the last two weeks. Mutual First is not a bank, credit union or any kind of regular financial institution. It’s an entity aiming to make money by suing appraisers. Based in Texas, it acquires foreclosed loans, mostly seconds, for small fractions of the original principal amounts. It then files lawsuits against the appraisers who performed appraisals years ago for the lenders, though sometimes the appraisals were not for the lenders who actually made the loans. In its lawsuits, Mutual First claims that the appraisers are liable to Mutual First for damages as the result of negligent overvaluation in the appraisals. The damages demanded include the full unpaid balance of the long-ago foreclosed loan (some were foreclosed 4-5 years ago or more), even though Mutual First itself only paid a very small amount to buy the loan after it was already foreclosed and after the appraised property no longer served as security.
The background information that I have described below makes it seem very unlikely that Mutual First will succeed against appraisers in the long term. I am confident it will fail. Its track record over the last year is already poor. Nevertheless, I am also confident that until the plug is pulled by investors, Mutual First will be a nightmare for dozens, perhaps hundreds, of appraisers dragged into its lawsuits.
According to demand letters preceding the lawsuits, Mutual First’s litigation is managed by an entity using the name Savant Claims Management, though the parties operating it also sometimes use the names or entities Savant Legal Group and SavantLG. These are not law firms; they are claims processors. The people who work for them use titles like “claims director” and “discovery director.” However, to actually file lawsuits, they must use law firms. One of those firms is named Lloyd Ward & Associates, PC. The work of attorneys in that firm in the consumer debt settlement industry has led to notable controversies and has been the subject of legal media attention and litigation (WA appellate decision and OH appellate decision). Interestingly, however, both of the law firms responsible for filing Mutual First’s most recent court complaints use the same email address at the domain “savantlg.com” for communications about the cases.
According to marketing literature circulated by a third-party investment promoter: “The directors of Savant Claims Management, LLC have been collecting on sub-prime mortgage portfolios since the market crash in late 2008.” A recent court filing indicated that two of these Savant “directors” are the sole members of Mutual First. These individuals do have a history of trying to create investment returns through litigation involving defaulted debt. One of their last ventures was known as Heritage Pacific Financial, which ended in bankruptcy earlier this year. Before its financial failure, most of Heritage Pacific’s litigation efforts were directed at trying to collect from borrowers. Those cases produced a backlash of counterclaims and lawsuits by some borrowers for alleged wrongful collection practices, even a proposed class action, and a few significant monetary judgments by other parties against Heritage Pacific itself. The former management is also beset with lawsuits filed by unhappy investors, not just relating to Heritage Pacific but to other loan collection and investment ventures as well (HP Debt Exchange, LLC and HP Locate, LLC).
A small part of the bankrupt Heritage Pacific’s litigation involved suing appraisers over appraisals for the defaulted debt. In the cases I observed, Heritage Pacific did not succeed financially. One of the appraisers sued by Heritage Pacific, in fact, obtained a judgment against the company for his legal costs after the court dismissed the case. Nevertheless, the marketing literature from the promoter seeking investments indicated that the upstart Savant’s business model will focus on suing appraisers, asserting that appraisers make better targets than borrowers. Mutual First, in fact, did start suing appraisers late last year in Florida state court. As of this date, Mutual First does not seem to be pursuing those cases actively, and the only case I have observed reach a final resolution was by way of a voluntary dismissal requested by Mutual First after the defendant appraiser filed a motion to dismiss.
In May, it then tried a different tactic by filing 16 new cases against appraisers in federal court in the Eastern District of Texas. That court is known as the “rocket docket” because of the speed in which it handles cases, and the third-party investment promoter stated that cases would now “go from file to trial in less than six months!” Mutual First’s rocket misfired on the launch pad. The appraisers Mutual First sued in Texas did not reside in Texas, which promptly caused the court to ask for legal justification supporting why the cases belonged in the Eastern District of Texas. Shortly thereafter, Mutual First requested dismissal of all 16 cases before the appraisers even had to respond.
Now, it appears that Mutual First has begun filing cases anew in federal court in Florida and New Jersey. In late August, Mutual First sued at least 17 appraisers in those courts, including several that it had previously sued in Texas. It remains to be seen if Mutual First and/or Savant intend to follow through with a grand plan to sue hundreds more — to that end, the investment promoter circulated scenarios involving the hypothetical filing of hundreds cases, potentially even more than a thousand cases, against appraisers. Based on my experience in seeing the outcome of thousands of appraiser professional liability cases, however, I think it’s very unlikely a campaign like that would succeed because the proposed returns in the investment scenarios depended on unrealistic assumptions being met; two key assumptions were that they would settle 80% of their cases and recover an average of $50,000 in each case. These assumptions do not reflect the reality of professional liability claims against appraisers, at least, in our program. The assumptions also seem disconnected from sound analysis of the legal merit of the claims to be pursued and Mutual First’s ability to present admissible evidence at trial (the investment scenario also did account for trials). But these are lessons any actual investors would have to learn for themselves.
If Mutual First or Savant pursue the scenarios offered by the investment promoter, they would eclipse the number of lawsuits filed by the FDIC itself against appraisers since 2007 in connection with its receivership of more than 500 failed lenders. However, the FDIC’s own financial experience suing individual residential appraisers suggests that it is very unlikely that such litigation effort would pay off as an investment. Suing residential appraisers hasn’t worked for the FDIC overall, even though the FDIC has many more legal advantages in its favor than a private litigant, including a specific statutory extension of applicable statutes of limitation. Moreover, in 2011, an investment fund that I wrote about in a post at the time — LSF6 Mercury REO Investments — tried to implement the same kind of strategy. That fund was affiliated with the large hedge fund Lone Star. After about 50 cases, LSF6 and Lone Star gave up and filed no more. It would be an even harder strategy to make pay off now because we are almost three years further past the time of the mortgage-boom loans that are the subject of these lawsuits.
Looking at all this from another point of view: what if these companies actually were to succeed with the scenarios put forth and systematically recover tens of millions of dollars against thousands of residential appraisers? Such success would fuel more rounds of litigation by this venture and new ones. If they succeed, they would have a bigger effect on the business of residential appraising and likely put more appraisers out of work than any other of the recent events affecting the industry: the mortgage meltdown, the HVCC, and rise of the AMC-business model. I don’t think this is going to happen but a number of appraisers unfortunately will likely be sued before the investors pull the plug. It’s sad to me that those appraisers will be dragged through Savant’s litigation mill, but maybe it’s sadder that apparently there are some appraisers doing reviews for the purpose of assisting the operation. A review is not just an appraisal review when it’s being used to support litigation like this.
If you are an appraiser and you are contacted by either Mutual First or Savant Claims Management, I suggest that you immediately contact your professional liability insurance provider and discuss the threat with them, and I suggest that you do not provide any information or respond to either company before then.
In the near future, if Mutual First and Savant continue to threaten the appraisers we insure, we will be developing a special informational resource accessible to defense counsel and other interested parties. The resource will efficiently catalog documents and information concerning the operation and related entities, including relevant court complaints, orders, judgments, transcripts and background material.
This article was originally published in the Appraisal Law Blog by Peter Christensen.
Peter Christensen is an attorney who advises professionals and businesses about legal and regulatory issues concerning valuation and insurance. He serves as general counsel to LIA Administrators & Insurance Services. He can be reached at peter@liability.com.
