Reliance on Farmland Valuation a Foreseeable Mistake

On April 3, 2019, the Iowa Court of Appeals issued an opinion concerning an alleged negligent misrepresentation of farmland value. The court found that plaintiffs were not justified in their reliance of either of two appraisal companies’ valuation of farmland and affirmed the district courts grant of summary judgment.

Background

A real estate developer passed away in 2014 leaving a will which was created before his marriage. The will created a life estate for his parents with a remainder interest to his brother and sister. Soon after the developer’s death, his father passed away leaving his mother as the sole owner of the life estate.The developer's surviving wife was given nothing under his will.

Iowa law creates an elective share where a surviving spouse is entitled to take a fractional share of the decedent spouse’s estate. The surviving spouse may elect to take the share regardless of whether or not they were in the will. Here, the developer's surviving spouse filed an election to take her share as his surviving spouse under Iowa Code section 633.238. To settle the wife’s claim, the developer's mother entered into negotiations with the wife to determine the estate’s value. A major part of those negotiations was determining the value of two parcels of farmland just north of the city of North Liberty totaling 59.14 acres.

The executor of the estate employed an appraisal company to determine the market value of the land. In its report, the company valued the land at $1.24 million. The valuation was based on a comparison of nearby areas which had been developed with single family housing and the potential for residential development on the farmland in the near future.

While acting as their mother’s power of attorney, the developer’s two siblings questioned the accuracy of the appraisal. The sister believed the valuation was too high because the land was not ready for development since it was not feeding into sewer lines and the city planner could not confirm any plans to develop the land into residential property. Additionally, the sister was able to produce documentation that the land was valued at $600,000 in 2012. The brother brought this concern to the estate’s attorney, but the estate chose to not seek another appraisal.

On their own, the siblings paid for another appraisal by a different company in 2015. The second company reviewed the original report and told the siblings that it believed the valuation was realistic and accurate. Because of that, the family decided to cancel a second appraisal and use the original appraisal in mediation talks with the developer's wife. In July 2015, the family executed an agreement under which the wife received her elective share. The court opinion did not disclose the amount of the payment to the wife.

In December 2016, the mother filed a lawsuit against both appraisal companies claiming the first company negligently misrepresented the appraisal of the farmland, the family relied on the inaccurate valuation, and this caused the family to assume greater liabilities in the negotiations with the decedent’s wife. They also claimed the second appraisal company was negligent in its review of the original report and that the family relied on the review to their detriment.

Reasoning

To show that someone is liable for negligent misrepresentation, the plaintiff must prove that: 1) the representations were made in the course of their business; 2) the representations were false when made; (3) the representations were made for the guidance of others in their business transactions; (4) the defendant was negligent in making the representations; (5) the representations were made for the benefit of plaintiff; (6) the defendants intended the information influence the plaintiff in a certain transaction; and (7) the plaintiffs reliance on the representations was reasonable or justified.

The only issue the court addressed was the final element. The family claimed they were justified in relying on the appraisals during mediation talks because they were not experts in farmland valuation. However, the district court found they were not justified in their reliance on the appraisals for several reasons. First, while the siblings were not expert realtors or appraisers, they both possessed significant knowledge of factors contributing to the farmland’s value.

For example, the siblings were well aware the lack of sewer service would impact the value as well as the farmland’s distance from public infrastructure. The siblings vocalized these concerns to the estate attorney but still used the appraisal value in the mediation talks. The Court of Appeals reasoned a buyer cannot recover for the misrepresentation of an obvious defect. In the same way, there were many red flags concerning the farmland valuation. Because of that, relying on a professional’s opinion was not justifiable in this situation. The court affirmed the motion for summary judgment.