The Misuse of Standards of Practice in Valuation Litigation

Many depositions of appraisers reflect an emphasis
on whether the appraiser followed the Uniform Standards of Appraisal
Practice (USPAP). Accreditation societies require members to follow
USPAP and stay educated on any changes to maintain accreditation
status. The attorney taking the deposition may be familiar with the
preamble and ethics section of USPAP and may have a general
understanding of the applicable standards for real estate, personal
property or business valuations. However, they may be less familiar
with valuation theory and the varying interpretations of USPAP.

</p><p>Through testimony experience, it has become evident to me that USPAP
has become more often used as a strategy to discredit witnesses. In
many cases, this is a two-way street in which both sides attack the
USPAP criteria rather than the other pertinent aspects of the case.
While this method of focusing on USPAP has not been practiced to the
same extent in bankruptcy cases as in <i>ad valorem</i> tax or errors
and omission cases, it is likely that the tactic may become more
common in bankruptcy court. </p><p>The objective in any valuation is to find
the correct value and to demonstrate the support behind that value
conclusion. The determination of value and its defense should be the
focus in litigation, rather than whether the report meets the
technical measure of USPAP. USPAP is typically not a law (except in
cases of real estate studies in federally related transactions),
although some may think it is. It is only a guideline (unless required
by statute) and may or may not lead to the proper valuation. It
certainly, if followed, adds value to the report but does not
guarantee a correct value opinion. In a case where a judge requires a
USPAP-compliant report, the basis of the case would understandably
include an effort to defend or discredit a report based on conformity.

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The determination of value and its defense should be the focus in
litigation, rather than whether the report meets the technical measure
of USPAP.
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<p>Before USPAP, testimony was limited as to how value was determined.
After USPAP, attorneys came to see it as an easy way to trip up an
expert. However, a report meeting the guidelines may have little to do
with support for the value conclusions. Here, USPAP is more likely
misused as a tool to confuse the issue rather than argue the value
assigned and the defense of same. </p><p>Some examples of deposition
questioning using USPAP are: </p><p>1. Question: "<i>Shouldn't you have
included XYZ in the report so it would not be misleading?</i>" It
is a violation of USPAP to have an intentionally misleading report.
"Misleading" is a word used to attack various areas of a
report. <br> 2. Question: "<i>Were there others, not mentioned in
the report, that assisted you to come up with value?</i>" USPAP
says that you must identify significant contributors to the report.
The appraiser's opinion may be based on many sources of information to
determine value, such as dealers, users, manufacturers and outside
experts, and this is normal procedure for arriving at a conclusion.

<br> 3. Question: "<i>Did you obtain a highest and best-use
analysis?</i>" Regarding machinery &amp; equipment, USPAP
8-2(b)(x) refers to the highest and best use, but the explanation also
says "unless an opinion as to the highest and best use is
unnecessary." </p><p>What difference does it make whether the appraiser
met USPAP's technical standards as long as the appraiser can defend
the value conclusions? Isn't that the real issue? The profession of
appraising has been around a long time, and the guidelines of USPAP
were a great addition. However, it is increasingly being relied upon
improperly by some litigators. </p><p>An accredited appraiser should always
be prepared to meet the USPAP standards. However, the value and
support are more appropriately the issues rather than the format of
the report. Meeting each and every point of USPAP creates a good
report format, but by itself is not the assurance of a good value. But
most reports are done without the thought of future litigation.
Historically, the judge will allow the report to be used regardless of
whether it complies with USPAP. The rationale is that the report could
have been prepared for a particular use such as a loan, dissolution,
allocation or for some other reason, and it is the value of that
report that is in question. </p><p>This is not to imply that following USPAP
should never be questioned. USPAP is a wonderful guideline, and
appraisers should always do their best to meet it. Any negligence that
affects the ultimate value conclusions should be argued. The sanctions
or loss of accreditation is the worry of the appraiser. But it is the
value of a report that is most important. If the format of the report
has an error, it does not negate the conclusion as defended,
notwithstanding an effort to discredit the opposition's expert. </p>