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August 21, 2012 Articles

Particular Evidence Problems with Appraisals, Part II

Defeating a hearsay objection to the admission of an appraisal report is only one hurdle that parties have to jump if they want to use an appraisal report to prove value.

By Hon. Pam Pepper

In the Spring 2012 issue of Bankruptcy Litigation, we talked about how a party could get around hearsay objections to the admission of an appraisal report by going through the “records of regularly conducted activity” requirements of Federal Rule of Evidence 803(6). But defeating a hearsay objection to the admission of an appraisal report is only one hurdle that parties have to jump if they want to use an appraisal report to prove value.

There are a couple of basic premises that undergird the rules of evidence. Evidence must be relevant, and it must be reliable. If the evidence isn’t relevant, none of the other rules really matter—the court is not going to admit it. And if it isn’t reliable, the same holds true.

Federal Rule of Evidence 401 defines “relevance.” Evidence is “relevant” if “(a) it has any tendency to make a fact more or less probable than it would be without the evidence; and (b) the fact is of consequence in determining the action.” That’s a pretty broad definition, and it almost creates a presumption of some degree of relevance for most evidence. But even relevant evidence isn’t automatically admissible. Rule 403 of the Rules of Evidence states that “[t]he court may exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.”

As discussed in the previous article, a party usually wants to admit appraisal or valuation reports because the party assumes that those reports have, in the words of Rule 401, a “tendency” to make the fact of the value of something more probable than it would be without the report. But appraisal reports don’t always make the report’s assertion of value more probable.

One issue that plagues the proponents of appraisal reports, an issue that goes directly to a court’s consideration of relevance, is timing. It takes time, and it costs money, to obtain an appraisal report. An appraisal of commercial real estate may require more time and money than an appraisal of residential real estate. An appraisal of a multimillion dollar going-concern business may require more time and money than an appraisal of a small family farm. Regardless, the reality is that by the time the proponent arrives at the evidentiary hearing or trial at which he or she plans to present the appraisal report, the valuation contained in that report likely is already out of date.

This is even more likely—obviously—if the asset being valued is one whose market is particularly volatile. A Biedermeier chaise may take some time to value but likely holds a relatively steady value over time. Thus, if the proponent obtained the appraisal report in 2010 and seeks to admit it in 2012, the valuation in that report might still hold relevance to the court. On the other hand, a piece of residential real estate in Arizona likely will have changed value significantly between 2010 and 2012—and most definitely will have changed value between 2008 and 2010. The value contained in an appraisal report from 2008 likely will have no persuasive impact on the court.

Although parties often cannot change the circumstances under which they obtain appraisal reports—the client does not have the funds to obtain a more up-to-date report or cannot find an appraiser in time for the trial—they can at least be prepared to argue the timeliness issue if an opponent objects to relevance. If, for example, the outdated report is the only evidence of value available from either side, it may still be persuasive in spite of its age. If the proponent can supplement the record with more recent evidence of value—a recent tax bill, for example (assuming that the proponent can surmount challenges to the admissibility of that document)—the proponent may be able to rehabilitate the appraisal report to some extent. It pays, however, to think of these options before drawing the objection.

Similarly, the credentials of the appraiser/valuation company preparing the report relate directly to relevance. Obtaining an appraisal of a dairy farm from an appraiser who has spent 15 years appraising residential real estate and who has appraised only two other farms—both crop farms—makes the proponent vulnerable to a challenge to relevance. An appraisal of a service business conducted by a firm whose specialty is valuation of manufacturing firms will face a relevance challenge. Often, courts look less to the educational credentials of the appraiser than to the appraiser’s experience. An appraiser who never had a day of formal training in his life, but who has appraised 97 percent of the farms sold in the surrounding counties in his 30-year career, will have a great deal of persuasive value to a court. An appraisal from a newbie who has a great deal of book learning but no experience will have little value.

Needless to say, the optimal conditions under which to think about these issues are conditions in which your client has the funds and the time to order the appraisal report from the right appraiser, and to have it prepared as near as possible in time to the date on which you’ll offer it into evidence. But as noted above, those optimal conditions do not always exist in the bankruptcy world. The next best thing is to think about how you might rehabilitate a report, if it suffers from these flaws, so that you can persuade the court that it is relevant.

Copyright © 2012, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).