In 2000, a steel plant in the U.K. sought an asset-based loan from Bank of America.  The bank recommended a local appraisal firm, which reported a range of value between $7.0 million (forced liquidation) and $8.5 million (orderly liquidation).  The bank agreed to lend the plant $5.75 million, and then turned around and sold the loan in a $374 million portfolio to Wells Fargo.  At the time, Wells Fargo engaged the same appraisal firm to conduct a second valuation—but later refused to pay for it, perhaps because the steel plant’s forced liquidation value came back at only $2.86 million.  By March 2002, the steel plant was in receivership, its assets selling for only $2.2 million. 

But when Wells Fargo tried to sue the appraisal firm for breach of contract, the U.S. District Court (Illinois) found that it was not a beneficiary of the contract between the appraisers and the steel plant. “The only beneficiary was the borrower.”  Plus, the court was none-too impressed with the bank’s due diligence.  The one Wells Fargo employee who reviewed the steel plant loan couldn’t remember the loan, the appraisal—or the portfolio, and his handwritten note referenced an incorrect value for the appraisal.  “[I]t is difficult to reconcile the error….with the claimed practice of careful examination of the appraisal,” the court said, in dismissing the claims. 

Although the bank could file an alternative suit, based on negligent misrepresentation, it would have to show a “rigorous processing of its loan portfolio.”  That could be difficult for any lender to prove, the court warned, in what could be an ominous footnote for the U.S. banking industry.  “It will be a few years before an American jury [will] be likely to accept the premise of careful lending.” 

We’ll include the complete case abstract for Wells Fargo Business Credit, Inc. v. Dovebid Valuation Services, Inc. (Sept. 18, 2008) in the upcoming December issue of Business Valuation Update™.