In 2000, a steel plant in South Wales (U.K.) sought an asset-based loan from Bank of America (BOA).  As part of its due diligence, BOA contacted a valuation firm (Dovebid), which entered into an agreement with the steel plant to appraise its assets.  The appraisers valued an orderly liquidation of the plant’s assets at $8.5 million and a forced liquidation at just over $7.0 million.  The appraisal contained the “customary proviso” that its conclusions were based on economic trends within 90 days of the valuation; it also disclaimed any guaranteed “sale results,” since its opinions did “not apply to any past or future dates.”  Finally, the report noted that it was intended for use only by the purchaser (the steel plant) and any other users should understand that the purchaser did not receive any guaranteed values by paying for the report.

Based on this appraisal, BOA agreed to extend a $5.75 million to the steel company.  The appraisal firm was neither a party to the loan nor a guarantor of the borrower’s obligations. Not long after, BOA sold the loan to Wells Fargo as part of a $374 million portfolio.  Less than a year later, the steel plant was in default.   Wells Fargo requested the same appraisal firm to conduct a second valuation, which it completed in July 2001—but Wells Fargo refused to pay for it, perhaps because it estimated the forced liquidation value at only $2.86 million.  In March 2002, the steel plant went into receivership, its assets selling for $2.2 million.

Wells Fargo sued the appraisal firm for breach of contract, claiming that it (Wells Fargo) and BOA were third party beneficiaries of the contract between the appraisers and the steel plant.  But on the appraisers’ motion for summary judgment, the U.S. District Court (Illinois) found no authority to support Wells Fargo’s position.  “Appraisers, in these circumstances, serve the lender,” it said, “and a referral by a bank to a specific appraiser is simply a service to the lender by naming an appraiser that the lender deems to be competent.”   BOA was not an intended beneficiary of the contract; the only beneficiary was the borrower.  Wells Fargo came into the transaction “long after” the contract was complete.

Look for a complete abstract of Wells Fargo Business Credit, Inc. v. Dovebid Valuation Services, Inc., 2008 WL 4324231 (N.D. Ill.)(Sept. 18, 2008) in the December 2008 Business Valuation Update™.  The full-text of the court case—in addition to over 2,700 BV-specific federal and state decisions—is available at BVLaw™.