No Lender Liability For Alleged Inflated Appraisal

Andrew M. McKenzie, Edmonds Lawyer

Especially since the Great Recession, distressed borrowers have felt the need to get creative in coming up with theories to avoid foreclosure.  Borrower desperation sometimes inspires borrowers to project blame on the lender for poor underwriting practices.  To paraphrase the arguments of some borrowers, “If my lender had been more careful, I wouldn’t have borrowed as much money, and would never have been in this predicament.” 

A recent unpublished appellate decision in Washington (Banner Bank v. Givens) examined whether borrowers may assert the defense of “unclean hands” where a lender sues to enforce a loan which was allegedly based upon an inflated appraisal of the collateral.  In Givens, a couple borrowed $220,000 in 2007, pledging two of the borrowers’ several lots of land as collateral under a second position deed of trust (another lender’s loan of $500,000 already encumbered the lots).  The second position lender obtained an appraisal showing a value of $800,000, but the appraisal was for all five of the borrowers’ lots, not just the two which were collateral for the loan.  This meant the two encumbered lots were insufficient to secure the second lender’s loan.  The borrowers came upon hard times when health problems hit.  Several years later, the senior lender foreclosed, leaving the second lender (Banner Bank) with no security for the loan.  In 2018, Banner Bank sued on the promissory note for their $220,000 loan.  Prior to and at the trial, one of the borrowers argued that the bank could not obtain relief under any equitable theory because the bank had “unclean hands” due to having used an inflated or mistaken appraisal.

Division III of the Court of Appeals sided with the bank.  It explained the equitable defense of unclean hands, as follows: “Those who act unjustly or in bad faith act with unclean hands. . . Equity disqualifies a plaintiff with unclean hands when the inequitable behavior inheres in the transaction for which it brings suit. . . . In other words, under the ‘clean hands’ doctrine, a court may not grant equitable relief to a party at fault in the transaction at issue. . . . [The borrower] cites no authority that suggests a lender engages in unclean hands if it obtains a fraudulent appraisal or lends money on an overvalued collateral.”  The Court then cited favorably to a case from Colorado which rejected a defense of unclean hands based upon collateral being far less than the balance of the loan, and concluded that unclean hands did not apply here.

It’s true that Shakespeare famously wrote in one of his plays, “Neither a borrower nor a lender be.”  But for better or worse, our modern economy would not function without lending and borrowing.  Mere foolishness in underwriting standards alone does not make render a lender unable to enforce a loan.  Generally speaking, lenders tend to incur liability in situations of true bad faith or in violations of statutes or regulations.  Most of the time, this involves some form of deception, genuine bad faith, unconscionable terms, or lack of required disclosures.

The lawyers at Beresford Booth have experience litigating loan disputes on behalf of both lenders and borrowers.  We would be happy to assist you.

To Learn More about No Lender Liability For Alleged Inflated Appraisal, please do not hesitate to contact us at or by phone (425) 776-4100 for assistance.

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