Traditionally, property owners have been allowed to testify in Texas Courts about the value of their own property, even if they do not otherwise qualify as an expert.  2011 saw significant developments in the application of this so-called Property Owner Rule.

For secured lenders, appraisal testimony can be critical – for example, when seeking a post-foreclosure deficiency and the property owner raises the market value defense.  But what happens when the property owner is a corporate entity?  Can its representative testify as to value?

First, some background:  In Reid Road M.U.D. No. 2, v. Speedy Stop Food Stores, Ltd., 337 S.W.3d 846 (Tex. 2011), the Texas Supreme Court addressed the applicability of the so-called Property Owner Rule to representatives of corporate entities.  In short, the Court found as follows:

We believe the better rule is to treat organizations the same as natural persons for purposes of the Property Owner Rule, with certain restrictions on whose testimony can be considered as that of the property owner.  We hold that the Property Owner Rule is limited to those witnesses who are officers of the entity in managerial positions with duties related to the property, or employees of the entity with substantially equivalent positions and duties.  Further, the Property Owner Rule falls within the ambit of Texas Rule of Evidence 701 and therefore does not relieve the owner of the requirement that a witness must be personally familiar with the property and its fair market value, but the Property Owner Rule creates a presumption as to both.

Id. at 849 (emphasis added) (In that case (a condemnation proceeding), the affidavit of the witness was not allowed, primarily because it failed to reflect the requisite personal knowledge on the part of the representative – in other words, it did not appear from the affidavit that the witness had actual knowledge of the specific property.).

Later in the year, the Dallas Court of Appeals addressed a corporate representative’s testimony in a post-foreclosure deficiency suit in Corniello v. State Bank and Trust, Dallas, 344 S.W.3d 601 (Tex. App. – Dallas 2011, no pet. hist.).

In Corneillo, an LLC borrower and its guarantor moved for a determination of fair market value following a foreclosure, pursuant to Section 51.003 of the Texas Property Code (motion to determine fair market value at time of foreclosure), and the debtor – corporate rep’s testimony was offered by affidavit in response to a motion for summary judgment filed by the lender.  The LLC’s rep in this case was the sole member of the LLC and fit within the category of appropriate representatives to provide such testimony, and he purportedly had personal knowledge about the subject property.

Notably, the representative was not identified as an expert witness; however, the appellate court reversed the trial court’s summary judgment for the lender, holding, in part, that the corporate representative’s testimony under Rule 701 (the fact witness rule) at least created a fact issue that should have precluded the summary judgment.

In the litigation context, this rule implicates both Rules 701 (opinion testimony by a lay witness) and 702 (testimony by an expert witness) of the Texas Rules of Evidence.  In other words, courts can find themselves walking a fine line between testimony of a lay person with personal knowledge of a particular property and that of an expert witness who holds special training and expertise.  As noted, this is a more difficult issue when the owner is not an individual, but rather an entity that can only speak through its representatives:

A reasonable balance as to who may testify under the Property Owner Rule on behalf of an entity is struck by allowing such testimony only from an officer in a management position with duties that at least in some part relate to the property at issue, or an employee of the entity in a substantially equivalent position.  See Redman Homes, Inc. 920 S.W.2d 669; Porras, 675 S.W.2d at 504.

Reid Road M.U.D. No. 2, 337 S.W.3d at 854.

Lessons Learned and Best Practices – Deficiency Suits.

In short, the best practice is always to retain a qualified valuation expert.  For lenders, retention of an appraiser is a must if a deficiency action is contemplated.  Many lenders prefer to utilize the services of an “MAI” appraiser, but even that designation is not determinative or even necessary (“Rule 702 does not require a witness to have any particular license to qualify as an expert.”).[1]  The point is that the appraiser should be qualified, and preferably, disinterested.

In a foreclosure context, our suggested “best practice” is to have the appraiser retained prior to the foreclosure sale, and make sure that the appraiser has some familiarity of the property as of the date of the foreclosure sale.  For example, one might suggest a drive-by or other check by the appraiser (literally on or near the date of the sale) so that months later the appraiser can truthfully testify from some personal familiarity at or near the time of the foreclosure sale.  Again, the issue will be value as of the time of the sale.

For corporate property owners who may not have the funds to retain a qualified expert, selection of the appropriate corporate representative is necessary, and to state the obvious, that person should have actual personal knowledge about the subject property.

Finally, whether relying upon Rule 701 or 702, whenever valuation testimony is anticipated (practitioners should always assume that to be the case in a deficiency suit), expert witness designation practices must be followed.  Err on the side of disclosing any testifying expert (and don’t forget the attorneys’ fee expert) as early as possible.

*Roger Cox, a shareholder with the Underwood Law Firm, is Board Certified in Business Bankruptcy Law (and formerly Board Certified in Commercial/Real Estate Law) by the Texas Board of Legal Specialization.  Mr. Cox regularly represents lending institutions in foreclosures, restructuring, and formal bankruptcy proceedings.  This article is for general information only and is not intended as legal advice.