                           In the
 United States Court of Appeals
              For the Seventh Circuit
                        ____________

No. 06-3441
DECATUR VENTURES, LLC, et al.,
                                       Plaintiffs-Appellants,
                              v.

KIMBERLY DANIEL,
                                         Defendant-Appellee.
                        ____________
       Appeal from the United States District Court for the
        Southern District of Indiana, Indianapolis Division.
   No. 1:04-CV-00562-JDT-WTL—John Daniel Tinder, Judge.
                        ____________
     ARGUED MARCH 30, 2007—DECIDED MAY 4, 2007
                   ____________


 Before EASTERBROOK, Chief Judge, and BAUER and
WILLIAMS, Circuit Judges.
  EASTERBROOK, Chief Judge. Michael Stapleton made
Trent Decatur a terrific offer: Stapleton would locate
“under-valued” homes, arrange to borrow more than the
actual purchase price, and use the surplus to fix up the
properties so that they could be rented. All Decatur had
to do was agree to repay the loans. Stapleton promised to
supply the down payment, do the repairs, and locate the
tenants. Decatur could put his feet up on the desk and
wait for the rentals to roll in, enough to retire the loans
with profit to spare.
  Like most offers too good to be true, this was not true.
After remitting “rents” just long enough to persuade
2                                              No. 06-3441

Decatur to invest in additional properties, Stapleton
pocketed the money. Or so Decatur says in this suit; for
now we must take his allegations as given. Decatur and
several other investors—we use “Decatur” to represent
all of the victims—maintain that Stapleton had helpers.
One aide was Courtenay Stocker, who used his position at
NovaStar Home Mortgage, Inc., to line up lenders. Accord-
ing to the complaint, Stocker was in on the scam but the
lenders were not. They thought the properties worth more
than the amount being advanced.
  Lenders thought this because the files contained apprais-
als signed by both Lisa Phillips and Kimberly Daniel. For
$300 per parcel, Phillips promised to provide an inflated
appraisal. (To repeat: This is just an allegation. Nothing
has been proved. We shall not repeat this caution, but the
reader must keep it in mind.) Phillips was an apprentice
(a “licensed trainee appraiser” under Indiana law) and
needed supervision. Phillips engaged Daniel to provide
that supervision. Indiana requires the appraiser to accom-
pany the apprentice to the site the first 50 times they work
together. 876 Ind. Admin. Code §3-6-9(j)(1). Daniel some-
times accompanied Phillips but usually didn’t; she vouched
for whatever Phillips proposed without adhering to
professional standards of verification, such as spot-check-
ing the supposedly comparable properties. When Daniel
signed some forms showing that she had not seen the
appraised property herself, she provided these to Phillips
in a way that made it easy for Phillips to change them so
that they falsely showed that Daniel had done what the
law (and the lender) require. So the loans were made, and
Decatur is on the hook for payment, which will cost him a
good deal more than he can raise by selling the properties.
  An example illustrates how the scheme worked. These
round numbers do not fit any of the actual transactions,
but they give the idea. Stapleton located a house that the
owner was willing to sell for $50,000. Phillips appraised
No. 06-3441                                               3

the property at $100,000; Daniel verified this appraisal.
Stocker prepared papers showing that the owner had
contracted to sell the parcel to Decatur for $100,000;
Stocker also lined up a bank willing to lend $90,000
against Decatur’s promise to repay (plus a mortgage on
the real estate). Decatur signed papers verifying that
$100,000 was the actual price and that the $10,000 down
payment to be produced at closing would be his money.
Both of Decatur’s representations were false: he knew that
the property cost less (he expected Stapleton to use the
difference for renovations) and put up none of his own
money. At closing the $10,000 came from Stapleton—and
went right back to him, as none of that cash reached
the seller. The bank’s $90,000 was divided between the
seller ($50,000) and Stapleton ($40,000), who paid $300 to
Phillips for her assistance (with $50 going from Phillips to
Daniel). That left $39,700 to be split between Stocker and
Stapleton, who might send a few monthly payments of
“rent” Decatur’s way to keep the fish on the hook while
more deals were arranged. As this example illustrates,
Decatur was no angel; his willingness to deceive the
lender was vital. But for current purposes the defense of in
pari delicto need not be considered.
  Federal and state claims—RICO plus fraud and negli-
gence—against Stapleton (plus Stapleton Ventures, Inc.)
and Stocker (plus NovaStar) are awaiting trial in
the district court. Similar claims against Phillips have
been dismissed without prejudice; plaintiffs have con-
cluded that she is judgment-proof. But Daniel carried
insurance. The district court granted summary judgment
in her favor after concluding that appraisers in Indiana
owe duties to lenders but not borrowers such as Decatur.
2006 U.S. Dist. LEXIS 56589 (S.D. Ind. Aug. 11, 2006).
Appraisers are liable to third parties only for fraud. But
because Indiana treats an appraisal as an opinion rather
than a fact, the representation could be fraudulent only
4                                             No. 06-3441

if the appraisal’s author did not believe her own numbers.
And of that, the district judge concluded, there is no
evidence. This ruling wrapped up the claim against Daniel,
and the district court entered a judgment under Fed. R.
Civ. P. 54(b).
  “Indiana follows Ultramares Corp. v. Touche, Niven &
Co., 255 N.Y. 170, 174 N.E. 441 (1931) (Cardozo, J.), in
limiting the liability of accountants, lawyers, and other
professionals when persons receive their reports and
opinions second-hand. See Essex v. Ryan, 446 N.E.2d 368
(Ind. App. 1983).” Ackerman v. Schwartz, 947 F.2d 841,
846 (7th Cir. 1991). In a jurisdiction that follows
Ultramares, a professional owes a duty of care only to his
client plus any third party who the professional knows
will see and rely on any opinion he renders. Indiana has
applied this approach to appraisers. See Emmons v.
Brown, 600 N.E.2d 133 (Ind. App. 1992). Daniel’s client
was either NovaStar or Stapleton (the record is not clear
which), and she knew that the lender would review and
rely on her reports. Lenders require appraisals to protect
themselves from the people who are tempted to misrepre-
sent the value of security in order to get their hands on
more money. Nothing in the record suggests that Daniel
anticipated that Decatur would rely on her work to pro-
tect himself from his own folly in believing Stapleton.
Decatur does not cite (and we could not find) any case in
Indiana holding an appraiser liable to a buyer for care-
less preparation of an opinion furnished to a lender.
  Decatur tries to get around this obstacle by arguing
that NovaStar or Stapleton acted as his agent in the
transaction, and that he was at least a third-party benefi-
ciary of the appraisals. The idea is that appraisals are
designed to help buyers get financing. That theory is
fundamentally incompatible with the lender’s goal of self-
protection and with Ultramares. Indiana eventually may
abandon that doctrine (it represents a minority approach
No. 06-3441                                               5

among the states), but we doubt that the state would do
so by treating people the professional has never heard of,
and who are not the professional’s clients, as third-party
beneficiaries of a contract between the professional and the
actual client. That exception would swallow the rule. And
the argument that NovaStar and Stapleton were Decatur’s
agents is loopy. Stocker and Stapleton were in league
against Decatur. He dealt with them at arms’ length.
  In Ackerman, on which Decatur vainly relies, the
professional (a lawyer rendering a tax-shelter opinion) sent
the opinion directly to (real) agents working on behalf of
potential investors. The lawyer knew that potential
investors would rely on the opinion; inducing them to part
with their money was the point of the exercise. But Daniel
did not send her appraisal to Decatur or anyone represent-
ing his interests, and, as we have stressed, appraisers
expect lenders to use their opinions to protect themselves
from borrowers. Decatur’s own complaint alleges that he
set out to deceive the lender about the purchase price of
the real estate. That’s why lenders need protection!
Decatur knew that the appraisal always exceeded the
actual transaction price. He may have believed that the
real estate would be worth more than the loan after
improvements, which the surplus loan proceeds would
fund, but he did not rely on Daniel for the proposition
(which he knew to be false) that each unimproved parcel
was worth the amount reported to the lender as the
price Decatur paid.
  This leaves the possibility that Daniel could be liable
for committing fraud, a theory that even unanticipated
recipients of a professional’s report may invoke. What
we’ve already said implies that Decatur did not rely on
Daniel’s statements. But the district court granted sum-
mary judgment for a more fundamental reason: there
was no fraud. Indiana treats appraiser’s reports as opin-
ions, which can be neither true nor false, and hence not
6                                             No. 06-3441

fraudulent unless the speaker disbelieves her own words.
See Kreighbaum v. First National Bank & Trust, 776
N.E.2d 413, 421 (Ind. App. 2002); Block v. Lake Mortgage
Co., 601 N.E.2d 449, 451 (Ind. App. 1993); see also
Wheatcraft v. Wheatcraft, 825 N.E.2d 23, 30-31 (Ind. App.
2005) (“The general rule is that statements of value are
regarded as mere expressions of opinion.”). Decatur has
not argued that Daniel recognized that Phillips was
whipping up bogus estimates.
  An argument to that effect might have been available.
Honest estimates should be randomly distributed around
the truth. The estimates for which Daniel vouched,
however, were always high—way high. The record con-
tains both the actual transaction price and the Phillips/
Daniel appraisal for seven properties. The appraisal was
as much as 500% of the transaction price and never less
than 114%; the average was 178% of the prices that
Stapleton had negotiated with the sellers. A statistical
analysis of these estimates, compared with the normal
variation of honest estimates in the appraisal business,
might have established whether this degree of difference
between appraised prices and real transactions prices
reasonably could be ascribed to chance.
  Instead of offering such an analysis, however, Decatur
hired his own appraiser (David Woods) in an effort to show
how wrong Daniel had gone. Woods was about as far off, in
the other direction, as the Phillips/Daniel appraisals:
Woods signed his name to estimates that were only 64% of
actual transaction prices. Why Decatur thought to compare
one appraisal with another, rather than with real prices,
is hard to fathom. Any opportunity to use statistics to
imply that Daniel must have smelled a rat has been
bypassed. What’s more, the fee of $50 per report would not
have tipped her off (by suggesting that she was being
paid to look the other way, or being compensated for risk);
the record implies that this fee is ordinary.
No. 06-3441                                                 7

   This drives Decatur to argue for vicarious liability.
Phillips must have understood that she was supplying
false appraisals. We know that Phillips lied about some
objectively verifiable claims; for example, her appraisals
often overstated the number of square feet in the houses
(and never erred in the opposite direction). Her alteration
of Daniel’s certificates is fraud and implies willingness to
lie about other subjects too. According to Decatur,
Phillips’s state of mind should be imputed to Daniel
because Indiana requires supervising appraisers to “take
full responsibility” for trainees’ reports. 876 Ind. Admin.
Code §3-6-9(i).
  What does “full responsibility” mean? It could mean that
Daniel “must submit to professional discipline as if she
had written the reports”; it could mean that Daniel “is
liable in civil litigation as if she had written the reports”;
it could mean that Daniel “is liable in civil litigation to
the same extent as the person who actually wrote the
reports.” The last of these three possibilities is vicarious
liability, but the first two are not, because they do not
impute Phillips’s state of mind to Daniel—and the first
possibility is never of use to any plaintiff.
   Indiana’s judiciary has not chosen among these mean-
ings; indeed, the state’s courts have never cited 876 Ind.
Admin. Code §3-6-9. Nor, for that matter, has a similar
provision in any other state been the subject of a reported
decision that we know of. Section 3-6-9 is part of Indiana’s
licensure code, which suggests that the first possibility
(that the rule is limited to professional discipline) is the
one that Indiana’s judiciary is likely to select. And if the
state were to apply the rule in litigation, it probably would
not use it as the basis of vicarious liability. Indiana has
adopted (through incorporation by reference in 876 Ind.
Admin. Code §3-6-2, 3) the Uniform Standards of Profes-
sional Appraisal Practice. These standards, which may be
8                                              No. 06-3441

found at http://commerce.appraisalfoundation.org/html/
2006%20USPAP/toc.htm, provide among other things that:
    An appraiser must not communicate assignment
    results in a misleading or fraudulent manner. An
    appraiser must not use or communicate a mislead-
    ing or fraudulent report or knowingly permit an
    employee or other person to communicate a mis-
    leading or fraudulent report.
USPAP Conduct (Ethics Rule) ¶4 (emphasis added). The
knowledge requirement in this standard is incompatible
with vicarious liability for another person’s fraud.
  Section 3-6-9(i) appears to be similar in function to Rule
5.1 of the ABA’s Model Rules of Professional Conduct. The
2007 version of this rule provides:
    Rule 5.1 Responsibilities Of Partners, Manag-
    ers, And Supervisory Lawyers
    (a) A partner in a law firm, and a lawyer who
    individually or together with other lawyers pos-
    sesses comparable managerial authority in a law
    firm, shall make reasonable efforts to ensure that
    the firm has in effect measures giving reasonable
    assurance that all lawyers in the firm conform to
    the Rules of Professional Conduct.
    (b) A lawyer having direct supervisory authority
    over another lawyer shall make reasonable efforts
    to ensure that the other lawyer conforms to the
    Rules of Professional Conduct.
    (c) A lawyer shall be responsible for another law-
    yer’s violation of the Rules of Professional Conduct
    if:
        (1) the lawyer orders or, with knowledge of the
        specific conduct, ratifies the conduct involved;
        or
No. 06-3441                                                9

        (2) the lawyer is a partner or has comparable
        managerial authority in the law firm in which
        the other lawyer practices, or has direct super-
        visory authority over the other lawyer, and
        knows of the conduct at a time when its conse-
        quences can be avoided or mitigated but fails
        to take reasonable remedial action.
If Phillips and Daniel were lawyers, Rule 5.1(c)(1) would
limit Daniel’s liability to specific conduct of which she has
“knowledge”. The knowledge requirement shows that the
supervisor is not vicariously liable for a supervised per-
son’s fraud. See Ronald D. Rotunda & John S.
Dzienkowski, Legal Ethics: The Lawyer’s Deskbook on
Professional Responsibility 890 n.15 (2006 ed.). We doubt
that Indiana would understand §3-6-9(i) and USPAP
Conduct (Ethics Rule) ¶4 differently.
                                                  AFFIRMED

A true Copy:
      Teste:

                        ________________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit




                   USCA-02-C-0072—5-4-07
