EMERGING TRENDS IN A WARMING PURCHASE AND SALE MARKET
THE BID-NESS OF AUCTIONS
AUCTIONS OF REAL ESTATE AND TITLE ISSUES
James L. Gosdin
Senior Vice President, Chief Underwriting Counsel, Associate General Counsel
Stewart Title Guaranty Company
Houston, Texas
1.
BACKGROUND OF COMMERCIAL AUCTIONS
There are innumerable ways to provide auctions, such as in-person live open outcry auctions,
online live auctions, telephone auctions, sealed bid auctions, and timed online auctions.
Categories of auctions include:
•
English auctions
“Open ascending price auctions” or open bids with each bid higher than the prior bid.
•
Dutch auctions
“Open descending price auctions” pursuant to which the auctioneer announces an asking
price and the price is lowered until a bidder agrees to the auctioneer’s price, named after
Dutch tulip auctions.
•
First-price sealed-bid auctions or blind auctions
Simultaneous sealed bids, to the high bidder.
•
Second-price sealed-bid second-price auctions
Winning bidder pays second-highest bid.1
The types of auctions based on escalating bidding include:
•
Absolute auctions (or auctions without reserve)
“The property is sold to the highest bidder, regardless of the price….”2
•
Minimum bid auctions
“The auctioneer will accept bids at or above a published minimum price. This minimum
price is always stated in the brochure and advertisements and is announced at the
auction….”3
1
2
3
“Auction.” Wikipedia: The Free Encyclopedia. Wikimedia Foundation, Inc., 10 June 2015. Web. 15 June 2015.
<http://en.wikipedia.org/wiki/Auction>; “Auction theory.” Wikipedia: The Free Encyclopedia. Wikimedia Foundation, Inc.,
9 March 2015. Web. 15 June 2015. <http://en.wikipedia.org/wiki/Auction_theory>; Leslie R. Fine, “Auctions.” The Concise
Encyclopedia
of
Economics.
2008.
Library
of
Economics
and
Liberty.
15
June
2015.
<http://www.econlib.org/library/Enc/Auctions.html>.
“Types of Auctions.” National Association of REALTORS®. <http://www.realtor.org/auction/types-of-auctions>.
Id.
•
Reserve auctions (auctions subject to confirmation)
“…[T]he high bid is reduced, in effect to an offer not a sale. A minimum bid is not
published, and the seller reserves the right to accept or reject the highest bid within a
specified time - anywhere from immediately following the auction up to 72 hours after
the auction concludes.”4
There is a general presumption that auctions are made with reserve unless a contrary intent is
manifested. Unless different intent is shown, an auction bid will be made subject to the terms
shown by advertising, posting, and other publication that bidders are or should be aware of, as
the terms are modified by any announcement of the auctioneer at the time of the auction. The
offer made by the auctioneer is revocable and the sale is not complete until the fall of the
hammer, and the property may be withdrawn unless the auction is announced as made without
reserve. “The Restatement Second of Contracts, section 28, sets it up this way: at an auction,
unless a contrary intention is manifested, the auctioneer invites offers from bidders, which
he may accept or reject; when goods are put up without reserve, the auctioneer offers to sell to
the highest bidder, regardless of the amount of the bid and the goods cannot be withdrawn unless
no bid is made within a reasonable time. Paragraph (2) states: ‘Unless a contrary intention is
manifested, bids at an auction embody terms made known by advertisement, posting or other
publication of which bidders are or should be aware, as modified by any announcement made by
the auctioneer when the goods are put up.’ Witkin cites this section, as well as early California
cases and two text writers (Corbin and Williston) for the following rule: ‘An auctioneer normally
solicits or calls for offers, and the bidders are the offerors. Such an offer is revocable, no sale is
complete until the fall of his hammer, and the auctioneer may withdraw the goods unless the
auction is announced to be without reserve.’ (1 Witkin, Summary of Cal. Law (9th ed. 1987)
Contracts, § 134, p. 158.)”5
If an auction is advertised and made as a “no reserve auction” or “absolute auction,” the land
cannot be withdrawn after bidding commences, and an oral agreement between the owner and
auctioneer to use a “shill” or false bidder, unknown to sincere bidders, to raise the price is void
and unenforceable as contrary to public policy. “Unquestionably, the most famous illegal
purpose contract case is the legendary and perhaps supposititious ‘highwayman’s case,’ that
generations of law students have trained on. There, one criminal unsuccessfully attempted to
invoke equity to sue another for a share of their ill-gotten booty. Our Court in 1956 discussed
this case, quoting from Pothier on Obligations, in a fashion that cannot be improved upon, as
follows: ‘There is a tradition that a suit was instituted by a highwayman against his companion to
account for his share of the plunder, and a copy of the proceedings has been published as found
amongst the papers of a deceased attorney. It was a bill in the Exchequer, which avoided stating
in direct terms the criminality of the engagement, and is founded upon a supposed dealing as
copartners in rings, watches, et cetera, but the mode of dealing may be manifestly inferred. The
tradition receives some degree of authenticity, by the order of the court being such as would in
all probability ensue from such an attempt. The order was, that the bill should be dismissed with
costs for impertinence, and the solicitor fined 50£. The printed account is accompanied by a
memorandum which states the particular times and places where the plaintiff and defendant were
afterwards executed.’ [Manning v Bishop of Marquette, 345 Mich. 130, 133; 76 N.W.2d 75-134
4
5
Id.
Lim v. The.TV Corp. Internat., 99 Cal. App. 4th 684, 121 Cal. Rptr. 2d 333, 338 (Cal. App. 2d Dist. 2002).
(1956), quoting 2 Evans’, Pothier on Obligations (3d Am ed), pp 2, 3.] Fortunately for the
present parties, Michigan law tends to be far less harsh than the early common law in England….
In sum, the clean hands doctrine bars the present claims. No person capable of understanding the
advertising that Mr. Rose [the owner] caused to be published, as Mr. Rose certainly was, could
have felt that the use of a shill bidder was ethically acceptable conduct. Thus, application of the
clean hands doctrine is justified because the claims in question are inextricably tied to Mr.
Rose’s agreement to a fraudulent shill bidder scheme, and Mr. Rose will not be heard to claim he
had a right to rely on advice that he and NAG [the auction company] could get together to
swindle the very individuals they had advertised to attract. In the trenchant and stinging words of
Justice Smith in Manning v Bishop of Marquette, 345 Mich. 130, 131; 76 N.W.2d 75 (1956), ‘A
rogue does not appeal to our conscience.’”6
The auctioneer has broad flexibility in the bid process if the reserve price has not been exceeded.
“To the extent that Gall [the auctioneer] found bids from the ether, the terms of an open outcry
auction permit the auctioneer to bid in amounts below the reserve price on behalf of the seller.
Actions by an auctioneer to encourage a bidding frenzy are fully consistent with the interests of a
bankruptcy estate attempting to sell property. No one was defrauded as a result of Gall’s
conduct, which I find to have been appropriate in the circumstances. Auctioneers at indoor
auctions frequently find bids coming from the chandelier; since this auction occurred on a boat
dock, no chandeliers were present.”7
If an absolute auction, or an auction without reserve, is conducted, a complaint alleging that the
bidder’s winning bid and the advertisement for an absolute auction are an offer and acceptance
of a contract for the sale of land is a contract action that must be brought against the owner, not
the auctioneer who is an agent acting for a disclosed principal. In New York, for example, a
separate cause of action for breach of the duty to conduct a fair auction may be brought if the
auction was a private auction to selected potential buyers who submitted written bids, but not if
the auction was an ordinary auction by public sale to the highest bidder.8
There is a distinction between a reserve auction and a conditional auction. In a reserve auction, a
contract to sell is formed when the bidding is closed and the auctioneer announces the
acceptance of a bid, whereas in a conditional auction, the seller may accept or reject bids after
close of bidding.9 “In a conditional auction, the seller reserves the right to accept or reject bids
after the close of the bidding. Most authorities recognize that in order for an auction to be
considered a conditional auction, the conditions must be effectively communicated to
prospective bidders. Those conditions generally inform potential buyers that the auctioneer does
not have the authority to accept the high bid and that bids will remain mere offers until accepted
by the sellers….(‘[T]here is a distinction between auctions which are merely conducted with
reserve and those in which the seller explicitly reserves the right to approve, confirm or reject the
high bid.’)…The key distinction between an auction with reserve and a conditional auction is
that property can only be withdrawn before the close of bidding in the former, but it can be
withdrawn after the close of bidding in the latter.…[T]he sales auction was indeed a conditional
6
7
8
9
Rose v. Nat'l Auction Group, 466 Mich. 453, 463, 467, 646 N.W.2d 455, 461, 463 (Mich. 2002).
In re New River Boat Club, Inc., 417 B.R. 667, 675-676 (Bankr. S.D. Fla. 2009).
Nathanson v. Grand Estates Auction Co., No. 10-CV-2643 (JS), 2010 U.S. Dist. LEXIS 124720 (E.D.N.Y. Nov. 23, 2010).
Truman Capital Advisors LP v. Nationstar Mortg., LLC, No. 13 Civ. 5945 (NRB), 2014 U.S. Dist. LEXIS 118246
(S.D.N.Y. Aug. 22, 2014); 7 Am. Jur. 2d Auctions & Auctioneers § 34.
auction where the sellers retained the right to accept or reject bids until after the bidding
ceased….Because the auction was conditional, Young’s bids were offers subject to sellers’
acceptance after the bidding closed at the auctioneer’s call of ‘mark it down.’”10
A buyer at auction is bound by the announcement of terms made by the auctioneer at the auction,
even if the buyer did not hear the auctioneer’s announcement and prior advertisement had stated
that the sale was made with “no reservation or right to confirm or approve.” The auctioneer’s
announcement that the land was “sold to the gentleman over there” did not impact the right of
the seller, who notified buyer on a Tuesday morning that the bid of the prior Saturday had been
rejected. The established principle is that conditions prescribed by the owner or seller and
announced at the auction will bind the buyer, even if the buyer did not hear them. A majority of
courts addressing the issue have held that the auctioneer’s authority to sign a memorandum may
be revoked either by the seller or by the buyer between the fall of the hammer and the execution
of a memorandum.11
The auction company may be engaged to sell land in parcels and may be appointed as an
attorney-in-fact to sign a contract for the sale of the land to the high bidder, subject to whatever
conditions are imposed in the auction or listing agreement. Such agreement may obligate the
seller to deliver a deed to the high bidder.12
The buyer at an auction under the stimulus of liquor will not be relieved of the buyer’s
obligations of contracts made, unless the party was so drunk as to be “destitute of reason and
unable to comprehend the nature of the contract and its consequences.” The test imposed is the
ability of the buyer to understand the nature of the act, scope and effect, or consequences and
nature, not whether the buyer acted wisely and discreetly and gathered a bargain. If the other
party has no knowledge of the buyer’s intoxication and did not take advantage or practice fraud,
then equity will not interfere on behalf of the buyer.13
Like other contracts, a purchase agreement at a public auction does not exclude specific
performance as a remedy available to the parties unless the language is definite and positive in its
terms to reflect a clear intent of the parties.14
The terms of the purchase contract will prevail over the auction bid and acceptance and will
supersede prior negotiations and oral agreements, since the auction brochure states that the
purchase agreement will control. However, the seller will be responsible for any representations
made in the auction materials prepared by the auctioneer.15
The purchase of real property at an auction remains subject to the statute of frauds, and absent a
legal description is not enforceable. For example, a receipt provided to the buyer that described
10
11
12
13
14
15
Young v. Hefton, 38 Kan. App. 2d 846, 852-854, 173 P.3d 671, 676-678 (Kan. Ct. App. 2007).
Moore v. Berry, 40 Tenn. App. 1, 288 S.W.2d 465 (Tenn. Ct. App. 1955).
Dietz v. Bielitsky, 1964 Pa. Dist. & Cnty. Dec. LEXIS 257, 35 Pa. D. & C.2d 731, 14 Bucks Co. Law Rep. 73 (Pa. C.P.
1964) (sales contract by auctioneer with high bidder for several tracts was ordered rescinded because the property had not
been subdivided).
Burch v. Scott, 168 N.C. 602, 84 S.E. 1035 (N.C. 1915).
Cain Family Farm, L.P. v. Schrader Real Estate & Auction Co., No. 57D01-0812-PL-021, 2012 Ind. Super. LEXIS 24 (Ind.
Super. Ct. Aug. 20, 2012).
613 Agro Holdings, LLC v. Renick, No. 12-2425-JAR-KMH, 2013 U.S. Dist. LEXIS 35917 (D. Kan. Mar. 14, 2013).
the property as “220 ac, 100 ac, 50 ac” was not adequate when not supplemented by a contract
with a written legal description. The exception to the statute of frauds may apply if the seller
shows payment of consideration, possession by the buyer, and permanent and valuable
improvements by the buyer with consent of the seller, but is inapplicable because the buyer did
not take possession.16 A binding contract is created between the highest bidder and the
auctioning person after the fall of the hammer or the end of bidding in any customary manner
and a written signed document, such as a contract, reflecting the sale and satisfying the statute of
frauds.17
2.
BASIS FOR AN AUCTION
Auctions of owned residential and commercial real estate often occur in the United States. Many
auctions not driven by a contract between the owner and auctioneer commonly involve distressed
property, such as mortgage foreclosures, ad valorem tax lien foreclosures, condominium and
other homeowners’ or property owners’ association lien foreclosures, sheriff’s sales, forfeited
land, Internal Revenue Service (IRS) auctions, federal and state receiverships, bankruptcy sales,
estate sales, and execution sales. Public auctions typically involve residential property, although
foreclosures, bankruptcy sales, and estate sales by auction do occur. Auctions may be in bulk or
for specific parcels. Estate auction sales of real estate, in parcels, frequently relate to farm and
ranch land.
Common examples of auctions of real estate include:
•
Auction conducted by the auction company under contract (such as a listing agreement)
with the owner, and in some cases authorizing the auction company to act as the owner’s
agent
•
Lender-owned foreclosed (REO/repossession) property (often involving registration
before auction, immediate deposit after successful bid, sale “as is”)
•
Estate of decedent or guardianship sale (which may be sold at public sale or public
auction, or may be sold at private sale, subject to subsequent court approval in many
cases)
•
Bankruptcy sale (as provided in Bankruptcy Rule 6004(f),18 by private sale or public
auction, and as provided in Bankruptcy Rule 600519 for employment of an auctioneer)
•
Receivership sale under state or federal law
•
Federal forfeiture auction20 (U.S. Marshals Service)
•
State forfeiture auction
•
Internal Revenue Service Real Property sale (at public auction or sealed-bid auction)
•
Ad valorem tax sale/tax collector’s sale
•
Sheriff’s sale (execution sale)
•
Association foreclosure (e.g., condominium or planned unit development)
16
17
18
19
20
Maddox v. Cosper, 25 S.W.3d 767 (Tex. App. Waco 2000, no pet.).
Caprock Wine Co. v. Devalmont Vineyards, Inc. (In re Caprock Wine Co.), No. 09-50576-RLJ-11, Adv. No. 10-05021, 2012
Bankr. LEXIS 1403, *29 (Bankr. N.D. Tex. Apr. 3, 2012).
Fed. R. Bankr. P. 6004(f).
Fed. R. Bankr. P. 6005.
See http://www.treasury.gov/auctions/treasury/rp/.