Auction House Bidding & Selling

In the comments on the article Auction Laws in the U.S.A., a couple of great questions have been asked by Frank Ceresi. While I posted a response in the comments, I thought this would be a good topic and may generate its own comments and questions.

Frank asks:
Is it lawful for the principal owners of an auction house to consign items in their own live and/or internet auction?
Is it lawful for the principals in an auction house to bid in their own live or internet auction?

Response:
I’m not aware of anything unlawful with an auction house selling items they have purchased to resell. Why should it be? This is how most resellers operate in the first place, from flea markets to major department stores, whether they sell used or new goods. I wouldn’t understand why anyone would consider this to be an unacceptable practice. The auction house purchases items and sells them to the highest bidder. This is the purest form of capitalism and free enterprise. After all, companies sell their own stocks and commodities by auction everyday, through the New York Stock Exchange.

Now, the second question requires a little clarification. Of course, while the laws can vary from state to state, I would also recommend that you carefully read the laws for your particular state to determine any variances from most other state laws. So, keep in mind, my following comments are for majority of state laws, but there could be the possibility of a few states that may indicate otherwise. Keep in mind, at auction, the buyer must perform their own due diligence and know the laws, as well as the terms of the auction.

In most states, the seller or their agent (which can certainly include the auctioneer) may be allowed to bid on behalf of any minimum reserve prices set by the seller, as long as “SUCH BIDDING IS DISCLOSED” to the bidders. This is also the primary difference between “shilling” and “protecting the reserve”.

There are basically two ways to “protect the reserve”. One method method is to “Pass” the item, if it does not meet the reserve. The other is “bidding on behalf of the reserve” and may only be done if DISCLOSED to the bidders (note the emphasis). Some auctioneers may also use a consignor bidder number or “house number”, in such cases that the reserve is not met, to keep things flowing smoother and allows for tracking during settlement of the auction.

The key point is “DISCLOSURE”. If the auctioneer has not disclosed that such bidding may be allowed, then it would be considered “shilling” and would be considered fraudulent bidding.

This disclosure may be in the form of written “Terms and Conditions” which may be posted or otherwise made available to the bidders, or may be statements made during the “Opening Statements” of the auction, which is why it is always a good idea to be present at the beginning of an auction and listen closely to everything the auctioneer says, at that time. If you arrive late, you are still bound by those oral statements, even though you may not have actually heard them being made. This falls under the same basis as you’ve probably heard before, concerning your responsibilities to know the law prior to any actions you take… “ignorance is no excuse”. So, if they have written terms and conditions, you should read them carefully, in their entirety. However, there is no requirement that the terms must be written. For that matter, the auctioneer is also allowed to set forth the conditions of each sale, as each item is being offered, which may also superceed any previous statements made or modify the terms for that particular sale.

It should also be noted that the auctioneer is not required to state whether any item has a reserve or not, much less how much the minimum reserve price may be for any item. In fact, at most auctions, any reserve is kept secret and is not disclosed. There are several reasons for this and experience has certainly born out a couple of those most prominently… one is that it “sets a maximum price in the mind of the buyer” and we all know that an item is worth what the highest bidder is willing to pay on a particular day.

This is not to say that the item may not bring more on a different day, with different buyers and the seller is not required to sell their item for less than they are willing to accept. This goes back to the definition of “Fair Market Value” which is “the price a willing buyer and willing seller agree on”. Therefore, this is the basis of the “reserved minimum” which must be met, before the seller agrees to sell.

Another reason why most auctioneers don’t disclose reserves, is due to another element of human nature… if the minimum amount is disclosed, most won’t even offer a starting bid at the reserve price. It’s as though they automatically deem the price to be “too high”. (Of course, then there are those that don’t understand auction laws and think everything has to sell regardless of price and think that if it starts lower, they might get it anyway.) However, from experience, if the item has a “reasonable” reserve, the bidders will usually meet or exceed it, if there are two or more truly interested bidders and they are allowed to start the bidding where ever they wish and bid accordingly. Of course, if there is only one interested bidder, the seller’s agent may bid against them until it reaches the reserve (if such bidding was properly DISCLOSED, as discussed above).

Of course, if you have attended auctions, you also know that you may set your own price prior to bidding, only to find yourself bidding more than you initially intended, as you felt it was worth more than you hoped someone else would pay.

Unfortunately, one of the myths that many people have about auctions, is that “everything must sell regardless of price” and they go looking for a “steal of a deal”. While there are often plenty of great deals to be had, there is no requirement that everything must be sold regardless of price. The U.C.C. states that “all auctions are considered to be WITH Reserve, UNLESS stated to be Absolute”. Therefore, the auctioneer may still cancel the sale of any item prior to announcing ’sold’, if he/she feels that the item has not met a reasonable value, even if it does not have a minimum reserve price. However, the ethical auctioneer would not bid against you in such cases (since there is no specific reserve), but only ‘Pass’ the item if a reasonable value was not reached.

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6 Responses to Auction House Bidding & Selling

  1. antique auctioneer says:

    Hi,
    I have been getting mixed messages about about the legality of selling rifles and shoot guns at estate auctions. What type of liability does it place on the auctioneer?
    Thanks

    • Auction Law says:

      The answer to your question is going to vary on a number of factors. Two of the primary factors relate to Federal law and State law. I can basically answer the Federal law part, but it still depends on your specific State laws, in regard to selling any type of firearm.

      According to Federal law (enforced by the BATF), if you are selling for a sole individual (or estate), you may sell any firearms in the auction.

      You can NOT take them into your own possession or on consignment, unless you are a licensed firearms dealer.

      So, if you are doing an on-site auction for an estate, this should not be a problem. If you are bringing the contents of an estate into your own auction house to sell, then you would typically ask them to bring the firearms in, right before the sale. Keep in mind, you can NOT have any other consignments at such sale, as you must be solely representing the individual/estate.

      Now, you must check your own state laws for any other particular regulations.

      Liability is another matter altogether. That word alone, may tend to put dollar signs into some lawyer’s eyes, as there is absolutely nothing without some type of liability.

      Regarding the transfer of such firearms, I would limit the sale to only those residents of the particular State, as selling to others that live in other states may get into other laws over the legal transportation of firearms across state lines. In addition, at a minimum, I would recommend obtaining full information on individuals who purchase any firearm, including address, phone, and driver’s license number. Of course, social security number and a photo would be an added plus. It’s not required, but it might help if it turns up later in a police investigation.

      If you are going to sell firearms to citizens of other states or take firearms with other consignments, then it would be best to get a Federal Firearms Dealer license. Only a dealer can send a firearm across state lines and it must be sent ONLY to another dealer, who can then deliver it to the new owner. Of course, as a FFL dealer, you can also run the background check on the individuals and further reduce your potential liability.

      Of course, these are the “basics”. If you have any doubts, regarding the circumstances surrounding the sale of firearms in your State, then I would recommend that you carefully read all laws pertaining to such sales or decline from selling firearms. This is not one of those matters that you want to “bend” any rules, in the slightest. The BATF takes such things VERY seriously.

  2. Pat says:

    There is some substance is deliberating over whether undue influence or undue advantage was afforded one who acquired advantage in the marketplace by exclusive access to goods that one then sells under a license of fiduciary duty that may well push the event into intentional tort rather than accidental or incidental benefit.

    When schemes are configured to produce that result, there is nothing fair about the trade or its approach to advantage the designer/controller, and where it touches either fiduciary obligations ignored, or tax authority obligations ignored, it may well descend to criminal conduct, not consistent with professional license.

    • Jim says:

      Pat,
      I feel that this was appropriately explained in the post. First, unless it is an absolute auction, there is no mandate that an item must be sold, if a reasonable offer has not been made and it is up to the auctioneer’s discretion to withdraw the item prior to announcing “sold”.

      The remark about “undue influence” has no basis if there is a reserve price, as it will not sell anyway, unless the reserve price is met. So, if there is only one individual that is bidding, they would not have the opportunity to bid and it may never reach the reserve price, therefore a lost opportunity for the potential buyer. That’s why the auctioneer may use such disclosures to allow for bidding on behalf of a reserve.

      There is nothing criminal, if such bidding has been disclosed to the bidders and they are aware that such bidding on behalf of the seller’s reserves may take place, as needed.

  3. Gary Boatman says:

    Wow..thanks for this…was trolling around and found your link. I am in need of advice. My partner and I have retained an attorney to sue for specific performance to complete the sale of a new condo that was auctioned by a reputable nationally recognized auction house for a seller/owner/developer. 4 Resdiential and mutliple retail condo spaces were auctioned on the same day. The first residential auction was non-reserve/buyers choice. The remaining residential condos were sold Reserve (clearly spelled out in literature and verbally at auctio by the auctioneer) We won the 1st auction but the owner refuses to sell. We have a court date set but now his attny wants to go to mediation (not unexpectedly) and we’re ok with that as long as getting the property is on the table. We have no signed contract with the seller of course. Is there an enforceable implied contract between us and the seller? The subpoena’d audio recording of the auction, which the owner attended, clearly states that our condo was going “to the final/highest bidder” and that no matter what, the winner of the first auction would own the condo as long as the minimum bid was met (which it was). How strong is our case? The auction house has no documents to force the sale of the property (one would wonder why they would be so ignorant of this possibility where the owner refuses to sell) Oh…multiple printed documents also indicate that the first residential condo would be sold Non reserve/buyers choice. We really want this condo and it’s at a great price. We’ve done our homework, studied the docs, and did nothing wrong and we feel we should win this.

    • Auction Law says:

      Gary
      I’m a little confused. At one point you state that the condo was being sold without reserve, then you indicated that it would sell if it met its minimum (which it did).

      In any case… when it comes to real estate, it is difficult to make the seller sell the property without a signed contract. So, if the seller didn’t sign the final contract with the high bidder, you probably can’t make him do so.

      However, it seems that you may have a good case against the auctioneer for breach of contract. Since you agreed to the terms of the auction and if those terms were met, then the auctioneer may be held liable.

      Then it would be up to the auctioneer to take it up with the seller, if the seller isn’t complying with the terms of the auctioneer/seller’s contract. Of course, if the seller’s contract indicated that he would sell the property if it met the minimum price (or no minimum), then the auctioneer should be able to enforce his contract against the seller.

      Of course, this can get messy… but if the auctioneer had a solid contract with the seller, you might have to wait a while until that matter is settled in order to get your contract enforced. However, if the auctioneer did not have a properly formed contract with the seller, you may win your case against the auctioneer for “damages”, but you might not end up owning the condo.

      Of course, this is where a good lawyer can make the difference in how you might proceed.

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