Auction House Bidding & Selling

March 16, 2009

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.


Government Siezed Property Auctions

March 15, 2009

In one of the comments, Seth asks “If a loan balance is owed to the bank on a vehicle seized by the IRS, if you buy that vehicle at auction does the bank lose its lien on the vehicle?”.

Of course, there is a lot of misinformation or at least, a lot of ambiguities in the information, that is the subject of many books and other “information guru” offerings, which try to get consumers to buy their offerings, in the hopes of “How To Get Rich At Auction”.

The short answer to Seth’s question is, “NO!”.

When purchasing seized assets, you are only buying the government’s “interest” or in other words, the government’s portion of “claim to the property”. It does not preempt other claims, such as loans from a mortgage company or lender, which may still be entitled to foreclose for lack of payment.

In the case of the IRS, we can look at their specific regulations and the terms and conditions used for such auctions. You will also note, that the original taxpayer still has the “right of redemption” for 180 days. This means, they can pay you what you paid, plus interest and reclaim their property from you, within 6 months of your purchase. So, don’t run off and sell it too quickly or you may be liable for returning the property to them.

IRS Terms of Sale:
Nature of Title: The right, title and interest of the taxpayer in and to the property is offered for sale subject to any prior valid outstanding mortgages, encumbrances, or other liens in favor of third parties against the taxpayer that are superior to the lien of the United States. All property is offered for sale “where is” and “as is” and without recourse against the United States. No guaranty or condition of any of the property, or its fitness for any use or purpose. No claim will be considered for allowance or adjustment or for rescission of the sale based on failure of the property to conform with any expressed or implied representation.

Title Offered: Only the right, title and interest of the taxpayer in and to the property will be offered for sale. If requested, the Internal Revenue Service will furnish information about possible encumbrances, which may be useful in determining the value of the interest being sold.

IRS Sections regarding the Rights of Sale & Redemption:
Redemption Rights: The rights of redemption, as specified in Internal Revenue Code Section 6337, are quoted as follows:
* Sec. 6337. Redemption of Property.
(a) Before Sale. – Any person whose property has been levied upon shall have the right to pay the amount due, together with the expenses of the proceeding, if any, to the Secretary at any time prior to the sale thereof, and upon such payment the Secretary shall restore such property to him, and all further proceedings in connection with the levy on such property shall cease from the time of such payment.

(b) Redemption of Real Estate After Sale.
(1) Period. – The owners of any real property sold as provided in Section 6335, their heirs, executors, or administrators, or any person having any interest therein, or a lien thereon, or any person in their behalf, shall be permitted to redeem the property sold, or any particular tract of such property at any time within 180 days after the sale thereof.

(2) Price. – Such property or tract of property shall be permitted to be redeemed upon payment to the purchaser, or in case he cannot be found in the county in which the property to be redeemed is situated, then to the Secretary, for the use of the purchaser, his heirs, or assigns, the amount paid by such purchaser and interest thereon at the rate of 20 percent per annum.

Section 6339(c). Effect of Junior Encumbrances.
A certificate of sale of personal property given or a deed to real property executed pursuant to section 6338 shall discharge such property from all liens, encumbrances, and titles over which the lien of the United States with respect to which the levy was made had priority.


Fiduciary Duty of an Auctioneer

November 15, 2007

An auctioneer’s fiduciary duty is to the seller. This means the auctioneer is an agent for the seller and must act in the best interests of the seller.

This falls back on the basis of general law, widely accepted in all courts of law throughout the U.S.:
(1) “Fiduciary” means an agent, trustee, partner, corporate officer or director, or other representative owing a fiduciary duty with respect to an instrument (i.e. “contract”).
(2) “Represented person” means the principal, beneficiary, partnership, corporation, or other person to whom the duty stated in subdivision (1) is owed.

In addition, the field of real estate is usually quoted in many examples because they are basically the only industry that allows for “dual agency”. However, to completely understand this “agency”, you must understand that the Broker has ultimate responsibility for all transactions by any salespersons working under the supervision of the Broker’s license, therefore the actual Broker is undertaking the role of dual agency (not the individual salespersons, as I will explain). In other words, the Broker can not be a direct party in the transaction (in any way and must remain neutral, or without specific directions to either salesperson) and will appoint two different salespersons to work for the seller and the buyer, since an individual agent cannot represent a fiduciary to both. On the same basis of law, if a RE salesperson has not specifically contracted to act as a buyer’s agent, then it is automatically assumed that the salesperson is acting on behalf of the seller, therefore is the fiduciary only for the seller.

To support that last statement, the Federal Trade Commission (FTC) speaks of this in numerous publications, one of which is:
http://www.ftc.gov/os/comments/realestatecompetition/518795-00391.htm
Fiduciaries are held to a higher standard under common law. Upon visiting, for example, a store, a consumer does not expect, or have any right to expect, the store’s salesperson to be looking out for the consumer’s best interest. But in hiring a trusted lawyer or real estate agent or investment trust company (you may also add “auctioneer”) to act for him, a client expects full fiduciary responsibility, including undivided loyalty, with no undisclosed conflicts of interest. Consumers are more easily misled when, as clients, not just customers, they are giving their trust to their own professional fiduciary.

In addition, you can find additional commentary on the basis of fiduciary duties at:
http://en.wikipedia.org/wiki/Fiduciary
Conflict of duty and duty
A fiduciary’s duty must not conflict with another fiduciary duty. Conflicts between one fiduciary duty and another fiduciary duty arise most often when a lawyer or an agent, such as a real estate agent (also add “auctioneer”), represent more than one client, and the interests of those clients conflict. This usually occurs when a lawyer attempts to represent both the plaintiff and the defendant in the same matter, for example. The rule comes from the logical conclusion that a fiduciary cannot make the principal’s interests a top priority if he has two principals and their interests are diametrically opposed; he must balance the interests, which is not acceptable to equity. Therefore, the conflict of duty and duty rule is really an extension of the conflict of interest and duty rules.”

Also see:
http://en.wikipedia.org/wiki/Conflict_of_interest

In other words, as a sole individual/entity, you can not have a conflict of fiduciary duties between the parties, or you are subject to a dereliction of duty to one or both parties. Therefore, under the basis of general law, it basically means that when an auctioneer signs a contract with a seller (the principal), the auctioneer has a fiduciary duty to the seller to act as their primary agent on their behalf and in their best interests or “as they would act”.

Now, this does not mean that if the seller misrepresents something, that the auctioneer doesn’t have a “duty” to the buyer to correct the problem. However, the auctioneer and the seller are both responsible for providing a reasonable duty to provide said goods in the condition stated for the agreed upon price/trade, as this falls under the Fair Trade Agreement statutes (that you can also search for under the FTC’s website). However, this does not create a fiduciary duty to the buyer, but only serves to treat the buyer fairly under the FTC’s Fair Trade Agreement.

The primary point is regarding the auctioneer’s fiduciary duty to act on behalf of the seller. The difference between the Fair Trade Act regarding buyers and fiduciary duty to the client (seller) is the same, regardless of whether it is a real estate transaction or the sale of any other type of property.

A Fiduciary can not represent two different parties with opposing intents. The primary fiduciary is to the client that has contracted the auctioneer to sell (act on their behalf for the sale of) their goods.

Some have attempted to imply that the Terms and Conditions of Sale implies a fiduciary duty. This is not the case, as the FTC’s Fair Trade Act specifically demonstrates that it is only an agreement for the terms of the sale and creates no other duty upon the seller (or their agent) as a representative of the buyer, as they are opposing parties until the final agreement has been reached. The Terms & Conditions (terms of their agreement) for an auction are only the conditions of finalizing the transaction, which both, the buyer and the auctioneer (seller’s fiduciary agent) are agreeing to as part of the sale, with only price being the final factor and determined upon the call of “Sold”. Therefore, the auctioneer has only “perfected a sales agreement” (that’s how a lawyer would state it) with the buyer on behalf of the seller (the principal fiduciary).


Auction Laws in the U.S.A.

August 18, 2007

In the U.S., there is no federal law regulating auctions (Thank goodness). Regulation is left up to individual states, as this is how the U.S. Constitution was intended. States have differing requirements on licensing, education, bonding, fees and other aspects of conducting an auction. While, not all states require licensing, most states do have laws and/or regulations covering the auction industry. The Uniform Commercial Code (U.C.C.) was the original basis for auction laws in all states, except Louisiana which only enacted part of the Code.

The Uniform Commercial Code is often quoted when people talk about auction laws, but the U.C.C. is not actually law. A group of lawyers worked on drafting the Uniform Commercial Code for over 10 years (1941-1951) to complete the proposed statute and get it approved by the American Bar Association. The U.C.C. is just a general “code of commerce” that has become a precedent of law, but the Uniform Commercial Code has no legal significance, except that 49 states have drafted most of the U.C.C. into their own laws. The first state to adopt it was in 1951 and the 49th state to adopt it was in 1967. Why only 49 states? Louisiana law is typically based Napoleonic law, while the other 49 are based on English law. (So, Louisiana just has their own way of doing things.)

You can see what the Uniform Commercial Code says in regards to auctions at: U.C.C. § 2-328. Sale by Auction

In addition to the basic Uniform Commercial Code (or parts of it) in each state’s business law, each state may have their own additional laws, modifications or administrative rules that also govern auctions and may also vary somewhat from the actual U.C.C., as originally drafted. You can find a list of State Auction Laws & Auctioneer Licensing Information in the top menu & right-hand column of this page.

If there is no link to your state, then your state may not have state licensing requirements for auctioneers. However, this doesn’t mean that your state does not have laws regulating auctions. If you have information or links to webpages outlining the laws, let me know and I will update the information after verifying the information.


Introduction to Auction Law

August 10, 2007

The intent of this blog is to help others understand the laws that govern auctions and the standards of ethics that must also be held by those in this profession. I decided to use this as a way to dispel myths, misunderstandings and other false perceptions that plague the auction profession.

Auction Law may be a little beyond my actual scope, as I’m not a lawyer, so nothing on this site is intended to be legal advice, but is for informational purposes only (That’s my disclaimer and I’m sticking to it). However, I am an auctioneer. One thing many people don’t understand is the vast range of laws that auctioneers must keep up with and abide by, so as an auctioneer, I do have a pretty fair knowledge of many laws. Your questions are definitely welcome and I’ll do my best to give accurate and honest answers. But remember, it is only my opinion or understanding of the law and is not considered legal advice. If you need legal advice, consult a lawyer (and no, I won’t recommend one, even though I have two in my family).