SPECIAL EDITION The official publication of the National Auctioneers Association
WWW.AUCTIONEERS.ORG AUCTIONEER 119
w illiamsauc t ion.c o m 8 0 0 . 8 0 1 . 8 0 0 3
REAL MARKET VALUE
“I didn’t really believe in auctions until I met Tommy
and Dean Williams almost 13 years ago. As bankers and
investors, we’ve used Williams & Williams in several
aspects. We’ve bought and sold properties through their
auction process. They have consistently evaluated our
properties appropriately and marketed them well. And
they get a fair price, which allows us to move on, worry-
free, to the next transaction.
When you place your properties for auction, you have to
trust in the auction company and team... that they are
going to work with honesty and integrity. I would
recommend Williams & Williams because I’ve witnessed
their consistency. The company as a whole is better today
than it has ever been. They are making big inroads and
real progress in simplying the process, removing the red
tape, by bringing buyers and sellers together quickly and
delivering real market value. From farm liquidation to
selling a home, they give you more.”
By the National Auctioneers Association
This special edition of Auctioneer Please be sure to read the disclaimer on the Table of
magazine is a compilation of legal Contents page. If you need exact legal advice on a specif-
columns published in the magazine ic problem you have, talk to a lawyer in your area to get
from 2003 to 2008. We believe you will advice that is the most up-to-date available and which
find this extremely helpful in running applies exactly to your state. No column in a national mag-
By Thomas L. Williams, CAI your auction firm and avoiding the azine can substitute for such exacting advice.
NAA President legal and procedural problems that
arise in today’s business environment. The columns in this publication are grouped by subject
and arranged alphabetically.
The columns consist of a question asked by a reader
(usually a practicing Auctioneer) and an answer provided For example, the first chapter is on Absentee Bids and
by attorney/licensed Auctioneer Kurt Bachman, with the answers questions about responsibilities to the seller and
assistance of attorney Joshua A. Burkhart. when to start bidding. The second chapter is on auction
types (Absolute, Sealed Bid, Reserved) and answers ques-
These questions are about pressing, real-life situations tions about procedures, seller obligations, beginning the
faced by Auctioneers. The answers are given in simple lan- bids, cancelling an absolute auction, and owner confirma-
guage for the non-lawyer to understand. In some cases tion.
you’ll find questions are on similar topics, but keep read-
ing because the answers reveal additional very valuable The final chapter is a compilation of various topics,
information. including laws regulating taking photographs at auction,
when to incorporate, unsolicited faxes, the Sherman Anti-
A recent survey of the magazine’s readers found that the Trust Act, who owns an exterior mounted fan, and others.
Legal Questions column by Kurt Bachman was the high-
est-read section of the magazine (79 percent of readers I hope you will read this magazine closely and keep it as
saying they read it every month). That shows the desire of a legal resource for your business. Another legal resource
Auctioneers and auction staff to know how the law per- you should be aware of, also published by NAA, is called
tains to their business. “Waiting For The Hammer To Fall,” A General Overview
of Auction Law. This booklet, written by Kurt Bachman in
Wise Auctioneers today know that you must be educat- 2002, was sent to every NAA member in the past and is
ed on the laws that regulate your business, and take steps sent to each new member when they join.
to comply with the law. This magazine will be one more
tool to help you achieve that. This is not meant to be a NAA remains committed to furthering the auction
comprehensive explanation of the law in these areas, but a knowledge of its members through publications such as
guide to point you in the right direction. these.
WWW.AUCTIONEERS.ORG AUCTIONEER 3
About the Authors
Kurt R. Bachman is a partner in the law He serves as special counsel to NAA and is general coun-
firm of Beers Mallers Backs & Salin, sel for the Indiana Auctioneers Association.
LLP. He is a license Auctioneer and Kurt Bachman is also author of “Waiting For The
attorney in the State of Indiana. He Hammer To Fall: A General Overview of Auction Law.”
graduated from Indiana University (2002). He is frequently asked to write articles for nation-
School of Law and was licensed to prac- al and state publications and has been retained to serve as
tice law in Indiana in 1989. He is a an expert witness on auction law matters. His primary
Kurt R. Bachman
member of the Indiana Auctioneers areas of practice are auction, corporate, real estate and tax
Association and a lifetime member of law.
the National Auctioneers Association.
Joshua A. Burkhardt is an associate clerk (2001-2002). He clerked in the United States
attorney with Beers Mallers Backs & District Court, South District of Indiana, Indianapolis
Salin, LLP. He graduated with highest Division, with the Honorable John D. Tinder and the
distinction from Ohio Northern Honorable David F. Hamilton.
University College of Law and was Joshua became an associate attorney with Mallers Backs
licensed to practice law in Indiana in & Salin, LLP in 2002. He devotes a portion of his practice
Joshua A. Burkhardt
2001. He has also built on his unique to auction law. He also practices in the areas of commer-
experience as a federal judicial law cial litigation and appellate law.
This outline is being provided to you solely as a of the law pertaining to each and every situation or
guide to identifying various legal issues pertaining any particular jurisdiction. The laws discussed
to the auction industry. This publication is by no here are general in nature in the time frame of
means intended to be a comprehensive summary 2003 to 2008, and should not be relied upon in
of all such legal issues. In addition, these columns lieu of competent legal advice. For any specific
are not intended as a full and complete statement questions and advice, always consult your attorney.
WWW.AUCTIONEERS.ORG AUCTIONEER 5
CODE OF ETHICS
National Auctioneers Association
RESPONSIBILITIES TO CLIENTS AND CUSTOMERS
Article I Members pledge to protect and promote the interests of the client. This obligation of absolute fidelity to the
client’s interests is primary but does not relieve members of their obligation to treat all parties to the transaction fairly.
Article 2 Members must, in conducting an auction, deal with customers in a manner exhibiting the highest standards of
professionalism and respect. Members owe the customer the duties of honesty, integrity and fair dealing at all times.
Article 3 Members should, to assure better service to the seller and to prevent misunderstandings, enter into written agreements
or, at a minimum, clear oral agreements that set forth the specific terms and conditions of the engagement.
Article 4 Members shall not accept compensation from any party, other than the client, even if permitted by law, without the
full knowledge of all the parties to the transaction.
Article 5 Members shall provide the highest level of competent service in those fields in which members are customarily engaged.
This competency is attained by education, training, study, practice and experience. Competence also includes the
wisdom to recognize the limitations of that knowledge and when to seek the counsel, assistance or client referral
appropriate for the circumstances.
Article 6 Members shall not undertake to provide professional services where either they members of their immediate family
members of their firm, or any entity in which they have an ownership interest has presently or contemplates an
interest, without first specifically disclosing such interest or contemplated interest.
Article 7 Members shall not make a profit on expenditures made for their client without the client’s prior knowledge and
Article 8 Members shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal
counsel be obtained when the interest of any parry to the transaction would be appropriately served.
Article 9 Members shall keep monies coming into their possession in trust for other persons such as escrows, trust funds, client’s
monies and other similar items in a separate special account, in an appropriate financial institution.
Article 10 Members shall not disclose any confidential client information without the client’s specific consent except as required
by appropriate legal authorities.
RESPONSIBILITIES TO THE PUBLIC
Article 11 Members shall avoid misrepresentation or concealment of pertinent facts. There is an affirmative obligation to disclose
adverse factors of which they have personal knowledge.
Article 12 Members must be careful at all times to present a true picture in their advertising and representations to the public.
Members shall ensure that all advertising includes the names and information necessary for the public to contact the
auctioneer or firm responsible for conducting the auction.
Article 13 Members must participate in continuing education programs and should keep informed on all matters affecting the
auction industry and their areas of specialization.
Article 14 Members are duty bound at all times to abide by the laws and regulations which govern the profession as well as those
which, if violated, would negatively affect their ability to present to the public an image of behavior that appropriately
represents the professionalism of our industry.
RESPONSIBILITIES TO THE PROFESSION
Article 15 Members should never publicly criticize a competitor using false or deceptive information. Where an opinion of a
competitor’s transaction is especially requested, it should be rendered in conformity with strict professional courtesy
Article 16 Members should willingly share with other members the lessons learned through experience and study to better the
profession, members’ business practices and how the profession is perceived by society. Members shall be loyal to the
NAA; this includes active participation in educational, civic and charitable endeavors.
Article 17 Members should conduct their business affairs so as to avoid disputes with other members. In an instance where a
controversy between members arises, they should seek the assistance of the NAA to arbitrate the controversy.
Article 18 Members, having personal knowledge of an act by another member that, in their opinion, is a material violation of
the ethical principles of this Code shall treat the matter in accordance with the procedures of filing a grievance.
Article 19 Members charged with unethical practice or who are asked to present evidence in any disciplinary proceeding or
investigation shall promptly and voluntarily place all pertinent facts and information before the appropriate body.
6 AUCTIONEER WWW.AUCTIONEERS.ORG
Table of Contents
Chapter order and sample list
of topics within each chapter:
Chapter 1 —Absentee Bids – Responsibilities to the seller, when to start bidding................................................. 9
Chapter 2 —Auction Types (Absolute, Sealed Bid, Reserved) – Procedures,
seller obligations, beginning the bids, cancelling an absolute auction, owner confirmation.................................... 11
Chapter 3 —Auctioneer Liabilities and Responsibilities........................................................................................... 21
Chapter 4 —Buyer and Seller Issues – buyer information, consignor bidding
on his own items, taking possession early, banning people from the auction grounds............................................. 27
Chapter 5 —Buyer’s Premium/Commissions – who the Buyer’s Premium belongs too,
sales tax on the BP, areas banning the BP, when the BP is available......................................................................... 37
Chapter 6 —Contracts/Terms and Conditions/Uniform Commercial Code – Procedures
to collect money, reopening bidding, arbitration, titles, breach of contract, selling to minors................................ 47
Chapter 7 —Contract Auctioneers – protecting your liability, employee
or independent contractor?.......................................................................................................................................... 63
Chapter 8 —Firearms Licensing and Laws – When a federal firearms license
is needed, selling ammunition..................................................................................................................................... 67
Chapter 9 ---Foreclosure/Bankruptcy – Trustees’ duties, dealing with courts,
selling before the foreclosure date, executor versus beneficiary................................................................................ 69
Chapter 10 —Payments/Varied Funds/Escrow Accounts – recovering payment, out of town bidders,
escrow accounts described, credit card fees, binding contracts, trust accounts, buyer release............................... 73
Chapter 11 —Professional Ethics – Auctioneers bidding on their own items,
by bidding, phantom bidds, bidding without disclosure............................................................................................. 85
Chapter 12 —Real Estate – contracts, disclosures, mistakes, insects and bugs,
MLS, property lines, paint, mult-parcel auctions....................................................................................................... 93
Chapter 13 —Miscellaneous issues – Taking photographs at auction, When to incorporate,
unsolicited faxes, the Sherman Anti-Trust Act, Who owns exterior mounted fan, and others................................. 105
WWW.AUCTIONEERS.ORG AUCTIONEER 7
Absentee bids Where to start bidding
on absentee bids?
Does the Auctioneer have any responsibility to tell
the seller any details of how absentee bids will be
There seems to be a never ending controversy about
handled or the amount of the absentee bids?
absentee bids. It seems the main question is when an
absentee bid is left on an item, where does the
Auctioneer start the bidding? Is it his or her fiduci-
ANSWER -- The prudent Auctioneer should com-
ary duty and responsibility to start at the absentee bid
ply with a seller's reasonable request for such infor-
or should it be started at a lower increment and sold
mation concerning the details on how absentee bids
at a lower increment if no other bidding takes place?
will be handled or the amount of such bids.
It seems there are as many answers to this as there
Remember that the Auctioneer acts as the seller's
are Auctioneers. Is an absentee bid a legal binding
agent in conducting an auction sale. In that capacity,
contract? If the item is sold for less than the absen-
the Auctioneer owes a duty of loyalty and good faith
tee bid, and the seller wishes to collect all of the
to his principal, the seller. As such, the Auctioneer
money that was left on the absentee bid, is the
must comply with the reasonable requests of his prin-
Auctioneer liable for the difference.
cipal, and it is my opinion that a request for informa-
tion on how absentee bids will be handled is reason-
ANSWER -- There is a great deal of confusion about
able. In fact, it is good practice to clarify your right to
absentee bids. Absentee bids create controversies
accept absentee bids and the procedure for doing so
because they tend to create a conflict with an
with the seller in writing prior to the auction sale,
Auctioneer’s legal duty. As you are aware, an
presumably in your agreement for auctioneering
Auctioneer is the agent of the seller. As the seller’s
services. Remember that the acceptance of absentee
agent, the Auctioneer owes a fiduciary duty to the
bids creates an inherent conflict of interest for the
Auctioneer. On one hand, you are acting on behalf of
Since the Auctioneer is the agent of the seller, he or
the seller to obtain the highest possible price for his
she should not act as the agent of a bidder as well.
or her property, while at the same time you are acting
The Auctioneer has a duty to the seller to obtain the
on behalf of the absentee bidder to obtain the seller's
highest price for an item to be sold. The bidder, how-
property at the lowest possible price. Because of this
ever, wants to purchase the item for the lowest possi-
inherent conflict it is best to clarify in writing the pro-
ble price. There is an inherent conflict.
cedures for acceptance of absentee bids with the sell-
Generally, you should not act as the bidder’s agent.
er prior to the sale. In this way, potential disagree-
When a bidder makes an absentee bid, you should
ments with your seller can be avoided.
make it clear that you are the agent of the seller. If
you act as the bidder’s agent, even inadvertently, the
law will generally impose a duty to act for the bidder.
WWW.AUCTIONEERS.ORG AUCTIONEER 9
It is difficult to imagine auctions where an Auctioneer
represents the seller and a bidder and both walk away
from the sale satisfied. If you have duties to both the
seller and the bidder, either one could eventually sue
you for violation of that duty.
In order to avoid being considered the bidder’s
agent, you should obtain clear and explicit instruc-
tions from the bidder. How should the bid be used?
Should the Auctioneer wait to use the bid?
The bidder’s instructions should take away any
guess work and all discretion. If you do not have any
discretion to act on behalf of the bidder, you should
not be considered his or her agent. You should care-
fully consider the issue and establish appropriate
policies and procedures for absentee bids. You must
use absentee bids carefully in order to avoid being
considered the agent of the bidder. Otherwise, you
are inviting costly litigation.
10 AUCTIONEER WWW.AUCTIONEERS.ORG
(Absolute, Sealed Bid, Reserved)
Seller’s obligations after auction Avoid this deceptive
I recently had an absolute auction for a rather inexpen-
sive boarded-up inner city property? My Auctioneer
Can you advertise or print in your brochure that an
opened and closed the auction with no-bids. The sale
auction for real estate is "Absolute" and then in the
was recorded. Immediately after the conclusion of the
fine print say..."Absolute subject to minimum bid of
auction, a bidder offered $1,000. Another bidder asked
$450,000, plus 5% buyer's premium?"
what the first bidder offered and the Auctioneer asked
if he was interested and the bidder said “no.” We put it
ANSWER -- No. An Auctioneer should not advertise
on paper and presented to the seller who not at the sale.
an auction as "absolute" if there is no bona fide inten-
The seller refused to accept the contract.
tion to sell to the highest bidder. The term "absolute
What are the seller’s obligations to accept an offer
auction" is a term of art indicating that the property
that was taken outside of the purview of the absolute
will be sold to the highest bidder, regardless of price
and without any limiting conditions. Using the fine
print to negate the advertised intention to sell
ANSWER -- Once an auction sale is concluded, the
absolute may not work and would certainly invite dis-
seller generally has no further obligation to accept an
putes and costly litigation over whether the sale was
offer that was taken outside of the actual sale. If the
truly an absolute sale, entitling the highest bidder to
seller were obligated to accept such an offer, this
purchase the goods not subject to any reserve.
would negate the purpose of the sale by auction, which
In many states, the use of fine print in this manner
is intended to produce competition among bidders.
would also be considered a deceptive business prac-
Auctioneers should also recognize that, in some states,
tice. Beyond these considerations, each Auctioneer
the Auctioneer may be prohibited from negotiating a
who is a member of the National Auctioneers
sale of real estate outside of the actual auction sale
Association has made a pledge to adhere to the associ-
unless he or she is a licensed real estate agent.
ation's Code of Ethics. The code states that no auction
In some cases, the Auctioneer may retain the exclu-
should be advertised "absolute" or "without reserve"
sive right under the agreement for auctioneering
unless there is a bona fide intent to transfer ownership
services to sell the property for some period of time
at the time of advertising and at the time of the auc-
beyond the date of the auction sale. If that were the
tion, regardless of the bid or bidder. Improper adver-
case, one would need to look closely at the agreement
tisements like these confuse and mislead potential bid-
for services to confirm whether or not a post auction
ders, thus harming the auction industry and placing
sale is binding on the seller. However, in most situa-
the seller and Auctioneer in danger of legal liability.
tions, a seller is generally not contractually obligated
Therefore, no sale should be advertised as absolute
to accept an offer that is received after the conclusion
unless the seller truly intends to sell the goods to the
of the auction sale.
highest bidder, without reserve.
WWW.AUCTIONEERS.ORG AUCTIONEER 11
Selling by reserve or Practice defines an "absolute auction" as "an auction
where the property is sold to the highest qualified
“owner confirmation” bidder with no limiting conditions or amount. The
seller may not personally bid, or do so though an
Please explain to fellow Auctioneers the difference agent." The situation you describe is not a true
between selling a piece of real estate with a reserve absolute auction. In effect, the Auctioneer is bidding
price or selling it subject to owners confirmation of the as the agent of the seller on the property up to the
final bid. Is there a difference and, if so, what is it? amount of the reserve.
Furthermore, an Auctioneer should exercise cau-
ANSWER -- There is no meaningful difference tion when advertising an auction as a absolute auc-
between selling real estate at an auction with a reserve tion. If an auction is advertised as absolute when
or selling it at an auction subject to confirmation. Both there are, in fact, limiting conditions or amounts, the
of these auctions are known as "reserve auctions." Auctioneer is inviting costly litigation. Under these
NAA's Code of Ethics and Standards of Practice circumstances, an Auctioneer could be liable for
defines" reserve auction" as "an auction in which the deceptive advertising and even fraud. Finally, you
seller retains the right to establish a minimum price, to should also check with an attorney licensed in
accept or decline any and all bids, or to withdraw the Virginia to make sure this type of transaction is not
property at any time prior to the announcement of the prohibited. In addition to the dual agency disclosure
completion of the sale by the Auctioneer." As you can you should disclose that you (as the Auctioneer) may
see, an auction with reserve price is a specific type of be bidding if, in fact, such transaction is permitted
reserve auction. For comparison, NAA's Code of Ethics with disclosure in Virginia.
and Standards of Practice defines an "absolute auction"
as "an auction where the property is sold to the highest -----
qualified bidder with no limiting conditions or amount.
The seller may not personally bid or though an agent." Bid increments in absolute auctions
If there are any limiting conditions or a reserve, the
auction is a reserve auction and not an absolute auction. An interesting note from a court case here in Ohio.
Apparently, an auction was advertised as selling
----- "absolute, to the highest bidder!" I would imagine many
of us have advertised over the years in this fashion.
Can this sale be advertised At this auction, the bidding reached $1,500 for an
item, and the Auctioneer was asking $1,550. A bidder
as absolute auction? bid $1,525 and the Auctioneer refused to take that
bid (thinking, I suppose, that was not enough of an
I have a question regarding the legalities involved in increase over the previous bid).
a real estate auction transaction where a seller has No more bids, so Auctioneer sold item for $1,500.
stated his minimum sales price (reserve) and the The $1,525 bidder filed suit, claiming auction was
Auctioneer is willing to guarantee that minimum. In advertised "selling to the highest bidder," yet the
this situation, can the sale be advertised as "highest bidder" didn't get this item.
"AbsolUte," since the Auctioneer is guaranteeing the I'm told the terms and conditions of the auction
reserve? I understand dual agency must be disclosed stated something like "Auctioneer reserves the right
and agreed upon by the seller, but what other disclo- to refuse bids which are but a trifling advance over
sures might be necessary? Maybe this situation pres- the prior bid ..."
ents a much "too tangled web" to even consider? I wonder if an Auctioneer advertises this way, that
even a bid of $1500.01 would have had to been
ANSWER -- In my opinion, what you described is a accepted?
"tangled web" that you should avoid. As referenced
above, NAA's Code of Ethics and Standards of ANSWER -- Good question. The advertisement of an
12 AUCTIONEER WWW.AUCTIONEERS.ORG
auction, in addition to giving notice of the sale, may locate a federal law that relates to the issues you
announce the terms and conditions of the sale. Where raised in your letter. However, there are federal
such an advertisement is made, the terms and condi- statutes that apply to Auctioneers that could impose
tions of the contract that is completed upon the fall of criminal sanctions. For example, if an Auctioneer or
the hammer are understood to be those presented in auction company advertises a sale of food, drugs,
the relevant advertisement prior to the auction, or as devices, services, or cosmetics as an absolute auction,
modified by the Auctioneer before bids are submitted. and it is not truly an absolute auction, the Auctioneer
Usually the Auctioneer, at the time and place appoint- or auction company would be violating the Unfair
ed for the auction, announces the terms and conditions Trade Practices Act. The Unfair Trade Practices Act
which are generally deemed to supersede all previous- prohibits any false advertisement by the United
ly published terms and to bind the purchaser. States mail or by any means for the purpose of induc-
Even when a sale is advertised as "absolute, to the ing the purchase of food, drugs, devices, services, or
highest bidder!" the Auctioneer has the authority to cosmetics. The violation of the Unfair Trade Practices
control the manner of the sale. This right may be lim- Act can result in criminal or civil liability. An
ited, however, when you have an absolute auction. Auctioneer may be punished by a fine of not more
The National Auctioneers Association Code of Ethics than $5,000 or by imprisonment for not more that six
defines an absolute auction as "an auction where the months (or both) for the first violation of the Act.
property is sold to the highest qualified bidder with In order to avoid liability for violation of the Unfair
no limiting conditions or amount." Trade Practices Act, Auctioneers should be com-
If there are any limiting conditions, the sale is not pletely truthful and honest in all advertisements. If
an absolute auction. Requiring bids to be at least $50 the sale is truly an absolute auction, without any lim-
more than the previous bid may be considered a lim- iting conditions or amount, you should not be con-
iting condition. It could be perceived as a limiting cerned about criminal liability.
condition by the courts in Ohio, so you should be There are certain types of auctions that have more
careful to protect yourself from liability. extensive federal regulation. For example, there are
federal regulations that apply to the sale of guns, agri-
----- cultural products, and endangered species. There are
also federal laws that apply to special circumstances,
Is this a federal crime? such as the Sherman Anti-Trust Act.
I recently read the article in the NAA magazine per- -----
taining to "absolute auctions." Hopefully you can ver-
ify for me something that I read while in a law library Legal issues of selling
in Seattle. I remember reading, I believe somewhere
in the UCC, that if an auction is advertised as
by “choice” method
"absolute" and title to what ever is sold "absolute"
does not transfer to someone new, then the Please discuss the legal and/or enforceability issues
Auctioneer is subject to up to five years in the feder- in regard to selling "choice." There is probably merit
al penitentiary. Can you verify that this is accurate? with discussing the pros and cons of "choice," and I
am personally, generally, not a fan. I find it slows the
ANSWER -- Generally, the legislature and judiciary of auction and encourages conspiracies between bid-
each state establish the applicable auction laws. ders. I do find sometimes there is increased competi-
Auctioneers need to be more concerned about civil lia- tion, but nevertheless, this is not my question here.
bility. It is more common for Auctioneers to be sued for First of all, selling "choice" means offering, for exam-
fraud or breach of contract than for an Auctioneer to be ple, three kerosene lanterns up for auction, and say-
subject to criminal liability. There are, however, certain ing "These are selling choice." In our area, this means
federal laws that apply to Auctioneers. the high bidder then has the choice of lanterns.
After extensive research, I have not been able to Sometimes, then, other bidders or attendees then
WWW.AUCTIONEERS.ORG AUCTIONEER 13
have "choice" of the remaining, but I'll save that legal able amount of time, it makes more sense to proceed
issue for another post. So, what is being sold when with the auction.
things are selling "choice?" It appears to me we are If you are concerned about having all of the terms of
selling an option to choose, rather than selling any the contract clearly established, you can have buyers
particular item. Then, is this contract unilateral or register prior to the auction and agree to the terms and
bilateral? Normally, option or choice contracts are conditions. One section of the contract can discuss
unilateral, and not enforceable upon the other party. choice sales. Otherwise, there are no definite terms or
A simple option to buy is clearly unilateral. conditions. The contract will not expire in a set amount
I'm suggesting here a few questions: (1) Does the high of time, unless it is specifically agreed to as a condition
bidder have to take any? (2) What is the term of this of the sale. If someone cannot make up his or her mind
option? (3) What if the high bidder wants to wait 5 min- at the auction, you can generally reach an agreement
utes to choose? 10 minutes? 3 days? (4) Does the with the buyer to terminate the contract.
option expire and, if so, when does it expire? (5) If this The final issue is whether there is a meeting of the
contract exists, then how does the Auctioneer terminate minds and a binding contract. Parties to a contract do
the contract?" (6) Can the Auctioneer cancel the option not need to agree to all of the terms in order for a con-
without the high bidder's consent? Another worthy tract to exist. There does need to be, however, an agree-
consideration here is the nature of contracts. A central ment on the primary terms and conditions. Here there
issue in any contract is mutual assent -- a meeting of the is an agreement to purchase an item from a group of
minds. If the buyer and the Auctioneer have any dis- items, at a certain price, and at a certain time. I think
agreement about the above (6) issues, or other issues, most courts would determine that a contract exists.
then maybe we don't have a contract at all, since there There is some confusion about selling choice. The
is no meeting of the minds? terms of the contract generally are not clearly defined.
Therefore, I suggest that you sell choice for only mis-
ANSWER -- You have raised some valid questions cellaneous personal property of a nominal value.
and concerns regarding selling "choice." Selling
choice can be confusing to buyers and can create dis- -----
agreements. Since there is some confusion regarding
choice contracts, I suggest that you sell choice for Non-absolute auction procedures
only miscellaneous personal property of a nominal
value. You asked several questions about choice and I In an auction which is not absolute (an absolute auc-
have attempted to answer as many of those as possi- tion means there is no minimum price set or limiting
ble in the limited space I am provided. conditions) what is the correct way to handle individ-
The distinction between a bilateral and unilateral ual items which carry an agreed upon (with the
contract is generally irrelevant. Bilateral and unilat- owner) reserve price?
eral contracts are both enforceable in a court of law.
Most contracts, including option contracts, are bilat- ANSWER -- The National Auctioneers Association
eral agreements. A bilateral contract simply means Code of Ethics defines an “auction with reserve” as “an
that both parties to the contract have an obligation to auction in which the seller or his agent reserves the
the other party. right to accept or decline any and all bids.” The NAA
When you are selling choice for nominal items you Code of Ethics defines an absolute auction as “an auc-
need to distinguish between the legal and practical tion where the property is sold to the highest qualified
issues. In order to effectively sell choice for items, bidder with no limiting conditions or amount.”
you need to keep the auction moving. Is the highest When you discuss the terms and conditions of a sale
bidder bound by a contract? Yes. Will it make sense with a customer, you should discuss whether proper-
to stop the auction and sue the bidder to enforce the ty should be sold at an auction with reserve or an
contract? No. absolute auction. (An Auctioneer, as the agent for the
If the highest bidder decides that he does not want seller, should also advise the seller on the benefits and
an item or cannot make up his mind after a reason- risks of each type of sale.) Regardless of whether the
14 AUCTIONEER WWW.AUCTIONEERS.ORG
seller wants the property sold at an auction with because of poor attendance due to weather or ineffec-
reserve or an absolute auction, the first step is to get tive marketing and advertising of the auction event. I
the agreement in writing signed by the seller. see the phrase, “Announcements auction day take
If the seller wants the property to be sold at an auc- precedence over printed material” in some Auctioneers
tion with reserve, the written contract should clearly ads and wondered if there is any basis in law.
state that the seller has the right to accept or reject
the bid. If the seller sets a minimum price for certain ANSWER -- The Uniform Commercial Code (“UCC”)
items, the contract should identify each specific item does not specifically address the issue of auction day
with a minimum price and state the minimum price. announcements. I am not aware of any provisions in
The contract should further provide that everything the Ohio Revised Code that specifically relates to this
else (all other property to be sold by the Auctioneer issue either, but I am not licensed in Ohio and cannot
without a minimum bid) may be sold by the comment on the laws in that jurisdiction.
Auctioneer to the highest bidder in the normal course Your question relates to attempting to convert an
of business without seller confirmation. The last pro- absolute auction into an auction with reserve when
vision protects the Auctioneer from having to check there is low attendance or other concerns. The NAA
with the seller on each and every item, especially Code of Ethics defines an absolute auction as an
items like miscellaneous personal property. “auction where the property is sold to the highest
The next step is to advertise the sale. Avoid language qualified bidder with no limiting conditions or
that would indicate that the property must be sold to amount.” An auction with reserve is an “auction in
the highest bidder. You should be careful not to convert which the seller or his agent reserves the right to
a reserve auction to an absolute auction. There have accept or decline any and all bids.”
been cases where Auctioneers inadvertently converted Your question presents some difficult legal and eth-
an auction with reserve to an absolute auction by using ical issues to consider.
language that suggested the sale was an absolute auc- I would not advise Auctioneers to rely on the quot-
tion. Carefully selecting the language you use in an ed provision for authority to change the sale from an
advertisement will help avoid costly litigation. absolute auction to an auction with reserve. While the
The Auctioneer, at the time and place appointed for language is fairly broad, it is more commonly used to
the auction, should also announce the terms and con- clarify errors in advertisements or change relatively
ditions of the sale prior to the sale. The terms and minor terms, as opposed to the nature of the sale.
conditions announced are usually deemed to super- If you advertise a sale as an absolute auction and attempt
sede all previously published terms and to bind the to convert it to an auction with reserve just before the auc-
purchaser. The announcement should make it clear tion begins, you are inviting costly litigation.
that the sale is a reserve auction and that the seller Whether this conversion constitutes fraud or decep-
has either established minimum prices or reserves tive advertising in a particular state is ultimately a legal
the right to accept or decline any and all bids. conclusion that will have to be decided by a Court of
competent jurisdiction in each state. It presents a risk,
----- however, that Auctioneers should generally avoid.
Courts across the United States have considered
Converting from absolute issues relating to absolute auctions and the nature of
absolute auctions. An “absolute auction” is a term of
to reserve at last minute art describing a specific type of auction with its own
legal rules. In an absolute auction, the seller general-
Does the UCC or Ohio Revised Code address the ly reserves the right to withdraw the property at any
issue of auction day announcements taking prece- time prior to calling for bids. After calling for bids,
dence over previously printed auction terms and condi- the property may only be withdrawn if there are no
tions? In other words, can an Auctioneer change the bids within a reasonable period of time. If there is a
terms of sale from the printed “All sells to the high bid- bid, then the property is to be sold to the highest bid-
der, no minimum or reserve” to an auction with reserve der with no limiting conditions. (Auctioneers should
WWW.AUCTIONEERS.ORG AUCTIONEER 15
be aware that there is an effort to restrict the seller’s auctions is one of the more complex areas of auction
right to withdraw the property prior to calling for law. More importantly, the resolution of this type of
bids. This reform has been proposed in response “to issue usually will depend upon the specific facts.
harm caused to bidders who rely on an advertisement Therefore, Auctioneers should exercise caution when
for an auction and spend time and money traveling to they hold absolute auctions, particularly before he or
participate in the auction just to have the auction can- she cancels the sale or withdraws the property, to
celled in its entirety before a bid can even be placed.” ensure compliance with the NAA Code of Ethics and
Auctioneers should carefully consider the effects of the applicable law.
canceling an auction or withdrawing property.) I am not licensed in the state of Florida and am unable
Auctioneers also have ethical responsibilities to to comment on the laws in that particular jurisdiction.
their clients, the public, and the profession.Generally, You should contact an attorney licensed in your state to
attempting to convert an absolute auction to an auc- receive a legal opinion if one is necessary. However, I can
tion with reserve is unethical and inappropriate. It give you some of my general thoughts on this matter.
would also harm the reputation of Auctioneers in Let’s consider the relevant issues separately.
general and the auction profession. Standard of 1. Can an Auctioneer cancel the auction or with-
Practice 1.2 provides: “The practice of encouraging a draw the property from an absolute auction? An
client to market a property as ‘absolute’ when in actu- Auctioneer is the agent of the seller. As the seller’s
ality the member has verbally promised to convert agent, the Auctioneer owes a fiduciary duty to act for
the sale to an auction with reserve, or alternatively to his or her benefit. A fiduciary duty is the highest stan-
cancel the sale if the marketing campaign does not dard of duty implied by law. Before the seller agrees
produce an opening bid sufficient to satisfy the to sell property at an absolute auction, an Auctioneer
intended reserve of the client, is strictly prohibited.” has a duty to advise the seller of the risk of selling
In summary, Auctioneers should not attempt to property at an absolute auction. In addition, an
convert absolute auctions to an auction with reserve. Auctioneer generally has the duty to advise a seller of
If necessary, under the circumstances, the seller his or her rights to withdraw the property from the
should consider withdrawing the property or cancel- absolute auction or to cancel the auction, including all
ing the sale prior to calling for bids and (preferably) applicable limitations.
after receiving legal advice. An Auctioneer generally cannot cancel the sale or
withdraw the property without the seller’s consent
----- and approval. The seller has the right to cancel the
auction or withdraw property from the auction. After
Can you cancel an absolute auction? the Auctioneer discusses these issues with the seller,
the Auctioneer is obligated to cancel the auction or
In Florida, we have absolute auctions and auctions withdraw the property if the seller instructs the
with reserves. If an auction is advertised as an absolute Auctioneer to do so.
auction with no minimum and no reserve, can an 2. When can a seller cancel the sale or withdraw the
Auctioneer cancel the auction or change the auction to property from an absolute auction? For absolute auc-
an auction with a minimum if his client tells him to do tions, courts generally state that the seller can cancel
so? Also, in an auction, if we ask for starting bids before the sale or withdraw property from the sale prior to a
the auction begins in order to jumpstart the auction, is calling for bids or a legitimate bid being made.
the act of taking written or verbal starting bids where In general, however, Auctioneers should attempt to
the auction starts, or does it start when those bids are avoid canceling an absolute auction on the day of the
placed before the public? sale. Sellers may become concerned when there is a
small crowd and will panic and cancel the sale. This
ANSWER -- The NAA Code of Ethics defines an results in bad publicity for Auctioneers.
absolute auction as “An auction where the property is In fact, legislation has been proposed which would
sold to the highest qualified bidder with no limiting limit the seller’s ability to cancel an absolute auction
conditions or amount.” The law relating to absolute or withdraw property from the sale. It has been pro-
16 AUCTIONEER WWW.AUCTIONEERS.ORG
posed, for example, that the right to cancel the sale keting campaign does not produce an opening bid
must be exercised at least a few days before the sale. sufficient to satisfy the intended reserve of the client,
Such proposals are the result of Auctioneers abusing is strictly prohibited.”
the right to cancel the sale or withdraw property. If Even if the Auctioneer and seller do not have an
an individual travels from California to Florida for an actual express agreement to convert the sale from an
absolute auction that is eventually cancelled on the absolute auction to an auction with reserve, it would
day of the sale, he or she will understandably be upset appear to the bidders, and possibly a court, that there
about the wasted time and money. is such an agreement. In addition, such an agreement
One way to address some of these concerns is to could be implied under certain circumstances.
modify the language used when advertising an In sum, this is a complex area of the law and
absolute auction. Auctioneers should consider pro- Auctioneers should exercise caution. Auctioneers can
viding notice that the sale can be cancelled or the take steps to protect themselves by advising a seller of
property withdrawn. For example, if an Auctioneer the risk of selling items at an absolute auction during
places an advertisement for an absolute auction that their first meeting. The discussion should include the
provides “Seller retains the right to cancel the auction seller’s rights to withdraw the property from the
or to withdraw the property prior to calling for bids,” absolute auction or to cancel the auction, including all
the public, legislatures, and courts would feel less applicable limitations. In addition, when an Auctioneer
sympathetic to complaints about the loss of travel becomes concerned about selling the property (due to
time and expenses. small crowds, the marketing campaign, etc.) he or she
3. When is an Auctioneer calling for bids? I am not should immediately advise the seller again of the risks
aware of any case where a dourt clarified when an of proceeding with the sale versus cancelling the auc-
Auctioneer begins calling for bids. It is clear, howev- tion or withdrawing the property.
er, that once any legitimate bid is submitted, the sell-
er cannot withdraw or cancel the sale. Once an -----
Auctioneer begins the chant, he or she is clearly “call-
ing” for bids. But what about when the Auctioneer is Meaning of reserve auction
canvassing the crowd and looking for opening bids?
The Auctioneer, in my opinion, is calling for bids and opening bids
when he or she begins asking for bids, not simply
when the bids are placed before the public. In California, there is no auction license law, only a
Again, once any legitimate bid is submitted, the sell- requirement for an Auctioneer bond, which for about
er cannot withdraw or cancel the sale. If an $300 to $400 can be obtained by anyone.
Auctioneer is considering cancelling the auction, the Due to the real estate slump here, a lot of real estate
decision should be made prior to seeking opening agents are advertising themselves as Auctioneers with
bids or canvassing the crowd. or without the Auctioneer bond. The terminology
4. Can an absolute auction be converted to an auc- they are using seems very misleading. As an example:
tion with reserve? An absolute auction generally may * “Absolute Auction (subject to lender approval in
not be converted to an auction with reserve. When an small print)
absolute auction has been scheduled and attendance * “Sold To Highest Bidder (reserve auction in small
is too low, the Auctioneer should continue with the print)
sale unless the seller cancels the auction or withdraws * “Opening Bid $150,000 -- Listed at $300,000
the property. The NAA Code of Ethics prohibits con- (Reserve Auction in small print.)
verting an absolute auction into an auction with I am particularly interested in knowing your opin-
reserve. Standard of Practice 1.2 provides: “The prac- ion is about the “Reserve Auction” versus “Minimum
tice of encouraging a client to market a property as Bid Auction.” Per the Glossary of Auction Terms on
‘absolute’ when in actuality the member has verbally the National Auctioneers Association’s website, an
promised to convert the sale to an auction with Opening Bid is “The lowest acceptable amount at
reserve, or alternatively to cancel the sale if the mar- which the bidding must commence.” In this case,
WWW.AUCTIONEERS.ORG AUCTIONEER 17
where the Auctioneer is saying this is a reserve auc- listed at $300,000 and that the Auctioneer will begin
tion, is the wording “Opening Bid” indicating that this bidding at $150,000. The advertisement does not con-
is the “minimum” acceptable amount?” tain language that implies it is an absolute auction or
The Auctioneer would not indicate any minimum that it is anything other than a reserve auction.
on the reserve auction and said that the “Opening In a reserve auction the Auctioneer has complete dis-
Bid” is just were they were starting the bidding and cretion to decide where to begin the auction. There are
had nothing to do with a “minimum” since it was a two schools of thought on this issue. Some Auctioneers
reserve auction. I see this as misleading buyers to prefer to begin bidding at the reserve price while other
come because the “Opening Bids” where around half Auctioneers prefer to begin bidding below the reserve
of what the list price was (these properties were all price in an effort to gain momentum and exceed the
listed on the MLS) and according to the Auctioneer reserve price. The opening bid does not have to be the
there were no minimums set on the reserve auction. reserve price. An Auctioneer can start the bidding at,
Please clarify the usage of these terms. above, or below the reserve price.
It is also important to remember that an Auctioneer
ANSWER -- The NAA Code of Ethics defines an has obligations to his or her client. Auctioneers, as
absolute auction as “an auction where the property is the seller’s agent, are bound to act on behalf of the
sold to the highest qualified bidder with no limiting seller as authorized by the auction contract.
conditions or amount.” The term “reserve auction” is Auctioneers also have a fiduciary duty to act on behalf
defined as “an auction in which the seller retains the of the seller. So, an Auctioneer would not have the
right to establish a minimum price, to accept or authority to advertise the sale as absolute when the
decline any and all bids or to withdraw the property seller wants to conduct a reserve auction.
at any time prior to the announcement of the comple- Auctioneers should consider their obligations to
tion of the sale by the Auctioneer.” The language their client and to the public before advertising a sale.
used in an auction advertisement is important. Two of
the advertisements raise a concern. -----
The first advertisement referenced, “Absolute Auction
(subject to lender approval),” is unethical and mislead-
ing. There is no such thing as a hybrid absolute auction Beginning bid at absolute auction
or an absolute auction subject to the approval of the
lender or anyone else. The sale is either absolute or not. Is it legal for Auctioneers to get an opening bid prior
There is no middle ground. This type of sale would be to absolute auction, with an opening bid contract?
misleading to a buyer and is unethical. In these For example, say that we sign up an absolute auction
instances, an aggrieved buyer may file an action seeking and then two weeks prior to the sale we find a potential
specific performance by the seller. buyer who will sign a contract to open the bid at
The “Sold to Highest Bidder” language could result $75,000 on a property valued at $100,000. We have
in the conversion of the auction to an absolute auc- previously used a “Buyer’s Incentive” in which a buyer
tion – particularly if the “reserve auction” notice is can submit an opening bid above a given amount and if
not conspicuous. Auctioneers should avoid language they are the highest (and winning) bidder, they receive
that would indicate that the property must be sold to a percentage off of their final contract price. I know
the highest bidder. There have been cases where other auction companies use this as well. Using the def-
Auctioneers inadvertently converted an auction with inition of absolute auction, do you see any conflict with
reserve to an absolute auction by using language that the definition or concept with this practice?
suggested the sale was an absolute auction. Carefully
selecting the language you use in an advertisement ANSWER -- Advertising an absolute auction is an
will help avoid costly litigation. express statement made by the Auctioneer to the bid-
I am not as concerned about the “Opening Bid ders and that the property will be sold to the highest
$150,000 – Listed at $300,000” advertisement. This bidder with no minimum bid or limiting conditions.
advertisement simply states that the property has been When an Auctioneer agrees to discount or rebate a
18 AUCTIONEER WWW.AUCTIONEERS.ORG
portion of the purchase price to the opening bidder, In addition, in the absolute auction context, if an
if the opening bidder is the highest bidder, the con- Auctioneer accepts a bid, his or her acceptance of a
cept of an absolute auction is undermined. For bid may constitute calling for bids, which, from the
instance, if an Auctioneer is auctioning a parcel of moment the Auctioneer accepts the bid, would pre-
real estate and has entered into a “Buyer’s Incentive” vent the seller from withdrawing the property or can-
with a bidder (Bidder A), and another bidder (Bidder celing the sale. Essentially, in the bidder incentive
B) submits a bid in excess of Bidder A’s bid, would arrangement, the Auctioneer is privately accepting
Bidder A’s discount reduce Bidder A’s actual bid? bids and rewarding bidders for their pre-auction bids.
Bidder A knows that if his bid is the highest bid, then Such a practice appears to violate the terms of the
he will receive the discount, which may actually be auction method and of the NAA Code of Ethics.
lower than Bidder B’s highest bid. Auctioneers should avoid providing such bidder
Consider a hypothetical example. Bidder A gets a 1% incentives at an absolute auction, because it affords
discount because he/she agreed to submit an opening one bidder an advantage over all other bidders based
bid prior to the auction in the amount of $500,000, simply on the bidder’s willingness to enter a bid prior
which means that Bidder A is actually bidding $495,000 to the actual auction.
(with the 1% discount). Bidder B then submits a bid of In an absolute auction, Auctioneers should be care-
$505,000, and Bidder A submits a bid at $506,000. ful about offering buyer’s incentives like a discount
With the buyer’s incentive, Bidder A’s bid is actually from the final purchase price. When the discount is
submitting a bid that will be discounted $5,060. So, taken into consideration, another individual’s bid
Bidder A’s actual bid is $500,940, which is $4,060 lower could actually be considered the highest bid. This sit-
than Bidder B’s bid. Can Bidder A be the highest bid- uation could result in a dispute over who owns the
der? It seems unfair to allow Bidder A to have such an property. In addition, seeking bids (particularly when
advantage over other bidders because Bidder A submit- one is accepted) prior to the auction could be consid-
ted the opening bid prior to the auction. In fact, such a ered calling for bids. Once the Auctioneer is deemed
system appears to be a violation of the NAA Code of to be calling for bids, the property may not be with-
Ethics in that the Auctioneer did not deal with the pub- drawn from the sale or the auction canceled.
lic fairly and honestly.
The NAA Code of Ethics states, “Members owe the
customer the duties of honesty, integrity and fair
dealing at all times.” Article 2. A discount to the bid-
der who submits a pre-auction bid would not be fair Can this home be sold absolute?
and honest to all of the other bidders. In fact, permit-
ting such a practice may encourage potential buyers
We have five owners on a home that was signed over
to submit bids to the Auctioneer in advance of the
to them in 1997 with their aunt having a life estate to
auction just so they can get the discount. Such a
live there. She died and now they have all signed a
practice could be damaging to the auction profession.
contract to sell absolute to the highest bidder regard-
Under the buyer incentive, the highest qualified bid
less of price. After she died, they went to an attorney
may not be the successful bid because the discount
and asked what they needed to do. He or she said the
diminishes the value of a bid received from one bid-
aunt didn't have any money, so they wouldn't have to
der. Such an arrangement may result in the seller not
open an estate. Now that we have signed a contract to
receiving the highest bid price.
sell at auction absolute, the attorney says they have to
If the Auctioneer tries to sell the property to Bidder
get the home appraised and cannot sell it for less than
B, and Bidder A learns of the buyer’s incentive, he or
two-thirds the appraised value. The five sellers all live
she could file a complaint in the local court seeking spe-
out of town and want to get rid of this liability. They
cific performance. Bidder B could argue that his or her
have all signed a purchase agreement also for the
bid is actually the highest. The courts may receptive to
high bidder. Can we sell it absolute?
this type of argument. This type of bidder incentive, at
an absolute auction, may invite costly litigation.
WWW.AUCTIONEERS.ORG AUCTIONEER 19
ANSWER -- A life estate generally means the person ty so the estate’s assets can be properly sold and the proceeds
holding the life estate owns the property only during their distributed and the estate properly closed. If this is the case,
lifetime and, upon their death, the property passes to the a lawyer can advise on the estate issues that would influence
person or persons holding the remainder interest. In the absolute auction sale of the real estate.
essence, the person holding a life estate has an ownership
interest in the property up to the last second of their life. -----
Immediately, upon their death, the ownership interest
passes to the person(s) holding a remainder interest.
If your client’s aunt prepared a deed in which she reserved Sealed bid explanation
a life estate to herself and granted a remainder interest to
five of her nieces and nephews, then, at the moment the I am doing a sealed bid sale auction on specialized
aunt passed away, her ownership interest ceased and the equipment. Other than the normal disclosures we give
property should not be subject to probate. The nieces and to the buyers, are there any potential pitfalls, or legal
nephews became the owners of the home at the moment the
terms we need to address to our buyers and sellers?
aunt passed away.
If the sellers are the deed holders of the real estate, then
the aunt’s estate should not be relevant with respect to ANSWER -- Although the conduct of the actual sale
selling the property by absolute auction or any other is different, many of the same procedures leading up
means. If the five people who had a remainder interest are to a live auction should be observed in the case of a
now the owners of the real estate and they consent to sell sealed bid auction. All bidding procedures and terms
the property at absolute auction, then it appears that they of the sale should be outlined in detail for prospective
have the right to dispose of the property in any manner bidders. Be sure to set a deadline for receiving bids
they see fit. and note that any late bids will not be accepted.
However, since the attorney is advising the nieces and You will probably want to reserve in the seller the
nephews to have the property appraised and not to sell it right to reject any and al~bids. Since this will be a sale
for less than two-thirds the appraised value, then perhaps
of specialized equipment, you should also confirm
there is more going on than what is revealed in this ques-
that this will not qualifY as a "bulk sale."
tion. If the attorney insists that the property is subject to
an appraisal, then I recommend engaging an attorney in Many states require special action on the part of an
order to establish the true status of the title to the real Auctioneer when he or she has reason to believe that
property and to determine whether the property is subject an auction sale will include more than half of the sell-
to the aunt’s estate. er's inventory.
It is possible that the deed conveying the remainder These requirements protect the seller's creditors
interest to the nieces and nephews was defective, never from the potential that no assets will be available to
recorded or did not create the property interests satisfy existing debts.
described in the question. If the deed was defective, then Finally, you should determine whether any DCC
the real property may be subject to the aunt’s estate. financing statement has been filed with the Secretary
In addition, if the nieces and nephews did not have a
of State or other central filing authority in your state
remainder interest in the aunt’s property, then they may
securing the equipment being sold. This search will
not have had the authority to contract with the Auctioneer
to sell the real estate. The last thing an Auctioneer wants determine if any entity holds a valid security interest
to do is invest time and energy into selling a property only in the equipment, which is often the case. An
to learn the selling party is not authorized to sell the sub- Auctioneer who sells equipment subject to a valid
ject property. If an estate must be opened and the prop- security interest may become personally liable for any
erty is part of the estate, then the personal representative damage suffered by a secured party as a result of the
is the person with the authority to sell the decedent’s sale. For this reason, be sure to obtain from the sell-
assets and would be the proper party to the auction con- er a written acknowledgement that the equipment
tract. being sold is not subject to any security interests, and
Perhaps one of the nieces or nephews is serving as the per- indemnifying the Auctioneer for any damages result-
sonal representative for the decedent. If the property is sub-
ing from the failure of the seller to properly advise
ject to the aunt’s estate, then there are legal procedures and
the Auctioneer of any such liens or encumbrances.
formalities that must be followed in order to sell the proper-
20 AUCTIONEER WWW.AUCTIONEERS.ORG
Protection of personal assets agent. While I am not licensed in the state of New
York or familiar with those particular state laws,
Auctioneers are generally permitted to form a corpo-
I am a real estate Auctioneer in New York State.
ration, limited liability company or other business
Here, a real estate salesperson cannot be incorporat-
entity within which to conduct their business. Thus,
ed in the same way a principle broker can.
even if you are not able to incorporate as a real estate
Accordingly, the protections afforded this degree of
salesperson, you may be able to do so as an
separation from one's personal assets are not avail-
Auctioneer and thereby conduct your trade with the
able to the licensee. (The NYS Department of State
benefit of protection from personal liability.
and the NYS Association of Realtors are trying to
resolve this issue -- unsuccessfully so far!) Errors and
Omission insurance provides a limited amount of
protection, but then what happens? What do you sug-
gest short of putting all of your assets into your Personal Property
I am an Auctioneer in Maryland and lifetime mem-
ANSWER -- You have already touched on one of the ber of the NAA and would like to know what respon-
key protection devices, insurance to cover errors and sibilities does an Auctioneer have after a no-sale,
omissions. This type of policy will provide some pro- specifically the no-sale of a personal property item
tection in the event that you fail to meet standard (liquor license)? If there is a no sale on the sale day,
practices in the industry. It is a very important meas- does the Auctioneer have any further obligations?
ure for protecting your personal assets. However, you
must read each policy carefully, as the exclusions con-
tained therein often limit the extent of coverage. ANSWER -- In the event of a "no sale" the
Beyond proper insurance, the formation of a business Auctioneer should give a proper accounting to the
entity provides a nice layer of protection from per- seller of the failure of the item to sell at auction and
sonal liability, where permitted by law. You should safeguard the seller's property for a reasonable
speak with a New York attorney who is familiar with amount of time until it can be retrieved. Depending
real estate and auction law, especially with regard to on the agreement of the parties, you may have a right
licensing and other regulations. to partial compensation on an unsold item. In addi-
You may find that the law does allow the formation tion, you may still have the exclusive right to sell the
of a professional corporation, limited liability compa- item for some period of time following the sale, which
ny or similar business entity to help shield you from will also depend upon the agreement of the parties.
personal liability. This may depend on whether you As is often the case, the Auctioneer's agreement for
only sell real estate within the confines of an auction services will dictate the respective rights and respon-
sale or if you also act as a more traditional real estate sibilities of the parties. It is for this reason that we
WWW.AUCTIONEERS.ORG AUCTIONEER 21
always remind Auctioneers to utilize and keep up to may be sued for breach of contract. If he still does not
date a comprehensive written agreement for auction- complete the transaction, the property should be sold
eering services. to the highest bidder at another commercially reason-
able sale. The breaching buyer would then be liable
----- for the difference between his bid and the successful
bid at the subsequent auction sale, plus any costs
Legal recourse for buyer’s remorse incurred in conducting the second sale and as a result
of the buyer’s breach. This should also be a reminder
that all Auctioneers should include a clause in their
What legal course of action can an auction company
standard agreement for services stating that the
take when a registered bidder buys an item but later
Auctioneer is not liable for the failure of any success-
in the day gets buyer’s remorse and doesn't pay for or
ful bidder to complete the transaction.
take the item? This happened to me on a $15,000 cat
We have our bidders register for a number, which
states clearly the terms and conditions on the back
side of the card. It clearly states that the bidder will Liability for onsite auctions?
not retract his bid or stop payment, etc. What hope of
legal action do we have? It is interesting that our local At an auction at the consignor's home, some three
district attorney is telling me that there is nothing I red brick steps were broken. Now the consignor says
can do! that people who bought a piano at the auction broke
them. Employees say that the bricks were broken
ANSWER -- What you have here is a classic breach early in the morning by just walking on them, and
of contract. When the hammer falls, that signifies the that they were in poor condition. I was going to pay to
consummation of a contract between the seller and have the three broken bricks replaced, but the origi-
the successful bidder. Absent fraud or misrepresenta- nal bricks can't be matched so the consignor wants
tion, a valid contract exists at the completion of the new steps, at $3,500, which is twice as much as I
auction sale. The district attorney won’t do anything made on the job. Who's liable? Was it normal wear
in this case because there really has been no criminal and tear? Shouldn't homeowners insurance cover it?
behavior, just the “civil” breach of contract. Your When I do onsite auctions should I request to see
claim against the seller arises from the agency rela- homeowners insurance? I do about 30 onsite auctions
tionship created between the seller and yourself as a year.
Auctioneer. As such, it is really the seller who has a
right of action against the putative buyer. The seller ANSWER -- Unfortunately, the question of liability
may thus bring an action based on breach of contract for damage to a home under these circumstances
against the buyer for his failure to complete the trans- depends on a number of facts that are not included in
action. your question. Since you have a specific matter that
Generally, a buyer or seller of real estate may requires legal attention, however, you should consult
demand that the transaction be fulfilled by the par- an attorney licensed in New York for representa-
ties, which is called specific performance. However, tion.(Please review the disclaimer.)
there is generally no right to demand specific per- Although I am not licensed in New York and unable
formance in the sale of personal property, except to comment on the law in that particular jurisdiction,
where the item is unique and in other limited circum- I am able to give you some general information that
stances. In this case, the seller is therefore left to sue may help.
for any damages incurred as a result of the buyer’s There are several factual issues that need to be
breach of contract. resolved to determine who would be liable for the
I would suggest first that the buyer be given written steps. The issues include: (1) What was the condition
notice that he must complete the transaction or he of the steps before the auction? and (2) Who broke
22 AUCTIONEER WWW.AUCTIONEERS.ORG
the steps? If you or your employees broke the steps, mine how to reduce your risk for liability. For exam-
you may have incurred some liability for the repair. If ple, let's consider the auction of a commercial heat-
you cannot reach an agreement with the consignor, a ing unit.
court would need to determine, after consideration of (1) Are there any liens or fixture filings related to
all the evidence, the extent (if any) of your liability. the item? Your written contract should put the bur-
You also asked about homeowner's insurance cover- den on the seller to notify you if there are any liens or
age for the repair. Each policy of homeowner's insur- fixture filing related to the item. Otherwise, you may
ance is different. I would need to review the policy be responsible for doing a title search or looking for
carefully in order to determine whether the insurance UCC fixture filings with the Secretary of State. Both
should cover the repair. You must realize, however, of these are time consuming and could be expensive.
that you may be held responsible for the repair even If there are liens or security interests in an item, you
though there is insurance coverage. need to make sure those items are removed prior to
If you want to continue conducting onsite auctions, or as part of the sale.
you should contact an attorney to discuss the possibil- (2) Who is going to physically disconnect the heat-
ity of including a section on liability in your contract. ing unit from the building? The amount of your
Contract provisions can be drafted to address these potential liability depends on the answer to this ques-
types of issues. A contract specifically written for tion. Furthermore, the terms and conditions of the
onsite auctions could significantly reduce and limit contract should change depending on the answer.
your liability for this type of situation. The seller, the buyer, or you will be responsible for
removing the heating unit.
----- (3) Is the commercial heating unit to be discon-
nected from the structure prior to the auction? If the
Disconnecting structural items item is physically removed from the structure prior to
the auction, it is clear that either you or the seller is
responsible for detaching and removing the heating
Occasionally we sell an item which must be physi-
unit. The advantage to having the item removed prior
cally disconnected (electrical, plumbing, heating,
to the auction is that you do not need to worry as
structurally) from a building, device or other appurte-
much about damage to the heating unit. If the heat-
nance. We currently use a "hold harmless" agreement
ing unit is damaged in the removal, you can notify the
to permit this. The agreement we provide is between
bidders of the damage and the price will be adjusted
the seller and the buyer. Obviously there are a great
accordingly. If you sell the heating unit to the highest
many considerations when the possibility of property
bidder before you detach it, however, the buyer will
damage and or personal injury is factored in. Would
complain if the item is damaged during the removal.
you care to embrace some of the legal implications
(4) Who will be responsible for any damage to the
regarding the question?
commercial heating unit? It depends on the terms
and conditions of the contract. You should have a spe-
ANSWER -- You are correct that there are a number
cific contract that you use when items need to be
of factors that must be considered. Some of the items
physically detached from another structure. If you or
that should be considered include: (1) Are there any
your employees are going to physically disconnect
liens or fixture filings related to the item; (2) Who is
and remove the heating unit, you should have clauses
going to physically disconnect the item from the
in your contract, such as a hold harmless clause, to
structure? (3) Is the item going to be disconnected
reduce your liability for any damage to it. If the sell-
from the structure prior to the auction? (4) Who is
er has agreed to disconnect the item, the contract
responsible for any damage to the item being
should state that he or she will bear the risk for any
removed? (5) Who is responsible for any damage to
damage. Finally, if the buyer wants to take out the
the structure? (6) Is there anything that you can do to
heating unit, the contract should place the risk for any
reduce or minimize your risk and liability?
damage on him.
Considering these questions will help you to deter-
(5) Who will be responsible for any damage to the
WWW.AUCTIONEERS.ORG AUCTIONEER 23
building? Again, it depends on the terms and condi- two-thirds of the appraised value.
tions of the contract. If the contract does not address It appears from the emphasis in your question, how-
liability for damage to the building or structure, the ever, you are under the impression that the sale pro-
party that caused the damage will generally be held ceeds must be at least two-thirds of the total
responsible for any damages. In other words, if you appraised value of the business. This type of require-
agreed to remove the commercial heating unit, in our ment would be very unusual and would present a risk.
example, and negligently damage the building in the Even if you put a high reserve on every item sold you
process, you would be responsible for the damages to cannot be sure that you will sell enough items to gen-
the building. erate two-thirds of the appraised value of the busi-
ness. If the law requires you to generate two-thirds of
----- the value of the business to be authorized to com-
plete the sale, I would advise you to walk away.
Should I refuse to conduct The requirement should only be for each item to
sell for at least two-thirds of the appraised value. You
this sheriff’s sale? may, however, want to check with an attorney
licensed in Ohio to make sure.
The local sheriff's department called me to do a
sheriff's sale of a masonry business. Everything has to -----
be appraised by a separate person and tagged. Then a
separate person has to conduct the auction. They Protecting me and the client
would like for me to conduct the sale; however, they
have put stipulations on the sale. Everything the busi-
I have a potential auction, but first I must be able
ness has to bring two-thirds of the appraised value, or
to satisfy the potential client with assurance of a pro-
the court will not let them sell it. I guess another
cedure that will indemnify them from any potential
Auctioneer did one like this and he got sued.
problems resulting from an auction.
What would I have to do legally to keep me out of
The client is a commercial property owner and leas-
trouble with my license and not get sued if I handle
es large spaces to many different clients. During 2004
this sale? I would appreciate any advice or legal
a large space was leased to a company I will call
actions required on my part before I get involved in
"Lessee." The client received rents for a period
this situation. Is it worth doing or should I walk away?
through the end of 2004. Then the client heard noth-
Is there a way that I can advertise this and make
ing else from Lessee. Lessee has not been in contact
announcements the day of the sale to protect me?
with the client since December 2004. Lessee left a
What would you suggest?
large quantity of production equipment, fork lifts,
materials, tools and supplies in the client's building.
ANSWER -- Several states, including Indiana, have
Several of Lessee's customers have contacted the
laws that require property in some circumstances to
client wanting to know how to send payments owed
be sold for at least two-thirds of the appraised value.
to Lessee. The client's attorneys have run UCC
Typically, these laws relate to the sale of real estate or
checks on the equipment in Tennessee and Kentucky
personal property taken by the sheriff to satisfy a
and found no claims on the contents. It has now been
seven months and the client wants to liquidate the
Although I am not licensed in Ohio and unable to
contents to cover the rents past due.
comment on the law in that particular jurisdiction, I
Can you advise me on the appropriate procedure in
would expect the statute provides that each item
this instance on how to approach this potential auc-
must sell for at least two- thirds of its appraised value.
tion? In so doing, I wish to protect myself and the
The items for sale will probably consist of equipment,
client. I am insured with liability insurance. Any
bricks, computers, desks, and other similar items.
advice you may offer would be deeply appreciated.
Each item is to be separately appraised and you sim-
ply need to place a reserve on each item of at least
24 AUCTIONEER WWW.AUCTIONEERS.ORG
the Illinois auction law? Does that advertising apply
ANSWER -- There are a few legal issues that you to any other states?
need to consider in order to protect yourself and your
client under these circumstances. The landlord/ten- ANSWER -- I would be surprised if an Illinois Court
ant relationship between your client and Lessee is ruled that the Wisconsin Auctioneer violated Illinois
governed by the terms and conditions of the written law by advertising a Wisconsin auction in a paper in
lease agreement. Lease agreements generally Illinois. Auctioneers typically advertise in states other
describe the rights and obligations of both parties. than the state where the auction is to be held.
There should be specific provisions relating to any I am not licensed in Illinois and am unable to com-
default and the expiration of the lease. These provi- ment on the laws in that particular jurisdiction. You
sions should explain the landlord’s rights to the prop- should contact an attorney licensed in your state to
erty and equipment left behind by Lessee. You receive a legal opinion, if one is necessary. However,
should obtain a copy of the lease and review it care- I can give you some of my thoughts on this matter.
fully with your attorney. Illinois state licensing laws are written broadly and
If the lease agreement does not explain what should appear to require the Wisconsin Auctioneer to be
happen with the equipment upon the termination or licensed in Illinois before he can advertise in Illinois.
expiration of the lease, you should ask your attorney I would argue, however, that the advertisement
about any state laws that may apply. Historically, land- should not be considered a violation the law as long as
lords were permitted to maintain and sell the proper- the Wisconsin Auctioneer does not hold himself or
ty of tenants that failed to pay their rent. herself out as an Auctioneer in the State of Illinois.
The landlord was permitted to keep the money I think the courts would be more likely to construe
owed to him and any excess was paid to the tenant. the law to find there is no violation. A ruling that a
Today, however, unless otherwise agreed to in the person needs to be licensed as an Auctioneer by the
lease, landlords are not generally permitted to keep State of Illinois simply to advertise an out-of-state
and sell the property without first trying to return it auction in an Illinois paper would be a hyper-techni-
to the tenant. State law may require your client to cal reading of the law.
obtain a court order permitting the sale of the prop- Your question asks whether the Wisconsin
erty or at least provide written notice to the tenant of Auctioneer would violate Illinois law. Only a court of
his intent to sell the property. competent jurisdiction can definitively state whether
You should also discuss with your attorney the law the Wisconsin Auctioneer violated Illinois law by
of abandonment. If Lessee took off like a thief during placing the advertisement. You may want to consider
the night without providing any notice to the landlord contacting the licensing commission, Office of Banks
or any forwarding address, the landlord may be able and Real Estate, to get their opinion on this issue.
to argue that Lessee abandoned the property and for-
feited his rights to the property. A determination of -----
whether property has been abandoned usually
depends upon the specific facts. The conservative Does “Privacy Act Notice”
route would be to ask the appropriate court for per-
mission to have the property sold. affect Auctioneers?
----- How does the “Privacy Act Notice” affect auction-
eers and all the private information we gather. A
Does this violate state auction law? member that sells automobiles informed me that the
auto association mentions that they must take great
precautions in handling this private information they
If an Auctioneer in Wisconsin advertises a
Wisconsin auction in an Illinois newspaper without
Does this affect the auctioneer? If it does, perhaps
an Illinois license number in the ad, does that violate
you could explain what we must do to be in compli-
WWW.AUCTIONEERS.ORG AUCTIONEER 25
ance. advise their clients. In some instances, state and fed-
eral law may impose further legal duties upon
ANSWER -- It is not clear from your question what Auctioneers. The specific state statute in the ques-
you mean by the “Privacy Act Notice.” There are sev- tion appears to require the seller to provide the
eral federal laws that require certain types of busi- Missouri Department of Revenue with a signed and
nesses to send out Privacy Notices relating to infor- completed Notice of Sale or Bill of Sale within 30
mation that may be collected about customers. A few after the sale of a vehicle.
of these Acts include: If the Auctioneer agrees to notify the Department
* The Privacy Act of 1974. The Privacy Act generally of the sale of a seller’s automobile, then the
applies to federal agencies and could apply to busi- Auctioneer is contractually required to notify the
nesses closely working with federal agencies. Department on behalf of the seller. The forms, how-
* The Health Insurance Portability and ever, require the seller to make certain acknowledge-
Accountability Act (“HIPAA”). HIPAA generally ments concerning the vehicle and sign the forms
applies to insurance companies and health care under penalties of perjury. Unless the Auctioneer is
providers, but it also applies to businesses sponsoring provided with signed forms at the time of consigning
or maintaining a group health plan for its employees. the vehicle, the Auctioneer may not have the ability
* The Gramm-Leach-Bliley Act of 1999. The Act reg- to deliver signed forms to the Department. Not being
ulates the sharing of personal information about indi- able to deliver signed forms to the Department may
viduals who obtain financial products or services from create a problem for the Auctioneer and the seller.
financial institutions. It attempts to inform individu- Rather than accepting the responsibility to provide
als about the privacy policies and practices of finan- notice on behalf of clients, Auctioneers may simply
cial institutions, so that consumers can use that infor- advise their clients of the procedures and timelines
mation to make choices about companies with whom required by the Department. In order to effective
they wish to conduct business. advise clients, Auctioneers will want to familiarize
Whether any or all of these Acts apply to your com- themselves with the Department’s forms, deadlines
pany or you, depend upon a number of issues related and mailing address.
to your business. If you are concerned about whether If an Auctioneer decides to simply advise his or her
any of these acts apply to your business, you should clients of the obligation to report, he or she should
contact an attorney licensed in your State for more explain the procedures and timelines required by the
information. Department when selling vehicles for clients. In
addition, the auction contract should be amended to
----- show that the seller is obligated to report the sale of
the vehicle. The auction contract could require the
Auctioneer’s duty to report seller to represent and warrant that he or she is aware
of the requirement and will file the report. Additional
sales to the state? provisions requiring the seller to indemnify and hold
the Auctioneer harmless for any damages, costs and
Missouri has a new law that requires individuals and expenses incurred, as a result of the failure to report
business to report sales of vehicles to the state capi- the sale, should also be considered.
tol, Jefferson City, within 30 days. Do Auctioneers
have any responsibility to report sales for clients? -----
ANSWER -- The duties of Auctioneers to their
clients are generally defined in the contract between
the seller and the Auctioneer. In addition to the con-
tractual duties, Auctioneers also have a fiduciary duty
as the agent of their clients, which requires
Auctioneers to be absolutely loyal and to properly
26 AUCTIONEER WWW.AUCTIONEERS.ORG
Buyer and Seller Issues
terms of his or her agreement to purchase.
Can consignor require Auctioneer?
I want to know what buyer information we can give
to the seller. We have a seller who wants all the infor- As I understand the Uniform Commercial Code in
mation that she can, get but we want to protect our regard to auctions, "the title passes at the fall of the
buyer's information also. We know that we will not give hammer....". With this in mind, my question is this:
out the social security number and driver's license If an item is sold at auction with title passing at the
number, but can we give out phone numbers, address fall of the hammer and the purchaser does not pay for
and names of buyers? I know that a lot of the informa- the item, can the consignor require the auctioneer to
tion is public record. We do not trust the seller and are pay him for the item with commission deducted?
afraid that she may call some of the buyers because they The consignor's position is that title has passed per
left some of the items that they did not want. Commercial Code at the auction, does not want the
item returned, feels that the title now may be cloud-
ANSWER -- The practice of Auctioneering is based ed by the auction procedure and thinks it is up to the
to a large degree on agency law principles. The auctioneer to pursue payment from purchaser via
Auctioneer acts as an agent for his or her principal, civil court.
the seller. In that relationship, the Auctioneer owes a
duty of good faith to the seller and must act accord- ANSWER -- Unless the Auctioneer has undertaken
ing to the seller's lawful directives. In relation to a duty to do so by express agreement, a consignor of
information concerning the buyer which has been goods at auction cannot generally require the
gained by the auctioneer in carrying out his or her Auctioneer to pay for an item absent actual receipt of
duties to the seller, there is generally no requirement funds from the buyer, commissions deducted or not.
that the auctioneer hold such information confiden- In fact, the Auctioneer in some situations may actual-
tial. In fact, he or she may have an obligation arising ly be entitled to his or her commission from the sell-
from the agent / principal relationship to disclose er, or at least a portion thereof, even if the buyer fails
such information to the seller. to complete the transaction. Some courts have found
As such, it would be acceptable to make a disclosure that an Auctioneer has a duty in the context of the
of information within the Auctioneer's possession auction relationship to prepare the sale and locate a
that is rationally related to the purpose for which the willing buyer. Once the Auctioneer has done so, their
Auctioneer's services were retained, such as the obligation has been met and he or she may be enti-
buyer's name and address. It would be especially rea- tled to compensation for the efforts expended in
sonable to make such a disclosure in a situation like locating a buyer, regardless of whether the transac-
this, since the buyer has failed to comply with the tion is completed or not. The Auctioneer is generally
required only to pay over proceeds in his or her pos-
WWW.AUCTIONEERS.ORG AUCTIONEER 27
session within a reasonable time following the sale.
Thus, a consignor of goods cannot generally demand -----
payment from the Auctioneer if a buyer fails to com- Placing assets in another sale
plete the sale.
Is it legal to own and place assets in another sell-
er's advertised sale and sell them at an auction with-
out disclosing that you are quick hammering/protect-
Consignees bid on own items? ing your assets and running the buyers? I have talked
to Auctioneers who are placing their assets in a sale
I am about to do my very first auction and have a where the advertising is paid for by a seller. The
lot of questions of which the most pressing at this Auctioneer includes their assets first in the sale and
moment is if I should allow consignees to bid on their fails to pay a prorate portion of the advertising/labor
own items? I have heard both sides of the argument for the sale. Normally, the Auctioneer will buy-in
and although I do not feel comfortable with letting a their assets, if he does not like the price, without
consignee bid, I was told it's okay. Please let me know notice to the buyers.
the best policy as soon as possible.
ANSWER -- An Auctioneer, in his or her capacity as
Answers: Questions concerning a seller's ability to bid an agent, must exercise the utmost good faith, loyalty,
on their own items are some of the most commonly and honesty toward the seller. Terms like "quick ham-
encountered. This practice is often referred to as mering," "protecting your assets," and "running the
"puffing" or "by-bidding." Generally, a seller may not buyers" have different interpretations throughout the
bid on his or her own items unless a proper disclosure country, but it remains clear that all Auctioneers have
of the right to do so is given to all potential bidders. an ethical and legal duty to refrain from buying or
In some states, seller bidding is not permitted even if selling at their own auction for personal gain. Beyond
a disclosure is made. The Uniform Commercial these considerations, when Auctioneers bid at their
Code, which has been adopted in almost every state, own auctions an appearance of impropriety is created
provides that if the Auctioneer knowingly receives a which can cloud the respected reputation of our pro-
bid on the seller's behalf or the seller makes or pro- fession in the eyes of the public, and I therefore
cures such a bid, and notice has not been given that strongly discourage the use of such practices.
liberty for such bidding is reserved, the buyer may at
his or her option either avoid the sale or take the -----
goods at the price of the last good faith bid prior to
the completion of the sale. Buyer takes item before
While the Uniform Commercial Code only applies
to goods and not real estate, the underlying principles offer is accepted
behind the general rule apply equally to auctions of
real estate. Therefore, with few exceptions, bidding We recently assisted another Auctioneer in liquidat-
by the consignor is not permitted unless a disclosure ing a number of automobiles, trucks and other
is made to potential bidders. Even in such cases, the licensed vehicles. Some of the vehicles had a
practice of allowing seller bidding may be seen by "reserve" on them. After auctioning a truck, the
potential bidders as improper and can often reflect Auctioneer announced that it would be "sold on an if"
poorly on your professional reputation. As such, I (if the seller would accept that offer) and we would
would recommend alternative methods for protecting get back to him with confirmation or rejection by the
the seller's goods, such as setting a reasonable reserve seller. The purchaser quickly went to the cashier (we
price and reserving in the seller the right to reject all are not computerized) and wrote a check for the vehi-
bids. These methods will help protect the seller with- cle, came back to the auction site and drove the truck
out creating an appearance of impropriety. away before seller confirmation could be obtained
28 AUCTIONEER WWW.AUCTIONEERS.ORG
and refuses to return the vehicle or return our phone duty not to arbitrarily exclude patrons, such as a pub-
calls. His check has not been cashed and title has not lic warehouse Auctioneer whom the parties almost of
been transferred into his name. What should be our necessity are required to deal with because that the
next action? only source of the particular goods. You also want to
remain cognizant of the fact that the sale is intended
ANSWER -- The Auctioneer in this case should have to encourage competition among bidders, so exclu-
made a prior disclosure that the sale was subject to sion should only be done in circumstances where the
acceptance by the seller. A proper disclosure that all sale cannot be continue in a safe and efficient manner
bids are subject to seller approval must be made with the problem bidder present.
before the opening of bids. One may not attach addi-
tional terms or conditions after the sale has been con- -----
summated. If a proper disclosure was made prior to
the sale that bids were subject to seller approval, then Can consigned item
the sale was not yet completed. However, if the
Auctioneer attempted to attach this additional term be repossessed?
after the sale was completed with no prior disclosure,
the item has been properly sold and the seller has no I picked up a consignment of a living room set
right of rejection. Thus, you should consider when which was purchased from a furniture store I assisted
the disclosure was made. If no disclosure was made in liquidating a few months ago. The consignor
until after the sale was completed, you have a binding showed me a copy of his receipt and followed my reg-
agreement and ownership of the vehicle should be ular procedures. A day later the old manager of the
transferred. In that regard, one must also recognize furniture stored phoned me and requested that I
the possibility that an Auctioneer in this situation allow her boss to pick up the set. She states that it was
could become liable to the seller for negligence in not paid in full and her boss would like to repossess
failing to conduct the sale according to the seller's the set. Again the consignor showed me a receipt for
lawful directives. the furniture. What do you suggest?
----- ANSWER -- As with any auction sale, the answer will
depend to a great extent on the contractual relation-
Can we ban people ship of the parties. The general rule is that title to
goods sold at auction passes at the fall of the hammer.
from our auctions? However, as with any other sale, an auction sale may
be subject to an express condition, such as payment in
I was wondering if we as Auctioneers can ban indi- full, so that title does not pass to the buyer until that
viduals from our sales, someone that has a beef with condition is satisfied. As such, the terms of the sale
another buyer, or runs down merchandise. Does it between your consignor and the furniture store will
make a difference if the sale is advertised as a public control the analysis. A more practical solution would
auction, estate, or other type of sale? be to contact both parties and try to reach an under-
standing with regard to the outstanding funds owed.
ANSWER -- Generally, the law recognizes the right Since the consignor wishes to sell the furniture and
of an owner of an establishment to exclude patrons, as the store owner simply wants payment, you could
long as the exclusion is not based solely on race, color, have the parties agree, in writing, that the goods will
or some other protected classification. This is espe- be sold and the proceeds distributed such that the
cially true where the excluded individual has disrupt- store owner receives the outstanding amount due
ed the sale, harassed other patrons, or generally acted him and the consignor would receive the balance. If
in an unfit manner. This remains true, even in the you are unable to resolve this matter with the agree-
case of most public auctions. There are some situa- ment of all parties, you may need to consult an attor-
tions where the Auctioneer may be under a public ney to help you determine whether the furniture
WWW.AUCTIONEERS.ORG AUCTIONEER 29
store has the right to repossess the goods under coming onto his property, I am unaware of any claim
Florida law. Often, the seller will retain a security that the bidder’s brother would have against the sell-
interest in the goods sold, such that they have such a er, assuming that the property purchased by the
right of repossession. Also, remember that each buyer was made available for delivery following prop-
Auctioneer should include in their standard agree- er payment.
ment for services a provision whereby the seller war- You might suggest that the seller pursue a counter-
rants that they have clean title to the property being claim against the plaintiff for any damages to his
offered for sale, and indemnifying the Auctioneer property (if it was not completely demolished) and
against any liability that may be incurred as a result of for prosecuting a frivolous suit. Although I am not
defects in title. licensed in Florida and I am therefore unable to com-
ment on the law in that particular jurisdiction, many
----- states permit a person who is forced to defend against
a lawsuit that is wholly without merit to recover their
Excluding people from property costs in defending the action, including reasonable
We had an auction which entailed the bidding of all
the building material, such as windows, doors, cabinets,
carpet, etc., in which, after those bidders got what they
purchased, the rest of the house was coming down. Is restricting a purchaser legal?
The seller is getting sued in small claims court for
$10,000 for stopping a person from coming on his I have a potential seller who wants to have an auc-
property, who was not the original bidder, but the tion, but wants to restrict the neighboring landowner
brother of a bidder. He brought his son who was 13, from bidding, and wants to go as far as placing a deed
the bidder brother, and the 13 year old starting tak- restriction against them ever purchasing the proper-
ing a sledge hammer and destroying items they had ty. What are the legal ramifications?
no reason to destroy (again the person whose bid
number he used [brother] was not theirs, in fact, the ANSWER -- Generally, an auction is an open sale
bidder showed an address of Iowa, while the building and anyone, with few exceptions, is qualified to
material is in Florida. Additionally, the person doing become a bidder. While some courts have held that
the suing had insulation falling everywhere. there is no obligation upon an Auctioneer to receive
The seller is, of course, fit to be tied. I told him I the bid of an insolvent or irresponsible person, an
would show up the day of court in support of him and Auctioneer must use discretion and have some
explain everything that I was familiar with. Is their knowledge supporting his decision.
anything you could tell me to help my seller? I have Attempting to place limits or restrictions to prevent
another sale like it this weekend and one the first of a particular individual from bidding is risky.
the month. Furthermore, a deed restriction attempting to pre-
vent a specific individual from purchasing real prop-
ANSWER -- Generally, private property is not a erty may not be effective. Although I am not licensed
place of public accommodation and a landowner may in Kentucky and unable to comment on the law in
lawfully exclude others from his property. As such, it that particular jurisdiction, many states require deed
would appear to me from the limited information restrictions or covenants to relate to the property and
provided in your question that the landowner in this to benefit the property. The courts in your state may
case acted within his rights. However, without a copy find a restriction that a particular individual cannot
of the small claims complaint, I am unable to give a own the property does not relate to, or sufficiently
more reasoned opinion on your question. Yet, unless benefit, the property.
there was some unlawful conduct on the part of the Furthermore, courts generally do not enforce
landowner other than simply stopping a person from unreasonable restrictions on the alienation of real
30 AUCTIONEER WWW.AUCTIONEERS.ORG
property. You should contact an attorney licensed in you or your business. The contract could contain
Kentucky for more specific information. clauses prohibiting the conduct described in the
You should be careful to make sure that you do not hypothetical. If a bidder fails or refuses to comply
become involved in the dispute. These types of dis- with the terms and conditions of the sale, he could be
putes invite costly litigation over whether the restric- barred from the sale and kept off the business prop-
tions or sale are valid. It appears that the neighboring erty.
landowner has already expressed an interest in the
land, so it would be safer to have the real estate sold -----
Removing someone from auction
Can you legally have someone removed from a pub-
Can you exclude bidders lic auction?
from an auction?
ANSWER -- It depends. If you are referring to a
sheriff's sale or another type of public auction on
Hypothetically, let’s say that a bidder attends a pub-
municipal property, then someone can only be
lic auction sale for the sole purpose of acting as an
removed for a breach of the peace or engaging in
agent for hire of unsuspecting novice bidders by
unlawful conduct. If you are referring to a typical
claiming to be "a friend of the Auctioneer." At the
auction that is taking place on private property, then
beginning of each sale, the Auctioneer identifies all
you can generally have someone removed.
personnel in his employ to discourage this sort of
If someone is creating a problem or you have legit-
behavior. What are the Auctioneer's rights, if any, to
imate concerns about an individual, you can give him
bar this type individual from attending future public
notice and tell him not to return to the property. If he
attempts to return to the property you can have him
charged with criminal trespass. I would not advise
ANSWER -- Generally, an auction is an open sale
removing someone during the auction, unless there is
and anyone, with few exceptions, is permitted to
a breach of the peace or some other reason for imme-
come and is qualified to become a bidder. Attempting
to place limits or restrictions to prevent a particular
If you have a business that is open to the public,
individual from attending the auction or bidding is
there are a few limits on your right to keep people
away. Federal law prohibits you from discriminating
If the bidder, however, is engaging in fraudulent or
against someone because of race, national origin, reli-
criminal conduct, call the police and they will remove
gion, and sex. In order to protect yourself from claims
him or her from your property. You can also notify a
of discrimination you should have a good reason to
bidder that you do not want them on your property.
have someone removed from the auction or for keep-
Once the bidder is notified to stay away from your
ing him away. You should also document the reasons
property, you can call the police if he or she returns.
for your actions.
In addition to identifying all personnel, you should
consider requiring all buyers to register before the
auction. When each buyer registers he or she could
be required to execute a document stating that they
agree to the terms and conditions of the sale. More
Auctioneers should consider this option. First, it is a Is it a legal sale if nobody
great way to limit your liability. Second, it gives you
the opportunity to deal with problems like the one shows up?
you described in the hypothetical. You should have an
attorney draft the terms and conditions of the sale for Is it a legal sale if after you do all required postings
WWW.AUCTIONEERS.ORG AUCTIONEER 31
and mailings and advertisings, and no one shows up, man between the seller and buyer, he or she cannot
that this is considered a legal sale? Can the property afford to have bidders be the high bidder on one or
then be disposed of anyway or sold? more items then not be paid. Unfortunately, there
are a small percentage of persons who register, bid on
ANSWER -- I would need additional information to one or more items then either leave without paying or
give you a definitive answer. It depends on your con- in some instances, they take the item and leave with
tract with the seller and the circumstances of the sale. out paying.
I can, however, give you some guidance that will help There are some of these folks demanding their per-
you with this issue. sonal information back, claiming the possibility of iden-
It is important to remember that an Auctioneer is tity theft. Of course, if the person happens to be one of
an agent. An Auctioneer is the exclusive agent of the the bidders on one or more items, then the Auctioneer
seller. As an agent you owe a fiduciary duty to your is in a position of having to pay for these items. This is
seller. An Auctioneer has a duty to sell the property especially problematic if this bidder has also taken the
for the highest value and to follow the instructions of merchandise, since without the personal information,
the seller. there is no way to track the bidder thief.
An Auctioneer also has a duty to provide full disclo- Here are two questions given the above circum-
sure of all material facts and advise the seller of stances: A. Is the Auctioneer required to return any
important information. If no one shows up to bid at or all personal information taken from the "bidder"?
an auction, you should generally consider canceling If so, what protection does the Auctioneer have
the sale. The law relating to items given on consign- against the above scenario? B. When a bidder refuses
ment is that they should be sold or returned to the to pay or leaves the auction without paying, what legal
seller. You cannot throw away, destroy, or give away options does the Auctioneer have to recover the value
the property. of the items not paid for, whether taken or not?
An Auctioneer’s fiduciary duty also will prevent him
from being able to simply purchase the property at ANSWER -- I am not aware of any requirements
the time of the sale. Several states have laws that pre- applicable to Auctioneers to return any personal
vent an Auctioneer from bidding at their own auc- information, upon request, from a potential bidder.
tions. In states where the auctioneer is permitted to The personal information is given to you voluntarily
bid on items, the Auctioneer must have the consent when the bidders register for the auction and that
of the seller and must disclose prior to the sale to bid- information generally should be used in collection
ders that he may be bidding on items. efforts when he or she leaves without paying the bill.
This question raises an important issue: What Federal and state laws exist relating to the problem of
should you do if no one shows up for the sale? This is identity theft and the protection of personal informa-
an issue that should be discussed with the seller prior tion. Identity theft is a federal crime and is a crime
to entering into an agreement. Once an agreement is under the laws of several states as well. Recently, the
reached on this issue, it should be included as a term federal government imposed requirements on busi-
of the contract. nesses for the disposal of certain sensitive records and
documents. FACTA could apply to Auctioneers
----- under some circumstances and requires certain doc-
uments to be burned, pulverized, or shredded. This is
to prevent individuals from being able to search
through garbage cans, known as “Dumpster Diving,”
to get personal information about customers.
Identity theft I am not licensed in the state of Tennessee and am
unable to comment on the laws in that particular
jurisdiction. You should contact an attorney licensed
Verification of identification is very important at an
in your state to determine whether there are any laws
auction. Since the Auctioneer is merely the middle-
requiring the information to be returned.
32 AUCTIONEER WWW.AUCTIONEERS.ORG
In response to your second question, if a bidder using the terms as they are defined in the NAA Code
leaves an auction with the property purchased without of Ethics. The Code of Ethics defines an “auction
paying for the item, you should contact the police to with reserve” as “[a]n auction in which the seller or
report the theft. The police department can assist with his agent reserves the right to accept or decline any
finding an individual and obtaining payment or the and all bids.” The term “auction without reserve,”also
return of the items. If you take the loss and decide to known as an absolute auction, is defined as “[a]n auc-
report the theft to your insurance carrier to seek recov- tion where the property is sold to the highest quali-
ery, you will generally need a police report as well. The fied bidder with no limiting conditions or amount.”
bidder can also be sued for breach of contract, conver- Sellers commonly complain about the purchase price
sion of the property, and other matters. of items sold by absolute auction. When items are
If a bidder leaves an auction without the property sold at an absolute auction, there is always a risk that
purchased and without paying for the item, you the item will be sold for less (and sometimes signifi-
should generally consider attempting to resell the cantly less) than the appraised or fair market value.
item. The seller would have a possible breach of con- When discussing the possible sale of property with
tract claim against the successful bidder, but it gener- the seller, an Auctioneer should advise the seller on
ally is not worth the costs or time involved. The dam- the benefits and risks of selling property without a
ages usually would be minimal too. reserve. An Auctioneer should make sure that his sell-
er understands that risk and fully accept it. If the sell-
----- er is unwilling to take that risk or other concerns are
present, an Auctioneer should advise that the sale be
Beware creating conducted with a reserve. When property is to be
sold at an auction with reserve, the Auctioneer should
“unreasonable expectations” also advise the seller on the appropriate amount for
Some months ago I was contacted by an attorney If you fully advised the seller of the risk of an
regarding his client’s claim that I had not sold a piece absolute auction and followed the terms of the con-
of Victorian furniture which was consigned to us. The tract between you and the seller, your risk should be
consignor had received a check but did not feel the minimal. You need to be careful and exercise caution
$250 was enough. The contract was a No Reserve when you make statements about how much you
Contract. I sent all proof that the sale had occurred think something will sell for at all times, particularly
and had been videotaped. at an absolute auction.
I have now been threatened with civil fraud action The fact that you wrote “will try for $1,500” on the
unless I pay $1,500, plus lawyer's fees. She says I contract should not be grounds for changing the
promised that amount, which I never did. What I did nature or character of the auction. The seller, howev-
do was write down "will try for $1,500" under the No er, may argue that you practically guaranteed or
Reserve and I did list the estimate in the catalog at assured her that the furniture will sell for $1,500.
$750-$1,000 trying to get the interest level up. That The NAA Code of Ethics has a provision relating to
type of furniture doesn't sell well and I did tell her this issue. Standard of Practice 1.3 provides:
that the day we removed it 'as a favor' since she was “Members must not build unreasonable expectations
moving. Did I mess up by writing the $1,500 down? about the outcome of an auction in the mind of a
potential client in order to secure the client’s busi-
ANSWER -- Your question raises a number of legal ness.” The argument may be persuasive to a judge,
and ethical issues that cannot be properly addressed magistrate or the public, however, I do not have
without a clear understanding of all the facts in your enough information to consider the strength of the
particular case. Your liability and risk in this matter, argument.
however, depend upon the language in your contract You should notify your insurance carrier of the claim
and your actions as the agent for the seller. and work with them to resolve the issue. If you made
In answering your question, I assumed that you are statements that would lead the seller to reasonably
WWW.AUCTIONEERS.ORG AUCTIONEER 33
believe that the property will sell for $1,500, you may impact on your business. It could also result in costly
want to try negotiating a settlement to resolve the matter. litigation. The safest course of action is to keep the
bidder’s registration information confidential.
Protect your bidders’ information
Responsibility for items
How should we handle registered bidder's informa- left on our property
tion? Can we give this info to our client at the end of
the auction as part of the settlement and proof of who
Items that have been purchased and left on our
was at their auction? Should we have registered bid-
business premises create some issues and potential
ders request that we not issue their info to our
legal obligations. What is our legal responsibility
clients? In asking this I am talking about a "typical"
regarding damage or theft? After these unclaimed
estate auction situation where it may be a neighbor-
(yet paid for) items have been left, at what point do
hood type of auction and everyone knows everyone
they become our property (or do they?) Can we bill
(more or less). We find that our clients have a gen-
for storage of the items? How long must these items
uine interest in who was at their auction and who
be kept with unsuccessful attempts to contact the
bought what just as a fact of knowing what went on.
owners for arrangement of pickup? Can they be
Normally if it is an auction where the names we have
offered for resale and when?
registered might be considered "valuable" property
then we would not share the list with the seller.
ANSWER -- This question involves a problem that
almost all Auctioneers will agree is quite common.
ANSWER -- With identity theft and the protection
While the law on this issue will vary from state to
of personal information being such a hot issue, I
state, there are some general principles that apply in
would generally advise you to protect your bidders’
almost every situation. First, title to property gener-
ally passes to the buyer upon the fall of the hammer.
There are federal and state laws that prohibit the
Absent an express agreement to the contrary, liability
disclosure of personal information in some circum-
for theft, fire or other damage rests with the buyer
stances. You should contact an attorney licensed in
following completion of the sale.
your state to determine whether any these laws apply
This is not to say, however, that an Auctioneer
to you and your business. If your registration form
should not use due care in holding such items for a
requests each bidder’s Social Security number or a
reasonable time following the sale. The Auctioneer
credit card number, it is even more important to pro-
also has a duty, which may be limited to some extent
tect the personal information.
by the agreement of the parties, to safeguard certain
If you want to disclose bidders’ personal informa-
types of property prior to the fall of the hammer. In
tion to the seller, you should at least modify your reg-
order to avoid any problems in this area, every
istration form. You could modify the form to insert
Auctioneer should have the buyer execute a memo-
two boxes, where the bidder could direct how his per-
randum of sale which indicates that the goods must
sonal information should be used. By marking one
be removed from the premises within a certain peri-
box the bidder could consent to having his informa-
od of time and that storage fees will be assessed if the
tion disclosed to the seller. By checking the other box,
goods are not recovered within that time period. The
the bidder could request to have his information kept
memorandum of sale should also expressly limit the
confidential. I expect, however, that few would be
Auctioneer's liability for theft or damage to the prop-
willing to have their information disclosed.
erty. Once the property has been left for an unreason-
You should also consider the risk of negative public-
able amount of time, as that term is defined accord-
ity. If someone were to have his or her identity stolen
ing to state laws, the Auctioneer may have the ability
as a result of your disclosure, it may have a significant
to consider the goods abandoned and re-sell them.
34 AUCTIONEER WWW.AUCTIONEERS.ORG
Since the law on this subject and the proper proce- Is bidder responsible for damages?
dure for disposing of such goods will vary depending
on your state, you should consult the relevant statuto-
We had a registered bidder bid the price up to
ry authority in your jurisdiction or an attorney who
$950/acre and then decided that he would not take
has experience in auction law.
the property. We resold the property for a loss of
$125 per acre plus premium. In your opinion, is the
bidder responsible for the difference and the dam-
ages to our auction company? It appeared to several
Selling property abandoned of the other bidders and auction guests that the man
on Auctioneer's land was a bi-bidder, which he was not.
ANSWER -- The high bidder in this situation
I took on consignment a boat (no trailer) which has
became the successful buyer when the hammer fell in
no title, only with the promise that the seller would
acceptance of his or her bid. His or her failure to
procure a title. That was over a year ago. He has stat-
complete the sale means that the buyer is in breach
ed that he will pick up the boat and try to sell it him-
of contract. Yet you have probably already learned in
self. He has made no effort to retrieve the boat. I
your career as an Auctioneer that it can be cost pro-
have put it on my own trailer in order to allow the
hibitive to actually enforce the buyer’s obligations in
seller to take it home and return the trailer. The grass
many cases. With regard to auctions of personal prop-
is growing. I have to keep moving the thing around,
erty, the Auctioneer may generally maintain an action
and he obviously doesn't want to fool with it. So the
in his or her own name against the purchaser to
question is: How do I make the boat disappear? Say,
recover the purchase price for the property upon the
do you need a boat?
buyer’s breach. However, with respect to real estate
auctions, the Auctioneer generally has no special
ANSWER -- Thanks for "floating" the idea, but I'll
property or interest that will enable him to enforce
just address your question instead.
the contract. In most cases it is only the seller who
As you might expect, when a seller has abandoned
may enforce a contract for real property.
property in this manner the procedure for disposing
When the buyer defaults, he or she will not be enti-
of the watercraft will vary from state to state.
tled to the return of a deposit or earnest money made
Maryland, like most states, probably outlines a statu-
if there was an agreement that it would be forfeited
tory procedure where notice consisting of a standard
to the seller or Auctioneer in the event the buyer fails
minimum number of days must be given to the water-
to perform. The Auctioneer can limit his damages in
craft owner that the property will be sold if the owner
these situations by requiring that registered bidders
does not claim the property and pay any outstanding
consent to the forfeiture of their deposit if the sale is
balance within a reasonable amount of time, which is
not completed through no fault of the seller. You
also usually fixed by statute.
should also consider including a provision whereby
In most states, you will be entitled to reasonable
the registered bidders agree to pay attorneys fees in
storage fees and expenses of the sale, which should be
the event the Auctioneer is forced to resort to legal
held in a manner that is commercially reasonable
action to enforce the buyer’s obligations after the sale.
under those particular circumstances. State statutes
usually provide a procedure for obtaining title to the
watercraft as well, since you have indicated that the
seller has no title.
You should consult with a licensed attorney in order
to ascertain the specific statutory requirements for
liquidating the property in Maryland.
WWW.AUCTIONEERS.ORG AUCTIONEER 35
36 AUCTIONEER WWW.AUCTIONEERS.ORG
Buyer's premium belongs The use of buyer's premiums varies across the coun-
try. In some regions the buyer's premium is a pre-
to whom? dominant practice while in other regions it is much
less common. In my opinion, the decision to charge a
The letter from Patsy Shaddox in this column in the buyer's premium must be given careful considera-
March 2004 issue of Auctioneer had a statement that tion. Remember that some less-sophisticated auction
I think needs clarification. It said, "The buyer's pre- goers may have no idea what the trade term "buyer's
mium belongs to the auction company." But, I heard premium" means. As such, when they purchase an
at our recent Kansas Auctioneers Association annual item at auction and upon settlement find out that the
meeting that "The buyer's premium belongs to the buyer's premium costs them an extra ten percent or
buyer." Since the answer to Patsy's question made no more, they may be left with a negative impression of
reference to her statement, I now wonder if I heard the sale and what they consider to be hidden charges.
wrong. Obviously, one of us is wrong. As such, I believe every Auctioneer has an obligation
to consider the effect that buyer's premiums have on
ANSWER -- The short answer is that the buyer's the auction industry as a whole. Ultimately, it is the
premium normally belongs to the Auctioneer, but the decision of the Auctioneer, made in conjunction with
question demands a brief discussion on the topic of the seller, as to whether a buyer's premium will be
buyer's premiums. The "buyer's premium" is a charge charged and how it will be allocated.
normally paid by the buyer at auction which is usual-
ly based on a percentage of, and paid in addition to, -----
the buyer's winning bid. This practice is often
employed as a way to reduce the commissions that Sales tax on buyer’s premium?
the seller is required to pay the Auctioneer by shift-
ing some of that burden to the buyer, through the
Should Auctioneers charge sales tax on a buyer’s pre-
payment of a buyer's premium. However, since the
terms for recovery of a buyer's premium are a func-
tion of the contract for auctioneering services, the
ANSWER -- The requirements for collection of sales
allocation of the buyer's premium among the
tax vary greatly from state to state and often depend
Auctioneer, seller and buyer will vary depending
on the nature of the sale, as well as the particular
upon the agreement of the parties. Ultimately, the
buyer. In some situations, the obligation to collect
Auctioneer will generally receive the same amount of
sales taxes falls on other parties and the Auctioneer
compensation and the seller generally receives the
may not be required to collect sales tax at all. As a
same proceeds with or without a buyer's premium
general rule, since a buyer’s premium is included as a
provision, because the buyer will logically reduce his
part of the total sale price at auction, sales tax should
or her bid accordingly, if they know that a buyer's pre-
be collected. Yet there is also an argument that the
mium will be charged.
WWW.AUCTIONEERS.ORG AUCTIONEER 37
buyer’s premium is a fee for services and thus exempt When is buyer’s premium
from the collection of sales taxes in many states. You
must therefore check with your State Auctioneer available?
Licensing Commission and Department of Revenue
to determine if sales tax should be charged on a When a real estate auction has buyers premium, is
buyer’s premium in your state. that commission available to the Auctioneer or auc-
tion company at the time of sale or is it due at clos-
This is when the offer has been accepted by the sell-
Buyer’s Premium er and the BP is 10% with a 25% deposit at comple-
tion of sale.
Using a buyer’s fee is becoming a trend across the
country. This is a fee charged to the buyer. Who do ANSWER -- When do you want to be paid? Before
the proceeds of this fee belong to—the seller or we look at the specific question asked, let me briefly
Auctioneer? Does this change the role of agency? explain what the buyer’s premium is and how it
works. The use of a buyer’s premium is accepted
nationally as an alternative method of paying the
ANSWER -- The fee you are referring to is known as Auctioneer for his or her services. A buyer’s premium
the “buyer’s premium.” The use of a buyer’s premium is often employed to help shift the burden for pay-
is accepted nationally as an alternative method of ment of the Auctioneer’s commission from the seller
paying the Auctioneer for his or her services. The use to the buyer at an auction.
of a buyer’s premium is often employed as a means to Simply stated, a buyer’s premium is a fixed percent-
help shift the burden for payment of the Auctioneer’s age of the sales price that is collected from a success-
commission from the seller to the buyer at auction. ful bidder in addition to the amount of the successful
Simply stated, a buyer’s premium is a fixed percent- bid. For example, if the bid is $100 and the buyer’s
age of the sales price that is collected from a successful premium is ten percent, the invoice to the buyer
bidder in addition to the amount of the successful bid. would be $110.
For example, if the bid is $100 and the buyer’s premi- As an alternative to the traditional commission
um is 10 percent, the invoice to the buyer would be based fee structure, the Auctioneer and seller will
$110. Auctioneers have traditionally been compensat- often agree to reduce or eliminate the commission
ed through the payment of a commission paid to the paid by the seller and instead agree that the
Auctioneer by the seller, which is normally based upon Auctioneer will be either partially or fully compensat-
the total auction proceeds. As an alternative to this ed through the retention of a fee levied against the
commission based fee structure, the Auctioneer and successful buyer at auction: the buyer’s premium.
seller will often agree to reduce or eliminate the com- The buyer’s premium is a matter of choice. The
mission paid by the seller and instead agree that the buyer’s premium is only used when the Auctioneer
Auctioneer will be either partially or fully compensated and seller agree to it in their contract. Auctioneers
through the retention of a fee levied against the suc- and sellers will have to decide whether to use it. If
cessful buyer at auction - the buyer’s premium. the Auctioneer and seller agree to use a buyer’s pre-
The buyer’s premium is a matter of choice. The mium, it should be made a part of the contract
buyer’s premium is only used when the Auctioneer between the Auctioneer and seller and between
and seller agree to it in their contract. Auctioneers buyer and seller.
and sellers have to decide whether to use it. The When the buyer’s premium is due depends upon
buyer’s premium is simply a part of the contract the contract made between the seller and the suc-
between the Auctioneer and seller and does not sig- cessful bidder. There should be an agreement stating
nificantly affect the agency relationship. when the buyer’s premium becomes due, such as an
agreement that bidders are required to sign when
----- they register for the auction. I think that it is appro-
38 AUCTIONEER WWW.AUCTIONEERS.ORG
priate for the buyer’s premium to be paid at the time buyer’s premium of three percent, it would be rea-
of sale. In other words, the buyer’s premium should sonable for him or her to reduce the seller’s commis-
be collected immediately after declaring the proper- sion to seven percent, so the Auctioneer is paid the
ty to be sold. When the property is sold, the same total fee. It appears from the question asked
Auctioneer’s job of bringing a ready and willing buyer that the seller is willing to pay a commission of seven
and a ready and willing seller together is finished. percent, but is requesting that the Auctioneer charge
Furthermore, the Auctioneer should be entitled to a buyer’s premium of five percent, so the seller can
payment regardless of whether the property closes. receive a portion of the buyer’s premium collected by
Ultimately, the time for payment of the buyer’s pre- the Auctioneer.
mium is up to you and your bidders. The NAA’s Code of Ethics has several provisions
that indirectly relate to this issue. Article 1 recog-
----- nizes the Auctioneer’s duty to the seller, but also
explains: “This obligation of absolute fidelity to the
Who does buyer’s client’s interests is primary, but does not relieve mem-
bers of their obligation to treat all parties to the trans-
premium belong to? action fairly.” Standards of Practice 1.1 further pro-
vides: “Members must not enter into an agreement
A seller recently asked our firm to charge a buyer’s with a client to withhold information from the public
premium in a real estate auction and rebate a portion that would prove to be unsafe, illegal, detrimental to
to him. In my opinion, the practice is deceptive to the the public or material to making a decision to bid.”
buyer. Is there an ethical or legal position on this Finally, Article 2 explains: “Members must, in con-
issue? Who does the buyer’s premium belong to? ducting an auction, deal with customers in a manner
exhibiting the highest standards of professionalism
ANSWER -- Before we look at the specific question and respect. Members owe the customer the duties
asked, let me briefly explain what the buyer’s premi- of honesty, integrity and fair dealing at all times.”
um is and how it works. The use of a buyer’s premi- These ethical rules prohibit the use of a buyer’s pre-
um is accepted nationally as method of paying the mium to obtain extra money for the seller, unless the
Auctioneer for his or her services. A buyer’s premium fact that additional money will be paid to the seller is
is often employed to help shift the burden for pay- fully and adequately disclosed. The buyer’s premium
ment of the Auctioneer’s commission from the seller is intended to pay the Auctioneer for his or her serv-
to the buyer at an auction. Simply stated, a buyer’s ices. Charging a buyer’s premium where a portion of
premium is a fixed percentage of the sales price or a the premium is paid to the seller is deceptive and
flat fee that is collected from a successful bidder in unethical. Bidders that are familiar with the buyer’s
addition to the amount of the successful bid. For premium know that it is to pay for the Auctioneer’s
example, if the bid is $100 and the buyer’s premium services. Usually, an Auctioneer either announces
is ten percent, the total amount owed by the buyer information at the beginning of an auction about the
would be $110. buyer’s premium or provides written information
The buyer’s premium is a matter of choice. As an about it in the general terms and conditions of the
alternative to the traditional commission based fee auction. The use of the buyer’s premium to collect
structure, the Auctioneer and seller will often agree additional funds for the seller would generally con-
to reduce or eliminate the commission paid by the flict with these terms and be deceptive. An
seller and instead agree that the Auctioneer will be Auctioneer may be able to engage in this practice eth-
either partially or fully compensated through the ically, but only after he or she modifies any announce-
retention of a fee levied against a successful buyer at ment and the general terms and conditions about the
auction -- the buyer’s premium. buyer’s premium and fully discloses that some of the
Let’s assume for this question that an Auctioneer premium will be paid to the seller.
usually charges a 10 percent commission for the sale The act of charging a buyer’s premium where some
of real estate. If the Auctioneer agrees to charge a of the money is paid to the seller also invites costly lit-
WWW.AUCTIONEERS.ORG AUCTIONEER 39
igation and may result in civil liability. This type of buyer’s premium is a fixed percentage of the sales
behavior could be considered fraudulent and is a mis- price or a flat fee that is paid by a successful bidder in
representation to the bidders (unless the Auctioneer addition to the amount of the successful bid.
fully disclosed the use of the buyer’s premium). In Unless the contract between the seller and
this matter, it appears that the seller is attempting to Auctioneer states differently, the buyer’s premium
collect additional funds from the auction without the should be used to pay for the Auctioneer’s services
public or bidders being aware of it. Auctioneers and any related expenses. When the buyer’s premium
should not charge a buyer’s premium when the is used to pay for the Auctioneer’s services, the
Auctioneer does not intend to keep the funds as pay- Auctioneer will generally reduce or eliminate the
ment of his or her commission. commission to be paid by the seller. The end result is
the same as giving the buyer’s premium to the seller
----- and the Auctioneer collecting a full commission –
more money for the seller.
Who does the buyer’s For example, if an Auctioneer usually charges a 10
percent commission for the sale of real estate and the
premium belong to? Auctioneer agrees to charge a buyer’s premium of
three percent, it would be reasonable for him or her
Who does the buyer's (bidder’s) fee belong to at an to reduce the seller’s commission to seven percent.
auction? This when an Auctioneer or company holds The result is that the Auctioneer is paid the same
an auction, he or she may typically charge a 5 to 15 total fee, but the seller recovers more money from
percent fee on the sale of an item and thus when set- the sale.
tlement is made there is extra revenue from the final It is important to remember, however, that the
sale of the item that the buyer must pay. nature of the legal relationship between an
I have been to many national and state conferences Auctioneer and the seller is based in contract law. As
and either the buyer’s fee is a sacred item that no one such, the Auctioneer and seller are free to negotiate
wants to discuss, or the Auctioneer as an agent is the terms of their agreement as they see fit. The
afraid to admit what they do with the additional rev- Auctioneer should make it clear in the contract with
enues. Wisconsin does not address this under the the seller what fees are charged and how proceeds
Auctioneer regulations. And yet we have a number of from the buyer’s premium are to be used. Finally,
people (buyers and sellers) who are requesting infor- Auctioneers should keep in mind their ethical
mation on this. responsibilities to not mislead bidders or make any
My interpretation is the buyer’s fee is established on misrepresentations regarding the buyer’s premium.
the seller’s merchandise and therefore this is a fee
that should be returned to the seller to use to offset -----
the costs for the sale. In our business since we have
used the buyer’s fee, we have returned it all to the Buyer’s Premium should be
seller. Now many of our colleagues in this profession
have indicated that we are in error. I disagree. allowed worldwide, not banned
Incidently, we must also pay sales tax in Wisconsin on in Australia
the buyer’s fee.
A government agency in my area, Western
ANSWER -- In general, the buyer’s premium
Australia, has issued a recommendation that a law be
belongs to the Auctioneer. The use of a buyer’s pre-
passed to prohibit Auctioneers from charging a
mium is accepted nationally as a method of paying
Buyer's Premium. This is of concern to me as an NAA
the Auctioneer for his or her services. A buyer’s pre-
member and also to the auction industry as a whole in
mium is often employed to help shift the burden for
Western Australia. If this recommendation is passed
payment of the Auctioneer’s commission from the
as law, it would have serious ramifications for our
seller to the buyer at an auction. Simply stated, a
40 AUCTIONEER WWW.AUCTIONEERS.ORG
auction industry. buyer’s premium is only used when the Auctioneer
As an NAA member I request your assistance to and seller agree to it in their contract. Auctioneers
help educate and convince our government that their and sellers have to decide whether to use it. The
recommendation is flawed and is not consistent with buyer’s premium is simply a part of the contract
the rest of the world. between the Auctioneer and seller and does not sig-
nificantly affect the agency relationship. If
ANSWER -- Yes. The buyer’s premium should be Auctioneer were not permitted to charge a buyer’s
accepted nationally and internationally as an alterna- premium, they would have to increase commissions.
tive method of paying the Auctioneer for his or her Increasing commissions could result in sellers taking
services. The buyer’s premium was initially used in their property somewhere else to sell it.
the Netherlands and has been used throughout While it is true that a buyer is not in a position to
Europe for many years. negotiate with an Auctioneer on the terms of the
The buyer’s premium is employed as a means to buyer’s premium, no one is forcing the buyer to make
help shift the burden for payment of the Auctioneer’s a bid at an auction where a buyer’s premium is being
commission from the seller to the buyer at auction. used. If bidders simply refused to bid at auctions
Simply stated, a buyer’s premium is a fixed percent- where a buyer’s premium is being used, the auction
age of the sales price that is collected from a success- industry would have to reconsider the use of the pre-
ful bidder in addition to the amount of the successful mium.
bid. For example, if the bid is $100 and the buyer’s The buyer and seller generally have the freedom to
premium is ten percent, the invoice to the buyer enter into contracts as they decide to do so. That free-
would be $110. dom should not be restricted simply because some
Auctioneers have traditionally been compensated bidders do not understand the buyer’s premium or
through the payment of a commission paid to the may have difficulty factoring it in when making a bid.
Auctioneer by the seller, which is normally based The buyer’s premium is generally disclosed prior to
upon the total auction proceeds. As an alternative to the sale and should part of the terms of the auction.
this commission based fee structure, the Auctioneer The buyer’s premium is not a hidden cost and should
and seller will often agree to reduce or eliminate the not be a surprise to any buyer. Furthermore, the
commission paid by the seller and instead agree that buyer’s premium is not fraudulent or unethical.
the Auctioneer will be either partially or fully com- Auctioneers around the world should be able to con-
pensated through the retention of a fee levied against tract with a seller to sell property at an auction with a
the successful buyer at auction -- the buyer’s premi- buyer’s premium.
The Department of Consumer and Employment Excerpt about buyer’s premium proposal from the
Protection in its Final Report (July 2007) recom- Minister of Consumer Protection of Western
mended that the buyer’s premium be prohibited. It Australia.
explained: “It has been argued that bidders will fac- The Department of Consumer and Employment
tor the cost of the premium into the level of their Protection issued a lengthy document in July 2007
bids, and that this results in a lower price for the ven- that recommended changes to the Auction Sales Act
dor. However, it can be counter-argued that the of 1973, which currently regulates auctions and auc-
alternative is for the auctioneer to charge a higher tioneers in Western Australia.
commission or rate to the vendor, with the net result The following text is the opening paragraph and the
being the same for the vendor.” (5.3.1) The Final buyer’s premium sections of that document. The text
Report explained: “A number of stakeholders has been shortened due to space limitations.
expressed the view that as the auctioneer is acting on “In Western Australia, auctions and
behalf of the vendor and providing a service to the auctioneers...now play a significant role to ascertain
vendor, all fees payable to the auctioneer should be market price. The industry in Western Australia is
the responsibility of the vendor.” regulated by the Auction Sales Act of 1973. In recent
The buyer’s premium is a matter of choice. The years there has been an ongoing review of the regula-
WWW.AUCTIONEERS.ORG AUCTIONEER 41
tions and discussion of proposed changes with gov-
ernment, citizens and others. Proposed changes are As I understand it, when a buyer’s premium is used
aimed at protecting buyers and sellers fro unfair prac- to determine the final contract price on real estate
tices and anti-competitive practices. Vendor bidding, sold, the Auctioneer’s commission at closing is posted
disclosures by Auctioneers, record keeping, trust on the seller’s side of the settlement statement. If a
accounts, Internet bidding and licensure of real estate Auctioneer uses a buyer’s premium and
Auctioneers, said the Minister of Consumer advertises that “The seller pays no commission,”
Protection. could he or she be sued for fraud?
“It is recommended that auctioneers be prohibited
from requiring payment of a buyer’s premium.” ANSWER -- There is a distinction between a buyer’s
A buyer’s premium is paid as a levy on the buyer for premium and a commission. A buyer’s premium is
the privilege of buying at auction and is paid as rev- defined in the NAA Code of Ethics as “An advertised
enue to the auctioneer. There is no current provision percentage of the high bid or flat fee added to the
in the Act dealing with buyer’s premiums. A signifi- high bid to determine the total contract price to be
cant number of complaints arise concerning the paid by the buyer.”
imposition of a buyer’s premium. A buyer’s premium allows the seller to receive the
It has been argued that bidders will factor the cost of full bid price of the property being sold and the
the premium into the level of their bids, and that this Auctioneer to be compensated the difference
results in a lower price for the vendor. However, it can between the bid price and the amount paid. For
be counter-argued that the alternative is for the auction- example, if an Auctioneer is engaged to sell a parcel
eer to charge a higher commission or rate to the vendor, of real estate with a 10% buyer’s premium and the
with the net result being the same for the vendor. property sells for $100,000, then the buyer must
The Discussion Paper sought feedback as to bring $110,000 to the closing and the seller receives
whether there is a need to take any action to address $100,000 and the Auctioneer receives $10,000. In
this issue. A majority of stakeholders who provided a comparison, an Auctioneer’s commission is a percent-
response in relation to this issue were of the view that age fee earned by the Auctioneer based upon the
buyer’s premiums should not be permitted. These final sale price. The Auctioneer’s commission is gen-
stakeholders were of the view that purchasers could erally a percentage of the bid price that is withheld
be at a disadvantage as it is sometimes difficult to fac- from the sale proceeds and the seller receives less
tor the cost of the buyer’s premium into the total than the amount actually bid for the property. Using
price when bidding, especially given the speed at the above example, if an Auctioneer was engaged to
which auctions are carried out. sell a parcel of real estate with a 10% commission and
A number of stakeholders expressed the view that the property sells for $100,000, then the seller
as the auctioneer is acting on behalf of the vendor and receives $90,000 and the Auctioneer receives
providing a service to the vendor, all fees payable to $10,000.00.
the auctioneer should be the responsibility of the If the property is real estate and the Auctioneer is
vendor. In addition, a buyer is in no position to nego- to be compensated on a commission basis, then at the
tiate with an auctioneer, whereas a vendor can nego- closing the commission would be paid by the seller
tiate a fair and appropriate fee for service. from the sale proceeds. The closing statement should
The alternative view was also expressed that the reflect the commission payment and list the expense
issue of buyer’s premiums should be left to the mar- on the seller’s side of the statement. On the other
ket to determine.” hand, if a buyer’s premium is used to shift the costs to
the buyer, then the buyer brings more money to the
----- closing than the seller is entitled to receive and the
buyer’s premium is listed as an expense on the buyer’s
Buyer’s premium versus side of the closing statement.
On the advertising issue, unfortunately, Auctioneers
“seller pays no commission” (like all other professionals) can be sued at anytime
42 AUCTIONEER WWW.AUCTIONEERS.ORG
and for practically any reason. State law usually Absolute auction question
requires the party alleging a claim based on fraud to
particularly describe the circumstances constituting
1-- We have a fairly large real estate auction compa-
fraud. Advertising certain services and a certain type
ny based in Columbus, Ohio. A few years ago an
of compensation for those services (buyer’s premium
Auctioneer working for us suspended an absolute
or no commission) may lead to a claim for fraud if the
auction after it was started. The high bidder filed a
services or compensation for those services deviate
complaint with our Department of Commerce and
from the terms of the advertisement.
we were disciplined for "false advertising." The adver-
The auction contract should state how the
tisement that was referenced in the case said "Selling
Auctioneer is to be compensated: a commission,
to the highest bidder regardless of price."
buyer’s premium, or both. The seller and the
Since then, our company has told me (our main
Auctioneer usually negotiate the type of compensa-
Auctioneer) that we can place ads that say "selling to
tion the Auctioneer will earn for selling property and
the highest bidder" but not to place ads that say "sell-
specifically include the compensation method in the
ing to the highest bidder regardless of price" because
auction contract. For an Auctioneer to advertise that
of this case. I have stressed to them that both these
the seller pays no commission may be premature
statements are essentially the same, and stopping
because the Auctioneer is advertising that he or she
either after the auction is opened (ref to: UCC 2-328)
will provide a service that will be compensated based
is just the same "false advertising." Nevertheless, they
on the seller’s agreement to use the buyer’s premium
maintain the one statement is fine, while the other is
to compensate the Auctioneer. It is possible that an
Auctioneer advertises that sellers pay no commission,
then enters into an auction contract in which the sell-
ANSWER -- The issue here actually centers on the
er and Auctioneer agree to pay the Auctioneer a com-
conduct of the sale, rather than the language used in
mission. Under this situation, the Auctioneer may
the advertisement. In an absolute auction, each lot is
find that a disgruntled seller might file a compelling
sold to the highest bidder, with no reserve price and
claim for fraud.
no minimum bid. Once the auctioneer calls for bids
The auction contract is the critical document
in an absolute auction, the property may not proper-
between the Auctioneer and the seller. A well-draft-
ly be withdrawn from the sale. In that regard, you are
ed auction contract will allow the Auctioneer to make
correct that both statements are essentially the same
necessary disclosures with respect to its advertise-
and could lead to claims of false advertising if the sale
ments, services and compensation. Although
is stopped after the auctioneer calls for bids.
Auctioneers may spend time and money meeting
There has been some question as to what conduct
with an attorney in order to prepare an Auction con-
rises to the level of "calling for bids."Obviously this
tract, there are no guarantees that a displeased seller
occurs once the Auctioneer opens the sale and begins
will not sue the Auctioneer. The question is whether
taking bids. But there is also a question whether an
the auction contract contains adequate disclosures
Auctioneer's actions in canvassing the crowd may be
and disclaimers that provide the Auctioneer with a
considered "calling for bids", thus negating the auc-
tioneer's ability to withdraw the property from sale in
Because some people may use the terms buyer’s
an absolute auction. Therefore, the auctioneer must
premium and commission interchangeably, it recom-
use care in offering property for sale without a
mended that the Auctioneer to take the time to
reserve price and in canvassing the crowd for poten-
explain the differences between these two forms of
compensation to the seller. Otherwise, the seller may
In this case, it is not the advertisement itself that
be confused by the terms of compensation and assert
created what the state Department of Commerce
a claim for fraud against the Auctioneer.
considered false advertising, but the actual conduct
of the sale. Either statement would generally be
acceptable as long as the sale is not suspended after
WWW.AUCTIONEERS.ORG AUCTIONEER 43
the Auctioneer calls for bids on a particular lot. his or her property, even though you already have an
Alternatively, either statement might be considered agreement to sell that property at auction. Absent a
false advertising if the lot is withdrawn after the auc- specific agreement of the parties on this issue, the
tioneer calls for bids. So, in this situation, it was the courts have been split on the subject of whether an
auctioneer's subsequent conduct in withdrawing the Auctioneer is entitled to his or her full commission
property from sale after calling for bids that made the absent a sale at auction. Some courts have found that
advertisement false, not the actual language of the while the Auctioneer may not be entitled to his or her
advertisement itself. If the sale had been concluded, full commission, the legal theory of "quantum meruit"
there would have undoubtedly been no claim of false demands that the Auctioneer is entitled to the rea-
advertising. It is thus important to remember that, in sonable value of his or her services already rendered
an absolute sale, an item may not properly be with- in furtherance of the sale.
drawn after the Auctioneer calls for bids. Each auc- This situation helps to illustrate why it is so impor-
tioneer must therefore give appropriate consideration tant to have a comprehensive contract with the seller
to the risks involved in an absolute auction and advise for engagement of your auctioneering services which
the seller of those risks before offering an item for gives the Auctioneer the exclusive right to sell the
sale "without reserve." property during the term of the agreement, whether
by sale at auction or otherwise.
Commission from later sale?
How to recover compensation
I am an Auctioneer in Indiana. I recently held an
auction for a family and one of the items to be sold I have a long and complicated question about an
was a tractor with a reserve of $20,000. The bidding auction I booked in Akron, OH. I booked a commer-
only got to $9,000, so we announced that the tractor cial real estate auction that was to be held March 24th
would go back in the barn. One of the bidders later 2003. It was canceled by two attorneys who, I believe,
approached the owner and negotiated a selling price are defrauding the estate of several million dollars.
of $15,000. We ran the sale through the auction pro- Here are the details: A large industrial park with
ceeds as part of the sale. Later the family questioned two buildings where left in a trust to the wife and one
whether or not I should receive commission on that daughter. Right after the death, one of the attorneys
one item since "I hadn't really sold it"! Under the told the wife that she only had three days to sell one
UCC am I entitled to the commission or not? of the buildings to pay the taxes and debts. Not know-
ing any better, the attorney sold the building for less
ANSWER -- The Uniform Commercial Code, or than half the appraised value. With the help of an
UCC, has no specific provisions regarding an accountant, the building was sold to some partners
Auctioneer's right to commissions absent an actual who paid $2.3 million: just enough to pay the current
sale at auction. As such, the Auctioneer's entitlement tax and mortgage. Then at closing the wife was told to
to his or her commission in this situation is controlled give away another $3 million in vacant land to com-
by the agreement of the parties and interpretations of plete the closing. Later after the closing the wife
the courts. Generally, the contract for auctioneering found out there was no immediate need to pay the
services between an Auctioneer and the seller may tax, and she had been taken. Both attorneys said they
specifically provide that the Auctioneer has the exclu- relied on the accountant's advice, and the account-
sive right to sell the property during the term of the ants said they relied on the attorneys' advice.
contract and is entitled to a commission on the sale Then she called National Property Auctioneers Inc
whether the property is sold at auction or otherwise. to sell the remaining building. Contracts where
As many Auctioneers have discovered, it is not signed, advertising began and one attorney said that,
uncommon for an owner to arrange a private sale of because proper notice wasn't taken by the S corpora-
44 AUCTIONEER WWW.AUCTIONEERS.ORG
tion, the auction must be canceled or there would be Double commission
a lawsuit and the corporation would loose the S corp.
status. At the last minute we canceled the auction to
We recently ran across a competitor’s auction con-
protect the wife who is also the trustee and president
tract wherein they charged both the seller and buyer
of the S corp. Then the attorneys both decided it
a commission. The total commission being 17.5% on
would be best for the wife to also sell the other build-
a deal for more than $6 million in a real estate trans-
ing for less than half appraised value so she wouldn't
action. I have three questions: (1) At what point does
owe so much tax.
disclosure have to be made to both buyer and seller
The wife has lost an estimated $11 million dollars
that 2 commissions are being charged? (2) Do both
plus legal fees. I personally contacted the Attorney
commissions have to appear on the closing state-
General from the State of Ohio on her behalf. I was
ment? (3) And if the bid price instead of the sales
told I had to go to the Ohio Bar Association with my
price is used on the closing statement, leaving one of
problems. The Ohio Bar President is also the attorney
the commissions not accounted for, is it not a red flag
who has caused her most of the problems. What do I
that something a little shady is going on?
ANSWER -- The answer to all of your questions
ANSWER -- Your question raises a number of issues
relates to the Auctioneer’s role as the agent of the
that cannot be properly addressed without a clear and
seller. The relationship between the Auctioneer and
concise understanding of all the facts in that particu-
seller is governed by the written contract and the
lar case. There certainly may exist factors that com-
Auctioneer’s fiduciary duty to the seller. The
pelled your former client's attorneys to make deci-
Auctioneer and seller are usually free to negotiate the
sions as they did. Without a full understanding of the
commission and terms of the sale. In your example,
case, I am certainly in no position to question their
there is a total commission of 17.5 percent. I would
judgment or that of the estate's accountants.
guess that the seller was responsible for paying 7.5
However, there are some facts that remain clear. In
percent and the successful bidder had to pay a 10
this case, you may rest assured that if the attorneys for
percent buyer’s premium. Under these circumstances
the estate committed fraud, they would be judged by
the seller would be aware of the total commission to
the disciplinary counsel on their acts regardless of any
be paid to the Auctioneer.
affiliation with the state bar association. In fact, the
Auctioneers generally do not act as the agent for the
disciplinary commission has no direct affiliation with
buyer. In fact, I always advise Auctioneers to take
the state bar association. I will therefore answer your
steps to avoid being considered an agent of the buyer.
question from the perspective of an Auctioneer who
Therefore, the Auctioneer does not typically have any
seeks compensation for his or her services rendered.
duty to advise the buyer of the total commission
Most courts have found that an Auctioneer is enti-
being charged for the sale.
tled, at minimum, to the value of the services ren-
Whether the Auctioneer discloses his or her com-
dered when a seller withdraws property from sale. As
mission on the closing statement really does not mat-
such, you would have a right of action against the
ter. The disclosure of the commission does not have
estate (or whomever contracted for your services) for
any affect on the contract between the buyer and sell-
compensation for the value of your services expended
er. In other words, full disclosure of the commission
in preparing the sale, plus expenses. You may there-
on the closing statement does not change anything.
fore need to file a claim against the estate or the rel-
After the successful bidder’s bid has been accepted
evant contracting party if you wish to recover com-
there is a binding contract. The buyer cannot simply
pensation for expenses and your efforts expended in
terminate the contract at the closing because he or
preparing for the sale.
she thinks the Auctioneer will receive too much
money on the sale.
WWW.AUCTIONEERS.ORG AUCTIONEER 45
Don’t post information about members change their rates and fees after a particu-
lar posting, the courts could infer an implied agree-
rates, commissions ment.
There are significant penalties for a violation of any
On the NAA website’s Discussion Forum section federal antitrust statute. In fact, recent legislation
recently, there was a discussion about Auctioneers’ increased the penalties for violations of the Sherman
rates and commissions. I have the impression that Antitrust Act. The legislation raised the maximum
you cannot or should not discuss rates or commissions corporate fine from $10 million to $100 million and
in any forum (including discussion forums, seminars, the maximum individual fine from $350,000 to $1
etc.) because of concerns that Auctioneers may million. The legislation also increased the maximum
appear to agreeing to set rates in unison, thereby vio- prison sentence from three to 10 years.
lating the Sherman Antitrust Act. While the general discussion of rates and charges is
The person writing on the Discussion Forum wrote not prohibited, the concern with this type of forum is
that he believes “You can talk all you want (about that these postings could later become the basis for
rates), but you just cannot agree to have every one an antitrust lawsuit against the NAA and its members.
agree to charge the same commission or rates. That is In the event of criminal or civil antitrust litigation, the
where you get into trouble, agreeing to charge the NAA could be compelled to show to federal or state
same rate.” Is this accurate? authorities all postings to this website. Therefore, the
NAA strongly discourages the posting of information
ANSWER -- Federal antitrust statutes prohibit an about rates, commissions and fees.
agreement that is an unreasonable restraint of trade.
For example, the Sherman Antitrust Act prohibits the -----
“contract, combination… or conspiracy” in unreason-
able restraint of trade. These three terms from the
Sherman Antitrust Act refer to the underlying agree-
ment, an element for prosecution and litigation.
An agreement that forms the basis of an antitrust
violation can be oral or written. It can also be an
express agreement or an implied agreement. Usually,
there is no express written agreement to fix or set fees
or rates in antitrust cases. More often, the agreement
is inferred from the actions and conduct of the par-
In order to infer an agreement, the courts examine
all direct evidence for any hints of an agreement. The
evidence of such an agreement may include such
things as miscellaneous documents, meeting minutes,
letters, memoranda, and emails. The courts may also
consider circumstantial evidence available to deter-
mine whether an agreement exists. This can include
the examination of similar or parallel actions taken by
For example, if a well-respected NAA member
posts his or her rates and fees for selling automobiles
on an NAA discussion forum and everyone in that
community changes their rates to match his when
they sell automobiles, it could appear that there is an
agreement. Similarly, if a significant number of
46 AUCTIONEER WWW.AUCTIONEERS.ORG
Contracts / Terms and
Conditions / UCC
Procedure to collect money Reopening bidding is
regulated by UCC
An auction is an oral legal binding contract. What
is the proper procedure to collect the money? I have
I have heard so many conflicting statements on "re-
a situation in which the buyer bids and purchases an
opening" bidding after the Auctioneer says SOLD. I
item then leaves the auction site without either pick-
am convinced at least 30% of NAA Members do not
ing up the item and later refuses to pay for the item.
understand the Uniform Commercial Code or basic
contract law. Frankly, it scares the heck out of me as
ANSWER -- Completing a sale and ensuring actual
it reflects on all Auctioneers. What is the law on this
payment is often one of the most difficult tasks faced
by the seller and the auctioneer. Unless the item at
issue is real estate, the seller cannot generally require
ANSWER -- The ability of an Auctioneer to re-open
the buyer to specifically perform their agreement to
bidding after the fall of the hammer is a common
purchase. The seller is instead entitled to pursue
question. An Auctioneer generally has a large meas-
recovery of any damages resulting from the buyer's
ure of discretion in the conduct of the sale and the
failure to complete the sale.
acceptance of bids. As many Auctioneers know, the
The first logical step is to send a certified letter to
Uniform Commercial Code (the "UCC") is a set of
the buyer demanding payment and setting forth a
model laws for transaction dealing with goods that
deadline for a reply. If the buyer fails to act on the
have been adopted to some extent in almost every
demand for payment, the seller will be forced to file
state. Although the law will differ to some extent from
suit against the buyer for breach of contract. As pre-
state to state on this issue, UCC section 2-328 pro-
viously discussed, specific performance is generally
vides that a sale by auction is complete when the
not available, so the seller will be left to seek recovery
Auctioneer so announces by the fall of the hammer or
for his or her damages resulting from the buyer's fail-
in other customary manner. The UCC goes on to
ure to consummate the transaction. In that regard, it
state that where a bid is made while the hammer is
is often most advantageous to sell the item to a differ-
falling in acceptance of a prior bid, the Auctioneer
ent buyer either before or immediately after filing
may in his discretion reopen the bidding or declare
suit. In this way, the seller is better equipped to
the goods sold under the bid on which the hammer
prove their damages, mainly the difference between
was falling. So the Auctioneer generally has a certain
the final selling price and the buyer's original offer, as
amount of discretion to re-open the bidding where a
well as any costs reasonably incurred in having to re-
bid is made contemporaneously with the fall of the
sell the property.
hammer. Although the UCC only applies to goods,
the same general rules would apply to auctions of real
property in most states.
WWW.AUCTIONEERS.ORG AUCTIONEER 47
----- is represented. Each Auctioneer must therefore care-
Arbitration clause fully consider the pros and cons of arbitration and
then decide if an arbitration clause is right for them.
I see that many Auctioneers, including myself, have
an arbitration clause in their contract. If need be, how
does one execute this clause in such a way that will be
effective and efficient? Please let me know what your Sellers not truthful
experiences with arbitration have been. Is it function- about ownership
ally necessary to have an attorney involved in arbitra-
tion? Must one spend time reading up on how to con-
How do we protect ourselves from sellers who are
duct oneself in such a proceeding if one does it with-
not truthful about the ownership of property? For
out an attorney? What would it be like for me if I rep-
example, we sell a lot of restaurants, on one particu-
resented myself and they had an attorney? What are
lar auction last year we did UCC checks and came up
the down sides of arbitration? What other questions
clean. On the day before the auction we find out that
should I be asking myself?
the owner had a totally different company that did
have UCC filings on the equipment. There was no
ANSWER -- Arbitration clauses are a common term
way we could have known the name of that company
in many contracts, not just those entered for auction-
without him telling us. Lucky for us it was a bank that
eering services. A standard arbitration clause pro-
was friendly with us and we were able to get a release
vides that in the event of a dispute between the par-
to sell the equipment.
ties arising out of the execution or performance of the
contract, the dispute is to be settled through arbitra-
ANSWER -- This is a very common problem faced
tion rather than traditional litigation through the
by Auctioneers. It will often surface just days or even
courts. Arbitration clauses are popular because they
hours before an auction is scheduled to begin. The
may help reduce the high costs associated with formal
Auctioneer typically finds that the seller does not
and time-consuming litigation.
have clear title to the property proposed for sale. In
But Auctioneers must carefully consider whether
this case, you have even taken extra measures by
they should include an arbitration clause in their
searching all UCC filings, which is a recommended
agreement for services.
practice to ensure clear title. But you have insightful-
Oftentimes, the arbitration clause will provide that
ly noted that the seller may own several different
the decision of the arbitrator is final, or "binding," and
business entities, making UCC searches unreliable in
thus precludes the parties from pursuing the option
certain cases where you only have limited information
of formal litigation through the courts. In this way,
about the seller. In order for Auctioneers to protect
you may be prematurely relinquishing your right to
themselves from sellers who are not truthful about
have a dispute decided by the courts (and a jury of
the ownership of property, the prudent Auctioneer
your peers) where you retain the right to appeal a
should ensure that the seller has affirmatively
"bad" decision. You may therefore choose to integrate
acknowledged, in writing, that they hold clear title to
an arbitration clause that demands the referral of the
all property being sold and there are no outstanding
dispute to non-binding arbitration as a prerequisite to
liens or other encumbrances.
the initiation of formal litigation. In this way, you are
More importantly, the Auctioneer should require
given the opportunity to resolve issues arising out of
the seller to indemnify the Auctioneer against any
the contract in an efficient and cost-effective manner,
and all damages that may result from the seller's fail-
but still retain your right to litigate if the parties can-
ure to properly disclose any such liens or encum-
not reach an amicable resolution of the dispute.
brances. This is very important because the
While it is not functionally necessary to have an attor-
Auctioneer may become liable to a third party for
ney involved in arbitration, you will be at a distinct
auctioning property where the seller does not have
disadvantage without one, especially if your opponent
clear title. In the end, there is no way to fully guard
48 AUCTIONEER WWW.AUCTIONEERS.ORG
against sellers who fail to be truthful in disclosing the
ownership of property. However, a properly-drafted Troubles with titles
indemnification provision will help protect the
Auctioneer and provide a means to recover any dam-
It seems in more recent years I have witnessed
ages suffered as a result of the seller's failure to prop-
more problems with real estate titles. Are more attor-
erly disclose liens and other encumbrances.
neys assigning this to paralegals, and rubber stamp-
ing their efforts, leading to potential problems? I
advise the buyers to consider buying title insurance,
when they ask me my opinion, and state that their
Is there a standard attorney can tell them of potential problems after
format contract? closing, even with a good title search.
ANSWER -- Many attorneys do delegate the draft-
I am a new owner of All Bid Real Estate Auction
ing of deeds to paralegals and other office assistants.
Service LLC, based in W. Bloomfield, MI. As a new
So long as the attorney thoroughly reviews the docu-
owner I find it hard to find a Real Estate Auction
ment for accuracy, a quality document can be pro-
Listing and Purchase Agreement as well a Back Up
duced at minimal cost utilizing office personnel.
Purchase Agreement. I know that there are state laws
However, as you have become aware, some attorneys
as well as uniform laws that affect real estate listing
fail to adequately review documents of conveyance,
and purchase agreements. However, isn’t there a
leading to problems after the transaction has closed.
standard format that one could take to their attorney,
As an attorney, I believe that title insurance is an
or am I on my own?
absolutely vital component in most real estate trans-
actions. The cost is relatively low and the protection
ANSWER -- As regular readers of my column
afforded by the policy is well worth the investment.
already know, written contracts are an important tool
The policy commitment will provide a proper legal
for protecting against potential liability and for ensur-
description and reveal any liens on the property that
ing a smooth sale. Most Auctioneers already know
might otherwise go undetected. The exceptions on
that real estate sales often have special requirements,
the policy commitment will also reveal any easements
such as the need to provide buyers with a disclosure
or other burdens upon the real estate that may impact
of any property defects, especially in residential sales.
the buyer's ability to fully utilize the property. For
Beyond these considerations, you must remember
these reasons, we recommend the purchase of title
that many states draw a distinction between real
insurance for all but the most "friendly" transactions.
estate agents or brokers and Auctioneers, such that
However, Auctioneers should understand that title
one who is licensed as an Auctioneer but not a seller
insurance is merely an opinion of the issuing title
of real estate may not offer property for sale outside
company, which generally will not involve an attor-
of an auction. An attorney who is has experience with
ney's opinion. So your practice of advising clients to
real estate and auction law in your state can properly
purchase title insurance and to seek the advice of an
advise you of these matters and assist in drafting a
attorney is well founded. By doing so, you are both
standard agreement for services that will cover almost
meeting your obligations to adequately inform your
any situation. They will be aware of local laws and
clients of possible risks and at the same time helping
requirements for the sale of real estate. You can then
to shield yourself from potential liability.
use the form document to simply fill in the names of
the parties and the essential terms of the agreement.
In this way, a small investment in the services of an
experienced attorney will save you from potential
problems in the future.
WWW.AUCTIONEERS.ORG AUCTIONEER 49
price. I would first recommend that the buyer either
personally or through an attorney forward a written
What action after breach notification to the seller that they are in breach of con-
of contract? tract and demand that the breeder's certificate be
immediately forwarded or legal action will &e initiated.
With regard to your comments on the Auctioneer,
I have a question I would request that you address
he or she is generally the seller's agent and only acts
for me in regards to auction law. I received a phone
as the buyer's agent for the limited purpose of draft-
call today from a member of our community who
ing the memorandum of sale. Although the
recently purchased a mare in Texas at a horse sale.
Auctioneer may help resolve the matter as a gesture
The mare was advertised as bred. The buyer was to
of good faith, he or she would generally have no lia-
receive a breeder's certificate in regards to the foal,
bility to the buyer under these circumstances, and the
whereby the buyer could register the horse with the
buyer should look to the seller for satisfaction.
American Paint Horse Association after the birth.
However, the seller has refused to tender the breed- -----
er's certificate, asserting that the horse did not sell for
enough money at the sale to provide the certificate. Auctioneers’ obligations to explain
The seller has requested an additional $1,000 prior to
tendering the certificate. The buyer feels he did pay What obligation does the auctioneer have to explain
a fair price and purchased the mare with the under- all parts of a written agreement with a client when ade-
standing that the certificate on the colt was included. quate time is given, a few days, for the client to have it
He stated the advertisements stated this and the reviewed by legal counsel? I'm speaking specifically
Auctioneer at the sale barn confirmed it on the date about a clause in my agreement that allows for a per lot
of sale. How should the buyer proceed to avoid fur- minimum of up to $25 in addition to, or instead of, the
ther expense? I suggested he inform the owner of the agreed upon commission amount.
sale barn/Auctioneer as they were his agent at the
time of sale. I would appreciate any response and ANSWER -- As a general rule, every party is
direction you may be able to provide. assumed to have read and agreed to the provisions of
a contract that is voluntarily executed. However, the
ANSWER -- Although it appears that the buyer has Auctioneer, as the seller’s agent, stands in a fiduciary
a valid claim against the seller in this case, it may be relationship and is thus bound to protect his client’s
impossible for the buyer to proceed without any fur- interests. He must therefore make a full, fair and
ther expense. The fact is that the buyer probably has understandable explanation to the client before hav-
a valid and binding agreement for the' sale of the ing them sign any contract, particularly when the con-
mare at the price of the successful bid, which tracts are with the agent himself.
includes the breeder's certification.. The seller is Your case is somewhat different because the seller
therefore in breach of contract for his or her failure was given the opportunity to have his own legal coun-
to complete the transaction according to the agreed sel review the agreement. In most cases, the
upon terms and the buyer is entitled to pursue an Auctioneer should make his explanation commensu-
action against the seller. rate with the sophistication of the particular seller
The buyer may choose to represent himself in an that he or she is dealing with, and should allow the
action against the seller, but absent a specific agree- seller the opportunity to seek legal counsel of their
ment to pay attorneys fees each party to litigation is own. If the seller does not like the provision at issue,
generally required to bear their own expenses. In this he or she can either re-negotiate or exercise their
case, the buyer would be entitled to demand that the right not to contract with you. But as a matter of
seller either produce the breeder's certificate or pay ethics and good business practice, you should always
damages equal to the difference between the value of ensure that the seller understands and agrees to every
the mare without the certificate and the final bid portion of the contract. This will certainly help avoid
50 AUCTIONEER WWW.AUCTIONEERS.ORG
any misunderstandings upon completion of the sale. and is the offeree. If, however, the seller rejects the
offer and makes a counteroffer, the seller becomes
----- the offeror and the buyer is the offeree.
Have UCC filings been rescinded? In the auction context, the classification of individ-
uals may change. In a reserve auction, the person
A group of us attending a recent NAA seminar making a bid to purchase an item is the offeror. He or
(where no attorneys were present) were told that the she is offering a sum of money to purchase an item
UCC filings were now rescinded by 44 states. True? that is subject to being accepted or rejected. The
Auctioneer facilitates the sale of the items by asking
ANSWER -- When an applicant pledges collateral for and inviting offers to purchase on behalf of the
on a loan, Uniform Commercial Code (UCC) filings seller. In an absolute auction, however, it is appropri-
tell you whether others have filed a claim against the ate to consider the seller the offeror. The seller can-
same collateral. If a business has pledged its invento- not reject a valid bid and is required to the sell the
ry as collateral for a loan with a bank and the bank has item to the highest bidder.
filed its financing statement, then everyone else in One benefit to auctioning real estate is that the
the world is deemed to have notice of the bank's Auctioneer takes a more active role than a realtor
security interest. does in the general real estate transaction. While the
It is similar to recording a mortgage lien to give realtor shuffles papers back and forth, the Auctioneer
notice to everyone of an interest in a parcel of real steps into the shoes of the seller and controls the pur-
estate. The UCC filing helps protect the creditor. chase process. When a bid is made to purchase an
There are several types of UCC filings. The most item at a reserve auction, the Auctioneer has the
common filings are the UCC-l financing statement authority to bind the parties to a contract. In an
and the fixture filing. absolute auction, the Auctioneer is making an offer to
Although I am not licensed in New York and unable sell the item and as soon as a bid is made there is a
to comment on the law in that particular jurisdiction, legally binding contract, subject to any timely subse-
I have not heard of it or any state rescinding UCC fil- quent bids.
ings. If even a few states rescinded UCC filings, it
would be a significant change in commercial law. -----
----- When does a minor
Who is the “offeror” at auction?
What is the present age of consent for contractual
I read somewhere that the status of a person or per- liability? Years ago it was 21, and a minor couldn't be
sons selling real estate changes, if the real estate is held liable for a purchase. An example was a young-
sold in a conventional manor versus being auctioned. ster buying a car, paying cash, taking it out and
If I remember correctly, it has something to do with wrecking it and then coming back to ask for his
being an "offeree" or "offeror." As I remember there money back. At that time, he or she was entitled to
are many advantages to auctioning, but I can't get their money back and the seller was left being
remember which side of the coin is which, so I hope held responsible. I presume the same laws apply
that you can clarify the situation. I think it would be today although the age may now be 18, instead of 21.
beneficial to all Auctioneers to have this information. Over the years we have had young kids attend auc-
tions and buy things on their own. Normally we watch
ANSWER -- Generally, in a real estate transaction the parents to ascertain it's okay with them. So far, we
the buyer makes the offer to purchase and is consid- haven't had any problems, but in our sue-happy soci-
ered the offeror. Thus, the seller of the real estate ety, I can envision someone below the legal age buy-
would have the ability to accept or reject the offer ing something, taking it home and using it and break-
WWW.AUCTIONEERS.ORG AUCTIONEER 51
ing it and then coming back to the auction wanting before a judge or a jury, it may be submitted to arbi-
their money back. trators within a much shorter time period. The time
and preparation for arbitration is also much shorter.
ANSWER -- In most states, a minor becomes com- Arbitration is an attempt to resolve the dispute with-
petent to contract at the age of 18. If you enter into a out court intervention. In arbitration proceedings,
contract with an infant, the contract is voidable at the court intervention is limited by the applicable arbitra-
option of the infant. If a 16 year-old child purchases a tion laws, but award enforcement is facilitated by
vehicle, then wrecks it, he or she could void the con- those same laws.
tract and seek to recover his or her money. The pur- Except under a few limited circumstances, arbitra-
pose of this rule is to protect minors from foolishly tion clauses are binding and irrevocable. Even if you
squandering their wealth through contracts made later decide that it is in your best interest to litigate a
with crafty adults who would take advantage of them dispute in court, you may be forced to arbitrate the
in the marketplace. case. Many states, including Missouri, have statutes
You need to be careful accepting bids from minors that establish procedures to compel arbitration.
even if it appears that the parents have given their Finally, it is important to realize that an attorney can
approval. In some jurisdictions, the approval and draft an arbitration clause in many ways. Parties can
consent of a parent will not defeat the infant's right to agree to settle any claim arising from a contract by
avoid the contract. Check with an attorney licensed in arbitration administered by the American Arbitration
your state for more specific information on this issue. Association or under the rules of the American
Arbitration Association. The clause could require all
----- disputes to be arbitrated or only certain types of dis-
putes. The clause can also provide for whether there
Should I use an arbitration clause? will be one arbitrator or a panel of arbitrators select-
ed. The clause can also specify the place where the
arbitration will occur. You should contact an attorney
I recently sold at auction a residence for a client
to have a clause specifically drafted for you and your
who had a lawyer present when we signed the exclu-
business, if you want an arbitration clause, instead of
sive sale agreement. The lawyer wanted to put in the
adopting language recommended on any website.
sales contract that, "In the event of legal action, all
parties hereto agree to adjudicate solely by arbitra-
tion according to the rules of the American
I agreed and put it in the contract. The lawyer also Violation of the Sherman
told me that I should put this language in all our Anti-Trust Act?
contracts. What do you think? Is this a good idea? I
went to the American Arbitrations website and they
If the collusion to suppress prices between two or
have specific language that I am contemplating put-
more potential bidders at an auction is a violation of
ting in all my residential sales contracts. Thank you.
the Sherman Anti-Trust Act, would the same law
apply to the collusion between an Auctioneer and
ANSWER -- There are some benefits and drawbacks
shill or by-bidder? It seems if it is illegal to suppress
to using arbitration clauses. Arbitration is a private,
prices it is also illegal under the same act to artificial-
informal process where the parties submit their dis-
ly inflate prices.
putes to an individual or a panel of individuals author-
ized to resolve the controversy by rendering a final
ANSWER: Yes. The Sherman Anti-Trust Act general-
and binding award. The main reason for requesting
ly prohibits contracts, combinations, trusts, and con-
an arbitration clause is that arbitration is generally
spiracies in restraint of trade and commerce. Unless
quicker and cheaper than full-blown litigation. While
there is a specific exemption, the Sherman Act
it may take years to litigate a case to conclusion
applies to just about every effort to manipulate prices
52 AUCTIONEER WWW.AUCTIONEERS.ORG
or monopolize trade or commerce. With regard to but are not limited to, who owns the property, how an
auctions, the Act applies to both sides of the selling individual is paid for the sale, the manner of conduct-
block – bidders and Auctioneers alike. ing the sale, and how the sale of the property was
If two or more bidders conspire to keep the prices advertised.
low at an auction, they have violated the Sherman The facts that the sale of the real estate was “with
Anti-Trust Act. Similarly, if an Auctioneer and a shill reserve” and by “Sealed Bid Auction” tend to indicate
(the seller or another) conspire to artificially control that it should be considered an auction. The final
prices, they have violated the Sherman Anti-Trust determination of whether a particular sale is an auc-
Act. In addition to violation of the Sherman Anti- tion (particularly when the sale is consummated by an
Trust Act the Auctioneer may also be liable for fraud. unlicensed individual), however, must be made by
Violation of Sherman Anti-Trust Act can result in your State Board of Auctioneers or the local prosecu-
some harsh penalties. The purpose of the Act to is to tor’s office.
protect buyers and sellers alike from those who would
use artificial means to eliminate competition and -----
manipulate market pricing. The Sherman Act pro-
vides for fines and the possibility of imprisonment for Where is the written contract?
those that violate it.
Consider this situation. You begin a job of remov-
ing items from an estate because a city says the house
is unclean, to be condemned and the people will lose
Was it an Auction? it. Then as time goes on, the family asks you to help,
but is not sure of what all will need to be done, but as
Our state, New Hampshire, requires both a real time goes on more, they feel the house needs to be
estate license to sell/lease real estate and an cleaned, items removed and sold, so you help the
Auctioneers license to conduct auctions. A broker, family, and they state they will pay, that it is an emer-
licensed only as a real estate agent, marketed a home gency. At first little is required, just a path per the
using the words by "Sealed Bid Auction, with reserve, city’s building codes, but then because of cat feces
and a 10% buyer premium." The broker used MLS, and other filth more is required due to debris being
mailings and a website to promote the offering. It wall to wall and floor to ceiling for fire and health haz-
sounded like a duck, walked like a duck but was it a ard reasons, adult protective services was even
duck? Was this sealed bid offering an auction requir- involved. Then one member of the family disagrees
ing an Auctioneer’s license or wasn't it? If it is an and wants to be guardian and conservator and the old
auction, what factors determine when the "line in the guardian has not paid you, but you already have
sand" crossed? three-fourths of the items. They state that the new
guardian will pay and there will still be an auction,
ANSWER -- An auction means the public sale of but now you have not heard anything, and the court
real or personal property, or both, in which the sale date just passed. If the two conservators do not follow
price of the property offered is increased by bids until through, do they still owe you, even if there is no con-
the highest acceptable bidder becomes the purchas- tract yet? Or can you sell the items, take your invest-
er. Most states have laws that prohibit an individual ed amount out and then put the rest in escrow? The
from acting as an Auctioneer or conducting an auc- person is still alive, now in an apartment, the house is
tion, unless he is a licensed Auctioneer. not presently livable and had lots of items, some
Furthermore, many states have laws that prohibit a good, some antiques and some not good, some
person from advertising a sale as an auction, unless he destroyed by the 65 cats that were there. What do you
is licensed and complies with the applicable state do? Or what are your rights?
laws. The factors that are considered to determine
whether the property was sold at an auction include, ANSWER -- This is yet another example of the
WWW.AUCTIONEERS.ORG AUCTIONEER 53
importance of having a written contract. In order to to him that I had a lot of money invested in advertis-
protect yourself or your company, every customer ing; expenses in securing the help for the sale and
should be required to sign a written contract. The that people might travel for miles to the sale and
contract should be drafted by a licensed attorney and would be quite unhappy with our auction firm and
should identify the work that is required and how the him, as well. He still insisted he didn't want to do the
Auctioneer will be paid. The contract should also be sale that day. Nevertheless, we did the auction, gave
completed and signed prior to doing any work. him his accounting from the sale that day and his
When dealing with a guardian it is even more check. I never heard any more from him on it. My
important to have a written contract. Guardianship brother, who is an attorney, went into orbit when he
(also known as conservatorship) is a legal procedure heard the details. Immediately, he drew up a contract
by which a court declares an adult incompetent and for me to use. This led to the creation of the law that
appoints someone to manage financial matters, living is currently in existence in New Hampshire today.
arrangements and medical care decisions. Generally, Did I do right, or should I have gone to jail? I under-
the court must authorize or approve contracts and the stand that there are still Auctioneers today that do not
payment of contracts entered into on behalf of the use contracts. Should they be worried?
It appears, however, that you made an oral contract ANSWER: I advise all Auctioneers to have written
with the guardian. The oral agreement may be suffi- contracts with each seller prior to doing any work.
cient if a new guardian is appointed and wants to con- The contract should establish the terms of the sale
tinue working with you. If the new guardian refuses and be fully executed. A written contract should
to execute a written contract or pay you for the work clearly establish the terms and conditions for an auc-
completed, you will need to hire an attorney to look tion and will help reduce the possibility of disputes
into this matter for you. and liability.
You should carefully consider the risk involved with Conducting an auction without a written contract is
selling any items in your possession to get your fee. not a crime. It is, however, very risky. You were lucky
You may not have the authority to sell the items and with your experience. Years ago a verbal contract to
you may be inviting costly litigation. Even though you sell property at auction was generally enforceable. A
had an oral agreement with the previous guardian, verbal contract may, however, not be worth the paper
you need to be able to establish that the agreement it is written on. One of the parties could forget or mis-
existed and that it authorized you to sell the items. understand the terms of the contract. In other cases,
Furthermore, the agreement probably needs to be a party to a verbal contract may simply lie and deny
approved by the court. Thus, the agreement may not any agreement. As a result, most states now have laws
be worth the paper it is written on. that require a written contract for an auction. If the
seller sued you stating that you did not have authori-
------ zation to sell the house, you may have been involved
in years of costly litigation.
Why written contracts
Can real estate deposit
Many years ago, a man's wife died and he engaged
me to do an auction and sell his house out. It was be forfeited?
well-advertised, and my crew and I arrived at 7 a.m.
to set it up. He had been drinking and greeted me Given the fact that Sales Article 2-328 of the UCC,
with the news that he decided not to have an auction Sale By Auction, specifically does not include real
that day and, in those days, agreements were made estate sales, can the high bidder be held to the writ-
with a handshake. I had no contract with him, as none ten agreement that, if they are the winning bidder
was required and we did not need them. I explained they will sign the purchase and sale agreement and
54 AUCTIONEER WWW.AUCTIONEERS.ORG
complete the sale? -----
In the event specific performance of the real estate
purchase is unenforceable, can the deposit made with What to do when missing bids
the Registration To Bid be forfeited for breaching
When an Auctioneer "misses" bids, what responsi-
bility does he or she have to reopen the bidding?
ANSWER -- Article 2 of the Uniform Commercial
Most times the case is that two or three people have
Code (“UCC”) relates to the sale of goods and the
been involved from the start in bidding on a particu-
Uniform Land Transfer Act of 1975 (“ULTA”) relates
lar item, then at the last minute someone who has not
to the sale of real estate. Section 2-328 of the UCC
been bidding up until then, raises their card in an
and section 2-207 of ULTA both relate to sale by auc-
attempt to "snipe" and is upset when the Auctioneer
tion and mirror each other. While the provisions of
does not "see" him. He wants the Auctioneer to
the UCC and ULTA may be persuasive authority,
reopen the bidding under the "tie bid" rules.
they are not binding upon you unless the law was
adopted in your state.
ANSWER -- The “tie bid” rules refer to section 2-
These sections, however, do not answer the ques-
328 of the Uniform Commercial Code. Section 2-
tions you asked. Once the hammer falls and the
328(2) provides: “A sale by auction is complete when
Auctioneer announces the completion of the sale,
the Auctioneer so announces by the fall of the ham-
there is a binding contract between the buyer and
mer or in other customary manner. Where a bid is
seller. The terms and conditions of the contract
made while the hammer is falling in acceptance of a
include any terms the buyer agreed to in writing
prior bid the Auctioneer may, in his discretion,
when he registered and the terms announced prior to
reopen the bidding or declare the goods sold under
the auction. If the buyer refuses to sign the purchase
the bid on which the hammer was falling.”
agreement after the sale, he or she can be sued for
The situation you described, where an Auctioneer
breach of contract.
simply does not see or notice a bid, is not directly
The question then becomes what are the damages
resolved by the UCC. However, the “tie bid” rules
for the breach of contract. Generally, courts will not
are often applied by analogy. Furthermore, courts
force a buyer to complete the purchase of the prop-
have generally recognized that an Auctioneer pos-
erty. Specific performance is an equitable remedy
sesses a great deal of discretion with respect to the
that is generally used when a seller breaches the con-
conduct of an auction and the acceptance of bids.
tract and refuses to convey the property to the buyer.
This discretion generally includes the right either to
Instead, the court would award monetary damages
close bidding or reopen bidding based on whether
for the delay of the sale, costs incurred, and other
the Auctioneer believes a bid was timely raised.
damages. The damages in this type of situation are
normally difficult to measure, so your attorney can
draft clauses for damages that will suit your needs.
In the typical residential real estate purchase agree-
ment, there is a provision for liquidated damages for Should I put arbitration clause
breach of the contract. The clause can be drafted so in my real estate contract?
that the damages will be a specific percent of the pur-
chase price or the deposit made at registration
I recently sold at auction a residence for a client who
whichever is greater. The deposit made at registration
had a lawyerpresent when we signed the exclusive
is not automatically forfeited. It must be clearly set
sale agreement. The lawyerwanted to put in the sales
forth in the terms and conditions of the contract. The
contract that, "In the event of legal actionall parties
deposit must be a reasonable amount as well. It
hereto agree to adjudicate solely by arbitration
should be close to the actual amount of damages and
accordingto the rules of the American Arbitration
cannot be a penalty.
Association."I agreed and put it in the contract. The
WWW.AUCTIONEERS.ORG AUCTIONEER 55
lawyer also told me that Ishould put this language in
all our contracts. What do you think? Isthis a good
idea? I went to the American Arbitrations website What clauses should I put
and they have specif-ic language that I am contem- in my contracts?
plating putting in all my residentialsales contracts.
Where can I find legal clauses that I should incor-
ANSWER -- There are some benefits and drawbacks
porate into my auction contracts? I live in Florida.
to using arbi-tration clauses in your contracts.
Auctioneers are often reluctant to show other
Arbitration is a private,informal process where the
Auctioneers their contracts. Most people add things
parties submit their disputes to anindividual or a
into their contacts after they have been burned or
panel of individuals authorized to resolve thecontro-
sued. I would like to have a good contract to begin
versy by rendering a final and binding award. The
with. Unfortunately very few attorneys are familiar
main reason for requesting an arbitration clause is
with auction law.
thatarbitration is generally quicker and cheaper than
full-blownlitigation. While it may take years to litigate
ANSWER -- You should talk to an attorney to revise
a case to conclu-sion before a judge or a jury, it may
and review your contract. While it is possible to find
be submitted to arbitra-tors within a much shorter
legal clauses over the Internet and in certain books,
time period. The time and prepa-ration for arbitra-
legal clauses should be carefully selected and tailored
tion is also much shorter. Arbitration is anattempt to
for you and your business. You should exercise cau-
resolve the dispute without court intervention. Inan
tion before using any clauses you find on the Internet
arbitration proceeding, court intervention is limited
or in a book.
by theapplicable arbitration laws, but award enforce-
Some individuals would rather purchase legal forms
ment is facilitat-ed by those same laws.
from Wal-Mart instead of working with an attorney.
Except under a few limited circumstances, arbitra-
An attorney, however, can customize your contract
tion claus-es are binding and irrevocable. Even if you
for your business. A good contract may reduce the
later decide that itis in your best interest to litigate a
likelihood of litigation and minimize the damages you
dispute in court, you maybe forced to arbitrate the
are required to pay. In other words, a good contract
case. Many states, including Missouri, have statutes
will generally save you money in the long run.
that establish procedures to compelarbitration.
You should understand the contract and you should
Finally, it is important to realize that an attorney can
have a reason for inserting a legal clause. If you have
draftan arbitration clause in many ways. Parties can
problems locating an attorney familiar with auction
agree to settleany claim arising from a contract by
law, contact the local bar association. The local bar
arbitration administeredby the American Arbitration
association should be able to give you a referral.
Association or under the rules ofthe American
Finally, I am surprised that other Auctioneers are
Arbitration Association. The clause couldrequire all
reluctant to show you their contracts. It may be help-
disputes to be arbitrated or only certain types ofdis-
ful to remind them of Article 16 of the NAA Code of
putes. The clause can also provide for whether there
Ethics. Article 16 provides: “Members should willing-
will beone arbitrator or a panel of arbitrators select-
ly share with other members the lessons learned
ed. The clause canalso specify the place where the
through experience and study to better the profes-
arbitration will occur. Youshould contact an attorney
sion, members’ business practices and how the pro-
to have a clause specifically draftedfor you and your
fession is perceived by society.”
business, if you want an arbitration clause, instead of
adopting language recommended on any website.
You must put disclosures
in your contract
56 AUCTIONEER WWW.AUCTIONEERS.ORG
paint hazards (“Protect Your Family From Lead In
Do I have to put fair housing language in my con- Your Home”); (2) disclose any know information con-
tract, and lead paint language in my contract? I know cerning lead-based paint and/or lead based paint haz-
that Realtors have to put those in their contracts. Is ards; and (3) disclose any records and reports on lead-
this federal law or state law? Does it have to be in based paint and/or lead-based paint hazards. In addi-
auction contracts? tion to these requirements, sellers must typically give
a buyer 10 days to conduct a paint inspection or risk
ANSWER -- An Auctioneer that sells real property assessment at their own expense, unless it is waived.
should generally have fair housing and lead-based (For more information see the October 2004
paint disclosure language in the auction contract. As Auctioneer magazine.)
an agent of the seller, an Auctioneer is required to Your auction contract can give the seller notice of
inform the seller of the seller’s obligations under these obligations and your intent to abide by the law.
these acts and to ensure compliance. Failure of the You should contact an attorney licensed in Maryland
Auctioneer to do so will invite costly litigation, civil to discuss specific language that should be used for
fines, and can even result in criminal sanctions. your contract.
The Fair Housing Act is a federal law that prohibits
discriminatory housing practices. Under the law, an -----
individual selling real estate generally cannot refuse
to sell or rent to an individual who makes a legitimate Where can I check for filings?
offer based on race, color, national origin, sex, reli-
gion, family status, or disability. An individual selling
From time to time we do corporate auctions.
real estate cannot treat a potential buyer differently
Where does one go to find information on bankrupt-
because of his membership in any of the above cate-
cies and Uniform Commercial Code filings? Do we
have to check in multiple district courts or is there a
The Fair Housing Act also prohibits Auctioneers,
central place to check all filings?
real estate brokers, and other from persuading indi-
viduals to rent or sell housing by telling them that a
ANSWER -- Unfortunately, there is no central place
particular race, color, etc. is moving into the neigh-
or database where you can conduct a search for both
borhood. The Act also prohibits discriminatory adver-
bankruptcy and UCC filings. Each state has jurisdic-
tisements and steering races or certain groups to a
tion over UCC filings and decides where they will be
recorded and maintained, while the federal govern-
Auctioneers should be aware of the Fair Housing
ment exercises jurisdiction over all bankruptcy filings.
Act and its requirements. Anyone who violates the
The most common search methods for U.S.
Act runs the risks of being held responsible for dam-
Bankruptcy filings include the following:
ages, attorney fees, and possibly punitive damages.
Conducting a search at your local United States
You should not treat anyone differently in sale of real
Bankruptcy Court; Conducting a search over the tele-
estate, or at any time for that matter, because of the
phone using the U.S. Bankruptcy Voice Case
individual’s race, color, national origin, sex, religion,
Information System (“VCIS”); Conducting a search
family status, or disability. An individual’s rights are
over the Internet on the PACER system; and
protected by federal law, and may be further covered
Conducting a search over the Internet through a paid
by state and local laws and regulations.
subscription service provider.
The Residential Lead-Based Paint Hazard
The method you choose will depend on your busi-
Reduction Act of 1992 is another federal law that
ness. Do you conduct business only in your local com-
applies to the sale of homes built before 1978. The
munity or do you conduct business throughout the
Act was passed to protect families from exposure to
state? Do you hold auctions in another state or help
lead from paint, dust, and soil. The seller must (1)
sellers from other states? How often do you search
provide the buyer with an EPA-approved information
for bankruptcy filings? In Pennsylvania there are
pamphlet on identifying and controlling lead-based
WWW.AUCTIONEERS.ORG AUCTIONEER 57
three separate U.S. Districts – Eastern District of sold “as is, where is?” There was this bidder a few
Pennsylvania, Middle District of Pennsylvania, and months back who was not be able to personally attend
Western District of Pennsylvania. If you conduct my auction and left a bid to purchase an old 4 door
business throughout the State you may have to check rusted out Model A Ford he wanted to restore. He
with all three districts for bankruptcy documents. was the successful bidder and was immediately con-
It is generally not the best use of your time to go to tacted by me that afternoon following the completion
the U.S. Bankruptcy Court to conduct a search. As an of the auction. There were other various Model A
alternative, you can search for bankruptcy filing over parts advertised, and he asked if they were included
the telephone by calling the VCIS and using their with the auto. I told and showed him what was
automated system. Currently, there is no charge for included with the auto and that the other miscella-
VICS searches. The toll-free numbers in neous parts such as extra gas tanks, cowlings, head
Pennsylvania are: Eastern District 888-584-5852, lamps, tail lights etc. were not included as part of the
Middle District 877-440-2699 and 888-531-9485, auto, and that these items would be sold as individual
Western District 800-795-2829. pieces. However, when he came to pick up the
Another alternative is to use PACER (short for vehicle and pay for it he wanted to know where the
“Public Access to Court Electronic Records”). extra gas tanks, cowlings, lights etc. were and then
PACER is an electronic public access service that demanded these other items to be provided because
allows users to obtain information about a case. The his bid was based on getting all these other parts, or
PACER system is a service provided by the United he would not have bid the amount he had. After
States Judiciary for a reasonable fee. If you want to numerous telephone conversations, lots of verbal
register for the PACER service or to get more infor- abuse from this individual and my futile attempts to
mation visit http://pacer.psc.uscourts.gov or call 800- explain again, I received a letter from his attorney
676-6856. There are several other subscription serv- stating I was in breach of the contract and the
ices that will conduct bankruptcy searches on-line. requested items by her client must be provided
These services are provided by private businesses for immediately or she would file a lawsuit against me.
a fee. I explained to her what her client was shown and told
Finally, you can search for UCC filings by contact- as well as sending her a copy of my auction handbill. To
ing the Secretary of State, in most jurisdictions, and avoid a lawsuit, I was finally able through the attorney
at the local County Recorder’s Office. You should to get him to agree to accept an additional gas tank and
always check with the Secretary of State and the cowling (which I had to locate and purchase out of
County Recorder’s Office in order to search for all pocket.) When I delivered the items directly to the
applicable UCC filings. In Pennsylvania, you can attorney, she told me that auctioneers all over the coun-
search for UCC filings on the website of the try are being sued because, even though this notice is
Pennsylvania Department of State. plainly shown in all the printed materials as well as
being stated prior to the auction not only for myself but
----- numerous other auction companies, that the informa-
tion provided does not protect us in any way and we can
What protective language be held personally liable.
She suggested a legal type of printed instrument be
can I include? prepared and signed by each and every purchaser
(especially larger purchases) stating that they were
How should I protect myself when preparing my taking a particular described item for the amount
handbills and other printed information, as well as stated on a given date and was releasing the auction
announcing at the beginning of an auction that buy- company and the seller of any future personal liabili-
ers are purchasing items that they have been given a ty. (This could be a nightmare to keep up with.) What
chance to inspected prior to the auction, and that should we do in order to avoid this happening again
items are being sold to the highest bidder without any sometime down the road?
warranties, given or implied, and all items are being
58 AUCTIONEER WWW.AUCTIONEERS.ORG
ANSWER -- You raised several significant legal
issues with your question. Let’s consider each issue -----
briefly. Duty to conduct UCC, IRS
First, it appears that the successful bidder gave you
an absentee bid prior to the auction for this item. searches
There is a great deal of confusion about absentee
bids. An absentee bid can and will create a conflict of What duty does an Auctioneer have to conduct
interest, if an Auctioneer is not careful. When an UCC and IRS searches when the consignor repre-
Auctioneer acts as the agent of the seller and buyer, sents there are no liens in the auction contract and
he or she is inviting costly litigation. Please see the the Auctioneer has no actual knowledge to the con-
question and answer on absentee bids in the May trary, without, however, conducting any inquiry and
issue for additional information about absentee bids. relying only on the consignor's representations?
Second, there are a number of steps you can take to
protect yourself and your business. Generally, your ANSWER -- Your question relates to an Auctioneer’s
handbills and other printed advertisements should responsibility to do “due diligence” before selling the
clearly state what item is being sold. There should be property. Generally, an Auctioneer should conduct a
no confusion about what is included and what is not diligent title search for ownership of and liens on the
included in the sale. At the beginning of an auction, property whenever possible. Conducting the search
you should also announce the terms and conditions of will give you peace of mind and help you to avoid
the auction. The terms and conditions should include costly litigation. Your question seems to be whether
that the bidders have been given a chance to inspect an Auctioneer should still conduct the search when
all items prior to the auction and that all items are the seller states that he or she owns the property and
being sold without any express or implied warranties. there are no liens on it. There are a few situations
In other words, the items are being sold “as is, where where Auctioneers should conduct the search despite
is.” Prior to the sale of a specific item, particularly an such representations.
expensive item, you should generally describe the First, I generally advise Auctioneers to conduct a
item being sold. Again, you should make it clear search for big ticket items. Even when the seller
whether any additional items are included in the sale. states that there are no ownership issues or liens, you
The auction, including the announcement, should should take the time to search for UCC, IRS, or other
also be videotaped so it can be shown later in the types of liens on items that will sell for a significant
event there is a dispute. amount of money. Items that will sell for a significant
Third, another step you should take to protect your- amount of money are more likely to have liens on
self is to have bidders register for the auction prior to them. In addition, an individual or business is more
the sale. When bidders register they should show likely to file a lawsuit when it relates to a big ticket
their identity, provide contact information, and exe- item.
cute a document providing the terms and conditions Second, I generally advise Auctioneers to conduct a
and showing the bidder’s acceptance of the terms of search on any property where the seller is not willing
the sale. The terms and conditions would be similar to represent and warrant that he or she owns the
to terms you announce prior to the auction, but can property and that there are no liens in the written
also contain other terms to protect you and your busi- auction contract. An oral representation is as valuable
ness. You should contact an attorney licensed in your as the paper it is written on. The seller should repre-
state to help you draft the registration form. sent and warrant that he or she owns the property
Finally, I agree that it would be helpful to have a free and clear in your auction contract. The seller
finalized written sales contract executed for every should also represent and warrant that he or she is
item sold, but I do not think that it is necessary to not aware of any lawsuits about or claims made for
protect yourself or your business. It is also not practi- the property. If the seller refuses to make these rep-
cal to have a written sales contract prepared for inex- resentations, it is a red flag and you should conduct a
pensive items. complete and thorough search.
WWW.AUCTIONEERS.ORG AUCTIONEER 59
Finally, I advise Auctioneers to conduct a search If the Statute of Frauds is asserted to further less
whenever something smells fishy. Unfortunately, we than honest and fair dealings, at least in some states,
cannot trust each and every client. There are some the courts may conduct a careful examination of the
clients that we just get a bad feeling about (especial- transaction. In jurisdictions that permit courts to
ly those you just read about in the paper). Whenever study the transaction, the courts will consider the cir-
you have any reason to be suspicious or become con- cumstances surrounding the transaction in order to
cerned, you should take the time to conduct a search. ensure that the Statute of Frauds is not being assert-
It is usually worth the effort and could help you to ed to perpetuate fraud rather than to prevent fraud.
avoid years of litigation. This approach places an emphasis on the intent of the
buyer. By examining the surrounding circumstances,
----- a court can make logical inferences with respect to
whether the buyer acted with a fraudulent intent. If
Buyer claims only signed the court concludes that the Statute of Frauds is
being asserted to perpetuate fraud, it will generally
contract is enforceable enforce the contract.
Other states, however, permit the Statute of Frauds
I recently conducted an auction of some vacant to be raised as a defense even if a bidder fraudulent-
land. The sale went as planned with no problems, and ly submitted bids at a real estate auction. The courts
one person bought three tracts. After the auction was in these jurisdictions tend to agree that the
over I filled out the contract and got the sellers to sign Auctioneer and seller do not have a valid claim
it. I took it to the buyer and he refused to sign, saying against a bidder for that type of conduct alone. As
he had changed his mind. I contacted the back-up you can see, the law in each jurisdiction with respect
bidder and he was not interested in taking over the to the Statute of Frauds will be an important matter
contract. The original buyer says he is not liable to consider when selling real estate at auction.
because he did not sign the contract. A similar issue is whether the Auctioneer has
I have always been under the impression that bid- authority to bind a buyer to a transaction. An
ding at an auction was an enforceable contract. This Auctioneer serves in a unique capacity when selling
buyer contends that the statute of fraud says you must real estate by the auction method. The Auctioneer
have a signed contract for it to be enforceable. The and seller have a contractual arrangement that
default of this person has cost the sellers and myself a defines the responsibilities and duties the Auctioneer
large amount of money. Can you give me information owes to the seller. When conducting an auction, the
on what the law is? Auctioneer has some duty to the bidders, in that the
Auctioneer must recognize and record their valid bids
ANSWER -- This is a complex area of the law and on various lots being sold. Without this implicit duty,
raises a few issues that deserve discussion. The the auction method would not function efficiently.
Statute of Frauds is a legal doctrine with its origin in The critical issue is whether the Auctioneer may act
English law. Its purpose is to protect parties to certain as the agent of the buyer (in this limited manner)
transactions, including the sale of real estate. when the Auctioneer acknowledges the highest bid
Applying the doctrine can be complex, especially and records the highest bidder’s name, memorializing
when selling real estate at auction. The Statute of the buyer of the real estate.
Frauds generally requires: (1) a written memoran- State law is split on whether the Auctioneer can
dum (2) that embodies the terms of the contract, (3) serve the dual role of agent for the seller and the
an adequate description of the real estate, and (4) the buyer. In most instances, Auctioneers should avoid
signature of the buyer and seller (some states may acting as the agent for the buyer because it creates a
only require the name being entered while most conflict of interest. The law surrounding the Statute
require the signature). The Statute of Frauds is of Frauds, however, presents a narrow exception. For
intended to protect buyers and sellers from fraudu- instance, some states have statutes that give an
lent or deceitful conduct by either party. Auctioneer express authority to act for both the seller
60 AUCTIONEER WWW.AUCTIONEERS.ORG
and buyer in transactions where a written memoran- high bidder, no minimum or reserve” to an auction
dum is required to satisfy the Statute of Frauds. This with reserve because of poor attendance due to
statutory authority gives the Auctioneer the right to weather or ineffective marketing and advertising of
act on behalf of the seller and buyer to bind both par- the auction event.
ties to the transaction through a written memoran- I see the phrase, “Announcements auction day take
dum. precedence over printed material” in some
Some states do not permit the Auctioneer to act as Auctioneers’ ads and wondered if there is any basis in
the agent for the buyer and seller in the same trans- law.
action. These states recognize the inherent conflict
between the parties. In these states, Auctioneers are ANSWER -- Yes, auction day announcements gen-
prohibited from serving the dual role for both the erally do take precedence over prior advertisements.
seller and the buyer. Auctioneers can generally correct any errors or advise
In addition, Auctioneers should consider the terms the audience of any issues that have come up.
and conditions of the auction. Auctioneers should However, there are some important issues to consid-
require bidders to register prior to the auction and er before an Auctioneer should attempt to convert
agree to specific written terms. The terms of the reg- the sale from an absolute auction to a reserve auction.
istration can expressly permit the Auctioneer to bind Under the NAA’s Code of Ethics, “Members must
the buyer after the sale or may (on its own) be suffi- not enter into an agreement with a client to market
cient to satisfy the statute of frauds. Other terms of property as ‘absolute’ when in actuality the member
the sale may also be satisfactory. For example, where has verbally promised to convert the sale to an auc-
the Auctioneer’s catalogue listed as a condition of sale tion with reserve, or alternatively to cancel the sale if
that “the record of sale kept by the Auctioneer and the marketing campaign does not produce an open-
bookkeeper must be taken by the buyer as absolute ing bid sufficient to satisfy the intended reserve of the
and final in all disputes,” a bidder at the sale, by client, is strictly prohibited.” Standards of Practice
virtue of his or her participation, agrees to accept the 1.2. Auctioneers should conduct the sale in the same
Auctioneer’s memorandum as satisfying the statute of manner as it was advertised. If an Auctioneer con-
frauds. verts absolute auctions to an auction with reserve on
Each transaction is unique and the law in each state the date of sale, or, in the alternative, cancels absolute
will determine what is required to comply with the auctions because of poor attendance, then a claim
Statute of Frauds. Furthermore, Auctioneers who could potentially be made against the Auctioneer or
regularly sell real estate should consult with an attor- seller for misrepresentation or fraud. In addition, the
ney licensed in their state to determine whether they failure to conduct an auction as advertised may result
have the authority, on behalf of the buyer, to execute in disciplinary action or the refusal to renew the
a written agreement and bind the buyer to the trans- Auctioneer license. Therefore, Auctioneers should
actions. conduct the auction in a manner consistent with the
----- The general rule for auctions is that all auctions are
with reserve, unless they are advertised as absolute.
Do auction day announcements The Ohio Revised Code contains a specific definition
and conditions for conducting an absolute auction,
supersede previous information? including provisions similar to the general rule. It
also includes specific provisions regarding the refusal
Does the UCC or Ohio Revised Code address the to renew, suspend, and revocation of the license.
issue of auction day announcements taking prece- Auctioneers should generally avoid situations where
dence over previously printed auction terms and con- day of sale announcements conflict with advertised
ditions? terms. If circumstances are such that a change in a
In other words, can an Auctioneer change the terms term is necessary (other than converting an absolute
of sale from the printed words that say “All sells to the auction to an auction with reserve), the Auctioneer
WWW.AUCTIONEERS.ORG AUCTIONEER 61
should post notices throughout the auction site con-
cerning the change in terms, incorporate the modi-
fied term into the bidder registration process and ver-
bally announce the change prior to the auction. A
signed registration form that states the bidder accepts
the modified terms illustrates his/her knowledge and
consent to the terms as a condition of his/her partici-
pation in the auction.
An Auctioneer should not attempt to convert an
absolute auction to a reserve auction on the day of the
sale. The change of such a material term is likely to
invite costly litigation. The fact an auction is adver-
tised as absolute creates the expectation that the sale
will be conducted as an absolute auction. Bidders can
travel from far away, incurring time and travel
expenses, to attend the auction because the sale being
advertised as absolute.
The auction should be conducted in the manner
specified in the advertisements.
62 AUCTIONEER WWW.AUCTIONEERS.ORG
Auctioneer for hire are being properly classified as independent contrac-
tors, since the auction company often dictates every
aspect of the auction sale. In any event, you should con-
I am a newer Auctioneer and as I grow my own
firm your employment status with the auction company
company I have decided to take on some "Auctioneer
and obtain a general release and indemnification agree-
for hire business." With all of the lawsuit-happy folks
ment in order to protect yourself from potential liabili-
out there, should I get a document signed by the
ty for all the areas discussed in your question. Careful
company hiring me to release me from liability for
preparation in this area will help you avoid major prob-
such things as selling things that may not have clean
lems in the future.
titles, selling things under value etc, accidents while
serving as Auctioneer (i.e.; accidents while handling
merchandise) and many more I can think of, or am I
under an umbrella of the company I am working for?
This is a new area for me. What type of agreement is best?
ANSWER -- Absolutely. Every Auctioneer should There's a company in my hometown that is looking
ensure that they are protected by a comprehensive for an Auctioneer. They want to hire me as an
agreement for services, whether they are working alone employee and use my auction services. They have not
or in conjunction with an auction company. Remember hired my auction company, just me as an individual. I
that the relationship between the parties in an auction suggested they acquire an Auctioneer bond and post
sale is controlled by their contractual agreements, and it with the Secretary of State. What's the best way to
you can protect yourself by ensuring that you are given arrange our agreement so, if my auctioneering servic-
comprehensive indemnification. While the auction es are used, I can be protected?
company may have already obtained a general release
and indemnification agreement from the seller, you ANSWER -- The first step in your case would be to
should ensure that you are also given similar protection, determine in what capacity the company wishes to
either from the seller or the auction company. employ your services. Generally, one who works for
Most of the time, the auction company will require another is either classified as an employee or an inde-
that you provide your services as an independent con- pendent contractor. Most Auctioneers in this type of
tractor. In this capacity, you are treated far differently arrangement are employed as independent contrac-
than a regular employee. You pay your own taxes and tors. This is because the Auctioneer maintains a high
generally have a certain amount of discretion in con- degree of control over the conduct of their work and
ducting the sale, at least in theory. You also have greater they are normally paid by the job rather than by the
exposure to liability as an independent contractor than hour. If you are providing your services as an inde-
as an employee. In recent years, there has been some pendent contractor, you should have the company
debate among Auctioneers concerning whether they sign a written agreement that clarifies the exact terms
WWW.AUCTIONEERS.ORG AUCTIONEER 63
under which you will provide your services as an al liability for the willful failure to withhold income
Auctioneer. You should ensure that the agreement taxes and the employee’s share of FICA despite the cor-
contains terms by which the company indemnifies porate shield against personal liability. In addition,
you and agrees to hold you harmless from any and all there may be significant penalties and interest to be
liability arising from the company’s own conduct. paid.
With regard to the bonding and licensing issues, it is Several methods have been used or proposed for
not clear from your question whether the prospective determining whether a worker is truly an independent
employer is an auction company or not. However, in contractor as opposed to an employee. The question of
either event, you must take the responsibility to worker status, however, always turns on the facts of a
ensure that you have obtained all necessary bonds particular working arrangement. The key factor is the
and licenses to conduct auctions in your state, since degree of control an Auctioneer or auction company
your ability to continue your trade depends upon it. exercises over a worker. The more control the
Auctioneer or company exercises over a worker, the
----- more likely the worker will be classified as an employee.
The more independence given to the worker, i.e. the
Employee v. Independent worker exercises more control and discretion, the more
likely he is to be classified as an independent contract.
We would like information concerning an
Auctioneer's position in regard to contract labor laws. Is a contract bid caller liability
We live in Oklahoma. We have no full-time employ-
ees and use part-time contract labor in sale set-up
for company negligence?
and sale day labor for auctions on-site. We do not
have an auction gallery or auction barn. If I am hired to bid call for another auction compa-
ny, am I liable for their negligence?
ANSWER -- There are several state and federal labor
and employment laws that apply to contract labor. For ANSWER: No. If you are hired by another auction
example, there are wage and hour laws, anti-discrimi- company to bid call, and you do not have an interest
nation laws, and overtime laws. For this question, I pre- in or control of that business, you should not be
sumed that you were asking about the difference responsible for the auction company's negligence.
between employees and independent contractors and As always, you will be responsible for your own neg-
answered the question accordingly. ligence. In order to keep your risk for liability to a
The improper classification of workers as independ- minimum, you should be careful not to assume any
ent contractors rather than employees is an ongoing duties or direct employees at the other auction com-
problem for many Auctioneers and auction companies. pany. In other words, you should carefully consider
The IRS is closely scrutinizing the treatment of workers taking on other responsibilities such as supervising
as independent contractors rather than as employees. employees or dealing directly with customers.
Workers such as clerks, cashiers and ringmen have rou- You should have a written contract with the auction
tinely been misclassified as independent contractors. company setting forth the terms and conditions of
Harsh consequences result from the reclassification of your employment. In addition to the terms relating to
workers as employees during an IRS audit. If the IRS the salary and other benefits, the contract should
successfully reclassifies a worker as an employee, an state whether you would be an employee or inde-
Auctioneer that is a sole proprietor or partner will have pendent contractor. If you are concerned about liabil-
personal liability for any withholding and Federal ity or know that the other auction company regularly
Insurance Contribution (“FICA”) taxes not paid. If the has problems, consider adding a few clauses to limit
auction company hiring the worker is a corporation, any you liability.
responsible officer of the corporation will have person- -----
64 AUCTIONEER WWW.AUCTIONEERS.ORG
Contractor or employee? men have routinely been misclassified as independ-
ent contractors. Harsh consequences result from the
I'm a licensed real estate broker and Auctioneer. I reclassification of workers as employees during an
have three real estate sales agents that hold their licens- IRS audit. If the IRS successfully reclassifies a work-
es under my brokerage. They each also hold associate er as an employee, an Auctioneer that is a sole propri-
Auctioneer licenses under my license, mostly for the etor or partner will have personal liability for any
credibility of being 'licensed' Auctioneer that helps dis- withholding and Federal Insurance Contribution
tinguish them from other realtors. Are these three peo- (“FICA”) taxes not paid. If the auction firm hiring the
ple still independent contractors or did they cross the worker is a corporation, any responsible officer of the
line and might now be considered employees? They corporation will have personal liability for the willful
only sell real estate by auction and are compensated on failure to withhold income taxes and the employee’s
a commission basis (similar to conventional real estate share of FICA despite the corporate shield against
agents). I don't withhold taxes, they've signed inde- personal liability. In addition, there may be significant
pendent contractor agreements with me. penalties and interest to be paid.
Furthermore, you should reconsider the issue peri-
ANSWER -- Whether an individual is an employee or odically. If you review the status of the three individ-
independent contractor depends on a number of fac- uals now and conclude that they are independent
tors and can only be determined after examination of contractors, you cannot simply forget about the issue.
his or her specific job duties and responsibilities. In As your question implies, small changes in job duties
other words, the question of worker status always turns and responsibilities could change the workers’ status.
on the facts of a particular working arrangement.
Several tests and methods have been used to deter- -----
mine whether a worker is truly an independent con-
tractor as opposed to an employee. In fact, there is a Are these employees considered
20 point test that is used in some circumstances. The
key factor, however, is the degree of control an
Auctioneer or auction firm exercises over a worker.
The more control the Auctioneer or firm exercises I'm a licensed real estate broker and also a licensed
over the worker, the more likely he or she will be clas- Auctioneer. I have three licensed real estate sales
sified as an employee. The more independence given agents that hold their licenses under my brokerage.
to the worker (i.e. the worker exercises more control They each also hold associate Auctioneer licenses
and discretion), the more likely he is to be classified under my license, mostly for the credibility of being a
as an independent contractor. The fact that these licensed Auctioneer that helps distinguish them from
individuals signed independent contractor agree- other Realtors. Are these three people still independ-
ments is helpful, but the existence of these agree- ent contractors or did they cross the line and might
ments do not conclusively decide the issue. now be considered employees? They only sell real
The issue is an important one to consider. There are estate by auction and are compensated on a commis-
federal and state labor laws that may apply to an sion basis (similar to conventional real estate agents).
employee, but not an independent contactor (or vise I don't withhold taxes. They've signed independent
versa). These laws could include, but are not limited contractor agreements with me.
to, wage and hour laws, anti-discrimination laws, and
overtime laws. ANSWER -- Whether the real estate agents would
The improper classification of a worker as an inde- be considered independent contractors or employees
pendent contractor rather than an employee is an is difficult to determine based on the contracts and
ongoing problem for many Auctioneers and auction licensing arrangements described. Whether an indi-
firms. The IRS is closely scrutinizing the treatment of vidual is considered an employee or an independent
workers as independent contractors rather than as contractor, as a matter of law, is based on the facts and
employees. Workers such as clerks, cashiers and ring- circumstances surrounding the working relationship
WWW.AUCTIONEERS.ORG AUCTIONEER 65
between the parties. grocery store cashier and an Auctioneer under the
An independent contractor is generally a person who above analysis. Grocery store cashiers are usually man-
has been engaged to complete certain work, actually aged and controlled by the business and use the busi-
performs and controls such work, uses their tools, mate- ness’s tools: cash registers and scanners. A grocery store
rials and methods without significant oversight by the cashier usually is provided with a checkout line, smock,
person engaging them to perform the work. Instead, an and nametag to perform their duties. Grocery store
employee is managed and controlled by the employer cashiers are usually required to be at work by a certain
and uses the employer=s tools to perform their work. time, answer to management and are required to follow
The fact that agents have registered their real estate company policies while at work. On the other hand,
licenses under a certain broker’s license and also regis- Auctioneers operate with more independence and meet
tered their associate Auctioneer licenses under the with clients at all times of the day. Auctioneers usually
same individual’s Auctioneer license is a factor that provide their own automobiles, equipment, are licensed
would be considered, but does not conclusively estab- professionals and set their own schedules.
lish an employer-employee or principal-independent Grocery store clerks are generally paid on an hourly
contractor relationship. basis. Once the grocery store clerk clocks in, he or she
Although parties may enter into independent contrac- is being paid for the time they spend at the job.
tor agreements, such agreements describe the parties’ Auctioneers are paid a commission. This means an
expectations and obligations. These agreements will be Auctioneer’s payment is based on their success in selling
considered, but are not binding on the courts. Most real estate and merchandise at auction. Auctioneers
courts in the United States and the Internal Revenue usually control the progress of their work.
Service will evaluate and examine the factual relation- Instead, a grocery store clerk does what they are
ship between the parties. In fact, the IRS has devel- instructed to do while at work. In other words,
oped a multi-factor test to determine whether or not Auctioneers enjoy a certain amount of independence in
individuals are employees or independent contractors. carrying out their objectives in comparison to a grocery
The emphasis of the question appears to be on the store clerk. The degree of control the person has over
potential tax liability should these individuals be deter- their work is often an important consideration for courts
mined to be employees instead of independent contrac- in determining whether there is an independent con-
tors. The IRS has created a multi-factor analytical tractor or employee relationship.
framework in order to determine whether a worker is In most instances, grocery store clerks are not likely to
an employee or an independent contractor. have a written contract with the grocery store. All
First, the IRS inquires about the behavioral control Auctioneers should have a written and signed contract
of the worker. The behavioral aspects address issues with the seller that defines the functions of the
such as the type of instruction given to the worker, Auctioneer and the expectations of the seller. A con-
whether the worker uses their own tools and materials. tract will illustrate the intentions of the parties.
Second, the IRS inquires about the financial control of Further, it will demonstrate that the Auctioneer is not a
the worker. With respect to financial control, the IRS long-term employee because his or her services are to
examines whether the worker was reimbursed for busi- auction property on a certain date. In addition, a writ-
ness expenses and the extent of the workers investment. ten contract will explain the terms under which the
In addition, the financial control also examines the Auctioneer earns a commission, which will usually be a
extent the worker’s service are available in the market percentage of sale proceeds.
place and the type of payment the worker receives, such While having an independent contractor agreement
as hourly wage or payment per job. Third, the IRS will defines the parties’ obligations and responsibilities, the
evaluate the type of relationship the business has with factual analysis will generally determine whether there
the worker. At this point in the analysis, the IRS will is an employer-employee or principal-independent con-
consider written contracts describing the type of rela- tractor relationship. The factors discussed above offer
tionship the parties intended to enter, as well as the insight as to how a court and/or the IRS may review the
benefits (insurance, vacation pay, pension plan, etc.), if facts of a relationship between a worker and company.
any, the business provides the worker and the perma- For further explanation of the IRS multi-factor test,
nency of the work. please visit the IRS website for an electronic version of
Let’s examine an obvious difference by comparing a Publication 15-A, at www.irs.gov/pub/irs-pdf/p15a.pdf.
66 AUCTIONEER WWW.AUCTIONEERS.ORG
Firearms Licensing and Laws
Selling ammunition indemnification for any damages resulting from the
sale in an effort to provide at least one layer of pro-
tection from liability. You may also be required to
I am conducting an estate auction this Spring that
obtain a federal manufacturer’s license, depending on
contains new and reloaded ammunition. What, if any,
the nature and extent of your ammunition sales. In
additional liability would the Auctioneer and or the
addition, since there are state and local laws that may
widow, who is the personal representative, assume?
also apply to your sale, it is imperative that you con-
My biggest concern is the reloaded ammo. If selling
sult a lawyer who is familiar with auction and gun
is a “no-no,” would giving it away be recommended?
laws in your particular area prior to the auction sale to
ensure compliance with all applicable laws.
ANSWER -- Sales of guns and ammunition are a par-
ticularly complex area of auction law, primarily due to
the high level of governmental control. There are
numerous state, federal and local laws regulating the
sale of such items, making it difficult to address your Where to find felon
question in this limited forum. Under federal law, one details for firearms sales
may not knowingly sell, give or otherwise dispose of any
firearm or ammunition to fugitives, convicted felons,
We sell firearms as personal property of individuals
drug users, aliens, juveniles, persons subject to a court’s
at auction. We have a form that a seller signs to trans-
protective order, and numerous other classes.
fer ownership. The form is similar to the ATF's form
You must also obtain a federal license if you are
which requests information on a buyer's background,
“engaged in the business of selling firearms,” as
such as felony convictions, criminal background, etc...
opposed to someone who makes occasional sales. In
We require that the buyer signs the form prior to
addition, federal law specifically requires that one
release of any firearms. On pistols, we do hold for 5
who reloads ammunition is required to be licensed as
days until we attempt to make a background check.
a manufacturer if he or she engages in the business of
However, it is getting more difficult to find out infor-
selling or distributing reloads for the purposes of
mation on individuals. We have used the Internet and
livelihood or profit. Beyond these considerations, you
were able to identify through the use of court records
must consider the possible liability flowing from the
and even subscribe to Net Detective. However all
sale of such ammunition. While it cannot be said that
these areas are closing their doors on us due the pri-
the Auctioneer would be directly liable for the actions
vacy acts etc. Are we doing things right and where can
of others after the auction sale, the expense of
we licensed Auctioneers, who are not licensed
defending against possible claims would undoubtedly
firearm dealers, get information on felons?
be overwhelming. If you are compelled to offer the
ammunition for sale, you should ensure that the
ANSWER -- Sales of firearms are a particularly com-
property owner provides the Auctioneer with full
plex area of auction law, primarily due to the high
WWW.AUCTIONEERS.ORG AUCTIONEER 67
level of governmental control. There are numerous sionally offer firearms at a consignment auction and
state, federal and local laws regulating the sale of such then only making certain not to take the guns on con-
items, making it difficult to address your question in signment but require the owner to maintain posses-
this limited forum. Under federal law, one may not sion and control of the firearms until sold, then I do
knowingly sell, give or otherwise dispose of any firearm not need a federal firearms license and would be legal
or ammunition to fugitives, convicted felons, drug under the laws enforce by the bureau of Alcohol,
users, aliens, juveniles, persons subject to a court’s pro- Tobacco and Firearms. Is this correct?
tective order, and numerous other classes. You must
also obtain a federal license if you are “engaged in the ANSWER -- The requirements for the lawful sale of
business of selling firearms,” as opposed to someone firearms are complex. You asked a specific question
who makes only occasional sales. about the sale of firearms at a consignment auction and
A private person may sell a firearm to another private my answer is restricted to answering your question.
individual in his or her state of residence and, similarly, The sale of firearms at an auction requires careful plan-
a private individual may buy a firearm from another pri- ning and documentation. An Auctioneer should only
vate person who resides in the same state. Of course, attempt to conduct the sale when you are fully informed
the transferor/seller may not knowingly transfer a of all your legal obligations. From your question, it
firearm to someone who falls within any of the cate- appears that you want to sell firearms at an auction with-
gories listed above. It is generally not necessary for a out obtaining a federal firearms license.
federal firearms licensee (FFL) to assist in the sale or The Gun Control Act, administered by the Bureau of
transfer when the buyer and seller are "same-state" res- Alcohol, Tobacco, Firearms and Explosives (ATF), part
idents, but you should consider using a licensed gun of the Department of Justice, contains federal licensing
dealer as an intermediary to facilitate the transaction. standards for various firearms businesses (manufactur-
The gun dealer will be more familiar with federal and ers, importers, and dealers). These laws are strictly
local gun laws and has the ability to run a background enforced. The violation of the Gun Control Act could
check. I believe this is a good method to help protect result in substantial fines and even jail time.
Auctioneers against liability. Generally, a person may only buy a firearm within the
You should be able to submit a form containing infor- person’s own state of residence, except for a few excep-
mation about the buyer to your state or local police who tions. Individuals with a certain type of criminal record
will run a criminal background check by contacting the and history are prohibited from acquiring firearms.
National Instant Criminal Background Check System Furthermore, there are special rules regarding waiting
(NICS), a national database containing records of per- periods and record keeping. There are also state and fed-
sons who are disqualified from obtaining firearms. In eral laws regarding background checks and other
any event, the buyer at auction should always agree to requirements. If you are engaged in the business of deal-
these conditions of sale in writing and be required to ing in firearms, you must be a licensed dealer and ensure
make an affirmative certification that they are not a compliance with all applicable federal and state laws.
fugitive, convicted felon, drug user, alien, juvenile, or I think it would be difficult to argue that you are sell-
person subject to a court’s protective order. Since there ing the firearms at a consignment sale, but at the same
are numerous additional compliance requirements that time you are not taking “the guns on consignment.”
vary from state to state, it is imperative that you consult Even if you do not take physical possession of the
a lawyer who is familiar with auction and gun laws in firearms, you may be found to have some type of con-
your particular area to ensure complete compliance structive possession. You should contact an attorney
with all applicable regulations. licensed in North Carolina to discuss your obligations
under all applicable federal and state laws before selling
any type of firearms.
In order to protect yourself, you should obtain a feder-
When is a firearms license needed? al firearms license or engage the services of a licensed
dealer to ensure compliance with the law and to com-
As best as I can determine, as long as I only occa- plete the transaction.
68 AUCTIONEER WWW.AUCTIONEERS.ORG
Foreclosure / Bankruptcy
Restraint of free trade? who have experience in selling distressed assets.
Current regulations are such that bankruptcy trustees
I'm frustrated with the way attorneys in the bank- have the authority and discretion to choose qualified
ruptcy court and Small Business Administration Auctioneers to perform the needed service, subject to
administrators can agree among themselves, to approval by the bankruptcy court. The court’s objective
restrict their use of private Auctioneers. They don't is to ensure the best recovery for the bankruptcy estate,
seem to be accountable to a higher ethic or public and it generally does not interfere with the trustee’s
ombudsman. It's difficult to prove or quantify, but choice regarding who will conduct the auction. In turn,
I'm convinced that such prejudice exists. It seems to many bankruptcy trustees work exclusively with the
be a means of free trade restraint solely for the pur- same Auctioneers, presumably having encountered
pose of making their work easier, rather than allowing success with those professionals in the past. In the
for some competitive bidding to keep the process absence of kick-backs from the Auctioneer to the
clean and at a fair marketable price to the taxpayer. trustee or some other fraudulent conduct, the trustee is
Add to this the ability of government in general and generally permitted by the Court to retain whomever
specifically state government and schools of higher he or she wishes, so long as the Auctioneer is qualified
education, to hire in-house, existing staff positions to and the compensation is reasonable.
preclude private Auctioneers from providing third- Many bankruptcy courts establish a list of qualified
party separation in the liquidation process for surplus Auctioneers and set reasonable requirements for
property, and you've got several reasons why many approval and inclusion on the list. In order to avail
Auctioneers are working as less than capacity. Do you yourself of these auctions, make sure that you are
see this as restraint of free trade, or something else, included on such lists. As for changing the rules that
and, can we do something about it. allow trustees to work with a select few, Auctioneers
as a group should continue to support organizations
ANSWER -- Sometimes it can seem like a select few like the NAA that further the interests of all
of our colleagues always seem to have an edge when it Auctioneers by lobbying state and federal legislators
comes to certain types of auction sales. Bankruptcy in an effort to encourage the adoption of legislation
trustees and government administrators often develop which ensures fair and equitable property liquida-
relationships with certain Auctioneers, making it diffi- tions, and equal opportunities for all Auctioneers.
cult for some to make any headway into these lucrative
areas. Yet, those relationships logically develop because -----
the Auctioneer has shown that they conduct successful
Bankruptcy auctions, as an example, are subject to
supervision by the bankruptcy court. The Bankruptcy
Code has specific provisions that regulate the hiring of
Auctioneers. The court tends to prefer Auctioneers
WWW.AUCTIONEERS.ORG AUCTIONEER 69
Trustees duty in a Chapter 7 Dealing with the bankruptcy court?
I have a question about bankruptcy judges and ref-
erees. In the past we have dealt with a referee doing
We specialize in the sale of intellectual property. A
bankruptcies. We have been told by the referee that
recent Chapter 7 Trustee had numerous patents
there is one judge in particular that believes the
(from a bankrupt dot.com firm) which were jointly
Auctioneer is due at maximum 10% commission.
owned by a prominent Japanese electronics firm. In
The judge also wants all of the proceeds from the
lieu of putting then up for auction sale with the firm's
bankruptcy to go to the court and then the court pays
other intellectual property, she elected to accept a
out the commission back to the auction company (us).
single offer from the joint owner. I suggested she
Now part of doing these auctions, we have to pack-
obtain a written offer, valid for 30 days and allow us
up, pick-up, set-up, advertise, have the auction, and
to auction them off to seek maximum value for the
settle with the buyers. Along with this we have salary
creditors. She did not want to do that and took their
to pay for the work described previous. We have
offer. It has been my experience that such offers are
made concessions on the percentage, but have been
generally well under their actual value. Since we rely
charging a buyer’s premium, which we keep to pay
on trustees primarily, our firm accepted her decision.
for the advertising and workers salaries. Now more
Does she not have a legal obligation to seek the high-
than one auction company locally is being told we
est value for the creditors? We even offered to use
need to give the buyer’s premium back to the court
her offer as a reserve price and charge her a commis-
for any previous sales, and any commission over 10%,
sion only on what we received above that. That failed
also they have requested the list of buyers, and their
to persuade her. Is there anything we should have
names, addresses, etc.
Now for the questions. Can the courts legally do
this? Do we have any grounds to protect ourselves
ANSWER -- No. The filing of a Chapter 7 bankrupt-
from this kind of attack from the bankruptcy court,
cy petition usually results in the liquidation of all non-
other than refusing to do business with them? I
exempt assets held by the debtor (regardless of
believe we made good faith representation and
whether it is a business or an individual). The
received market compensation for the goods sold (in
Chapter 7 Trustee plays an important role in assisting
Idaho). Now the court wants more money from what
the creditors with the proceedings. The trustee has a
was sold at auction. What can we do?
duty to the creditors to find assets and to maximize
the value of the bankruptcy estate.
ANSWER -- This is another question that shows the
While the trustee has a duty to maximize the value of
importance of having a clearly-written contract. The
the bankruptcy estate, the trustee has discretion in
answer to these questions hinge on the contract
deciding on how to proceed. A trustee, generally, will
entered into between you and the bankruptcy
not be obligated to sell assets at an auction even though
trustee. I can, however, give you some guidance and
it may obtain a higher price than at a private sale.
information that should help you avoid this type of
You need to convince the trustee that you can sell
the assets at auction for more than the trustee could
A buyer’s premium is a stated percentage that an
sell them for privately. I am surprised that the trustee
Auctioneer adds to the highest bid for each lot sold to
decided not to auction the assets with a reserve price.
determine the lot’s selling price. It is a price sur-
The trustee is paid for each bankruptcy a percentage
charge provided for in the terms of the auction and
of the money raised for the creditors. So, the trustee
assessed against buyers on their purchases.
has an interest in obtaining the highest value for the
When a trustee decides to have real estate or per-
sonal property sold at auction, the trustee and
Auctioneer should enter into a written contract set-
ting forth the terms and conditions of the sale and the
70 AUCTIONEER WWW.AUCTIONEERS.ORG
compensation to be paid to the Auctioneer. The con- the Court to administer the estate. When disputes
tract should clearly state all of the compensation to be arise between the beneficiaries and the executor, it is
paid to the Auctioneer after the sale – including the important to exercise caution.
buyer’s premium. The trustee is required to forward The executor and the beneficiaries should take the
a copy of the contract to the creditors for their review. time to resolve any disputes they have and allow the
If the creditors do not object to the contract, the sale to occur. Generally, these types of disputes can
trustee will explain the contract to the court. The be resolved quickly. Typically, there would be an
trustee must obtain the court’s approval before it can appraisal of all the property. The executor should
proceed with the sale of the items. then get a list of the specific items the beneficiaries
The judge has discretion when he or she reviews the want to keep. There could be family heirlooms that
contract. If a judge thinks that the maximum commis- family members want to keep. The executor may sim-
sion for an Auctioneer should be 10 percent, he or ply be able to give an item or items to the beneficiar-
she has the authority to reject contracts providing for ies as a portion of their share of the estate. The
a higher commission. The judge also has the authori- remaining property would then be sold and the pro-
ty to reject all contracts where the Auctioneer is ceeds divided.
attempting to charge a buyer’s premium. If the Court issues an order authorizing the sale of
If the court approved the contract, then it is unlike- specific items, you can generally proceed with the
ly the court would seek additional assets for the bank- sale. If you have any doubts, you should check with an
ruptcy estate. If the contract does not provide for attorney licensed in your state. If the executor and
charging a buyer’s premium, however, you have a dif- beneficiaries cannot reach any agreement in this mat-
ferent story. If you provided to the trustee a contract ter and there is no court order authorizing the sale, it
that does not reference a buyer’s premium and the may be advisable to simply walk away.
court was not aware that you charged a buyer’s premi-
um, then the court can and probably should attempt -----
to obtain the additional funds for the bankruptcy
estate. If the contract clearly stated that you were Selling on or before
going to charge a buyer’s premium, the court should
not be permitted to recover those funds. foreclosure date
----- I am trying to sell a piece of property in Frederic,
WI that is going into foreclosure. Can I sell the prop-
Executor versus beneficiaries erty up to the foreclosure date and still give 30 days
until closing, or do you have to have it closed on or
before foreclosure? This property is a home with an
The executor of an estate wants to sell the proper-
attached wooded lot and the person is still residing in
ty. The beneficiaries do not want to sell. They want to
keep the property themselves. Who should the
Auctioneer listen to? Who should he be responsible
ANSWER -- Once foreclosure proceedings are initi-
to? What is our liability?
ated, it will be almost impossible to convey mar-
ketable title without the assistance and consent of the
ANSWER -- You should be very careful in this mat-
mortgage holder. The ability of the seller to transfer
ter in an effort to avoid costly litigation. I would gen-
title upon the initiation of foreclosure proceedings
erally advise against selling the items beneficiaries
will likely be limited by the contract between the sell-
want at an auction in this type of dispute.
er and the mortgage holder. All outstanding principal,
However, your contract for the auction should be
late charges, penalties and fees associated with the
with the executor, also known as the personal repre-
mortgage and foreclosure proceedings, which can be
sentative, of the estate. The executor, or personal rep-
rather substantial, must be satisfied before the seller
resentative, of the estate is the person appointed by
can transfer marketable title to the property. In addi-
WWW.AUCTIONEERS.ORG AUCTIONEER 71
tion, any formal court proceedings seeking foreclo- of Representatives or Senate will be required to spon-
sure of the mortgage holder’s interest will need to be sor any proposed legislation. You may also want to
resolved by the parties. You would therefore need to write a letter to Governor Linda Lingle to determine
determine the extent that foreclosure proceedings whether she would support the change.
affect the seller’s ability to transfer title under the
terms of the mortgage agreement by working closely -----
with the seller’s attorney and mortgage company so
that consent to the transaction may be obtained.
There have always been many foreclosure auctions
where I live, in Hawaii. All seem to be conducted by
lawyers or Realtors, virtually never by Auctioneers.
These auctions could be done so much better by a
professional Auctioneer, in my opinion. How do we
get the law to require Auctioneers to be involved or
ANSWER -- It would be difficult to change the law
to require a licensed Auctioneer to conduct all fore-
closure auctions. I think you would end up fighting
the local bar associations and Realtors in Hawaii to
change the law. As I mentioned above, most states
have exceptions to the licensing requirements for
sales made under the direction of the court. A fore-
closure action usually results in a judicially ordered
sale of the property that generally falls within one of
In order to ensure that the foreclosure auctions are
conducted by licensed Auctioneers, existing law
would need to be modified. Auctioneers in Hawaii
would need to make sure that there is no exception to
the licensing requirement for sales made under the
direction of the court. Hawaii Auctioneers may also
seek to insert a requirement for foreclosure auctions
to be conducted by a properly licensed Auctioneer.
If you are serious about your desire to change the
law, then you should start by locating other
Auctioneers in Hawaii that support the change. You
should also contact the Hawaii Auctioneers
Association to see if they would be willing to support
the change. After you have gathered support for the
proposed amendments, you should write to and con-
tact key legislators. A member of the Hawaii House
72 AUCTIONEER WWW.AUCTIONEERS.ORG
Payments / Varied Funds /
Recovering payment is difficult the seller, who should approve the payment terms of
the sale. Checks and credit cards should not be
I had a vehicle auction where I am required to give accepted as payment unless the seller has specifically
the titles to the buyer at the time of sale. We usually authorized these payment methods in writing and
have a check verification machine to help us verify if agreed to assume all responsibility for collection.
checks are good. At one site we did not have a phone
line. Anyhow, two checks bounced from the same -----
person for two different cars. The buyer kept telling
me that the money was coming. He returned the When bidder is out of town
vehicles with almost 3,000 and 750 miles more than
when the cars were sold to him. Is my only option I have an upcoming real estate auction where one
small claims court for rental or what? I asked the of my hottest prospects will be out of town, although
District Attorney about the matter and he said they he will be bidding via cell phone. If he turns out to be
probably would not file criminal charges. the high bidder, how do I get him to be legally com-
mitted to buying the property knowing he will not be
ANSWER -- Recovering payment is one of the most able to sign the real estate contracts or put down the
difficult tasks an Auctioneer faces. In a situation such escrow money until a later date? I have a Bank Letter
as this, the seller and his or her Auctioneer have some of Guarantee from his bank to secure the purchase
available remedies, most often pursued through the price, but still confused on how to secure this deal
small claims court to minimize time and expenses. An with him out of town.
action could be filed against the buyer for the diminu-
tion in value attributed to the use of the vehicles and ANSWER -- It has become increasingly common for
any costs incurred as a result of the buyer's failure to bidders to participate in a sale by telephone, Internet, or
make proper payment. In most states, there is a civil other electronic medium. Auctioneers have therefore
remedy available for writing bad checks in addition to become justifiably concerned that the absentee buyer
the possibility of criminal charges. So you may pursue can be held to his or her winning bid. Contracts for the
a civil claim for writing bad checks even if the local sale of real estate must be in writing in order to be
prosecutor chooses not to pursue criminal charges. enforceable under what is commonly referred to as the
There may be additional claims, such as conversion, statute of frauds. To meet the requirements of the
that may apply depending on the circumstances of statute of frauds concerning a memorandum of the sale,
the particular case. As such, you should consult an it is essential that the memorandum be signed by the
attorney in your area for direction on what claims may party against whom the agreement is to be enforced.
be pursued against the buyer for his conduct, includ- So far as the seller is concerned, the Auctioneer, as
ing civil prosecution for presentment of a check his or her authorized agent to conduct the sale, has
drawn on insufficient funds. authority to sign the memorandum of sale on the sell-
Also, remember that you are acting as an agent for er's behalf. Yet upon acceptance of a bid the
WWW.AUCTIONEERS.ORG AUCTIONEER 73
Auctioneer also becomes the agent of the buyer as with complete disclosure.
well for the purpose of drawing up and signing the We happen to also be real estate brokers, and in
memorandum of sale in compliance with the statute Arkansas, the day of sale "buyer paid deposit" must be
of frauds. The Auctioneer thus becomes the agent of placed into the real estate escrow and not the auction
both the seller and the buyer for this limited purpose. company's escrow for personal property into the real
So the Auctioneer generally has the authority to act escrow, so two separate escrow accounts are required
and bind the buyer in this type of transaction. to comply with both auction licensing board and real
However, the Auctioneer's "dual agency" can create a estate commission laws, rules and regulations.
conflict for the Auctioneer when he or she is repre-
senting both parties to a transaction. Since real estate ANSWER -- The keeping of escrow accounts is com-
purchases often involve significant details with regard pulsory in just about every jurisdiction. This method
to evidence of marketable title, closing, possession allows the Auctioneer to hold client funds outside of
and a number of other issues, you should consider the Auctioneer's own funds, commonly referred to as
requesting that the buyer hire someone to act as their "commingling." Prudent Auctioneers should always
agent to complete the sale. In this way, you can help make a concerted effort to comply with ethical obli-
ensure that the buyer will be held to his commitment gations such as maintaining client funds in escrow.
and avoid any potential conflicts. When a situation arises where there is no clear
The "Letter of Guarantee" or "Letter of Credit" answer, it is best to understand and comply with the
from the buyer's banker also helps to secure his or spirit of the law. The intent of such regulations is to
her obligations. The letter of credit is a pledge by the avoid the commingling of funds. I believe it is appro-
buyer's bank that should the buyer wrongfully fail to priate to receive all funds on account and then imme-
complete the transaction, the holder of the letter of diately transfers those funds to which you are entitled
credit may look to the bank for payment. This will as a buyer's premium to your account. In this way,
certainly help secure the Buyer's obligation, but you you have complied with the intent of the rule by sep-
must be aware that oftentimes in the event of a dis- arating client funds from your own. In some cases,
pute, the bank will deposit the money with a court that may require the keeping of two separate escrow
having jurisdiction over the case to decide if the accounts, especially in situations involving the sale of
money should be paid. So while a letter of credit is real property. By acting according to the spirit of the
very helpful, the most important factor is to ensure law or rules on the keeping of client funds, you avoid
that the absentee buyer is legally obligated on the the appearance of impropriety and help protect your-
agreement, which requires the signature of an agent self from the potential for liability.
who has the authority to bind the buyer.
Handling client funds?
Escrow accounts discussed
In Ohio we are required to deposit auction sale pro-
I know that state laws govern, but laws are not ceeds in our escrow account. The question is: "Am I,
always clear. The buyer's premium belongs to the as the Auctioneer, allowed to deduct my commission
auction company; however it's collected at the same and expenses before I settle out the proceeds with my
time seller's money is collected and paid together. It seller?"
appears to me that if the buyer's premium is deposit- In other words, is there any law that prohibits me
ed into the escrow, it would be considered to be co- from taking my commission and expenses a week or
mingling of funds-even if a check is written immedi- so before I give the net proceeds to my seller? It has
ately to remove the auction company's portion of the not been a problem, but often times when I have
sale day proceeds for the buyer paid premiums. I do three or four auctions out in front of me, and I need
agree that this method is, however, a much better money to pay for advertising, postage, office expens-
"paper trail" and, in my opinion, provides the client es, labor, etc. I often take the commission and
74 AUCTIONEER WWW.AUCTIONEERS.ORG
expenses from a past auction to pay for expenses for ANSWER -- It is very difficult to lock up the deposit
future auctions before I close out some past auctions so there are no issues. It depends in a large part on
with my sellers. what your contract with the buyer provides and what
you announce prior to the auction.
ANSWER -- Article 9 of the National Auctioneers I have not been able to review your contract or a
Association Code of Ethics provides: "Members shall videotape of your auction, so I am not familiar with
keep monies coming into their possession in trust for the contract terms related to the deposit. However, it
other persons such as escrows, trust funds, client's is common for purchase agreements to treat the
monies and other similar items in a separate special deposit as liquidated damages.
account, in an appropriate financial institution." Several A purchase agreement for the sale of real estate will
states, including Ohio, require money received from generally provide for liquidated damages in the
the sale at auction of property belonging to an owner or amount of the deposit or a specific percent of the
consignee to be deposited into a special trust or escrow purchase price whichever is greater. The clause also
account. Whether money can be taken out of the spe- provides that in the event the buyer breaches the
cial trust or escrow account before settling with a client contract the seller can keep the deposit.
is generally determined by each local community. Liquidated damages, however, are supposed to be a
NAA's Code of Ethics does not prohibit an Auctioneer close estimate of the actual damages suffered. The
from taking his or her commission prior to giving the amount set forth in the contract as liquidate damages
net proceeds to your client. should be an estimate of the damages that would
In order to reduce any concerns and to minimize result from a breach. It cannot be used as a penalty
the risk of a dispute with a client, the contract for breaching the contract. If the deposit is for
between you and the seller should address this issue. $10,000 and the seller can only prove actual damages
The written contract should explain the fees and of $1,000, the court probably would not allow the
when the fees can be taken from the special trust or seller to keep the full deposit.
escrow account. You should have a contract that If the contract simply provides that the deposit is
explains the entire agreement to the seller, so there not refundable or contains some other terms, a differ-
are no surprises. ent analysis may apply. Furthermore, the law allows
you and your customers to be sued for practically any-
----- thing at anytime. It does not, however, mean that the
complaining party will win.
How can you lock up a deposit? In the example you referenced, it appears that the
parties ended up splitting the deposit as a settlement
I run a real estate auctioneering business besides to the litigation. Even if the seller is clearly entitled to
my regular real estate brokerage company. I have had the deposit, it may have been advantageous to settle
problems in the past turning over non-refundable the litigation. The stress and costs of the litigation can
deposits to the seller when the buyers have backed encourage people to settle their claim even when
out. Clearly in the agreements they sign, during the they are in the right.
opening remarks that are videotaped and all the other
print material tells the buyer that the deposit is non- -----
However I had a case this past year where the Stop payment on check
buyer's attorney threatened to sue both me and the
seller stating his client got bad information from us.
can constitute theft
Again, all our marketing materials state that the buyer
should do his own investigation and not rely solely on I had a situation in which a buyer at a recent auc-
the info provided. The seller and the buyer ended up tion stopped payment on his check. After my initial
splitting the deposit. How can you lock up that shock of getting the check back after a week of not
deposit so there are no issues? hearing of any problems from any customers, I real-
WWW.AUCTIONEERS.ORG AUCTIONEER 75
ized this should be considered a theft. I contacted the Passing on credit card fees
sheriff's department in the county in which the auction
(and now theft) theft occurred, and the officers met me
What are the real implications of passing on credit
to make a report. I was fortunate to have an officer who card fees to a buyer? Our state regulations clearly
got right on it, and made a visit to the buyer’s home. state that this is an offense. I have, on occasion,
The auction goers made up a ridiculous story of why attended one particular auction where the
this happened, such as checks were stolen and that they Auctioneer informs the audience that “There will be
had a block on their bank account. a 5% charge to anyone using a credit card.” I spoke
The officer investigated and determined their story with someone with some authority in our state who
to be untrue. The end result was that they made good said that this is really a matter between the
on their purchase after being threatening with Auctioneer and the credit card company. Is this an
charges of theft by fraud and obstructing an investi- offense of any serious magnitude? If so, do I have an
gation. Once they paid me, they thought they were ethical responsibility to report it to the state board?
off the hook, but they were wrong. The officer went
back and paid them another visit and informed them
the case was still being reviewed for charges of ANSWER -- I would advise Auctioneers licensed in
attempted theft by fraud and obstructing an investi- Texas to follow the laws and regulations relating to
gation. These particular auction goers were a known passing on credit card fees. If there is a Texas regula-
problem to other Auctioneers, but not me until now. tion prohibiting the conduct, it should be followed.
The police got involved because it was handled and I do not know whether the licensing commission in
treated different than an “NSF” (insufficient funds) Texas would treat this matter as a “serious” offense. I
check, since the customer initiated the stop payment. consider any violation of the law, however, to be seri-
ous. The licensing commission usually is charged with
----- enforcing the law and a violation (or repeated viola-
tions) can result in the suspension, revocation, or
ANSWER -- I am happy that we were able to quickly denial of your license. Violation of specific regula-
resolve the situation. The Uniform Commercial Code tions can also expose you to criminal penalties such as
permits an individual to stop payment on his or her fines and jail time.
check. The individual requesting a stop-payment order Normally, the agreement between you and the
must generally identify the check, by providing the credit card companies prohibits you from passing the
check number, so the bank will not pay the check. An fees to the consumer. You should carefully review the
oral stop-payment order will generally expire after 14 agreement. If you violate the agreement, you could
days. If the stop- payment order is issued in writing or be sued for breach of contract and prohibited from
an oral stop-payment order is confirmed in writing it is accepting payment by credit card.
effective for six months and may be renewed. Whether you have an ethical responsibility to report
An individual must generally have a valid legal cause the violation is another issue. Article 18 of the NAA
to stop the check. He or she should generally issue a Code of Ethics provides:
replacement check. If someone fails to pay for items “Members, having personal knowledge of an act by
purchased at an auction, remember to file a police another member that, in their opinion, is a material
report for theft. It will help you recover the money violation of the ethical principles of this Code shall
owed to you and your client, and will discourage treat the matter in accordance with the procedures of
criminal behavior in the future. filing a grievance. STANDARD OF PRACTICE 18.1
You should also check with an attorney to determine In order for any professional organization to earn and
whether any other damages are permitted under the maintain the confidence of the constituencies it
state’s law. In some states, when someone issues an serves, it must demonstrate to them the ability to
improper stop-payment order you can sue for the “police” its own. Members have the unique ability to
amount of the check, treble damages, and attorney fees. observe and therefore assist in the stewardship of this
trust. Members have an obligation to assist the NAA
76 AUCTIONEER WWW.AUCTIONEERS.ORG
and its officers in all matters, including the investiga- rials and at the auction sale. As always, remember to
tion, censure, discipline, or dismissal of members check with your state licensing board or a local attor-
who engage in violations of this Code.” ney to confirm laws relating to the imposition of cred-
I would suggest that you discuss this matter with the it card surcharges in your particular state.
Auctioneer referenced above. He or she may not be
aware of the regulation. If you inform him of the reg- -----
ulation, he may stop passing along credit card fees. If
he continues to violate the law, you should report the Is this sale a binding contract?
conduct to the NAA or the state board.
A man attended one of my auctions and purchased
----- a 1957 Studebaker pickup for $14,100. He paid us by
personal check and so, after the sale was over, I set-
The laws on credit card surcharges tled with the sellers. Three or four days later, we got
a stop payment on that check and his excuse was his
I have been to other Auctioneers’ auctions and have wife was unhappy with his purchase. Well, he agreed
noticed that they charge a 3 % fee if the customer to give us $1,500 in settlement but we were only able
uses a credit card to pay. What is law on this practice? to resell the pickup for $10,750. I agreed to give him
the commission I made on the sale and he should pay
the difference. He has never replied and this has
Cash Discounts been 60 days ago. I'm wondering what legal action I
can take. It appeared to me that it was a binding con-
I have been told by our state licensing board that tract between me and him in front of five other peo-
you cannot “charge” a fee for a credit card transaction ple and he should be obligated to pay the difference.
but are allowed to offer “cash discounts” yet every
single auction that I have attended in every state, ANSWER -- It depends. I am not sure what you
even my own the past few months accept credit cards mean by “He agreed to give us $1,500 in settlement.”
and post that they charge a 5% fee for credit card If you are referring to legally settling your claim
transactions. The signs for this are clearly posted and against the bidder, and he did pay the $1,500, you
have been for quite some time. Is this a new law or do may have extinguished any and all right to pursue him
these auctioneers not even know the law? for the deficiency. It depends on the settlement
agreement that you made with him. Is the settlement
ANSWER -- The use of credit card surcharges has agreement in writing? If so, what does it say? If nec-
become increasingly prevalent as more and more essary, you should contact your attorney to determine
Auctioneers begin accepting this alternative payment whether you can pursue him.
method. The reason many Auctioneers charge a 3 % If you didn’t settle the claim, you can sue him for
fee if the customer uses a credit card is because the breach of contract. With the fall of the hammer there
Auctioneer is usually charged that very same fee by was a legally binding contract between the buyer and
the credit card issuer. He or she is simply passing that seller for the exchange of $14,100. The buyer
cost on to the card user in exchange for offering the breached the contract, however, by failing to make
convenience of credit card payment. Most merchants payment in accordance with the terms. Fortunately,
outside of the auction industry often absorb this you were able to reduce and minimize your losses by
usage fee and the consumer is none the wiser. re-selling the truck. If you didn’t settle the claim, the
Although the law in each state differs, I believe that buyer should be responsible for the difference.
it is generally permissible for an auctioneer to charge The deficiency is not a significant amount. You may
a 3 % premium for acceptance of payment by credit be able to avoid court costs and legal fees by suing the
card. The buyer can avoid this fee by simply using a bidder in the local small claims court. If, however, the
different payment method. The fee should be clearly bidder registered and agreed to pay all necessary col-
disclosed to potential buyers in all promotional mate- lection costs, including reasonable attorney fees, you
WWW.AUCTIONEERS.ORG AUCTIONEER 77
may want to engage an attorney and sue him in the If someone fails to pay for items purchased at an auc-
local court of general jurisdiction. tion after he or she takes possession of the property, you
This illustrates the need for have bidders register for should file a police report for theft. It will help you
the auction and agree to pay collection costs and attor- recover the money owed to you and your client, and
ney fees. If you do not have that provision in your con- will discourage similar behavior in the future.
tract, you could end up spending more in attorney fees
trying to collect than you could possibly recover. -----
Finally, if the bidder is responsible for all necessary col-
lection costs, including reasonable attorney fees, you Problems with a promissory note?
have additional leverage in pursuing the claim.
If a potential bidder forgot his checkbook, and
wanted to buy a large item such as a tractor, or even
a bid on a piece of real estate, what advice would you
Improper stop payment of check give on taking a promissory note to be redeemed with
cash or certified funds later? Also, what problems
Recently at one of my auctions a zero radius mower could arise by taking a note? Are there more rights to
was sold for $2,900 (with tax $3,074). Within 3 days of the creditor, than the debtor of the note, or are both
the auction, I received notice from my bank that the parties equal?
check used to purchase this mower had a stop pay- If the person defaults on the note, is the agent totally
ment in place. I still have the mower in my posses- responsible to the seller, or does seller have right to col-
sion, and have talked to the buyer. The buyer lect, or is the agents responsibility to collect should this
explained that they didn't want to pay that amount for happen? Auctioneers want every buyer, but offering a
the mower, so wanted to back out. buyer who forgot his checkbook the promissory note
Do I have any recourse at this point. The mower, if option seems to open more problems than working
sold again, may not bring the same amount, and I am with a bad check or is this just being overly cautious?
out commission as well as bank charges.
ANSWER -- You raised several significant issues in
ANSWER -- The Uniform Commercial Code permits your question. I will attempt to address as many of
an individual to stop payment on his or her check. An these issues as possible in this response. This column
oral stop-payment order will generally expire after 14 does not provide me with an adequate opportunity to
days. If the stop-payment order is issued in writing or discuss all of these issues in full. This response, how-
an oral stop-payment order is confirmed in writing, ever, may result in questions from other readers on
however, it usually will be effective for six months. A these issues in a subsequent column.
stop payment order may also be renewed. First, you generally should not take a promissory
An individual must generally have a valid legal cause note for the sale of an item or real estate, unless you
to stop the check. An individual simply should not be receive specific authorization or approval from your
permitted stop a check when he or she feels like it. seller. An Auctioneer is the agent of the seller. As an
Here, it appears that the buyer simply changed his agent, the Auctioneer owes a fiduciary duty to act for
mind and decided not to proceed with the sale. the seller’s benefit.
Generally, under the UCC you are permitted to sue A fiduciary duty is highest standard of duty implied
for the face amount of the check. You should also by law. Courts across the country that have reviewed
check with an attorney licensed in Michigan to deter- the agency issue conclude that an Auctioneer has the
mine whether you are entitled to any other damages authority to sell for cash. The Auctioneer should have
under Michigan law. In some states, when someone specific authorization set forth in the written contract
issues an improper stop-payment order you can sue before accepting checks, promissory notes, credit
for the amount of the check, double or treble dam- card payments, or any other form of payment. As an
ages, and attorney fees. agent for the seller, an Auctioneer should discuss this
78 AUCTIONEER WWW.AUCTIONEERS.ORG
issue and advise the seller on the different options. If ANSWER -- A fee to a buyer for allowing him or her
you accept a promissory note as payment from a to make payment by a credit card is generally
buyer without discussing it with your seller, you may referred to a “convenience charge.” There are a few
be inviting costly litigation. items to consider before simply adding the 3% fee,
Second, the issues that arise from non-payment of however.
a promissory note are similar to those that arise with First, you should consider the Auctioneer’s role as
a check. One benefit to securing payment by a prom- the agent for the seller. The relationship between the
issory note is that you can add specific provisions for Auctioneer and seller is governed by the written con-
the repayment. For example, in the event of a default tract and the Auctioneer’s fiduciary duty to the seller.
a promissory note should permit the recovery of col- An Auctioneer and seller are generally free to negoti-
lection costs and expenses, including reasonable ate the terms of the contract. An Auctioneer does not,
attorney fees. A check, however, will usually result in however, automatically have authority to accept pay-
a faster payment. Non-payment of a check is also a ment by a credit card. In fact, unless the written
criminal violation in some jurisdictions. Promissory agreement or state law provides otherwise, an
notes and checks are common forms of payment, Auctioneer may only accept payments in cash for
which one is better for you will depend upon your items sold.
business and situation. Before you can accept credit card payment, you
Third, the seller is generally responsible for collect- should advise your client of the benefits and risks of
ing for non-payment from a buyer. As mentioned accepting credit card payments. Your fiduciary duty
above, an Auctioneer is the agent of the seller. The generally requires you to fully disclose the situation to
Auctioneer’s job is to bring a willing buyer and a will- the seller and to let him or her make the decision. If
ing seller together to complete the transaction. The your client authorizes you to accept credit card pay-
resulting contract is between the buyer and seller. ments at the auction, you should put that into your
Therefore, when a buyer fails to pay for an item the written contract before it is signed by the seller.
seller should generally sue for breach of contract Second, some states have regulations that prohibit
(even when the check or promissory note is made Auctioneers from passing credit card fees on to the
payable to the Auctioneer). Since the Auctioneer is buyer. Since I am not licensed in the State of Kansas
not a party to the contract the Auctioneer normally and unable to comment on their laws in that jurisdic-
cannot bring a claim for breach of contract. tion, you should contact an attorney licensed in your
An Auctioneer, however, may bring a claim against a state to discuss this issue.
debtor for a bad check or for failure to pay a promis- Third, in order to accept credit card payments you
sory note if the check or note are made payable to the have to enter into a written agreement with one or more
Auctioneer. The costs and expenses involved in credit card providers. Normally, the agreement between
attempting to collect the debt may discourage you and the credit card companies prohibits you from
Auctioneers from seeking to recover payment. As a passing the fees on to the consumer. You should careful-
practical matter, however, an Auctioneer may be will- ly review the agreement. If you violate the agreement,
ing to try collecting from the buyer to make sure he you could be sued for breach of contract and prohibited
or she obtains his commission. from accepting payment by credit card.
Wording to explain credit card fee Trust account required
We're doing a trial using a credit card machine at
in real estate deals
our auctions. What is a safe wording to post stating we
will be charging a 3% fee to cover the credit card? We I am an active Indiana real estate broker associate
don't want to state it as a buyer’s premium, as we with RE/MAX and also an Indiana licensed
don't charge a buyers premium. Auctioneer. When we sell real estate at auction and
WWW.AUCTIONEERS.ORG AUCTIONEER 79
accept a down payment, where does the down pay- this issue. First, real estate brokers should consider the
ment need to go within an escrow account? policies and procedures of any organization they are
I have contracted with the seller as Auctioneer affiliated with, such as RE/MAX. You should also
through my auction company and also list the property review your contract with any organization you are affil-
through the RE/MAX office with the seller. Would it be iated with to ensure compliance. Second, real estate
legal to hold the down payment in the auction compa- brokers are generally required to keep all funds belong-
ny escrow account or does it need to be held in the real ing to others that come into their possession in a sepa-
estate escrow account with RE/MAX brokerage? rate trust account. Determining whether funds should
be placed into a real estate broker’s trust account or an
ANSWER -- It appears that you are selling real Auctioneer’s trust account can be tricky. You may have
estate as the Auctioneer and listing the properties to modify your contracts to address this issue.
through RE/MAX to allow you to assist in closing the
sale. Throughout the transaction, you should be care- -----
ful with all funds you obtain and keep them in the
appropriate accounts. Furthermore, you need to keep How to handle non-payment
detailed records of all funds you receive as both
Auctioneer and real estate broker. We had a buyer at a three-day auction that purchased
Auctioneers in Indiana, as in most jurisdictions, are items from all three days totaling over $150,000. He
required to keep all funds belonging to others that received copies of his invoices and said he would wire
come into their possession in a trust account. the funds on the next Monday. When we did not
Auctioneers are generally required to clearly identify receive the wire we started phoning. Most of the time
all trust accounts and to keep detailed records of the we would not get him but when we did talk to him he
funds (and any interest) in each trust account that would still state that he was going to pay and in fact we
identifies the amount of money held for specific indi- did receive three different wires from him, one for
viduals. Several jurisdictions, including Indiana, pro- $6,500, one for $5,600 and one for $11,200; still quite a
hibit Auctioneers from mixing or co-mingling trust bit shy from the total amount due. Finally when he still
funds with personal funds or other business funds. had not paid by the time the auction facility had to be
Another issue to consider is the possible effect of vacated we moved from the facility as many of his items
using another account, such as the RE/MAX account, purchased as we could, but we could not get everything
as your Auctioneer’s trust account. If an individual moved in the allotted time and several items of his
files a complaint with the Auctioneer Commission, remained at the auction facility.
the Commission could initiate an investigation of We have still not received total payment for his
your trust account activities and records. Auctioneers items, although he called in regards to this matter.
are usually required to make their detailed account- Our terms are clear payment due immediately after
ing records available to the Commission upon the auction end. When we have an exceptionally long
request. If the Commission initiated an investigation, and large auction and an out of town purchaser we do
all activity in the trust account may have to be dis- allow them a day or so to get the funds to us. We do
closed to the Commission. understand sometimes it takes a little time. We were
Auctioneers should also consider their ethical respon- even still trying to work with him on the final week
sibilities. Article 9 of the NAA’s Code of Ethics and that items had to be removed, which was two weeks
Standards of Practice provides: “Members shall keep after the auction and still he did not pay. What are
monies coming into their possession in trust for other our legal options now in regards to this matter?
persons such as escrows, trust funds, client’s monies
and other similar items in a separate special account, in ANSWER -- In this situation, you should consider
an appropriate financial institution.” So, Auctioneers the following options: (1) reselling the property pur-
should keep funds obtained as an Auctioneer separate chased, (2) continuing trying to collect from the
from other business or personal funds. buyer, or (3) suing him for breach of contract. You
There are, however, a few complicating factors with should discuss these options with the seller and
80 AUCTIONEER WWW.AUCTIONEERS.ORG
determine how to proceed. The decision, at least in Buyer release of down payment
part, will depend upon the language in your contract.
It appears from your question that you still have pos-
For the last 10 years we have required a non-
session of some or all the property he purchased at the
refundable down payment at our real estate auctions
auction. The fact that you have possession of the prop-
as part of the terms set forth by the seller and adver-
erty should give you some peace of mind and addition-
tised prior to the auction. Last year, for the first time,
al leverage. If he fails to make payment in a reasonable
a property did not close as scheduled and, due to
amount of time, you should consider sending written
some non-disclosed items, the buyer and sellers each
notice to the buyer that unless the lots are completely
paid for by a certain date you will re-sell the property
The sellers finally empowered me to negotiate a
and seek to hold him responsible for the difference in
division of the down payment, and the sellers ended
the purchase price. You may be required to give him a
up retaining part and refunding the balance. This was
certain number of days notice before the sale. If the lots
the only way the buyer would sign a cancellation of
sell for more than he agreed to pay, your claim against
purchase agreement. My question is: Can I have the
the buyer generally disappears. If the lots sell for less
buyer sign a cancellation releasing the down payment
than he agreed to pay, the buyer should be responsible
at the auction that can be recorded if they do not
for the difference.
close in a timely manner?
However, before you decide to sell any of the prop-
erty, you should consider discussing this matter with
ANSWER -- A cancellation releasing the down pay-
an attorney licensed in your state. Even though the
ment (“mutual release”) is a form that is generally
buyer has not paid the full balance, he has made some
signed by both parties when a purchase will not close
payments for the lots he agreed to purchase. Has he
as anticipated. Executing a mutual release immedi-
asked for these payments to be applied to any specif-
ately after an auction of real estate may not be a good
ic lot? Does he still claim that he intends to pay the
business practice because it could send the wrong
remaining price? If you sell the property without
message to the buyer and seller.
carefully following state law, you could be sued for
For example, consider a successful bidder agreeing
breach of contract.
to pay $500,000 for the purchase of real estate. Both
In the alternative, you can continue attempting to col-
parties, at the time of sale, expect the sale to close as
lect the debt. He has made some payments, but is no
agreed. If an Auctioneer asks the buyer to sign a
where close to paying off the full balance at this time.
mutual release after the execution of the purchase
So, this may not be the best option. Unless stated oth-
agreement, the buyer may question the seller’s will-
erwise in your contract, you are not generally obligated
ingness to complete the sale or infer that there is a
to pursue collection efforts on behalf of the seller.
problem. If the buyer executes a mutual release at
The Auctioneer is the agent of the seller and essen-
the same time as he or she signs the purchase agree-
tially disappears from the transaction after the com-
ment, the seller can unilaterally terminate the agree-
pletion of the sale (except for other associated
ment at any time and pocket the down payment.
responsibilities to the seller). The actual contract of
Buyers would generally resist signing the mutual
sale is between the seller and the buyer. Thus, the
release. Furthermore, if the seller is aware that the
seller is usually obligated to pursue collection either
Auctioneer obtained an executed mutual release
by hiring an attorney or contacting a collection
from the buyer, the seller may question the
agency. The seller should also consider suing the
Auctioneer’s ability to complete the sale, which could
buyer for breach of contract. This is a significant
interfere with the relationship between the seller and
amount of money. If the bidder registered and agreed
to pay all necessary collection costs, including reason-
In addition, the mutual release is normally drafted
able attorney fees, you will have additional leverage in
in such a way that it helps protect the Auctioneer.
pursuing the claim.
When a bidder makes a down payment for the sale of
real estate, the Auctioneer usually will hold onto the
WWW.AUCTIONEERS.ORG AUCTIONEER 81
proceeds as an escrow agent. When a real estate sale business practice because it could send the wrong
does not close, both parties will usually end up message to the buyer and seller.
demanding payment of the funds held in escrow. The For example, consider a successful bidder agreeing to
Auctioneer does not want to be in a position where he pay $500,000 for the purchase of real estate. Both par-
or she must decide to whom to give the money. The ties, at the time of sale, expect the sale to close as
mutual release requires the buyer and seller to agree agreed. If an Auctioneer asks the buyer to sign a mutu-
on the disposition of the down payment so the al release after the execution of the purchase agree-
Auctioneer knows how to distribute the proceeds. If ment, the buyer may question the seller’s willingness to
both parties refuse to sign the mutual release, the complete the sale or infer that there is a problem. If the
Auctioneer may file a complaint with the local court buyer executes a mutual release at the same time as he
naming both parties to the contract and paying the or she signs the purchase agreement, the seller can uni-
money into the Court. This will usually allow the par- laterally terminate the agreement at any time and pock-
ties to fight over who should receive the money, but et the down payment. Buyers would generally resist
keeps the Auctioneer out of it. signing the mutual release. Furthermore, if the seller is
Auctioneers generally should not attempt to have a aware that the Auctioneer obtained an executed mutu-
buyer sign the mutual release immediately after the al release from the buyer, the seller may question the
execution of the purchase agreement. When the prop- Auctioneer’s ability to complete the sale, which could
erty does not close and there is going to be a fight over interfere with the relationship between the seller and
the down payment, an Auctioneer should contact an the Auctioneer.
attorney for assistance in navigating the dispute. In gen- In addition, the mutual release is normally drafted
eral, the mutual release should only be used when the in such a way that it helps protect the Auctioneer.
transaction is not going to close and the parties reach an When a bidder makes a down payment for the sale of
agreement on the distribution of the proceeds. real estate, the Auctioneer usually will hold onto the
proceeds as an escrow agent. When a real estate sale
----- does not close, both parties will usually end up
demanding payment of the funds held in escrow. The
Buyer release of down payment Auctioneer does not want to be in a position where he
or she must decide to whom to give the money. The
For the last 10 years we have required a non-refund- mutual release requires the buyer and seller to agree
able down payment at our real estate auctions as part of on the disposition of the down payment so the
the terms set forth by the seller and advertised prior to Auctioneer knows how to distribute the proceeds. If
the auction. Last year, for the first time, a property did both parties refuse to sign the mutual release, the
not close as scheduled and, due to some non-disclosed Auctioneer may file a complaint with the local court
items, the buyer and sellers each secured attorneys. naming both parties to the contract and paying the
The sellers finally empowered me to negotiate a money into the Court. This will usually allow the par-
division of the down payment, and the sellers ended ties to fight over who should receive the money, but
up retaining part and refunding the balance. This was keeps the Auctioneer out of it.
the only way the buyer would sign a cancellation of Auctioneers generally should not attempt to have a
purchase agreement. My question is: Can I have the buyer sign the mutual release immediately after the
buyer sign a cancellation releasing the down payment execution of the purchase agreement. When the
at the auction that can be recorded if they do not property does not close and there is going to be a
close in a timely manner? fight over the down payment, an Auctioneer should
contact an attorney for assistance in navigating the
ANSWER -- A cancellation releasing the down pay- dispute. In general, the mutual release should only be
ment (“mutual release”) is a form that is generally used when the transaction is not going to close and
signed by both parties when a purchase will not close the parties reach an agreement on the distribution of
as anticipated. Executing a mutual release immedi- the proceeds.
ately after an auction of real estate may not be a good -----
82 AUCTIONEER WWW.AUCTIONEERS.ORG
Where does down payment ry language concerning earnest money in the context
of a real estate transfer indicates that the responsibil-
need to be held? ity for holding and accounting for earnest money pro-
ceeds is on the licensed real estate principal.
I am an active Indiana real estate broker associate Statutes of other states may not provide a bright line
with RE/Max and also an Indiana licensed test for distinguishing whether to deposit earnest
Auctioneer. When we sell real estate at auction and money in the Auctioneer or real estate trust account.
accept a down payment, where does the down pay- In those states, Auctioneers should consult with an
ment need to go into an escrow account? I have con- attorney licensed to practice in the jurisdiction in
tracted with the seller as Auctioneer through my auc- which the Auctioneer conducts business.
tion company, and also list the property through the As a general rule, Auctioneers should consider this
Remax office with the seller. Would it be legal to hold situation before entering into the auction contract.
the down payment in the auction company escrow The auction contract with the seller should state
account or does it need to be held in the real estate whether the Auctioneer will hold earnest money for
escrow account with Remax brokerage? the real estate auction or whether the earnest money
will be held by a third party – a realtor or escrow com-
ANSWER -- Auctioneers who are also licensed real pany. The contract would then eliminate any confu-
estate brokers have a unique situation when handling sion over where the money is being held and will help
the proceeds from a real estate auction. Generally, keep accurate records.
the law imposes a requirement on both Auctioneers In circumstances where a real estate agent has a
and real estate brokers to maintain trust accounts or written a contract with a real estate company or bro-
escrow accounts in which they deposit funds being ker, the terms of the contract must be reviewed. The
held for others. Selling real estate at auction creates a contract may require all earnest money to be held in
unique question with respect to which trust account the real estate broker’s trust account.
the Auctioneer, who is also a licensed real estate prin- Before an Auctioneer who is licensed to sell real
cipal, should deposit the earnest money. estate puts client funds into his or her auction trust
State licensing laws usually provide guidance on fund, he or she should investigate their state’s law and
matters in which a duty is imposed on a profession. all relevant contracts. After reviewing this informa-
Auctioneers are licensed to conduct auctions, which tion, an Auctioneer should be able to determine
includes marketing the sale, crying the sale and which trust account to use for the earnest money.
accounting for the proceeds of the sale. Auctioneer For Auctioneers who are not licensed to sell real
licensing laws generally do not give Auctioneers the estate, they can either work with a broker or contact
right to sell real estate. a real estate attorney. An attorney can generally hold
For instance, in Indiana, the law provides that the earnest money in his or her client trust account,
Auctioneers are limited to advertising and conducting prepare all of the documentation, and handle the
the bidding of a real estate auction. Once the closing for a reasonable fee.
Auctioneer announces that bidding has concluded,
the Auctioneer is prohibited from taking any addi- -----
tional action necessary to transfer title to the real
estate. This express language in the law indicates that Proper wording about
Auctioneers may not take any action once the auction
is completed, which would include collecting and credit card charge?
holding earnest money.
In comparison, Indiana law expressly provides that We're doing a trial using a credit card machine at
principal real estate brokers’ trust accounts shall con- our auctions. What is a safe wording to post stating we
tain all earnest money deposits, funds held for closing will be charging a 3% fee to cover the credit card? We
escrows, sale proceeds not yet disbursed, and all don't want to state it as a buyer’s premium, as we
other funds belonging to others. The specific statuto- don't charge a buyer’s premium.
WWW.AUCTIONEERS.ORG AUCTIONEER 83
auction candidates. All of the time constraints of a
ANSWER -- A fee to a buyer for allowing him or her live auction apply.
to make payment by a credit card is generally How can we protect ourselves from online bidders
referred to a “convenience charge”. There are a few who win a bid, then fail to pickup their merchandise?
items to consider before simply adding the 3% fee, Our terms are quite specific. We automatically
however. charge the buyer’s credit cards. Months later they
First, you should consider the Auctioneer’s role as chargeback their purchases claiming that they did not
the agent for the seller. The relationship between the receive their merchandise.
Auctioneer and seller is governed by the written con- The credit card companies are unsympathetic to
tract and the Auctioneer’s fiduciary duty to the seller. our claim that the buyer abandoned the merchandise,
An Auctioneer and seller are generally free to negoti- despite our clearly agreed-upon written terms.
ate the terms of the contract. An Auctioneer does not,
however, automatically have authority to accept pay- ANSWER -- Internet fraud complaints are very com-
ment by a credit card. In fact, unless the written mon. The National Consumers League releases an
agreement or state law provides otherwise, an annual list of Internet fraud complaints filed with it
Auctioneer may only accept payments in cash for Internet Fraud Watch (IFW) program. There were
items sold. 36,802 complaints of Internet fraud in 2002 and
Before you can accept credit card payment, you 37,183 complaints in 2003. Online auctions topped
should advise your client of the benefits and risks of the list of complaints for 2002, 2003, and 2004.
accepting credit card payments. Your fiduciary duty Online auctions accounted for 89 percent of the com-
generally requires you to fully disclose the situation to plaints to the IFW in 2003 and 51 percent of the
the seller and to let him or her make the decision. If complaints in 2004. With this background it is not
your client authorizes you to accept credit card pay- surprising that the credit card companies are not
ments at the auction, you should put that into your sympathetic to your claim.
written contract before it is signed by the seller. You stated that you have a contract with specific
Second, some states have regulations that prohibit terms regarding the purchase and payment of items.
Auctioneers from passing credit card fees on to the It appears that your contract provides that the buyer
buyer. Since I am not licensed in the State of Kansas abandons the property if he fails to pickup the mer-
and unable to comment on their laws in that jurisdic- chandise. You may also want to consider adding a pro-
tion, you should contact an attorney licensed in your vision for liquidated damages if the buyer fails to
state to discuss this issue. complete the transaction. Online transactions can
Third, in order to accept credit card payments you create problems, such as this one, that you generally
have to enter into a written agreement with one or wouldn’t have at a live auction.
more credit card providers. Normally, the agreement You can attempt to reduce the number of bad sales
between you and the credit card companies prohibits by asking for specific information that would help you
you from passing the fees on to the consumer. to collect these debts. Typically, the buyer will pro-
You should carefully review the agreement. If you vide his name, address, email address, and credit card
violate the agreement, you could be sued for breach number. You may also want to consider asking for
of contract and prohibited from accepting payment the bidder’s social security number and date of birth.
by credit card. With the specific contract and this information you
could hire a collection agency to attempt to secure
----- payment. It could, however, discourage some people
prevent others from bidding on items. Another
Dealing with Internet fraud alternative to consider is not accepting credit card
payments. You may have more luck using Paypal,
requiring payment by check, or some other alterna-
We conduct a great number of Internet-only auc-
tive payment method.
tions for smaller clients who might not otherwise be
84 AUCTIONEER WWW.AUCTIONEERS.ORG
Adding contents to home auction ANSWER -- Under general auction law principals,
an Auctioneer acts as an agent for the seller, who is
the Auctioneer's principal.
I recently attended a real estate auction where the
As such, the Auctioneer owes a fiduciary duty to the
Auctioneer added several hundred thousand dollars
seller to act in his or her best interests, most primari-
worth of contents to a vacant home. The home was a
ly by obtaining the highest price possible for the sell-
million dollar home in a gated community. The con-
er's goods at auction.
tents were sold in two days and the real estate didn't
By bidding on the seller's goods, the Auctioneer and
sell. This seemed to be a good way to sell the house-
his staff could be acting contrary to the best interests
hold furnishings. Is this legal or not?
of the seller.
Although the Auctioneer may actually increase the
ANSWER -- Generally, an Auctioneer may conduct
ultimate price obtained by the seller for his goods by
the sale at any suitable location. Although it may seem
bidding up the price, the Auctioneer's interests in this
obvious, the Auctioneer must obtain the consent of the
situation are in conflict.
homeowner to use the premises for a sale of personal
He or she would be under a duty to obtain the high-
property in this manner. The Auctioneer must also
est price for the seller's goods, while at the same time
make no improper statements concerning the owner-
seeking to purchase those goods at the lowest possi-
ship of the personal property items, or imply that they
ble price for himself.
are uniquely valued through some association with the
In some states, an Auctioneer and his or her staff
million-dollar home. These actions could lead to allega-
are prohibited by law from bidding at any auction
tions of fraud, and thus severe penalties for the auction-
they are conducting.
eer. Yet as long as there is no misrepresentation with
Where such bidding is not specifically prohibited,
regard to the quality or origin of the property that
the Auctioneer must obtain the consent of the seller
would materially affect its value, the location of the sale
and should explicitly convey to all individual bidders
is really immaterial.
that he or she reserves the right to bid. The
----- Auctioneer should make this statement not only in
the auction sales agreement, but also by announcing
such an intention at the auction before the
Can Auctioneer bid Auctioneer calls for bids. In addition, the Auctioneer
on items at his own auction? should refrain from bidding at an absolute auction.
Such a practice would certainly leave a feeling of
I was curious as to the legality of an Auctioneer or impropriety among other bidders and if your success-
his staff bidding at an auction which they are con- ful bid is far below the fair market value of an item,
ducting. I know it is prohibited in states like your actions could be considered a breach of your
Pennsylvania. but was wondering how that issue is fiduciary duty to the seller.
WWW.AUCTIONEERS.ORG AUCTIONEER 85
Am I liable for “restitution”? items and that my money is as good as theirs is.
Last week I auctioned a motorcycle repair shop and
the customer was very pleased, except for the fact
I have become interested in purchasing estates and
that I was bidding on a few of the items. This was the
have a concern. Is it true that when a person purchas-
first time anyone has ever said anything about me
es and sells an item for an exorbitant profit they can
bidding on items. I explained to him that I did dis-
be liable for restitution to the seller of that item? I
close everything to the crowd and that I have seen
have heard that this is especially true when the pur-
many other Auctioneers bid in their own auctions. I
chaser offered a much smaller amount than it's
also explained that everything that I bought just made
worth, and the purchaser had a prior awareness of its
the final gross of the auction go up which was money
in his pocket. My customer seemed to be pacified by
my explanation. In my opinion, I think this practice is
ANSWER -- It depends. This question deals with the
not only legal but ethical as well, as long as the
relationship between contract law and auction law.
Auctioneer discloses his or her intentions. Do you
One party may be liable for "restitution" under a
think it is all right to do this, and have you seen many
number of circumstances.
other Auctioneers buy items at their own auctions?
"Restitution" is generally an equitable remedy that
a court may award in cases where it would be unfair
ANSWER: Although buying items at your own auc-
and unjust to allow someone to maintain a benefit or
tion is generally permissible it should be avoided.
gain. In the legal arena, we say that restitution may be
Most states allow an Auctioneer to purchase items at
awarded to prevent "unjust enrichment. "
his or her own auction only if the seller consents and
Restitution may be awarded where the other party
the Auctioneer give proper disclosure of the fact that
committed fraud or breached a contract. Restitution
he may bid on items. Despite the fact that it may be
damages may also be awarded when there is a breach
permissible to purchase items at your own auction, it
of some type of fiduciary or special relationship - such
creates several problems. First, an Auctioneer is an
as an agency relationship.
agent for a seller. As an agent, the Auctioneer owes a
Unfortunately, I do not have enough information to
fiduciary duty to act for the seller's benefit, while sub-
determine the amount of risk you may have for pur-
ordinating one's personal interest to the other person.
chasing these estates. I can, however, offer some gen-
A fiduciary duty is highest standard of duty implied
by law. When an Auctioneer purchases something
If you are attempting to purchase items for resale at
from his own auction it creates a conflict between the
a profit while you are the Auctioneer or are acting as an
Auctioneer and seller. The Auctioneer wants to pur-
agent for another, you have a significant risk for restitu-
chase items at a lower price and the seller wants to
tion liability. Some states even prohibit the Auctioneer
obtain the highest price for each lot.
from bidding on items he is attempting to sell for anoth-
The fiduciary duty should not be compromised in
er. On the other hand, if you purchase an estate on your
favor of the Auctioneer's personal desire to purchase
own behalf, where someone else is the Auctioneer, your
property. Second, this type of self-dealing can dam-
risk for liability will be much lower.
age the reputation of Auctioneers and the profession.
I expect that the damage to the profession may not be
worth the possible benefits of bidding on items.
Even though it is permissible, purchasing items at
Buying items at your own auction your own auction is fraught with danger and should
be avoided. If you want to purchase an item that will
I have completed over 1,800 auctions and from time be sold at the auction, you should consider not
to time I will bid on some items in the auction that I accepting the sale. Otherwise, you take the risk and
am conducting. During my opening statement I may be inviting costly litigation.
always disclose this and I show everyone my bid num-
ber and tell them that I might be biding on one or two -----
86 AUCTIONEER WWW.AUCTIONEERS.ORG
By-bidding method? Phantom Bidding?
My question concerns the different methods used I understand that you do not approve of phantom
by Auctioneers to start the bidding. Whenever our bidding or puffery at sales. In the event that real
company does not have an auction I attend as many property is being offered at public auction, with
other auctions as I can. I am also severely addicted to reserve, how is an Auctioneer expected to handle the
auctions. I have noticed some Auctioneers start by bidding if only one active bidder is participating in
using a starting bid or base amount and asking for an the bidding process and the reserve price has not
incremental bid. When there is not a bid they drop been met at that point.
the base amount and ask for the next increment. Such It would seem most logical that a phantom bid,
as," I'm bid 1000 now bid 1100, bid 1100, bid 1100 for which is in effect a counter-offer, could be used to
me." If there is no bid they drop their base to 900 and push up the bidder to the reserve prices; otherwise,
ask for 1000. If no one bids, they drop to 800 and ask the sale is unsuccessful. Do you consider phantom
for 900, and so on until someone actually bids. This bids legal when a property is being offered with
method of starting the bid seems common among reserve?
livestock Auctioneers and personal property
Auctioneers. I have heard some real estate ANSWER: No. For those who do not know, phantom
Auctioneers use the same method. I would like to bidding occurs when an Auctioneer calls a bid that no
know if this is a form of by-bidding. Is it legal and is bidder has made. It is used to trick bidders into
it ethical. believing there is competition for a lot where none
ANSWER: By-bidding is the practice of making ficti- Some Auctioneers use phantom bids to fool bidders
tious bids for an item for the purpose of misleading into paying more for goods than competitive bidding
and stimulating other bidders interested in an item. would require. For example, an Auctioneer opens the
The chant is more of an art and may not even be bidding on an item at $500. Legitimate bidders then
clearly understood. Nevertheless, Auctioneers need bid on the lot and increase the price to $1,500. If no
to be careful about how they start the chant. If the one appears interested in bidding more than $1,500,
chant suggests that you have a bid, when you actually the Auctioneer could throw in a phantom bid at
do not, then the Auctioneer is engaging in unethical $1,650 with the hope that it would trick the highest
by-bidding. In a reserve auction, an Auctioneer bidder into bidding more on the item.
should invite bids but should not state that he has a The Auctioneer does not need any assistance and a
bid, unless he actually does. skilled bid-caller can roll through phantom bids so
Implying that you have a bid, when you do not, is easily that most bidders never suspect anything.
unethical. Article 11 of the National Auctioneers Phantom bidding is fraud because it is a misrepresen-
Association Code of Ethics and Standards of tation of a material fact. The Auctioneer calls a bid
Practices says that an Auctioneer should avoid mis- and tells the audience how much the highest bidder
representations of pertinent facts. Article 2 further has declared he is willing to pay to own the lot. The
provides: "Members must, in conducting an auction, Auctioneer is misrepresenting the highest bid to the
deal with customers in a manner exhibiting the high- bidders.
est standards of professionalism and respect. As a member of the National Auctioneers
Members owe the customer the duties of honesty, Association and a member of this profession, we have
integrity and fair dealing at all times." obligations and duties to the public. Article 11 of the
The chant you quoted above seems to imply that NAA Code of Ethics and Standard of Practice pro-
there is a bid for $1,000. The phrase "I'm bid" gener- vides: "Members shall avoid misrepresentation or
ally means that you have a bid. This interpretation is concealment of pertinent facts. There is an affirma-
strengthened by the words "now bid 1100." tive obligation to disclose adverse factors of which
they have personal knowledge." Article 14 provides:
WWW.AUCTIONEERS.ORG AUCTIONEER 87
"Members are duty bound at all times to abide by the Bidding without disclosure
laws and regulations which govern the profession as
well as those which, if violated, would negatively
Does an owner or Auctioneer have the legal right to
affect their ability to present to the public an image of
purchase or bid on items without making this fact
behavior that appropriately represents the profes-
known in the advertising of their auction?
sionalism of our industry."
Finally, you should think about money. If you were
ANSWER -- An owner or Auctioneer generally does
caught using phantom bids, it may destroy your rep-
not have a “legal right” to bid on items without full
utation and business. You also would be inviting cost-
disclosure. Whether an owner or Auctioneer may bid
ly litigation. Phantom bids are illegal and unethical
depends upon several factors including: (1) the type
and should be avoided, even where there is a reserve.
of auction, (2) the specific facts and circumstances,
You should simply tell the bidders that the reserve
and (3) the applicable state law. Let’s consider the
has not been met in an effort to get them to increase
owner’s right to bid on items at an absolute auction
and a reserve auction. Afterward, we will consider
whether an Auctioneer can and should bid on items
at their own auction.
In an absolute auction, the owner cannot bid on an
Selling your own property item under the NAA Code of Ethics. The NAA Code
of Ethics defines an absolute auction as “An auction
If you own property you are going to auction, is it where the property is sold to the highest qualified
necessary to put “owner/agent” in all advertising like bidder with no limiting conditions or amount. The
you would in a normal list and sell situation? seller may not bid personally or through an agent.” In
addition to prohibiting the owner from bidding at an
ANSWER -- It appears from your question that you absolute auction, the ethical standards prohibit
are referring to selling your own real or personal agents of the owner from bidding. This last part of the
property at an auction where you act as the rule, since an Auctioneer is the agent of the owner,
Auctioneer. Several states have laws or rules that prohibits the Auctioneer from bidding on property
require advertisements to disclose the name of the sold at an absolute auction.
Auctioneer conducting the sale and the name of the In a reserve auction, an owner may be permitted to
seller. These laws usually do not have an exception for bid on items at the auction. A reserve auction is
when the Auctioneer is selling his or her own proper- defined by the NAA Code of Ethics as “An auction in
ty. You can easily list yourself as owner of the proper- which the seller retains the right to establish a mini-
ty and Auctioneer to avoid any possible violation of mum price, to accept or decline any and all bids or to
the law. withdraw the property at any time prior to the
If you do not want to list your name as the owner as announcement of the completion of the sale by the
well as the Auctioneer in the advertisement, you auctioneer.” Several states require disclosure of the
should discuss this matter with an attorney licensed in fact that the owner may bid at an auction. If the
the state of Kentucky. owner reserved the right to bid at the auction, the
It is important to understand, however, that you Auctioneer should fully disclose that fact prior to the
should not be listed as owner/agent in an advertise- auction. Otherwise, the Auctioneer may jeopardize
ment. Generally, the Auctioneer is the agent of the the sale and be inviting costly litigation.
seller and owes a fiduciary duty to the seller. The issue of whether an Auctioneer can bid on
However, when you sell your own property at an auc- items at a reserve auction merits some additional con-
tion there is no agency relationship. The law should sideration. Although buying items at your own auc-
not recognize an agency relationship with yourself. tion is generally permissible, it should be avoided.
Most states allow an Auctioneer to purchase items at
----- his or her own auction only after the owner consents
88 AUCTIONEER WWW.AUCTIONEERS.ORG
and the Auctioneer gives proper disclosure of the fact Article 2, “Members must, in conducting an auction,
that he or she may bid on items prior to the sale. deal with customers in a manner exhibiting the high-
There are a few states, however, that prohibit est standards of professionalism and respect.
Auctioneers from bidding at their own auctions. So, Members owe the customer the duties of honesty,
before bidding on anything make sure you under- integrity and fair dealing at all times.” The NAA Code
stand and comply with the applicable law. of Ethics defines customer as “The party who attends
Despite the fact that it may be permissible to pur- the auction for the purpose of buying the property
chase items at your own auction, it creates several offered for sale.” The obligation to deal fairly and
problems. First, an Auctioneer is an agent for the honestly with the customer would generally prevent
owner. As an agent, the Auctioneer owes a fiduciary an Auctioneer from submitting a bid. State law may
duty to act for the owner’s benefit and must subordi- also prevent an Auctioneer and the Auctioneer’s
nate his personal interest to the owner’s interest. (A agents from bidding during an auction in which the
fiduciary duty is highest duty implied by law.) When Auctioneer is crying for bids. The law prohibits an
an Auctioneer purchases something at an auction he Auctioneer from bidding in an absolute auction
or she is conducting, it creates a potential conflict he/she is conducting. In addition, some states prohib-
between the Auctioneer and seller. The Auctioneer it Auctioneers from bidding in a reserve auction.
desires to purchase a lot for a reasonable price and The majority of states permit the Auctioneer to bid
the seller wants to obtain the highest possible price at his or her own auction only after the seller consents
for each lot. The fiduciary duty should not be com- and adequate disclosure of the Auctioneer’s intent to
promised in favor of an Auctioneer’s personal desire bid has been made. The agency relationship between
to purchase property. Second, this type of selfdealing the Auctioneer and the seller creates a fiduciary duty
can damage the reputation of Auctioneers and the in which the Auctioneer owes the seller loyalty. This
profession. duty of loyalty is called into question when an
I expect that the damage to the profession may not Auctioneer wants to bid at his or her own auction,
be worth the possible benefits of bidding on items. which means the seller must consent to the
Even though it may be permissible, an Auctioneer Auctioneer’s bidding prior to the auction being con-
should usually avoid purchasing items at an auction ducted. After the seller consents, the Auctioneer
he or she is conducting. should announce his or her intent to bid on items
prior to the sale. Whether or not this practice is per-
----- mitted is generally an issue of state law.
In addition to Auctioneer bidding, this may also be
Is this real estate bidding considered a shill bid. A shill bid is a bid where the
person submitting the bid has no expectation of pur-
by Auctioneer legal? chasing the item or property being auctioned. Shill
bidding may also be referred to as ghost bidding or
I currently work for a firm that is involved in the by-bidding. The sole purpose of the shill bid is to arti-
sale of real property. I observed at an auction that the ficially increase the price of the item or property
Auctioneer selling the property reached a peak of a being sold. In the context of an absolute auction, the
$200,000 high bid. He then "threw" a bid to the effect of a shill bid is that the qualified bidder may be
crowd of $210,000 at which time he was the high bid- unknowingly bidding against himself or herself.
der. He then "worked" the crowd to get them to bid a For example, if a bidder submits a bid of $10,000
$211,000 bid so as to avoid being the purchaser of the and a shill bid of $15,000 is made and the qualified
property and was successful at getting a bidder to the bidder then bids $16,000, the legitimate bidder was
$211,000. Is this an illegal practice? I have a real bidding against his or her own bid because the shill
moral issue with this practice and wanted to get a sec- bidder had no intent to purchase the property. If the
ond opinion on the matter. Auctioneer has knowledge of such a bid or knowing-
ly participates in attracting a shill bid, then the
ANSWER -- According to the NAA Code of Ethics, Auctioneer has violated the NAA Code of Ethics,
WWW.AUCTIONEERS.ORG AUCTIONEER 89
most likely violated states law, and may have commit- subject property. At the conclusion of the sale of the
ted fraud. Even if state law permits the Auctioneer to subject property, if the Auctioneer or seller was the
bid on property he or she is selling (after the seller successful bidder, the Auctioneer must announce the
consents and the Auctioneer makes the disclosure to identity of the purchaser.
the bidders), the Auctioneer should only submit legit- In auctions without reserve or after the reserve on
imate bids when he or she intends to purchase the a lot has been reached, sellers are generally prohibit-
property. ed from bidding, which means the Auctioneer is also
When conducting auctions, Auctioneers must prohibited from bidding. The Auctioneer, as agent for
remember that they are bound by ethical considera- the seller, cannot bid at an auction where the seller is
tions and that engaging in unethical practices is a neg- prohibited from bidding. While Auctioneer bidding
ative reflection on them and on the Auctioneer pro- may be technically legal, depending on the state law
fession generally. In states that allow Auctioneers to concerning seller bidding, it raises serious ethical
bid at auctions they are conducting, it is important to issues of impropriety and is strife with allegations of
uphold the professional standards. fraud. Although the NAA has not taken a position on
Auctioneer and seller bidding, it recommends that
----- the Auctioneer consult with an attorney licensed in
the state where the auction will take place prior to
Can Auctioneer bid bidding for the seller at an auction.
Under the NAA Code of Ethics, Auctioneers must
on behalf of seller? deal with bidders in a manner exhibiting the highest
standards of professionalism and respect, which
I have seen the following sentence advertised and I means that Auctioneers owe bidders the duty of hon-
wonder if it legal in all states, especially in Indiana? - esty, integrity and fair dealing at all times. Article 2.
--- "The Auctioneer reserves the right to bid on behalf Additionally, the NAA Code of Ethics defines a bid as
of the seller until the reserve price is achieved." “a prospective buyer’s indicating or offer of a price he
If so, then is there any special procedure that we, as or she is willing to pay to purchase the property at
Auctioneers, should follow? auction. Bids are usually in increments established by
the Auctioneer.” If Auctioneers are bound by their
ANSWER -- Where state law permits a seller to bid duty to treat bidders with honesty, integrity and fair
at their own auction, then the Auctioneer, as the dealing at all times, then it seems that Auctioneers
agent of the seller, generally can bid too. Most states would need to disclose that they were bidding on
permit an Auctioneer to bid on behalf of the seller behalf of the seller at the time they submit the bid.
when the seller consents to it (it should be in the auc- Otherwise, the Auctioneer would be in breach of
tion contract) and where the Auctioneer discloses their duty of honesty, integrity and fair dealing to the
that he or she may be bidding. bidders.
In order for an Auctioneer to bid, state law must not Perhaps a hypothetical example would be of assis-
prohibit the seller or Auctioneer from bidding and tance. Consider an Auctioneer who is engaged for the
the Auctioneer’s advertisements, announcements, purpose of selling property valued at approximately
and registration agreement must make the bidders $100,000 with a reserve of $65,000. On the day of the
explicitly aware that the Auctioneer will be bidding auction, there is low attendance and a bidder submits
on behalf of the seller. a bid of $50,000. No one else submits a bid on the
In Arkansas, for example, Auctioneers are required property, so the Auctioneer bids $60,000 (without
to provide notice in all forms of advertising (print, disclosing that he was bidding on behalf of the seller),
electronic, published and unpublished) that and the bidder submits his/her second bid in the
Auctioneers and/or the seller may bid. Further, in amount of $65,000 and he/she becomes the purchas-
Arkansas, immediately prior to the Auctioneer open- er of the property.
ing bidding on a subject property, the Auctioneer The bidder was unaware that he was bidding against
must announce that the Auctioneer may bid on the himself because the Auctioneer did not disclose to
90 AUCTIONEER WWW.AUCTIONEERS.ORG
the bidder that the Auctioneer was bidding for the How to deal with
seller. If the bidder decided to sue the Auctioneer
and the seller, the bidder may have a potential claim the litigation crisis?
for fraud. Although there may be plausible defenses a
fraud claim, Auctioneers are discouraged from partic- How do we address trivial lawsuits from disgruntled
ipating, encouraging, arranging or conducting such buyers who have no legal or moral grounds for their
auctions. suits? We still have to defend ourselves at costs.
Another hypothetical may illustrate the difference
between disclosure and non-disclosure. Consider an Answer: The litigation crisis is something every busi-
Auctioneer engaged for the purpose of selling prop- ness owner is concerned about. We live in a litigious
erty valued at $100,000 with a reserve of $65,000. On society where television dramas relating to the legal
the day of the auction, there is low attendance and a system capture the attention of the audience. You can
bidder submits a bid of $50,000. Afterwards, the sue or be sued by anyone for practically anything.
Auctioneer submits a bid of $60,000 (making a full The concern is about nuisance lawsuits – lawsuits
disclosure by announcing that he was bidding on that have little or no legal merit. The problem with
behalf of the seller), and the bidder makes a second these types of claims is that they can costs more in
bid in the amount of $65,000 and becomes the pur- legal fees to defend than it would to settle the litiga-
chaser of the property. tion. It does not make economic sense to pay $6,000
The Auctioneer’s disclosure to the bidder allowed to $10,000 in legal fees to get a lawsuit dismissed
the bidder make the decision to bid a higher amount when it can be settled for $2,000 to $5,000. Large
without the Auctioneer withholding information from companies generally consider nuisance lawsuits just
the bidder. In other words, the Auctioneer upheld part of the cost of doing business.
his/her duty of honesty, integrity and fair dealing with I do have a few suggestions for you to consider. You
the bidder at all times. The bidder can still com- and your business should be properly insured.
mence an action for fraud, however, the facts in the Adequate insurance is your first line of defense.
second hypothetical demonstrate that the Auctioneer Insurance will generally cover the costs of the
clearly notified the bidder that the Auctioneer was defense as well as any damages for which you may be
bidding on behalf of the seller and the bidder submit- held responsible, after your deductible.
ted his/her bid with that knowledge. This is much Furthermore, there is a possibility of getting the legal
more defensible conduct than the conduct in the pre- fees paid by the opposing party. Although I am not
vious hypothetical. licensed in Ontario and unable to comment on the
While bidders and sellers may not like the effect of law in that particular jurisdiction, you may be permit-
the disclosure required under Arkansas law and dis- ted to file a counterclaim for frivolous litigation or
cussed in the second hypothetical, Auctioneers are abuse of process against someone that filed a claim
professionals and their conduct is not unrestrained without any basis in law or fact.
for the purpose of obtaining the maximum bid for the A counterclaim for frivolous litigation is a vehicle
seller without the bidders’ knowledge. Rather, sever- to seek to recover the attorney fees incurred in the lit-
al state legislatures have drafted laws governing igation. While courts are reluctant to award damages
Auctioneers conduct with respect to this practice. for frivolous litigation, filing the counterclaim will at
Additionally, the NAA has published the Code of least give you additional leverage for negotiation.
Ethics to ensure that Auctioneers conduct fair and Finally, you should consider adopting policies and
honest auctions in order to preserve the public’s trust procedures that will reduce the possibility of litiga-
in the auction method of sale and the auction profes- tion. These policies and procedures could include,
sion. For these reasons, I do not encourage but are not limited to, full and adequate disclosures
Auctioneers to bid on behalf of sellers at any auctions. for the sale, recording or videotaping the auction or
parts of it, tagging items purchased after the sale, and
----- requiring buyers to register before the auction.
Requiring all buyers to register before the auction
WWW.AUCTIONEERS.ORG AUCTIONEER 91
and execute a document stating that they agree to the
terms and conditions of the sale is an excellent way to
reduce your risk for litigation.
You should have an attorney draft the terms and
conditions of the sale for your business. The terms
and conditions should be different for real estate,
personal property, or intellectual property auctions.
The terms could include an arbitration clause, as dis-
cussed in my response to the first question, or a num-
ber of other provisions to reduce your liability.
Is this Auctioneer's ad legal?
I have a question concerning an advertisement that
was run by a local Auctioneer. The ad states that "We
sell real estate for 1%." I thought that there is either
a federal or state law that prohibits such practice. I
would like to know if this is legal and, if not, who
should I contact? It has hurt our business and other
auction firms in the area and we all would like to
know if there is any legal remedy.
ANSWER -- It would seem that no Auctioneer can
sell real estate for 1% commission and sustain his or
her business. However, if the Auctioneer really wants
to provide his or her services at 1% as a loss leader in
an effort to expand business contacts, I suppose that
the "freedom of contract" would allow such represen-
tation, assuming that the Auctioneer has not given
false information or otherwise misled the seller.
While I am not licensed to practice in the state of
Illinois, many states prohibit false or misleading
advertising, and deceptive business practices, which
may apply in this case. Your state Auctioneer's com-
mission or professional licensing authority would be
the appropriate agency for filing a complaint. If the
offending Auctioneer's conduct is prohibited by law
in your jurisdiction, the state Auctioneer's commis-
sion or professional licensing authority will promptly
address your concerns and take appropriate action to
halt any inappropriate conduct.
92 AUCTIONEER WWW.AUCTIONEERS.ORG
Selling short of the Real estate sale mistake
I sold some real estate is California and I might have
I sell real estate through auction. We just sold a made a mistake. During the process of the real estate
property short of a mortgage and the seller is unable auction, I took a break when it look liked bids were at
to come up with all the funds to close. The seller a standstill, in order to have time to visit with the sell-
signed a document saying he would make any and all er and determine if the price was acceptable to the
funds available to close before we took the property buyer—it included a buyer’s confirmation statement
to auction. Our company had its doubts that it would in both the advertising and terms and conditions. I
even bring the mortgage balance (which was kept to told the crowd that we were going to take a 15-
ourselves). We asked the seller what if it falls short? minute break. The then highest bidder left to go
The seller said he needed to move on in his life and make a telephone call to his bank to determine if
wanted us to sell it. So we sold it at Absolute Auction. additional funds were available should he need to go
And it fell short as we thought. higher on his bid. I confirmed with the seller that the
Someone said there was a Colorado law, or many be real estate was going to sell and reopened the bidding
it is federal law, that if the auction company sells a about five minutes later, 15 minutes like I told the
property though auction and the property has a mort- crowd. The bidding resumed and the property sold
gage, and it sells short, it is not the duty of the seller before the original high bidder returned.
to pay the debt, but rather the duty of the auction The original high bidder has filed an injunction to
company. Is that true? What is the law? prevent the sale to proceed, as he claims I changed
the terms (did not wait 15 minutes) and the seller is
ANSWER -- The seller in this case would generally suing me claiming I did not achieve the highest value
have an obligation to clear all liens before transferring for the property. What is your opinion?
the property, and the buyer would thus have the right
to seek redress against the seller and not the ANSWER -- Questions of this nature do not present
Auctioneer. I am aware of no Colorado or Federal law an easy answer, since the law and results will vary
stating that it is the duty of the Auctioneer to pay off from state to state. With that in mind, although the
any such liens not released, but you should check terms of the sale may have been altered in this case it
with an attorney practicing in your jurisdiction for is not clear that the original high bidder actually had
further clarification. In a situation such as this, the a binding contract for the sale, since it appears that
buyer should demand proof that any and all liens the Auctioneer never signaled that he was the suc-
have been released before completing the closing on cessful bidder. As such, it is possible that the original
a sale of real estate, and require the seller to certify in high bidder has no claim against either you or the
writing that all liens have been or will be released. seller.
Any claim of the original high bidder would normal-
WWW.AUCTIONEERS.ORG AUCTIONEER 93
ly be directed against the seller, since you were acting mean that the actual broker (him or her) must sign all
in your capacity as his agent. The seller, as principal, real estate auction contracts. This statute makes it
is generally liable for all acts of his agent while acting clear that the broker must "contract," but I'm not
within the parameters of the established agency. under the impression that means "sign." Can you shed
Although it is not clear that the original high bidder some light on this for me? Thanks!
ever achieved a binding contract in the sale, and thus
may have no right of recovery, the seller may have a ANSWER -- It seems that your concerns were
claim against you for professional negligence. shared by the Ohio State Auctioneers Commission at
Professional negligence is generally defined as the the Commission’s April 23, 2004 meeting, the mem-
“failure to meet the standards of a reasonably compe- bers discussed this very issue with regard to the
tent practitioner.” It is possible that, by re-convening recent amendments of Ohio law on real estate auc-
the sale prior to the announced time and thereby tions. Under the Department of Agriculture’s inter-
missing out on higher bids from other participants, pretation, it makes sense that the actual broker must
you may have committed professional negligence. sign the sales agreement. They are contracting with
The characteristics of a reasonable competent the seller as the seller’s agent. The Auctioneer it
Auctioneer may vary greatly depending on where you seems is simply conducting the sale on behalf of the
practice and the opinion of the judge or jury. You seller and his broker/agent. The Auctioneer’s contract
should therefore consult an attorney in your area that (the cooperative agreement) will be with the broker,
is familiar with auction law litigation. not the seller.
This reply is somewhat limited and is based on the
----- information provided in your question due to the fact
that I am not licensed to practice in the state of Ohio.
Contracting of real estate You should therefore consult the Ohio Auction
Commission or a licensed Ohio attorney who is famil-
iar with state auction law for further information on
I'm located in Ohio, and this involves Ohio law. The
subject matter regards the contracting of real estate
at auction. Here is the statute in question:
Ohio Revised Code 4707021. Sale of real property at
auction. Only a real estate broker who is licensed
under Chapter 4735. of the Revised Code and who is What about bugs?
licensed as an auctioneer under this chapter may con-
tract for the sale of real property at auction. A real We sold a house "as is, where is" in November. The
estate broker who is licensed under Chapter 4735. of long form disclosure states the house has never been
the Revised Code but who is not licensed as an auc- checked or treated for termites. The buyer had abili-
tioneer under this chapter may contract for the sale of ty to do inspections at her own cost and choose not to.
real property only if either of the following applies: Now three months later, she is wanting to sue the
(A) The auctioneer who conducts the auction is a seller for not disclosing termite infestation. Where do
salesperson licensed under Chapter 4735 of the we stand with that issue?
Revised Code and is associated with the real estate
broker who contracts for the sale of the real proper- ANSWER: An Auctioneer is an agent for the seller.
ty. (B) The real estate broker enters into a coopera- The fight is over the disclosures is between the seller
tive agreement with another real estate broker to the buyer. While you or your employees may be
licensed under Chapter 4735. of the Revised Code called as witnesses, you should not be actively
with whom an auctioneer licensed under this chapter involved in the litigation. It sounds like the buyer
is associated and the auctioneer conducts the auction. may bring a claim for fraud or rescission against the
The Ohio Department of Agriculture administers seller. If the seller had actual knowledge of or should
ORC 4707 and I am told they are interpreting this to have known about the termite infestation, the buyer
94 AUCTIONEER WWW.AUCTIONEERS.ORG
may prevail in the litigation. hazards.
The buyer may be able to bring a claim against you Third, under most state laws, the seller of residen-
and your business, if you made any personal repre- tial real estate is required to disclose any defects
sentations and warranties. As long as you disclosed known to him concerning major home systems. These
your agency relationship with the seller to the bid- systems usually include the home's foundation,
ders, the seller should be responsible for the repre- plumbing, septic, heating, and cooling systems. Most
sentations and warranties. You may also be subject to states have adopted a residential real estate disclosure
liability if you had any knowledge of the termite infes- form used for making the disclosures. You should
tation prior to the sale. Otherwise, you and your busi- check the law in your state to determine which disclo-
ness should not be involved in the litigation or any sures must be made by the seller. Finally, Auctioneers
negotiations. also have an ethical duty not to misrepresent or con-
ceal known facts. Article 11 of the National
----- Auctioneers Association Code of Ethics and
Standards of Practice provides: "Members shall avoid
Disclosure of real estate conditions misrepresentation or concealment of pertinent facts.
There is an affirmative obligation to disclose adverse
factors of which they have personal knowledge."
What our obligations as far as disclosure to buyer,
An Auctioneer should disclose all known defects in
protection of seller, etc as it relates to Real Estate by
order to comply with his legal and ethical obligations.
ANSWER: This is, without a doubt, the broadest
question I have ever received. There have been books
written on this subject alone. The answer to this ques- Property line disagreement
tion will be slightly different in each state as well.
Although I am not licensed in Oklahoma and unable We sold a 5 acre tract at an estate auction in 2004.
to comment on the law in that particular jurisdiction, The deceased had purchased the property in 1998 at
I am able to give you some general information that another auction. The survey is on file at the county
may help. courthouse and was done by a competent surveyor.
In an effort to answer this question, I have limited We found the corresponding pins still in place and
my responses to reserve auctions and to the sale of another tract to the side corresponded to these mark-
residential real estate. As the seller's agent, an ers as well. The neighbor, who owns the adjoining
Auctioneer is required to inform the seller of his obli- 100+ acres, put a fence approximately 20 feet inside
gations to disclose and to ensure compliance. Failure the property we sold and stated that the survey we
of the Auctioneer to do so can result in costly litiga- had was incorrect. His survey from 1950 seemed to
tion and liability. show the lines that coordinated with his new fence.
First, you and the seller need to disclose all known He refuses to move his fence and claims that is the
defects with the real estate. If you or the seller hide true property line.
or conceal known defects, you may be liable for fraud. My question is this: Whether the neighbor is right
Once the seller discloses the defects to the buyer, the or wrong in this case about the true property line and
seller usually will be protected from claims relating to since his new fence is along an assumed line (his
them. Second, you are required to disclose the exis- assumption) and not a clearly marked line by a sur-
tence of lead-based paint. Around 80 percent of all veyor, what right(s) does our client have on removing
housing built before 1978 contains some lead paint. the fence? Is it the duty of the adjoining landowner to
Research has shown that the presence of lead based prove that the fence is on his line or is it up to the
paint can create health hazards for building occu- owner of the 5 acres to prove the true line?
pants, especially children. Federal law requires the
disclosure of known information on lead-based paint
WWW.AUCTIONEERS.ORG AUCTIONEER 95
ANSWER: Without an opportunity to review the sur- contacted you, you should seek legal representation
veys and conduct an investigation into this matter, I to determine the extent, if any, of your liability.
cannot even guess which survey is correct. A survey is First, an Auctioneer is an agent for the seller and
an opinion based upon the legal description of the facilitates the sale of property. An Auctioneer invites
property. The survey is an educated guess about the offers from bidders and can bind the buyer and sell-
location of the property lines. As such, it is possible er to a contract. The Auctioneer, after the contract is
that both surveys are wrong. You can attempt to formed, in essence, disappears from the transaction.
resolve the conflict by hiring another survey company So long as there is no fraud, concealment or misrep-
to survey both lots. The neighbors can also negotiate resentation an Auctioneer will generally not be held
and compromise the issue as well. Your client should liable for a transaction.
not cut down or remove the fence on his own. If the Second, your contract with the seller should address
neighbor's survey is correct, your client would be the issue regarding representations made by the sell-
responsible for the cost of replacing the fence. er. Your contract with the seller should require the
If they cannot agree or resolve the issues by them- seller to provide you with all of the relevant informa-
selves, your client should file a lawsuit with a court to tion about a parcel. The contract should require the
get the fence removed. After reviewing all of the evi- seller to certify certain facts as well, such as the size
dence, the court will decide where the true property of the parcel. The contract should also state that you
line is located. It is important to get the issue resolved are going to rely on the representations made by the
in a reasonable amount of time. If your client does seller to complete the sale. Third, most deeds state
not do anything, the neighbor may be able to acquire that the parcel contains a certain amount of acres
title to the 20 feet of land by adverse possession. “more or less” or some other words of qualification.
In general, where property is sold for a lump sum,
----- also known as a “gross sum,” the statement of the
quantity of acres is not a significant part of the con-
Problems from land tract. The buyer generally takes the risk when pur-
chasing the property without a survey so long as there
size estimation is no fraud, concealment, or misrepresentation.
Where land is sold at so much per acre, and there is
In November 2003 I sold several parcels of land for a deficiency in the number of acres conveyed, howev-
a client in Virginia. The announcements I made that er, the purchaser is generally entitled to some com-
day explained that I was selling as per the deed with pensation for the difference in size.
all easements and rights-of-way if any did exist. My Fourth, an Auctioneer must disclose information
contract clearly states that the seller will hold me regarding the parcel. You cannot conceal or misrep-
harmless from any claims made by him this day or in resent any information given to you. In this case, you
the future or in the past. This seller has power of advertised or announced some information regarding
attorney for his father-in-law, who has alzheimers dis- the parcel. At the time of the sale, you thought that
ease, and could not help us in this matter. I sold a par- the parcel contained “a little less than an acre.”
cel of land (that my seller client gave me measure- If you were knew, or should have known based on
ments for) that was a little less than an acre. In realty the facts in the case, that the size of the parcel was
after considerable investigation it turns out to be less smaller than the parcel was advertised, you may be
than .18 of an acre. I have received a letter from her liable to the buyer for damages.
lawyer for restitution. What are my legal obligations Furthermore, Auctioneers have ethical obligations
since I do not want to ever defraud anyone? to disclose the relevant facts. The National
Auctioneers Association Code of Ethics provides:
ANSWER -- Without being able to review your con- “Members shall avoid misrepresentation or conceal-
tract with the seller and discuss this matter with you ment of pertinent facts. There is an affirmative obli-
in detail, I do not have enough information to render gation to disclose adverse factors of which they have
advice on your legal obligations. Since an attorney personal knowledge.”
96 AUCTIONEER WWW.AUCTIONEERS.ORG
You should discuss these issues with your legal issue in 1996. They issued a statement that appears
counsel. These issues will assist him or her in deter- topermit the buyer to conduct lead-based paint tests
mining whether you have any liability in this matter. or risk assessmentduring the due diligence period
prior to the auction date, instead ofgiving the buyer
----- 10 days after the sale. It did not provide any infor-
mation on sales without a “due diligence” period.
Must I fill out the This interpretiveguidance, however, is not a part of
the law. Therefore, you shouldconsider the issue
lead-based paint form? carefully before relying upon it.
As an agent of the seller, an Auctioneer is required
Do you need to fill out the lead base form when you by this law toinform the seller of the seller’s obliga-
sell a fore-closure property at auction? tions under the Act and toensure compliance. Failure
of the Auctioneer to do so will invitecostly litigation,
ANSWER -- Generally, yes. To protect families from civil fines, and can even result in criminal sanc-tions.
exposure to leadfrom paint, dust, and soil, Congress Therefore, it is extremely important that Auctioneers
passed the Residential Lead-Based Paint Hazard be awareof their obligations when conducting a sale
Reduction Act of 1992, also known as Title X. Section (or lease transaction) ofhouses built before 1978. The
1018 of this law directed the Department of Housing seller should generally want to make the disclosure. If
andUrban Development (HUD) and Environmental the sellerfails to disclose the known existence of lead-
Protection Agency(EPA) to require the disclosure of based paint, the buyer maybe able to rescind the con-
known information on lead-basedpaint and lead- tract. The disclosure helps protect the seller.
based paint hazards before the sale or lease of most-
housing built before 1978.The seller must generally -----
provide (1) an EPA-approved informa-tion pamphlet
on identifying and controlling lead-based paint haz- Real estate agency and disclosure
ards (“Protect Your Family From Lead In Your
Home”); (2) disclo-sure of any known information
What is the most frequent issue that causes legal
concerning lead-based paint and/orlead based paint
problems in selling real estate at auction?
hazards; and (3) any records and reports on lead-
based paint and/or lead based paint hazards.
ANSWER -- From what I see and hear in the auction
Generally, there shouldbe some statement in the
community, the most common issues that cause prob-
contract between the buyer and seller toshow the
lems in the sale of residential real estate appear to be
buyer received the required information.In addition
the Auctioneer’s agency status and the disclosure
to these requirements, sellers must typically give the-
requirements. An Auctioneer is the agent of the sell-
homebuyer a 10-day period to conduct a paint
er and has legal responsibilities to the seller. Those
inspection or risk assess-ment at their own expense.
responsibilities generally include assisting the seller
The best way to handle this issue is to have the 10-
with the proper disclosures.
day period waived by the buyer. The Auctioneer
As an agent, Auctioneers must explain the transac-
asked to con-duct the sale should obtain a written
tion process to the sellers and notify them of any
statement from the principalregarding the age of the
requirements or risk. (Advising your seller of the risk
house to be sold. The Auctioneer should requireas a
involved is especially important when the real estate
term of the auction contract, for the sale of a house
is going to be sold at an absolute auction.) An
built prior to1978, that the principal require, as a
Auctioneer is also required to inform the seller of his
term of the sale to all potential buy-ers, a written
obligations to disclose and to ensure compliance with
waiver of all paint inspections or risk assessments.If
the law. Failure of the Auctioneer to do so can result
the 10-day period is not waived, you may be able to
in costly litigation and liability.
have it com-pleted prior to the auction.
The Auctioneer and the seller need to disclose all
HUD and EPA issued interpretive guid-ance on this
WWW.AUCTIONEERS.ORG AUCTIONEER 97
known defects with the real estate. If you or the sell- ANSWER -- Yes, there are a few ways to address this
er hide or conceal known defects, you could be liable type of problem with the MLS board. The listing
for fraud. Once the seller discloses the defects to the service agency should have a written contract with
buyer, the seller usually will be protected from claims the MLS board. The contract would state the terms
relating to them. and conditions for using the MLS service.
Under most state laws, the seller of residential real You and the listing service agency should review the
estate is required to disclose any defects known to contract to make sure that the MLS board is in com-
him concerning major home systems. These systems pliance with it. I would be surprised to find a provi-
usually include the home’s foundation, plumbing, sion in the contract prohibiting the use of the word
septic tanks, heating, and cooling systems. Most “auction” or other auction terms in the MLS listing. If
states have adopted a residential real estate disclosure necessary, you can contact a local attorney to help you
form used for making the disclosures. review the contract.
You are also required to disclose the existence of If the MLS board is violating the contract by refus-
any known lead-based paint and/or lead-based paint ing to allow the word “auction” and other auction
hazards. Around 80 percent of all housing built terms in the MLS listing, the listing agency could
before 1978 contains some lead paint. Research has threaten to sue for breach of contract. The threat of
shown that the presence of lead-based paint can cre- the lawsuit may be enough to get their attention and
ate health hazards for building occupants, especially encourage the board to comply.
children. Federal law requires the disclosure of There also may be other issues involved. The MLS
known information on lead-based paint hazards. The board could be engaging in unfair competition or in
seller must also provide an EPA-approved informa- violation of state or federal anti-trust laws. These
tion pamphlet on identifying and controlling lead- issues depend on the specific facts involved in this
based paint hazards (“Protect Your Family From matter and the laws of the state of Nevada.
Lead In Your Home”). I am also concerned about the advertisement cur-
Auctioneers should check the law in their state to rently on MLS since you stated that it is “misleading.”
determine the disclosures that must be made by the You need to make sure that it does not misrepresent
seller. Every Auctioneer that sells real estate should the sale in any way that would violate state law or your
be familiar with the disclosure requirements imposed ethical obligations. Article 12 of the NAA Code of
by law. Ethics provides: “Members must be careful at all
times to present a true picture in their advertising
----- and representations to the public. Members shall
ensure that all advertising includes the names and
MLS refusal about the information necessary for the public to contact the
Auctioneer or firm responsible for conducting the
word “auction” sale.” You are also required to provide “customers
with a clear understanding of all the terms and condi-
Is there any way to address the problem of a local tions of the auction.” (Standard of Practice 2.2.)
MLS (Multiple Listing Service) board refusing to
allow the word "auction" or other auction indicators -----
in their listings? I recently had a problem when I
hired a limited service agency to 'list' the property What can buyer do
into the MLS. The MLS would not allow public
remarks about the listing as it related to the auction when seller dies?
of the property, thus, when it posted to the
Realtor.com siteit was in the least misleading. Other I received a call from a gentleman on behalf of his
full service brokers have listed auctions in the recent friend, regarding the following scenario and question.
past. The friend bought a piece of real estate at auction.
Subsequent to the auction and prior to the date the
98 AUCTIONEER WWW.AUCTIONEERS.ORG
sale was supposed to close, the seller passed away. she could request to be released from the contract. If
The closing has been delayed due to the need to go the estate agrees, the buyer can recover his deposit
through the probate process. The buyer is frustrated and walk away from the transaction. At this point in
because his down payment money is tied up and he time, however, it appears that there is a binding con-
cannot get possession of the property. Since the sell- tract that both parties need to comply with. block the
er cannot perform in accordance with the terms of sale or fails to comply with the terms of the contract,
the contract, the buyer’s questions are: (1) What is his the buyer should be able to recover damages to the
obligation to honor the contract, (2) Can he declare extent of his or her loss. If the buyer simply wants
the seller to be in default and thus have the contract out of the contract, he or she could request to be
declared null and void and get his down payment released from the contract. If the estate agrees, the
money back, or (3) Can he request the seller’s agent buyer can recover his deposit and walk away from the
to lower the price of the property to compensate for transaction. At this point in time, however, it appears
the “damage” to the buyer due to the delay in clos- that there is a binding contract that both parties need
ing? to comply with.
ANSWER -- It depends. It appears that the buyer -----
purchased the real estate at an auction. Afterwards,
the buyer made a deposit on the purchase of the real Breaking out pieces in
estate. I am assuming that the buyer and seller exe-
cuted a purchase agreement or memorandum of sale multi-parcel auctions
prior to the death of the seller.
The primary issue presented by this question is Recently I learned about a discussion concerning a
whether buyer is still obligated to perform under the multi-parcel auction and some company getting in
contract. Generally, the death of the seller of real hot water over doing it absolute, and then breaking
estate will not have an impact on the agreement to parcels back out and keeping the bidding open. Is this
sell the property. There is a binding contract between legal?
the buyer and the seller. After an estate is opened, the
personal representative or executor will usually han- ANSWER -- You question relates specifically to
dle the sale of the property and it should proceed multi-parcel sales where tracts of land are usually sold
according to the terms of the contract. individually and in various combinations. Sellers and
Whether a buyer can declare a default, terminate Auctioneers agree to have property sold at a multi-
the contract, or attempt to obtain the property at a parcel auction in an effort to generate higher prices
lower price depends upon the terms and conditions and profits. The bids on individual parcels and com-
of the contract. Were there any specific deadlines set binations compete and the property is sold in the
in the contract for the sale of the property? Is the manner resulting in the highest total sale price.
death of the seller defined as a term of default under Multi-parcel auctions are usually structured as a
the contract? These are items that should be exam- reserve auction where all bids are subject to the sell-
ined carefully. The buyer should consider contacting er’s acceptance. When a multi-parcel sale is conduct-
an attorney licensed in his or her state for help with ed as an absolute auction things tend to get a little
these issues. messy. Whether this sale violated the law is ultimate-
The seller’s estate should proceed with the sale of ly a legal conclusion that will have to be decided by a
the real estate in accordance with the terms of the court of competent jurisdiction in each state. This
contract, including the closing date, and should not question can be answered differently by the courts
be permitted to delay the transaction. If the estate across the United States. If a court in Kentucky con-
attempts to block the sale or fails to comply with the cludes that an Auctioneer violated the law in the sale
terms of the contract, the buyer should be able to above, it does not follow that the same sale would be
recover damages to the extent of his or her loss. illegal in Indiana, Florida, Washington, or other
If the buyer simply wants out of the contract, he or states.
WWW.AUCTIONEERS.ORG AUCTIONEER 99
Instead of examining this question under Kentucky Realtor’s contract
law, let’s consider it under the NAA Code of Ethics.
While the Code of Ethics establishes obligations
In my state of Wisconsin, if you are not a real estate
which may go beyond those mandated by law, the
agent you are not allowed to use the Realtor’s con-
NAA nevertheless requires that members conduct
tract when selling real estate at auction. I don’t know
their profession according to the principles found in
if that is the case elsewhere. I sold home in Louisiana
the Code of Ethics and Standards of Practice. Under
and used the real estate contract there before I was
the Code, members pledge to protect and promote
aware of the Wisconsin law. Is there some way to
the interests of their clients. This obligation of
write a generic real estate contract for Auctioneers.
absolute fidelity to the client’s interests is primary, but
Currently, each one of us may be authoring our own.
does not relieve members of their obligation to treat
I am currently having an attorney draw up one for me
all parties to the transaction fairly.
for a home I am selling here. That gets expensive.
The Code of Ethics defines an “auction with
reserve” as “an auction in which the seller or his agent
ANSWER -- There are a few issues that Auctioneers
reserves the right to accept or decline any and all
should consider before an Auctioneer engages in
bids.” The Code of Ethics defines an absolute auction
business in more than one state. First, an Auctioneer
as “an auction where the property is sold to the high-
should consider whether he or she is required to be
est qualified bidder with no limiting conditions or
licensed by the other state or a political subdivision in
amount.” So long as there are no limiting conditions,
order to lawfully conduct an auction. Second, an
I tend to think that you can have a multi-parcel sale
Auctioneer should consider whether there are any
conducted as an absolute auction.
laws, regulations, or practices that may apply that are
In an absolute auction, however, the seller cannot
different from the Auctioneer’s home state.
reject a valid bid and is required to sell the land to the
The State of Louisiana generally requires an
highest bidder. So, special caution should be taken
Auctioneer to be licensed before he or she can law-
with the contract and advertisements, however, to
fully conduct auctions within the state. In this matter,
ensure everyone understands the transaction and
I presume that the Auctioneer is properly licensed as
when the highest bid is determined.
an Auctioneer in Louisiana or exempt from the
I have a final note of caution, however. While you
licensing requirement. However, when an Auctioneer
can have a multi-parcel absolute auction under the
conducts an auction without a license in a state that
Code of Ethics, it would be difficult to conduct the
requires a license, the Auctioneer could be subjected
sale in a manner that is consistent with an absolute
to fines or other penalties.
auction. Simply calling a sale an absolute auction does
Since each state has different laws, regulations, and
not make it an absolute auction. The chant and man-
practices, an Auctioneer must carefully consider the
ner of the sale could be examined to determine
terms of sale and any written contract. It is possible
whether it was conducted appropriately. The bidding
for an Auctioneer to have a generic form real estate
must be kept open on all of the sales until the end, to
contract in each specific state where he or she prac-
determine the highest bidder. In conclusion, con-
tices. Generally, you should not use a contract draft-
ducting a multi-parcel absolute auction is risky. It
ed for a specific state to sell real estate in other juris-
must be done carefully to avoid confusion and invit-
dictions. Each state has different, even conflicting,
ing costly litigation.
laws that may need to be considered. So, if I draft a
I would generally advise Auctioneers conducting
contract for the sale of real estate in Indiana, an
multi-parcel sales to structure them as a reserve auc-
Auctioneer should think twice before using the same
contract in Ohio, Michigan, or Illinois.
While it may be possible to have a contract drafted
that could be used in several states, it would be
impractical. An attorney would have to become famil-
iar with the laws from several jurisdictions and write
100 AUCTIONEER WWW.AUCTIONEERS.ORG
a contract in a manner that is consistent with all of the fraud; (2) misrepresentation; (3) tortuous interfer-
laws where the contract is to be used. The end result ence with a contractual relationship; (4) and other
would most likely be a rather lengthy document that potential claims. I suggest contacting an attorney
would be difficult to use. In addition, it would even licensed in your state and discussing these issues with
be more difficult for buyers and sellers to understand. him or her.
It would also be difficult and expensive to update and Since the statements and representations of the real
modify the contract when there are changes in the estate agent relating to the reserve amount were false
law. and her actions prevented the sale from being suc-
The safest route is to have an attorney draft a form cessful, there may be a claim for fraud or misrepre-
real estate contract for each state where you plan to sentation. Individuals are generally not allowed to
sell real estate. The form real estate contract should make false representations, which are relied upon,
be reviewed periodically to ensure that it complies and injure another party. The realtor said there was
with the law. an agreement to not sell the condo for less than
$500,000. If this is an untrue statement of fact, and
----- the other elements required by state law can be satis-
fied, there may be a valid claim.
Can realtor disrupt an auction? In addition, once two parties enter into a valid con-
tract, third parties are generally prohibited from
interfering with the performance of either party’s
I recently had two disturbing incidents in recent real
obligations arising under the contract. In this matter,
estate auctions that lead to the following two related
the Auctioneer and the seller have a contract and the
questions: While doing my pre-auction announce-
real estate agent may have tortuously interfered with
ments on a condo unit, a real estate agent (and resi-
the Auctioneer’s ability to perform. In order to prevail
dent of the complex) interrupted and stated to my
on a claim for tortuous interference with contract, a
registered bidders that, even if they were the success-
party must prove the following general requirements:
ful bidder, they may not be able to live in the unit
(1) the existence of a valid contract; (2) defendant’s
unless "approved" by the board as stated in the house
knowledge of the contract; (3) defendant’s intention-
rules. She then stated to all present that we (the auc-
al cause of the breach of that contract; and, (4) dam-
tion company and the owner of the condo) had no
ages. Whether the real estate agent’s actions meet
right to auction the unit. At this point, two of the six
these requirements is an issue to address with an
bidders walked out.
Also, as treasurer of the condo board, she printed in
The statement about the approval of the board being
the monthly newsletter that we (the auction compa-
required before the successful bidder can live in the
ny) had agreed not to sell the unit for less than
condominium is also a concern. Unfortunately, I have
$500,000. My seller's reserve price was below that
not had an opportunity to review the condominium
and we never made any such agreement and further-
by-laws or restrictive covenants (which are probably
more, we never had any contact with anyone from the
the house rules referred to by the real estate agent).
board. Here are my two questions: Can some kind of
If the by-laws and restrictive covenants do not
legal action be taken against her? And, can a condo
require approval of the board, this statement may
board hold "approval" authority over someone who
support the claim for fraud. If the house rules do
legally buys a piece of real estate?
require the approval of the board, the issue becomes
what is the criteria for approval. Federal law prohibits
housing discrimination on the basis of race, origin,
ANSWER -- The actions of the real estate agent and
religion, ethnicity, nationality, and sex. Any rules that
condo board at the time of the auction certainly raise
deny the above classes housing opportunities may be
a few potential legal issues. It seems that there are a
void and unenforceable.
few potential claims you could make against the agent
These types of provisions have been successfully
and condo board. These claims may include: (1)
challenged in some instances. It depends upon what
WWW.AUCTIONEERS.ORG AUCTIONEER 101
the house rules say. If a successful buyer is not inform the seller of the process, risks, and rewards
approved by the board, he or she should seek legal associated with each type of auction.
counsel to review the rules of the condominium In addition, disclosures play an important part in
board to determine whether they comply with feder- every real estate auction. As the seller’s agent, an
al and state law and are enforceable. Auctioneer is required to inform the seller of his obli-
gations to disclose and to ensure compliance. Failure
----- of the Auctioneer to do so can result in costly litiga-
tion and liability. The disclosures that Auctioneers
Real estate auction legal issues need to be considered include, but are not limited to,
the following: (1) any and all know defects, (2) lead
base paint disclosure (if required), and (3) state law
I’m just getting started and plan to focus exclusively
usually requires disclosure of any defects known to
on real estate auction sales, especially residential. I
the seller concerning major home systems (roof,
am a California licensed real estate broker and
heater, air-conditioner, etc.). Some states, including
Realtor, so I’m familiar with most of the legal issues
Indiana, require the disclosure of underground tanks
in that regard. What I would like to know are the top
in certain commercial transactions. The seller should
5 or 10 legal issues you encounter, or are concerned
disclose these items to comply with the law and pro-
about, in regards to real estate auctions and how to
tect himself or herself from claims relating to them.
protect ourselves or avoid them.
Also, Auctioneers should maintain good communica-
tion with the seller. Sellers want information about
ANSWER -- There are several significant legal issues
the sale and understand the process. Auctioneers are
to consider in real estate auctions. Obviously, selling
selling, in many instances, the family home or the
real estate by auction method is unique and has its
family farm so there may be some emotional attach-
own challenges and rewards.
ment. Failing to communicate with the seller
Real estate auctions can be conducted either with
(answering questions or advising sellers of their legal
reserve or without reserve. The distinction between
responsibilities) will usually create problems and
these two methods is crucial. The Auctioneer, as the
could result in costly litigation. Sellers can become
agent for the seller, must explain the risks to the sell-
frustrated if they are not aware of the Auctioneer’s
er and to advertise the auction consistently. An auc-
actions concerning the marketing or advertisement of
tion without reserve is an auction where the property
is sold to the highest qualified bidder with no limiting
To avoid dealing with confusion or a frustrated sell-
conditions or amount. At an auction without reserve,
er, keep them informed of the process and send them
the seller must understand that a successful bid may
copies of the advertisements published for the sale of
be substantially lower than the value of the subject
their real estate. These simple steps can help keep
property. The advantage of an auction without
the Auctioneer and seller on good terms.
reserve is that it may draw more bidders to the auc-
Furthermore, Auctioneers must know what they are
tion because the seller is committed to selling the
selling. As part of the due diligence for commercial or
valuable real estate, Auctioneers should consider hav-
An auction with reserve is an auction in which the
ing title work completed and a survey prepared. The
seller or his agent reserves the right to accept or
title work and survey can be extremely important in
decline any and all bids. This form of sale removes
advising your clients concerning the sale of their
some of the seller’s risk because it gives the seller
property at auction. Title work will verify the seller’s
more control over the sale of the property.
ownership of the property and reveal any liens on the
Auctioneers need to be careful about the language
real estate. The liens which may be found during a
used in advertising the sale. In some cases, the lan-
title search include mortgages, mechanic’s liens, judg-
guage used in advertising the sale has converted an
ments, and taxes. These items will usually need to be
auction with reserve to an auction without reserve.
paid at or before the closing.
When auctioning real estate an Auctioneer must
A survey of the subject property will reveal any
102 AUCTIONEER WWW.AUCTIONEERS.ORG
other encroachments on the property and verify the clauses occurs everyday in the United States. Most
acreage. Encroachments such as easements, disputed homes, businesses and farms have mortgages that
property lines and floodways may influence the price secure repayment of amounts borrowed by the own-
of the property and the reserve amount. Auctioneers ers. The due on sale clause is incorporated into a
should take steps to learn about these types of prob- large percentage of real estate mortgages. Lenders
lems before they become a dispute. usually issue mortgage loans to owners of real proper-
Finally, upon obtaining the highest bid for the real ty based on each owners’ credit and income with
estate the Auctioneer, or someone in his or her staff, respect to the value of the property. The purpose of
should be prepared to meet with the successful bid- the due on sale clause is to prevent the owner of the
der immediately to have him or her sign the real real estate from transferring the property to a higher
estate contract. A few months ago, a reader asked a credit or income risk without the bank’s knowledge.
question about the statute of frauds and its applica- Auctioning such properties requires the Auctioneer
tion. Specifically, the reader indicated that the suc- to investigate the amount owed on any mortgages
cessful bidder refused to sign the purchase agree- that may encumber the properties. The concern of
ment after the sale and invoked the statute of frauds the seller is that the Auctioneer attract and accept
as a defense (Statue of frauds is a legal doctrine that bids in amounts that allow the seller to pay the bal-
requires the parties to certain transactions, such as ance owed on the various mortgages out of the auc-
real estate transactions, be reduced to a written tion sale proceeds. The Auctioneer should investigate
instrument, contain an adequate description of the the title of the property to become aware of all liens
subject property and be signed by the party against on the property and the amounts owed for each lien.
whom the writing is being enforced.) An Auctioneer may want to consider ordering title
Having the buyer and seller sign the purchase agree- work for all properties in order to discovery any mort-
ment help ensure that they are willing to complete gages or liens on the properties. Once the Auctioneer
the transaction. It is important to have the successful discovers the amount owed on a mortgage or lien, he
bidder sign as soon as possible to avoid any time for or she should discuss setting an appropriate reserve
second thoughts to change his or her mind. These are with the client. An auction with the appropriate
a few of the most common problems and steps that reserve will give the seller assurance that they will not
can be taken to avoid them. An Auctioneer, as the be responsible for paying the difference between the
agent of the seller, owes a fiduciary responsibility to selling price and the amount owed on the mortgage
the seller. Keeping the legal obligations in mind will loan.
help an Auctioneer avoid most legal problems. Properties that are subject to a mortgage should
generally be sold at a reserve auction. There are sig-
----- nificant risks associated with selling the property at an
absolute auction. Some jurisdictions even prohibit
Handling “subject to” mortgages Auctioneers from selling properties subject to a mort-
gage at absolute auction, unless the mortgage compa-
ny agrees to the auction or a financially secure indi-
I have been approached to sell by auction a portfo-
vidual agrees to pay remaining mortgage balance.
lio of about 10 properties that all have "subject to"
Even when it may be permissible, it usually will not
mortgages. I am nervous as in all cases the lender has
be wise to conduct the sale as an absolute auction.
in the small print "that should title change the mort-
For example, if an Auctioneer sells a property at
gage is due on sale" or something similar. The owner
absolute auction for $35,000 and the property has a
is a lawyer and also has a title company and he says
mortgage with a balance of $50,000, the seller will be
there is nothing illegal, and that the worse that can
liable for the remaining $15,000 as well as the
happen is that the lender calls the loan in. Should I
Auctioneer’s fees and expenses. Under these circum-
stances, the seller may sue the Auctioneer in an effort
to recover the difference between the selling price
ANSWER -- Selling properties with due on sale
and the balance owed on the mortgage. The
WWW.AUCTIONEERS.ORG AUCTIONEER 103
Auctioneer’s risk increases dramatically when selling
more expensive properties subject to a mortgage by
In addition, the mere fact that there is a mortgage
lien on the property could be considered a limiting
condition. If the sale proceeds do not satisfy the
mortgage, and the seller fails to pay, the buyer will
not own the property free of all liens. If no one pays
the remaining mortgage balance, the bank could fore-
close and take the property.
Obviously, advertisements for the sale of properties
should require bidders to have financing arranged
prior to the auction and indicate that liens exist on the
property. If the successful bidder has his or her
financing arranged, then the due on sale clause in the
existing mortgage is less important. The successful
bidder’s bid should exceed the amount owed on the
seller’s mortgage loan. The bidder’s financial institu-
tion will loan the successful bidder an amount that
will allow the seller to pay off the mortgage and
obtain a release of mortgage. Afterwards, the bidder’s
financial institution will take a mortgage security
interest in the real estate.
Auctioneers should sell real estate subject to a mort-
gage at a reserve auction, where the proceeds of the
sale can be used to pay off the existing mortgage.
Before an Auctioneer agrees to conduct an absolute
auction of real property, which is subject to a mort-
gage, he or she should consult with a licensed attor-
ney in the jurisdiction in which the auction will be
held to ensure compliance with state law.
104 AUCTIONEER WWW.AUCTIONEERS.ORG
Who is liable in lawsuit? keting company to send illegal faxes on your behalf.
Thus, while you may be liable to the receiver of the
Several months ago I hired a marketing company to fax communication if you are considered the sender,
fax information to "their" mailing list for a specific you also have the ability to seek indemnification from
type of equipment. Several weeks later, I received a the marketing company. As such, you might forward
letter from an attorney in Ohio requesting punitive a copy of the Ohio attorney’s letter to the marketing
damages for his client because he received the fax. company and demand that they take appropriate
My question is... Who is liable: my company or the action to resolve the matter. At the same time, you
marketing company I paid to fax the information? I should advise the Ohio attorney that the marketing
was not told that their list was a random or purchased company was the sender of the fax, not you.
list, nor was I told it was being faxed to people who Hopefully those steps will lead the complaining party
didn't request to be on a mailing list. I was told that to pursue the issue with the marketing company
they had a mailing list of "x" amount of people who rather than you personally. If you find that the matter
purchased the type of equipment I was going to auc- cannot be resolved amicably and you are forced to
tion. I told them how many to send and the zip defend the case, you should consider a third party suit
codes/areas to send. against the marketing company for their conduct in
sending the unsolicited fax.
ANSWER -- Under a little-known federal “Junk Fax” -----
law, it is unlawful for any person to use a telephone
facsimile machine, computer or other device to send Disclaimers for locksmith
an unsolicited advertisement to a telephone facsimile
machine. The law provides that one may bring a court
action based upon a violation of this law and recover
either $500 or the actual monetary loss for each vio- Is it legal and, if so, what disclaimers must be
lation. In addition, if the court finds that the defen- adhered to in order to sell locksmith equipment, such
dant willingly or knowingly violated this law, punitive as a lockpick set of tools at auction?
damages equal to three times the above referenced
amounts may also be levied against the offender. ANSWER -- Generally, locksmith equipment and
The question of who will be liable in your case lock picking tools should only be sold to a bona fide
depends to a large extent on who is considered the locksmith, a bona fide auto repossessor, a licensed car
sender of the fax and on your relationship with the dealer, a lock manufacturer, or a motor vehicle man-
marketing company, which is based primarily on the ufacturer. You should therefore require purchasers to
law of agency. A principal is generally liable for those certify in writing that they there are one of these
acts of his or her agent which are made within the classes of purchasers.
scope of the agent’s authority. However, in this case it They should also certify that they will not use the
seems fairly clear that you did not authorize the mar- tools in an unlawful manner and that they will comply
WWW.AUCTIONEERS.ORG AUCTIONEER 105
with all applicable federal, state and local laws per- Repeated explanations to the landlord have been in
taining to the use and possession of such tools. In vain. He has rented the space to another restaurant
addition, the purchaser should agree to indemnify that, obviously, could use this fan in their new opera-
and hold the Auctioneer and seller harmless against tions. The new tenant was in attendance at our auc-
any and all liability that may arise out of the purchas- tion and did not bid on the exhaust system--in fact,
er’s possession and use of the tools. they indicated that the unit was too small for their
As you might expect, each state has different laws future needs!
with regard to the sale of personal property items like I have turned the matter over to the bank and the sell-
locksmithing tools. It is, therefore, important to er's attorney as it is my belief that we acted properly
check the laws that apply in your state to sales of under the direction of the seller and his bank to sell all
these items for any further restrictions. assets. Since our seller had originally purchased this fan
----- from the previous tenant--with funds borrowed from
the bank--all secured assets would include this exterior
Who owned fan unit? fan unit since it was part of, and attached to, the exhaust
system. The building was left in tact with the fan's hole
We liquidated a small 'mom and pop' pizza restau- properly covered in a workmanlike manner. What was
rant which had only been open for two years. There our proper "legal" handling of this matter? All rents
was a properly executed and recorded financial state- were current and the landlord knew in advance of the
ment, with the state, showing a first, secured, priori- auction--telling the seller that the space was to be
ty interest in all the equipment and assets. We gained stripped and left "like an empty box!" Who "owned" the
written permission from the secured creditor indicat- exterior-mounted fan unit?
ing that all assets were to be sold and the net pro-
ceeds turned over to them. ANSWER -- This question focuses on what are
The restaurant was located in a strip mall. The land- referred to as fixtures. A fixture begins as personal
lord had re-rented the space nece sitating an expedited property but then becomes part of the real estate
auction to accommodate the landlord and his new ten- through the process of attachment or accession. Once
ant. Our seller had purchased, with the proceeds of the a true fixture has been attached, it usually cannot be
bank's original loan, some equipment from the previous removed from real property.
tenant of the space, also a small restaurant. This pur- The question here is whether the fan remained
chase included the exhaust hood/make-up air system, removable personal property or became a fixture
among other things. Per instructions from our seller-- when it was attached to the real estate. An analysis of
and their bank--we sold everything from the restaurant, the original lease agreement between the landlord
including the exhaust hood and its externally mounted and the seller is the best way to shed some light on
(on the side of the building) ventilation exhaust fan. this dispute. The lease agreement may clarify exactly
This fan was an integral part of the exhaust system. We what is included in the leased premises, and whether
have sold hundreds of these fans with their hoods over or not the exhaust fan was a part of the leased prem-
our 29 years in the business with never a problem. Now ises or personal property of the seller. It would be
that the auction is over and the exhaust system has been helpful if the seller has a bill of sale or some other
removed, the net proceeds were turned over to the receipt from the former tenant indicating that the fan
secured creditor as was instructed. unit was owned by the former tenant and title passed
The landlord has now 'demanded' the return of "his" to your seller. Finally, the manner of attachment
fan unit--claiming that it was his since it was mount- often has an impact in these cases as well. Courts will
ed on the exterior of the building and had been orig- typically rule that, absent a specific agreement of the
inally installed by the previous tenants, etc. The land- parties, an item is considered a fixture if it is perma-
lord claims the fan unit was a leasehold improvement nently attached to the real property and its removal
and therefore belonged to the landlord, not the ten- would cause permanent or considerable damage to
ants, and therefore could not be secured by the bank the real property. So the extent of the damage, if any,
or owned by the tenant! that was inflicted on the landlord's building may
106 AUCTIONEER WWW.AUCTIONEERS.ORG
direct the analysis here if the lease agreement is silent auction. During this time we confirmed the opening
on whether the fan was considered a fixture and the bid offered by the home owner just across the road.
seller has no bill of sale indicating the passage of title. Although $25,000 would be less than half of what we
From the Auctioneer's perspective, it seems that you thought the final bid would be, this was an absolute
simply followed the reasonable instructions of your auction, so that should make a good starting point.
seller in auctioning the goods, and merely acted as As we started the auction I asked for higher bids to
the seller's agent. The dispute here is really between start and then announced that I had an opening bid
the seller, his bank and the landlord, and you should of $25,000 and began asking for 30. Well, the fire-
direct those parties to settle the dispute among them- works started, a man stepped forward shaking his fin-
selves. This question further reminds all Auctioneers ger demanding to know "Who bid the $25,000?
to ensure that your standard agreement for auction- Nobody here bid! You are running a crooked auc-
eering services contains a provision whereby the sell- tion!" Suddenly this gathering of friendly neighbors
er acknowledges that he or she has marketable title to became unruly shouting out "He's right, you have to
the property being sold free from liens or other tell us who bid!" I tried to explain that I did indeed
encumbrances. The agreement should also clarify have a bid. Then I immediately sent my ring man to
that the Auctioneer will have no liability or duty to check with the bidder to see if he would allow us to
defend in such disputes, and that the seller indemni- disclose him as our bidder, as the ring man started his
fies and holds the Auctioneer harmless against any way the man stepped forward and said "I didn't tell
and all damages that may arise out of the Auctioneer's you that I would start the bid, we were just talking, so
reliance on any misrepresentations made by the sell- if that is my bid I withdraw it."
er with regard to the nature of the title held. The man shaking his finger replied "That's what I
----- thought. Now...I'll start you for $5,000" and sat back
down on the roadside. So, with our new start of
Group violates Sherman Act $5,000 we worked our way up to the final bid of
$23,000. Each time the neighbors would see some-
one bid, one of them would go talk to them to remind
In May 2003 we sold acreage along the river within a
them that you can't develop this "swamp."
city's limits. This was (swamp ground) in a flood way
The buyer was the bar owner. He did not at any time
with one possible building site at one end and no pres-
appear to be working with the neighbors, however at
ent ability to develop or use the balance for anything
the conclusion of the auction, his attorney, (who was
other than "quiet enjoyment." A roadway separated this
one of the neighbors) stepped up to do the contract
parcel from some nice homes built along the river's
work and informed us that he, himself and the bar
bank. A couple of these homeowners expressed a possi-
owner were forming a partnership with some of the
ble interest in bidding on the property. One such neigh-
neighbors to own the property to make sure that it
bor said he would start the bidding at $25,000 (10 days
would never be developed. These people scared my
prior to the auction). At one end of the property the
first bidder and tried to intimidate all others. The fact
road curved north onto a city street. At this curve there
they bid against each other early on may have just
was a small gravel parking area used by the customers
been confusion on their part. The last bids were
of the small marina and bar just across the road. The
between outside investors and the bar owner.
auction sign placed near the gravel area disappeared in
I felt trapped by the absolute auction and these men
just a few days. The sign at the other end of the prop-
took control of my auction. After 30 years in the auc-
erty was not bothered.
tion business I had never had one unfold quite like
On the auction day, as neighbors began to gather
this -- and I thought or hoped I wouldn't see it again.
and chat we learned that they expected the bar owner
However a similar situation came up recently. This
to buy the property for the parking area. Whenever
time we were not selling at absolute auction and the
someone not from the neighborhood would walk up,
seller declined the bid.
a neighbor would immediately approach them to try
Is there a law being broken that I might be able to
to learn of their intent and reason for attending the
inform these underhanded bidders of, or would a sell-
WWW.AUCTIONEERS.ORG AUCTIONEER 107
er have grounds for some sort of civil suit? The same ly tape-recording a live auction event legal without
scenario has surely happened to other Auctioneers or prior permission of the auction house or the
soon will with the increase of real estate at auction. Auctioneer? If this happens, is it within the right of
the Auctioneer or owner to request the person to
ANSWER: Yes. From the facts you provided it appears identify themselves and explain what purpose they
that the bidders violated the Sherman Anti-Trust Act. are taking pictures for? Your comments and opinion
The Sherman Act generally prohibits contracts, combi- are appreciated.
nations, trusts, and conspiracies that unreasonably
restrain trade and commerce. The Sherman Act applies ANSWER: Generally, taking pictures of an auction
to almost every effort to manipulate prices or monopo- and tape recording a live auction without permission
lize trade or commerce. It is designed to protect buyers of the auction house or auctioneer is legal. There are
and sellers alike from those who would use artificial certain limitations, however, and you can restrict bid-
means to eliminate competition and manipulate market ders from doing it in the future.
pricing. The Act applies to Auctioneers and bidders. The issues presented in your question relate to the
If two or more bidders conspire to keep the prices issues of privacy. You and your business have privacy
low at an auction, they have violated the Sherman rights that may be violated if someone goes too far.
Anti-Trust Act. Similarly, if an Auctioneer and a shill For example, if someone takes your picture or
conspire to artificially control prices, they have violat- records your auction without permission and uses
ed the Act. Here the bidders were using threats and them for commercial advantage, you have claim for
intimidation to keep others from bidding and to keep invasion of privacy.
the prices artificially low. A claim for invasion of privacy is complex and diffi-
The violation of the Sherman Anti-Trust Act can cult to prove. If you have found out that someone is
result in some harsh civil or criminal penalties. If the taking pictures and recording live auctions, you can
seller of the land decided to sue the bidders in feder- attempt to stop them by requiring all buyers to regis-
al court he may be able to recover up to three times ter before the event and agree to the terms and con-
the amount of his damages, plus his attorney fees. ditions of the auction. You could include in the terms
Criminal enforcement of the Sherman Act is the and conditions, for example, "No photographs or tap-
responsibility of the Antitrust Division of the U.S. ing (video or audio) of the auction is permitted with-
Department of Justice. A criminal conviction for vio- out the express written permission of the owner." You
lating the Sherman Act can result in large fines or could also post signs in an effort to discourage picture
years of imprisonment. taking or taping during auctions.
If bidders intimidate other bidders or you suspect -----
some type of agreement to keep the prices low, you
should notify the bidders of the Sherman Act. You Sunset laws are enforceable
should also notify them that a violation of the Act could
result in criminal and civil liability. If bidders continue When a state enacts a new law as a “sunset law”
to be problems, as an agent for the seller, you should (meaning it has an ending date), such as an
discuss the options with the seller. You have a duty to Auctioneer license law, is this sunset law enforce-
advise the seller or his options. These options include able? When changes are made during the course of
suspending or canceling the sale, even though it is an the 10-year sunset, how do the people that are affect-
absolute auction, and continuing with the auction. ed by the sunset law find out the changes so they can
----- abide by them? Can this law or ruling be enforced if
Is photographing without the persons that it affects are not notified?
In Illinois, 6 years ago there was an auction license
permission illegal? law instituted. This law was set in as a Sunset law,
which means in 10 years it will come up for a vote to
Is picture taking (which includes pictures of bid- either become law or be abolished. We all had to
ders, employees and the Auctioneer) and also secret- become licensed and pay our fees. There seem to
108 AUCTIONEER WWW.AUCTIONEERS.ORG
have many changes since the inception of this law, (ISAA). One of the primary purposes of ISAA is to
with no notification to the licensees. keep its members informed of current developments
in Illinois. Contacting your state’s licensing commis-
ANSWER -- You asked several questions about the sion to obtain information. In Illinois, the Office of
licensing law requirements in Illinois and sunset pro- Banks and Real Estate (OBRE) is primarily responsi-
visions. Let’s examine each question separately. ble for ensuring compliance with the licensing laws.
First, the licensing requirement in Illinois is a “sun- When you have a question about licensing laws, the
set law” that is currently set to expire on January 1, OBRE or the Illinois Auction Advisory Board should
2010. A sunset law is a statute or provision in a law be able to provide some assistance. Contacting an
that requires periodic review of the policy reasons for attorney licensed in your state to determine whether
the law. The legislature must take some action to con- there have been any changes to the law.
tinue the law by a certain date. If no action is taken, In order to protect yourself and your business, you
the law will expire and cease to exist. should stay informed of the legal requirements for
As you are probably aware, sunset laws are common- Auctioneers in order to avoid violating the law.
ly used and generally are enforceable. I am not -----
licensed in Illinois, however, and unable to comment
on the specific laws in Illinois. Furthermore, I would Beware of pre-paid legal services
not be able to determine whether the law you
referred to is enforceable without conducting exten-
What do you think of pre-paid legal services? I have
sive research and analysis. So, I cannot answer this
used a pre-paid legal service to get my legal questions
specific question. (Please see my disclaimer.)
answered concerning my auction business and for fam-
Second, you asked whether a statute can be
ily situations. The answers are state specific, so I can
enforced against someone who has not been notified
count on their answers to be relevant and reliable for
of a change in the law. In other words, can an
my state. Pre-paid legal has saved my auction business
Auctioneer be held responsible for violating the law
thousands of dollars and they also did the will for me
when he or she did not know the law? Yes. Under our
and me for the price of membership. What do you
legal system, the law can and generally will be
think of this type of legal service?
enforced against an Auctioneer even when he or she
is not notified of the change. The traditional response
ANSWER -- I am not sure whether you are asking
to this question, which you already know, is “igno-
about a specific company or asking about pre-paid
rance of the law is no excuse.” You are required to
legal arrangements in general. I am not familiar with
keep yourself informed of the laws that may affect
any of the companies that are currently offering pre-
you and your business.
paid legal arrangements and do not express an opin-
Third, since Auctioneers are required to be
ion about them. I can, however, give you some gener-
informed of all applicable state, federal, and local
al information about pre-paid legal arrangements.
laws, the question then becomes how should
You should carefully consider the terms of any pre-
Auctioneers keep themselves informed of the laws
paid legal agreement prior to agreeing to it, in an
that may affect them. There are a few options to con-
effort to determine whether it is appropriate for you.
sider in an effort stay informed. The best options typ-
Pre-paid legal arrangements are not for everyone. A
pre-paid legal arrangement typically works like an
Taking continuing education classes from reputable
insurance contract. You will pay premiums monthly
organizations and associations. When you take mean-
or annually to the organization. In return, when you
ingful continuing education classes that focus on auc-
need legal advice, you call the organization and they
tioneering in your state, you should be advised of any
will have an attorney contact you. There are, howev-
significant changes in the legal landscape.
er, a few disadvantages to using a pre-paid legal
Contacting or joining your state auctioneer associa-
arrangement that you should consider. First, there
tion. For example, Illinois Auctioneers should consid-
usually are a number of services excluded from the
er joining the Illinois State Auctioneer Association
WWW.AUCTIONEERS.ORG AUCTIONEER 109
contract. If you or your business is sued, most pre- names. Is this correct? Here is what the fax said:
paid legal arrangements will not pay for an attorney to “Courts make no distinction between businesses,
defend you in the action. Most pre-paid legal auctioneers and individuals selling single items. If this
arrangements also will not pay for an attorney to rep- is a commercial transaction of any kind, we should
resent you if you decide to sue someone else. The not be running brand names unless the advertiser has
contract may also exclude the buying or selling of real permission from the owner of the brand to use the
estate and other transactions where you would want name/likeness/etc in advertising….If a business, auc-
legal representation. There are typically a number of tioneer, or individual is receiving compensation for
exclusions, so you may never receive the kind of legal the sale of that item, then the brand name cannot be
representation you want or need. used without permission. Our department policy will
Second, you cannot personally select the attorney that be to make our advertisers aware of this sticky legal
will be working with you. When a client calls my office, ground, but we will not alter their advertising our-
he or she wants and expects to talk to me. My clients selves. It is their decision to comply with the regula-
know me and have established a personal relationship tions but we will discourage any misuse of brand
with me. When you participate in a pre-paid legal names. Private party used car advertising is given an
arrangement, however, if you have a legal question you exception because the brand name is also a defining
have to call the organization that established the pre- description of a product that would be difficult to
paid legal service. Afterwards, an attorney will call you describe without using the name.”
to discuss the matter with you. You generally have no
control or authority to select the attorney that will assist ANSWER -- I have not seen the advertisement ref-
you. You could end up talking with a different attorney erenced in your letter and do not know how the
each and every time you call for advice. trademarks or brand names were used. So, I cannot
Third, the pre-paid legal arrangement could actually comment on the specific advertisement referenced in
be more expensive. With pre-paid legal arrangements your letter. I can, however, give you some general
you generally pay a monthly premium. If you have to information about trademarks and their use.
pay monthly premiums for a long period of time when Trademarks are "protected words, names, symbols,
you do not need any legal advice, you may end up pay- sounds, or colors that distinguish goods and services
ing more over the long term than you would by simply from those manufactured or sold by others and to
hiring an attorney when you need advice. indicate the source of the goods." Trademarks are
Fourth, in order for the business offering pre-paid associated with the goodwill for a product and are
legal services to make any money it has to keep its commonly used to identify the product and bring
costs to a minimum. In order to keep its costs low, it people into the store.
may not hire quality attorneys or lawyers with signifi- Generally, the sellers of genuine goods do not need
cant experience. If the business offering pre-paid a trademark owner’s permission to use the trademark
legal services does not pay the attorneys adequately, it to sell the goods. Sellers (including Wal-Mart, Target,
will not have the best attorneys to offer legal advice. individuals, and Auctioneers) have always been able
For these reasons, Beers Mallers Backs & Salin, to use the trademark of a good to sell the genuine
LLP and I do not participate in any pre-paid legal article. So long as the advertising is not false and the
arrangements. goods are genuine, the trademark can be used to
----- identify the goods without permission from the origi-
nal trademark owner.
Use of trademarks (brand names) For example, if a NAA Auctioneer wants to sell a used
Whirlpool washer and dryer, he or she can advertise
A Pennsylvania newspaper recently sent a fax to an and identify the lot as a used Whirlpool washer and
Auctioneer saying that advertisers (such as dryer without permission from Whirlpool. Otherwise,
Auctioneers) cannot use brand names such as Black how would I be able to distinguish my washer and dryer
& Decker or Lazy Boy due to not having permission from other washers and dryers, such as GE? In addi-
from those companies to advertise those brand tion, an Auctioneer can advertise a repaired Whirlpool
110 AUCTIONEER WWW.AUCTIONEERS.ORG
washer and dryer as a “repaired” or "reconditioned" business asset sales takes place, with a need to protect
Whirlpool washer and dryer. lienholders, buyers, and sellers. It seems that none of the
Non-genuine items include such things as counter- auction laws seem to cover the real estate transaction.
feit goods and remakes. If you replaced a Buick body In fact, it seems to me that the auction process is
with a Ford body, the resulting vehicle is not a gen- part 1 of a 2-part mechanism for real estate auctions.
uine Ford (but this vehicle could be advertised as a 1. The auction process determines who will be the
Ford body with a Buick chassis and engine). eligible buyer and the price that the real property will
Auctioneers need to develop some business sense be sold for. 2. The real estate process then carries out
and know what is being sold. Counterfeits such as the sale transaction, generally through an escrow
new fake Gucci purses or T-shirts bearing unautho- holding company or some other legal escrow tool.
rized marks could get an Auctioneer into trouble. If this is so, might the California E&O carrier need
One step Auctioneers can take to protect themselves to cover the real estate transaction portion of the
is to insist on the seller producing papers verifying sale? The auction seems to merely be a process that
the authenticity of an item (at least for new products determines who will be allowed to buy, at what price,
or expensive products where such papers should be and what terms of ultimate sale, all taking place
available). through real estate brokerage law.
Auctioneers should generally advertise items that
they plan to sell at a future auction. If an Auctioneer ANSWER -- Insurance policies are written contracts
sells a Whirlpool washer and dryer, he or she should between the insurance company and the insured.
not hold himself or herself out as a Whirlpool seller Whether there is coverage is for a specific injury or
or dealer. The fact that an Auctioneer sold one of loss depends upon the exact language of the policy
their products does not give him or her the right to and the applicable state law. It appears that your
continually use the trademark. The Auctioneer insurance company is based in California. So, an issue
should not continue to use the Whirlpool trademark, that needs to be considered is whether California law
unless he or she has another Whirlpool item to sell. controls the interpretation of the policy or another
As an alternative to listing items that are to be sold at state’s law. There will usually be a “choice of law”
an auction, the Auctioneer can run a simple adver- clause somewhere in the policy. The choice of law
tisement stating that he or she sells used appliances. clause will specify which state’s laws will apply to the
In other words, an Auctioneer can advertise the name interpretation of the policy.
of verifiable products. For example, an estate sale can I am not licensed in California and am unable to
be advertised as having Wedgwood China (verifiable by comment on the laws in that jurisdiction. You should
the mark on the dishes), Lladro figurines, Whirlpool contact an attorney licensed in your state to receive a
washer and dryer, and other products – as long as he or legal opinion if one is necessary. The specific lan-
she actually has these items for sale. guage of the policy will control whether there is cov-
----- erage. Unfortunately, without reviewing the policy
and applicable state law, I cannot give you any addi-
Errors and Omission insurance tional information on the coverage issue.
Whether an auction of real estate should be consid-
I am a licensed Auctioneer (in states that have auc- ered a two-step process is interesting. In some states
tion license laws) and a real estate broker in a few it is a two-step process. Your state’s law may permit
states. Here is my question to you: Recently, our Auctioneers to call bids for the sale, but require an
California E&O insurance ecarrier said that they individual with a real estate license to close the trans-
would not cover auctions of real estate. However, action. So, there are two parts of the sale.
they have no problem in covering real estate broker- In my opinion, however, considering the transaction a
age transactions. two-step process generally is not helpful. In most real
It seems to me that what the auction laws cover are estate auctions the terms and conditions of the sale,
Business and Professions Codes that include the except for the price, are established prior to the fall of
Uniform Commercial Code to regulate how chattle of the hammer. After the auction, the buyer cannot nego-
WWW.AUCTIONEERS.ORG AUCTIONEER 111
tiate the terms of the sale. In other words, the transac- Each state will also have a state agency to enforce state
tion is essentially complete after the auction. laws relating to the sale of alcohol.
In an absolute auction, for example, the transaction is As a side issue, Auctioneers should prohibit con-
complete with the fall of the hammer. In an absolute sumption of alcohol at the auction premises.
auction there are no contingencies or other limiting Permitting consumption of alcohol at your business
conditions. Thus, upon the fall of the hammer title to may require a bartender license or some other state
the property effectively passed to the seller. license. Furthermore, serving or permitting con-
In these instances, the buyer may sue the seller for sumption of alcohol invites costly litigation.
specific performance if he or she refuses to close the Auctioneers have enough to worry about during an
transaction. (In this type of litigation there may be an auction- without wondering whether individuals will
issue on whether the parties can satisfy the statute of be able to drive home without having an accident.
frauds, but there should not be an issue about the Second, Auctioneers should not sell or give any type
contract terms.) of alcohol to minors. When an Auctioneer is planning
----- to sell any type of alcohol (decanters with intact seals,
bottles of wine, or other alcoholic beverages), he or
Sale of liquor decanters she should require all bidders to register and show at
least one form of identification before the auction to
When conducting an auction of personal property, establish each bidders age. Thus, the registration
how do I handle a collection of liquor decanters if process would permit the Auctioneer to verify
part of the decanters have the seal intact? Can I sell whether a registered bidder is over the age of 21.
all of the decanters since I'm selling decanters and Third, before an Auctioneer sells any decanters
not be concerned about the contents or should I not filled with original liquor, he or she should generally
sell those that have original contents? disclaim the quality of the contents. Even with the
seal intact, the liquor may not be of the quality bid-
ANSWER -- Auctioneers who sell decanters, orna- ders expect. Fourth, some states and municipalities
mental bottles for holding and serving alcohol, with require an Auctioneer selling liquor or alcohol to
an intact seal and the original contents should exer- obtain an “auction liquor license.” It is not uncom-
cise caution. An Auctioneer should make sure that he mon for wine and other spirit auctions to be conduct-
or she is complying with all applicable federal, state, ed in the larger cities, like Chicago. An auction liquor
and local laws relating to the sale of alcohol. When an license may be required for a specific sale, regardless
Auctioneer sells decanters with an intact seal, he or of whether the alcohol is sold for private use or resale.
she is selling the liquor and decanter, the liquor cannot Auctioneers should carefully consider these issues
be ignored. Before selling decanters with the seal or prior to selling alcoholic beverages or decanters con-
any type of alcohol, Auctioneers should consider the taining alcohol. If you are not familiar with the
laws regulating its sale and the following concerns. requirements in your state, you should contact an
First, state and federal law may require that an attorney for guidance. When an Auctioneer sells a
Auctioneer be licensed (or have a permit) to sell alco- decanter with its original seal intact, he or she is also
hol or liquor. Whether a license is required usually will selling the alcohol and must comply with the law.
depend upon whether an Auctioneer is simply conduct-
ing an estate auction or regularly engaged in the busi- -----
ness of selling beers, wines, distilled spirits, or other
alcoholic beverages. The federal agencies involved in Shill bidding
enforcing federal laws regarding the sale of alcohol
include the Bureau of Alcohol, Tobacco, Firearms and What would you recommend in regards to the mat-
Explosives (ATF) and the Alcohol and Tobacco Tax and ter of shill biding or commingling? Are they illegal by
Trade Bureau (TTB). The TTB, in some circumstances, any parties at auction, and how can they be stopped?
requires a permit before an individual or business is
permitted to engage in the business of selling alcohol. ANSWER -- Shill bidding is a practice whereby an
112 AUCTIONEER WWW.AUCTIONEERS.ORG
agent or associate of the seller submits false bids for the pects the shill scheme. Second, the Auctioneer can
purpose of artificially increasing bids from bona fide ignore or refuse to accept the shill’s bids. Third, have
bidders. There are a variety of scenarios in which a sell- a ring man watch the shill closely and approach the
er’s agent will make false bids to drive up prices. shill to confirm the bid and his registration informa-
Spotting the false bidder is the key to stopping shill bids. tion. Finally, if the Auctioneer is fairly confident that
The practice is prohibited in nearly every jurisdiction. an individual is acting as a shill and does not stop after
If Auctioneers become aware that a seller has being approached, the Auctioneer or the seller can
employed a shill, the Auctioneer should consider ask the shill to leave the auction. (Auctioneers should
his/her ethical duties. Auctioneers are bound by the exercise caution because it is possible that the alleged
National Auctioneers Association’s Code of Ethics, shill bidder has no connection to the seller and was
which imposes a duty of honesty, integrity and fair making valid bids.)
dealing with clients. Further, the Uniform Auction Despite all of the preparations and efforts
and Auctioneer Licensing Act (“UAALA”) prohibits Auctioneers employ, there is no foolproof way to stop
Auctioneers from misleading the seller, buyer, or bid- shill bidding. Knowing how to handle a shill may
ders during the sale. UAALA also expressly prohibits cause them to discontinue their shill practices. More
Auctioneers from knowingly using phantom bids or importantly, each Auctioneer needs to protect his or
shills. See UAALA § 5-101. Knowingly accepting or her reputation and prevent others from thinking that
participating in shill bidding would be misleading he or she is knowingly involved with the use of a shill.
buyers during the conduct of a sale. -----
The effect of a shill bid is that a bona fide bidder is
bidding against himself/herself because the shill does Self-storage units
not intend to purchase the merchandise. For exam-
ple, if a bona fide bidder submits a bid for $10.00 for
I may soon auction the contents of several self-stor-
an item and the shill bids $15, and the bona fide bid-
age units that have been abandoned or otherwise
der makes another bid at $20, the bona fide bidder
remain unpaid. What legal considerations and/or pit-
was cheated out of $10.00, because the shill did not
falls should I be aware of in this type of auction? I
intend to purchase the item. Obviously, the more
know they take place all the time, but I am not famil-
expensive the merchandise the more the bona fide
iar with them.
bidder is cheated in a shill bidding scheme.
How can Auctioneers spot or stop a shill bidder?
ANSWER -- Texas, like most states, has a specific law
Preventative measures may dissuade some shill bid-
involving personal property placed in storage units.
ding schemes. Auctioneers should incorporate lan-
Typically, notice must be given to the renter and the
guage into their contract that the seller will refrain from
sale must be properly advertised. One must also look at
using shills or similar devises during the auction.
the rental agreement between the owner of the storage
Second, Auctioneers should post their rules at each
unit and the renter. It will outline the key terms of the
auction they conduct and should disclose that shill bid-
parties' agreement in the event of abandonment or
ding is prohibited. Third, again incorporate language
non-payment, and the permissible extent of those
into the bidder registration process that further places
terms is often governed by state law. It is therefore
bidders on notice that shill bidding is prohibited.
important to confirm the law in your particular jurisdic-
Stopping a shill bidding scheme can be a problem
tion when dealing with a sale of this type.
for an Auctioneer. Assume that a bidder submits a bid
at key times of the Auction on various items and the
Auctioneer suspects the bidder is submitting shill
bids. The Auctioneer has a few options with respect Storage auctions regulations
to addressing the potential shill.
First, the Auctioneer can stop the auction and con- Many storage companies have their managers con-
firm that the shill bidder is the current bidder. This duct storage unit auctions, some every month for
lets the shill know that the Auctioneer at least sus- multiple locations. This seems to be a violation of
WWW.AUCTIONEERS.ORG AUCTIONEER 113
state auction laws. at them for firing them. For all I know, they could still
If this isn't, is it okay for an Auctioneer to buy the be taking payments of rent from these six renters
storage units and resell the items at a weekly auction without the owner knowing it, and be pocketing the
in their auction center? I think many Auctioneers profits. If we sell these units, maybe they could sue
could supplement their income doing storage auc- for the value. How do I protect myself? Would an
tions for storage companies. I know the storage com- indemnity clause protect me from lawsuits in this
pany managers are doing storage auctions in Indiana, case? The property is small and 10 sheds is about 25
Illinois and Ohio. percent of their space.
ANSWER -- A majority of states do require ANSWER -- Some states have passed statutes to
Auctioneers to be licensed in order to conduct lawful expressly define the relationship between a renter and
auctions. Most, if not all, of these licensing laws have storage company. In these states, the renter’s obliga-
a few exceptions to the licensing requirement. tions and the storage company’s obligations are pre-
The five most common exceptions to the licensing scribed by law. Usually, the statute grants the owner of
requirement include the following: (1) any auction the storage company a lien on the personal property it
conducted by or on behalf of a charitable organiza- is storing. The lien is to cover rent and labor charges
tion; (2) any individual who offers his or her own incurred to store the renter’s personal property.
goods at auction; (3) an auction conducted by or Additionally, if the owner of the storage unit takes
under the direction of any public authority; (4) an additional measures to preserve the renter’s personal
auction conducted by or on behalf of a person property, then the lien also covers the reasonable
appointed by judicial order or decree; and (5) any sale expenses associated with the measures taken. Also,
required by law to be an auction. These laws usually the owner of a storage facility is allowed to recover
do not have an exception for storage companies – so the expenses he or she incurs in selling and disposing
these auctions depending on state law, may need to of the renter’s property. The lien is generally superior
be conducted by licensed Auctioneers. to all other liens, except liens perfected prior to the
I also agree that many Auctioneers could obtain addi- sale of the renter’s property and any tax liens.
tional business by expanding to do storage auctions for Generally, these statutes require a written rental
storage companies. While storage auctions present new agreement containing a bold statement informing the
opportunities, they also present new risks. Auctioneers renter that the owner of the storage facility has a lien on
should conduct some due diligence and learn more all personal property the renter places in storage. The
about storage auctions before making the jump. statutes also establish the procedures storage unit own-
----- ers must follow to dispose of the renter’s property.
If a state statute does not exist in a jurisdiction or
Storage unit auction dilemma the storage unit owner does not have a written rental
agreement, then the issue may be governed by the
I sell storage units that sometimes don’t pay their state’s bailment law. Bailment is a situation that can
rent. A company recently came to me and said they arise when one party entrusts his or her property to
took over the management of their own property another party for safekeeping. In this instance, the
back from an outside company. They have 10 units bailor (renter) gives his or her property to a bailee
that the management company cannot supply rental (storage company) for a period of time.
agreements to, and the people that have their proper- Without a written agreement, however, the storage
ty in these units have not been in and have not paid company may not have a valid lien on the property. The
them any rent for over a year. written agreement and state law normally work togeth-
I have never come across this situation, and neither er and permit the storage company to sell the renter’s
have three other Auctioneers I spoke with. I don’t property. The storage company must generally have a
know how I can sell them without a rental agreement. lien on the property before it can sell the goods.
How do I protect my auction company if this is some In order for Auctioneers to protect themselves, they
scam from the old management company to get back should consider including specific representations
114 AUCTIONEER WWW.AUCTIONEERS.ORG
made by the storage company in the auction contract.
Some suggested representations include, for exam- Is there a "rule of thumb" as to when and where an
ple, the following: (1) the renter and storage compa- auction company should incorporate? As an incorpo-
ny entered in and have a valid rental agreement; (2) rated entity is it possible or advisable for the firm to
renter is in default of the terms of the contract in that have its own auction license?
the renter has failed to make payments to the storage
company; (3) the storage company has lawful posses- ANSWER -- An auction company should conduct its
sion of the renter’s property; (4) the storage company affairs under some form of business association,
followed all statutory provisions (if any) and notified whether a corporation, limited liability company
the renter that it intends to sell his or her property ("LLC"), limited liability partnership ("LLP") or other
and that it no longer desires to possess the renter’s business entity. The formation of a business entity such
property; and (5) the storage company has a valid lien as a corporation or LLC allows the shareholders or
on the property or judgment authorizing the sale. members to conduct the auction company's business
These representations are suggestions and not com- affairs with certain protections from personal liability
prehensive nor applicable in each and every situation. for the conduct and debts of the corporation or LLC.
If a storage company is unwilling to make these rep- An auction company should form a business entity
resentations, an Auctioneer should be skeptical about prior to starting its business if at all possible. The state
whether the storage company has the authority to sell where the majority of your business will be transact-
the renter’s property. ed is generally where you should incorporate or
In addition to the above representations, organize, depending on the size of your business and
Auctioneers should include an indemnification some other factors, mostly dealing with tax implica-
clause. The auction contract should state that the tions. You should also register your entity in each
storage company agrees to indemnify, defend, and state where you conduct business. It is usually possi-
hold the Auctioneer harmless for any claims brought ble and often mandatory for the auction company to
by the renter against the Auctioneer. This type of have its own license, but each individual auctioneer
clause will not protect an Auctioneer from his or her should keep and maintain his own credentials as well.
own fraudulent or negligent conduct, but it would There are a number of taxation and legal considera-
provide protection to an Auctioneer who enters an tions that must be taken into account when selecting a
agreement in reliance on the above representations. form of business entity, so you should discuss such mat-
State law and the written contract generally define ters with your accountant and attorney before forming
the duties and obligations between a renter and a -----
storage company. The written contact also explains
what should happen when a party defaults on his or Selling part of my company to agent
her duties and obligations.
An Auctioneer can refer to the contract between the I am the owner/broker of an auction company that
renter and the storage company to determine whether is a corporation and primarily sells real estate. We
the storage company has the right to sell the renter’s recently started a traditional listing/sales division
property. Bailment relationships, on the other hand, "doing business as" under the corporation. I have
create unique legal questions with respect to the three agents currently that are part of the listing serv-
Auctioneer’s duty to the renter. In situations where a ice and was asked by one of them if I would sell him
storage company cannot or will not provide a written 1% of my company. His reason was so that when he
contract, Auctioneers should be aware of the potential dealt with potential clients, he could honestly refer to
bailment relationship and question whether the storage the company as "our company." I do believe that if I
company has authority to sell the property. do go along with this idea, that I would have to have
----- a clause that would have any ownership interest
revert back to me upon him leaving the company.
What's your opinion on doing this?
When to incorporate
WWW.AUCTIONEERS.ORG AUCTIONEER 115
ANSWER -- In this situation, a lot will depend on Land trust as method to avoid taxes
your relationship with this particular agent. Even if
the relationship is solid today, things have a way of
Please discuss land trust as a method of heirs to
changing over time and it is a rare partnership that
avoid inheritance taxes. Also, how do you set one up?
does not eventually experience some strain. If the
agent in this case is made even a minor shareholder,
ANSWER -- The establishment of a trust is a com-
he may be entitled to notice of all meetings and have
monly used method for protecting assets from taxa-
a vote in all corporate decisions. This may create extra
tion in estate planning. This method is most often
paperwork and some added cost in conducting the
incorporated into an estate plan when the assets of an
affairs of the corporation, and limit your ability to
individual or married couple will likely exceed the
direct the corporate affairs in a manner which you
exemption amount afforded under the Internal
alone believe to be in the corporation's best interests.
Revenue Code. The trust is set established by a writ-
Unless the agent is proposing to contribute capital
ten instrument and real property owned by the
or some other valuable asset to the corporation in
"grantors" is transferred to a trustee who holds the
exchange for his ownership interest, you should care-
land "in trust" for the benefit of those persons named
fully consider what his participation will bring to the
in the instrument establishing the trust.
venture, and whether that participation will justify
If the trust is set up to be irrevocable and the
the additional paperwork and loss of complete con-
grantors retain no incidents of ownership, the proper-
trol. If you decide that the benefits provided by his
ty is no longer considered to be the property of the
participation outweigh the potential drawbacks, you
grantors and is therefore not generally included in their
should require that he execute a "buy-sell" or "cross-
taxable estate upon death. In effect, the property
purchase" agreement whereby the new shareholder
remains available for use by the trust grantors during
agrees that his shares must be sold back to the corpo-
their lifetime and then to the trust beneficiaries upon
ration, and perhaps limiting his ability to participate
the death of the grantors, who are usually the grantor's
in corporate affairs.
children. Establishing such a trust will require the pay-
ment of "up-front" legal fees, but these fees are often
vastly offset by the savings realized in inheritance taxes
Donated vehicles upon the death of the trust grantors. You should discuss
these issues with your legal advisor to see if the estab-
Can I auction donated vehicles without being a "car lishment of a trust is right for you.
dealer or salesman?" If not, what are my alternatives? -----
ANSWER -- Although each state has a different pol-
icy on this issue, most states will require some type of
vehicle sales license or endorsement, even if you are Advertising in a license state
already a licensed Auctioneer. In some states, the
answer may depend on whether your auction busi- Oklahoma has no state licensing requirement. Texas
ness is exclusively dedicated to the sale of donated does. Can an Oklahoma Auctioneer advertise an auc-
autos or if this is just a small portion of your business. tion to be conducted in Oklahoma in Texas newspa-
Many states require an actual vehicle auction busi- pers without a Texas license?
ness or dealer's license. Since the law in each state
will differ on vehicle auctions, you should check with ANSWER -- You should exercise caution before you
your state auction commission and local licensing advertise in a Texas paper without a Texas license. I
authorities to confirm the actual licensing require- am not licensed in the State of Texas and am unable
ments in your area. to comment on the laws in that particular jurisdiction.
----- You should contact an attorney licensed in Texas to
receive a legal opinion if one is necessary. However, I
116 AUCTIONEER WWW.AUCTIONEERS.ORG
can give you some of my thoughts on this matter. laws start their own auction business via eBay. It has
Texas requires an Auctioneer and auction company to opened the gate to a whole new level of fraud as well as
be licensed prior to engaging in the auction business new horizons in marketing to a much wider audience.
within the State of Texas. Since you are not conducting My question is: Why haven't states required individuals
the auction in Texas, you should not have to worry -- who are in effect conducting nation-al or even inter-
about being required to have an Auctioneer’s license. national auction businesses within their borders -- to be
You may, however, be required to obtain an auction licensed and bonded? One could argue that the
company license. An auction company is generally one Internet auction world has opened the door to wider
that engages in the business of arranging, managing, fraud potentialthan the conventional auction method
sponsoring, advertising, or conducting auctions. Since and thus whatever the license and bonding require-
you are considering advertising an auction in a Texas mentswere intended to serve are even more relevant to
newspaper, you should consider obtaining an auction Internet auctions.
company license. You should also be aware that Texas
could seek to impose civil or criminal penalties for ANSWER -- The Internet and Internet auctions pres-
advertising an auction in a Texas newspaper without a ent Auctioneers with some difficult legal andethical
license (even though it is unlikely). questions. The federal government, state governments,
If you advertise in Texas regularly (or otherwise the NAA, and Auctioneers havebeen and will continue
engage in the auction business in Texas), you should to grapple with these issues. You raised a valid question.
consider obtaining an auction company license. Since you are required to be properly licensed and
Several states require individuals or businesses to bonded in Massachusetts, why shouldn’t someone
have an auction company, or an equivalent, license in who conducts an auction via the Internet in
order to advertise, manage, sponsor, or arrange an Massachusetts be licensed and bonded? The answer
auction. You should carefully consider the implica- is because no one has figured out how to resolve all of
tions of advertising in another state before you do so. the competing issues related to on-line auctions.
Another issue to consider is whether you have to First, not every state in the United States of America
register your business in Texas. To transact business requires an Auctioneer to be licensed.
in Texas, as in several states, a business from another Thirty-three states currently require a state license for
state must register with the secretary of state. The an Auctioneer. Massachusetts is a unique state, because
registration requirement applies to most business you are required to have a state license and can also be
entities including corporations, limited liability com- required to be licensed by local municipalities (such as
panies, limited partnerships, business trusts, and oth-
in the City of Cambridge). Twelve states do not require
ers. A business that fails to register with the secretary
a state license, but currently permit licensing require-
of state, when required to do so, may be enjoined
from transacting business in the state and may not file ments and regulations to be imposed by its cities,towns,
or maintain a lawsuit in the courts within the state. or counties. The remaining five states do not generally
So, if you frequently conduct or transact business in impose licensing requirements.
Texas, you should register your business with the sec- Second, if an Internet auction company was required
retary of state. to be licensed in each and every state where someone
----- purchased an item via the Internet, several Internet
auction companies would have to be licensed in all of
the states that require state licenses and by many local
Why don’t states regulate municipalities. Such a requirement could put most
Internet Auctioneers? companies out of business. Each state generally has ali-
censing fee that would be required. Each state has dif-
Many, if not most states require Auctioneers to be ferent licensing and examination require-ments. Each
licensed and bonded. I understand this is to protect the state generally has some continuing education require-
public and marketplace from incompetence and fraud. ment. North Carolina attempted to require companies
This is good. I have noticed over the past several years that conduct Internet auctions to be licensed as an
individuals who would not qualify under these prudent Auctioneer or auction firm.
WWW.AUCTIONEERS.ORG AUCTIONEER 117
In October of 1998, the Auctioneers Association of the property or parts of the property over to one of the
North Carolina published an article that contained spouses and requiring either spouse to pay an amount,
the opinion of the North Carolina Auctioneer either in gross or in installments, that is just and prop-
Licensing Board relating to Internet auctions. The er; (3) ordering the sale of the property under such con-
Licensing Board was of the opinion that if you con- ditions as the court prescribes and dividing the pro-
duct Internet auctions in the state of North Carolina ceeds of the sale; or (4) ordering the distribution of
and you were not exempt from thelicensing require- benefits that are payable after the dissolution of mar-
ments, then you were required to obtain an riage, by setting aside to either of the parties a percent-
Auctioneer or auction firm license. Information age of those payments either by assignment or in kind
regarding the Board’s interpretation of the law was at the time of receipt.
circulated on the Internet. In less than a week, the A party to a dissolution proceeding in Indiana would
North Carolina Auctioneer Licensing Board’s office generally engage the services of an appraiser when
was deluged with telephone calls from as far away as there is a valid dispute over the value of property.
Japan. Eventually, two individuals from the North Auctioneers should contact an attorney licensed in their
Carolina General Assembly came to the Licensing jurisdiction to determine whether state law requires an
Board and requested that the Board defer action. appraisal and determine whether there are any special
NorthCarolina is still deferring action on this issue. procedure when selling property in a divorce.
Illinois has taken a different approach. It does not -----
require an Internet auction company to obtain an
Auctioneer or auction firm license. It does, however,
require Internet auction companies to register with
the state. Most states are sitting on the sidelines wait-
ing to see what will hap-pen regarding this issue.
Is appraisal of fair market
I have always heard that divorce cases require
appraisals to be done in fair market value, but I have
spent some time looking for a reference to such a rule
and I can't seem to find anything except other
appraisers stating it as fact. Can you provide a legiti-
mate reference to such a rule?
ANSWER -- The legal procedures for obtaining a
divorce and property settlement vary in each state. I gen-
erally do not handle any divorces cases. I have had an
opportunity, however, to discuss this issue with other
members of Beers Mallers Backs & Salin who do handle
divorces and obtain some general information for you.
In Indiana, for example, there is generally no require-
ment for personal or real property to be appraised. The
Court, however, is required to divide the property in a
just and reasonable manner. The Court may divide the
property among the spouses in any of the following
manners: (1) division of the property in kind; (2) setting
118 AUCTIONEER WWW.AUCTIONEERS.ORG