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* Chairman and CEO, Sheldon Good & Company, LLC, B.S. Finance, magna cum laudeSyracuse University, J.D. De Paul University College of Law; [email protected].

** Professor of Law and Director, Center for Real Estate Law at The John Marshall LawSchool, J.D. University of Chicago; [email protected]. The authors want to thank thefollowing John Marshall Law students: Robert Faulkner, J.D., The John Marshall Law School,LL.M. in Real Estate Law candidate, and Stanley Marion Fellow in Real Estate Law; JustinRiley, J.D., South Texas College of Law, and LL.M. in Real Estate Law candidate; DennisFoldenauer, J.D. candidate; and Amanda Meindl, J.D. candidate, for their invaluable researchassistance in preparation of this Article, as well as The John Marshall Law School for a FacultyResearch Grant to support this scholarship.

REAL ESTATE AUCTIONS—LEGAL CONCERNSFOR AN INCREASINGLY PREFERRED

METHOD OF SELLING REAL PROPERTY

Steven L. Good*

Celeste M. Hammond**

Editors’ Synopsis: Part I of this Article provides an introduction andhistory of the real estate auction as a means of selling non-distressedproperties as an alternative to negotiated sales. Part II analyzes, from alegal perspective, auction practices that allegedly undercut the reputa-tion of the industry, including complaints of both buyers and sellers.Part III reviews existing legal and ethical rules that affect the real estateauction process, and considers why existing rules are not adequate andare in need of reform.

I. INTRODUCTION AND HISTORY OF THE AUCTION INDUSTRY AND AN ALTERNATIVE TO NEGOTIATEDSALES OF NON-DISTRESSED REAL PROPERTY ................ 767A. History of Using the Auction to Sell Real Property ........... 767B. Advantages and Disadvantages of Using Auctions ........... 770C. The Auction Process in the Private Sector .......................... 773

1.Role of Auctioneer ........................................................... 7732.The Auction Contract ...................................................... 7753.Types of Auction Contract ............................................... 7764.Typical Steps in Preparation for a Real Estate Auction .. 778

II. AUCTION PRACTICES THAT UNDERCUT THE REPUTATION OF THE INDUSTRY .................................. 780A. Practices Affecting the Seller ............................................. 780

1.“Sales Talk” and Fraud in the Inducement .................... 7802.Misinformation about Seller’s Right to Cancel an

Absolute Auction .............................................................. 785

766 40 REAL PROPERTY, PROBATE AND TRUST JOURNAL

3.Auctioneer’s Failure to Require Bidder to Comply With Registration Requirements ...................................... 787

4.Failure to Disclose .......................................................... 7885.Mandatory Arbitration .................................................... 789

B. Practices Affecting the Buyer ............................................. 7901.Inconsistent Bidder Registration Practices ..................... 7902.Shill Bidders, Fraudulent Bidders, and By-Bidders ........ 7913.Seller Bidding .................................................................. 7934.Unclean Hands ................................................................ 7955.Deceptive Advertising ...................................................... 7976.Mandatory Arbitration .................................................... 8017.Denial of High Bidder at Absolute Auction ..................... 803

III. LEGAL RULES THAT AFFECT THE AUCTION PROCESS ........................................................................... 805A. Government Regulation through Licensing of

Auctioneers and Real Estate Brokers .................................. 8051.Auctioneer License .......................................................... 8062.Real Estate Broker License ............................................. 8073.Unclear Licensing Requirements and Implications ......... 808

B. (Mis)application of the Uniform Commercial Code to Real Estate Auctions? ......................................................... 8121.The Uniform Sales Act and the Uniform

Commercial Code ............................................................ 8122.The Uniform Land Transactions Act ............................... 814

IV. PROPOSALS FOR REFORM ................................................ 814A. Reforms Based upon the ULTA ......................................... 815

1.ULTA Section 2-207(a) ................................................... 8152.ULTA Section 2-207(c) .................................................... 8163.ULTA Section 2-207(d) ................................................... 817

B. Reexamination of Strict Agency Rules in Real Estate Auctions .............................................................................. 818

C. Deceptive Trade Practices Acts Should Apply to Real Estate Auctions ........................................................... 8201.Uniform Deceptive Trade Practices Act (Revised) .......... 8212.California Business and Professions Code .................... 823

D. Other Suggestions for Reform ............................................ 823V. CONCLUSION .................................................................... 824

WINTER 2006 Real Estate Auctions 767

1 See Harold D. Hunt, Going Once, Going Twice, Sold!, TIERRA GRANDE, July 2002,available at http://recenter.tamu.edu/tgrande/vol9-3/1565.html (last visited Feb. 3, 2006).

2 Id.; see also Grant S. Nelson & Dale A. Whitman, Reforming Foreclosure: TheUniform Non Judicial Foreclosure Act, 53 DUKE L. J. 1399, 1415 (2004) (“The prevalenceof auctions in itself raises questions, given that auctions are not a common way of arrangingarms-length market sales of real estate in the United States.”).

3 Steven L. Good & Margot B. Weinstein, The Auction Advantage: Innovative Cor-porate Real Estate Portfolio Sales, CORP. REAL EST. LEADER, Mar. 2005, at 54-58.

4 Steven L. Good & Wallace J. Wolff, Real Estate Auctions: A Prudent DispositionStrategy for Fiduciaries Owning Real Estate, ABA TR. & INVESTMENTS, November/December 2005, at 40.

5 In May 2005, the Professional Standards Committee of the NAR ruled on two ques-tionable auctions practices. It approved an auction case interpretation for insertion into theNAR’s Code of Ethics, holding that certain sales talk was a violation of Article 1. The NARis the nation’s largest professional association, consisting of over 1 million members in2005. Kevin A. Roth, 2001 MEMBER PROFILE: DEMOGRAPHIC, ECONOMIC, ANDPROFESSIONAL CHARACTERISTICS OF REALTORS ® (2001).

6 Proposals for legal reforms are covered infra Section IV.7 But certainly not in Australia and New Zealand, where auctions are commonly used

to sell residential real estate to individual home buyers. Christopher J. Mayer, Assessing thePerformance of Real Estate Auctions, 26 REAL ESTATE ECON. 41, 42 (1998).

According to estimates of the National Association of Realtors(NAR), thirty percent of all real estate will be sold through auctions by2010.1 There has been a tremendous increase in the use of auctions be-tween 1980, when $10 billion was sold in the U.S., and 1999, when $49.5billion was sold.2 Good and Weinstein thoroughly discuss the auctionadvantage.3 Auctions might be the most efficient method of sale, espe-cially for properties that are not easily valued.4 Yet, there is little under-standing of the auction process. Additionally, some players involved inthe auction industry have sullied the public’s view of selling real estate byauction. This has led to allegations of ethical and legal shortcomings.5More important, proposals for reform are forthcoming to insure that thismethod of selling real property is a win-win situation for both sellers andbuyers.6

I. INTRODUCTION AND HISTORY OF THEAUCTION INDUSTRY AND AN ALTERNATIVE TO NEGOTIATED

SALES OF NON-DISTRESSED REAL PROPERTY

A. History of Using the Auction to Sell Real Property

In the United States,7 real estate auctions were used almost exclu-sively to sell distressed properties involved in mortgage foreclosure,


8 Even some technically nondistress sales in the 1990s, like those auctions liquidatingthe assets of insolvent savings and loan associations and HUD auctions of its inventory ofhouses that it acquired through defaulted mortgages, really were distress sales and the resi-dential properties in those sales were in worse shape than properties from privately ne-gotiated sales, see Nelson & Whitman, supra note 2, at 1418.

9 Mayer, supra note 7, at 41-43 (reporting that the results of data collected from salesof nonforeclosure, residential properties during the mid to late 1980s in Dallas and LosAngeles suggests that properties in a boom market (Los Angeles) sell at auction at a lowerdiscount (zero to nine percent) than those in a bust market (Dallas) where the discount washigher (nine to twenty-one percent) and notes a difference in the discount between single siteand scattered site sales).

10 See Nelson & Whitman, supra note 2.11 Those companies include Sheldon Good & Company, LLC (Chicago, Illinois), Cantor

Fitzgerald & Co. (New York, New York), and Kennedy Wilson, Inc. (Santa Monica, California).In 1998, Homebid.com held the first successful real estate auction over the internet.

property tax foreclosure, and bankruptcy lawsuits until the mid 1970s.8

Because of the perception that auction prices were much below the fairmarket value, brokers and other advisers to owners of real estate discour-aged the use of auctions except in dire circumstances.9 Professors GrantNelson and Dale Whitman, scholars reviewing the proposed Uniform NonJudicial Foreclosure Act, have recently given thoughtful attention to theinadequacies of auctions held pursuant to court order in foreclosure.10 Thelaw often uses auctions to extinguish a debtor’s rights as opposed to max-imizing the value of the property being sold. These legal complexities oft-en create a negative perception that real estate auctions are a way to selldistressed properties and, they no doubt discourage prospective buyers, afact that in itself affects the selling price. Thus, for purposes of this Arti-cle, the authors are only concerned with real estate auctions as an alterna-tive to negotiated nondistress sales.

Throughout the 1980s and 1990s, real estate auction companies work-ed diligently to demonstrate that the real estate auction was a legitimatemeans of selling real estate, regardless of the category (such as residential,commercial, or “trophy home”). Thanks to intense marketing efforts, hun-dreds of thousands of successful sales, and most important, positive wordof mouth, those first auction companies are now seen as pioneers.11 Thefirst auction companies are knowledgeable organizations that revitalizedan age-old sales approach to sell their clients’ properties expeditiouslyand for fair value.


12 For example, by 2005, Sheldon Good & Company, LLC had sold more than 40,000U.S. and international properties in 70 different classes and produced $9 billion in sales in2005. Sheldon Good & Company, LLC, Expanding the Way the World Does Real Estate,http://www.sheldongood.com/uploads/expandingtheway.pdf (last visited Feb. 3, 2006).

13 See generally U.C.C. § 2-328 (2004).The rules only apply by analogy and often arenot appropriate for auction sales of real property.

14 See, e.g., Pyles v. Goller, 674 A.2d 35, 39 (Md. App. 1996) (expressing frustration:“The law related to sale of property at an auction is a legal anomaly. Various treatisesdescribe the controlling legal principles at length and are, for the most part, in harmony.Little of this law, however, has made its way into the case law. Many state and federalcourts, therefore, have relied on the treatises’ persuasive authority for auction questions.”).Id. at 39.

15 In this Article, the authors rely on private files for some information.16 See infra Section III B (critiquing the use of the UCC for real estate auctions).

With the indisputable triumph of the real estate auction format, a fewnational real estate companies have become industry titans.12 Numerousupstart companies have entered the industry in an effort to gain some ofthe real estate auction selling business. Charges of increasing legal andethical violations on the margins or in the gray areas of existing ruleshave come with the increased competition among the auction companiesto get sellers of real estate to hire them. What the rules are, and what theyshould be, is unclear in many instances, because courts respond to issuesabout sales of personal property, not real estate, when interpreting auctionrules.13

Because widespread use of auctions to sell nondistressed real estate isso new, the legal and ethical rules have not caught up with the issues fac-ing the industry.14 An exhaustive analysis of past claims and disputes, orthose currently pending, is challenging. Research in this field is difficultbecause so many of the cases have been settled, often with confidentialityagreements before they reach appellate courts, or have been resolvedthrough arbitration.15 The absence of reported appellate cases makes itdifficult to find specific examples of the gray area and to suggest how toavoid these problems. To investigate cases at earlier stages of litigationwould require an in-person review of pending and resolved cases on astate by state basis—an impracticable task.

Furthermore, there is not a consistent, clear body of case law or legis-lation in this area.16 Different courts often make different rulings on thesame issues. Little scholarly attention has been given to the problemshere. Yet, there is a serious concern that the questionable conduct of someindustry players threatens the entire industry and may stifle the recent


17 See Toby True, The Gray Area of Real Estate Auctions, 177 N.J.L.J. 1196 (2004).The NAR has been dealing with the perception problems through its National AuctionForum and National Association of Auctioneers.

18 Economists may judge auctions to be best for society, because they involvetransferring the property to the individual who values it most, guaranteeing efficient use ofsociety’s resources. See, e.g., Terrence J. Schroepfer, Allocating Spectrum Through the Useof Auctions, 14 HASTINGS COMM. & ENT. L.J. 35, 37 (1991).

19 Good & Weinstein, supra note 3 at 54.20 See Nelson & Whitman, supra note 2, at 1416.21 See Alan R. Kravets, Going, Going, Gone! Real Estate Auctions in the 90’s, PROB.

AND PROP., May-June 1992, at 38, 40.22 See Nelson & Whitman, supra note 2, at 1416-17.23 See Steven L. Good & Sheldon Gottlieb, Real Estate Auctions: A Guide for the

Seller’s Lawyer, PROB. & PROP., Sept.-Oct. 1988, at 41 for an excellent discussion of a range

progress to make auctions an acceptable, if not yet preferred, process forselling real estate.17

B. Advantages and Disadvantages of Using Auctions

The decision whether to use an auction depends on the circumstancesof the seller.18 Auctions generally “work extraordinarily well for proper-ties that are not easily valued.”19 Properties are difficult to value for anumber of reasons, including the type of property, location, market vola-tility, economic cycles affecting the property, and supply and demand. Anadvantage of auctions is that they create a deadline, which is not availablewith a traditional approach to selling real estate. And, the seller canschedule the auction sale to respond to its own timing needs: the propertyis sold on the date of the auction, not when a buyer happens to submit anoffer that is often subject to many contingencies that meet the buyer’sneeds or after a lengthy marketing period.

Because the seller determines the selling date, carrying costs associ-ated with owning the property can be reduced or eliminated.20 For exam-ple, the shortened period for an auction program, which typically runsfrom beginning to end within eight weeks, can save a seller three to sixmonths’ additional costs of taxes, insurance, security, and repairs.21

Auctions alleviate loss of income for unused land or land being rentedbelow market value.22 In a soft market, selling the real estate, even at alower than hoped-for price, may be preferable to waiting for market con-ditions to improve sufficiently to produce a buyer using conventionalsales programs. And, the seller’s income tax goals can be better met whenthe seller determines the date of sale.23


of advantages to seller.24 See text infra Section II A2 (discussing the seller’s ability to withdraw a property

from an auction).25 See Good & Weinstein, supra note 3, at 54.26 See Good & Wolff, supra note 4.

Additional advantages to the seller include the auction’s tendency toobtain a market focus through aggressive, intensive marketing techniquesthat show the seller the likely bidders, if any. Indeed, this may convincethe seller to withdraw the property before the auction and either hold ituntil there is a better market or negotiate a sale with one of the prospec-tive bidders.24

As the use of auctions to market and sell nondistressed real estate hasincreased, people in the industry have suggested additional advantages tosellers in particular circumstances. For example, Steven L. Good andMargot B. Weinstein have demonstrated how the auction process benefitscorporations wishing to dispose of surplus real estate.25 For those withmultiple properties, their entire portfolio can be marketed at the same timewith the bidding timeline structured to give the selling corporations anopportunity to evaluate the range of offers for each property as well as forthe entire portfolio. To accomplish this, the bids will be irrevocable untilseven business days following the conclusion of the last property’s auc-tion.

Steven L. Good and Wallace J. Wolff suggest advantages to fiducia-ries who sell real estate assets through the auction process.26 Becauseowning and managing real estate in compliance with the Uniform PrudentInvestor Act or similar rules affecting fiduciaries is challenging, espe-cially in light of modern portfolio diversification principles, a trustee orexecutor of an estate may decide to sell the real estate asset. The conven-tional selling process has drawbacks, especially with difficult-to-valueproperties. Also, the documenting required of careful fiduciaries sellingreal estate is more complicated than selling any other asset. In addition tothe usual advantages of the auction program, here the use of an auctionaccomplishes the requirement of an arm’s-length transaction, made diffi-cult when one or more of the beneficiaries is interested in buying theasset.

Moreover, even the buyer may benefit from the definiteness of thesale date in the auction program. Instead of spending additional timenegotiating terms of the sales contract and performing due diligence after


27 See, e.g., Well v. Schoeneweis, 427 N.E. 2d 1343, 1346 (Ill. App. Ct. 1981) (pro-viding that once the auctioneer’s hammer has come down, the seller cannot withdraw theproperty—the sale has occurred).

28 See Nelson & Whitman, supra note 2, at 1419, 1421-22.29 See Kravets, supra note 21, at 41-42.30 This has led Steven L. Good and Alan R. Kravets to advise sellers’ attorneys to offer

a neutral contract, a contract to which the buyer’s lawyer will say to his or her client, “‘It’sa fair contract. As long as you have the money and are prepared to close on the purchase,the contract will protect you.’” Stephen L. Good & Alan R. Kravets, Representing Sellersin Residential Real Estate Auctions, THE COMPLEAT LAWYER, Spring 1992, at 43, 46.

31 Nelson & Whitman, supra note 2, at 1417.32 See STEVEN D. LEVITT & STEPHEN J. DUBNER, FREAKONOMICS 7-9 (2005) (showing

that real estate brokers will keep their own homes on the market longer than those of theirseller-clients because of the commission structure in the real estate sales industry).

the seller accepts the offer, the buyer’s successful bid binds the seller tothe contract; the seller cannot withdraw the property from sale.27 The auc-tion company will announce the successful bidder, now buyer, veryquickly. Prospective buyers must understand that private auctions greatlydiffer from public, forced-sale auctions used in foreclosures, because buy-ers are permitted to perform more due diligence before the bidding be-gins.28

Yet, the use of pro-seller, pre-designated sales contracts, drafted bythe auctioneer’s attorney may discourage a buyer who evaluates the pro-posed form as too pro-seller.29 The seller determines all of the terms of thesales contract, which are disclosed in advance of the sale.30 The high bid-der only determines the price; no contingencies or variations in the termsset forth by the seller are permitted. Thus, the auction company shouldarrange to have sources of buyer financing, title, survey, environmentalreports, and other customary due diligence materials available for buyersprior to the initiation of bidding at the auction. If these issues are notaddressed before asking buyers to submit binding bids, buyers will oftenbe discouraged from bidding, which will create a poor sales result.

One of the disadvantages of the auction process to the seller is that thesales price may be lower than the seller would like, because the sale mustoccur on a given date with whatever group of bidders attends the auction.Unless effective marketing by the auction company produces a crowd ofserious, able bidders, the price may be lower than would be obtained at anegotiated sale.31 And in thin markets, a longer period on the market mayproduce a higher price.32


33 See infra Section III.34 At least until the sale of the property when the auctioneer is agent of both the seller

and the buyer. See, e.g., Doty v. Wilder, 15 Ill. 407 (1854); see generally, 7A C.J.S.Auctions and Auctioneers § 5 (1988) (providing that agency duties to buyer generally areconsidered to be less extensive than to the seller). See infraSection IV.B (discussingimplication of agency rules and evaluating whether they function well).

35 See 7 AM. JUR. Auctions and Auctioneers § 65 (2005).36 Jorge Contreras, The Art Auctioneer: Duties and Assumptions, 13 HASTINGS COMM.

& ENT. L.J. 717, 723 (1991).37 See 345 S.E.2d 513 (S.C. Ct. App. 1986).38 See Contreras, supra note 36, at 723.39 See infra Section III A (discussing licensing of real estate auctioneers).

C. The Auction Process in the Private Sector

1. Role of Auctioneer

In most jurisdictions, auctioneers of real estate must be licensed undera complicated set of state rules as real estate brokers, auctioneers, orboth.33 Auctioneers are subject to legal and ethical regulations imposedupon those with these licenses. Basically, auctioneers serve as agents ofthe sellers,34 and in this capacity, they draw up and sign the memorandumof the sale and the real estate sales contract on behalf of the sellers.35

Duties imposed on the auctioneer include diligence, obedience, disclo-sure, accounting, and loyalty as a fiduciary to the seller.36 The duty ofdiligence requires the auctioneer to do all it can to obtain the highest pricefor the property by extensive advertising that builds excitement into thebidding process. The duty of disclosure requires the auctioneer to informthe seller of all material facts that might affect the seller. For example, inEaddy v. Dorn, the auctioneer was held liable to the seller for the salesprice bid by a mentally incompetent person, because the auctioneer knewof the bidder’s defective capacity and failed to inform the seller.37

In defining the extent of the fiduciary duty of the auctioneer to theseller or owner, the courts have never clearly addressed the issue, andcommentators have questioned the appropriateness of general agency re-quirements, given the reality of the auction process.38 After years withoutclarity, the trend is for the courts to examine the standard of care betweena real estate broker and his principal (the seller) by analogy. A brokerindisputably must act in good faith and in the interest of his principal.Courts have begun to apply this rule to auctioneers, because auctioneersfunction like brokers when making sales of real estate and may even belicensed as a broker.39 This view increases the duty of the auctioneer to


40 See No. 03A01-9612-CV-00397, 1998 Tenn. App. LEXIS 790, at *7 (Tenn. Ct. App.Nov. 28, 1998).

41 Id. at *7, 8 (quoting from Knox-Tenn Rental Co. v. Jenkins Insurance, Inc. 755S.W.2d 33, 36 (Tenn. 1988), Walker v. Waler, 52 Tenn. (5Heisk.) 425, 427-8 (1871)).

42 Id.at *10.

one of utmost good faith to the seller from the earlier view of a minimalistduty of ordinary care. This increases the legal accountability and liabilityof auctioneers for more questionable actions than in the past.

In Lindsey v. Coulter, the court used the more exacting standard. Af-ter sensing the auctioneer’s inability to advertise the auction, Mr. Lindsey,the property owner, decided to rescind the auction contract. Mr. Lindseyconveyed the desire to rescind to the auctioneer in person and in writtencorrespondence. However, Mr. Lindsey’s wife encouraged the auction totake place as proposed. The auction was held, but Mr. Lindsey refused toexecute the purchaser’s sales contract. Following a settlement between thebuyers at auction and the Lindseys, the court considered whether the auc-tioneer’s allegedly insufficient advertising breached his duty to the Lind-seys, and whether the Lindseys owned a commission on the sale. Thecourt held, “Coulter as an auctioneer, was an agent for the Lindseys.40

Describing the agency relationship, the court went on to note:

The very relationship implies that the principal has reposed sometrust or confidence in the agent and the agent or employee isbound to the exercise of the utmost good faith, loyalty and hon-esty toward his principal or employer.. . .It is universally recognized that an agent stands in a fiduciary re-lationship to his principal and is under a duty to be careful, skill-ful, diligent and loyal in the performance of his principal’s busi-ness and that for a failure so to act he subjects himself to liabilityto his principal for any damages naturally and proximately flow-ing from the breach or duty.41

Thus, the court held that, given the auctioneer’s knowledge of the princi-pals’ disagreement over whether the sale should be held, “Coulter pro-ceeded with the sale at his own potential risk.”42 Though the case wasremanded for further proceedings, the court clearly held that an auctioneeris an agent of his principal.

This Article considers whether or not this analogy is apt for the


43 See supra Contreras, supra note 36, at 723.44 See Ann Morales Olazabal, Redefining Realtor Relationships and Responsibilities:

The Failure of State Regulatory Responses, 40 HARV. J. ON LEGIS. 65, 74-91 (2003).45 See Swinebroad-Denton v. Hornback, 744 S.W.2d 429 (Ky. Ct. App. 1987).46 See generally 7 AM. JUR. 2D Auctions and Auctioneers §§ 65-69 (2005). See also

RESTATEMENT (SECOND) OF AGENCY § 13 (1958) (“An agent is a fiduciary with respect tomatters within the scope of his agency.”); RESTATEMENT (SECOND) OF AGENCY § 13 cmt.a (1958) (“The agreement to act on behalf of the principal causes the agent to be a fiduciary,that is, a person having a duty, created by his undertaking, to act primarily for the benefitof another in matters connected with his undertaking.”).

47 Swinebroad-Denton, 744 S.W.2d at 429.

auction industry in light of obligations to buyers and to society.43 How-ever, real estate auction companies can provide financing and title ser-vices for buyers via captive related companies like real estate brokerages.

There have been significant changes in real estate brokerage agencyprinciples over the last decade, creating a variety of conflicting state li-censing law statutory frameworks.44 Frameworks include the concepts ofsubagency, designated agency, and transactional agency. A real estateagent may owe a different standard of care to the buyer, seller, and trans-action depending on the approach adopted by the state.

2. The Auction Contract

Upon agreeing to hold an auction, the seller and auctioneer execute anauction contract that sets up the relationship. The auction contract isdistinguishable from an exclusive listing contract executed between aseller and real estate broker,45 although like the listing contract, the auc-tion contract does establish an agency relationship between the seller andthe auctioneer.46

In Swinebroad-Denton v. Hornback, the parties asked the court todefine the nature of the seller’s auction contract with the auctioneer.47 In acomplicated fact pattern, the seller and auctioneer, which was also a li-censed real estate broker, had entered into an exclusive sales contract thatexpired on March 15, 1983. Subsequently, the seller entered into an auc-tion contract on May 12, 1983, with the auctioneer or broker, under whichthe auctioneer was to hold an auction of the seller’s real estate on June 18,1983. However, prior to the auction, another licensed real estate brokerentered into an exclusive right-to-sell contract with the sellers; that brokerfailed to disclose that he already represented a buyer who had executed areal estate sales agreement for the land and ended up owning it. TheKentucky Real Estate Commission determined that the second broker had


48 Id. at 431 (citing KY. REV. STAT. ANN. 324.160(1)(l) (West 1987)).49 Id.50 See Roberts v. J.L. Todd Auction Co., 170 S.E.2d 862 (Ga. Ct. App. 1969).51 Id. at 863.52 Id.

violated a Kentucky statute prohibiting the negotiation or sale of realestate when the seller had an exclusive agency agreement with anotherbroker.48 The trial court reversed the commission on that finding. Theappellate court affirmed the decision below, holding that an auctioncontract is not the same as an exclusive right-to-sell contract with theseller. Thus, the broker had not violated the ethical rule. The court ex-plained,

But an auction sale contract is a far cry from an exclusive right tosell. For example, an exclusive right to sell contract, such as theone first in time between the Wilhites and appellant, applies to aproposed sale of the property by either public or private means.The auction sale contract, later agreed upon by the Wilhites andappellant, gave appellant only the exclusive right to auction theproperty.

Moreover, a seller may withdraw from an auction sale con-tract anytime before the beginning of the auction, being liable tothe auctioneer only for reasonable compensation or expenses upto that time.49

A Georgia court examined an auction contract entered into by onlyone of several joint owners with the auctioneer.50 The seller agreed togrant the auctioneer the exclusive right to sell certain real property at anauction and agreed to pay the auctioneer a commission and “to make deedor necessary conveyances” to any purchaser.51 The auctioneer succeededin recovering the commission and attorney’s fees, because “[i]f onecontracts absolutely to sell that which he does not own ‘he will be boundby the terms of the agreement.’”52

3. Types of Auction Contract

In reviewing and evaluating the role of the auctioneer, it is importantto understand the basic types of auctions that the auctioneer and the seller,and subsequently the auctioneer and the buyer, may choose as the auctionprogram. The reserve auction requires no minimum bid, but the seller re-


53 In practice, the auctioneer may have predicted a range of expected sales prices, suchas $1 million plus or minus 10%, but notwithstanding this prediction, a seller might stillelect to set the reserve at $1.5 million, in which case the auctioneer may still agree to theauction despite the auctioneer’s belief that an appropriate reserve would be $1.1 million, butcharge a fee to cover its costs of the sale.

54 See Pyles, 674 A.2d at 40. Contra East v. Brown, 986 P.2d 523-25 (Okla. Civ. App.1999) (treating an auction sale “subject to sellers’ approval” as a reserve auction andannouncing the general rule about reserve auctions to be that sellers may only withdraw theproperty up until the hammer fall). The general rule applies equally to absolute auctions andis not limited to reserve auctions in which the seller may withdraw the property even afterthe auction has ended.

55 See Hunt, supra note 1. See also U.C.C. § 2-238 (2005) (discussing reserve andwithout reserve/absolute auctions. Subsection 3 indicates that a sale is with reserve unlessit is explicit that the auction is without reserve).

56 See infra Section II A (discussing the many abuses found with respect to this typeof auction.)

57 Pyles, 674 A.2d at 40 (emphasis omitted).

serves the right to accept or reject the highest bidder according to theterms, conditions, and timing of the auction. This reserve amount is not aminimum and most often is not disclosed to the bidders. The seller andauctioneer agree on the reserve amount, which is a confidential number. Ifthat undisclosed reserve price is bid, the seller owes a commission to theauctioneer but is not obligated to enter into a sales contract with anybidder.53 Thus, the seller can reject the highest bid for virtually no rea-son.54 The seller’s ability to reject appears to protect the seller from lowbidding, but it may reduce the number of prospective bidders who will bewilling to perform the necessary due diligence if the time and cost couldbe destroyed by the seller’s unwillingness to accept any offer. Yet, auc-tions are presumed to be reserve unless they are advertised specifically tobe of a different type.55

A “leap of faith auction” is a variation on the reserve auction with noundisclosed reserve. A leap of faith auction arises when the seller and theauctioneer cannot predict a likely range of prices sufficient to set thereserve. The auctioneer may agree to hold the auction but often willcharge a fee to cover expenses of the auction that can be charged againstthe commission if the property sells at the auction.

Where the auction contract sets up an absolute or no minimum bidauction,56 real property is sold to the highest bidder regardless of price.This guarantees that a sale will occur. “[I]n an auction held ‘without re-serve,’ the opening of bids by the auctioneer constitutes a firm offer, asopposed to an invitation to make an offer” as in a reserve auction.57 It is


58 Id. at 41 (refusing to permit the seller to bid at an absolute auction even where thereason for seller’s bidding was that the highest bid was less than the mortgage on the land).

59 Hunt, supra note 1 (quoting William Bone, President of the Gadsden, Alabama-basedNational Auction Group, Inc.).

60 See Good & Weinstein, supra note 3, at 58.61 Id.62 See id.

inconsistent with this type of auction, and illegal, for sellers to bid at theauction to insure that the mutual assent that is necessary for a contractualrelationship will remain. If sellers were permitted to bid, they could ef-fectively reject the highest bid.58 Auctioneers conclude, “‘Absolute auc-tions typically attract the most bidders because of the lure of the bar-gain,’” and for that reason, absolute auctions bring the highest price.59 Incontrast, the minimum bid auction contract specifies that the auctioneerwill only accept bids at or above a certain minimum price announced atthe auction and in all advertisements.

Most auctions use the open outcry format where bidders gather at onetime and one place (even if the “place” is created telephonically). Thisformat works well when the price is the main consideration of the biddingoutcome. The bidders must bid on identical terms set forth in the biddingpackage, and all the bidders are equally desirable and qualified.60 Goodand Weinstein suggest sealed bid auctions when the price may not be thesole consideration, bidding in the alternative for different sales terms, or ifone buyer is clearly superior to others.61 A sealed bid auction may bepreferable, for example, when selling a portfolio of properties. A hybrid,sealed bid, convertible auction format may be most effective for a portfo-lio of properties when the auction format starts as a sealed bid auction andis converted during the pendency of the process to an open outcry event.Good and Weinstein use case studies of auctions conducted for Alcoa andNewell Rubbermaid to sell “two portfolios of 19 surplus properties in 12states totaling more than 4.1 million sq. ft. of manufacturing facilities andover 500 acres of industrial land” to demonstrate the effectiveness of us-ing the sealed bid convertible format.62

4. Typical Steps in Preparation for a Real Estate Auction

In the private, nondistress auction of real estate, the auctioneer is aunique professional that is both a real estate expert and an auctioneer, ca-pable of marketing and selling particular real estate to a capable buyer at aprice acceptable to the seller. This requires the auctioneer to review the


63 See Kravets, supra note 21, at 40.64 Good & Kravets, supra note 30, at 45.65 Id.; See also Good & Gottlieb, supra note 23, at 43 (“Perhaps the most important

element is a clear determination of the services to be provided by the auction-eer . . . . Beware the auctioneer who ‘gets the business’ and then contracts out the variouskey functions (e.g., open houses and marketing.)”).

66 Steven L. Good & Barry A. Chatz, Value & Cents: From Nursing Home toCorrectional Center via Auction—A Case Study, AM. BANKR. INST. J., Apr. 1998, at 26.

property, including the legal aspects of the title and permitted uses. Ide-ally, the auctioneer and staff will have knowledge and experience in law(environmental, contracts, and real estate), selling real estate, marketingreal estate, and real estate finance.63 Auctioneers who are knowledgeableabout the real estate auction business recommend a long checklist of itemsthat should be considered by the parties and included in the auction con-tract:64 the name of the legal title holder; a legal description; duties of theauctioneer; compensation of the auctioneer; duties of the seller (obtainingsurvey, title report, and personal property included in sale); length of timefor the auction contract; whether the auction will be reserve or absolute;and items required to meet local, state, and federal law. The auction con-tract should be clear about the marketing plan (including references toadvertising, times for showings to prospects, and location and time for theauction) and whether the seller pays for the costs incurred. The contractshould contemplate the development of a bidder’s information package(including the real estate sales contract to be executed with the successfulbidder, financing information, all terms of the auction, and informationabout expenses of ownership of the property),65 which is customarily de-veloped once the auctioneer has been retained. The auction listing agree-ment is more complicated than the exclusive listing agreement used inconventional sales of real estate, because it contemplates a defined andstructured timeline that is not easily changed once set.

Numerous case studies of actual properties sold demonstrate theeffectiveness of the auction process. Steven L. Good and Barry A. Chatz,writing from the perspective of the auctioneer, published a case studyinvolving a nursing home in Wisconsin that considered the auction ap-proach after the nursing home lost its court battle to keep from losing itslicense.66 By that time, potential purchasers had dropped out of the pic-ture. The property was a 350-bed nursing home on a twenty acre site; ithad been closed for more than two years. Physically, it was in such terri-ble shape that a buyer’s application for a new license would require


67 Id.

extensive repairs. As the case authors noted,

The proposition, therefore, was to find a buyer for the propertythat would retrofit it for an alternative use, bearing in mind thatany costs incurred during a prolonged rehabilitation and market-ing time would not be recouped in the form of a higher sellingprice. The challenge was designing a program that would effectu-ate a sale of the property on a timely basis to a bona fide pur-chaser for this unusual property.67

Because of the considerable experience of the auctioneer, the propertywas marketed and sold for twice the minimum bid to a local county cor-rectional group. The minimum bid had been set to cover delinquent taxes,utility, and other maintenance costs and to maximize the return to credi-tors. The result was a success.

II. AUCTION PRACTICES THAT UNDERCUT THE REPUTATION OF THE INDUSTRY

A. Practices Affecting the Seller

1. “Sales Talk” and Fraud in the Inducement

Sometimes an auctioneer, like a real estate broker, may play a part ina seller’s decision to sell real estate. As part of this process, the auctioneermay offer estimates or opinions as to the property’s value or the price itmight bring at auction. The weight given by the seller to these estimatesgreatly varies depending on the style of auction chosen. In reserve bid orminimum bid auctions, the seller has reserved the right to reject the high-est bid if it is too low. However, in an absolute or without reserve auction,the seller must accept the highest bid no matter what. Sellers who rely onbid projections and assurances from the auctioneer can be terribly disap-pointed when the projected price is not realized in absolute or withoutreserve auctions. Some sellers attempt to litigate the matter as an action-able misrepresentation or as fraud in the inducement. The auctioneer willreassure the seller as a method of convincing the seller to enter into anabsolute or no minimum bid auction contract just before the opening bidis made, while the seller still has the right to cancel the auction. Based onthe reassurances of the auctioneer at these critical times, the seller goesahead with the absolute auction, only to be slammed with a much lower


68 See 646 N.W.2d 455, 459-60 (Mich. 2002) (agreeing with the auctioneer’s claim thathis representations were mere puffing or sales talk and noting that the contract includedmultiple disclaimers as to “the value of the property or the price at which it might sell.”).

69 See id. at 457.70 See id. at 458.71 See id. at 459.72 Id. See generally RESTATEMENT (SECOND) OF CONTRACTS § 169(a) (1981) (pro-

viding that if “an assertion is one of opinion only, the recipient is not justified in relying onit unless the recipient (a) stands in such a relation of trust and confidence to the personwhose opinion is asserted that the recipient is reasonable in relying on it . . . . ”). See alsoid. at § 168 (“The propensity of sellers and buyers to exaggerate the advantages to the otherparty of the bargains they promise is well recognized, and to some extent their assertions ofopinion must be discounted.”).

73 See Rose, 646 N.W.2d at 459.74 Id.

price in some instances.Nevertheless, the courts consistently find no actionable misrepresen-

tation or fraud from these reassurances. In Rose v. National AuctionGroup, Inc., the auctioneer orally projected that the seller’s propertywould bring $850,000 at an absolute or no reserve auction.68 The sellersthen signed with the auctioneer a contract that specifically disclaimed theauctioneer’s representations as to the property’s likely price at the pro-posed absolute auction.69 With the sellers’ concern about what the pricebidding would yield and intention of canceling the auction with a total ofonly five bidders, the auctioneer reassured them that a shill would partici-pate in the bidding to reach the desired secret reserve price.70 When theproperty was sold for $175,000, the sellers brought a suit seeking reim-bursement of the commissions paid based upon the auction contract.71

They argued unsuccessfully that there was fraud and misrepresentation inthe auctioneer’s projections. The trial court held that the sellers had noreason to rely on the auctioneer’s oral projections as to the property’sprice at auction when the contract specifically disclaimed any liability forprojections.72 In a second count, the sellers sought damages for postcon-tract activities, specifically the shill bidder’s failure to participate aspromised.73 The sellers asked for the price that would have been bid if theshill bidder performed as promised.74 The Supreme Court of Michiganstrongly affirmed the trial court’s ruling in favor of the auctioneers: “Ourlaw follows this norm as it is undisputed that the use of a ‘shill’ or falsebidder unbeknown to the sincere bidders at an auction is contrary to our


75 Id. at 459-60.76 See 265 F.3d 27 (1st Cir. 2001).77 Id. at 30.78 Id.79 Id. at 31.80 Id. at 33 n.8. (“Claims for fraudulent and negligent misrepresentation, although

obviously distinct, both require that the defendant have made a false representation ofpresent fact and that the plaintiff justifiably relied on the representation as true.”).

81 Id. at 36 (“With regard to the first statement about the market value of land to begarnered at auction, the relationship between Kearney and King Auction was not vulnerableor one-sided such that Kearney could not undertake his own investigation into the marketvalue of his property or the range of values of land sold by King at auction.”).

82 No. 2002-T-0161, 2003 Ohio App. LEXIS 5945, at *7, 8 (Ohio Ct. App. Dec. 5,2003) (citing OHIO REV. CODE ANN. §§ 1345.01-1345.03 (West 2005) (prohibiting deceptiveacts or practices occurring before, during, or after a consumer sales transaction)).

83 Id. at *2.84 Id. at *4-6.

public policy.”75

In Kearney v. J.P. King Auction Co., the court reached a similar de-cision when a disappointed seller claimed an actionable misrepresentationfor the auctioneer’s oral projection of the property’s value at auction.76

The seller had purchased the land for $90,000 and had received an offerof $1.8 million before contacting the auctioneer.77 Before executing theauction contract, the auctioneer claimed the land would bring a minimumof $3.5 million at the proposed absolute auction.78 Instead, the land waseventually auctioned for a mere $8,000.79 The court held that the sellerhad no justifiable reason to rely on the auctioneer’s projections, becausethey were statements regarding a future event80 and the seller could haveinvestigated the accuracy of these representations himself.81

In Colburn v. Baier Realty & Auctioneers, a homeowner sought relieffor an auctioneer’s alleged misrepresentations under the Ohio ConsumerSales Practice Act (OCSPA).82 The sellers had unsuccessfully listed theirhome with a real estate broker at a reduced listing price of $158,000 be-fore turning to the defendant auctioneers, who represented that the housewould bring between $125,000 and $135,000 at an absolute auction.83 Theproperty was auctioned for $69,000, and the sellers claimed that OCSPAapplied to this transaction, because although a pure real property transac-tion is not covered, the sellers alleged that their agreement with the auc-tioneer was a mixed transaction, involving both the sale of goods andprovision of personal services.84 The court held that the language of theauction contract did not provide for performance of personal services by


85 Id. at *10.86 Id. at *12.87 00 C 18634, Or. Cir. Ct, Marion County, retrieved June 18, 2004, case filed Octo-

ber 13, 2000 and settled in early 2004. Submission from Steven L. Good & Thomas F. Trueto the Nat’l Ass’n of Realtors Auction Forum for Submission to the Nat’l Ass’n of RealtorsProf’l Standards Comm. 23-25 (Summer 2004) (on file with the authors) [hereinafter NARReport].

88 NAR Report, supra note 87, at 23.

the auctioneer for the homeowners, and therefore, it was not a consumersales transaction.85 And, the court responded to allegations of fraud by theauctioneer by noting a fairly clear rule: “[A]ny oral representations madeto appellants that were not embodied in the listing agreement, or includedtherein by reference , are not part of the contract.”86

Cruze v. National Auction Group involved a seller that had unsuc-cessfully attempted to sell two parcels, one vacant and one with a houseon it, for $14 million, through a broker.87 Next, the seller elected to use anauction procedure, and informed the auctioneer that they would acceptany offer between $9 million and $11 million for both parcels combined,but that the vacant parcel must not be sold unless the house parcel, thelocation of a trophy house, was also sold.

The auctioneer advised the sellers that an absolute auction was the on-ly way to obtain their desired price, even though the sellers clearly hadcertain reserves in mind in their discussions with the auctioneer. The auc-tioneer specifically represented that the following would protect the sell-ers: (1) every bidder who registered would be assigned a bid assistant whowas an employee of the auctioneer; and (2) the bid assistant would solicitboth a potential pre-auction opening bid and a potential high bid fromeach registered bidder and then relay that information to the seller beforethe auction, thus allowing the seller potentially to cancel the auctionbefore it began if the seller was not comfortable with the bid range. Withthese reassurances, the seller signed an absolute auction contract.

A week before the auction, the seller was still concerned that the va-cant land would sell, but not the trophy house. When the seller’s attorneydrafted an addendum to the bidder’s agreement (to be signed by bidders atregistration in order to participate in the auction) that reserved the seller’sright to cancel the auction if the house did not sell on auction day, theauctioneer represented that the addendum would be illegal, because “it‘violated federal law.’”88 With the auctioneer’s continuing reassurancethat both properties would be successfully auctioned, the sellers agreed to


89 Id. at 24.90 Id.91 Id. at 51 (describing Rayfield v. Nat’l Auction Group, Inc., No. CV-94-98 (Cir. Ct.

Bullock County, Ala. Mar. 27, 1997).92 Id. at 52.

remove the addendum from the bidder’s package.Furthermore, one hour before the scheduled event, the auctioneer rep-

resented that it had obtained a minimum opening bid of $3 million for thehouse parcel in an effort to stop the sellers from canceling the auction.The Cruzes refused to allow the auction to begin, which was their right,until the auctioneer reassured them that he had a minimum opening bidfor the house of $5 million. The auction began one hour later than thescheduled time. The $5 million opening bid was the only bid for thehouse parcel. Active bidding on the vacant parcel resulted in its sale for$1.6 million. The auctioneer never disclosed that the opening bidder onthe house had circumvented the registration procedure and was allowed tobid even though the auctioneer knew the bidder’s check was not good.The bidder did not tender a valid check after the auction. The sellers andauctioneer settled the lawsuit out of court and the house never sold!89 Inthe end, the Cruzes’ greatest fear came to fruition—they were unable tosell the trophy house at auction but did sell the adjoining land. Theyreturned the trophy house to the conventional market but had been unableto sell it by mid-2004.90

In another unreported case, the auctioneer represented to the sellerthat extensive advertising would ensure that the property would bringbetween $800,000 and $1.2 million at the proposed absolute auction.91

Following the execution of the auction contract, a third party, Lee Batson,offered the seller $600,000 for the property. The auctioneer advised theseller that bidders at the auction would need to pay more than $650,000 tobuy the property. When only one registered bidder arrived on auction day,the sellers attempted to cancel the auction, but the auctioneer refused.When the auction concluded, the property sold for $318,000 to LeeBatson, the individual who had offered $600,000 during the auctionlisting period. The sellers litigated their claim of misrepresentation, andthe jury awarded them $3.5 million. The sellers appealed the agreementaward and finally settled out of court for an undisclosed sum.92

Another scenario involved an auctioneer who promised the seller aguaranteed minimum price at his absolute auction by providing a shill


93 See No. CA-8244, 1991 Ohio App. LEXIS 2033, at *4-*5 (5th Cir. Apr. 22, 1991).94 Id. at *6.95 See Holston v. Pennington, 304 S.E.2d 287, 290 (Va. 1983).96 See, e.g., supra Section II A 1.97 See generally 7 AM. JUR. 2d Auctions and Auctioneers § 21 (2005).98 See 646 N.W.2d at 458.99 See id.

bidder to raise the bids. In Ringer v. Marks, a seller executed an absoluteauction contract with the auctioneer.93 The sellers contended that theauctioneer fraudulently induced them into the contract by his reassurancesand promises to take care of the bidding by using a shill bidder to raisethe price fraudulently during the course of the bidding. Unfortunately forthe sellers, the court held they had no right to rely on the auctioneer’sillegal promise to supply shill bidders and granted summary judgment tothe auctioneer on the seller’s claim of fraudulent inducement.94

2. Misinformation about Seller’s Right to Cancel an Absolute Auc-tion

An absolute auction is one with no minimum price and in which theterms of sale are an offer, accepted by bids, which create a binding con-tract.95 Absent abuses discussed earlier with respect to absolute auctions,96

a seller must accept the highest bid. However, regardless of the type ofauction, a seller may always withdraw the property or cancel the auctionprior to the opening of bids.97 Indeed, auctioneers frequently reassure sell-ers by notifying them of this right. After advertising an absolute or no re-serve auction, and so presenting what appears to be a guarantee thatproperty will be sold, some auctioneers and owners cancel the auctionminutes before its scheduled start.

A seller may decide to cancel an auction when the bidder turnout in-dicates the sale will not bring a desired minimum price, even if the auc-tioneer advertised the sale as an absolute auction. Unfortunately, someauctioneers try to convince sellers not to exercise this right to cancel. InRose v. National Auction Group, the seller contracted with the auctioneerto sell property at an absolute auction.98 After the seller told the auctioneerthat he wished to cancel the auction, the auctioneer encouraged him tocontinue, because the auctioneer had arranged for shill bidders to increasethe sales price fraudulently.99 The seller agreed, and after the shill bidderscheme failed, the property sold for a fraction of what the seller had


100 See id.101 See id. at 471.102 NAR Report, supra note 87 at 61 (describing Simek v. J.P. King Auction Co., No.

03 CV 198 (D. Wyo. Aug. 27, 2004).103 Id.104 See id.105 Id. at 51 (describing the Rayfield case, in which the auctioneer refused the seller’s

request to cancel the auction, which also ended in disappointment for the seller). 106 See id. at 23-24.107 Id. at 23.

hoped to realize at the sale.100 The Supreme Court of Michigan affirmedthe decisions below that the unclean hands of the seller precluded anydamage award based upon the auctioneer’s reassurances that the shillbidder’s efforts would guarantee that expectations would be met.101

In some cases, the auctioneer will tell the seller that canceling theauction is not an option. In an unreported case, the seller became con-cerned that the auctioneer had failed to market the property properly asprovided in the auction contract only a week before the sale.102 The auc-tioneer then flew to the property and met personally with the seller in anattempt to ease the seller’s fears. The auctioneer falsely told the seller“that ‘canceling was not an option.’”103 The seller proceeded to auctionthe property and received $1,005,000, although he believed its fair marketvalue was $3 million.104 Indeed, the seller immediately cancelled theauction of a second piece of land following the disappointing results ofthe first auction and after obtaining accurate legal advice. Simek’s com-plaint stressed that J.P. King violated the contractual relationship by notpreparing a proper advertising campaign and by neglecting its fiduciaryduty in maintaining a prior unreported relationship with the successfulbidder. This case has not yet been resolved.105

An auctioneer provided similar false information in Cruze v. NationalAuction Group.106 The sellers attempted to create an addendum to thebidder’s registration form, indicating their right to cancel the “auction ‘ifthe house does not sell and close on auction day.’”107 The auctioneer knewof this addendum and approved it prior to the auction. On auction day,however, an affiliate of the auctioneer met with the sellers and stated thatthe addendum violated federal law. The sellers agreed to remove theaddendum and continue with the auction. Unfortunately, the vacant lotwas sold, but the house was not, the exact scenario the sellers had wished


108 See id.109 276 So. 2d 569, 570 (Ala. 1973).110 See id.111 See id.112 Id. at 571.113 Red Cardinal Fifteen, Inc. v. Lange, No. 96-1115, 1997 U.S. App. LEXIS 1411, at

*1 (4th Cir. Jan. 28, 1997).114 See id. at *2.

to guard against with the proposed addendum.108

Though other aspects of a dispute may be actionable, absent other cir-cumstances, a seller who wishes to cancel an absolute auction must do soclearly and before the bidding begins. In Kinmon v. J.P. King AuctionCo., the seller told the auctioneer the minimum price for which he waswilling to sell the property.109 The parties never incorporated this priceinto the auction contract, and the auctioneer advertised the sale as anabsolute auction.110 The seller did not approve of this arrangement, butallowed the auctioneer to continue advertising the auction as absolute andpermitted the auction to proceed.111 When the property sold for a fractionof the seller’s desired price, he initiated action. The court ruled in favor ofthe purchaser and auctioneer, suggesting that the seller had failed to exer-cise his right to cancel: “It is the general rule that the agency to sell atauction, whether such auction be ‘with reserve’ or ‘absolute’ may bewithdrawn at any time prior to the opening of bids. . . . This withdrawal ofauthority must be clear and unequivocal.”112

3. Auctioneer’s Failure to Require Bidder to Comply with Registra-tion Requirements

Real estate auctions require bidders to register before participating.This registration process typically involves proof of available funds tocover a down payment or earnest money deposit. While most serious bid-ders meet these requirements, some auctioneers attempt to circumvent theprocess through registration of fraudulent bidders.

In a typical example of this form of abuse, the auctioneers in RedCardinal Fifteen, Inc. v. Lange contrived a bogus bidder scheme.113 Thesellers scheduled an auction of their beachfront property; the auctioneerrequired bidders to complete a bidder registration form and submit acashier’s check for $100,000, payable to the auctioneers. Approximatelytwo weeks prior to the auction date, Richard Chang was the first and onlybidder to register.114


115 See id. at *3.116 See id. at *4.117 See id. at *6-8.118 See id. at *13.119 34 N.W.2d 682, 682 (Wis. 1948).120 Id.121 Id. at 684.122 Id.

The auctioneers represented to the sellers that Chang was a wealthyresident of Hong Kong and had submitted the requisite check. At the auc-tion, when none of the other registered bidders bid the agreed minimumprice, Chang stepped in and bid the minimum $4.4 million for the entireproperty.115 Following the auction, however, Chang refused to execute apurchase agreement.116 The sellers attempted to locate Chang using theauctioneer’s bidder registration form, but the form contained little infor-mation about him. Finally, the sellers located Chang in California, initi-ated action, and learned of his ongoing personal and professional relation-ship with the auctioneer. In addition, the sellers learned that the auction-eer had financed Chang’s trip to the auction site knowing that Chang nev-er had the money to purchase the property.117

A variation on this practice occurs when an auctioneer “receives” bidsover the telephone. The bidder disappears after the auction and cannotcomplete the contract. Both are examples of shill bidding or by-bidding.In the Lange case, the court held the auctioneer’s use of Chang as a shambidder, and that the nondisclosure of this fact to the sellers was a breachof its fiduciary duty for which it was answerable in damages.118

4. Failure to Disclose

An auctioneer’s failure to disclose facts regarding the subject of hisagency is another common breach of fiduciary duties. In Faultersack v.Clintonville Sales Corp., the auctioneer agreed before the auction to fi-nance a potential bidder to enable him to bid at the auction.119 The auc-tioneer did not disclose this fact to the sellers, who sued the auctioneer forthe commission and refused to execute the purchase agreement.120 TheWisconsin Supreme Court ruled that the auctioneer’s agreement with thebidder “contained elements directly affecting the agent’s attitude towardand his activities in respect to the sale of the plaintiffs’ farm.”121 Further,the court found it unnecessary to find fraud or damage because the seller“only has to show a failure of full disclosure on the part of the agent.”122


123 Id.124 579 So. 2d 165, 166 (Fla. Dist. Ct. App. 1991).125 See id. at 166-67.126 See id. at 167.127 See id. Both sellers and real estate brokers have a duty under Florida law“to disclose

facts of which [they are] aware that materially affect the value of real property.” Id. at 169.128 In this instance, Campen’s actions resulted in placing Torbron in an

uncertain and much worse financial position than when he entered theAgreement, to-wit: an unsuccessful auction, inability to close any of theauction sales, less time to market the property before the first mortgagepayment was due, potential claims by successful bidders of the othereight lots purchased at an absolute auction, and litigation costs.

Id. at 170.129 See id. at 171.

As a result, the court held, “In the absence of full disclosure of the facts tothe principal he can refuse to pay the commission or recover a commis-sion already paid.”123

In Torbron v. Campen, an auctioneer contracted to sell a parcel of un-developed land at auction.124 The auctioneer contacted the city and was in-formed that the proposed subdivision of the land into sixteen parcelswould violate two city ordinances.125 Indeed, the county, through its at-torney, told the auctioneer’s attorney that the auctioneer should announceto the bidders at the auction the necessity of compliance with these ordi-nances before any improvements upon the parcels could be built.126 Theauctioneer never informed the seller or the bidders at the auction, andwhen a purchaser of eight of the sixteen lots learned of the county’srequirements, she refused to close.127 The auctioneer then sued the sellersto foreclose a second mortgage the sellers had made to the auctioneer tosecure cash advances and earned commissions; the sellers counterclaimedfor breach of the auction contract. The appeals court reversed the judg-ment of foreclosure, because the auctioneer’s failure to disclose the or-dinance frustrated the entire agreement.128 The appeals court affirmed thetrial court’s finding of a breach of the auction contract.129

5. Mandatory Arbitration

Auctioneers’ insertion of mandatory arbitration clauses in auctioncontracts also may contribute to problems in the real estate auction indus-try, because mandatory arbitration provisions mainly protect auctioneersfrom bad publicity when clients bring claims, contributing to a lack oftransparency in the industry. Additionally, resolution of disputes by pri-


130 NAR Report, supra note 87, at 23-24.131 Id. at 24.132 Pronghorn Development, Ltd. v. National Auction Group, Inc., No. 6:03CV3004.

(W.D. Mo. Jan. 14, 2003). See also NAR Report, supra note 87, at 47.133 Complaint at ¶ 6, Pronghorn Dev., Ltd. v. Nat’l Auction Group, Inc., No.

02CV782532 (Howell Cty. Cir. Ct., Cir. Div. Jan. 06, 2003).134 Id. at ¶ 7.135 Id. at ¶ 12.

vate, confidential arbitration interferes with the development of ascertain-able rules regulating the industry. Typically, the auctioneer prepares theauction contract and the seller signs it with little negotiation of its terms,much like exclusive listing agreements between brokers and sellers.

For example, in Cruze v. National Auction Group the auction contractcontained a mandatory arbitration provision.130 Following the sellers’ al-legations of fraud, the auctioneer attempted to invoke the mandatory arbi-tration provision to block the Cruzes’ attempts at extensive discovery.The court rejected the auctioneer’s attempts, and the Cruzes learned thatthe legitimate bidders were never willing to bid more than $4.2 million,contrary to the auctioneer’s claims that it had obtained a guaranteed open-ing bid of no less than $5 million on the home alone.131 Like the privatesettlement that ultimately resolved Cruze, arbitration resulted in an un-publicized resolution. Worse, with arbitration, the public does not learn ofany complaints filed against the auctioneer. Thus, use of mandatory arbi-tration clauses does a disservice to the value of alternative dispute resolu-tion and the auction industry as a whole.

B. Practices Affecting the Buyer

1. Inconsistent Bidder Registration Practices

In Pronghorn Dev., Ltd. v. National Auction Group, the purchaserbrought an action against the auctioneer for fraudulent misrepresentationas to who was allowed to bid at the auction.132 The auctioneer’s advertisedterms required bidders to provide certified funds of $2,500 per parcel, or$50,000 for the entire property, in order to bid at the auction.133 The auc-tioneer assured the prospective bidder that all bidders who participated inthe auction were qualified.134 The auctioneer’s assurances were dubious atbest, because subsequent investigation showed that at least some of thebidders did not qualify, which artificially inflated the price of the prop-erty.135


136 See 1997 U.S. App. LEXIS 1411 at *7-8.137 See id. at *2.138 See id. at *3.139 See id. at *4.140 Id. at *7.141 See id.142 See id. at *23.143 See 834 F. Supp. 519 (D.N.H. 1993).144 See id. at 521.145 See id.

2. Shill Bidders, Fraudulent Bidders, and By-Bidders

Perhaps the most common problem with auctions is the use of fraudu-lent bidders, also known as shill or by-bidders. The seller employs a by-bidder, who has no intention to purchase, to raise the price by fictitiousbids, thereby increasing competition among the bidders.

In Red Cardinal Fifteen v. Lange, the auctioneer employed a by-bid-der to meet the seller’s reserve price.136 The auctioneers, having no regis-tered bidders as the sale date approached, registered an individual namedChang, whom they falsely represented to be a wealthy resident of HongKong.137 At the auction, when no one bid above the agreed minimum, theauctioneer lowered the opening bid to the seller’s reserve price, at whichpoint Chang immediately bid the minimum for the entire property, and theproperty was sold to him.138 When asked to execute the purchase agree-ment, Chang refused.139 After the sellers brought a breach of contractaction against Chang, he admitted that the auctioneers told him “‘that ifhe would bid on the property his bid would be conditioned upon reviewand approval of the sales documentation.’”140 It was also found that Changhad a prior personal and professional relationship with the auctioneers.141

On appeal, the court affirmed the district court’s ruling in favor of thesellers on their claim that the auctioneer breached its fiduciary duty whenit employed Chang.142

In Stormy Weathers, Inc. v. FDIC, the court looked to New Hamp-shire’s statutes to determine the outcome of a reserve auction in which thesellers employed a by-bidder.143 A bank advertised property for sale at areserve auction and included its right to bid on the property within theterms of the auction.144 The bank did bid on the property, but when thebuyer learned of this, he refused to close on it.145 While the practice ofseller bidding is generally accepted when announced to other bidders at areserve auction, the court found this practice fell within New Hampshire’s


146 See id. at 524 (citing N.H. REV. STAT. ANN. ch. 358-G:1 II (1988)).147 See 802 S.W.2d 934, 938 (Ky. Ct. App. 1990).148 37 Pa. D. & C.2d 283, 284-85 (C.P. 1965).149 Id. (no determination was made as to who entered the $20,000 bid or whether this

bid was ever made by anyone).150 Id. at 285.151 See NAR Report, supra note 87, at 29.152 See id.153 See id. at 30.

statutory prohibitions against collusive bidding.146 This case stands incontrast to a similar situation in Nicholson v. Clark, in which the courtheld that the announced use of a by-bidder was legal in a reserve auc-tion.147 These contrary holdings evidence the importance of understandingthe statutory requirements of the state where an auction is to be held.

Courts have been more conclusive in holding the use of by-bidders inabsolute auctions illegal. In Pillsbury v. McNabb, in an absolute auction,the auctioneer announced a bid of $20,000 after receiving a bona fide bidof $17,500.148 This bid was not bona fide, and a buyer unrelated to theauction subsequently bought the property.149 After finding an absoluteauction had occurred, the court held, “[T]he owners may not themselvesbid in the property, for such would be equivalent to withdrawing it fromsale.”150

A Georgia case that was settled out of court, Hammond v. Anderson,provides another example of alleged illegal use of a by-bidder.151 Thesellers contacted the plaintiff, a friend, and asked her to serve as a by-bidder at the absolute auction of their home. The auctioneers told the by-bidder that they would handle the bidding for her, and having no otherbids, the auctioneers entered a bid for the by-bidder at the sellers’ secretminimum price of $600,000. The auctioneers assured the by-bidder thatexecution of the sales contract and deposit of her own personal funds asearnest money would have no legal effect. The shill executed the salescontract. Later, Hammond sued the sellers, the auctioneer, and the titlecompany that was holding the earnest money deposit of $64,500 forrescission of the real estate sales contract and a return of the earnest mon-ey.152 The suit, filed originally in U.S. District Court in Georgia in 1997,was settled in 1998. By settling this case, the seller and auctioneer avoid-ed a finding of wrongdoing in the court record.153


154 7 AM. JUR. 2D Auctions and Auctioneers § 30 (2005).155 See 674 A.2d at 38.156 See id.157 See id.158 Id. at 40.159 See id.160 See id.161 See id. at 38-39.162 See id. at 39.

3. Seller Bidding

Sellers who bid at their own absolute auctions create concern in thereal estate auction industry. Sellers are prohibited from bidding at theirown absolute auction.154

The court in Pyles v. Goller provides an analysis of why.155 On theday of the auction, only the appellee, Goller, and an unknown bidder hadregistered to bid at the auction.156 However, prior to the auction, thesellers informed the auctioneer that they were considering bidding on theproperty themselves.157 The auctioneer later testified that “it was his un-derstanding that ‘[at] an absolute auction, the owner does not have theability to bid on his own property.’”158 Despite these reservations, theauctioneer allowed the sellers to bid at the auction and never announcedthis fact.159

Following the auction, the sellers informed the auctioneer that theywere prepared to accept their own bids on two of the lots and reject theappellee’s bid on another.160 The appellee filed suit against the sellers forspecific performance, which the trial court granted.161 The sellers ap-pealed.162 In its opinion, the court explained the prohibition on seller bid-ding at an absolute auction:

[I]n an absolute auction, or an auction held without reserve, mu-tual contingent assent is achieved when an offer is made. Eachbid is a mutual assent between the seller and the respective bid-der, contingent only on no higher bid being received.

. . . .

At an auction held “without reserve,” if a seller were allowedto bid on the property, the auctioneer’s request for bids would nolonger constitute a bona fide offer. For example, the owner couldchoose to out-bid a competitor, thus, in effect, rejecting the “high-


163 Id. at 41-42.164 See id. at 41.165 Id. at 41.166 See id. at 43.167 See NAR Report, supra note 87, at 20.168 See id. at 20-21.

est bidder’s” acceptance.163

In this case, the sellers attempted to use their joint ownership as ajustification of their bidding at the auction.164 The court rejected this ar-gument: “Pyles and Reed’s joint ownership argument is an end runaround the prohibition of owners bidding in a ‘without reserve’ auc-tion.”165 Thus, the court upheld the trial court’s order of specific perfor-mance in favor of the “real” bidder.166

The sellers in Chimney Cove v. National Auction Group alleged thatthe auctioneer had advised that they could bid at the auction, even thoughit was an absolute or no reserve auction.167 Following several unusualevents, even for auctions, including losing contact with telephone bidders,the subdivision lots were sold at a price much lower than the seller ex-pected. The seller never made a bid but executed and performed the salescontracts with the winning bidders to avoid litigation. However, the sel-lers filed suit against the auctioneer, alleging that the auctioneer know-ingly breached its fiduciary duties in conducting the auction that resultedin $190,000 damages to the plaintiff. The plaintiff argued that, amongother things, the auctioneer breached its fiduciary duty to the sellers inmisrepresenting the law with respect to seller bidding at an absoluteauction. The parties settled within two weeks of filing the lawsuit. Thus,the court did not rule on whether a duty had been breached.168

An unresolved and unlitigated fact pattern that often arises at auctionsis that partners or co-beneficiaries seek to buy out each other by way of anabsolute auction. In these cases, prudent auctioneers disclose in advanceof the auction that members or partners reserve the right to bid on theirown account and not on behalf of the owning partnership. This informsthird parties and allows the ownership or partnership the opportunity tooffer the property to the widest group of interested buyers. The thresholdquestion, however, is always: Is this bidding arrangement legitimate, or isit being used to defraud other bona fide bidders?


169 646 N.W.2d at 458.170 Id.171 Id. at 459.172 Id.173 Id. at 459.174 Id. at 460.175 Id. at 463.176 Id. at 461.

4. Unclean Hands

At some auctions, participants will make agreements that impair theprocess of fair bidding on the property. These agreements affect not onlythe fair bidding at the auction but also the general public trust in the saleof real estate at auction.

In the most common scenario, a seller will reach an agreement withthe auctioneer to have a by-bidder enter fraudulent bids to increase theselling price. In Rose v. National Auction Group, only five bidders hadregistered on the day of the auction, which concerned the sellers.169 Whenthe sellers told the auctioneers that they wished to cancel the auction, theauctioneers reassured them that if the bidding was not likely to meet thesellers’ expectation of $850,000, a by-bidder would be directed to enterfraudulent bids.170 After the auction stalled at $175,000, the seller autho-rized the auctioneers to use a by-bidder as they had agreed.171 To thesellers’ dismay, the by-bidder never participated in the auction.172

After the sellers signed the real estate sales agreement with the high-est bidder at $175,000, they brought suit against the auctioneer seekingequitable relief, because the sellers claimed they would have cancelled theauction if not for the by-bidder scheme.173 The sellers sought “to retro-spectively revoke their obligations to NAG under the written contract forthe holding of the auction.”174 The Supreme Court of Michigan refused togrant equitable relief, citing the clean hands doctrine.175 Under this doc-trine the court held,

If a contract has been entered into through fraud, or to accomplishany fraudulent purpose, a court of equity will not, at the suit ofone of the fraudulent parties,—a particeps doli,—while theagreement is still executory, either compel its execution or decreeits cancellation, nor after it has been executed, set it aside, andthus restore the plaintiff to the property or other interests whichhe had fraudulently transferred.176


177 Id. at 464.178 See 1991 Ohio App. LEXIS 2033.179 Id. at *3.180 Id. at *1.181 Id. at *5 (referring to OHIO REV. CODE ANN. § 4707.15 (C), (I), (J) (LexisNexis

2003 & Supp. 2005)).182 No. 1996CA00096, 1997 Ohio App. LEXIS 1041, at *1 (Mar. 3, 1997).183 See id. at *2.184 See id.185 See id. at *2,3 passim.186 See id. at *3.

Additionally, the sellers attempted to claim the auctioneers were neg-ligent in failing to supply the by-bidder as agreed. The court also rejectedthat claim and held, “It cannot be said that there was any breach of duty indefendants’ ‘failure’ to follow through with the alleged shill bidderscheme because there cannot be a legal duty to commit an illegal act.”177

Thus, the court denied all of the sellers’ claims and granted summary dis-position in favor of the auctioneers.

In another example of an auctioneer’s promise to supply a by-bidder,the court in Ringer v. Marks reached a similar conclusion to that of theMichigan court in Rose.178 In Ringer, the seller executed an auction con-tract after being promised by the auctioneer that the property would sellfor at least $90,000, despite no mention of this amount in the auctioncontract.179 The sellers claimed the auctioneer fraudulently induced theminto agreeing to an auction, because the auctioneer promised to provide aby-bidder to raise the price to $90,000.180 Despite accepting the seller’sclaims as true, the court held, “[A]ppellant[s] had no right to rely on sucha promise by Baier because it is an illegal promise.”181

Bid rigging by bidders and their agents is another example of anagreement that courts refuse to enforce. In Frenz v. Hoover, a piece ofproperty was separated into two parcels to be sold first separately andthen as a block, in whatever way netted the highest price for the seller.182

Frenz was the high bidder on the back parcel and was prepared to bid onthe entire property.183 Before that second round of bidding, however,Hoover’s agent, Fernandez, approached Frenz.184 Fernandez told Frenzthat the Hoovers would be willing to sell the back parcel, and thus, Frenzshould refrain from bidding on the property.185 Frenz refrained as planned,and the Hoovers successfully bid on the property.186

The litigation in Frenz stemmed from the Hoovers’ refusal to convey


187 Id. at *5,6.188 Id. at *7.189 C.A. No. 2004, 1991 Ohio App. LEXIS 5409, at *1,2 (Nov. 13, 1991).

the back parcel to Frenz as agreed. In its holding, the court cites section4707.151(B) of the Ohio code, defining bid rigging as “a conspiracy be-tween auctioneers, . . . any participants in an auction, or any other personswho agree not to bid against each other at an auction or who otherwiseconspire to decrease the number . . . of bids offered at auction.”187 Apply-ing the statute, the court refused to specifically enforce the party’s agree-ment and allowed the Hoovers to keep the entire property:

Frenz refrained from bidding in exchange for the Hoovers’ agree-ment to sell him the back parcel for the amount of his originalbid. The effect of this agreement was to reduce the number ofbids on the property, and to decrease the total amount of moneybid for the property.188

5. Deceptive Advertising

Another source of conflict in the real estate auction industry lies inthe advertisement of the auction. In some cases, the complex nature ofselling multitract properties at auction confuses unsophisticated parties. Inothers, bidders miss modifications to the auction terms announced by theauctioneers at the auction, which confuses them. At the extreme, someauction advertisements simply misrepresent what is being offered for saleor the terms of the auction sale.

At the most basic level, the public’s expectations of an auction’sterms can be inconsistent with the terms announced. This difference hasled to conflicts when disappointed bidders view the terms as indicating anabsolute auction when in fact it is one with reserve. In Deacon v. Augus-tine, an auction of four separate parcels was advertised as “offered inparcels, then as a unit. Selling the way it nets the owners the most dol-lars.”189 As is common in real estate auctions of multiple parcels, theseller in this case auctioned the individual parcels, followed by an auctionof the entire property. The plaintiff bid on an individual parcel and thenentered the high bid on the property as a whole, which was higher thanthe combined total of the bids entered on the tracks individually. How-ever, the seller rejected even this higher bid. The bidder claimed he had anabsolute right to the property and that, unless otherwise advertised, a realestate auction is absolute, rather than with reserve. Citing multiple author-


190 Id. at *4,5 (citing CORBIN, CONTRACTS 159 (1952) and referring to 1 WILLISTON,CONTRACTS 76-77 (3d ed. 1957); MURRAY, CONTRACTS 76-77 (3d ed. 1990); andCALAMARI & PERILLO, CONTRACTS 39-40 (3d ed. 1987). “An auction is deemed to be ‘withreserve’ unless otherwise indicated . . . This understanding of an auction sale was in bothRestatements of Contracts.”).

191 Love v. Basque Cartel, 873 F. Supp. 563, 566, 572 (D. Wyo. 1995) (bold typeremoved) (illustrating the complexities of a multi-parcel auction. The Federal District Courtreviewed a videotape and its transcript to determine whether the announcements at the auc-tion were clear and consistent with the advertisements).

192 See id. at 568.193 See id.194 See id.

ities, the court rejected this view and held

that an auctioneer does not offer an item for sale; rather, he in-vites the bidders to make offers to him. The seller can reject anybid, and can withdraw the item from sale if he has not alreadyaccepted a bid. It is not necessary for him to reserve this right.190

Despite the court’s ruling that is consistent with a clear rule of law, bid-ders who are unfamiliar with principles of auction law may misinterpretadvertisements that do not clearly explain the nature of the auction.

Even when the auctioneer announces the auction as having a reserve,confusion can result when the parcels are offered in combination or intheir entirety after being offered in individual parcels. In Love v. BasqueCartel, auction advertisements announced the reserve prices for the par-cels as well as the following:

Minimum Bid—Absolute Auction: On receiving the announcedminimum bid for each offered ranch property, the auction willthen move to an absolute sale with the parcels selling to the high-est bidders as acknowledged by the auctioneer. The ranch will beoffered in 11 separate ranch units as hereafter outlined and also inits entirety. Sellers will accept that bid or combination of bids thatmake up the highest sales price for the total offering.191

The parcels were auctioned individually, and nine of the eleven met theseller’s required minimum.192 Following the individual sales, the plaintiffsuccessfully bid on the property as a whole for $3.96 million.193 Conflictarose when the plaintiffs, successful bidders on two individual parcels,argued that the combined price of the individual lots was $4.035 mil-lion.194 They argued that this higher price required the seller to sell the


195 See id.196 See id.197 Id. at 572.198 See id. at 571-72.199 304 S.E.2d at 290. Contra Love, 873 F. Supp. at 573 (permitting oral explanations

by the auctioneer at the auction “as long as they are not repugnant to or inconsistent with theadvertisements.”).

200 See id. at 289.201 532 S.W.2d 561 (Tenn. Ct. App. 1975).202 Id. at 563.

ranch as individual parcels.195 The plaintiffs’ calculation of the sum of theprices for the individual lots included the below-minimum bids on twoparcels.196 The court held the language of the advertisement indicated theseller’s right to reject below-minimum bids and further, “[T]his in turnmeans that the sellers were entitled to omit the below minimum bids incomparing the aggregate of the individual parcel bids to the bid for theranch in its entirety.”197 In this case, the dispute stemmed from the com-plex nature of the sale and the keen interests of many bidders in the90,000 acre Harriet Ranch, rather than from the advertisement itself.198

However, it provides an example of the need for clarity in the advertise-ment of real estate auctions.

Furthermore, auctioneers’ oral modification of advertised terms forauctions may cause bidders to believe they have been deceived. Auction-eers usually announce modifications to the gathered bidders on the day ofthe auction. The court in Holston v. Pennington, in holding oral modifica-tions valid when announced prior to the start of bidding, followed thegenerally accepted rule.199 In Holston, the auctioneer announced only justbefore the sale that the seller reserved the right to block the bids and tosell the tract in its entirety if that price exceeded the total price for theindividual lots.200

In Johnson v. Haynes, the failure to announce all the terms of the con-tract caused the dispute between the sellers and the auctioneer.201 All mar-keting and advertising by the auctioneer indicated that the auctions termswere to be announced at the sale. The auction contract provided the pro-perty was “to be sold by the auctioneer ‘at the highest price bid when putup at Public Auction by the party of the second part (auctioneer) and allsales under this contract are to be confirmed by First party (seller).’”202

However at the auction, the auctioneer announced the relevant terms ofpayment except for the seller’s right to confirm all sales. The court held,


203 Id. at 565.204 See NAR Report, supra note 87, at 40.205 Id. at 40-41.206 Complaint at 6, Threatt v. Nat’l Auction Group, Inc., No. 01-A-11508-6 (Gwinnett

County Super. Ct. Nov. 2, 2001).207 Id. at 10.

“[W]here the right to reject bids is not stated in the printed posters, nor isit announced at the sale, that right cannot be asserted after the bid isaccepted by the fall of the hammer or other act of acceptance by the auc-tioneer.”203

The Haynes case demonstrates that waiting until auction day toannounce or to modify terms of the sale can cut both ways, sometimesharming the seller, sometimes the bidder. The terms should be clearly andconsistently disclosed well in advance of the auction to protect all parties.

While confusing, modified, or unannounced auction terms may besources of conflict, actual misrepresentations in auction advertising aregreater cause for alarm. In Mozingo v. National Auction Group, the auc-tion company knowingly misrepresented the nature of the auction itself.204

In that case, the court ordered the property’s sale, and only one of twenty-six heirs who owned the real estate contracted with the auctioneer to sellthe property at absolute auction. The auction company advertised theauction as an absolute auction even though discovery showed that it knewcourt approval of the sale was required and that there were many heirswho had not signed the auction contract. On the day of the sale, the auc-tioneer announced to the bidders, for the first time, that the sale was sub-ject to court approval. Though this specific announcement was legal, itraises the question as to the legality of knowingly advertising an auctionas absolute, then changing the terms once the bidders have gathered. Ad-ditional charges against the auctioneer arose because of violations offiduciary duty and because the auctioneer promised a secret reserve bidthat would protect sellers from risks attendant to an absolute auction.205

In Threatt v. National Auction Group, the advertisements indicatedthat the seller, Kenny Rogers, was selling his estate, Beaver Dam Farms,fully furnished.206 The auctioneer represented to bidders, upon theirinspection on the morning of the auction, that “[w]hat [y]ou [s]ee [i]s[w]hat [y]ou [g]et” except for several minor personal furnishings.207 Theusual real estate sales agreement, signed by purchasers after successfulbidding, typically includes a listing of the personal property to be in-cluded in the sale. In this auction sale, it did not. Subsequently, the seller


208 See id. See also NAR Report, supra note 87, at 65–66.209 854 So. 2d 65 (Ala. 2003).210 See id. at 67.211 See id. at 67-68.212 See id. at 67.213 Id. at 68.

removed many of the items shown in the auction brochures. The purchas-ers filed suit against the auctioneers, and discovery showed that theauctioneers had pressured the seller to leave on display certain items thathe either intended to keep or did not even own (such as leased golf carts)to improve the appearance of the estate. In addition, the list of items thatthe seller expressly intended to keep was not included in the purchaseagreement. In the end, the purchasers dropped their suit against the auc-tioneers because of the costs of litigation.208

6. Mandatory Arbitration

As insertion of pre-dispute arbitration clauses into all sorts of con-sumer contracts increases, there is an increased likelihood of disputes overmandatory arbitration clauses included in contracts associated with realestate auctions.

In one dispute, National Auction Group, Inc. v. Hammett, a sellerdefaulted on the purchase agreement executed with the buyer by failing toproduce marketable title at the closing; in fact, the seller had no title.209

The seller-defendant did not appeal the default judgment of $134,114against it in the breach of contract suit. However, the auctioneer-defen-dant moved to compel arbitration of the case that the buyer broughtagainst the auctioneer for breach of the purchase agreement, fraud, sup-pression, negligence, deceit, and conspiracy.210 The auction contractbetween the seller and the auctioneer included a mandatory arbitrationclause.211 The arbitration clause specifically provided binding arbitrationas the seller’s sole remedy when disputes between the two parties couldnot be resolved within thirty days.212 The auctioneer argued that all of thepurchaser’s claims against it could “be based only upon [the purchaser’s]status as a third-party beneficiary to the listing agreement” between theauctioneer and the seller.213 Hence, the arbitration clause would requirethat these claims could only be resolved through arbitration.

Although the court did not rule on the merits of purchaser’s claimsagainst the auctioneer, it ruled that the auctioneer had no right to compelarbitration of the plaintiff’s claims, because those claims were based upon


214 Id. at 70.215 See Aguillard v. Auction Mgmt. Corp., 908 So.2d 1 (La. 2005).216 Id. at 4.217 See id.218 See id. at 5.219 See id.220 Id. at 6.221 Id.222 See id. at 18.

the purchase agreement and the relationship between the auctioneer andthe bidders at the auction, not on the auction contract: “The application ofthat arbitration agreement is limited to disputes between the parties to thelisting agreement concerning questions of law or fact, or both, arising outof or relating to the listing agreement, the parties’ performance under thatagreement, or an alleged breach of that agreement.”214

Auctioneers who wish to bind both sellers and bidders to private bind-ing arbitration for any disputes learned a valuable lesson from Hammett:insert a predispute arbitration clause into the bidder’s contract.

The Supreme Court of Louisiana, with one justice dissenting, re-versed an appellate court ruling that a predispute arbitration clause in theAuction Terms and Conditions that bidders was required to sign as part ofthe registration process was a contract of adhesion and, thus, unenforce-able.215 In that case, the auctioneer required bidders to register and signthe “Auction Terms and Conditions,” which contained the disputed ar-bitration clause.216 The terms and conditions also contained a clause thatreserved the seller’s right to withdraw the property at any time.217 At theauction, the purchaser was the high bidder, but after the real estate salesagreement was executed, the sellers refused to close on the property.218

When the buyer sought to enforce the sales agreement, the seller filed amotion to stay proceedings pending arbitration.219 The district court de-nied the motion, and “[t]he court of appeal affirmed [that] ruling, findingthe entire contract between the parties, including the arbitration clause,was adhesionary and lacked mutuality.”220 The appeals court noted thatthe “plaintiff was not in a position to bargain regarding the terms of theagreement with the defendants and was required to sign the documentprior to receiving a bid number and participating in the auction.”221

When the seller appealed the decision to the Supreme Court of Loui-siana, the court reversed the lower court rulings and granted the seller’smotion to stay proceedings pending arbitration.222 The court began its


223 Id. at 7 (citing LA. REV. STAT. ANN. § 9:4201 (2005)).224 Id. at 8-9 (quoting Golz v. Children’s Bureau of New Orleans, 336 So.2d 865, 869

(La. 1976)).225 Id. at 10.226 Id. at 17.227 615 P.2d 541, 543 (Wyo. 1980).228 See id. at 542-44

analysis by noting that “the positive law of Louisiana favors arbitra-tion.”223 It then described its definition of a contract of adhesion as “astandard contract, usually in printed form, prepared by a party of superiorbargaining power for adherence or rejection of the weaker party. Often insmall print, these contracts sometimes raise a question as to whether ornot the weaker party actually consented to the terms.”224

In rejecting the plaintiff’s argument that the auction contract was oneof adhesion, the Louisiana Supreme Court resolved the split among theappellate courts:

Accordingly, even if a contract is standard in form andprinted in small font, if it does not call into question thenon-drafting party’s consent and if it is not demonstratedthat the non-drafting party did not consent or his consentis vitiated by error, the contract is not a contract of adhe-sion.225

Because the court found nothing sufficient to establish a superior bargain-ing power in the defendant, it ruled that neither the contract nor the arbi-tration clause were void under contract of adhesion analysis.226

7. Denial of High Bidder at Absolute Auction

It sometimes disappoints a bidder to learn that its highest bid at theauction does not entitle it to purchase the real estate at that price. In a re-serve auction, the seller may cancel the highest bid for no reason at all.The offer of the bidder and the acceptance of the seller formulates thecontract between the seller and the bidder. In the case of a high bidderwho is denied at an absolute auction, a court may use a different contractsanalysis.

In Pitchfork Ranch Co. v. Bar TL, the seller executed an auction con-tract, under which the auctioneer agreed to hold an absolute auction.227

The auction was advertised as absolute, and on the day of sale, the plain-tiff bidder bid $1.61 million for the entire property.228 However, a com-


229 Id. at 545.230 See id.231 See id.232 See id. at 548-54.233 Id. at 549.234 Id. at 554.235 See id.236 See, e.g., State v. Gordon, 125 A.2d 477, 481 (Conn. 1956) (holding regulation of

auctioneers constitutional, because “[t]he business of an auctioneer . . . has always been

peting bidder attempted to bid $10,000 more.229 The auctioneer denied thehigher bid, because he had imposed a $25,000 minimum bid incrementpolicy.230 This policy was unknown to bidders and had not been agreed toby the seller.231

The court included a lengthy analysis of the nature of bidding at anabsolute or no-reserve auction.232 It concluded that

in the no-reserves auction, the contract is consummated with eachbid, subject only to a higher bid being received. This is so be-cause the seller makes his offer to sell when he advertises the salewill be a no-reserves sale to the highest bidder. Once the first bidhas been received, the only acceptance which forms a bindingagreement is the one offered by the highest bidder.233

The court held that the auctioneer had no right to reject the higher bidof $1,610,000:

There is no contract of sale until the highest bid is made. The sell-er’s contract is with the highest bidder. The highest bidder canenforce his rights in damages. Other bidders have no claim fortransfer of title against the seller because they have no contractupon which to base a right of action.234

Thus, the seller was under no obligation to close the sale of the ranch tothe defendant. The court confirmed quiet title in the seller.235

III. LEGAL RULES THAT AFFECT THE AUCTION PROCESS

A. Government Regulation through Licensing of Auctioneers and RealEstate Brokers

The business of conducting real estate auctions requires public super-vision so that purchasers will not be imposed upon and owners of prop-erty sold at auction will not be defrauded.236 These factors, along with the


affected with a public interest and subject to legislative restriction.”) (citing earlier cases);Gilbert v. Matthews, 352 P.2d 58, 63 (Kan. 1960) (“However, the right to sell at auction isnot absolute but may be withheld unless there is compliance with reasonable regulations.The business is affected with a public interest and is subject to reasonable legislative re-striction and regulation to prevent abuses and frauds.”).

237 See, e.g., OHIO REV. CODE ANN. § 4707.02 (LexisNexis Supp. 2005) (“The de-partment shall not issue or renew a license [for auctioneer] if the applicant or licensee hasbeen convicted of a felony or crime involving fraud or theft in this or another state at anytime during the ten years immediately preceding application or renewal.”).

238 See, e.g., OHIO REV. CODE ANN. § 4707.99 (LexisNexis Supp. 2005).239 See, e.g., NAR Report, supra note 87, at 38-39 (discussing Master Shore Builders,

Inc. V. J.P. King Auction Co., No. 90-5817 (E.D. Pa. June 6, 1993, which was settled by theparties after the Federal District Court denied three separate motions for summary judgmentby the auctioneer and the case was set for a jury trial).

240 See 225 ILL. COMP. STAT. ANN. 407/20-5(d) (West Supp. 2005) (“Conducting anauction or providing an auction service in Illinois without holding a valid and current licenseunder this Act is declared to be adverse to the public welfare, to constitute a public nuisance,

fear of improper manipulation, are the bases for governmental regulationof the industry. Most states now require either a separate auctioneer’s li-cense for those conducting auction sales of real estate or a real estate bro-ker’s license. Generally, the licensing authorities may refuse to grant alicense to one whose character and qualifications are not satisfactory orwhen the public interest requires that the license application be denied.237

Under most regulations, the act of selling property at auction without a li-cense constitutes a misdemeanor offense.238 While most national real es-tate auction companies are sincere in their efforts to guarantee that theyare appropriately licensed in each state where they are conducting sales,the process can be confusing and daunting, especially because of the var-iety of licensing requirements, both as auctioneers and as real estate bro-kers, and because of reciprocity agreements between some states. How-ever in some instances, it has been alleged that an auction company thatwas aware of not meeting licensing requirements has breached the cove-nant of good faith and fair dealing when it enters into an auction contractwith sellers.239

1. Auctioneer License

When a seller decides to hold a real estate auction, the seller must firstselect an appropriate auctioneer. Many states regulate auctioneers andauction services through auctioneer licensing statutes. These statutes aredesigned to protect the public interest and minimize deception by unscru-pulous auctioneers.240


and to cause irreparable harm to the public welfare.”); see also 3 TENN. JUR. Auctions andAuctioneers § 2 (2004) (“under the police power, the business of auctioneering is alegitimate subject of regulation by ordinance”).

241 See ALA. CODE §§ 34-4-1 to 54 (LexisNexis 2002 repl.); ARK. CODE ANN. §§ 17A-17-101 to 312 (West 2001 repl. & Supp. 2005); FLA. STAT. ANN. §§ 468.382 - 399 (West2001); GA. CODE ANN. §§ 43-6-1 to 26 (2005); 225 ILL. COMP. STAT. ANN. 407/5-1 to407/99-999 (West Supp. 2005); IND. CODE §§ 25-6.1-1-1 to 25-6.1-9-10 (1996); KY. REV.STAT. ANN. §§ 330.010 – 990 (LexisNexis 2001 repl.); LA. REV. STAT. ANN. §§ 37:3101 –3148 (2000); ME. REV. STAT. ANN. tit. 32, §§ 284 – 299 (Supp. 2004); MISS. CODE ANN. §§73-4-1 to 51 (2004 rev.); MO. REV. STAT. §§ 343.010 – 250 (West 2001); N.H. REV. STAT.ANN. §§ 311-B:1 to B:13 (LexisNexis 2005 repl.); N.C. GEN. STAT. §§ 85B-1 to 9 (2003);OHIO REV. CODE ANN. §§ 4707.01 – 99 (LexisNexis 2003); OR. REV. STAT. §§ 698.635 –650 (2003); 63 PA. STAT. ANN. §§ 734.1 – 34 (West 1996); R.I. GEN. LAWS §§ 5-58-1 to11 (2004); S.C. CODE ANN. §§ 40-6-05 to 380 (Supp. 2004); TENN. CODE ANN. §§ 62-19-101 to 127 (1995 & Supp. 2005); TEX. OCC. CODE ANN. §§ 1802.001 – 303 (Vernon 2004);VT. STAT. ANN. tit. 26 §§ 4602 – 4609 (Supp. 2005); VA. CODE ANN. §§ 54.1-600 to 607(2005); WASH. REV. CODE ANN. §§ 18.11.050 – 920 (West 2005); and WIS. STAT. ANN. §§480.01 – 26 (West 1998).

242 See OHIO REV. CODE ANN. § 4707.01(A) (LexisNexis 2005) (defining auction asincluding sale of real or personal property). See also OKLA. STAT. tit. 59 §§ 981-983 (West2005) (defining public auction sales as sale of goods); N.M. STAT ANN. §§ 61-16-1 to 17(LexisNexis 2005) (defining purpose of act as regulation of sales of jewelry). Cf. N.J. STAT.ANN. §§ 45:17-1 to 5 (West 2005) (“Nothing herein contained shall apply to the sale of realproperty at auction.”).

243 OHIO REV. CODE ANN. § 4707.021 (LexisNexis 2005).244 Id. See also GA. CODE ANN. § 43-6-9(b) (2005) (“It shall be unlawful for any

licensed auctioneer or apprentice auctioneer to act in such capacity in the sale of real pro-perty unless such auctioneer or apprentice auctioneer shall also be licensed as a real estatebroker, associate broker, or salesperson under Chapter 40 of this title . . . .”); TENN. CODEANN. § 62-19-102(a)(2) (1997) (“It is unlawful for any person to . . . [c]onduct, or offer toconduct, an auction of real property unless such person is duly licensed as an auctioneer, andas a broker or affiliate broker under the provisions of the Tennessee Real Estate BrokerLicense Act of 1973 . . .”); WASH. REV. CODE ANN. § 18.11.250 (West 2005) (“Auctioneersand auction companies may call for bids on real estate but only persons licensed under

Twenty-three states have enacted auction and auctioneer licensingstatutes that include auctions of real estate.241 While each state’s auctionlicensing statute has unique attributes, Ohio’s auctioneer code provides auseful framework for discussing the auction licensing statutes of the otherstates. In Ohio, a section of the Code sets out definitions, including for thesale of real estate at auction.242 Another section describes the requirementsan auctioneer must meet to auction real estate:243 “Only an auctioneer whois licensed under this chapter and who is licensed as a real estate broker ora real estate salesperson under Chapter 4735. of the Revised Code shallsign an auction contract for the sale of real property at auction.”244


chapter 18.85 RCW may perform activities regulated under that chapter.”). Cf. ME. REV.STAT. ANN. tit. 32, § 297 (2004) (providing that an auctioneer must be licensed under realestate broker licensing statutes unless “hired to call bids on real estate being sold at an auc-tion and the auctioneer does not prepare contracts or otherwise control the actual sale or takecustody of any part of the purchase price.”); KY. REV. STAT. ANN. §§ 330.010-990 (Lex-isNexis 2001). “A licensed real estate broker may not sell real estate at auction without anauctioneer’s license. However, a real estate broker and an auctioneer may collaborate in thesale of real estate at auction.” Id. § 330.020 Opinions of Attorney General.

245 See 225 ILL. COMP. STAT. 407/10-1(a)(3) (2004) (describing exemptions for li-censees under Real Estate License Act, 225 ILL. COMP. STAT. 454/1-1 et seq. (2004)); FLA.STAT. ANN. § 468.383(7) (2005) (“This act does not apply to [a]uctions conducted as a partof the sale of real property by a real estate broker, as defined in s. 475.01(1)(a).”).

246 See IND. CODE ANN. § 25-34.1-3-2(b)(10) (LexisNexis 2004) (noting that the realestate broker code does not apply to “conduct of a sale at public auction by a licensed auc-tioneer pursuant to IC 25-6.1”). See also LA. REV. STAT. ANN. §§ 37:3101 – 3144 (2005)(citing La. Att’y Gen. Op. No. 1994-76, 1994 La. AG LEXIS 114). “The legislature has ex-empted auctioneers from mandatory licensure under the real estate licensing law.”)); MD.CODE ANN., BUS. OCC. & PROF. § 17-102(4) (LexisNexis 2004) (“This title does not applyto . . . a licensed auctioneer while selling any real estate at public auction. . . .”); MO. REV.STAT § 339.010(5)(3) (West 2005) (noting that the real estate broker licensing act is notapplicable to auctioneers “employed by the owner of the property. . . .”); MONT. CODE ANN.§ 37-51-103(1)(a) (2004) (exempting “auctioneer employed by the owner or lessor to aid andassist in conducting a public sale held by the owner or lessor. . . .”); N.H. REV. STAT. ANN.§ 331-A:4(IV) (LexisNexis 2004) (exempting “[a]n auctioneer selling at public auc-tion. . . .”); 63 PA. STAT. ANN. § 455.304 (West 2004) (exempting “[a]n auctioneer licensedunder the act of September 29, 1961 (P.L. 1745, No. 708), known as ‘The Auctioneers’License Act,’ while performing authorized duties at any bona fide auction.”); VA. CODEANN. § 54.1-2103(A)(8) (2005) (exempting licensed auctioneer from real estate brokerstatute “provided the bidding at such auction is held open for no longer than forty-eighthours”).

247 See N.C. GEN. STAT. § 93A-2(a) (2004) (defining a real estate broker as one who

In contrast to the Ohio statute and those like it, auction license stat-utes in Florida and Illinois specifically exempt real estate brokers fromany requirement to obtain auctioneer licenses in addition to their realestate broker licenses.245

2. Real Estate Broker License

Examining the various real estate broker statutes offers a more com-plete picture of different licensing requirements and exemptions. A num-ber of real estate broker licensing statutes exempt auctioneers, whenconducting an auction, from obtaining the required real estate brokerlicenses.246 However, states may place additional qualifications on theseexemptions.247 An interesting example of an additional qualification is


“auctions or offers to auction (specifically not including a mere crier of sales)”).248 IOWA CODE § 543B.7(5) (2004).249 See Olazabal, supra note 44, at 67.250 See 588 S.W.2d 558, 559 (Tenn. Ct. App. 1979).251 See id. at 558.252 See id. at 559.

found in Iowa Code section 543B.7, which excludes an auctioneer’s actsin conducting the auction but severely limits the auctioneer’s activities:

The auctioneer’s role must be limited to establishing the time,place, and method of an auction; advertising the auction includinga brief description of the property for auction and the time andplace for the auction; and crying the property at the auction. Theauctioneer shall provide in any advertising the name and addressof the real estate broker or attorney who is providing brokerageservices for the transaction and who is also responsible for clos-ing the sale of the property. The real estate broker or attorneyproviding brokerage services and closing services shall be presentat the time of the auction and, if found to be in violation of thissubsection, shall be subject to a civil penalty. . . .248

Under statutes like Iowa’s, the seller and auctioneer would be well ad-vised to require the auctioneer to be a licensed real estate broker beforeexecuting any auction contract for the sale of real estate.

3. Unclear Licensing Requirements and Implications

The variety of state auctioneer licensing requirements for auctions ofreal estate is a potential source of conflict for people interested in sellingor purchasing real estate at auction. There is very little standardization,even in the licensing laws and agency rules regulating real estate agentsand brokers.249 Often, these conflicts arise when sellers employ non-resident auctioneers to conduct auctions in a state where they lack therequisite license(s).

In David Witherspoon, Inc. v. Wood, a Louisiana auction company,which was not licensed in the state of Tennessee where the auction was tobe conducted, solicited items for inclusion in the auction sale.250 Theplaintiff, who desired to sell personal property, executed an auction con-tract with Ivestor.251 Ivestor then employed Wood, an auctioneer licensedin Alabama (which had a reciprocity agreement with Tennessee), to con-duct the auction.252 Wood inquired about getting the Tennessee auction


253 See id.254 See id.255 See id. at 558.256 See id.257 See id. at 560.258 See id.259 Id. at 559.260 See Cantrell v. Morgan, No. 01A01-9008-CH-00289, 1991 Tenn. App. LEXIS 338

(Tenn. Ct. App. Apr. 26, 1991).261 See id. at *8.

license and was told that if he conducted the sale for Ivestor, he would beresponsible for the sale, because Ivestor was not licensed as an auction-eer.253 Wood obtained the Tennessee license and conducted the sale forIvestor.254 When Ivestor would not turn over proceeds from the sale, theplaintiff sued Ivestor, Wood, and Ivestor’s surety.255 Ivestor did not con-test the default judgment entered against it by the trial court, but Woodand his surety appealed a judgment of $1,288 representing the unpaidproceeds.256 The appellate court affirmed, rejecting Wood’s argument thatthe seller’s agent (Ivestor) had received the proceeds and that Wood wasnot liable.257 The court ruled that even the negotiation of the auction con-tract by Ivestor specifically violated the license statute with possiblecriminal penalties.258 Wood’s knowledge that Ivestor was not licensed,coupled with Wood’s statement to the licensing body that he would beresponsible for the proceeds, voided the auction contract. To hold other-wise, the court found, “[W]ould render any protection afforded to thepublic by the act a nullity, because then any unlicensed person couldemploy a licensed auctioneer to cry a sale and neither the licensed auc-tioneer nor his bonding company would have any further responsibility inthe matter.”259 While what is required of non-resident auctioneers underthe relevant auction statutes varies from state to state, mere negotiation byan auctioneer who is not properly licensed may void the underlying auc-tion contract.

A later Tennessee case illustrates the importance of adherence to thelicensing requirements. In that case a licensed Tennessee real estate bro-ker, who did not hold a valid Tennessee auctioneer’s license, negotiatedan auction contract.260 The court held that the negotiation of the auctioncontract violated the Tennessee auction statute and declared the auctioncontract void.261 Clearly in Tennessee, the auctioneer must be duly li-censed even before the negotiation of the auction contract with the seller.


262 See Adair v. Ala. Real Estate Comm’n, 303 So.2d 119 (Ala. App. 1974).263 Id. (citing ALA. CODE tit. 46 sec. 311(7) (Recomp. 1958) (as amended).264 Adair, 303 So. 2d at 123.265 See id. at 120.266 Id. at 122 (“Section 311 (2) provides that: ‘It shall be unlawful for any person, . . .

to . . . auction real estate . . . unless such person, . . . is licensed as a broker . . . under theprovisions of this chapter, . . . .’”).

267 Id. at 123.268 Younkin v. State Real Estate Comm’n, 774 A.2d 1281 (Pa. Commw. Ct. 2001).269 Id. at 1287-88.

Confusion about reciprocity arrangements permitted under a statelicensing regime led to discipline of a licensed Alabama real estate bro-ker. The defendant entered into a cooperative agreement with a real estatebroker, licensed only in Tennessee, to auction or sell certain real estatelocated in Alabama.262 The defendant argued that because the broker li-cense law permitted cooperation, including sharing the commission withbrokers licensed in other states,263 and because a licensed real estate bro-ker must conduct an auction of real estate in Alabama, the law permits thecooperating broker to conduct the auction.264 The appellate court con-firmed the ninety-day suspension of the defendant’s license by order ofthe Alabama Real Estate Commission.265 The court construed the licens-ing statute to require that a broker licensed in Alabama must conduct areal estate auction.266 In logic similar to that in Witherspoon, the courtruled that to hold otherwise would invite “circumvention of the Alabamareal estate law, whereby out-of-state brokers, merely by entering into acooperating agreement with an Alabama broker, could auction property inAlabama.”267 While states often participate in reciprocity agreements withother states in licensing of nonresident auctioneers, courts strictly con-strue licensing statutes. The auctioneer who conducts a real estate auctionwithout obtaining the proper licenses does so at great risk.

A Pennsylvania court sustained a $500 fine against an auctioneer whowas not licensed as a real estate broker in Pennsylvania, when the auction-eer found a satisfactory purchaser after conducting the auction.268 Thecourt held the exemption of auctioneers from compliance with the state’sreal estate broker licensing statute applied only to sales negotiated atauction, not sales made privately afterward.269

In a similar case, an auctioneer negotiated a real estate auction con-tract in which the seller promised to pay the auctioneer the agreed com-


270 Express Auction Servs., Inc. v. Conley, 732 A.2d 1012 (Md. 1999).271 Id. at 1016.272 Id.273 See id. See also Childs v. Ragonese, 460 A.2d 1031 (Md. 1983) (applying con-

flicting standards to conclude that an auctioneer who executes an auction contract with theseller is not entitled to a commission when the highest bidder refuses to close. The auc-tioneer argued he was entitled to commission based on the Maryland Real Property Article,section 14-105, that entitles a real estate broker to a commission when the real estate salescontract is signed. The court refused to find that the statute applied to auctioneers, but thenapplied the Maryland common law’s consummated sale standard that had only applied toreal estate brokers (before the statute was enacted) to auctioneers).

274 63 Misc. 324, 325 (N.Y. App. Term 1909).275 See 709 A.2d 1178 (D.C. Cir. 1998).276 See Pyles, 674 A.2d at 39-41 (relying on AM. JUR. Auctions and Auctioneers;

mission if a sale occurred within sixty days of the auction date.270 Thecourt held the auction contract was valid, because the state’s real estatebroker statutes exempted the auctioneer from licensure as a broker.271

However, the court further held this exemption applicable only to sales ofreal estate at a public auction, not those occurring afterward, regardless ofthe terms of an auction contract.272 Thus, the court denied the auctioneerhis commission, because it resulted from providing real estate brokerageservices that did not fall within the state’s exemption for auctioneers ne-gotiating sales at a public auction.273

However, courts resist invalidating a purchase agreement when a pur-chaser seeks rescission because an unlicensed auctioneer conducted theauction. In Van Praag v. Weinberg, the court refused to invalidate anauction of goods merely because an unlicensed auctioneer conducted thesale.274

Moreover, disciplining licensed brokers for violating the licensingrules may involve their conduct in the auction industry. For example, inGoldsten v. District of Columbia Real Estate Commission, the appellatecourt affirmed a five year license suspension of a broker who had beenconvicted in a federal court of conspiracy to rig bids and suppress compe-tition at public real estate auctions, pursuant to 15 U.S.C. section 1.275

B. (Mis)application of the Uniform Commercial Code to Real EstateAuctions?

1. The Uniform Sales Act and the Uniform Commercial Code

Currently, few specific and uniform rules address real estate auctions.Because of this, some courts have relied on treatises,276 while other courts


CORBIN, CONTRACTS; and RESTATEMENT OF CONTRACTS).277 See, e.g., Forbes v. Wells Beach Casino, Inc., 307 A.2d 210, 219-20 (Me. 1973);

Well, 427 N.E.2d at 1343.278 See Pyles, 674 A.2d at 40, n.6.279 U.C.C. § 2-102 (2003). See also Gallegos v. Graff, 508 P.2d 798, 799 (Colo. Ct.

App. 1973) (holding that the UCC does not apply to transfer of interests in real property andso there was no implied warranty of habitability by builder of new home) (noting UCCsection 2-607 only pertains to the sale of goods); Fink v. Denbeck, 293 N.W.2d 398, 401(Neb. 1980); U.C.C. § 2-607(3) (2003) (providing that a buyer of a good, but not real estate,must within a reasonable time after he discovers or should have discovered any breach notifythe seller of breach or be barred from any remedy”).

280 U.C.C. § 2-105(1) (2003) (mentioning realty only in its definition of goods inconnection with “unborn young of animals and growing crops and other identified thingsattached to realty as described in the section on goods to be severed from realty (Section 2-107).”).

281 Cuba v. Hudson & Marshall, Inc., 445 S.E.2d 386, 387, n.1 (Ga. Ct. App. 1994)(noting that, although the UCC does not apply to sale of real estate at auction directly,“Courts in other states have recognized that this portion of the Article reflects common lawprinciples applicable to land auctions as well as auctions of goods . . . and have borrowedrules from it or applied it to land auctions by analogy”).

282 One of the authors had the good fortune to have had Professor Dunham as herprofessor and faculty advisor while a student at the University of Chicago Law School.

283 Marion W. Benfield, Jr., Wasted Days and Wasted Nights: Why the Land ActsFailed, 20 NOVA L. REV. 1037, 1042 (1996).

284 See Cuba, 445 S.E.2d at 388 n.1. See also Pyles, 674 A.2d at 40 n.6.285 See Well, 427 N.E.2d at 1346.See also Outpost Café, Inc. v. Fairhaven Sav. Bank,

322 N.E.2d 183, 184 (Mass. App. Ct. 1975).

have looked to Article 2 of the Uniform Commercial Code (UCC),277 andsome courts have mentioned the Uniform Land Transactions Act(ULTA).278

Article 2 of the UCC applies only to the transactions involving goodsas defined therein.279 The UCC impliedly prohibits its application to trans-actions of real estate.280 However, with respect to auctions of real estate,some courts have applied the UCC directly, relied on the UCC, or appliedthe UCC by analogy.281 Indeed, Professor Allison Dunham282 and Profes-sor Marion W. Benfield, Jr., the co-reporters of the ULTA who both hadvery prominent roles in its drafting, purposefully patterned the ULTA onArticles 2 and 9 of the UCC.283 Even when courts have relied on the UCCin regard to real estate auctions, and have not mentioned the ULTA, manycourts have found that the UCC encompasses common law principles ofauctions.284 Courts generally decide that the principles stay the same nomatter what is being auctioned.285


286 58 N.W.2d 693, 696 (Wis. 1953).287 Id.288 Id.289 U.C.C. § 2-101 official cmt. (2003).290 U.L.T.A. § 2-207 (amended 1977), 13 Pt. II U.L.A. (2002).291 See id. at cmt. 4.292 See Benfield, supra note 233, at 1039.293 Id. § 1-102(1).294 See Benfield, supra note 233, at 1038-39.

The application of the UCC principles to real estate auctions is not arecent trend; courts applied these principles even before the creation andadoption of the UCC. In Zuhak v. Rose, the Supreme Court of Wisconsinfaced the issue of whether a contract was formed in a real estate auc-tion.286 The Court decided that the auction was without reserve based onthe Uniform Sales Act, as adopted in Wisconsin.287 In relying on theUniform Sales Act, while acknowledging that it only applies to personalproperty, the Court concluded, “[T]here is no reason to suppose that themeaning of the words ‘without reserve’ varies depending on whether atthe moment the auctioneer is offering land or goods.”288 Court decisionsanalogizing the UCC to real estate auctions occurred prior to the adoptionof the UCC and may be relied upon because, after all, Article 2 of theUCC is a modernization of the Uniform Sales Act.289

Perhaps a better source of reliance would be the ULTA. Section 2-207of the ULTA addresses the issue of real estate auctions.290 Although itmay not seem intuitive to apply the UCC to real estate auctions, applica-tion of the ULTA would have similar results because section 2-207 of theULTA derived from section 2-328 of the UCC.291 Because the efforts ofso many thoughtful and experienced scholars and practitioners went intodrafting the ULTA, perhaps it has some core approaches that could serveas a basis for reform in auctioning real estate. If so, Professor Benfield’slament of “wasted days and wasted nights” might not be completely ac-curate.292

2. The Uniform Land Transactions Act

The ULTA was drafted between 1969 and 1978 “to simplify, clarify,and modernize the law governing real estate transactions.”293 Although nostate has adopted the ULTA,294 it can provide guidance and understandingfor the courts applying the UCC to real estate auctions.

Section 2-207 of the ULTA was derived from section 2-328 of the


295 U.L.T.A. § 2-207 cmt. 4.296 See id. at cmt. 3.297 See Benfield, supra note 233, at 1045.

UCC.295 Section 2-328(2) of the UCC, which defines when a sale by auc-tion is complete, is virtually identical to section 2-207(c) of the ULTA.There are some differences though between the two uniform acts. TheULTA does not address section 2-328(1) of the UCC, which deals withthe auction of lots. Section 2-328(3) of the UCC, which compares auc-tions with reserve to auctions without reserve, is similar to section 2-207(a) of the ULTA. The UCC differs, however, in that a bidder’s retrac-tion of the bid prior to completion of the sale does not revive any previousbids, whereas the ULTA does not address the situation. Section 2-328(4)of the UCC, which addresses a situation in which the seller of the goodsat auction reserves the right to bid at the auction without providing noticeto the bidders of that reservation, is similar to section 2-207(d) of theULTA except concerning remedies. Under the ULTA, the buyer’s onlyremedy is rescission, but under the UCC, the buyer may rescind thecontract or take the goods at the price of the last good faith bidder.296 TheULTA also has two subsections in section 2-207 not found in section 2-328 of the UCC: section 2-207(b) that addresses the issue of sealed bidsand section 2-207(e) that addresses the issue of tendering payment. Inaddition to these comparisons, in portions of these uniform laws relatingto auctions, several other sections relating to secured transactions arecomparable.297

IV. PROPOSALS FOR REFORM

Proposals for comprehensive legal and ethical reforms of the real es-tate auction industry should come from special state commissions set upto study identified problems. There is even a strong argument to considera Uniform Real Estate Auctions Act to reduce the confusion between thevarious state laws and the inconsistencies in the laws in consideration ofthe increasing national and international aspects of real estate auctions.Below are some suggestions for the consideration of a legislative group.

A. Reforms Based upon the ULTA

1. ULTA Section 2-207(a)

The first part of section 2-207 of the ULTA adopts the common lawand UCC presumption that an auction of real estate is with reserve unless


298 See U.L.T.A. § 2-207(a); cf. U.C.C. § 2-328(3) (1998).299 U.C.C. § 2-328(3).300 See Marten v. Staab, 543 N.W.2d 436, 443 (Neb. 1996) (citing Pitchfork Ranch Co.,

615 P.2d at 541).301 See id. at 443. See also Well, 427 N.E.2d at 1346 (providing that a bid at an auction

constitutes an offer to buy and the fall of the hammer or any other customary means con-stitutes the acceptance).

the real estate is explicitly put up without reserve. If an auction is withreserve, the auctioneer may withdraw the property at any time before theauctioneer announces completion of the sale. In contrast, when an auctionis absolute or without reserve, the auctioneer may not withdraw the pro-perty, unless no bid was made on that particular piece of property within areasonable time. The last portion of this subsection allows a bidder toretract or change the bid, in either a with reserve or without reserveauction, at any time prior to when the auctioneer announces completion ofthe sale.298 However, the UCC adds to this section that “a bidder’s retrac-tion does not revive any previous bid”;299 whereas, for one reason oranother, the ULTA does not address this point or provide any insight inthe comments following the section.

Although most of section 2-207(a) promotes high standards within theindustry, some suggestions for change are appealing. First in an auctionwithout reserve, there should be some sort of a time limit (perhaps 10days) placed on the seller or auctioneer after which the auction may not becancelled except for force majeure or other emergency situations. Thisproposal responds to harm caused to bidders who rely on an advertise-ment for an auction and spend time and money traveling to participate inthe auction just to have the auction cancelled in its entirety before a bidcan even be placed. At the very least, the auction listing broker should berequired to make full disclosure to bidders that, at an auction withoutreserve, the seller has the right to cancel the auction at any time until a bidis given.

Second, a bidder should not be able to change or withdraw the bidduring the auction. This proposal for change responds to the applicationof established contracts principles that may harm the seller. In an auctionwithout reserve, putting up the property is an offer by the seller, and a bidis an acceptance by the buyer, conditioned only on a higher bid’s notbeing placed.300 But in an auction with reserve, the bidder, as the offeror,makes an offer and the auctioneer, as the offeree, accepts the offer.301

However, if the auctioneer notifies the bidders that the bids are subject to


302 See East v. Brown, 986 P.2d 523, 525 (Okla. Civ. App. 1999). See also Cuba, 445S.E. 2d at 388 (providing that the fall of the hammer at an auction merely ends the bidding,and no contract is formed until the seller actually accepts the high bid).

303 See 1 RICHARD A. LORD, WILLISTON ON CONTRACTS § 5:8 (4th ed. 1990).304 Query: what happens when the high bidder fails to execute the real estate sales con-

tract but still claims some sort of ownership rights in the property?305 U.L.T.A. § 2-207(c) (amended 1977).306 See id.307 U.L.T.A. § 2-207(d).

the seller’s approval, the bang of the gavel is not an acceptance but mere-ly the completion of the bidding.302 Therefore, under current law, a biddermay withdraw the bid before completion of the sale, including meetingthe reserve, because an offer may be revoked before it is accepted.303

Last, in the case when the highest bid fails, the second highest biddershould be bound as well as the highest bidder, pending the execution ofthe real estate sales contract.304 Under the UCC and the ULTA, the secondhighest bidder is not bound. This proposed change would protect the sell-ers who likely have paid a fee to the auctioneer for costs of the auction.Theoretically, the auctioneer’s completion of the bidding process by ac-cepting the highest bid marks the end of the auction. If the highest bidfails to result in a binding contract, the seller must re-auction the propertyresulting in the expenditure of significant additional fees. Therefore, hold-ing the second highest bidder liable would protect the sellers from suffer-ing the cost and expense of auctioning their property twice.

2. ULTA Section 2-207(c)

This section of the ULTA is virtually identical to section 2-328(2) ofthe UCC. It provides that a sale by an auction is complete when theauctioneer so announces by the fall of the hammer or in other customarymanner.305 If a bidder announces a bid while the hammer is falling, theauctioneer may, in his discretion, reopen the bidding and call for morebids or announce that the bidding is over and declare the property sold tothe bidder who bid before the hammer began to fall.306

3. ULTA Section 2-207(d)

This subsection provides, “If the auctioneer knowingly receives a bidon the seller’s behalf or the seller makes or procures a bid on his ownbehalf, and notice has not been given to other bidders or potential biddersthat bidding by the seller is reserved, the buyer may avoid the sale.”307


308 See U.C.C. § 2-328(4) (2003).309 See id.310 See U.L.T.A. § 2-207(d), cmt. 3.311 See 834 F. Supp. at 525.312 See id. at 521.313 See id.314 See id. at 524.315 See id. at 250.316 See N.H. REV. STAT. ANN. § 358-A:10(I) (2004).317 See Christopher Curran & Joel Schrag, Does It Matter Whom An Agent Serves?

Evidence From Recent Changes in Real Estate Agency Law, 43 J. L. & ECON. 265, 265(2000).

This portion of the subsection is the same as section 2-328(4) of the UCC,except the UCC gives the buyer an election of remedies when this sectionbecomes applicable.308 Under the UCC, the buyer may avoid the sale ortake the goods at the price of the last good faith bid prior to the comple-tion of the sale.309 Comment 3 to section 2-207 of the UTLA acknowl-edges the departure from section 2-328(4) of the UCC, but it fails to setforth any reason for it,310 because there is none. This section of the ULTAshould be amended to read the same as the UCC. A bidder’s only remedyshould not be rescission. Instead, the bidder should be allowed to choosebetween rescission and taking the property at the last good faith bid.

An alternative approach for reform of this serious violation of buyers’expectations in participating in real estate auctions would follow thecourt’s decision in Stormy Weathers, in which the court found that theauctioneer unlawfully used a by-bidder.311 The FDIC, as receiver of Dart-mouth Bank, was auctioning off property.312 The auctioneer used a by-bidder to stimulate bidding, but the court held that the by-bidder went toofar.313 The court decided that a reservation of the right to bid on one’s ownproperty at an auction does not entitle the owner to bid successively (morethan one bid) with a good faith bidder.314 The court relied on New Hamp-shire statutes and found that the FDIC conducted “collusive bidding” andas a result committed an “unfair and deceptive act or practice” as definedunder the state’s Consumer Protection Act.315 A violation of that statutecarries certain remedies to the harmed party including actual damages,treble damages, court costs, and attorneys’ fees.316

B. Reexamination of Strict Agency Rules in Real Estate Auctions

The traditional notion of the real estate broker as the agent of theseller has changed over the past twenty years.317 The trend, and recom-


318 But see Paul L. Reynolds, Note, Chernick v. Fasig-Tipton: A Caveat to the HorseTrader, 74 KY. L.J. 889, 909-10 n.139 (1985-86) (indicating all auction cases in Kentuckyholding that an auctioneer is an agent of both seller and buyer involve the sale of realty).

319 See, e.g., Harper v. Adametz, 113 A.2d 136, 139 (Conn. 1955) (holding real estatebroker breached his fiduciary duty to buyer when he failed to disclose the buyer’s offer tothe seller).

320 See, e.g., Klotz v. Fauber, 189 S.E.2d 45 (Va. 1972).321 See Paula C. Murray, The Real Estate Broker and the Buyer: Negligence and the

Duty to Investigate, 32 VILL. L REV. 939, 960 (1987).322 Id. at 959.323 See Ronald Benton Brown, Joseph M. Grohman & Manuel R. Valcarcel, Real

Estate Brokerage: Recent Changes in Relationships and a Proposed Cure, 29 CREIGHTONL. REV. 25, 79 (1995).

324 See id.325 See Olazabal, supra note 44, at 100. She asserts, Contemporary amendments to most states’ real estate licensing statutes have bro-ken completely with the common law and have extended certain agency duties,like the duties of honesty and fairness and the duty to account for any party’sfunds, to those consumers that are not represented by the licensee. Using “other

mendation, is to impose a duty on brokers to buyers as well. Even when abroker is not a dual agent or buyer broker, as in most real estate auctionsituations,318 some courts have recognized a fiduciary relationship (thoughnot an agency relationship) between the broker and the buyer.319 Othercourts have been unwilling to find a fiduciary duty, absent an agencyrelationship.320 Paula Murray points out the “untenable legal position” of abroker who owes fiduciary duties of utmost loyalty and good faith to boththe seller and the buyer.321 Instead, she urges a duty of the broker to thebuyer “as a normal business relationship in which the broker must notintentionally or negligently mislead the buyer”322—something like theobligation of good faith and fair dealing imposed in contract negotiations.

Other scholars have proposed enactment of statutory brokerage re-lationship rules that would require a listing broker, which would seem toinclude an auctioneer or broker, to make a reasonable good faith effort tohelp the seller market the property.323 That rule would require brokers tomake reasonable good faith efforts to locate appropriate properties andservice providers for potential buyers, including inspectors, financing, andattorneys.324 By abrogating the common law rules of agency and fiduciaryduties implied in that relationship, these proposals for reform of realestate broker responsibilities should be considered better to protect theparties at the real estate auction, especially the bidders who have inade-quate protection in most jurisdictions.325 The reform proposals would also


party” duties, these states have added substantive protections for all parties to areal estate transaction, whether or not these parties are represented by a licensee.326 Case Interpretation 1-31 (cross referenced as Case Interpretation 12-18 in the NAR

Code of Ethics & Arbitration Manual) (on file with author). Business schools frequently usecase studies as the basis for teaching. They are based on actual situations and feature aresolution, according to a principle (often from an economic perspective). These are similar,but not the same, as hypotheticals and problems in legal education materials. This case studysituation is evaluated in light of ethical rules of the NAR.

327 Id.328 Seller has the right to cancel the auction up until the bidding begins under current

law.329 A correct statement for an absolute auction.

permit auctioneers to enhance their roles with bidders in much the sameway that brokers, through affiliated, captive, and related companies, havewith buyers. For example, auctioneers could offer financing to auctionbidders through affiliated agencies.

Both the Auction Forum of the NAR and the National AuctioneersAssociation (NAA), the trade groups for real estate auctioneers, focusmuch attention in their ethical rules on the proper roles for their membersin conducting auctions of real estate. For example, the Professional Stan-dards Committee of the NAR ruled on two auction practices in May,2005. The case study326 used as the basis for that ruling can be summa-rized briefly: Seller T had inherited waterfront property in Hawaii that shewanted to sell to meet family financial obligations. T located Realtor Qwhose Internet website prominently advertised his auction services. Qadvised T to contract for an absolute auction in order to get the best price.Although T was skeptical and expressed her concerns about a guarantee ofprice, Q emailed T, “You have a choice piece of beachfront. They aren’tmaking anymore of that, you know. It will easily bring at least a million,five hundred thousand dollars.”327 T traveled to Hawaii for the auction andbecame upset when she saw only a few bidders present and engaged incasual conversation with bidders who indicated that the property wouldsell for much less (one told her that he would bid no more than $250,000;another told her that he “expected a fire sale”). T panicked and insistedthat Q cancel the auction328 after Q’s only reassurance, “This is an auc-tion. The high bidder gets the property.”329

Subsequently, two ethics complaints were filed against Q, the auc-tioneer. T complained that Q misled her by repeatedly assuring her thather property would sell for “at least $1,500,000” and by not explaining toher that at an absolute auction the high bidder would be the purchaser at


330 Case Interpretation I, supra note 326.331 See supra note 5.332 Case Interpretation I, supra note 326.333 Id.334 Id.335 Id.336 The panel’s position is consistent with current law regarding the right of the seller

to cancel an absolute auction. The buyer’s complaint indicates the bad feelings that an abruptcancellation on the day of the auction may generate.

337 Available at www.auctioneers.org/aboutNAA/positionpapers.php (last visited Feb.3, 2006).

whatever price.330 The NAR hearing panel agreed and held that Q’s con-duct, although not a guarantee of the price, violated Article 1 of the Codeof Ethics.331 By taking no steps to explain the auction process and theresults of an absolute auction, “REALTOR Q’s actions and statementshad clearly not protected his client’s interests . . .”332

The second complaint examined in the case study was from Buyer B,a bidder registered for the auction, and related to Q’s ad that specificallyprovided, “Absolute Auction on July 1.”333 Nowhere in the ad was “theremention that the auction could be cancelled or the property sold before-hand.”334 B complained that this advertising “violated Article 12’s ‘truepicture’ requirement.”335 The hearing panel agreed with Q’s position:“There had been an absolute auction scheduled—as REALTOR Q hadadvertised—and there was no question but that REALTOR Q had nochoice but to cancel the auction when he had been instructed to do so byhis client.”336

The NAA issued an Official Statement of the National AuctioneersAssociation Concerning Proper Ethical Conduct for Absolute Auctions ofReal Estate to “stem growing public sentiment questioning the integrity ofthe absolute auction method and to preserve the hard earned reputation ofauctioneers throughout the country. . . .”337

Making these ethical rules, which depend on voluntary compliance bymembers, a part of a comprehensive, uniform law of real estate auctionswould further the goals of protecting the public and the reputation of theindustry.

C. Deceptive Trade Practices Acts Should Apply to Real Estate Auctions

1. Uniform Deceptive Trade Practices Act (Revised)

The court in Stormy Weathers recognized that collusive bidding by


338 See 834 F. Supp. 519 (D. N.H. 1993); N.H. REV. STA. ANN. § 358-G:1 II (1955)(defining collusive bidding as “a practice whereby the auctioneer or his agent and any personcauses fictitious bidding during an auction for the purpose of misleading or stimulating otherpersons who are bidding in good faith.”).

339 Stormy Weathers, Inc., 834 F. Supp. at 523 n.3.340 See 429 N.E.2d 1267 (Ill. App. Ct. 1981); 815 ILL. COMP. STAT. ANN. 510/2 (1999).341 See Duhl, 429 N.E.2d at 1270.342 Id. at 1277. But see Greene v. Rogers Realty & Auction Co., 586 S.E.2d 278 (N.C.

Ct. App. 2003).

undisclosed agents of the seller and shill bidding violated the New Hamp-shire statute forbidding unfair and deceptive trade practices.338 “At leasttwelve states . . . [had] enacted statutes prohibiting the use of puffers orby-bidders to artificially enhance the sale price of property at auction”339

by 1993, the year the case was decided.Plaintiffs in other jurisdictions have argued, with varying results, that

the states’ deceptive trade practices acts provide them relief. In Duhl v.Nash Realty an Illinois appellate court reversed the trial court’s ruling thatthe complaint did not state a cause of action under the Consumer Fraudand Deceptive Business Practices Act.340 Although that case did notinvolve an auction of real estate, it involved a broker’s representationsabout the value of the plaintiff’s current house and the value of the housethat plaintiff was interested in purchasing with the proceeds from the saleof the current house.341 The court emphasized that the Illinois legislatureintended to give more protection than that provided by common law fraudprinciples:

Section 2 of the Act (which was held to apply to misrepresenta-tions by real estate brokers to prospective purchasers . . .), indi-cates a decisive move on the part of the Illinois legislature toenact broad protective coverage of consumers from the manytypes of deceptive or unfair selling and advertising techniquesused by businesses.

Since the Act affords even broader consumer protections thandoes the common law action of fraud, it is clear that a plaintiffsuing under the Act need not establish all of the elements of fraudas the Act prohibits any deception or false promise.342

People interested in protecting parties to a real estate auction in the fastgrowing industry should consider the Uniform Deceptive Trade Practices


343 See 815 ILL. COMP. STAT. ANN. 510/2 (2005) (adopting Uniform Deceptive TradePractices Act).

344 510/2(a)(9).345 510/2(a)(12). See, e.g., Unique Concepts, Inc. v. Manuel, 669 F. Supp. 185 (N.D.

Ill. 1987) (holding that any conduct that creates a likelihood of confusion ormisunderstanding is potentially actionable under the Illinois version of the statute; thestatements need not actually have been false but only misleading).

346 510/2(b).347 815 ILL. COMP. STAT. ANN. 510/3 (West 1966).348 Id.

Act.343 Section 2(a) provides: “A person engages in a deceptive tradepractice when” he “advertises goods or services with intent not to sellthem as advertised.”344 An understanding about secret reserves betweenthe auctioneer and seller, for example, would come within this classifica-tion. Section 2(a)(12) prohibits “any other conduct which . . . creates alikelihood of confusion or of misunderstanding,” which might includevariance between the advertising and oral modifications of the terms atthe auction or the use of terminology that is not clear to all bidders.345

Similarly, requiring the auctioneer to explain more clearly the type ofauction and the seller’s rights (to cancel within a certain period of timebefore the event and to reject the highest bid for no reason at all) wouldimprove the reputation of this method for selling real estate. In addition,section 2(b) reduces the burden of proof on parties charging deceptivetrade practices: “In order to prevail in an action under this Act, a plaintiffneed not prove competition between the parties or actual confusion ormisunderstanding.”346

In Illinois, “A person who is likely to be damaged by a deceptivetrade practice of another may be granted injunctive relief . . . [without][p]roof of monetary, damage, loss of profit or intent deceive.”347 Award-ing costs, including attorneys’ fees to the prevailing party, is expresslyallowed if the court finds that the defendant willfully engaged in a decep-tive trade practice.348 An express provision includes as damages to bid-ders, who register only to have the auction cancelled at the last minute,the expenses in due diligence, for their time in attending, and the expenseof travel. The goal is to place the risk of loss on the auctioneers andsellers when ready, willing, and able buyers show up to bid at an auctionthat the seller cancelled right before it was scheduled to begin.


349 CAL. BUS. & PROF. CODE § 17530 (2005).350 Id. at § 17-500.351 See People v. Dollar Rent-A-Car Systems, Inc., 259 Cal. Rptr. 191 (Ct. App. 1989).

2. California Business and Professions Code

Section 17530—False Statement Concerning Realty in the Business& Professions Code makes it unlawful for a person, firm, or agent tomake any statement or assertion of fact in a publication, including anewspaper, the Internet, or a circular “concerning the extent, location,ownership, title or other characteristic, quality, or attribute of any realestate located in this state or elsewhere, which is known to . . . be untrueand which is made or disseminated with the intention of misleading.”349

Section 17500, False or Misleading Statements, prohibits untrue or mis-leading statements made as part of a plan or scheme with the intent not tosell real or personal property as advertised. The penalty for violation “is amisdemeanor punishable by imprisonment in the county jail” or a fine of$2,500.350 This is an ineffective penalty when the transaction involves alarge, single asset, rather than multiple, smaller sales. When the spirit ofthe law is violated with respect to a real estate auction, the $2,500 fine isno deterrent. At least one California case extended the prohibition againstuse of untrue or misleading statements in selling real or personal propertyor personal services to the use of false or misleading oral statements.351

D. Other Suggestions for Reform

In order to place the risk of loss squarely on those who cause it, theauctioneer and the seller should be jointly and severally liable to biddersfor damages. This will alleviate some serious problems of proof under thecurrent rules when it is difficult to prove that one was liable or that agen-cy rules protect the auctioneer or the seller from liability.

The highest bidder should be bound, except in reserve auctions orwhen the seller reserves a clear right to approve, to the contract automati-cally, whether or not the bidder signs after the sale. This rule, with conse-quences for its breach, would discourage a fairly common practice ofhaving a shill bidder make the highest bid and then disappear with noconsequences. Likewise, a bidder may not change or withdraw a bid whilethe auction is ongoing. In addition, the second highest bidder should bebound in case the highest bidder fails to close on the transaction.

Finally, to stop abuses caused by the auctioneer’s adding binding,predispute arbitration clauses into the auction contracts and the bidding


packages bidders must sign, the rules should limit the enforcement only todisputes where less than a certain dollar amount is involved (perhaps$25,000), unless the parties agree after the dispute arises. Informed partiesare able to negotiate arbitration and other dispute resolution preferences,and in commercial real estate transactions with competent counsel at thefront end, informed parties often limit the applicability of the arbitrationclause.

V. CONCLUSION

This Article seeks to explain the real estate auction process as it ap-plies to sell nondistressed properties and to set forth and examine the legalissues surrounding real estate auctions in the hope that a full review of themultiplicity and inconsistency of the rules can lead to a comprehensive,uniform set of rules for real estate auctions that will protect both the par-ties and the auction industry.

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