, , , , , , , ,

Amanda McCarter Williams recently posed this question:

    “Is it just me or does “Sealed Bid & Absolute Auction” seem rather confusing? I read about an upcoming auction where it’s called a “Sealed Bid & Absolute Auction.” The explanation is “All bids are due by such-n-such date and selected sealed bidders will be invited to a private absolute auction on such-n-such date.” Just wondering what others think about this type of auction…”

In other words, can someone have a sealed bid submission round and then take only certain bidders from that round into a final round of bidding, and call it an, “absolute auction?”

Maybe there are two questions here?

  • Is this practice unethical?
  • Is this practice illegal?

Let’s start with a look at excerpts from the National Auctioneers Association (NAA) position paper titled: Official Statement of the National Auctioneers Association Concerning Proper Ethical Conduct for Absolute Auctions of Real Estate

This “Sealed Bid & Absolute Auction” method suggests:

  • Only certain bidders who have bid high enough in the sealed bid round are permitted to participate in the absolute auction.
    NAA’s position: No auction should be advertised “absolute” or “without reserve” unless there is a bona fide intent to transfer ownership at the time of advertising and at the time of the auction, regardless of the bid or bidder.

This “Sealed Bid & Absolute Auction” method suggests:

  • If the sealed bids aren’t satisfactory, the absolute auction could/would be cancelled.
    NAA’s position: Auctioneers must not circumvent a sale represented to the public as absolute by “canvassing” the crowd for opening bids prior to the auction with the preexisting intention of calling off the sale if the potential bids are not acceptable to the seller. In such a case, it is clear that there was no true intention to sell the real estate to the highest bidder regardless of price and the auctioneer would be perpetrating a fraud upon those in attendance.

This “Sealed Bid & Absolute Auction” method suggests:

  • The highest sealed bid is used as a starting bid (minimum bid) at the absolute auction.
    NAA’s position: In an absolute auction, or auction “without reserve”, the seller has committed to selling the property to the highest bidder, without any minimum which must be realized at the sale.

It would appear that by analyzing these three aspects of the Sealed Bid & Absolute Auction method, the method is unethical by any measure.

However, is this method illegal?

The primary argument we’ve seen suggesting this is legal, is that the laws which govern, “absolute” (without reserve) auctions and with reserve auctions are exclusive to the auction of goods, and not real property.

Therefore, such a method would only be illegal if the auction was being held in regard to personal property. We wrote about this misnomer recently: Does the UCC 2-328 apply to real estate?

Further, most all states which license auctioneers have some language in their license law such as:

    The licensing agency may deny, refuse, suspend, or revoke the license of any auctioneer who demonstrates bad faith, dishonesty, incompetency, or untruthfulness or any other conduct that constitutes improper, fraudulent, or dishonest dealings including misrepresentation and unethical practice.

Per such language, it would be almost certain that a licensed auctioneer would likely lose his or her license if the Sealed Bid & Absolute Auction method was employed. However, would such unethical practice be viewed as illegal practice?

The courts in the United States are increasingly bridging the gap between unethical behavior and illegal behavior. Too, state legislatures are writing laws which describe unethical behavior as illegal. Such laws already exist in many jurisdictions where a breach of fiduciary duty is unethical, and thus illegal.

An event where sealed bids are submitted, and then only certain bidders are then permitted to bid further at a potential absolute auction where the highest sealed bid is the opening bid … unethical or illegal? Yes.

Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He is adjunct faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.