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chairOur question today regards, “How to manage legal seller bidding …?” This is a distinctly different question than, “How to manage illegal seller bidding?”

Given that there are only two types of auctions, and one being a without reserve auction with no reserves, the other type is with reserve, which can include one or more reserves.

What are the types of reserves which can be included in a with reserve auction?

  • Any type of disclosed minimum bid, or minimum increase over a prior bid
  • A right for the property to be withdrawn any time before the fall of the hammer
  • The seller may accept or reject the high bid, so long as the hammer has not fallen
  • The seller has a undisclosed minimum amount for which the property won’t sell below
  • The seller bidding himself or though someone else on his behalf
  • Generally, any other type of limiting condition which impacts bidders

Legal seller bidding can be handled basically two ways. The actual seller can bid, or the seller can authorize someone to bid on his behalf. This “someone else” can be anyone — a friend, relative, neighbor, the auctioneer, clerk, cashier, ring worker … anyone he designates.

The questions basically are two:

    1. How is the actual bidding handled?
    2. How is a “no sale” situation handled?

Here’s an example. A seller consigns an item he believes should demand $500. He and the auctioneer sign a with reserve auction contract, and the auctioneer assures his client the item will not sell for less than $500. His plan — which the seller has knowledge of, and consents to — is to have his clerk bid for his client against the other bidders to ensure either the bidding reaches (at least) $500 or the item is not sold.

The auction begins by the auctioneer announcing that the seller reserves the right to bid. Then, this item is opened for bid and a bidder in the crowd bids $100. The clerk bids $125 and the other bidder bids $150 … until either the price reaches $500 or it doesn’t. If it reaches $500 (or more,) it sells for the highest accepted bid. If the bid doesn’t reach $500, then the item doesn’t sell.

If the item doesn’t sell, some auctioneers say, “this item passed,” or “no sale” while others say, “Sold!” to the clerk’s bid number. I think “passed” or “no sale” is more honest than “Sold!” given the item didn’t actually sell.

What’s important about legal seller bidding is it is disclosed (reserved) and that it is either the seller actually bidding or someone bidding under direction from the seller. If it’s not disclosed (reserved) or it’s portrayed as such, but not the seller (or his designee) bidding, it is strictly prohibited.

The UCC 2-328 says it this way:

If the auctioneer knowingly receives a bid on the seller’s behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved, the buyer may at his option avoid the sale or take the goods at the price of the last good faith bid prior to the completion of the sale.

In other words, outside of the what the seller authorizes and is disclosed, no such seller bidding bidding is permitted. The auctioneer can’t just decide unilaterally to bid because he thinks that special item is going too cheap. He also can’t bid just because he knows or strongly suspects the genuine bidder will bid again … unless he’s bidding with the genuine intent to purchase.

How do we know this? The Supreme Court of the United States ruled on this issue, and said as much regarding fictitious bids — bids which are represented as real, but don’t actually exist.

Of course, the UCC 2-328 provides a remedy for such illegal seller bidding, which includes the buyer voiding the sale altogether. What is interesting is if the seller is the high bidder, no specific remedy is provided.

Can our clerk in our example bid because he desires to own the item? Surely. That’s what genuine intent is all about. Generally throughout the United States anyone other than the owner of the item (property) can bid if they bid with the genuine intent to purchase — and shouldn’t they? Auctions are all about maximizing the seller’s position.

It would be hard to argue that an owner was bidding with the genuine intent to purchase, given he already owns the property. In other words, if an owner wants to strictly continue to own something, shouldn’t the auction be avoided altogether?

Lastly, some auctioneers restrict some people from being the seller’s designee for legal seller bidding purposes. An auctioneer might say, “I don’t allow my ring workers to bid for the seller,” and that’s fine, so long as the seller consents and has adequate resources otherwise to bid legally if desired. Again, these bids are to be made by the seller or his designee.

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 serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.