I recently read a blog entry describing the notion that a lot might be "unsold" after the fall of the hammer as "far fetched". In reality, however, the notion that a lot might be "unsold" is not "far fetched" at all – at least, not as a matter of law.
Putting the discussion in context, the suggestion that lots cannot be "unsold" seems to be a variation on the theme that bidding at an auction either cannot or should not ever be reopened after the fall of the hammer. Advocates of this position typically rely on the first sentence of the second paragraph of Uniform Commercial Code Section 2-328, as follows:
"A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner."
This often quoted sentence from the UCC tells us that a sale is complete with the fall of the hammer. Moreover, UCC Section 2-106(a), defines a "sale" as "the passing of title from the seller to the buyer for a price." Thus, if we are content in reading selected parts of the UCC – out of context – to support the position that bidding cannot or should not ever be reopened after the fall of the hammer, there you have it. Not only does the fall of the hammer result in a contract between the seller and the buyer, but – unless you provide otherwise in your bidder terms and conditions – title actually passes at that moment. It doesn’t get any clearer than that! So, how can people (like me) argue that the auctioneer has the discretion to reopen the bidding after the fall of the hammer? And, how can anyone support the "far fetched" notion that a lot can be "unsold" after the fall of the hammer? Isn’t that a breach of contract? Doesn’t the buyer already own it? To answer those questions, and more, it’s helpful to actually read the entire second paragraph of UCC Section 2-328, which provides:
"A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid the auctioneer may in his discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling."
So, what does UCC Section 2-328 say, and what does it really mean?
Well, the second sentence of the second paragraph of UCC 2-328 creates what lawyers call a condition. Under the law, a condition is something that can undo, or otherwise affect the rights under, a contract. A condition can also divest someone of an interest that he or she previously obtained. So, while there is no separator word between the first and second sentences of the second paragraph of UCC 2-328, as a practical legal matter the paragraph works as if the word BUT, or the word HOWEVER, or the word EXCEPT appeared there. Thus, any contract formed or rights acquired as a result of the first sentence are limited by the second sentence. So, as a matter of law, a lot can be "unsold" after the fall of the hammer. In other words, notwithstanding contractual consequences triggered by the fall of the hammer, Section 2-328 provides the auctioneer with discretion to upset the relationship formed by the fall of the hammer by reopening the bidding with the possibility that the lot might be sold to someone else. That’s what the law says, and it is wholly consistent with the case law and with historic auction practices.
In Kline v. Fineberg, 481 So.2d 108 (Fla.Dist.Ct.App. 1986), a Florida appellate court held that –
"[An] auctioneer possesses a great deal of discretion with respect to the conduct of an auction and the acceptance of bids. Blossom v. Milwaukee Chicago Railroad Co., 70 U.S. (3 Wall.) 196, 18 L.Ed. 43 (1866); Jones v. Tennessee Valley Authority, 334 F. Supp. 739 (M.D.Fla. 1971); McPherson Bros. Co. v. Okanogan County, 45 Wn. 285, 88 P. 199 (1907). This discretion includes the right either to close bidding or reopen bidding based on whether the auctioneer believes a bid was timely raised. See Sanford v. Sanford, 355 So.2d 365 (Ala. 1978); Hoffman v. Horton, 212 Va. 565, 186 S.E.2d 79 (1972)."
Kline v. Fineberg, 481 So.2d at 109. In Kline, real property was exposed for judicial sale by public auction with Kline and Fineberg both biding. On recognition of Fineberg’s $4,100,000 bid, the auctioneer cried "$4,100,000, to Fineberg. Once to Fineberg for $4,100,000, twice to Fineberg for $4,100,000, three times to Fineberg for $4,100,000. Sold to Fineberg." Kline tendered an advancing bid prior to the declaration of "sold," but the advancing bid was not seen by the auctioneer. In that case, there was an initial determination to reopen the bidding to recognize Kline’s timely tendered advancing bid. However, after Fineberg and his attorney objected, a supervisor at the judicial sale concluded that the sale was closed on the declaration of "sold" to Fineberg, notwithstanding the missed bid. The advancing bidder challenged the sale, arguing that the bidding should have been reopened to recognize his timely tendered bid. The court held that the initial determination to reopen the bidding should not have been overruled, and that bidding should have been reopened to recognize Kline’s timely tendered advancing bid. In acknowledging the auctioneer’s discretion to reopen the bidding, the court concluded that "we find that the sale should have been continued. Our holding is in keeping with the 'main purpose of auction sales [which] is to obtain the best financial returns for the owner of the property sold . . . .'" Id.
In Hoffman v. Horton, 212 Va. 565, 186 S.E.2d 79, the Supreme Court of Virginia held that an auctioneer has the discretion to reopen the bidding after the fall of the hammer in order to recognize a timely tendered advancing bid that was made "prior to or simultaneously with" the fall of the hammer but was overlooked by the auctioneer. Hoffman, 212 Va. at 566-67, 186 S.E.2d 79, 80. Hoffman involved the foreclosure sale of real property at auction. There, the auctioneer recognized a $177,000 bid from Hoffman, and, seeing no advancing bid, the auctioneer asked, "‘Are you all through bidding, gentlemen?’" Id. at 565-66, 186 S.E.2d at 79. Thereafter, the auctioneer cried "‘Going once for $177,000.00, going twice for $177,000.00, sold for $177,000.00." Id. at 565-66, 186 S.E.2d at 79. At that point, the auctioneer formed his right hand into a fist and dropped it into the palm of his left hand, simulating the fall of a hammer. Id. at 565-66, 186 S.E.2d at 79. Immediately, the auctioneer was advised that he had missed an advancing bid in the amount of $178,000, and the auctioneer, who had neither seen nor heard the $178,000 bid, used his discretion to reopen the bidding. Id. at 565-66, 186 S.E.2d at 79. Hoffman objected to the reopening of the bidding, arguing that he had purchased the property when it was initially declared sold. Id. at 566, 186 S.E.2d at 79. Notwithstanding Hoffman’s objection, the auctioneer reopened the bidding and recognized the timely tendered, previously overlooked, advancing bid of $178,000. Bidding continued, with Hoffman as one of the bidders, and "the property was finally knocked down to [Hoffman] for $194,000." Id. at 566, 186 S.E.2d at 79. Thereafter, Hoffman paid the purchase price of $194,000 under protest and brought an action to recover the difference between his original high bid of $177,000 and his final high bid of $194,000. Id. at 566, 186 S.E.2d at 80. In rejecting Hoffman’s challenge to the reopening of the bidding, the Virginia Supreme Court observed that, although overlooked by the auctioneer, the advancing bid of $178,000 was tender before Hoffman’s $177,000 was accepted. Id. at 566, 186 S.E.2d at 80. The Court, then, looked to Section 2-328 of the Uniform Commercial Code, and found it to be a persuasive statement of the law that should be applied to the sale of real property at auction, concluding that "while the Uniform Commercial Code is not controlling here, we think it appropriate to borrow from it to establish the rule applicable to the transaction at hand."Id. at 566-67, 186 S.E.2d at 80.
In Callimanopulos v. Christie’s Inc., 621 F.Supp.2d 127 (S.D.N.Y. 2009), a painting was exposed for sale at auction, and, after recognizing a phone bid for $3,000,000, the auctioneer surveyed the bidding floor, saw no advancing bid, and declared "[s]old to the phone for three million dollars." Callimanopulos, 621 F.Supp.2d at 129. Immediately after declaring the painting sold to the phone bidder, the auctioneer was advised that he has missed an advancing bid from a bidder on the floor that was timely tendered prior to the fall of the hammer. Id. The auctioneer, then, announced that he was reopening the bidding to recognize the timely tendered, but previously overlooked, advancing bid. Id. The bidding was reopened over the strenuous objection of phone bidder who argued that he was the purchaser of the painting for $3,000,000. Id. The auctioneer, then, recognized the previously overlooked bid for $3,100,000. Id. Under protest, the phone bidder advanced the bid to $3,150,000. Id. The floor bidder, then, advanced the bid to $3,200,000. Id. The phone bidder declined to make a further advance, and the painting was knocked down to the floor bidder for $3,200,000. Id. The phone bidder challenged the sale, and the court held that even though, under the UCC, a sale at auction is complete with the fall of the hammer, the auctioneer has discretion to reopen the bidding to recognize a timely tendered, but previously overlooked, bid. Id. In other words, the court read both sentences of the second paragraph of UCC 2-328. Specifically, the court noted that "under the UCC it is clear that while the fall of the hammer concludes a sale, where a bid is made while the hammer is falling, the auctioneer has the discretion to recognize that bid even after the hammer has fallen." Id. at 130.
In Ragusa v. Greco, 171 La. 686, 131 So. 849 (1930), there was a judicial sale of real property at which an advancing bid that was timely tendered prior to the fall of the hammer, but went unnoticed until after the property was declared sold on a lower bid. In that case, Ragusa tendered an opening bid of $1,000 that was acknowledged by the deputy sheriff conducting the sale. Ragusa, 171 La. at 687, 131 So. at 849. Before the fall of the hammer, an advancing bid was tendered by a bidder named Nunez. Id. Without noticing the advancing bid, the deputy sheriff, whose attention was on Ragusa, declared the property sold. Id. Nunez, who was prepared to bid up to $4,000 for the property did not complain, but the debtor brought an action to set aside the sale. Id. at 688-89, 131 So. at 849-50. The Louisiana Supreme Court ultimately concluded that, the deputy sheriff would have taken Nunez’s bid had he seen it. Id. The court also found that the deputy sheriff would have reopened the bidding after the fall of the hammer had he been made aware of Nunez’s timely tendered bid. Id. The court, then, noted that "[i]t is essential to a valid auction sale that it should be made to the highest bidder and for the highest price that the auctioneer can obtain . . . ." Id. Therefore, the court concluded that the sale should be set aside and that the property should be resold at a subsequent auction. Id.
Each of Kline, Hoffman, Callimanopulos, and Ragusa dealt with practical realities in the auction industry, and in each of these cases, property was – to use a recently coined phrase – "unsold" after the fall of the hammer, and, then, sold again.
There is, of course, a difference between a timely tendered missed bid and a late bid. If a bid is tendered before the fall of the hammer but is overlooked by the auctioneer, it is a missed bid. By comparison, if a bid is tendered, for the first time, after the fall of the hammer, it is a late bid. The crucial difference between a missed bid and a late bid, is that the auctioneer has the discretion to reopen the bidding after the fall of the hammer so as to recognize a bid that was tendered, but overlooked, before the fall of the hammer, but will not reopen the bidding for a late bid. This is not to say that an auctioneer must reopen the bidding – that’s what discretion is all about. And, while an auctioneer may choose to reject the discretion to reopen the bidding (taking an "I never reopen the bidding approach"), it would be prudent for any auctioneer who elects a practice under which the bidding is never reopened to specifically address that practice in both the seller’s contract and the bidder terms and conditions and to adhere to his or her abandonment of discretion without exception.
The next natural question is whether UCC 2-328 recites the entire universe of possible conditions under which a contract can be undone, or a lot can be "unsold" and possibly resold. The answer to that question is no. Contracting parties can always establish conditions. And, an auctioneer may include a variety of such conditions in his or her bidder terms and conditions (which is the contract between the auctioneer and each bidder, and which forms the basis of the contract between the seller and the buyer). This ability is recognized in Section 1-302 of the UCC.
While there are numerous circumstances under which it might be appropriate to reopen the bidding at a live auction, online auctions introduce additional situations under which it may be appropriate to reopen the bidding. By way of example, and without limitation, (i) an auto-extend feature not properly engaged may block bidders and cause and unintended early termination on a lot, (ii) inadvertently toggling the wrong time-zone may cause bidding to end early, or (iii) there may be some other glitch that interferes with the receipt or recognition of bids. These are issues that advances in technology have brought to the auction industry. Technology offers opportunity with associated risk. Unless an auctioneer is prepared to assume all of the risk, these are matters that should be addressed in the seller’s contract and in bidder terms and conditions. That way, everyone is on the same page from the beginning of the process through its conclusion. As such, it seems appropriate to provide for flexibility in bidder terms and conditions, to provide that no sale is final until certified by the auctioneer, and to permit the reopening of the bidding on the occurrence of certain conditions.
This is for information and discussion purposes only and does not constitute legal advice. No attorney-client relationship is intended or created with any reader.