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Throughout the 1980s and 1990s, real estate auction companies worked diligently to show the world that the real estate auction was a legitimate means of selling real estate, regardless of category (residential, commercial, trophy home, etc.), just as their counterparts at Christie’s or Sotheby’s did for the sale of fine art and collectibles. The prior public misconception was that real estate auctions had a negative stigma attached to them � if a property was listed for auction, then it must be distressed or a fire sale. As we have now passed through the new millennium, however, this negative stereotype has been thoroughly quashed. Thanks to intense marketing efforts, hundreds of thousands, if not millions, of successful sales, and most importantly of all, positive word-of-mouth, those first real estate auction companies are now seen as pioneers � knowledgeable organizations that revitalized an age-old sales approach to sell their clients’ properties expeditiously and for fair value. Unfortunately, not all real estate auction companies are practicing their profession according to the same high ethical standards, as some companies have willingly waded into a legal and ethical gray area in an attempt to secure new business and solidify their standing within the industry. Why is this area gray rather than black or white? Because of the auction’s recent emergence as a means to sell real estate on a widespread basis, the real estate auction industry does not have an established history of case law within the state and federal court systems of the United States. It is not uncommon for different courts to issue contrasting rulings when addressing the same issues. This legal confusion has perpetuated the gray area in which some of these real estate auction firms now operate. LEGAL GRAY AREAS In a recent report commissioned by the National Auction Forum of the National Association of Realtors to investigate legal issues of concern within the real estate auction industry, 13 issues contributing to the legal gray area were cited as needing immediate attention to ensure that the real estate auction industry can continue to prosper. These issues were of importance to both buyers and sellers and ranged from improper auction bidder registration techniques to questions concerning the duty of care owed by an auctioneer to his or her client. Of the 13 issues, five in particular occurred with distressing regularity: 1. The role of fraudulent inducements and “projected” minimum price guarantees by auction companies to induce clients into signing real estate auction listing agreements. 2.�The last-minute cancellation of absolute auctions on questionable merits. 3. The use of fraudulent bidders (also known as by-bidders, shill bidders, straw bidders, or puffers). 4.�The use of deceptive advertising and ambiguity in auction terms. 5.�The settling of lawsuits brought by disgruntled buyers or sellers (by settling these cases, the auction companies are able to avoid a legal “paper trail” and can continue to recruit new clients with tales of their unimpeachable records of customer satisfaction). Efforts are currently under way by the National Association of Realtors to address these problems, but broader legislative measures need to be taken on a state and national level. The easiest way to put a face to these issues of concern is to offer them in a hypothetical scenario that highlights the harmful effects of these practices for the buyer, the seller, the real estate broker, and the real estate auction industry. In one controversial scenario, the seller and the auction company enter into an illegal compact whereby it is agreed that the auction company will place a by-bidder in the auction audience who is charged with fraudulently bidding until the seller’s minimum price is obtained. The auctioneer’s retention is then executed between the parties requiring that the property be sold absolute, without reserve, regardless of the price, as a way of inducing unsuspecting buyers to participate in the auction. In some cases, these illegal compacts are made at the inception of the transaction. In other cases, they are made after the auction company learns that the result at auction is likely to fall far short of the valuation projection the auction company originally projected to the seller in order for the auction company to obtain this disposition assignment. A HORRIBLE DISMAY Following the completion of the bidding and after the seller learns that, in fact, no by-bidder or fraudulent bids were in fact placed, the seller is horribly dismayed by the low price of the winning auction bid, which in many cases is hundreds of thousands, if not millions, of dollars less than the projected figure quoted by the auction company. The distraught seller then turns to the court system in an attempt to be compensated for the damages caused by the oral misrepresentations of the auction company. Unfortunately, the sellers are trapped in the aforementioned legal gray area, and the courts refuse to help. Some courts have stated that if these projections or price guarantees are not included in a written contract, then they are not actionable. Colburn v. Baier Realty & Auctioneers, 2003 Ohio App. LEXIS 5945. Other courts have held that an auctioneer cannot be liable for a statement concerning a future event (i.e., the potential auction sales price), since such statements are only considered to be opinion. Kearney v. J.P. King Auction Co., 265 F.3d 27 (1st Cir. 2001). These courts believe that the price guarantee is merely an opinion and does not constitute a misrepresentation because the seller could have easily further investigated the property pre-auction and assessed its value. Courts have commented further that even though the auction companies may have misled the sellers in regard to property price and originally suggested the use of a fraudulent by-bidder, the sellers still could not recover. An agreement to use a by-bidder between a seller and its agent (i.e., the auction company) is said to be a violation of public policy, because a party cannot rely on an illegal promise that would defraud the public for their betterment. The parties participating in this illegal agreement are said to have unclean hands and are not allowed to benefit, even if the agreement was created when one party, in this case, the auction company, convinced an inexperienced second party, the sellers, of the legitimacy of the agreement. Rose v. The National Auction Group Inc., 646 N.W.2d 455 (Sup. Ct. Mich. 2002). Sadly for the sellers in most cases, they are forced to relinquish their property for a fraction of what they believed it to be worth, and the legal system will do nothing to protect them from the unethical auctioneers. Adding insult to injury, the sellers are still required to compensate the auctioneers with their full commission on the auction sale. It is not only sellers who are negatively affected by the unethical practices of these auction companies. Buyers have been forced to file lawsuits to defend their rights in numerous instances, for issues such as deceptive advertising, the illegal use of by-bidders, and for specific performance where the seller is not happy with the winning bid at auction and attempts to block the property transfer. In addition, brokers have been regularly harmed when auctions are cancelled or the transfer of property is denied, as they lose their commissions and the many hours they have put into the process, not to mention being left with an unhappy client. The public, however, must not get caught up in all the negativity. For the hundreds of successful auctions that have been held, there have been very few incidents like that which transpired between Master Shore Builders Inc., the former owner and builder of condominium units at LaQuinta Towers in Lower Township, N.J., and the J.P. King Auction Co., of Gadsden, Ala. In this matter, J.P. King solicited Master Shore to market and conduct an auction of Master Shore’s unsold condominium units at LaQuinta Towers. The auction outcome led to a lawsuit being filed by Master Shore in the Eastern District of Pennsylvania alleging fraud, negligence, and breach of contract on the part of J.P. King. Master Shore believed that the lack of bidder turnout at the auction strongly indicated that they were defrauded out of the $105,000 marketing fee which they had paid to J.P. King prior to the auction, and the economic outcome was a grave disappointment as well � units that were previously valued at $170,000 sold in the range of $70,000. Master Shore stated that it sustained losses pursuant to the sale of the condominium units in excess of $1 million. The case was settled for a confidential amount in 1993 just before going to trial, but only after Master Shore’s attorneys were able to successfully fend off multiple summary judgment motions by J.P. King’s attorneys. The lawsuit raised issues of concern such as deceptive and inadequate marketing, misrepresentation of ability to procure a sale price, and the settling of cases to avoid any findings of guilt, and is a good overall example of what currently ails the real estate auction industry. Fraudulent inducement, the illegal use of by-bidders, unclean hands, canceled absolute auctions, and settling cases to avoid a legal paper trail are just the mainstream issues of concern in the real estate auction industry. The courts will continue to struggle and issue inconsistent rulings until there is some type of change and authority within the real estate auction industry that is capable of establishing a consistent code of ethical behavior. The National Association of Realtors, via its National Auction Forum, is pushing to institute a standard of ethics that will empower a harmed private party (i.e., the seller or bidder) and give them the right to proceed with a private cause of legal action against an unethical auctioneer and auction company. The time has come when the courts can no longer rely on contradictory holdings, rulings by analogy to other fields ( Worswick v. Switzer, 778 S.W.2d 226 (Ky. Ct. App., 1989)), and by reference to the Uniform Commercial Code, which is not intended to cover the sale of real property. Until this new standard of ethics or similar legal reform is adopted, buyers, sellers, brokers, and any parties who are interested in participating in the real estate auction format would be wise to do a thorough background check of the legal history of the real estate auction company that they are considering becoming involved with. Toby True is an attorney in Chicago specializing in real estate finance and corporate law. This article originally appeared in the New Jersey Law Journal , the ALM daily newspaper published in Newark.

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