NJ Supreme Court: 3-Day Attorney Review 'Would Fundamentally Interfere' With Real Estate Auctions

The New Jersey Supreme Court, finding that residential real estate transactions are distinct from absolute auctions, said imposing a three-day attorney review on auctions would “fundamentally interfere with the method by which buyers and sellers choose to conduct such sales.”

According to the Supreme Court’s June 9 opinion, Mengxi Liu was the highest bidder in a real estate auction of a residential home in Bernardsville in 2016. Max Spann Real Estate conducted the auction for the property, owned at the time by the Sylvester L. Sullivan Grantor Retained Income Trust with John C. Sullivan as trustee. Sullivan entered into a real estate auction agreement with Max Spann.

Liu represented herself as an experienced real estate buyer and completed pre-auction forms acknowledging receipt of the property information package, which included a template contract for sale and attached notice, according to the opinion. It is unclear whether Liu herself, or her husband, Liang Wang, actually signed the bidder registration form, which stated that “this is an auction sale, not subject to an attorney review period.”

Liu’s bid $1.1 million for the property, according to the opinion. The contract and notice were signed and Liu paid a $121,000 deposit. Max Spann deposited the money in an escrow account.

Liu did not ultimately purchase the property due to her inability to secure a mortgage. She also traveled to China to retrieve the needed funds, but was barred by Chinese law from wiring the money to the United States. After Liu failed to complete the purchase of the property, Max Spann conducted a second auction and sold the property for $825,000, the opinion said.

Sullivan brought this action against Max Spann for alleged failure to qualify Liu as a buyer with sufficient funds to close title and breach of the implied covenant of good faith and fair dealing for failing to release the $121,000 escrow deposit to the trust, according to the opinion.

Sullivan filed an amended complaint naming Liu as a defendant after the trial court ruled that Liu was an indispensable party. Max Spann filed a counterclaim against Sullivan for half of the funds held in escrow and a counterclaim against Liu for breach of contract. The trial court directed the three parties to submit briefs on whether a residential real estate sale at auction is valid without an attorney review provision, according to the opinion.

The trial court ultimately held that no three-day attorney review clause was necessary and that the contract was enforceable as the bidder was provided the contract in advance of the auction and agreed to review it prior to bidding. It was ordered that Max Spann and the trust would equally divide the $121,000 deposit in escrow, according to the opinion.

In her appeal, Liu cited the state Supreme Court’s ruling in New Jersey State Bar Ass’n v. New Jersey Ass’n of Realtor Boards, which held that realtors preparing contracts are not participating in the unauthorized practice of law and that a three-day attorney review period is allowed where either party’s counsel may cancel the contract. An Appellate Division majority affirmed the trial court judgment. The dissent questioned the court’s jurisdiction, which formed the basis of Liu’s appeal to the Supreme Court by right pursuant to Rule 2:2-1(a)(2).

Liu asked the court to reverse the Appellate Division ruling, stating that “it would be unfair to apply any modification of the State Bar Ass’n rule to her because her bid of $1.1 million was grossly excessive, her failure to purchase the Property was not her fault, and Max Spann engaged in the unauthorized practice of law.” Sullivan argued to affirm the ruling, and stated that the three-day attorney review period does not apply to residential real estate auctions. Max Spann argued to affirm the ruling and said that allowing a party to cancel an auction contract would disrupt the practice of selling real estate at auction.

Amicus curiae New Jersey State Bar Association recommended mandatory review of realtor-prepared auction sale contracts. In opposition, amicus curiae New Jersey Realtors argued to affirm the judgment and “clarify that the attorney review mandate of State Bar Ass’n does not apply to real estate auctions.”

Justice Anne M. Patterson, in her written opinion for the unanimous court, concurred with the Appellate Division ruling that State Bar Ass’n ”does not govern the absolute auction setting of this appeal.”

“Were we to permit counsel to cancel contracts for any reason after an auction as in a traditional real estate transaction,” stated Patterson, “buyers would be deprived of the opportunity to purchase property at a bargain price, and sellers would lose the benefit of an accelerated and final sale.

“Moreover, we do not consider the role of the licensed real estate salesperson in this case— filling in the spaces left blank on the Contract for Sale of Real Estate for the name and address of the buyer, the bid price, the buyer’s premium, and the total purchase price—to constitute the unauthorized practice of law,” said Patterson.

Patterson stated that since the importance of legal representation and attorney review was clearly communicated to the buyer before the auctions, the court’s objective in State Bar Ass’n had been achieved here.

In conclusion, Patterson stated that Liu has no defense for the breach-of-contract claims asserted by Sullivan and Max Spann, no three-day provision was required, and no unauthorized practice of law took place.

Chief Justice Stuart Rabner, Justices Lee Solomon and Fabiana Pierre-Louis, and Judge Clarkson Fisher Jr. joined in Patterson’s opinion.

Counsel for Max Spann, Peter G. Verniero of Sills Cummis & Gross, stated, “My client is pleased that the Supreme Court upheld the contract and auction in this case, recognizing the distinction between such auctions and traditional residential real estate sales.

“We are also pleased that the Court recognized that the bidding materials used by my client had served the consumer protection objectives outlined in prior case law,” added Verniero.

Attorney F. Bradford Batcha who argued the cause and authored the amicus brief for the New Jersey State Bar Association, stated, “The NJSBA is pleased that the Court carefully carved out a very narrow exception to the required 3-day attorney review clause, only for transactions which are absolute auctions, without reserve, held in person, where proper consumer protections are provided to the public in advance of the auction.”

Counsel for Sullivan, Pierre Chwang of Wilentz, Goldman & Spitzer stated, “The Supreme Court’s opinion repudiates the Appellant’s final attempt to throw the kitchen sink at a valid and enforceable contract.  My clients, who did nothing more than put a home up for sale, can finally receive closure.”