STEVE PROFFITT
Auctioneer & Attorney At Law
Post Office Box 70584 * Richmond, VA 23255
(804) 649-9192 * AuctionLaw@aol.com

A CLOSING LOOK AT UCC SECTION 2-328


No single statute holds more important law for auctions and auctioneering than Section 2-328 of the Uniform Commercial Code ("UCC"). It’s a BIGGIE! For The past two issues we’ve reviewed this statute to determine what its provisions mean for auctioneers and auctions. We’ll finish that review this time and turn the page on Section 2-328.

I. REMEMBER SECTION 2-328 OF THE UCC.

Unlike any other statute in the UCC, Section 2-328 deals exclusively with auctions and auctioneering. It’s a mini-bible of important rules you should commit to memory. Here’s another look at this important statute in its entirety.

Section 2-328 reads:

(1) In a sale by auction if goods are put up in lots each lot is the subject of a separate sale.

(2) 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.

(3) Such a sale is with reserve unless the goods are in explicit terms put up without reserve. In an auction with reserve the auctioneer may withdraw the goods at any time until he announces completion of the sale. In an auction without reserve, after the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time. In either case a bidder may retract his bid until the auctioneer’s announcement of completion of the sale, but a bidder’s retraction does not revive any previous bid.

(4) 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. This subsection shall not apply to any bid at a forced sale.

II. WHAT WE’VE DONE SO FAR.

We began two issues ago by covering the first two paragraphs of the statute. Last time we moved on to the third paragraph which is loaded with five important rules. That brings us to paragraph (4). So what significance does the final paragraph of Section 2-328 have for auctioneers and auction-goers?

III. PARAGRAPH (4) CONTAINS A VERY IMPORTANT RULE.

The drafters of the UCC had loaded plenty of firepower into the statute by the time they finished the first three paragraphs, but they still found room for two more rules for the closing act of paragraph (4). The first of these rules is a VERY BIG punch that gives a LOT of power to bidders in modern auctions.

A. Sellers Don’t Bid Without Notice.

When it comes to auctions, I think I’m pretty much like the next fellow. I always enjoy going. I get a charge from the thrill of the "hunt" for some new treasure to add to my collection, or closet, as the case may be. My competitive juices flow freely when I’m bidding on an item my wife or I really want. And I like things to be done fairly. I always obey the rules and I want everyone else to obey them, too.

Would you feel you were being treated fairly if the person you were bidding against for the bachelor’s chest you covet is its owner, the seller, and the seller’s intention to bid on her own goods was never announced to you and the other bidders at an auction? I certainly wouldn’t.

Do you think sellers should be able to bid on their own goods without revealing their intention to the other bidders at an auction? I don’t.

Does the law allow sellers to bid on their own goods without disclosing this intention to the other bidders? No!

"Says who?" asks a perturbed seller.

The drafters of the UCC do, and that’s the first rule, and by far the most important rule, in paragraph (4) of Section 2-328.

B. Undisclosed Seller Bidding Is Treacherous.

As a lawyer with expertise in auction law, and as an auctioneer, and as a frequent bidder, I know that undisclosed seller bidding is one of the most treacherous practices that occurs at auctions. It’s bad, it’s wrong, and it’s illegal. Undisclosed seller bidding is just another form of fraud that tricks and damages innocent bidders by making them pay more for goods than the market prices would have been, but for the wrongful bidding by a "hidden" seller. Sometimes seller bidding dupes other bidders into paying a little more for what they want, and sometimes it wrings from their billfolds a lot more. But thanks to paragraph (4), there’s a policeman on the block and he’s carrying a big nightstick.

C. Two Powerful Options For Bidders.

The importance of paragraph (4) to bidders is that it stands ready to completely negate and punish undisclosed seller bidding. How? By declaring that any such bid will empower "the buyer" with either of two options:

1. The buyer may declare the sale’s contract with the seller to be void so that the buyer has no responsibility to purchase the lot or pay the seller any amount; or

2. The buyer may disregard the "hammer price" that the lot was sold for and instead pay the seller only "the price of the last good faith bid prior to the completion of the sale." In other words, the amount of the buyer’s last "real" bid before the seller started bidding would become the sale price for the lot if the buyer chooses this option.

Pretty powerful stuff this paragraph (4) holds.

D. When Are These Options Triggered?

So when does a bidder get to lock, load, and fire one of these two options at a seller. Section 2-328 makes it plain that either of two events will empower the buyer.

First, "[i]f the auctioneer knowingly receives a bid on the seller’s behalf. . ." then the buyer may invoke one of paragraph (4)’s equalizers. But this provision alone would do bidders little good. Oh sure, there are unsavory auctioneers in the market who flaunt law and ethics and allow undisclosed seller bidding, but they are the vast minority. Most auctioneers are honest, hard-working people. So proof of the auctioneer’s complicity by "knowingly" receiving "a bid on the seller’s behalf" is just not going to be proved very often. In fact, while the reputations of auctioneers are often "tarred" by bidders who learn of seller bidding, the truth is that the auctioneers generally don’t know it. Think about it — there is just no way we can know and identify all of the relatives, friends, co-workers and so forth that unscrupulous sellers can deploy at auctions to do their bidding for them.

Second, but the drafters of Section 2-328 didn’t leave bidders in a bind. Paragraph (4) goes on to also empower a buyer with the two curative options if "the seller makes" undisclosed bids for his own goods, or if the seller "procures such a bid and notice has not been given that liberty for such bidding is reserved." BINGO! There’s the power ball for bidders. If a bidder can prove that a seller bid on a lot without reserving the right to do so, or that anyone bid on the seller’s behalf, the buyer can wheel in the two options, take aim, and fire to cure the violation.

E. An Example.

Let’s consider an example. A beautiful, Chippendale secretary is offered at a fine antiques auction. The piece opens at $5,000 and quickly runs up to $25,000 at which point it is "knocked down" for this amount to a nice lady who wants the piece for her home. For the sake of the example, please indulge my liberty with some "amazing" facts.

As the lady stands in the checkout line, she learns from another patron that the seller had been her competitor in bidding for the secretary. No notice had been given to the bidders that the seller had reserved the right to bid. The lady angrily confronts the auctioneer with this accusation and he sheepishly admits that the seller had begun to bid at $10,000 "to protect his investment" in the piece. The lady’s previous bid had been for $9,000.

The lady now has two options. First, she can avoid the sale entirely which means she owes nothing to the seller, and she gets nothing from the seller. Second, she can demand the sale of the secretary to her — for how much? Nine thousand dollars, and not a penny more. Why? Because $9,000 was the amount of "the last good faith bid prior to the completion of the sale." Pretty powerful, huh? You bet it is! And the reason for it is that the drafters of the UCC well understood the harm and damage that undisclosed seller bidding can wreak in the auction markets, and they wanted bidders to have a BIG hammer to hit it with whenever it occurs.

F. But There’s A Problem.

But as good a job as the UCC drafters did, I can’t give them an "A" for paragraph (4). No, a "B+" is about the most generous I can be in grading the effectiveness of the provision.

Why?

Well, the answer for my lower grade lies in my disappointment with the drafters’ inadequate use of language. It turns out they didn’t think the auction scenario through as carefully as they should have, and they used only a shower cap when they needed an umbrella.

Mark Twain once wrote, "The difference between the right word and the almost right word is the difference between the lightning bug and lightning." That’s what happened in paragraph (4) — the wrong word was used. The trouble lies with the drafters’ use of the word, "seller," as opposed to the much more inclusive term, "good faith high bidder."

What’s the big deal?

The problem is that the statute gives the two-pronged option power only to a "buyer" of the lot in question, and not to the good faith high bidder. Consequently, if the seller himself buys his item back, the good faith high bidder seems to be left with no remedy under paragraph (4), because he never became the "buyer." It seems most unlikely this is the result the drafters intended, but the language reads as it does and there’s no provision made for a good faith high bidder who loses the item back to the seller who is bidding on it without right.

This is an unfortunate reduction in the reach and power of Section 2-328 (4). Still, if I were representing an aggrieved bidder in a lawsuit on this point, I would argue to the court that the word "buyer" includes my client, a "good faith would-be buyer." Some liberal courts would likely buy this argument and give my client his victory, but strict construction courts likely wouldn’t give an inch. In the latter case, I would advise my client to pursue a fraud action against the seller in an effort to recover damages.

IV. BUT SOMETIMES SELLER BIDDING IS OKAY.

The closing sentence of paragraph (4) stands for the proposition, "Never say never."

Just when you thought sellers can never bid without reserving the right to do so, I must tell you that there is an exception. But it’s very limited.

When an auction is a "forced sale," a seller may bid on the lots without reserving the right to do so.

What’s a "forced sale?"

A "forced sale" is one where an owner’s goods are being sold involuntarily to satisfy a third party’s claim against the owner or the goods. The third party is the seller at the auction. Forced sales result from a variety of scenarios. Here are a few examples:

1. An owner fails to pay a bank loan for which his goods have been pledged as collateral.

2. An owner fails to pay the price for an item bought from a store and the store has recorded a security interest to create a lien against the item.

3. A debtor fails to pay a legal judgments that is enforced by the holder against his property.

4. An owner loses his car for failure to pay the repair bill to her car and a lien is claimed against her car.

5. An owner loses his property for failure to pay a warehouseman for storing his property and a lien is claimed against the property.

In each of these cases, paragraph (4) allows seller bidding without reserving the right to do so. The reason is surely because this is a "forced," and not voluntary, auction and the seller has an important financial stake to protect. But that doesn’t eliminate the possible harm to unknowing bidders.

The UCC’s drafters would have done bidders a much greater service if they had required sellers to reserve the right to bid even at "forced" sales. This wouldn’t have favored sellers, and it wouldn’t have harmed bidders. Under the current law, sellers are favored and the potential for bidders to be harmed by undisclosed seller bidding is every bit as much as it is in any other auction. But the drafters didn’t afford bidders that protection. At a minimum, they should have at least required that "forced" sales be disclosed to be "forced" sales. Unfortunately, they didn’t do that either.

V. CONCLUSION.

Bidders, paragraph (4) did you a lot of good, but it ended on kind of a sour note. If you want to improve the chance that all of your auction experiences will be good ones, here are three tips.

First, know your auctioneer’s reputation. At an auction, nothing beats an honest auctioneer for importance.

Second, ask the auctioneer if seller bidding will be allowed.

Third, NEVER forget your armor and shield: "CAVEAT EMPTOR!"

Next time we’ll cover another issue of interest to auctioneers and auction-goers. Until then . . . see you at the auctions!

Steve Proffitt is an auctioneer, attorney at law, and an instructor at Reppert School of Auctioneering. His columns on auctions and auctioneering appear regularly in numerous industry and trade publications including AntiqueWeek, Maine Antiques Digest, and Auction Exchange. The information provided does not represent legal advice or the formation of an attorney-client relationship, and readers should seek the advice of their own attorneys in their respective states on all legal issues. Mr. Proffitt may be contacted at Post Office Box 70584, Dept. S, Richmond VA 23255, or by email at AuctionLaw@aol.com.

John Stephen Proffitt III

Copyright , December 1, 2000

All Rights Reserved