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Considering Title, Possession, and Risk of Loss in the Sale of Personal Property at Auction

The UCC, Bidder Terms and Conditions, and Why a Romalpa Clause is the Wrong Tool for the Job

· title,Auction,Possession and risk

Considering Title, Possession, and Risk of Loss in the Sale of Personal Property at Auction: The UCC, Bidder Terms and Conditions, and Why a Romalpa Clause is the Wrong Tool for the Job

When does title pass to personal property sold at auction, and does it make a difference if the auction is conducted online? This question was posted recently in an auctioneers’ forum on social media, and it generated a lot of discussion about the way things are, the way things ought to be, and the way things used to be (which, based on my analysis, are all pretty much the same). There was even a suggestion that auctioneers consider using a Romalpa clause in their bidder terms and conditions. A Rompala clause? – you ask! That gives rise to a whole different discussion about the nature of auction sales and the relationship between the seller and the buyer. Toward the end of this post, I’ll talk about Romalpa clauses just enough to identify what they really are and to show why they have no place in the typical auction context.

Title, possession, and risk of loss are separate, but related, concepts that are implicated by the fall of the hammer at auction. At the most elementary level: (i) title refers to ownership of property; (ii) possession refers to the custody, care, and control of property; and (iii) risk of loss refers to the potential to suffer harm (economically or otherwise) from the damage, destruction, or other loss of property.

While the concepts of title, possession, and risk of loss are related, they do not always reside with the same party at the same time with respect to any particular item of property (although they may). It is possible to have title to property, but not have possession of that property. Among other circumstances, this occurs when there is a bailment (i.e., the owner of the property (the "bailor") delivers possession of the property to another (the "bailee") for some specific purpose). By way of example, when a consignor delivers consigned property to an auctioneer, a bailment is established. The consignor is the bailor and the auctioneer is the bailee. Title remains with the consignor, but possession is with the auctioneer. Risk of loss is going to depend on several factors, but because this particular bailment is for the mutual benefit of the parties, the auctioneer is obligated to use ordinary care in safeguarding the property (i.e., the same standard of care that the auctioneer would use with regard to his or her own property).

Now, what happens when that personal property is sold at auction? With respect to title, the North Carolina Auctioneer Licensing Board (which seems to be a pretty good source for identifying standards in the industry) has observed that "[t]itle for personal property sold at auction passes when the auctioneer accepts the final bid and announces the item sold (at the fall of the hammer)." ( This view actually states the rule set forth in Article 2 of the Uniform Commercial Code. According to UCC Section 2-328 "[a] sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner." Under UCC Section 2-106, a "sale" is defined as "the passing of title from the seller to the buyer for a price." If, according to Section 2-328, the sale (i.e., the passing of title) is complete with the fall of the hammer, then title passes at that moment and the price that the buyer is obligated to pay is established at that moment. The only things left to do are for the auctioneer to deliver possession and to transfer the risk of loss to the buyer, and for the buyer to pay for the property. The auctioneer may, however, retain possession until payment is made. Under this circumstance, the auctioneer exercises a possessory lien against the property, and is not required to release possession until payment is received – even though title may have passed by operation of law. This is roughly analogous to an artisan’s lien pursuant to which the mechanic who worked on your car may maintain possession of the car until you pay for the repairs. If the auctioneer retains possession through a possessory lien until payment is made, risk of loss will, typically, not pass to the buyer until possession is transferred.

Unless the auctioneer retains possession of personal property struck off at an onsite auction until payment is made, possession and risk of loss will, typically, pass immediately to the buyer, along with title, at the fall of the hammer. To this end, I have seen Bidder Terms and conditions using language such as:

  • BUYER’S RESPONSIBILITY. After a Bidder has won the bid with his or her high bid, such Bidder becomes the new owner of the item, even though he or she may not have paid for the item yet. The item becomes the full and sole responsibility of the Buyer at that time, and the Buyer assumes all risk of loss and damage. Buyers should protect their items accordingly.

The specific language just quoted was on a bid card at a commercial liquidation auction at which the auctioneer sold lot after lot (sitting on pallet after pallet) as the auctioneer and the bidders made their way, together, through the facility. In that context, it certainly makes sense to pass possession and risk of loss to the buyer along with title at the fall of the hammer. Allocation of risk is always a big concern, and either the auctioneer will retain the responsibility (and associated risk) of safeguarding purchases at the auction or the onsite buyer will assume that responsibility (and associated risk).

Bear in mind, however, that the rule established in UCC Section 2-328 – that title passes with the fall of the hammer – doesn’t have to apply at your auction if you choose a different rule and articulate that rule in your Bidder Terms and Conditions. This is because the UCC establishes gap-filler provisions that apply by default if the parties have not agreed otherwise. Specifically, UCC Section 1-302 provides that the effect of provisions of the UCC may be varied by agreement.

A good example addressing this issue is the pre-UCC case of Lott v. Delmar, 2 N.J. 229, 66 A.2d 25 (N.J. 1949). The Lott case involved the sale of goods at auction and the court looked to the Uniform Sales Act – which was the predecessor statute to UCC Article 2. Here, it is important to note that the statutory language at issue in Lott – that "a sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in other customary manner" survives in UCC Section 2-328 today. In Lott, the auctioneer retained possession of the goods after the auction and, unfortunately, they were stolen before the buyer paid for them and took possession. Significantly, the court observed that, applying the rule that title passes with the fall of the hammer would have caused both title and risk of loss to pass to the buyer (to the buyer’s detriment under the circumstances). Specifically, the court observed that "[t]he property in the goods passes when the hammer falls, unless the intention is to the contrary." As such, had the parties not agreed to the contrary, title would have passed at the moment the hammer fell. In the Lott case, however, the court observed that the parties had agreed that title would not pass with the fall of the hammer, but, rather, on the completion of payment terms. As such, the court made two important points: first, if the parties say nothing, title to personal property put up at auction passes from the seller to the buyer with the fall of the hammer; and, second, the parties can agree that title, possession, and risk of loss will pass sometime other than at the moment the hammer falls. This is controlling precedent in the state of New Jersey, and is persuasive in other jurisdictions.

Similarly, in United States v. Blair, 193 F.2d 557 (10th Cir. 1952), the United States Court of Appeals for the Tenth Circuit observed that title to personal property passes from the seller to the buyer at the time the hammer falls, unless the parties agree otherwise. In Blair, the Bidder terms and Conditions provided: "In all cases the property will be awarded to the bidders submitting the highest bid. If through error we should make an award to someone other than the high bidder, the erroneous award will be revoked and the proper award will be made." Because a timely received written bid was overlooked, a lot was stuck off to Blair, who had not, as a matter of fact, made the highest bid. When the higher bid was brought to the auctioneer’s attention, efforts were made to correct the situation and to either reacquire the property from Blair or to make Blair to pay the difference between his bid amount and the amount of the previously overlooked high bid. The appeals court decided that there was a condition to the passing of title, and, as such – notwithstanding the established rule that title passes with the fall of the hammer – title did not pass at that moment due to the operation of the Bidder Terms and Conditions. Because Blair was decided in the federal courts, the decision is not binding on any state interpreting the UCC, but it is persuasive jurisprudence.

Lott and Blair are exceptions that prove the rule. In each case, the court noted that title to personal property at auction typically passes with the fall of the hammer, but that there was an exception in the Bidder Terms and Conditions that caused a different rule to apply.

While it is true that, in In re Western States Wire Corp., 490 F.2d 1065 (9th Cir 1974), the United States Court of Appeals for the Ninth Circuit (in a bankruptcy case determining who was responsible to pay a personal property tax assessment) interpreted California law to conclude that title to personal property (in that case, a boat) did not pass with the fall of the hammer, it is noteworthy that the court failed to address UCC Section 2-106 in its analysis. Additionally, it is worth noting that the court’s interpretation of California law in In re Western States Wire Corp. is just that – an interpretation of state law by a federal court that is not binding on the California state courts or on the state courts in any other jurisdiction.

Rather than argue about whether title to personal property passes with the fall of the hammer (and, I think it does), or at some other time, and, perhaps, roll the dice as to the correctness of your interpretation, it seems that the better course is to clearly establish the applicable rule in your Bidder Terms and Conditions (with parallel language in the seller’s contract). You should also use that opportunity to set the rules for possession and risk of loss. In this way, you get all parties singing from the same hymnal at the beginning of the process, and reduce the likelihood of disputes on the back end.

Unless you say otherwise in your Bidder Terms and Conditions, the same rule for passage of title applies whether your bidder is onsite, or participating remotely via the internet, or by telephone, or by absentee bid. Under Section 2-328, payment does not affect the passage of title, but the seller, through the auctioneer, may maintain a possessory lien against the property until payment is made (i.e., buyer can’t remove the property until it is paid for). At an onsite auction possession and risk of loss will, more often than not, immediately (or at least promptly) pass to the onsite buyer. As a practical matter, at an online auction, possession and risk of loss typically do not pass immediately to the remote buyer because the property remains in the auctioneer’s possession (or the seller’s possession) until pick-up or delivery. For this reason, it is important to address possession and risk of loss (including shipping and delivery terms) in your online Bidder Terms and Conditions; otherwise, the applicable default provision of the UCC (2-501 through 2-511) will control.

Under any circumstances, it seems that, with respect to an online auction, there will be a period of time during which the auctioneer retains both possession of the property and bears the risk of loss. To make your life easier in the event of a nonpaying remote buyer, you may consider providing in your Bidder Terms and Conditions that title and possession will only pass when payment is made (and clears). This way, while your buyer will still have a contractual obligation to pay (and should be liable for any deficiency if he or she defaults and the property is resold for less), you are not executing on a possessory lien when reselling, but, rather, you are selling property with respect to which title remains in the seller. Potentially, therefore, there may be fewer hoops to jump through in order to resell.

The long and the short of it is this – consider when you and your seller want title to pass and be clear about your pick-up and/or delivery terms, keeping in mind that you probably want possession and risk of loss to pass to the buyer at the soonest possible moment.

Now, let’s talk about Romalpa clauses. Because the Romalpa clause is so foreign (you’ll see the pun when it comes by) to the concept of auctioneering in the United States, I would not ordinarily spend a lot of time (if any) discussing it in an auction law blog post. However, as it has just been suggested (albeit on social media) as a viable tool for auctioneers, I have decided to spend a few moments discussing it and suggesting that it is really the wrong tool for the job.

A Romalpa clause is a special type of retention of title provision that, while used with some frequency in the United Kingdom and continental Europe, is not nearly as popular, or prevalent, in the United States. The Romalpa clause is named after the English case Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium, 1 W.L.R. 676 (1976). In that case, a Dutch company, Aluminium Industrie Vaassen B.V., supplied aluminum foil to an English company, Romalpa Aluminium. Seeking to avoid the risks associated with being an unsecured trade creditor, the vendor retained title to the raw materials that it provided. The vendor’s title also extended to products into which the raw materials were incorporated, and to the proceeds from the sales of the finished products. When the buyer became insolvent, the vendor stepped ahead of both secured and unsecured creditors to reclaim the goods to which it had retained title, and to claim the finished products along with the proceeds from subsequent sales.

Here, in the United States, in a non-auction context, a seller has the ability – under Article 9 of the UCC – to perfect a security interest in goods sold to a buyer. Under those circumstances, title passes to the buyer (unless it is a lease governed by UCC Article 2A), and the seller either retains a certificate of title or files an Article 9 financing statement on Form UCC-1 with the Secretary of State in the appropriate jurisdiction. Based on the priority among creditors, a secured creditor under Article 9 gets to take in preference to unsecured creditors and junior secured creditors in the event of the buyer’s insolvency. Trade creditors, however, tend to be unsecured. As such, in a normal non-auction transaction, if a trade creditor sells on terms (say 30 days net for payment) and takes no security interest, the seller becomes an unsecured creditor, and its interests are subordinate to the claims of secured creditors. While, as indicated above, a seller can become a secured creditor (or, even better, acquire a purchase money security interest or PMSI), that involves the costs and processes for perfecting a security interest, and is not typical as regards’ ordinary trade creditors. Additionally, there are hoops that a secured creditor must jump through before it can execute on its security interest. In the United States, however, it is much more typical to see an Article 9 security interest than a true Romalpa clause – which is, essentially, like a security interest on steroids.

While, I suppose there can be an argument for introducing a Romalpa clause into a non-auction transaction between a trade creditor and the party to whom the trade creditor is supplying goods, I don’t know that a typical Romalpa clause – which involves the sale of goods on credit – fits within the model of a typical auction transaction unless the seller is willing to finance the sale over time. As described at the beginning of this post, it is possible to establish a rule in your Bidder Terms and Conditions delaying the passage of title until payment is made, but unless you’re talking about extended payment arrangements, and the seller’s willingness to act like (and in certain ways to be treated like) a trade creditor, you are not talking about a Romalpa clause. A real concern with respect to using a true Romalpa clause in the auction context is the property is released prior to both payment and passage of title, putting the seller at significant risk – not only with respect to possible loss of the property (or its value), but there may be liability issues (particularly with machinery, equipment, and vehicles) if someone is injured by property that is still owned by the seller but put into use by the buyer. Additionally, with a true Romalpa clause, the transaction continues after (and possibly well after) the close of the auction. In this regard, prudence would dictate that the seller maintain insurance after the fall of the hammer and until all payment obligations have been satisfied and title is transferred at some later date.

Bottom line – Article 2 of the UCC allows you to determine when title, possession, and risk of loss transfer to the buyer. That determination should be articulated in both your seller’s contract and in your Bidder Terms and Conditions. I would not, however, introduce foreign concepts (now you see the pun) into the auction industry that would have the effect of making your seller a trade creditor, albeit super-charged trade creditor, or otherwise fundamentally changing the nature of the auction transaction.

This post is for informational purposes only and does not constitute, and is not intended to constitute, legal advice. No attorney client relationship is created or intended.