Return to site

The Non-Paying Bidder and the Risk of Relying on Bad Advice



George A. Michak, Esq.

Mark Twain famously observed that – "It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so." These cautionary words are as relevant today as when first penned, and should be considered before accepting – and acting on – auction law advice that just might not be so. An example of the kind of risky advice that just might get you into trouble is the assertion – made, repeatedly, on social media and in blog posts – that if you encounter a non-paying bidder you should just re-sell the lot and move on, perhaps getting more money for your seller (and you) the second time around while retaining the right to sue your non-paying bidder for damages if there is a significant decrease in the hammer price when the lot is re-sold. While that may appear to be sound practical advice, in reality, the simple, uninformed, answer is not always the best – and may very well put the auctioneer at risk.

I was discussing this very issue recently, and – before I could get to the risky part – an auctioneer described how he had been bitten in this scenario. The auctioneer volunteered that he sold a car for $10,000 at auction, and, when the winning bidder didn’t pay (and refused to communicate with the auctioneer), the auctioneer re-sold the vehicle. Good news – the car brought $15,000 at the second auction. Both the seller and the auctioneer were happy . . . until the non-paying bidder sued the auctioneer to recover the $5,000 swing in the price – and won! And, that’s the risky part. You see – unless you provide otherwise in your Bidder Terms and Conditions (which this auctioneer hadn’t) – under the Uniform Commercial Code (Section 2-328 and Section 2-106) title will ordinarily pass with the fall of the hammer. Therefore, even though the winning bidder turned out to be a non-paying bidder, that non-paying bidder owned the car. While the auctioneer had a possessory lien against the vehicle for the purchase price, it is typically necessary to give notice prior to selling property to execute on such a lien, and, while you may be able to pursue the non-paying bidder for any deficiency, you will normally be required to account for any surplus (if there is one). Moreover, you may lose your (or your original seller’s) right to recover a deficiency from the non-paying bidder if you fail to provide the proper notices before the lot is re-sold. In this particular case, the court found that when the auctioneer re-sold the car he was selling the non-paying bidder’s property, and that the non-paying bidder was entitled to damages above the original purchase price. An additional complicating issue is that, when the auctioneer sold property belonging to the non-paying bidder, he did so without a contract with the non-paying bidder – who, now, became the seller. This could also be a real problem in a licensing state that requires a written contract between the seller and the auctioneer.

As with many auction-related issues, your ability to re-sell a lot won by a non-paying bidder without putting yourself and your seller in jeopardy may be controlled by what you have in writing – specifically, in this regard, your Bidder Terms and Conditions. There are a number of ways to skin this cat, and to protect both the auctioneer and the seller. You could provide in your Bidder Terms and Conditions that title only passes when payment clears (this may make more practical sense at an online auction than a live auction where you want to put the risk of loss, immediately, on the buyer who is present; however, even at a live auction, you could provide that risk of loss passes with possession but that title passes only on payment). You could also provide that, if payment is not made within a stated period of time, the lot (and any interest in the lot) is abandoned back to the original seller or to the auctioneer (this may also make sense if a winning bidder fails to pick-up a lot after paying for it). Bear in mind that, while you can always argue abandonment, your life may be easier if you can point to the Bidder Terms and Conditions.

In any event, it is not good advice, nor is it good practice, to simply re-sell property (even if not paid for) unless you know who actually owns it as a matter of law, and unless you have a legal right to do so.

This is for discussion purposes only and is not intended to be legal advice. No attorney-client relationship is established, or intended, between the author and anyone reading this article. If you have any questions regarding the issues discussed, you should seek advice regarding your specific situation from a qualified attorney.