A realty company selling a debtor’s farm had to forfeit its commission when its auctioneer failed to disclose that he was bidding on the property for his own company while taking bids at the public auction.
That omission violated a Virginia regulation that says an auctioneer may not bid on his own behalf “unless notice has been given that such bidding will be permitted,” according to a Roanoke bankruptcy judge.
But the bankruptcy court let the deal go through anyway after deciding the sale was “inherently fair” under the court’s newly adopted test for assessing the auctioneer’s duty in the context of a bankruptcy sale.
Although some courts apply a per se rule barring sales of bankruptcy estate property to insiders and estate professionals, U.S. Bankruptcy Judge Paul M. Black opted for a test that let the fiduciary show that the sale was an arm’s-length transaction.
The bankruptcy court confirmed debtor Marcus Stanley’s Chapter 13 plan on Nov. 2, 2015. The plan provided for a May 1, 2016 deadline for a private sale of Stanley’s 54-acre farm in Washington County.
Known at the “Toby Hanna Farm,” the property contained a rental house, a log barn and fences. It had no road frontage, but did contain a one-mile private right-of-way over neighbors’ properties.
The debtor’s plan called for Meade Realty to continue to market the property privately, up to the May 1 deadline. A real estate agent initially listed the farm with a purchase price of $215,000, with later reductions to $175,000, then $165,000.
A verbal offer of $90,000 was deemed too low by the agent and the debtor, and the property ultimately went to auction on June 11, 2016.
Meade Realty advertised the auction for two weeks in the local newspaper and printed around 400 informational brochures for a display box and mailed another 50 brochures to potential buyers. Signs advertising the auction were placed on the road leading to the property, according to the court’s opinion in In re Stanley (VLW 016-4-010).
About 16 or 17 people showed up for the auction, including neighboring property owners, according to evidence presented to Black. Thirteen people registered as bidders at the auction, but neither auctioneer Michael E. Anderson or his own company, Farmlands Inc., registered as a bidder.
Anderson sought an initial bid of $200,000 but didn’t get a bite. He began working downwards and ultimately started the bidding, on behalf of his own company, at $40,000.
Anderson testified that he told the crowd the property “wasn’t going to get any cheaper” and that is when he started the bidding by putting in this first bid for his company, an entity separate from Meade Realty.
When a bid came in at $42,000, Anderson said he realized he probably should not be conducting the auction, and he asked another Meade auctioneer to cry the sale. He said he also consulted the representative for the bank that held the lien on the farm, who did not object. The bank’s representative testified that he was only authorized to bid $25,000 for the farm.
Anderson continued to bid on the property and ultimately bought it for Farmlands for $55,000.
But the debtor later protested the sale price was “very insufficient” and said he did not realize Anderson was behind the purchase when he signed the sales contract.
Historically, auctioneers in Virginia were not allowed to bid on properties over which the auctioneers were conducting a sale, according to the bankruptcy judge.
Currently, Virginia state regulations governing auctioneers allow them to bid on properties at sales over which they are presiding, if adequate disclosure is made, the court said.
Black said the failure to make an adequate public disclosure of Anderson’s additional role at the sale violated 18 VAC § 25- 21-120. There was no evidence that anyone at Meade Realty made a disclosure that one of its auctioneers was bidding at the sale.
“Neither the Debtor nor anyone else, other than possibly First Bank, was aware that Anderson would be bidding at the auction in advance of Anderson’s bidding. Therefore, Anderson and Meade Realty violated Section 25-21-120 of the Regulations of the Virginia Auctioneers Board by Anderson bidding on his own behalf without providing notice that his bidding would be permitted,” Black wrote.
But Black refused to set aside the sale, as the evidence indicated the sale was in the best interests of the bankruptcy estate.
Meade Realty had adequately advertised the sale and there was no evidence Stanley could get a better price at a second sale. The bank already had capped its bid at $25,000, given the limited access to the property. Anderson was not the only bidder at the sale, and he started the bidding above the bank’s best offer. Neighboring property owners were present, in person and by telephone, but they failed to step up to gain the property.
Other than the lack of disclosure that Anderson would be bidding, “the Auction had all the hallmarks of an active and competitively conducted sale,” Black said.
The court penalized Meade Realty for the regulatory violation, saying it could not collect a 5 percent commission from the sale or reimbursement of its expenses.
“The difficulty was my client did not realize who the buyer was,” said Abingdon lawyer Robert T. Copeland, who represented the debtor but did not attend the sale. The farm’s best use is for grazing, and the decline in value from the farm’s earlier appraisals reflects falling cattle prices, he said.
“The question is, are we going to do any better the next time” in a new sale, Copeland said. The court concluded that was not likely.