An Auctioneer may Commingle his/her Funds With Those of his/her Principal When the Parties Share a Debtor-Creditor Relationship

In Mystic Color Lab, Inc. v. Auctions Worldwide, LLC, 284 Conn. 408 (Conn. 2007), the Supreme Court of Connecticut held that an auctioneer may not be held liable for conversion or statutory theft when the auctioneer and principal shared only a debtor-creditor relationship.  Tthe agreement between the auctioneer and the seller did not contain any language requiring segregation of the auction proceeds or any provision mandating the auctioneer to hold the auction proceeds in trust or for the benefit of the principal seller.  Therefore, the auctioneer cannot be held liable for conversion or statutory theft when he commingled the auction sale proceeds with his operating account.  

In this case, the Plaintiff seller, Mystic Color Lab, Inc. (“Plaintiff”) entered into a written commission sale agreement with the defendant auctioneer, Auctions Worldwide, LLC (“Defendant auctioneer”) to sell Plaintiff’s photo processing equipment.   The agreement included terms which stated that the sale proceeds shall be paid directly to the Defendant auctioneer and the Plaintiff agreed to reimburse expenses incurred for labor, advertising, and marketing expenses.  The Defendant auctioneer conducted an auction and the proceeds from the sale was deposited in the Defendant auctioneer’s general operating account.  The sale proceeds were commingled with funds from purchases of other auctions as well as other [money] belonging to the auctioneer. 

The auctioneer did not deliver the final accounting or the sale proceeds due to Plaintiff within the time frame mentioned in the agreement.  Consequently, the Plaintiff demanded payment of the sale proceeds.  Defendant auctioneer acknowledged that it owed the Plaintiff money, but did not make payment.  There were different negotiations between the Plaintiff and Defendant relating to the payment terms.  

The Plaintiff filed a suit in January 2004 alleging claims against the Defendant auctioneer for breach of contract and claims against both Defendant auctioneer and Loeser for common-law conversion, statutory theft under § 52-564, and violation of the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42-110a et seq. Thereafter, the Defendants agreed that they owed Plaintiff a balance of $ 267,907.67.  However, the parties entered into an agreement and the CUTPA claim was withdrawn.

The trial court entered a judgment in the Plaintiff’s favor.  The Defendants appealed to the Appellate Court stating that the trial court improperly (1) concluded that the Defendants were liable in tort for the conversion  of auction proceeds, (2) concluded that the Defendants were liable for statutory theft of the auction proceeds under General Statutes § 52-564 and, thus, improperly awarded treble damages to Plaintiff, and (3) failed to apply the economic loss doctrine to the common-law conversion claim, which would have precluded recovery for purely economic loss.  The Supreme Court of Connecticut transferred the appeal to itself (Conn. Gen. Stat. § 51-199(c) and Conn. Gen. Prac. Book, R. App. P. § 65-1).

The Court in this case observed that the Courts from other jurisdictions that have examined the auctioneer-seller relationship when an auctioneer fails to remit proceeds also suggest that, in the absence of the segregation of auction proceeds, the relationship should be viewed as that of a debtor and creditor. Id. at 422.  The Court discussed various cases such as In re Rine & Rine Auctioneers, Inc., 74 F.3d 848, 853 (8th Cir. 1996); United States v. Lawson, 925 F.2d 1207, 1210 (9th Cir. 1991); In re Farrell & Howard Auctioneers, Inc., 172 B.R. 712, 716 (Bankr. D. Mass. 1994); and In re Walker Industrial Auctioneers, Inc., 38 B.R. 8, 12-13 (Bankr. D. Or. 1983) and found that the circumstances in the case at hand are analogous to the above mentioned cases.  Id. at 422-28.  

The Court noted that the secondary authority also characterizes the auctioneer-seller relationship as that of a debtor and creditor when the funds are comingled. Id. at 424. See, e.g., 7 Am. Jur. 2d 422, Auctions and Auctioneers § 80 (1997) ("It has been said that an auctioneer may properly commingle his funds with those of his principal . . . . [When] the auctioneer is permitted to commingle funds, his status toward the principal with regard to the money he receives is more properly viewed as that of a debtor than of a bailee."). Id.   Also, secondary sources suggest that an auctioneer's  commingling of auction proceeds with funds from other auctions or other sources is not abnormal and does not constitute misconduct on the part of the auctioneer. Id. See 2 Restatement (Second), supra, § 398, comment (c) ("In the case of certain professional agents, such as auctioneers and factors, it is customary, and hence ordinarily understood, that the agent can properly mingle his funds with those of his principal. . . . If the funds are properly mingled, the  [*425]  inference is that the agent becomes a debtor to the amount received for the principal . . . ."). Id. at 424-25.  

The Court concluded that the Defendant auctioneer and Plaintiff shared a debtor and creditor relationship. The Defendant auctioneer had a contractual obligation to pay the Plaintiff the sale proceeds due to him within the time frame mentioned in the agreement.  The Court stated that, as in the case of In re Farrell & Howard Auctioneers, Inc., supra, 713, and In re Walker Industrial Auctioneers, Inc., supra, 12, the agreement between the seller and auctioneer did not include any language requiring isolation of the auction proceeds or any provision requiring that the Defendant auctioneer hold the auction proceeds in trust or for the benefit of Plaintiff.  The Court noted that, during the fifteen day period following the auction, Plaintiff had complete control over the funds. The agreement between the parties did not include any provision limiting how the funds could be used or directed during that fifteen day period.  In addition, either parties did not plead nor was there any evidence showing an intent to form a trust with regard to the auction proceeds.  Also, the agreement did not include any language which suggested that the auctioneer would receive the auction sale proceeds "on behalf of" the Plaintiff. See, e.g., In Re Rine & Rine Auctioneers, Inc., supra, 853. 

In light of the above, the Court concluded that the Plaintiff’s claims for conversion and statutory theft must fail.   Therefore, the Court found that the trial court incorrectly determined that the auction proceeds belonged to the Plaintiff and improperly rendered judgment in favor of Plaintiff on its claims of conversion and statutory theft.