An Auction is Presumed to be ‘with Reserve Auction’ when a Minimum Bid is Declared by Auctioneer

In Marten v. Staab, 4 Neb. App. 19, (Neb. Ct. App. 1995), the Nebraska Court of Appeals held that, in auctions where a minimum bid is declared by the auctioneer or owner of property we must presume that the auction is ‘with reserve.’ In such cases, the property is not to be sold via an absolute auction. 

In this case, Plaintiff-Appellants (“Appellants”), estate representatives of the decedent, offered decedent’s real property for sale by auction. The auctioneer involved stated that the property would be sold in five parcels with a minimum bid for each. Defendant-Appellees (“Appellees”) were the only bidders in this auction. They offered a bid below the minimum for each parcel.  So, the auctioneer did not accept their bids, and the property was not sold at the auction. Bidders then moved to the Nebraska District Court for Thomas County and sued Appellants for specific performance on the ground that their bid was binding since it was the highest bid received. The district court held that the Appellants must transfer their decedent's property to Appellees notwithstanding their failure to satisfy the minimum bid at the auction of the decedent's property.  This appeal followed.  

The appellate court in making the above stated decision analyzed the nature of auctions.  The court observed that an auction is a public sale of property to the highest bidder by one licensed and authorized to do so. The goal of an auction is to get the seller the best financial return by free and fair competition among bidders. Id. at 24.  7A C.J.S. Auctions and Auctioneers § 1 (1980). The appellate court found that there are two kinds of auctions: those "with reserve" and those "without reserve." Id. at 24-25

The appellate court stated that are no decided Nebraska cases that comprehensively discusses the nature of auctions. Id. at 25 However, the law of auctions is well established and does not vary much between jurisdictions. In the state of Nebraska, statutory provisions governing sale of goods by auction are found under the Uniform Commercial Code, see Neb. U.C.C. § 2-328. Id. However, these provisions do not address real estate sale in particular. Id.  

The appellate court relied on the Wyoming court’s decision in Pitchfork Ranch Co. v. Bar TL, 615 P.2d 541 (Wyo. 1980) to understand the nature of auctions. Id. In an auction with reserve, the bidder is deemed to be the party making the offer while the auctioneer as agent for the seller, is the offeree. Id.  The ramification of a with reserve auction is that the principal may choose to withdraw the property at any time, before the hammer falls. In cases where the bidding is too low, the auctioneer need do nothing and there is no contract between the seller and the bidder. Id. See, also, 1 Corbin on Contracts, § 4.14 (Joseph M. Perillo rev. ed. 1993); 7A C.J.S., supra, §§ 1-27.

On the other hand, an auction without reserve, or a no reserve auction, is where the legal relationship between the seller and the bidder is reversed. This is also called an "absolute auction." Id. See 1 Corbin on Contracts, supra. See, also, Holston v. Pennington, 225 Va. 551, 304 S.E.2d 287 (1983) (holding that absolute auction is equivalent to auction without reserve). In the without reserve auction, the seller becomes the offeror and the bidder becomes the offeree by reason of the collateral contract theory. Id. Pitchfork Ranch Co., supra. 

In a without reverse auction, a collateral contract is present. Id. at 26 This is simply the owner's agreement with all potential bidders that he will not withdraw the property from sale, no matter how low the highest bid might be. Id. Therefore the highest bona fide bidder at an auction without reserve may insist that the property be sold to him or that the owner answer to him in damages. Id. Wilcher, supra, citing Drew v. Deere Co., 19 A.D.2d 308, 241 N.Y.S.2d 267 (1963).

Generally, an auction is deemed to be conducted with reserve unless there is an express announcement or advertisement to the contrary before the auction takes place. Id. Ferry v. Udall, 336 F.2d 706 (9th Cir. 1964), cert denied 381 U.S. 904, 85 S. Ct. 1449, 14 L. Ed. 2d 286 (1965); Chevalier v. Town of Sanford, 475 A.2d 1148 (Me. 1984); 7A C.J.S., supra. 

The appellate court stated that, when an auctioneer presents an article for sale, he ordinarily is not making an operative offer. Id. Therefore, such an auction is "with reserve." Id. The nature of the auction does not change even though the seller has advertised or made statements that the article will be sold to the highest bidder. Id. Such statements are usually "merely preliminary negotiation, not intended and not reasonably understood to be intended to affect legal relations." Id. 1 Corbin on Contracts, supra at 639-40.

The appellate court found that, in the present case, neither the sale bill nor the published notice advertised an "absolute" auction or a "without reserve" auction. Id. at 21. Also, the auctioneer never promised or declared an unconditional, absolute, or without reserve sale of the land to the high bidder on the auction day. Id. at 22. Moreover, the personal representatives on two occasions stated, through their agent, that it was not an absolute sale. Id. And they also said that they would not be asking the court to confirm Appellees’ bids. Therefore, it is clear that the auction in question was not an absolute or without reserve auction. 

The appellate court in this case stated that the auction must be presumed to be with reserve unless it was expressly stated that it was an absolute auction. Id. at 13. In the case at hand, no evidence suggested that the auction was an absolute auction. Further, the auctioneer had declared a minimum bid for each lot of property and the bidders bid in an amount lower than the minimum bid. Therefore, Appellees could not claim the property.