Of Auction Sales and Fees: Going, Going, Going … Not Gone

Garden v. Central Nebraska Housing Corp., 719 F.3d 899 (8th Cir. 2013) –

A secured party obtained relief from the automatic stay to allow the trustee under a deed of trust to sell a farm.  The secured party contended that (i) it had a contract to purchase the farm as the result of the trustee’s auction, and (ii) its secured claim included certain attorney and inspection fees.

The 8th Circuit upheld a district court decision that (a) the secured creditor did not have a binding sale contract, (c) rejected its claim for attorney fees, and (c) not only disallowed the claim for inspection fees but also found that the inspections violated the automatic stay, justifying an award of sanctions.  A dissenting opinion argued that the request for inspection fees was not properly evaluated by the district court:  there was no violation of the automatic stay, and thus no basis for sanctions.

A secured party (CNH) acquired a first deed of trust in a farm based on a post-petition assignment of the note and trustee.  After the debtors defaulted during their bankruptcy, CNH obtained relief from the automatic stay to permit an auction to sell the farm under the deed of trust.

Before the auction it was announced: “The Trustee’s Sale will remain open for ten (10) minutes and I will accept any bids offered during that time.”  There was no announcement that the sale would close at the end of the 10 minutes or that further bids would be refused after that time.

Shortly before the 10 minutes expired, CNH made a bid of $113,000.  Although the trustee’s representative announced the expiration of the 10-minute period, he did not warn prior to expiration and did not solicit any final bids before closing the auction.  He also did not announce that the property was sold to CNH.  After a competing bidder protested, he decided to accept additional bids, with the result that a third party was the highest bidder at $166,500.  (The successful bidder assigned its bid to a company owned by the owner of CNH.)

CNH argued that it had purchased the property for $113,000, so that the excess $53,500 should be returned to it.  With respect to disposition of the proceeds, the debtors objected to CNH’s claims for ~$17,500 for monthly inspections and ~$7,500 in attorney fees.  The district court agreed with the debtors, and found that the inspections before relief from the stay was granted were attempts to encumber the farm and were void as a violation of the automatic stay, and inspections after relief was granted constituted unauthorized post-petition transfers that were avoidable.

Determination of whether CNH had a valid contract required a review of the nature of auctions.  As described by the 8th Circuit, there are two types of auctions:  those with reserve and those without reserve.  If an auction is without reserve, the seller makes an offer and the bidder is the offeree.  The seller has no right to withdraw the property once a bid has been submitted.  Thus each bid constitutes a contract, subject only to higher bids.  In contrast, if an auction is with reserve, the bidder is considered the offeror and the seller the offeree.  Thus no bargain exists until the seller accepts, and all bids may be rejected and the property withdrawn until the sale is completed.

The 8th Circuit concluded that a statement prior to the auction that property “will be sold to the highest bidder” is not sufficient to establish an auction without reserve.  And if the auction was with reserve, the seller had to accept the bid.  The court also noted that the general rule is that acceptance is indicated by “the fall of the hammer” or by other audible or visible means, such as by saying that the property is “going, going, gone.”  Thus, in this case the auction was with reserve; and there was no acceptance of CNH’s bid by the seller, so CNH never had a contract to buy the property.

With respect to fees, the attorney fees were evaluated using the standard test which requires the claimant to show “(1) that it is over secured in excess of the fees requested; (2) that the fees are reasonable; and (3) that the agreement giving rise to the claim provides for attorney’s fees.”  The district and circuit courts agreed that CNH failed to establish that the fees satisfied the requirements of the trust or that they were reasonable.  Consequently, the attorney’s fees were not allowed.

The more interesting issue was treatment of the request to allow inspection fees.  The 8th Circuit majority opinion affirmed the district court award of ~$25,500 to the debtors as sanctions for CNH’s violation of the automatic stay.  The majority opinion does not elaborate on the nature of the stay violation.  However, as described in the dissenting opinion, the district court framed the question of whether CNH was entitled to the inspection fees in terms of whether the inspections violated the automatic stay or were avoidable post-petition transfers.

The district court concluded (and apparently the majority of the 8th Circuit agreed) that the inspections prior to relief from the stay constituted a violation of the stay because the “inspection fees were an attempt to encumber the property without specific permission from the bankruptcy court;”  and inspections after relief from the stay constituted an avoidable post-petition transfer.  The dissenting opinion characterizes this analysis as “fundamentally flawed.”

First, incurring inspection costs is not a violation of the stay.  The stay does not bar all post‑petition charges.  For example, Section 506(b) of the Bankruptcy Code authorizes adding post‑petition interest to a secured claim, as well as other post‑petition charges such as attorney’s fees.  Rather the issue is whether a creditor takes steps to circumvent the bankruptcy court’s control of the bankruptcy estate.  The stay could have been implicated, for example, by attempting to collect the fees from the debtors by billing them directly.  However, in this case CNH merely sought reimbursement authorization from the court pursuant to Section 506(b).

The distinction is between actions taken outside the bankruptcy court and legal actions within the bankruptcy court.  Section 362(a) does not stay actions specifically authorized elsewhere in the Bankruptcy Code.

With respect to the conclusion that the inspections were avoidable post‑petition transfers after CNH obtained relief from the stay, there was no transfer of property of the estate, and none would occur unless and until the court authorized it.

According to the dissenting opinion, since the only violation of the stay identified by the district court was costs incurred by CNH for inspections, which was in error, there was no basis for finding that there was a violation of the stay; and thus no sanctions should have been awarded.

The analysis of the auction process illustrates once again that seemingly minor technicalities can matter, and it pays to be absolutely clear about the parties’ intentions.  As for treatment of the inspection fees, it is hard to know what to make of the district court analysis (or the fact that its decision was sustained by a majority of the 8th Circuit).

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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