NEVADA NATIONAL LEASING COMPANY v. HEREFORD (1983)

In this case we hold that when a foreclosure creditor bids on repossessed personal property at a public auction with the knowledge of the auctioneer, but without the knowledge of the other bidders, the auction is lawful and is not a sham auction.

William Linke, representing Nevada National Leasing Company (“Nevada”), retained auctioneer Cliff Schick and his company, Construction Equipment Auction Company (“Schick”), to sell at public auction two backhoes and a trailer which Nevada had repossessed from third party lessees in default on their leases.   On the day of the auction Linke discussed the mechanics of the auction with Schick and said he would be bidding on the equipment and Schick agreed he could do so.   None of the bidders were told that Linke represented Nevada.

Linke bid on all three items of equipment and in each case Linke and Lee Hereford were the last two bidders.   Hereford was the high bidder on all three pieces of equipment.   His last bids were $3,600 and $6,100 for the two backhoes and $10,000 for the trailer.   His last bids before Linke started bidding were $500, $3,500 and $6,000, respectively.   Pursuant to the terms of purchase, Hereford made a down payment of $7,000 to Schick's cashier on the day of the auction and paid the balance to Schick within two days.   After payment Hereford took possession of the equipment and Nevada sent him title documents for the trailer but refused to give him title to the two backhoes, even though Schick told Linke that Hereford had paid for the equipment and should be given title.

Nevada and Schick had a dispute and Schick did not transfer Hereford's payment to Nevada.   Linke subsequently requested that Hereford release the backhoes to Nevada and told Hereford that title would not be given to Hereford until Nevada received the payment.   Linke further told Hereford the equipment would be “picked up” if Linke could find it.   Nevada has never transferred title of the backhoes to Hereford, although Hereford has continuously had possession of them.

Nevada filed a complaint against Hereford and Schick for breach of contract, money not received, conversion and claim and delivery.   A default judgment was entered against Schick on which no appeal was taken.   Hereford answered the complaint and by way of an amended cross-complaint against Nevada, Schick and Linke alleged a sham auction and sought punitive damages.   The trial court rendered judgment for Hereford on the complaint, and on his cross-complaint against Schick and Nevada awarded him compensatory damages in the sum of $14,700, representing the difference between Hereford's last bids before Linke began bidding and Hereford's final bids.   The trial court found that Nevada's representative secretly bidding on the repossessed property resulted in a sham auction.   The court also rendered judgment in favor of Hereford and against all cross-defendants for punitive damages in the amount of $10,000 on the basis that the cross-defendants “conspired and fraudulently raised the prices and bids” on the equipment.

Nevada contends the judgment must be reversed because Nevada was authorized to bid at the auction by California Uniform Commercial Code section 2328, subdivision (4), which provides:

“If the auctioneer knowingly receives a bid on the seller's behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved, the buyer may at his option avoid the sale or take the goods at the price of the last good faith bid prior to the completion of the sale.   This subdivision shall not apply to any bid at a forced sale.”   (Emphasis added.)

Nevada correctly contends that the auction in the present case was a “forced sale” within the meaning of the statute, thus secret bidding was permitted.

The California Uniform Commercial Code does not define “forced sale.”   However, a California Code commentary to section 2328 states that the forced sale exclusion “permits, for example, an execution creditor to bid at a ‘forced sale.’   This avoids a possible problem in construction since an execution creditor is not a seller in the normal sense of the word.”  (Cal. code com., 23A West's Ann.Cal.U.Com.Code, § 2328 (1964 ed.) p. 356.)

In the only reported decision on point, which also involved a sale of repossessed collateral, the Alabama Supreme Court determined that an Alabama statute (Code of Ala.1975, § 7–2–328, subd. (4)) identical to California Uniform Commercial Code section 2328, subdivision (4), “impliedly gives a foreclosing creditor the right to bid without notice at sale of its collateral.”  (Sly v. First Nat. Bank of Scottsboro (Ala.1980) 387 So.2d 198, 200.)   Such a holding is consistent with the general policy of protecting both a secured creditor and the defaulting debtor by encouraging procedures that will enable realization of the best possible price for repossessed collateral.  (See Uniform Com.Code com., 23C West's Ann.Cal.U.Com.Code, § 9504 (1964 ed.) p. 603;  Cal. code com., 23C West's Ann.Cal.U.Com.Code, § 9504 (1982) pocket supp.) p. 110;  see 1 Cal.Com.Law (Cont.Ed.Bar 1966) § 3.60, p. 62 [purpose of forced sale exception in section 2328 “is obviously to inspirit bidding at forced sales”].)

Hereford relies on Peterson v. Hornblower (1867) 33 Cal. 266, 276–277, which held that an execution or foreclosure sale of real property consented to by the owner was not a “forced sale” within the meaning of the constitutional provision protecting homesteads from “forced sale.”  (Cal. Const., art. 20, § 1.5;  former Cal. Const., art. 17, § 15;  see also White v. Rosenthal (1934) 140 Cal.App. 184, 186–187, 35 P.2d 154.)   But in light of the California Code Comment indicating that an execution sale is a forced sale within the meaning of section 2328, no analogy to Peterson v. Hornblower can appropriately be drawn.

Because Nevada, as a foreclosing creditor, was authorized to bid at the auction without giving notice that it might do so, the judgment for compensatory damages of $14,700 must be reversed.   The award of $10,000 punitive damage must also be reversed because it was expressly based upon the erroneous determination that Nevada improperly bid at the auction.   The judgment on the complaint in favor of Hereford is affirmed.   It was stipulated at oral argument of this appeal that Nevada continues to withhold title to the two backhoes from Hereford despite the fact that Hereford had paid the full amount he bid at the auction.   Thus, Nevada's wrongful withholding of title still continues.   Although the judgment on the cross-complaint for compensatory and punitive damages must be reversed, the matter is remanded to the trial court for reconsideration of the sole issue of what damages, if any, Hereford has sustained as a result of Nevada's wrongful withholding of title to the two backhoes.

The judgment is reversed and the cause remanded for further proceedings consistent with this opinion.

KING, Associate Justice.

LOW, P.J., and HANING, J., concur.