“Forced Sale” Exception Under section 2328 of the California Uniform Commercial Code does not Apply to an Auction Sale in Which Seller Secretly bids on its own Goods at the Auction

The Superior Court of California in Nev. Nat'l Leasing Co. v. Hereford, 36 Cal. 3d 146, 149 (Cal. 1984) held that a “forced sale” exception under Cal U Com Code § 2328 does not apply to an auction sale in which the Seller secretly bid on its own equipment to ensure that it got acceptable prices for the equipment.  

In this case, the Court discussed whether or not an auction sale in which the seller-owner voluntarily bid on its own goods at the auction sale constitutes a “forced sale” under the California law.  The Plaintiff Nevada National (“Plaintiff”) is a leasing company.  Nevada state court awarded the Plaintiff possession of construction equipment from defaulting lessees.  The Plaintiff contracted with an auction company to sell the equipments at an auction in San Jose, California.  The Plaintiff and the auctioneer agreed that the owner would bid on the auctioned items to increase the sales prices.  At auction, Plaintiff’s employee placed bids on the equipment to assure acceptable prices.  Lee Hereford, cross-complainant and defendant (“Defendant”) was the highest successful bidder on three items of construction equipment sold at auction.  He cross-complained that Plaintiff and the auction company conducted an illegal auction under Cal. Com. Code § 2328(4).  

The trial court found that the auction was illegal and awarded punitive and remedial damages to the Defendant pursuant to the provisions of the § 2328(4) of the California Uniform Commercial Code.  Plaintiff appealed this decision.  

The appellate Court stated that California law is designed to protect the buyer at an auction from undisclosed, competitive bidding by the owner and seller of the auctioned goods. Id. at 148. Cal. Com. Code § 2328.  The statute aims to protect buyers from unfair and commercially unreasonable tactics that sellers may use to boost the sale price of their goods. Id.  However, this provision does not apply to a "forced sale." Id. Cal. Com. Code § 2328(4).  The sub section specifically states that: “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.”  The term, "forced sale," is not defined in the Code; therefore, the Court has to determine its meaning in the context of the case at bench. Id. 

The Court in this case had to decide whether or not the voluntary sale by the owner-seller of repossessed leased goods constitutes a "forced sale" by the seller  within the meaning of section 2328, subdivision (4). Id. at 148-49.  The Court noted that the plaintiff had other commercially reasonable alternatives to sell its equipments. Id. at 152.  But the Plaintiff chose to raise the sales prices by secretly bidding on its own goods, even though it did not intend to purchase the equipment if it were the successful bidder. Id.   The Court stated that such sales tactics were long been disapproved by the law in California. Id.   The Court stated that, long before the adoption of section 2328, the state prohibited the use of "by-bidders" or "puffers" to make sham bids. Id.  The state classified such practices as a fraud against the public. Id.   After analyzing the facts of the case, the Court concluded that the auction sale in this case was not a "forced sale" within the meaning of section 2328, subdivision (4) because the sale was voluntary. Id. at 153. 

Therefore, the Plaintiff, as the lessor-seller and owner, was prohibited from secretly bidding on its own goods at the auction at which they were being sold. Id. at 1499.   The Court noted that such bidding is not allowed under section 2328, unless prior to the auction, the seller first notifies the buyers its intent to bid on its own property.  Id.  The Court found that the Plaintiff in this case bid on its own goods without disclosing its intent to bid to the potential bidders, therefore it violated section 2328. Id.