An Auctioneer/Auction Company that Auctions Property on Behalf of a Principal Who Has no Title is Held Liable For Conversion

The Georgia Court of Appeals of Third Division held in Deere & Co. v. Miller-Godley Auction Co., 249 Ga. App. 797 (Ga. Ct. App. 2001) that an auction company/auctioneer who sells property on behalf of a principal having no title thereto is personally liable to the true owner for conversion.  The appellate court found that the trial court erred in finding that public policy counseled against requiring auction companies/auctioneers to verify the title of the goods they sold

This case involves a suit for conversion against an auction company, Miller-Goodley (“Appellee”). Appellee sells the equipment on consignment from the owner and requires the owner to sign a statement to the effect that the owner is the lawful owner of the equipment and that there are no liens on the equipment. Deere, the Appellant (“Appellant”) in this case financed the purchase of farm equipments by Southern Farm Investments, Inc (“Purchaser”) and recorded UCC-1 financing statements properly and timely. The Purchaser of the equipment delivered the equipment to Appellee without notice to Appellant. Appellee accepted the purchaser's false representation that the equipment was not subject to any lien. Appellee did not investigate the representation or check for liens. Appellee then sold the equipment at auction and paid the proceeds, less its commission, directly to the Purchaser. After learning of the sale, Appellant sought payment for the equipment from Appellee. Appellee refused, and Appellant filed the suit for conversion in trial court. Both parties filed motions for a directed verdict. The trial court granted Appellee's motion for a directed verdict. Appellant challenged the trial court’s judgment.

Appellant alleged that the trial court erred in holding that Appellee was not liable to Appellant for conversion when Appellee, without Appellant's knowledge or consent, sold goods in which Appellant held a perfected security interest. Deere & Co.249 Ga.App.797-798.

The Court of Appeals noted that courts in the state of Georgia have not specifically determined an auctioneer’s liability to a secured creditor for conversion when the auctioneer, without the secured creditor's knowledge or consent, sells goods in which the secured creditor holds a perfected security interest.Id. at 798

The court considered Georgia state agency law, law from other jurisdiction, and public policy in analyzing this issue and reaching at a conclusion.  

Georgia state agency law: Conversion involves the unauthorized assumption and exercise of the right of ownership over personal property belonging to another, contrary to the owner's rights. “Any distinct act of dominion wrongfully asserted over another's property in denial of his right, or inconsistent with it, is a conversion. It is unnecessary to show that the defendant applied it to his own use, if he exercised dominion over it in defiance of the owner's right, or in a manner inconsistent with it." It is well established that an agent may be guilty of conversion even though he has no knowledge of the true owner's title and acts in good faith. The agent, even though innocent, is liable if he assists in a conversion because he stands in the shoes of his principal. The liability of both the principal and the agent is based not upon contract, but upon tort. Id.798-99

In this case the court has observed the relationship between a seller and an auctioneer is that of principal and agent.  Further an auctioneer exercises an act of dominion over the property he auctions when he sells the property. This is especially true considering the fact that an auctioneer receives a monetary benefit from selling the property. Thus, he personally benefits from any conversion that might occur. Under Georgia law, "it is immaterial that such dominion was exercised in good faith, for whoever meddles with another's property, whether as principal or agent, does so at his [own] peril, and it makes no difference that in doing so he acts in good faith." Id. at 799.

The court also considered Georgia federal court decision in which the court stated that an auctioneer should be held liable for conversion when he auctions property on behalf of a principal who has no title. In one of the cases an auctioneer sold cattle in which the United States had a recorded security interest, and the government sued for conversion. As in this case, the auctioneer claimed that he never asserted dominion or control over the cattle, but acted merely as the debtor's agent. The federal court found that a conversion had occurred under Georgia law, holding that an agent may be guilty of conversion even though he has no knowledge of the true owner's title and acts in good faith. Citing cases from the Third, Fourth, Fifth and Ninth Circuits, the court in LaGrange Stockyard noted as follows: "The almost universally accepted rule is that an agent, factor, commission merchant or auctioneer who receives property from his principal, sells it and pays the proceeds to him is guilty of conversion if the principal has no title to the property, even though the agent acts without knowledge of the defect title." Id. at 799- 800 (quoting United States v. LaGrange Stockyard, 270 F. Supp. 492 (N.D. Ga. 1967).

Other Jurisdictions: The appellate court stated that every jurisdiction that has considered the question at issue has held an auctioneer liable for conversion when property is sold subject to a perfected security interest. Liability for conversion is usually imposed regardless of the fact that the auctioneer acted in good faith and without actual or constructive knowledge of the security interest. Id. at 797-800

Appellee also cited cases from three states, Kentucky, Tennessee and Mississippi, and argued that the court should adopt the minority view recognized by our sister states. However, even under the minority view espoused by Appellee, the auction company would be held liable in this case. While most jurisdictions hold that an auctioneer is liable even if the auctioneer has no knowledge that his principal does not have clear title to the goods the auctioneer sells, these three states have held that an auctioneer is liable only if he has either actual or constructive notice of the owner's secured interest. In the present case, it is undisputed that Deere filed UCC-1 financing statements for both pieces of equipment. The UCC-1 financing statements gave Appellee constructive notice of Appellant’s security interest. Id. 

The court of Appeals stated that the Uniform Commercial Code (UCC) was intended to create a dependable system of secured transactions which could be protected when there was compliance with the Code's filing requirements. The purpose of UCC financing statements is to provide notice to interested third parties that enforceable security interests may exist in the property. If a third party is permitted to ignore such notice, then financing statements are rendered a nullity. Id.

Appellee further contended that mandating auctioneers to perform lien searches would be logistically prohibitive due to the amount of equipment they receive and the late date they receive the equipment.  However, allowing auctioneers to ignore financing statements simply because the search is inconvenient undermines the very concept of constructive notice in this state. Id. at 800-801.

The court noted that auctioneers should be charged with knowing that possession does not equate with, and does not confer upon the possessor-principal, ownership of or title to the possessed property. In addition, if an auctioneer has not had the foresight to protect himself when the goods are offered to him for sale, he can seek indemnity from the principal. This discourages larceny and the reckless sale of personal property. Id. at 801

The appellate court found that while an auctioneer's role as a mere agent or conduit may stir sympathy, and it may seem harsh to impose liability for unknowingly aiding the conversion, an analysis of Georgia agency law mandates such a rule. Requiring auction companies to perform lien searches might be a time-consuming procedure and not consistent with existing business practice. However, the public policy issues of upholding the UCC and protecting innocent owners and purchasers balance in favor of this requirement. Holding auction companies liable for conversion will protect, as much as possible, the truly innocent parties: the owner and the purchaser. Id. at 801

The Court of Appeals also stated that the agent stands in the shoes of the seller. Because Appellee became the agent for the dishonest seller, it must stand the loss. Even under the minority view espoused by Appellee, the auction company would be held liable because it had constructive notice of Appellant's secured interest. It is undisputed that Appellant complied with the UCC filing requirements in this case, and its security interests should have been known and protected. Id. at 801

Appellee further argued that in this case, the conversion does not involve the impairment or denial of the rights of the lien holder or owner of the property in question. It points out that most of the cases cited by Appellant involve the sale of cattle or cotton, which Appellee labeled as “fungible goods." In those cases, the owners must elect money damages. However, in the present case, Appellant can sue upon the debt or foreclose its perfected security interest in the equipment.   According to Appellant, a person is guilty of conversion only when it would be impossible to recover the secured goods themselves once they enter the stream of commerce.Id.

The court found that this analysis ignores the clear mandates of conversion law and agency law in this state: an agent may be guilty of conversion whether the property converted is fungible or not. Moreover, this analysis undermines the reasons behind UCC filing requirements: to provide notice that enforceable security interests may exist in the property. Id. at 801-802

Hence the Court concludes that the trial court erred in finding that public policy counsels against requiring auctioneers to verify the title of the goods they sell and in granting Appellee’s motion for a directed verdict and reversed the judgment. Id.