Yaffe Meets Rabizadeh

Steve Proffitt | January 14th, 2013

Auction Law and Ethics

Yaffe Meets Rabizadeh

by Steve Proffitt

When present meets past, as Yogi Berra said, "It's déjà vu all over again," or something like that. This happened when Yaffe met Rabizadeh-but with opposite results.

-A Costly Walk

May 11, 1984, was a good spring day in Richmond, Virginia. Across the street from where Ronald Yaffe lived, a foreclosure auction was underway at another house. Yaffe walked over to observe attorney Winfrey Wade taking bids on the property. Wade was the substitute trustee under a deed of trust that secured a note against the property and in favor of Heritage Savings and Loan Association. The homeowner was in default on the note, and Heritage was selling the collateral to satisfy the balance owed.

The bidding was spirited. Yaffe bid $110,000. No higher bid was offered, and Wade announced the sale of the property to him for that amount. Yaffe said he needed to go to his house to get a check for the required earnest-money deposit. Meanwhile, Wade prepared and signed a memorandum of sale.

When Yaffe returned, he told Wade he had been unaware the property was subject to a prior deed of trust, and he refused to pay the deposit. Instead, he asked Wade to reopen the auction. Wade refused.

Subsequently, Heritage notified Yaffe that the property would be resold and that he would be responsible for any deficiency in the selling price. The property was auctioned again on June 15, 1984, and sold for $80,000. Yaffe refused to pay the shortfall, and Heritage sued him and recovered a judgment for damages of $30,000.

Yaffe appealed the judgment to the Supreme Court of Virginia and advanced several defenses. One was founded on Virginia's statute of frauds, which requires a writing "by the party to be charged or his agent" to evidence a contract for the sale of real estate. All of the states have a statute of frauds or the like in some form. These laws were enacted to cover a variety of transactions and situations where contracts must be evidenced by a signed writing before they will be valid and enforceable. This is a safeguard against the fraud and perjury that could otherwise arise from one party making a false claim against another. Yaffe attempted to use Virginia's statute as a shield by alleging he had signed no contract relative to his purchase of the property.

The Supreme Court of Virginia noted the expanded duties that an auctioneer has in such a matter. In affirming the trial court's judgment, the court held: "[F]or a brief time, from the fall of the hammer until the closing of the sale, an auctioneer is the agent both of the buyer and of the seller. If he makes any written notation of the buyer's name and the amount of his bid for the property sold during this time, it is a sufficient memorandum to take the case out of the statute of frauds."

Yaffe lost his appeal and was ordered to pay the damages awarded, along with his associated costs.

-Name That Number

Lawyers are often accused of nitpicking. Here I go. Look carefully at the second sentence quoted above from the court's opinion and count to the ninth and tenth words. The court found that the written memorandum prepared by the auctioneer would satisfy the statute of frauds if it included the "buyer's name." This holding restated longstanding Virginia law that dates back to a decision by the Court of Appeals in 1835.

I first found Yaffe and its predecessor cases back in the 1990's while doing legal research. I was beginning to represent a number of auctioneers and was reading all of the cases involving auctions that I could find. I noted then the court's requirement that a "written notation" must be made by the auctioneer of the "buyer's name" in order to satisfy the statute of frauds. This rang an alarm, because I knew the great majority of auctioneers substituted bidder registration numbers in place of actual names when identifying buyers on clerking sheets and in sales memoranda. I began advising my clients of the potential danger of using bidder numbers when making sales in the absence of writings linking these numbers to real names.

Fast forward to 2012.

-A Costly Call

Albert Rabizadeh is a dealer in Imperial Russian artwork. In 2008 Rabizadeh bid by telephone in an auction conducted by William J. Jenack Estate Appraisers & Auctioneers, Inc., a high-end auctioneer of antiques and fine art in the state of New York. Rabizadeh was interested in what the auctioneer described as a "Russian silver/enamel covered box with gilt interior." He won the piece for a bid of $400,000. Jenack's clerk recorded Rabizadeh's bidder number and the amount of his high bid on the clerking sheet, which also listed an identifying number for the consignor. Neither the consignor nor the buyer was identified by name on the sheet.

The sale rolled backward and downhill when Rabizadeh refused to pay the purchase price for the box. Jenack sued him for breach of the sale contract. Ultimately, the auctioneer was awarded a judgment against Rabizadeh totaling $402,398. Rabizadeh appealed the ruling to the New York Appellate Division, the state's intermediate appellate court.

-Number Not Name, Again

On September 19, 2012, the court found for Rabizadeh and reversed the judgment. The decision was rooted in the court's finding that New York's statute of frauds had been violated when the consignor's name was omitted from any of the documents that related to the contract for sale for the box. The court found that other writings existed to identify Rabizadeh by name as the purchaser, so the use of a bidder number for him on the clerking sheet was not fatal, as was the case for the unidentified consignor.

The pertinent part of New York's statute of frauds (General Obligations section 5-701) reads: "Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking…

"(6.) [I]f the goods be sold at public auction, and the auctioneer at the time of the sale enters in a sale book a memorandum specifying the nature and price of the property sold, the terms of the sale, the name of the purchaser, and the name of the person on whose account the sale was made, such memorandum is equivalent in effect to a note of the contract or sale, subscribed by the party to be charged therewith…."

The statute requires that "the name of the purchaser, and the name of the person on whose account the sale was made…" must both be entered by the auctioneer "in a sale book (or) memorandum" for the sale. The Appellate Division relied on this requirement to rule that a written sale memorandum must "reveal the identity of, (and) not merely a number assigned to, the parties to the contract" in order to satisfy the statute of frauds. Consequently, it is ineffective to identify either the consignor or the buyer to an auction sale solely by a number and not an actual name, and this failure will allow a party to void the sale.

Rabizadeh used this flaw to walk away from a $400,000 sale and a $402,398 judgment. His gain was the consignor's and the auctioneer's loss. The reach of this decision is not limited in New York to just Jenack, its consignor, and Rabizadeh. This ruling applies equally to all within the jurisdiction who are involved in similar circumstances.

-Advice

I do not give legal advice through this column. Nevertheless, here is some general advice to consult with your attorney about for a legal opinion.

Consignors: Consignors want sales with buyers that are founded on valid and enforceable contracts. If you are about to consign valuable assets for auction in New York, you should first query the auctioneer about the auction house's knowledge of the Jenack decision and the procedures it is employing to ensure that consignors are spared a similar fate. There is no reason to subject yourself to risk and damage when diligence and prudence can help you avoid the jaws of a now-known danger. If you cannot reach a feeling of security for making a consignment, go in a different direction.

Buyers: If you are not planning on experiencing buyer's remorse and becoming desirous of either not performing or unwinding a sale contract, there is nothing for you to do about this decision. On the other hand, if you do wish to avoid an auction purchase, you should run to your attorney and request a legal opinion on your options in light of the Jenack decision.

Auctioneers: My advice—pay the lawyers.

Jenack was snared by a situation that it and many others probably did not foresee. That is too bad. Not all New York auctioneers, however, would be equally vulnerable. The roll of the New York State Bar includes many of the brightest and ablest lawyers. Some of these lawyers represent auctioneers and auction firms. These attorneys would have read section 5-701 and spotted the obvious risk posed in subparagraph (6). Those who did alerted their clients to the issue and gave preventive advice to enable them to steer around this ice field.

All auctioneers need the benefit of like advice. If you work for an auctioneer that has not recently done so, engage a good lawyer and request an audit and update on the laws and regulations that apply to auctions and sales. Ask the attorney to alert you to possible problems and suggest measures to avoid these threats. This process should be repeated periodically. The money spent to steer clear of risk will be less than what will have to be paid once trouble has struck.

-Suggestions

Here are five points to discuss with your attorney to conform your practices to the rule of Jenack.

First, understand what the statute of frauds requires with regard to sales generally and auction sales specifically.

Second, if you are going to use numbers to identify consignors, bidders, and/or buyers, consider adding a provision to your auction contract for the consignor to acknowledge approval of this practice. You do not want to be sued by a disappointed consignor if something goes amiss.

Third, consider adding a statement to your bidder registration form that the bidder will be assigned a number for bidding, but the registration form with the bidder's actual name will link to the number and serve to satisfy the requirements of all applicable law. Add that you are entitled to share the bidder's identity with the consignor.

Fourth, consider a provision for the terms of auction that explains the number identification system you use and state that other documents with the actual names of the consignors (unless not disclosed by specific instruction of a consignor) and bidders are linked to these numbers to satisfy the requirements of all applicable law.

Finally, consider a provision for the terms of auction that explains you, as auctioneer, are the agent for the consignor and authorized to conduct the auction and form contracts for sale on behalf of the consignor with the buyers. [Caveat: Understand that where the identity of a consignor remains undisclosed, you will be liable to a buyer the same as the consignor would be had the consignor's identity been disclosed to the buyer.] Make sure your name, as agent, appears on all clerking sheets and memoranda of sales.

Until the February issue of M.A.D., good bidding and Happy New Year, everyone!

Steve Proffitt is general counsel of J.P. King Auction Company, Inc., Gadsden, Alabama. He is an auctioneer and instructor at the Reppert School of Auctioneering in Auburn, Indiana, and at the Mendenhall School of Auctioneering in High Point, North Carolina. The information in this column does not represent legal advice or the formation of an attorney-client relationship. Readers should seek the advice of their own attorneys on all legal issues. Proffitt may be contacted by e-mail at <sproffitt@jpking.com>.