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Specific Disclosures for Auctions G THE B IN EN V C R H E S A N 8 D 8 8 BA E 1 R SINC Web address: http://www.nylj.com VOLUME 239—NO. 97 tuesday, may 20, 2008 OUTSIDE COUNSEL BY THOMAS D. KEARNS AND RENEE M. ZAYTSEV Specific Disclosures for Auctions ellers engaged in corporate and real York law that “[a]uction sales should be property auctions should take note conducted with full and fair opportunity for of a recent decision by the U.S. competition among bidders, and that “[a]ny SDistrict Court for the Southern conduct, artifice, agreement, or combination, District of New York in which a losing the purpose and effect of which is to stifle bidder’s fraud claims against the seller of a fair competition and chill the bidding, is commercial high-rise building in midtown contrary to public policy and will cause the Manhattan were allowed to proceed. sale to be set aside.”2 In Solow v. Conseco Inc.,1 defendant In his briefs, Mr. Solow also relies on Valeo Thomas D. Kearns Renee M. Zaytsev Conseco Inc. (Conseco), through its broker Engine Cooling Inc. v. Atkinson Co. of Cal,3 Eastdil Realty Company LLC (Eastdil), one of the few reported cases to explicitly, initiated an auction of the General Motors million less than Mr. Solow’s, and who was albeit briefly, treat the issue of the fairness Building pursuant to a Bankruptcy Court given an additional opportunity to match of auctions. There, the First Department order permitting it to sell the building “for Mr. Solow’s bid. allowed a potential buyer’s claims against a the best available price.” Potential purchasers Mr. Solow brought suit in the Southern seller of a subsidiary to proceed where the were required to execute a confidentiality District of New York, asserting claims for potential buyer alleged that the seller had agreement in which Conseco expressly breach of duty to hold a fair auction, fraud, induced it into spending nearly $300,000 reserved the right, in its sole discretion, to promissory estoppel, and unjust enrichment, investigating and evaluating the subsidiary, terminate discussions with any bidder at any and seeking a declaratory judgment declaring only to unfairly use the potential buyer’s time. On behalf of Conseco, Eastdil also that the sale to Mr. Macklowe was void as offer as a “foil” to get a higher bid. Citing no sent out invitations to potential bidders contrary to public policy. Although Mr. precedent, the court concluded that “once specifying detailed procedures and deadlines Solow’s claims for promissory estoppel and the parties agreed to a private auction to for the submission of first and second round unjust enrichment, as well as his request select potential purchasers who submitted bids. In addition, the second-round bid letter for a declaratory judgment, were denied, written bids, the auction had to be conducted contained a disclaimer that the building’s Judge Barbara S. Jones refused to dismiss fairly pursuant to its terms.”4 Thus, as Mr. owner “reserves the right, in its sole and the remaining claims. Solow argues, Valeo may indeed suggest that absolute discretion, to accept or reject any While the case was not decided on the once a seller agrees to a private auction, that offer for any reason.” merits, that it was allowed to proceed at all auction must be conducted fairly pursuant Sheldon H. Solow was selected for both should raise concerns for sellers who have to its terms. first- and second-round bidding. After engaged in or intend to engage in similar executing the confidentiality agreement, auctions. In particular, the court’s decision Specific Disclaimers Mr. Solow submitted timely first and final emphasizes that a contract provision giving The more interesting point to make bids, eventually offering a bid of $1.4 billion, the seller absolute discretion to accept or concerning the court’s decision in Solow relates which Mr. Solow alleged was the highest bid. reject bids may not adequately protect sellers to the role of specific disclaimers. In its motion However, the building was ultimately sold to who deviate from the rules of the auction. to dismiss the complaint, defendant Conseco Harry Macklowe, who allegedly submitted argues that where an owner has expressly his bid after the specified deadline and in Duty to Hold a Fair Auction reserved its right to conduct the sale process contravention of a number of other auction in any manner or “to accept or reject any rules, whose previous “final” bid was $35 A noteworthy aspect of the Southern District’s decision in Solow is that it is one of offer for any reason,” that reservation of rights only a handful of New York cases to consider precludes the existence of any duty to conduct the fairness of property or business auctions. an auction, fair or otherwise. Thomas D. Kearns is a partner and Because case law concerning a seller’s duty It is a well-settled principle of contract Renee M. Zaytsev is an associate at to conduct a fair auction is surprisingly law that while “exculpatory provisions Olshan Grundman Frome Rosenzweig and silent, in making his case Mr. Solow relies drawn in broad and sweeping language [are] Wolosky, practicing in real estate and corporate in large part on public policy considerations, not given effect,” parties “may contract transactions, and litigation, respectively. citing to the general proposition in New away their liability…on the condition that NEW YorK Law JOURNAL tuesday, may 20, 2008 their intention be expressed clearly and in bidding documents. As noted above, in Valeo a • “Seller may select the winning bid unequivocal terms.”5 bidder for the purchase of a subsidiary company in its discretion and may consider the In the auction context, the role of brought claims for breach of contract, breach reputation, including history of litigation, specific disclaimers was addressed by the of the duty to hold a fair auction, and unjust of the bidder, and the seller’s judgment First Department in Banner Industries Inc. enrichment against the seller after the seller as to the ability of the bidder to close v. Schwartz,6 where the court upheld the rescinded its acceptance of the bidder’s offer. the sale.” dismissal of a complaint by an unsuccessful There, as in Solow, the bidding documents • “Seller reserves its rights to sell to a bidder in an auction for the sale of two expressly reserved the seller’s right to accept favored bidder or a bidder with which it corporate divisions. The bidder claimed that or reject any offer in its absolute discretion. has other existing or potential business or he was induced to participate in the auction Nevertheless, the court held that because the personal relationship, whether or not such by the seller’s fraudulent misrepresentations bidding documents did not expressly reserve bidder has submitted the highest bid.” regarding the fairness of the auction, when the seller’s right to rescind an acceptance, • “After bids are submitted, Seller may in fact the seller intended to sell, and did the bidder’s breach of contract claim permit a preferred buyer or buyers to make in fact sell, the divisions to a preferred third could proceed. matching or higher bids without permitting party. The court held that the complaint was all bidders to do so. Accordingly, a bidder properly dismissed “on the ground that the may become a ‘stalking horse’ or ‘foil’13 xxxxxxxxxxxxxx disclaimers were sufficiently specific to bar any for Seller to give Seller leverage to raise 7 claim of reliance on oral misrepresentations.” The court’s decision a favored bidder’s price.” In other contexts, it is equally clear that a emphasizes that a contract • “No obligation to sell shall be binding on specific disclaimer may preclude liability. For provision giving the seller Seller unless and until a written contract example, in Danann Realty Corp. v. Harris,8 absolute discretion to accept of sale is signed and delivered by Seller. the leading case on specific disclaimers, the Seller may rescind any oral acceptance Court of Appeals dismissed plaintiff’s claim or reject bids may not of a winning bid prior to the execution that he had been fraudulently induced to enter adequately protect sellers who and delivery of such contract of sale for into a contract because of defendant’s false deviate from the rules of any reason including the receipt of a representations, holding that because plaintiff subsequent higher bid, whether or not such had signed a specific disclaimer stipulating that the auction. subsequent bid was made within the time xxxxxxxxxxxxxx the seller had not made any representations not frames set forth in the bidding documents.” embodied in the contract, his allegations were 9 destroyed. The court observed that while a Practical Considerations ••••••••••••••••••••••••••••• general merger clause would not have warranted An important lesson to take away 1. 06-Civ-5988 (S.D.N.Y. Jan. 11, 2008). dismissal, the presence of a specific disclaimer 2. Plaintiff’s Mem. of Law in Opp. to Defendant’s from these cases is that where the auction was “inconsistent with the contention that Motion to Dismiss the Complaint at 7, citing 7 New York procedures contain a specific disclaimer Jurisprudence 2d Auctions and Auctioneers §23 (1997). plaintiff relied upon the misrepresentation, 3. 240 AD2d 176 (1st Dept. 1997). addressing the very matter that is the subject and was led thereby to make the contract.”10 4. Id. of an unsuccessful bidder’s grievance, the 5. Gross v. Sweet, 49 NY2d 102, 110 (1979) (internal Relying on Dannan, numerous courts have citation omitted). bidder cannot prevail. These basic tenets similarly declined to impose liability on a party 6.
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