Bankr. E.D.N.C.: In re Faison: Collusion between Bidders at Auction

Prior to filing bankruptcy,  Mr.  Faison had received an offer to purchase his real property from Marlowe & Moye for $1.1 million dollars, conditioned on improved road access being allowed by the Town of Knightdale.  When that was not granted, the sale fell through and Mr.  Faison eventually filed Ch. 11.  His confirmed plan provided for the sale of the property with a realtor,  but when that too was unavailing, the bankruptcy court approved an auction.

At auction, Marlowe & Moye ultimately had the highest bid at $577,000, with Timothy Griffin being the second highest at $571,000.

Mr.  Faison alleged that during a “quiet period” between bids at the auction, Mr.  Marlowe and Mr.  Griffin left the auction room together and were subsequently seen by the auctioneers exchanging documents, possibly including a check, implying that the parties colluded in their bidding.

While the bankruptcy court found the allegations alarming, neither Mr.  Faison nor the Bankruptcy Administrator had subpoenaed either Marlowe, Moye or Griffin to testify and without more substantiation could not find collusion.  Further, the bankruptcy court held that the manner in which the auction was conducted contributed to the possibility of collusion, reduced the auctioneer’s commission for 6% to 3%, and instructed that future auctions must:

1. Move quickly to be a series of competing bids, with “quiet periods” being particularly disfavored.

2. Bidders should not be allowed to depart the auction area.

3. Telephone and internet auctions should be used sparingly.

4. Auctions should always be recorded.

While neither Mr.  Faison nor the Bankruptcy Administrator called Marlowe, Moye or Griffin to testify, that should not stop the U.S. Attorney from having the F.B.I. question them regarding their  actions at the auction.  18 U.S.C.  § 157(3) provides that:

A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so—makes a false or fraudulent representation, claim, or promise... in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title, shall be fined under this title, imprisoned not more than 5 years, or both.

While some believe that collusion is not a crime, the behavior of Marlowe and Griffin very well could subject them to criminal prosecution.