Friday, 26 September 2008

Thoroughbred Auction Legalese

I'm just back from Keeneland, where I spent too many days looking at way too many horses at the annual yearling sale. A couple of stories coming out of the sale sparked my lawyerly interest in those obscure terms called "Conditions of Sale" that govern the relationships among the auction houses, consignors, agents the people who actually buy and sell horses.

The first story was the embarrassment of Keeneland's selling a horse for $1.1 million to someone who apparently didn't have the money to pay for it. The successful, if underfunded, bidder, Karen Sanderson, a dentist from London, outlasted Sheikh Mohammed's agent John Ferguson to get the Medaglia d'Oro filly out of Amizette (Hip No. 1084) on the first Saturday of the marathon sale. Then, after the auctioneer’s hammer fell, Keeneland discovered – surprise – that Dr. Sanderson didn’t exactly have approved credit. 

Embarrassed Keeneland officials scrambled to clean up the mess.  First, after Ferguson and his $1 million underbid were nowhere to be found, they sold the filly privately to restaurateur Bobby Flay, reportedly for somewhere in the neighborhood of $800,000.  Then, in an unheard of display of generosity, or perhaps shame, they announced that Keeneland would pay the consignor, Trackside Farm, acting on behalf of the Breeder, Rob Whiteley’s Liberation Farm, the full $1.1 million hammer price (net, of course, of Keeneland’s normal commission).  The usual rule is that the seller doesn’t get paid until Keeneland gets paid. 

The second story, which relates back to an earlier breeding-stock sale this year, surfaced on the Bighorse2 discussion group, an email list frequented by owners and breeders, at about the same time.  Kimberley Quirk, a small-scale breeder, who’d consigned her filly to the sale, reported that she’d never received her share of the sales proceeds, because Keeneland, before paying her consignor, had subtracted debts that the consignor owed with respect to other horses, in which the breeder never had an interest.  And when the breeder complained to Keeneland, she was told that them’s the rules; just read the conditions of sale. And if you have a complaint, go sue the consignor, not us. 

Rob Whiteley, the breeder of the Medaglia d’Oro filly, is one of the most respected people in the Kentucky horse industry.  He’s a member of the Board of Directors of Fasig-Tipton, co-founder of the Consignors and Commercial Breeders Association (CBA), the breeder’s trade association, and the breeder of such stars as Roman Ruler, El Corredor, Strong Hope, Henny Hughes and Badge of Silver. (He’s also reportedly a seriously good guy. As founder of the Horse Farm Workers Educational Assistance Fund, he’s been instrumental in providing over 300 scholarships for children of bluegrass farm employees.) 

On the other hand, probably no one who works at Keeneland has even heard of Kimberley Quirk, the breeder who never received her sales proceeds. She’s so below the radar that she doesn’t even appear in a Google search, at least not one connected to horses.  So, if one were cynical, the answer to why one breeder was paid immediately and the other will in all likelihood never see her money is clear. Status still has its rewards. 

Now, in theory, relations among buyers, sellers, consignors and the auction houses are governed by their conditions of sale, the lengthy and generally unread legalese that you skip over to get to the sire and dam lists and the catalog pages. Sometimes, as in Rob Whiteley’s case, the auction house can decide to ignore its own rules.  But, unless you’re a pillar of the Kentucky establishment, you can’t count on that happening. So those conditions do matter, because when an auction house decides to enforce them, the courts will almost always uphold the conditions, even when they conflict with common sense. (Those who want to pursue the legal precedents should get in touch with me directly; there are some cases out there, and, uniformly, they hold for the auction companies.) 

Each auction company has its own conditions of sale, fashioned by its own lawyers, and there are some important differences among them.  (Ocala Breeders Sales Co., for example, has a “bone warranty” that neither Fasig-Tipton nor Keeneland has been willing to match.) But, by and large, the major auction companies have been moving toward more uniformity on such issues as steroid testing, the use of a repository for x-rays and other veterinary data, and, most recently, the introduction of a code of conduct for bloodstock agents and others representing buyers and sellers at the sales. So, since I’m most familiar with the Keeneland conditions, I’ll use those as a roadmap. You can see the full conditions of sale here.  Today’s blog entry will deal with the business side of the auction, and a follow-up piece will talk about veterinary information, warranties, and a buyer’s right to return a horse. 

The most fundamental rule of an auction is that, if you’re the winning bidder, you have to pay for the horse. Keeneland’s 7th Condition of Sale provides that: 

Purchaser shall make payment to Keeneland in all cases.  Unless Keeneland determines to extend credit to a purchaser, purchaser shall make payment for the full purchase price (which shall include any sales tax which may be due and owing as determined by Keeneland or as may be later determined by the Kentucky Revenue Cabinet upon audit) for each horse purchased as may be required by Keeneland and not later than thirty (30) minutes from the fall of the hammer, such payment to be in the form of U.S. currency or approved bank check, certified check, or traveler’s check.  

All the auction companies have similar provisions, although at Fasig-Tipton and Ocala, I’ve been able to buy horses by handing over a personal check, rather than cash or a bank check.  But some prospective bidders still arrive at sales with bundles, or even suitcases, of cash. If you do get approval to buy on credit, you have 15 days to pay following the end of the sale. As for who gets credit, the Dr. Sanderson incident certainly highlights the casual nature of the process.  For ordinary buyers like me, the credit process involves someone from Keeneland calling my bank and seeing if I have enough money to pay for what I propose to buy.  Of course, even if that’s true when they approve credit, it might not be true 15 days after the sale.  For high-end buyers, I’d like to think that there’s a more rigorous vetting, but who knows? If anything, the good-old-boy nature of the horse business in Kentucky suggests that some folks get their credit approved with no investigation at all. 

If a buyer doesn’t pay on time, Keeneland charges interest at 1.5% per month (cheaper than some credit cards!) and has the right to repossess the horse, resell it (in effect, a foreclosure sale) and then go after the defaulting purchaser for any deficiency.  Presumably, the wheels of justice are slowly grinding away at the $200,000-plus that Dr. Sanderson still owes for Bobby Flay’s Medaglia d’Oro filly. But until Keeneland collects the full amount from the buyer, it has no obligation to pay that to the consignor – though it did make full payment for the Medaglia d’Oro filly even though, legally, it didn’t have to. 

A lot of horse buyers like auctions because they think that they’ll get a fair market price, in open, competitive bidding.  Most of the time, in my observation, that’s true, but there have been enough examples of rigged bids, pushing the price higher than it otherwise would have been, to create some serious doubts. 

How does the price get pushed up? First, the seller or consignor has the right to set a reserve.  In addition, the seller or consignor can bid on the horse.  So, between the consignor’s active bidding, and the auctioneer’s pulling bids out of the ether to bring the price close to the reserve, there are a lot of imaginary bids flying around the auction ring.  It’s only after the reserve has been reached that one can have reasonable confidence that there are real live people out there bidding. 

In addition, it’s been an open secret that some bloodstock agents have been in cahoots with sellers to push up the price on horses, with the agent getting a fee from the ultimate buyer AND a kickback from the very happy seller.  Here’s how it works: the horse would sell for, say, $100,000 absent collusion. Instead, the buyer’s agent and someone acting on behalf of the consignor bid it up to $200,000, which the buyer pays.  Then the happy consignor gives the buyer’s agent a “gift” of, say, $40,000. Everyone’s happy except the buyer. 

The well-publicized cases of Satish Sanan and Jess Jackson, each of whom was victimized this way, have led to one of the more salutary changes in auction condition, the adoption of a Code of Conduct for agents at horse sales.  This code of conduct, which was drafted by an industry task for in response to the Jackson and Sanan cases, has now been incorporated in Keeneland’s conditions of sale and thus presumably provides some legal protection for a buyer whose agent is playing both sides. Basically, the Code prevents the agent from receiving anything of value from the other side, or engaging in bidding against the interests of his client, without full advance disclosure. 

There were still rumors of horses being bid up, to the detriment of the eventual purchaser, at Keeneland, but it seems to me that the new code of conduct is at least a useful first step.  If it keeps a few wealthy folks from being victimized and, therefore, losing their enthusiasm for racing, it’s probably a good thing. 

The Code also bars agents from having undisclosed ownership positions in horses that they might be buying for their clients. And a new provision in Keeneland’s conditions of sale takes a first step toward the more general issue of disclosing the real ownership of horses that go through the auction ring.  If you look at a sales catalog, most of the pages will say the horse is “consigned by XYZ,” rather than “property of ABC.”  A new addition to the conditions of sale this year establishes a voluntary ownership registry for accurate information on who owns a horse that’s to be sold.  That information, though, is available only to buyers and their agents, and anyone looking at the information is required to keep it confidential.  Only if there has been a change in ownership after the horse has arrived on the grounds at Keeneland is there required to be a public announcement, and even then, the identity of the new owner doesn’t have to be disclosed. If a consignor chooses to use the ownership registry and provides false information – surely no one would be that stupid? – then the purchaser can recover damages equal to half the price of the horse. 

I don’t know to what extent there was any information in the ownership registry at the Keeneland sale, and mandatory public disclosure would certainly seem the better option.  Why do people want to keep their ownership secret anyway? 

Next: what the auction companies do – and don’t – provide In the way of warranties for the horses they sell.