By Thomas R. Miller, Former Legal Counsel, Director, and Special Deputy Attorney General
A lot of homes are changing hands on the courthouse steps. Last year alone, more than 800,000 properties went through foreclosure and some analysts predict the number may soar to one million in 2012.
With so many foreclosure properties available, bargain hunters and investors are sometimes in fierce competition with each other. This is good because the purpose of a foreclosure sale is to maximize the sales price of a property to repay the lender and, if there is money left over, restore as much equity as possible to the defaulting homeowner.
High foreclosure prices are not, however, what most investors are looking for. Some bidders have resorted to illegal agreements among themselves to keep foreclosure property prices low. These can range from elaborate “give or take” arrangements, where one bidder pays another for the right to bid free from the other’s competing bid, to arrangements in which bidders agree to take turns bidding in successive sales – “I’ll-buy-this-one-and-you-buy-the-next-one” deals. Whether or not money changes hands and whether the agreement is formal or informal, all such arrangements are felonies under the federal Sherman Anti-Trust Act, 15 U.S.C.A. §1.
The Sherman Act declares every “contract, combination…, or conspiracy in restraint of trade or commerce among the several states….” to be illegal. You might think that a sale which occurs on the steps of a county courthouse was so local a matter that it could not trigger the statute under the “among the several states” language, but that issue was settled long ago by the courts. Not only do foreclosure sales often involve the rights of a lender located in a state other than the state where the property is located, the sale is part of the machinery of a system of interstate financing and debt servicing.
Penalties under the law are severe. Violators may be fined up to $1,000,000 and sentenced up to ten years in prison. If the violator is a corporation, the maximum fine is $100,000,000.
In one case that reached the United States Court of Appeals for the Fourth Circuit (the circuit that includes North Carolina), a handful of real estate speculators participated in a conspiracy to hold down the price of properties sold at foreclosure auctions by agreeing not to bid against each other. The court characterized the activity as “bid-rigging.” The speculators agreed among themselves that only one of the group would bid on and purchase a foreclosure property. Afterwards, the group would meet and hold another entirely private auction amongst themselves. The high bidder would be awarded the property and the profit from the private sale was shared out among all the members of the group. The conspirators were careful to keep their arrangements informal so as to leave no paper trail. In all, the group members purchased about ten properties.
In spite of their precautions, the conspiracy was discovered and members of the group were charged and convicted of Sherman Act violations. United States v. Romer, 148 F.3d 359 (4th Cir. 1998).
Attorneys from the Antitrust Division of the United States Attorney’s Office in Atlanta have advised the Real Estate Commission that incidents of bid-rigging in foreclosure sales are on the rise across the country. With the increase in bid-rigging has come a new emphasis on enforcement and prosecution. In just the last few months, federal authorities have pursued dozens of cases from coast to coast. A probe in northern California has netted at least 20 investors in bid-rigging schemes. Similar investigations have resulted in guilty pleas and convictions in Alabama, New Jersey, and even North Carolina.
The FBI and U.S. Attorney’s Office aren’t the only agencies on the lookout for foreclosure bid-rigging conspiracies. The Consumer Protection Division of the North Carolina Attorney General’s Office has also broken up a couple of schemes, requiring the bidders to pay more than $800,000 in civil damages.
North Carolina real estate brokers should take care to steer clear of any sort of anti-competitive arrangements between bidders in foreclosure sales. Not only do such arrangements prevent owners and lenders from getting a fair price, they are criminal felonies. With penalties approaching $1,000,000 in fines and up to ten years in prison, a broker who participates in or facilitates a conspiracy to restrain competitive bidding in a foreclosure sale will have much more to worry about than the revocation of his or her broker license.
This article came from the May 2012-Vol43-1 edition of the bulletin.