What if the Auction House goes belly-up?

[computerworks]

Cal Metal sent this press release he received in for posting...

The message is how 'at risk' an auction sale can be if the funds are not escrowed...

Classic car auctioneer crashes with large debt
By Andrew English (Filed: 22/01/2004)

A subsidiary of one of London's oldest auction houses, Coys, which specialises in the sale of classic cars, has ceased trading with debts of 5 million pounds.

"We have applied for a CVA [Creditors' Voluntary Agreement] for one of our companies," said Coys' director Douglas Jamieson. "We are negotiating with our main financiers and with creditors, and have appointed a supervisor."

Ashok Bhardwaj of Middlesex, the company's nominee supervisor, said: "Coys of Kensington (Sales) Limited is insolvent and has ceased to trade. Our proposal went out last Friday for a creditors meeting on February 10. There are about 30 unsecured creditors, most of them private individuals and most of them in the UK."

Coys of Kensington last held an auction of more than 700 lots in the Royal Horticultural Halls on December 4. The majority of the 33 creditors are sellers whose cars were successfully sold at that auction but who have yet to receive a settlement, well past the 35 days stated in Coys' conditions of business for that auction. These include Peter de Savary and Lord Langford.

One creditor, who has not received a settlement cheque for his pre-war classic that sold on Dec 4, said: "I've lost the car, I've lost the money, everything. That was my pension. Why in hell's name was buyers' money not kept in an escrow account?"

Several creditors have questioned the further involvement of the Coys name in the Autosport auction sale in Solihull on January 10.

The company that held this sale, however, is Coys Limited, which was incorporated in January 2003 and is owned by people who are connected with Coys of Kensington.

Coys Limited recently bought out the tangible assets of that company and has continued to trade as an auctioneer of classic cars.

Ashok Bhardwaj confirmed the asset valuation was "more than a fair amount of their value". In explanation for the sale, the company's proposal to its creditors sent out on January 16 states: "The company sustained heavy losses against budgeted projected incomes.

"In order to ensure continuity of trading in the auction business, we decided that it was in the best interest of the creditors for all new business to be continued through Coys Limited to which would be sold all the assets of the company including the goodwill and which in future would continue the business formerly conducted by the company."

The creditors' proposal suggests the setting up of a scheme funded in part by Coys Limited, which will settle the creditors over three years with an estimated 23.98 pence in the pound. If creditors do not accept the proposal, the company will be forced into liquidation.

The proposal claims the debts have arisen because of a failed expansion plan in Europe and the US and a resistance to trade in the UK market.

It uses the name Coys of Kensington (Sales) Limited throughout but the company's name has been changed with effect from last Tuesday to Motoring Marketing Ltd.

While the Coys name was originally established in 1919, the classic car auction side of the business has swapped titles frequently in recent years.

Known since 1997 as Coys of Kensington (Sales) Limited, it was changed in December 2002 into Motoring Marketing Limited and again in January 2003 to Coys of Kensington Sales Limited, before the change two days ago back to Motoring Marketing Limited.

"Private creditors are just a handful out of 700 lots, that have been tied up because of our repayment schedule," said Jamieson. '
'We will be settling. We are giving our best endeavours to satisfy this to the best advantage of everyone . . . but it would be extremely damaging to the Coys name if this company failed."

"This isn't just bad for Coys," said one auctioneer competitor, "this is bad for all of us."

[Excaliber]

Shocking! How much is 24 pence to a pound anyway?

Ernie

[Doug I]

that's the same as 24 cents on the dollar.

[Jamo]

In the good ol USA, when we sell agricultural produce through consignment brokers, they automatically have to put the money in trust...and the brokers are obligated as fidiciaries to the seller. If they go bankrupt, the trust monies are NOT considered assets of the bankrupt, and can still be distributed to the sellers. Of course, if there is co-mingling, you're screwed, and that's when we go lock down their accounts. This is under a law we call PACA. Maybe we have a BK attorney who can tell us about other types of items and how they are treated here.

Seems to me that if you are going to consign a car (or antiques, etc.) to a broker, you want to make sure the money goes into a trust account for this specific reason.

[Cal Metal]

Jamo:

There was a company back in the 80s that was a big auction house in the U.S. that went down like the one reported here. The name Southard rings a bell, but I am not sure about that. In any event, the sellers were not paid and the sales proceeds ended up in the bankruptcy pool.

[Jamo]

Cal

Wow! We have that special law in ag, the Perishable Agricultural Commodities Act, because ag produce is indeed "perishable"...the res is no longer around when the dispute arises.

Hopefully, your post will make folks think about what the contractual arrangements are when they consign...whether to a big auction house or the speciality car lot down the street.

[Chaplin]

The rule Jamo described generally applies to other goods as well. The whole trick is making sure the funds are not treated as assets of the bankrupt's estate. This is done by demonstrating the the bankrupt did not have legal or equitable title to the funds in question and can be accomplished in a number of ways. Obviously, an express trust or escrow agreement is the best way to do this, but if you don't have one of these, you're not totally screwed, you just have an uphill battle. For instance, a creditor might be able to establish the existence of an equitable or constructive trust. Another argument a creditor could make in that unfortunate circumstance is that the auction house is acting as a "mere conduit" between buyer and seller, and thus, the bankrupt never had a legal right to such funds, and therefore such funds should not be considered assets of the bankrupt's estate. Of course, none of this is any good if the bankrupt has already spent the creditor's money and there is no $$ left. In that circumstance, the creditor may in fact be screwed . To avoid these problems, best bet is to have an express trust or escrow agreement. That's my .02

[snakeeyes]

If you listen closely you can hear all the "puckering" going on with guys who just sold cars at the Barrett-Jackson auction. I would hope that B-J uses some sort of trust arrangement as SOP, but if nothing else maybe the Coys debacle will help make it so in the future.

[Excaliber]

So this guy at the auction lost his wallet with $10,000 dollars in it. It was announced that he would pay a reward of $3000 to anyone who found it.

.......from the back of the room someone said, "$3500".

Ernie

[Cal Metal]

Jamo, Snakeeyes and Chaplin:

Since you three are brothers of the Bar, are there any state laws that make it a criminal offense to commingle the funds of a purchaser (the Coy's situation) and use them as assets in settling creditors claims in a bankruptcy. This seems, on the surface, as a willing intent by those parties to defraud, IMHO.

I guess my question is, if the auction house takes the funds and spends the money to settle claims, are there criminal sanctions that can be levied against those individuals working as prinicpals for the auction house?

[JWheaton]

Baseball bats wouldn't work in civilized Britain, would they?


As I read through the article, intuitively I thought the same thing that Cal is asking. Seems as if there is possibly criminal intent. What are the Coys boys living and driving these days?

[KobraKarl]

Cal ,

I was just thinking the same thing. I was a creditor once in a somewhat similar debacle. It was discovered the bussiness was still collecting investment funds up until the day they sent out letters describing their intent to self file bankruptsy.

A "class action" was filed aginst the principlals of the company .

Still waiting for that "day in court"

KK

[Jamo]

Cal

I'm not a criminal attorney, nor did I stay at a Holiday Inn last nite, but I would suppose a DA might look into a fraud count or two if the facts were especially clear. However, criminal investigations are not know for their quickness.

Again, we are more likely to go into court immediately to shut down accounts, call in a reciever or do whatever it takes to prevent the dissipation of whatever funds there are. However, our ability to do so is based not only on the specialized laws we have in ag, but the contractual rights we built in...in other words, you can't ignore doing some homework ahead of time in order to be this aggressive.

When I say shut down accounts...I mean just that. We literally slap a court order on the bank to shut down the accounts and hold the funds safe pending resolution. About the only thing that might get paid out of the funds during the pendency would be wages already earned, and payroll taxes.

[ninoxxxx]

If you truely want all the facts, visit www.coysoflondon.info this website has been put up by the creditors. No bull****, just information

[computerworks]

Bad URL...link does not function.

Check it and re-post if incorrect.

[acedes_magna]

The site was advertised in the Daily Telegraph on Saturday and worked fine on Monday but had gone offline on Tuesday. The gist of it was that some UK auction houses (H&H, Barons - check out the letter from NatWest on the H&H website) ring-fence client funds so that if they go bust clients are not at risk. The Coys subsidiary that went bust did not do this, but is itself ring fenced from the other companies trading as 'Coys' so they can carry on as if nothing had happened. If this is correct no doubt it will come out in court. If it is not correct it may be a reason why the website is now offline!

[acedes_magna]

A quick lunchtime net search discovered the following:

http://www.ferrariownersclub.co.uk/h...ary/coys_2.asp

Coys have an auction listed on their website for 4 March 2004, but nothing about any solvency problems. Curious or what?

[Wayne Maybury]

I wonder how many cars will go on the block on March 4th?

I know very little about the law, but something doesn't add up here. Can you imagine being the poor fellow that puts his car up for sale, sells it, and then doesn't get paid? In the mean time the auction house continues to do business under another name. I have heard of "buyer beware" in the past but now it is "seller beware".

Wayne

[acedes_magna]

Latest from the Daily Telegraph on Saturday....

http://www.telegraph.co.uk/money/mai...%2Fcncar28.xml