Opinion ID: 891708
Heading Depth: 2
Heading Rank: 3

Heading: Public Auction to the Highest and Best Bidder

Text: {60} The State Land Office has promulgated regulations that, the Land Commissioner argues, adequately provide for a public auction. We do not dispute whether the four challenged exchanges were conducted under these regulations. Rather, in this Section, we examine the second purely legal question regarding the Enabling Act's limitations on the Land Commissioner's discretion that we put forth above in our mandamus discussion: As a matter of law, do the challenged exchanges comply with the required elements for a valid sale of land, including the requirement of a public auction to the highest and best bidder?
{61} An auction is [a] public sale of property to the highest bidder. Black's Law Dictionary 149 (9th ed. 2009). In 1876, the Ohio Supreme Court described the history of the auction: This practice is said to have originated with the Romans, who gave it the descriptive name of auction, an increase, because the offered property was sold to him who would offer the most for it. This method of sale was established by the Romans for the disposal of military spoils, and was conducted sub hasta that is, under the spear; on such occasions the spear was stuck in the ground. This practice has passed away as to the spear, but the method still continues. Crandall v. State, 28 Ohio St. 479, 481 (1876). The court described some modern variations, including the Dutch method and sale by candle, but concluded that all variations have common elements: At auctions the bidders fix by competition the price at which the offered property is sold. This competition is an element of each offer and each bid. Into each of the methods named, competition is a necessary element in the offer, the bid and the act of selling the offered property. Id. Thus, competition is the means by which an auction achieves the primary goal, obtaining the best return for the seller. Around the same time, the U.S. Supreme Court described its understanding of a public auction: When the law requires a sale of property, real or personal, to be made at public auction, after due notice, it is for the purpose of inviting competition among bidders that the highest price may be obtained for what is sold. Porter v. Graves, 104 U.S. 171, 174, 26 L.Ed. 691 (1881). {62} Contemporaneously with the passage of New Mexico's Enabling Act, several state courts discussed the required elements for an auction. The Montana Supreme Court interpreted the requirement that sales of state lands shall be at public auction, to mean a sale to the highest and best bidder with absolute freedom for competitive bidding. State ex rel. Danaher v. Miller, 52 Mont. 562, 160 P. 513, 515 (1916) (internal quotation marks and citation omitted). The court further warned that [a]ny agreement . . . to stifle competition or chill the bidding is a fraud upon the principle upon which the sale is founded. Id. The Supreme Court of the Territory of Hawaii explained that competition. . . is that which distinguishes a sale at auction from other sales where the attempt to sell and to agree on a price is made with but one prospective purchaser at a time. Territory v. Toyota, 19 Haw. 651, 653 (1909). The Idaho Supreme Court adopted Hawaii's perspective: In an auction, competition is a necessary element. . . . Hammond v. Alexander, 31 Idaho 791, 177 P. 400, 401 (1918) (citing Toyota, 19 Haw. at 653). {63} The foregoing opinions, issued around the same time that New Mexico became a state, are some indication of what the framers of the Enabling Act likely meant when they said: Said lands shall not be sold or leased, in whole or in part, except to the highest and best bidder at a public auction. Over time, courts have continued to focus on the element of competition as essential to a public auction. See In re Peoples Cab Co., 89 F.Supp. 577, 580 (W.D.Pa.1950) ([T]he very purpose of an auction . . . is to fetch together all those who may be interested to buy and set them against each other with whatever stimulus that may provide, as opposed to other kinds of sale.); B.H. Stief Jewelry Co. v. Walker, 36 Tenn.App. 427, 256 S.W.2d 392, 397 (1952) (Competitive bidding, up or down, is an essential element of an auction sale. A sale at fixed or flat prices, no higher nor lower, is not an auction sale regardless of the manner in which the merchandise is offered for sale at the fixed price.); State v. Pub. Util. Comm'n of Tex., 246 S.W.3d 324, 343-44 (Tex.App.2008) (explaining the legislature's intent in requiring an auction was to encourage competition); Kolbo v. Blair, 379 S.W.2d 125, 129 (Tex. App.1964) ([A] sale at public auction is a sale to the highest bidderits object, a fair priceits means, competitionits results, a sale, presumed as a matter of law to be fairly conducted.); Mfrs. Hanover Trust Co. v. Koubek, 240 Va. 276, 396 S.E.2d 669, 671-72 (1990) (explaining that a public sale and auction require a competitive environment and that the early policies behind the requirement, protecting financial return, still apply today). We recognize that competition has been an essential element of a public auction since before the time New Mexico adopted the Enabling Act, that it was essential when New Mexico adopted the Enabling Act, and that it is still essential today. {64} Courts have also emphasized that an auction's purpose is distinct from other types of sales. The Hawaii Territorial Court, for example, instructed that [t]he main purpose of auction sales is to obtain the best financial returns for the owners of the property sold. Toyota, 19 Haw. at 652. The public auction, thus, is a mechanism to make sales using an objective basis, the highest financial gain, to discern between offers. This characteristic of an auction made it an attractive tool when states sought to safeguard public land sales against favoritism. The Minnesota Supreme Court explained that the public auction requirement for sales of its state school lands was to foster and conserve the school fund, to prevent school lands from being sold at an inadequate price, and to secure competition therefor, and to guard against favoritism in the disposition thereof. State v. Evans, 99 Minn. 220, 108 N.W. 958, 959 (1906) {65} The U.S. Supreme Court stated that the public auction and notice requirements in the Arizona and New Mexico Enabling Act were . . . intended to guarantee, by preventing particular abuses through the prohibition of specific practices, that the trust received appropriate compensation for trust lands. Lassen, 385 U.S. at 464, 87 S.Ct. 584 (considering Arizona's identical Enabling Act); see also Fain, 790 P.2d at 248 (The purpose of [the auction] provision is to ensure that the trust receives the most benefit possible from sale or other use of the trust lands. Without sale at public auction, the trust is not guaranteed the additional profit that might result from competitive bidding. (internal citation omitted)). As previously explained, the particular abuses that Congress sought to prevent were the repeated violations of a similar grant made to New Mexico in 1898 . . . [that] allegedly consisted of private sales at unreasonably low prices, and the [Senate Committee on the Territories] evidently hoped to prevent such depredations here by requiring public notice and sale. Lassen, 385 U.S. at 464, 87 S.Ct. 584 (footnote omitted). {66} Finally, courts recognize that for a valid auction to occur it must be fair and open. See, e.g., Springer v. Kleinsorge, 83 Mo. 152, 163 (1884) (The offer of property at public auction is itself a proclamation by the seller that the highest bidder, in a fair and open competition, is to obtain the property.). Open competition furthers the purpose of using an auction as a sale mechanism because it dissuades favoritism and encourages objectivity. This raises the question as to what open means. Case law and our own Enabling Act's history demonstrate that an auction remains open even if general parameters are established for the purpose of ensuring that the highest bid also results in the highest financial delivery. In other words, limiting bids to those parties whose credit is secured or parties who have other indicia of reliability in order to guarantee the best financial returns, is acceptable. Some measure of discretion is vested in auctioneers as to the precise methods to be pursued in attaining [the best financial returns], for example, bids need not be accepted from minors or from persons irresponsible either financially or mentally or from drunken persons or from one offering in bad faith or even from one making but a slight raise in his bid over the bid last announced. Toyota, 19 Haw. at 653. {67} Section 10 of the Enabling Act incorporates the idea that an open auction can be limited to pursue the best financial return as well. S.Rep. No. 61-454, at 18. Significantly, a prior version Section 10 of the New Mexico Enabling Act did not provide for an auction to the highest and best bidder, but rather only the highest bidder, S.Rep. No. 61-454, at 18. That earlier version also prohibited land sales on credit, unless accompanied by security, id., the credit sales provision was later removed, and the term and best was added, requiring that the winning bidder be the highest and best, Enabling Act § 10. The initially proposed limitation on credit sales is precisely the type of limitation contemplated by the requirement that the highest bid also be the best bid. Requiring sale to the highest and best bidder therefore provides for objective selection of the winning bid at a public auction, while ensuring that the sale remain open to competitive bidding. {68} Thus, the Enabling Act's mandate that sales be only to the highest and best bidder at a public auction requires more than just a minimum floor price. It means that the trust beneficiaries have, at least, an opportunity by way of a sale driven by open competition among bidders for the best price. The inclusion of the term best does not, however, provide discretion in selecting the winning bidder. Just as other courts have done before us, we recognize that the purpose of an auction is to obtain the highest financial return. Further, we recognize that Congress selected a public auction as the mechanism for selling public lands in New Mexico to allow an objective means for buyer selection, thus eliminating the risk of favoritism that was pervasive in public land sales, particularly in the New Mexico Territory before the Enabling Act.
{69} Before today our Court had not discussed the elements required for a valid public auction. In State ex rel. Otto v. Field , however, we wrote that the Enabling Act requires the same basis for all bids and bidders and that a negotiated contract, established after an auction, would be objectionable because it would defeat that requirement. 31 N.M. 120, 179, 241 P. 1027, 1050 (1925). Other jurisdictions have found that negotiations and bargaining prior to an auction impede competition and are inconsistent with the meaning of a true auction. As we shall see, the presence of extended negotiations with one bidder long before notice to the public of an auction presents a particular problem for the Land Commissioner in this case. {70} The U.S. Supreme Court long ago recognized the contradiction between private negotiation and public auction. See Porter v. Graves, 104 U.S. 171, 26 L.Ed. 691 (1881). In Porter, a seller negotiated for the sale of property left intestate, for which state law required sale of the intestate property at a public auction. Id. at 172-73. In order to comply with that law, the property was advertised and then announced at the sale by the auctioneer as sold to perfect a contract for sale to the buyer's company. Id. at 173. The Court found that, if the sale were challenged by parties interested in having the property bring its full value, the sale would surely have been set aside because it was not a valid auction. Id. at 174. Continuing on, in language particularly appropriate to the four challenged exchanges in this case, the Court stated: To make a private bargain beforehand between the party who wishes to buy and the person authorized to sell, as to the price and other incidents of the contract, and then invoke the forms of a public sale with competition to give effect to the private bargain is a course of procedure well calculated to defeat the purpose for which the public sale is required. Id. at 174. {71} Similarly, state courts have found negotiations and bargaining between bidders prior to an auction to be antithetical to a valid auction. In Hammond, the Idaho Supreme Court found that a conveyance of state trust land was not sold by auction as required by the state's constitution, when negotiations occurred between the bidding parties. 177 P. at 400-01. Before bidding started, auction participants drew lots among themselves for the parcels of land available and then took turns bidding, one party per parcel, as determined by the lots drawn. Id. Although the court found that not all agreements among prospective bidders would defeat an auction, if the purpose in so agreeing is to stifle competition, and if it causes the property to be awarded to a bidder, or bidders, for less than would have otherwise been offered, the vendor may avoid the sale. Id. at 401. Because the court found the sale was void, it rejected the writ of mandamus requesting enforcement of the sale. Id. {72} We recognize that bargaining and negotiation between buyers and sellers or between buyers prior to a sale negates the essence of what it means to have a public auction free and open to competition. Rather than seeking the highest financial gain through objective means, negotiation and bargaining design a satisfactory exchange for two parties to the exclusion of the public. See Black's Law Dictionary, supra, at 169 (defining a bargain as [a]n agreement between parties for the exchange of promises or performances), 1136 (defining a negotiation as [a] consensual bargaining process in which the parties attempt to reach agreement on a disputed or potentially disputed matter). Negotiation usu[ally] involves complete autonomy for the parties involved, without the intervention of third parties. Black's Law Dictionary, supra, at 1136.
{73} For the following reasons, the four challenged land exchanges do not comply with the Enabling Act's requirement for a public auction. The undisputed facts on record show that each land exchange process involved extensive private negotiations with specific parties. Those private parties had significant advantages over any possible competitors. The Land Commissioner target[ed] the exchange lands as part of an overall plan, whereby the purpose of the exchanges was not to secure the highest financial gain to the trust through selection of the highest and best bid, but rather to accomplish other land management goals. Finally, the means for selecting the winning bid were not objective. Thus, the exchanges embody the elements indicative of favoritism that the drafters of the Enabling Act sought to avoid by requiring public notice and public auction. {74} In describing the Stanley Ranch exchange, the Land Commissioner concedes that the exchange would not have been possible or desirable to the state: In the absence of this kind of discussion and a bidding process that allowed for a single transaction in which certain trust lands would be conveyed for other lands which would justify the disposition, it is unlikely that any kind of transaction could be completed that would provide sufficient benefit to the trust. In other words, the negotiations that took place for the Stanley Exchange were the only way to accomplish the goals the State Land Office had set for that land exchange. Because no other parties had the opportunity to participate in such discussions that made any kind of transaction . . . sufficient[ly] benefi[cial] to the trust, there was no competition, no safeguards of objectivity, no openness, and thus no public auction. {75} The Land Commissioner insists there was no taint of favoritism. But the requirement of a public auction means that the people should not have to take anyone's word attesting to his or her objectivity. To the contrary, the Enabling Act chose a mechanism to protect against favoritism and stipulated a public auction to the highest and best bidder through open competition. The people did not select, and in fact rejected, private negotiation as an approved mechanism for the sale of public land.
{76} During oral argument the Attorney General compared the challenged land exchanges to the sale of a tailor-made suit; he questioned whether any true competition could take place when an auctioned product was custom-made for only one particular customer. The metaphor is a good one, if incomplete. More precisely, each transaction is better thought of as an exchange of tailor-made suits, in which the auctioned suit is custom-made for the buyer, suits are the preferred currency, and the winning suit is custom-made for the seller. No one else has such a suit, or as a practical matter, can find one. Competition is surely in jeopardy when the bidding party also holds the one and only suit custom-made for the seller. {77} The uncontested facts demonstrate, more clearly than an exchange of custom-made suits, that the land exchange procedure applied in each of the four challenged exchanges lacked competition. First, each applicant (a neighboring landowner) contacted the State Land Office to specify land desired in exchange for specific land held by the State Land Office. This first step in the exchange procedure allowed the applicant the opportunity to craft the land available for sale to his own interests. While this step of the process, alone, may not have precluded competition entirely, it contributed to the lack of competition when combined with the next steps. {78} The State Land Office then appraised the exchange proposal for the land's value and its ability to ameliorate management and access issues. If interested in the applicant's proposal, the State Land Office then began working with the applicants to plan a sale that satisfactorily met the interests of both partiesthe applicant and the State Land Office. This second step of the exchange process allowed the applicants an extended time period, compared to the notice for any other parties, to design their bids through back and forth communication over a substantial period of time. These communications and adjustments occurred long before other potential bidders were notified that the Land Commissioner would be exchanging land. {79} Even the Land Commissioner describes this process as a negotiation with each private land owner. In the case of the Stanley Ranch exchange, the initial evaluation by the Land Commissioner found substantial changes would need to be made in order to proceed with the consideration of any exchange. State Land Office staff then spent many months discussing an exchange that would meet legal requirements and be beneficial to the trust. The Stanley Ranch negotiations took two years before the Land Office announced an auction. The UU Bar Ranch negotiation took over a year and a half, and the CS Ranch and Galloway exchange negotiations had been going on for over a year and a half before the Attorney General filed its Writ of Mandamus early in 2010. {80} Based on the foregoing process, by the time an auction was announced by the Land Commissioner at the tail end of the process, one applicant already knew that its previously proposed and negotiated exchange was mutually agreeable. In contrast, all other potential bidders were permitted only ten weeks between announcement of the sale and an opportunity to participate in the sale. During those ten weeks other potential bidders had to (1) ascertain the desirability of the lands offered by the State Land Office, (2) determine the risk/reward of spending the time and money to appraise their lands when another bid already existed that was acceptable to the State, (3) appraise their exchange land, and (4) construct a competitive bid of greater value than the lands offered, either independently or in cooperation with others. {81} All the while, other potential bidders would know that the Land Commissioner did not have to accept their bids, even if superior in price and ability to performbecause, as we shall see in the discussion below, the Land Commissioner's criteria for selecting the winning bids were not objective, nor were they focused on the highest and best bid. Even if competing bids were theoretically possible in the face of the advantages to the bidding landowner and disadvantages to other bidders, the process was designed such that other bidders would not likely succeed. The foregoing procedure made competition the essential element of an auctionimprobable rather than fundamental.
{82} In addition to the lack of competition, the challenged exchanges and the State Land Office's exchange process frustrate the intended purpose of a public auction as well as the purpose of the Enabling Act's inclusion of the public auction sales requirement. As we discussed, supra, the purpose of an auction is to obtain the highest financial gain, and the purpose of Congress's requirement that an auction be the mechanism used for public land sales was to require an objective means of sale, eliminating the possibility of private favoritism. {83} We should be candid about the objectives of these particular exchanges. They were designed to achieve a predetermined result. The exchanges were for the purpose of addressing specific land management problems in specific geographical regions checkerboard areasthat could only be resolved by privately negotiated exchanges with neighboring landowners. Only certain land, however, along the checkerboard border could be exchanged in a manner that would ameliorate land management problems of both the State Land Office and its neighbors. Outside land (land from somewhere else) might be worth more, even a lot more, but it could not address the checkerboarding issue; it would only replace one owner for another into the same checkerboarding problem. It is no stretch for us to recognize that these problems could only be resolved through a privately negotiated exchange, which is exactly what the parties attempted to accomplish. {84} For example, the Stanley Ranch exchange would provide the ability to fulfill the State Land Office's plan for an access road and campsites, all part of creating a prime recreational and quality hunting area. The UU Bar Ranch proposal was of interest because it offered in-fill parcels. The CS Ranch exchange would allow construction of a loop road and would fill in land holdings. The Galloway proposal would provide in-fill parcels and an access road. {85} The State Land Office frankly states in its Brief in Opposition, at page 40, that [t]he checkerboarding problems in the White Peak area created a compelling reason for the Commissioner to target specific lands for exchange in order to consolidate, or unitize, the existing state trust lands in the area, thereby increasing the value of those lands by more than $13 million, enhancing the Commissioner's ability to protect that land, increasing the recreational opportunities available within the area, increasing access to the trust lands, and augmenting grazing revenues. (Emphasis added.) Not only were the lands targeted for exchange, but the State Land Office describes the exchanges as the Land Commissioner exercising his power to manage lands through exchanges designed to address the checkerboarding problems in various parts of the state. (Emphasis added.) The State Land Office's exchange rules, in fact, state that the commissioner . . . may select the proposal or proposals he determines are the highest and best, that is, the proposal or proposals that he believes will be most beneficial to the trust in accordance with the standards set forth in Subsection A and C of 19.2.21.8 NMAC. 19.2.21.10 NMAC (6/15/2004). Subsection A provides that [t]he commissioner may enter into an exchange when the commissioner determines that the exchange will result in a material benefit to the trust and the purpose of the exchange would serve the best interests of the trust. 19.2.21.8(A) NMAC (6/15/2004). Subsection C, similarly, allows the commissioner [to] select another method of determining true value [one that does not involve a qualified appraiser] if he determines that such method is in the best interests of the trust and conform to law. 19.2.21.8(C) NMAC. According to the State Land Office Rules, the purposes of land exchanges are subjectively defined by the Land Commissioner, and financial advantage to the trust is not emphasized as the priority. In line with these rules, both the Stanley Ranch and the UU Bar Ranch bid specifications vested the Land Commissioner with discretion to select the winning bid, based on subjective factors rather than absolute financial benefit to the trust fund. The Selection of the Winning Bid provision of the Bid Information Packets for both exchanges provided, in full: The Commissioner will exercise his discretion in selecting the exchange proposal which is in the best interest of the State trust, considering the following factors: (1) the extent to which the appraised value of the Offered Lands, as determined by the Commissioner, exceeds the appraised value of the Exchange Lands; (2) the effect, if any, that the bidder's proposed use of the Exchange Lands would have on the utility and value of any adjacent state trust lands; (3) the proximity of the Offered Lands to other state trust lands, and any land management issues; (4) the difference in acreage between the Offered Lands and the Exchange lands; (5) any other benefits accruing to, or detriments to, the state trust from the proposed acquisition. None of the five factors provides an objective, measurable means of distinguishing between bids. Even if a bid were highest in monetary value and demonstrably superior in all respects under factors (1)-(4), factor (5) would give the Land Commissioner discretion to reject that bid based essentially on anything he determined to be in the best interest of the trust. Such opportunity for discretion is a direct affront to the purposes of the public auction requirement. {86} In sum, the four challenged exchanges and the State Land Office exchange procedures, in general, preclude the existence of a public auction. As a matter of law, private negotiation negates the required competition. Further, the Land Commissioner's discretion to select a buyer negates the safeguards intended by the Enabling Act's auction requirement. Without the benefit of an auction's objective means of sale, awards of land only for the highest financial return to the state trust, there is no protection against favoritism. Therefore, such private land exchanges represent a departure from the Land Commissioner's ministerial duties under the Enabling Act. When the Land Commissioner chooses to dispose of land, he must do so by a true public auction.