Dutch Auctions and Texas Shoot-Outs

As my colleague Rodney Max says in his most recent blog post on the “Mediator’s Proposal”, when impasse occurs in a mediation, “it’s just begun”.  The mediator’s challenge is to find a way to break the impasse while still preserving the parties’ rights of self-determination.  Rodney discussed one such technique, the “mediator’s proposal” or the “silver bullet”.  In this post, I offer another technique applicable to a specific subset of cases.  In this scenario, the mediator offers a methodology, but never a dollar amount, for resolving the dispute.  The heavy lifting, i.e. determining the settlement value, is set entirely by the parties.  The end result is quick and certain.

Consider the two following cases.  Brother and sister, who cannot stand one another, inherit a house from their last surviving parent.  They now each have an undivided one-half interest as tenants in common.  Keeping the house will require them to deal with each other on matters like rent, maintenance, taxes, and insurance.  Partition would seem the only legal option.  Next, consider a case involving two shareholders who own equal 50 percent interests in a closely held corporation.  The corporation still has value as a going concern, but there is no shareholder’s agreement addressing how one shareholder buys out the other.  Judicial dissolution looms on the horizon.

Assuming that the parties are willing and able either to buy or sell their interest to the other, the mediator might consider proposing settling the case by means of a “closed Dutch auction”.  In some circles, the process is called a “Texas shoot-out”.  I first saw this technique discussed by California mediator Ralph Williams in the always-terrific “Negotiation Law Blog” published by Victoria Pynchon.  It is a somewhat refined version of the “I cut, you choose” method by which two children would share the last piece of cake.

Using the case of the estranged siblings, the mediator would propose that they each submit one sealed bid to the mediator, setting forth the price at which they would sell their 50 percent share.  There is no further bidding.  The mediator opens both bids.  The sibling with the high bid (say, $260,000) “wins”, and buys out the other sibling’s interest at the lower bid amount (say, $225,000).

Why does this work?  It works because it forces parties to look beyond emotional barriers to settlement (in exactly the kinds of cases where emotions are likely to run hot) and focus instead on solving the actual problem.  Because each party sets the price at which he or she is willing to be a seller, whoever “loses” the auction and is forced to sell is hardly in a position to complain.  The closed Dutch auction encourages realistic bidding, and more importantly, penalizes underbidding.  After all, the party who bids too low not only has to sell, but must do so at a low price.  In a battered real estate market, the closed Dutch auction may have the extra benefit of inflating the bids somewhat, giving the seller more than he or she might realize in either an arm’s length sale or a partition.  Here again, the “winning” buyer can hardly complain, because the purchase price is still less than the selling price he or she set.

In my next post, I will discuss the pros and cons of another “endgame” approach to breaking impasse.




Michael S. Orfinger is a principal mediator at the firm of Upchurch, Watson, White and Max. For more information visit Michael S. Orfinger's biography.

 

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