Best Offers Are Not Always The Highest

So you want a troubled property, and you throw out the biggest bid.  Does that mean you win?  Not always.  A good receiver knows better.  Case in point:

Yidi, LLC v. JHB Hotel, LLC, et al., 8th Dist. No. 104856, 2017-Ohio-1285.

This story begins when Yidi, LLC filed an action against JHB Hotel, LLC, 3M Realty, LLC, 3M Development, LLC and Hickory Court, LLC, to whom it lent money secured by three properties in Cleveland, Ohio.  Upon Yidi’s request, the trial court appointed Mark Dottore as receiver, whose responsibilities included obtaining the highest and best commercially-reasonable price for the borrowers’ property.  To that end, he hired David Wagner and Hanna Commercial to market the property, and established blind bidding procedures approved by which interested purchasers could submit offers privately and confidentially.

After vetting several potential buyers and fielding several offers from the borrowers in the process, Dottore chose an offer from Alto Partners, LLC, who submitted a $9.1 million bid, which included a non-refundable commitment of $450,000 if the deal did not go forward.  A day before the hearing to confirm the bid, SRI, LLC, an equity investor in JHB Hotel, submitted a $9.5 million bid, which included a $100,000 refundable deposit.  At the hearing, Dottore testified that, although SRI’s bid was higher, they failed to submit their bid in accordance with bidding procedures and failed to provide documentation regarding their ability to close on the transaction.  After the hearing, the trial court affirmed the receiver’s request to approve the sale to Alto Partners, and SRI and the borrowers appealed.

On appeal, SRI argued that its bid was better because the offer was higher.  Dottore argued that SRI’s failure to comply with bidding procedures or to provide evidence that it was able to close the deal made it less reasonable than Alto Partners’ bid, which also provided a non-refundable commitment and substantial financial information.  The record also showed that the borrowers were given numerous opportunities to secure financing for the property, but never finalized any offer.  The Eighth District affirmed the trial court’s decision.

What does this mean?  When a receiver sets bidding procedures, follow them.  When a receiver requests documents showing your ability to close, do so.  Also, as a receiver, picking the best bid is not just selecting the highest one: a receiver’s responsibility is to the creditors, not to the potential purchasers.  Said another way, picking a lower bid that is supported by financial documentation and a non-refundable commitment is more commercially reasonable than taking a higher bid that has neither.

The author, Jonathan F. Hung, Esquire, is an associate attorney at Green & Green, Lawyers whose experience includes serving as a receiver.  Do you have a question about receiverships that you need an answer to?  Green & Green, Lawyers, has the experience to assist borrowers, lenders, and receivers as they navigate Ohio’s new receivership laws.