LLC Mortgage May Be Challenged


Purchaser Alleges Mortgage Was Not Approved by All LLC Members

A mortgage given by a New Jersey limited liability company to one of its members can be challenged by the purchaser in a court-approved sale of the business, the Appellate Division holds, reversing the trial court.

This case arises out of the estate planning undertaken by John Best and his wife, defendant Patricia Ann Best, after Mr. Best learned that he was terminally ill.  The couple owned Sea Village Marina in Northfield (across the bay from Margate).  They had transferred 25 percent of the business to their son, John, in 1994.

Succession Plan for LLC Only Partially Completed

John Best became ill in 2003 and an estate plan was put together that assumed that he was the sole owner of the marina.  He would acquire the interests of his wife and son and they would receive mortgages back for $1.6 million and $200,000 respectively.  As it turned out, the plan was never fully completed and John never acquired the 25 percent interests of his son.

Mark Best refused to transfer his interest and later said that he would never have approved the mortgage because it didn’t represent a valid debt.  His mother did transfer her interest and received the mortgage.  The result was that at the time that John Best died, the business was owned 75 percent by his wife and 25 percent by his son.

Mortgage Given by Limited Liability Company

Most of the value of the business was in the property, according to the court, but the property was encumbered by a mortgage.  That mortgage, however, was not approved by all of the members or the managers.

It later developed that none of the children nor the wife wanted the business.  They tried to sell the property but the offers were much lower than would be necessary to pay the secured debts of the business totaling $2.267 million.  Ultimately the court approved the sale of the business to a third party that took the property while reserving the right to challenge the mortgage.

LLC Challenges Mortgage Given to Former Owner

Patricia Best opposed the sale.  After the transaction was completed, the purchaser filed a complaint seeking to invalidate the mortgage.  On motions for summary judgment, the trial court held that the mortgage was valid and that the failure to enforce its terms would grant the purchaser a windfall.

The Appellate Division reversed, finding that the purchaser had expressly reserved its right to challenge the mortgage and that the court had approved the sale under those terms.

Because the court had previously entered an order requiring those interested in the will of John Best to bring any claims challenging the mortgage and no one had made such a challenge, Patricia argued that the purchaser of the LLC was barred as well.  The Appellate Division also rejected this claim.  The fact that the prior owners of the LLC might be barred from asserting the claim did not prevent the same claim from being brought directly by the LLC.

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