Factual Issues Require Resolution to Determine LLC Ownership

Ballingall v. Ballingall, No. A-2494-21, 2023 WL 3698577 (N.J. Super. App. Div. May 30, 2023)

This dispute arose among siblings Carol Ballingall (“Carol”), JoAnn Strack (“JoAnn”), and David Ballingall (“David”) over the control of four limited liability companies (“LLCs”).  Carol and JoAnn appealed an Order granting summary judgment for their brother, David.  The Order declared David the managing member of the LLCs.  Additionally, Carol and JoAnn appealed the court’s denial of their motion for summary judgment seeking to assert their majority ownership interest in the LLCs and recognize Carol as the managing member.  The dispute centered around the validity of 2016 operating agreements for the LLCs executed by David, Carol, and JoAnn.

The siblings’ parents each owned 50% of the LLCs.  Their father died in 2015, leaving his 50% share in the LLCs in a testamentary trust (“Trust”) naming his spouse as beneficiary.  Carol was named trustee of the Trust and executor of her father’s estate.  After their father’s death, the siblings transferred their mother’s interest equally among them and in 2016 executed new operating agreements for the LLCs.  The operating agreements expressly stipulated that each sibling held a one-third interest in the LLCs and appointed David as managing member.  In 2020 and 2021, Carol and JoAnn voted to elect Carol as managing member, requiring David’s removal.  David rejected the validity of Carol’s election because the 2016 operating agreements stipulated that only elected managing members could be removed.  David was not elected, but rather was appointed through the operating agreements and did not believe he could be removed.

Carol and JoAnn filed an action challenging the validity of the 2016 operating agreements and seeking, among other things, declaration of Carol as managing member.  Carol and JoAnn argued that the operating agreements were null and void because the Trust, which held their father’s 50% ownership interest, never agreed to or executed the operating agreements.  By their account, each sibling held a one-sixth interest with the remaining 50% belonging to the Trust.

David argued the operating agreements were valid, rejecting Carol and JoAnn’s attempt to remove him as managing member.  David contended that their father’s interest was transferred directly to their mother because Carol did not transfer his interest to the Trust as executor of his estate or as trustee of the Trust. As such, David asserted the siblings’ mother owned 100% of the shares when her assets were transferred.  By David’s account each sibling held a one-third interest in the LLCs, making the 2016 operating agreements valid.

The trial court declined to address the validity of the operating agreements.  The trial court recognized issues of fact related to if and when the Trust obtained an ownership interest in the LLCs.  However, the trial court reasoned that the factual issues pertaining to the validity of the Trust’s ownership interest belonged in a separate estate matter.  The judge found the language of the operating agreements created an undisputed fact that the Trust did not have a 50% ownership interest in the LLCs.  The court considered the operating agreements binding contracts, meaning Carol and JoAnn were not able to legally elect Carol as managing member because the language of the operating agreements did not allow for David’s removal.

On appeal, Carol and JoAnn contended the court erred in granting summary judgment.  They argued David’s admissions were undisputed facts establishing the invalidity of the operating agreements.  They pointed to two admissions made in David’s answer to the initial complaint. David admitted (1) their father left his interest to the Trust maintained by Carol, and (2) David remained managing member until a 50% interest in the LLCs was placed in the Trust.  In opposition, David submitted a certification detailing (1) the lack of evidence of the Trust’s ownership interests in the LLCs through tax filings or estate transfers, and (2) Carol and JoAnn’s failure to object to the operating agreements stipulating each of their one-third interests.

The Appellate Division reversed the grant of summary judgment for David and affirmed the denial of summary judgment for Carol and JoAnn, remanding the case for further proceedings. The court found unresolved factual issues precluding summary judgment for either party. Specifically, factual issues existed pertaining to the status of the Trust’s interests in the LLCs.

The Appellate Division disagreed with the trial court’s action granting summary judgment while at the same time admitting the existence of issues of material fact.  The trial court erred in declining “to consider the impact of fact issues on a motion for summary judgement simply because those issues related to the administration of a trust.” Id. at 15 n. 7.  The appellate court noted that, rather than entering summary judgment, the trial court should have denied the motion and directed the parties to resolve the Trust issues in probate court.  The Appellate Division declined to address issues regarding the interpretation of the 2016 operating agreements and parties’ intentions.  The Appellate Division also reasoned that such issues can be properly addressed on remand with a complete record of the facts after determining the validity of the operating agreements.