Northlake Development L.L.C. v. Bankplus
2011 WL 1743943, 60 So. 3d 792, 2011 Miss. LEXIS 234 (2011)
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Rule of Law:
A conveyance of a limited liability company's (LLC) real property by a member who lacks both actual and apparent authority is void ab initio, not merely voidable, unless and until the LLC ratifies the act.
Facts:
- George Kiniyalocts and Michael Earwood formed Kinwood Capital Group, LLC (Kinwood) to develop property.
- Kinwood's operating agreement required a vote of members holding at least 75% of membership interests to approve the sale of substantially all of the company's assets.
- Earwood secretly formed another LLC, Northlake Development, LLC (Northlake), with himself as the sole owner and managing member.
- Purporting to act as Kinwood's 'Managing Member,' Earwood executed a warranty deed transferring a significant parcel of Kinwood's real estate to his own company, Northlake, without Kiniyalocts' knowledge or the required vote.
- Northlake then used the property as collateral to secure a loan from BankPlus.
- Earwood used most or all of the loan proceeds for his personal benefit.
Procedural Posture:
- Northlake Development, LLC filed for Chapter 11 bankruptcy, listing the disputed property as an asset.
- Kinwood Capital Group, LLC filed an objection in the bankruptcy proceeding, contesting the validity of the deed.
- The U.S. Bankruptcy Court found for Kinwood, declaring the deed from Kinwood to Northlake and the subsequent deed of trust to BankPlus null and void.
- BankPlus appealed the bankruptcy court's decision to the U.S. District Court, which affirmed the judgment.
- BankPlus, as appellant, appealed the district court's decision to the U.S. Court of Appeals for the Fifth Circuit.
- The Fifth Circuit, finding no controlling state precedent, certified the determinative question of Mississippi law to the Mississippi Supreme Court.
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Issue:
Is a deed conveying substantially all of an LLC's real estate, executed by a minority member without actual or apparent authority, void ab initio or merely voidable against the rights of a subsequent bona fide purchaser for value?
Opinions:
Majority - Dickinson, Presiding Justice
The transfer is void ab initio. A conveyance of LLC property by a member lacking legal authority is a nullity unless later ratified by the LLC. Earwood lacked actual authority because Kinwood’s Operating Agreement required a 75% member vote for such a transaction, which he did not have. He also lacked apparent authority because the grantee, Northlake, was his own entity, and Earwood's knowledge of his own lack of authority was imputed to Northlake. The doctrine of apparent authority cannot be used by a party who knows the agent lacks actual authority. Because the act was done without any authority, it had no legal effect on Kinwood's ownership of the property. For the transfer to become valid, Kinwood would have needed to ratify it after the fact, which it never did. Therefore, the deed was void from its inception, and no valid title could pass to Northlake or be used to secure a loan from BankPlus.
Analysis:
This decision clarifies Mississippi agency and LLC law by establishing a strong protection for a company's assets against unauthorized acts by its members. By holding that such transfers are void ab initio rather than voidable, the court prioritizes the property rights of the principal (the LLC) over the interests of subsequent bona fide purchasers. This ruling places a greater due diligence burden on third parties, such as lenders, to verify a member's authority before entering into significant transactions involving LLC assets. It effectively prevents a fraudulent transfer from ever gaining legal legitimacy without the principal's express post-hoc consent.
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