Northlake Development L.L.C. v. Bankplus
60 So. 3d 792, 2011 WL 1743943, 2011 Miss. LEXIS 234 (2011)
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Rule of Law:
A conveyance of substantially all 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 the LLC subsequently ratifies the act.
Facts:
- George Kiniyalocts and his business partner, Michael Earwood, formed Kinwood Capital Group, LLC (Kinwood) to develop property.
- Earwood secretly formed a separate LLC, Northlake Development, LLC (Northlake), in which he was the sole owner and managing member.
- On July 12, 2000, Earwood executed a warranty deed purporting to transfer a parcel of Kinwood's property to Northlake, signing as Kinwood's 'Managing Member.'
- Kinwood's operating agreement required a 75% member vote to approve the sale of substantially all of the company's assets, a threshold Earwood did not meet.
- Northlake then used the property as collateral to secure a loan from BankPlus, which had obtained a title certificate from Earwood's law firm.
- Earwood used most, if not all, of the loan proceeds for his personal benefit.
- Kiniyalocts was unaware of Earwood's unauthorized transfer of the property until after Northlake filed for bankruptcy.
Procedural Posture:
- Northlake Development, LLC, filed a petition for Chapter 11 bankruptcy in the U.S. Bankruptcy Court.
- Kinwood Capital Group, LLC, filed an objection in the bankruptcy proceeding, asserting that the property deed to Northlake was invalid.
- The bankruptcy court entered judgment for Kinwood, declaring the Kinwood deed and the BankPlus deed of trust null and void.
- BankPlus, as appellant, appealed the decision to the U.S. District Court, which affirmed the bankruptcy court's judgment.
- BankPlus then appealed to the U.S. Court of Appeals for the Fifth Circuit.
- Finding no controlling state precedent, the Fifth Circuit certified a question of 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?
Opinions:
Majority - Dickinson, Presiding Justice
The transfer is void ab initio. A transfer of property made by an agent of an LLC who lacks any legal authority—either actual or apparent—is a legal nullity unless and until the principal ratifies it. The court determined that Earwood lacked actual authority because Kinwood's operating agreement explicitly required a 75% member vote for such a transaction. The court also found Earwood lacked apparent authority because the doctrine of apparent authority is unavailable to a party who knows the agent lacks actual authority. Since Earwood was the sole owner of Northlake, his knowledge of his own lack of authority was imputed to Northlake, the grantee. Because Kinwood never ratified the unauthorized conveyance, the deed was void from its inception and had no legal effect, meaning it could not pass title to Northlake or create a valid security interest for BankPlus.
Analysis:
This decision solidifies a critical point of Mississippi agency and LLC law, providing strong protection for business entities against unauthorized acts of their members. By classifying such unauthorized transfers as void ab initio rather than voidable, the court prevents title from passing even to a subsequent bona fide purchaser for value. This places a heightened duty on third parties, like lenders, to conduct thorough due diligence to confirm a member's authority before entering into significant transactions, especially those involving the disposition of substantially all of an LLC's assets.
