Stone v. Jetmar Properties, LLC
733 N.W.2d 480, 43 A.L.R. 6th 813, 2007 Minn. App. LEXIS 80 (2007)
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Rule of Law:
A deed conveying real property to a business entity is void if the entity has not been legally formed and is not in existence at the time of the deed's delivery.
Facts:
- In November 2002, Keith Hammond drafted articles of organization for Jetmar Properties, LLC, but did not file them with the secretary of state.
- In late 2002, Selwin Ortega gave Hammond an unsecured $200,000 loan, which Hammond failed to repay.
- In May 2003, Hammond fraudulently induced Dale Stone to transfer a duplex to Jetmar via a quitclaim deed to improve the company's balance sheet, promising to return the property in 60 days.
- On May 14, 2003, Stone executed the quitclaim deed to Jetmar, which Hammond, acting as Jetmar's president, accepted and recorded.
- On May 15, 2003, Hammond mortgaged the duplex to Ortega as security for an extension on the preexisting $200,000 loan.
- Ortega recorded the mortgage on May 20, 2003, after confirming that public records showed title had been transferred from Stone to Jetmar.
- After Hammond defaulted on the loan, Ortega initiated foreclosure proceedings in December 2003 and purchased the property at the foreclosure sale on March 2, 2004.
- On March 11, 2004, nine days after the foreclosure sale, Hammond filed Jetmar's articles of organization with the secretary of state, officially forming the LLC.
Procedural Posture:
- Dale Stone filed an action in district court against Keith Hammond, Jetmar Properties, LLC, and Selwin Ortega.
- Stone sought damages and a declaratory judgment stating he was the owner of the duplex.
- The district court (trial court) entered a judgment in favor of Stone, concluding the quitclaim deed to Jetmar was void because the LLC did not exist at the time of delivery.
- The district court's ruling voided the subsequent mortgage and foreclosure sale, awarding title to Stone.
- Selwin Ortega, as the defendant, appealed the district court's judgment to the Minnesota Court of Appeals.
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Issue:
Is a quitclaim deed to a limited-liability company void if the company has not filed its articles of organization and is therefore not a legal entity at the time of the deed's delivery?
Opinions:
Majority - Lansing, J.
Yes, the quitclaim deed is void because a conveyance of real property to a non-existent legal entity is a nullity. For a deed to be valid, it must be delivered to a grantee capable of taking title. Because Jetmar's articles of organization had not been filed, it was not a legal entity when Stone delivered the deed. The court rejected the argument that Jetmar was a 'de facto corporation,' holding that this common law doctrine was abolished by statute in Minnesota for both corporations and, by extension, LLCs. The court also declined to adopt a rule that title could vest later upon the entity's formation, adhering to the principle that a deed to a non-existent grantee is void at the moment of conveyance. Because the deed to Jetmar was void, Jetmar never held title, meaning the subsequent mortgage to Ortega and the foreclosure sale based on that mortgage were also void.
Analysis:
This decision solidifies the legal requirement that a grantee must be a legally existing entity at the time of a real property conveyance for the transfer to be valid. By explicitly extending the statutory abolition of the 'de facto corporation' doctrine to LLCs, the court removes a potential loophole and emphasizes strict compliance with formation statutes. The ruling underscores that a void deed is a complete nullity that cannot be cured by subsequent good-faith purchasers, placing a significant due diligence burden on lenders and buyers to verify the legal status of entities in a chain of title, not just the recorded documents themselves. This strengthens protections for original property owners against fraud involving sham entities.
