In Re Northlake Development L.L.C.
| Docket Number: | 2010-FC-01308-SCT | |
| Supreme Court: | Opinion Link Opinion Date: 05-05-2011 Opinion Author: Dickinson, P.J. Holding: Certified question answered. |
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| Additional Case Information: |
Topic: Federally certified question - Limited liability company - Section 79-29-303(1) - Void transfer of real property - Subsequent bonafide purchaser - Actual authority - Doctrine of apparent authority - Ratification Judge(s) Concurring: Waller, C.J., Carlson, P.J., Randolph, Lamar, Kitchens, Chandler, Pierce and King, JJ. |
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| Trial Court: |
Date of Trial Judgment: 08-06-2010 Case Number: 09-60743 |
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| Party Name: | Attorney Name: | |||
| Appellant: | In the Matter of Northlake Development L.L.C.: Kinwood Capital Group, L.L.C.; George Kiniyalocts, Individually and as General Partner of Kiniyalocts Family PTRS. I, LTD |
JAMES R. MOZINGO, WILLIAM M. SIMPSON, II |
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| Appellee: | BankPlus | DANNY E. RUHL, WILLIAM H. LEECH |
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Synopsis provided by:  If you are interested in subscribing to the weekly synopses of all Mississippi Supreme Court and Court of Appeals hand downs please contact Tammy Upton in the MLI Press office. |
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| Topic: | Federally certified question - Limited liability company - Section 79-29-303(1) - Void transfer of real property - Subsequent bonafide purchaser - Actual authority - Doctrine of apparent authority - Ratification |
| Summary of the Facts: | Michael Earwood, the minority member of Kinwood Capital Group, LLC, secretly formed Northlake Development, LLC, with himself as sole owner. Earwood then signed a deed purporting to transfer a parcel of Kinwood’s property to Northlake, which then granted a deed of trust on the property to secure a bank loan. Northlake later defaulted on the loan and filed bankruptcy, listing the property as an asset. Upon learning what Earwood had done, Kinwood’s majority member, George Kiniyalocts, filed an objection in Northlake’s bankruptcy proceeding, arguing that Earwood had no authority to transfer Kinwood’s property, and Northlake’s deed was void. The bankruptcy judge—finding that Earwood never had the authority to convey the property from Kinwood to Northlake and that the Kinwood deed could not pass title of any kind—entered judgment for Kinwood, declared the Kinwood deed and the BankPlus deed of trust null and void, and required both to be cancelled in the land records of Panola County. BankPlus appealed to the district court, which affirmed. BankPlus then appealed to the United States Court of Appeals for the Fifth Circuit, arguing that the Northlake deed was not void, but rather was voidable; and that—because it had taken the deed of trust from Northlake in good faith and without notice that the Kinwood deed was unauthorized—its deed of trust was enforceable. The Fifth Circuit certified the question to the Mississippi Supreme Court. |
| Summary of Opinion Analysis: | The question certified by the Fifth Circuit is: when a minority member of a Mississippi limited liability company prepares and executes, on behalf of the LLC, a deed to substantially all of the LLC’s real estate, in favor of another LLC of which the same individual is the sole owner, without authority to do so under the first LLC’s operating agreement, is the transfer of real property pursuant to the deed: (i) voidable, such that it is subject to the intervening rights of a subsequent bonafide purchaser for value and without notice, or (ii) void ab initio, i.e., a legal nullity? It is undisputed that, pursuant to Kinwood’s Operating Agreement, Earwood did not have actual authority to transfer the property. Under section 79-29-303(1) of the Limited Liability Company Act, Earwood was an agent of Kinwood for the purpose of conducting “in the usual way” Kinwood’s business and affairs. Generally, an agent cannot bind the principal to a contract unless the principal clothes the agent with authority, whether actual or apparent. Earwood (the sole owner of the grantee, Northlake) certainly knew he had no authority to convey Kinwood’s property to Northlake. And because Earwood’s knowledge of his own wrongdoing was imputed to Northlake, it took the property with knowledge that Earwood had no authority to sign the deed. Because the doctrine of apparent authority is unavailable to one who knows an agent lacks actual authority, Earwood did not have apparent authority to transfer the property to Northlake. If an agent purports to act for his principal but is without any legal authority to do so, his action generally has no legal effect on his principal. Nevertheless, a principal can ratify the agent’s unauthorized acts and, upon doing so, becomes bound. A person ratifies an act by manifesting assent that the act shall affect that person’s legal relations, or conduct that justifies a reasonable assumption that the person so consents. So where no actual or apparent authority exists to transfer a principal’s property, the deed is void unless and until later ratified. Absent ratification—and prior to ratification—nothing changes. Earwood was without authority (actual or apparent) to convey the property to Northlake. Once Kinwood learned of the purported conveyance, it could have ratified it—but didn’t. Kinwood’s rights in the property are therefore unaffected by the actions of Earwood, Northlake, or any other subsequent party. |
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