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 v. BankPlus
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IN THE SUPREME COURT OF MISSISSIPPI
NO. 2010-FC-01308-SCT
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
v.
BANKPLUS
ATTORNEYS FOR BANKPLUS:
ATTORNEYS FOR KINWOOD
CAPITAL GROUP, L.L.C.
NATURE OF THE CASE:
DISPOSITION:
DANNY E. RUHL
WILLIAM H. LEECH
JAMES R. MOZINGO
WILLIAM M. SIMPSON, II
CIVIL - FEDERALLY CERTIFIED
QUESTION
CERTIFIED QUESTION ANSWERED 05/05/2011
MOTION FOR REHEARING FILED:
MANDATE ISSUED:
EN BANC.
DICKINSON, PRESIDING JUSTICE, FOR THE COURT:
¶1.
Michael Earwood, the minority member of Kinwood Capital Group, LLC,1 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
1
Kinwood is a member-managed, Mississippi limited-liability company. See generally Miss.
Code Ann. §§ 79-29-101 to 79-29-1201 (Rev. 2009).
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. Because Earwood had neither actual nor apparent
authority to transfer Kinwood’s property, and because Kinwood did not ratify the transaction,
it was void and of no legal effect.
BACKGROUND FACTS AND PROCEEDINGS
¶2.
After Kiniyalocts and his attorney and business partner, Earwood, formed Kinwood
to develop property, Earwood secretly formed Northlake Development, LLC, with himself
as sole owner, managing member, and registered agent for service of process. Then, on July
12, 2000, Earwood signed a warranty deed as Kinwood’s “Managing Member,” conveying
Kinwood’s property to Northlake.
¶3.
Northlake applied to BankPlus for a loan, secured by the property. After obtaining
a title certificate from Earwood’s two-person law firm, signed by Earwood’s law partner,
BankPlus made the loan, taking as collateral a deed of trust on the property. Earwood put
most and perhaps all of the BankPlus loan proceeds to his personal use.
¶4.
When Northlake later filed for Chapter 11 bankruptcy protection, Earwood signed the
petition, listing the property as a Northlake asset. Kiniyalocts learned what Earwood had
done, and contested the deed that purportedly transferred Kinwood’s property to Northlake.
The learned 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
2
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.
¶5.
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.
¶6.
The Fifth Circuit, finding that the case “presents an important and determinative
question of Mississippi limited liability company and property law for which there is no
controlling Mississippi Supreme Court precedent . . . ,” certified the question to us.2
ANALYSIS
¶7.
The precise question certified to us 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? 3
2
Kinwood Capital Group v. BankPlus (In re Northlake Dev., L.L.C.), 614 F.3d 140, 145
(5th Cir. 2010). See also M.R.A.P. 20.
3
Kinwood, 614 F.3d at 145.
3
¶8.
It is undisputed in the facts presented to us—and implicit in the question certified to
us by the Fifth Circuit—that Earwood did not have actual authority to transfer the property.
Kinwood’s Operating Agreement includes the following limitation:
All management decisions shall be by a vote of the Members owning a
majority of the Membership Interests. Notwithstanding any provision in this
Agreement to the contrary, the affirmative vote of Members holding at least
Seventy-five percent (75%) of all Membership Interests shall be required to
approve the sale, exchange, or other disposition of all, or substantially all, of
the Company’s assets (other than in the ordinary course of the Company’s
business) which is to occur as part of a single Transaction or plan.
Because Earwood had no actual authority to transfer Kinwood’s property, we now turn to the
question of apparent authority.
¶9.
Although the Mississippi Limited Liability Company Act4 does not specifically
address the issue presented, it does inform our analysis with the following provision, which
creates an agency relationship between a member-managed LLC and its members:
[E]very member is an agent of the limited liability company for the purpose of
conducting its business and affairs, and the act of any member, including, but
not limited to, the execution in the name of the limited liability company of
any instrument for apparently carrying on in the usual way the business or
affairs of the limited liability company of which he is a member, binds the
limited liability company, unless the member so acting has, in fact, no
authority to act for the limited liability company in the particular matter and
the person with whom he is dealing has knowledge of the fact that the member
has no such authority.5
4
Miss. Code Ann. §§ 79-29-101 to 79-29 -1204 (Rev. 2009). Because the LLCs in this case
all were formed before January 1, 2011, they are not subject to the provisions of the Revised
Mississippi Limited Liability Company Act. See Miss. Code Ann. § 79-29-1301 (Supp. 2010). We
therefore consider the provisions of the unrevised Act.
5
Miss. Code Ann. § 79-29-303(1) (Rev. 2009).
4
¶10.
Under this statute, 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.6 The bankruptcy court found that Earwood lacked Kinwood’s actual authority
to enter into the transaction with Northlake; that Earwood knew he had no authority to enter
into the transaction; and that Kiniyalocts remained unaware of the unauthorized act until the
commencement of bankruptcy proceedings.
¶11.
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,7 we must conclude that
Earwood did not have apparent authority to transfer the property to Northlake.
¶12.
The certified question essentially asks us whether the unauthorized conveyance was
voidable; that is to say, was it an effective transfer of title unless and until Kinwood
repudiated it? If—as BankPlus argues—it was voidable, then the BankPlus deed of trust
6
Christian Methodist Episcopal Church v. S & S Constr. Co., 615 So. 2d 568, 572 (Miss.
1993) (citing Andrew Jackson Life Ins. Co. v. Williams, 566 So. 2d 1172, 1180 (Miss. 1990)).
7
Mladineo v. Schmidt, 52 So. 3rd 1154, 1167 (Miss. 2010) (“Apparent authority exists when
a reasonably prudent person, having knowledge of the nature and usages of the business involved,
would be justified in supposing, based on the character of the duties entrusted to the agent, that the
agent has the power he is assumed to have.”).
5
survives. The Fifth Circuit graciously did not confine our “reply to the precise form or scope
of the question certified.” 8
¶13.
It is settled law in Mississippi that, absent some form of legal authority, an agent is
powerless to affect the legal relationship between his principal and others.9 If an agent
purports to act for his principal but is without any legal authority to do so, his action
generally 10 has no legal effect on his principal.11 Nevertheless, our law allows a principal to
ratify the agent’s unauthorized acts and, upon doing so, becomes bound. We find the
following explanations from the Restatement (Third) of Agency to be illustrative:
Ratification has an immediate effect on legal relations between the principal
and agent, the principal and the third party, and the agent and the third party.
Ratification recasts those legal relations as they would have been had the agent
acted with actual authority. Legal consequences thus “relate back” to the time
the agent acted. Ratification creates claims not otherwise present, giving the
principal and the third party enforceable rights against each other . . . .12
8
Kinwood, 614 F.3d at 145.
9
Patriot Commercial Leasing Co. v. Jerry Enis Motors, Inc., 928 So. 2d 856, 865 (Miss.
2006) (citing 2 C.J.S. Agency §§ 95, 96); Johnson v. Blasdale, 9 Miss. (1 S. & M.) 17 (1843) (“The
act of an agent who exceeds his authority, is binding upon his principal to the extent of his authority,
but is void for the residue.”). See also Restatement (Third) of Agency § 1.01 cmt. c (2005) (“Only
interactions that are within the scope of an agency relationship affect the principal’s legal
position.”).
10
The notable exception—inapplicable here—is where, despite the absence of an agency
relationship, a “principal” may be estopped from denying agency. Ala. Great S. R.R. Co. v. McVay,
381 So. 2d 607, 612 (Miss. 1980) (citing Restatement (Second) of Agency § 8B (1958)). See also
Restatement (Third) of Agency § 2.05 (2005).
11
He may, however, be liable to the other contracting party for breach of contract, breach
of warranty of authority, or some other cause of action against the agent himself.
12
Restatement (Third) of Agency § 4.02 cmt. b. (2005) (emphasis added). See also Barnes,
Broom, Dallas & McLeod, PLLC v. Estate of Cappaert, 991 So. 2d 1209, 1212 (Miss. 2008) (citing
6
¶14.
Ratification does not arise by operation of law; rather, “[a] person ratifies an act by
(a) manifesting assent that the act shall affect that person’s legal relations, or (b) conduct that
justifies a reasonable assumption that the person so consents.” 13 It is true that, under some
circumstances, a principal’s inaction can result in ratification, but only where the principal
has notice that others will infer from his silence that he intends to manifest his assent to the
act.14 That is certainly not the case here.
¶15.
So where no actual or apparent authority exists to transfer a principal’s property, we
decline to characterize the deed as voidable. Rather, it is void unless and until later ratified.
Ratification is a principal’s after-the-fact, conscious decision to be bound by an agent’s
unauthorized act, and it is that decision that can trigger the principal’s liability to third
parties. Where the agent has no actual or apparent authority, a principal has no need to
repudiate an agent’s unauthorized act in order to “put things back” the way they were.
Absent ratification—and prior to ratification—nothing changes.
CONCLUSION
¶16.
Earwood was without authority (actual or apparent) to convey the property to
Northlake. The conveyance therefore had no effect on Kinwood’s interest in the property.
Once Kinwood learned of the purported conveyance, it could have ratified it—but didn’t.
Autry v. State, 698 So. 2d 84, 87 (Miss. 1997)).
13
Restatement (Third) of Agency § 4.01(2) (2005) (emphasis added). See also Estate of
Cappaert, 991 So. 2d at 1212 (“Ratification may be established through affirmative acts or
inaction.”).
14
Restatement (Third) of Agency § 4.01 cmt. f (2005).
7
Kinwood’s rights in the property are therefore unaffected by the actions of Earwood,
Northlake, or any other subsequent party.
¶17.
CERTIFIED QUESTION ANSWERED.
WALLER, C.J., CARLSON, P.J., RANDOLPH, LAMAR, KITCHENS,
CHANDLER, PIERCE AND KING, JJ., CONCUR.
8
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