Kinwood Capital Group, L.L.C. v. Northlake ( 2010 )

REVISED AUGUST 9, 2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 6, 2010
No. 09-60743
Lyle W. Cayce
Clerk
In the Matter of: NORTHLAKE DEVELOPMENT L.L.C.,
Debtor
-------------------------------------------------
KINWOOD CAPITAL GROUP, L.L.C.; GEORGE KINIYALOCTS,
Individually and as General Partner of Kiniyalocts Family PTRS. I, LTD.,
Appellees
v.
BANKPLUS,
Appellant
Appeal from the United States District Court
for the Southern District of Mississippi
Before GARWOOD, STEWART, and CLEMENT, Circuit Judges.
PER CURIAM:
BankPlus appeals the district court’s affirmance of the bankruptcy court’s
decision that certain deeds BankPlus held were legal nullities. Because the case
presents an important and determinative question of Mississippi limited liability
No. 09-60743
company and property law for which there is no controlling Mississippi Supreme
Court precedent, we certify the question to the Supreme Court of Mississippi.
CERTIFICATION FROM THE UNITED STATES COURT OF
APPEALS FOR THE FIFTH CIRCUIT TO THE SUPREME COURT
OF MISSISSIPPI, PURSUANT TO RULE 20 OF THE
MISSISSIPPI RULES OF APPELLATE PROCEDURE.
TO THE SUPREME COURT OF MISSISSIPPI AND THE
HONORABLE JUSTICES THEREOF:
I. STYLE OF THE CASE
The style of the case in which this certification is made is Kinwood Capital
Group, L.L.C. v. BankPlus, No. 09-60743, in the United States Court of Appeals
for the Fifth Circuit. The case is on appeal from the judgment of the United
States District Court for the Southern District of Mississippi, which affirmed the
judgment of the United States Bankruptcy Court for the Southern District of
Mississippi in the adversary proceeding styled Kinwood Capital Group, L.L.C.
v. Northlake Development, L.L.C. and BankPlus, pending in the bankruptcy
proceeding in said court styled In re: Northlake Development L.L.C., Debtor.
II. STATEMENT OF FACTS
Three entities and two individuals are the primary actors in this dispute.
Kinwood Capital Group, L.L.C. (“Kinwood”) is a member-managed Mississippi
limited liability company formed in March 1998 for the purpose of purchasing
and developing an approximately 520-acre tract of land in Panola County,
Mississippi (the “Property”). Kinwood was formed by George Kiniyalocts and
Michael Earwood, his attorney and business partner, with Kiniyalocts owning
80 percent of the LLC and Earwood owning 20 percent. Approximately one
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No. 09-60743
month later, Kiniyalocts conveyed his interest in Kinwood to a family limited
partnership he controlled,1 less 5 percent of the LLC, which he conveyed to
Earwood, so that Kiniyalocts owned 75 percent of the LLC and Earwood owned
25 percent. Though Kinwood’s Certificate of Formation did not contain any
limitation on the authority of Kinwood’s members to convey Kinwood-owned
property, the LLC’s Operating Agreement, which was not publicly available, did
contain this 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.
The effect of this limitation was that Kiniyalocts held veto power over any major
asset sale.
Kinwood bought the Property at a foreclosure sale for $535,001. Kinwood
and both Kiniyalocts and Earwood in their personal capacities borrowed a total
of $575,000 from Mellon Bank to acquire the Property; all three remain liable for
that debt. The plans to re-sell the Property to a golf developer fell apart. Soon
afterwards—in June 2000—Earwood formed Northlake Development, L.L.C.
(“Northlake”), with himself as sole owner, managing member, and registered
agent for service of process. Kiniyalocts had no knowledge of Northlake. Again
without Kiniyalocts’s knowledge, Northlake undertook a separate negotiation
1
Kiniyalocts and Kiniyalocts Family Partners I, LTD are referred to collectively as
“Kiniyalocts.”
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No. 09-60743
with the golf developer and entered into a contract. Ultimately, this sale did not
close either.
On July 12, 2000, Earwood signed, purportedly on behalf of Kinwood, a
warranty deed conveying the Property from Kinwood to Northlake (the “Kinwood
Deed”). He signed the document as Kinwood’s “Managing Member.” The
Kinwood Deed was recorded on August 7, 2000. Before recording the deed,
Earwood approached BankPlus about borrowing money for Northlake with the
Property as collateral. BankPlus agreed to lend Northlake approximately
$300,000. In return, Earwood, on behalf of Northlake, executed a deed of trust
to the Property in favor of BankPlus (the “BankPlus Deed”). The BankPlus Deed
pledged Northlake’s interest in the Property as collateral for the loan.2
BankPlus obtained a title certificate to the Property from Earwood’s two-person
law firm, signed by Earwood’s law partner, on August 10, 2000. Earwood put
most and perhaps all of the BankPlus loan proceeds to his personal use.
These facts came to light after Northlake filed for Chapter 11 bankruptcy
protection in August 2005. Earwood signed the petition for Northlake and listed
the Property as a Northlake asset. After a dismissal and a second bankruptcy
filing, the case was converted to a Chapter 7 bankruptcy and a trustee was
appointed.
The bankruptcy court found that Earwood never had the authority to
convey the Property from Kinwood to Northlake and that, as a result, the
Kinwood Deed could not pass title of any kind. The bankruptcy court entered
2
BankPlus later lent more money to Northlake with the Property as collateral.
Earwood executed a new Deed of Trust on behalf of Northlake each time. The deeds of trust
are referred to collectively as the “BankPlus Deed.”
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No. 09-60743
judgment for Kinwood, declared the Kinwood Deed and the BankPlus Deed null
and void, and required both to be cancelled in the land records of Panola County.
BankPlus appealed to the district court, which affirmed. The district court
noted that no Mississippi court had construed Mississippi LLC law on the ability
of an LLC member to bind the LLC in a case where the LLC member’s action led
an innocent third party to purchase an interest in the property. The court made
an Erie guess that Earwood’s signature on the Kinwood Deed was more akin to
a void forgery than a voidable transfer—i.e., one in which a deed is facially valid
but induced by fraud.
III. Legal Issues
It does not appear that the Mississippi statute governing the agency power
of LLC members, MISS. CODE ANN. § 79-29-303, directly controls this case.
Because Kinwood is a member-managed LLC, three parts of the statute affect
Earwood’s power to bind the LLC:
(1) . . . [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.
(3) An act of a manager or a member which is not apparently
for the carrying on in the usual way the business of the
limited liability company does not bind the limited liability
company unless authorized in accordance with the limited
liability company agreement.
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No. 09-60743
(4) No act of a manager or member in contravention of a
restriction on authority shall bind the limited liability
company to persons having knowledge of the restriction.
MISS. CODE ANN. § 79-29-303.3
The language in § 79-29-303(4) (“No act of a manager or member in
contravention of a restriction on authority shall bind the limited liability
company to persons having knowledge of the restriction”) does not affect the
relationship between Kinwood and BankPlus because the entities did not have
any direct contact with one another; the transactions at issue are between (1)
Kinwood — Northlake, and (2) Northlake — BankPlus. Nor does it establish
that the deed in question is void ab initio rather than voidable. The statute
addresses the nature of Kinwood’s obligations to Northlake; it does not
determine whether a deed that is valid on its face, but that does not bind the
grantor to the grantee, becomes valid when passed to an innocent third-party
purchaser.4 In other words, § 79-29-303(4) means that the Kinwood Deed was
at least voidable. That begs the ultimate question.
3
Beginning on January 1, 2011, § 79-29-303 will be re-codified, as amended, at § 79-29-
307. See 2010 Miss. Laws Ch. 532, H.B. 683, §§ 1, 4. The amendments do not answer, on their
face, the question certified here. What will be MISS. CODE ANN. § 79-29-1317 states that the
new LLC laws do “not apply to an action or proceeding commenced before the mandatory
application date. Prior law applies to the action or proceeding.” 2010 Miss. Laws Ch. 532,
H.B. 683, § 1.
4
Discussing a similar fact pattern in the context of Kentucky partnership law, the Sixth
Circuit explained that a functionally identical Kentucky statute “simply says that, as a general
proposition, the partnership is not bound by partners who act contrary to a restriction on their
authority when the parties dealing with the partner had knowledge of the restriction.” Noble
v. Nat’l Mines Corp., 774 F.2d 144, 147 (6th Cir. 1985). Rather than “mandate that a
transaction is void when a partner acts contrary to a restriction on his or her authority,” the
court stated, “[i]t simply protects the partnership by providing that the entity is not bound by
that act.” Id. at 148.
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No. 09-60743
Mississippi courts have held several types of deeds voidable rather than
void ab initio. For example, when a corporation takes an ultra vires action not
authorized by its charter, the result can usually be ratified and thus cannot have
been void ab initio. See Home Owners’ Loan Corp. v. Moore, 185 So. 253, 255
(Miss. 1939) (“An act of a corporation relating to the subjects within its powers
though it should exceed those powers is not void.”); see also Haynes v. Covington,
21 Miss. (13 S. & M.) 408, 1850 WL 3405, at *2 (Miss. 1850).5
Similarly, a fraudulent conveyance is voidable rather than void ab
initio—i.e., it is subject to the intervening rights of a bona fide purchaser for
value without notice of the fraud. See Parker v. King, 108 So. 2d 224, 226 (Miss.
1959) (fraudulently induced execution of a mineral deed is voidable); see also
Guice v. Burrage, 156 F.2d 304, 306 (5th Cir. 1946); Lee v. Boyd, 16 So. 2d 30, 30
(Miss. 1943); Sanders v. Sorrell, 3 So. 661, 663 (Miss. 1888). A forged
conveyance, on the other hand, is void ab initio and cannot pass title to a bona
fide purchaser. See Securities Inv. Co. of St. Louis v. Williams, 193 So. 2d 719,
722 (Miss. 1967) (“The note and trust deed having been forgeries, even an
5
LLCs can also, as a general matter, ratify unauthorized conveyances. See 1 LARRY
E. RIBSTEIN & ROBERT R. KEATINGE, RIBSTEIN & KEATINGE ON LIMITED LIABILITY COMPANIES
§ 8:5 (updated Nov. 2009) (“Even if an act is not within a member’s agency power, the other
members can actually authorize it, engage in conduct that creates the appearance of authority
or an estoppel, or ratify the act.”). The same treatise takes the position that deeds like the one
at issue here are voidable rather than void ab initio. “Even if a real property conveyance is
unauthorized, if property is held and conveyed in the LLC’s name”—as it was here—“the LLC
probably cannot attack the conveyance to a remote grantee who lacks knowledge of who holds
rights in the chain of title.” 1 RIBSTEIN & KEATINGE § 8:10. The treatise writers note,
however, that “most LLC statutes, unlike partnership law [statutes], do not make this
explicit.” Id. (footnote omitted). This describes the situation in Mississippi. If Kinwood had
been a partnership rather than an LLC, the Kinwood Deed likely would have been voidable
rather than void ab initio under Mississippi’s adoption of the Uniform Partnership Act. See
MISS. CODE ANN. § 79-13-302(b).
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No. 09-60743
innocent purchaser, for value and without notice that they were forgeries, could
acquire no title.”).
Mississippi courts have held deeds void ab initio in homestead cases. A
homestead occupied by husband and wife cannot be conveyed without the
signature of both spouses, and any deed made without both signatures is
absolutely void and passes no title. See Thornhill v. Caroline Hunt Trust Estate,
594 So. 2d 1150, 1152 (Miss. 1992).6 Mississippi courts have also held
unauthorized tax sales by the State to be void ab initio rather than voidable. See
Pittman v. Currie, 391 So. 2d 654, 655 (Miss. 1980); see also In re Hardy, 910 So.
2d 1052 (Miss. 2005) (citing a tax sale case in support of its holding that certain
deeds made by an agent who exceeded her power of attorney were void ab initio);
Money v. Wood, 118 So. 357, 360 (Miss. 1928); Hit-tuk-ho-mi v. Watts, 15 Miss.
(7 S. & M.) 363 (Miss. 1846).
We did not find that any of these classes of cases answered the
voidable/void ab initio question presented here. The issue has serious and
potentially far-reaching public policy implications for Mississippi LLCs and
those who do business with them. For that reason, we have determined that the
better course is to certify the question.
6
The homestead rule is codified by statute, see MISS. CODE ANN. § 89-1-29, and its
original purpose was highly specific: “these homestead provisions first were listed in the Code
of 1880 primarily as a protection for the wife in lieu of dower . . . . The basic purpose was . . .
to prevent her husband from conveying or encumbering the homestead without the consent of
his wife . . . .” Grantham v. Ralle, 158 So. 2d 719, 724 (Miss. 1963).
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No. 09-60743
IV. QUESTION CERTIFIED
We hereby certify, on our own motion, the following determinative
question of law7 to the Supreme Court of Mississippi:
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?
This court disclaims any intention or desire that the Supreme Court of
Mississippi confine its reply to the precise form or scope of the question certified.
The record and copies of the parties’ briefs are transmitted herewith.
This panel retains cognizance of the appeal of this case pending response
from the Supreme Court of Mississippi, and this court hereby CERTIFIES the
question posed above.
QUESTION CERTIFIED.
7
The question is determinative of the only issue this court will consider on appeal. In
the event the Kinwood Deed is held to be voidable rather than void ab initio, Kinwood raises
a second argument that BankPlus was not a bonafide purchaser for value. That fact-intensive
determination will be left to the bankruptcy court on remand should it be necessary to do so.
9