Kinwood Capital Group, L.L.C. v. Northlake , 643 F.3d 448 ( 2011 )

Case: 09-60743 Document: 00511507570 Page: 1 Date Filed: 06/14/2011
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
June 14, 2011
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 that BankPlus held were legal nullities. The panel
certified a question to the Mississippi Supreme Court, and that court accepted
the question. We AFFIRM.
Case: 09-60743 Document: 00511507570 Page: 2 Date Filed: 06/14/2011
No. 09-60743
Kinwood Capital Group, L.L.C. (“Kinwood”) is a member-managed
Mississippi limited liability company formed for the purpose of purchasing and
developing an approximately 520-acre tract of land in Mississippi (“Property”).
As relevant here, George Kiniyalocts owned 75 percent of Kinwood through a
family limited partnership he that controlled,1 and Michael Earwood, his
attorney and business partner, owned 25 percent. Under Kinwood’s Operating
Agreement, Kiniyalocts held veto power over any major asset sale.
Earwood subsequently formed Northlake Development, L.L.C.
(“Northlake”), with himself as sole owner and managing member. Kiniyalocts
had no knowledge of Northlake. 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,
1
Kiniyalocts and Kiniyalocts Family Partners I, LTD are referred to collectively as
“Kiniyalocts.”
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.”
2
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No. 09-60743
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 had no 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 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, and the district court affirmed.
Because 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, we certified the following
determinative question 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?
In re Northlake Dev., L.L.C., 614 F.3d 140, 145 (5th Cir. 2010). We “disclaim[ed]
any intention or desire that the Supreme Court of Mississippi confine its reply
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to the precise form or scope of the question certified. Id. The Mississippi
Supreme Court accepted the certified question; its answer resolves the case.
The Mississippi Supreme Court explained that the deed was neither
voidable nor void ab initio, but “void and of no legal effect” because Earwood, as
an agent of Kinwood, lacked actual or apparent authority to convey Kinwood’s
Property and Kinwood never ratified the purported transfer. Northlake Dev.
L.L.C. v. BankPlus, --- So.3d ---, 2011 WL 1743943, at *1 (Miss. 2011). Under
Mississippi law, an agency relationship exists between a member-managed
limited liability company such as Kinwood and its members. Id. at *2 (citing
Miss. Code Ann. § 79-29-303(1) (Rev. 2009)). As a member of Kinwood, Earwood
was Kinwood’s agent. Id.“Generally, an agent cannot bind the principal to a contract unless the
principal clothes the agent with authority, whether actual or apparent.” Id.(citations omitted). Under Kinwood’s Operating Agreement, Earwood lacked
actual authority to transfer the Property. Earwood knew that he did not have
actual authority to convey the Property, and as Earwood is the sole owner of
Northlake, his knowledge is imputed to Northlake. Id. “Because the doctrine of
apparent authority is unavailable to one who knows an agent lacks actual
authority,” and both Earwood and Northlake knew Earwood lacked actual
authority, Earwood did not have apparent authority to transfer the Property to
Northlake. Id. “[W]here no actual or apparent authority exists to transfer a
principal’s property, . . . . the deed is void unless and until later ratified.” Id. at
*3. Kinwood could have ratified the purported conveyance by “manifesting
assent that [the conveyance] [would] affect [its] legal relations” or through
“conduct that justifie[d] a reasonable assumption” that it had consented to the
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transfer. Id. (quoting Restatement (Third) of Agency § 4.01(2) (2005)).3 Kinwood
never ratified Earwood’s purported transfer. Id. “Kinwood’s rights in the
property are therefore unaffected by the actions of Earwood, Northlake, or any
subsequent party.” Id.
AFFIRMED.
3
As the Mississippi Supreme Court noted, “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. That is
certainly not the case here.” Northlake Dev., 2011 WL 1743943, at *3 (citing Restatement
(Third) of Agency § 4.01 cmt. f (2005)).
5