Ltd. v. Bankplus

• Decision Date: 06 August 2010
• Docket Number: No. 09-60743.,09-60743.
• Citation: 614 F.3d 140
• Parties: 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.
• Court: U.S. Court of Appeals — Fifth Circuit

614 F.3d 140

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.

No. 09-60743.

United States Court of Appeals,Fifth Circuit.

Aug. 6, 2010.

James Ray Mozingo (argued), William Michael Simpson, II, Knight, Mozingo & Quarles, P.L.L.C., Ridgeland, MS, for Appellees.

William Hollis Leech (argued), Daniel Elwood Ruhl, Copeland, Cook, Taylor & Bush, P.A., Ridgeland, MS, for BankPlus.

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 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 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 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 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.

(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.

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, 184 Miss. 283, 185 So. 253, 255 (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.Err. & App.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, 235 Miss. 80, 108 So.2d 224, 226 (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, 195 Miss. 794, 16 So.2d 30, 30 (1943); Sanders v. Sorrell, 65 Miss. 288, 3 So. 661, 663 (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...