Kinwood Capital Group, L.L.C., et al v. Northlake Development L.L.C.

Filing

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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 N o . 09-60743 Lyle W. Cayce Clerk I n the Matter of: N O R T H L A K E DEVELOPMENT L.L.C., D eb tor ------------------------------------------------K I N W O O D CAPITAL GROUP, L.L.C.; GEORGE KINIYALOCTS, I n d iv id u a lly and as General Partner of Kiniyalocts Family PTRS. I, LTD., A p p e lle e s v. BANKPLUS, A p p e lla n t

A p p e a l from the United States District Court fo r the Southern District of Mississippi

B e fo r e GARWOOD, STEWART, and CLEMENT, Circuit Judges. P E R CURIAM: B a n k P lu s appeals the district court's affirmance of the bankruptcy court's d e c is io n that certain deeds BankPlus held were legal nullities. Because the case p resen ts an important and determinative question of Mississippi limited liability

Case: 09-60743

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No. 09-60743 c o m p a n y and property law for which there is no controlling Mississippi Supreme C o u r t precedent, we certify the question to the Supreme Court of Mississippi. CERTIFICATION FROM THE UNITED STATES COURT OF A P P E A L S FOR THE FIFTH CIRCUIT TO THE SUPREME COURT O F MISSISSIPPI, PURSUANT TO RULE 20 OF THE M I S S I S S I P P I RULES OF APPELLATE PROCEDURE. T O THE SUPREME COURT OF MISSISSIPPI AND THE H O N O R A B L E JUSTICES THEREOF: I . STYLE OF THE CASE T h e style of the case in which this certification is made is Kinwood Capital G r o u p , L.L.C. v. BankPlus, No. 09-60743, in the United States Court of Appeals fo r the Fifth Circuit. The case is on appeal from the judgment of the United S t a te s District Court for the Southern District of Mississippi, which affirmed the ju d g m e n t of the United States Bankruptcy Court for the Southern District of M is s is s ip p i in the adversary proceeding styled Kinwood Capital Group, L.L.C. v . Northlake Development, L.L.C. and BankPlus, pending in the bankruptcy p r o c e e d in g in said court styled In re: Northlake Development L.L.C., Debtor. I I . STATEMENT OF FACTS T h r e e entities and two individuals are the primary actors in this dispute. Kinwood Capital Group, L.L.C. ("Kinwood") is a member-managed Mississippi lim it e d liability company formed in March 1998 for the purpose of purchasing a n d developing an approximately 520-acre tract of land in Panola County, M is s i s s i p p i (the "Property"). Kinwood was formed by George Kiniyalocts and M ic h a e l Earwood, his attorney and business partner, with Kiniyalocts owning 8 0 percent of the LLC and Earwood owning 20 percent. Approximately one 2

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No. 09-60743 m o n t h later, Kiniyalocts conveyed his interest in Kinwood to a family limited p a r t n e r s h ip he controlled,1 less 5 percent of the LLC, which he conveyed to E a r w o o d , so that Kiniyalocts owned 75 percent of the LLC and Earwood owned 2 5 percent. Though Kinwood's Certificate of Formation did not contain any lim it a t i o n on the authority of Kinwood's members to convey Kinwood-owned p r o p e r t y , the LLC's Operating Agreement, which was not publicly available, did c o n t a in this limitation: A ll management decisions shall be by a vote of the Members o w n in g a majority of the Membership Interests. Notwithstanding any provision in this Agreement to the c o n t r a r y , the affirmative vote of Members holding at least S e v e n t y -fiv e percent (75%) of all Membership Interests shall b e required to approve the sale, exchange, or other disposition o f all, or substantially all, of the Company's assets (other than in the ordinary course of the Company's business) which is to o c c u r as part of a single Transaction or plan. The effect of this limitation was that Kiniyalocts held veto power over any major a s s e t sale. K in w o o d bought the Property at a foreclosure sale for $535,001. Kinwood a n d both Kiniyalocts and Earwood in their personal capacities borrowed a total o f $575,000 from Mellon Bank to acquire the Property; all three remain liable for t h a t debt. The plans to re-sell the Property to a golf developer fell apart. Soon a ft e r w a r d s -- in June 2000--Earwood formed Northlake Development, L.L.C. (" N o r t h la k e " ), with himself as sole owner, managing member, and registered a g e n t for service of process. Kiniyalocts had no knowledge of Northlake. Again w it h o u t Kiniyalocts's knowledge, Northlake undertook a separate negotiation

Kiniyalocts and Kiniyalocts Family Partners I, LTD are referred to collectively as "Kiniyalocts."

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No. 09-60743 w it h the golf developer and entered into a contract. Ultimately, this sale did not c lo s e either. On July 12, 2000, Earwood signed, purportedly on behalf of Kinwood, a w a rra n ty deed conveying the Property from Kinwood to Northlake (the "Kinwood D e e d " ). He signed the document as Kinwood's "Managing Member." The

K in w o o d Deed was recorded on August 7, 2000. Before recording the deed, E a r w o o d approached BankPlus about borrowing money for Northlake with the P r o p e r ty as collateral. BankPlus agreed to lend Northlake approximately

$ 3 0 0 ,0 0 0 . In return, Earwood, on behalf of Northlake, executed a deed of trust t o the Property in favor of BankPlus (the "BankPlus Deed"). The BankPlus Deed p le d g e d Northlake's interest in the Property as collateral for the loan.2 B a n k P lu s obtained a title certificate to the Property from Earwood's two-person la w firm, signed by Earwood's law partner, on August 10, 2000. Earwood put m o s t and perhaps all of the BankPlus loan proceeds to his personal use. These facts came to light after Northlake filed for Chapter 11 bankruptcy p r o t e c t io n in August 2005. Earwood signed the petition for Northlake and listed t h e Property as a Northlake asset. After a dismissal and a second bankruptcy filin g , the case was converted to a Chapter 7 bankruptcy and a trustee was a p p o in te d . The bankruptcy court found that Earwood never had the authority to c o n v e y the Property from Kinwood to Northlake and that, as a result, the K in w o o d Deed could not pass title of any kind. The bankruptcy court entered

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 ju d g m e n t for Kinwood, declared the Kinwood Deed and the BankPlus Deed null a n d void, and required both to be cancelled in the land records of Panola County. B a n k P lu s appealed to the district court, which affirmed. The district court n o te d that no Mississippi court had construed Mississippi LLC law on the ability o f an LLC member to bind the LLC in a case where the LLC member's action led a n innocent third party to purchase an interest in the property. The court made a n 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 b u t induced by fraud. I I I . Legal Issues It does not appear that the Mississippi statute governing the agency power o f 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 E a r w o o d 's power to bind the LLC: ( 1 ) . . . [E]very member is an agent of the limited liability c o m p a n y for the purpose of conducting its business and a ffa ir s , and the act of any member, including, but not limited t o , the execution in the name of the limited liability company o f any instrument for apparently carrying on in the usual way t h e business or affairs of the limited liability company of w h ic h he is a member, binds the limited liability company, u n le s s the member so acting has, in fact, no authority to act fo r the limited liability company in the particular matter and t h e person with whom he is dealing has knowledge of the fact t h a t the member has no such authority. (3 ) An act of a manager or a member which is not apparently fo r the carrying on in the usual way the business of the lim it e d liability company does not bind the limited liability c o m p a n y unless authorized in accordance with the limited lia b ilit y company agreement. 5

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No. 09-60743 (4 ) No act of a manager or member in contravention of a r e s t r i c t io n on authority shall bind the limited liability c o m p a n y to persons having knowledge of the restriction. MISS. CODE ANN. § 79-29-303.3 T h e language in § 79-29-303(4) ("No act of a manager or member in c o n t r a v e n tio n of a restriction on authority shall bind the limited liability c o m p a n y to persons having knowledge of the restriction") does not affect the r e la t io n s h ip between Kinwood and BankPlus because the entities did not have a n y direct contact with one another; the transactions at issue are between (1) K in w o o d -- Northlake, and (2) Northlake -- BankPlus. Nor does it establish t h a t the deed in question is void ab initio rather than voidable. The statute a d d r e s s e s the nature of Kinwood's obligations to Northlake; it does not d e t e r m in e whether a deed that is valid on its face, but that does not bind the g r a n t o r to the grantee, becomes valid when passed to an innocent third-party p u r c h a s e r .4 In other words, § 79-29-303(4) means that the Kinwood Deed was a t least voidable. That begs the ultimate question.

Beginning on January 1, 2011, § 79-29-303 will be re-codified, as amended, at § 79-29307. 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. 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 M is s is s ip p i courts have held several types of deeds voidable rather than v o id ab initio. For example, when a corporation takes an ultra vires action not a u t h o r iz e d by its charter, the result can usually be ratified and thus cannot have b e e n void ab initio. See Home Owners' Loan Corp. v. Moore, 185 So. 253, 255 (M is s . 1939) ("An act of a corporation relating to the subjects within its powers t h o u g h it should exceed those powers is not void."); see also Haynes v. Covington, 2 1 Miss. (13 S. & M.) 408, 1850 WL 3405, at *2 (Miss. 1850).5 S im ila r ly , a fraudulent conveyance is voidable rather than void ab in itio -- i.e ., it is subject to the intervening rights of a bona fide purchaser for v a lu e without notice of the fraud. See Parker v. King, 108 So. 2d 224, 226 (Miss. 1 9 5 9 ) (fraudulently induced execution of a mineral deed is voidable); see also G u ic e 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

c o n v e y a n c e , on the other hand, is void ab initio and cannot pass title to a bona fid e purchaser. See Securities Inv. Co. of St. Louis v. Williams, 193 So. 2d 719, 7 2 2 (Miss. 1967) ("The note and trust deed having been forgeries, even an

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 MI S S . CODE ANN. § 79-13-302(b).

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No. 09-60743 in n o c e n t purchaser, for value and without notice that they were forgeries, could a c q u ir e no title."). Mississippi courts have held deeds void ab initio in homestead cases. A h o m e s te a d occupied by husband and wife cannot be conveyed without the s ig n a t u r e of both spouses, and any deed made without both signatures is a b s o lu t e ly void and passes no title. See Thornhill v. Caroline Hunt Trust Estate, 5 9 4 So. 2d 1150, 1152 (Miss. 1992).6 Mississippi courts have also held

u n a u t h o r iz e d tax sales by the State to be void ab initio rather than voidable. See P ittm a n v. Currie, 391 So. 2d 654, 655 (Miss. 1980); see also In re Hardy, 910 So. 2 d 1052 (Miss. 2005) (citing a tax sale case in support of its holding that certain d e e d s made by an agent who exceeded her power of attorney were void ab initio); M o n e y 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 v o id a b le /v o id ab initio question presented here. The issue has serious and p o t e n t ia lly far-reaching public policy implications for Mississippi LLCs and t h o s e who do business with them. For that reason, we have determined that the b e tt e r course is to certify the question.

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 I V . QUESTION CERTIFIED W e hereby certify, on our own motion, the following determinative q u e s t io n of law 7 to the Supreme Court of Mississippi: W h e n a minority member of a Mississippi limited liability c o m p a n y prepares and executes, on behalf of the LLC, a deed t o substantially all of the LLC's real estate, in favor of a n o t h e r LLC of which the same individual is the sole owner, w it h o u t authority to do so under the first LLC's operating a g r e e m e n t, is the transfer of real property pursuant to the d e e d : (i) voidable, such that it is subject to the intervening r ig h t s of a subsequent bonafide purchaser for value and w it h o u t notice, or (ii) void ab initio, i.e., a legal nullity? This court disclaims any intention or desire that the Supreme Court of M is s is s ip p i confine its reply to the precise form or scope of the question certified. The record and copies of the parties' briefs are transmitted herewith. T h is panel retains cognizance of the appeal of this case pending response fr o m the Supreme Court of Mississippi, and this court hereby CERTIFIES the q u e s t io n posed above. Q U E S T IO N CERTIFIED.

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.

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