Authority in Member-Managed LLCs: Case Study of Inray Northlake Development
Overview
Context: Discussion on whether actions by a member of a member-managed LLC, without authority, bind the LLC.
Case: Inray Northlake Development considered by the Mississippi Supreme Court.
Background
Parties Involved:
Kinwood Capital Group, LLC: A member-managed LLC formed to hold and develop property.
George Kinney-Yaylocks and Michael Earwood: Founders of Kinwood; Earwood holds a minority 25% interest.
Operating Agreement:
Major asset dispositions require approval by members holding at least a 75% interest.
Incident
Actions by Earwood:
Formed Northlake Development LLC secretly, naming himself sole member.
Executed a warranty deed conveying Kinwood's property to Northlake.
Subsequent Developments:
Northlake applied for a loan from Bank Plus, using the property as collateral.
Northlake later filed for Chapter 11 bankruptcy, listing the property as its asset.
Legal Challenge
Challenge by Kenny Yalox:
Disputed Earwood's authority to transfer Kinwood's property to Northlake.
Bankruptcy Court Decision:
Concluded Earwood lacked authority, declaring the Kinwood deed and Bank Plus's deed of trust null and void.
Appeals
Bank Plus's Argument:
The deed was voidable, not void.
Claimed enforcement was valid as Bank Plus took the deed of trust in good faith, unaware of Earwood's lack of authority.
Court Proceedings:
District court affirmed the bankruptcy court decision.
Bank Plus appealed to the Fifth Circuit.
The Fifth Circuit certified the question to the Mississippi Supreme Court, as it was a first impression matter in Mississippi.
Key Legal Question
Does a member's unauthorized actions bind the LLC if an innocent third party acts in good faith and without notice of the lack of authority?
Implications
This case addresses significant legal questions regarding authority and accountability within an LLC structure, particularly in the context of property transactions and third-party engagements.