It's common for members of a member-managed limited liability company, or LLC, to conduct business on behalf of the LLC. But what if a member acts without the authority to do so? Do that member's actions bind the LLC?
The Mississippi Supreme Court considered these questions in the case of Inray Northlake Development. George Kinney-Yaylocks and Michael Earwood formed Kinwood Capital Group, LLC. a member-managed LLC, to hold and develop property. Earwood was the minority member, holding only a 25% interest. Kenwood's operating agreement stated that members holding at least a 75% interest must approve any major disposition of the company's assets.
Earwood secretly formed Northlake Development LLC, naming himself the sole member. Earwood then executed a warranty deed conveying Kinwood's property to Northlake. Shortly after that, Northlake applied to Bank Plus for a loan. Bank Plus made the loan but took a deed of trust on the property as collateral.
A few years later, Northlake filed for Chapter 11 bankruptcy, listing the property as Northlake's asset. Kenny Yalox learned of Earwood's actions and challenged the deed, purportedly transferring Kinwood's property to Northlake. The bankruptcy court concluded, that Earwood had no authority to make the conveyance and declared the Kinwood deed and Bank Plus's deed of trust null and void. Bank Plus appealed. The district court affirmed.
Bank Plus appealed to the Fifth Circuit, arguing that the deed was voidable, not void, and enforceable in this instance because Bank Plus had taken the deed of trust from Northlake in good faith and without notice that Earwood didn't have the authority to convey it. Finding this to be a question of first impression for Mississippi, the Fifth Circuit certified the question to the Mississippi Supreme Court.