The Mississippi Supreme Court recently invalidated a deed by a minority LLC owner to a new LLC and the subsequent deed of trust on the property.  Even though the bank dealing with the new LLC did not know that the prior deed was invalid, the bank lost its security interest in the property.

The Takeaway

This could have far-reaching implications for Mississippi real estate attorneys, lenders, and title companies.  Since limited liability company operating agreements (or other business entity documents for that matter) are not public record, any business in the chain of title could potentially invalidate a lender’s security interest in a mortgage.  We can expect banks and other lenders to take a closer look at transfers in the chain of title from business entities.

The Facts

Michael was a minority owner of Kinwood LLC.  He formed another LLC (Northlake LLC) of which he was the sole owner.  He then deeded Kinwood LLC real estate to Northlake LLC and used the real estate to secure a loan.  Northlake LLC defaulted on the loan and declared bankruptcy.

It turns out that the operating agreement of Kinwood LLC did not permit Michael to transfer the real estate from Kinwood LLC in the first place.  As a minority owner, Michael didn’t have the votes required to execute a deed without the consent of the other members.

When the other members of Kinwood LLC learned what had happened, they had the bankruptcy judge declare both the deed to Northlake LLC and the deed of trust void.

The bank appealed the bankruptcy judge’s order to the district court, which affirmed, and then to the Fifth Circuit.  The bank argued that the deed of trust was not void, but voidable.  Because the bank had accepted the deed of trust from Northlake LLC in good faith (without knowledge that the transfer from Kinwood LLC was not authorized), the deed of trust should be enforceable.

The Fifth Circuit found that the case involved a matter of Mississippi law for which there is no controlling precedent.  It certified the following question to the Mississippi Supreme Court:

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 bona fide  purchaser for value and without legal notice, or  (ii) void ab initio, i.e.,  a   legal nullity?

The Law

• A limited liability company operating agreement can limit the actual authority of a member to bind the company in certain transactions.
• Even if a member does not have actual authority, he may have apparent authority. Apparent authority can bind the LLC unless:
  • The member does not have actual authority to act for the company; and
  • The person with whom he is dealing has knowledge of the fact that the member has no such authority.

The Analysis

• Actual Authority – Do to the limitation in the operating agreement, Michael clearly did not have actual authority to transfer the real estate from Kinwood LLC to Northlake LLC.
• Apparent Authority – Focusing on the transfer from Kinwood LLC to Northlake LLC: Michael knew he didn’t have actual authority.  That knowledge was imputed to Northlake LLC.   Applying the above analysis for apparent authority:
  • The member (Michael) did not have actual authority to act for the company (Kinwood LLC);
  • The other party to the transaction (Northlake LLC) had knowledge that Michael didn’t have authority to transfer the property.
  • Thus, Michael had no apparent authority to transfer the property from Kinwood LLC to Northlake LLC.

The Holding

Since Michael had neither actual nor apparent authority to transfer the property, his actions did not affect the title to the property.

Northlake Development, L.L.C. v. Bankplus, 2011 WL 1743943, No. 2010-FC-01308-SCT (Miss. May 5, 2011)

The Mississippi legislature recently passed new laws that change and clarify the rules for recording legal documents in Mississippi.  The new amendments , which have been signed by the governor and take effect on July 1, 2011, will change the way Mississippi real estate attorneys prepare documents for recording with local chancery clerks.

New Acknowledgement Provisions

The new legislation provides a safe-harbor form of general acknowledgment that can be used by business organizations:

Personally appeared before me, the undersigned authority in and for the said county and  state, on this ________ day of ________, 20________, within my jurisdiction, the within named ________, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed in the above and foregoing instrument and acknowledged that he/she/they executed the same in his/her/their representative capacity(ies), and that by his/her/their signature(s) on the instrument, and as the act and deed of the person(s) or entity(ies) upon behalf of which he/she/they acted, executed the above and foregoing instrument, after first having been duly authorized so to do.

Mississippi real estate attorneys typically use the model language in the current statute for acknowledgment by business entities, but the model language doesn’t cover every possible combination of business entity.  This new safe harbor language will help address these deficiencies.

The new legislation also allows chancery clerks to refuse to record an instrument that is not properly acknowledged.  But if the chancery clerk does record the document, it is constructive notice notwithstanding the defective acknowledgement.

The original bill included language stating that acknowledgments used in other states would be recognized in Mississippi if they were proper in the laws of the state where the document was signed.  This provision generated a heated discussion within the Mississippi Bar’s Real Property Section prior to the passage of the bill.  Some felt that this would place too great a burden on Mississippi attorneys by requiring them to make a judgment call about the validity of out-of-state acknowledgments.  The exclusion of this language is likely to have little effect, however, since the recordation of an acknowledgement done in another state, even if defective, will serve as constructive notice.

New Real Estate Recording Requirements

New legislation will also change the requirements for recording Mississippi legal documents, including deeds and certificates of trust.  These new requirements update the changes made a few years ago, which significantly changed the way we prepare documents for recording in Mississippi. Here’s a summary of the new changes:

• All documents must now use at least 10 point font.  This is an increase from the 8 point font permitted under the prior law.
• The document preparer must list his or her physical address and business telephone number. The prior law allowed the preparer to use a post office box and a cellular or home telephone number.
• The first page of the document must list the name, physical mailing address and business phone number of ever grantor, grantee, borrower, beneficiary, trustee, or other party to the instrument. Prior law required this information on deeds only (and not deeds of trust, etc.).

All of these changes go into effect on July 1, 2011.

Mississippi Tax Lien Case: A procedural error in a tax sale resolves in favor of the original landowner

I posted yesterday on the Mississippi tax sale and tax lien process and how tax sales are generally disfavored by the courts.  In my experience, if a court can find a reason to invalidate a tax sale, it will.  It is important for tax lien attorneys who represent tax lien purchasers to follow the formalities to the tee.  And it is important for tax lien attorneys who represent owners to know the formalities well enough to bring a successful challenge.

To illustrate the importance of strict adherence to the tax lien requirements, I want to look at a recent Mississippi appellate case involving the issue of notice and whether the court’s failure to execute an affidavit detailing due diligence in serving notice voided the tax deed granted to the purchaser.   Roleh, Inc., lost its commercial property in August 2004 after failing to pay their 2003 real property taxes. The property was sold at a tax sale to an investment group called Maitland Investors. In December 2004, after the sale of the commercial property, the Mississippi Secretary of State administratively dissolved Roleh At the time of the dissolution, the registered agent for Roleh was T.N. Roberts, who died in 2003.

By 2006, the commercial property had been sold by Maitland and ended up in the possession of C.F.P. Properties, Inc. Two years after the tax sale, Roleh had failed to redeem the property and the clerk of the Chancery court mailed notice of the final sale to Roleh. Notice was returned to the court with the message that Roleh was no longer at the address that had been on record with the Secretary of State.  The clerk then published notice in the newspaper announcing the expiration of the tax redemption period. Another written notice was sent to Roleh and it too was returned. It is alleged that the clerk filed an affidavit reciting the attempts at providing notice to Roleh. However, the affidavit was not in the tax-sale record.

Roleh filed to have the sale of the property voided based on the fact that the affidavit proving notice was not in the official tax sale records regarding the property.  The lower court found in Roleh’s behalf, holding that the lack of an affidavit by the court documenting attempts to provide notice was sufficient grounds to set aside the tax sale.  On appeal, the Court of Appeals affirmed the lower court’s holding and voided the final sale of the commercial property. The Court of Appeals stated that the policy in Mississippi is to favor and protect the original landowner from sale of land for failure to pay taxes.

C.F.P. Properties, Inc. v. Roleh, Inc., NO. 2009-CA-00391-COA.

Today I want to pick back up on what is becoming a series on Mississippi real estate.  As indicated in Mississippi Probate and Real Estate, the issues of real estate and probate law are so intertwined that to be capable in one requires an understanding of the other.

Last week, I looked at the general topic of adverse possession in Mississippi and a Mississippi adverse possession case.  This week, I want to look at Mississippi’s tax sale statutes. There seems to be an increased interest in this topic at this time of year, in advance of the tax sales in August.  We will begin with a general overview of Mississippi tax liens and tax sales.  Tomorrow, we will take a look at a recent Mississippi tax lien case to see how tax sales play out in real life.

A tax sale occurs when there are overdue taxes on real estate. Mississippi tax sales are typically held the last Monday in August and are well-noticed in local newspapers.  At the tax sale, the taxes are auctioned by competitive bid using an overbid system. The successful bidder will pay the taxes due for the property.  That payment of taxes becomes a lien on the property in favor of the buyer.  The buyer is given a tax lien certificate to evidence his claim against the property.

The original owner has two years to “redeem” the property. Redemption occurs when the original owner pays the amount he owed plus any taxes since paid on the property and interest and fees that are charged by the court. If the original owner is unable to redeem the property, the buyer will be given a sales deed at the end of the two-year period.

Mississippi tax sales are fraught with technical formalities.  And since they are generally disfavored by the court, failure to comply with the formalities usually results in invalidation of the tax sale.  For example, one requirement is that, at the end of the redemption period, the county Chancery Clerk is required to send notice to the original owner that the final sale of the property will take place.[1] Under this statute, the sheriff must make service of notice, and notice must also be sent by registered or certified mail.  Failure to give proper notice could be grounds for invalidating the tax sale.

[1] Miss. Code Ann. § 27-43-3 (Supp. 2009).

I wrote yesterday about adverse possession in Mississippi and how it relates to probate.  Today I want to look at a recent Mississippi Court of Appeals case in which the appellant tried to use adverse possession to claim a possessory right in the land of his neighbors to the north. The court tested the claim by applying the elements of adverse possession that we discussed yesterday to the facts of the situation and deciding whether the appellant had met his burden of proof by providing clear and convincing evidence.

In Niebanck v. Block, two families of landowners (the Dale and the Wimses families) had discovered that a Mr. and Mrs. Niebanck had a fence running across the southernmost part of their property and asked the Niebancks to remove it.  In response, the Niebancks wrote the Dale’s and Wimses’ each a letter offering to purchase their land for 5,000 dollars an acre. In the letter, the Niebancks stated that they had believed the property to the fence and including the fence was theirs. And that they had used and maintained said property for over 14 years. However, in fairness and with neighborly consideration they would like to make an offer to buy the property.

Both neighbors responded to the Niebancks letter with a request that the fence be removed and the use of the property be returned to them. The Niebancks then sought an injunction from the court to prevent the removal of the fence and asserted their claim that the property was actually theirs under the legal principle of adverse possession. The Niebancks argued that they had maintained possession of their neighbors’ land for the statutory 10-year period in an adverse way.  Specifically, the Niebancks asserted that they owned 0.7 and 0.4 acres of each of their northern neighbors’ land.

The lower court found that the Niebancks had failed to meet certain elements of adverse possession. In particular the Neibancks had failed to establish by clear and convincing evidence that they had maintained 2) actual or hostile possession and 3) open, notorious, and visible possession.  The Niebancks appealed.

On appeal, the Mississippi Court of Appeals reviewed the lower court’s decision regarding adverse possession.  The Court noted that in order for the possession to be considered hostile, the landowner of the disputed property could not believe that the possessors presence on the property was by permission.  In this case, the previous owner of the Dale’s and Wimses’ property had given Mrs. Niebanck permission to ride her horse on his property. This made the Niebancks occasional use of their property permissive as oppose to hostile.

The element of actual or hostile possession is there to put the current landowner on notice to the fact that their land is being occupied by another. Setting up a dwelling or making a spectacle of your use of the land is often enough to meet this requirement. But if you have received permission to use the land, all subsequent acts become permissive possession rather than actual or hostile.

The court also discussed whether the Niebancks met the element of having open, notorious, and visible possession of their neighbors land. The court held that mere possession of the land is not enough for it to be considered open and notorious. This requirement is also there to give the landowner notice that a person other than them is occupying their land. Thus giving them a chance to regain possession of their land.

The Niebancks asserted that their possession was open and notorious based on the fact that there was an old barb wired fence north of their actual boundary line.  Previous cases have said that if a fence encloses the property for a period of ten or more years, title of the land will vest in the adverse possessor, even if the fence is in disrepair.[1]

However, the Niebancks did not build the fence.  It was there when they came into possession of their land. The previous owner, who owned all the acreage that was subsequently subdivided and sold to the Niebancks, Dales and Wimses, had put the fence up as part of a corral for cows. Therefore, the fence was not used to show open, visible and notorious possession.  And the Niebancks did not fulfill the burden of proving, by clear and convincing evidence, that the element of open, notorious and visible possession was met.

The Mississippi Court of Appeals held that the husband and wife failed in their claim of adverse possession and consequently needed to remove their fixtures from their neighbors land.

Niebanck v. Block, NO. 2009-CA-00530-COA.

[1] Roy v. Kayser, 501 So. 2d 1110, 1112 (Miss. 1987).