Tuller v. Nantahala Park Co.

• Decision Date: 05 August 1981
• Docket Number: No. 21541,21541
• Citation: 276 S.C. 667,281 S.E.2d 474
• Court: South Carolina Supreme Court
• Parties: Charles B. TULLER, Jr., Not Individually But as Nominee of the Trustees of Cousins Mortgage Equity and Investments, an Unincorporated Business Trust Organized Under the Laws of the State of Georgia, Respondent, v. NANTAHALA PARK COMPANY, Hilton Head Plantation Company, Inc., also known asHilton Head Plantation Company; Citibank; and First National Bank of Chicago, of which Hilton Head Plantation Company, Inc., also known as Hilton HeadPlantation Company,Citibank and First National Bank of Chicago are, Appellants.

Page 474

281 S.E.2d 474

276 S.C. 667

Charles B. TULLER, Jr., Not Individually But as Nominee of

the Trustees of Cousins Mortgage Equity and Investments, an

Unincorporated Business Trust Organized Under the Laws of

the State of Georgia, Respondent, v. NANTAHALA PARK COMPANY, Hilton Head Plantation Company,

Inc., also known asHilton Head Plantation Company; Citibank;

and First National Bank of Chicago, of which Hilton Head

Plantation Company, Inc., also known as Hilton

HeadPlantation Company,Citibank and First National Bank of

Chicago are, Appellants.

No. 21541.

Supreme Court of South Carolina.

Aug. 5, 1981.

McKay, Sherrill, Walker & Townsend, Columbia, for Hilton Head Plantation Co., Inc.

Roof & Cox, Columbia, for Citibank, et al.

Callison, Tighe & Rush and Nelson, Mullins, Grier & Scarborough, Columbia, for respondent.

LITTLEJOHN, Justice:

The issue presently before the court is the validity of a real estate mortgage given by defendant Hilton Head Plantation Co., Inc. (Hilton Head Co.) to plaintiff Cousins Mortgage Equity and Investments (Cousins) ¹. The Mortgage covers 58 acres on Hilton Head Island in Beaufort County, South Carolina.

A review of the facts is necessary to a discussion of the issues. In the early 1970's, Sea Pines Co. and its two wholly-owned subsidiaries, Hilton Head Co. and Nantahala Park Co. (Nantahala), were land developers. Hilton Head Co. generally developed resort property on Hilton Head Island, while Nantahala was chiefly involved with resort development around Macon and Clay Counties in North Carolina.

About September, 1973, Nantahala began negotiations for a loan from Cousins to be used toward acquisition of development property in North Carolina. On October 16, 1973, the negotiations culminated in a $3.4 million loan. The full amount was not advanced by Cousins at that time. To secure the loan, Cousins was given a mortgage to approximately 7,000 acres of Nantahala's land in North Carolina, and Sea Pines guaranteed payment on the note. The negotiations also expressly anticipated the pledge of some of Hilton Head Co.'s property as additional security.

Several weeks later, on October 31, 1973, defendants Citibank and First National Bank of Chicago (collectively referred to as "Banks") entered into a revolving credit loan agreement with Hilton Head Co. This loan was basically a ten-year project for land acquisition by Hilton Head Co. in which it could borrow money from Banks not to exceed $64 million. To secure this debt, Hilton Head Co. gave the Banks a mortgage to 3,300 acres of its property, and Sea Pines guaranteed payment. The 58 acre tract on Hilton Head Island was not included in the mortgage. The mortgage, which refers to the agreement, was duly recorded in Beaufort County.

In April, 1974, pursuant to the terms of the Nantahala-Cousins transaction, Hilton Head Co. gave Cousins the mortgage here in issue to a 58 acre tract (valued around $700,000) on Hilton Head Island. Cousins relied on this additional security in making further advances from the $3.4 million loan to Nantahala.

In latter 1974, the Banks, recognizing that the Sea Pines corporate family was incurring financial problems, began negotiations in an effort to protect its revolving credit loan without resorting to foreclosure. The discussions resulted in a pledge of all Hilton Head Co. stock to the Banks. Ultimately, the banks bought out Hilton Head Co. in its entirety in November, 1975, by acquiring all of its stock.

In February, 1976, Cousins commenced foreclosure proceedings to sell the mortgaged property in both North and South Carolina for payment on its outstanding debt of roughly $4 million. At the North Carolina foreclosure, Cousins acquired the 7,000 acre mortgaged property with a bid of about $2 million. Sea Pines was released as guarantor following payment of good consideration to Cousins. The remaining debt of approximately $2 million was reduced to roughly $1.3 million upon a showing that Cousins' bid of $2 million on the North Carolina property was more than $700,000 less than the fair market value of that property.

Cousins now seeks to foreclose its mortgage lien on the 58 acres on Hilton Head Island towards satisfaction of the remaining debt. Hilton Head Co. and the Banks answered the foreclosure complaint and raised several defenses, as follows:

(1) The mortgage constitutes a fraudulent conveyance of the Banks, as creditors, under the Statute of Elizabeth (§ 27-23-10, Code of Laws of South Carolina, 1976);

(2) The mortgage violates § 33-13-170, 1976 Code, which prohibits certain corporate guaranties;

(3) Hilton Head Co. received no good consideration for the mortgage at a time when in fact it had a negative net worth;

(4) Cousins is barred from foreclosure of the South Carolina property because it made an election of remedies by initially foreclosing on the North Carolina property; and

(5) Cousins chilled the bidding in North Carolina by seeking an amount in excess of that owed.

The matter was heard by a special referee, who concluded that the mortgage constituted a fraudulent conveyance as to the Banks. All other defenses were decided in Cousins' favor. Exceptions were taken by all parties on appeal to the circuit court. The circuit judge reversed the special referee's finding that the mortgage constituted a fraudulent conveyance and ordered foreclosure. Hilton Head Co. and the Banks have appealed.

We treat first the basic issue on which the referee and the circuit judge disagreed: Was the mortgage from Hilton Head Co. to Cousins in April, 1974, a fraudulent conveyance within the terms of the Statute of Elizabeth, § 27-23-10 of the 1976 Code? and, did the lower court err in holding that the conveyance was not fraudulent?

Insofar as the appeal of Hilton Head Co. is concerned, we hold that this litigant has no standing to contest the validity of the mortgage it executed. Certainly, under no view can it be said that the mortgage was entered into for the purpose of defrauding Hilton Head Co. It can be forcefully argued that the Banks, by acquiring all of the Hilton Head Co. stock, have no stronger rights, but the result we reach need not stand on this ground alone.

As relates to the appeal by the Banks, we are in agreement with the circuit judge, who held that the Banks were not entitled to have the mortgage declared invalid. The circuit judge correctly disposed of this issue. We adopt his discussion as the directive of this court:

Under South Carolina Law, the obtaining of a judgment and a nulla bona return is a condition precedent to bringing a suit to void a voluntary transfer as a fraudulent conveyance. Numerous cases have held that the right to attack a voluntary conveyance on the grounds of legal or unintentional fraud belongs solely to a pre-existing creditor and such creditor is required to reduce its debt to judgment and have execution issued and returned nulla bona before proceeding to void a transfer as a fraudulent conveyance. This requirement is based upon the usual rule that one invoking equitable remedies must have exhausted his remedies at law. A full explanation of the history and application of the rule can be found in Temple v. Montgomery, 157 S.C. 85, 153 S.E. 640 (1929). This rule is clearly stated in Temple :

The law requires in an action by a creditor solely to set aside his debtor's voluntary deed, for legal fraud, allegation and proof that the debt was reduced to judgment, execution issued to enforce collection of the judgment, and a nulla bona return on the execution by the Sheriff.

In this case the banks have not met these essential requirements. There has been no action to reduce the debt owed to the banks to judgment, no execution and no nulla bona return on the execution. In his report the special referee relies on the case of Penning v. Reid, et al., 167 S.C. 263, 166 S.E. 139 (1931). He concluded that under Penning the plaintiff's mortgage was a fraudulent conveyance. After reviewing Penning and other South Carolina cases, I am satisfied that the special referee did not properly apply the law to the facts in this case.

Consistent with other cases in this state, Penning holds that for a creditor to prevail in an action to set aside a conveyance for legal fraud, he must obtain a judgment, execute upon it and receive a nulla bona return from the sheriff.

The reason for this requirement is made clear in Penning : the liquidation of the debtor's property is conclusive on the issue of whether his assets will satisfy his debts. The creditor is entitled to have the conveyance set aside only if the debtor's property does not in the "final event" prove sufficient to pay his debts existing at the time of conveyance. The court summarized the rule in Penning as follows:

... one who is in debt, cannot make a voluntary conveyance, which will prevail against existing debts. The rule is thus stated in Richardson v. Rhodus, 14 Rich. 95 (we add italics): "The general rule is, that, as against creditors...