In re Palmetto Interstate Dev. II, Inc.

653 B.R. 230

IN RE: PALMETTO INTERSTATE DEVELOPMENT II, INC., Debtor(s).

C/A No. 23-01102-EG

United States Bankruptcy Court, D. South Carolina

Signed August 17, 2023

Linda Barr, Brandon K. Poston, Office of United States Trustee, Columbia, SC, for U.S. Trustee.

Robert H. Cooper, The Cooper Law Firm, Greenville, SC, for Debtor.

Order

Elisabetta G. M. Gasparini, United States Bankruptcy Judge District of South Carolina

The relief set forth on the following pages, for a total of 23 pages including this page, is hereby ORDERED.

ORDER GRANTING SUMMIT SHORES LENDER, LLC'S MOTION TO DISMISS

THIS MATTER came before the Court for a hearing on August 3, 2023, to consider the Motion to Dismiss this case pursuant to 11 U.S.C. §§ 105 and 1112 filed by Summit Shores Lender, LLC ("Summit Shores")¹ and the Objection thereto filed by Palmetto Interstate Development II, Inc. ("Debtor").² The hearing was attended by Leonard Ray Watts ("Watts"), the Debtor's Chairman of the Board and 100% shareholder; James Marshall Biddle, Esq. ("Biddle"), the Debtor's President; Robert H. Cooper ("Debtor's Counsel"); and Tara Nauful ("Summit Shores' Counsel"). At the hearing, Watts and Biddle testified under oath, and exhibits submitted by Summit Shores—including a set of facts to which Summit Shores and Debtor stipulated and which are incorporated below—were admitted into evidence without objection. After careful consideration of the facts, applicable law, and arguments of counsel, the Court grants the Motion to Dismiss, declines to retain jurisdiction over the related adversary proceedings, and retains jurisdiction over the Motion for Sanctions for Willfully Violating the Automatic Stay ("Motion for Sanctions") filed by the Debtor on July 19, 2023.³ The Court enters the following findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52.⁴

FACTS

Debtor is a corporation organized and existing under the laws of the State of South Carolina and owns "single asset real estate" as that term is defined by 11 U.S.C. § 101(51B). Biddle is the Debtor's registered agent and has been Debtor's President since approximately January 2023. Watts, a real estate developer who owns several other companies, is Debtor's Chairman of the Board and its 100% shareholder. Debtor claims an interest in the following parcels of real property located in the Summit Shores development of Myrtle Beach, SC (the "Properties"):

(1) 1.5 acres of "raw land" located at N Hwy 17 Bypass, Lot A-1, Tax Map #180002283, which is owned by Debtor in fee simple and claimed by Debtor to be worth $5.1 million;

(2) 5.58 acres of "raw land" located at N Hwy 17 Bypass, Lot AA, Tax Map #180002286, which is owned by Debtor in fee simple and claimed by Debtor to be worth $5.75 million;

(3) 1.8 acres of "raw land" located at N Hwy 17 Bypass, Lot C-1, Tax Map #180002288, which is owned by Debtor in fee simple and claimed by Debtor to be worth $3.05 million;

(4) 3.82 acres of "raw land" located at N Hwy 17 Bypass, Lot C-2, Tax Map #180002289, which is owned by Debtor in fee simple and claimed by Debtor to be worth $3.35 million;

(5) 3.33 acres of "raw land" located at N Hwy 17 Bypass, Lot AA-1, Tax Map #180002004, which is owned by Summit Shores, but the Debtor claims an equitable interest therein and asserts the property is worth $5.25 million;

(6) 6.29 acres of "raw land" located at N Hwy 17 Bypass, Lot A, Tax Map #180002284, which is owned by Summit Shores, but the Debtor claims an equitable interest therein and asserts the property is worth $9.75 million; and

(7) 4.25 acres of "raw land" located at N Hwy 17 Bypass, Lot B, Tax Map #180002274, which is owned by Summit Shores, but the Debtor claims an equitable interest therein and asserts the property is worth $9.05 million.

The factual background regarding Debtor's incorporation and the history involving the Properties spans over a decade and is extensive. While it is not crucial to delve into what has transpired over the past 10 years in excruciating detail for purposes of ruling on the Motion currently before this Court, based on the pleadings filed and documents submitted into evidence, the facts can be summarized as follows:

A. State Court Litigation

Watts and some of his companies initially owned all seven Properties. Subsequently, he sold three parcels ("First Parcels") to individuals who obtained financing from, and granted mortgages to, Enterprise Bank of South Carolina ("Enterprise"). They defaulted on their loans with Enterprise, and in 2013, Enterprise filed a foreclosure action in the Horry County, South Carolina Court of Common Pleas (the "State Court") to foreclose its mortgages on the First Parcels (No. 2013-CP-26-2410). Debtor sought financing from Summit Shores to buy the First Parcels and settle Enterprise's foreclosure action. Summit Shores loaned Debtor $8.5 million, and, as a condition to the extension of funds, it required liens on the First Parcels, the release of Enterprise's liens thereon, and Debtor to be incorporated. All the Properties were eventually transferred to Debtor, and Summit Shores was granted liens on them. On June 19, 2014, in consideration for the loan, Debtor executed and delivered to Summit Shores a Promissory Note in the original principal amount of $8.5 million, a Mortgage, and other documents, pursuant to which Summit Shores has a first mortgage lien on all assets of the Debtor.⁵ Subsequently, Enterprise was paid the amount required for it to release its liens on the First Parcels; nonetheless, it proceeded with its foreclosure action, obtaining title to the First Parcels as the successful bidder at the foreclosure sales.

Debtor did not timely make—nor has it ever made—payments on the Promissory Note to Summit Shores. Consequently, on March 4, 2015, Summit Shores commenced a foreclosure action against Debtor and Watts in the State Court captioned Summit Shores Lender, LLC v. Palmetto Interstate Development II, Inc., No. 2015-CP-26-01729 (the "Foreclosure Action") to foreclose its liens on the other four Properties ("Second Parcels"). Biddle, an attorney licensed in South Carolina, represented Debtor and Watts, as the guarantor of the debt, in the Foreclosure Action.

In 2016, Summit Shores filed a separate lawsuit in the State Court against Enterprise and other defendants related to Enterprise's failure to release its liens on the First Parcels and continuation of its foreclosure action (No. 2016-CP-26-02163) ("Fraud Action"). In 2022, a jury returned a verdict against Enterprise, awarding Summit Shores nearly $16 million in actual and punitive damages. Following the verdict, Summit Shores and Enterprise entered a sealed settlement.

The Foreclosure Action remained dormant from April of 2016 to November of 2022. On February 7, 2023, Summit Shores filed a Motion for Summary Judgment in the Foreclosure Action, which Debtor and Watts opposed, asserting that, because it was already made whole by the $16 million verdict in the Fraud Action, Summit Shores should be precluded from proceeding with foreclosure on the Second Parcels and directed to enter a satisfaction of its mortgage. On March 9, 2023, a hearing was held on Summit Shores' Motion for Summary Judgment, and the matter was taken under advisement. On March 16, 2023, a Staff Attorney for the Master-in-Equity presiding over the Foreclosure Action emailed counsel for Summit Shores and Debtor advising them that the Master-in-Equity would grant partial summary judgment to Summit Shores. The email requested that Summit Shores' counsel prepare a proposed order "granting partial Summary Judgment to [Summit Shores] for a judgment of foreclosure leaving open the issue of amounts due to be resolved in mediation or determined by the court with a trial. Mediation is to be scheduled within the next 30 days. A trial date is also to be scheduled when the mediation is scheduled."⁶

B. Debtor's Bankruptcy Filing

On April 17, 2023 (the "Petition Date"), Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. Debtor admits that it filed this case to invoke the automatic stay of 11 U.S.C. § 362 to stay the Foreclosure Action and file the two adversary proceedings against Summit Shores described below. On April 18, 2023, the Master-in-Equity in the Foreclosure Action entered an Order granting, in part, Summit Shores' Motion for Summary Judgment. Because the Order was entered after the Petition Date, the Order was subsequently vacated by consent.

Debtor is a "debtor in possession" as that term is defined by 11 U.S.C. § 1101(1), and no trustee has been appointed. On May 15, 2023, Debtor filed schedules and statements.⁷ The only assets listed in the schedules are the Properties,⁸ and Debtor owns no other assets—tangible or intangible. The parties agree the Second Parcels have never generated any revenue and cost money to maintain. Summit Shores is Debtor's only secured creditor, and the parties stipulate that Summit Shores' claim is approximately $20,707,964.39.⁹ However, Debtor disputes it owes this amount through its adversary proceedings described below. Debtor's only unsecured creditor thus far is the Internal Revenue Service ("IRS"), which has filed a claim for $500.00, with $200.00 claimed as priority.¹⁰

Other than funds advanced or loaned by Watts, Debtor has no income or sources of revenue. The filing fee and the retainer paid to Debtor's Counsel for the bankruptcy representation was paid by Watts. Debtor has never had any employees other than its principals. The real estate taxes on the Second Parcels have been paid by Summit Shores.

On May 22, 2023, at the meeting of creditors pursuant to 11 U.S.C. § 341, Biddle testified that Debtor's plan was to reorganize through its pursuit of adversary proceedings against Summit Shores to regain title to the First Parcels and cease the Foreclosure Action on the Second Parcels, with the ultimate goal of developing the Properties. To date, Debtor has filed three Monthly Operating Reports covering the period...