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Between January and July of 1988, under the October 1987
contract, Clinch River made payments to petitioner totaling
$3,180,000, leaving a balance of $1,956,000 ($5,136,000 less
$3,180,000 equals $1,956,000) to be paid upon completion of the
mill renovation which balance, in July of 1988, was accrued as
income on petitioner's books and records.
Upon completion of the renovation, the mill reopened, and
Clinch River began operating the mill 7 days a week. Clinch
River, however, failed to pay the $1,956,000 balance due
petitioner under the October 1987 cost-plus contract.
By letter dated July 11, 1988, Clinch River wrote petitioner
and acknowledged the $5,136,000 total bill for renovation of the
mill, but Clinch River also requested additional time to pay the
$1,956,000 balance due. Specifically, Clinch River represented
that by October 30, 1988, it would make an additional payment of
$603,000 to be financed from additional loan proceeds. Clinch
River made no representation as to when it would pay the amount
due in excess of $603,000.
By letter dated October 25, 1988, Clinch River informed
petitioner that it would not be able to pay the $603,000 promised
by October 30, 1988. Clinch River had no capital, operating
funds, or credit from which to make the payment.
Due to Clinch River's financial condition, petitioner and
Clinch River renegotiated certain aspects of the cost-plus
contract relating to renovation of the mill and specifically
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