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The PEDRO was a 47-foot twin diesel motor yacht, the hull of
which was made of carbon steel. The exterior of the hull was
zinc chromate bonded for corrosion resistance purposes, but the
interior of the hull was not so bonded.
The outfitting of the PEDRO was completed in July or August
of 1988. In December, 1987, before the outfitting was completed,
Northrop and Johnson, petitioners' marketing representative, had
suggested an asking price of $520,000 for the boat. In
September, 1988, Durham Trust Bank issued a mortgage on the
completed boat in the amount of $321,000, which was approximately
the amount petitioners were required to pay Pedro-Holland, having
been given one year "free financing" from the delivery date in
July, 1987.
Shortly thereafter, petitioners and Northrop and Johnson
agreed to advertise the boat for sale at a price of $465,000. In
November, 1988, petitioners decided that, due to their heavy
carrying charges and to obtain a quick sale, they would reduce
the asking price to $396,000, which petitioners figured was just
below their "total base cost" of $402,000.
On February 7, 1989, a valve exploded on the boat, creating
a two-inch hole five feet below the water line. Since the boat
weighed 40 tons, the explosion created a "geyser" inside the
hull. With the prompt intervention of the U.S. Coast Guard, the
boat was kept from totally sinking, but took three feet of water
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