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4. Modification of the Sale Agreement
On September 14, 1987, petitioners and Voier agreed to raise
the Seattle Pump stock purchase price by $40,000 based on Seattle
Pump's accounts receivable. On that date, Voier agreed not to
compete with petitioners, and petitioners agreed to give bonuses
to certain key employees. Petitioners gave Voier a promissory
note for $40,000 secured by petitioners' savings account.
5. 1989 Promissory Note and Letter of Credit
A balloon payment for the balance owing on the $262,000 note
was due in late 1988. Petitioners asked Voier to extend the due
dates of the $262,000 and $40,000 promissory notes. Voier agreed
to refinance and extend the due dates of the two notes.
On February 1, 1989, petitioners signed a $286,000
promissory note (1989 note) to Voier, which combined the
outstanding obligations of the 1986 and 1988 promissory notes and
increased the interest rate. Voier required petitioners to
secure the 1989 note with a letter of credit. Petitioners
applied to Evergreen Bank for a new letter of credit. Evergreen
Bank issued a new letter of credit on February 1, 1989 (the 1989
letter of credit) to secure the 1989 note.
As with the 1987 letter of credit, the 1989 letter of credit
allowed petitioners to pay amounts drawn on it by Voier, enabling
petitioners to avoid collection by Evergreen Bank by paying the
amount due. Petitioners used the same two deeds of trust to
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