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Riviera manufactured fiberglass boats. Petitioners
incorporated Riviera on January 12, 1978. Petitioners were the
100-percent shareholders of Riviera. Petitioner husband was the
president of Riviera, and petitioner wife was its vice president.
Petitioners initially invested $30,000 for the common stock
of Riviera. Petitioners also initially "loaned" Riviera
$42,809.03 represented by a promissory note. In return for
advancing these funds, Riviera executed a 6-page security
agreement on January 13, 1978, that granted petitioners, among
other rights, a security interest in "all boats, motors, pumps,
inventory, molds, equipment, tools, raw materials, work in
process and accounts receivable".
By August 31, 1979, petitioners claim they had advanced
Riviera an additional $44,755.81. Riviera and petitioners
executed a total of $87,564.84 in promissory notes as of that
date.
On October 9, 1979, in a document entitled "Action by
Unanimous Written Consent of the Board of Directors", Riviera
ratified the above-mentioned "borrowings" described in the
security agreement and the promissory notes. On October 9, 1979,
petitioners, in their individual capacities, sent a letter to
Riviera demanding "payment of the total amounts due [$87,564.84]
under the notes including interest not later than 10 days from
receipt of this letter."
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