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National's establishing a sinking fund or reserve for the payment
of principal and interest on the Fries note, and the note was not
secured.
Concurrently with the execution of the Fries note, Brands
advanced $24,900 as a "loan" to National and in exchange therefor
received a note on terms similar to the Fries note. Either
Tucker or Tavistock also advanced funds to National of $49,800 at
this time under similar terms. Burkhalter did not make such an
advance to National. Immediately after the advances, National
had a debt to equity ratio of 166 to 1 ($149,400 notes to $900
equity). From the start, the expectation of the shareholders was
that the operations would generate the cash profits to repay the
advances.
On the same day that National received the advances,
petitioner conveyed an interest in his house to Tavistock in
exchange for $75,000. Petitioner understood that, as a condition
of his employment with National, he was required to infuse
capital into the company. However, he did not have any cash on
hand, nor was he in a position to risk substantial amounts of
money at the time. Therefore, he mortgaged his residence to
Tavistock and contributed the proceeds to National. National
issued the Fries note in return for that infusion of cash.
Shortly after these transactions were completed, National
acquired an operating travel agency from Clark Howard (Howard),
called Action Travel (Action), for roughly $200,000. National
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Last modified: May 25, 2011