-8-
establish reserves. Thereafter, section 5.3.4 of the IHCL Restated
Agreement directed liquidation proceeds to go--
To the payment to the Partners, who have positive
capital account balances, in proportion to their positive
capital account balances, of an amount equal to the sum
of the positive balances in the Partners' capital
accounts as of the date of such distribution, after
giving effect to all contributions, distributions and
allocations of Net Income, Net Loss and Gain for all
periods, including the period during which such
distribution occurs.
As of December 31, 1985, THEI had a beginning capital account
value of zero. For 1986, it had a negative capital account value
or balance of $1,701,520 for both its general and limited
partnership interests. For the next 5 years, its negative capital
account balance consistently exceeded $5 million. During the year
at issue, THEI did not have a positive capital account balance.
By January 1986, Dondi had contributed $10.8 million to IHCL
and agreed to pay the $9 million balance in subsequent quarterly
installments. Dondi, however, encountered difficulties and failed
to make its payment due January 6, 1987. Accordingly, in April
1987, THEI gave Dondi written notice, under section 4.3.4.2(d) of
the IHCL Restated Agreement, that Dondi's allocation of 99 percent
of IHCL's losses was terminated. The IHCL Restated Agreement then
allocated the net losses of IHCL to the partners pro rata in
accordance with their partnership interests. Thereafter, 15
percent of the losses were allocated to Dondi, reflecting its
limited partnership interest, and 85 percent of the losses were
allocated to THEI, reflecting both its general and limited
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