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Petitioner was a 50-percent shareholder and secretary and
treasurer of D.B. Metalworks, Inc. (Metalworks), a tree cutting
and welding business. Petitioner purchased his 50 percent share
in Metalworks for $1,000.
On July 13, 1988, Donald Brown, president of Metalworks,
executed a note in the name of Metalworks (the first note), which
was attested to by petitioner, in petitioner's capacity as
"secretary-treasurer" of Metalworks. The first note provides
that, in 90 days, Metalworks will pay $22,879.75, plus interest,
to Farmers & Merchants Bank. Additionally, Mr. Brown and
petitioner signed a "Guaranty of Payment" (guaranty) in which
they agreed, inter alia, to be jointly and severally liable to
pay the first note. The page on which the guaranty was printed
also contains a transfer by Farmers & Merchants Bank, dated
December 22, 1988, of all "rights, title and interest to the
within note" to petitioner "WITHOUT recourse on us".
Additionally, petitioner individually signed a note (the
second note), dated August 8, 1989, which provides that, in 59
days, petitioner will pay $22,879.75, plus interest, to Farmers &
Merchants Bank. As security for the second bank note, petitioner
granted Farmers & Merchants Bank a security interest in the first
note. Below the language assigning the first note as collateral
is the following language: "[Petitioner] WILL REDUCE THIS LOAN
AS SOON AS D.B. METALWORKS COMES OUT FROM UNDER BANKRUPTCY.
[Petitioner] HAS HIS HOUSE ON CAMELLIA DRIVE SOLD, WILL BE CLOSED
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