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In an attempt to make Speedmart profitable, petitioner, in
1982 and 1983, expanded Speedmart's operations from one
convenience store to five, installed gas pumps and food
concessions at each location, opened the stores 24 hours a day, 7
days per week, and hired a general manager. Even after these
changes, Speedmart continued to lose money. On June 24, 1985,
Speedmart filed for protection from creditors under chapter 11 of
the United States Bankruptcy Code. A plan of reorganization was
confirmed on June 8, 1988. Petitioner closed and sold
Speedmart's four unprofitable stores and tried to make the
remaining store profitable.
In 1990, 1991, and 1992, petitioner made several advances of
funds to Speedmart and creditors of Speedmart. Petitioner was
advised by a bankruptcy attorney that his advances to Speedmart
must be in the form of a loan. In December of 1991, petitioner
executed, on behalf of Speedmart, a one-page document entitled
"continuation of 1985 promissory note" (the 1991 Note). In it,
Speedmart promised to repay "All sums advanced in cash and
inventory". The terms called for 8-percent interest and
repayment of principal 30 days following demand.
Petitioner's effort to revive Speedmart was unsuccessful,
and the remaining store continued to lose increasing amounts of
money. In 1992, Speedmart sold the store to a competitor, and
the proceeds were used to partially repay Speedmart's priority
creditors. Unsecured creditors received no repayments.
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