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Petitioner became the general partner and 55-percent owner of
VIP. On October 12, 1984, VIP borrowed $900,000 from Security
Bank (Security) and used the proceeds to satisfy the Guaranty
loan. A promissory note (the Security note) was signed by
petitioner as general partner of VIP. The original maturity date
of the Security note was November 15, 1984. At the same time and
as part of the loan transaction with Security, petitioner pledged
to Security his own certificate of deposit in the amount of
$1,025,000 as collateral.
1985 Sale to Michael Grossman
On December 31, 1985, over 1 year after the original
maturity date of the Security note, VIP sold the Sheraton Hotel
to Michael Grossman. Without assuming the Security note, Mr.
Grossman gave VIP a promissory note (the Grossman note) dated
December 31, 1985, for $708,000, maturing on May 1, 1986. Also
on December 31, 1985, Mr. Grossman gave VIP a Replacement
Promissory Note (the replacement note) dated December 31, 1985,
for $700,000, maturing on September 15, 1986, which he signed as
“Michael Grossman, Trustee.” The replacement note was given in
“renewal + extension” of the Grossman note.
Note Renewal, Default, and Offset by Security Bank
After the original maturity date on the Security note
passed, Security and VIP executed a “Deferral Agreement” several
times, extending the maturity date to later dates and providing
that the "Lender/Secured Party by acceptance of the interest
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