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As an additional inducement for the lenders to accept the
investor notes from the partnerships as collateral, the
partnerships negotiated and purchased financial guaranty bonds
from Admiral Insurance Co. (Admiral). The bonds provided that in
the event any limited partner defaulted on his or her obligations
under the investor notes, Admiral agreed to pay to the lender(s)
the amount due under the investor notes. The terms of the
financial guaranty bonds provided that upon the satisfaction of
the bond, the lenders were required to transfer the investor
notes as well as the security agreements to Admiral.
Concomitantly with the purchase of the bonds, the
partnerships entered into indemnity agreements in which the
partnerships agreed to indemnify Admiral against any loss on the
bonds. In most instances, the partnerships' obligation under the
indemnity agreements was secured by liens on real estate
properties owned by the partnerships.
Sometime in 1987 and 1988, the partnerships initiated
bankruptcy proceedings and terminated payments on the partnership
notes held by the financial lenders. Consequently, the lenders
made demand on the limited partners who had contributed the
investor notes, to the extent stipulated in the financial
guaranty bonds. The limited partners, however, refused to honor
the outstanding investor notes. The lenders, therefore, demanded
and received a settlement from Admiral pursuant to the terms of
the bonds.
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Last modified: May 25, 2011