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continuing through February 1992. The note remained subject to
full repayment of principal and interest upon demand
notwithstanding the oral agreement to amortize principal over 5
years.
Estes Co. made monthly payments of interest in accordance
with the terms of the note through January 1989. On March 8 and
August 28, 1988, Estes Co. made payments of $250,000 each toward
principal, thereby reducing the principal balance to $1,750,000.
Problems in the real estate economy in Arizona during the
late 1980's resulted in declining real estate values in that
State. Mr. Estes advised the Shedds during December 1988 that
Estes Co. was facing financial difficulties. Estes Co. defaulted
on the loan when it failed to make the monthly interest payment
due February 25, 1989. At the time of the default, the
outstanding principal balance represented 58 percent of the
plan's assets. Following the default, Mr. Shedd concluded that
collection of the outstanding principal balance was in jeopardy
and that the note was worthless. Consequently, for plan year
ended September 19, 1989, the plan wrote off on its books as a
worthless debt the principal balance remaining on the loan.
During July 1990, partly on the basis of Mr. Shedd's
efforts, Estes Co. identified a pool of assets from which
payments could be made to a limited group of creditors, including
the plan. Therefore, various entities in which Mr. Estes was
involved (the Estes companies), including Estes Co. and Estes
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