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participation interest in the Schanno note.1 As pertinent, the
participation agreement provided:
American hereby sells and Participant hereby
purchases a participation in the *** [Schanno note], a
copy of which is attached hereto and made a part hereof
as Exhibit “A”. The purchase price is $1,200,000 and
shall be paid to American upon the execution of this
Agreement by Participant and American.
To cover the purchase price, American debited petitioner’s
checking account for $1.2 million.
The Schanno note and the Grojean note each had identical
interest rates and were both 6-year notes with a due date of
September 1, 1995. The Schanno note called for monthly payments
of principal, whereas the Grojean note did not require payment of
principal until the September 1, 1995, due date. Both notes
called for monthly interest payments.
The participation agreement provided that American’s
interest in the Schanno note was superior to petitioner’s
participation interest. Petitioner became entitled to monthly
interest payments only upon payment of the interest by Schanno to
American under the Schanno note. When American received a
monthly payment on the Schanno note, American credited
petitioner’s participating share to petitioner’s checking account
1Petitioner’s offered rationale for this structure was that
he believed this would enable him to attain the same secured
status as American, whose security interest was superior to
Transamerica’s.
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