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and contemporaneously debited the account for the interest
payments due under the Grojean note. Petitioner was not entitled
to participate in any of the principal on the Schanno note until
American recovered its full share of principal. After American
recovered its entire principal on the Schanno note, petitioner
became entitled to his share of principal as a credit against the
principal due on the Grojean note.
American had sole authority and discretion to exercise its
rights under the Schanno note without the advice or consent of
petitioner, including authority to do all of the following: (1)
Alter or modify the Schanno note or collateral agreement; (2)
release, substitute, or exchange collateral; (3) waive any
enforcement of any contractual terms against the borrower; or (4)
forbear from collection. American issued to petitioner a
participation certificate evidencing petitioner’s ownership of a
$1.2 million participation interest in the Schanno note. After
execution of the foregoing transactions, on September 6, 1989,
Schanno Acquisition merged with and into Schanno, leaving Schanno
as the surviving entity and petitioner as the sole shareholder.
In October 1989, petitioner and American restructured the
Grojean note and the participation agreement by reducing the
Grojean note to $1 million and reducing petitioner’s
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