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participation interest by virtue of the following circular
transaction with American: (1) Petitioner borrowed $1.2 million
from American, and petitioner signed the Grojean note; (2)
petitioner returned the $1.2 million to American; (3) American
gave petitioner a participation certificate evidencing a $1.2
million participation interest in the Schanno note. No cash
changed hands, and American handled the transaction through
simultaneous electronic debits and credits. When the parties
amended the arrangement to include a participation interest in
the credit note, it was handled similarly with no cash changing
hands.
The Schanno note and the credit note were the mirror images
of the Grojean note and the Grojean credit note, respectively.
When American received a monthly payment on the Schanno note or
the credit note, American credited petitioner’s participating
share to petitioner’s checking account and contemporaneously
debited the account for the interest payments due under the
Grojean note and the Grojean credit note. Once American
recovered its principal on both notes, petitioner’s share of
principal was to be credited against the principal due on the
Grojean note and the Grojean credit note. Payments by Schanno on
the Schanno note and the credit note kept petitioner current on
the Grojean note and the Grojean credit note. Like a guarantor,
petitioner would not be liable--thus not called upon to make an
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Last modified: May 25, 2011