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condition for a loan to finance petitioner's purchase of Wagner's
shares. It was a customary practice for the Bank to require a
covenant not to compete when it provided financing for the buyout
of a partner in an ongoing business. Wagner indicated that he
would agree to sign a covenant not to compete.
Wagner and Forest (on behalf of petitioner) began
negotiations in earnest in late November. The Bank ultimately
approved a loan to Sharewell of $1 million to finance the buyout
of Wagner. In connection therewith, Wagner was required by the
Bank to agree to purchase a $300,000 participation in the loan.
Wagner’s participation in the loan was intended to provide the
Bank with additional protection or collateral for the loan. In
addition, the Bank required collateral from petitioner in the
form of a pledge of petitioner’s accounts receivable, inventory
and equipment, as well as all stock in Sharewell and a life
insurance policy covering Forest. An internal Bank document,
styled a loan worksheet, dated November 28, 1990 (Loan
Worksheet), listed the foregoing as security for the loan, as
well as Wagner’s $300,000 participation. The Loan Worksheet did
not make any reference to a covenant not to compete.
The loan was evidenced by a loan agreement between Sharewell
and the Bank executed on December 12, 1990 (Loan Agreement). The
Loan Agreement provided for a loan of $1 million and an
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