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Finance’s notes on the Eurobond market, City, HGI, and Finance
entered into a series of transactions intended to capitalize
Finance, whereby the equity of Finance would consist of
promissory notes issued by HGI.
1. 1977 Capitalization of Finance
On April 26, 1977, City transferred $13,200,000 from its
bank account to Finance’s bank account as a contribution to
capital. On the same day, Finance transferred the $13,200,000 to
HGI in exchange for a document captioned as a promissory note in
that amount from HGI (1977 HGI note). The 1977 HGI note bore no
interest, was unsubordinated and unsecured, and was payable on
June 1, 1978, or upon demand thereafter. Also on April 26, 1977,
HGI transferred to City the $13,200,000 received from Finance.
In its general activity ledger, City recorded the
$13,200,000 transfer to Finance as a contribution to the capital
of Finance and the receipt of $13,200,000 from HGI as a dividend
received from HGI.
HGI disclosed the 1977 HGI note as an obligation to Finance
on its audited financial statements for each of the years the
1977 HGI note was outstanding, which statements were submitted to
the Securities and Exchange Commission and various State
regulatory agencies. HGI informed the group of banks with which
it had a revolving credit agreement of the issuance of the 1977
HGI note and the subsequent dividend to City. On April 27, 1977,
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