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put period, SMP could convert the banks’ membership interests
into preferred debt, and the banks’ potential payback would be
limited to the same $5 million that they could have received
almost immediately by exercising the put option.
Presumably, this conversion feature was of little concern to
the banks, because as we have found, they intended to exercise
their put option as soon as possible anyway. The debt conversion
feature would appear to have provided SMP added assurance,
however, that the banks would exercise their put option, which
was an essential part of the Ackerman group’s plan to acquire the
banks’ built-in losses.
d. Distribution Rights
Petitioner also points to certain distribution rights that
the banks were given in their preferred interests in SMP.
Amendment No. 1 to the SMP LLC agreement provided that SMP would
make annual distributions to its members of all “Excess Cash
Flow” according to the following priorities:
(i) First. The holders of Preferred Interests
shall receive pro rata in accordance with their
respective Preferred Capital Accounts the lesser of (x)
Excess Cash Flow and (y) an amount equal to 8% of the
balance of the Preferred Capital Accounts on the last
121(...continued)
language to mean that the put price would equal the original $5
million credited to the banks’ preferred capital accounts,
unadjusted for any “Net Income” adjustments to those accounts
that might subsequently occur. With that being said, the banks
had no incentive to stick around until Dec. 31, 1997, as opposed
to Dec. 31, 1996.
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