SECURITY AGREEMENT



SECURITY AGREEMENT

This Agreement is made effective as of [date] (Effective Date), between

Secured Party: [name and address of secured party] (Secured Party)

and

Debtor: [name and address of purchaser] (Debtor)

(collectively, the “Parties”).

RECITALS

A. Secured Party has agreed to extend credit to Debtor, as set forth within a promissory note (Note), pursuant to an agreement of purchase and sale of assets (Agreement) requiring Debtor to grant a security interest in certain collateral as security for the payment of the Note and all other obligations of Debtor owed to Secured Party.

B. Debtor has agreed to grant a security interest in certain collateral as security for payment of the Note and other obligations of Debtor owed to Secured Party.

The Parties agree as follows:

AGREEMENT OF THE PARTIES

1. Definitions

As used in this Security Agreement, the following definitions (in addition to other terms and provisions set forth in Article IX of the Michigan Uniform Commercial Code, MCL 440.9101 et seq.) shall apply:

1.1 Collateral. The Collateral shall consist of all of the personal property of Debtor, wherever situated, whether now owned or later acquired, used in connection with Debtor’s business (as described in this Agreement), including:

[The following items are permitted under Article 9; however, include only the item(s) agreed on to be given as collateral.]

A. Accounts

B. “As-Extracted” Collateral

C. Chattel paper

D. Deposit Accounts

E. Documents

F. Equipment

G. Farm Products

H. General Intangibles, including payment intangibles

I. Goods

J. Instruments, including promissory notes

K. Inventory [Add the following if license issued by the Michigan Liquor Control Commission (MLCC):] [excluding, however, any beverages, inclusive of alcohol, beer, and/or wine, sold pursuant to license issued by the Michigan Liquor Control Commission (MLCC)]

L. Investment Property

M. Letters of Credit and Letters-of-Credit Rights

N. Supporting Obligations

O. To the extent not listed above as original Collateral, proceeds and products of the foregoing, including all Inventory repossessed or returned, and, in addition, as used in this Security Agreement, Inventory includes goods held for sale or lease or furnished or to be furnished under contracts of service, or goods being processed for sale in Debtor’s business, as now or later conducted, including raw materials, work in process, finished goods, and materials and supplies used or consumed in Debtor’s business

[Add ¶P. if MLCC license is involved.]

P. All rights of Debtor in any license and permit issued by the Michigan Liquor Control Commission (MLCC license) used in conjunction with the operation of Debtor’s business at Debtor’s address, subject to (i) approval of the MLCC and (ii) the rules and regulations promulgated by the MLCC.

1.2 Debtor’s Address. [Debtor’s address].

1.3 Note. The promissory note executed (or to be executed) in connection with the extension of credit by Secured Party to Debtor in the principal amount of $[amount], which Debtor acknowledges and confirms is owing to Secured Party without any setoff, counterclaim, or deduction of any kind (all of which Debtor agrees not to assert and all of which are waived by Debtor).

1.4 Obligations. This Security Agreement secures the following (collectively, the “Obligations”):

A. Debtor’s liabilities under the Note, the Agreement, and this Security Agreement

B. the repayment of (i) any amounts that Secured Party may advance or spend for the maintenance or preservation of the Collateral and (ii) any other expenditures that Secured Party may make under the provisions of this Security Agreement or for the benefit of Debtor

C. all amounts owed under any modifications, renewals, or extensions of any of the foregoing items

D. all other amounts, obligations, and liabilities either now or in the future owed by Debtor to Secured Party

E. any of the foregoing that arises after the filing of a petition by or against Debtor under the Bankruptcy Code, even if the obligations due do not accrue because of the automatic stay under the Bankruptcy Code Section 362 or otherwise

1.5 Term. A period of time commencing on the date of this Agreement and terminating on the Termination Date.

1.6 Termination Date. The date when all Obligations owed by Debtor to Secured Party have been satisfied and Debtor has notified Secured Party of Debtor’s election to terminate this Agreement.

1.7 UCC. Any term used in the Uniform Commercial Code (UCC) as now in effect as of the date of this Agreement in the State of Michigan and not defined in this Security Agreement has the meaning given to the term in the UCC.

2. Grant of Security Interest. As security for the payment or performance of the Obligations (as defined in this Agreement), Debtor grants a Security Interest in the Collateral to Secured Party.

3. Perfection of Security Interests

3.1. Filing of Financing Statement

A. Debtor authorizes Secured Party to file a financing statement (Financing Statement) describing the Collateral.

B. Secured Party is authorized to seek and receive before the Note’s effective date an official report from the Michigan Secretary of State (SOS Report) indicating that Secured Party’s security interest is prior to all other security interests or other interests reflected in the report.

3.2. Possession

A. Debtor shall have possession of the Collateral, except where otherwise expressly provided in this Security Agreement or where Secured Party chooses to perfect Secured Party’s security interest by possession or control in addition to the filing of a financing statement.

B. Whenever the Collateral is in the possession of a third party, Debtor will join with Secured Party in notifying the third party of Secured Party’s security interest and obtaining an acknowledgment from the third party that the third party is holding the Collateral for the benefit of Secured Party.

3.3. Control. Debtor will cooperate at all times with Secured Party in obtaining control with respect to Collateral.

4. Post-Effective Date Covenants and Rights Concerning the Collateral

4.1 Inspection. The Parties to this Security Agreement may inspect any Collateral in the other Party’s possession or control at any time on reasonable notice.

4.2 Personal Property. The Collateral shall remain personal property at all times and Debtor shall not affix any of the Collateral to any real property in any manner that would change its nature from that of personal property to real property or to a fixture.

4.3 Secured Party’s Collection Rights. Secured Party shall have the right at any time to enforce Debtor’s rights against the account debtors and obligors.

4.4 Limitations on Duties Concerning Maintenance of Collateral

A. Debtor has the risk of loss of the Collateral, and

B. Secured Party has no duty to collect any income accruing on the Collateral or to preserve any rights relating to the Collateral.

4.5 No Disposition of Collateral. Except as expressly set forth in this Agreement, Secured Party does not authorize, and Debtor agrees not to,

A. make any sales or leases of any of the Collateral,

B. license any of the Collateral, or

C. grant any other security interest in any of the Collateral.

4.6 Inventory. Debtor has the power to sell Debtor’s Inventory in the ordinary course of Debtor’s business, provided that Debtor is not in default. In addition, the Parties agree as follows:

A. A sale of Debtor’s Inventory not in the ordinary course of business shall constitute a default.

B. The interest of Secured Party shall continue in all proceeds of sales and all dispositions of Debtor’s Inventory.

[If Debtor will finance purchases of after-acquired inventory, add the following:]

C. If Debtor desires to grant a purchase-money security interest in any Inventory (forming a part of the Collateral) to a party other than Secured Party (Third Party), Debtor shall (1) give prior written notice to Secured Party, (2) obtain the prior written consent of Secured Party, and (3) require Third Party to give written notice to Secured Party in the manner required by law.

[Add if Inventory is the primary collateral and if Debtor agrees:]

D. Although Secured Party has a security interest in all of Debtor’s existing and future Inventory, inclusive of proceeds thereof, together with other individual items constituting the Collateral, as a minimum security under this Agreement, Debtor will at all times maintain Inventory in accordance with the following: The Inventory will be of an aggregate loan value which, when added to the loan value of any specific account established in accordance with the terms of this Agreement, will equal two times the aggregate unpaid principal of all loans made under this Agreement. If Debtor fails to maintain an Inventory in such amount, Debtor will immediately make the necessary reduction in the unpaid principal amount of the Note.

[If the parties agree and no MLCC license is involved, the following additional language may be included:]

4.7 Special account. Debtor will immediately on receipt of all checks, drafts, cash, and other remittances in payment of inventory sold, or on account of Debtor’s accounts receivable, deposit the same in a special bank account maintained with Secured Party, over which Secured Party alone has withdrawal power. The funds in the account shall be held by Secured Party as security for any new loan made under this Agreement. The proceeds shall be deposited in precisely the form received, except for the endorsement of Debtor where necessary to permit the collection of items, which endorsement Debtor agrees to make, and which Secured Party is also authorized to make on Debtor’s behalf. Pending such deposit, Debtor agrees that Debtor will not commingle any such checks, drafts, cash, and other remittances with any of Debtor’s funds or property, but will hold them separate and apart and in an express trust for Secured Party until deposit is made in the special account. Secured Party will, at least once each week, apply the whole or any part of the collected funds on deposit in the special account against the principal and/or interest of any loans, the order and method of such application to be in the discretion of Secured Party. Any portion of the funds on deposit in the special account which Secured Party elects not to so apply may be paid over by Secured Party to Debtor. With respect to the foregoing representations, covenants, and warranties of Debtor, Debtor acknowledges that Secured Party is relying on the foregoing to the detriment of Secured Party.

[If an MLCC license is involved, delete ¶4.7. Because of the potential of Secured Party’s having control over the proceeds derived from the sale of MLCC licensed Inventory and the potential control over the MLCC license arising from the language of the paragraph, the MLCC will reject the language contained in ¶4.7.]

5. Covenants, Warranties, and Representations of Debtor. Debtor, as an inducement to Secured Party to extend credit to Debtor, covenants, represents, and warrants to Secured Party the following:

5.1 Title to and Transfer of Collateral. Debtor has rights in or the power to transfer the Collateral and its title to the Collateral free of all adverse claims, liens, security interests, and restrictions on transfer or pledge except as created by this Security Agreement.

5.2 Location of Collateral. Except as set forth in this Security Agreement, Debtor will maintain the Collateral at and will not remove the Collateral from Debtor’s Address without the prior written consent of Secured Party. Debtor will promptly notify Secured Party in writing of any change in the location of any place of business or establishment of any new place of business of Debtor.

5.3 Organization and Name. Debtor is duly organized and operating a business under the laws of the State of Michigan; Debtor’s exact legal name is as set forth in this Agreement; and, further, until the Obligations are paid in full, Debtor agrees that Debtor will

A. preserve its existence in good standing and not, in one transaction or a series of related transactions, merge into or consolidate with any other entity, or sell all or substantially all of Debtor’s assets;

B. not change Debtor’s name without providing Secured Party with 30 days’ prior written notice; and

C. not change its location as that term is defined in UCC 9-307 (MCL 440.9307).

5.4 Use. The Collateral will be used primarily for Debtor’s business.

[Use the following ¶5.4 if MLCC license is involved.]

5.4 Use. The Collateral will be used primarily for Debtor’s business and in compliance with the rules and regulations promulgated by the MLCC.

5.5 Records. Debtor will at all times during this Agreement keep accurate and complete records of Debtor’s Collateral and will, at any time at Secured Party’s request, deliver to Secured Party a schedule specifically identifying all of the Collateral.

5.6 Taxes and Charges. Debtor will promptly pay when due all taxes, assessments, or other charges lawfully levied or assessed on the Collateral before they become delinquent and penalties accrue, except to the extent that they are being contested in good faith by appropriate proceedings, but only after written notice is given by Debtor to Secured Party.

[Use the following ¶5.6 if MLCC license is involved.]

5.6 Taxes and Charges. Debtor will promptly pay when due all taxes, assessments, or other charges lawfully levied or assessed on the Collateral before the taxes or charges become delinquent and before penalties accrue, including all fees imposed by the MLCC, unless and to the extent that they are being contested in good faith by appropriate proceedings. However, this may be done only after written notice is given by Debtor to Secured Party.

5.7 Insurance. Debtor will keep the Collateral continuously insured with insurance carriers in amounts and against risks that shall be reasonably satisfactory to Secured Party, with the loss payable clause in favor of Secured Party.

[If the parties agree, the following additional language may be included.]

[All policies of insurance shall provide for 30 days’ written notice of cancellation to Secured Party, and Secured Party shall be furnished with evidence of compliance with the foregoing provisions. In addition, each policy shall contain an endorsement that states the interest of Secured Party shall not be impaired or invalidated by any act or neglect of Debtor. In the event of loss, Secured Party shall have full power to collect any and all insurance on the Collateral, and to apply it at Secured Party’s option to the Obligation, whether or not matured, for the restoration or repair of the Collateral.]

5.8 Indemnification. Debtor agrees to indemnify and save harmless Secured Party from any loss or damage caused by the Collateral or its use and to immediately give written notice to Secured Party of any loss of or damage to the Collateral occasioned by any cause.

5.9 Impairment of Collateral. If the Collateral becomes unsatisfactory to Secured Party or deteriorates in market or actual value, Debtor will, after written demand given by Secured Party to Debtor, promptly reduce the debt to Secured Party to the extent specified by Secured Party or, in the alternative, increase the Collateral to the amount affixed by Secured Party.

5.10 Financial and Other Statements. During the term of this Agreement, Debtor will deliver to Secured Party as soon as practicable after the end of each fiscal year of Debtor (and in any event, within 90 days thereafter), the following:

A. Debtor’s balance sheet at the end of such year

B. Debtor’s tax return for such fiscal year

C. a certificate of good standing or similar document from the Office of the Secretary of State affirming that the Debtor remains duly organized under the laws of the State of Michigan

Secured Party agrees that Secured Party shall hold in the strictest confidence any and all financial statements that may be delivered to Secured Party under this Agreement and shall use such financial statements only for the intended purpose of providing Secured Party with information pertaining to the ability of Debtor to perform under this Agreement.

6. Events of Default. The occurrence of any of the following shall, at the option of Secured Party, be an Event of Default:

A. any default, any act or omission that constitutes a default described in the Note, this Security Agreement, or any of the other Obligations

B. Debtor’s failure to comply with any of the provisions of, or the incorrectness of any representation or warranty contained in, this Security Agreement, the Note, or in any of the other Obligations

C. transfer or disposition of any of the Collateral, except as expressly permitted by this Security Agreement

D. attachment, execution, or levy on any of the Collateral

E. Debtor’s voluntarily or involuntarily becoming subject to any proceeding under (i) the Bankruptcy Code or (ii) any similar remedy under state statutory or common law

F. Debtor’s failure to comply with or becoming subject to any administrative or judicial proceeding under any federal, state, or local (i) hazardous waste or environmental law, (ii) asset forfeiture or similar law which can result in the forfeiture of property, or (iii) other law, where noncompliance may have any significant effect on the Collateral

G. Secured Party’s receiving at any time following the Effective Date an SOS Report indicating that Secured Party’s security interest is not prior to all other security interests or other interests reflected in the report

7. Default Costs. Should an Event of Default occur, Debtor will pay to Secured Party all costs reasonably incurred by the Secured Party for the purpose of enforcing its rights, including

A. costs of foreclosure;

B. costs of obtaining money damages; and

C. a reasonable fee for the services of attorneys employed by Secured Party for any purpose related to this Security Agreement or the Obligations, including consultation, drafting documents, sending notices, or instituting, prosecuting, or defending litigation or arbitration.

8. Remedies on Default

8.1 General. On any Event of Default, Secured Party may pursue any remedy available at law (including those available under the provisions of the UCC), or in equity to collect, enforce, or satisfy any Obligations then owing, whether by acceleration or otherwise.

8.2 Remedies. On any Event of Default, Secured Party shall have the right to pursue any of the following remedies separately, successively, or simultaneously:

A. File suit and obtain judgment and, in conjunction with any action, Secured Party may seek any ancillary remedies provided by law, including levy of attachment and garnishment.

B. Take possession of any Collateral not already in its possession without demand and without legal process. On Secured Party’s demand, Debtor will assemble and make the Collateral available to Secured Party as the Secured Party may direct. Debtor grants to Secured Party the right, for this purpose, to enter into or on any premises where Collateral may be located.

C. Without taking possession, sell, lease, or otherwise dispose of the Collateral at public or private sale in accordance with the UCC.

[If MLCC license is involved, add the following MLCC remedy provisions:]

8.3 Special Remedy—Reassignment of MLCC License Subject to Approval by MLCC

A. In addition to all other rights and remedies provided in this Agreement, it is agreed that if Debtor defaults and Secured Party elects any remedies allowed pursuant to this Agreement or any additional remedies allowed by law, on written demand made by Secured Party to Debtor, Debtor shall reassign to Secured Party, or to Secured Party’s designee, any interest which Debtor may have in and to any MLCC license issued by the MLCC and used in connection with Debtor’s business at Debtor’s address, subject to approval by the MLCC. Further, after reassignment of the MLCC license by Debtor to Secured Party, or the Secured Party’s designee, and after compliance by the Parties with the provisions pertaining to the exercise of Secured Party’s right in the event of default by Debtor, Debtor shall be discharged from any deficiency liability or any further obligation due and owing on the Note or Security Agreement, or both.

B. The provisions of this paragraph that pertain to reassignment of the MLCC license are subject to approval by the MLCC; neither Party claims any interest in the MLCC license.

C. The Parties acknowledge that the security interest of Secured Party is an inadequate security, standing alone, without the agreement of reassignment of MLCC license. Further, the specific performance of an agreement to reassign the MLCC license (in addition to the exercise of any rights pursuant to this Agreement) is the only adequate remedy Secured Party has and is one of the reasons Secured Party has been induced to sell the Collateral to Debtor on terms other than cash payment.

[Insert any other language that may be agreed on by the Parties.]

9. Foreclosure Procedures

9.1 No Waiver. No delay or omission by Secured Party to exercise any right or remedy accruing on any Event of Default shall (a) impair any right or remedy, (b) waive any default or operate as an acquiescence to the Event of Default, or (c) affect any subsequent default of the same or of a different nature.

9.2 Notices Regarding Sale. Secured Party shall give Debtor such notice of any private or public sale as may be required by the UCC.

9.3 Condition of Collateral. Secured Party has no obligation to clean up or otherwise prepare the Collateral for sale.

9.4 No Obligation to Pursue Others. Secured Party has no obligation to attempt to satisfy the Obligations by collecting them from any other person liable for them, and Secured Party may release, modify, or waive any Collateral provided by any other person to secure any of the Obligations, all without affecting Secured Party’s rights against Debtor. Debtor waives any right it may have to require Secured Party to pursue any third person for any of the Obligations.

9.5 Compliance with Other Laws. Secured Party may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral, and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.

9.6 Warranties. Secured Party may sell the Collateral without giving any warranties as to the Collateral. Secured Party may specifically disclaim any warranties of title or the like. This procedure will not be considered adversely to affect the commercial reasonableness of any sale or other disposition of the Collateral.

9.7 Sales on Credit. If Secured Party sells any of the Collateral on credit, Debtor will be credited only with payments actually made by the Purchaser, received by Secured Party, and applied to the indebtedness of the Purchaser. If the Purchaser fails to pay for the Collateral, Secured Party may resell the Collateral and Debtor shall be credited with the proceeds of the sale.

9.8 Purchases by Secured Party. If the Secured Party purchases any of the Collateral being sold, Secured Party may pay for the Collateral by crediting some or all of the Obligations of Debtor.

9.9 No Marshaling. Secured Party shall have no obligation to marshal any assets in favor of Debtor, or against or in payment of

A. the Note,

B. any of the other Obligations, or

C. any other obligation owed to Secured Party by Debtor or any other person.

10. Miscellaneous

10.1 Assignment

A. This Security Agreement shall bind and shall inure to the benefit of the heirs, legatees, executors, administrators, successors, and assigns of Secured Party and shall bind all persons who become bound as a debtor to this Security Agreement.

B. Secured Party does not consent to any assignment by Debtor except as expressly provided in this Security Agreement.

C. Secured Party may assign its rights and interests under this Security Agreement. If an assignment is made, Debtor shall render performance under this Security Agreement to the assignee. Debtor waives and will not assert against any assignee any claims, defenses, or setoffs that Debtor could assert against Secured Party except defenses that cannot be waived.

10.2 Severability. Should any provision of this Security Agreement be found to be void, invalid, or unenforceable by a court or panel of arbitrators of competent jurisdiction, that finding shall affect only the provisions found to be void, invalid, or unenforceable and shall not affect the remaining provisions of this Security Agreement.

10.3 Notices. Any notices required by this Security Agreement shall be deemed to be delivered when a record has been either (a) deposited in any U.S. postal box if postage is prepaid and the notice properly addressed to the intended recipient, (b) received by facsimile transmission, (c) received through the Internet, or (d) when personally delivered.

10.4 Headings. Section headings used in this Security Agreement are for convenience only. They are not a part of this Security Agreement and shall not be used in construing it.

10.5 Governing Law. This Security Agreement is being executed and delivered and is intended to be performed in the State of Michigan and shall be construed and enforced in accordance with the laws of the State of Michigan.

10.6 Rules of Construction

A. No reference to “proceeds” in this Security Agreement authorizes any sale, transfer, or other disposition of the Collateral by the Debtor.

B. “Includes” and “including” are not limiting.

C. “Or” is not exclusive.

D. “All” includes “any” and “any” includes “all.”

10.7 Integration and Modifications

A. This Security Agreement is the entire agreement of the Debtor and Secured Party concerning its subject matter.

B. Any modification to this Security Agreement must be made in writing and signed by the Party adversely affected.

10.8 Waiver. Any Party to this Security Agreement may waive the enforcement of any provision to the extent the provision is for its benefit.

10.9 Further Assurances. Debtor agrees to execute any further documents, and to take any further actions, reasonably requested by Secured Party to evidence or perfect the security interest granted in this Agreement, to maintain the first priority of the security interests, or to effectuate the rights granted to Secured Party in this Agreement.

The Parties have signed this Security Agreement on the dates set forth below, to be effective as of the Effective Date listed on the first page.

| | |DEBTOR |

| | |[Name of Debtor] |

| | | |

|Dated: ______________________ | |By: /s/______________________ |

| | |[Typed name of authorized signer] |

| | |Its: ______________________ |

| | |SECURED PARTY |

| | |[Name of Secured Party] |

|Dated: ______________________ | | |

| | |By: /s/______________________ |

| | |[Typed name of authorized signer] |

| | |Its: ______________________ |

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