FORBEARANCE AGREEMENT (LYLES UNITED, LLC)

Exhibit 10.3

This FORBEARANCE AGREEMENT (LYLES UNITED) (“this Agreement”) is entered into as of February 26, 2009, by and among PACIFIC ETHANOL, INC., a Delaware corporation (the “Company”), PACIFIC AG. PRODUCTS, LLC (“PAP”), PACIFIC ETHANOL CALIFORNIA, INC. (“PECA”; together with PAP and the Company, the “PE Parties”, and each a “PE Party”) and LYLES UNITED, LLC, a Delaware limited liability company (the “Lender”), as parties to the Loan Documents (defined below).  The Company, PAP, PECA and Lender are sometimes referred to individually as a “Party” and collectively as the “Parties” herein.  Capitalized terms used in this Agreement which are not otherwise defined herein shall have the meanings given such terms in the Loan Documents.

WHEREAS, Lender is the holder of that certain Amended and Restated Promissory Note, dated November 7, 2008, in the principal amount of $30.0 million by the Company in favor of Lender (the “Note”), which without acceleration is due and payable on March 15, 2009 (the “Maturity Date”);

WHEREAS, Lender is the beneficiary under that certain Unconditional Guaranty, dated November 7, 2008, from PAP with respect to the indebtedness under the Note (the “PAP Guaranty”), and Lender is also the Secured Party under that certain Security Agreement, dated November 7, 2008, by and between PAP and Lender, with respect to the indebtedness under the Note (the “PAP Security Agreement”);

WHEREAS, Lender is the beneficiary under that certain Limited Recourse Guaranty, dated November 7, 2008, from PECA with respect to the indebtedness under the Note (the “PECA Guaranty”; together with the PAP Guaranty, the “Guarantees”), and Lender is a party to that certain Joint Instruction Letter, dated November 7, 2008, from the Company and Lender to PECA (the “Joint Instruction Letter”);

WHEREAS, Lender is a party to that certain Loan Restructuring Agreement, dated as of November 7, 2008, by and among the PE Parties, Pacific Ethanol Imperial, LLC, a Delaware limited liability company, and Lender (the “Restructuring Agreement”; together with the Note, the Guarantees, the PAP Security Agreement, and the Joint Instruction Letter, the “Loan Documents”);

WHEREAS, the PE Parties have advised Lender that Company will be unable to pay the interest payment under the Note due and payable on March 1, 2009, which nonpayment will constitute an Event of Default under the Note if payment shall not have been made within five days of the Company’s receipt of Lender’s written notice to the Company of such nonpayment, and the nonpayment of such obligation by the Company and by PAP and PECA under the Guarantees will also constitute a default or event of default in accordance with the terms of each of the other Loan Documents (the “Anticipated Interest Payment Default”);

WHEREAS, the PE Parties have advised Lender that the Company will be unable to pay accrued interest and the $30.0 million principal balance of the Note due on the Maturity Date, which nonpayment will constitute an Event of Default under the Note, and the nonpayment of such obligation by the Company and by PAP and PECA under the Guarantees will also constitute a default or event of default in accordance with the terms of each of the other Loan Documents (the “Anticipated Maturity Date Payment Default”) (collectively, with the Anticipated Interest Payment Default, the “Anticipated Defaults”);

WHEREAS, Lender will have various rights and remedies after the occurrence of each of the Anticipated Defaults;

WHEREAS, certain indirect subsidiaries of the Company, consisting of the owners of four ethanol plants (collectively, the “Plant Entities”) and a holding company for those Plant Entities (“PEHC”) are parties to that certain Credit Agreement dated as of February 27, 2007 (as amended from time to time thereafter) by and among the Plant Entities, PEHC, WestLB AG, New York Branch (“WestLB”), and certain other parties (the “West LB Credit Agreement”), and the Company is a party to that certain Sponsor Support Agreement, dated as of February 27, 2007 (as amended thereafter), among the Company, PEHC and WestLB (collectively, with the West LB Credit Agreement, the “WestLB Obligations”);

WHEREAS, a direct subsidiary of the Company, Kinergy Marketing LLC, an Oregon limited liability company (“Kinergy”) is a party to that certain Loan and Security Agreement, dated as of July 28, 2008, by and among Kinergy, Wachovia Capital Finance Corporation (Western) (“Wachovia”) and certain other parties (the “Wachovia Loan Agreement”), and the Company has issued a Guarantee, dated July 28, 2008, in favor of Wachovia with respect to the indebtedness under the Wachovia Loan Agreement (collectively, with the Wachovia Loan Agreement, the “Wachovia Obligations”);

WHEREAS, the PE Parties have requested that Lender agree and, subject to the terms and conditions of this Agreement, Lender has agreed, during (and only during) the Forbearance Period as defined below in this paragraph, (a) with respect to respect to each of the Anticipated Defaults, to forbear from any demand for immediate payment of any amounts due under the Note or the other Loan Documents, and from any exercise of rights to foreclose on any or all of the property of any PE Party in which Lender has been granted a security interest under any of the Loan Documents, or to enforce the Guarantees, until the earliest to occur of (i) March 31, 2009; (ii) the date of termination of the Forbearance Period pursuant to Section 5 hereof; and (iii) the date on which all of the obligations under the Note and under any of the other Loan Documents have been paid and discharged in full and the Note has been canceled (the “Forbearance Period”);

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the PE Parties and Lender hereby agree as follows:

1.             Incorporation of Preliminary Statements .  The preliminary statements set forth above are hereby incorporated into this Agreement as accurate and complete statements of fact.  Without limiting the foregoing, each PE Party hereby acknowledges and agrees that (a) the Note is valid, outstanding and enforceable in accordance with its terms; (b) Lender has, and shall continue to have, valid, enforceable and perfected security interests in and liens upon the property of any PE Party in which Lender has been granted a security interest under any of the Loan Documents; (c) the Guarantees are valid and enforceable in accordance with their terms; (d) absent the effectiveness of this Agreement, Lender has, upon the occurrence of any event of default under any of the Loan Documents, the right to enforce its security interest in, and liens on, the property of any PE Party in which Lender has been granted a security interest under any of the Loan Documents, enforce the obligations of PAP and PECA under the Guarantees, and enforce its other rights and pursue its other remedies under the Loan Documents; (e) absent the effectiveness of this Agreement, the Note is payable in full on the Maturity Date, and all obligations under the Note and the Loan Documents are payable in accordance with the terms thereof, without defense, dispute, offset, withholding, recoupment, counterclaim or deduction of any kind; and (f) after giving effect to this Agreement, the Note will be payable in full on the earlier to occur of March 31, 2009 and the termination of the Forbearance Period, and all obligations under the Note and any other Loan Documents shall be payable on such date without defense, dispute, offset, withholding, recoupment,  counterclaim or deduction of any kind.

2.            Forbearance

Provided that no Forbearance Default (as defined below) occurs, and subject in all respects to the terms and conditions of this Agreement including satisfaction of the conditions precedent to the effectiveness of this Agreement set forth in Section 3 below, during the Forbearance Period Lender agrees that it shall not (i) declare to be due and payable or seek to collect all or any portion of the outstanding principal amount of the Note or interest thereon, or any other obligations under the Loan Documents, or (ii) exercise any remedies provided for under the Note or the other Loan Documents or applicable law on account of the Anticipated Defaults.   Upon termination of the Forbearance Period, Lender shall have the right to enforce any and all remedies with respect to any default, including any event of default then outstanding under the Note or any of the other Loan Documents (including, without limitation, any Anticipated Default).   Under all events and circumstances, the entire principal balance and all accrued and unpaid interest under the Note and any obligations under any of the other Loan Documents shall be due and payable immediately and in full upon expiration of the Forbearance Period without any further notice or demand of any kind or nature whatsoever.

3.             Conditions of Effectiveness of this Agreement .   This Agreement shall become effective as of the date hereof (the “Effective Date”) when, and only when:

(a)           Lender shall have received counterparts of this Agreement duly executed and delivered by the PE Parties, and Lender shall have executed this Agreement;

(b)           Lender shall have received a copy of the final form of a forbearance agreement as executed by WestLB, in form and substance satisfactory to Lender, regarding the WestLB Credit Agreement (the “WestLB Forbearance Agreement”), providing for a forbearance period co-terminous with the Forbearance Period hereunder, and such forbearance shall be in full force and effect;

(c)           Lender shall have received a copy of a final form of a notice or agreement executed by Wachovia for extension of the forbearance period through March 31, 2009 pursuant to that certain Amendment and Forbearance Agreement, dated February 13, 2009, regarding the Wachovia Loan Agreement (the “Wachovia Forbearance Agreement”), in form and substance satisfactory to Lender, providing for a forbearance period co-terminous with the Forbearance Period hereunder, and such forbearance shall be in full force and effect; and

(d)           All of the representations and warranties of the PE Parties contained in this Agreement shall be true and correct on and as of the Effective Date (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date).

4.            Representations and Warranties .  To induce Lender to enter into this Agreement, each of the PE Parties represents and warrants to Lender (which representations and warranties also shall be deemed made on and as of the Effective Date):

(a)          Other than the Anticipated Defaults, there is no default presently outstanding nor any presently existing condition that will, with the passage of time, constitute a default during the Forbearance Period;

(b)          Such PE Party has the requisite corporate power and authority and the legal right to execute and deliver this Agreement, and to perform the transactions contemplated hereby.  The execution, delivery and performance by such PE Party o