Exhibit 10.1
NON-RECOURSE INDEMNITY AND SECURITY AGREEMENT
This Non-Recourse Indemnity and
Security Agreement (this “Agreement”) is made and
entered into as of September 14, 2007, by and between
CAPITALSOUTH BANK, an Alabama banking corporation (the
“Bank”), and JAMES C. BOWEN, a resident of Duval
County, Florida (“Indemnitor” or “Bowen”),
and is joined in by CAPITALSOUTH BANCORP, a Delaware corporation
and a registered bank holding company (“CapitalSouth”),
with respect to Section 32 and Exhibit A of this
Agreement.
R E C
I T A L S :
A. The Bank is a wholly-owned
subsidiary of CapitalSouth Bancorp, a Delaware corporation and a
registered bank holding company (“CapitalSouth”).
B. CapitalSouth and Monticello
Bancshares, Inc., a Florida corporation and a savings and loan
association holding company (“Monticello”), have
heretofore entered into that certain Agreement and Plan of Merger
dated February 28, 2007 (the “Merger Agreement”),
which is joined in by Indemnitor.
C. Mortgage Lion, Inc.
(“Mortgage Lion”) is a wholly-owned subsidiary of
Monticello Bank, a federal savings bank (“Monticello
Bank”), which in turn is a wholly-owned subsidiary of
Monticello.
D. In connection with the
consummation of the Merger Agreement, it is also contemplated that
Monticello Bank will be contemporaneously merged with and into the
Bank.
E. Indemnitor is the principal
shareholder of Monticello and is desirous of the transactions
contemplated by the Merger Agreement being consummated.
F. Monticello Bank and/or
Mortgage Lion are parties to various agreements pursuant to which
loans are sold by them to investors (“Loan
Purchasers”).
G. In connection with
consummation of the Merger Agreement, Indemnitor is to be issued a
promissory note by CapitalSouth in the original principal amount of
Eight Million Dollars ($8,000,000) (the “Original Promissory
Note”). CapitalSouth and Indemnitor hereby agree that
CapitalSouth shall bifurcate the Original Promissory Note and issue
to Indemnitor one promissory note in the original principal amount
of One Million Five Hundred Thousand Dollars ($1,500,000) (the
“Pledged Note”) in order to fund any indemnification
obligations of Indemnitor under this Agreement. CapitalSouth shall
issue to Indemnitor a second promissory note in the amount of Six
Million Five Hundred Thousand Dollars ($6,500,000) (the
“Non-Pledged Note”), which the parties hereto agree
shall not fund any indemnification obligations of Indemnitor under
this Agreement. The amortization schedule for each of the Pledged
Note and the Non-Pledged Note will be contained therein, and
CapitalSouth and Indemnitor hereby agree that the Pledged Note will
not begin to amortize until the final
payment
to Indemnitor of all principal and interest owed to Indemnitor
under the Non-Pledged Note is made by CapitalSouth.
H. As further consideration
hereunder, CapitalSouth is willing, to the extent provided herein,
to permit Indemnitor to convert a portion of the Non-Pledged Note
to CapitalSouth common stock, and to grant to Indemnitor certain
registration rights with respect to the shares of CapitalSouth
common stock that Indemnitor receives pursuant to his conversion of
the Non-Pledged Note.
I. CapitalSouth and the Bank
seek tangible assurance that Monticello Bank and Mortgage
Lion’s estimated liability with respect to repurchase
obligations, indemnities and damages to Loan Purchasers is not
inconsistent with CapitalSouth assumptions.
NOW, THEREFORE, in consideration of
the premises, the mutual covenants contained herein, and for Ten
Dollars ($10.00) and other good and valuable consideration paid in
hand by the Bank to Indemnitor, the receipt and sufficiency of
which are hereby acknowledged by Indemnitor, the parties hereto,
intending to be legally bound, do hereby agree as follows:
1. Indemnitor hereby assumes all
liability for, and undertakes without condition, limitation or
reservation of any kind, except as expressly provided herein, to
pay, protect, defend, indemnify and save Bank and CapitalSouth
harmless from and against any and all claims, damages, losses,
liabilities, obligations, settlement payments, penalties,
assessments, citations, directives, litigation, demands, judgments,
suits, proceedings, costs, disbursements and expenses of any kind
or of any nature whatsoever, including attorney’s fees and
expenses (collectively, “Claims”) which may at any
time, subject to the limits set forth in Sections 3, 4 and 5,
be imposed upon, incurred by or asserted or awarded against any of
the Bank, Mortgage Lion, Monticello Bank, Monticello, CapitalSouth,
or any of their respective officers, directors or employees, and
arising, directly or indirectly, from or out of or in any way
related to (i) any breach or alleged breach or violation of
any obligation, or an obligation to repurchase a loan or indemnify
the original purchaser thereof, existing under or pursuant to any
agreement, understanding, instrument, representation, assignment,
endorsement or conveyance, of any type or nature, affecting or
relating to the sale or transfer of any loan of any type or nature,
including mortgage loans, construction loans, home equity loans,
home equity lines of credit, letters of credit or installment loans
by Monticello Bank or Mortgage Lion to a Loan Purchaser, occurring
on or prior to the “Effective Time of the Merger” under
the Merger Agreement (each a “Covered Loan”), whether
or not caused by or within the control of Indemnitor, Mortgage
Lion, Monticello Bank, Monticello or CapitalSouth, and
(ii) any claim, suit, demand, including the settlement thereof
and any expenses, including attorney’s fees, disbursements,
costs of investigation, expert fees, court fees, mediator fees and
arbitrator fees, relating to any Covered Loan sold, transferred or
hypothecated to a third party by any of Mortgage Lion, Monticello
or Monticello Bank prior to the Effective Time of the Merger,
whether sounding in contract, tort, statutory claim or otherwise,
and whether such claim, suit or demand is brought, known or
knowable prior to or after the Effective Time of the Merger.
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2. For purposes of this
Agreement, amounts subject to indemnification under Section 1
(“Indemnified Costs”) which are of the following nature
shall be determined as specified below:
a. Indemnified Costs which are
out-of-pocket expenses, such as indemnification payments by the
Bank, settlements, attorney’s fees, consultant fees and the
like, shall be the actual amount paid by the Bank. Any subsequent
recoveries, reductions, reimbursements or discounts with respect
thereto, such as damages or indemnity payments from third parties,
shall be deducted from Indemnified Costs which are incurred or, to
the extent such was paid by the Indemnitor, reimbursed
thereto.
b. The Indemnified Costs with respect
to a repurchased loan shall be equal to (i) the gross sum paid
to repurchase such loan, including principal, return of any
premiums originally paid by the purchaser with respect thereto,
accrued interest, and any other amounts asserted by the purchaser,
and reasonably accepted by the Bank, less (ii) the fair market
value of such loan, which, in the Bank’s full and absolute
discretion, may be the amount for which such loan could be
reasonably expected to be sold to another purchaser on a
non-recourse basis subject only to representations with respect to
title to such loan, or, in the case of a defaulted Covered Loan,
the fair market value of the collateral therefor, as determined by
a third-party appraisal.
c. The Indemnified Costs shall not
include internal costs of the Bank and/or Mortgage Lion incurred in
connection with responding to any claims with respect to Covered
Loans except with respect to personnel, if any, whose primary
responsibility relates to working with or managing Claims, and in
any event such internal costs shall exclude allocations of
overhead, costs associated with any compensation payable to
Indemnitor, and any allocation of executive management compensation
with respect to the Bank.
d. All amounts shall be computed in
accordance with generally accepted accounting principles,
consistently applied, but shall include appropriate reductions or
credits for any federal and state income tax savings with respect
thereto.
3. Notwithstanding anything else
to the contrary contained in Section 1, Indemnitor shall have
no liability or obligation with respect to otherwise Indemnified
Costs, until the Indemnified Costs incurred or accrued reach Two
Million Five Hundred Thousand Dollars ($2,500,000) (the
“Threshold Amount”), commencing as of August 31,
2007.
4. Notwithstanding anything else
to the contrary contained in Section 1, Indemnitor shall have
no obligation under this Agreement with respect to any Indemnified
Cost which both (i) first occurs or is accruable after the
fourth anniversary of the Effective Time of the Merger and
(ii) the basis of which was not known or reasonably expected
as of
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such
fourth anniversary date; that is , Indemnitor shall
continue to be responsible with respect to any Indemnified Cost
even if incurred after such fourth anniversary date if any similar
or related Indemnified Cost with respect to a given Covered Loan
had begun to be incurred or accrued prior to such fourth
anniversary date or if on or prior to such fourth anniversary date
a reasonable person would expect Indemnified Costs to be incurred
with respect to one or more specifically identified Covered Loans.
The parties agree to negotiate in good faith to determine an
appropriate reserve amount for any Indemnified Cost which is
expected to be incurred or accrued after such fourth anniversary
date. Indemnitor’s liability under this Agreement shall not
exceed such reserved amount. If the parties cannot agree on such
reserve amount, any differences between their estimated future
amounts may be withheld by the Bank as a reserve but shall be
released to Indemnitor at such time in the future that the parties
agree or such Indemnified Costs are otherwise finally determined.
At such time, the remaining balance, if any, of such reserve shall
be released to Indemnitor, together with interest which, in
addition to any other amounts of interest already payable upon such
reserve ( i.e. , if it continues to be held in the form of
the Pledged Note or a portion thereof) will equal a rate on such
amount due to be released to Indemnitor of not less than ten
percent (10%) per annum from the fourth anniversary date.
5. Notwithstanding anything else
to the contrary contained in Section 1, Indemnitor shall be
responsible for payment of only fifty percent (50%) of all
Indemnified Costs (the “Indemnified Obligation Share”)
above the Threshold Amount and shall be absolutely limited to a
maximum amount of One Million Five Hundred Thousand Dollars
($1,500,000) (the “Maximum Amount”). Amounts which are
due by Indemnitor shall be deducted immediately from the principal
balance which is due and owing under the Pledged Note or otherwise,
or at the election of Indemnitor (or in the event that the Pledged
Note has been converted, in whole or in part, to another form of
Collateral), paid in cash or its equivalent by the Indemnitor to
the Bank not later than thirty (30) days after the
presentation to the Indemnitor of an invoice with respect thereto.
Upon request of the Bank, Indemnitor shall promptly execute an
acknowledgement with respect to the reduction of any principal
amount from the Pledged Note or other obligation held as
Collateral. Notwithstanding anything else to the contrary contained
in Section 1, if and when the principal balance of the Pledged
Note has been reduced to zero, all obligations of Indemnitor under
this agreement shall cease, and Indemnitor shall not owe any
further amounts for any Indemnified Costs.
6. The Bank and Indemnitor
contemplate mutual cooperation with respect to minimizing the
amount of any Indemnified Costs. In that regard, the Bank
contemplates permitting Indemnitor an active role, so long as he
diligently and effectively pursues such, in the administration of
Claims. In that regard, Indemnitor shall not be deemed an employee
or agent of the Bank but shall regularly consult with the Bank.
Notwithstanding the foregoing, the Bank and Mortgage Lion shall
have full and absolute discretion in dealing with any Covered Loan
and incurring any Indemnified Cost, whether before or after the
Threshold Amount is reached. Indemnitor shall have no right to
assume defense or consent or not consent, reasonably or otherwise,
to any action or settlement which may be brought or effected by the
Bank and/or Mortgage Lion in good faith. Nothing in this Agreement
shall limit the full and absolute discretion of the Bank or
Mortgage Lion (after the Effective Time of the Merger), and their
respective officers, directors and employees, to take or omit to
take such actions, compromise or refuse to compromise such claims,
incur or decline to incur such
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costs
and expenses, to employ or engage, or not employ or engage, such
persons as the Bank deems appropriate, and no such action or
failure to act by the Bank or Mortgage Lion shall in any way
impair, reduce or diminish the obligations of Indemnitor under this
Agreement. Any consultation, practice or course of dealing by the
Bank with respect to Indemnitor shall not constitute a waiver of
any provision with respect to this Agreement or any obligation on
the part of the Bank to continue to do so. There is no obligation
under this Agreement for the Bank to provide Indemnitor with any
contemporaneous or periodic reports or updates with respect to the
Covered Loans or any Indemnified Costs or expectations of
Indemnified Costs, other than at such times that invoices are
submitted by the Bank to Indemnitor. Indemnitor may request, in
writing, copies of invoices, settlements, accounting ledgers and
canceled checks with respect to the Indemnified Costs which have
been incurred or have been accrued. Except upon written
authorization of the CEO, President or CFO of the Bank, Indemnitor
shall not act in an manner which either binds the Bank or Mortgage
Lion with respect to a Covered Loan or an Indemnified Cost or which
purports to be action on behalf of the Bank under this
Agreement.
7. In furtherance of
Indemnitor’s collaborative role hereunder, Indemnitor agrees
to use his commercially reasonable efforts to assist the Bank, and
to cause other persons knowledgeable in matters relating to Covered
Loans to assist the Bank, in connection with the resolution of any
Claims relating thereto. The foregoing shall not be construed to
require the full business time and efforts of Indemnitor or for
Indemnitor to incur any out-of-pocket costs with respect thereto.
In the event that it is necessary for Indemnitor to provide any
testimony or respond to any subpoenas, no fees or compensation
shall be payable to Indemnitor in connection therewith. To the
extent that Indemnitor is entitled, under the terms of the Merger
Agreement or the bylaws of any of Mortgage Lion, Monticello Bank,
CapitalSouth Bank or CapitalSouth to any indemnification with
respect to any matter relating to the Covered Loans, such costs of
indemnification shall be considered an Indemnified Cost
hereunder.
8. Indemnitor represents and
warrants that Indemnitor has provided the Bank with full and
accurate information with respect to the Covered Loans and all
pending or threatened claims with respect thereto, and shall
continue to do so through the Effective Time of the Merger, and
thereafter for so long as Indemnitor is in a position as an officer
or director of any of Mortgage Lion, the Bank or CapitalSouth to do
so, and that such information does not omit to state any fact
necessary, in light of the statements made, to not be
misleading.
9. As security for the prompt
payment and performance of each of the covenants and obligations of
Indemnitor under this Agreement, including payment of the
Indemnified Obligation Share (time being of the essence with
respect thereto), and payment of any enforcement costs hereunder
(collectively all of the liabilities and obligations of Indemnitor
under this Agreement being referred to as the
“Obligations”), Indemnitor hereby assigns to the Bank
and grants to the Bank a security interest in the principle balance
Pledged Note, excluding all interest due or to become due on the
Pledged Note, and any extensions, renewals, substitutions or
novations of the Pledged Note (collectively, the
“Collateral”), and hereby deposits and pledges to the
Bank the Pledged Note and grants to the Bank a lien thereon and a
security interest therein. The Pledged Note will contain a
restriction, using
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such
language as reasonably agreed to by CapitalSouth, alerting any
potential transferee of this Agreement and voiding any such
transfer in violation of this Agreement.
10. Notwithstanding anything to
the contrary contained herein, but without in any manner releasing,
impairing or otherwise affectin
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