MASTER SUBORDINATION AND INTERCREDITOR AGREEMENT

          This MASTER SUBORDINATION AND INTERCREDITOR AGREEMENT (this
“Agreement”), dated as of November 10, 2005, is made by and among IBF FUND
LIQUIDATING LLC, a Delaware limited liability company as the holder of the
Seller Notes, as defined below (“Seller”), IBF FUND LIQUIDATING LLC, a Delaware
limited liability company, as the holder of the Convertible Debentures, as
defined below (“Debenture Holder”) (collectively, Seller and Debenture Holder
are referred to individually and collectively as the “Subordinated Creditor”),
and CAPITALSOURCE FINANCE LLC, a Delaware limited liability company (the “Senior
Lender”), and acknowledged by SUNSET BRANDS, INC., a Nevada corporation
(“Guarantor”), its wholly-owned subsidiary and surviving corporation of the
Merger, defined below, U.S. MILLS, INC., a Delaware corporation and successor in
interest by merger to USM Acquisition Sub, Inc. (“Borrower”) (Guarantor and
Borrower sometimes hereinafter are referred to individually as an “Obligor” and
collectively as the “Obligors”).

RECITALS

          A. The Obligors and Senior Lender have entered into a Revolving
Credit, Term Loan and Security Agreement of even date herewith (such Revolving
Credit, Term Loan and Security Agreement, as the same hereafter may be amended,
modified, supplemented or restated from time to time, hereinafter is referred to
as the “Senior Loan Agreement”), pursuant and subject to the terms and
conditions of which the Senior Lender thereunder has agreed to make loans and
other financial accommodations to Borrower. Capitalized terms used but not
defined herein shall have the meanings set forth in the Senior Loan Agreement.

          B. Pursuant to the Amended and Restated Acquisition Agreement and Plan
of Merger, dated as of the date hereof (the “Merger Agreement”), among Seller,
Borrower, Guarantor and its wholly-owned subsidiary USM Acquisition Sub, Inc.
(“Merger Sub”), Merger Sub will be merged with and into Borrower and Borrower
will continue as the surviving corporation as a wholly-owned subsidiary of
Sunset (the “Merger”).

          C. Pursuant to the Merger Agreement, Obligors will be indebted to
Seller, and such indebtedness is to be evidenced by (a) a Subordinated Note of
even date herewith in the original principal amount of $5,000,000 made by
Obligors in favor of Seller (“Seller Note No. 1”) and (b) a Subordinated Note of
even date herewith in the original principal amount of $1,000,000 made by
Obligors in favor of Seller (“Seller Note No. 2”) (collectively, the “Seller
Notes”). To secure the obligations of Obligors to Seller under the terms of the
Seller Notes, the Obligors have granted to Seller a security interest in all of
their assets.

          D. Upon the closing of the Merger, Guarantor issued to Seller shares
of Guarantor’s Series B Preferred Stock (the “Series B Preferred Stock”) and
related warrants.

          E. The proceeds of Loans under the Senior Loan Agreement will be used,
in part, by Obligors to pay the balance of the purchase price payable pursuant
to the Merger Agreement.

          F. Pursuant to the terms of the Merger Agreement, Guarantor has issued
to the Debenture Holder secured convertible debentures in the aggregate amount
of $5,000,000 of (together with any reissuances, substitutions or replacements
thereof, the “Convertible

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Debentures”) which are convertible into shares of the common stock of Guarantor.
To secure Guarantor’s obligations to the Debenture Holder, the Convertible
Debentures and related documents, the Obligors have granted to Debenture Holder
a security interest in the all of their assets.

          G. One of the conditions precedent to Senior Lender’s obligations
under the Senior Loan Agreement is that this Agreement shall have been executed
and delivered by the all of the parties hereto.

 

 

 

 

NOW THEREFORE, the parties hereto hereby agree as follows:

 

 

 

1. Recitals and Definitions.

 

 

 

          1.1. Recitals. The Recitals set forth above are acknowledged by the
Subordinated Creditor to be true and correct and are incorporated herein by this
reference.

 

 

 

          1.2. Definitions. As used herein, the following terms shall have the
following meanings:

 

 

 

 

          “Bankruptcy Code” shall mean Chapter 11 of Title 11 of the United
States Code, as amended from time to time, any successor statute, and all rules
and regulations promulgated thereunder.

 

 

 

 

 

          “Blockage Period” shall mean the period (i) commencing on the date
Senior Lender notifies Subordinated Creditor that a Senior Default has occurred
and (ii) ending on the date which is the earlier to occur of (A) the date Senior
Lender elects to terminate such period by notice to Subordinated Creditor, (B)
the date the Senior Lender waives such Senior Default or such Senior Default is
cured, (C) the date all of the Senior Indebtedness is paid indefeasibly in full,
in cash, and the Commitments have been terminated, and (D) if, and only if, the
Senior Default is a Senior Covenant Default, the date which is 270 days after
the commencement of the Blockage Period. If the Senior Default that commences a
Blockage Period is a Senior Payment Default, then the Blockage Period shall end
on the earliest to occur of the circumstances set forth in clauses (A) through
(C).

 

 

 

 

 

          “Closing Date” shall mean the date of this Agreement.

 

 

 

 

 

          “Commitments” all commitments of Senior Lender under the Senior Loan
Agreement to lend money to or for the benefit of Borrower.

 

 

 

 

 

          “Guaranty” shall mean the “Guaranty,” as such term is defined in the
Senior Loan Agreement.

 

 

 

 

 

          “Lien” shall mean any mortgage, deed of trust, pledge, assignment,
lien, charge, encumbrance or security interest of any kind, including without
limitation, those created or arising from the Subordinated Debt Documents, or
the interest of

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a vendor or lessor under any conditional sale agreement, capitalized lease or
other title retention agreement.

 

 

 

 

 

          “Loan Documents” shall mean the “Loan Documents,” as such term is
defined in the Senior Loan Agreement (including, without limitation, the
Guaranty).

 

 

 

 

 

          “Person” shall mean any individual, firm, corporation, limited
liability company, business enterprise, trust, association, joint venture,
partnership, government, governmental agency or other entity, whether acting in
an individual, fiduciary or other capacity.

 

 

 

 

 

          “Proceeding” shall mean any insolvency, bankruptcy, receivership,
custodianship, liquidation, reorganization, assignment for the benefit of
creditors or other proceeding for the liquidation, dissolution or other winding
up of Obligors (or either of them) or their properties (including, without
limitation, any such proceeding under the Bankruptcy Code).

 

 

 

 

 

          “Senior Collection Action” shall mean any judicial proceeding or other
action initiated by Senior Lender against the Obligors (or either of them) to
collect the Senior Indebtedness, to foreclose the Senior Liens or otherwise to
enforce the rights of Senior Lender under the Senior Loan Agreement and the
other Senior Debt Documents or applicable law with respect to the Senior
Indebtedness.

 

 

 

 

 

          “Senior Covenant Default” shall mean any Default or Event of Default
under the Senior Debt Documents or any other occurrence permitting Senior Lender
to accelerate the payment of all or any portion of the Senior Indebtedness
(other than a Senior Payment Default).

 

 

 

 

 

          “Senior Debt Documents” shall mean the Senior Loan Agreement and the
other Loan Documents, all as the same may be amended, restated, supplemented or
otherwise modified from time to time.

 

 

 

 

 

          “Senior Default” shall mean any Senior Covenant Default or any Senior
Payment Default.

 

 

 

 

 

          “Senior Indebtedness” shall mean all obligations, liabilities and
indebtedness of every nature of each Obligor and each other Person from time to
time owed to Senior Lender under the Senior Debt Documents, including interest,
principal and all fees, costs and expenses now and from time to time hereafter
owing, due or payable, whether before or after the commencement of a Proceeding
and whether or not authorized under the Bankruptcy Code to collect such interest
from either Obligor (including any interest accruing at a default or post
judgment rate), together with any amendments, modifications, renewals or
extensions thereof to the extent not prohibited by the terms of this Agreement
and any interest accruing thereon after the commencement of a Proceeding,
whether or not allowed in such Proceeding.

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          “Senior Liens” shall mean all Liens now or hereafter granted to Senior
Lender to secure the Senior Indebtedness.

 

 

 

 

 

          “Senior Payment Default” shall mean any failure by either Obligor to
make any required payment of interest or principal, or any material fee or other
monetary payment, Lender the Senior Debt Documents, including, without
limitation, any default in payment of Senior Debt after acceleration thereof
and/or the filing of a Proceeding, or any failure to pay the amounts described
in this definition regardless of any requirement of notice or lapse of time or
both before such failure to pay becomes an Event of Default under the Senior
Debt Documents.

 

 

 

 

 

           “Subordinated Collection Action” shall mean (i) any acceleration of
the Subordinated Indebtedness, (ii) to file or initiate, or to join with other
Persons in filing or initiating, a Proceeding against either Obligor, (iii) any
judicial proceeding or other action initiated or taken by Subordinated Creditor,
or by Subordinated Creditor in concert with other Persons, against either
Obligor to collect the Subordinated Indebtedness or otherwise to enforce the
rights of Subordinated Creditor under the Subordinated Debt Documents or
applicable law with respect to the Subordinated Indebtedness or (iv) any action
(judicial or non-judicial) to exercise rights and remedies against any assets,
properties, or other interests of either Obligor, including, without limitation,
actions to foreclose, sell or dispose collateral, or enforce Liens, pursuant to
the Uniform Commercial Code.

 

 

 

 

 

           “Subordinated Debt Documents” shall mean the Subordinated Debenture
Holder Debt Documents and the Subordinated Seller Debt Documents.

 

 

 

 

 

          “Subordinated Debenture Holder Debt Documents” shall mean the
Convertible Debentures and all related documents, including all other documents,
instruments and agreements executed and delivered by either Obligor, Debenture
Holder or any other Person evidencing, governing the terms of repayment of or
otherwise pertaining to Subordinated Debenture Holder Indebtedness, all as the
same may be amended, restated, supplemented or otherwise modified from time to
time.

 

 

 

 

 

          “Subordinated Seller Debt Documents” shall mean the Seller Notes and
all other documents, instruments and agreements executed and delivered by any
Obligor, Seller or any other Person evidencing, governing the terms of repayment
of or otherwise pertaining to Subordinated Seller Indebtedness, all as the same
may be amended, restated, supplemented or otherwise modified from time to time.

 

 

 

 

 

          “Subordinated Debenture Holder Indebtedness” shall mean all
obligations, liabilities and indebtedness of every nature of each Obligor and
each other Person from lime to time owed to Debenture Holder in respect of the
Subordinated Debenture Holder Debt Documents, together with all accrued and
unpaid interest

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thereon and all fees, costs and expenses now and from time to time hereafter
owing, due or payable in connection with any of the foregoing, whether before or
after the commencement of a Proceeding or a Subordinated Collection Action.

 

 

 

 

 

          “Subordinated Indebtedness” shall mean all obligations, liabilities
and indebtedness of every nature of each Obligor and each other Person from time
to time owed to Subordinated Creditor in respect of the Subordinated Debenture
Holder Indebtedness or the Subordinated Seller Indebtedness, together, in each
case, with all accrued and unpaid interest thereon and all fees, costs and
expenses now and from time to time hereafter owing, due or payable in connection
with any of the foregoing, whether before or after the commencement of a
Proceeding or a Subordinated Collection Action.

 

 

 

 

 

          “Subordinated Seller Indebtedness” shall mean all obligations,
liabilities and indebtedness of every nature of each Obligor and each other
Person from time to time owed to Seller in respect of the Subordinated Seller
Debt Documents, together with all accrued and unpaid interest thereon and all
fees, costs and expenses now and from time to time hereafter owing, due or
payable in connection with any of the foregoing, whether before or after the
commencement of a Proceeding or a Subordinated Collection Action.

 

 

 

 

 

          “Subordinated Securities” shall mean any securities of any Obligor
issued in connection with a Proceeding, the payment of which is junior or
otherwise subordinated, at least to the extent provided in this Agreement, to
the payment of all Senior Indebtedness and to the payment of all securities
issued in exchange therefor to the holders of the Senior Indebtedness.

 

 

 

 

2. Subordination of the Subordinated Indebtedness to the Senior Indebtedness.

 

 

 

          2.1. Payment Subordination. Upon the terms and conditions contained in
this Agreement the payment of any and all of the Subordinated Indebtedness
hereby expressly is subordinated to the prior indefeasible payment in full in
cash of the Senior Indebtedness and the termination of the Commitments.

 

 

 

 

          2.2. Lien Subordination. Subordinated Creditor hereby unconditionally
agrees that: (i) all Liens of the Subordinated Creditor in any property of
either Obligor shall be and hereby are subordinated to the Senior Liens, and
(ii) other than as set forth in Section 2.7(b), the Subordinated Creditor shall
have no right to possession of any property of any Obligor or to take any
Subordinated Collection Action, unless and until all the Senior Indebtedness
shall have been fully paid and satisfied and the Commitments have been
terminated. Notwithstanding any rights or remedies available to Subordinated
Creditor under applicable law (including, without limitation, under the
Bankruptcy Code) or under any Subordinated Debt Document, Subordinated Creditor
shall not, without the prior written consent of Senior Lender, be permitted to
take any action to foreclose, repossess, marshal, control or exercise any
remedies with respect to any property of the either Obligor or take any other
action which would interfere with or impair the Senior Liens or the rights of
Senior Lender against the either Obligor’s property, until the

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payment in full of the Senior Indebtedness and the termination of the
Commitments. Notwithstanding the date, manner or order of grant, attachment or
perfection of any Liens or any Senior Liens, and notwithstanding any provision
of the UCC or any other applicable law or the provisions of any Subordinated
Debt Document or any other Senior Debt Document or any other circumstance
whatsoever, the Subordinated Creditor, hereby agrees that (a) any Senior Liens
now or hereafter held by or for the benefit of Senior Lender shall be senior in
right, priority, operation, effect and all other respects to any and all
Subordinated Creditor Liens and (b) any Subordinated Creditor Lien now or
hereafter held by or for the benefit of any Subordinated Creditor shall be
junior and subordinate in right, priority, operation, effect and all other
respects to any and all Senior Liens. The Senior Liens shall be and remain
senior in right, priority, operation, effect and all other respects to any
Subordinated Creditor Liens for all purposes, whether or not any Senior Liens
are subordinated in any respect to any other Lien securing any other obligation
of either Obligor, any other grantor or any other Person and regardless of
whether the Lien purported to be granted is found to be improperly granted,
improperly perfected, a fraudulent conveyance or legally or otherwise deficient
in any manner. Each of the Senior Lender, and the Subordinated Creditor, agrees
that it will not, and hereby waives any right to, directly or indirectly,
contest or support any other Person in contesting, in any proceeding (including
any Proceeding), the priority, validity or enforceability of any Senior Lien, or
the validity or enforceability of the priorities, rights or obligations
established by this Agreement; provided that nothing in this Agreement shall be
construed to prevent or impair the rights of the Senior Lender to enforce this
Agreement. Each Obligor, by its execution of this Agreement, hereby acknowledges
and agrees to the provisions of this paragraph, notwithstanding anything to the
contrary in any document to which such Obligor is a party.

 

 

 

          2.3. Payment Restrictions. Notwithstanding any provision of the
Subordinated Debt Documents to the contrary and in addition to any other
limitations set forth herein or therein, no payment of any principal, interest,
fees, costs, expenses or any other amount due with respect to the Subordinated
Indebtedness shall be made, and no Subordinated Creditor shall exercise any
right of set-off or recoupment with respect to any Subordinated Indebtedness,
until all of the Senior Indebtedness is indefeasibly paid in full in cash and
the Commitments have been terminated, except that:

 

 

 

          (A) after the first anniversary of the Closing Date, Obligors may make
and Seller may receive regularly scheduled current payments of interest on the
outstanding principal balance of Seller Note No. 1 at a rate per annum not to
exceed that rate set forth in Seller Note No. 1 as in effect on the date hereof,
but only if (1) no Default or Event of Default has occurred and is continuing
under the Senior Debt Documents; and (2) the Obligors’ payment of such interest
will not result in, cause, or create a Default or Event of Default under the
Senior Debt Documents. Interest on Seller Note No. 1 shall accrue at the rate of
no higher than 18% per annum on the principal outstanding from time to time on
such note. All interest on Seller Note No. 1 during the first year following the
Closing Date shall accrue, but shall not be paid by the Obligors to Seller until
all of the Senior Indebtedness is indefeasibly paid in full in cash and the
Commitments have been terminated. After the first anniversary of the Closing
Date, 50% of the interest on Seller Note No. 1 shall be payable by the Obligors
(if permitted by the terms and conditions of

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this Agreement) and the remaining 50% of the interest shall accrue and shall not
be payable until the later of (y) the maturity of Seller Note No. 1 or (z) such
date as when all of the Senior Indebtedness is indefeasibly paid in full in cash
and the Commitments have been terminated;

 

 

 

          (B) after the first anniversary of the Closing Date, Obligors may make
and Seller may receive prepayments of the principal of Seller Note No. 1, but
only if (1) no Default or Event of Default has occurred and is continuing under
the Senior Debt Documents; (2) the Obligors’ prepayments of the principal of
Seller Note No. 1 will not result in, cause, or create a Default or Event of
Default under the Senior Debt Documents; (3) the source of the prepayment is
entirely from a new capital infusion into the Obligors on terms and conditions
satisfactory to the Senior Lender which shall include, without limitation, a
provision that the provider of new capital infusion will agree to subordinate
its debt to Senior Lender on terms no less favorable than those contained
herein; and (4) Obligors have provided 30 calendar days prior written notice to
the Senior Lender of all of the foregoing prior to making any such prepayment;
and

 

 

 

          (C) Obligors may make and Seller may receive regularly scheduled
current payments of interest on the outstanding principal balance of Seller Note
No. 2, but only if (1) no Default or Event of Default has occurred and is
continuing under the Senior Debt Documents; and (2) the Obligors’ payment of
such interest will not result in, cause, or create a Default or Event of Default
under the Senior Debt Documents. Interest on Seller Note No. 2 shall accrue at a
rate no higher than the interest rate charged on the Term Loan.

 

 

 

          (D) at any time, Obligors may make and the Debenture Holder may
receive prepayments of the principal of the Convertible Debentures, but only if
(1) no Default or Event of Default has occurred and is continuing under the
Senior Debt Documents; (2) such payment will not result in, cause, or create a
Default or Event of Default under the Senior Debt Documents; (3) the source of
such payment is entirely from a new capital infusion into the Obligors on terms
and conditions satisfactory to the Senior Lender which shall include, without
limitation, a provision that the provider of new capital infusion will agree to
subordinate its debt and any Liens in any property of either Obligor to Senior
Lender on terms no less favorable than those contained herein, and (4) Obligors
have provided 30 calendar days prior written notice to the Senior Lender of all
of the foregoing prior to making any such prepayment.

 

 

 

          2.4. Proceedings. In the event of any Proceeding, (a) all Senior
Indebtedness first shall be indefeasibly paid in full in cash and the
Commitments shall have been terminated before any payment of or with respect to
the Subordinated Indebtedness shall be made, other than any payment consisting
of Subordinated Securities; (b) any payment which, but for the terms hereof,
otherwise would be payable or deliverable in respect of the Subordinated
Indebtedness (other than Subordinated Securities) shall be paid or delivered
directly to Senior Lender (to be held and/or applied by Senior Lender in
accordance with the terms of the Senior Loan Agreement) until all Senior
Indebtedness is indefeasibly paid in full in cash and the Commitments have been
terminated, and Subordinated Creditor irrevocably authorizes, empowers and
directs all receivers,

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trustees, liquidators, custodians, conservators and others having authority in
the premises to effect all such payments and deliveries and further irrevocably
authorizes and empowers Senior Lender to demand, sue for, collect and receive
every such payment or distribution; (c) Subordinated Creditor agrees to execute
and deliver to Senior Lender or its representative all such further instruments
requested by Senior Lender confirming the authorization referred to in the
foregoing clause (b); (d) Subordinated Creditor agrees (i) not to waive,
discharge, release or compromise any claim of Subordinated Creditor in respect
of the Subordinated Indebtedness without the prior written consent of Senior
Lender, which consent will not be unreasonably withheld, and (ii) to take all
actions as Senior Lender reasonably may request in order to enable Senior Lender
to enforce all claims upon or in respect of the Subordinated Indebtedness; (e)
Subordinated Creditor expressly consents to the granting by the Obligors to
Senior Lender of first priority Liens on the Obligors’ property and assets in
connection with any financing provided by Senior Lender to the Obligors after
the commencement of such Proceeding; (f) Subordinated Creditor shall not propose
or support any plan, financing, or order which would have the effect of
canceling, modifying or amending, to the detriment of the Senior Lender, the
relative Lien priorities set forth in this Agreement; and (g) Subordinated
Creditor agrees to execute, verify, deliver and file any proofs of claim in
respect of the Subordinated Indebtedness requested by Senior Lender in
connection with any such Proceeding and hereby irrevocably authorizes, empowers
and appoints Senior Lender its agent and attorney-in-fact to execute, verify,
deliver and file such proofs of claim upon the failure of Subordinated Creditor
to do so at least ten Business Days prior to the bar date for filing such proofs
of claim. The provisions of this Agreement shall continue in full force and
effect notwithstanding the occurrence of a Proceeding against either Obligor or
any of its property. To the extent of the Subordinated Creditor’s subordinated
lien in any property of either Obligor, and to the extent the Subordinated
Creditor has or acquires any rights under Section 363, Section 364 or Section
1126 of the Bankruptcy Code with respect to such property of such Obligor,
Subordinated Creditor hereby agrees not to assert such rights without the prior
written consent of Senior Lender. In the event and during the continuation of
any Proceeding, Subordinated Creditor shall not object to or oppose any cash
collateral order or plan in each case approved by Senior Lender.

 

 

 

          2.5. Incorrect Payments. If before all Senior Indebtedness is
indefeasibly paid in full in cash and all Commitments have been terminated (a)
any payment not permitted under Section 2.3 hereof is received by a Subordinated
Creditor on account of the Subordinated Indebtedness (other than Subordinated
Securities), or (b) any cash payment not permitted under Section 7.5(i) of the
Senior Loan Agreement is received by a Subordinated Creditor, any such payment
shall not be commingled with any asset of Subordinated Creditor, shall be held
in trust by such Subordinated Creditor for the benefit of Senior Lender and
shall be paid over to Senior Lender, or its designated representative, for
application (in accordance with the Senior Loan Agreement) to the payment of the
Senior Indebtedness then remaining unpaid, until all of the Senior Indebtedness
is indefeasibly paid in full in cash and all Commitments of Senior Lender have
been terminated; provided, such Subordinated Creditor shall not be responsible
for making any such payment to Senior Lender unless Senior Lender has requested
such payment from such Subordinated Creditor within 90 days of Senior Lender
having actual knowledge that a payment was made to such Subordinated Creditor in
violation of this Section 2.5;

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provided, further that notwithstanding the foregoing, such 90 day limitation
shall not apply to any payments received by Subordinated Creditor that such
Subordinated Creditor has actual knowledge that it received in violation of this
Section 2.5.

 

 

 

          2.6. Sale, Transfer. No Subordinated Creditor shall sell, assign,
dispose of or otherwise transfer (each, a “Transfer”) all or any portion of the
Subordinated Indebtedness owing to such Subordinated Creditor unless, prior to
the consummation of any such action, (a) such Subordinated Creditor shall give
Senior Lender at least five (5) Business Days prior written notice of any such
Transfer, and (b) the transferee thereof executes and delivers to Senior Lender
a written acknowledgement and joinder, in form and detail reasonably
satisfactory to Senior Lender, that the transferee is a party to this Agreement
as a Subordinated Creditor and shall be bound by all of the terms and conditions
of this Agreement. Notwithstanding the failure to execute or deliver any such
agreement, the subordination effected hereby shall survive any sale, assignment,
disposition or other transfer of all or any portion of the Subordinated
Indebtedness, and the terms of this Agreement shall be binding upon the
successors and assigns of any Subordinated Creditor, as provided in Section 12
below.

 

 

 

          2.7. Restriction on Action by Subordinated Creditor/Right to Purchase.

 

 

 

          (a) Until the Senior Indebtedness is indefeasibly paid in full in cash
and the Commitments have been terminated and notwithstanding anything contained
in the Subordinated Debt Documents or the Senior Loan Agreement and the other
Senior Debt Documents to the contrary, Subordinated Creditor shall not agree to
any amendment or modification of, or supplement to, the Subordinated Debt
Documents as in effect on the date hereof if such amendment, modification or
supplement would be adverse to Senior Lender. Subordinated Creditor agrees to
provide Senior Lender with a copy of any proposed amendment, modification or
supplement to the Subordinated Debt Documents at least three (3) Business Days
prior to their execution.

 

 

 

 

 

          (b) Until the Senior Indebtedness is indefeasibly paid in full in cash
and the Commitments have been terminated no Subordinated Creditor shall take any
Subordinated Collection Action, except that Subordinated Creditor may declare
the entire Subordinated Indebtedness to be due and payable immediately if either
(i) such acceleration of the Subordinated Indebtedness is allowed under terms of
the Subordinated Debt Documents, (ii) the Subordinated Creditor has given the
Senior Lender at least thirty days’ notice of its intent to accelerate the
Subordinated Indebtedness, and (iii) there is no Blockage Period in effect, or
the Senior Indebtedness has been accelerated. Following acceleration of the
Subordinated Indebtedness, the Subordinated Creditor may take no further
Subordinated Collection Action until the Senior Indebtedness is indefeasibly
paid in full in cash and the Commitments have been terminated.

 

 

 

          (c) Following acceleration of the Senior Indebtedness, nothing
contained herein is intended, or shall be deemed, to restrict or modify the
ability of the Subordinated Creditor from purchasing the Senior Indebtedness
from the Senior Lender at a cash purchase price equal to the amount of all
Obligations owing to the Senior Lender under the Senior Debt Documents at the
time of such acceleration.

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          2.8. Financing Restriction on Senior Lender. Senior Lender agrees that
the aggregate outstanding amount of Loans made by Senior Lender to Obligors
shall not exceed $10,000,000 at any time. Except as set forth in the preceding
sentence, nothing contained in this Agreement shall be deemed to restrict or
limit the right of Senior Lender to extend additional financing to any Obligor
or any of their respective subsidiaries or affiliates, to increase the Senior
Indebtedness or the rate of interest or fees payable thereon or to agree to any
other amendment or modification of, or supplement to, the Senior Loan Agreement
or the other Senior Debt Documents or to take any Senior Collection Action,
whether prior or subsequent to the initiation of any Proceeding. Subordinated
Creditor hereby consents to and waives any right of notice of any such
amendment, modification or supplement and agrees that the subordination
effective hereby shall continue in full force and effect notwithstanding any
such amendment, modification or supplement.

 

 

 

          2.9. Subrogation. Subject to the payment in full in cash of all Senior
Indebtedness and the termination of the Commitments, Subordinated Creditor shall
be subrogated to the rights of Senior Lender to receive payments or
distributions of assets of the Obligors applicable to the Senior Indebtedness
until the principal of, and interest and premium, if any, on, and all other
amounts payable in respect of the Subordinated Indebtedness shall be paid in
full. For purposes of such subrogation, no payment or distribution to Senior
Lender under the provisions hereof to which Subordinated Creditor would have
been entitled but for the provisions of this Agreement, and no payment pursuant
to the provisions of this Agreement to Senior Lender by Subordinated Creditor,
as between either Obligor and its creditors other than Senior Lender, shall be
deemed to be a payment by either Obligor to or on account of the Senior
Indebtedness. Notwithstanding the foregoing provisions of this Section 2.9, the
holders of the Subordinated Indebtedness shall have no claim against Senior
Lender for any impairment of any subrogation rights herein granted to the
holders of the Subordinated Indebtedness.

 

 

 

          2.10. Legend. Until the Senior Indebtedness is indefeasibly paid in
full in cash and the Commitments have been terminated, the Subordinated Debt
Documents at all times shall contain in a conspicuous manner the following
legend:

 

 

 

 

 

“The obligations evidenced hereby are subordinate in the manner and to the
extent set forth in that certain Master Subordination and Intercreditor
Agreement (the “Subordination Agreement”) dated as of November 10, 2005, among
Sunset Brands, Inc., (“Sunset”), U.S. Mills, Inc. (“Mills”), IBF Fund
Liquidating LLC, as Seller, IBF Fund Liquidating LLC, as Debenture Holder and
CapitalSource Finance LLC, (the “Senior Lender”), to the obligations (including
interest) owed by Sunset and Mills to Senior Lender from time to time. Each
holder hereof, by its acceptance hereof, shall be bound by the provisions of the
Subordination Agreement.”

          3. Continued Effectiveness of this Agreement. The terms of this
Agreement, the subordination effected hereby, and the rights and the obligations
of Subordinated Creditor and Senior Lender arising hereunder, shall not be
affected, modified or impaired in any manner or to any extent by (a) any
amendment or modification of or supplement to the Senior Loan

10

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Agreement, the other Senior Debt Documents or any of the Subordinated Debt
Documents, and Subordinated Creditor hereby irrevocably consents to, and waives
any claim it may have against Senior Lender or either Obligor as a result of,
any amendment, modification or supplement of the Senior Loan Agreement or the
other Senior Debt Documents; (b) the validity or enforceability of any of such
documents; or (c) any exercise or non-exercise of any right, power or remedy
under or in respect of the Senior Indebtedness or the Subordinated Indebtedness
or any of the instruments or documents referred to in clause (a) above. The
Senior Indebtedness shall continue to be treated as Senior Indebtedness and the
provisions of this Agreement shall continue to govern the relative rights and
priorities of the holders of Senior Indebtedness and Subordinated Creditor even
if all or part of the Senior Liens are subordinated, set aside, avoided or
disallowed in connection with any Proceeding (or if all or part of the Senior
Indebtedness is subordinated, set aside, avoided or disallowed in connection
with any Proceeding as a result of the fraudulent conveyance or fraudulent
transfer provisions under the Bankruptcy Code or under any state fraudulent
conveyance or fraudulent transfer statute or if any interest accruing on the
Senior Indebtedness following the commencement of such Proceeding is otherwise
disallowed) and this Agreement shall be reinstated if at any time any payment of
any of the Senior Indebtedness is rescinded or must otherwise be returned by any
holder of Senior Indebtedness or any representative of such holder.

 

 

 

 

4. Representations and Warranties.

 

 

 

 

 

4.1. Seller hereby represents and warrants to Senior Lender as follows:

 

 

 

 

 

          A Binding Agreements. This Agreement, when executed and delivered,
will constitute the valid and legally binding obligation of Seller enforceable
against it in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors’ rights generally and by
equitable principles.

 

 

 

 

 

          B No Conflicts. Seller is the current owner and holder of the Seller
Notes. No provisions of any mortgage, indenture, contract, agreement, statute,
rule, regulation, judgment, decree or order binding on Seller or affecting the
property of Seller conflicts with, or requires any consent which has not already
been obtained under, or would in any way prevent the execution, delivery or
performance of the terms of this Agreement. No pending or, to the best of
Seller’s knowledge, threatened, litigation, arbitration or other proceedings if
adversely determined would in any way prevent the performance by Seller of the
terms of this Agreement.

 

 

 

 

 

          C Copy of Subordinated Seller Debt Documents. There is attached to
this Agreement a true, correct and complete copy of the Subordinated Seller Debt
Documents.

 

 

 

 

 

4.2. Debenture Holder hereby represents and warrants to Senior Lender as
follows:

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          A Binding Agreements. This Agreement, when executed and delivered,
will constitute the valid and legally binding obligation of such Debenture
Holder enforceable against it in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors’ rights generally and by equitable principles.

 

 

 

 

 

          B No Conflicts. The Debenture Holder are the current owner and holder
of the Subordinated Debenture Holder Debt Documents. No provisions of any
mortgage, indenture, contract, agreement, statute, rule, regulation, judgment,
decree or order binding on the Debenture Holder or affecting the property of the
Debenture Holder conflicts with, or requires any consent which has not already
been obtained under, or would in any way prevent the execution, delivery or
performance of the terms of this Agreement. No pending or, to the best knowledge
of the Debenture Holder, threatened, litigation, arbitration or other
proceedings if adversely determined would in any way prevent the performance by
the Debenture Holder of the terms of this Agreement.

 

 

 

 

 

          C Copy of Subordinated Cornell Debt Documents. There is attached to
this Agreement a true, correct and complete copy of the Subordinated Debenture
Holder Debt Documents.

          5. Cumulative Rights, No Waivers. Each and every right, remedy and
power granted to Senior Lender hereunder shall be cumulative and in addition to
any other right, remedy or power specifically granted herein, in the Senior Loan
Agreement and the other Senior Debt Documents or in the Subordinated Debt
Documents or now or hereafter existing in equity, at law, by virtue of statute
or otherwise, and may be exercised by Senior Lender, from time to time,
concurrently or independently and as often and in such order as Senior Lender
may deem expedient. Any failure or delay on the part of Senior Lender in
exercising any such right, remedy or power, or abandonment or discontinuance of
steps to enforce the same, shall not operate as a waiver thereof or affect
Senior Lender’s right thereafter to exercise the same, and any single or partial
exercise of any such right, remedy or power shall not preclude any other or
further exercise thereof or the exercise of any other right, remedy or power,
and no such failure, delay, abandonment or single or partial exercise of Senior
Lender’s rights hereunder shall be deemed to establish a custom or course of
dealing or performance among the parties hereto.

          6. Provisions Define Relative Rights. This Agreement is intended
solely for the purpose of defining the relative rights of the Senior Lender on
the one hand and the Subordinated Creditor on the other, and no other person
shall have any right, benefit or other interest under this Agreement. Except as
expressly set forth in this Agreement, nothing herein shall (a) impair, as
between either Obligor and the Senior Lender and either Obligor and the
Subordinated Creditor, the obligation of such Obligor, which is absolute and
unconditional, to pay the Senior Indebtedness to the Senior Lender, on the one
hand, and the Subordinated Indebtedness to the Subordinated Creditor, on the
other hand, in each case in accordance with their respective terms; or (b)
affect the relative rights of the Senior Lender or the Subordinated Creditor
with respect to any other creditors of either Obligor.

12

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          7. Bailee For Perfection.

 

 

 

          (a) The Senior Lender agrees to hold any Collateral in the possession
or control (as such term is defined in the Uniform Commercial Code) of the
Senior Lender (collectively, the “Possessory Collateral”) as bailee for and on
behalf and for the benefit of the Subordinated Creditor solely for the purposes
of perfecting the security interests granted in such Possessory Collateral
pursuant to the Subordinated Debt Documents, subject to the terms and conditions
hereof, it being agreed that the Senior Lender has no duties to the Subordinated
Creditor in connection with such possession or control or such Possessory
Collateral.

 

 

 

          (b) Upon the indefeasible payment in full of the Senior Indebtedness
and the Commitments have been terminated, the Senior Lender shall deliver the
remainder of the Possessory Collateral, if any, in its possession, and to the
extent practicable, transfer control of the remainder of the Possessory
Collateral, if any, under its control, to the Subordinated Creditor (as their
interest may appear in the Junior Subordination Agreement dated of even date
herewith among the Subordinated Creditors and Obligors, except as a court of
competent jurisdiction may otherwise direct.

 

 

          8. Modification. Any modification, termination or waiver of any
provision of this Agreement, or any consent to any departure by Subordinated
Creditor therefrom, shall not be effective in any event unless the same is in
writing and signed by Senior Lender and Subordinated Creditor and then such
modification, termination, waiver or consent shall be effective only in the
specific instance and for the specific purpose given. Any notice to or demand on
Subordinated Creditor in any event not specifically required of Senior Lender
hereunder shall not entitle Subordinated Creditor to any other or further notice
or demand in the same, similar or other circumstances unless specifically
required hereunder.

 

 

 

9. Additional Documents and Actions.

 

 

 

           (a)Subordinated Creditor at any time, and from time to time, after
the execution and delivery of this Agreement, upon the request of Senior Lender
and at the expense of Subordinated Creditor, promptly will execute and deliver
such further documents and do such further acts and things as Senior Lender
reasonably may request in order to effect fully the purposes of this Agreement.

 

 

 

           (b) Senior Lender agrees to assign to Seller all rights that Senior
Lender has in all Landlord Waiver and Consents and warehouseman waivers that
Senior Lender has obtained in connection with its Senior Loan Agreement on the
date that the Senior Indebtedness is indefeasibly paid in full in cash and the
Commitments have been terminated.

          10. Notices. Any notice or request under this Agreement shall be in
writing and shall be given to any party hereto at such party’s address set forth
beneath its signature on the signature page hereto, or at such other address as
such party may hereafter specify in a notice given in the manner required under
this Section 10. Any such notice or request shall be given only by, and shall be
deemed to have been received upon: (a) registered or certified mail, return

13

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receipt requested, on the date on which such notice or request is received as
indicated in such return receipt, (b) delivery by a nationally recognized
overnight courier, one (1) Business Day after deposit with such courier, or (c)
facsimile or electronic transmission, in each case upon telephone or further
electronic communication from the recipient acknowledging receipt (whether
automatic or manual from recipient), as applicable.

          11. Severability. In the event that any provision of this Agreement is
deemed to be invalid by reason of the operation of any law or by reason of the
interpretation placed thereon by any court or governmental authority, the
validity, legality and enforceability of the remaining terms and provisions of
this Agreement shall not in any way be affected or impaired thereby, all of
which shall remain in full force and effect, and the affected term or provision
shall be modified to the minimum extent permitted by law so as to achieve most
fully the intention of this Agreement.

          12. Successors and Assigns. Subject to the terms of Section 2.6
hereof, this Agreement shall be binding upon and inure to the benefit of the
successors and permitted assigns of Senior Lender, the Obligors and Subordinated
Creditor.

          13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall be one and the same instrument.

          14. Defines Rights of Creditor. The provisions of this Agreement are
solely for the purpose of defining the relative rights of Subordinated Creditor
and Senior Lender and shall not be deemed to create any rights or priorities in
favor of any other Person, including, without limitation, the Obligors.

          15. Conflict. In the event of any conflict between any term, covenant
or condition of this Agreement and any term, covenant or condition of any of the
Subordinated Debt Documents, the Senior Loan Agreement or the other Senior Debt
Documents, the provisions of this Agreement shall control and govern. For
purposes of this Section 15, to the extent that any provisions of any of the
Subordinated Debt Documents provide rights, remedies and benefits to Senior
Lender that exceed the rights, remedies and benefits provided to Senior Lender
under this Agreement, such provisions of the applicable Subordinated Debt
Documents shall be deemed to supplement (and not to conflict with) the
provisions hereof.

          16. Headings. The paragraph headings used in this Agreement are for
convenience only and shall not affect the interpretation of any of the
provisions hereof.

          17. Termination. This Agreement shall terminate upon the indefeasible
payment in full in cash of the Senior Indebtedness and the termination of the
Commitments.

          18. Default Notices. Subordinated Creditor shall immediately notify
Lender in writing if any event of default occurs under the Subordinated Debt
Documents.

14

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          19. No New Security for Subordinated Indebtedness; No Contest of
Liens; Specific Performance:

 

 

 

          (a) Subordinated Creditor agrees that it will not at any time require,
take or accept any additional collateral security for all or any portion of the
Subordinated Indebtedness, except for those Liens in existence as of the date
hereof unless such additional collateral security shall be subject to a valid
first priority Lien of the Senior Lender. In the event Subordinated Creditor
takes or accepts any additional collateral security for the Subordinated
Indebtedness in violation of the terms of this Agreement, Subordinated Creditor
hereby appoints Senior Lender its agent and attorney-in-fact to execute, file,
record and deliver any such UCC termination statements, releases or other
documents necessary to release any such collateral security. Such appointment of
Senior Lender as Subordinated Creditor’s agent and attorney in fact is coupled
with an interest and is irrevocable until the Senior Indebtedness has been
indefeasibly paid in full in cash and the Commitments have been terminated.

 

 

 

          (b) Subordinated Creditor agrees that it will not at any time contest
the validity, perfection, priority or enforceability of the Senior Liens. The
provisions of this Agreement shall apply regardless of any invalidity,
unenforceability or lack of perfection of the Senior Liens.

 

 

 

          (c) Senior Lender agrees that nothing contained in this Agreement
shall limit the Debenture Holders ability to seek injunctive relief or specific
performance against Sunset for Sunset’s failure to convert the Debenture
Holder’s Convertible Debentures or exercise the Debenture Holder’s warrants, in
each case to common stock of Sunset in breach of the terms of the Convertible
Debentures or the Warrants issued thereunder.

          20. Governing Law; Jurisdiction; Construction. This Agreement shall be
governed by and construed in accordance with the internal laws of the State of
Maryland. Any judicial proceeding against Subordinated Creditor or either
Obligor with respect to this Agreement may be brought in any federal or state
court of competent jurisdiction located in Montgomery County of the state of
Maryland. By execution and delivery of this Agreement, Subordinated Creditor and
each Obligor (a) accepts the non-exclusive jurisdiction of the aforesaid courts
and irrevocably agrees to be bound by any judgment rendered thereby, (b) agrees
that service of process upon it may be made by certified or registered mail,
return receipt requested, pursuant to Section 8 hereof, and (c) waives any
objection to jurisdiction and venue of any action instituted hereunder and
agrees not to assert any defense based on lack of jurisdiction, venue,
convenience or forum non conveniens. Nothing shall affect the right of Senior
Lender to serve process in any manner permitted by law or shall limit the right
of Senior Lender to bring proceedings against Subordinated Creditor or either
Obligor in the courts of any other jurisdiction having jurisdiction. Any
judicial proceedings against Senior Lender, involving, directly or indirectly,
the Loan Documents or this Agreement shall be brought only in a federal or state
court located in Montgomery County of the state of Maryland. The Subordinated
Creditor acknowledge that they participated in the negotiation and drafting of
this Agreement and that, accordingly, none of them shall move or petition a
court construing this Agreement to construe it more stringently against one
party than against any other.

15

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          21. Waiver of Right to Jury Trial. EACH PARTY TO THIS AGREEMENT HEREBY
EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION
ARISING HEREUNDER OR IN ANY WAY CONNECTED WITH OR INCIDENTAL TO THE DEALINGS OF
THE PARTIES WITH RESPECT HERETO OR THE TRANSACTIONS CONTEMPLATED HEREBY, WHETHER
NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR
OTHERWISE. EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO
THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES TO THE WAIVER OF
THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY.

          22. Senior Loan Agreement; Reliance. Subordinated Creditor has been
advised by counsel in connection with the negotiation and execution of this
Agreement and is not relying upon any oral representations or statements
inconsistent with the terms and provisions hereof. Subordinated Creditor
acknowledges that (i) it has benefited and will benefit from the execution,
delivery and performance by Senior Lender of the Senior Loan Agreement and the
other Loan Documents, (ii) the financing provided under the Senior Loan
Agreement constitutes valuable consideration to it, (iii) this Agreement is
intended to be an inducement to Senior Lender to execute, deliver and perform
the its obligations under the Senior Loan Agreement and the other Loan Documents
and to provide the financing contemplated thereunder and (iv) Senior Lender is
relying on the subordination and other provisions of this Agreement in entering
into and performing the Senior Loan Agreement and the other Loan Documents and
providing the financing contemplated thereunder.

[remainder of this page intentionally left blank]

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          IN WITNESS WHEREOF, the parties hereto have caused this Master
Subordination and Intercreditor Agreement to be executed as of the date first
above written.

 

 

 

 

 

IBF FUND LIQUIDATING LLC, as Seller

 

 

 

By:

/s/ A. Steinberg

 

 

--------------------------------------------------------------------------------

 

 

Name:

Arthur Steinberg

 

Title:

Manager

 

 

 

 

Notice Address:

 

 

 

IBF Fund Liquidating LLC

 

c/o Kaye Scholer LLP.

 

425 Park Avenue

 

New York, NY 10022

 

Attention: Arthur J. Steinberg, Esq., Manager

 

 

 

Telephone: (212) 836-8564

 

Telecopy: (212) 836-6157

 

 

 

IBF FUND LIQUIDATING LLC, as
Debenture Holder

 

 

 

By:

/s/ A. Steinberg

 

 

--------------------------------------------------------------------------------

 

 

Name:

Arthur Steinberg

 

Title:

Manager

 

 

 

 

Notice Address:

 

 

 

IBF Fund Liquidating LLC

 

c/o Kaye Scholer LLP.

 

425 Park Avenue

 

New York, NY 10022

 

Attention: Arthur J. Steinberg, Esq., Manager

 

 

 

Telephone: (212) 836-8564

 

Telecopy: (212) 836-6157

--------------------------------------------------------------------------------

 

 

 

 

 

CAPITALSOURCE FINANCE LLC

 

 

 

By:

/s/ Stephen M. Klein

 

 

--------------------------------------------------------------------------------

 

 

Name:

/s/ Stephen M. Klein

 

Title:

Managing Director

 

 

 

 

4445 Willard Avenue, 12th Floor

 

Chevy Chase, MD 20815

 

Attention: Business Credit Services,

 

Portfolio Manager

 

Telephone: (301) 841-2700

 

Telecopy: (301) 841-2313

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