Exhibit 10.5

INSIDER SUBORDINATION AGREEMENT
 
THIS AGREEMENT is made and entered into effective this 9th day of March, 2007,
by and between MISCOR Group, Ltd., HK Engine Components, LLC. (collectively, the
“Borrowers”), MFB Financial (hereinafter referred to as the “Bank”), and John A.
Martell (the “Subordinating Party”).
 
W I-T N E S S E T H:
 
WHEREAS, Borrowers are presently, or will hereafter become, indebted to
Subordinating Party as eAdenced by one or more promissory note(s) and other
instruments (the “Martell Notes”); and
 
WHEREAS, Borrowers and Subordinating Party have requested that Bank extend
credit to Borrowers, but Bank is willing to do so if, and only if, all of the
indebtedness owing or to become owing by Borrowers to Subordinating Party, and
all collateral for such indebtedness, are expressly subordnated to any and all
indebtedness now or hereafter owhg to Bank by Borrowers and all collateral for
such indebtedness.
 
NOW, THEREFORE, in consideration of the mutual terms and provisions contained
herein, and in order for Borrowers and Subordinating Party to induce Bank to
extend credit to Borrowers, the parties agree to as follows:
 
1.  For purposes hereof, the following terms shall have the following meanings:
 

a.  
“Bank” shall mean and refer to MFB Financial, a banking institution with its
principal place of business located in St. Joseph County, Indiana, as well as to
all related and affiliated financial institutions and entities, as well as to
all successors, assigns and participants of MFB Financial.

 

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b.  
“Superior Indebtedness” shall mean and refer to any and all indebtedness and
obligations now or hereafter owing by one or more of the Borrowers to Bank,
including, but not limited to, future advances, and all obligations of one or
more of the Borrowers to Bank under any and all promissory notes, mortgages,
security agreements, assignments, leases, guaranties, and all other agreements
or documents heretofore or hereafter executed by one or more of the Borrowers to
or in favor of Bank, including any and all interest, late charges, prepayment
premiums, and all other amounts accruing or payable under any such documents,
including principal and interest accruing before or after commencement of any
voluntary or involuntary bankruptcy or reorganization, insolvency or similar
proceedings regarding one or more of the Borrowers, whether such indebtedness or
obligations be direct or indirect, absolute or contingent, or primary or
secondary, and all partial or full extensions, renewals or modifications
thereof. The “Superior Indebtedness” shall specifically include, but not be
limited to, the indebtedness owing by Borrowers to Bank represented by a certain
promissory note dated of even date herewith, in the original principal amount of
$5,000,000.00, together with all renewals, extensions and modifications thereof,
as well as all accrued and accruing interest and costs as provided in paragraph
3.

 

c.  
“Subordinated Debt” shall mean any and all indebtedness and obligations now or
hereafter owing by one or more of the Borrowers to Subordinating Party,
including, but not limited to, future advances, and all obligations of one or
more of the Borrowers under any and all notes, mortgages, security agreements,
assignments, leases, guaranties, and all other agreements or documents
heretofore or hereafter executed by one or more of the Borrowers to or in favor
of Subordinating Party, including all interest, late charges, prepayment
premiums, and othor amounts set forth in any such documents, and including
principal and interest accruing before or after commencement of any voluntary or
involuntary bankruptcy or reorganization, insolvency or similar proceedings
regarding one or more of the Borrowers, whether such indebtedness or obligations
be direct or indirect, absolute or contingent, or primary or secondary, and all
partial or full extensions, renewals or modifications thereof. The “Subordinated
Debt” shall specifically include, but not be limited to, the Martell Debt
Instruments and all amounts owing thereunder, together with all renewals,
extensions and modifications thereof.

 

d.  
It is understood and agreed that the “Subordinated Debt” shall include any and
all indebtedness and liabilities of each and every nature and description owing
or to become owing by one or more of the Borrowers to the Subordinating Party
and/or to Subordinating Party’s successors and assigns. It is further understood
and agreed that the “Superior Indebtedness” shall include any and all
indebtedness and liabilities of each and every nature and description owing or
to become owing by one or more of the Borrowers to Bank and/or to Bank’s
successors and assigns.

 

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All references herein to “Borrowers” shall mean and refer to one or more of the
Borrowers, in any combination. Accordingly, any reference to assets or property
of Borrowers shall include any and all assets and property of one or more of the
Borrowers, in any combination. All promises and agreements of Borrowers
contained herein shall be construed as the promises and agreements of each of
the Borrowers, Whenever the context thereof requires, reference herein made to
the singular number shall be understood as including the plural, and likewise,
the plural shall be understood as including the singular. Specifically, but not
in limitation of the foregoing, the term “Borrowers” shall refer to each entity
included in the definition of that term, above.
 
2.  Subordinating Party hereby agrees that any and all of the Subordinated Debt
shall be and hereby is absolutely and unconditionally subordinated in every
manner and to every extent to the Superior Indebtedness and to the prior payment
and satisfaction in full of the Superior Indebtedness. The Subordinating Party
further agrees that each and every security interest, mortgage, lien, claim,
right or title of Bank in, to or against any real or personal property or assets
of Borrowers shall be superior to each and every security interest, mortgage or
lien which Subordinating Party has or may acquire in the same property or
assets. Each and every security interest, mortgage or lien hold by or in favor
of Subordinating Party in, to or against such property or assets is and shall
remain absolutely and unconditionally subordinated, junior, inferior and
postponed in priority, operation and effect to the priority, operation and
effect of any security interest, mortgage or lien held by or in favor of Bank,
all with the same force and effect as though such security interest, mortgage or
lien field by or in favor of Bank had attached and was perfected prior to the
perfection of any such security interest, mortgage or lien of Subordinating
Party. Subordinating Party agrees to execute such instruments and documents as
Bank may request from time to time in order to evidence or accomplish the intent
of this Agreement, and Subordinating Party and Borrowers expressly consent to
the delivery, filing and recording of any such instruments or documents with
such persons and authorities as Bank shall deem appropriate. Bank makes no
representation or warranty concerning any collateral or the
 

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validity, perfection or priority of any security interest, lien or mortgage.
Bank shall have no duty to preserve, protect, care for, insure, take possession
of, collect, dispose of or realize upon any property. Bank may in its discretion
apply the proceeds of collateral to any indebtedness then owing by Borrowers to
Bank secured thereby in any order as Bank deems appropriate.
 
3.  Borrowers agree that any and all of the Superior Indebtedness must be fully
paid and discharged, together with all interest thereon and all expenses of
collecting the same or otherwise protecting and/or enforcing the rights and/or
interests of Bank, including, but not limited to, attorneys’ and legal
assistants’ fees and collection expenses, before any payment to Subordinating
Party, by way of cash, setoff or otherwise, may be paid to Subordinating Party
by Borrowers. Notwithstanding the foregoing and any other provision hereof,
Borrowers shall be entitled to pay regularly scheduled interest payments on the
Subordinated Debt provided that there shall not have occurred a default in any
of Borrower’s obligations to Bank.
 
4.  Subordinating Creditor and Borrowers will cause each instrument evidencing
Subordinated Debt to be endorsed with the following legend:
 
The indebtedness evidenced by this instrument is subordinated to the prior
payment in full of the Superior Indebtedness (as defined in the Insider
Subordination Agreement hereinafter referred ant to the Insider Subordination
Agreement dated effective as of March 9th, 2007, by the maker hereof and payee
named herein in favor of MFB Financial, the Bank referred to in such Insider
Subordination Agreement.”
 
Subordinating Party and Borrowers also agree that each and every financing
statement filed with any governmental office pertaining to the Subordinated
Indebtedness and/or the security therefor shall contain the following:
 
Notwithstanding the order of filing of financing statements concerning the
Debtor, the security interests described herein are, and shall at all times
 

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remain, subordinate and inferior to any and all security interests now or
hereafter held by or in favor of MFB Financial and its successors and assigns.
 
Further, Subordinating Party and Borrowers will mark their respective books of
account in such a manner as shall be effective to give proper notice of the
effect of this Subordination Agreement and will, in the case of any hereafter
arising Subordinated Debt which is not evidenced by an instrument, upon Bank’s
request, cause such Subordinated Debt to be evidenced by an appropriate
instrument or instruments containing the language required above; provided
however, that the foregoing shall not permit Borrowers to incur or assume any
indebtedness in violation of the terms governing the Superior Indebtedness.
Subordinating Party and Borrowers each will at their own expense and at any time
and from time to time, promptly execute and deliver all further instruments and
documents, and take all further action, that may be necessary or desirable, or
that Bank may reasonably request, in order to protect any right or interest
granted or purported to be granted hereby or to enable Bank to exercise and
enforce its rights and remedies hereunder.
 
5.  Borrowers shall not make any payment, and Subordinating Party shall not
receive or accept any payment, with respect to any of the Subordinated Debt in
violation of this Agreement. In the event Subordinating Party receives any
payment from Borrowers that is not expressly permitted hereby, whether such
payment be in cash by setoff (or otherwise, Subordinating Party shall be liable
and accountable therefor to Bank. Subordinating Party shall be deemed to have
received each and every such payment in trust for the use and benefit of Bank,
and Subordinating Party shall not commingle the same with any other funds and
shall pay over and deliver each such payment immediately to Bank, even if Bank
does not make demand for such payment or delivery.
 
6.  This subordination shall survive and remain in full force and effect in the
event of any administration of the property and/or affairs of Borrowers arising
from any assignment for the benefit of creditors, bankruptcy, receivership,
liquidation or other like proceedings.
 
7.  This Agreement is a continuing subordination and shall continue in full
force and effect, and Bank may make extensions of credit to Borrowers in
reliance upon this Agreement, at any time any Superior Indebtedness or costs
described in Paragraph 3 hereof remain unpaid. Subordinating Party agrees that
Bank, at any time and from time to time, may enter into such agreements with
Borrowers as Bank may deem proper affecting any property which secures all or
any portion of the Superior Indebtedness (the “Collateral”), and may sell,
surrender or otherwise deal with any of the Collateral without notice to
Subordinating Party and without in any way impairing or affecting this
Agreement. The obligations of Subordinating Party, and the subordination’s
provided for herein, shall not be affected or impaired by any compromise,
release, renewal, extension, forbearance, indulgence, alteration, change in,
modification of, grant of participation in, or other disposition of any
documents or instruments executed by Borrowers in favor of Bank, any release of
any guarantor of the obligations of Borrowers to Bank or any other person, any
failure of Bank to pursue its remedies against the Collateral or any one or more
of the guarantors or any other person, any failure to collect any of the
indebtedness owing by Borrowers to Bank when due, any failure to give notice of
acquisition or expected acquisition of a purchase money security interest, or
any delay or omission by Bank in the exercise of any right or remedy against
Borrowers or any guarantor of the obligations of Borrowers to Bank.
 
8.  In the event of the liquidation of Borrowers or the Collateral, or
distribution of Borrowers’ assets, any obligation of Borrowers to Bank shall be
satisfied and discharged before Subordinating Party receives any distributive
share or payment on account of its obligations
 

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against Borrowers. Any dividends or other payments with respect to the
Collateral, by virtue of any insolvency proceedings instituted by or against
Borrowers, shall also be distributed first to Bank, in an amount required to
satisfy the full about of the Superior Indebtedness. In order to enable Bank to
enforce its rights hereunder in any such action or proceeding, Bank is hereby
irrevocably authorized and empowered, in its discretion, to make and present,
for and on behalf of Subordinating Party such proofs of claims against Borrowers
or against any Bankruptcy trustee or debtor in possession on account of
indebtedness hereby subordinated as Bank may deem expedient or proper, and to
vote such proofs of claims in any such proceedings, and to receive and collect
any and all Mends or other payments or disbursements made thereof in whatever
form the same may be paid or issued, and to apply same on account of any
indebtedness owing to Bank by Borrowers which relate to the Superior
Indebtedness; and Subordinating Party further agree to execute and deliver to
Bank such assignment(s), release(s) or other instruments as may be required by
Bank in order to enable it to enforce any and all such claims and to collect any
and all dividends or other payments or disbursements which may be made at any
time (a) in connection with any such liquidation of Borrowers or the Collateral
or the distribution of Borrowers’ assets and/or (b) on account of all or any of
the indebtedness hereby subordinated.
 
9.  All persons executing the Agreement in a representative capacity warrant
that they have authority to execute this Agreement and bind the entities they
purport to represent. Subordinating Party represents, warrants and certifies
that the execution and delivery of this Agreement (i) do not violate the
provisions of the Martell Debt Instruments and the documents pertaining thereto
(ii) are binding acts of Subordinating Party, and (iii) this Agreement will be
an enforceable obligation of Subordinating Party according to the terms and
provisions hereof.
 
10.  This Agreement constitutes the entire understanding of the parties hereto
pertaining to the matters covered hereby and may only be modified or amended by
a writing signed by ad parties. This Agreement is binding on, and shall inure
to, the parties hereto and their respective heirs, representatives, successors
and assigns.
 
11.  Subordinating Party and each of the Borrowers acknowledge and agree that
(i) they have been given the opportunity to consult with counsel and other
advisors of their respective choice, and after having the opportunity to consult
with such counsel and advisors, knowingly, voluntarily and without duress,
coercion, unlawful restraint, intimidation or compulsion, enter into this
Agreement, (ii) this Agreement has been entered into in exchange for good and
valuable consideration, the receipt and sufficiency of which Borrowers and the
Subordinating Party acknowledge, and (iii) they have carefully and completely
read all of the terms and provisions of this Agreement and are not relying on
the opinions or advice of Bank or its agents or representatives in entering into
this Agreement.
 
12.  The parties agree that this Agreement is the product of their joint
efforts, that it expresses their agreement, and that it should not be
interpreted in favor of or against any party merely because of that party’s
efforts in preparing it.
 
13.  This Agreement shall be enforceable in, and interpreted under, the laws of
the State of Indiana. The parties hereto acknowledge that the transactions
contemplated by this Subordination Agreement bear a reasonable relation to the
state of Indiana. The parties hereto agree that the internal laws of the state
of Indiana shall govern this Subordination Agreement and the exhibits hereto,
including, but not limited to, all issues related to usury. Any action to
enforce the terms of this Subordination Agreement or any of its exhibits shall
be brought exclusively in
 

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the state and/or federal courts situated in St. Joseph County, Indiana. Service
of process upon any party hereto in any action to enforce the terms of this
Subordination Agreement may be made by serving a copy of the summons and
complaint, in addition to any other relevant documents, by commercial overnight
courier to such party at its principal address set forth in this Agreement.
 
14.  The subordination’s and priorities specified in this Agreement are not
conditioned upon the nonavoidability and perfection of the security interest to
which another security interest is subordinated and, if the security interest to
which another security interest is subordinated is not perfected or is
avoidable, for any reason, then the subordination’s and relative priority
agreements provided herein shall continue to be effective as to the particular
Collateral which is the subject of the unperfected or avoidable security
interest. In no event shall Subordinating Party institute, or join as a party in
the institution of any action, suit or proceeding or take any action of any kind
whatsoever seeking a determination that a security interest held by Bank is
unperfected or avoidable, or in any way make any assertions to that effect.
 
15.  The following miscellaneous provisions shall apply to this Agreement:
 

a.  
Waiver. The failure of any party hereto at any time or from time to time to
require performance of another party’s obligations under this Agreement shall in
no manner affect the right to enforce any provision of this Agreement at a
subsequent time, and the waiver of any rights arising out of any breach shall
not be construed as a waiver of any rights arising out of any subsequent breach.

 

b.  
Severability. If any one or more of the provisions of this Agreement shall be
held invalid or unenforceable, the validity and enforceability of all other
provisions of this Agreement shall not be affected.

 

c.  
Counterparts. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument, and shall become effective when one or more
counterparts have been signed by each of the parties.

 

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d.  
Fees and Expenses. In the event any party breaches this Agreement, all costs and
expenses, including attorneys, fees, incurred by a non-breaching party shall be
included in the damages which may be recovered as a result of such breach or
default. In any litigation relating to this Agreement and the transactions
contemplated hereby, the prevailing party shall be entitled to recover its costs
and reasonable attorneys’ fees.

 

e.  
Limitations on fights of Third Parties. Nothing expressed or implied in this
Agreement is intended or shall be construed to confer upon or give any person or
entity other than the parties hereto any rights or remedies under or by reason
of this Agreement or the transactions contemplated hereby.

 

f.  
Contents of Agreement. Each person signing this Agreement (whether for herself
or for himself Individually or on behalf of an entity or organization)
acknowledges that this Agreement may reflect changes from previous drafts, if
any, and that he or she has read and reviewed this Agreement carefully. Each
person signing this Agreement also acknowledges that he or she has not relied on
any other party to this Agreement, or on any officer, agent, partner, employee
or attorney of any other party to this Agreement, to explain the provisions of
this Agreement to him or her, or to identify changes that have been made from
prior drafts or versions of this Agreement, if any. Rather, each person signing
this Agreement agrees to be solely responsible for being aware of the contents
of this Agreement.

 
16.  Borrowers and Subordinating Party agree to give Bank written notice, by
registered or certified mail, postage prepaid, of any action or inaction by Bank
or any of its officers, directors, employees, agents or attorneys in connection
with this Agreement, the Superior Indebtedness, the Collateral, or any related
transactions, that may be actionable against Bank or any officer, director,
employee, agent or attorney of Bank, or a defense to the enforcement hereof or
payment of any loans or any promissory note, including, but not limited to, any
commission of a tort or violation of any contractual duty or duties implied by
law. Borrowers and Subordinating Party agree that unless such notice is given as
promptly as possible (and in any event within ninety (90) days) after Borrowers
and/or Subordinating Party have knowledge, or with the exercise of reasonable
diligence should have had knowledge, of any such
 

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action or inaction, Borrowers and Subordinating Party shall not assert, and
shall be deemed to have waived, any such claim or defense.
 
All notices and other communications required or permitted to be given pursuant
to the terms of this Subordination Agreement shall be in writing and mailed by
registered or certified mail with return receipt requested, and delivered to the
applicable party at the address indicated below:
 

 

 
If to Subordinating Party:
John A. Martell
1125 South Walnut Street
South Bend, Indiana 46679
       
If to the Borrowers
MISCOR Group, Ltd.
1125 South Walnut Street
South Bend, Indiana 46679
Attn: President
       
If to Bank:
MFB Financial
4100 Edison Lakes Parkway, Suite 300
Mishawaka, Indiana 46545
Attn: Donald R. Kyle, Chief Operating Officer
       
With a copy to:
Steven L. Hostetler, Esq.
P.O. Box 1210
Mishawaka, Indiana 46546-1210

17.  WAIVER OF JURY TRIAL. THE PARTIES HERETO, AFTER CONSULTING OR HAVING HAD
THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE ANY RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY
LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED INSTRUMENT
OR AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY
COURSE OF CONDUCT, DEALINGS, STATEMENTS, WHETHER ORAL OR WRITTEN, OR ACTIONS
 

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OF ANY OF THEM. NONE OF THE PARTIES HERETO SHALL SEEK TO CONSOLIDATE, BY
COUNTERCLAIM OR OTHERWISE ANY ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH
ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THESE
PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR
RELINQUISHED BY ANY OF THE PARTIES EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY
ALL OF THEM.
 
Signatures on Following Page

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IN WITNESS WHEREOF, the parties hereto ave executed this Agreement on the date
and year first above written.
“BORROWERS”

MISCOR GROUP, Ltd.

By: /s/ John A. Martell
John A. Martell, President

HK ENGINE COMPONENTS, LLC

By: /s/ John A. Martell
John A. Martell, Management Member

MAGNETECH INDUSTRIAL SERVICES, INC.

By: /s/ John A. Martell
John A. Martell, President

MAGNETECH POWER SERVICES, LLC

By: /s/ John A. Martell
John A. Martell, President

MARTELL ELECTRIC, LLC

By: /s/ John A. Martell
John A. Martell, Managing Member

“SUBORDINATING PARTY”

/s/ John A. Martell
John A. Martell, Individually

“BANK”
MFB Financial

By: /s/ Donald R. Kyle
Donald R. Kyle, Chief Operating Officer

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STATE OF INDIANA )
) SS:
ST. JOSEPH COUNTY )

Before me, the undersigned, a Notary Public in and for said County and State
personally appeared John A. Martel, Individually, and on behalf of MISCOR Group,
Ltd., HK Engine Components, LLC, Magnetech Industrial Services, Inc., Magnetech
Power Services, LLC, and Martell Electric, LLC, and acknowledged of the
execution of the foregoing Subordination Agreement this 8th day of March, 2007.
 
/s/ James M. Lewis
James M. Lewis, Notary Public
Residing in St. Joseph County, Indiana

James E. Lewis
Notary Public, State of Indiana
St. Joseph County
My Commission Expires
February 09, 2008
My commission expires:

Feb 9, 2008

 
STATE OF INDIANA )
) SS:
ST. JOSEPH COUNTY )

Before me, the undersigned, a Notary Public in and for said County and State
personally appeared Donald R. Kyle, Chief Operating Officer, on behalf of MFB
Financial, and acknowledged of the execution of the foregoing Subordination
Agreement this 9th day of March, 2007.
 
/s/ Susan M. Scheu
Susan M. Scheu, Notary Public
Residing in St. Joseph County, IN
My commission expires:

1-21-2014