Exhibit 10.4
PAYMENT AND PERFORMANCE GUARANTY AGREEMENT
     THIS PAYMENT AND PERFORMANCE GUARANTY AGREEMENT (this “Guaranty”) is made
effective as of the 7th day of August, 2006, by ADVOCAT INC., a Delaware
corporation (the “Guarantor”), for the benefit of CAPMARK FINANCE INC., a
California corporation, formerly known as GMAC Commercial Mortgage Corporation
(including its successors, transferees and assigns, “Lender”).
R E C I T A L S:
     A. Diversicare Afton Oaks, LLC, a Delaware limited liability company (the
“Afton Oaks Borrower”), Diversicare Assisted Living Services NC I, LLC, a
Delaware limited liability company (the “NC I Borrower”), Diversicare Assisted
Living Services NC II, LLC, a Delaware limited liability company (the “NC II
Borrower”), Diversicare Briarcliff, LLC, a Delaware limited liability company
(the “Briarcliff Borrower”), Diversicare Chisolm, LLC, a Delaware limited
liability company (the “Chisolm Borrower”), Diversicare Hartford, LLC, a
Delaware limited liability company (the “Hartford Borrower”), Diversicare
Hillcrest, LLC, a Delaware limited liability company (the “Hillcrest Borrower”),
Diversicare Lampasas, LLC, a Delaware limited liability company (the “Lampasas
Borrower”), Diversicare Pinedale, LLC, a Delaware limited liability company (the
“Newport Borrower”), Diversicare Windsor House, LLC, a Delaware limited
liability company (the “Windsor Borrower”), and Diversicare Yorktown, LLC, a
Delaware limited liability company (the “Yorktown Borrower”; the Afton Oaks
Borrower, the NC I Borrower, the NC II Borrower, the Briarcliff Borrower, the
Chisolm Borrower, the Hartford Borrower, the Hillcrest Borrower, the Lampasas
Borrower, the Newport Borrower, the Windsor Borrower and the Yorktown Borrower,
together with their successors and/or assigns, may be referred to collectively
herein as the “Borrowers” or individually as a “Borrower”), has borrowed the sum
of THIRTY MILLION SIX HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS
($30,625,000.00) (the “Loan”) from Lender, evidenced by Borrowers’ Note I (as
defined in the Loan Agreement [as herein defined]) and Note II (as defined in
the Loan Agreement) of even date herewith (collectively, the “Note”) and that
certain Loan Agreement by and between Lender and Borrowers of even date herewith
(the “Loan Agreement”), and secured by, among other things, those certain Deed
of Trust and Security Agreements and/or Mortgage and Security Agreements, of
even date herewith (collectively, the “Mortgage”) granting a first lien on the
skilled care nursing facilities and/or assisted living facilities more
particularly described in the Loan Agreement (collectively, the “Facility”).
     B. The Note, the Loan Agreement, the Mortgage and the other documents,
certificates, instruments and agreements executed by Borrowers in connection
with the Loan or to otherwise evidence or secure the Loan, and all renewals,
supplements, or amendments thereto or a part thereof, are collectively referred
to as the “Loan Documents”.
     C. As a condition of making the Loan, Guarantor has agreed to guaranty,
absolutely and unconditionally, payment of the Guaranty Obligations (as defined
below), subject to the terms and conditions set forth in this Guaranty.

 

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AGREEMENT
     NOW, THEREFORE, in consideration of the above and as an inducement to
Lender to make the Loan evidenced by the Note and the Loan Agreement, and as
security for the payment of the Loan and all interest from time to time accrued
and unpaid thereon, and all expenses, fees, charges and other amounts from time
to time due and owing to Lender under the Note, and the other Loan Documents,
and for the performance of all covenants, agreements and other obligations from
time to time owing to, or for the benefit of, Lender pursuant to the Loan
Documents, including, without limitation, the payment and performance of all of
Borrowers’ obligations pursuant to Article IV of the Loan Agreement
(collectively referred to herein as the “Guaranty Obligations”), Guarantor,
intending to be legally bound, hereby covenants, agrees, represents and warrants
as follows:
     1. Guaranty. Guarantor hereby absolutely and unconditionally guarantees to
the Lender the full, regular and punctual payment and performance of the
Guaranty Obligations within ten (10) days of the Lender’s demand therefor.
Without limiting the generality of the foregoing, “Guaranty Obligations” is used
herein in its most comprehensive sense to include all debts, obligations and
indebtedness described in the Loan Documents, whether now or hereafter made,
incurred, or created, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated, determined or undetermined, and
regardless of whether there is any recourse with respect to any portion of such
Guaranty Obligations as against Borrowers or any partner of Borrowers. In
addition, Guarantor guarantees the full payment of, and agrees to reimburse
Lender for, all costs of collection incurred by Lender in enforcing the Guaranty
Obligations and pursuing any remedies set forth in the Loan Documents and/or the
Guaranty, including, without limitation, court costs and actual attorneys’ fees
(including, but not limited to, fees in any bankruptcy or appellate proceeding).
     2. Payments. All payments to be made by Guarantor to Lender hereunder shall
be made in lawful money of the United States of America, in immediately
available funds, at 200 Witmer Road, Horsham, Pennsylvania 19044, or such other
location designated by Lender in writing, and shall be accompanied by a notice
from Guarantor stating that such payments are made under this Guaranty. All
payments available to Lender for application in payment or reduction of the
Guaranty Obligations may be applied by Lender in such manner and in such amount,
and at such time or times and in such order and priority as Lender may see fit
and to the payment or reduction of such portion of the Guaranty Obligations as
Lender may elect.
     3. Subsequent Acts by Lender. Lender may, in its sole discretion and
without notice to Guarantor, take any action which might otherwise be deemed a
legal or equitable release or discharge of Guarantor’s obligations hereunder
without either impairing or affecting the liability of Guarantor for payment of
the Guaranty Obligations (but in no event shall Lender collect more than the
aggregate amount of the Guaranty Obligations), which actions might include, by
way of illustration and not limitation:
          (a) at any time or from time to time, the time for Borrowers’
performance of or compliance with any provision of the Loan Documents may be
extended or such performance or compliance may be waived by Lender;

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          (b) the acceptance of partial payment of the Guaranty Obligations;
          (c) any of the acts permitted in the Loan Documents may be performed;
          (d) the Loan Documents may from time to time be amended and/or renewed
by Borrowers and Lender for the purpose of adding any provisions thereto or
changing in any manner the rights of Lender or of Borrowers thereunder;
          (e) the maturity date of the Note may be changed or renewed in whole
or in part;
          (f) the maturity of the Note may be accelerated in accordance with the
terms of the Loan Documents or any future agreement between Borrowers and Lender
or the holder of such Note;
          (g) any collateral security for all or any part of the Guaranty
Obligations may be exchanged, released, compromised, consolidated, surrendered
or otherwise dealt with, and Lender’s interest therein may be released and may
or may not be perfected;
          (h) the settlement, release, compounding, compromise, cancellation,
rearrangement or consolidation of any of the Guaranty Obligations;
          (i) the collection of or other liquidation of any claims Lender may
have in respect to the Guaranty Obligations;
          (j) the granting of indulgences, forbearance, compromises, extensions
or adjustments in respect to any covenant or agreement under the Loan Documents;
and/or
          (k) the release from liability of any Guarantor and/or any additional
parties who may guarantee payment of the Guaranty Obligations or any portion
thereof.
4. Certain Rights, Subordination, Etc.
          (a) Lender may pursue its rights and remedies under this Guaranty and
shall be entitled to payment hereunder notwithstanding any other guaranty of all
or any part of the Guaranty Obligations, and notwithstanding any action taken by
Lender to enforce any of its rights or remedies under such other guaranty, or
any payment received thereunder (but in no event shall Lender collect more than
the aggregate amount of the Guaranty Obligations).
          (b) Any obligation or debt of Borrowers now or hereafter held by
Guarantor is hereby subordinated to the Guaranty Obligations and, except for the
obligations due under the Management Agreement (as defined in the Loan
Agreement), which obligations are governed by the Subordination Agreement (as
defined in the Loan Agreement), Guarantor shall not enforce or collect any such
indebtedness from Borrowers. Nevertheless, upon request by Lender, Guarantor
shall collect, enforce and receive such indebtedness of Borrowers to Guarantor.
Any sums collected at Lender’s request or collected in contravention of the
prohibition set forth herein shall be held by Guarantor as trustee for Lender
and shall be paid over to Lender on account of the Guaranty Obligations;
provided, however, that such payments shall not impair, reduce or affect in any
manner the liability of Guarantor under the other

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provisions of this Guaranty (but in no event shall Lender collect more than the
aggregate amount of the Guaranty Obligations).
          (c) Guarantor agrees that if any event of default exists under the
Loan Documents (“Event of Default”) and is continuing, (i) such Guarantor shall
not accept payment from any other guarantor of any Guaranty Obligations by way
of contribution or similar rights on account of any payment made hereunder by
Guarantor to Lender, all of which rights are hereby subordinated to Guarantor’s
obligations hereunder to Lender, (ii) Guarantor will not take any action to
exercise or enforce any rights to such contribution, and (iii) if Guarantor
should receive payment, satisfaction or security for any indebtedness of
Borrowers to Lender, the same shall be delivered to Lender in the form received,
endorsed or signed as may be appropriate for application on account of or as
security for the indebtedness of Borrowers to Lender and, until so delivered,
shall be held in trust for Lender as security for the indebtedness of Borrowers
to Lender.
          (d) In the event of any default by Borrowers with respect to the
Guaranty Obligations, Guarantor agrees to pay or perform on demand the Guaranty
Obligations in the time and manner as provided in Paragraph 1 hereof. Lender
shall not be under a duty to protect, secure or insure or be required to
liquidate any security or lien provided by the Mortgage or other such collateral
held by Lender prior to making such demand.
          (e) Notwithstanding any payment or payments made by Guarantor under
this Guaranty, Guarantor expressly, irrevocably and unconditionally waives and
releases any and all “claims” (as that term is defined in the Bankruptcy Reform
Act of 1978, as amended, 11 U.S.C. Sections 101 et seq., and the regulations
adopted and promulgated pursuant thereto (collectively, the “Bankruptcy Code”))
it may now or hereafter have against Borrowers, and shall not be entitled to,
and hereby expressly waives, any and all rights of subrogation, reimbursement,
indemnity, exoneration and contribution against Borrowers, which Guarantor may
now or hereafter have against Borrowers without regard to whether any such right
or claim arises expressly; provided, that such waiver and release shall not be
effective as to any such claim or entitlement or such subrogation and other
rights that accrue after the indefeasible payment, performance or other
satisfaction in full of the Guaranty Obligations.
     5. Representations and Warranties. Guarantor represents and warrants to
Lender that:
          (a) Existence, Power and Qualification. Guarantor is a duly organized
and validly existing corporation, has the power to own its properties and to
carry on its business as is now being conducted, and is duly qualified to do
business and is in good standing in every jurisdiction in which the character of
the properties owned by it or in which the transaction of its business makes its
qualification necessary.
          (b) Power and Authority. Guarantor has full power and authority to
incur the Guaranty Obligations provided for herein, all of which have been
authorized by all proper and necessary action.
          (c) Financial Position. The financial statements of the Guarantor
heretofore furnished to Lender are complete and correct and fairly present the
financial position of the

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Guarantor as of the date thereof. Since the date of said financial statements
there has been no material adverse change in the financial position or
operations, or the business taken as a whole, of Guarantor from that set forth
therein.
          (d) Litigation. Except as shown on Exhibit A attached hereto, there
are no legal or arbitral proceedings or any proceedings by or before any
governmental or regulatory authority or agency now pending against Guarantor, in
which an adverse decision could materially and adversely affect the financial
position of Guarantor.
          (e) No Breach. The execution and delivery of this Guaranty, the
consummation of the transactions herein contemplated and compliance with the
terms and provisions hereof will not (i) conflict with or result in a breach of,
or require any consent (not heretofore obtained at the time this representation
is made) under, any applicable law, administrative proceeding or regulation, or
any order, writ, injunction or decree of any court or governmental authority or
agency, or any agreement or instrument to which Guarantor is a party or by which
Guarantor is bound or to which Guarantor is subject, (ii) constitute a default
under any such agreement or instrument or under Guarantor’s articles of
incorporation, partnership agreement, operating agreement or any other agreement
or instrument binding upon Guarantor, or (iii) result in the creation or
imposition of any lien upon any of the revenues or assets of Guarantor pursuant
to the terms of any such agreement or instrument.
          (f) Approvals. To the best of Guarantor’s knowledge, no
authorizations, approvals, or consents of (other than those heretofore obtained
and in full force and effect), and no filings or registrations with (other than
those heretofore obtained and in full force and effect), any governmental or
regulatory authority or agency are necessary for the execution, delivery or
performance by Guarantor of this Guaranty or for the validity or enforceability
thereof.
          (g) Taxes, etc. Guarantor has filed all United States federal and
state tax returns and all other tax returns that are required to be filed by
Guarantor and has paid all taxes due pursuant to such returns or pursuant to any
assessment received by Guarantor, except such taxes, the payment of which is not
yet due, or which if due, is not yet delinquent or is being contested in good
faith or which has not been finally determined.
          (h) Benefit. The making of the Loan by Lender to Borrowers will
directly benefit Guarantor.
     6. Financial Covenants and Other Information. Guarantor shall provide
Lender the following financial statements and information on a continuing basis
during the term of the Loan:
          (a) Within one hundred twenty (120) days after the end of each fiscal
year of Guarantor, audited financial statements of Guarantor prepared by a
nationally recognized accounting firm or independent certified public accountant
acceptable to Lender, which statements shall be prepared in accordance with GAAP
and certified by the chief financial officer of Guarantor as true and correct in
all material respects and shall include a balance sheet and a statement of
income and expenses for the year then ended. In lieu of its obligations

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hereunder, Guarantor may submit to lender, upon its filing thereof, a copy of
form 10K as filed with the United States Securities and Exchange Commission.
          (b) Within forty-five (45) days of the end of each fiscal quarter of
Guarantor, unaudited financial statements of Guarantor, prepared in accordance
with GAAP, which statements shall include a balance sheet and statement of
income and expenses for the quarter then ended, certified by the chief financial
officer of Guarantor as true and correct in all material respects. In lieu of
its obligations hereunder, Guarantor may submit to Lender, upon its filing
thereof, a copy of Form 10Q as filed with the United States Securities and
Exchange Commission.
          (c) As soon as available, but in no event more than thirty (30) days
after the filing deadline, as may be extended from time to time, copies of all
federal, state and local tax returns of Guarantor, together with all supporting
documentation and required schedules.
          (d) Within forty-five (45) days after the end of each fiscal quarter
of Guarantor, a certificate of the chief financial officer of Guarantor
confirming compliance with the covenants and requirements set forth herein.
     The Lender reserves the right to require such other financial information
of Guarantor in such form and at such other times (including monthly or more
frequently, but not more frequently than reasonable) as Lender shall deem
necessary, and Guarantor agrees promptly to provide or to cause to be provided,
such information to Lender. All financial statements must be in form and detail
as Lender may from time to time request.
     7. Guarantor Covenants. Guarantor covenants and agrees that it shall
achieve and maintain the following covenants so long as the Guaranty Obligations
are outstanding, to be tested on a quarterly basis (the “Guarantor Covenants”):
          (a) Fixed Charge Coverage Ratio, as defined herein, equal to or
greater than 1.10x. “Fixed Charge Coverage Ratio” means a ratio in which the
first number is the sum of net income (loss) of Guarantor as set forth in
Guarantor’s consolidated statement of operations prepared in accordance with
GAAP, calculated based upon the preceding twelve (12) months and Non-Operating
Expenses (hereinafter defined) less the Payments of Professional Liability
(hereinafter defined) and the second number is the sum of interest expense,
lease expense and the scheduled current maturities of long-term debt (excluding
balloon maturities). “Non-Operating Expenses” shall mean the provision
(benefit) for self-insured professional and general liability, depreciation and
amortization, interest expense, lease expense, asset impairment expense, and
income tax expense (benefit). “Payments of Professional Liability” shall mean
the total out of pocket expense associated with professional and general
liability related settlements, legal fees or administration for all facilities
owned and/or operated by entities related to Guarantor;
          (b) Liquidity, as defined herein, equal to or greater than
$2,000,000.00. “Liquidity” shall mean the sum of Guarantor’s unrestricted cash
and availability as defined pursuant to the Guarantor’s A/R Loan (as defined in
the Loan Agreement); and
          (c) Funded Debt to Adjusted EBITDA Ratio, as defined herein, equal to
or less than 4.25x. “Funded Debt to Adjusted EBITDA Ratio” means a ratio in
which the first number

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is the sum of interest bearing debt obligations of the Guarantor, its affiliates
and/or its subsidiaries and Settlement Promissory Notes, as defined herein, and
the second number is the sum of net income (loss) of Guarantor as set forth in
Guarantor’s consolidated statement of operations prepared in accordance with
GAAP, calculated based upon the preceding twelve (12) months, income tax expense
(benefit), the provision (benefit) for self-insured professional liability,
depreciation and amortization and interest expense less the Payments of
Professional Liability. “Settlement Promissory Notes” shall mean promissory
notes issued by Guarantor, its affiliates and/or its subsidiaries associated
with the settlement of certain professional liability claims and other disputes.
          (d) Guarantor agrees that the occurrence of an event of default as
specified herein with respect to that certain Consolidated Amended and Restated
Master Lease dated as of November 8, 2000, and any documents and instruments
executed in connection therewith, together with any amendments thereto, and any
modifications, renewals and extensions thereof (the “Omega Master Lease”) by and
between Divericare Leasing Corp., as Lessee, and Sterling Acquisition Corp., a
subsidiary of Omega Healthcare Investors, Inc., as Lessor (collectively,
“Omega”) will result in an Event of Default under the Loan Documents
(collectively, the “Omega Default”). Specifically, this covenant will be
triggered by the following:
               (i) an Event of Default under the Omega Master Lease declared by
Omega in writing;
               (ii) an Event of Default in any payment due under the Omega
Master Lease; or
               (iii) subject to any applicable notice, cure or grace periods
provided for under the Omega Master Lease, other events that could result in the
termination of the Omega Master Lease or any facility leases associated with
Leased Properties (as defined in the Omega Master Lease), repossession of the
Lease Properties by Lessor, or acceleration of the Rent due under the Omega
Master Lease.
     Notwithstanding the above, upon the satisfaction of the Loan Obligations
associated with the Note II Loan, the Guarantor Covenants defined above shall no
longer apply.
     8. Guaranty is a Continuing Obligation. The obligations of the Guarantor
under this Guaranty shall be continuing, absolute, irrevocable and unconditional
under all circumstances, and shall remain in full force and effect or be
reinstated, until all of the Guaranty Obligations shall have been paid and
performed in full, irrespective of the bankruptcy, insolvency, merger,
reorganization, termination, discontinuation or dissolution of a Borrower or any
assignment for the benefit of creditors by a Borrower. The Guarantor
acknowledges and agrees that Guarantor’s obligations hereunder shall apply to
and continue with respect to any of the obligations of a Borrower under the Loan
Documents which are subsequently recovered from the Lender for the reasons set
forth below. In the event that any payment by or on the behalf of a Borrower to
Lender is held to constitute a preference, fraudulent transfer or other voidable
payment under any bankruptcy, insolvency or similar law, or if for any other
reason the Lender is required to refund such payment or pay the amount thereof
to any other party, including, without limitation, as a result of the
appointment of a receiver, intervenor, or conservator of, or trustee or similar
officer

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for, any Borrower or of any substantial part of its property or otherwise, such
payment by the Borrower or any other party to the Lender shall not constitute a
release of the Guarantor from any liability hereunder, and this Guaranty shall
continue to be effective or shall be reinstated (notwithstanding any prior
release, surrender or discharge by the Lender of this Guaranty or of the
Guarantor), as the case may be, with respect to, and this Guaranty shall apply
to, any and all amounts so refunded by the Lender or paid by the Lender to
another party (which amounts shall constitute part of the Guaranty Obligations),
and any interest paid by the Lender and any attorneys’ fees, costs and expenses
paid or incurred by the Lender in connection with any such event. It is the
intent of the Guarantor and the Lender that the obligations and liabilities of
the Guarantor hereunder are absolute and unconditional under any and all
circumstances and that until the Guaranty Obligations are fully and finally paid
and performed, and not subject to refund or disgorgement, the obligations and
liabilities of the Guarantor hereunder shall not be discharged or released, in
whole or in part, by any act or occurrence that might, but for the provisions of
this Guaranty, be deemed a legal or equitable discharge or release of a
guarantor. The Lender shall be entitled to continue to hold this Guaranty in its
possession for a period of one year from the later of (a) the date the Guaranty
Obligations are paid and performed in full, or (b) if not paid in accordance
with the Guaranty Obligations, the expiration or termination of the Loan, and
for so long thereafter as may be necessary to enforce any obligation of the
Guarantor hereunder and/or to exercise any right or remedy of the Lender
hereunder.
     9. Waiver and Release of Subrogation and Participation. Guarantor shall
have no right of subrogation in or under the Guaranty Obligations, and no rights
of reimbursement, indemnity or contribution from the Borrowers or any other
rights by law, equity, statute or contract that would give rise to a
creditor-debtor relationship between Guarantor and the Borrowers. Guarantor
shall have no right to participate in any way in any of the collateral which is
conveyed under the Loan Documents as security for the Guaranty Obligations.
Guarantor hereby explicitly waives and releases any of the above-described
rights of subrogation, reimbursement, indemnity, contribution, participation,
and any right to require the marshalling of Borrowers’ assets under any
circumstances.
     10. Continuing Validity. Guarantor further agrees that the validity of this
Guaranty and the obligations of Guarantor hereunder shall in no way be
terminated, affected or impaired (a) by reason of the assertion by Lender of any
rights or remedies which it may have under or with respect to either the Note,
the Mortgage, or the other Loan Documents, against any person obligated
thereunder or against the owner of the premises covered by the Mortgage, (b) by
reason of any failure to file or record any of such instruments or to take or
perfect any security intended to be provided thereby, (c) by reason of the
commencement of a case under the Bankruptcy Code by or against any person
obligated under the Note, the Mortgage or the other Loan Documents, or the death
of any Guarantor, or (d) by reason of any payment made on the Guaranty
Obligations or any other indebtedness arising under the Note, the Mortgage or
the other Loan Documents, whether made by Borrowers or Guarantor or any other
person, which is required to be refunded pursuant to any bankruptcy or
insolvency law; it being understood that no payment so refunded shall be
considered as a payment of any portion of the Guaranty Obligations, nor shall it
have the effect of reducing the liability of Guarantor hereunder. It is further
understood, that if a Borrower shall have taken advantage of, or be subject to
the protection of, any provision in the Bankruptcy Code, the effect of which is
to prevent or delay Lender from taking any remedial action against Borrowers,
including the exercise of any option

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Lender has to declare the Guaranty Obligations due and payable on the happening
of any default or event by which under the terms of the Note, the Mortgage or
the other Loan Documents, the Guaranty Obligations shall become due and payable,
Lender may, as against Guarantor, nevertheless, declare the Guaranty Obligations
due and payable and enforce any or all of its rights and remedies against
Guarantor provided for herein.
     11. Notice. All notices given under this Guaranty shall be in writing and
shall be either hand delivered or mailed, by certified U.S. mail, return receipt
requested, first class postage prepaid, to the other party, at its address set
forth below or at such other address as such party may designate by notice to
the other party:
          (a) If to Guarantor:
Advocat Inc.
1621 Galleria Blvd.
Brentwood, Tennessee 37027
Attn: Glynn Riddle
with a copy to:
Harwell Howard Hyne Gabbert & Manner, P.C.
315 Deaderick Street, Suite 1800
Nashville, Tennessee 37238
Attention: John N. Popham, IV, Esq.
          (b) If to Lender:
Capmark Finance Inc.
200 Witmer Road
Horsham, Pennsylvania 19044
Attention: Servicing Department
with a copy to:
Bradley Arant Rose & White llp
One Federal Place
1819 Fifth Avenue North
Birmingham, Alabama 35203-2119
Attention: Shannon B. Lisenby, Esq.
     12. No Waiver by Lender; Remedies. No failure on the part of Lender or the
holder of the Note to exercise, and no delay in exercising, any right hereunder
or thereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right. Guarantor hereby agrees
that all rights and remedies that Lender is afforded by reason of this Guaranty
are separate and cumulative and may be pursued separately, successively, or
concurrently, as Lender deems advisable. In addition, all such rights and
remedies are non-exclusive and shall in no way

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limit or prejudice Lender’s ability to pursue any other legal or equitable
rights or remedies that may be available. Failure of Lender to insist upon
strict performance or observance of any of the terms, provisions and covenants
hereof or to exercise any right herein contained shall not be construed as a
waiver or relinquishment of the right to demand strict performance at another
time. Receipt by Lender of any payment or performance on the Guaranty
Obligations shall not be deemed a waiver of the breach of any provision hereof
or of any of the Loan Documents. Without limiting the generality of the
foregoing, Guarantor agrees that in any action by Lender by reason of the
Guaranty Obligations, Lender, at its election, may proceed (a) against Guarantor
together with Borrowers, (b) against Guarantor and Borrowers, individually, or
(c) against Guarantor only without having commenced any action against, or
having obtained any judgment against, Borrowers.
     13. Certain Waivers by Guarantor. AS A FURTHER INDUCEMENT TO LENDER TO MAKE
THE LOAN AND IN CONSIDERATION THEREOF, GUARANTOR FURTHER COVENANTS AND AGREES
THAT SERVICE OF ANY SUMMONS AND COMPLAINT OR OTHER PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE MADE BY REGISTERED OR CERTIFIED MAIL DIRECTED TO GUARANTOR AT
GUARANTOR’S ADDRESS HEREINABOVE SET FORTH, GUARANTOR HEREBY WAIVING PERSONAL
SERVICE THEREOF. GUARANTOR HEREBY WAIVES THE PLEADING OF ANY STATUTE OF
LIMITATIONS AS A DEFENSE TO THE OBLIGATIONS HEREUNDER. GUARANTOR HEREBY WAIVES
NOTICE OF THE ACCEPTANCE HEREOF, PRESENTMENT, DEMAND FOR PAYMENT, PROTEST,
NOTICE OF PROTEST, OR ANY AND ALL NOTICE OF NON-PAYMENT, NON-PERFORMANCE OR
NON-OBSERVANCE, OR OTHER PROOF, OR NOTICE OR DEMAND.
     THE GUARANTOR FURTHER WAIVES AND AGREES NOT TO ASSERT: (A) ANY RIGHT TO
REQUIRE LENDER TO PROCEED AGAINST ANY BORROWER OR TO PROCEED AGAINST ANY OTHER
GUARANTOR, OR TO PROCEED AGAINST OR EXHAUST ANY SECURITY FOR THE GUARANTY
OBLIGATIONS, OR TO PURSUE ANY OTHER REMEDY AVAILABLE TO LENDER, OR TO PURSUE ANY
REMEDY IN ANY PARTICULAR ORDER OR MANNER, (B) THE BENEFIT OF ANY STATUTE OF
LIMITATIONS AFFECTING GUARANTOR’S LIABILITY HEREUNDER OR THE ENFORCEMENT HEREOF,
(C) NOTICE OF THE EXISTENCE, CREATION OR INCURRING OF NEW OR ADDITIONAL
INDEBTEDNESS OF ANY BORROWER TO LENDER, (D) THE BENEFITS OF ANY STATUTORY
PROVISION LIMITING THE LIABILITY OF A SURETY, (E) ANY DEFENSE ARISING BY REASON
OF ANY DISABILITY OR OTHER DEFENSE OF BORROWERS OR BY REASON OF THE CESSATION
FROM ANY CAUSE WHATSOEVER (OTHER THAN PAYMENT IN FULL) OF THE LIABILITY OF
BORROWERS FOR THE GUARANTY OBLIGATIONS, (F) THE BENEFITS OF ANY STATUTORY
PROVISION LIMITING THE RIGHT OF LENDER TO RECOVER A DEFICIENCY JUDGMENT, OR TO
OTHERWISE PROCEED AGAINST ANY PERSON OR ENTITY OBLIGATED FOR PAYMENT OF THE
GUARANTY OBLIGATIONS, AFTER ANY FORECLOSURE OR TRUSTEE’S SALE OF ANY SECURITY
FOR THE GUARANTY OBLIGATIONS, AND (G) ANY OTHER DEFENSE OR CIRCUMSTANCE WHICH
MIGHT OTHERWISE CONSTITUTE A LEGAL OR

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EQUITABLE DISCHARGE OF GUARANTOR’S LIABILITY HEREUNDER, ARISING FROM OR OUT OF
THE LOAN, THE LOAN DOCUMENTS AND/OR THE FACILITY.
     14. Waiver of Automatic Stay. GUARANTOR HEREBY AGREES THAT, IN
CONSIDERATION OF LENDER’S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE
FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOAN, IN THE
EVENT THAT GUARANTOR SHALL (A) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT
JURISDICTION OR BE THE SUBJECT OF ANY PETITION UNDER ANY SECTION OR CHAPTER OF
TITLE 11 OF THE UNITED STATES CODE, AS AMENDED (“BANKRUPTCY CODE”), OR SIMILAR
LAW OR STATUTE, (B) BE THE SUBJECT OF ANY ORDER FOR RELIEF ISSUED UNDER THE
BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE, (C) FILE OR BE THE SUBJECT OF ANY
PETITION SEEKING ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT,
LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL
OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR
DEBTORS, (D) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY
TRUSTEE, RECEIVER, CONSERVATOR, OR LIQUIDATOR, OR (E) BE THE SUBJECT OF AN
ORDER, JUDGMENT OR DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION
APPROVING A PETITION FILED AGAINST GUARANTOR FOR ANY REORGANIZATION,
ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR
RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO
BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS, THEN, SUBJECT TO COURT APPROVAL,
LENDER SHALL THEREUPON BE ENTITLED, AND GUARANTOR HEREBY IRREVOCABLY CONSENTS
TO, AND WILL NOT CONTEST, AND AGREES TO STIPULATE TO RELIEF FROM, ANY AUTOMATIC
STAY OR OTHER INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE, OR
SIMILAR LAW OR STATUTE (INCLUDING, WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE
PERIOD SET FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE, ON OR
AGAINST THE EXERCISE OF THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO LENDER AS
PROVIDED IN THIS AGREEMENT AND/OR THE LOAN DOCUMENTS, AND AS OTHERWISE PROVIDED
BY LAW, AND GUARANTOR HEREBY IRREVOCABLY WAIVES GUARANTOR’S RIGHTS TO OBJECT TO
SUCH RELIEF.
     15. Guaranty of Payment. This is a guaranty of payment and not of
collection and upon any default of a Borrower under the Note, the Mortgage, the
Loan Agreement or the other Loan Documents, Lender may, at its option, proceed
directly and at once, without notice, against Guarantor to collect and recover
the full amount of the liability hereunder or any portion thereof, without
proceeding against Borrowers or any other person, or foreclosing upon, selling,
or otherwise disposing of or collecting or applying against any of the Facility
or other collateral for the Loan.
          (a) Joint and Several Liability. The term “Guarantor” as used in this
Guaranty shall refer individually and collectively to all signers of this
Guaranty. Each undertaking herein

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contained shall be the joint and several undertaking of each signer hereof if
more than one, and it is specifically agreed that Lender may enforce the
provisions hereof with respect to one or more of such signers without seeking to
enforce the same as to all or any such signers. Guarantor hereby waives any
requirement of joinder of all or any other of the parties hereto in any suit or
proceeding to enforce the provisions hereof.
          (b) Assignment. Lender may assign this Guaranty or any rights or
powers hereunder, in whole or in part, in connection with the sale of the Note
and assignment of the Mortgage. The duties and obligations of Guarantor may not
be delegated or transferred by Guarantor without the prior written consent of
Lender which may be withheld in its absolute discretion. Each reference herein
to Lender shall be deemed to include its successors and assigns, to whose favor
the provisions of this Guaranty shall also inure. Each reference herein to
Guarantor shall be deemed to include the heirs, executors, administrators, legal
representatives, successors and assigns of Guarantor, all of whom shall be bound
by the provisions of this Guaranty. If any party hereto shall be a partnership
or a limited liability company, the agreements and obligations on the part of
Guarantor herein contained shall remain in force and application notwithstanding
any changes in the individuals or entities composing the partnership or the
limited liability company, and the term “Guarantor” shall include any altered or
successive partnerships and any altered or successive limited liability
companies but the predecessor partnerships and their partners, and the
predecessor limited liability companies and their members, shall not thereby be
released from any obligations or liability hereunder.
     16. Intentionally Deleted.
     17. Waiver of Trial by Jury; Service of Process. GUARANTOR HEREBY WAIVES
TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE GUARANTOR AND THE LENDER
MAY BE PARTIES ARISING OUT OF, IN CONNECTION WITH, OR IN ANY WAY PERTAINING TO,
THIS AGREEMENT AND/OR ANY OF THE OTHER LOAN DOCUMENTS. IT IS AGREED AND
UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS
AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST
PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT. THIS WAIVER IS KNOWINGLY,
WILLINGLY AND VOLUNTARILY MADE BY THE GUARANTOR, AND THE GUARANTOR HEREBY
REPRESENTS THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY
INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR
NULLIFY ITS EFFECT. THE GUARANTOR FURTHER REPRESENTS AND WARRANTS THAT GUARANTOR
HAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS
WAIVER BY INDEPENDENT LEGAL COUNSEL, OR HAS HAD THE OPPORTUNITY TO BE
REPRESENTED BY INDEPENDENT LEGAL COUNSEL SELECTED BY GUARANTOR OF GUARANTOR’S
OWN FREE WILL, AND THAT GUARANTOR HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER
WITH COUNSEL. GUARANTOR HEREBY IRREVOCABLY DESIGNATES NATIONAL REGISTERED
AGENTS, INC., AND HIS/HER SUCCESSORS IN OFFICE, AS THE TRUE AND LAWFUL ATTORNEY
OF GUARANTOR FOR THE PURPOSE OF RECEIVING SERVICE OF ALL LEGAL NOTICES AND
PROCESS ISSUED BY ANY COURT IN THE STATE OF ALABAMA AS WELL AS SERVICE OF ALL
PLEADINGS AND OTHER

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DOCUMENTS RELATED TO ANY LEGAL PROCEEDING OR ACTION ARISING OUT OF THE NOTE.
GUARANTOR AGREES THAT SERVICE UPON SAID NATIONAL REGISTERED AGENTS, INC. SHALL
BE VALID REGARDLESS OF GUARANTOR’S WHEREABOUTS AT THE TIME OF SUCH SERVICE AND
REGARDLESS OF WHETHER GUARANTOR RECEIVES A COPY OF SUCH SERVICE, PROVIDED THAT
THE LENDER SHALL HAVE MAILED A COPY TO GUARANTOR IN ACCORDANCE WITH THE NOTICE
PROVISIONS HEREIN. GUARANTOR AGREES TO PAY ALL COURT COSTS AND REASONABLE
ATTORNEY’S FEES INCURRED BY LENDER IN CONNECTION WITH ENFORCING ANY PROVISION OF
THIS AGREEMENT. NOTWITHSTANDING THE FOREGOING, LENDER AGREES TO USE REASONABLE
EFFORTS TO PROVIDE GUARANTOR WITH NOTICE OF THE FILING OF ANY LAWSUIT BY LENDER
AGAINST GUARANTOR.
     18. Power and Authority. Guarantor (and its representative, executing
below, if any) has full power, authority and legal right to execute this
Guaranty and to perform all its obligations under this Guaranty.
     19. Complete Agreement; Modification; Waiver. All understandings,
representations and agreements heretofore had with respect to this Guaranty are
merged into this Guaranty which are incorporated herein which alone fully and
completely expresses the agreement of Guarantor and Lender. In no event shall
any modification or waiver of the provisions of this Guaranty be effective
unless in writing executed by Lender. Any waiver granted by Lender shall be
applicable only in the specific instance for which it is given.
     20. Governing Law. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF ALABAMA AND APPLICABLE FEDERAL LAW.
     21. Counterparts; Construction. This Guaranty may be executed in any number
of counterparts, all of which when taken together shall constitute one and the
same instrument. Words of any gender used in this Guaranty shall be held and
construed to include the other gender, and words in the singular shall be held
and construed to include the plural, and words in the plural shall be held and
construed to include the singular, unless this Guaranty or the context otherwise
requires.
     22. Review by Guarantor. GUARANTOR HAS RECEIVED COPIES OF, AND HAS HAD THE
OPPORTUNITY TO REVIEW, ALL OF THE LOAN DOCUMENTS REFERRED TO IN THIS GUARANTY.
GUARANTOR HAS DISCUSSED THIS GUARANTY WITH GUARANTOR’S LEGAL COUNSEL, AND
GUARANTOR UNDERSTANDS THE NATURE AND EXTENT AND THE LEGAL AND PRACTICAL
CONSEQUENCES OF GUARANTOR’S LIABILITY UNDER THIS GUARANTY.
     23. No Oral Agreement. To the extent allowed by law, Guarantor agrees to be
bound by the terms of the following notice:

     NOTICE: THIS GUARANTY AND THE OTHER LOAN DOCUMENTS CONSTITUTE A WRITTEN
AGREEMENT WHICH REPRESENTS

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    THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES.

  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE
LOAN.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

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     IN WITNESS WHEREOF, this Guaranty has been duly executed by the undersigned
as of the day and year first written above.

            GUARANTOR:

ADVOCAT INC., a Delaware corporation
      By:   /s/ Glynn Riddle       Print Name:  Glynn Riddle       Its: Chief
Financial Officer     

                 
STATE OF
            )  
 
 
 
           
 
            :  
COUNTY
            )  
 
 
           

     I, the undersigned, a Notary Public in and for said County in said State,
hereby certify that                     , whose name as                      of
Advocat Inc., a Delaware corporation, is signed to the foregoing instrument and
who is known to me, acknowledged before me on this day that, being informed of
the contents of said instrument, he, as such officer and with full authority,
executed the same voluntarily for and as the act of said corporation.
     Given under my hand and official seal this the ___day of ___, 2006.

                  Notary Public           

AFFIX SEAL
My commission expires:                     

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