Exhibit 10.5
REPLACEMENT INTERCREDITOR AGREEMENT
(Accounts Receivable)
     THIS INTERCREDITOR AGREEMENT is made as of the 4th day of August, 2006 (the
“Effective Date”), by and between AMSOUTH BANK, an Alabama state banking
corporation (“AmSouth”), Diversicare Afton Oaks, LLC, a Delaware limited
liability company (the “Afton Oaks Borrower”); Diversicare Pinedale, LLC, a
Delaware limited liability company (the “Newport Borrower”); Diversicare Windsor
House, LLC, a Delaware limited liability company (the “Windsor Borrower”);
Diversicare Briarcliff, LLC, a Delaware limited liability company (the
“Briarcliff Borrower”); Diversicare Hartford, LLC, a Delaware limited liability
company (the “Hartford Borrower”); Diversicare Chisolm, LLC, a Delaware limited
liability company (the “Chisolm Borrower”); Diversicare Hillcrest, LLC, a
Delaware limited liability company (the “Hillcrest Borrower”); Diversicare
Yorktown, LLC, a Delaware limited liability company (the “Yorktown Borrower”);
Diversicare Lampasas, LLC: a Delaware limited liability company (the “Lampasas
Borrower”); and Diversicare Assisted Living Services NC I, LLC, a Delaware
limited liability company (the “NC I Borrower”) and Diversicare Assisted Living
Services NC II, LLC, a Delaware limited liability company (the “NC II Borrower”;
NC I Borrower and NC II Borrower are collectively known as the “Carolina Beach
Borrower”), (Afton Oaks Borrower, Newport Borrower, Windsor Borrower, Briarcliff
Borrower, Hartford Borrower, Chisolm Borrower, Hillcrest Borrower, Yorktown
Borrower, Lampasas Borrower, and the Carolina Beach Borrower may be referred to
collectively herein as, the “Borrower”), and CAPMARK FINANCE INC., a California
corporation (formerly known as GMAC COMMERCIAL MORTGAGE CORPORATION, a
California corporation) (the “Lender”).
R E C I T A L S
      A. (i) Lender is the present owner and holder of that certain loan (the
“Note I Loan”) in the original principal amount of $22,500,000.00 made to
Borrower, which Note I Loan is secured by, among other things, the following
(collectively, the “Note I Security”): (i) first lien deed of trust or mortgage
(collectively, the “Note I Mortgage”) with respect to each Borrower’s right,
title, and interest in and to its facilities (which are more particularly
described on Schedule A attached hereto (the “Note I Facilities”), including the
underlying real property (the “Note I Real Property”), the improvements thereon,
and all equipment, fixtures, inventory, and personal property used in connection
therewith, (ii) a first lien security interest and an assignment of Borrower’s
interest in all general intangibles, licenses, permits, reimbursement contracts,
leases and contracts, (iii) a first lien security interest and an assignment of
Borrower’s interest in all rents and leases relating to the Note I Facilities,
(iv) an assignment of the management contract and subordination of management
fees, and (v) a second lien security interest in accounts receivable issuing
from the Note I Facilities.

 

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     (ii) Lender is the present owner and holder of that certain Loan (the “Note
II Loan”) in the original principal amount of $8,125,000 made to Borrower, which
Note II Loan is secured by, among other things, the following (collectively, the
“Note II Security”):
     (a) first lien deed of trust or mortgage (collectively, the “Note II
Mortgage”; the Note I Mortgage, the Note II Mortgage, and the Second Mortgage,
as defined below, are collectively referred to herein as the “Mortgage”) with
respect to each Borrower’s right, title, and interest in and to its facilities
(which are more particularly described on Schedule A attached hereto (the “Note
II Facilities”; the Note I Facilities and the Note II Facilities are
collectively referred to herein as the “Facilities”), including the underlying
real property (the “Note II Real Property”; Note I Real Property and Note II
Real Property are collectively referred to herein as the “Real Property”), the
improvements thereon, and all equipment, fixtures, inventory, and personal
property used in connection therewith, (b) a first lien security interest and an
assignment of Borrower’s interest in all general intangibles, licenses, permits,
reimbursement contracts, leases and contracts, (c) a first lien security
interest and an assignment of Borrower’s interest in all rents and leases
relating to the Note II Facilities, (d) an assignment of the management contract
and subordination of management fees, (e) a second lien security interest in
accounts receivable issuing from the Note II Facilities, (f) an assignment of
the DCMS Note Receivable and the Workers’ Comp Retro Premiums (both hereinafter
defined on Schedule B), and (g) a second lien deed of trust or mortgage (the
“Second Mortgage”) with respect to the Borrower’s right, title, and interest in
and to the Note I Facilities securing Note I Loan, including the Real Property.
     The Note I Security and the Note II Security may be referred to
collectively herein as the “Security”. The Note I Loan and Note II Loan may be
referred to collectively herein as the “Mortgage Loan”. The Note I Facilities
and the Note II Facilities maybe referred to collectively herein as the
“Facilities”. The loan agreement, as defined herein, and all other documents or
instruments listed on Schedule C attached hereto and made a part hereof, and all
other documents or instruments now or hereafter executed by Borrower evidencing,
securing or relating to the Mortgage Loan, as herein defined, and all amendments
thereto and restatements or replacements thereof, as the same may be amended
from time to time, are hereinafter referred to collectively as the “Mortgage
Loan Documents.” Capitalized terms not otherwise defined herein shall have the
same meaning as set forth in the Mortgage Loan Documents.
     B. Pursuant to the terms of that Replacement Reduced and Modified Renewal
Revolving Promissory Note executed by Diversicare Management Services, Co., a
Tennessee corporation (“DMS”) as of October 29, 2004, as amended in the maximum
principal amount of $2,500,000.00, as further amended and decreased to the
maximum principal amount of $2,300,000.00 (the “AmSouth Priority Amount”),
AmSouth will continue to provide for the benefit of DMS, Borrower and certain
entities related to Borrower or Corporate Guarantor, as defined below, a secured
revolving credit facility, secured by, among other things, the Accounts (as
hereinafter defined) of Borrower, the guaranty of Advocat Inc., a Delaware
corporation (the “Corporate Guarantor”), the Stock (as hereinafter defined) and
other things as set forth in that Master Amendment to Loan Documents and
Agreement executed by AmSouth, Lender and

 

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certain Debtors as defined therein on November 8, 2000 to be effective as of
October 1, 2000, as subsequently amended (the “Master Amendment”). (The
Replacement Reduced and Modified Renewal Revolving Promissory Note, as amended
is herein referred to as the “AmSouth Note”).
     C. AmSouth and Lender executed an Intercreditor Agreement, signed by DMS,
Diversicare Leasing Corp., a Tennessee corporation (“DLC”) and wholly owned
subsidiary of Advocat Finance, Inc., a Tennessee corporation (“AFI”) and wholly
owned subsidiary of the Corporate Guarantor, and by Corporate Guarantor, dated
as of Decmeber 27, 1996, as subsequently amended (the “Original Intercreditor
Agreement”), which Original Intercreditor Agreement set forth certain rights and
priorities with respect to the collateral securing AmSouth’s and Lender’s
respective credit accommodations to Borrower, and Subsidiaries as defined
therein.
     D. Since execution of the Original Intercreditor Agreement, AmSouth’s and
Lender’s respective credit accommodations have changed substantially, and the
parties heretohave entered into this Replacement Intercreditor Agreement in
order to agree upon, reaffirm and restate the relative rights and priorities
with respect to the collateral securing their credit accommodations to Borrower.
ARTICLE I
DEFINITIONS
     Section 1.1. Certain Definitions. Words and terms defined in the Recitals
of this Agreement shall have the meanings therein ascribed to them, and, in
addition, the following words and terms when used herein shall have the
respective meanings indicated:
          “Accounts” has the meaning set forth on Schedule B attached hereto.
          “AmSouth Accounts” means certain assets of the Borrower as set forth
on attached Schedule B hereto.
          “AmSouth Loan Agreement” means the Master Amendment.
          “AmSouth Loan Documents” shall mean, collectively, the Master
Amendment, all Loan Documents as defined therein, all other documents or
instruments now or hereafter executed by Borrower evidencing, securing or
relating to the AmSouth Note, and all amendments thereto and restatements or
replacements thereof.
          “AmSouth Obligations” means the loan obligations of the Borrower as
more particularly set forth in the AmSouth Note and the AmSouth Loan Documents.
          “Availability” means the maximum loan availability of DMS in the
amount of the AmSouth Priority Amount.
          “Business Day” means a day, other than Saturday or Sunday and legal
holidays, when AmSouth and Lender are both open for business.

 

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          “Ceased Funding” means, with respect to the Possession Date, the date
that AmSouth has notified Lender in writing that it has determined to cease
making further advances under the AmSouth Loan Documents.
          “Common Collateral” has the meaning given such term in Section 2.5
hereof.
          “Default Notice” means a notice by Lender to AmSouth that an Event of
Default (as defined in the Mortgage Loan Documents) exists pursuant to the
Mortgage Loan Documents, a copy of which notice of Event of Default has been
given to Borrower, unless Lender is prevented from giving notice to Borrower by
bankruptcy or other applicable law.
          “Lender Accounts” has the meaning given such term in Section 2.2
hereof.
          “Lender Obligations” means the “Loan Obligations” as defined in the
Mortgage Loan Documents.
          “Managed Health Care Plans” means, collectively, any health
maintenance organization, preferred provider organization or the like.
          “Medicaid” means that certain program of medical assistance, funded
jointly by the federal government and the States, for impoverished individuals
who are aged, blind and/or disabled, and/or members of families with dependent
children, which program is more fully described in Title XIX of the Social
Security Act (42 U.S.C. §§ 1396 et seq.) and the regulations promulgated
thereunder.
          “Medicare” means that certain federal program providing health
insurance for eligible elderly and other individuals, under which physicians,
hospitals, skilled nursing homes, home health care and other providers are
reimbursed for certain covered services they provide to the beneficiaries of
such program, which program is more fully described in Title XVIII of the Social
Security Act (42 U.S.C. §§ 1395 et seq.) and the regulations promulgated
thereunder.
          “Mortgage Loan Documents” has the meaning set forth in the Recitals
hereof.
          “Patient Agreements” means collectively any and all contracts,
authorizations, agreements or consents made by or on behalf of any patient or
resident of the Facilities, or any other person seeking or obtaining services or
Goods from Borrower, pursuant to which a Borrower provides skilled nursing care,
intermediate care and/or assisted living facility, or any form of patient or
residential care, as well as related services at the Facilities (as such
contracts, authorizations, agreements or consents may be amended, supplemented,
renewed, replaced, extended or modified from time to time). The Patient
Agreements include consents to treatment and assignments of payment of benefits.
          “Payors” means and includes any and all patients or residents of the
Facilities of Borrower, Managed Health Care Plans or other Third Party Payors,
and all other persons or entities obligated on any Account, Document,
Instrument, Chattel Paper or otherwise under any agreement for the payment or
reimbursement for services rendered, Goods provided, or costs incurred by
Borrower, or otherwise obligated on any indebtedness owing to Borrower.

 

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          “Permits” means: (a) the operating licenses for the Facilities, any
certificate of need, and any other license, permit, approval or certificate
which from time to time, may be issued or is required to be issued by the United
States, any state or local government, or any agency or instrumentality of any
of the foregoing with respect to the construction, installation or operation of
the Facilities or any portion or component of the Facilities, the providing of
any profession or other services by the Borrower, the purchase, sale,
dispensing, storage, prescription or use of drugs, medications or the like by
Borrower, or any other operations or businesses of Borrower; and
(b) certifications and eligibility for participation by Borrower, with respect
to its operation of the Facilities and any related businesses or operations, in
programs or arrangements with, or reimbursement from Third Party Payors
including Medicare and Medicaid; and (c) all other licenses, permits and
certificates used or useful in connection with the ownership, operation, use or
occupancy of the Facilities.
          “Possession Date” means, with respect to the Facilities, the earlier
to occur of the date upon which (a) Lender, or its nominee, has taken actual
physical possession and control of such Facility, whether by foreclosure, deed
in lieu of foreclosure, appointment of a receiver or other legal process and
AmSouth has received five (5) Business Days notice thereof in accordance with
Section 3.1 hereof, (b) Lender, or its nominee, has begun the operation and
management of such Facility to the exclusion of the direct or indirect operation
or management of such Facility by the Borrower and/or its agents and AmSouth has
received five (5) Business Days notice thereof in accordance with Section 3.1
hereof, (c) sixty (60) days after Lender has given AmSouth a Default Notice with
respect to an Event of Default (as defined in the Mortgage Loan Documents) which
was not cured within such sixty (60) day period and AmSouth has received notice
thereof in accordance with Section 3.1 hereof, (d) the date upon which all of
the AmSouth Obligations have been indefeasibly paid in full and the AmSouth Loan
Agreement has been terminated, or (e) the date upon which AmSouth has Ceased
Funding.
          “Proceeds” means all proceeds (but specifically excluding all proceeds
of insurance and condemnation) from the sale, exchange, transfer, collection,
loss, damage, disposition, substitution or replacement of any of the Accounts.
          “Secured Lenders” shall mean, collectively, Lender and AmSouth.
          “Stock” shall mean, collectively, all stock of the Corporate
Guarantor, and all stock, membership or partnership interests of the
Subsidiaries.
          “Subsidiaries” shall mean, collectively, DMS, the Corporate Guarantor,
AFI, DLC, Advocat Ancillary Services, Inc., a Tennessee corporation (“AAS”)and
wholly-owned subsidiary of DMS, Diversicare General Partner, Inc., a Texas
corporation (“DGP”) and wholly-owned subsidiary of DLC, First American Health
Care, Inc., an Alabama corporation (“FAHC”) and wholly-owned subsidiary of DLC,
Diversicare Leasing Corp. of Alabama, an Alabama corporation (“DLCA”) and
wholly-owned subsidiary of DLC, Advocat Distribution Services, Inc.., a
Tennessee corporation (“ADS”) and wholly-owned subsidiary of DMS, Diversicare
Assisted Living Services, Inc., a Tennessee corporation (“DALS”) and a
wholly-owned subsidiary of AFI, Diversicare Assisted Living Services, NC, LLC, a
Tennessee limited liability company formed by DMS and DALS (“DALS-NC”), Sterling
Health Care Management, Inc., a Kentucky corporation (“SHCM”) and wholly-owned
subsidiary of DLC, and any and all other

 

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entities subsidiaries of the Borrower, DMS, DLC or any entity herein named,
formed subsequent to the execution of this Agreement.
          “Third Party Payors” means any and all Managed Health Care Plans,
private insurers, Blue Cross and/or Blue Shield plans, employee medical expense
assistance programs, programs established, maintained and/or administered by any
federal, state or local governmental authority (including, without limitation,
Medicare and Medicaid programs), and other similar third party payors.
     The following terms shall have the same respective meanings as are given to
those terms in the Uniform Commercial Code of the State of California, as
amended: “Chattel Paper”, “Contracts”, “Contract Rights”, “Documents”, “General
Intangibles”, “Goods”, “Instruments.” Without limiting the foregoing, the
following kinds and types of property to the extent related to the Facilities
shall be included within the definition of “General Intangibles”:
     (a) Permits, Patient Agreements, Provider Agreements and all other
agreements (whether now existing or hereafter made) between any of the Borrower
and any Third Party Payor relating to any rights of any Borrower or to payment
and/or reimbursement from, or claims of Borrower against, any Third Party Payor;
     (b) All franchises, sub franchises, rights to distribute, sales agencies,
licenses, permits, leases, rights to indemnification, rights as insured,
including the right to be provided a defense, warranty rights, concessions and
concession rights, customer lists, yellow page or trade journal listing,
telephone numbers, and any and all other property or rights necessary,
convenient, or proper with respect to the continued operation of the business of
Borrower as now or hereafter conducted by any of the Borrower with respect to
the operation or use of the Facilities;
     (c) All patents and patent applications, together with the right to sue for
past, present, and future infringements, all rights corresponding thereto
throughout the world and all reissues, divisions, continuations, renewals,
extensions, and continuations-in-part thereof and all improvements thereon;
     (d) All trademarks, trade names, and trade secrets, together with the right
to sue for past, present, and future violations corresponding thereto, and all
good will associated therewith; and
          All copyrights, together with the right to sue for past, present, or
future violations or infringements of rights of the copyrights, and all
renewals, extension and continuations thereof.
     Section 1.2. Singular terms shall include the plural forms and vice versa,
as applicable, of the terms defined.

 

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     Section 1.3. Terms contained in this Agreement shall, unless otherwise
defined herein or unless the context otherwise indicates, have the meanings, if
any, assigned to them by Uniform Commercial Code in effect in the State of
Tennessee.
     Section 1.4. All accounting terms used in this Agreement shall be construed
in accordance with general accounting principles, except as otherwise defined.
     Section 1.5. All references to other documents or instruments shall be
deemed to refer to such documents or instruments as they may hereafter be
extended, renewed, modified or amended and all replacements and substitutions
therefor.
     Section 1.6. Upon execution of this Agreement, the Original Intercreditor
Agreement shall be terminated.
ARTICLE II
INTERCREDITOR AGREEMENT
     Section 2.1. Relative Security Interests in the Accounts. The rights and
priorities in the Accounts described herein between the Secured Lenders shall be
as set forth in this Agreement irrespective of: (a) the validity of any security
interest of either of the Secured Lenders in any or all of the Accounts,
(b) whether and in what order the security interests of the Secured Lenders in
the Accounts were perfected, (c) the provisions of applicable law (bankruptcy or
otherwise), or (d) which of the Secured Lenders has possession of the Accounts.
     Section 2.2. Rights in the Accounts and Related Collateral.
          (a) AmSouth Accounts. Except as provided in Section 2.2(b) below,
AmSouth and Lender agree that at all times, whether before, during or after the
pendency of any bankruptcy, reorganization or other insolvency proceeding, and
notwithstanding the priorities that ordinarily would result under the Uniform
Commercial Code as enacted in each and every applicable jurisdiction, and as
amended from time to time, and other applicable law for the order of granting or
perfecting of any security interests referred to herein, AmSouth shall have a
first and prior security interest in, upon and to the AmSouth Accounts, and if
AmSouth has advanced funds pursuant to the terms of the AmSouth Note within
ninety (90) days immediately preceding the Possession Date (collectively, the
“Prepossession Advance”), AmSouth shall have a first and prior security interest
in, upon and to any Accounts which accrue or arise after the Possession Date but
only up the total amount of the Prepossession Advance, and Lender shall have a
second priority security interest in such AmSouth Accounts or Accounts. AmSouth
shall have no interest in any collateral securing the Mortgage Loan Documents or
any tangible or intangible property of Borrower or Corporate Guarantor other
than the Accounts and Common Collateral to the extent described herein, and the
Stock.
          (b) Lender Accounts. AmSouth and Lender agree that at all times,
whether before, during or after the pendency of any bankruptcy, reorganization
or other insolvency proceeding, and notwithstanding the priorities that
ordinarily would result under the Uniform Commercial Code as enacted in each and
every applicable jurisdiction, and as amended from time to time, and other
applicable law for the order of granting or perfecting of any security interests
referred to herein, on and after the Possession Date, Lender shall have a first
priority

 

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security interest in all of Borrower’s future Accounts, arising on or after a
Possession Date (except that AmSouth shall have a first lien on future Accounts
arising or accruing after the Possession Date but only up to the total amount of
the Prepossesion Advance and such Accounts shall not be considered “Lender
Accounts” as defined below), and thereafter acquired or arising and any and all
additions and accessions to any of the foregoing, and any and all replacements,
products and Proceeds of any of the foregoing (“Lender Accounts”). Subject to
Section 2.3(a), on and after the Possession Date, AmSouth shall have a second
priority security interest in such Lender Accounts until such time as the
AmSouth Obligations are paid in full or AmSouth’s rights are terminated in
accordance with Section 2.3(c) herein. AmSouth and Borrower covenant and agree
that, for so long as the AmSouth Obligations remain outstanding, the
Availability shall not be increased and the Maturity Date of the AmSouth Note,
which date is January 29, 2008, shall not be extended, without Lender’s prior
written consent.
          (c) General Intangibles, Contract Rights and Agreements. Until such
time as Lender has received payment in full of all Lender Obligations, Lender
shall hold a first priority security interest in and to all of the General
Intangibles and Contract Rights of the Borrower, including, but not limited to,
all Patient Agreements, Permits and Provider Agreements, and the Proceeds and
products thereof; provided; however, that to the extent any such Proceeds or
products, or any other payments derived from such General Intangibles or
Contract Rights are inextricably related to the collection of AmSouth Accounts,
then the same shall be deemed to be AmSouth Accounts, and the relative interest
of Lender and AmSouth shall be determined in accordance with Sections 2.2(a) and
2.2(b) hereof. Notwithstanding anything herein to the contrary, AmSouth Accounts
shall not include any Permits related to the operation of the Facilities, and
AmSouth shall have no right to transfer, sell, convey or otherwise affect the
Permits related to the operation of the Facilities.
     Section 2.3. Release of Security Interest.
          (a) Upon receipt by AmSouth of payment in full of all AmSouth
Obligations and termination of the AmSouth Loan Documents, AmSouth will notify
Lender of such event in accordance with Section 3.1 below, and AmSouth, at
Borrower’s expense, will execute any and all termination statements, UCC-3
amendments or releases (as applicable) to fully effectuate AmSouth’s release and
extinguishment of its security interest in the AmSouth Accounts, Accounts,
Lender Accounts, Common Collateral and the Stock.
          (b) Notwithstanding anything to the contrary contained herein or in
the Mortgage Loan Documents, if any AmSouth Accounts are sold, transferred or
conveyed or otherwise disposed of: (i) as permitted under the AmSouth Loan
Documents, or (ii) as otherwise consented to by AmSouth and Borrower, or
(iii) in conjunction with the exercise of AmSouth’s rights and remedies under
the AmSouth Loan Documents, then, subject to the terms of this Agreement, Lender
shall and hereby agrees to release any and all rights to and interests in such
AmSouth Accounts (but not to the Proceeds thereof to the extent set forth in the
last sentence of this Section 2.3(b)), and such AmSouth Accounts shall be
transferred free and clear of all liens and security interests (including the
lien of Lender). Lender shall execute such release documents as AmSouth may
request, from time to time, to effectuate the terms hereof. To the extent that
the Proceeds of any such sale of AmSouth Accounts exceed the AmSouth
Obligations, then any such excess shall be delivered to Lender (to the extent
that Lender is

 

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otherwise entitled thereto in accordance with the Mortgage Loan Documents and/or
applicable law).
     Section 2.4. Collection of Accounts.
          (a) Until such time as the AmSouth Obligations have been indefeasibly
paid in full and the AmSouth Loan Documents have been terminated, Lender shall
immediately deliver to AmSouth any payment it receives with respect to the
AmSouth Accounts in precisely the same form received (but with the endorsement
of Lender receiving the same where necessary) for application in reduction of
the AmSouth Obligations, and agrees that until so delivered, the payment shall
be held in trust for AmSouth as the property of AmSouth. Until the AmSouth
Obligations are indefeasibly paid in full, Lender agrees that it will not
institute any legal proceeding against Borrower with respect to any AmSouth
Accounts or otherwise enforcing or exercising rights in the AmSouth Accounts for
all or part of any amount due under the Mortgage Loan Documents. Any Proceeds
received by Lender in excess of an amount necessary to satisfy in full the
Lender Obligations shall otherwise be held by Lender in trust for AmSouth and
remitted to AmSouth (to the extent that AmSouth is otherwise entitled thereto in
accordance with the AmSouth Loan Documents and applicable law). Until all of the
Lender Obligations are indefeasibly paid in full, AmSouth agrees that it will
not institute any legal proceeding against Borrower with respect to any Lender
Accounts or otherwise enforcing or exercising rights in the Lender Accounts for
all or part of any amount due under the AmSouth Loan Documents.
          (b) At Lender’s option, at any time subsequent to the Possession Date,
Lender may pay or cause to be paid the AmSouth Obligations to AmSouth. If Lender
pays the AmSouth Obligations, Lender shall have a first priority security
interest in and lien on all of the AmSouth Accounts and the Common Collateral,
and AmSouth will execute and deliver to Lender releases and satisfactions of its
security interests in all Accounts, Common Collateral and the Stock. In the
event AmSouth fails to file such release and satisfaction within thirty
(30) days after Lender’s written demand therefor, Lender is hereby authorized to
file in AmSouth’s name, any releases and satisfactions necessary to effectuate
the release contemplated hereby, and Lender will provide to AmSouth a copy of
such release. AmSouth hereby constitutes and appoints Lender its true and lawful
attorney-in-fact, with full power of substitution in the premises, to exercise
such rights. This power of attorney shall be deemed to be a power coupled with
an interest and shall be irrevocable so long as any of the Lender Obligations
are outstanding. If Lender pays the AmSouth Obligations, Borrower agrees such
payment, together with interest thereon at the interest rate set forth in the
Mortgage Loan Documents, from the date paid, shall be a debt owing, jointly and
severally, by Borrower to Lender and shall, together with all costs of
collection, be secured by all of the Accounts and other Lender Collateral, and
all such indebtedness, interest thereon and costs of collection, if any, shall
be due and payable promptly on demand by Lender.
          (c) Subject to the limitations set forth in this Agreement, Lender
agrees that it will not make any assertion or claim in any action, suit or
proceeding of any nature whatsoever in any way challenging the priority,
validity or effectiveness of the liens and security interests granted to AmSouth
with respect to the AmSouth Accounts, the Accounts that accrue subsequent to the
Possession Date up to the total amount of any Preposession Advance made by
AmSouth,

 

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and the Stock, or the validity or effectiveness of the subordinate liens and
security interests of AmSouth with respect to the Lender Accounts, under and in
connection with the AmSouth Loan Documents or related agreement between AmSouth
and Borrower. Lender further agrees that AmSouth’s lien and security interest in
the AmSouth Accounts, and the Accounts that accrue subsequent to the Possession
Date up to the total amount of any Preposession Advance made by AmSouth, and the
Stock, at all times while any AmSouth Obligations or the AmSouth Priority Amount
are owing from Borrower to AmSouth shall be superior and prior to the liens and
security interests granted to Lender pursuant to the Mortgage Loan Documents
(which liens and security interests of Lender shall be subject and inferior to
those of AmSouth) in such AmSouth Accounts, Accounts or Stock, irrespective of
the time, order or method of attachment or perfection of AmSouth’s and Lender’s
liens and security interests, or the filing of financing statements or the
taking of possession of the AmSouth Accounts, or any portion thereof.
          (d) Subject to the limitations set forth in this Agreement, AmSouth
agrees that it will not make any assertion or claim in any action, suit or
proceeding of any nature whatsoever in any way challenging the priority,
validity or effectiveness of the liens and security interests granted to Lender
with respect to the Lender Accounts that accrue or arise from and after the
Possession Date, or the validity or effectiveness of the subordinate liens and
security interests granted to Lender with respect to the AmSouth Accounts that
accrued before the Possession Date, under and in connection with the Mortgage
Loan Documents, or any amendment, extension or replacement thereof or related
agreements in favor of Lender. Borrower further agrees that Lender’s lien and
security interest in the Lender Accounts which accrue or arise from and after
the Possession Date, at all times while any indebtedness or other obligations
are owing to Lender that are secured by such Lender Accounts, shall be superior
and prior to the liens and security interests granted to AmSouth pursuant to the
AmSouth Loan Documents (which liens and security interests of AmSouth shall be
subject and inferior to those of Lender), in such Lender Accounts, irrespective
of the time, order or method of attachment or perfection of AmSouth’s and
Lender’s liens and security interests, or the filing of financing statements or
the taking of possession of the AmSouth Accounts, or any portion thereof.
          (e) No sale or other disposition of AmSouth Accounts by or at the
direction of AmSouth in an aggregate amount in excess of the AmSouth Priority
Amount may be made at a discounted price (i.e., for less than the present value
of the AmSouth Accounts using a discount rate of 10%) without first providing
written notice to Lender accompanied by a term sheet or summary of written terms
from a prospective third party purchaser of such AmSouth Accounts, and offering
Lender a period of ten (10) business days within which to purchase such AmSouth
Accounts on the same terms. In the event Lender purchases such AmSouth Accounts
(which it shall have no obligation to purchase), AmSouth agrees that upon
receipt of the purchase price (x) all such AmSouth Accounts, all liens or
security interests therein, and all Proceeds thereof, shall be assigned by
AmSouth to Lender.
     Section 2.5. Rights in the Collateral. AmSouth and Lender acknowledge that
the books and records of Borrower relating to the Accounts (including but not
limited to electronic records and related software and related computer
equipment) may be included among the collateral for both the AmSouth Loan and
the Mortgage Loan (the “Common Collateral”). As to the Common Collateral, Lender
agrees that AmSouth’s security interest shall be prior to that of Lender prior
to the Possession Date, but AmSouth agrees, in the exercise of Lender’s security

 

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interest, to allow Lender to have reasonable access to the Common Collateral in
AmSouth’s possession and will, upon Lender’s request and upon payment of
AmSouth’s actual out-of-pocket costs, provide copies of all Common Collateral to
Lender. Within five (5) Business Days after the Possession Date, AmSouth shall
turn over to Lender all Common Collateral in AmSouth’s possession. After the
Possession Date, Lender shall have a first priority security in and to the
Common Collateral pursuant to the terms of Section 2.4 (b).
     Section 2.6. Access to the Facilities. AmSouth acknowledges that among
other Security, Lender holds a first lien mortgage on the Facilities, including
the premises upon which the Accounts and Common Collateral may be located.
Lender agrees that if it or its nominee should acquire possession of the
Facilities, it will allow AmSouth reasonable access to the Facilities, Accounts
and Common Collateral, at AmSouth’s cost and expense, after Lender or its
nominee attains possession thereof for the purpose of examining and copying the
records relating to the Accounts and pursuing collection thereof, and no such
possession of the Facilities shall affect the relative priorities of Secured
Lenders as set forth herein with respect to Accounts and Common Collateral.
     Section 2.7. Agreement to Give Notice of Default.
          (a) AmSouth agrees to send Lender a copy of any notice of default
given to Borrower under the AmSouth Loan Documents simultaneously with AmSouth
giving of such notice to Borrower (provided that failure of AmSouth to provide
such notice of default shall not create or result in any liability of AmSouth to
Lender), and Lender shall have the right (but not the obligation) to cure such
default within any grace or cure period provided to Borrower under the AmSouth
Loan Documents. The giving of such notice of default shall not affect the
relative rights of the parties under this Agreement.
          (b) Lender agrees to send AmSouth a copy of any Default Notice given
to Borrower under the Mortgage Loan Documents simultaneously with Lender’s
giving of such notice to Borrower (provided that failure of Lender to provide
such notice of default shall not create or result in any liability of Lender to
AmSouth), and AmSouth shall have the right (but not the obligation) to cure such
default within any grace or cure period provided to Borrower under the Mortgage
Loan Documents. The giving of the Default Notice shall not affect the relative
rights of the parties under this Agreement except as otherwise set forth herein.
ARTICLE III
MISCELLANEOUS
     Section 3.1. Notices etc. Any notice or other communication required or
permitted to be given by this Agreement or by applicable law shall be in writing
and shall be deemed received, with confirmation of receipt or delivery by such
carrier or courier: (a) on the date delivered, if sent by hand delivery (to the
person or department if one is specified below) or by facsimile (provided that
such facsimile transmission is confirmed on the date the facsimile is sent by
one of the other methods of giving notice provided for in this Section), or
(b) one (1) Business Day following the date deposited with Federal Express or
other reputable national overnight carrier, and in each case addressed as
follows:

 

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If to AmSouth:
  Tim McCarthy, Sr., Vice President
 
  AmSouth Bank
 
  315 Deaderick Street
 
  Nashville, TN 37219
 
   
 
  with a copy to:
 
   
 
  Marcy S. Hardee, Attorney
 
  Gullett, Sanford, Robinson & Martin, PLLC
 
  315 Deaderick Street, Suite 1100
 
  P.O. Box 198888
 
  Nashville, TN 37219-8888
 
   
If to Lender:
  Capmark Finance Inc.
 
  200 Witmer Road
 
  P.O. Box 1015
 
  Horsham, PA 19044-0809
 
  Attn: Servicing Account Manager
 
  Fax: (215) 328-3620
 
   
 
  and
 
   
 
  Capmark Finance Inc.
 
  2801 Highway 280 South, Suite 305
 
  Birmingham, AL 35223
 
  Attn: Laura York McDonald
 
   
 
  with a copy to:
 
   
 
  Shannon B. Lisenby, Esquire
 
  Bradley Arant Rose & White llp
 
  One Federal Place
 
  1819 Fifth Avenue North
 
  Birmingham, AL 35203-2119
 
   
If to Borrower:
  Advocat Inc.
 
  1621 Galleria Blvd.
 
  Brentwood, TN 37027-2926
 
  Attn: R. Glynn Riddle
 
   
 
  with a copy to:

          Any party may change its address to another single address by notice
given as herein provided, except any change of address notice must be actually
received in order to be

 

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effective. If the notice is tendered pursuant to the provisions of this Section
and is refused by the intended recipient thereof, the notice, nevertheless,
shall be considered to have been given and shall be effective as of the date
herein provided.
     Section 3.2. Successors and Assigns. This Agreement shall be binding upon
the parties hereto and their respective legal representatives, successors and
assigns.
     Section 3.3. Separability. If any provision of this Agreement be deemed
invalid or unenforceable as contrary to applicable law, the parties hereto agree
that such provision shall automatically be deemed to be reformed as to be
consistent with applicable law.
     Section 3.4. Amendments. This Agreement may not be amended or modified
except by a written instrument signed by the parties hereto.
     Section 3.5. Relation of Parties. This Agreement is entered into solely for
the purposes set forth in the Recitals above, and, except as is expressly
provided otherwise herein, no party to this Agreement assumes any responsibility
to the other party regarding the financial condition of the Borrower or any
other party regarding any Accounts of the Borrower or of any property of
Borrower or any other circumstances bearing upon the risk of non-payment of the
obligations of Borrower to the parties hereto. Lender and AmSouth each shall be
responsible for maintaining its relationship with the Borrower, and no party
shall be deemed the agent of any other party for any purpose.
     Section 3.6. Counterparts. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered, shall be an original,
but such counterparts shall together constitute one and the same instrument.
     Section 3.7. Miscellaneous.
          (a) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Tennessee.
          (b) Borrower agrees to pay all reasonable costs and expenses now or
hereafter incurred by AmSouth and Lender in connection with the preparation,
execution, recording and/or enforcement of this Agreement, including, without
limitation, all taxes, recording fees and reasonable attorneys’ fees and
expenses.
          (c) At the option of Lender, the failure by the Borrower or AmSouth to
act in all respects in conformity with the requirements of this Agreement shall
constitute an “Event of Default” under each of the Mortgage Loan Documents. At
the option of AmSouth, the failure by the Borrower or Lender to act in all
respects in conformity with the requirements of this Agreement shall constitute
an “Event of Default” under each of the AmSouth Loan Documents.
     Section 3.8. Related Documents. AmSouth and Lender hereby acknowledge that
in the event of any conflict between this Agreement and the AmSouth Loan
Documents and/or the Mortgage Loan Documents, the provisions of this Agreement
shall govern and control the relative rights and priorities of the Secured
Lenders with respect to the AmSouth Accounts and

 

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Lender Accounts. Borrower hereby agrees to provide Lender with a fully signed
copy of the AmSouth Loan Documents and all amendments thereto upon request by
Lender.
     Section 3.9. Authorized Signatories. Borrower, AmSouth and Lender and their
undersigned representatives respectively represents and warrant that they have
the full power and authority to execute and deliver this Agreement and that this
Agreement constitutes the valid and binding obligations of such respective
parties enforceable in accordance with its terms.
     Section 3.10. Termination of this Agreement. The subordinations,
agreements, and priorities set forth in this Agreement shall remain in full
force and effect until the AmSouth Loan or the Mortgage Loan, as the case may
be, have been paid and satisfied in full and any commitments to lend by AmSouth
and Lender, respectively, have been terminated.
     Section 3.11. No Third Party Beneficiaries. This Agreement and the terms
and provisions hereof are solely for the benefit of Lender and AmSouth and shall
not benefit any other person, including, but not limited to, Borrower, Corporate
Guarantor, guarantors or any affiliates of any such parties. Nothing in this
Agreement is intended to affect, limit, alter or in any way diminish the
security interests or mortgage liens which AmSouth or Lender hold in the assets
of Borrower or any other party insofar as the rights of Borrower, or such other
parties are concerned. Lender and AmSouth specifically reserve any and all of
their respective rights, security interests and mortgage liens and right to
assert security interests and mortgage liens against the Borrower or other
parties.
     Section 3.12. Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE ANY
RIGHT THAT ANY OF THEM MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY CLAIM,
COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN
ANY WAY RELATED TO THIS AGREEMENT OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING
OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF THE PARTIES HERETO WITH RESPECT
TO THIS AGREEMENT OR THE EXERCISE OF ANY PARTY’S RIGHTS AND REMEDIES UNDER THIS
AGREEMENT OR OTHERWISE OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO,
IN ALL OF THE FOREGOING CASES WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE.
THE PARTIES HERETO AGREE THAT ANY PARTY MAY FILE A COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT
OF THE PARTIES HERETO TO IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY
JURY AS AN INDUCEMENT TO THE PARTIES TO ENTER INTO THIS AGREEMENT, AND THAT, TO
THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER
(WHETHER OR NOT MODIFIED HEREIN) BETWEEN THE PARTIES HERETO SHALL INSTEAD BE
TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement
intending to be an instrument under seal. This Agreement may be executed and
delivered in counterparts.
[SIGNATURES ON FOLLOWING PAGES]

 

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            AMSOUTH:

AMSOUTH BANK,
an Alabama state banking corporation
      By:   /s/ Tim McCarthy         Tim McCarthy, Sr. Vice President           

 

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            LENDER:

CAPMARK FINANCE INC.,
a California corporation,
f/k/a GMAC Commercial Mortgage Corporation
      By:   /s/ Laura Y. McDonald       Name:   Laura Y. McDonald       Title:  
Senior Vice President                      

 

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            BORROWER:

AFTON OAKS BORROWER:

DIVERSICARE AFTON OAKS, LLC, a Delaware limited
liability company
      By:   /s/ Glynn Riddle       Its:   CFO                      

            NEWPORT BORROWER:

DIVERSICARE PINEDALE, LLC, a Delaware limited
liability company
      By:   /s/ Glynn Riddle       Its:   CFO                      

            WINDSOR BORROWER:

DIVERSICARE WINDSOR HOUSE, LLC, a Delaware
limited liability company
      By:   /s/ Glynn Riddle       Its:   CFO                      

            BRIARCLIFF BORROWER:

DIVERSICARE BRIARCLIFF, LLC, a Delaware limited
liability company
      By:   /s/ Glynn Riddle       Its:   CFO                      

 

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            HARTFORD BORROWER:

DIVERSICARE HARTFORD, LLC, a Delaware limited
liability company
      By:   /s/ Glynn Riddle       Its:   CFO                      

            CHISOLM BORROWER:

DIVERSICARE CHISOLM, LLC, a Delaware limited
liability company
      By:   /s/ Glynn Riddle       Its:   CFO                      

            HILLCREST BORROWER:

DIVERSICARE HILLCREST, LLC, a Delaware limited
liability company
      By:   /s/ Glynn Riddle       Its:   CFO                      

            YORKTOWN BORROWER:

DIVERSICARE YORKTOWN, LLC, a Delaware limited
liability company
      By:   /s/ Glynn Riddle       Its:   CFO                      

 

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            LAMPASAS BORROWER:

DIVERSICARE LAMPASAS, LLC, a Delaware limited liability company
      By:   /s/ Glynn Riddle       Its:   CFO                      

            CAROLINA BEACH BORROWER:

DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability
company
      By:   /s/ Glynn Riddle       Its:   CFO                      

            DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited
liability company
      By:   /s/ Glynn Riddle       Its:   CFO                      

 

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            CORPORATE GUARANTOR:

ADVOCAT INC., a Delaware corporation
      By:   /s/ Glynn Riddle       Its:   CFO