Exhibit 10.9

 

SUBORDINATION AGREEMENT

 

THIS SUBORDINATION AGREEMENT (this “Subordination Agreement”) is entered into as
of January 27, 2017, among IOWA STATE BANK (“Senior Lender”), the parties who
have executed this Agreement as “Junior Lenders”, together with such additional
parties who may execute a counterpart signature page hereto (collectively,
“Junior Lenders”), and AMERICAN POWER GROUP CORPORATION (“APGC”) and AMERICAN
POWER GROUP, INC. (“APGI”). Hereinafter, all references to the “Company” shall
be understood to refer to both APGC and APGI as individual entities, consistent
with fully protecting the security interests of the Senior Lender.

R E C I T A L S:

 

A.       Senior Lender has made or will make one or more loans to APGI, a
subsidiary of APGC, on or prior to the date hereof (the “Senior Debt”) pursuant
to the Loan Agreement.

 

B.       The Company has granted Senior Lender liens on its assets to secure the
repayment of the Senior Debt.

 

C.       Junior Lenders have agreed to loan the Company an aggregate of up to
$3,000,000.

 

D.       It is the agreement of the parties that the Junior Debt shall be
subordinate to Senior Debt and the security therefor, all as hereafter provided.

 

NOW, THEREFORE, for good and valuable consideration, the receipt, sufficiency
and adequacy which are hereby acknowledged, the parties hereto agree as follows:

 

1.       Definitions. The following terms shall have the respective meanings
specified below or in the Section or Recital referred to below:

 

“Bankruptcy Proceeding” means any proceeding by or against any party for relief
under any bankruptcy, reorganization or insolvency law or laws relating to the
relief of debtors, or any receivership, insolvency or assignment for the benefit
of creditors, or any proceeding for any liquidation, liquidating distribution,
dissolution or other winding up of such party, voluntary or involuntary, whether
or not involving insolvency or bankruptcy proceedings.

 

“Collateral” See Section 12.

 

“Enforcement Action” means any action to enforce or attempt to enforce any right
or remedy available to Junior Lenders to collect the Junior Debt, including any
action or proceeding (a) to accelerate the maturity of, or demand as immediately
due and payable, all or any part of the Junior Debt, or (b) to commence,
continue or participate in any judicial, arbitral or other proceeding or any
collection or enforcement action of any kind, against the Company or the
Company’s assets seeking, directly or indirectly, to enforce any rights or
remedies, or to enforce any of the obligations incurred by the Company, under or
in connection with the Junior Debt.

 

“Junior Debt” means the indebtedness of the Company payable to Junior Lenders in
the original principal sum of up to $3,000,000 pursuant to the terms of those
certain Subordinated Contingent Convertible Promissory Notes dated on or after
January 27, 2017.

 

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“Junior Liens” See Section 3.

 

“Loan Agreement” means that certain Business Loan Agreement between APGI and
Senior Lender dated as of September 14, 2016 as it has been and may be amended,
restated or otherwise modified from time to time.

 

“Permitted Payments” See Section 4.

 

“Senior Debt” See Paragraph A of the Recitals hereof.

 

“Senior Liens” See Section 3.

 

“Subordination Event” means the occurrence of an Event of Default as defined in
the Loan Agreement.

 

2.       Subordination. The Junior Debt will be subordinate and junior in right
of payment and collection to the payment and collection in full of all
indebtedness, obligations and liabilities of the Company to Senior Lender
pursuant to the Senior Debt.

 

3.       Lien Subordination. Junior Lenders hereby agrees that any and all
liens, rights, and security interests owned, claimed, or held, or to be owned,
claimed, or held by Junior Lenders as security for the Junior Debt (the “Junior
Liens”) are and shall be in all things subordinate and inferior to any and all
liens, rights, and security interests owned, claimed, or held, or to be owned,
claimed, or held by Senior Lender as security for the Senior Debt (the “Senior
Liens”). Junior Lenders represent that the Junior Debt is unsecured as of the
date of this Subordination Agreement.

 

4.       Limitations on Payments. Except as is hereinafter set forth in this
Section 4, no payment shall be made by the Company on account of or for
application against the Junior Debt if, at the time of or immediately after such
payment, any of the Senior Debt shall remain outstanding, and no distribution or
payment of any kind shall be received by the Junior Lenders from the Company in
respect of the Junior Debt, and Junior Lender will not otherwise receive any
amount whatsoever from the Company on account of or for application against the
Junior Debt, whether as a result of setoff, realization upon collateral or
otherwise, until the Senior Debt shall have been fully paid and satisfied. The
provisions of the first sentence of this Section 4 notwithstanding, for so long
as no Subordination Event shall have occurred and be continuing or shall occur
as a result of any payment, the Company may pay the Junior Lenders and the
Junior Lenders may receive the payments of principal and interest payable on the
Junior Debt (collectively, the “Permitted Payments”) in accordance with its
terms. Upon the occurrence of a Subordination Event, all further payments of
Permitted Payments to Junior Lenders shall immediately be suspended until the
Subordination Event no longer exists. Once a Subordination Event no longer
exists, the payment of Permitted Payments by the Company to the Junior Lenders
may resume, including past due Permitted Payments so long as the payment of such
past due Permitted Payments would not result in an Event of Default under the
Loan Agreement. Notwithstanding the foregoing, or any other provision of this
Agreement, nothing herein shall be deemed to prohibit the Junior Lenders from,
at any time and from time to time, converting all or any portion of the Junior
Debt into equity securities of the Company or from exercising warrants to
purchase equity securities of the Company.

 

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5.       Certain Distributions. Junior Lenders agree that in the event of any
distribution, division or any application, partial or complete, voluntary or
involuntary, by operation of law or otherwise, of all or any part of the assets
of the Company or the proceeds thereof to creditors of the Company or upon the
indebtedness of the Company, in any case for reason of the liquidation,
dissolution or winding up of the Company or the Company’s business, or in the
event of any sale, receivership, insolvency or Bankruptcy Proceeding or
assignment for the benefit of creditors, or any proceeding by or against the
Company for any relief under any bankruptcy or insolvency law or laws relating
to the relief of debtors, the adjustment of indebtedness, reorganizations,
compositions or extensions, then and in any such event any payment or
distribution of any kind or character, either in cash, property, securities or
otherwise, which shall be payable or deliverable by the Company upon or with
respect to any or all indebtedness of the Company to Junior Lenders shall be
paid or delivered directly to Senior Lender for application on the Senior Debt,
until the Senior Debt shall have been fully paid and satisfied. Junior Lenders
hereby grant Senior Lender the right to file proofs of claim on account of the
Junior Debt in any Bankruptcy Proceeding in the event Junior Lender fails to do
so within ten (10) days of the bar date pertaining thereto.

 

6.       Remedies Standstill. Until the Senior Debt has been paid in full, the
Junior Lenders shall not, without the prior written consent of the Senior
Lender, take any Enforcement Action with respect to the Junior Debt, provided,
however, that (i) nothing herein shall prohibit the Junior Lenders from
accelerating all or any portion of the Junior Debt in accordance with its terms
without the consent of the Senior Lender and (ii) following the expiration of
the Standstill Period (as defined below), the Junior Lenders may take an
Enforcement Action. All Enforcement Actions taken by the Junior Lenders
hereunder shall at all times be and remain subject to the terms of this
Agreement and any and all payments and collections received by the Junior
Lenders in respect of the Junior Debt pursuant to any Enforcement Action shall
be paid over to the Senior Lender for application to the payment in full of the
Senior Debt (whether or not then due) in such order and manner as the Senior
Lender shall determine until all obligations under the Senior Debt have been
paid and discharged in full in cash. Notwithstanding the foregoing, the Junior
Lenders may, subject to the terms hereof, without the consent of the Senior
Lender, file proofs of claim and vote such claims in any Insolvency Proceeding
involving the Company or its assets. For purposes of this Agreement, “Standstill
Period” shall mean the period commencing on the date of the occurrence of and
Event of Default and ending upon the earliest to occur of (i) the date which is
90 days after the Senior Lender shall have received a written notice from any of
the Junior Lenders of such default; and (ii) the date of the commencement of any
Bankruptcy Proceeding with respect to any Obligor or its assets.

 

7.       Additional Agreements. Other than as specifically provided for herein,
Junior Lenders agree (a) that they will not commence or pursue in any action of
any kind (including any Enforcement Action or Bankruptcy Proceeding) to
prohibit, limit or impair the commencement or pursuit by Senior Lender of any of
its rights or remedies under or in connection with the Senior Debt or otherwise
available to Senior Lender under applicable law; and (b) that any instrument
evidencing the Junior Debt shall expressly provide that the Junior Debt is
subject to the provisions of this Subordination Agreement.

 

8.       Treatment of Payments. If, notwithstanding the provisions of this
Subordination Agreement, any cash or distribution of assets of the Company,
whether in cash, property, securities or otherwise, which, under the provisions
of this Subordination Agreement should not have been paid to Junior Lenders, is
received by any of Junior Lenders or any person on behalf of any of them, or
provision is made for such payment or distribution, such payment or distribution
shall be held in trust for the benefit of and shall immediately be paid and
delivered directly to Senior Lender, with any necessary endorsement, for
application to the payment of the Senior Debt; whether or not due, until the
Senior Debt shall have been fully paid and satisfied.

 

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9.       No Impairment. The provisions of this Subordination Agreement are
intended solely for the purpose of defining the relative rights of the Junior
Lenders or any holder of the Junior Debt, on one hand, and Senior Lender or any
holder of the Senior Debt, on the other hand, and nothing contained in this
Subordination Agreement is intended to or shall impair, as between the Company,
other creditors, and Junior Lenders or any holder of the Junior Debt, all
amounts due and payable in accordance with the Junior Debt, or to affect the
relative rights of the Junior Lenders or any holder of the Junior Debt and
creditors of the Company other than Senior Lender or holders of the Senior Debt,
nor shall anything herein or therein prevent Junior Lenders or any holders of
the Junior Debt from exercising all remedies against the Company otherwise
permitted by applicable law, subject to the rights of Senior Lender under the
provisions of this Subordination Agreement.

 

10.       Obligations Hereunder Not Affected. No action or inaction of Senior
Lender or any other person, and no change of law or circumstances, shall release
or diminish the obligations, liabilities, agreements or duties hereunder of the
Junior Lenders or the Company, or affect this Subordination Agreement in any way
or provide any party any recourse against Senior Lender.

 

11.       Specific Performance. Senior Lender is hereby authorized to demand
specific performance of this Subordination Agreement at any time when any other
party shall have failed to comply with any of the provisions of this
Subordination Agreement applicable to it. The Company and Junior Lenders hereby
irrevocably waive any defense based upon the adequacy of a remedy at law which
might be asserted as a bar to such remedy of specific performance and waive any
requirement of the posting of any bond which might otherwise be required before
such remedy of specific performance is granted.

 

12.       Deed in Lieu of Foreclosure. As to any of the assets and properties
subject to the Senior Liens (the “Collateral”), Senior Lender may at any time
after the occurrence and during the continuance of a default under the Senior
Debt accept a full or partial deed in lieu or assignment in lieu of foreclosure
in its own name or in the name of its designee or nominee or otherwise.

 

13.       Subrogation. No payment or distribution to Senior Lender pursuant to
the provisions of this Subordination Agreement shall entitle Junior Lenders to
exercise any rights of subrogation in respect thereof until the Senior Debt
shall have been paid and satisfied in full. After the payment of the Senior Debt
in full and provided no payments are voidable, Junior Lenders shall be
subrogated to the rights of Senior Lender to receive payments or distributions
applicable to the Senior Debt to the extent the distributions otherwise payable
to the Junior Lenders have been applied to the payment of the Senior Debt.

 

14.       Choice of Law. THIS SUBORDINATION AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF IOWA.

 

15.       Waivers and Amendments. This Subordination Agreement may not be
amended, waived, terminated, or otherwise modified except in writing executed by
Senior Lender, and in the case of amendments and modifications, by (a) Junior
Lenders holding not less than 67% of the principal amount of the outstanding
Junior Debt and (b) the Company.

 

16.       No Implied Waiver. Any delay in the exercise of or any failure to
exercise any right or remedy of any party to this Subordination Agreement shall
not be deemed a waiver of any such right or remedy.

 

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17.       Binding Effect. This Subordination Agreement shall be binding upon the
parties and their respective successors, transferees and assigns. Each reference
in this Subordination Agreement to Junior Lenders shall include any assignee or
transferee of the Junior Debt and the Junior Liens, and each reference in this
Subordination Agreement to Senior Lender shall include any assignee or
transferee of the Senior Debt and the Senior Liens.

 

18.       Invalid Provisions. If any term or provision of this Subordination
Agreement shall be determined to be illegal or unenforceable, all other terms
and provisions hereof shall nevertheless remain effective and shall be enforced
to the fullest extent permitted by law.

 

19.       Further Assurances. The Junior Lenders agree and acknowledge that this
Subordination Agreement may be filed for the record for the purposes of giving
notice of the subordination herein granted, and the Junior Lenders and the
Company further agree to execute such subordinations, financing statements and
other documents that may be requested by Senior Lender to more fully give effect
to the provisions of this Subordination Agreement

 

20.       Notices. All notices, requests, consents, demands and other
communications required or permitted under this Subordination Agreement shall be
in writing and, unless otherwise specifically provided in this Subordination
Agreement, (i) shall be deemed sufficiently given or furnished (a) if delivered
by a commercial messenger service regularly retaining receipts for such
delivery, effective on the date of delivery by the commercial messenger service;
(b) if sent by registered or certified mail, return receipt requested, effective
three (3) business days after the date of deposit; (c) if sent by telephonic
facsimile transmission on a business day during normal business hours with a
copy sent by regular mail, effective on the date imprinted on the facsimile
transmission form; or (d) if delivered by the air courier services known as
FedEx, Express Mail, Airborne or Emory Air, effective two business days after
the date of delivery thereof to the courier for either next day or two-day
delivery, and (ii) shall be addressed to the parties as listed as follows, or,
with respect to the Junior Lenders, as set forth on a counterpart signature page
to this Subordination Agreement:

 

Senior Lender’s address:

 

IOWA STATE BANK

5 E Call Street

Algona, IA 50511

Attn: ______________________

 

Company’s address:

 

AMERICAN POWER GROUP CORPORATION and

AMERICAN POWER GROUP, INC.

7 Kimball Lane, Building A

Lynnfield, MA 01940

Attn: Chief Financial Officer

 

21.       Counterparts. This Subordination Agreement may be signed in any number
of complete counterparts, each of which when so executed by all parties hereto
shall be deemed to constitute one and the same agreement; but in making proof of
this Subordination Agreement it will not be necessary to produce or account for
more than one such counterpart executed by all parties hereto.

 

22.       Notice of Final Agreement. THIS SUBORDINATION AGREEMENT REPRESENTS AND
EMBODIES THE ENTIRE AND FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE
SUBJECT MATTER HEREOF AND SUPERSEDES ALL PRIOR WRITTEN OR ORAL AGREEMENTS AND
UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF. THIS
SUBORDINATION AGREEMENT MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

 

[Signature pages follow.]

 

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IN WITNESS WHEREOF, this Subordination Agreement is executed as of the date
first above written.

 

  JUNIOR LENDER:               By:        Name:           Address:        

 

[Junior Lender signature pages to this agreement are on file with

American Power Group Corporation and are intentionally omitted]

 

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SENIOR LENDER:

 

  IOWA STATE BANK       By: /s/ Levi Trauger   Name: Levi Trauger   Title: Loan
Officer

 

  COMPANY:       AMERICAN POWER GROUP CORPORATION       By: /s/ Charles E. Coppa
  Name: Charles E. Coppa   Title: Chief Financial Officer

 

  AMERICAN POWER GROUP, INC.       By: /s/ Charles E. Coppa   Name: Charles E.
Coppa   Title: Treasurer

 

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