Exhibit 10.7


 


SECURITY
AGREEMENT


 


This Security Agreement (“Agreement”), dated as of April 1, 2008,
is between HIGHWATER ETHANOL, LLC, a Minnesota limited liability company (the “Debtor”),
and U.S. BANK NATIONAL ASSOCIATION, a national banking association (in its
capacity as Trustee under the Indenture, the “Secured Party”).


 


WHEREAS, the Debtor has entered into a Lease Agreement with the City of
Lamberton, Minnesota (the “City”), dated of even date with this Agreement (as
amended, restated and in effect from time to time, the “Bond Lease”), the City’s
interest in which has been assigned to the Secured Party pursuant to a Trust
Indenture, dated as of April 1, 2008 (the “Indenture”) pursuant to which
the City has issued its Solid Waste Facilities Revenue Bonds, Series 2008A
(Highwater Ethanol, LLC Project) (the “Bonds”) in the original aggregate amount
of $15,180,000; and


 


WHEREAS, it is a condition precedent to the execution and delivery of
the Obligations as defined herein that the Debtor execute and deliver to the
Secured Party a security agreement in substantially the form hereof; and


 


WHEREAS, the Debtor wishes to grant a security interest in favor of the
Secured Party, as Trustee for the Bonds, as herein provided.


 


NOW, THEREFORE, in consideration of the promises contained herein and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:


 


1.                                       Definitions.  All capitalized terms used herein without
definitions shall have the respective meanings provided therefor in the Bond
Lease.  The term “State,” as used herein,
means the State of Minnesota.  All terms
defined in the Uniform Commercial Code of the State and used herein shall have
the same definitions herein as specified therein.  However, if a term is defined in Article 9
of the Uniform Commercial Code of the State differently than in another Article of
the Uniform Commercial Code of the State, the term has the meaning specified in
Article 9.  The term “Bond Documents”
means the Bond Lease, the Indenture and the Bonds.  The term “Obligations,” as used herein, means
all of the indebtedness, obligations and liabilities of the Debtor to the City
and Secured Party under the Bond Lease and the other Bond Documents, of every
kind, nature or description, individually or collectively, whether direct or
indirect, joint or several, absolute or contingent, primary or secondary, due
or to become due, now existing or hereafter arising, whether provided for under
or in respect of the Bond Lease or otherwise or under any promissory notes or
other instruments or agreements executed and delivered pursuant thereto or in
connection therewith or this Agreement or otherwise and any overdrafts or other
deposit account liabilities of the Debtor to the Secured Party, and the term “Event
of Default,” as used herein, means the failure of the Debtor to pay or perform
any of the Obligations as and when due to be paid or performed under the terms
of the Bond Lease and the other Bond Documents and 


 


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shall also have the
meaning given to such term in the Bond Lease or any other Bond Document.


 


2.                                       Grant
of Security Interest.  The Debtor
hereby grants to the Secured Party, to secure the payment and performance in
full of all of the Obligations, a first priority security interest in and so
pledges and assigns to the Secured Party, in all goods, property and assets of
the Debtor, including, but not limited to the following goods, property, assets
and rights of the Debtor, wherever located, whether now owned or hereafter
acquired or arising, and all proceeds and products thereof (all of the same
being hereinafter called the “Collateral”):


 


2.1.                              All
personal and fixture property of every kind and nature including, without
limitation, all goods, equipment, inventory, grain, grain inventory, furniture
and fixtures, all of every kind and nature (including any accessions,
additions, improvements, attachments and accessories thereto and products and
proceeds thereof, and all operating manuals, service records, maintenance logs
and warranties applicable thereto), and including all inventory, including, but
not limited to, all corn, grain, ethanol and DDGS inventory, in which the
Debtor has an interest in mass or a joint or other interest or right of any
kind.


 


2.2.                              All
instruments (including promissory notes, notes receivable and supporting
obligations), documents, negotiable and non-negotiable documents of title,
negotiable and non-negotiable warehouse receipts, bills of lading, transit
receipts or other documents of title, however denominated (collectively, “Warehouse
Receipts”), and the goods underlying or relating to Warehouse Receipts,
including, but not limited to, the Debtor’s present and future rights to take
possession and delivery of goods underlying or relating to any Warehouse
Receipt.


 


2.3.                              All
accounts, all of the Debtor’s rights to goods represented by or securing any
accounts, all proceeds from the disposition or collection of accounts, all of
the Debtor’s rights as an unpaid vendor, including the right to reclaim goods,
the right to stop goods in transit and the right to replevy goods, and all
guaranties, letters of credit and other supports to the payment of accounts,
chattel paper (whether tangible or electronic), deposit accounts (whether
maintained with the Secured Party or other financial institutions),
certificates of deposit (whether negotiable or non-negotiable),
letter-of-credit rights (whether or not the letter of credit is evidenced by a
writing), supporting obligations, any other contract rights or rights to the
payment of money, insurance claims and proceeds, trademarks, service marks,
copyrights, patents and other intellectual property rights and all of the
Debtor’s rights therein or thereto, software, general intangibles (including
all payment intangibles), all payments and rights to payments whether or not
earned by performance including, but not limited to, accounts and payments from
the USDA Commodity Credit Corporation Bioenergy Program and other similar
programs, price support payments, subsidy payments, guaranty payments, payments
in kind, deficiency payments, letters of entitlements, storage payments,
emergency assistance, diversion payments, production flexibility contracts,
contract reserve payments, grain insurance fund claim rights, grain 


 


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insurance fund
proceeds and all similar programs of any and every kind, whether federal, state
or local, and any other rights to payment under or from any preexisting,
current or future federal, state or local government program, and the products
and proceeds of all the foregoing.


 


2.4.                              All
farm products, including, but not limited to, all poultry and livestock and
their young, together with all products and replacements for such poultry and
livestock; all crops, annual or perennial, and all products of such crops; and
all grain, feed, seed, fertilizer, chemicals, medicines, and other supplies
used or produced in the Debtor’s operations or sold as inventory, and the
products and proceeds and rights to payments associated with all or any of the
foregoing.


 


2.5.                              All
books, records, ledger sheets or cards, reports, invoices, purchase orders,
customer lists, mailing lists, files, correspondence, computer programs, tapes,
disks and other documents or data processing software that at any time relates
to any of the foregoing or are otherwise necessary or helpful in realizing on
or collecting on any Collateral.


 


2.6.                              All
investment property, securities, securities accounts (including, but not
limited to, all accounts maintained with First National Capital Markets, Inc.)
and the securities entitlements, securities and investment property contained
therein, all hedging accounts and all commodity and securities entitlements,
investment property, commodities and other rights associated with such hedging
accounts, and all commodity accounts and all the commodities, securities and
investment property contained therein.


 


2.7.                              All
commercial tort claims now existing or hereafter arising.  The Secured Party acknowledges that the
attachment of its security interest in any additional commercial tort claim as
original collateral is subject to the Debtor’s compliance with Section 4.7
below.


 


3.                                       Authorization
to File Financing Statements.  The
Debtor hereby irrevocably authorizes the Secured Party at any time and from
time to time to file in any filing office in any Uniform Commercial Code
jurisdiction any initial financing statements and amendments thereto that (a) indicate
and describe the Collateral, including, but not limited to, descriptions of the
Collateral as all assets of the Debtor, or words of similar effect, and (b) provide
any other information required by part 5 of Article 9 of the Uniform
Commercial Code of the State, or such other jurisdiction, for the sufficiency
or filing office acceptance of any financing statement or amendment, including (i) whether
the Debtor is an organization, the type of organization and any organizational
identification number issued to the Debtor and, (ii) in the case of a
financing statement filed as a fixture filing or indicating Collateral as
as-extracted collateral or timber to be cut, a sufficient description of real
property to which the Collateral relates. 
The Debtor agrees to furnish any such information to the Secured Party
promptly upon the Secured Party’s request. 
In addition, the Debtor hereby authorizes the Secured Party to file all
effective financing statements pursuant to 7 U.S.C. Section 1631, 


 


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and amendments to
effective statements, describing the Collateral in any offices as the Secured
Party, in its sole discretion, may determine. 
If requested by the Secured Party, the Debtor will provide the Secured
Party with a list of the buyers, commission merchants and selling agents to or
through whom the Debtor may sell farm products or grain and a list of all
elevators, warehousemen or others where the Debtor stores corn.  The Debtor authorizes the Secured Party to
notify all such buyers, commission merchants, selling agents, elevators,
warehousemen or any other person, of the Secured Party’s security interest in
the Debtor’s farm products, corn or grain unless prohibited by law.  The Debtor also ratifies its authorization
for the Secured Party to have filed in any Uniform Commercial Code jurisdiction
any like initial financing statements or amendments thereto if filed prior to
the date hereof.


 


4.                                       Other
Actions.  To further the attachment,
perfection and first priority of, and the ability of the Secured Party to
enforce, the Secured Party’s security interest in the Collateral, and without
limitation on the Debtor’s other obligations in this Agreement, the Debtor
agrees, in each case at the Debtor’s expense, to take the following actions
with respect to the following Collateral:


 


4.1.                              Promissory
Notes, Instruments and Tangible Chattel Paper.  If the Debtor shall at any time hold or
acquire any instruments, promissory notes or tangible chattel paper, the Debtor
shall, upon request of the Secured Party, forthwith endorse, assign and deliver
the same to the Secured Party, accompanied by such instruments of transfer or
assignment duly executed in blank as the Secured Party may from time to time
specify. The Debtor will not deliver possession of, endorse or assign any
instruments, promissory notes or tangible chattel paper to any person or entity
other than the Secured Party.


 


4.2.                              Deposit
Accounts.  For each deposit account
that the Debtor at any time opens or maintains, the Debtor shall, at the
Secured Party’s request and option, pursuant to an agreement in form and
substance satisfactory to the Secured Party, either (a) cause the
depositary bank to comply at any time with instructions from the Secured Party
to such depositary bank directing the disposition of funds from time to time
credited to such deposit account, without further consent of the Debtor, or (b) arrange
for the Secured Party to become the customer of the depositary bank with
respect to the deposit account, with the Debtor being permitted, only with the
consent of the Secured Party, to exercise rights to withdraw funds from such
deposit account.  The Secured Party
agrees with the Debtor that the Secured Party shall not give any such instructions
or withhold any withdrawal rights from the Debtor, unless an Event of Default
has occurred and is continuing, or would occur, if effect were given to any
withdrawal not otherwise permitted by the Bond Documents.  The provisions of this paragraph shall not
apply to (i) any deposit account for which the Debtor, the depositary bank
and the Secured Party have entered into a cash collateral agreement specially
negotiated among the Debtor, the depositary bank and the Secured Party for the
specific purpose set forth therein, (ii) a deposit account for which the
Secured Party is the depositary bank and is in automatic control, and (iii) deposit
accounts 


 


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specially and
exclusively used for payroll, payroll taxes and other employee wage and benefit
payments to or for the benefit of the Debtor’s salaried employees.


 


4.3.                              Investment
Property.  If the Debtor shall at any
time hold or acquire any certificated securities, the Debtor shall forthwith
endorse, assign and deliver the same to the Secured Party, accompanied by such
instruments of transfer or assignment duly executed in blank as the Secured
Party may from time to time specify.  If
any securities now or hereafter acquired by the Debtor are uncertificated and
are issued to the Debtor or its nominee directly by the issuer thereof, the
Debtor shall immediately notify the Secured Party thereof and, at the Secured
Party’s request and option, pursuant to an agreement in form and substance
satisfactory to the Secured Party, either (a) cause the issuer to agree to
comply with instructions from the Secured Party as to such securities, without
further consent of the Debtor or such nominee, or (b) arrange for the
Secured Party to become the registered owner of the securities.  If any commodity interests or securities,
whether certificated or uncertificated, or other investment property now or
hereafter acquired by the Debtor are held by the Debtor or its nominee through
a securities intermediary or commodity intermediary, the Debtor shall
immediately notify the Secured Party thereof and, at the Secured Party’s
request and option, pursuant to an agreement in form and substance satisfactory
to the Secured Party, either (i) cause such securities intermediary or (as
the case may be) commodity intermediary to agree to comply with entitlement
orders or other instructions from the Secured Party to such securities
intermediary as to such securities or other investment property, or (as the
case may be) to apply any value distributed on account of any commodity
contract as directed by the Secured Party to such commodity intermediary, in
each case without further consent of the Debtor or such nominee, or (ii) in
the case of financial assets or other investment property held through a
securities intermediary, arrange for the Secured Party to become the
entitlement holder with respect to such investment property, with the Debtor
being permitted, only with the consent of the Secured Party, to exercise rights
to withdraw or otherwise deal with such investment property.  The Secured Party agrees with the Debtor that
the Secured Party shall not give any such entitlement orders or instructions or
directions to any such issuer, securities intermediary or commodity
intermediary, and shall not withhold its consent to the exercise of any
withdrawal or dealing rights by the Debtor, unless an Event of Default has
occurred and is continuing, or, after giving effect to any such investment and
withdrawal rights not otherwise permitted by the Bond Documents, would occur.


 


4.4.                              Collateral
in the Possession of a Bailee.  If
any Collateral is at any time in the possession of a bailee, warehouseman or
elevator, the Debtor shall promptly notify the Secured Party thereof and, at
the Secured Party’s request and option, shall promptly obtain an acknowledgement
from the bailee, warehouseman or elevator, in form and substance satisfactory
to the Secured Party, that the bailee, warehouseman or elevator holds such
Collateral for the benefit of the Secured Party, and that such bailee,
warehouseman or elevator agrees to comply, without further consent of the
Debtor, with instructions from the Secured Party as to such Collateral,
including, but 


 


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not limited to, the delivery of such Collateral to the Secured Party or
as the Secured Party directs, or the payment of the sale proceeds of such
Collateral to the Secured Party, or as the Secured Party directs.  The Secured Party agrees with the Debtor that
the Secured Party shall not give any such instructions unless an Event of
Default has occurred and is continuing or would occur after taking into account
any action by the Debtor with respect to the bailee, warehouseman or elevator.


 


4.5.                              Electronic
Chattel Paper and Transferable Records. 
If the Debtor at any time holds or acquires an interest in any
electronic chattel paper or any “transferable record,” as that term is defined
in Section 201 of the federal Electronic Signatures in Global and National
Commerce Act (as hereafter amended), or in Section 16 of the Uniform
Electronic Transactions Act as in effect in any relevant jurisdiction, the
Debtor shall promptly notify the Secured Party thereof and, at the request and
option of the Secured Party, shall take such action as the Secured Party may
reasonably request to vest in the Secured Party control, under Section 9-105
of the Uniform Commercial Code, of such electronic chattel paper or control
under Section 201 of the federal Electronic Signatures in Global and
National Commerce Act or, as the case may be, Section 16 of the Uniform
Electronic Transactions Act, as so in effect in such jurisdiction, of such
transferable record.  The Secured Party
agrees with the Debtor that the Secured Party will arrange, pursuant to
procedures satisfactory to the Secured Party and so long as such procedures
will not result in the Secured Party’s loss of control, for the Debtor to make
alterations to the electronic chattel paper or transferable record permitted
under UCC Section 9-105 or, as the case may be, Section 201 of the
federal Electronic Signatures in Global and National Commerce Act or Section 16
of the Uniform Electronic Transactions Act for a party in control to make
without loss of control, unless an Event of Default has occurred and is
continuing or would occur after taking into account any action by the Debtor
with respect to such electronic chattel paper or transferable record.


 


4.6.                              Letter-of-Credit
Rights.  If the Debtor is at any time
a beneficiary under a letter of credit, the Debtor shall promptly notify the
Secured Party thereof and, at the request and option of the Secured Party, the
Debtor shall, pursuant to an agreement in form and substance satisfactory to
the Secured Party, either (i) arrange for the issuer and any confirmer or
other nominated person of such letter of credit to consent to an assignment to
the Secured Party of the proceeds of the letter of credit, or (ii) arrange
for the Secured Party to become the transferee beneficiary of the letter of
credit, with the Secured Party agreeing, in each case, that the proceeds of the
letter to credit are to be applied to the Obligations in such order and
priority as the Secured Party.


 


4.7                                 Commercial
Tort Claims.  If the Debtor shall at
any time hold or acquire a commercial tort claim, the Debtor shall immediately
notify the Secured Party in a writing signed by the Debtor of the particulars
thereof and grant to the Secured Party in such writing a security interest
therein and in the proceeds thereof, 


 


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all upon the terms of this Agreement, with such writing to be in form
and substance satisfactory to the Secured Party.


 


4.8                                 Other
Actions as to Any and All Collateral. 
The Debtor further agrees, at the request and option of the Secured
Party, to take any and all other actions the Secured Party may determine to be
necessary or useful for the attachment, perfection and first priority of, and
the ability of the Secured Party to enforce, the Secured Party’s security
interest in any and all of the Collateral, including, without limitation, (a) executing,
delivering and, where appropriate, filing financing statements and amendments
relating thereto under the Uniform Commercial Code, to the extent, if any, that
the Debtor’s signature thereon is required therefor, (b) causing the Secured
Party’s name to be noted as secured party on any certificate of title for a
titled good if such notation is a condition to attachment, perfection or
priority of, or ability of the Secured Party to enforce, the Secured Party’s
security interest in such Collateral, (c) complying with any provision of
any statute, regulation or treaty of the United States as to any Collateral if
compliance with such provision is a condition to attachment, perfection or
priority of, or ability of the Secured Party to enforce, the Secured Party’s
security interest in such Collateral, (d) obtaining governmental and other
third party waivers, consents and approvals in form and substance satisfactory
to Secured Party, including, without limitation, any consent of any licensor,
lessor or other person obligated on Collateral, (e) obtaining waivers from
mortgagees and landlords in form and substance satisfactory to the Secured
Party and (f) taking all actions under any earlier versions of the Uniform
Commercial Code or under any other law, as reasonably determined by the Secured
Party to be applicable in any relevant Uniform Commercial Code or other
jurisdiction, including any foreign jurisdiction.


 


4.9.                              Warehouse
Receipts.


 


(a)                                  The
Debtor has delivered or will deliver to the Secured Party any and all
documents, instruments and writings in any way relating to the Warehouse
Receipts or in any way relating to the property evidenced thereby.  As long as this Agreement remains in effect,
the Debtor shall immediately deliver to the Secured Party any and all future
documents, instruments, or other writings applicable or in any way relating to
the foregoing in the Debtor’s possession. 
In the event that the Debtor is unable to deliver original Warehouse
Receipts, and such other documents, to the Secured Party at the time this
Agreement is executed, as required above, the Debtor agrees to deliver
immediately such Warehouse Receipts to the Secured Party upon issuance of the
same.


 


(b)                                 The
Debtor further agrees that the Secured Party shall have the right at any time,
and from time to time, whether or not one or more Events of Default exist under
the Bond Lease, to demand that the Debtor immediately deliver to the Secured
Party any and all Warehouse Receipts held in the Debtor’s possession or control
for or representing all or any part of the 


 


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Collateral that is then or may thereafter be issued in
the name of the Debtor.  The Debtor
unconditionally agrees to deliver such Warehouse Receipts to the Secured Party
on demand.


 


(c)                                  In
addition to Warehouse Receipts, the Secured Party may require the Debtor from
time to time, one or more times, to deliver to the Secured Party such lists,
descriptions and designations of any applicable Collateral not represented by
Warehouse Receipts as the Secured Party may require to identify the nature,
extent and location of the same.


 


(d)                                 The
Debtor represents and warrants to the Secured Party that all of the Debtor’s
grain at any time, and from time to time, represented by Warehouse Receipts or
included in any list, description or designation referred to above, will at all
times be owned by the Debtor free and clear of all liens, encumbrances and
security interests of any kind whatsoever, excepting only the security interest
of the Secured Party pursuant hereto.


 


(e)                                  As
long as no Event of Default exists, the Debtor may sell or use in its
operations the property released by the Secured Party from or under Warehouse
Receipts, as well as the Debtor’s property not represented by Warehouse
Receipts, in carrying on the Debtor’s business in the ordinary course,
substantially in the same manner as now conducted; but a sale in the ordinary
course of business shall not include any transfer or sale in satisfaction,
partial or complete, of a debt owed by the Debtor.


 


4.10.                        Farm
Products.  After the occurrence of an
Event of Default, the Debtor shall not store, transfer or consign any farm
products without the prior written consent of the Secured Party.  The Debtor shall not store, transfer or
consign any farm products without first obtaining a written acknowledgment from
any person to whom physical possession of any such farm products are delivered (a) of
the Secured Party’s security interest in such farm products, (b) that it
holds possession of such farm products for the Secured Party’s benefit, (c) that
it will not issue negotiable documents with respect to such farm products and (d) that
it agrees to follow the Secured Party’s instructions as to disposition of farm
products upon its receipt of such instructions. 
The Debtor will comply with the provisions of all federal, state or
local government programs, agreements and contracts to which the Debtor is a
party.


 


4.11.                        Proceeds.  The Debtor shall transfer all proceeds of all
Collateral into the Debtor’s main operating account established and maintained
by the Debtor with the Secured Party, or in such other deposit account as
required by the Secured Party.  The
Debtor shall not grant any other person or entity a security interest, lien or
other encumbrance in or on such deposit account.


 


5.                                       Relation
to Other Security Documents.  The
provisions of this Agreement supplement the provisions of the Bond Lease,
Mortgage and other Bond Documents.  


 


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Nothing contained
in the Bond Lease, Mortgage or other Bond Documents shall derogate from any of
the rights or remedies of the Secured Party hereunder.


 


6.                                       Representations
and Warranties Concerning Debtor’s Legal Status.  The Debtor represents and warrants to the
Secured Party as follows: (a) the Debtor’s exact legal name is that
indicated on the first page and on the signature page hereof, (b) the
Debtor is an organization of the type, and is organized in the jurisdiction set
forth on the first page of this Agreement, (c) the Debtor’s tax
identification number is 20-4798531 and the Debtor’s organizational
identification number is
                                  
or if left blank, then the Debtor has none, and (d) each of the Debtor’s
places of business and, if more than one, its chief executive office, as well
as the Debtor’s mailing address, if different, are listed in Schedule A
attached to this Agreement and incorporated herein by reference.


 


7.                                       Covenants
Concerning Debtor’s Legal Status. 
The Debtor covenants with the Secured Party as follows: (a) the
Debtor will not change its name, its place of business or, if more than one,
chief executive office, or its mailing address or organizational identification
number if it has one, (b) if the Debtor does not have an organizational
identification number and later obtains one, the Debtor shall forthwith notify
the Secured Party of such organizational identification number, and (c) the
Debtor will not change its type of organization, jurisdiction of organization
or other legal structure.


 


8.                                       Representations
and Warranties Concerning Collateral, Etc. 
The Debtor further represents and warrants to the Secured Party as
follows: (a) the Debtor is the owner of the Collateral, free from any
right or claim or any person or any adverse lien, security interest or other
encumbrance, except for the security interest created by this Agreement and
other liens permitted by the Bond Lease, (b) except as disclosed to the
Secured Party, none of the account debtors or other persons obligated on any of
the Collateral is a governmental authority covered by the Federal Assignment of
Claims Act or like federal, state or local statute or rule in respect of
such Collateral, (c) the Debtor holds no commercial tort claim except as
indicated on Schedule A attached to this Agreement, and (d) the Debtor has
at all times operated its business in compliance with all applicable provisions
of the federal Fair Labor Standards Act, as amended, and with all applicable
provisions of federal, state and local statutes and ordinances dealing with the
control, shipment, storage or disposal of hazardous materials or substances.


 


9.                                       Covenants
Concerning Collateral, Etc.  The
Debtor further covenants with the Secured Party as follows: (a) the
Collateral, to the extent not delivered to the Secured Party pursuant to Section 4,
will be kept at those locations listed on Schedule A and the Debtor will not
move any Collateral to any location not shown in Schedule A without providing
at least thirty (30) days prior written notice to the Secured Party, which
notice shall include the new location, (b) except for the security
interest herein granted and liens permitted by the Bond Lease, the Debtor shall
be the owner of the Collateral free from any right or claim of any other
person, lien, security interest or other encumbrance, and the Debtor shall
defend the same against all claims and demands of all persons at any time
claiming the same or any interests therein adverse to the Secured Party, (c) the
Debtor shall not pledge, mortgage or 


 


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create, or suffer
to exist any right of any person in or claim by any person to the Collateral,
or any security interest, lien or encumbrance in the Collateral in favor of any
person, other than the Secured Party except for liens permitted by the Bond
Lease, (d) the Debtor will keep the Collateral in good order and repair
and will not use the same in violation of law or any policy of insurance
thereon, (e) the Debtor will permit the Secured Party, or its designee, to
inspect and audit the Collateral at any reasonable time, wherever located,
according to the terms of the Bond Lease, (f) the Debtor will pay promptly
when due all taxes, assessments, governmental charges and levies upon the
Collateral according to the terms of the Bond Lease or incurred in connection
with the use or operation of such Collateral or incurred in connection with
this Agreement, (g) the Debtor will continue to operate, its business in
compliance with all applicable provisions of the federal Fair Labor Standards
Act, as amended, and with all applicable provisions of federal, state and local
statutes and ordinances dealing with the control, shipment, storage or disposal
of hazardous materials or substances, (h) the Debtor will apply for all
subsidies, price support payments, guaranty payments and other payments of any
kind available to the Debtor under any federal, state or local governmental
program relating to the use of corn to produce ethanol, the production of
ethanol, the sale of ethanol and any other activities of the Debtor, will file
for all tax credits and deductions available for any of the foregoing, and will
take no action, or omit to take any action, which would preclude or jeopardize
in any manner the Debtor’s ability to participate in any such payments,
programs, tax credits or deductions and (i) the Debtor will not the Debtor
will not discount, factor, sell or otherwise dispose, or offer to sell or
otherwise dispose, of any of the Collateral, including, but not limited to,
instruments, general intangibles, tangible or electronic chattel paper,
promissory notes and/or accounts, or any interest therein except for (i) sales
and leases of inventory in the ordinary course of business and (ii) so
long as no Event of Default has occurred and is continuing, sales or other
dispositions of obsolescent items of equipment consistent with past practices;
provided, however, that permitted sales under this Section are also
permitted under the Bond Lease.  In the event
that such sales are not permitted under the Bond Lease, then such sales are
also not permitted hereunder.  In
addition, the Debtor will only store grain owned by the Debtor not evidenced by
a Warehouse Receipt in facilities owned by the Debtor at locations set forth on
Schedule A.


 


10.                                 Insurance.


 


10.1.                        Maintenance of Insurance.  The Debtor will maintain the insurance
required in the Bond Lease.  All such
insurance covering the Collateral shall be payable to the Secured Party as loss
payee under a “standard” or “New York” loss payee clause.


 


10.2.                        Insurance Proceeds.  The proceeds of any casualty insurance in
respect of any casualty loss of any of the Collateral shall, subject to the
rights, if any, of other parties with an interest having priority in the
property covered thereby, (i) so long as no Event of Default has occurred
and is continuing, the damaged Collateral can be economically repaired or
replaced in the sole discretion of the Secured Party and the casualty loss is
$250,000 or less and the conditions precedent in the Bond Lease with 


 


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respect to the disbursement of insurance proceeds to the Debtor have
been satisfied, be disbursed to the Debtor for direct application by the Debtor
solely to the repair or replacement of the Debtor’s property so damaged or
destroyed, and (ii) in all other circumstances, be held by the Secured
Party as cash collateral for the Obligations. 
Subject to the foregoing, the Secured Party may, at its sole option,
disburse from time to time all or any part of such proceeds so held as cash
collateral, upon such terms and conditions as the Secured Party may reasonably
prescribe, for direct application by the Debtor solely to the repair or
replacement of the Debtor’s property so damaged or destroyed, or the Secured
Party may apply all or any part of such proceeds to the Obligations with the
amount of the Loans, as described in the Bond Lease (if not then terminated)
being reduced by the amount so applied to the Obligations.


 


10.3.                        Continuation of Insurance.  All policies of insurance shall provide for
at least 20 days prior written cancellation notice to the Secured Party.  In the event of failure by the Debtor to
provide and maintain insurance as herein provided, the Secured Party may, at
its option, provide such insurance and charge the amount thereof to the Debtor,
subject to the terms of the Bond Lease. 
The Debtor shall furnish the Secured Party with certificates of
insurance and policies evidencing compliance with the foregoing insurance
provision.


 


11.                                 Collateral
Protection Expenses; Preservation of Collateral.


 


11.1.                        Expenses Incurred by Secured
Party.  In the Secured Party’s
discretion, if the Debtor fails to do so, the Secured Party may discharge taxes
and other encumbrances at any time levied or placed on any of the Collateral,
maintain any of the Collateral, make repairs thereto and pay any necessary
filing fees or insurance premiums.  The
Debtor agrees to reimburse the Secured Party on demand for all expenditures so
made.  The Secured Party shall have no
obligation to the Debtor to make any such expenditures, nor shall the making
thereof be construed as the waiver or cure of any Event of Default.


 


11.2.                        Secured
Party’s Obligations and Duties. 
Anything herein to the contrary notwithstanding, the Debtor shall remain
obligated and liable under each contract or agreement comprised in the
Collateral to be observed or performed by the Debtor thereunder.  Neither the Secured Party nor any other
Lender shall have any obligation or liability under any such contract or
agreement by reason of or arising out of this Agreement or the receipt by the
Secured Party of any payment relating to any of the Collateral, nor shall the
Secured Party or any other Lender be obligated in any manner to perform any of
the obligations of the Debtor under or pursuant to any such contract or
agreement, to make inquiry as to the nature or sufficiency of any payment
received by the Secured Party in respect of the Collateral or as to the
sufficiency of any performance by any party under any such contract or
agreement, to present or file any claim, to take any action to enforce any
performance or to collect the payment of any amounts which may have been
assigned to the Secured Party or to which the Secured Party may be entitled at
any time or times.  The Secured Party’s
sole duty 


 


11

















 


with
respect to the custody, safe keeping and physical preservation of the
Collateral in its possession, under Section 9-207 of the Uniform
Commercial Code of the State or otherwise, shall be to deal with such
Collateral in the same manner as the Secured Party deals with similar property
for its own account.


 


12.                                 Securities
and Deposits.  The Secured Party may
at any time following and during the continuance of an Event of Default, at its
option, transfer to itself or any nominee any securities constituting
Collateral, receive any income thereon and hold such income as additional
Collateral or apply it to the Obligations. 
Whether or not any Obligations are due, the Secured Party may following
and during the continuance of an Event of Default demand, sue for, collect, or
make any settlement or compromise which it deems desirable with respect to the
Collateral. Regardless of the adequacy of Collateral or any other security for
the Obligations, any deposits or other sums at any time credited by or due from
the Secured Party to the Debtor may at any time be applied to or set off
against any of the Obligations.


 


13.                                 Notification
to Account Debtors and Other Persons Obligated on Collateral.  If an Event of Default shall have occurred
and be continuing, the Debtor shall, at the request and option of the Secured
Party, notify account debtors and other persons obligated on any of the Collateral
of the security interest of the Secured Party in any account, chattel paper,
general intangible, instrument or other Collateral and that payment thereof is
to be made directly to the Secured Party or to any financial institution
designated by the Secured Party as the Secured Party’s agent therefor, and the
Secured Party may itself, if an Event of Default shall have occurred and be
continuing, without notice to or demand upon the Debtor, so notify account
debtors and other persons obligated on Collateral.  After the making of such a request or the
giving of any such notification, the Debtor shall hold any proceeds of
collection of accounts, chattel paper, general intangibles, instruments and
other Collateral received by the Debtor as trustee for the Secured Party
without commingling the same with other funds of the Debtor and shall turn the
same over to the Secured Party in the identical form received, together with
any necessary endorsements or assignments. 
The Secured Party shall apply the proceeds of collection of accounts,
chattel paper, general intangibles, instruments and other Collateral received
by the Secured Party to the Obligations, such proceeds to be immediately
credited after final payment in cash or other immediately available funds of the
items giving rise to them.


 


14.                                 Power
of Attorney.


 


14.1.                        Appointment and Powers of
Secured Party.  The Debtor hereby
irrevocably constitutes and appoints the Secured Party and any officer or agent
thereof, with full power of substitution, as its true and lawful
attorneys-in-fact with full irrevocable power and authority in the place and
stead of the Debtor or in the Secured Party’s own name, for the purpose of
carrying out the terms of this Agreement, to take any and all appropriate
action and to execute any and all documents and instruments that may be
necessary or useful to accomplish the purposes of this Agreement and, without
limiting the generality of the foregoing, 


 


12

















 


hereby gives said attorneys the power and right, on behalf of the
Debtor, without notice to or assent by the Debtor, to do the following:


 


(a)                                  upon
the occurrence and during the continuance of an Event of Default, generally to
sell, transfer, pledge, make any agreement with respect to or otherwise dispose
of or deal with any of the Collateral in such manner as is consistent with the
Uniform Commercial Code of the State and as fully and completely as though the
Secured Party were the absolute owner thereof for all purposes, and to do, at the
Debtor’s expense, at any time, or from time to time, all acts and things which
the Secured Party deems necessary or useful to protect, preserve or realize
upon the Collateral and the Secured Party’s security interest therein, in order
to effect the intent of this Agreement, all at least as fully and effectively
as the Debtor might do, including, without limitation, (i) the filing and
prosecuting of registration and transfer applications with the appropriate
federal, state, local or other agencies or authorities with respect to
trademarks, copyrights and patentable inventions and processes, (ii) upon
written notice to the Debtor, the exercise of voting rights with respect to
voting securities, which rights may be exercised, if the Secured Party so
elects, with a view to causing the liquidation of assets of the issuer of any
such securities, and (iii) the execution, delivery and recording, in
connection with any sale or other disposition of any Collateral, of the
endorsements, assignments or other instruments of conveyance or transfer with
respect to such Collateral; and


 


(b)                                 to
the extent that the Debtor’s authorization given in Section 3 is not
sufficient, to file such financing statements with respect hereto, with or
without the Debtor’s signature, or a photocopy of this Agreement in
substitution for a financing statement, as the Secured Party may deem
appropriate and to execute in the Debtor’s name such financing statements and
amendments thereto and continuation statements which may require the Debtor’s signature.


 


14.2.                        Ratification by Debtor.  To the extent permitted by law, the Debtor
hereby ratifies all that said attorneys shall lawfully do or cause to be done
by virtue hereof.  This power of attorney
is a power coupled with an interest and is irrevocable.


 


14.3.                        No Duty on Secured Party.  The powers conferred on the Secured Party
hereunder are solely to protect its interests in the Collateral and shall not
impose any duty upon it to exercise any such powers.  The Secured Party shall be accountable only
for the amounts that it actually receives as a result of the exercise of such
powers, and neither it nor any of its officers, directors, employees or agents
shall be responsible to the Debtor for any act or failure to act, except for
the Secured Party’s own gross negligence or willful misconduct.


 


13
















 


15.                                 Rights
and Remedies.  If an Event of Default
shall have occurred and be continuing beyond any applicable grace or notice and
cure period provided for in the Bond Lease, the Secured Party, without any
other notice to or demand upon the Debtor have in any jurisdiction in which
enforcement hereof is sought, in addition to all other rights and remedies,
whether conferred in the Bond Lease or at law or in equity, the rights and
remedies of a secured party under the Uniform Commercial Code of the State and
any additional rights and remedies which may be provided to a secured party in
any jurisdiction in which Collateral is located, including, without limitation,
the right to take possession of the Collateral, and for that purpose the
Secured Party may, so far as the Debtor can give authority therefor, enter upon
any premises on which the Collateral may be situated and remove the same
therefrom.  The Secured Party may in its
discretion require the Debtor to assemble all or any part of the Collateral at
such location or locations within the jurisdiction(s) of the Debtor’s
principal office(s) or at such other locations as the Secured Party may
reasonably designate.  Unless the
Collateral is perishable or threatens to decline speedily in value or is of a
type customarily sold on a recognized market, the Secured Party shall give to
the Debtor at least ten (10) days prior written notice of the time and
place of any public sale of Collateral or of the time after which any private
sale or any other intended disposition is to be made.  The Debtor hereby acknowledges that ten (10) days
prior written notice of such sale or sales shall be reasonable notice.  In addition, the Debtor waives any and all
rights that it may have to a judicial hearing in advance of the enforcement of
any of the Secured Party’s rights and remedies hereunder, including, without
limitation, its right following an Event of Default to take immediate
possession of the Collateral and to exercise its rights and remedies with
respect thereto.


 


16.                                 Standards
for Exercising Rights and Remedies. 
To the extent that applicable law imposes duties on the Secured Party to
exercise remedies in a commercially reasonable manner, the Debtor acknowledges
and agrees that it is not commercially unreasonable for the Secured Party (a) to
fail to incur expenses reasonably deemed significant by the Secured Party to
prepare Collateral for disposition or otherwise to fail to complete raw
material or work in process into finished goods or other finished products for
disposition, (b) to fail to obtain third party consents for access to
Collateral to be disposed of, or to obtain or, if not required by other law, to
fail to obtain governmental or third party consents for the collection or
disposition of Collateral to be collected or disposed of, (c) to fail to
exercise collection remedies against account debtors or other persons obligated
on Collateral or to fail to remove liens or encumbrances on or any adverse
claims against Collateral, (d) to exercise collection remedies against account
debtors and other persons obligated on Collateral directly or through the use
of collection agencies and other collection specialists, (e) to advertise
dispositions of Collateral through publications or media of general
circulation, whether or not the Collateral is of a specialized nature, (f) to
contact other persons, whether or not in the same business as the Debtor, for
expressions of interest in acquiring all or any portion of the Collateral, (g) to
hire one or more professional auctioneers to assist in the disposition of
Collateral, whether or not the collateral is of a specialized nature, (h) to
dispose of Collateral by utilizing Internet sites that provide for the auction
of assets of the types included in the Collateral or that have the reasonable
capability of doing so, or that match buyers and sellers of assets, (i) to
dispose of assets in wholesale rather than retail markets, (j) to disclaim



 


14

















 


disposition
warranties, (k) to purchase insurance or credit enhancements to insure the
Secured Party against risks of loss, collection or disposition of Collateral or
to provide to the Secured Party a guaranteed return from the collection or
disposition of Collateral, or (l) to the extent deemed appropriate by the
Secured Party, to obtain the services of other brokers, investment bankers,
consultants and other professionals to assist the Secured Party in the
collection or disposition of any of the Collateral.  The Debtor acknowledges that the purpose of
this Section 16 is to provide non-exhaustive indications of what actions
or omissions by the Secured Party would fulfill the Secured Party’s duties
under the Uniform Commercial Code or other law of the State or any other
relevant jurisdiction in the Secured Party’s exercise of remedies against the
Collateral and that other actions or omissions by the Secured Party shall not
be deemed to fail to fulfill such duties solely on account of not being
indicated in this Section 16. 
Without limitation upon the foregoing, nothing contained in this Section 16
shall be construed to grant any rights to the Debtor or to impose any duties on
the Secured Party that would not have been granted or imposed by this Agreement
or by applicable law in the absence of this Section 16.


 


17.                                 No
Waiver by Secured Party, Etc.  The
Secured Party shall not be deemed to have waived any of its rights or remedies
in respect of the Obligations or the Collateral unless such waiver shall be in
writing and signed by the Secured Party. 
No delay or omission on the part of the Secured Party in exercising any
right or remedy shall operate as a waiver of such right or remedy or any other
right or remedy.  A waiver on any one
occasion shall not be construed as a bar to or waiver of any right or remedy on
any future occasion.  All rights and
remedies of the Secured Party with respect to the Obligations or the
Collateral, whether evidenced hereby or by any other instrument or papers,
shall be cumulative and may be exercised singularly, alternatively,
successively or concurrently at such time or at such times as the Secured Party
deems expedient.


 


18.                                 Suretyship
Waivers by Debtor.  The Debtor waives
demand, notice, protest, notice of acceptance of this Agreement, notice of
loans made, credit extended, Collateral received or delivered or other action
taken in reliance hereon and all other demands and notices of any
description.  With respect to both the
Obligations and the Collateral, the Debtor assents to any extension or
postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of or failure to perfect any security
interest in any Collateral, to the addition or release of any party or person
primarily or secondarily liable, to the acceptance of partial payment thereon
and the settlement, compromising or adjusting of any thereof, all in such
manner and at such time or times as the Secured Party may deem advisable.  The Secured Party shall have no duty as to
the collection or protection of the Collateral or any income therefrom, the
preservation of rights against prior parties, or the preservation of any rights
pertaining thereto beyond the safe custody thereof as set forth in Section 11.2.  The Debtor further waives any and all other
suretyship defenses.


 


19.                                 Marshalling.  The Secured Party shall not be required to
marshal any present or future collateral security (including but not limited to
the Collateral) for, or other assurances of payment of, the Obligations or any
of them or to resort to such collateral 


 


15

















 


security or other
assurances of payment in any particular order, and all of its rights and
remedies hereunder and in respect of such collateral security and other
assurances of payment shall be cumulative and in addition to all other rights
and remedies, however existing or arising. 
To the extent that it lawfully may, the Debtor hereby agrees that it
will not invoke any law relating to the marshalling of collateral which might
cause delay in or impede the enforcement of the Secured Party’s rights and
remedies under this Agreement or under any other instrument creating or
evidencing any of the Obligations or under which any of the Obligations is
outstanding or by which any of the Obligations is secured or payment thereof is
otherwise assured, and, to the extent that it lawfully may, the Debtor hereby
irrevocably waives the benefits of all such laws.


 


20.                                 Proceeds
of Dispositions; Expenses.  The
Debtor shall pay to the Secured Party on demand any and all expenses, including
reasonable attorneys’ fees and disbursements, incurred or paid by the Secured
Party in protecting, preserving or enforcing the Secured Party’s rights and
remedies under or in respect of any of the Obligations or any of the
Collateral. After deducting all of said expenses, the residue of any proceeds
of collection or sale or other disposition of the Collateral shall, to the
extent actually received in cash, be applied to the payment of the Obligations
in such order or preference as the Secured Party may determine, proper
allowance and provision being made for any Obligations not then due.  Upon the final payment and satisfaction in
full of all of the Obligations and after making any payments required by Sections
9-608(a)(1)(C) or 9-615(a)(3) of the Uniform Commercial Code of the
State, any excess shall be returned to the Debtor.  In the absence of final payment and
satisfaction in full of all of the Obligations, the Debtor shall remain liable
for any deficiency.


 


21.                                 Overdue
Amounts.  Until paid, all amounts due
and payable by the Debtor hereunder shall be a debt secured by the Collateral
and shall bear, whether before or after judgment, interest at the rate of
interest for overdue principal set forth in the Bond Lease.


 


22.                                 Governing
Law; Consent to Jurisdiction.  THIS
AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
MINNESOTA.  The Debtor agrees that any
action or claim arising out of, or any dispute in connection with, this
Agreement, any rights, remedies, obligations, or duties hereunder, or the
performance or enforcement hereof or thereof, may be brought in the courts of
the State or any federal court sitting therein and consents to the non-exclusive
jurisdiction of such court and to service of process in any such suit being
made upon the Debtor by mail at the address specified in the notice provision
of the Bond Lease.  The Debtor hereby
waives any objection that it may now or hereafter have to the venue of any such
suit or any such court or that such suit is brought in an inconvenient court.


 


23.                                 Waiver
of Jury Trial.  THE DEBTOR WAIVES ITS
RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY
DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS, REMEDIES, OBLIGATIONS,
OR DUTIES HEREUNDER, OR THE PERFORMANCE OR 


 


16

















 


ENFORCEMENT HEREOF
OR THEREOF.  Except as prohibited by law,
the Debtor waives any right which it may have to claim or recover in any
litigation referred to in the preceding sentence any special, exemplary,
punitive or consequential damages or any damages other than, or in addition to,
actual damages. The Debtor (i) certifies that neither the Secured Party
nor any representative, agent or attorney of the Secured Party has represented,
expressly or otherwise, that the Secured Party would not, in the event of
litigation, seek to enforce the foregoing waivers or other waivers contained in
this Agreement, and (ii) acknowledges that, in entering into the Bond
Lease and the other Bond Documents to which the Secured Party is a party, the
Secured Party is relying upon, among other things, the waivers and
certifications contained in this Section 23.


 


24.                                 Miscellaneous.  The headings of each section of this
Agreement are for convenience only and shall not define or limit the provisions
thereof. This Agreement and all rights and obligations hereunder shall be
binding upon the Debtor and its respective successors and assigns, and shall
inure to the benefit of the Secured Party and its successors and assigns.  If any term of this Agreement shall be held
to be invalid, illegal or unenforceable, the validity of all other terms hereof
shall in no way be affected thereby, and this Agreement shall be construed and
be enforceable as if such invalid, illegal or unenforceable term had not been
included herein. The Debtor acknowledges receipt of a copy of this Agreement.


 


17

















 


IN WITNESS WHEREOF, intending to be legally bound, the
Debtor has caused this Agreement to be duly executed as of the date first above
written.


 


	
   

  	
  HIGHWATER
  ETHANOL, LLC, a Minnesota

  limited liability company

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Brian Kletscher

  
	
   

  	
   

  	
  President

  



 


 


CERTIFICATE OF ACKNOWLEDGMENT


 


	
  STATE OF South
  Dakota

  	
  )

  
	
   

  	
  ) ss.

  
	
  COUNTY OF
  Minnehaha

  	
  )

  



 


Before me, the undersigned, a Notary Public in and for
the county aforesaid, on this 24th day of April, 2008, personally
appeared Brian D. Kletscher, to me known personally, and who, being by me duly
sworn, deposes and says that he is the President of Highwater Ethanol, LLC, and
that said instrument was signed on behalf of said limited liability company by
authority of its President, and said President acknowledged said instrument to
be the free act and deed of said limited liability company.


 


 


	
   

  	
  /s/ Vicki Blake

  
	
   

  	
  Notary Public

  



 


 


	
  My commission
  expires:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  2/10/12

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  My County of
  Residence is:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Minnehaha

  	
   

  	
   

  



 


S-1

















 


	
   

  	
  Accepted:

  
	
   

  	
   

  
	
   

  	
  U.S. BANK
  NATIONAL ASSOCIATION, a

  national banking association,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Christine Robinette

  
	
   

  	
   

  	
  Its Vice
  President

  



 


S-2

















 


SCHEDULE
A


 


Locations/Commercial
Tort Claims


 


	
  I.

  	
   

  	
  Debtor Location:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  205 N. Main
  Street, PO Box 96

  
	
   

  	
   

  	
  Lamberton, MN
  56152

  
	
   

  	
   

  	
   

  
	
  II.

  	
   

  	
  Commercial Tort
  Claims:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  None

  



 


A-1