Document:

exv10w3

 

	 	 	 	 	 

EXECUTION VERSION

Exhibit
10.3

GUARANTY

     GUARANTY, dated as of March 4, 2008 (the “Guaranty”), by Westmoreland Resources, Inc.,
a Delaware corporation (“Guarantor”), in favor of Purchasers (as hereinafter defined).

     Reference is hereby made to (i) that certain Senior Secured Convertible Note Purchase
Agreement, dated as of March 4, 2008, by and among Westmoreland Coal Company (the
“Company”), a Delaware corporation, Tontine Partners, L.P., a Delaware limited partnership,
and Tontine Capital Partners, L.P., a Delaware limited partnership (each, “Purchaser” and
collectively, “Purchasers”) and Tontine Capital Associates, L.P., a Delaware limited
partnership, as Collateral Agent for Purchasers (together with its permitted successors in such
capacity as the collateral agent, the “Collateral Agent”) (the “Note Purchase
Agreement”), (ii) that certain Security Agreement, dated as of March 4, 2008, by and among the
Guarantor, Purchasers and the Collateral Agent (the “Security Agreement”), (iii) that
certain Pledge Agreement, dated as of March 4, 2008, by and among the Company, Guarantor, and
Collateral Agent (the “Pledge Agreement”), and (iv) that certain First Interstate Business
Loan Agreement by and between Guarantor and First Interstate Bank dated October 29, 2007 (as in
effect as of the date hereof, the “First Interstate Loan Agreement”, and together with all
related documents and agreements thereunder, the “First Interstate Loan Documents”).

	1.	 	CONTINUING GUARANTEE OF PAYMENT AND PERFORMANCE. For good and valuable consideration,
Guarantor absolutely and unconditionally guarantees full and punctual payment and satisfaction
of the Indebtedness of Company to Purchasers, and the performance and discharge of all the
Company’s obligations under the Note Purchase Agreement, the Notes, and the other Transaction
Documents. This is a guaranty of payment and performance and not of collection, so Purchasers
can enforce this Guaranty against Guarantor even when Purchasers have not exhausted their
remedies against anyone else obligated to pay the Indebtedness or against any collateral
securing the Indebtedness, this Guaranty or any other guaranty of the Indebtedness. Guarantor
will make any payments to Purchasers or their respective orders, on demand, in legal tender of
the United States of America, in same-day funds, without set-off or deduction or counterclaim,
and will otherwise perform the Company’s obligations under the Note Purchase Agreement and
Transaction Documents. Under this Guaranty, Guarantor’s liability is unlimited and
Guarantor’s obligations are continuing.

	2.	 	INDEBTEDNESS. The word “Indebtedness” as used in this Guaranty means all of the principal
amount outstanding from time to time and at any one or more times, accrued unpaid interest
thereon and all collection costs and legal expenses related thereto permitted by law,
attorneys’ fees, arising from any and all debts, liabilities and obligations of every nature
or form, now existing or hereafter arising or acquired, that the Company individually or
collectively or interchangeably with others, owes or will owe Purchasers under the Note
Purchase Agreement, the Notes, and the other Transaction Documents.

 

 

	 	 	If Purchasers presently hold one or more guaranties, or hereafter receives additional
guaranties from Guarantor, Purchasers’ rights under all guaranties shall be cumulative.
This Guaranty shall not (unless specifically provided below to the contrary) affect or
invalidate any such other guaranties. Guarantor’s liability will be Guarantor’s aggregate
liability under the terms of this Guaranty and any such other unterminated guaranties.

	3.	 	CONTINUING GUARANTY. THIS IS A “CONTINUING GUARANTY” UNDER WHICH GUARANTOR AGREES TO
GUARANTEE THE FULL AND PUNCTUAL PAYMENT, PERFORMANCE AND SATISFACTION OF THE INDEBTEDNESS OF
THE COMPANY TO PURCHASERS, NOW EXISTING OR HEREAFTER ARISING OR ACQUIRED, ON AN OPEN AND
CONTINUING BASIS. ACCORDINGLY, ANY PAYMENTS MADE ON THE INDEBTEDNESS WILL NOT DISCHARGE OR
DIMINISH GUARANTOR’S OBLIGATIONS AND LIABILITY UNDER THIS GUARANTY FOR ANY REMAINING AND
SUCCEEDING INDEBTEDNESS EVEN WHEN ALL OR PART OF THE OUTSTANDING INDEBTEDNESS MAY BE A ZERO
BALANCE FROM TIME TO TIME.

	4.	 	DURATION OF GUARANTY. This Guaranty will take effect when received by Purchasers without the
necessity of any acceptance by each Purchaser, or any notice to Guarantor or to the Company,
and will continue in full force until all the Indebtedness incurred or contracted before
receipt by Purchasers of any notice of revocation shall have been fully paid and satisfied and
all of Guarantor’s other obligations under this Guaranty shall have been performed in full.
If Guarantor elects to revoke this Guaranty, Guarantor may only do so in writing. Guarantor’s
written notice of revocation must be delivered to Purchasers, in accordance with Section 11.10
of the Note Purchase Agreement as applied to Purchasers. Written revocation of this Guaranty
will apply only to new Indebtedness created after actual receipt by each Purchaser of
Guarantor’s written revocation. For this purpose and without limitation, the term “new
Indebtedness” does not include the Indebtedness which at the time of notice of revocation is
contingent, unliquidated, undetermined or not due and which later becomes absolute,
liquidated, determined or due. For this purpose and without limitation, “new Indebtedness”
does not include all or part of the Indebtedness that is: incurred by the Company prior to
revocation; incurred under a commitment that became binding before revocation; renewals,
extensions, substitutions, and modifications of the Indebtedness or, for the avoidance of
doubt, is incurred as interest paid in kind in accordance with the Note Purchase Agreement.
Release of any other guarantor or termination of any other guaranty of the Indebtedness shall
not affect the liability of Guarantor under this Guaranty. A revocation Purchasers receive
from any one or more Guarantors shall not affect the liability of any remaining Guarantors
under this Guaranty.

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	5.	 	GUARANTOR’S AUTHORIZATION TO PURCHASERS. Guarantor authorizes Purchasers and the Collateral
Agent in accordance with the provisions of the Note Purchase Agreement, either before or after
any revocation hereof, without notice or demand and without lessening Guarantor’s liability
under this Guaranty, from time to time: (A) prior to revocation as set forth above, to
increase the principal balance under the Notes for interest paid in kind in accordance with
the Note Purchase Agreement, or otherwise to extend additional credit to the Company; (B) to
alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time
for payment or other terms of the Indebtedness or any part of the Indebtedness, including
increases and decreases of the rate of interest on the Indebtedness; extensions may be
repeated and may be for longer than the original loan term; (C) to take and hold security for
the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate,
fail or decide not to perfect, and release any such security, with or without the substitution
of new collateral; (D) to release, substitute, agree not to sue, or deal with any one or more
of the Company’s sureties, endorsers, or other guarantors on any terms or in any manner
Purchasers may choose; (E) to determine how, when and what application of payments and credits
shall be made on the Indebtedness; (F) to apply such security and direct the order or manner
of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of
the controlling security agreement or deed of trust, as Purchasers or the Collateral Agent in
their discretion may determine; (G) to sell, transfer, assign or grant participations in all
or any part of the Indebtedness in accordance with the provisions of Section 11.1 of the Note
Purchase Agreement; and (H) to assign or transfer this Guaranty in whole or in part.

	6.	 	GUARANTOR’S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Purchasers
that (A) no representations or agreements of any kind have been made to Guarantor which would
limit or qualify in any way the terms of this Guaranty; (B) this Guaranty is executed at the
Company’s request and not at the request of Purchasers; (C) Guarantor has full power, right
and authority to enter into this Guaranty; (D) the provisions of this Guaranty do not conflict
with or result in a default under any agreement or other instrument binding upon Guarantor and
do not result in a violation of any law, regulation, court decree or order applicable to
Guarantor; (E) Guarantor has not sold, leased, assigned, encumbered, hypothecated,
transferred, or otherwise disposed of all or substantially all of Guarantor’s assets, or any
interest therein except for the liens and rights of First Interstate Bank with respect to the
Collateral as set forth in the First Interstate Loan Documents, and will not, without the
prior written consent of Purchasers, sell, lease, assign, encumber, hypothecate, transfer, or
otherwise dispose of all or substantially all of Guarantor’s assets, or any interest therein;
(F) upon any Purchaser’s request, Guarantor will provide to such Purchaser financial and
credit information in form acceptable to such Purchaser, and all future financial information
which will be provided to such Purchaser will be true and correct in all material respects and
fairly present Guarantor’s financial condition

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	 	 	as of the dates the financial information is provided; (G) except as previously disclosed
in public filings, no material litigation, claim, investigation, administrative proceeding
or similar action (including those for unpaid taxes) against Guarantor is pending or
threatened; (H) no Purchaser has made any representation to Guarantor as to the
creditworthiness of the Company; and (I) Guarantor has established adequate means of
obtaining from the Company on a continuing basis information regarding the Company’s
financial condition. Guarantor agrees to keep adequately informed from such means of any
facts, events, or circumstances which might in any way affect Guarantor’s risks under this
Guaranty, and Guarantor further agrees that, absent a request for information, Purchasers
shall have no obligation to disclose to Guarantor any information or documents acquired by
Purchasers in the course of their relationship with the Company.

	7.	 	GUARANTOR’S WAIVERS. Except as prohibited by applicable law, Guarantor waives any right to
require Purchasers (A) to continue lending money or to extend other credit to the Company; (B)
to make any presentment, protest, demand, or notice of any kind, including notice of any
nonpayment of the Indebtedness or of any nonpayment related to any collateral, or notice of
any action or nonaction on the part of the Company, Purchasers, any surety, endorser, or other
guarantor in connection with the Indebtedness or in connection with the creation of new or
additional loans or obligations; (C) to resort for payment or to proceed directly or at once
against any person, including the Company or any other guarantor; (D) to proceed directly
against or exhaust any collateral held by any Purchaser or the Collateral Agent from the
Company, any other guarantor, or any other person; (E) to give notice of the terms, time, and
place of any public or private sale of personal property security held by any Purchaser or the
Collateral Agent from the Company or to comply with any other applicable provisions of the
Uniform Commercial Code; (F) to pursue any other remedy within any Purchaser’s power; or
(G) to commit any act or omission of any kind, or at any time, with respect to any matter
whatsoever.
	 
	 	 	Except as prohibited by applicable law, Guarantor also waives any and all rights or
defenses based on suretyship or impairment of collateral including, but not limited to, any
rights or defenses arising by reason of (A) any “one action” or “anti-deficiency” law or
any other law which may prevent any Purchaser or the Collateral Agent from bringing any
action, including a claim for deficiency, against Guarantor, before or after any such
Purchaser’s or the Collateral Agent’s commencement or completion of any foreclosure action,
either judicially or by exercise of a power of sale; (B) any election of remedies by
Purchasers or the Collateral Agent which destroys or otherwise adversely affects
Guarantor’s subrogation rights or Guarantor’s rights to proceed against the Company for
reimbursement, including without limitation, any loss of rights Guarantor may suffer by
reason of any law limiting, qualifying, or discharging the Indebtedness; (C) any disability
or other defense of the Company, of any other guarantor, or of

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	 	 	any other person, or by reason of the cessation of the Company’s liability from any cause
whatsoever, other than payment in full in legal tender, of the Indebtedness; (D) any right
to claim discharge of the Indebtedness on the basis of unjustified impairment of any
collateral for the Indebtedness; (E) any statute of limitations, if at any time any action
or suit brought by any Purchaser or the Collateral Agent against Guarantor is commenced,
there is outstanding Indebtedness which is not barred by any applicable statute of
limitations; or (F) any defenses given to guarantors at law or in equity other than actual
payment and performance of the Indebtedness. If payment is made by the Company, whether
voluntarily or otherwise, or by any third party, on the Indebtedness and thereafter
Purchasers are forced to remit the amount of that payment to the Company’s trustee in
bankruptcy or to any similar person under any federal or state bankruptcy law or law for
the relief of debtors, the Indebtedness shall be considered unpaid for the purpose of the
enforcement of this Guaranty.
	 
	 	 	Guarantor further waives and agrees not to assert or claim at any time any deductions to
the amount guaranteed under this Guaranty for any claim of setoff, counterclaim, counter
demand, recoupment or similar right, whether such claim, demand or right may be asserted by
the Company, the Guarantor, or both.

	8.	 	GUARANTOR’S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees that each
of the waivers set forth above is made with Guarantor’s full knowledge of its significance and
consequences and that, under the circumstances, the waivers are reasonable and not contrary to
public policy or law. If any such waiver is determined to be contrary to any applicable law
or public policy, such waiver shall be effective only to the extent permitted by law or public
policy.

	9.	 	SUBORDINATION OF THE COMPANY’S DEBTS TO GUARANTOR. Guarantor agrees that the Indebtedness,
whether now existing or hereafter created, shall be superior to any claim that Guarantor may
now have or hereafter acquire against the Company, whether or not the Company becomes
insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against the
Company, upon any account whatsoever, to any claim that Purchasers may now or hereafter have
against the Company. In the event of insolvency and consequent liquidation of the assets of
the Company, through bankruptcy, by an assignment for the benefit of creditors, by voluntary
liquidation, or otherwise, the assets of the Company applicable to the payment of the claims
of both Purchasers and Guarantor shall be paid to Purchasers and shall be first applied by
Purchasers to the Indebtedness. Subject to the rights of First Interstate Bank under the First
Interstate Loan Documents, Guarantor does hereby assign to Purchasers all claims which it may
have or acquire against the Company or against any assignee or trustee in bankruptcy of the
Company; provided however, that such assignment shall be effective only for the purpose of
assuring to Purchasers full payment in legal tender of the Indebtedness. If any Purchaser so
requests, any notes or credit

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	 	 	agreements now or hereafter evidencing any debts or obligations of the Company to Guarantor
shall be marked with a legend that the same are subject to this Guaranty and, subject to
the rights of First Interstate Bank under the First Interstate Loan Documents, shall be
delivered to the Collateral Agent, or if none, to Purchasers. Guarantor agrees, and
subject to the extent permitted under the First Interstate Loan Documents if then in
effect, Purchasers are hereby authorized, in the name of Guarantor, from time to time to
file financing statements and continuation statements and to execute documents and to take
such other actions as Purchasers deem necessary or appropriate to perfect, preserve and
enforce their rights under this Guaranty.
	 
	 	 	Any obligation of the Company or the Guarantor in this Agreement that requires delivery of
Collateral or other items to, or the possession or control of Collateral or other items with, the
Collateral Agent or any Purchaser shall be deemed complied with and satisfied if such delivery is
made to, or such possession or control is with, the agent or any lender under the First Interstate
Loan Documents, so long as the First Interstate Loan Agreement is in full force and effect and has
not been terminated in accordance with its terms or otherwise.

	10.	 	MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this
Guaranty.

	 	a.	 	Amendments. This Guaranty, together with any Transaction Documents,
constitutes the entire understanding and agreement of the parties as to the matters
set forth in this Guaranty. No alteration of or amendment to this Guaranty shall be
effective unless given in writing and signed by the party or parties sought to be
charged or bound by the alteration or amendment.
	 
	 	b.	 	Attorneys’ Fees; Expenses. Guarantor agrees to pay upon demand all of the
Collateral Agent’s and Purchasers’ costs and expenses, including any attorneys’ fees
and legal expenses, incurred in connection with the enforcement of this Guaranty. The
Collateral Agent and Purchasers may hire or pay someone else to help enforce this
Guaranty, and Guarantor shall pay the costs and expenses of such enforcement. Costs
and expenses include the Collateral Agent’s and Purchasers’ attorneys’ fees and legal
expenses whether or not there is a lawsuit, including attorneys’ fees and legal
expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment collection
services; provided that such fees and expenses shall be limited to those of
one counsel to the Collateral Agent and Purchasers collectively and, if reasonably
requested by the Collateral Agent or Purchasers, one local counsel in each
jurisdiction in which Collateral is located; provided further that in
the event of a conflict of interest between the Collateral Agent and any Purchaser or
between Purchasers, Guarantor shall pay all reasonable out-of-pocket fees and expenses
of such additional counsel as may be necessary. Guarantor

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	 	 	 	also shall pay all court costs and such additional fees as may be directed by the
court.
	 
	 	c.	 	Caption Headings. Caption headings in this Guaranty are for convenience
purposes only and are not to be used to interpret or define the provisions of this
Guaranty.
	 
	 	d.	 	Governing Law. This Guaranty will be governed by federal law applicable to
Purchasers and, to the extent not preempted by federal law, the laws of the State of
New York without regard to its conflicts of law provisions.
	 
	 	e.	 	Integration. Guarantor further agrees that Guarantor has read and fully
understands the terms of this Guaranty; Guarantor has had the opportunity to be
advised by Guarantor’s attorney with respect to this Guaranty; the Guaranty fully
reflects Guarantor’s intentions and parol evidence is not required to interpret the
terms of this Guaranty. Guarantor hereby indemnifies and holds Purchasers and the
Collateral Agent harmless from any losses, claims, damages, and costs (including
attorneys’ fees) suffered or incurred by Purchasers and the Collateral Agent as a
result of any breach by Guarantor of the warranties, representation and agreements of
this paragraph.
	 
	 	f.	 	Interpretation. In all cases where there is more than one Guarantor or
entities in addition to the Company become borrowers, then all words used in this
Guaranty in the singular shall be deemed to have been used in the plural where the
context and construction so require; and where there is more than one borrower named
in this Guaranty or when this Guaranty is executed by more than one Guarantor, the
words “Company” and “Guarantor” respectively shall mean all and any one or more of
them. The words “Guarantor,” “Company,” and “Purchaser” or “Purchasers” and
“Collateral Agent” include the successors, assigns, and transferees of each of them.
If a court finds that any provision of this Guaranty is not valid or should not be
enforced, that fact by itself will not mean that the rest of this Guaranty will not be
valid or enforced. Therefore, a court will enforce the rest of the provisions of this
Guaranty even if a provision of this Guaranty may be found to be invalid or
unenforceable. If any one or more of the Company or Guarantor are corporations,
partnerships, limited liability companies, or similar entities, it is not necessary
for Purchasers to inquire into the powers of the Company or Guarantor or of the
officers, directors, partners, managers, or other agents acting or purporting to act
on their behalf, and any indebtedness made or created in reliance upon the professed
exercise of such powers shall be guaranteed under this Guaranty.

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	 	g.	 	Notices. Any notice required to be given under this Guaranty shall be given
in accordance with Section 11.10 of the Note Purchase Agreement, and if to Guarantor,
addressed as follows:

	 	 	 	Westmoreland Resources, Inc.

P.O. Box 449

Hardin, MT 59034

Attn: Morris W. Kegley

Telecopy Number: (719) 448-8097

	 	 	 	with a copy to:

	 	 	 	Westmoreland Coal Company

2 North Cascade Avenue, 14th Floor

Colorado Springs, Colorado 80903

Attn: General Counsel

Telecopy Number: (719) 448-8097

	 	 	 	Unless otherwise provided or required by law, if there is more than one Guarantor, any
notice given by Purchasers to any Guarantor is deemed to be notice given to all Guarantors.

	 	h.	 	No Waiver by Purchasers. Purchasers shall not be deemed to have waived any
rights under this Guaranty unless such waiver is given in writing and signed by
Required Purchasers or by each Purchaser if so required under Section 11.1 of the Note
Purchase Agreement. No delay or omission on the part of Purchasers in exercising any
right shall operate as a waiver of such right or any other right. A waiver by
Purchasers of a provision of this Guaranty shall not prejudice or constitute a waiver
of Purchasers’ rights otherwise to demand strict compliance with that provision or any
other provision of this Guaranty. No prior waiver by Purchasers, nor any course of
dealing between Purchasers and Guarantor, shall constitute a waiver of any of any
Purchaser’s rights or of any of Guarantor’s obligations as to any future transactions.
Whenever the consent of Purchasers is required under this Guaranty, the granting of
such consent by Purchasers in any instance shall not constitute continuing consent to
subsequent instances where such consent is required and in all cases such consent may
be granted or withheld in the sole discretion of Purchasers.
	 
	 	i.	 	Successors and Assigns. Subject to any limitations stated in this Guaranty
on transfer of Guarantor’s interest, this Guaranty shall be binding upon and inure to
the benefit of the parties, their successors and assigns.

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	 	11.	 	DEFINITIONS. The following capitalized words and terms shall have the following meanings
when used in this Guaranty. Unless specifically stated to the contrary, all references to
dollar amounts shall mean amounts in lawful money of the United States of America. Words and
terms used in the singular shall include the plural, and the plural shall include the
singular, as the context may require. Words and terms not otherwise defined in this Guaranty
shall have the meanings attributed to such terms in the Uniform Commercial Code:

	 	a.	 	Collateral Agent. The words “Collateral Agent” shall have the
meaning set forth in the second paragraph of this Guaranty.
	 
	 	b.	 	Company. The word “Company” shall have the meaning set forth in the
second paragraph of this Guaranty.
	 
	 	c.	 	First Interstate Loan Agreement. The words “First Interstate Loan
Agreement” shall have the meaning set forth in the second paragraph of this
Agreement.
	 
	 	d.	 	First Interstate Loan Documents. The words “First Interstate Loan
Documents” shall have the meaning set forth in the second paragraph of this
Agreement.
	 
	 	e.	 	Guarantor. The word “Guarantor” shall have the meaning set forth in
the preamble to this Guaranty.
	 
	 	f.	 	Guaranty. The word “Guaranty” means this Guaranty, as this Guaranty
may be amended or modified from time to time, together with all exhibits and schedules
attached to this Guaranty from time to time.
	 
	 	g.	 	Indebtedness. The word “Indebtedness” means the Company’s
indebtedness to Purchasers as defined in Section 2.
	 
	 	h.	 	Purchaser and Purchasers. The words “Purchaser” and
“Purchasers” shall have the meaning set forth in the preamble to this
Guaranty.
	 
	 	i.	 	Note or Notes. The words “Note” or “Notes” means the Notes
executed by the Company in the original aggregate principal amount of $15,000,000
dated March 4, 2008, together with all increases thereto in accordance with the Note
Purchase Agreement, renewals of, extensions of, modifications of, refinancings of,
consolidations of, and substitutions for the Notes or Note Purchase Agreement.
	 
	 	j.	 	Note Purchase Agreement. The words “Note Purchase Agreement” shall
have the meaning set forth in the second paragraph of this Guaranty.
	 
	 	k.	 	Pledge Agreement. The words “Pledge Agreement” shall have the
meaning set forth in the second paragraph of this Guaranty.

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	 	l.	 	Purchaser or Purchasers. The words “Purchaser” and
“Purchasers” shall have the meaning set forth in the second paragraph of this
Guaranty.
	 
	 	m.	 	Security Agreement. The words “Security Agreement” shall have the
meaning set forth in the second paragraph of this Guaranty.
	 
	 	n.	 	Transaction Documents. The words “Transaction Documents” shall have
the meaning set forth in the Note Purchase Agreement.

	 	12.	 	ACKNOWLEDGMENT. GUARANTOR ACKNOWLEDGES THAT THE INDEBTEDNESS AND OBLIGATIONS OF THIS
GUARANTY ARE SECURED BY THE COLLATERAL DESCRIBED IN THE SECURITY AGREEMENT DATED MARCH 4,
2008. EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS GUARANTY
AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS
EFFECTIVE UPON GUARANTOR’S EXECUTION AND DELIVERY OF THIS GUARANTY TO PURCHASERS AND THAT THE
GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED
“DURATION OF GUARANTY”. NO FORMAL ACCEPTANCE BY PURCHASERS IS NECESSARY TO MAKE THIS GUARANTY
EFFECTIVE.

[remainder of page intentionally left blank]

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     IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the day and year first above
written.

	 	 	 	 	 
	GUARANTOR:

	 	 	 	 
	 
	 	 	 	 
	WESTMORELAND RESOURCES, INC.	 	 
	 
	By:   /s/ Keith E. Alessi

	 	 
	
 

	 	 
	Name: Keith E. Alessi

	 	 
	Title: Chief Executive Officer

	 	 

[signature
page to guaranty]exv10w4

 

EXECUTION VERSION

Exhibit 10.4

SECURITY AGREEMENT

     SECURITY AGREEMENT, dated as of March 4, 2008, is made and executed between Westmoreland
Resources, Inc., a Delaware corporation (“Grantor”), and Tontine Capital Associates, L.P.,
a Delaware limited partnership, as Collateral Agent for Purchasers (as hereinafter defined)
(together with its permitted successors in such capacity as the collateral agent, the
“Collateral Agent”).

     Reference is hereby made to (i) that certain Senior Secured Convertible Note Purchase
Agreement, dated as of March 4, 2008, by and among Westmoreland Coal Company, a Delaware
corporation (the “Company”), Tontine Partners, L.P., a Delaware limited partnership, and
Tontine Capital Partners, L.P., a Delaware limited partnership (each, “Purchaser” and
collectively, “Purchasers”) and the Collateral Agent (the “Note Purchase
Agreement”), (ii) that certain Pledge Agreement, dated as of March 4, 2008, by and among the
Company, Grantor, Purchasers and the Collateral Agent (the “Pledge Agreement”) and (iii)
that certain First Interstate Business Loan Agreement by and between Grantor and First Interstate
Bank dated October 29, 2007, as in effect as of the date hereof (the “First Interstate Loan
Agreement” and together with all related documents and agreements thereunder, the “First
Interstate Loan Documents”).

	1.	 	GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to the Collateral
Agent a security interest in the Collateral to secure the Indebtedness and agrees that the
Collateral Agent shall have the rights stated in this Agreement with respect to the
Collateral, in addition to all other rights which the Collateral Agent may have by law.
	 
	2.	 	COLLATERAL DESCRIPTION. The word “Collateral” as used in this Agreement means the
following described property, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located, in which Grantor is giving to the Collateral Agent a
security interest for the payment of the Indebtedness and performance of all other obligations
under the Transaction Documents and this Agreement:

All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles.

In addition, the word “Collateral” also includes all the following, whether now owned or
hereafter acquired, whether now existing or hereafter arising, and wherever located:

(A) All accessions, attachments, accessories, tools, parts, supplies, replacements
of and additions to any of the collateral described herein, whether added now or
later.

(B) All products and produce of any of the property described in this Collateral
Section 2.

 

 

(C) All accounts, general intangibles, instruments, rents, monies, payments, and
all other rights, arising out of a sale, lease, consignment or other disposition of
any of the property described in this Collateral Section 2.

(D) All proceeds (including insurance proceeds) from the sale, destruction, loss,
or other disposition or any of the property described in this Collateral Section 2,
and sums due from a third party who has damaged or destroyed the Collateral or from
that party’s insurer, whether due to judgment, settlement or other process.

(E) All records and data relating to any of the property described in this
Collateral Section 2, whether in the form of a writing, photograph, microfilm,
microfiche, or electronic media, together with all of Grantor’s right, title, and
interest in and to all computer software required to utilize, create, maintain, and
process any such records or data on electronic media.

	3.	 	CROSS-COLLATERALIZATION. In addition to the Note Purchase Agreement, the Notes, the
Guaranty, and the Pledge Agreement, this Agreement secures all obligations, debts and
liabilities, plus interest thereon, of Grantor to the Collateral Agent, Purchasers, or any one
or more of them under or in connection with the Note Purchase Agreement, the Notes and the
other Transaction Documents, as well as all claims by the Collateral Agent, Purchasers, or any
one or more of them against Grantor, whether now existing or hereafter arising, under or in
connection with the Note Purchase Agreement, the Notes and the other Transaction Documents,
whether voluntary or otherwise, whether due or not due, direct or indirect, determined or
undetermined, absolute or contingent, liquidated or unliquidated, whether Grantor may be
liable individually or jointly with others, whether obligated as guarantor, surety,
accommodation party or otherwise.

	4.	 	GRANTOR’S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the
Collateral, Grantor represents and promises to the Collateral Agent that:

	 	a.	 	Perfection of Security Interest. Grantor agrees to take whatever actions are
requested by the Collateral Agent to perfect and continue the Collateral Agent’s
security interest in the Collateral. Upon request of the Collateral Agent, Grantor
will deliver to the Collateral Agent any and all of the documents evidencing or
constituting the Collateral, and Grantor will note the Collateral Agent’s interest
upon any and all chattel paper and instruments if not delivered to the Collateral
Agent for possession by the Collateral Agent.
	 
	 	b.	 	Notices to the Collateral Agent. Grantor will promptly notify the Collateral
Agent in writing in accordance with Section 11.10 of the Note Purchase Agreement prior
to any (1) change in Grantor’s name; (2)

2

 

	 	 	 	change in Grantor’s assumed business name(s); (3) change in the management of
Grantor; (4) change in the authorized signer(s); (5) change in Grantor’s principal
office address; (6) change in Grantor’s state of organization; (7) conversion of
Grantor to a new or different type of business entity; or (8) change in any other
aspect of Grantor that directly or indirectly relates to the Note Purchase
Agreement or other Transaction Documents. No change in Grantor’s name or state of
organization will take effect until after the Collateral Agent has received notice.
	 
	 	c.	 	No Violation. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and its
certificate or articles of incorporation and bylaws do not prohibit any term or
condition of this Agreement.
	 
	 	d.	 	Enforceability of Collateral. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial
Code, the Collateral is enforceable in accordance with its terms, is genuine, and
fully complies with all applicable laws and regulations concerning form, content and
manner of preparation and execution, and all persons appearing to be obligated on the
Collateral have authority and capacity to contract and are in fact obligated as they
appear to be on the Collateral. At the time any account becomes subject to a security
interest in favor of the Collateral Agent, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the account
debtor, for merchandise held subject to delivery instructions or previously shipped or
delivered pursuant to a contract of sale, or for services previously performed by
Grantor with or for the account debtor. So long as this Agreement remains in effect,
Grantor shall not, without the Collateral Agent’s prior written consent, compromise,
settle, adjust, or extend payment under or with regard to any such Accounts except in
the ordinary course of business. There shall be no setoffs or counterclaims against
any of the Collateral, and no agreement shall have been made under which any
deductions or discounts may be claimed concerning the Collateral except those
disclosed to the Collateral Agent in writing.
	 
	 	e.	 	Location of the Collateral. Except in the ordinary course of Grantor’s
business, Grantor agrees to keep the Collateral (or to the extent the Collateral
consists of intangible property such as accounts or general intangibles, the records
concerning the Collateral) at Grantor’s address set forth in Section 8(f) or at such
other locations as are acceptable to the Collateral Agent. Upon the Collateral
Agent’s request, Grantor will deliver to the Collateral Agent in form satisfactory to
the Collateral Agent a schedule of real properties and Collateral locations relating
to Grantor’s operations, including without limitation the following: (1) all real
property Grantor owns or is purchasing; (2) all real property Grantor is

3

 

	 	 	 	renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or
uses; and (4) all other properties where Collateral is or may be located.
	 
	 	f.	 	Removal of the Collateral. Except in the ordinary course of Grantor’s
business, including the sales of inventory, Grantor shall not remove the Collateral
from its existing location without the Collateral Agent’s prior written consent. To
the extent that the Collateral consists of vehicles, or other titled property, Grantor
shall not take or permit any action which would require application for certificates
of title for the vehicles outside the State of Montana, without the Collateral Agent’s
prior written consent. Grantor shall, whenever requested, advise the Collateral Agent
of the exact location of the Collateral.
	 
	 	g.	 	Transactions involving Collateral. Except for inventory sold or accounts
collected in the ordinary course of Grantor’s business, or as otherwise provided for
in this Agreement or in Section 5.2(a) of the Note Purchase Agreement, Grantor shall
not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While
Grantor is not in default under this Agreement, Grantor may sell inventory, but only
in the ordinary course of its business and only to buyers who qualify as a buyer in
the ordinary course of business. A sale in the ordinary course of Grantor’s business
does not include a transfer in partial or total satisfaction of a debt or any bulk
sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral
to be subject to any lien, security interest, encumbrance, or charge, other than as
provided for in this Agreement, without the prior written consent of the Collateral
Agent. This includes security interests even if junior in right to the security
interests granted under this Agreement. Unless waived by the Collateral Agent, all
proceeds from any disposition of the Collateral (for whatever reason) shall be held in
trust for the Collateral Agent and shall not be commingled with any other funds;
provided however, this requirement shall not constitute consent by the Collateral
Agent to any sale or other disposition. Upon receipt, Grantor shall immediately
deliver any such proceeds to the Collateral Agent.
	 
	 	h.	 	Title. Grantor represents and warrants to the Collateral Agent that Grantor
holds good and marketable title to the Collateral, free and clear of all liens and
encumbrances except for the liens under this Agreement. No financing statement
covering any of the collateral is on file in any public office other than those which
reflect the security interest (i) in favor of First Interstate Bank pursuant to the
First Interstate Loan Documents, and (ii) created by this Agreement, or (iii) to which
the Collateral Agent has specifically consented. Grantor shall defend the Collateral
Agent’s rights in the Collateral against the claims and demands of all other persons.

4

 

	 	i.	 	Repairs and Maintenance. Grantor agrees to keep and maintain, and to cause
others to keep and maintain, the Collateral in good order, repair and condition at all
times while this Agreement remains in effect. Grantor further agrees to pay when due
all claims for work done on, or services rendered or material furnished in connection
with the Collateral so that no lien or encumbrance may ever attach to or be filed
against the Collateral.
	 
	 	j.	 	Inspection of Collateral. The Collateral Agent and its designated
representatives and agents shall have the right at all reasonable times to examine and
inspect the Collateral wherever located.
	 
	 	k.	 	Taxes, Assessments and Liens. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this Agreement,
upon any promissory note or notes evidencing the Indebtedness, or upon any of the
other Transaction Documents. Grantor may withhold any such payment or may elect to
contest any lien if Grantor is in good faith conducting an appropriate proceeding to
contest the obligation to pay and so long as the Collateral Agent’s interest in the
Collateral is not jeopardized in the Collateral Agent’s sole opinion. If the
Collateral is subjected to a lien which is not discharged within fifteen (15) days,
Grantor shall deposit with the Collateral Agent cash, a sufficient corporate surety
bond or other security satisfactory to the Collateral Agent in an amount adequate to
provide for the discharge of the lien plus any interest, costs, attorneys’ fees or
other charges that could accrue as a result of a foreclosure or sale of the
Collateral. In any contest Grantor shall defend itself and the Collateral Agent and
shall satisfy any final adverse judgment before enforcement against the Collateral.
Grantor shall name the Collateral Agent as an additional obligee under any surety bond
furnished in the contest proceedings. Grantor further agrees to furnish the
Collateral Agent with evidence that such taxes, assessments, and governmental and
other charges have been paid in full and in a timely manner. Grantor may withhold any
such payment or may elect to contest any lien if Grantor is in good faith conducting
an appropriate proceeding to contest the obligation to pay and so long as the
Collateral Agent’s interest in the Collateral is not jeopardized.
	 
	 	l.	 	Compliance with Governmental Requirements. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental authorities, now
or hereafter in effect, applicable to the ownership, production, disposition, or use
of the Collateral, including all laws or regulations relating to the undue erosion of
highly-erodible land or relating to the conversion of wetlands for the production of
an agricultural product or commodity. Grantor may contest in good faith any such law,
ordinance or regulation and withhold compliance during any proceeding, including
appropriate appeals, so long as the Collateral Agent’s interest in the Collateral, in
the Collateral Agent’s opinion, is not jeopardized.

5

 

	 	m.	 	Hazardous Substances. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien on the
Collateral, used in violation of any Environmental Laws or for the generation,
manufacture, storage, transportation, treatment, disposal, release or threatened
release of any Hazardous Substance. The representations and warranties contained
herein are based on Grantor’s due diligence in investigating the Collateral for
Hazardous Substances. Grantor hereby (1) releases and waives any future claims
against the Collateral Agent for indemnity or contribution in the event Grantor
becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees
to indemnify, defend, and hold harmless the Collateral Agent against any and all
claims and losses resulting from a breach of this provision of this Agreement. This
obligation to indemnify and defend shall survive the payment of the Indebtedness and
the satisfaction of this Agreement.
	 
	 	n.	 	Maintenance of Casualty Insurance. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability coverage
together with such other insurance as the Collateral Agent may require with respect to
the Collateral, in form, amounts, coverages and basis reasonably acceptable to the
Collateral Agent and issued by a company or companies reasonably acceptable to the
Collateral Agent. Grantor, upon request of the Collateral Agent, will deliver to the
Collateral Agent from time to time the policies or certificates of insurance in form
satisfactory to the Collateral Agent, including stipulations that coverages will not
be cancelled or diminished without at least ten (10) days’ prior written notice to the
Collateral Agent and not including any disclaimer of the insurer’s liability for
failure to give such a notice. Each insurance policy also shall include an
endorsement providing that coverage in favor of the Collateral Agent will not be
impaired in any way by any act, omission or default of Grantor or any other person.
In connection with all policies covering assets in which the Collateral Agent holds or
is offered a security interest, Grantor will provide the Collateral Agent with such
loss payable or other endorsements as the Collateral Agent may require. If Grantor at
any time fails to obtain or maintain any insurance as required under this Agreement,
the Collateral Agent may (but shall not be obligated to) obtain such insurance as the
Collateral Agent deems appropriate, including if the Collateral Agent so chooses
“single interest insurance,” which will cover only the Collateral Agent’s interest in
the Collateral.
	 
	 	o.	 	Application of Insurance Proceeds. Grantor shall promptly notify the
Collateral Agent of any loss or damage to the Collateral if the estimated cost of
repair or replacement exceeds $100,000, whether or not such casualty or loss is
covered by insurance. The Collateral Agent may make proof of loss if Grantor fails to
do so within fifteen (15) days of the

6

 

	 	 	 	casualty. All proceeds of any insurance on the Collateral, including accrued
proceeds thereon, shall be held by the Collateral Agent as part of the Collateral.
If the Collateral Agent consents to repair or replacement of the damaged or
destroyed Collateral, the Collateral Agent shall, upon satisfactory proof of
expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of
repair or restoration. If the Collateral Agent does not consent to repair or
replacement of the Collateral, the Collateral Agent shall retain a sufficient
amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to
Grantor. Any proceeds which have not been disbursed within six (6) months after
their receipt and which Grantor has not committed to the repair or restoration of
the Collateral shall be used to prepay the Indebtedness.
	 
	 	p.	 	Insurance Reserves. The Collateral Agent may require Grantor to maintain
with the Collateral Agent reserves for payment of insurance premiums, which reserves
shall be created by monthly payments from Grantor of a sum estimated by the Collateral
Agent to be sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If fifteen (15)
days before payment is due, the reserve funds are insufficient, Grantor shall upon
demand pay any deficiency to the Collateral Agent. The reserve funds shall be held by
the Collateral Agent as a general deposit and shall constitute a non-interest-bearing
account which the Collateral Agent may satisfy by payment of the insurance premiums
required to be paid by Grantor as they become due. The Collateral Agent does not hold
the reserve funds in trust for Grantor, and the Collateral Agent is not the agent of
Grantor for payment of the insurance premiums required to be paid by Grantor. The
responsibility for the payment of premiums shall remain Grantor’s sole responsibility.
	 
	 	q.	 	Insurance Reports. Grantor, upon request of the Collateral Agent, shall
furnish to the Collateral Agent reports on each existing policy of insurance showing
such information as the Collateral Agent may reasonably request including the
following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the
policy; (4) the property insured; (5) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and (6) the
expiration date of the policy. In addition, Grantor shall upon request by the
Collateral Agent (however not more often than annually) have an independent appraiser
satisfactory to the Collateral Agent determine, as applicable, the cash value or
replacement cost of the Collateral.
	 
	 	r.	 	Financing Statements. Grantor authorizes the Collateral Agent to file a UCC
financing statement, or alternatively, a copy of this Agreement to perfect the
Collateral Agent’s security interest. At the Collateral Agent’s request, Grantor
additionally agrees to sign all other documents that are

7

 

	 	 	 	necessary to perfect, protect, and continue the Collateral Agent’s security
interest in the Property. Grantor will pay all filing fees, title transfer fees,
and other fees and costs involved unless prohibited by law or unless the Collateral
Agent is required by law to pay such fees and costs. Grantor irrevocably appoints
the Collateral Agent to execute documents necessary to transfer title if there is a
default. The Collateral Agent may file a copy of this Agreement as a financing
statement. If Grantor changes Grantor’s name or address, or the name or address of
any person granting a security interest under this Agreement changes, Grantor will
promptly notify the the Collateral Agent of such change.

	5.	 	GRANTOR’S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise
provided below with respect to accounts, Grantor may have possession of the tangible personal
property and beneficial use of all the Collateral and may use it in any lawful manner not
inconsistent with this Agreement or the Transaction Documents, provided that Grantor’s right
to possession and beneficial use shall not apply to any Collateral where possession of the
Collateral by the Collateral Agent is required by law to perfect the Collateral Agent’s
security interest in such Collateral. Until otherwise notified by the Collateral Agent,
Grantor may collect any of the Collateral consisting of accounts. At any time and due to an
Event of Default, the Collateral Agent may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to the Collateral Agent for application to
the Indebtedness. If the Collateral Agent at any time has possession of any Collateral,
whether before or after an Event of Default, the Collateral Agent shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if the Collateral
Agent takes such action for that purpose as Grantor shall request or as the Collateral Agent,
in the Collateral Agent’s sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a failure to
exercise reasonable care. The Collateral Agent shall not be required to take any steps
necessary to preserve any rights in the Collateral against prior parties, nor to protect,
preserve or maintain any security interest given to secure the indebtedness.
	 
	6.	 	THE COLLATERAL AGENT’S EXPENDITURES. If any action or proceeding is commenced that would
materially affect the Collateral Agent’s interest in the Collateral or if Grantor fails to
comply with any provision of this Agreement or any Transaction Documents, including but not
limited to Grantor’s failure to discharge or pay when due any amounts Grantor is required to
discharge or pay under this Agreement or any Transaction Documents, the Collateral Agent on
Grantor’s behalf may (but shall not be obligated to) take any action that the Collateral Agent
deems appropriate, including but not limited to discharging or paying all taxes, liens,
security interests, encumbrances and other claims, at any time levied or placed on the
Collateral and not otherwise permitted under this Agreement, and paying all costs for
insuring, maintaining and preserving the

8

 

	 	 	Collateral. All such expenditures incurred or paid by the Collateral Agent for such
purposes will then bear interest at the rate charged under the Notes from the date incurred
or paid by the Collateral Agent to the date of repayment by Grantor. All such expenses
will become a part of the Indebtedness and, at the Collateral Agent’s option, will (A) be
payable on demand; (B) be added to the balance of the Notes and be apportioned among and be
payable with any installment payments to become due during either (1) the term of any
applicable insurance policy; or (2) the remaining term of the Notes; or (C) be treated as a
balloon payment which will be due and payable at the Notes’ maturity. The Agreement also
will secure payment of these amounts. Such right shall be in addition to all other rights
and remedies to which the Collateral Agent may be entitled upon a default.

	7.	 	RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs, at any time thereafter, the
Collateral Agent shall have all the rights of a secured party under the New York Uniform
Commercial Code. In addition and without limitation, the Collateral Agent may exercise any
one or more of the following rights and remedies:

	 	a.	 	Accelerate Indebtedness. The Collateral Agent may declare the entire
Indebtedness immediately due and payable, without notice of any kind to any Credit
Party.
	 
	 	b.	 	Assemble Collateral. The Collateral Agent may require Grantor to deliver to
the Collateral Agent all or any portion of the Collateral and any and all certificates
of title and other documents relating to the Collateral. The Collateral Agent may
require Grantor to assemble the Collateral and make it available to the Collateral
Agent at a place to be designated by the Collateral Agent. The Collateral Agent also
shall have full power to enter upon the property of Grantor to take possession of and
remove the Collateral. If the Collateral contains other goods not covered by this
Agreement at the time of repossession, Grantor agrees the Collateral Agent may take
such other goods, provided that the Collateral Agent makes reasonable efforts to
return them to Grantor after repossession.
	 
	 	c.	 	Sell the Collateral. The Collateral Agent shall have full power to sell,
lease, transfer, or otherwise deal with the Collateral or proceeds thereof in the
Collateral Agent’s own name or that of Grantor. The Collateral Agent may sell the
Collateral at public auction or private sale. Unless the Collateral threatens to
decline speedily in value or is of a type customarily sold on a recognized market, the
Collateral Agent will give Grantor, and other persons as required by law, reasonable
notice of the time and place of any public sale, or the time after which any private
sale or any other disposition of the Collateral is to be made. However, no notice
need be provided to any person who, after an Event of Default occurs, enters into and
authenticates an agreement waiving that person’s right to notification of sale. The
requirements of reasonable notice shall be met if such notice

9

 

	 	 	 	is given at least ten (10) days before the time of the sale or disposition.
Subject to the limitations set forth in Section 11.2 of the Note Purchase
Agreement, all expenses relating to the disposition of the Collateral, including
without limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall became a part of the Indebtedness secured by this
Agreement and shall be payable on demand, with interest at the Notes rate from date
of expenditure until repaid.
	 
	 	d.	 	Appoint Receiver. The Collateral Agent shall have the right to have a
receiver appointed to take possession of all or any part of the Collateral, with the
power to protect and preserve the Collateral, to operate the Collateral preceding
foreclosure or sale, and to collect the Rents from the Collateral and apply the
proceeds, over and above the cost of the receivership, against the Indebtedness. The
receiver may serve without bond if permitted by law. The Collateral Agent’s right to
the appointment of a receiver shall exist whether or not the apparent value of the
Collateral exceeds the Indebtedness by a substantial amount. Employment by the
Collateral Agent shall not disqualify a person from serving as a receiver.
	 
	 	e.	 	Collect Revenues, Apply Accounts. The Collateral Agent, either itself or
through a receiver, may collect the payments, rents, income, and revenues from the
Collateral. The Collateral Agent may at any time in the Collateral Agent’s discretion
transfer any Collateral into the Collateral Agent’s own name or that of the Collateral
Agent’s nominee and receive the payments, rents, income, and revenues therefrom and
hold the same as security for the Indebtedness or apply it to payment of the
Indebtedness in such order of preference as the Collateral Agent may determine.
Insofar as the Collateral consists of accounts, general intangibles, insurance
policies, instruments, chattel paper, choses in action, or similar property, the
Collateral Agent may demand, collect, receipt for, settle, compromise, adjust, sue
for, foreclose, or realize on the Collateral as the Collateral Agent may determine,
whether or not Indebtedness or Collateral is then due. For these purposes, the
Collateral Agent may, on behalf of and in the name of Grantor, receive, open and
dispose of mail addressed to Grantor; change any address to which mail and payments
are to be sent; and endorse notes, checks, drafts, money orders, documents of title,
instruments and items pertaining to payment, shipment, or storage of any Collateral.
To facilitate collection, the Collateral Agent may notify account debtors and obligors
on any Collateral to make payments directly to the Collateral Agent.
	 
	 	f.	 	Obtain Deficiency. If the Collateral Agent chooses to sell any or all of the
Collateral, the Collateral Agent may obtain a judgment against any Credit Party for
any deficiency remaining on the Indebtedness due to the Collateral Agent after
application of all amounts received from the exercise of the rights provided in this
Agreement. Such Credit Party shall

10

 

	 	 	 	be liable for a deficiency even if the transaction described in this subsection is
a sale of accounts or chattel paper.
	 
	 	g.	 	Other Rights and Remedies. The Collateral Agent shall have all the rights
and remedies of a secured creditor under the provisions of the Uniform Commercial
Code, as may be amended from time to time. In addition, the Collateral Agent shall
have and may exercise any or all other rights and remedies it may have available at
law, in equity, or otherwise.
	 
	 	h.	 	Election of Remedies. Except as may be prohibited by applicable law, all of
the Collateral Agent’s rights and remedies, whether evidenced by this Agreement, the
Transaction Documents, or by any other writing, shall be cumulative and may be
exercised singularly or concurrently. Election by the Collateral Agent to pursue any
remedy shall not exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Grantor under this
Agreement, after Grantor’s failure to perform, shall not affect the Collateral Agent’s
right to declare a default and exercise its remedies.

	8.	 	MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this
Agreement:

	 	a.	 	Amendments. This Agreement, together with any Transaction Documents,
constitutes the entire understanding and agreement of the parties as to the matters
set forth in this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to be
charged or bound by the alteration or amendment.
	 
	 	b.	 	Attorneys’ Fees; Expenses. Grantor agrees to pay upon demand all of the
Collateral Agent’s and Purchasers’ costs and expenses, including any attorneys’ fees
and legal expenses, incurred in connection with the enforcement of this Agreement.
The Collateral Agent and Purchasers may hire or pay someone else to help enforce this
Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs
and expenses include the Collateral Agent’s and Purchasers’ attorneys’ fees and legal
expenses whether or not there is a lawsuit, including attorneys’ fees and legal
expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment collection
services; provided that such fees and expenses shall be limited to those of
one counsel to the Collateral Agent and Purchasers collectively and, if reasonably
requested by the Collateral Agent or Purchasers, one local counsel in each
jurisdiction in which Collateral is located; provided further in the
event of a conflict of interest between the Collateral Agent and any Purchaser or
between Purchasers, Grantor shall pay all reasonable out-of-pocket fees and expenses
of such

11

 

	 	 	 	additional counsel as may be necessary. Grantor also shall pay all court costs and
such additional fees as may be directed by the court.
	 
	 	c.	 	Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of this
Agreement.
	 
	 	d.	 	Governing Law. This Agreement will be governed by federal law applicable to
the Collateral Agent and, to the extent not preempted by federal law, the laws of the
State of New York without regard to its conflicts of law provisions. This Agreement
has been accepted by the Collateral Agent in the State of New York.
	 
	 	e.	 	No Waiver by the Collateral Agent. The Collateral Agent shall not be deemed
to have waived any rights under this Agreement unless such waiver is given in writing
and signed by the Collateral Agent. No delay or omission on the part of the
Collateral Agent in exercising any right shall operate as a waiver of such right or
any other right. A waiver by the Collateral Agent of a provision of this Agreement
shall not prejudice or constitute a waiver of the Collateral Agent’s right otherwise
to demand strict compliance with that provision or any other provision of this
Agreement. No prior waiver by the Collateral Agent, nor any course of dealing between
the Collateral Agent and Grantor, shall constitute a waiver of any of the Collateral
Agent’s rights or of any of Grantor’s obligations as to any future transactions.
Whenever the consent of the Collateral Agent is required under this Agreement, the
granting of such consent by the Collateral Agent in any instance shall not constitute
continuing consent to subsequent instances where such consent is required and in all
cases such consent may be granted or withheld in the sole discretion of the Collateral
Agent.
	 
	 	f.	 	Notices. Any notice required to be given under this Agreement shall be given
in accordance with Section 11.10 of the Note Purchase Agreement, and if to Grantor,
addressed as follows:

Westmoreland Resources, Inc.

P.O. Box 449

Hardin, MT 59034

Attn: Morris W. Kegley

Telecopy Number: (719) 448-8097

with a copy to:

Westmoreland Coal Company

2 North Cascade Avenue, 14th Floor

Colorado Springs, Colorado 80903

12

 

Attn: General Counsel

Telecopy Number: (719) 448-8097

	 	 	 	Unless otherwise provided or required by law, if there is more than one Grantor, any
notice given by the Collateral Agent to any Grantor is deemed to be notice given to all
Grantors.
	 
	 	g.	 	Power of Attorney. Grantor hereby appoints the Collateral Agent as Grantor’s
irrevocable attorney-in-fact for the purpose of executing any documents necessary to
perfect, amend, or to continue the security interest granted in this Agreement or to
demand termination of filings of other secured parties. The Collateral Agent may at
any time, and without further authorization from Grantor, file a carbon, photographic
or other reproduction of any financing statement or of this Agreement for use as a
financing statement. Subject to the limitations set forth in Section 11.2 of the Note
Purchase Agreement, Grantor will reimburse the Collateral Agent for all expenses for
the perfection and the continuation of the perfection of the Collateral Agent’s
security interest in the Collateral.
	 
	 	h.	 	Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that
finding shall not make the offending provision illegal, invalid, or unenforceable as
to any other circumstance. If feasible, the offending provision shall be considered
modified so that it becomes legal, valid and enforceable. If the offending provision
cannot be so modified, it shall be considered deleted from this Agreement. Unless
otherwise required by law, the illegality, invalidity, or unenforceability of any
provision of this Agreement shall not affect the legality, validity or enforceability
of any other provision of this Agreement.
	 
	 	i.	 	Successors and Assigns. Subject to any limitations stated in this Agreement
on transfer of Grantor’s interest, this Agreement shall be binding upon and inure to
the benefit of the parties, their successors and assigns. If ownership of the
Collateral becomes vested in a person other than Grantor, the Collateral Agent,
without notice to Grantor, may deal with Grantor’s successors with reference to this
Agreement and the Indebtedness by way of forbearance or extension without releasing
Grantor from the obligations of this Agreement or liability under the Indebtedness.
	 
	 	j.	 	Survival of Representation and Warranties. All representations, warranties,
and agreements made by Grantor in this Agreement shall survive the execution and
delivery of this Agreement, shall be continuing in nature, and shall remain in full
force and effect until such time as the Company’s Indebtedness shall be paid in full.

13

 

	 	k.	 	Time is of the Essence. Time is of the essence in the performance of this
Agreement.

	9.	 	RIGHTS OF FIRST INTERSTATE BANK. Notwithstanding anything to the contrary contained herein,
the rights of the Collateral Agent and the Purchasers and the obligations of Grantor as set
forth herein are subject to the rights of First Interstate Bank under the First Interstate
Loan Documents. To the extent that Grantor is required to deliver, endorse, or otherwise pay
over or otherwise provide possession or control over any of the Collateral as provided herein,
such obligations shall be subject to the rights of First Interstate Bank to such Collateral,
as set forth in the First Interstate Loan Documents. Further, any representation, warranty or
covenant of Grantor in this Agreement that the Collateral is not and shall not be subject to
any liens, encumbrances or other restrictions shall specifically be qualified by the liens and
rights of First Interstate Bank with respect to the Collateral as set forth in the First
Interstate Loan Documents. The limitations and qualifications set forth in this Section 9
shall be effective solely to recognize the rights of First Interstate Bank and shall not
otherwise impair the liens and security interests granted by Grantor to the Collateral Agent
pursuant to this Agreement. The parties acknowledge that, to the extent that the obligations
of Grantor to First Interstate Bank arising under the First Interstate Loan Documents have
been satisfied and such parties have no further obligations to make loans or advances to the
borrower thereunder, the limitations and qualifications set forth in this Section 9 shall be
of no further force or effect and Grantor covenants to take all such actions set forth herein
and necessary to give effect to the provisions of this Agreement.
	 
	10.	 	DEFINITIONS. The following capitalized words and terms shall have-the following
meanings when used in this Agreement. Unless specifically stated to the contrary, all
references to dollar amounts shall mean amounts in lawful money of the United States of
America. Words and terms used in the singular shall include the plural, and the plural shall
include the singular, as the context may require. Words and terms not otherwise defined in
this Agreement shall have the meanings attributed to such terms in the Uniform Commercial
Code:

	 	a.	 	Agreement. The word “Agreement” means this Security Agreement, as
this Security Agreement may be amended or modified from time to time, together with
all exhibits and schedules attached to this Security Agreement from time to time.
	 
	 	b.	 	Collateral. The word “Collateral” shall have the meaning set forth
in Section 1 of this Agreement.
	 
	 	c.	 	Collateral Agent. The words “Collateral Agent” shall have the
meaning set forth in the preamble to this Agreement.

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	 	d.	 	Company. The word “Company” shall have the meaning set forth in the
second paragraph of this Agreement.
	 
	 	e.	 	Credit Party or Credit Parties. The words “Credit Party” or
“Credit Parties” shall have the meaning set forth in the Note Purchase
Agreement.
	 
	 	f.	 	Environmental Laws. The words “Environmental Laws” mean any and all
state, federal and local statutes, regulations and ordinances relating to the
protection of human health or the environment, including without limitation the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601, et seq., the Superfund Amendments and Reauthorization
Act of 1988, Pub. L. No. 99-499, the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section
6901, et seq., or other applicable state or federal laws, rules, or regulations
adopted pursuant thereto.
	 
	 	g.	 	Event of Default. The words “Event of Default” shall have the
meaning set forth in the Note Purchase Agreement.
	 
	 	h.	 	First Interstate Loan Agreement. The words “First Interstate Loan
Agreement” shall have the meaning set forth in the second paragraph of this
Agreement.
	 
	 	i.	 	First Interstate Loan Documents. The words “First Interstate Loan
Documents” shall have the meaning set forth in the second paragraph of this
Agreement.
	 
	 	j.	 	Grantor. The word “Grantor” shall have the meaning set forth in the
preamble to this Agreement.
	 
	 	k.	 	Guarantor. The word “Guarantor” shall have the meaning set forth in
the Guaranty.
	 
	 	l.	 	Guaranty. The word “Guaranty” shall have the meaning set forth in
the Note Purchase Agreement.
	 
	 	m.	 	Hazardous Substances. The words “Hazardous Substances” mean
materials that, because of their quantity, concentration or physical, chemical or
infectious characteristics, may cause or pose a present or potential hazard to human
health or the environment when improperly used, treated, stored, disposed of,
generated, manufactured, transported or otherwise handled. The words “Hazardous
Substances” are used in their very broadest sense and include without limitation any
and all hazardous or toxic substances, materials or waste as defined by or listed
under the Environmental Laws. The term “Hazardous Substances” also
includes,

15

 

	 	 	 	without limitation, petroleum and petroleum by-products or any fraction thereof and
asbestos.
	 
	 	n.	 	Indebtedness. The word “Indebtedness” means the obligations and
indebtedness of Company under the Note Purchase Agreement, the Notes and the other
Transaction Documents, including all principal and interest together with all other
indebtedness and costs and expenses for which Grantor is responsible under this
Agreement or under any of the Transaction Documents.
	 
	 	o.	 	Note or Notes. The words “Note” or “Notes” means the Notes
executed by the Company in the original aggregate principal amount of $15,000,000
dated March 4, 2008, together with all increases thereto in accordance with the Note
Purchase Agreement, renewals of, extensions of, modifications of, refinancings of,
consolidations of, and substitutions for the Notes or Note Purchase Agreement.
	 
	 	p.	 	Pledge Agreement. The words “Pledge Agreement” shall have the
meaning set forth in the second paragraph of this Agreement.
	 
	 	q.	 	Property. The word “Property” means all of Grantor’s right, title
and interest in and to all the Property as described in the “Collateral
Description” section of this Agreement.
	 
	 	r.	 	Purchaser or Purchasers. The words “Purchaser” or
“Purchasers” shall have the meaning set forth in the second paragraph of this
Agreement.
	 
	 	s.	 	Transaction Documents. The words “Transaction Documents” shall have
the meaning set forth in the Note Purchase Agreement.

[remainder of page intentionally blank]

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          IN WITNESS WHEREOF, Grantor has executed this Agreement as of the day and year first above
written.

	 	 	 	 	 
	GRANTOR:	 	 
	 
	 	 	 	 
	WESTMORELAND RESOURCES, INC.	 	 
	 
	 	 	 	 
	By:

	 	/s/ Keith E. Alessi	 	 
	 

	 	 	 	 
	 

	 	Name: Keith E. Alessi	 	 
	 

	 	Title: Chief Executive Officer	 	 

[Signature page to Security Agreement]

S-1

 

	 	 	 	 	 	 	 
	COLLATERAL AGENT:	 	 
	 
	 	 	 	 	 	 
	TONTINE CAPITAL ASSOCIATES, L.P.	 	 
	as the Collateral Agent	 	 
	 
	 	 	 	 	 	 
	By:	 	TONTINE CAPITAL ASSOCIATES GP, L.L.C.,	 	 
	 	 	its general partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Jeffrey L. Gendell	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name: Jeffrey L. Gendell	 	 
	 

	 	 	 	Title: Managing Member	 	 

[Signature page to Security Agreement]

S-2

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