Document:

mm06-0115_8ke101.htm

EXHIBIT 10.1

 

Execution Copy

 

RESERVE SETTLEMENT AGREEMENT

 

RESERVE SETTLEMENT AGREEMENT (the “Agreement”), dated as of May 26, 2015, by and among (a) WMI Liquidating Trust (“WMILT”), (b) Thomas W. Casey, Stephen J. Rotella, David C. Schneider and Robert J. Williams, Jr. (collectively, the “Appellants”) and (c) AXIS Reinsurance Company, Continental Casualty Company, Those Certain Underwriters at Lloyd’s, London and London Companies, Subscribing to Policy Number 509QA015507, and XL Specialty Insurance Company (the “Insurer Parties”). The signatories hereto are referred to hereinafter collectively as the “Parties” or individually as a “Party”.

 

RECITALS1

 

A. On September 26, 2008, each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code.

 

B. Pursuant to the Confirmation Order, the Bankruptcy Court confirmed the Debtors’ Seventh Amended Plan.  On March 19, 2012, the Seventh Amended Plan became effective and, in connection therewith, WMILT became responsible for, among other things, resolving claims against the Debtors’ estates, the liquidation of the Debtors’ assets and the closing of the Debtors’ chapter 11 cases.

 

C. Pursuant to that certain Settlement Agreement, dated as of November 30, 2014 (as may be amended from time to time and, together with all amendments thereto, the “Settlement Agreement”), by and among (1) WMILT, (2) the D&O Claimants and (3) the Insurers, a copy of which is annexed hereto as Exhibit “A”, the parties thereto agreed, subject to certain conditions, to compromise and settle certain claims and causes of action asserted against, among others, the D&O Claimants and the Appellants, and to reconcile certain proofs of claim filed against the Debtors’ chapter 11 estates.

 

D. On December 12, 2014, the Appellants commenced litigation in the Superior Court of the State of Washington for King County (the “Superior Court”) by filing a complaint against certain of the Contributing Insurers asserting, among other things, that, by agreeing to the terms of the Settlement Agreement, such Contributing Insurers breached their obligations to the Appellants as set forth in their respective director and officer liability insurance policies under the 2007-08 Tower (the “Seattle Litigation”).  Pursuant to a notice, dated January 14, 2015, the Seattle Litigation was removed from the Superior Court to the United States Bankruptcy Court for the Western District of Washington (the “Washington Bankruptcy Court”).

 

E. On December 23, 2014, upon notice and a hearing, the Bankruptcy Court entered the Approval Order approving the Settlement Agreement and authorizing WMILT to consummate the transactions contemplated therein.

 

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1 Unless otherwise defined herein, capitalized terms used herein, including, without limitation, the following recitals, shall have the meanings ascribed to them in the Settlement Agreement, as defined below.

 

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F. On January 5, 2015, a notice of appeal from the Approval Order was filed by the Appellants (the “Appeal”).

 

G. Pursuant to that certain Amendment to Settlement Agreement, dated as of January 15, 2015, by and among WMILT, the D&O Claimants and the Insurers, the parties thereto agreed to amend Section 6.2 of the Settlement Agreement by extending the period in which the Effective Date must occur up to and including July 15, 2015.

 

H. The Parties have agreed to resolve all issues associated with the Settlement Agreement, the Seattle Litigation and the Appeal upon the terms set forth in this Agreement.

 

NOW, THEREFORE, the Parties, in consideration of the promises, covenants and agreements herein described, including, without limitation, the Recitals, which are incorporated herein by reference, and for other good and valuable consideration acknowledged by each of them to be satisfactory and adequate, and intending to be legally bound, do hereby mutually agree as follows:

 

AGREEMENT

 

Section 1. Settlement Consideration/Reserve.  Notwithstanding the provisions of Section 2.1(a) of the Settlement Agreement, on the Effective Date, WMILT shall cause Three Million Dollars ($3,000,000.00) of the Settlement Amount to be placed into an interest bearing segregated account (the “Reserve”), to be held by a third party agreed upon by WMILT and the Appellants (the “Agent”), with the fees and expenses of the Agent to be paid from the Reserve (including the interest accrued thereon), and to be otherwise used solely to reimburse Appellants for reasonable fees and expenses incurred by Appellants in the defense of an action or an investigation (an “Action”) commenced during the period from the date hereof up to and including September 25, 2018 (the “Deadline”) by the United States of America or one if its agencies against one or more of the Appellants and asserting claims and causes of action under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub.L.No. 101-73, 103 Stat. 183 (1989) (“FIRREA”).  In the event that an Action is commenced prior to the Deadline, subject to the limitation set forth in Section 7(g) hereof, upon the presentation to the Agent, with copies thereof provided to WMILT, of invoices of professionals retained by the Appellants, setting forth in detail the reasonable fees and expenses incurred by the Appellants, funds shall be distributed from the Reserve to the Appellants or their designated counsel.  WMILT shall have fifteen (15) Business Days’ prior written notice of any request for distribution from the Reserve to the Appellants and shall have such fifteen (15) Business Day period to challenge the reasonableness thereof, but shall have no ability to assert a “coverage defense” as if WMILT were an insurer in the 2007-08 Tower or the 2008-09 Tower.  To the extent that a challenge to the reasonableness of the fees and expenses is interposed, the undisputed portion(s) shall be paid and only the disputed portion(s) shall be withheld, with WMILT and the Appellants submitting the dispute(s) to binding mediation within sixty (60) days of submission of such challenge, and each of WMILT and the Appellants bearing their respective costs, attorneys’ fees and one-half of the cost of such mediation.  In the event that (1) an Action has not been commenced as of each of the respective dates set forth below, the Reserve shall be reduced on a dollar-for-dollar basis in the following amounts, with such funds being distributed 

 

 

  

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to WMILT within three (3) Business Days of each date, together with a notice thereof being provided to the Appellants: (i) on September 25, 2015, Five Hundred Thousand Dollars ($500,000.00), together with all interest which may have accrued on the amount contained in the Reserve as of such date; (ii) on September 26, 2016, Five Hundred Thousand Dollars ($500,000.00), together with all interest which may have accrued on the amount contained in the Reserve as of such date; (iii) on September 26, 2017, Five Hundred Thousand Dollars ($500,000.00), together with all interest which may have accrued on the amount contained in the Reserve as of such date; and (iv) on September 26, 2018, all amounts then contained in the Reserve, or (2) all of the Appellants receive a distribution on account of the Employee Components of the disputed portion of their respective proofs of claim, by settlement, an order of a court of competent jurisdiction or otherwise, the Reserve, together with all interest accrued thereon, shall be distributed to WMILT within three (3) Business Days of written evidence of such distribution being delivered to the Agent; or (3) the United States Department of Justice or the United States Attorney General states, in writing, that the United States of America shall not pursue any civil claims against any of the Appellants under FIRREA, the Reserve, together with all interest accrued thereon, shall be distributed to WMILT within three (3) Business Days of a copy of such written statement being delivered to the Agent and the Appellants or (4) an Action is commenced prior to the Deadline, no amount of Reserve, including all interest accrued thereon, shall be distributed to WMILT or otherwise reduced until (i) the Action is concluded or dismissed by final order of a court of competent jurisdiction or (ii) the United States Department of Justice or the United States Attorney General states, in writing, that the United States of America shall not pursue any claims against any of the Appellants under FIRREA.  Until released to WMILT by the Agent, no funds contained in the Reserve, including, without limitation, interest accrued thereon, shall be considered proceeds of the D&O Litigation or the Asserted Claim.

 

Section 2. Assignment of Reserve.  Subject to the conditions and limitations set forth herein, WMILT shall have the right to sell, assign or otherwise transfer WMILT’s interest, in whole or in part, in the Reserve to any third party.  To the extent such interest is sold, assigned or otherwise transferred, all references to WMILT in Section 1 hereof and all obligations of WMILT hereunder shall apply equally to, and be binding upon, the purchasers, assignees or transferees thereof.

 

Section 3. Release of WMI Entities.  On and effective as of the Effective Date, and without the need for the execution and delivery of additional documentation or the entry of any additional orders of the Bankruptcy Court, except as expressly provided in this Agreement, the Appellants and each of their respective assigns, advisors, representatives, members of his or her immediate family, heirs, executors, estates and administrators or any other Person that claims or might claim through, on behalf of or for the benefit of any of the foregoing whether directly or derivatively (the “Appellant Releasors”) shall be deemed to have irrevocably and unconditionally, fully, finally, and forever waived, released, acquitted and discharged the WMI Entities, WMB, each of the Debtors’ estates, the Reorganized Debtors, their respective past or present parent entities, subsidiaries, Affiliates, directors, officers, employees, professionals, including, without limitation, any and all professionals retained by WMI or WMILT in the Chapter 11 Cases pursuant to an order of the Bankruptcy Court other than ordinary course professionals and the predecessors, successors and assigns of any of them (collectively, the “WMI Releasees”) from any and all past, present and future claims, demands, rights, liabilities, 

 

 

  

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or causes of action of any and every kind, character or nature whatsoever, in law or in equity, known or unknown, whether asserted or unasserted, which the Appellants, or any of them, or anyone claiming through them, on their behalf or for their benefit have or may have or claim to have, now or in the future, against any WMI Releasee that are based upon, related to, or arise out of or in connection with any of the Indemnification Claims (as applicable), the Subrogation Claims, the Asserted Claim (including, without limitation, the Committee Letter and the Demand Letters) the D&O Litigation, the Carrier Litigation, the Appeal, the Seattle Litigation, the Outside Director Non-Indemnity Claims (as applicable), or any claim, act, fact, transaction, occurrence, statement or omission in connection with, or alleged or that could have been alleged in any of the foregoing, including, without limitation, any such claim, demand, right, liability, or cause of action for indemnification, contribution, or any other basis in law or equity for damages, costs or fees incurred by the Appellants arising directly or indirectly from or otherwise relating to the foregoing (the “WMI/Appellant Released Claims”). Further, the Appellant Releasors shall be deemed to have irrevocably and unconditionally, fully, finally, and forever granted the releases provided for in Sections 41.6, 41.7 and 41.8 of the Seventh Amended Plan, the forms of which are annexed hereto as Exhibit “B”.  Notwithstanding anything contained in this Section 3 or elsewhere to the contrary, the foregoing is not intended to release, nor shall it have the effect of limiting or releasing, (i) the Excluded Claims, or (ii) the WMI Releasees from the performance of their obligations in accordance with this Agreement.

 

Section 4. Release of the Appellants.  On and effective as of the Effective Date, and without the need for the execution and delivery of additional documentation or the entry of any additional orders of the Bankruptcy Court, except as expressly provided in this Agreement, the WMI Entities, each of the Debtors’ estates, and the Reorganized Debtors and each of the foregoing’s respective subsidiaries and Affiliates and the predecessors, successors and assigns of any of them and any other Person that claims or might claim through, on behalf of or for the benefit of any of the foregoing, whether directly or derivatively (including, without limitation, by or through the Debtors, the receivership of WMB’s assets or otherwise) (the “WMI Releasors”), shall be deemed to have irrevocably and unconditionally, fully, finally and forever waived, released, acquitted and discharged the Appellants, and each of their respective assigns, advisors, representatives, members of his or her immediate family, heirs, executors, estates and administrators (collectively, the “Appellant Releasees”), from any and all past, present and future claims, demands, rights, liabilities, or causes of action of any and every kind, character or nature whatsoever, in law or in equity, known or unknown, whether asserted or unasserted, which the WMI Releasors, or any of them, or anyone claiming through them, on their behalf or for their benefit, have or may have or claim to have, now or in the future, against any Appellant Releasee that are based upon, related to, or arise out of or in connection with any of the Committee Letter, the Demand Letters, the Asserted Claim, the D&O Litigation, the Indemnification Claims (as applicable), the Subrogation Claims, the Carrier Litigation, the Appeal, the Seattle Litigation, the Released Avoidance Actions and the Outsider Director Non-Indemnity Claims (as applicable), or any claim, act, fact, transaction, occurrence, statement or omission in connection with or alleged or that could have been alleged in relation to any of the foregoing including, without limitation, any such claim, demand, right, liability, or cause of action for indemnification, contribution, or any other basis in law or equity for damages, costs or fees incurred by the WMI Releasors arising directly or indirectly from or otherwise relating to the Committee Letter, the Demand Letters, the Asserted Claim, the D&O Litigation, the Indemnification Claims, the Subrogation Claims, the Carrier Litigation, the Appeal, the Seattle 

 

 

  

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Litigation, the Released Avoidance Actions or the Outside Director Non-Indemnity Claims (collectively, the “Appellant Released Claims”); provided, however, that, notwithstanding anything contained in this Agreement to the contrary, the foregoing is not intended to release, nor shall it have the effect of limiting or releasing, (i) the Excluded Claims and (ii) the Appellant Releasees from the performance of their obligations in accordance with this Agreement.

 

Section 5. Release of the Insurers.  On and effective as of the Effective Date, and without the need for the execution and delivery of additional documentation or the entry of any additional orders of the Bankruptcy Court, except as expressly provided in this Agreement, the Appellant Releasors shall be deemed to have irrevocably and unconditionally, fully, finally and forever waived, released, acquitted and discharged the Insurers, and each of their respective assigns, advisors, representatives, predecessors, successors, parent companies, subsidiaries, affiliates, directors, officers, employees, reinsurers, members of his or her immediate family, heirs, executors, estates and administrators (collectively, the “Insurer Releasees”), from any and all past, present and future claims, demands, rights, liabilities, or causes of action of any and every kind, character or nature whatsoever, in law or in equity, (including any claims for “bad faith”, breach of the duty of good faith and fair dealing, unfair claims handling, unfair or deceptive trade practices, or any violation of any insurance law, statute or regulation) known or unknown, whether asserted or unasserted, which the Appellant Releasors, or any of them, or anyone claiming through them, on their behalf or for their benefit, have or may have or claim to have, now or in the future, against any Insurer Releasee that are based upon, related to, or arise out of or in connection with any of the Committee Letter, the Demand Letters, the Asserted Claim, the D&O Litigation, the Seattle Litigation, the Indemnification Claims, the Subrogation Claims, the Carrier Litigation, the Outsider Director Non-Indemnity Claims (as applicable), and/or the 2007-2008 Policies or any claim, act, fact, transaction, occurrence, statement or omission in connection with or alleged or that could have been alleged in relation to any of the foregoing, including, without limitation, any claim, demand, right, liability or cause of action for indemnification, contribution, or any other basis in law or equity for damages, costs or fees incurred by the Appellant Releasors, arising directly or indirectly from or otherwise relating to the Committee Letter, the Demand Letters, the Asserted Claim, the D&O Litigation, the Seattle Litigation, the Indemnification Claims, the Subrogation Claims, the Carrier Litigation or the Outside Director Non-Indemnity Claims (collectively, the “Insured/Appellant Released Claims”).

 

Section 6. Unknown Claims.  With respect to any and all released claims under this Agreement, each Party under this Agreement shall expressly waive or be deemed to have waived the provisions, rights and benefits of California Civil Code §1542 (to the extent it applies herein), which provides:

 

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

 

Each Party expressly waives, and shall be deemed to have waived any and all provisions, rights and benefits conferred by any law of any state or territory of the United States, or principle of 

 

 

  

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common law or foreign law, that is similar, comparable or equivalent in effect to California Civil Code §1542.  The Parties may hereafter discover facts in addition to or different from those that any of them now knows or believes to be true with respect to the subject matter of the Agreement, but each Party shall expressly have and shall be deemed to have fully, finally and forever settled and released any and all claims, known or unknown, suspected or unsuspected, contingent or non-contingent, whether or not concealed or hidden, that now exist or heretofore have existed, upon any theory of law or equity now existing or coming into existence in the future, including conduct that is negligent, reckless, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts.  Each Party acknowledges and shall be deemed to have acknowledged that the foregoing waiver was separately bargained for and a key element of the settlement of which the releases contained herein are a part.

 

Section 7. Representations and Warranties of the Appellants.  Each of the Appellants hereby represents and warrants for himself, that:  (a) he has full requisite power and authority to execute and deliver and to perform his obligations under this Agreement, and the execution, delivery and performance hereof, and the instruments and documents required to be executed by him in connection herewith (i) have been duly and validly authorized by him and (ii) are not in contravention of any organizational documents or any agreements specifically applicable to him; and (b) no proceeding, litigation or adversary proceeding before any court, arbitrator or administrative or governmental body is pending against him which would adversely affect his ability to enter into this Agreement or to perform his obligations hereunder.

 

Section 8. Covenants.  Each of the Appellants hereby covenants and agrees as follows:

 

(a) None of the Appellants shall sell, transfer, pledge, hypothecate or assign any of the Indemnification Claims (or, where applicable, Indemnification Components), or any voting rights or participations or other interests therein during the period from the date hereof up to and including the Effective Date.

 

(b) None of the Appellants shall, except as expressly provided herein, (i) file any additional claims or proofs of claim, whatsoever, with the Bankruptcy Court against any of the Debtors (including secured, unsecured, administrative, priority or substantial contribution claims) other than as an amendment to an existing proof of claim, (ii) file any additional claims, commence or prosecute any pending or additional litigation, proceeding, action or matter or seek to recover damages or to seek any other type of relief against (1) any of the Insurer Releasees based upon, arising from or relating to the Insured/Appellant Released Claims, and (2) any of the WMI Releasees based upon, arising from or relating to the WMI/Appellant Released Claims, or any of the claims or causes of action asserted or which could have been asserted in the Chapter 11 Cases in connection therewith, or (iii) directly or indirectly aid any person in taking any action with respect to the WMI/Appellant Released Claims, that is prohibited by this Section 7(b).

 

(c) Except with respect to (i) the disputed portion of the Employee Components of the Appellants’ respective proofs of claim and (ii) litigation commenced or which may be commenced with respect thereto, each of the Appellants shall support, and otherwise take no 

 

 

  

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action to impede or preclude, the administration of the Chapter 11 Cases, or the consummation, implementation and administration of the Seventh Amended Plan.

 

(d) On the Effective Date, and without limiting the generality of the foregoing, each of the Appellants shall be deemed to have covenanted not to sue (1) the Insurer Releasees with respect to the Insured/Appellant Released Claims, and to be permanently barred and enjoined from instituting, prosecuting, pursuing or litigating, in any manner, the Insured/Appellant Released Claims against the Insurer Releasees, and (2) the WMI Releasees with respect to the WMI/Appellant Released Claims, and to be permanently barred and enjoined from instituting, prosecuting, pursuing or litigating, in any manner, the WMI/Appellant Released Claims against the WMI Releasees and (3) the D&O Releasees with respect to D&O Released Claims, and to be permanently barred and enjoined from instituting, prosecuting, or pursuing or litigating, in any manner, the D&O Released Claims against D&O Releasees.  Nothing in this Agreement is intended, nor shall be construed, to modify, alter, diminish or waive the Approval Order, or any portion thereof, including, without limitation, any release, bar order, or injunction provided for therein.

 

(e) On the Effective Date, the Appellants shall take such action as is necessary to (1) withdraw the Appeal, including, without limitation, filing a notice of dismissal with the United States District Court for the District of Delaware and (2) cause the dismissal, with prejudice, of the Seattle Litigation, including, without limitation, by filing a request, notice or stipulation of dismissal with the Washington Bankruptcy Court.

 

(f) Each of the Appellants shall not object to, or otherwise directly or indirectly aid any person in taking any action to oppose, the release of the Settlement Amount or amounts or distributions reserved in the Plan Reserve, the Reserve, the disputed claims reserve or disputed equity reserve pursuant to the Seventh Amended Plan on account of the Retained Subrogation Claims being released and redistributed to holders of allowed claims in accordance with the terms and provisions of Section 26.3 of the Seventh Amended Plan.

 

(g) In the event that an Action is commenced prior to the Deadline,

 

Appellants shall be entitled to submit invoices for reimbursement from the Reserve for up to two (2) independent defense counsel and WMILT shall be entitled to contest the amount and reasonableness of any fees and expenses incurred as provided herein; provided, however, that WMILT hereby waives any right to assert a “coverage defense” with respect thereto.

 

(h) On the Effective Date, each of the Appellants shall confirm in writing to the WMI Entities, the D&O Claimants and the Insurers that each of the representations and warranties set forth in Section 6 of this Agreement are true and correct as of the Effective Date.”

 

Section 9. Reimbursement of Fees.  On the Effective Date, the Appellants shall be reimbursed for fees and expenses incurred, up to an aggregate amount of Sixty Thousand Dollars ($60,000.00) (the “Limit”), through the Appellants’ retention of  Phillips, Goldman & Spence, P.A. and Gordon Tilden Thomas & Cordell LLP (collectively, the “Firms”), in connection with (1) the review of, the preparation and filing of responses to, and the review of the pleadings to stay the D&O Litigation, (2) the preparation and prosecution of their objection to the entry of the Approval Order and the Appeal, (3) the preparation of the complaint 

 

 

  

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commencing the Seattle Litigation and motions to stay related thereto and (4) the negotiation and execution of this Agreement.  WMILT and the Insurer Parties shall fund such reimbursement obligations up to the Limit on a twenty-five percent (25%)/seventy-five percent (75%) basis, respectively, with the Insurer Parties each paying an equal share of seventy-five percent (75%) of the Limit.  The obligation of the Insurer Parties to make payments of their portion of the Limit shall be several and not joint.  In order to receive such reimbursement, Appellants shall provide a copy of the Firms’ invoices or statements for fees and expenses incurred to WMILT and the Insurer Parties at the addresses set forth in Section 7.10 of the Settlement Agreement.  Within ten (10) Business Days of delivery thereof, WMILT and the Insurer Parties shall reimburse the Appellants up to the Limit for such fees and expenses reflected in the invoices or statements, in the percentages detailed above.

 

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as of the date set forth above.

 

	 	WMI LIQUIDATING TRUST 	 
	 	 	 	 
	
 

	
By: 

	/s/  Charles Edward Smith	 
	 	 	Name:	Charles Edward Smith	 
	 	 	Title:	General Counsel 	 

 

 

	 	THOMAS W. CASEY 	 
	 	 	 	 
	
 

	
By: 

	/s/  Thomas W. Casey	 

 

	 	STEPHEN J. ROTELLA 	 
	 	 	 	 
	
 

	
By: 

	/s/  Stephen J. Rotella	 

 

	 	DAVID C. SCHNEIDER 	 
	 	 	 	 
	
 

	
By: 

	/s/  David C. Schneider	 

 

	 	ROBERT J. WILLIAMS, JR. 	 
	 	 	 	 
	
 

	
By: 

	/s/  Robert J.Williams, Jr.	 

 

	 	AXIS REINSURANCE COMPANY	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Timothy Vazquez	 
	 	 	Name:	Timothy Vazquez	 
	 	 	Title:	AVP - Claims Manager	 

  

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	 	CONTINENTAL CASUALTY COMPANY	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  David Philips	 
	 	 	Name:	David Philips	 
	 	 	Title:	Sr. Claim Counsel	 

 

 

	 	
THOSE CERTAIN UNDERWRITERS AT

LLOYD'S, LONDON AND LONDON

COMPANIES, SUBSCRIBING TO

POLICY NUMBER 509QA01550707

	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Sean Simpson	 
	 	 	Name:	Sean Simpson	 
	 	 	Title:	Authorized Representative	 

 

 

	 	
XL SPECIALTY INSURANCE

COMPANY

	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Michael P. Morabito	 
	 	 	Name:	Michael P. Morabito	 
	 	 	Title:	Vice President, Claims	 

 

 

 

 

 

 

 

  

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EXHIBIT A

SETTLEMENT AGREEMENT

(Without Exhibits)

 

 

 

  

  

  

 

 EXECUTION COPY

SETTLEMENT AGREEMENT

SETTLEMENT AGREEMENT (the “Agreement”), dated as of November 30, 2014, by and among (a) WMI Liquidating Trust (“WMILT”), as successor in interest to Washington Mutual, Inc. (“WMI”) and WMI Investment Corp. (“WMIIC” and, collectively with WMI, the “Debtors”), (b) Kerry K. Killinger (“Killinger”) and Alan H. Fishman (“Fishman”) (collectively, the “Officer Claimants”), (c) Stephen I. Chazen, Anne V. Farrell, Stephen E. Frank, Thomas C. Leppert, Charles M. Lillis, Phillip D. Matthews, Regina T. Montoya, Michael K. Murphy, Margaret Osmer-McQuade, Mary E. Pugh, William G. Reed, Jr., Orin C. Smith, James H. Stever and Willis B. Wood, Jr. (collectively, the “Outside Director Claimants”), (d) David Bonderman (“Bonderman” and, collectively with the Officer Claimants and the Outside Director Claimants, the “D&O Claimants”) and (e) certain insurers under WMI’s director and officer liability insurance policies for 2007-2008 (the “2007-08 Tower”) and 2008-2009 (the “2008-09 Tower”), each as set forth on Exhibit “A” hereto (collectively, the “Insurers”). The signatories hereto are referred to hereinafter collectively as the “Parties” or individually as a “Party”.

 

RECITALS

 

A. On September 25, 2008, the Office of Thrift Supervision (the “OTS”), by order number 2008-36, closed Washington Mutual Bank (“WMB”), appointed the Federal Deposit Insurance Corporation (the “FDIC”) as receiver for WMB (the “FDIC Receiver”) and advised that the FDIC Receiver was immediately taking possession of WMB’s assets (the “Receivership”).

 

B. On or about September 25, 2008, the FDIC Receiver, the FDIC, in its corporate capacity, and JPMorgan Chase Bank, N.A. entered into that certain Purchase and Assumption Agreement, Whole Bank, dated September 25, 2008, as amended, modified or supplemented prior to the date hereof.

 

C. On September 26, 2008, each of the Debtors filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code, as amended (the “Bankruptcy Code”), with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”).  By order, dated October 3, 2008, the Debtors’ chapter 11 cases are being jointly administered and are styled as In re Washington Mutual, Inc., et al., No. 08-12229 (MFW) (the “Chapter 11 Cases”).

 

D. On December 12, 2011, the Debtors filed their Seventh Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the United States Bankruptcy Code [D.I. 9178] (as modified, the “Seventh Amended Plan”).  By order, dated February 23, 2012 (the “Confirmation Order”) [D.I. 9759], the Bankruptcy Court confirmed the Seventh Amended Plan in accordance with section 1129 of the Bankruptcy Code.

 

E. Upon satisfaction or waiver of the conditions described in the Seventh Amended Plan, the transactions contemplated therein were consummated on March 19, 2012.  Pursuant to the Seventh Amended Plan, the Confirmation Order and that certain Liquidating Trust Agreement effective March 6, 2012, the administration of 

  

  

  

 

 

the Chapter 11 Cases and the responsibility to reconcile and litigate remaining disputed proofs of claim were transferred to WMILT.

 

Bankruptcy Proofs of Claim

 

F. On or before March 31, 2009, the date established by the Bankruptcy Court as the last date to file proofs of claim against the Debtors and their chapter 11 estates, each of the D&O Claimants filed a proof of claim all of which, except for the proof of claim filed by Bonderman, asserted, among other claims, unliquidated claims for indemnification and advancement of defense and other litigation costs and damages, with respect to investigations, litigation commenced, threatened to be commenced or which may be commenced, under WMI’s articles of incorporation, by-laws and other corporate documents and applicable law, employment contracts and indemnification agreements (the “Indemnification Claims”).  A list of the Indemnification Claims of each of the D&O Claimants asserting such claims is attached hereto as Exhibit “B-1”.

 

G. Killinger also filed a proof of claim for employment-related benefits pursuant to certain employment agreements and other documents, (collectively, the “Killinger Non-Indemnity Claim”).  A list of the components of the Killinger Non-Indemnity Claim is attached hereto as Exhibit “C”. In addition, certain of the Outside Director Claimants filed proofs of claim, a list of which is attached hereto as Exhibit “D”, asserting claims against the Debtors’ estates for unpaid directors’ fees, reimbursement of ordinary course expenses incurred on behalf of the Debtors and deferred amounts allegedly owed as a result of service with various of the Debtors’ predecessor institutions (collectively, the “Outside Director Non-Indemnity Claims”).

 

H. On September 14, 2012, WMILT and, certain claimants entered into that certain Stipulation to Suspend Local Rule 3007-1(f)(iii) With Respect to Certain Director and Officer Claims (the “Bifurcation Stipulation”).  The Bifurcation Stipulation, approved by the Bankruptcy Court by order, dated September 17, 2012 [D.I. 10670], (1) bifurcated the proofs of claim filed by the foregoing Officer Claimants into two parts: (i) unliquidated claims for indemnification and advancement of defense and other litigation costs and damages with respect to investigations, litigation commenced, threated to be commenced or which may be commenced under WMI’s articles of incorporation, by-laws and other corporate documents and applicable law, employment contracts and indemnification agreements (collectively, the “Indemnification Components”), the list of which are set forth on Exhibit “B-1” hereto; and (ii) claims for severance payments and other employment-related benefits pursuant to certain employment agreements and other documents, including various documents with “change in control” provisions (collectively, the “Employee Components”), the list of which are set forth on Exhibit “B-2” hereto, and (2) provided, among other things, that WMILT could object to the Indemnification Components and Employee Components in separate objections notwithstanding Rule 3007-1(f)(iii) of the Local Rules for the United States Bankruptcy Court for the District of Delaware.

 

 

  

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The D&O Policies

 

I. WMI held, and WMILT as WMI’s successor in interest now owns and holds, director and officer liability insurance policies, including, for claims made during the period from May 1, 2007 through May 1, 2008 (the “2007-2008 Policies”) and the period from May 1, 2008 through May 1, 2009 (the “2008-2009 Policies” and, together with the 2007-2008 Policies, the “D&O Policies”), acquired in connection with WMI’s indemnification obligations to its officers and directors and to officers and directors of WMI’s subsidiaries, including certain of the D&O Claimants.  By orders, entered December 16, 2008, May 4, 2010 and September 23, 2010, the Bankruptcy Court granted relief from the automatic stay to allow the insurance carriers with respect to the 2007-2008 Policies (the “2007-2008 Insurers”) to advance and/or pay defense costs pursuant to the D&O Policies that are, or will become, owing to certain of the D&O Claimants who were named as defendants in certain then pending litigation and investigations.

 

The Creditors’ Committee Letter and the Demand Letters

 

J. By letter, dated April 27, 2009 (the “Committee Letter”), from the statutory committee of unsecured creditors appointed in the Chapter 11 Cases (the “Creditors’ Committee”) to the Board of Directors and certain officers of WMI, and following a preliminary investigation, the Creditors’ Committee provided a “Notice of Circumstances Resulting in Potential Claims” claiming that the persons set forth on Exhibit A to such notice had engaged in certain wrongful acts that injured the Debtors, the Debtors’ estates and the creditors thereof, including, without limitation, causing a wasteful transfer of Five Hundred Million Dollars ($500,000,000.00) from WMI to WMB on September 10, 2008 (the “September Downstream” ).

 

K. By letter, dated October 13, 2011, special litigation counsel to WMI and counsel to the Creditors’ Committee, and by letter, dated November 11, 2013, counsel to WMILT (collectively, the “Demand Letters”), (1) made a claim and demand upon, among others, certain of the D&O Claimants with respect to the September Downstream, (2) indicated the estate’s intent to pursue legal remedies against, among others, the named D&O Claimants in the absence of a negotiated resolution of liability in connection with the September Downstream (collectively, together with the Committee Letter and the Demand Letters, the “Asserted Claim”) and (3) stated that the estate was investigating other potential claims.

 

The Carrier-Related Litigation

 

L. Following receipt of the Demand Letters, several of the D&O Claimants and WMI sought coverage for the Asserted Claim under the 2008-2009 Policies, asserting that the 2008-2009 Policies require the insurers thereunder (the “2008-2009 Insurers”) to provide insurance coverage to them in the event that “claims”, which include the Asserted Claim set forth in the Demand Letters, are made against them based upon alleged acts of such D&O Claimants in their capacities as directors or officers of WMI.  In response to the foregoing requests, the 2008-2009 Insurers denied coverage under the 2008-2009 Policies for the Asserted Claim.

 

 

 

  

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M. By complaint, dated March 15, 2012 (the “XL Litigation”), the Debtors commenced litigation, styled Washington Mutual, Inc. v. XL Specialty Insurance Company, et al., Adv. Pro. No. 12-50422 (MFW), in the Bankruptcy Court against the 2008-2009 Insurers seeking, among other recoveries, compensatory and punitive damages and a declaratory judgment with respect to the 2008-2009 Insurers’ obligation to provide coverage under the 2008-2009 Policies with respect to the Asserted Claim.  The Bankruptcy Court dismissed the action due to a lack of bankruptcy court jurisdiction in an opinion reported as Washington Mutual, Inc. v. XL Specialty Insurance Company, et al., Adv. Pro. No. 12-50422 (MFW), 2012 WL 4755209 (Bankr. D. Del. Oct. 4, 2012).

 

N. WMILT then commenced litigation, Case No. N12C-10-087 (MMJ) (CCLD) (the “Delaware Action” and, together with the XL Litigation, the “Carrier Litigation”) in the Superior Court of the State of Delaware in and for New Castle County (the “Delaware Superior Court”) against the 2008-2009 Insurers, alleging, inter alia, that the 2008-2009 Insurers breached the 2008-2009 Policies by denying coverage to the D&O Claimants for the Asserted Claim.   The 2008-2009 Insurers filed a motion to dismiss the Delaware Action, asserting that WMILT lacked standing and the complaint otherwise failed to state a claim upon which relief may be granted or to present an actual controversy.  The Delaware Superior Court denied the 2008-2009 Insurers’ motion to dismiss, which decision the 2008-2009 Insurers appealed to the Supreme Court for the State of Delaware (the “Delaware Supreme Court”).  Pursuant to an opinion, dated May 28, 2014, and reported as XL Specialty Ins. Co. v. WMI Liquidating Trust, 93 A.3d 1208 (Del. 2014), the Delaware Supreme Court determined that the Delaware Action was not ripe and remanded the matter to the Delaware Superior Court with direction to dismiss the Delaware Action without prejudice to refiling.  By order, dated June 6, 2014, the Delaware Action was dismissed without prejudice by the Delaware Superior Court.

 

O. WMI and Allied World Assurance Company, Ltd. (“Allied”) are parties to the Allied World Assurance Company Policy No. C009436/001 (the “Allied Policy”), which policy WMI acquired in connection with WMI’s indemnification obligations to its officers and directors and to officers and directors of WMI’s subsidiaries.  In the XL Litigation, WMILT had named Allied as a defendant.  WMILT did not name Allied as a defendant in the Delaware Action.

 

P. On May 20, 2012, Allied filed an action against WMI and its successors, the trustee of WMILT and CSC Trust Company of Delaware (collectively, the “Bermuda Action Defendants”) in the Supreme Court of Bermuda, Civil Jurisdiction, styled Allied World Assurance Co., Ltd v. Washington Mutual, Inc., et al., Case No. 2012: 186 (Sup. Ct. Bermuda) (the “Bermuda Action”), seeking, among other things, alleged prevailing party attorneys’ fees (the “Bermuda Claims”).  Pursuant to a Standstill and Non-Waiver Agreement, dated December 6, 2012, and a First Amendment thereto, dated June 17, 2014, further activity between WMILT and Allied in connection with the Carrier Litigation and the Bermuda Action has been stayed subject to agreement among the parties thereto.

 

 

 

  

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The Plan Reserve Stipulations

 

Q. On November 17, 2010, the Debtors filed that certain (1) Motion to Estimate the Maximum Amount of Certain Claims for Purposes of Establishing Reserve Under the Debtors’ Confirmed Chapter 11 Plan [D.I. 5971] (the “Estimation Motion”), seeking to estimate the maximum amount of certain claims, including, without limitation, the Indemnification Claims, and (2) Sixtieth Omnibus (Substantive) Objections to Claims (Claim Nos. 2108, 2240, 2241, 2246, 2247, 2248, 2604, 2606, 2631, 2633, 2634, 2635, 2636, 2637 and 3242) [D.I. 5970], seeking to disallow claims filed by certain of the D&O Claimants as set forth on Exhibit “A” to the Sixtieth Omnibus.

 

R. By stipulations, dated February 21, 2012, June 7, 2012 and September 14, 2012 (the “Non-Subordinated Reserve Stipulations”), as approved by Bankruptcy Court orders, dated March 1, 2012 [D.I. 9797], June 11, 2012 [D.I. 10272], and September 17, 2012 [D.I. 10669], respectively (the “Reserve Orders”), certain of the Parties, among others (but not including the Insurers), (1) stipulated to the establishment of a contingent reserve under Section 26.3 of the Seventh Amended Plan (the “Non-Subordinated Reserve”) to provide for distributions on account of any Allowed Indemnification Claims that may be granted relating to any litigation, investigation, or demand, which has been or may be asserted against the D&O Claimants and not subject to subordination under section 510(b) of the Bankruptcy Code (collectively, the “Non-Subordinated Indemnification Claims”) and (2) determined to resolve the issues subject to the Estimation Motion.  Among other things, the Non-Subordinated Reserve Stipulations provide that, as of the date hereof, the Non-Subordinated Reserve shall be in an amount equal to the Pro Rata Share of Distributions that would be made to the D&O Claimants if the Non-Subordinated Indemnification Claims were Allowed Claims (in Class 12 of the Seventh Amended Plan) in the aggregate amount of Twenty-Three Million Four Hundred Four Thousand One Hundred Thirty-Nine Dollars ($23,404,139.00), to be used for distributions upon the granting of any Allowed Non-Subordinated Indemnification Claims.

 

S. Pursuant to letters, dated December 16, 2013 and January 6, 2014, counsel for Killinger and certain of the Outside Director Claimants stated that certain fees and expenses had been reimbursed by the Insurers and the respective categories of the Non-Subordinated Reserve pursuant to the Non-Subordinated Reserve Stipulations is as follows:

 

	 	
Unpaid Fees and Costs

	
$880,849.35

	 	 
	 	
Subrogation Claims

	
$4,399,179.60

	 	 
	 	
Potential Defense Fees and Costs

	
$18,124,109.96

	 	 

T. By stipulation, dated March 8, 2012 (the “Subordinated Claim Stipulation”), certain of the Parties (but not including the Insurers) stipulated to a contingent reserve under Section 26.3 of the Seventh Amended Plan to provide for distributions on account of any Allowed Indemnification Claims that may be granted relating to any litigation, investigation, or demand, which has been or may be asserted 

 

 

  

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against the D&O Claimants and are subject to subordination under section 510(b) of the Bankruptcy Code (the “Subordinated Reserve” and, together with the Non-Subordinated Reserve, the “Plan Reserve”).  By order, dated March 9, 2012 [D.I. 9838], the Bankruptcy Court approved the Subordinated Claim Stipulation.

 

The D&O Litigation

 

U. On October 14, 2014, WMILT commenced litigation against certain of the D&O Claimants with respect to, among other claims, the September Downstream by filing complaints in the Bankruptcy Court, in an action styled WML Liquidating Trust v. Thomas W. Casey, et al., Adv. Pro. No. ­­­­­­­­­­­14-50819 (MFW) (the “Bankruptcy Litigation”), and the King County Superior Court in the State of Washington, in an action styled WMI Liquidating Trust v. Thomas W. Casey, et al., Case No. 14-2-28048-3SEA (the “State Litigation” and, collectively with the Bankruptcy Litigation, the “D&O Litigation”).

 

V. The Parties, upon review of all factual information and after good-faith arm’s length negotiations, have determined, as set forth more fully below, that, subject to the terms and conditions contained herein, including, without limitation, the release of any and all Plan Reserves held under the Seventh Amended Plan for the Indemnification Claims asserted by the D&O Claimants, except for reserves for the Retained Subrogation Claims (as defined below), the D&O Claimants, WMILT and the Insurers have agreed to, among other things, compromise and settle the D&O Litigation and to provide the releases set forth in detail in Section 3 hereof.

 

NOW, THEREFORE, the Parties, in consideration of the promises, covenants and agreements herein described and for other good and valuable consideration acknowledged by each of them to be satisfactory and adequate, and intending to be legally bound, do hereby mutually agree as follows:

 

ARTICLE I

DEFINITIONS

 

Section 1.1. Recitals.  The recitals set forth above are true, are incorporated by reference and are explicitly made a part of this Agreement.

 

Section 1.2. Definitions.  The following definitions shall apply to and constitute part of this Agreement and all schedules, exhibits and annexes hereto:

 

“2004-2005 Policies” shall mean the various director and officer liability insurance policies held by WMI and/or WMILT for claims relating to the period from May 1, 2004 through May 1, 2005, acquired in connection with WMI’s indemnification obligations to its officers and directors and to officers and directors of WMI’s subsidiaries, including certain of the D&O Claimants.

 

“Affiliate” shall mean, with respect to any specified entity, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified entity.

 

 

 

  

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 “Allowed Claim” shall have the meaning ascribed to it in the Seventh Amended Plan.

 

“Approval Order” shall mean an order of the Bankruptcy Court approving the compromise and settlement embodied herein, substantially in the form annexed hereto as Exhibit “E”, or such other form which shall be, in form and substance, reasonably satisfactory to the Insurers.

 

 “Business Day” shall mean a day other than a Saturday, a Sunday or any other day on which commercial banks in New York, New York are required or authorized to close by law or executive order.

 

“Casey” shall mean Thomas W. Casey.

 

 “Claims” shall mean any and all claims, causes of action, liabilities, obligations, undertakings, damages, losses or other rights or remedies, whether at law or in equity, including, without limitation, all “claims” as defined in section 101(5) of the Bankruptcy Code.

 

“Contributing Insurers” shall mean, collectively, (a) of the 2007-2008 Insurers, Continental Casualty Company, AXIS Insurance Company and Those Certain Underwriters at Lloyd’s, London and London Companies, Subscribing to Policy Number 509QA015507 (“Lloyds”), and (b) of the 2008-2009 Insurers, XL Specialty Insurance Company, National Union Fire Insurance Company of Pittsburgh, PA and Columbia Casualty Company.

 

“Effective Date” shall mean the first (1st) Business Day on which, unless otherwise waived by the Parties, all of the events and conditions described in Section 6.1 of this Agreement have been satisfied; provided, however, that, unless otherwise waived by the Parties, the Effective Date shall occur no earlier than the fifteenth (15th) day following entry of the Approval Order.

 

“Excluded Claims” shall mean, collectively, (a) the claims of Casey, Rotella, Schneider and Williams for severance payments and other employment-related benefits pursuant to certain employment agreements and other documents, including various documents with “change in control” provisions, (b) the Employee Components of the proofs of claim filed by Todd H. Baker, Alfred Brooks, Debora Horvath and John P. McMurray, Claim Nos. 2274, 2159, 2683 and 2543, respectively, (c) the Retained Subrogation Claims, and (d) WMILT’s defenses to the Employee Claims, Employee Components and Retained Subrogation Claims; provided, however, that WMILT shall not assert as defenses to the Employee Claims, Employee Components or Retained Subrogation Claims (i) the receipt of one or more avoidable transfers, or (ii) any Insured’s action or failure to act with respect to any matter alleged in the Committee Letter, the Demand Letters or the D&O Litigation.

 

“FDIC Settlement Agreement” shall mean that certain Settlement and Release Agreement, dated as of December 13, 2011, by and among the FDIC, the FDIC Receiver, Killinger, Rotella, Schneider, Linda Killinger and Esther Rotella.

 

 

 

  

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“Final Order” shall mean an order or judgment of the Bankruptcy Court or other court of competent jurisdiction which has not been reversed, stayed, modified or amended and as to which (a) any right to appeal or seek certiorari, review, reargument, stay or rehearing has expired and no appeal or petition for certiorari, review, reargument, stay or rehearing is pending, or (b) an appeal has been taken or petition for certiorari, review, reargument, stay or rehearing has been filed and (i) such appeal or petition for certiorari, review, reargument, stay or rehearing has been resolved by the highest court to which the order or judgment was appealed or from which certiorari, review, reargument, stay or rehearing was sought or (ii) the time to appeal further or seek certiorari, review, reargument, stay or rehearing has expired and no such further appeal or petition for certiorari, review, reargument, stay or rehearing is pending; provided, however, that the possibility that a motion pursuant to Rule 60 of the Federal Rules of Civil Procedure or Bankruptcy Rule 9024 or pursuant to any similar law, rule or principle may be filed relating to such order shall not cause such order to not be a Final Order.

 

“Person” shall mean an individual, corporation, limited liability corporation, professional corporation, limited liability partnership, partnership, limited partnership, association, joint stock company, estate, legal representative, trust, unincorporated association, government or any political subdivision or agency thereof, and any business or legal entity and any spouses, heirs, predecessors, successors, representatives or assignees of any of the foregoing.

 

“Liquidating Trust Agreement” shall mean that certain WMI Liquidating Trust Agreement, dated as of March 6, 2012, by and among the Debtors, William C. Kosturos, as liquidating trustee, and CSC Trust Company of Delaware, as resident trustee.

 

“Related Actions” shall mean, collectively, the Carrier Litigation, the Bermuda Action and the D&O Litigation.

 

“Released Claims” shall mean, collectively, (a) any and all WMI Released Claims, D&O Released Claims, Insured Released Claims, Additional Insured Released Claims and Bermuda Released Claims (each as defined below), (b) claims or causes of action that arise in, relate to or have been or could have been asserted in the Chapter 11 Cases or the Receivership, including the “Avoidance Actions”, as defined in the September 14, 2012 Non-Subordinated Reserve Stipulation, against only the D&O Claimants (the “Released Avoidance Actions”), except for the Excluded Claims, and (c) claims that otherwise arise from or relate to the Seventh Amended Plan, this Agreement, and the negotiations and compromises set forth in this Agreement and the Seventh Amended Plan, including, without limitation, in connection with or related to any of the Debtors,  their Affiliates and their respective subsidiaries, assets, liabilities, operations, property or estates, the performance of its obligations in accordance with this Agreement, the Approval Order, the Confirmation Order or the Plan.

 

“Releasees” shall mean, collectively, the WMI Releasees, the Insurer Releasees, the D&O Releasees and the Additional Insured Releasees, each as defined below.

 

 

 

  

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 “Releasor” shall mean any Person that provides a release to any of the Releasees pursuant to the terms of this Agreement.

 

“Reorganized Debtors” shall mean WMI and WMIIC, as reorganized.

 

“Retained Subrogation Claims” shall mean the subrogation claims, if any, held by insurers under the 2004-2005 Policies pursuant to the Subordinated Claim Stipulation; provided, however, that, under all circumstances, to the extent an Insurer has a claim under the 2004-2005 Policies pursuant to the Subordinated Claim Stipulation, such claim shall be deemed to be a Released Claim for purposes of this Agreement and not included in the definition or calculation of “Retained Subrogation Claims”.

 

“Rotella” shall mean Stephen J. Rotella.

 

“Schneider” shall mean David C. Schneider.

 

“Subrogation Claims” shall mean the subrogation claims, if any, held by insurers under the D&O Policies.

 

 “Unknown Claims” shall mean any Released Claim, as defined herein, that any Releasor, as defined herein, does not know or suspect to exist in his, her or its favor at the time of giving the release in this Agreement that if known by him, her or it, might have affected his, her or its settlement and release in this Agreement. With respect to any and all Released Claims, each Releasor shall expressly waive or be deemed to have waived, and by operation of the Approval Order shall have waived the provisions, rights and benefits of California Civil Code § 1542 (to the extent it applies herein), which provides:

 

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTORS.

 

Each Releasor expressly waives, and shall be deemed to have waived, and by operation of the Approval Order shall have waived any and all provisions, rights and benefits conferred by any law of any state or territory of the United States, or principle of common law or foreign law, that is similar, comparable or equivalent in effect to California Civil Code § 1542.  The Releasors may hereafter discover facts in addition to or different from those that any of them now knows or believes to be true with respect to the subject matter of the Released Claims, but each Releasor shall expressly have and shall be deemed to have, and by operation of the Approval Order shall have fully, finally and forever settled and released any and all Released Claims, known or unknown, suspected or unsuspected, contingent or non-contingent, whether or not concealed or hidden, that now exist or heretofore have existed, upon any theory of law or equity now existing or coming into existence in the future, including conduct that is negligent, 

 

 

  

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reckless, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts. Each Releasor acknowledges and shall be deemed to have acknowledged, and by operation of the Approval Order shall have acknowledged, that the foregoing waiver was separately bargained for and a key element of the settlement of which this release is a part.

 

“Williams” shall mean Robert J. Williams, Jr.

 

“WMI Entities” shall mean WMI, WMILT, WMIIC, together with their present and former subsidiaries, affiliates, successors and assigns, including, without limitation, WMI Holdings Corp.

 

Section 1.3. Other Terms.  Other terms may be defined elsewhere in this Agreement and, unless otherwise indicated, shall have such meaning throughout this Agreement. As used in this Agreement, any reference to any federal, state, local or foreign law, including any applicable law, will be deemed also to refer to such law as amended and all rules and regulations promulgated thereunder, unless the context requires otherwise. The words “include”, “includes”, and “including” will be deemed to be followed by “without limitation”. Pronouns in masculine, feminine, or neuter genders will be construed to include any other gender, and words in the singular form will be construed to include the plural and vice versa, unless the context otherwise requires. The words “this Agreement”, “herein”, “hereof”, “hereby”, “hereunder”, and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited.

 

Section 1.4. Interpretation.  The Parties have participated jointly in the negotiation and drafting of this Agreement. If an ambiguity or question of intent or interpretation arises, this Agreement will be construed as if drafted jointly by the parties hereto and no presumption or burden of proof will arise favoring or disfavoring any party hereto because of the authorship of any provision of this Agreement.

 

ARTICLE II

SETTLEMENT TERMS

 

Section 2.1. Settlement Consideration.  In consideration for, and in full and complete satisfaction of, the Indemnification Claims, the Subrogation Claims, the Asserted Claim, the Carrier Litigation, the D&O Litigation and the 2007-2008 Policies, the following actions shall be taken or deemed to be taken as the case may be:

 

(a) Payment.  Within ten (10) days of the execution and delivery of this Agreement, WMILT shall provide the Contributing Insurers written notice, to the address and in the manner set forth in Section 7.10 of this Agreement, of instructions for the payments contemplated herein which may be made, by wire transfer of immediately available funds or check.  Within ten (10) days of the Effective Date, the Contributing Insurers, on behalf of the D&O Claimants, shall pay to WMILT, by wire transfer of immediately available funds or check, Thirty-Seven Million Dollars ($37,000,000.00) (the “Settlement Amount”) as follows:  (1) AXIS Reinsurance Company shall pay One Million Three Hundred Thirty-Three Thousand Three Hundred 

 

 

  

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Thirty-Four Dollars ($1,333,334.00); (2) Continental Casualty Company shall pay Six Hundred Sixty-Six Thousand Six Hundred Sixty-Six Dollars ($666,666.00); (3) Lloyds shall pay Twenty-Five Million Dollars ($25,000,000.00); (4)  XL Specialty Insurance Company shall pay Five Million Dollars ($5,000,000.00); (5) National Union Fire Insurance Company of Pittsburgh, PA shall pay Two Million Five Hundred Thousand Dollars ($2,500,000.00); and (6) Columbia Casualty Company shall pay Two Million Five Hundred Thousand Dollars ($2,500,000.00).  The obligation of the Contributing Insurers to make payments of their portion of the Settlement Amount shall be several and not joint.  Notwithstanding the foregoing, should any amount remain unexhausted on the 2007-2008 Policies issued by AXIS Reinsurance Company or Continental Casualty Company after subtracting from the policy limits the amounts to be paid pursuant to this Section 2.1 and any amounts paid under those policies to date, AXIS Reinsurance Company and Continental Casualty Company shall pay any such unexhausted amount towards covered Defense Expenses (as defined pursuant to XL Specialty Insurance Company Policy No. ELU097685-7), if any, until such policies are exhausted according to their terms.  For the avoidance of doubt, under no circumstances will any Contributing Insurer under the 2007-2008 Policies pay more than its policy limit for any reason.

 

(b) Chapter 11 Claims.  Except as expressly provided herein or pursuant to the terms and provisions of the Seventh Amended Plan, from and after the Effective Date, the D&O Claimants and the Insurers shall not object to, or take any action to prevent, the withdrawal, with prejudice, or the expungment of the Indemnification Claims (or, where applicable, the partial withdrawal of the Indemnification Component of a given proof of claim) and the Outside Director Non-Indemnity Claims, as applicable. Without in any way limiting the foregoing, from and after the Effective Date, and upon payment of the Settlement Amount as provided in Section 2.1(a) hereof, WMILT shall (1) direct Kurtzman Carson Consultants, LLC, the Bankruptcy Court-appointed claims agent in the Chapter 11 Cases, to remove from the claims registry of the Chapter 11 Cases the Indemnification Claims (or Indemnification Components, as applicable) and the Outside Director Non-Indemnity Claims, as applicable, except as expressly set forth herein and pursuant to the terms and provisions of the Seventh Amended Plan and (2) release all amounts or distributions from the Plan Reserve or the disputed claims reserve or the disputed equity escrow created pursuant to the Seventh Amended Plan, the Non-Subordinated Reserve Stipulations and the Subordinated Claim Stipulation, as the case may be, other than amounts or distributions associated with the Retained Subrogation Claims, and redistribute such amounts or distributions to holders of allowed claims in accordance with the terms and provisions of Section 26.3 of the Seventh Amended Plan and the Liquidating Trust Agreement.

 

Section 2.2. Outside Director Claims.  In consideration for, and in full and complete satisfaction of, the Outside Director Non-Indemnity Claims, on the Effective Date, the Outside Director Non-Indemnity Claims shall be deemed allowed in the amounts set forth on Exhibit “D” hereto.  On the first date scheduled for distributions in accordance with the terms and conditions of the Seventh Amended Plan following the Effective Date, WMILT shall make cash distributions to the Outside Director Claimants in an amount equal to the Outside Director Non-Indemnity Claims, as allowed, plus an amount equal to four percent (4%) thereof, net of applicable taxes, if any.  Without in any 

 

 

  

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way limiting the foregoing, all other amounts or distributions reserved on account of Outside Director Non-Indemnity Claims shall be deemed waived by the Outside Director Claimants and such other amounts or distributions shall be released from the Plan Reserve or the disputed claims reserve or disputed equity reserve created pursuant to the Seventh Amended Plan, the Non-Subordinated Reserved Stipulations and the Subordinated Claim Stipulation, as the case may be, and redistributed to holders of allowed claims in accordance with the terms and provisions of Section 26.3 of the Seventh Amended Plan and the Liquidating Trust Agreement.

 

Section 2.3. Killinger Non-Indemnity Claim.  Within ten (10) Business Days of the execution and delivery of this Agreement, Killinger shall elect one of the two forms of distribution set forth on Exhibit “F” hereto and provide WMILT written notice of such election to the address and in the manner set forth in Section 7.10 of this Agreement.  In consideration for, and in full and complete satisfaction of, the Killinger Non-Indemnity Claim, on the Effective Date, the Killinger Non-Indemnity Claim shall be deemed allowed in an amount based upon the election made by Killinger from the forms of distribution set forth on Exhibit “F”.  On the first date scheduled for distributions to be made in accordance with the terms and provisions of the Seventh Amended Plan following the Effective Date, and periodically thereafter in the event of an election for periodic payments pursuant to Exhibit “F” hereto, WMILT shall pay such amount, net of applicable taxes, if any, to the FDIC pursuant to the terms and provisions of Section I(E) of the FDIC Settlement Agreement.  Without in any way limiting the foregoing, all other amounts or distributions reserved on account of the Killinger Non-Indemnity Claim shall be deemed waived by Killinger and such other amounts or distributions shall be released from the Plan Reserve or the disputed claims reserve or disputed equity reserve created pursuant to the Seventh Amended Plan, the Non-Subordinated Reserved Stipulations and the Subordinated Claim Stipulation, as the case may be, and redistributed to holders of allowed claims in accordance with the terms and provisions of Section 26.3 of the Seventh Amended Plan and the Liquidating Trust Agreement.

 

Section 2.4. Stay and Dismissal of Actions.  As soon as practicable following payment of the Settlement Amount provided in Section 2.1(a) hereof, but in no event later than five (5) Business Days subsequent thereto, WMILT, the D&O Claimants and the Insurers shall take any and all action as is appropriate or as another Party may reasonably request to cause the respective clerks’ offices to record the dismissal, with prejudice, of the Bermuda Action and the D&O Litigation, including, without limitation, filing a request, stipulation or motion for dismissal with prejudice of such actions with the applicable court.

 

Section 2.5. Insurers.  Notwithstanding anything contained in this agreement to the contrary, the releases, representations and warranties, covenants and agreements provided by the Insurers herein are limited to their role and position as the insurer of one or more of the D&O Policies, their rights and obligations under one or more of the D&O Policies and the Settlement Amount to be paid hereunder.

 

 

  

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ARTICLE III

RELEASES AND BAR ORDER

 

Section 3.1.Release of WMI Entities.  On and effective as of the Effective Date, and without the need for the execution and delivery of additional documentation or the entry of any additional orders of the Bankruptcy Court, except as expressly provided in this Agreement, (i) the Insurers and each of their respective subsidiaries and Affiliates and the predecessors, successors and assigns of any of them and any other Person that claims or might claim through, on behalf of or for the benefit of any of the foregoing whether directly or derivatively (including, without limitation, by or through the Receivership or otherwise) (collectively, the “Insurer Releasors”), and (ii) the D&O Claimants and each of their respective assigns, advisors, representatives, members of his or her immediate family, heirs, executors, estates and administrators or any other Person that claims or might claim through, on behalf of or for the benefit of any of the foregoing whether directly or derivatively (the “D&O Releasors” and, together with the Insurer Releasors, the “Non-Debtor Releasors”) shall be deemed to have irrevocably and unconditionally, fully, finally, and forever waived, released, acquitted and discharged the WMI Entities, WMB, each of the Debtors’ estates, the Reorganized Debtors, their respective past or present parent entities, subsidiaries, Affiliates, directors, officers, employees, professionals, including, without limitation, any and all professionals retained by WMI or WMILT in the Chapter 11 Cases pursuant to an order of the Bankruptcy Court other than ordinary course professionals and the predecessors, successors and assigns of any of them (collectively, the “WMI Releasees”) from any and all past, present and future claims, demands, rights, liabilities, or causes of action of any and every kind, character or nature whatsoever, in law or in equity, known or unknown (including Unknown Claims), whether asserted or unasserted, which the Insurers or D&O Claimants, or any of them, or anyone claiming through them, on their behalf or for their benefit have or may have or claim to have, now or in the future, against any WMI Releasee that are Released Claims or otherwise are based upon, related to, or arise out of or in connection with any of the Indemnification Claims (as applicable), the Subrogation Claims, the Asserted Claim (including, without limitation, the Committee Letter and the Demand Letters) the D&O Litigation, the Carrier Litigation, the Outside Director Non-Indemnity Claims (as applicable), or any claim, act, fact, transaction, occurrence, statement or omission in connection with, or alleged or that could have been alleged in any of the foregoing, including, without limitation, any such claim, demand, right, liability, or cause of action for indemnification, contribution, or any other basis in law or equity for damages, costs or fees incurred by the Non-Debtor Releasors arising directly or indirectly from or otherwise relating to the foregoing (the “WMI Released Claims”). Further, the D&O Releasors shall be deemed to have irrevocably and unconditionally, fully, finally, and forever granted the releases provided for in Sections 41.6, 41.7 and 41.8 of the Seventh Amended Plan, the forms of which are annexed hereto as Exhibit “G”.  Notwithstanding anything contained in this Section 3.1 or elsewhere to the contrary, the foregoing is not intended to release, nor shall it have the effect of releasing, (i) the Excluded Claims, or (ii) the WMI Releasees from the performance of their obligations in accordance with this Agreement.

 

 

  

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Section 3.2. Release of the D&O Claimants.  Subject to the payment in full of the Settlement Amount, on and effective as of the Effective Date, and without the need for the execution and delivery of additional documentation or the entry of any additional orders of the Bankruptcy Court, except as expressly provided in this Agreement, (i) the Insurer Releasors and (ii) the WMI Entities, each of the Debtors’ estates, and the Reorganized Debtors and each of the foregoing’s respective subsidiaries and Affiliates and the predecessors, successors and assigns of any of them and any other Person that claims or might claim through, on behalf of or for the benefit of any of the foregoing, whether directly or derivatively (including, without limitation, by or through the Debtors, the receivership of WMB’s assets or otherwise) (the “WMI Releasors” and, together with the Insurer Releasors, the “Non-D&O Releasors”), shall be deemed to have irrevocably and unconditionally, fully, finally and forever waived, released, acquitted and discharged the D&O Claimants, Rotella, Schneider, Casey, Williams, and each of their respective assigns, advisors, representatives, members of his or her immediate family, heirs, executors, estates and administrators (collectively, the “D&O Releasees”), from any and all past, present and future claims, demands, rights, liabilities, or causes of action of any and every kind, character or nature whatsoever, in law or in equity, known or unknown (including Unknown Claims), whether asserted or unasserted, which the Non-D&O Releasors, or any of them, or anyone claiming through them, on their behalf or for their benefit, have or may have or claim to have, now or in the future, against any D&O Releasee that are Released Claims or otherwise are based upon, related to, or arise out of or in connection with any of the Committee Letter, the Demand Letters, the Asserted Claim, the D&O Litigation, the Indemnification Claims (as applicable), the Subrogation Claims, the Carrier Litigation, the Released Avoidance Actions and the Outsider Director Non-Indemnity Claims (as applicable), or any claim, act, fact, transaction, occurrence, statement or omission in connection with or alleged or that could have been alleged in relation to any of the foregoing including, without limitation, any such claim, demand, right, liability, or cause of action for indemnification, contribution, or any other basis in law or equity for damages, costs or fees incurred by the Non-D&O Releasors arising directly or indirectly from or otherwise relating to the Committee Letter, the Demand Letters, the Asserted Claim, the D&O Litigation, the Indemnification Claims, the Subrogation Claims, the Carrier Litigation, the Released Avoidance Actions or the Outside Director Non-Indemnity Claims (collectively, the “D&O Released Claims”); provided, however, that, notwithstanding anything contained in this Agreement to the contrary, the Insurers may assert against Rotella, Schneider, Casey and Williams any defense or counterclaim they deem necessary to the extent that Rotella, Schneider, Casey or Williams assert any claim against them or seek coverage from the Insurers notwithstanding the terms of this Agreement; and, provided, further, that,  notwithstanding anything contained in this Section 3.2 or elsewhere to the contrary, the foregoing is not intended to release, nor shall it have the effect of releasing, (i) the Excluded Claims and (ii) the D&O Releasees from the performance of their obligations in accordance with this Agreement.

 

Section 3.3. Release of the Insurers.  Subject to the payment in full of the Settlement Amount, on and effective as of the Effective Date, and without the need for the execution and delivery of additional documentation or the entry of any additional orders of the Bankruptcy Court, except as expressly provided in this Agreement, (i) the 

 

 

  

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D&O Releasors and (ii) the WMI Releasors (collectively, the “Insured Releasors”), shall be deemed to have irrevocably and unconditionally, fully, finally and forever waived, released, acquitted and discharged the Insurers, and each of their respective assigns, advisors, representatives, predecessors, successors, parent companies, subsidiaries, affiliates, directors, officers, employees, reinsurers, members of his or her immediate family, heirs, executors, estates and administrators (collectively, the “Insurer Releasees”), from any and all past, present and future claims, demands, rights, liabilities, or causes of action of any and every kind, character or nature whatsoever, in law or in equity, (including any claims for “bad faith”, breach of the duty of good faith and fair dealing, unfair claims handling, unfair or deceptive trade produces, or any violation of any insurance law, statute or regulation) known or unknown (including Unknown Claims), whether asserted or unasserted, which the Insured Releasors, or any of them, or anyone claiming through them, on their behalf or for their benefit, have or may have or claim to have, now or in the future, against any Insurer Releasee that are Released Claims or otherwise are based upon, related to, or arise out of or in connection with any of the Committee Letter, the Demand Letters, the Asserted Claim, the D&O Litigation, the Indemnification Claims, the Subrogation Claims, the Carrier Litigation, the Outsider Director Non-Indemnity Claims (as applicable), and/or the 2007-2008 Policies or any claim, act, fact, transaction, occurrence, statement or omission in connection with or alleged or that could have been alleged in relation to any of the foregoing, including, without limitation, any claim, demand, right, liability or cause of action for indemnification, contribution, or any other basis in law or equity for damages, costs or fees incurred by the Insured Releasors, arising directly or indirectly from or otherwise relating to the Committee Letter, the Demand Letters, the Asserted Claim, the D&O Litigation, the Indemnification Claims, the Subrogation Claims, the Carrier Litigation or the Outside Director Non-Indemnity Claims (collectively, the “Insured Released Claims”); provided, however, that, notwithstanding anything contained in this Section 3.3 or elsewhere to the contrary, the foregoing is not intended to release, nor shall it have the effect of releasing, (i) the Excluded Claims and (ii) the Insurer Releasees from the performance of their obligations in accordance with this Agreement.

 

Section 3.4. Release of Additional Insureds.  Without limiting the generality of the foregoing releases, subject to the payment in full of the Settlement Amount, on and effective as of the Effective Date, the WMI Releasors shall release all “Insureds” and “Insured Persons” under the 2007-2008 Policies and/or 2008-2009 Policies (as defined therein, respectively) (collectively, the “Additional Insured Releasees”) from any and all claims, demands, rights, liabilities, or causes of action of any and every kind, character or nature whatsoever, in law or in equity, known or unknown (including Unknown Claims), whether asserted or unasserted, which the WMI Releasors, or any of them, or anyone claiming through them, on their behalf or for their benefit, have or may have or claim to have, now or in the future, against any Additional Insured Releasee that are Released Claims or otherwise are based upon, related to, or arise out of or in connection with any of the Committee Letter, the Demand Letters, the Asserted Claim, the D&O Litigation, the Indemnification Claims, the Subrogation Claims, the Carrier Litigation and the Outside Director Non-Indemnity Claims (as applicable) or any claim, act, fact, transaction, occurrence, statement or omission in connection with or alleged or that could have been alleged in any of the foregoing 

 

 

  

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including, without limitation, any such claim, demand, right, liability, or cause of action for indemnification, contribution, or any other basis in law or equity for damages, costs or fees incurred by the Insured Releasors arising directly or indirectly from or otherwise relating to the Committee Letter, the Demand Letters, the Asserted Claim, the D&O Litigation, the Indemnification Claims, the Subrogation Claims, the Carrier Litigation or the Outside Director Non-Indemnity Claims (the “Additional Insured Released Claims”).

 

Section 3.5. Mutual Release of Bermuda Action.  Without limiting the generality of the foregoing releases, on and effective of the Effective Date, (a) Allied shall release the Bermuda Action Defendants from all claims, demands, rights, liabilities, or cause of action of any and every kind, character of nature whatsoever, in law or in equity, known or unknown (including Unknown Claims), whether asserted or unasserted, including any costs associated with the Bermuda Action, which Allied, or anyone claiming through it or on its behalf of for its benefit, have or may have or claim to have, now or in the future, against any of the Bermuda Action Defendants that are based up on, related to, or arise out of or in connection with the Bermuda Action or the Bermuda Claims (the “Bermuda Released Claims”) and (b) the Bermuda Action Defendants shall release Allied from the Bermuda Released Claims.  The parties to the Bermuda Action shall consent to the Bermuda Action being discontinued on the basis that there be no order as to costs.

 

Section 3.6. Release of Defense and Indemnity Claims.  Without limiting the generality of the foregoing releases, on and effective as of the Effective Date, the D&O Claimants and Insurers (whatever the nature of their claims), shall waive any and all rights to advancement, indemnity, subrogation, recoupment, clawback, and similar forms of legal and equitable relief against WMILT and each of the Debtors’ bankruptcy estates for all defense, indemnity and other costs paid, incurred, or to be paid or incurred by the D&O Claimants or the Insurers except for the Retained Subrogation Claims.

 

Section 3.7. Release of Reserves.  Notwithstanding anything contained in this Agreement to the contrary, on and effective as of the Effective Date, except for reserves for Retained Subrogation Claims, any reserves held under the Seventh Amended Plan for proofs of claims by the D&O Claimants for advancement, settlement, indemnification and defense costs paid, incurred, or to be paid or incurred by the D&O Claimants or the Insurers, including the Indemnification Claims (or Indemnification Components, as applicable), shall be released to WMILT and distributed in accordance with the terms and provisions of Section 26.3 of the Seventh Amended Plan and the Liquidating Trust Agreement.

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

 

Section 4.1. Representation and Warranties of the D&O Claimants.  Each of the D&O Claimants hereby represents and warrants for itself, that:  (a) he or she has full requisite power and authority to execute and deliver and to perform his or her obligations under this Agreement, and the execution, delivery and performance hereof, 

 

 

  

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and the instruments and documents required to be executed by him or her in connection herewith (i) have been duly and validly authorized by him or her and (ii) are not in contravention of any organizational documents or any agreements specifically applicable to him or her; and (b) no proceeding, litigation or adversary proceeding before any court, arbitrator or administrative or governmental body is pending against him or her which would adversely affect his or her ability to enter into this Agreement or to perform his or her obligations hereunder.

 

Section 4.2. Representation and Warranties of the Insurers.  Each of the Insurers hereby represents and warrants for itself, that (a) it has full requisite power and authority to execute and deliver and to perform its obligations under this Agreement, and the execution, delivery and performance hereof, and the instruments and documents required to be executed by it in connection herewith have been duly and validly authorized by it and (b) it owns the Subrogation Claims it is releasing as of the date of the executive hereof.

 

Section 4.3. Representation and Warranties of WMILT.  WMILT hereby represents and warrants for itself, and on behalf of the other Debtors, that:  (a) it is duly organized and validly existing under the laws of the jurisdiction of organization with all requisite power and authority to carry on the business in which it is engaged, to own the properties it owns, to execute this Agreement and to consummate the transactions contemplated hereby; (b) it has full requisite power and authority to execute and deliver and, upon entry of the Approval Order, to perform its obligations under this Agreement, and the execution, delivery and performance hereof, and the instruments and documents required to be executed by it in connection herewith (i) have been duly and validly authorized by it and (ii) are not in contravention of its organization documents or any material agreement specifically applicable to it; and (c) no proceeding, litigation or adversary proceeding before any court, arbitrator or administrative or governmental body is pending against it which would adversely affect its ability to enter into this Agreement or to perform its obligations hereunder.

 

Section 4.4. Representations of the Parties as to this Agreement.  Each Party represents and acknowledges that:  (a) in executing this Agreement, he, she or it does not rely, and has not relied, upon any representation or statement made by any other Party or any of such other Party’s representative, agents or attorneys, with regard to the subject matter, basis or effect of this Agreement or otherwise, other than as may be stated specifically in this Agreement; (b) in executing this Agreement, he, she or it has relied entirely upon his, her or its own judgment, beliefs and interest and the advice of his, her or its counsel and that he, she or it has had a reasonable period of time to consider the terms of this Agreement before entering into it; and (c) he, she or it has reviewed this Agreement and that he, she or it fully understands and voluntarily accepts all of the provisions contained herein.  Each Party further represents, acknowledges and agrees that this Agreement was the product of negotiations among the Parties and that any rule of construction as to ambiguities being resolved against the drafting party shall not apply in the interpretation of this Agreement.

 

 

 

  

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ARTICLE V

COVENANTS

 

Section 5.1. Covenants of the D&O Claimants.  Each of the D&O Claimants hereby covenants and agrees as follows:

 

(a) None of the D&O Claimants shall sell, transfer, pledge, hypothecate or assign any of the Indemnification Claims (or, where applicable, Indemnification Components), the Outside Director Non-Indemnity Claims or any voting rights or participations or other interests therein during the period from the date hereof up to and including the Effective Date; provided, however, that, if required by an insurance carrier party to the 2004-2005 Policies and not a party to this Agreement, Killinger may assign the portion of his Indemnification Claim relating to his pro rata portion of the Subordinated Reserve for the 2004-2005 Policies to any such insurance carrier.

 

(b) None of the D&O Claimants shall, except as expressly provided herein, (i) file any additional claims or proofs of claim, whatsoever, with the Bankruptcy Court against any of the Debtors (including secured, unsecured, administrative, priority or substantial contribution claims), (ii) file any additional claims, commence or prosecute any pending or additional litigation, proceeding, action or matter or seek to recover damages or to seek any other type of relief against (1) any of the Insurer Releasees based upon, arising from or relating to the Insured Released Claims, and (2) any of the WMI Releasees based upon, arising from or relating to the WMI Released Claims, or any of the claims or causes of action asserted or which could have been asserted in the Chapter 11 Cases, or (iii) directly or indirectly aid any person in taking any action with respect to the WMI Released Claims, that is prohibited by this Section 5.1(b).

 

(c) Each of the D&O Claimants shall support, and otherwise take no action to impede or preclude, the administration of the Chapter 11 Cases, or the consummation, implementation and administration of the Seventh Amended Plan.

 

(d) On the Effective Date, and without limiting the generality of the foregoing, each of the D&O Claimants shall be deemed to have covenanted not to sue (1) the Insurer Releasees with respect to the Insured Released Claims, and to be permanently barred and enjoined from instituting, prosecuting, pursuing or litigating, in any manner, the Insured Released Claims against the Insurer Releasees, and (2) the WMI Releasees with respect to the WMI Released Claims, and to be permanently barred and enjoined from instituting, prosecuting, pursuing or litigating, in any manner, the WMI Released Claims against the WMI Releasees.

 

(e) Each of the D&O Claimants shall not object to, or otherwise directly or indirectly aid any person in taking any action to oppose, the release of amounts or distributions reserved in the Plan Reserve, the disputed claims reserve or disputed equity reserve pursuant to the Seventh Amended Plan on account of the Retained Subrogation Claims being released and redistributed to holders of allowed claims in accordance with the terms and provisions of Section 26.3 of the Seventh Amended Plan.

 

 

 

  

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(f) On the Effective Date, each of the D&O Claimants shall confirm in writing to the WMI Entities and the Insurers that each of the representations and warranties set forth in Sections  4.1 and 4.4 of this Agreement are true and correct as of the Effective Date.

 

Section 5.2. Covenants of the Insurers.  The Insurers hereby covenant and agree as follows:

 

(a) None of the Insurers shall sell, transfer, pledge, hypothecate or assign any of the Subrogation Claims or any voting rights or participations or other interests therein during the period from the date hereof up to and including the Effective Date.

 

(b) None of the Insurers shall, except as expressly provided herein, (i) file any additional claims or proofs of claim, whatsoever, with the Bankruptcy Court against any of the Debtors (including secured, unsecured, administrative, priority or substantial contribution claims), (ii) file any additional claims, commence or prosecute any pending or additional litigation, proceeding, action or matter or seek to recover damages or to seek any other type of relief against (1) any of the D&O Releasees based upon, arising from or relating to the D&O Released Claims, and (2) any of the WMI Releasees based upon, arising from or relating to the WMI Released Claims or Bermuda Released Claims, or any of the claims or causes of action asserted or which could have been asserted in the Chapter 11 Cases, or (iii) directly or indirectly aid any person in taking any action with respect to the WMI Released Claims or the D&O Released Claims, that is prohibited by this Section 5.2(b).

 

(c) Each of the Insurers shall support, and otherwise take no action to impede or preclude, the administration of the Chapter 11 Cases, or the consummation, implementation and administration of the Seventh Amended Plan.

 

(d) On the Effective Date, and without limiting the generality of the foregoing, each of the Insurers shall be deemed to have covenanted not to sue, the WMI Releasees with respect to the WMI Released Claims, and to be permanently barred and enjoined from instituting, prosecuting, pursuing or litigating, in any manner, the WMI Released Claims against the WMI Releasees and (2) the D&O Releasees with respect to the D&O Released Claims, and to be permanently barred and enjoined from instituting, prosecuting, pursuing or litigating, in any manner, the D&O Released Claims against the D&O Releasees.

 

(e) Each of the Insurers shall not object to, or otherwise directly or indirectly aid any person in taking any action to oppose, the release of amounts or distributions reserved in the Plan Reserve or the disputed claims reserve or the disputed equity reserve pursuant to the Seventh Amended Plan on account of the Retained Subrogation Claims being released and redistributed to holders of allowed claims in accordance with the terms and provisions of Section 26.3 of the Seventh Amended Plan and the Liquidating Trust Agreement.

 

 

 

  

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(f) On the Effective Date, each of the Insurers shall confirm in writing to the WMI Entities and the D&O Claimants that each of the representations and warranties set forth in Sections 4.2 and 4.4 of this Agreement are true and correct as of the Effective Date.

 

Section 5.3. Covenants of WMILT.  WMILT hereby covenants and agrees as follows:

 

(a) WMILT shall take, all actions reasonably necessary to obtain, and shall take no action to impede or preclude, the approval of this Agreement, including, but not be limited to, filing on or prior to November 25, 2014, a motion for entry of the Approval Order, authorizing and approving the compromise and settlement set forth herein in accordance with Rule 9019 of Federal Rules of Bankruptcy Procedure.

 

(b)WMILT shall not:  (i) file any additional claims, commence or prosecute any pending or additional litigation, proceeding, action, or matter or seek to recover damages or to seek equitable relief against any of the Non-Debtor Releasees arising from or relating to the Insured Released Claims, Additional Insured Released Claims, or the D&O Released Claims, or (ii) directly or indirectly aid any Person in taking any act prohibited by clause (i) of this Section 5.3(b); provided, however, that WMILT may take such actions as are necessary to comply with applicable laws and rules, including Rev. Code Wash. (ARCW) §4.16.170, and generally to assure that the D&O Litigation is neither dismissed nor prejudiced pending the Effective Date.

 

(c) On the Effective Date, and without limiting the generality of the foregoing, WMILT shall be deemed to have covenanted not to sue (i) the D&O Releasees with respect to the D&O Released Claims, (ii) the Insurer Releasees with respect to the Insured Released Claims, (iii) the Additional Insured Releasees with respect to the Additional Insured Released Claims, and to be permanently barred and enjoined from instituting, prosecuting, pursuing or litigating in any manner the foregoing Released Claims against the foregoing Releasees.

 

(d) On the Effective Date, WMILT shall confirm in writing to the D&O Claimants and the Insureds that each of the representations and warranties set forth in Sections 4.3 and 4.4 of this Agreement are true and correct as of the Effective Date.

 

ARTICLE VI

CLOSING AND TERMINATION

 

Section 6.1. Conditions to Effective Date.  Except with regard to the covenants of the D&O Claimants set forth in Section 5.1 hereof, the covenants of the Insureds set forth in Section 5.2 hereof and the covenants of WMILT set forth in Section 5.3 hereof, the terms and provisions of this Agreement are expressly subject to the following conditions unless waived, in writing, by the Parties:

 

(a) the execution and delivery of this Agreement by each of the entities identified on the signature pages of this Agreement; and

 

 

 

  

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(b) the entry of the Approval Order by the Bankruptcy Court, and such Approval Order becomes a Final Order; provided, however, that, upon notice to the Contributing Insurers by WMILT, and with the consent of the Contributing Insurers, the Final Order condition of this subsection 6.1(b) may be waived.

 

Section 6.2. Termination of Agreement.  This Agreement may be terminated by any Party, at such Party’s sole option and discretion, in the event that (a) the WMILT Trust Advisory Board shall have failed to approve this Agreement, (b) any other Party hereto materially breaches any of the covenants set forth in Article V hereof or any of its other undertakings in this Agreement, or (c) the Approval Order is not entered by the Bankruptcy Court and the Effective Date does not occur on or prior to January 15, 2015.

 

Section 6.3. Effect of Termination.  Except as otherwise provided herein, in the event of the termination of this Agreement, this Agreement shall become null and void and be deemed of no force and effect, with no liability on the part of any Party hereto (or of any of its directors, officers, employees, consultants, contractors, agents, legal and financial advisors or other representatives), and no Party shall have any obligations to any other Party arising out of this Agreement. Any payments made pursuant to Section 2.1(a) hereof shall be returned in full to the payor within ten (10) days of termination of this Agreement.  Upon termination, except for the purpose of recovery of any payments made pursuant to Section 2.1(a) hereof or as otherwise provided herein, neither this Agreement nor any terms or provisions set forth herein shall be admissible in any dispute, litigation, proceeding or controversy among the Parties and nothing contained herein shall constitute or be deemed to be an admission by any Party as to any matter, it being understood that the statements and resolutions reached herein were as a result of negotiations and compromises of the respective positions of the Parties.  In addition, except for the purpose of recovery of any payments made pursuant to Section 2.1(a) hereof or as otherwise provided herein, no Party shall seek to take discovery concerning this Agreement or admit this Agreement or any part of it into evidence against any other Party hereto.

 

ARTICLE VII

MISCELLANEOUS

 

Section 7.1. Amendments.  This Agreement may not be modified, amended or supplemented except by a written agreement executed by each Party to be affected, or whose constituency may be affected, by such modification, amendment or supplement.

 

Section 7.2. No Admission of Liability.

 

(a) The execution of this Agreement is not intended to be, nor shall it be construed as, an admission or evidence in any pending or subsequent suit, action, proceeding or dispute of any liability, wrongdoing, or obligation whatsoever (including as to the merits of any claim or defense) by any Party to any other Party or any other Person with respect to any of the matters addressed in this Agreement.

 

 

 

  

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(b) None of this Agreement (including, without limitation, the Recitals and Exhibits hereto), the settlement or any act performed or document executed pursuant to or in furtherance of this Agreement or the settlement:  (i) is or may be deemed to be or may be used as an admission or evidence of the validity of any claim, or any allegation made in the Related Actions or of any wrongdoing or liability of any Party; (ii) is or may be deemed to be or may be used as an admission or evidence of any liability, fault or omission of any Party in any civil, criminal or administrative proceeding in any court, administrative agency or other tribunal; or (iii) is or may be deemed to be or used as an admission or evidence against the Reorganized Debtors or the Debtors with respect to the validity of any of the Released Claims.  None of this Agreement, the settlement, or any act performed or document executed pursuant to or in furtherance of this Agreement or the settlement shall be admissible in any proceeding for any purposes, except to enforce the terms of the Agreement, and except that any Party may file this Agreement in any action to effectuate the promises and obligations set forth herein, including, but not limited to, in order to support a defense or counterclaim based on the principles of res judicata, collateral estoppel, release, good faith settlement, judgment bar or reduction or any other theory of claim preclusion or issue preclusion or similar defense of counterclaim.

 

Section 7.3. Good Faith Negotiations.  The Parties recognize and acknowledge that each of the Parties hereto is represented by counsel, and such Party received independent legal advice with respect to the advisability of entering into this Agreement.  Each of the Parties acknowledges that the negotiations leading up to this Agreement were conducted regularly and at arm’s length; this Agreement is made and executed by and of each Party’s own free will; that each knows all of the relevant facts and his or its rights in connection therewith; and that he or it has not been improperly influenced or induced to make this settlement as a result of any act or action on the part of any party or employee, agent, attorney or representative of any party to this Agreement. The Parties further acknowledge that they entered into this Agreement because of their desire to avoid the further expense and inconvenience of litigation and other disputes, and to compromise permanently and settle the claims between the Parties settled by the execution of this Agreement.

 

Section 7.4. Third Party Beneficiaries.  Nothing in this Agreement, express or implied, is intended or shall be construed to confer upon, or to give to, any Person other than the Parties hereto, the Reorganized Debtors, the Releasees, and their respective successors and assigns, any right, remedy or claim under or by reason of this Agreement or any covenant, condition or stipulation thereof; and the covenants, stipulations and agreements contained in this Agreement are and shall be for the sole and exclusive benefit of the Parties hereto, the Releasees and their respective successors and assigns.

 

Section 7.5.Governing Law; Retention of Jurisdiction; Service of Process.  This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware and applicable federal law.  By its execution and delivery of this Agreement, each of WMILT, the D&O Claimants and the Insurers hereby irrevocably and unconditionally agrees for itself that any legal action, suit or proceeding between any or all of the foregoing with respect to any matter under or arising out of or in 

 

 

  

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connection with this Agreement or for recognition or enforcement of any judgment rendered in any such action, suit or proceeding, shall be brought in the Bankruptcy Court for that purpose only, and, by execution and delivery of this Agreement, each hereby irrevocably accepts and submits itself to the jurisdiction of such court, generally and unconditionally, with respect to any such action, suit or proceeding, subject to a Party’s rights pursuant to applicable law.  In the event any such action, suit or proceeding is commenced, the Parties hereby agree and consent that service of process may be made, and personal jurisdiction over any Party hereto in any such action, suit or proceeding may be obtained, by service of a copy of the summons, complaint and other pleadings required to commence such action, suit or proceeding upon the Party at the address of such Party set forth in Section 7.10 hereof, unless another address has been designated by such Party in a notice given to the other Parties in accordance with Section 7.10 hereof.

 

Section 7.6. Headings.  The headings of the sections, paragraphs and subsections of this Agreement are inserted for convenience only and are not part of this Agreement and do not in any way limit or modify the terms or provisions of this Agreement and shall not affect the interpretation hereof.

 

Section 7.7. Binding Agreement; Successors and Assigns; Joint and Several Obligations.  This Agreement shall be binding only upon the execution and delivery of this Agreement by the Parties listed on the signature pages hereto, subject to Bankruptcy Court approval as to the Debtors.  This Agreement is intended to, and shall be deemed to, bind and inure to the benefit of the Parties and their respective successors, assigns, administrators, constituents and representatives. The agreements, representations, covenants and obligations of the Parties under this Agreement are several only and not joint in any respect and none shall be responsible for the performance or breach of this Agreement by another.

 

Section 7.8. Entire Agreement.  This Agreement (including the exhibits hereto) and the Approval Order constitute the full and entire agreement among the Parties with regard to the subject hereof, and supersedes all prior negotiations, representations, promises or warranties (oral or otherwise) made by any Party with respect to the subject matter hereof.  No Party has entered into this Agreement in reliance on any other Party’s prior representation, promise or warranty (oral or otherwise) except for those that may be expressly set forth in this Agreement.

 

Section 7.9. Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original copy of this Agreement and all of which, when taken together, shall constitute one and the same Agreement. Copies of executed counterparts transmitted by telecopy or other electronic transmission service shall be considered original executed counterparts, provided receipt of copies of such counterparts is confirmed.

 

Section 7.10. Notices.  All demands, notices, requests, consents, and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) when personally delivered by courier service or messenger, (ii) upon actual receipt (as established by confirmation of receipt or otherwise) during normal business hours, otherwise on the first business day thereafter if transmitted electronically (by e-

 

 

  

23

  

 

 

mail transmission), by facsimile or telecopier, with confirmation of receipt, or (iii) three (3) Business Days after being duly deposited in the mail, by certified or registered mail, postage prepaid-return receipt requested, to the following addresses, or such other addresses as may be furnished hereafter by notice in writing, to the following Parties:

 

If to the WMI Entities, to:

 

WMI Liquidating Trust.

1201 Third Avenue, Suite 3000

Seattle, Washington  98101

Attn:  Charles Edward Smith, General Counsel

Facsimile:  (206) 432-8879

Email:  chad.smith@wamuinc.net

 

with a copy given in like manner to:

 

Alvarez & Marsal LLP

100 Pine Street, Suite 900

San Francisco, California 94111

Attn:  William C. Kosturos

Facsimile:  (415) 837-1684

Email:  bkosturos@alvarezandmarsal.com

 

- and -

 

Weil, Gotshal & Manges LLP

767 Fifth Avenue

New York, New York 10153

Attn:  Brian S. Rosen, Esq.

Facsimile:  (212) 310-8007

Email:  brian.rosen@weil.com

 

If to the Outside Director Claimants, to:

 

Perkins Coie LLP

1201 Third Avenue

Suite 4800

Seattle, Washington 98101-3099

Attn:  Ronald L. Berenstain, Esq.

Telephone: (206) 359-8477

Facsimile:  (206) 359-9477

Email: rberenstain@perkinscoie.com

If to Killinger, to:

 

Wilson Sonsini Goodrich & Rosati

650 Page Mill Road

Palo Alto, California 94304

 

 

  

24

  

 

 

 

Attn: Jerome F. Birn, Jr., Esq.

Facsimile:  (650) 493-6811

Email: jbirn@wsgr.com

 

- and -

 

Monzack Mersky McLaughlin

      & Browder, P.A.

1201 N. Orange Street

Wilmington, DE 19801

Attn: Rachel B. Mersky, Esq.

Facsimile:  (302) 656-2769

Email: rmerksy@monlaw.com

If to Fishman, to:

 

Schulte, Roth & Zabel LLP

919 Third Avenue

New York, NY 10022

Attn:  Howard O. Godnick, Esq.

Facsimile:  (212) 593-5955

Email: howard.godnick@srz.com

If to Bonderman, to:

 

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, NY 10006

Attn:  Mitchell A. Lowenthal, Esq.

Facsimile:  (212) 225-3999

Email: mlowenthal@cgsh.com

If to XL, to:

 

Wiley Rein LLP

1776 K Street NW

Washington, DC 20006

Attn:  Charles C. Lemley, Esq.

Facsimile:  (202) 719-7049

Email: clemley@wileyrein.com

If to National Union Fire Insurance Company of Pittsburgh, PA, to:

 

D’Amato & Lynch, LLP

2 World Financial Center

225 Liberty Street

New York, NY 10281

  

25

  

Attn:  Deborah Collins, Esq.

Facsimile: (212) 269-3559

Email: dcollins@damato-lynch.com

If to AXIS Insurance Company or AXIS Reinsurance Company, to:

 

BatesCarey LLP

191 N. Wacker Drive

Chicago, IL 60606

Attn: Ommid C. Farashahi, Esq.

Facsimile (312) 762-3200

Email: ofarashahi@batescarey.com

If to Continental Casualty Company or Columbia Casualty Company, to:

 

DLA Piper LLP (US)

1251 Avenue of the Americas

New York, NY 10020

Attn:  Stephen P. Davidson, Esq.

Facsimile: (212) 884-8456

Email: Stephen.davidson@dlapiper.com

If to Lloyds, to:

 

Sedgwick LLP

333 Bush Street, 30th Floor

San Francisco, CA 94104

Attn:  Eugene Elsbree, Esq.

Facsimile: (415) 781-2635

Email: Eugene.elsbree@sedgwicklaw.com

 

 

Section 7.11. Further Assurances.  Each of the Parties hereto agrees to execute and deliver, or to cause to be executed and delivered, all such instruments, and to take all such action as the other Parties may reasonably request in order to effectuate the intent and purposes of, and to carry out the terms of, this Agreement.

 

 

 

 

 

  

26

  

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as of the date set forth above.

 

 

 

	 	WMI LIQUIDATING TRUST 	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Charles Edward Smith	 
	 	 	Name:	Charles Edward Smith	 
	 	 	Title:	General Counsel 	 

 

	 	TODD H. BAKER	 
	 	 	 	 
	
 

	
By: 

	 	 

 

	 	DAVID BONDERMAN	 
	 	 	 	 
	
 

	
By: 

	/s/  David Bonderman	 

 

	 	ALFRED BROOKS	 
	 	 	 	 
	
 

	
By: 

	 	 

	 	STEPHEN I. CHAZEN	 
	 	 	 	 
	
 

	
By: 

	/s/  Stephen I. Chazen	 

	 	ANNE V. FARRELL	 
	 	 	 	 
	
 

	
By: 

	/s/  Anne V. Farrell	 

 

	 	ALAN H. FISHMAN	 
	 	 	 	 
	
 

	
By: 

	
/s/  Howard Godwick, 

Attorney for Alan H. Fishman

	 

  

27

  

 

	 	STEPHEN E. FRANK	 
	 	 	 	 
	
 

	
By: 

	/s/  Stephen E. Frank	 

	 	DEBORA D. HORVATH	 
	 	 	 	 
	
 

	
By: 

	 	 

 

	 	KERRY K. KILLLINGER	 
	 	 	 	 
	
 

	
By: 

	/s/  Kerry K. Killinger	 

 

 

	 	THOMAS C. LEPPERT	 
	 	 	 	 
	
 

	
By: 

	/s/  Thomas C. Leppert	 

 

	 	CHARLES M. LILLIS	 
	 	 	 	 
	
 

	
By: 

	/s/  Charles M. Lillis	 

	 	PHILLIP D. MATTHEWS	 
	 	 	 	 
	
 

	
By: 

	/s/  Phillip D. Matthews	 

 

	 	JOHN P. McMURRAY	 
	 	 	 	 
	
 

	
By: 

	 	 

 

 

	 	
MARGARET OSMER McQUADE

	 
	 	 	 	 
	
 

	
By: 

	/s/  Margaret Osmer McQuade	 

 

  

28

  

 

 

 

	 	
REGINA T. MONTOYA

	 
	 	 	 	 
	
 

	
By: 

	/s/  Regina T. Montoya	 

 

	 	
MICHAEL K. MURPHY

	 
	 	 	 	 
	
 

	
By: 

	/s/  Michael K. Murphy	 

 

	 	
MARY E. PUGH

	 
	 	 	 	 
	
 

	
By: 

	/s/  Mary E. Pugh	 

 

	 	
WILLIAM G. REED, JR.

	 
	 	 	 	 
	
 

	
By: 

	/s/  William G. Reed, Jr.	 

 

	 	
ORIN C. SMITH

	 
	 	 	 	 
	
 

	
By: 

	/s/  Orin C. Smith	 

 

	 	
JAMES H. STEVER

	 
	 	 	 	 
	
 

	
By: 

	/s/  James H. Stever	 

 

	 	
WILLIS B. WOOD, JR.

	 
	 	 	 	 
	
 

	
By: 

	/s/  Willis B. Wood, Jr.	 

 

	 	
ACE AMERICAN INSURANCE 

COMPANY

	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Sean Simpson	 
	 	 	Name:	Sean Simpson	 
	 	 	Title:	Sedgwick LLP, as authorized to sign on behalf of ACE American Insurance Company	 

 

 

 

  

29

  

 

	 	ALLIED WORLD ASSURANCE COMPANY LTD.	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  JaneE. Haylett 	 
	 	 	Name:	JaneE. Haylett 	 
	 	 	Title:	Vice President Professional Loan Claims	 

 

 

	 	ARCH INSURANCE GROUP	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Kim W. West	 
	 	 	Name:	Kim W. West 	 
	 	 	Title:	Partner 	 

 

 

	 	AXIS INSURANCE COMPANY	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Timothy C. Vazquez	 
	 	 	Name:	Timothy C. Vazquez 	 
	 	 	Title:	Assistant Vice President - Claims 	 

 

 

	 	AXIS REINSURANCE COMPANY	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Timothy C. Vazquez 	 
	 	 	Name:	Timothy C. Vazquez  	 
	 	 	Title:	Assistant Vice President - Claims  	 

 

 

	 	
AIG CLAIMS, INC., AS AUTHORIZED 

REPRESENTATIVE OF CHARTIS 

PROPERTY CASUALTY COMPANY

	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Maureen Conboy	 
	 	 	Name:	Maureen Conboy	 
	 	 	Title:	Assistant Vice President 	 

 

 

30

 

 

	 	COLUMBIA CASUALTY COMPANY	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  David Philips	 
	 	 	Name:	David Philips	 
	 	 	Title:	Senior Claim Counsel	 

 

 

	 	
CONTINENTAL CASUALTY 

COMPANY

	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  David Philips	 
	 	 	Name:	David Philips 	 
	 	 	Title:	Senior Claim Counsel 	 

 

 

	 	HOUSTON CASUALTY COMPANY	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Evelyn Williams	 
	 	 	Name:	Evelyn Williams 	 
	 	 	Title:	Authorized Representative 	 

 

 

	 	
AIG CLAIMS, INC., AS AUTHORIZED 

REPRESENTATIVE OF NATIONAL 

UNION FIRE INSURANCE COMPANY 

OF PITTSBURGH, PA

	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Maureen Conboy	 
	 	 	Name:	Maureen Conboy 	 
	 	 	Title:	Assistant Vice President  	 

 

 

	 	RSUI INDEMNITY COMPANY	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Scott Fahy 	 
	 	 	Name:	Scott Fahy 	 
	 	 	Title:	Assistant Vice President - RSUI Group, Inc. 	 

 

 

31

 

 

	 	SCOTTSDALE INDEMNITY COMPANY	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  John D. Briggs	 
	 	 	Name:	John D. Briggs 	 
	 	 	Title:	Assistant General Counsel 	 

 

 

	 	
THOSE CERTAIN UNDERWRITERS AT

LLOYD’S, LONDON AND LONDON

COMPANIES, SUBSCRIBING TO

POLICY NUMBER 509QA01550707

	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Eugene  V. Elsbree	 
	 	 	Name:	Eugene  V. Elsbree	 
	 	 	Title:	Authorized Representative 	 

 

 

	 	
THOSE CERTAIN UNDERWRITERS AT 

LLOYD’S, LONDON, SUBSCRIBING TO 

POLICY NUMBER B0509QA027908

	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Sean Simpson 	 
	 	 	Name:	Sean Simpson 	 
	 	 	Title:	Sedgwick LLP, as authorized to sign on behalf of those certain underwriters at Lloyd's London, subscribing to Policy No. B0509QAO27908	 

 

 

	 	
XL SPECIALTY INSURANCE 

COMPANY

	 
	 	 	 	 
	 	 	 	 
	
 

	
By: 

	/s/  Michael P.Morabito	 
	 	 	Name:	Michael P.Morabito 	 
	 	 	Title:	Vice President, Claims 	 

 

32

  

  

  

Execution Copy

EXHIBIT B

The following are relevant excerpts of the Seventh Amended Plan, a complete copy of which can be found at http://www.kccllc.net/wamu.

 

“41.6 Releases by Holders of Claims. (a) Global Third Party Releases. On the Effective Date, for good and valuable consideration, and to the fullest extent permissible under applicable law, each Entity (Creditor or holder of an Equity Interest) that (i) has held, currently holds or may hold a Released Claim or any Released Third Party Causes of Action, (ii) is entitled to receive, directly or indirectly, a distribution or satisfaction of its Claim or Equity Interest pursuant to the Plan, and (iii) elects, by not checking or checking the appropriate box on its Ballot or election form, as the case may be, to grant the releases set forth in this Section 41.6, on their own behalf and on behalf of anyone claiming through them, shall be deemed to have and hereby does irrevocably and unconditionally, fully, finally and forever waive, release, acquit and discharge (1) each and all of the Released Parties, from any and all Released Claims and/or any claim, act, fact, transaction, occurrence, statement, or omission in connection with or alleged in the Actions or in the Texas Litigation, or that could have been alleged in respect of the foregoing or other similar proceeding, including, without limitation, any such claim demand, right, liability, or cause of action for indemnification, contribution or any other basis in law or equity for damages, costs or fees incurred by the releasors herein arising directly or indirectly from or otherwise relating thereto and (2) each of (a) the AAOC Releasees, (b) the Senior Notes Claims Releasees, (c) the Senior Subordinated Notes Claims Releasees, (d) the PIERS Claims Releasees and (e) the CCB Releasees from any and all Released Third Party Causes of Action; provided, however, that each Entity that has elected not to grant the releases set forth in this Section 41.6, including, without limitation, any Entity that fails to execute and deliver a release following notice in accordance  with the provisions of Section 31.6(c) hereof, shall not be entitled to, and shall not receive, any payment, distribution or other satisfaction of its claim pursuant to the Plan; and, provided, further, that, notwithstanding anything contained in this Section 41.6(a) to the contrary, the release set forth in Section 41.6(a)(1) shall not extend to acts of gross negligence or willful misconduct of any Released Parties (other than with respect to the JPMC Entities and their respective Related Persons); and, provided, further, that, notwithstanding the foregoing, solely for purposes of this Section 41.6(a), “Released Parties” shall not include Related Persons other than (i) Related Persons of the JPMC Entities and (ii) Related Persons of the FDIC Receiver and FDIC Corporate.”

 

“41.7 Injunction Related to Releases. As of the Effective Date, all Entities that hold, have held, or may hold a Released Claim, an Estate Claim, any Released Third Party Causes of Action or an Equity Interest that is released pursuant to Sections

 

41.5 and 41.6 of the Plan, are, and shall be, permanently, forever and completely stayed, restrained, prohibited, barred and enjoined from taking any of the following actions, whether directly or indirectly, derivatively or otherwise, on account of or based on the subject matter of such discharged Released Claims, Estate Claim, Released Third Party Causes of Action or such Equity Interests: (i) commencing, conducting or continuing in any manner, directly or indirectly, any suit, action or other proceeding (including, without limitation, any judicial, arbitral, administrative or other proceeding) in any forum;  (ii) enforcing, attaching (including, without limitation, any prejudgment attachment), collecting, or in any way seeking to recover any judgment, award, decree, or other order; (iii) creating, perfecting or in any way enforcing in any matter, directly or indirectly, any Lien; (iv) setting off, seeking reimbursement or contributions from, or subrogation against, or otherwise recouping in any manner, directly or indirectly, any amount against any liability or obligation owed to any Entity released under Sections 41.5 and 41.6 hereof; and (v) commencing or continuing in any manner, in any place of any judicial, arbitration or administrative proceeding in any forum, that does not comply with or is inconsistent with the provisions of the Plan or the Confirmation Order.”

 

“41.8 Exculpation.  The Debtors, the Debtors’ officers and directors serving during the period from the Petition Date up to and including the Effective Date, the Creditors’ Committee and each of its members in their capacity as members of the Creditors’ Committee, the Equity Committee and each of its members in their capacity as members of the Equity Committee, and each of their respective professionals shall not have or incur any liability to any Entity for any act taken or omitted to be taken in connection with the Chapter 11 Cases (including any actions taken by the Creditors’ Committee after the Effective Date), the formulation, preparation, dissemination, implementation, confirmation or approval of the Plan or any compromises or settlements contained therein, the Disclosure Statement and the Supplemental Disclosure Statement related thereto, the Global  Settlement  Agreement, or any contract, instrument, release or other  agreement or document provided for or contemplated in connection with the consummation of the transactions set forth in the Plan and the Global Settlement Agreement; provided, however, that the foregoing provisions of this Section 41.8, shall not affect the liability of any Entity that otherwise would result from any such act or omission to the extent that such act or omission is determined in a Final Order to have constituted gross negligence or willful misconduct.  Nothing in the foregoing Section 41.8 shall prejudice the right of any of the Debtors, the Debtors’ officers and directors serving during the period from the Petition Date up to and including the Effective Date, the Creditors’ Committee and each of its members in their capacity as members of the Creditors’ Committee, the Equity Committee and each of its members in their capacity as members of the Equity Committee, and each professionals to assert reliance upon advice of counsel as a defense with respect to their duties and responsibilities under the Plan.”Exhibit 10.1

 

SUBSCRIBER’S NAME:     ______________________________________________________________

 

QUANTUMSPHERE,
INC.

A NEVADA CORPORATION

 

10% SUBORDINATED CONVERTIBLE PROMISSORY
NOTES

 

SUBSCRIPTION BOOKLET

 

THE PRIVATE PLACEMENT OF SECURITIES
DESCRIBED HEREIN HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
OR UNDER ANY SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER JURISDICTION. THIS PRIVATE PLACEMENT IS MADE PURSUANT
TO SECTION 4(2) OF SAID ACT, WHICH EXEMPTS FROM SUCH REGISTRATION TRANSACTIONS NOT INVOLVING A PUBLIC OFFERING. FOR THIS REASON,
THESE SECURITIES WILL BE SOLD ONLY TO INVESTORS WHO MEET CERTAIN MINIMUM SUITABILITY QUALIFICATIONS DESCRIBED HEREIN.

 

IN MAKING AN INVESTMENT DECISION
INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE SECURITIES OFFERED, INCLUDING THE MERITS AND RISKS INVOLVED.
AN INVESTOR SHOULD BE PREPARED TO BEAR THE ECONOMIC RISK OF AN INVESTMENT IN THE COMPANY FOR AN INDEFINITE PERIOD OF TIME BECAUSE
THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR THE LAWS OF ANY OTHER JURISDICTION, AND, THEREFORE,
CANNOT BE SOLD UNLESS THEY ARE SUBSEQUENTLY REGISTERED OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THERE IS NO OBLIGATION OF
THE ISSUER TO REGISTER THE SECURITIES UNDER THE SECURITIES ACT OR THE LAWS OF ANY OTHER JURISDICTION.

 

    	 

    	 

    

 

QUANTUMSPHERE, INC.

 

NOTE PURCHASE AGREEMENT

 

10% SUBORDINATED CONVERTIBLE PROMISSORY
NOTES

 

THIS NOTE PURCHASE
AGREEMENT (this “Agreement”) is made and entered into as of the date set forth on the signature page
hereto by and between QuantumSphere, Inc., a Nevada corporation (the “Company”), and the investor whose
name appears on the signature page hereto (the “Investor”).

 

WHEREAS, the Company
is conducting a private placement (the “Private Placement”) of its 10% Subordinated Convertible Promissory
Notes (the “Notes”). The Notes are convertible into common stock of the Company pursuant to the terms
set forth in the Notes. In addition, the Notes include a detachable warrant to purchase shares of common stock in an amount equal
to fifty-percent (50.0%) of the face value of the Notes, based on the exercise terms set forth in the common stock purchase warrant
(the “Warrants”). The Notes and the Warrants are collectively referred to herein as the “Securities”;
and

 

Whereas,
the Private Placement is to be exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities
Act”), pursuant to Section 4(2) of the Securities Act and/or Rule 506 of Regulation D and is limited to persons who
qualify as “accredited investors” as defined by Rule 501(a) of the Securities Act;

 

By execution below,
the Investor acknowledges that the Company is relying upon the accuracy and completeness of the representations contained herein
as a condition of complying with its obligations under applicable securities laws and this Agreement.

 

1.             Subscription.
Subject to the terms and conditions of this Agreement, the Investor hereby agrees to subscribe for the Securities in the original
principal amount set forth on the signature page hereto (the “Subscription Amount”). Upon receipt of
the Subscription Amount by the Company via wire transfer to the account designated by the Company in Section 1(a) below, or by
check made payable to “QuantumSphere, Inc.”, the Company shall (a) issue to the Investor a Note in the original principal
amount of the Subscription Amount in substantially the form attached hereto as Exhibit A, (b) issue to the Investor
a Common Stock Purchase Warrant in substantially the form attached hereto as Exhibit B, (c) counter-execute the Security
Agreement in substantially the form attached hereto as Exhibit C, and (d) counter-execute the Registration Rights
Agreement in substantially the form attached hereto as Exhibit D.

 

(a)          QSI
Wire Transfer Details. QSI wiring details are as follows:

 

Wells Fargo
Bank, N.A.

2677 Park Ave.,
Tustin, CA 92782

ABA No.:
121000248

Swift (International):
WFBIUS6S

Account No.: 8098588943

Account Name:
QuantumSphere, Inc.        

 

(b)          Binding
Subscription; Right to Reject. Subject to the terms and conditions hereof, the Investor’s obligation to subscribe and
pay for the Securities shall be complete and binding upon the execution and delivery of this Agreement. The Company reserves the
right to reject all or any part of any subscription for the Securities for any reason or no reason, where the subscription for
the Securities shall be subject to the acceptance of this Agreement by the Company.

 

2.             Use
of Proceeds. The Company proposes to use the proceeds from the Securities to fund working capital. Accordingly, the Company’s
management will have significant flexibility in applying the net proceeds of the Securities. The Investor should not invest in
the Securities if the Investor is not willing to grant the Company’s management such discretion over the net proceeds of
the Securities.

 

    	-1-

    	 

    

 

3.             Representations
and Warranties – Investor. The Investor acknowledges and represents as follows:

 

(a)          That
the Investor is in a financial position to hold the Securities for an indefinite period of time and is able to bear the economic
risk and withstand a complete loss of the Investor’s investment in the Securities;

 

(b)          That
the Investor, either alone or with the assistance of the Investor’s own professional advisor, has such knowledge and experience
in financial and business matters that the Investor is capable of evaluating the merits and risk of an investment in the Securities
and has the net worth to undertake such risks;

 

(c)          That
the Investor has obtained, to the extent the Investor deems necessary, the Investor’s own personal professional advice with
respect to the risks inherent in the investment in the Securities, and the suitability of an investment in the Securities in light
of the Investor’s financial condition and investment needs;

 

(d)          That
the Investor believes that an investment in the Securities is suitable for the Investor based upon the Investor’s investment
objectives and financial needs, and the Investor has adequate means for providing for the Investor’s current financial needs
and personal contingencies and has no need for liquidity of investment with respect to the Securities;

 

(e)          That
the Investor has been given certain information regarding the Company, and has asked for and received all information that Investor
deems necessary and a reasonable person would deem necessary, to make an informed investment decision, and has relied upon that
information for purposes of this investment;

 

(f)          That
the Investor recognizes that the Securities as an investment involve a high degree of risk, including, but not limited to, the
risk of economic losses from operations of the Company;

 

(g)          That
the Investor realizes that there is no public market for the Securities and the Investor may be unable to liquidate the Investor’s
investment in the event of an emergency, or pledge the Securities as collateral for a loan;

 

(h)          That
the Investor realizes that (i) the purchase of the Securities is a long-term investment; (ii) the purchaser of the Securities must
bear the economic risk of investment for an indefinite period of time because the Securities have not been registered under the
Securities Act or under the securities laws of any state and, therefore, the Securities cannot be resold unless they are subsequently
registered under said laws or exemptions from such registrations are available; and (iii) the transferability of the Securities
requires conformity with the restrictions contained in Section 4 below and legends will be placed on the certificate(s) representing
the Securities, referring to the applicable restrictions on transferability;

 

(i)          That
a legend will be placed on the Note or other instrument representing the Securities substantially to the following effect:

 

THESE SECURITIES HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY OTHER APPLICABLE FEDERAL OR
STATE SECURITIES LAWS, AND HAVE BEEN ISSUED AND SOLD IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS,
INCLUDING, WITHOUT LIMITATION, THE EXEMPTION CONTAINED IN SECTION 4(2) OF THE SECURITIES ACT. NEITHER THIS NOTE NOR SUCH SECURITIES
MAY BE SOLD OR TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT HAS BECOME AND IS THEN EFFECTIVE WITH RESPECT TO SUCH SECURITIES,
(2) THIS NOTE OR SUCH SECURITIES, AS APPLICABLE, IS TRANSFERRED PURSUANT TO RULE 144 PROMULGATED UNDER THE SECURITIES ACT (OR ANY
SUCCESSOR RULE) OR (3) THE COMPANY (AS HEREINAFTER DEFINED) HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT, TO
THE EFFECT THAT THE PROPOSED SALE OR TRANSFER OF THIS NOTE OR SUCH SECURITIES IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES
ACT AND ALL OTHER APPLICABLE FEDERAL OR STATE SECURITIES LAWS.

 

    	-2-

    	 

    

 

(j)          That
the Investor was not solicited to purchase the Securities by any means of general solicitation, including but not limited to the
following: (i) any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media,
or broadcast over television or radio; or (ii) any meeting where attendees were invited by any general solicitation or general
advertising; and

 

(k)          That
no person, firm or corporation has or will have, as a result of any act or omission by the Investor, any right, interest or valid
claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection
with the transactions contemplated by this Agreement.

 

4.           Transfer
Restrictions. The Investor has been advised that the Securities have not been registered under the Securities Act or applicable
state securities laws and that the Securities are being offered and sold pursuant to exemptions from such laws and that the Company’s
reliance upon such exemptions is predicated in part on the Investor’s representations as contained herein. The Investor represents
and warrants that the Securities are being purchased for the Investor’s own account and for investment purposes only, and
without the intention of reselling or redistributing the same; the Investor has made no agreement with others regarding any of
the Securities; and the Investor’s financial condition is such that it is not likely that it will be necessary to dispose
of any of such Securities in the foreseeable future. The Investor further represents and agrees that if the Investor should later
desire to dispose of or transfer any of the Securities in any manner, the Investor shall not do so without first obtaining (a)
an opinion of qualified legal counsel acceptable to the Company that such proposed disposition or transfer may be lawfully made
without the registration of such Securities pursuant to the Securities Act and applicable state securities laws, or (b) such registration
(it being understood that, the Company’s shall not have any obligation to register the Securities for such purpose).

 

5.           Residency.
The Investor represents and warrants that the Investor is a bona fide resident of, is domiciled in and received the offer and made
the decision to invest in the Securities in the state set forth in Section 14 hereof, and the Securities are being purchased
by the Investor in the Investor’s name solely for the Investor’s own beneficial interest and not as nominee for, or
on behalf of, or for the beneficial interest of, or with the intention to transfer to, any other person, trust or organization.

 

6.           Investor
Suitability. The Investor represents and warrants that the Investor comes within one or more of the categories marked below,
and that for any category marked the Investor has truthfully set forth the factual basis or reason the Investor comes within that
category. ALL INFORMATION IN RESPONSE TO THIS SECTION WILL BE KEPT STRICTLY CONFIDENTIAL, EXCEPT FOR DISCLOSURES TO FEDERAL OR
STATE REGULATORY AUTHORITIES. The Investor agrees to furnish any additional information that the Company deems necessary in order
to verify the answers set forth below.

 

	 	Category I	             	The Investor is an individual (not a partnership, corporation, etc.) whose individual net worth, or joint net worth with the Investor’s spouse, presently exceeds $1,000,000, exclusive of the Investor’s primary residence.  In the calculation of net worth (the amount of assets in excess of liabilities):
	 	 	 	 	 
	 	 	 	·	The Investor may include equity in personal property and real estate, expressly excluding the Investor’s principal residence, cash, short-term investments, stocks and securities.  Equity in personal property and real estate should be based on the fair market value of such property less debt secured by such property.
	 	 	 	 	 
	 	 	 	·	The amount of debt secured by the primary residence, up to its estimated fair market value, is not included as a liability, unless the person incurred debt within 60 days before buying securities in the unregistered offering for the purpose of buying those securities and not for buying the residence. In that situation, the amount of debt borrowed during that 60-day period must be included as a liability.

 

    	-3-

    	 

    

 

	 	 	 	·	Any debt secured by the primary residence in excess of the estimated fair market value of the home is included as a liability. 
	 	 	 	 	 
	 	Category II	             	The Investor is an individual (not a partnership, corporation, etc.) who had an individual income in excess of $200,000 in 2013 and 2014, or joint income with his/her spouse in excess of $300,000 in 2013 and 2014, and has a reasonable expectation of reaching that income level in 2015.
	 	 	 	 
	 	Category III	             	The Investor is a bank, savings and loan, insurance company; registered broker or dealer, registered investment company; registered business development company; licensed small business investment company (“SBIC”); or employee benefit plan within the meaning of Title I of ERISA whose plan fiduciary is either a bank, savings and loan, insurance company or registered investment advisor or whose total assets exceed $5,000,000.
	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	(describe entity)	 
	 	 	 	 	 
	 	Category IV	             	The Investor is a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940.
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	(describe entity)	 
	 	 	 	 	 
	 	Category V	             	The Investor is a non-profit organization within the meaning of Section 501(c)(3) of the Internal Revenue Code, corporation, business trust, or partnership, not formed for the purpose of acquiring the securities offered, with total assets in excess of $5,000,000.
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	(describe entity)	 
	 	 	 	 	 
	 	Category VI	             	The Investor is a trustee for a trust that is revocable by the grantor at any time (including an IRA) and the grantor qualified under either Category I or Category II above.  A copy of the declaration of trust or trust agreement and a representation as to the net worth or income of the grantor is enclosed.
	 	 	 	 	 
	 	Category VII	             	The Investor is an entity all the equity owners of which are “accredited investors” within one or more of the above categories, other than Category IV or Category V.  If relying upon this category alone, each equity owner must complete a separate copy of this Agreement.
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	(describe entity)	 
	 	 	 	 	 	 

 

    	-4-

    	 

    

 

7.           Knowledge
and Experience. The Investor further represents and warrants that the Investor has such knowledge and experience in financial
and business matters so as to be capable of evaluating the merits and risks of an investment in the Securities and protecting the
Investor’s own interests in this transaction, and does not desire to utilize the services of any other person in connection
with evaluating such merits and risks.

 

8.           Money
Laundering. The Investor further represents and warrants that it is not, nor is any person or entity controlling, controlled
by or under common control with the Investor, a Prohibited Person (as defined below), and that the funds used by the Investor exclude
any funds received or derived from a Prohibited Person. All information provided with respect to the identity of the Investor is
accurate, and all evidence of such identity is genuine. The Investor agrees to provide any information that may be requested by
the Company or any other person with responsibility for implementing measures to prevent money laundering or terrorist financing
to comply with its anti-money laundering program and related responsibilities from time to time. “Prohibited Person”
means a person involved in money laundering or terrorist activities, including those persons or entities that are included on any
relevant lists maintained by the U.S. Treasury Department’s Office of Foreign Assets Control, any senior foreign political
figures, their immediate family members and close associates, and any foreign shell bank.

 

9.           Need
for Additional Financing. The Investor acknowledges and understands that the Company may need to raise additional financing
(either through private or public offerings of the equity or convertible debt securities of the Company or through loans, lines
of credit and other forms of indebtedness by the Company). The issuance of additional equity or convertible debt securities will
have the effect of reducing the relative interests of the Investor and may require the grant of certain rights, preferences or
privileges superior to those of the Investor. In the event the Company is required to raise additional funds, the Investor acknowledges
and understands that there is no assurance that the Company will be able to obtain the additional funds necessary on terms favorable
to the Company, or at all, and that, if adequate funds are not available or are not available on acceptable terms, the Company
may not be able to continue as a going-concern.

 

10.          Reliance
on Representations and Warranties; Changes in Information. The Investor is informed of the significance to the Company of the
foregoing representations, agreements and consents, and they are made with the intention that the Company will rely on them. The
Investor further represents and warrants that the Investor's representations and warranties do not contain any untrue statement
of material fact or omit to state a material fact necessary in order to make said representations and warranties not misleading.
The Investor further agrees that, if there should be any change in the information provided by the Investor to the Company (whether
pursuant to this Agreement or otherwise), the undersigned will immediately furnish such revised or corrected information in writing
to the Company.

 

11.          Representations
and Warranties – Company. The Company represents and warrants as follows:

 

(a)          Organization,
Good Standing and Qualification. The Company is a corporation duly incorporated, validly existing and in good standing under
the laws of the State of Nevada. The Company has all requisite corporate power and authority to own and operate its properties
and assets, to execute and deliver this Agreement, to issue and sell the Securities, and to carry out the provisions of this Agreement
and to carry on its business as presently conducted. The Company is duly qualified to do business and is in good standing as a
foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes
such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect
on the Company or its business.

 

(b)          Compliance
with Other Instruments. The Company is not in violation or default of any term of its charter documents, each as amended, or
of any provision of any mortgage, indenture, contract, lease, agreement, instrument or contract to which it is party or by which
it is bound or of any judgment, decree, order or writ other than any such violation that would not have a material adverse effect
on the Company. The execution, delivery, and performance of and compliance with this Agreement, and the issuance and sale of the
Securities will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict
with or constitute a material default under any such term or provision, or result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture
or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of
its assets or properties.

 

    	-5-

    	 

    

 

(c)          Authorization;
Binding Obligations. All corporate action on the part of the Company, its officers, directors and stockholders necessary for
the authorization of this Agreement, and the exhibits hereto, the performance of all obligations of the Company hereunder and thereunder
at the closing and the authorization, sale, issuance and delivery of the Securities pursuant hereto has been taken. The Agreement
when executed and delivered, will be valid and binding obligations of the Company enforceable in accordance with their terms.

 

(d)          Compliance
with Laws; Permits. The Company is not in violation of any applicable statute, rule, regulation, order or restriction of any
domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership
of its properties, which violation would materially and adversely affect the business, assets, liabilities, financial condition,
operations or prospects of the Company. No governmental orders, permissions, consents, approvals or authorizations are required
to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this
Agreement, except such as have been duly and validly obtained or filed, or with respect to any filings that must be made after
the closing, as will be filed in a timely manner. The Company has all permits, licenses and any similar authority necessary for
the conduct of its business as now being conducted by it.

 

(e)          Disclosure
Documentation - Company Reports as Filed Pursuant to the Securities Exchange Act of 1934, as amended. The Company has delivered
to Investor the Company’s period reports filed with the Securities and Exchange Commission, including its Transition Report
on Form 10-KT filed on September 26, 2014, as updated through its Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2014 filed on November 14, 2014, its Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014
filed on February 17, 2015, and its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 filed on May 14,
2015 (the “Disclosure Documentation”). The financial statements and notes, as well as the narrative, in the Disclosure
Documents fairly presents the financial condition and the results of operations, balance sheet, and cash flow of the Company as
at the respective dates of and for the periods referred to in such financial statements, all in accordance with GAAP, expressly
subject to fiscal year-end adjustments (the effect of which will not, individually or in the aggregate, be materially adverse)
and the absence of notes (that, if presented, would not differ materially from those included in the respective balance sheets).

 

(f)          Tax
Matters. Except for matters that would not have a Material Adverse Effect (as defined herein) on the Company, to the knowledge
of the undersigned, any and all Tax Returns required to be filed with respect to the Company for any period ending on or prior
to the execution date of this Agreement have been timely filed (taking into account any extension of time to file granted to or
obtained on behalf of the Company), all such federal and state, income and non-income Tax Returns were true, correct and complete
in all material respects and were prepared in substantial compliance with all applicable Tax laws and regulations, all Taxes shown
to be payable on such Tax Returns have been paid or will be paid by the Company prior to the date of execution of this Agreement
and no deficiency for any material amount of Tax has been asserted or assessed by a Tax Authority against the Company. The Company
is not currently the beneficiary of any extension of time within which to file any Tax Return, and no written claim has ever been
made by a Taxing Authority in a jurisdiction where the Company does not file Tax Returns that the Company is or may be subject
to taxation by that jurisdiction. Additionally, the Company makes the following warranties and representations with respect to
Tax Matters:

 

(i)          The
Company has withheld and remitted all material Taxes required to have been withheld and remitted by it on or prior to the execution
of this Agreement in connection with any amounts paid or owing to any employee, independent contractor, creditor, member or other
third party.

 

(ii)         The
Company does not expect any Tax Authority to assess any additional Taxes for any period for which Tax Returns have been filed by
the Company on or prior to the date of execution of this Agreement.

 

    	-6-

    	 

    

 

(iii)          No
federal, state, local or non-U.S. Tax audits, administrative or judicial Tax proceedings are pending or being conducted with respect
to the Company, and the Company has not received in writing from any federal, state, local or non-U.S. Tax Authority (including
jurisdictions where the Company has not filed Tax Returns) any (1) notice indicating an intent to open an audit or other review,
(2) request for information related to Tax matters, or (3) notice of deficiency or proposed adjustment for any amount of Tax proposed,
asserted, or assessed by any Tax Authority against the Company.

 

(iv)          For
purposes of this Agreement the following definitions apply:

 

(1)         “Material
Adverse Effect” means a material adverse effect on the business or financial condition of the Company.

 

(2)         “Tax
Authority” shall mean any governmental agency, board, bureau, body, department or authority of any United States federal,
state or local jurisdiction or any foreign jurisdiction, having or purporting to exercise jurisdiction with respect to any Tax.

 

(3)         “Tax
Returns” shall mean all reports, returns, declarations, statements, claims for refund or other information required to
be supplied to a taxing authority in connection with Taxes.

 

(4)         “Taxes”
shall mean all taxes, charges, fees, levies or other similar assessments or liabilities, including income, gross receipts, ad valorem,
premium, value-added, excise, real property, personal property, sales, use, transfer, withholding, employment, unemployment, insurance,
social security, business license, business organization, environmental, workers compensation, payroll, profits, license, lease,
service, service use, severance, stamp, occupation, windfall profits, customs, duties, franchise and other taxes imposed by the
United States of America or any state, local or foreign government, or any agency thereof, or other political subdivision of the
United States or any such government, and any interest, fines, penalties, assessments or additions to tax resulting from, attributable
to or incurred in connection with any tax or any contest or dispute thereof.

 

(g)          Intellectual
Property. The Company has sufficient title to and ownership of, or other rights to use, all trade secrets, and, to its knowledge,
copyrights, information, proprietary rights, trademarks, service marks and trade names in each case necessary for its business
as now conducted without any material conflict with or infringement of the rights of others, except where such failures or conflicts
would not reasonably be expected to have a Material Adverse Effect. As of the date of this Agreement, the Company has not received
any written, or to its knowledge, oral communications alleging that the Company has violated or, by conducting its business as
proposed, would violate any of the trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights
of any other person or entity, except for such violations as would not reasonably be expected to have a Material Adverse Effect.

 

12.         Miscellaneous.

 

(a)          Governing
Law and Jurisdiction. This Agreement shall be governed in all respects by the laws of the State of Nevada, without regard to
any provisions thereof relating to conflicts of laws among different jurisdictions. The Investor hereby irrevocably and unconditionally
submits to the non-exclusive jurisdiction of the courts of the State of California. The Investor hereby agrees that all actions
or proceedings arising out of or relating to this Agreement or the transactions contemplated hereby must be litigated exclusively
in any such state or federal court, and accordingly, and the Investor irrevocably waives any objection which it may now or hereafter
have to the laying of the venue of any such litigation in any such court.

 

(b)          Successors
and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon,
the successors, assigns, heirs, executors and administrators of the parties hereto; provided, however, that the rights of Investor
to purchase the Securities shall not be assignable without the consent of the Company. This Agreement shall not be construed so
as to confer any right or benefit on any party not a party hereto, other than their respective successors, assigns, heirs, executors
and administrators.

 

    	-7-

    	 

    

 

(c)          Entire
Agreement; Amendment. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding
and agreement among the parties with regard to the subjects hereof and thereof and supersede all prior written or oral agreements
and understandings relating thereto. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination
is sought. This Agreement integrates all prior oral and written negotiations between the parties relating to the purchase of the
Securities by Investor and is the final agreement between the parties regarding same.

 

(d)          Notices,
Etc. All notices under this Agreement shall be sufficiently given for all purposes if made in writing and delivered personally,
sent by documented overnight delivery service or, to the extent receipt is confirmed, facsimile or other electronic transmission,
to following addresses and numbers.

 

Notices
to the Investor shall be addressed to:

 

                                                  

                                                  

                                                  

 

with a
copy to:

 

                                                  

                                                  

                                                  

 

or at
such other address and to the attention to such other person as the Investor may designate by written notice to the Company.

 

Notices
to the Company shall be addressed to:

 

Kevin
D. Maloney

Chief
Executive Officer and President

QuantumSphere,
Inc.

2905 Tech
Center Dr.

Santa
Ana, CA 92705

Facsimile:
714-545-6265

 

with a
copy to:

 

Gregory
L. Hrncir, Esq.

Chief
Strategy Officer

QuantumSphere,
Inc.

2905 Tech
Center Dr.

Santa
Ana, CA 92705

Facsimile:
714-545-6265

 

or at
such other address and to the attention of such other person as the Company may designate by written notice to the Investor.

 

(e)          Delays
or Omissions. No delay or omission to exercise any right, power or remedy occurring to any party upon any breach or default
of the other party under this Agreement shall impair any such right, power or remedy of such first party, nor shall it be construed
to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach
or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this Agreement, must
be in writing and shall be effective only to the extent specifically set forth in such writing or as provided in this Agreement.

 

    	-8-

    	 

    

 

(f)          Severability.
In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable
or void, this Agreement shall continue in full force and effect without such provision; provided that no such severability shall
be effective if it materially changes the economic benefit of this Agreement to any party.

 

(g)          Counterparts.
This Agreement may be executed at different times and in one or more counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.

 

13.         Subscription
Amount. The Parties agree that Investor has properly subscribed for the purchase of Securities in the following Subscription
Amount, where a Note shall be issued in the original principal amount (the Subscription Amount):

 

$____________________.

 

14.         Residency.
My state of residence, the state I received the offer to invest, and the state I made the decision to invest in the Securities
is:

 

                                                                                                                         .

 

15.         Ownership
of Securities. The Securities shall be issued in the following manner:

 

Place an “X” in one space below:

 

(a)                      
Individual Ownership

(b)                      
Community Property

(c)                       Joint
Tenant with Right of Survivorship (both parties must sign)

(d)                      Trust

(e)                      Other

 

16.         Registration
of the Securities. THE SECURITIES SUBSCRIBED FOR HEREIN SHOULD BE REGISTERED AS FOLLOWS:

 

                                                                                                                                                                                                         .

Please print above
the exact name(s) in which the Securities are to be held.

 

[SIGNATURE
PAGE FOLLOWS]

 

    	-9-

    	 

    

 

SIGNATURE

 

The Investor hereby represents that the
investor has read this entire Note Purchase Agreement and by the signature below agrees to the terms hereof.

 

 

	Date:	 	 	Address to Which Correspondence Should Be Directed:
	 	 	 	 
	By:	 	 	 
	 	 	 	Street Address
	 	 	 	 
	Name:	 	 	 
	 	 	City, State and Zip Code

 

	Title (if applicable):	 	 	 
	 	 	Social Security Number
	 	 	 
	 	 	 
	 	 	Telephone Number
	 	 	 
	 	 	 
	 	 	Email Address

 

    	-10-

    	 

    

 

ACCEPTANCE

 

The subscription for the Securities is hereby accepted by QuantumSphere,
Inc., a Nevada corporation, as of the date set forth below.

 

	QUANTUMSPHERE, INC.	 
	 	 	 
	By:	 	 
	 	Kevin D. Maloney	 
	 	Chief Executive Officer and President	 
	 	 	 
	Date:	 	 

 

    	-11-

    	 

    

 

EXHIBIT A

 

10% SUBORDINATED CONVERTIBLE PROMISSORY
NOTE

 

    	-12-

    	 

    

 

NEITHER THIS 10% SUBORDINATED CONVERTIBLE
PROMISSORY NOTE (THIS “NOTE”), NOR THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF, HAS BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY OTHER APPLICABLE FEDERAL OR STATE SECURITIES LAWS,
AND HAVE BEEN ISSUED AND SOLD IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS, INCLUDING, WITHOUT LIMITATION,
THE EXEMPTION CONTAINED IN SECTION 4(2) OF THE SECURITIES ACT. NEITHER THIS NOTE NOR SUCH SECURITIES MAY BE SOLD OR TRANSFERRED
UNLESS (1) A REGISTRATION STATEMENT HAS BECOME AND IS THEN EFFECTIVE WITH RESPECT TO SUCH SECURITIES, (2) THIS NOTE OR SUCH SECURITIES,
AS APPLICABLE, IS TRANSFERRED PURSUANT TO RULE 144 PROMULGATED UNDER THE SECURITIES ACT (OR ANY SUCCESSOR RULE) OR (3) THE COMPANY
(AS HEREINAFTER DEFINED) HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT, TO THE EFFECT THAT THE PROPOSED SALE
OR TRANSFER OF THIS NOTE OR SUCH SECURITIES IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND ALL OTHER APPLICABLE FEDERAL
OR STATE SECURITIES LAWS.

 

	
         US$_____________
	May 28, 2015

 

QUANTUMSPHERE, INC.

 

10% SUBORDINATED CONVERTIBLE PROMISSORY
NOTE

 

FOR VALUE RECEIVED, QuantumSphere,
Inc., a Nevada corporation (the “Company”), promises to pay to the order of ____________________________,
an individual, or such person’s successors and assigns (collectively, the “Holder”), the principal amount
of _______________________________ Dollars (US$_______________) (“Principal”), together with all accrued and
unpaid interest hereunder, on or before the earlier of (i) one (1) year from the date of issuance
of the Note, or (ii) closing of an equity financing of Four Million Dollars ($4,000,000) or more (“Qualifying Equity
Financing”)(the “Maturity Date”). Interest shall accrue and be payable as specified in
Section 2.

 

A.           This
Note is one of a series (the “Series”) of notes designated as the “10% Subordinated Convertible Promissory
Notes”.

 

B.           The
obligations due under this Note and the other notes in the Series are secured by a Security Agreement (the “Security Agreement”)
dated as of the date hereof and executed by the Company for the benefit of each Holder, and junior in priority to the senior lien
of Novus Capital or any successive third party lender who advances the Company not less than $1,000,000 of senior debt financing
(the “Senior Lender or Senior Debt Financing”). Additional rights of Holder and the other holders of
notes in the Series are set forth in the Security Agreement.

 

C.           This
Note is convertible into securities of the Company as provided herein.

 

    	-13-

    	 

    

 

The following is a statement of the rights
of the Holder and certain conditions to which this Note is subject, and to which the Holder, by the acceptance of this Note, agrees:

 

1.            Definitions.
As used in this Note, the following capitalized terms have the following meanings:

 

(a)          “Business
Day” means a day (i) other than Saturday or Sunday, and (ii) on which commercial banks are open for business in the State
of California.

 

(b)          “Default
Rate” means an interest rate of eighteen percent (18%) per annum.

 

(c)          “Event
of Default” has the meaning given in Section 6 hereof.

 

(d)          “Highest
Lawful Rate” means the maximum non-usurious rate of interest, as in effect from time to time, which may be charged, contracted
for, reserved, received or collected by the Holder in connection with this Note under applicable law.

 

(e)          “Holder”
shall mean the person or entity specified in the introductory paragraph of this Note or any person or entity who shall at the time
be the registered holder of this Note.

 

(f)          “Note”
shall mean this 10% Subordinated Convertible Promissory Note.

 

(g)          “Obligations”
means all debts, liabilities and obligations of the Company to the Holder under this Note and the Security Agreement, including
all unpaid Principal of this Note, all Interest accrued hereon, and all other amounts payable by the Company to the Holder hereunder
and under the Security Agreement, whether due or to become due, absolute or contingent, liquidated or unliquidated, determined
or undetermined.

 

2.            Interest.
Interest shall accrue on all outstanding Principal from the date hereof until paid at a rate of Ten Percent (10%) per annum (“Interest”).
Interest shall be computed on the basis of the actual number of days elapsed and a year of three hundred sixty (360) days. During
the existence of an Event of Default, Interest shall accrue on all outstanding Principal at the Default Rate.

 

3.            Prepayment.
The Principal and Interest may not be prepaid by the Company without the prior written consent of the Holder.

 

4.            Conversion.

 

(a)          Automatic
Conversion. All outstanding principal and accrued interest under the Note will be automatically converted into shares of common
stock of the Company at the closing of a Qualifying Equity Offering, provided such Qualifying Equity Offering closes prior to the
one-year anniversary of issuance of the Note (the “Automatic Conversion Date”), based upon a conversion price
equal to the lesser of (i) a twenty percent (20.0%) discount to the price per share of common stock of the Qualifying Equity
Financing, or (ii) a twenty percent (20.0%) discount to the closing bid price of the Company’s common stock, as listed
for trading on the Over The Counter Bulletin Board, on May 28, 2015 (the “Conversion Rate”).

 

    	-14-

    	 

    

 

(b)          No
more than five (5) days before the Automatic Conversion Date, the Company shall provide written notification to the Holder of the
price per share of the Qualifying Equity Offering, as well as a description of the number of shares of common stock to be issued
to Holder based upon the then outstanding principal and accrued interest under the Note divided by the Conversion Rate. At the
closing of the Qualifying Equity Financing, the Company shall issue instructions to the transfer agent to issue the applicable
number of shares of common stock to Holder. In the case of an automatic conversion pursuant hereto, the Units shall be deemed to
have been issued immediately prior to the close of the Merger and the Financing. In the case of a voluntary conversion, the Units
shall be deemed to have been issued on the date the notice of conversion is received by the Company. The Holder shall be treated
for all purposes as the holder of record of the Units unless the Holder provides the Company with written instructions to the contrary
or as otherwise required by law.

 

(c)          Voluntary
Conversion. The Holder may, at any time following the issuance of this Note and prior to the Closing of a Qualifying Equity
Financing, convert all or some of the outstanding principal and accrued interest under this Note at a conversion price equal to
the closing bid price of the Company’s common stock on May 28, 2015 (the “Voluntary Conversion”). To effectuate
the conversion, Holder shall complete and execute the Notice of Conversion attached hereto as Exhibit A attached hereto and return
it along with the original note to the Company. For interest calculation purposes, the Holder will accrue interest on this Note
through the date the Notice of Conversion is received by the Company, upon which the Note will be converted into shares of common
stock and the Company will issue instructions to the transfer agent to issue the applicable number of shares of common stock to
Holder.

 

(d)          If
the Company shall at any time from the date hereof through the repayment of this Note in full or the earlier conversion in full
hereof, by reclassification or otherwise, change the Company’s common stock into the same or a different number of securities
of any class or classes, or effect a split or reverse split of the Company’s common stock, this Note, as to the unpaid Principal
and Interest, shall thereafter be deemed to evidence the right to be issued (upon the conversion of this Note) an adjusted number
of shares of common stock as would have been issuable as a result of such change with respect to the Company’s common stock
if the Holder held such shares of common stock prior to such change. Whenever any event referenced in the first sentence of this
subsection shall become effective or be earlier approved by the Board of Directors of the Company, the Company shall promptly mail
by registered or certified mail, return receipt requested, to the Holder of this Note notice of such adjustment or adjustments
setting forth the adjustment to the Conversion Rate, and setting forth a brief statement of the facts requiring such adjustment
and setting forth the computation by which such adjustment was made. Such notice, in the absence of manifest error, shall be conclusive
evidence of the correctness of such adjustment.

 

(e)          The
Company covenants that until the repayment in full of this Note or the earlier conversion in full hereof, the Company will reserve
from its respective authorized and unissued shares of common stock a sufficient number of shares, free of preemptive rights, to
provide for the issuance of the shares of common stock upon the full conversion of this Note. The Company is required to have authorized
and reserved such number of shares of Company common stock as is actually issuable upon full conversion of the Note and exercise
of the detachable warrant (“Warrant”) that are included with the purchase of the Note that are exercisable into that
number of shares of common stock determined by the Conversion Rate in effect from time to time. The Company represents that the
shares of common stock (i) into which the Notes may be converted, and (ii) issuable upon exercise of the Warrant may be exercised,
shall be duly and validly issued, fully paid, and nonassessable. In addition, if the Company shall issue any securities or make
any change to its capital structure which would change the number of shares issuable upon conversion of the Note and exercise of
the Warrant, then in such event the Company shall, at the same time make proper provision so that thereafter there shall be a sufficient
number of shares of common stock authorized and reserved, free from preemptive rights, for conversion of the Note and exercise
of the Warrant. The Company agrees that its issuance of this Note shall constitute full authority to the respective officers and
agents of the Company who are charged with the duty of executing certificates, if any, to execute and issue the necessary shares
of common stock in accordance with the terms and conditions of this Note relating to conversion of the Note.

 

    	-15-

    	 

    

 

(f)          Upon
any partial conversion of this Note pursuant to Section 3(c), a new Note containing the same date, terms, and provisions
shall, at the request of the Holder, be issued by the Company to the Holder for the Principal balance of this Note and the Interest
which shall not have theretofore been converted or paid.

 

(g)          No
fractional shares of common stock will be issued upon conversion, but the number of such shares issuable shall be rounded to the
nearest whole share.

 

(h)          Nothing
contained in this Note shall be construed as conferring upon the Holder or any other person or entity the right to vote or to consent
or to receive notice as a shareholder in respect of meeting of shareholders for the election of directors of the Company or any
other matters or any rights whatsoever as a shareholder of the Company; and no dividends shall be payable or accrued in respect
of this Note.

 

5.            Highest
Lawful Rate. Notwithstanding any provision to the contrary contained herein, if during any period for which Interest is computed
hereunder, the amount of Interest computed on the basis provided for in this Note, together with all fees, charges and other payments
which are treated as interest under applicable law, as provided for herein or in any other document executed in connection herewith,
would exceed the amount of such Interest computed on the basis of the Highest Lawful Rate, the Company shall not be obligated to
pay, and the Holder shall not be entitled to charge, collect, receive, reserve or take Interest in excess of the Highest Lawful
Rate, and during any such period the Interest payable hereunder shall be computed on the basis of the Highest Lawful Rate.

 

6.            Make
Good Provision. During the term of this Note, including at any time prior to an Automatic Conversion or Voluntary Conversion
of this Note by Holder, if the Company elects to undertake another convertible debt financing on terms more favorable to the terms
of the Note and the Warrant, then in such event the terms of the Note and the Warrant shall be modified to reflect the more favorable
convertible debt financing terms.

 

7.            Events
of Default. Any of the following events which shall occur shall constitute an “Event of Default”:

 

(a)          the
Company shall fail to pay when due any amount of principal or interest hereunder or other amount payable hereunder or under the
Security Agreement, where such failure continues for five (5) days after receipt of written notice from Holder specifying such
failure; or

 

(b)          the
Company shall: (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all
or any material part of its property; (ii) admit in writing its inability to pay its debts generally as they become due; (iii)
make a general assignment for the benefit of any of its creditors; (iv) be dissolved or liquidated in full or in part; (v) commence
a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under
any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment
of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it; or (vi)
take or approve any action for the purpose of effecting any of the foregoing; or

 

(c)          proceedings
for the appointment of a receiver, trustee, liquidator or custodian of the Company or of all or any material part of its property,
or a voluntary or involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the
Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect, shall be commenced
and such involuntary case or proceeding shall not be dismissed or discharged within sixty (60) days of commencement; or an order
for relief shall be entered against the Company under the federal bankruptcy laws as now or hereafter in effect; or

 

    	-16-

    	 

    

 

(d)          a
default or event of default under any agreement of the Company shall occur that gives the holder of any other indebtedness for
borrowed money of the Company the right to accelerate the maturity of such indebtedness (subject to any applicable cure periods
set forth therein, if any); or

 

(e)          the
Company shall fail to observe or perform any other covenant, obligation, condition or agreement contained in this Note or the Security
Agreement and (i) such failure shall continue for fifteen (15) days, or (ii) if such failure is not curable within such fifteen
(15) day period, but is reasonably capable of cure within thirty (30) days, either (A) such failure shall continue for thirty (30)
days or (B) the Company shall not have commenced a cure in a manner reasonably satisfactory to Holder within the initial fifteen
(15) day period; or

 

(f)          any
representation or warranty made or furnished by or on behalf of Company to Holder in writing in connection with this Note or the
Security Agreement shall be false, incorrect, incomplete or misleading in any material respect when made or furnished.

 

Upon the occurrence of any Event of Default,
(x) the Holder may at any time declare all unpaid Obligations to be immediately due and payable without presentment, demand, protest
or any other notice of any kind, all of which are hereby expressly waived by the Company; (y) the Holder may exercise all rights
and remedies available to the Holder hereunder and under the Security Agreement and applicable law, and (z) in the case of an Event
of Default described in Section 7(b) or 7(c), all unpaid Obligations shall automatically become immediately due and
payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly and irrevocably
waived by the Company.

 

8.            Successors
and Assigns. Subject to the restrictions on transfer described in Section 10, the rights and obligations of the Company
and the Holder hereunder shall be binding upon and inure to the benefit of the successors, assigns, heirs, administrators and transferees
of the parties. Due to the reliance by the Company on the exemption from registration provided by Rule 506 of Regulation D, as
promulgated pursuant to the Securities Act, and the representation by Holder to the Company that Holder is an “accredited
investor” as such term is defined by Rule 501(a) of Regulation D, no assignment of this Note shall be made to any person
who is not an “accredited investor”, where any assignment or transfer of this Note, or any attempt thereof, shall be
null and void.

 

9.            Amendments
and Waivers. This Note may not be amended or modified, nor may any of its terms be waived, except by written instruments signed
by the Company and Holder. Each waiver or consent under any provision hereof shall be effective only in the specific instances
for the purpose for which given.

 

10.           Transfer
of this Note. Transfers of this Note shall be registered upon registration books maintained for such purpose by or on behalf
of the Company. Prior to presentation of this Note for registration of transfer, the Company shall treat the registered Holder
hereof as the owner and the Holder of this Note for the purpose of receiving all payments of Principal and Interest hereon and
for all other purposes whatsoever, whether or not this Note shall be overdue and the Company shall not be affected by notice to
the contrary.

 

    	-17-

    	 

    

 

11.          Assignment
or Delegation by the Company. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned or
delegated in whole or in part by the Company without the prior written consent of Holder.

 

12.          Notices.
Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon
the Company or Holder under this Note shall be in writing and mailed or delivered to each party to its address set forth in the
Security Agreement (or to such other address as the recipient of any notice shall have notified the other in writing). All such
notices and communications shall be effective (a) when sent by a commercially recognized means of overnight delivery providing
confirmation of receipt, on the business day following the deposit with such service; (b) when mailed, by registered or certified
mail, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; and (c) when
delivered by hand, upon delivery.

 

13.          Expenses;
Waivers. If action is instituted to collect this Note, the Company promises to pay on demand all costs and expenses, including
reasonable attorneys’ fees and costs, incurred in connection with such action. The Company hereby waives notice of default,
presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this
instrument.

 

14.          Further
Assurance. Each party shall execute, acknowledge, deliver, file, notarize and register (at its own expense) all documents,
instruments, certificates, agreements and assurances and provide all information and take or forbear from all such action as the
other party may reasonably deem necessary or appropriate to achieve the purposes of the Note or satisfy the obligations of the
Company hereunder.

 

15.          Severability.
Whenever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under all applicable
laws and regulations. If, however, any provision of this Note shall be prohibited by or be invalid under any such law or regulation
in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or
regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such
prohibition or invalidity without affecting the remaining provisions of this Note, or the validity or effectiveness of such provision
in any other jurisdiction.

 

16.          Cumulative
Rights, etc. The rights, powers and remedies of Holder under this Note and the Security Agreement shall be in addition to all
rights, powers and remedies given to Holder by virtue of any applicable law, rule or regulation of any governmental authority,
the Security Agreement or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised
successively or concurrently without impairing Holder’s rights hereunder. The Company waives any right to require Holder
to proceed against any person or entity or to exhaust any collateral or to pursue any remedy in Holder’s power.

 

17.          No
Waiver. No course of dealing between the Company and the Holder or any delay on the part of the Holder in exercising any rights
or remedies shall operate as a waiver of any such right or remedy of the Holder.

 

18.          Construction.
Each of the Security Agreement and this Note is the result of negotiations among, and has been reviewed by, the Company, Holder
and their respective counsel. Accordingly, this Note and the Security Agreement shall be deemed to be the product of all parties
hereto, and no ambiguity shall be construed in favor of or against the Company or Holder.

 

    	-18-

    	 

    

 

19.          Other
Interpretive Provisions. References in this Note and the Security Agreement to any document, instrument or agreement (a) includes
all exhibits, schedules and other attachments thereto, (b) includes all documents, instruments or agreements issued or executed
in replacement thereof, and (c) means such document, instrument or agreement, or replacement or predecessor thereto, as amended,
modified and supplemented from time to time and in effect at any given time. The words “hereof,” “herein”
and “hereunder” and words of similar import when used in this Note or the Security Agreement refer to this Note or
the Security Agreement, as the case may be, as a whole and not to any particular provision of this Note or the Security Agreement,
as the case may be. The words “include” and “including” and words of similar import when used in this Note
or the Security Agreement shall not be construed to be limiting or exclusive.

 

20.          Governing
Law and Jurisdiction. THIS NOTE AND ALL ACTIONS ARISING OUT OF OR IN CONNECTION WITH THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEVADA, WITHOUT REGARD TO THE CONFLICTS OF LAW RULES OF THE STATE OF NEVADA
OR OF ANY OTHER JURISDICTION. THE HOLDER HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION
OF THE COURTS OF THE STATE OF CALIFORNIA. THE HOLDER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY MUST BE LITIGATED EXCLUSIVELY IN ANY SUCH STATE OR FEDERAL COURT, AND ACCORDINGLY,
THE HOLDER IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH LITIGATION
IN ANY SUCH COURT.

 

21.          Waiver
of Jury Trial. EACH OF THE COMPANY AND THE HOLDER, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES
ALL RIGHT TO A TRIAL BY JURY AS TO ANY ISSUE RELATED HERETO IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING
TO THIS NOTE.

 

22.          Subordination.
Holder expressly agrees to the subordination of this Note to the Senior Debt Financing held by the Senior Lender, and where no
further action need to be taken by the Company or the Holder in connection with the subordination.

 

    	-19-

    	 

    

  

IN WITNESS WHEREOF, this Note has been executed by the Company
as of the date first above written.

 

	The Company:	 
	 	QuantumSphere, Inc.,
	 	a Nevada Corporation
	 	 	 
	 	By:	 
	 	 	Kevin D. Maloney
	 	Title:	CEO & President

 

Acknowledged and agreed to this 28th day of May,
2015.

 

The Holder:

 

	 	 
	 	Signature

 

	 	Name:	 

 

	 	Title (if applicable):	 

 

    	-20-

    	 

    

 

EXHIBIT A

NOTICE OF CONVERSION

OF

10% SUBORDINATED CONVERTIBLE PROMISSORY
NOTE

 

(To be Executed by
the Registered Holder in Order to Convert the Note)

 

FROM:                                                                                                                                               
 (“Holder”)

 

DATE:                                                                                                                                  
 (the “Conversion Date”)

 

		RE:	Conversion of the 10% Subordinated Convertible Promissory Note (the “Note”)
of QuantumSphere, Inc. (the “Company”) into shares of common stock (defined below)

 

 

The captioned Holder
hereby gives notice to the Company, pursuant to the above referenced Note that the Holder elects to convert $________________ of
the principal amount of, and accrued and unpaid interest on, the Note into fully paid and non-assessable shares of common stock
based upon the conversation rate equal to the lesser of (i) a twenty percent (20.0%) discount to the price per share of common
stock of the Qualifying Equity Financing (as defined in the Note), or (ii) a twenty percent (20.0%) discount to the closing
bid price of the Company’s common stock, as listed for trading on the Over The Counter Bulletin Board, on May 28, 2015. The
foregoing represents the Conversation Rate as defined in the Note.

 

	 	 
	 	Signature
	 	 
	 	 
	 	Print Name

 

    	-21-

    	 

    

 

EXHIBIT B

 

COMMON STOCK PURCHASE WARRANT

 

    	-22-

    	 

    

 

THE SECURITIES REPRESENTED BY THIS WARRANT
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SHARES UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE
SECURITIES ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS AND THE LAWS OF OTHER
APPLICABLE JURISDICTIONS.

 

	W-____	COMMON STOCK PURCHASE WARRANT	 

  

For the Purchase of Shares

of Common Stock, $0.001 par value

of

QuantumSphere, Inc.,

A Nevada Corporation

 

For value received,
__________________________ (the “Holder”), or Holder’s assigns, is entitled to, for a period of five (5)
years (the “Exercise Period”), exercise this Common Stock Purchase Warrant (the “Warrant”) for purchase
and receive that number of fully paid and nonassessable shares of the common stock, $0.001 par value (the “Common Stock”),
of QuantumSphere, Inc., a Nevada corporation (the “Company”) represented by 50% of the face value of the 10% Subordinated
Convertible Promissory Note (the “Note”) purchased by Holder from the Company and based upon an exercise price equal
to the lesser of (i) a twenty percent (20.0%) discount to the price per share of common stock of the next equity financing
of the Company of not less than $4,000,000 (the “Qualifying Equity Financing”), or (ii) a twenty percent (20.0%)
discount to the closing bid price of the Company’s common stock on May 28, 2015 as listed for trading on the Over The Counter
Bulletin Board under the symbol “QSIM” (the “Exercise Price”), upon presentation and surrender of this
Warrant and upon payment by bank check or wire transfer of the Exercise Price for such shares of Common Stock to the Company at
its principal office.

 

1.            Exercise
of Warrant. This Warrant may be exercised in whole or in part, from time to time, during the Exercise Period, by presentation
and surrender hereof to the Company, with the Notice of Exercise annexed hereto duly executed and accompanied by payment by bank
check or wire transfer of the Exercise Price for the number of shares specified in such form, together with all federal and state
taxes applicable upon such exercise, if any. If this Warrant should be exercised in part only, the Company shall, upon surrender
of this Warrant for cancellation, execute and deliver a new Warrant evidencing the right of the Holder to purchase the balance
of the shares purchasable hereunder. Upon receipt by the Company of this Warrant and the Exercise Price at the office of the Company,
in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon
such exercise, notwithstanding that certificates representing such shares of Common Stock shall not then be actually delivered
to the Holder. If the subscription rights represented hereby shall not be exercised at or before 5:00 P.M., Pacific Time, on the
expiration date specified above, this Warrant shall become void and without further force or effect, and all rights represented
hereby shall cease and expire.

 

2.            Rights
of the Holder. Prior to exercise of this Warrant, the Holder shall not, by virtue hereof, be entitled to any rights of a shareholder
in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not
enforceable against the Company except to the extent set forth herein.

 

    	-23-

    	 

    

 

3.            Adjustment
in Number of Shares.

 

(A)         Adjustment
for Reclassifications. In case at any time, or from time to time, after the date of issue (“Issue Date”), the holders
of the Common Stock of the Company (or any shares of stock or other securities at the time receivable upon the exercise of this
Warrant) shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have
become entitled to receive, without payment therefore, other or additional stock or other securities or property (including cash)
by way of stock-split, spinoff, reclassification, combination of shares or similar corporate rearrangement (exclusive of any stock
dividend of its or any subsidiary’s capital stock), then and in each such case the Holder(s) of this Warrant, upon the exercise
hereof as provided in Section 1, shall be entitled to receive the amount of stock and other securities and property which such
Holder(s) would hold on the date of such exercise if on the Issue Date they had been the holder of record of the number of shares
of Common Stock of the Company called for on the face of this Warrant and had thereafter, during the period from the Issue Date,
to and including the date of such exercise, retained such shares and/or all other or additional stock and other securities and
property receivable by them as aforesaid during such period, giving effect to all adjustments called for during such period. In
the event of a declaration of a dividend payable in shares of any equity security of a subsidiary of the Company, then the Company
may cause to be issued a warrant to purchase shares of the subsidiary (“Springing Warrant”) in an amount equal to such
number of shares of the subsidiary’s securities to which the Holders would have been entitled, but conditioned upon the exercise
of this Warrant as a prerequisite to receiving the shares issuable pursuant to the Springing Warrant.

 

(B)         Adjustment
for Reorganization, Consolidation, Merger. In case of any reorganization of the Company (or any other corporation the stock
or other securities of which are at the time receivable on the exercise of this Warrant) after the Issue Date, or in case, after
such date, the Company (or any such other corporation) shall consolidate with or merge into another corporation or convey all or
substantially all of its assets to another corporation, then and in each such case the Holder(s) of this Warrant, upon the exercise
hereof as provided in Section 1, at any time after the consummation of such reorganization, consolidation, merger or conveyance,
shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise of this Warrant
prior to such consummation, the stock or other securities or property to which such Holder(s) would be entitled had the Holders
exercised this Warrant immediately prior thereto, all subject to further adjustment as provided herein; in each such case, the
terms of this Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of
this Warrant after such consummation.

 

4.            Officer’s
Certificate. Whenever the number of shares of Common Stock issuable upon exercise of this Warrant or the Exercise Price shall
be adjusted as required by the provisions hereof, the Company shall forthwith file in the custody of its Secretary at its principal
office, an officer’s certificate showing the adjusted number of shares of Common Stock or Exercise Price determined as herein
provided and setting forth in reasonable detail the facts requiring such adjustment. Each such officer’s certificate shall
be made available at all reasonable times for inspection by the Holder(s) and the Company shall, forthwith after each such adjustment,
deliver a copy of such certificate to the Holder(s). Such certificate shall be conclusive as to the correctness of such adjustment.

 

5.            Restrictions
on Transfer. Certificates for the shares of Common Stock to be issued upon exercise of this Warrant shall bear the following
legend:

 

    	-24-

    	 

    

 

THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SHARES UNDER THE SECURITIES ACT OR AN EXEMPTION
FROM THE SECURITIES ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS AND THE LAWS
OF OTHER APPLICABLE JURISDICTIONS.

 

The Holder, by acceptance
hereof, agrees that, absent an effective registration statement under the Securities Act of 1933, as amended (the “Act”),
covering the disposition of this Warrant or the Common Stock issued or issuable upon exercise hereof, such Holder(s) will not sell
or transfer any or all of this Warrant or such Common Stock without first providing the Company with an opinion of counsel reasonably
satisfactory to the Company to the effect that such sale or transfer will be exempt from the registration and prospectus delivery
requirements of the Act. The Holder agrees that the certificates evidencing the Warrant and Common Stock which will be delivered
to the Holder by the Company shall bear substantially the legend set forth above in this Section 5. The Holder of this Warrant,
at the time all or a portion of such Warrant is exercised, agrees to make such written representations to the Company as counsel
for the Company may reasonably request, in order that the Company may be reasonably satisfied that such exercise of the Warrant
and consequent issuance of Common Shares will not violate the registration and prospectus delivery requirements of the Act, or
other applicable state securities laws.

 

6.            Loss
or Mutilation. Upon receipt by the Company of evidence satisfactory to it (in the exercise of reasonable discretion) of the
ownership of and the loss, theft, destruction or mutilation of any Warrant and (in the case of loss, theft or destruction) of indemnity
satisfactory to it (in the exercise of reasonable discretion), and (in the case of mutilation) upon surrender and cancellation
thereof, the Company will execute and deliver in lieu thereof a new Warrant of like tenor.

 

7.            Reservation
of Common Stock. The Company shall at all times reserve and keep available for issue upon the exercise of the Warrant such
number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding
Warrants.

 

8.            Notices.
All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, to the address furnished to the Company in writing by the Holder.

 

9.            Change;
Waiver. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only by an instrument
in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought.

 

10.          Law
Governing. This Warrant shall be construed and enforced in accordance with and governed by the laws of Nevada.

 

IN WITNESS WHEREOF, the Company has caused
this Warrant to be signed by its duly authorized officer on May 28, 2015.

 

	 	QUANTUMSPHERE, INC.
	 	 
	 	By:	 
	 	 	Kevin D. Maloney
	 	 	CEO & President

 

    	-25-

    	 

    

 

NOTICE OF EXERCISE

 

	TO:	QUANTUMSPHERE, INC.	DATE:                           

 

The
undersigned hereby elects irrevocably to exercise the within Warrant and to purchase                       
shares of the Common Stock of the Company called for thereby, and hereby makes payment by bank check or wire transfer of $          
 (at the Exercise Price defined in the Warrant) in payment of the Exercise Price pursuant thereto. Please issue the shares
of the Common Stock as to which this Warrant is exercised to:

 

___________________________

 

___________________________

 

___________________________

 

and if said number of Warrants shall not
be all the Warrants evidenced by the within Warrant, issue a new Warrant for the balance remaining of such Warrants to _____________________
at the address stated above.

 

	 	By:	 

 

	 	Print Name:	 

 

    	-26-

    	 

    

 

EXHIBIT C

 

SECURITY AGREEMENT

 

    	-27-

    	 

    

 

SECURITY
AGREEMENT

 

THIS SECURITY AGREEMENT
(this “Agreement”), is entered into as of May 28, 2015 by and between QuantumSphere, Inc., a Nevada corporation
(the “Borrower”), and each of the secured parties whose name appears on the signature pages to this Agreement
(individually, a “Secured Party” and, collectively, the “Secured Parties”). All capitalized
terms not otherwise defined herein shall the meanings ascribed to them in those certain Note Purchase Agreements and the Notes
(as defined below) by and between Borrower and each Secured Party (the “Note Purchase Agreements”).

 

RECITALS

 

WHEREAS, the Secured
Parties have loaned monies to Borrower, as more particularly described in the Note Purchase Agreements and as evidenced by 10%
Subordinated Convertible Promissory Notes issued by Borrower to the Secured Parties (the “Notes”);

 

WHEREAS, the term “Secured
Party” as used in this Agreement shall mean, collectively, all holders of Notes, including those persons who become holders
of Notes subsequent to the date hereof; and

 

WHEREAS, this Agreement
is being executed and delivered by Borrower to secure the Notes.

 

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

 

1.          Obligations
Secured. This Agreement secures, in part, the prompt payment and performance of all obligations of Borrower under the Notes,
and all renewals, extensions, modifications, amendments, and/or supplements thereto (collectively, the “Secured Obligations”).

 

2.          Grant
of Security.

 

a.           Collateral.
Borrower hereby grants, pledges, and assigns for the benefit of the Secured Parties, and there is hereby created in favor of each
of the Secured Parties, a security interest in and to all of Borrower’s right, title, and interest in, to, and under all
of the collateral set forth on Exhibit A hereto (collectively, “Collateral”) subject to Section
2(c) below.

 

b.           Effective
Date. This grant of security shall be effective as of the date hereof.

 

c.           Subordination.
The Notes and the Secured Obligations shall be subordinated, or junior in interest, to the obligations of Borrower in favor of
its senior lender, Novus Capital, or any other third party senior lender who provides a senior secured loan to the Company during
the term of the Notes, as well as debt incurred in the ordinary course of business.

 

3.          Filings
to Perfect Security. The Company will (and is hereby authorized to) file with any filing office such financing statements,
amendments, addenda, continuations, terminations, assignments and other records (whether or not executed by Borrower) to perfect
and to maintain perfected security interests in the Collateral by the Secured Parties, whereby (a) promptly upon the execution
of this Agreement, a Financing Statement on Form UCC-1 (the “Financing Statement”) shall be filed with the California
Secretary of State on behalf of the Secured Parties with respect to the Collateral; The Financing Statement shall designate each
of the Secured Parties as a Secured Party and Borrower as the debtor, shall identify the security interest in the Collateral, and
contain any other items required by law. The Financing Statement shall contain a description of collateral consistent with the
description set forth herein and shall not describe the collateral as “all assets” or “all personal property.”

 

    	-28-

    	 

    

 

4.          Transfers
and Other Liens. Except as set forth in Section 2(c) herein or in the Notes, Borrower shall not, without the prior written
consent of the Collateral Agent, in its sole and absolute discretion:

 

d.           Sell,
transfer, assign, or dispose of (by operation of law or otherwise), any of the Collateral outside of the ordinary course of business;

 

e.           Create
or suffer to exist any lien, security interest, or other charge or encumbrance upon or with respect to any of the Collateral, except
the security interests created hereby; or

 

f.            Permit
any of the Collateral to be levied upon under any legal process.

 

5.          Representations
and Warranties. Borrower hereby represents and warrants to the Secured Parties as follows: (a) to Borrower’s knowledge,
Borrower is the owner of the Collateral (or, in the case of after-acquired Collateral, at the time Borrower acquires rights in
the Collateral, will be the owner thereof) and that, except as expressly provided herein or contemplated pursuant to Section 2(c)
herein, no other person has (or, in the case of after-acquired Collateral, at the time Borrower acquires rights therein, will have)
any right, title, claim or interest (by way of Lien or otherwise) in, against or to the Collateral; (b) to Borrower’s knowledge,
except as expressly provided herein, upon the filing of a Financing Statement with the California Secretary of State, the Secured
Parties (or in the case of after-acquired Collateral, at the time Borrower acquires rights therein, will have) will have a perfected
security interest in the Collateral to the extent that a security interest in the Collateral can be perfected by such filing; (c)
all Accounts Receivable (as defined in Exhibit A) are genuine and enforceable against the party obligated to pay
the same; (d) Borrower has full power and authority to enter into the transactions provided for in this Agreement and the Notes;
(e) this Agreement and the Notes, when executed and delivered by Borrower, will constitute the legal, valid and binding obligations
of Borrower enforceable in accordance with their terms; (f) the execution and delivery by Borrower of this Agreement and the Notes
and the performance and consummation of the transactions contemplated hereby and thereby do not and will not violate Borrower’s
Certificate of Incorporation or Bylaws or any material judgment, order, writ, decree, statute, rule or regulation applicable to
Borrower (g) there does not exist any default or violation by Borrower of or under any of the terms, conditions or obligations
of (i) any indenture, mortgage, deed of trust, franchise, permit, contract, agreement, or other instrument to which Borrower is
a party or by which Borrower is bound, or (ii) any law, ordinance, regulation, ruling, order, injunction, decree, condition
or other requirement applicable to or imposed upon Borrower by any law, the action of any court or any governmental authority or
agency; and the execution, delivery and performance of this Agreement will not result in any such default or violation; (h) there
is no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand pending or, to the knowledge of Borrower,
threatened which adversely affects Borrower’s business or financial condition and there is no basis known to Borrower for
any action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand which could result in the same; and (i)
this Agreement and the Notes do not contain any untrue statement of material fact or omit to state a material fact necessary in
order to make the statements contained in this Agreement and the Notes not misleading.

 

    	-29-

    	 

    

 

6.          Events
of Default. For purposes of this Agreement, the term “Event of Default” shall mean and refer to any of the following:

 

g.           Failure
of Borrower to perform or observe any covenant set forth in this Agreement, or to perform or observe any other term, condition,
covenant, warranty, agreement or other provision contained in this Agreement, where such failure continues for fifteen (15) days
after receipt of written notice from Lender specifying such failure;

 

h.           Any
representation or warranty made or furnished by Borrower in writing in connection with this Agreement and the Notes or any statement
or representation made in any certificate, report or opinion delivered pursuant to this Agreement or in connection with this Agreement
is false, incorrect or incomplete in any material respect at the time it is furnished; or

 

i.            Occurrence
of any other Event of Default as defined in the Note.

 

7.          Remedies.
Upon the occurrence and during the continuance of an Event of Default (subject to the notice and cure provisions provided for herein,
if any), each Secured Party shall have the rights of a secured creditor under the California Uniform Commercial Code, all rights
granted by the Notes, this Security Agreement and by law, including the right to require Borrower to assemble the Collateral and
make it available to the Secured Parties at a place to be designated by Borrower. The rights and remedies provided in this Agreement
and the Notes are cumulative and may be exercised independently or concurrently, and are not exclusive of any other right or remedy
provided at law or in equity. No failure to exercise or delay by the Secured Parties in exercising any right or remedy under this
Agreement or the Notes shall impair or prohibit the exercise of any such rights or remedies in the future or be deemed to constitute
a waiver or limitation of any such right or remedy or acquiescence therein. Every right and remedy granted to the Secured Parties
under this Agreement and the Notes or by law or in equity may be exercised by any Secured Party at any time and from time to time.

 

8.          Further
Assurances. Borrower agrees that, from time to time, at its own expense, it will:

 

j.            Protect
and defend the Collateral against all claims and demands of all persons at any time claiming the same or any interest therein,
and preserve and protect Secured Party’s security interest in the Collateral.

 

k.          Promptly
execute and deliver to Secured Parties all instruments and documents, and take all further action necessary or desirable, as any
Secured Party may reasonably request to (i) continue, perfect, or protect any security interest granted or purported to be granted
hereby, and (ii) enable a Secured Party to exercise and enforce any of Secured Party’s rights and remedies hereunder with
respect to any Collateral.

 

l.            Permit
a Secured Party’s representatives to inspect and make copies of all books and records relating to the Collateral, wherever
such books and records are located, and to conduct an audit relating to the Collateral at any reasonable time or times.

 

9.          Reserved.

 

10.         Notices.
All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery
to the party to be notified, (b) when sent by confirmed telex, e-mail or facsimile if sent during normal business hours of
the recipient, if not, then on the next business day, (c) five (5) days after having been sent by registered or certified
mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt. All communications shall be sent as follows:

 

    	-30-

    	 

    

 

	 	If to the Secured Party:	 	 
	 	 	 	 
	 	 	 	 
	 	 	Facsimile:  _______________	 
	 	 	 	 
	 	If to Borrower:	QuantumSphere, Inc.	 
	 	 	2905 Tech Center Dr.	 
	 	 	Santa Ana, CA 92705	 
	 	 	Facsimile: 714-545-6265	 

 

or to such other address
or telecopy number as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith.

 

11.         Amendments and Waivers.
No modification, amendment or waiver of any provision of, or consent required by, this Agreement, nor any consent to any departure
herefrom, shall be effective unless it is in writing and signed by each of the parties hereto. Such modification, amendment, waiver
or consent shall be effective only in the specific instance and for the purpose for which given.

 

12.         Exclusivity
and Waiver of Rights. No failure to exercise and no delay in exercising on the part of any party, any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude
any other right, power or privilege. The rights and remedies herein provided are cumulative and are not exclusive of any other
rights or remedies provided by law.

 

13.         Invalidity.
Any term or provision of this Agreement shall be ineffective to the extent it is declared invalid or unenforceable, without rendering
invalid or enforceable the remaining terms and provisions of this Agreement.

 

14.         Headings.
Headings used in this Agreement are inserted for convenience only and shall not affect the meaning of any term or provision of
this Agreement.

 

15.         Counterparts.
This Agreement may be executed in one or more counterparts, each of which shall be deemed an original instrument, but all of which
collectively shall constitute one and the same agreement.

 

16.         Assignment.
This Agreement and the rights and obligations hereunder shall not be assignable or transferable by the any of the parties without
the prior written consent of the other parties.

 

17.         Survival.
Unless otherwise expressly provided herein, all representations warranties, agreements and covenants contained in this Agreement
shall survive the execution hereof and shall remain in full force and effect until the earliest to occur of (a) the payment in
full of the Notes, and (b) the conversion of the principal and accrued and unpaid interest and all other amounts owing under the
Notes into common stock of Borrower.

 

18.         Miscellaneous.
This Agreement shall inure to the benefit of each of the parties hereto and all their respective successors and permitted assigns.
Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable
right, remedy or claim under or in respect of this Agreement or any provision herein contained.

 

    	-31-

    	 

    

 

19.         GOVERNING
LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEVADA (WITHOUT GIVING
EFFECT TO ANY CHOICE OR CONFLICT OF LAWS PROVISIONS).

 

20.         CONSENT
TO JURISDICTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION
OF THE COURTS OF THE STATE OF CALIFORNIA. EACH OF THE PARTIES HERETO AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY MUST BE LITIGATED EXCLUSIVELY IN ANY SUCH STATE OR FEDERAL COURT, AND
ACCORDINGLY, EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE
VENUE OF ANY SUCH LITIGATION IN ANY SUCH COURT.

 

21.         WAIVER
OF JURY TRIAL.  EACH OF THE PARTIES HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION
WITH THIS AGREEMENT. EACH OF THE PARTIES HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVER AND (B) ACKNOWLEDGES THAT IT AND EACH OF THE OTHER PARTIES HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 21.

 

22.         Attorneys’
Fees. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in
such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing
party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees, costs and expenses of appeals.

 

23.         Entire
Agreement. This Agreement contains the entire agreement among the parties with respect to the transactions contemplated by
this Agreement and supersedes all prior agreements or understandings among the parties with respect to the subject matter hereof.

 

[SIGNATURE PAGE(S) FOLLOW]

 

    	-32-

    	 

    

 

IN WITNESS WHEREOF,
this Security Agreement has been executed as of the date first set written above.

 

“SECURED PARTY”

 

	By:	 	 

 

	Name:	 	 

 

	Title (if applicable):		 

 

“BORROWER”

 

QUANTUMSPHERE, INC.,

a Nevada corporation

 

	By:	 	 
	 	Kevin D. Maloney	 
	 	Chief Executive Officer & President	 

 

    	-33-

    	 

    

 

EXHIBIT A

 

COLLATERAL

 

Subject to Section 2(c) of the Security
Agreement, Borrower hereby grants, pledges, and assigns for the benefit of each Secured Party, and there is hereby created in favor
of the Secured Parties, a security interest in and to all of Borrower’s right, title, and interest in, to, and under all
assets and all personal property of Borrower, whether now or hereafter existing, or now owned or hereafter acquired, including
but not limited to the following (collectively, “Collateral”):

 

1.          All
accounts, chattel paper, contracts, contract rights, accounts receivable, tax refunds, notes receivable, documents, other choses
in action and general intangibles, including, but not limited to, proceeds of inventory and returned goods and proceeds from the
sale of goods and services, and all rights, liens, securities, guaranties, remedies and privileges related thereto, including the
right of stoppage in transit and rights and property of any kind forming the subject matter of any of the foregoing (“Accounts
Receivable”);

 

2.          All
time, savings, demand, certificate of deposit or other accounts in the name of Borrower or in which Borrower has any right, title
or interest, including but not limited to all sums now or at any time hereafter on deposit, and any renewals, extensions or replacements
of and all other property which may from time to time be acquired directly or indirectly using the proceeds of any of the foregoing;

 

3.          All
inventory and equipment of every type or description wherever located, including, but not limited to all raw materials, parts,
containers, work in process, finished goods, goods in transit, wares, merchandise furniture, fixtures, hardware, machinery, tools,
parts, supplies, automobiles, trucks, other intangible property of whatever kind and wherever located associated with the Borrower’s
business, tools and goods returned for credit, repossessed, reclaimed or otherwise reacquired by Borrower;

 

4.          All
documents of title and other property from time to time received, receivable or otherwise distributed in respect of, exchange or
substitution for or addition to any of the foregoing including, but not limited to, any documents of title;

 

5.          All
know-how, information, permits, patents, copyrights, goodwill, trademarks, trade names, licenses and approvals held by Borrower,
including all other intangible property of Borrower;

 

6.          All
assets of any type or description that may at any time be assigned or delivered to or come into possession of Borrower for any
purpose for the account of Borrower or as to which Borrower may have any right, title, interest or power, and property in the possession
or custody of or in transit to anyone for the account of Borrower, as well as all proceeds and products thereof and accessions
and annexations thereto; and

 

7.          All
proceeds (including but not limited to insurance proceeds) and products of and accessions and annexations to any of the foregoing.

 

    	-34-

    	 

    

 

EXHIBIT D

 

REGISTRATION RIGHTS AGREEMENT

 

    	-35-

    	 

    

 

REGISTRATION
RIGHTS AGREEMENT

 

THIS REGISTRATION RIGHTS
AGREEMENT (the “Agreement”) is dated May 28, 2015 by and between QuantumSphere, Inc., a Nevada corporation (the
“Company”), and each of the signatories hereto (collectively, the “Investor”).

 

RECITALS

 

WHEREAS, to
induce the Investor to invest in the Offering described in the accompanying Note Purchase Agreement, the Company has agreed to
provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or
any similar successor statute (collectively, the “Securities Act”), and applicable state securities laws.

 

NOW, THEREFORE, in
consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows:

 

AGREEMENT

 

1.          DEFINITIONS.

 

As used in this Agreement, the following
terms shall have the following meanings:

 

a.           “Person”
means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.

 

b.           “Register,”
“registered,” and “registration” refer to a registration effected by preparing and filing one or more Registration
Statements (as defined below) in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor
rule providing for offering securities on a continuous or delayed basis (“Rule 415”), and the declaration or ordering
of effectiveness of such Registration Statement(s) by the United States Securities and Exchange Commission (the “SEC”).

 

c.           “Registrable
Securities” means shares of common stock issuable to Investor upon conversion of the 10% Subordinated Convertible Promissory
Notes in the Offering (the “Shares”), and the shares of common stock issuable upon exercise of the warrants
issued to Investor pursuant to the Offering (“Warrant Shares”).

 

d.           “Registration
Statement” means a registration statement filed with the SEC, pursuant to the Securities Act, that includes the Registrable
Securities.

 

2.          REGISTRATION.

 

a.           Piggyback
Registration Rights. Investor shall be afforded unlimited piggyback registration rights with respect to the Shares and Warrant
Shares. The Company shall notify the Investor in writing no less than fifteen (15) calendar days prior to the filing of any Registration
Statement on Form S-1 or S-3 of its intention to file such registration statement with the Securities and Exchange Commission.
The Investor shall have a period of ten (10) calendar days to notify the Company of its intention to have its Registrable Securities
included in such Registration Statement.

 

    	-36-

    	 

    

 

b.           Sufficient
Number of Shares Registered. The number of shares of common stock included in a Registration Statement filed pursuant to Section
2(a) shall be sufficient to cover all of the Registrable Securities.

 

3.          RELATED
OBLIGATIONS.

 

a.           The
Company shall keep the Registration Statement effective pursuant to Rule 415 at all times until the date on which the Investor
shall have sold all the Registrable Securities covered by such Registration Statement (the “Registration Period”),
which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain
any untrue statement of a material fact or omit to a material fact required to be stated therein, or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading.

 

b.           The
Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule
424 promulgated under the Securities Act, as may be necessary to keep such Registration Statement effective at all times during
the Registration Period, and, during such period, comply with the provisions of the Securities Act with respect to the disposition
of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable
Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof
as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required
to be filed pursuant to this Agreement (including pursuant to this Section 3(b)) by reason of the Company’s filing a report
on Form 10-K, Form 10-Q or Form 8-K or any analogous report under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), the Company shall have incorporated such report by reference into the Registration Statement, if applicable, or shall
file such amendments or supplements with the SEC on the same day on which the Exchange Act report is filed which created the requirement
for the Company to amend or supplement the Registration Statement.

 

c.           The
Company shall furnish to the Investor without charge, (i) at least one (1) copy of such Registration Statement as declared effective
by the SEC and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference,
all exhibits and each preliminary prospectus, (ii) one (1) copy of the final prospectus included in such Registration Statement
and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (iii) such
other documents as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable
Securities owned by such Investor.

 

d.           The
Company shall use its best efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under
such other securities or “blue sky” laws of such jurisdictions in the United States as the Investor reasonably requests,
(ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii)
take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the
Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for
sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition
thereto to (w) make any change to its certificate of incorporation or by-laws, (x) qualify to do business in any jurisdiction where
it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction,
or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify the Investor of
the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the
Registrable Securities for sale under the securities or “blue sky” laws of any jurisdiction in the United States or
its receipt of actual notice of the initiation or threat of any proceeding for such purpose.

 

    	-37-

    	 

    

 

e.           As
promptly as practicable after becoming aware of such event or development, the Company shall notify the Investor in writing of
the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes
an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were made, not misleading (provided that in no event shall
such notice contain any material, nonpublic information), and promptly prepare a supplement or amendment to such Registration Statement
to correct such untrue statement or omission, and deliver one (1) copy of such supplement or amendment to each Investor. The Company
shall also promptly notify the Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment
has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness
shall be delivered to the Investor by facsimile on the same day of such effectiveness), (ii) of any request by the SEC for amendments
or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company’s
reasonable determination that a post-effective amendment to a Registration Statement would be appropriate.

 

f.            The
Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration
Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction within the
United States of America and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at
the earliest possible moment and to notify the Investor of the issuance of such order and the resolution thereof or its receipt
of actual notice of the initiation or threat of any proceeding for such purpose.

 

g.           At
the reasonable request of the Investor, the Company shall furnish to the Investor, on the date of the effectiveness of the Registration
Statement and thereafter from time to time on such dates as the Investor may reasonably request (i) a letter, dated such date,
from the Company’s independent certified public accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering, if any, and (ii) an opinion, dated as of such
date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily
given in an underwritten public offering (if applicable), addressed to the Investor.

 

h.           The
Company shall hold in confidence and not make any disclosure of information concerning the Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information
is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information
is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction,
or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement
or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning the Investor
is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to
the Investor and allow the Investor, at the Investor’s expense, to undertake appropriate action to prevent disclosure of,
or to obtain a protective order for, such information.

 

    	-38-

    	 

    

 

i.            The
Company shall use its best efforts either to cause all the Registrable Securities covered by a Registration Statement (i) to be
listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any,
if the listing of such Registrable Securities is then permitted under the rules of such exchange or to secure the inclusion for
quotation on the Over-The Counter Bulletin Board for such Registrable Securities. The Company shall pay all fees and expenses in
connection with satisfying its obligation under this Section 3(i).

 

j.            The
Company shall cooperate with the Investor to the extent applicable, to facilitate the timely preparation and delivery of certificates
(not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement
and enable such certificates to be in such denominations or amounts, as the case may be, as the Investor may reasonably request
and registered in such names as the Investor may request; provided, however, delivery of such certificates shall not be made until
such Registration Statement is declared effective by the SEC and all applicable state securities regulatory agencies.

 

k.          The
Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable
Securities.

 

l.            The
Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with
any registration hereunder.

 

m.           Within
two (2) business days after a Registration Statement which covers Registrable Securities is ordered effective by the SEC, the Company
shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities
(with copies to the Investor) confirmation that such Registration Statement has been declared effective by the SEC in the form
attached hereto as Exhibit 1.

 

n.           The
Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable
Securities pursuant to a Registration Statement.

 

4.          OBLIGATIONS
OF THE INVESTOR.

 

The Investor agrees that, upon receipt
of any notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e),
the Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering
such Registrable Securities until the Investor’s receipt of a copy of the supplemented or amended prospectus contemplated
by Section 3(e) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary, the
Company shall cause its transfer agent to deliver unlegended certificates for shares of Common Stock to a transferee of the Investor
in accordance with the terms of the Offering in connection with any sale of Registrable Securities with respect to which the Investor
has entered into a contract for sale prior to the Investor’s receipt of a notice from the Company of the happening of any
event of the kind described in Section 3(f) or the first sentence of 3(e) and for which the Investor has not yet settled. All selling
expenses relating to the Registrable Securities shall be borne exclusively by the Investor.

 

5.          EXPENSES
OF REGISTRATION.

 

All expenses incurred in connection with
registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing
and qualifications fees, printers, legal and accounting fees shall be paid by the Company.

 

    	-39-

    	 

    

 

6.          INDEMNIFICATION.

 

With respect to Registrable Securities
which are included in a Registration Statement under this Agreement:

 

a.           To
the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend the Investor, the directors,
officers, partners, employees, agents, representatives of, and each Person, if any, who controls the Investor within the meaning
of the Securities Act or the Exchange Act (each, an “Indemnified Person”), against any losses, claims, damages, liabilities,
judgments, fines, penalties, charges, costs, reasonable attorneys’ fees, amounts paid in settlement or expenses, joint or
several (collectively, “Claims”) incurred in investigating, preparing or defending any action, claim, suit, inquiry,
proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory
agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto (“Indemnified
Damages”), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material
fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification
of the offering under the securities or other “blue sky” laws of any jurisdiction in which Registrable Securities are
offered (“Blue Sky Filing”), or the omission or alleged omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material
fact contained in any final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein,
in light of the circumstances under which the statements therein were made, not misleading; or (iii) any violation or alleged violation
by the Company of the Securities Act, the Exchange Act, any other law, including, without limitation, any state securities law,
or any rule or regulation there under relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement
(the matters in the foregoing clauses (i) through (iii) being, collectively, “Violations”). The Company shall reimburse
the Investor and each such controlling person promptly as such expenses are incurred and are due and payable, for any legal fees
or disbursements or other reasonable expenses incurred by them in connection with investigating or defending any such Claims. Notwithstanding
anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (x) shall not apply to
a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by such Indemnified Person expressly for use in connection with the preparation
of the Registration Statement or any such amendment thereof or supplement thereto; (y) shall not be available to the extent such
Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company,
if such prospectus was timely made available by the Company pursuant to Section 3(e); and (z) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not
be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf
of the Indemnified Person. In connection with a Registration Statement, the Investor agrees to indemnify, hold harmless and defend,
to the same extent and in the same manner as is set forth in this Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement and each Person, if any, who controls the Company within the meaning of the Securities
Act or the Exchange Act (each an “Indemnified Party”), against any Claim or Indemnified Damages to which any of them
may become subject, under the Securities Act, the Exchange Act or otherwise, insofar as such Claim or Indemnified Damages arise
out of or is based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance
upon and in conformity with written information furnished to the Company by the Investor expressly for use in connection with such
Registration Statement; and, subject to Section 6(d), the Investor will reimburse any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained
in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement
of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably
withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim
or Indemnified Damages as does not exceed the net proceeds to the Investor as a result of the sale of Registrable Securities pursuant
to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained
in this Section 6 with respect to any prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement
or omission of material fact contained in the prospectus was corrected and such new prospectus was delivered to the Investor prior
to the Investor’s use of the prospectus to which the Claim relates.

 

    	-40-

    	 

    

 

b.           Promptly
after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall,
if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party
a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense
thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel
with the fees and expenses of not more than one counsel for such Indemnified Person or Indemnified Party to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified
Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between
such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Indemnified
Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of
any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available
to the Indemnified Party or Indemnified Person that relates to such action or claim. The indemnifying party shall keep the Indemnified
Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect
thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior
written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent.
No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry
of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such
claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights
of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter
for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time
of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend
such action.

 

    	-41-

    	 

    

 

c.           The
indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.

 

d.           The
indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party
or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject
to pursuant to the law.

 

7.          CONTRIBUTION.

 

To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect
to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however,
that: (i) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation;
and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received
by such seller from the sale of such Registrable Securities.

 

8.          REPORTS
UNDER THE EXCHANGE ACT.

 

The Company agrees to file all periodic
and other reports required to be filed as a publicly reporting company under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and to:

 

a.           make
and keep public information available as those terms are understood and defined in Rule 144 that may at any time permit the Investors
to sell securities of the Company to the public without registration (“Rule 144”);

 

b.           file
with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange
Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company’s
obligations under Section 6 hereof) and the filing of such reports and other documents is required for the applicable provisions
of Rule 144; and

 

c.           furnish
to the Investor, so long as the Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company
that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration.

 

9.          AMENDMENT
OF REGISTRATION RIGHTS.

 

Provisions of this Agreement may be amended
and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively),
only with the written consent of the Company and the Investor. Any amendment or waiver effected in accordance with this Section
9 shall be binding upon the Investor and the Company. No consideration shall be offered or paid to any Person to amend or consent
to a waiver or modification of any provision of any of this Agreement unless the same consideration also is offered to all of the
parties to this Agreement.

 

    	-42-

    	 

    

 

10.         MISCELLANEOUS.

 

a.           A
Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable
Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the
same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered
owner of such Registrable Securities.

 

b.           Any
notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be
in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent
by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending
party); or (iii) one business day after deposit with a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

 

	If to the Company, to:	QuantumSphere, Inc.	 
	 	2905 Tech Center Dr.	 
	 	Santa Ana, CA 92705	 
	 	Attention:  Kevin D. Maloney	 
	 	Facsimile:  (714) 545-6266 	 
	 	 	 
	If to the Investor, to:	 	 
	 	 	 
	 	 	 
	 	 	 
	 	 	 
	 	 	 

 

Any party may change its address by providing
written notice to the other parties hereto at least five (5) days prior to the effective date of such change. Written confirmation
of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date, recipient facsimile number and an image of the first
page of such transmission, or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service,
receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or
(iii) above, respectively.

 

c.           Failure
of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.

 

    	-43-

    	 

    

 

d.           This
Agreement shall be governed by and construed under the law of the State of Nevada, disregarding any principles of conflicts of
law that would otherwise provide for the application of the substantive law of another jurisdiction. The Company and the Investor
each: (a) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement shall be instituted
exclusively in California, or in the United States District Court, Los Angeles, California; (b) waives any objection to the
venue of any such suit, action or proceeding and the right to assert that such forum is not a convenient forum; and (c) irrevocably
consents to the jurisdiction of the California State Court, or the United States District Court, Los Angeles, California in any
such suit, action or proceeding. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY
TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.

 

e.           The
Agreement, the Note Purchase Agreement, the10% Subordinated Convertible Promissory Note, the Security Agreement, and the Common
Stock Purchase Warrant constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof.
The foregoing agreements supersede all prior agreements and understandings among the parties hereto with respect to the subject
matter hereof and thereof.

 

f.            This
Agreement shall inure to the benefit of and be binding upon the permitted heirs, personal representatives, successors and assigns
of each of the parties hereto.

 

g.           The
headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

 

h.           This
Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute
one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission
of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

 

i.            Each
party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver
all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry
out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

j.            The
language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules
of strict construction will be applied against any party.

 

k.          This
Agreement is intended for the benefit of the parties hereto and their respective permitted heirs, personal representatives, successors
and assigns, and is not for the benefit of, nor may any provision hereof be enforced by any other Person.

 

    	-44-

    	 

    

 

IN WITNESS WHEREOF, the parties have caused
this Registration Rights Agreement to be duly executed as of the date first written above.

 

“INVESTOR”

 

	By: 	 	 

 

	Name:	 	 

 

	Title (if applicable): 	 	 

 

“BORROWER”

 

QUANTUMSPHERE, INC.,

a Nevada corporation

 

	By:	 	 
	 	Kevin D. Maloney	 
	 	Chief Executive Officer & President	 

 

    	-45-

    	 

    

 

EXHIBIT 1

 

FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT

 

[TRANSFER AGENT]

Attn: _____________________

 

		Re:	QUANTUMSPHERE, INC.

 

Ladies and Gentlemen:

 

We are counsel to QuantumSphere, Inc.,
a Nevada corporation (the “Company”), and have represented the Company in connection with that certain private placement
(the “Offering”), pursuant to which the Company issued to __________________________ (the “Investor”) 10%
Subordinated Convertible Promissory Notes convertible into shares of its common stock, $0.001 par value (the “Common Stock”)
and detachable warrants to purchase shares of common stock (the “Warrant”). Pursuant to the Offering, the Company also
has entered into a Registration Rights Agreement with the Investors (the “Registration Rights Agreement”) pursuant
to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights
Agreement) under the Securities Act of 1933, as amended (the “Securities Act”). In connection with the Company’s
obligations under the Registration Rights Agreement, on ____________ ____, the Company filed a Registration Statement on Form ________
(File No. 333-_____________) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”)
relating to the Registrable Securities which names the Investor as a selling stockholder thereunder.

 

In connection with the foregoing, we advise
you that a member of the SEC’s staff has advised us by telephone that the SEC has entered an order declaring the Registration
Statement effective under the Securities Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and
we have no knowledge, after telephonic inquiry of a member of the SEC’s staff, that any stop order suspending its effectiveness
has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities
are available for resale under the Securities Act pursuant to the Registration Statement.

 

	 	Very truly yours,
	 	 
	 	 
	 	By:	 

 

		cc:	Investor

 

    	EXHIBITS

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