Document:

Settlement Agreement

 Exhibit 10.53 
 SETTLEMENT AGREEMENT 
 This SETTLEMENT AGREEMENT (this “Agreement”),
dated as of February 18, 2009, is among NOVASTAR MORTGAGE, INC., a Virginia corporation (“NMI”); NOVASTAR FINANCIAL, INC., a Maryland corporation (“NFI”); TABERNA PREFERRED FUNDING I, LTD., a Cayman Islands
company, and TABERNA PREFERRED FUNDING II, LTD., a Cayman Islands company (collectively, the “Taberna Preferred Securities Holders”); KODIAK CDO I, LTD., a Cayman Islands company (the “Kodiak Preferred Securities
Holder” and, together with the Taberna Preferred Securities Holders, the “Preferred Securities Holders”). 
 WHEREAS, NMI, NFI, NovaStar Capital Trust II, a statutory trust created under the laws of the State of Delaware (the “Kodiak Trust”), and Kodiak Warehouse LLC, a Delaware limited liability company, entered into that certain
Purchase Agreement, dated as of April 18, 2006 (the “Kodiak Purchase Agreement”); 
 WHEREAS, NMI, NFI, NovaStar
Capital Trust I, a statutory trust created under the laws of the State of Delaware (the “Taberna Trust”), Merrill Lynch International and Taberna Preferred Funding I, Ltd. entered into that certain Purchase Agreement, dated as of
March 15, 2005 (the “Taberna Purchase Agreement”); 
 WHEREAS, NMI, NFI and The Bank of New York Mellon Trust Company,
National Association (“BNYM”), a national banking association (as successor to JPMorgan Chase Bank, National Association (“JPMorgan”), as trustee (the “Kodiak Indenture Trustee”), are parties to
that certain Junior Subordinated Indenture, dated as of April 18, 2006 (the “Kodiak Indenture”); 
 WHEREAS, NMI, NFI
and BNYM (as successor to JPMorgan), as trustee (the “Taberna Indenture Trustee”), are parties to that certain Amended and Restated Junior Subordinated Indenture, dated as of September 20, 2005 (the “Taberna
Indenture”); 
 WHEREAS, NMI; BNYM (as successor to JPMorgan), as property trustee of the Kodiak Trust (the “Kodiak Property
Trustee”); BNY Mellon Trust of Delaware (“BNYM Delaware”) (as successor to Chase Bank USA, National Association (“Chase”)), as Delaware trustee (the “Kodiak Delaware Trustee”); and W. Lance
Anderson, Rodney E. Schwatken and Matthew R. Kaltenrieder, as administrative trustees of the Kodiak Trust (collectively, the “Kodiak Administrative Trustees”) are parties to that certain Amended and Restated Trust Agreement, dated
as of April 18, 2006 (the “Kodiak Trust Agreement”); 
 WHEREAS, NMI; BNYM (as successor to JPMorgan), as property
trustee of the Taberna Trust (the “Taberna Property Trustee”); BNYM Delaware (as successor to Chase), as Delaware trustee (the “Taberna Delaware Trustee”); and W. Lance Anderson, Rodney E. Schwatken and Matthew R.
Kaltenrieder, as administrative trustees of the Taberna Trust (collectively, the “Taberna Administrative Trustees”) are parties to that certain Second Amended and Restated Trust Agreement, dated as of September 20, 2005 (the
“Taberna Trust Agreement”); 
 WHEREAS, NFI guaranteed the obligations of NMI under the Kodiak Indenture pursuant to that
certain Parent Guarantee Agreement, dated as of April 18, 2006 (the “Kodiak Guaranty” and, together with the Kodiak Purchase Agreement, the Kodiak Indenture, the Kodiak Trust Agreement, and the documents and instruments
executed in connection therewith, the “Kodiak Indenture Documents”), between NFI and BNYM (as successor to JPMorgan), as trustee (the “Kodiak Guaranty Trustee”); 
  

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 WHEREAS, NFI guaranteed the obligations of NMI under the Taberna Indenture pursuant to that certain
Parent Guarantee Agreement, dated as of March 15, 2005 (the “Taberna Guaranty” and, together with the Taberna Purchase Agreement, the Taberna Indenture, the Taberna Trust Agreement, and the documents and instruments executed in
connection therewith, the “Taberna Indenture Documents”), between NFI and BNYM (as successor to JPMorgan), as trustee (the “Taberna Guaranty Trustee”); 
 WHEREAS, in that certain letter dated August 14, 2008, the Kodiak Preferred Securities Holder declared the principal amount of the Securities (as
defined in the Kodiak Indenture, the “Kodiak Securities”) to be due and payable immediately and asserted alleged defaults and events of default with respect to the Kodiak Indenture (collectively, the “Kodiak Events of
Default”); 
 WHEREAS, in that certain letter dated June 2, 2008, Taberna Capital Management, LLC, on behalf of the Taberna
Preferred Securities Holders, declared all of NMI’s obligations under the Series A Securities and the Series B Securities (each as defined in the Taberna Indenture and, collectively, the “Taberna Securities”) and the Taberna
Indenture to be due and payable immediately and asserted alleged defaults and events of default with respect to the Taberna Securities (collectively, the “Taberna Events of Default” and, together with the Kodiak Events of Default
and any alleged defaults or events of defaults under the Trust Securities (as defined in the Taberna Trust Agreement and in the Kodiak Trust Agreement), the Kodiak Indenture Documents and the Taberna Indenture Documents, the “Events of
Default”); 
 WHEREAS, on September 12, 2008, the Preferred Securities Holders filed a petition (the “Involuntary
Petition”) pursuant to Section 303 of the United States Bankruptcy Code to initiate an involuntary bankruptcy proceeding against NMI in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy
Court”), Case No. 08-12125 (the “Bankruptcy Case”); 
 WHEREAS, NMI filed its Motion of NovaStar Mortgage,
Inc. for Dismissal Pursuant to Bankruptcy Rule 1011(B) and Federal Rule of Civil Procedure 12(B)(3), or in the Alternative for Transfer of Venue to the Bankruptcy Court for the Western District of Missouri Pursuant to Bankruptcy Rule 1014(A)(2)
(Docket No. 6) on October 6, 2008; 
 WHEREAS, the Preferred Securities Holders filed their Objection to the Motion of NovaStar
Mortgage, Inc. for Dismissal Pursuant to Bankruptcy Rule 1011(B) and Federal Rule of Civil Procedure 12(B)(3), or in the Alternative for Transfer of Venue to the Bankruptcy Court for the Western District of Missouri Pursuant to Bankruptcy Rule
1014(A)(2) (Docket No. 8); 
 WHEREAS, NMI filed its Renewed Motion of NovaStar Mortgage, Inc. for Dismissal Pursuant to Bankruptcy Rule
1011(B) and Federal Rule of Civil Procedure 12(B)(3), or in the Alternative for Transfer of Venue to the Bankruptcy Court for the Western District of Missouri Pursuant to Bankruptcy Rule 1014(A)(2) (Docket No. 10); 
 WHEREAS, the Preferred Securities Holders filed their Objection to the Renewed Motion of NovaStar Mortgage, Inc. for Dismissal (Docket No. 22);

  

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 WHEREAS, NMI and the Preferred Securities Holders disagree and dispute, among other things, the
Involuntary Petition, the Preferred Securities Holders’ rights to file the Involuntary Petition and Delaware as a proper forum; 
 WHEREAS, the Bankruptcy Court has not entered an order for relief in the Bankruptcy Case; and 
 WHEREAS, the parties desire to
compromise and settle any and all claims that each may have against the other under the Kodiak Indenture Documents and the Taberna Indenture Documents, and the Preferred Securities Holders have agreed to dismiss the Involuntary Petition, to annul
the declarations of acceleration and to waive the Events of Default pursuant to the terms set forth herein. 
 NOW, THEREFORE, in
consideration of the Recitals and of the mutual promises and covenants contained herein, the parties agree as follows: 
 1. Upon satisfaction
of all the conditions precedent contained in Section 7 of this Agreement, the Preferred Securities Holders hereby (i) waive all Events of Default that exist on or occurred prior to the date hereof and (ii) annul the
declarations of acceleration with respect to the Events of Default. The Preferred Securities Holders, NMI and NFI hereby direct the Kodiak Indenture Trustee, the Kodiak Property Trustee, the Kodiak Delaware Trustee, and the Kodiak Guaranty Trustee
(collectively, the “Kodiak Trustees”), the Taberna Indenture Trustee, the Taberna Property Trustee, the Taberna Delaware Trustee and the Taberna Guaranty Trustee (collectively, the “Taberna Trustees” and, together
with the Kodiak Trustees, the “Trustees”) not to exercise any right or remedy under the Kodiak Indenture Documents or the Taberna Indenture Documents as a result of such Events of Default. 
 2. On the date hereof, the Escrow Agent shall receive a wire transfer from NMI in the amount of Two Million Five Thousand Seven Hundred Thirty-Eight and
51/100 Dollars ($2,005,738.51) (the “Kodiak Settlement Amount”), a wire transfer from NMI in the amount of Three Million Three Hundred Sixteen Thousand Nine Hundred Twenty-One and 08/100 Dollars ($3,316,921.08) (the “Taberna
Settlement Amount”), and a wire transfer from NMI in the amount of Three Hundred Eighty-Seven Thousand Dollars ($387,000) (the “Restructuring Costs Amount” and, together with the Kodiak Settlement Amount and the Taberna
Settlement Amount, the “Settlement Amount”). 
 3. Until the entry of the Dismissal Order defined below and satisfaction of
the conditions precedent contained in Section 7 of this Agreement, the Kodiak Trustees and the Kodiak Preferred Securities Holders shall have no right to receive any of the Kodiak Settlement Amount. Upon the entry of the Dismissal Order
and satisfaction of the other conditions precedent contained in Section 7 of this Agreement, WolfBlock LLP, as escrow agent (the “Escrow Agent”), pursuant to that certain Escrow Agreement, dated as of the date hereof
(the “Escrow Agreement”) and in the form attached hereto as Exhibit A, shall be authorized to disburse the Kodiak Settlement Amount to the Kodiak Indenture Trustee. The Preferred Securities Holders, NMI and NFI hereby direct
the Kodiak Indenture Trustee and the Kodiak Property Trustee to apply the Kodiak Settlement Amount in full satisfaction of NMI’s and NFI’s obligations with respect to all outstanding interest due on the Kodiak Securities through
December 31, 2008 (the “Kodiak Pre-Settlement Interest”). 
  

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 4. Until the entry of the Dismissal Order defined below and satisfaction of the conditions precedent
contained in Section 7 of this Agreement, the Taberna Trustees and the Taberna Preferred Securities Holders shall have no right to receive any of the Taberna Settlement Amount. Upon the entry of the Dismissal Order and satisfaction of
the other conditions precedent contained in Section 7 of this Agreement, the Escrow Agent shall be authorized to disburse the Taberna Settlement Amount to the Taberna Indenture Trustee. The Preferred Securities Holders, NMI and NFI
hereby direct the Taberna Indenture Trustee and the Taberna Property Trustee to apply the proceeds of the Taberna Settlement Amount in full satisfaction of NMI’s and NFI’s obligations with respect to all outstanding interest due on the
Taberna Securities through December 31, 2008 (the “Taberna Pre-Settlement Interest”). 
 5. Until the entry of the
Dismissal Order defined below and satisfaction of the conditions precedent contained in Section 7 of this Agreement, the Trustees, the trustees under the Operative Documents (as defined in the Exchange Agreement, the “New
Trustees”), the Preferred Securities Holders and their agents, advisors, attorneys and legal representatives shall have no right to receive any of the Restructuring Costs Amount. Upon the entry of the Dismissal Order and satisfaction of the
other conditions precedent contained in Section 7 of this Agreement, the Escrow Agent shall be authorized to disburse the Restructuring Costs Amount in full satisfaction of all legal fees, costs and expenses of the Trustees, the New
Trustees and the Preferred Securities Holders related to: (a) the Events of Default; (b) the Bankruptcy Case; and (c) the negotiation and execution of this Agreement, the Exchange Agreement defined below, and the documents and
instruments related thereto and hereto (the “Restructuring Costs”). 
 6. Except as described in Sections 3, 4
and 5 of this Agreement, neither NMI nor NFI shall have any direct or indirect obligation or liability with respect to the Kodiak Pre-Settlement Interest, the Taberna Pre-Settlement Interest or the Restructuring Costs, even if such Kodiak
Pre-Settlement Interest, Taberna Pre-Settlement Interest and Restructuring Costs, in the aggregate, exceed the Settlement Amount. If the conditions precedent contained in Section 7 are not satisfied by April 30, 2009 (the
“Expiry Date”), the Escrow Agent shall return the full amount of the Kodiak Settlement Amount, the Taberna Settlement Amount and the Restructuring Costs Amount to NMI on such date and no other party hereto, no Trustee and no agent
thereof shall have any right to any distribution of any such Settlement Amount. Upon the satisfaction of the conditions precedent contained in Section 7 of this Agreement, neither NMI nor NFI shall have any right, title or interest
(legal, equitable or otherwise) in the Kodiak Settlement Amount, the Taberna Settlement Amount or the Restructuring Costs Amount held by the Escrow Agent. Any disbursement to the Kodiak Indenture Trustee or the Taberna Indenture Trustee and any
application of the Kodiak Settlement Amount, the Taberna Settlement Amount or the Restructuring Costs in accordance with Sections 3 through 5 hereof shall not be subordinate or subject in right of payment to the prior payment in full
of any Senior Debt (as defined in the Kodiak Indenture, “Kodiak Senior Debt”) or any Senior Debt (as defined in the Taberna Indenture, “Taberna Senior Debt”) and shall be permitted to be made prior to the payment of
any Kodiak Senior Debt or any Taberna Senior Debt, even if (i) a default has occurred and is continuing (whether at maturity, by acceleration or otherwise) with respect to any Kodiak Senior Debt or any Taberna Senior Debt and/or (ii) any
Proceeding (as defined in the Kodiak Indenture and the Taberna Indenture) has commenced. 
  

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 7. This Agreement shall not be effective unless and until the satisfaction or, in the sole and absolute
discretion of each of the parties hereto, waiver of each of the following conditions precedent: 
 (a) the parties to that
certain Exchange Agreement (the “Exchange Agreement”) shall have executed and delivered such agreement in substantially the form attached as Exhibit B, the conditions precedent set forth therein shall have been satisfied, the
Kodiak Securities shall have been exchanged for the 2009 II/B Preferred Securities (as defined in the Exchange Agreement) pursuant thereto, and the Taberna Securities shall have been exchanged for the 2009 I/B Preferred Securities (as defined in the
Exchange Agreement) pursuant thereto on or before the Expiry Date; 
 (b) NMI and NFI shall have received opinions of counsel
to the Preferred Securities Holders, in form and substance reasonably satisfactory to NMI and NFI, that (i) the Preferred Securities Holders have the requisite power and authority to execute, deliver and perform under this Agreement and the
Exchange Agreement, and (ii) this Agreement and the Exchange Agreement constitute legal, valid and binding obligations of the Preferred Securities Holders and are enforceable against the Preferred Securities Holders in accordance with their
respective terms; 
 (c) the Preferred Securities Holders shall have obtained entry of a final, non-appealable dismissal order
of the Bankruptcy Court dismissing the Bankruptcy Case, substantially in the form attached as Exhibit C (the “Dismissal Order”) on or before the Expiry Date; and 
 (d) the Trustees shall have executed and delivered to NMI, NFI and the Preferred Securities Holders an acknowledgment of this Agreement,
in form and substance reasonably satisfactory to NMI, NFI and the Preferred Securities Holders, including an acknowledgement of the waivers and agreements set forth herein and the Trustees’ agreement to follow the directions set forth herein
(the “Acknowledgement of Trustees”). 
 8. Each party hereto hereby represents and warrants to each other party hereto as
follows: 
 (a) Power; Authorization. Such person has the corporate, limited liability, or trust power and authority
and has been duly authorized by all requisite corporate, limited liability, trust or other action to execute and deliver this Agreement and to perform such person’s obligations hereunder. This Agreement has been duly executed and delivered by
such person. 
 (b) Enforceability. This Agreement is the legal, valid, and binding obligation of such person,
enforceable against such person in accordance with its terms. 
  

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 9. The Kodiak Preferred Securities Holder hereby represents and warrants to NMI and NFI that it is the
legal and beneficial holder of all of the Preferred Securities (as defined in the Kodiak Indenture) issued by the Kodiak Trust other than Preferred Securities held by NMI or NFI. 
 10. The Taberna Preferred Securities Holders hereby represent and warrant to NMI and NFI that they are the legal and beneficial holders of all of the
Preferred Securities (as defined in the Taberna Indenture) issued by the Taberna Trust. 
 11. The Preferred Securities Holders, NMI and NFI
hereby (a) direct each Trustee to execute and deliver the Acknowledgement of Trustees and any and all such other documents and agreements as may be necessary and appropriate to consummate the transactions contemplated hereby and by the Exchange
Agreement and (b) agrees to and does hereby release each Trustee for any action taken or to be taken by any Trustee in connection with its execution and delivery of the Acknowledgement of Trustees or in connection with the transactions
contemplated hereby and by the Exchange Agreement and for any liability or responsibility arising in connection herewith. 
 12. This
Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. No other person shall be entitled to claim any right or benefit hereunder, including, without limitation,
the status of a third-party beneficiary of this Agreement. 
 13. Except as expressly set forth herein, there are no agreements or
understandings, written or oral, among the parties hereto, relating to this Agreement that are not fully and completely set forth herein. 
 14. The provisions of this Agreement are intended to be severable. If any provisions of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or enforceability without in any manner affecting the validity or enforceability of such provision in any other jurisdiction or the remaining provisions of this Agreement in any jurisdiction. 

15. This Agreement shall be governed by and construed and enforced in accordance with the internal substantive laws of the State of New York
applicable to contracts made and performed in that state, without regard to the choice of law principles thereof to the extent such principles would provide for the application of the substantive laws of a jurisdiction other than the State of New
York. 
 16. This Agreement may be executed in any number of counterparts and by different parties to this Agreement on separate
counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute one and the same agreement. Any signature delivered by a party by facsimile or other electronic transmission shall be deemed to be
an original signature hereto. 
 17. No amendment, modification, rescission, waiver or release of any provision of this Agreement shall be
effective unless the same shall be in writing and signed by the parties hereto. 
  

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 18. Nothing contained herein shall be an admission by any party. Without limiting the generality of the
foregoing, nothing herein shall be an admission by any party that (i) any claims against it or any other party exist or are meritorious; (ii) Delaware is a proper forum for any disputes between the parties; or (iii) the Preferred
Securities Holders have any right to initiate an involuntary bankruptcy proceeding against NMI or NFI. 
 19. Each party was represented by
counsel in the negotiation of this Agreement and consequently, this document shall be deemed to be jointly drafted by the parties. Each party hereto represents and warrants to the other parties that this Agreement was executed freely and
voluntarily, that no promises or representations that are not contained in this Agreement have been made to induce them to execute this Agreement, that they have not relied on any promise or representation (except as set forth herein), and that they
have conducted their own independent investigation of all matters they deem relevant regarding this Agreement. 
 [Remainder of Page
Intentionally Blank] 
  

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 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above
written. 
  

			
	NOVASTAR MORTGAGE, INC.
		
	By:	 	  

	Name:	 	  

	Title:	 	  

	
	NOVASTAR FINANCIAL, INC.
		
	By:	 	  

	Name:	 	  

	Title:	 	  

	
	KODIAK CDO I, LTD.
		
	By:	 	Kodiak CDO Management LLC
		 	Its: Collateral Manager
		
	By:	 	Kodiak Funding, LP
		 	Its: Sole Member
		
	By:	 	Kodiak Funding Company, Inc.
		 	Its: General Partner
		
	By:	 	  

	Name:	 	Robert M. Hurley
	Title:	 	Chief Financial Officer
	
	TABERNA PREFERRED FUNDING I, LTD.
		
	By:	 	Taberna Capital Management, LLC
		 	Its: Collateral Manager
		
	By:	 	  

	Name:	 	Michael A. Fralin
	Title:	 	Managing Director

			
	TABERNA PREFERRED FUNDING II, LTD.
		
	By:	 	Taberna Capital Management, LLC
		 	Its: Collateral Manager
		
	By:	 	  

	Name:	 	Michael A. Fralin
	Title:	 	Managing Director

 EXHIBIT A 
 FORM OF ESCROW AGREEMENT 

 EXHIBIT B 
 FORM OF EXCHANGE AGREEMENT 

 EXHIBIT C 
 FORM OF DISMISSAL ORDER 
 IN THE UNITED STATES BANKRUPTCY COURT 
 FOR THE DISTRICT OF DELAWARE 
  

					
	IN RE:	 		  	
		 	)                    	  	
	NOVASTAR MORTGAGE, INC.,	 	)	  	
		 	)	  	Case No. 08-12125-CSS
		 	)	  	Involuntary Petition
	 Alleged Debtor.
	 	)	  	
		 	)	  	Related Docket Entries: 35,    
		 	)	  	Obj. Deadline: March 2, 2009
		 	)	  	at 4:30 p.m. Eastern Time
		 	)	  	Hearing Date: March 9, 2009
		 	)	  	at 11:30 a.m. Eastern Time
	  
	 	)	  	

 ORDER GRANTING 
 JOINT MOTION TO DISMISS INVOLUNTARY CASE 
 PURSUANT TO 11 U.S.C. § 303(j) BY STIPULATION 

 BETWEEN ALLEGED DEBTOR AND PETITIONING CREDITORS 
 THIS MATTER COMES BEFORE THE COURT on March 9, 2009, to consider the Joint Motion to Dismiss Involuntary Case Pursuant To 11 U.S.C. § 303(j) by
Stipulation Between Alleged Debtor and Petitioning Creditors (Docket No.     ) (the “Joint Motion”) filed by Taberna Preferred Funding I, Ltd., Taberna Preferred Funding II, Ltd. and Kodiak CDO I, Ltd. (the
“Petitioning Creditors”) and NovaStar Mortgage, Inc. (“NMI”). Appearances are noted in the record. 
 The
Court, having jurisdiction hereof and having reviewed the files and records in this case together with the declarations of the witnesses and the statements of counsel, finds good cause exists for the entry of this Order. The Court further finds that
notice of the hearing to consider the Joint Motion was served on all parties identified in the Certificate of Service (Docket No.     ) filed by NMI in 

  

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this case, and such service was made pursuant to this Court’s Procedural Order (Docket No. 35). The Court further finds that due, proper and
sufficient notice was served pursuant to 11 U.S.C. §303(j). The Court further finds that the dismissal by stipulation proposed in the Joint Motion and the Settlement Agreement attached thereto are in the best interest of the estate. The Court
further finds that creditors are being treated fairly and equitably in light of the settlement with the Petitioning Creditors. 
 ACCORDINGLY, IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the form of notice served upon creditors and parties in interest shall be and hereby is APPROVED in all respects. 
 IT IS FURTHER ORDERED, ADJUDGED AND DECREED that this case shall be and hereby is DISMISSED, each party to bear its own costs unless otherwise specified
in the Settlement Agreement. 
 IT IS SO ORDERED. 
  

							
	 Date:
	 	  
	 		 	
		 		 		 	  

		 		 		 	Hon. Christopher Sontchi
		 		 		 	U.S. Bankruptcy Judge

  

 2Escrow Agreement

 Exhibit 10.54 
 EXECUTION COPY 
 ESCROW AGREEMENT 
 THIS ESCROW AGREEMENT (this “Agreement”), dated as of February 18, 2009, is by and among NOVASTAR MORTGAGE, INC., a Virginia
corporation (“NMI”); NOVASTAR FINANCIAL, INC., a Maryland corporation (“NFI”); TABERNA PREFERRED FUNDING I, LTD. (“Taberna I”); TABERNA PREFERRED FUNDING II, LTD.
(“Taberna II”); KODIAK CDO I, LTD. (“Kodiak” and, collectively with Taberna I and Taberna II, the “Holders”), and WOLFBLOCK LLP, a Pennsylvania limited liability partnership
(“Escrow Agent”). 
 WITNESETH: 
 WHEREAS, on the date hereof, NMI, NFI, the Holders and other parties thereto have executed an Exchange Agreement (the “Exchange Agreement”), a fully executed copy of which is attached hereto as
Exhibit A, which Exchange Agreement provides for the exchange of certain Securities and Existing Securities (as defined therein) on the terms and conditions set forth therein; and 
 WHEREAS, on the date hereof, NMI, NFI, the Holders, and other parties thereto have executed a Settlement Agreement (the “Settlement
Agreement”), a fully executed copy of which is attached hereto as Exhibit B, which Settlement Agreement provides for the settlement of outstanding claims and actions on the terms and conditions set forth therein; and

 WHEREAS, the Settlement Agreement provides for certain settlement amounts, as more particularly set forth therein, to be deposited with
Escrow Agent, which settlement amounts shall be held and disposed of by Escrow Agent in accordance with the terms of this Agreement; 
 NOW,
THEREFORE, in consideration of the premises and the covenants herein contained, the parties hereto hereby agree as follows: 
 1. Definitions. All
terms used herein and not otherwise defined herein have the same meaning that such terms have in the Exchange Agreement or the Settlement Agreement, as applicable. 
 2. Escrow Agent. Escrow Agent is hereby appointed as escrow agent to hold and distribute the Deposits defined in Section 3 hereof, in accordance with the terms hereof, and Escrow Agent hereby accepts such appointment and agrees
to act in such capacity. 
 3. Deposits. On or about the date hereof, Escrow Agent shall have received the following from NMI: 
 (a) A wire transfer in the amount of $2,005,738.51 (the “Kodiak Settlement Amount”); 

 (b) A wire transfer in the amount of $3,316,921.08 (the “Taberna Settlement
Amount”); and 
 (c) A wire transfer in the amount of $387,000 (the “Restructuring Costs Amount”).

 Items (a) through (c) referenced above shall, hereinafter, collectively be referred to as the “Deposits”. 
 Escrow Agent shall invest the Deposits in non-interest bearing accounts, with or through a commercial bank or similar institution having assets on
deposit of at least One Billion Dollars. Escrow Agent shall advise the parties hereto of the name and address of such institution and the account number assigned to each of the Deposits. 
 4. Release Conditions. Escrow Agent’s release and disbursement of the Deposits pursuant to Section 5 below is conditioned upon Escrow Agent’s receipt, on or before 5:00 p.m. (New York time)
April 30, 2009 (the “Expiry Date”) of the following (collectively, the “Release Conditions”): 
 (a) The Deposits; 
 (b) A copy of the final, non-appealable dismissal order of the Bankruptcy Court dismissing Case
No. 08-12125, as issued by the United States Bankruptcy Court for the District of Delaware (the “Dismissal Order”); and 
 (c) A certificate, substantially in the form of Exhibit C attached hereto, executed by NMI, NFI, and the Holders, certifying that: (i) the exchange of those certain Securities and Existing
Securities (as defined in such Exchange Agreement) has occurred in accordance with the terms and conditions of the Exchange Agreement; (ii) those conditions set forth in Section 7 of the Settlement Agreement have been satisfied or waived
by the applicable parties thereto; and (iii) Escrow Agent is authorized to disburse the Deposits in accordance with the provisions of this Agreement (the “Certificate”). 
 5. Closing and Release of Deposits. On the date all of the foregoing Release Conditions have been fully met, Escrow Agent shall: 
 (a) Disburse the Kodiak Settlement Amount to The Bank of New York Mellon Trust Company, National Association (“BNYM”), as the
Kodiak Indenture Trustee (as defined in the Settlement Agreement), in accordance with wire instructions provided by the Kodiak Indenture Trustee to the Escrow Agent with respect to such Kodiak Settlement Amount; 
 (b) Disburse the Taberna Settlement Amount to BNYM, as the Taberna Indenture Trustee (as defined in the Settlement Agreement), in accordance with wire
instructions provided by the Taberna Indenture Trustee to the Escrow Agent with respect to such Taberna Settlement Amount; 
  

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 (c) Disburse $150,000.00 of the Restructuring Costs Amount to Winston & Strawn LLP, as payment
for legal fees incurred, in accordance with wire instructions provided to the Escrow Agent; 
 (d) Disburse $30,000.00 of the Restructuring
Costs Amount to Gardere Wynne Sewell LLP, as payment for legal fees incurred, in accordance with wire instructions provided to the Escrow Agent; 
 (e) Disburse $175,000.00 of the Restructuring Costs Amount to WolfBlock LLP, as payment for legal fees incurred; 
 (f) Disburse
$7,000.00 of the Restructuring Costs Amount to Richards, Layton & Finger, P.A., as payment for legal fees incurred, in accordance with wire instructions provided to the Escrow Agent; and 
 (g) Disburse the remaining $25,000 of the Restructuring Costs Amount as instructed, such instructions to be in writing and approved by both NMI and the
Holders, to pay (or reimburse) expenses of the Trustees (as defined in the Settlement Agreement) and the trustees under the Operative Documents (as defined in the Exchange Agreement), including, to the extent not otherwise provided for in
Section 5(d) and (f) hereof, (i) the legal fees of the Trustees and the trustees under the Operative Documents, (ii) expenses to make the 2009 II/B Preferred Securities (as defined in the Exchange Agreement) eligible for
clearance and settlement as book-entry securities through the facilities of The Depository Trust Company and listed for trading through the PORTAL Market and (iii) CUSIP fees. 
 6. Failure of Release Conditions by the Expiry Date. If for any reason, by 5:00 p.m. (New York time) on the Expiry Date, the foregoing Release Conditions have not been fully met, Escrow Agent shall immediately
return the Kodiak Settlement Amount, the Taberna Settlement Amount and the Restructuring Costs Amount to NMI, pursuant to wire instructions provided by NMI to Escrow Agent. 
 7. Termination. This Agreement shall terminate upon the earlier to occur of (a) the disbursement of the Deposits pursuant to Section 5 or (b) the return of the Deposits pursuant to
Section 6. Upon such termination, Escrow Agent shall thereupon and thereafter be free and discharged of all obligations and liabilities hereunder. 
 8.
Escrow Agent. 
 (a) As escrow agent hereunder, Escrow Agent shall have no duties or responsibilities, except those duties and
responsibilities expressly set forth herein. Escrow Agent may consult with counsel and shall be fully protected with respect to any action taken or omitted by it in good faith on the advise of counsel, and shall have no liability hereunder except
for its gross negligence or willful misconduct. Escrow Agent may rely on any certificate, statement, request, consent, agreement or other instrument which it believes 

  

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in good faith to be genuine and to have been signed or presented by a proper person or persons. Escrow Agent shall not be bound by any modification to or
amendment of this Agreement unless in writing and signed by the parties hereto, and if its duties as Escrow Agent hereunder are affected, unless it shall have given its prior written consent thereto. In the event that Escrow Agent shall be uncertain
as to its duties or rights hereunder or shall receive instructions from the parties hereto with respect to the Deposits which, in its opinion, are in conflict with any provisions of this Agreement, Escrow Agent shall be entitled to refrain from
taking any action other than to keep safely the Deposits, until it shall be directed otherwise in writing by all of the parties hereto. 
 (b) Notwithstanding anything herein to the contrary or which might be construed to the contrary, the Escrow Agent shall be fully and completely discharged and released from any obligation or duty with respect to the Deposits when the Escrow
Agent has disbursed the same in accordance with this Agreement. 
 (c) If any dispute arises as to any action to be taken by the Escrow Agent
or any distribution of the Deposits, or as to Escrow Agent’s rights and duties under this Agreement, or if the Escrow Agent is in doubt as to such duties, or if any attachment, garnishment, or other similar proceeding is instituted or procured
as to all or any part of the Deposits, and if any writ, order, or rule of attachment, garnishment, or other similar order is levied upon or entered against any portion of the Deposits, the Escrow Agent shall have the right to: (i) interplead
the Deposits, or any part thereof, with a court of competent jurisdiction and upon notifying the other parties to this Agreement of such action, all liability of the Escrow Agent under the terms of this Agreement shall terminate, except to the
extent of accounting for the Deposits; or (ii) institute an action for a declaratory judgment as to the ownership of the Deposits. 
 (d) Escrow Agent shall not receive compensation for the performance of its duties hereunder. 
 (e) Escrow Agent shall be
indemnified for, and held harmless against, any loss or liability (including reasonable attorneys’ fees) incurred without willful misconduct or gross negligence on the part of Escrow Agent, and arising out of or in connection with its
acceptance of, or the performance of its duties and obligations under, this Agreement. 
 (f) Escrow Agent may resign hereunder by giving
written notice thereof to the parties hereto; provided, however, that Escrow Agent shall not be permitted to resign unless and until a successor escrow agent shall have been designated and approved by all parties hereto, which approval shall
not be unreasonably withheld, and shall have accepted such designation and agreed to be bound by the provisions of this Agreement. Such resignation shall then take effect upon the date specified in such notice, whereupon all duties of Escrow Agent
so resigning shall cease, other than the duty to account. 
  

 4 

 9. Miscellaneous. 
 (a) Severability. If any provision in this Agreement for any reason shall be held to be illegal, invalid or unenforceable, the other provisions of this Agreement will remain in full force and effect. Any
provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 
 (b) Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such state, without
regard to the conflict of laws rules thereof. 
 (c) Notices. Any notice or other communication required or permitted hereunder shall
be in writing and shall be delivered personally by hand, telecopier or mailed (by overnight courier or registered or certified mail, postage prepaid) as follows: 
  

					
		 	 if to NMI and NFI:

		
		 	 NovaStar Mortgage, Inc.
 2114 Central Street,
Suite 600
 Kansas City, MO 64108
 Telephone: (816) 237-7000

 Telecopier: (816) 237-7515
 E-Mail:
landerson@novastarfinancial.com
 Attention: Chief Executive Officer

		
		 	 with a copy to:

		
		 	 Husch Blackwell Sanders LLP
 1200 Main
Street, Suite 2300
 Kansas City, MO 64105
 Telephone:
(816) 421-4800
 Telecopier: (816) 421-0596
 E-Mail:
christopher.redmond@huschblackwell.com
 Attention: Christopher Redmond, Esq.

		
		 	 if to the Holders:

		
		 	 Taberna Preferred Funding I, Ltd.
 Taberna
Capital Management, LLC
 2929 Arch Street, 17th Floor
 Philadelphia, PA 19104
 Telephone: (215) 243-9033
 Telecopier: (215) 243-9030
 E-Mail: rlicht@raitft.com; and
 mfralin@tabernasecurities.com

  

 5 

					
		
		 	 Taberna Preferred Funding II, Ltd.
 Taberna Capital Management, LLC
 2929 Arch Street, 17th Floor
 Philadelphia, PA 19104
 Telephone: (215) 243-9033
 Telecopier: (215) 243-9030
 E-Mail: rlicht@raitft.com; and
 mfralin@tabernasecurities.com

		
		 	 Kodiak CDO I. Ltd.
 c/o Kodiak Capital
Management Company, LLC
 2107 Wilson Boulevard, Suite 400
 Arlington, VA 22201
 Telephone: (703) 875-7622
 Telecopier: (703) 351-7901
 E-Mail: rhurley@ejfcap.com; and lkucera@ejfcap.com

		
		 	 if to Escrow Agent:

		
		 	 Gerard S. Catalanello, Esq.
 WolfBlock LLP
250 Park Avenue New York, New York 10177
 Telephone: (212) 883-4973
 Telecopier No. 212-672-1173
 E-Mail: gcatalanello@wolfblock.com

  

 6 

 Each such notice or other communication shall be effective (i) if given by telecopier, when such
telecopy is transmitted to the telecopier number specified in Section 9(c) (with confirmation of transmission) or (ii) if given by any other means, when delivered at the address specified in Section 9(c). Any party by notice given in
accordance with this Section 9(c) to the other party may designate another address (or telecopier number) or person for receipt of notices hereunder. 
 (d) Consent to Jurisdiction and Service of Process. The parties hereto irrevocably (i) agree that any suit, action or other legal proceeding arising out of this Agreement may be brought in the courts
of the State of New York or the courts of the United States located in New York County, New York, (ii) consent to the jurisdiction of each court in any such suit, action or proceeding, (iii) waive any objection which they,
or any of them, may have to the laying of venue of any such suit, action or proceeding in any of such courts, and (iv) waive the right to a trial by jury in any such suit, action or other legal proceeding. 
 (e) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against
any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of
all of the parties reflected hereon as the signatories. 
 [SIGNATURE PAGE FOLLOWS] 
  

 7 

 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

  

			
	NMI:
	
	NOVASTAR MORTGAGE, INC.
		
	By:	 	  

	Name:	 	
	Title:	 	
	
	NFI:
	
	NOVASTAR FINANCIAL, INC.
		
	By:	 	  

	Name:	 	
	Title:	 	
	
	HOLDERS:
	
	KODIAK CDO I, LTD., as Holder
	
	By: Kodiak CDO Management, LLC, as Collateral Manager
	
	By: Kodiak Funding, LP, its Sole Member
	
	By: Kodiak Funding Company, Inc., its General Partner
		
	By:	 	  

	Name:	 	Robert M. Hurley
	Title:	 	Chief Financial Officer

  

 8 

			
	TABERNA PREFERRED FUNDING I, LTD., as Holder
	
	By: Taberna Capital Management, LLC, as Collateral Manager
		
	By:	 	  

	Name:	 	Michael A. Fralin
	Title:	 	Managing Director
	
	TABERNA PREFERRED FUNDING II, LTD., as Holder
	
	By: Taberna Capital Management, LLC, as Collateral Manager
		
	By:	 	  

	Name:	 	Michael A. Fralin
	Title:	 	Managing Director
	
	ESCROW AGENT:
	
	WOLF BLOCK LLP
		
	By:	 	  

	Name:	 	
	Title:	 	Authorized Partner

  

 9 

 EXHIBIT A 
 Fully Executed Copy of Exchange Agreement 
 See Attached 
  

 10 

 EXHIBIT B 
 Fully Executed Copy of Settlement Agreement 
 See Attached 
  

 11 

 EXHIBIT C 
 Form of Certificate 
 CERTIFICATE 
 The undersigned, being the parties to that certain Escrow Agreement dated as of February 18, 2009 (the “Escrow Agreement”), each
hereby certifies the following to WolfBlock LLP, as Escrow Agent under such Escrow Agreement, and to the other parties thereto with the understanding that that Escrow Agent will rely upon such representations in connection with its release and
distribution of the Deposits pursuant to the terms and conditions of the Escrow Agreement: 
 1. The exchange of those certain Securities and
Existing Securities, as contemplated by that certain Exchange Agreement, dated as of February 18, 2009, has occurred in accordance with the terms and conditions set forth therein. 
 2. All items required to be delivered in accordance with Section 7 of that certain Settlement Agreement, dated as of February 18, 2009 have
either been (i) duly delivered and approved, or (ii) waived by the applicable parties thereto. 
 3. Subject to the satisfaction of
the remaining Release Conditions set forth in Section 4 of the Escrow Agreement, the undersigned hereby authorizes Escrow Agent to release and disburse the Deposits in accordance with the provisions of Section 5 of the Escrow Agreement.

 [Remainder of Page Intentionally Left Blank] 
  

 12 

 IN WITNESS WHEREOF, the undersigned have executed this Certificate as of
                            , 2009. 
  

			
	NMI:
	
	NOVASTAR MORTGAGE, INC.
		
	By:	 	  

	Name:	 	
	Title:	 	
	
	NFI:
	
	NOVASTAR FINANCIAL, INC.
		
	By:	 	  

	Name:	 	
	Title:	 	
	
	HOLDERS:
	
	KODIAK CDO I, LTD., as Holder
	
	By: Kodiak CDO Management, LLC, as Collateral Manager
	
	By: Kodiak Funding, LP, its Sole Member
	
	By: Kodiak Funding Company, Inc., its General Partner
		
	By:	 	  

	Name:	 	Robert M. Hurley
	Title:	 	Chief Financial Officer

  

 13 

			
	TABERNA PREFERRED FUNDING I, LTD., as Holder
	
	 By: Taberna Capital Management, LLC, as Collateral Manager

		
	By:	 	  

	Name:	 	Michael A. Fralin
	Title:	 	Managing Director
	
	TABERNA PREFERRED FUNDING II, LTD., as Holder
	
	By: Taberna Capital Management, LLC, as Collateral Manager
		
	By:	 	  

	Name:	 	Michael A. Fralin
	Title:	 	Managing Director

  

 14

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