Document:

Exhibit 10.6

 

PLEDGE AGREEMENT

 

This Pledge Agreement
(this “Agreement”) dated as of June 20, 2005 between HSBC BANK USA, N.A.,
having an office at 452 Fifth Avenue, New York, New York 10018, as agent for
Lenders (as defined below) (in such capacity, “Agent”) and RAFAELLA APPAREL
GROUP, INC., a Delaware corporation having an office at 1411 Broadway, New
York, New York 10018 (“Pledgor”).

 

BACKGROUND TO THE AGREEMENT

 

Pledgor has entered or is
entering into a Financing Agreement dated as of June 20, 2005 (as amended,
modified, restated or supplemented from time to time, the “Financing Agreement”)
with Verrazano, Inc., each other subsidiary of Pledgor which becomes a
guarantor of the obligations thereunder from time to time, the financial
institutions named therein or which hereafter become a party thereto (each a “Lender”
and collectively, “Lenders”) and Agent pursuant to which Agent and Lenders have
agreed, subject to the terms and conditions contained therein, to provide
certain financial accommodations to Pledgor.

 

In order to induce Agent
and Lenders to provide or continue to provide the financial accommodations
described in the Financing Agreement, Pledgor has agreed to pledge and grant a
security interest to Agent for its benefit and for the ratable benefit of
Lenders in the Collateral (as hereinafter defined).

 

NOW, THEREFORE, in
consideration of the premises and for other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:

 

1.         Definitions.

 

All capitalized terms
used herein which are not defined shall have the meanings given to them in the
Financing Agreement.

 

2.         Pledge and Grant of
Security Interest.

 

To secure the full and
punctual payment and performance of the Obligations (the “Indebtedness”),
Pledgor hereby pledges, assigns, hypothecates, transfers and grants a security
interest to Agent for its benefit and for the ratable benefit of Lenders in all
of the following (the “Collateral”):

 

(a)       the shares of stock issued
by the issuers and set forth on Schedule A (each such issuer, an “Issuer”)
annexed hereto and expressly made a part hereof (all such shares, the “Pledged
Stock”), the certificates representing the Pledged Stock and all dividends,
cash, instruments and other property or proceeds from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all
of the Pledged Stock;

 

 

(b)       all additional shares of
stock of any Issuer of the Pledged Stock from time to time acquired by the Pledgor
in any manner, including, without limitation, stock dividends or a distribution
in connection with any increase or reduction of capital, reclassification,
merger, consolidation, sale of assets, combination of shares, stock split,
spin-off or split-off (which shares shall be deemed to be part of the
Collateral), and the certificates representing such additional shares, and all
dividends, cash, instruments and other property or proceeds from time to time
received, receivable or otherwise distributed in respect of or in exchange for
any or all of such shares; and

 

(c)       all options and rights,
whether as an addition to, in substitution of or in exchange for any shares of
the Pledged Stock.

 

3.         Delivery of Collateral.

 

All certificates
representing or evidencing the Pledged Stock shall be delivered to and held by
or on behalf of Agent pursuant hereto and shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
reasonably satisfactory to Agent. Pledgor hereby authorizes the Issuer upon
demand by Agent to deliver any certificates, instruments or other distributions
issued in connection with the Collateral directly to Agent, in each case to be
held by Agent, subject to the terms hereof. Agent shall have the right, when a
Event of Default has occurred and is continuing, to transfer to or to register
in the name of Agent or any of its nominees any or all of the Pledged Stock,
and to exchange certificates or instruments representing or evidencing Pledged
Stock for certificates or instruments of smaller or larger denominations.

 

4.         Representations and
Warranties of Pledgor.

 

Pledgor represents and
warrants to Agent that:

 

(a)       Pledgor has the requisite
power and authority to enter into this Agreement, to pledge the Collateral for
the purposes described herein and to carry out the transactions contemplated by
this Agreement.

 

(b)       The execution, delivery and
performance by Pledgor of this Agreement and the pledge of the Collateral
hereunder have been duly and properly authorized and do not and will not result
in any violation of any agreement, indenture, instrument, license, judgment,
decree, order, law, statute, ordinance or other governmental rule or regulation
applicable to Pledgor, except as could not reasonably be expected to have a
Material Adverse Effect.

 

(c)       This Agreement constitutes
the legal, valid and binding obligation of Pledgor enforceable against Pledgor
in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws.

 

(d)       Pledgor is the direct and
beneficial owner of each share of the Pledged Stock.

 

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(e)       All of the shares of the
Pledged Stock have been duly authorized, validly issued and are fully paid and
nonassessable.

 

(f)        Upon delivery of the
Pledged Stock to Agent or an agent for Agent, this Agreement creates and grants
a valid first Lien on and in the Collateral and the proceeds thereof, subject
to no prior security interest, mortgage, pledge, claim, lien, charge,
hypothecation, assignment, offset or encumbrance whatsoever or to any agreement
purporting to grant to any third party a Lien upon the property or assets of
Pledgor which would include the Collateral, except for Permitted Encumbrances.

 

(g)       There are no restrictions
on transfer of the Pledged Stock contained in the Certificate of Incorporation
or by-laws of the Issuer or otherwise which have not otherwise been enforceably
and legally waived by the necessary parties.

 

(h)       None of the Pledged Stock
has been issued or transferred in violation of the securities registration,
securities disclosure or similar laws of any jurisdiction to which such
issuance or transfer may be subject.

 

(i)        There are no actions or
proceedings pending or, to the best of Pledgor’s knowledge, threatened in
writing before any court, judicial body, administrative agency or arbitrator
which may materially adversely affect the Collateral.

 

(j)        No consent, approval,
authorization or other order of any person, firm, corporation or other entity (“Person”)
and no consent, authorization, approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body is required by the
Pledgor either (i) for the pledge of the Collateral pursuant to this Agreement
or for the execution, delivery or performance of this Agreement or (ii) for the
exercise by the Agent of the voting or other rights provided for in this
Agreement or the remedies in respect of the Collateral pursuant to this
Agreement, except as may be required in connection with such disposition by
laws affecting the offering and sale of securities generally.

 

(k)       No notification of the
pledge evidenced hereby to any Person is required.

 

(l)        The Pledged Stock
constitutes one hundred percent (100%) of the issued and outstanding shares of
capital stock of the Issuers thereof set forth on Schedule A annexed
hereto.

 

(m)      As of the date hereof, there
are no existing options, warrants, calls or commitments of any such character
whatsoever relating to any Pledged Stock and no indebtedness or other security
convertible into any Pledged Stock.

 

The representations and
warranties set forth in this Section 4 shall survive the execution and delivery
of this Agreement.

 

5.         Covenants.

 

3

 

Until such time as all of
the Indebtedness has been paid in full and the Financing Agreement has been
irrevocably terminated, Pledgor shall:

 

(a)       Not, other than as
permitted by the Loan Documents, sell, assign, transfer, convey, or otherwise
dispose of its rights in or to the Collateral or any interest therein; nor
create, incur or permit to exist any Lien whatsoever with respect to any of the
Collateral or the proceeds thereof other than that created hereby.

 

(b)       At Pledgor’s expense,
defend Agent’s right, title and security interest in and to the Collateral
against the claims of any Person and keep the Collateral free from all Liens,
except for the Liens granted to Agent under this Agreement.

 

(c)       At any time, and from time
to time, upon the written request of Agent, execute and deliver such further
documents and do such further acts and things as Agent may reasonably request
in order to effect the purposes of this Agreement including, but without
limitation, delivering to Agent upon the occurrence and during the continuance
of an Event of Default irrevocable proxies in respect of the Collateral in form
satisfactory to Agent exercisable only upon the occurrence and during the
continuance of an Event of Default. Until receipt thereof, this Agreement shall
constitute Pledgor’s proxy to Agent or its nominee to vote all shares of
Collateral then registered in Pledgor’s name upon the occurrence and during the
continuance of an Event of Default.

 

(d)       Within five (5) Business
Days of receipt thereof by Pledgor, deliver to Agent all notices and statements
relating to the Collateral received by Pledgor.

 

(e)       Not consent to or approve
the issuance to any Person other than Pledgor of (i) any additional shares of
any class of capital stock of the Issuer; (ii) any securities convertible
either voluntarily by the holder thereof or automatically upon the occurrence
or nonoccurrence of any event or condition into, or any securities exchangeable
for, any such shares; or (iii) any warrants, options, contracts or other
commitments entitling any person to purchase or otherwise acquire any such
shares.

 

6.         Voting Rights and
Dividends.

 

In addition to Agent’s
rights and remedies set forth in Section 8 hereof, in case an Event of Default
shall have occurred and has been declared by Agent and shall be continuing,
Agent shall (i) be entitled to vote the Collateral, (ii) be entitled to give
consents, waivers and ratifications in respect of the Collateral (Pledgor
hereby irrevocably constituting and appointing Agent, with full power of
substitution, the proxy and attorney-in-fact after the occurrence and during
the continuance of an Event of Default of Pledgor for such purposes) and (iii)
be entitled to collect and receive for its own use cash dividends paid on the
Collateral. Unless and until the Agent exercises its rights under the preceding
sentence, Pledgor shall remain entitled to take all such actions. Pledgor shall
not be permitted to exercise or refrain from exercising any voting rights or
other powers if such action would reasonably be expected to have a material
adverse effect on the value of the Collateral or any part thereof; and, provided,
further, that Pledgor shall give at least five (5) days’ written notice
of the manner in which Pledgor intends to exercise, or the reasons for
refraining from exercising, any voting rights or other powers other than with

 

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respect to any election of directors and voting with respect to any
incidental matters. All dividends and all other distributions in respect of any
of the Collateral, whenever paid or made, shall be delivered to Agent to hold
as Collateral and shall, if received by the Pledgor, be received in trust for
the benefit of Agent, be segregated from the other property or funds of the
Pledgor, and be forthwith delivered to Agent as Collateral in the same form as
so received (with any necessary endorsement).

 

7.         Events of Default.

 

The term “Event of
Default” wherever used herein shall mean the occurrence of an Event of Default
under the Financing Agreement, or Pledgor or the Issuer shall default in the
payment of any Obligation;

 

8.         Remedies.

 

Upon the occurrence of an
Event of Default, Agent may:

 

(a)       Demand, collect, receipt
for, settle, compromise, adjust, sue for, foreclose or realize upon the
Collateral (or any part thereof), as Agent may determine in its sole
discretion;

 

(b)       Transfer any or all of the
Collateral into its name, or into the name of its nominee or nominees;

 

(c)       Exercise all rights with
respect to the Collateral including, without limitation, all rights of
conversion, exchange, subscription or any other rights, privileges or options
pertaining to any shares of the Collateral as if it were the absolute owner
thereof, including, but without limitation, the right to exchange, at its
discretion, any or all of the Collateral upon the merger, consolidation,
reorganization, recapitalization or other readjustment of the Issuer thereof,
or upon the exercise by the Issuer of any right, privilege or option pertaining
to any of the Collateral, and, in connection therewith, to deposit and deliver
any and all of the Collateral with any committee, depository, transfer agent,
registrar or other designated agent upon such terms and conditions as it may
determine, all without liability except to account for property actually
received by it;

 

(d)       Subject to the requirements
of applicable law, sell, assign and deliver the whole or, from time to time,
any part of the Collateral at the time held by Agent, at any private or public
sale or auction, with or without demand, advertisement or notice of the time or
place of sale or adjournment thereof or otherwise (all of which are hereby
waived, except such notice as is required by applicable law and cannot be
waived), for cash or credit or for other property for immediate or future
delivery, and for such price or prices and on such terms as Agent in its sole
discretion may determine, or as may be required by applicable law.

 

Pledgor hereby waives and
releases any and all right or equity of redemption, whether before or after
sale hereunder. At any such sale, unless prohibited by applicable law, Agent
may bid for and purchase the whole or any part of the Collateral so sold free
from any such right or equity of redemption. All moneys received by Agent
hereunder whether upon sale of the Collateral or any part thereof or otherwise
shall be held by Agent and applied by it as

 

5

 

provided in Section 11 hereof. No failure or delay on the part of Agent
in exercising any rights hereunder shall operate as a waiver of any such rights
nor shall any single or partial exercise of any such rights preclude any other
or future exercise thereof or the exercise of any other rights hereunder. Agent
shall have no duty as to the collection or protection of the Collateral or any
income thereon nor any duty as to preservation of any rights pertaining
thereto, except to apply the funds in accordance with the requirements of
Section 11 hereof. Agent may exercise its rights with respect to property held
hereunder without resort to other security for or sources of reimbursement for
the Indebtedness. In addition to the foregoing, Agent shall have all of the
rights, remedies and privileges of a secured party under applicable law and the
Uniform Commercial Code of New York regardless of the jurisdiction in which
enforcement hereof is sought.

 

9.         Private Sale.

 

Pledgor recognizes that
Agent may be unable to effect (or to do so only after delay which would
adversely affect the value that might be realized from the Collateral) a public
sale of all or part of the Collateral by reason of certain prohibitions
contained in the Securities Act, and may be compelled to resort to one or more
private sales to a restricted group of purchasers who will be obliged to agree,
among other things, to acquire such Collateral for their own account, for
investment and not with a view to the distribution or resale thereof. Pledgor
agrees that any such private sale may be at prices and on terms less favorable
to the seller than if sold at public sales and that such private sales shall be
deemed to have been made in a commercially reasonable manner. Pledgor agrees
that Agent has no obligation to delay sale of any Collateral for the period of
time necessary to permit the Issuer to register the Collateral for public sale
under the Securities Act.

 

10.       Proceeds of Sale.

 

The proceeds of any
collection, recovery, receipt, appropriation, realization, disposition or sale
of the Collateral shall be applied by Agent as provided under the Financing
Agreement.

 

11.       Waiver of Marshaling.

 

Pledgor hereby waives any
right to compel any marshaling of any of the Collateral.

 

12.       Agent Appointed
Attorney-In-Fact and Performance by Agent. Upon the occurrence and during
the continuance of an Event of Default, Pledgor hereby irrevocably constitutes
and appoints Agent as Pledgor’s true and lawful attorney-in-fact exercisable
only after the occurrence and during the continuance of an Event of Default,
with full power of substitution, to execute, acknowledge and deliver any
instruments and to do in Pledgor’s name, place and stead, all such acts, things
and deeds for and on behalf of and in the name of Pledgor, which Pledgor could
or might do or which Agent may deem necessary, desirable or convenient to
accomplish the purposes of this Agreement, including, without limitation, to
execute such instruments of assignment or transfer or orders and to register,
convey or otherwise transfer title to the Collateral into Agent’s name. Pledgor
hereby ratifies and confirms all that said attorney-in-fact may so do and
hereby declares this power of attorney to be coupled with an interest and
irrevocable. If Pledgor fails to perform any agreement herein contained, Agent
may, after notice

 

6

 

to Pledgor and reasonable opportunity (but in no event less than 5
days) to cure, itself perform or cause performance thereof, and any reasonable
costs and expenses of Agent incurred in connection therewith shall be paid by
Pledgor as provided in Section 24 hereof.

 

13.       Termination.

 

This Agreement shall
terminate and Pledgor shall be entitled to the return, at Pledgor’s expense, of
such of the Collateral as has not theretofore been sold, disposed of or
otherwise applied pursuant to this Agreement upon payment in full of the
Indebtedness and irrevocable termination of the Financing Agreement.

 

14.       Concerning Agent.

 

The recitals of fact
herein shall be taken as statements of Pledgor for which Agent assumes no
responsibility. Agent makes no representation to anyone as to the value of the
Collateral or any part thereof or as to the validity or adequacy of the
security afforded or intended to be afforded thereby or as to the validity of
this Agreement. Agent shall be protected in relying upon any notice, consent,
request or other paper or document believed by it to be genuine and correct and
to have been signed by a proper person. The permissive rights of Agent
hereunder shall not be construed as duties of Agent. Agent shall be under no
obligation to take any action toward the enforcement of this Agreement or
rights or remedies in respect of any of the Collateral. Agent shall not be
personally liable for any action taken or omitted by it in good faith and
reasonably believed by it to be within the power or discretion conferred upon
it by this Agreement.

 

15.       Notices.

 

Any notice or other
communication required or permitted pursuant to this Agreement shall be deemed
given (a) when personally delivered to any officer of the party to whom it is
addressed, (b) on the earlier of actual receipt thereof or three (3) days
following posting thereof by certified or registered mail, postage prepaid, (c)
upon actual receipt thereof when sent by a recognized overnight delivery
service or (d) upon actual receipt thereof when sent by telecopier to the
number set forth below with electronic confirmation of receipt, in each case
addressed to each party at its address or telecopier number set forth below or
at such other address or telecopier number as has been furnished in writing by
a party to the other by like notice:

 

	
  If to Agent:

  	
   

  	
  HSBC Bank USA

  452 Fifth Avenue 

  New York, New York 10018 

  
	
   

  	
   

  	
  Attention:

  	
  Douglas Taliaferro

  
	
   

  	
   

  	
  Telephone:

  	
  212-525-5799

  
	
   

  	
   

  	
  Facsimile:

  	
  212-525-6905

  
	
   

  	
   

  	
   

  
	
  with a copy to:

  	
   

  	
  Hahn & Hessen LLP

  488 Madison Avenue

  New York, New York 10022

  Attention:

  

 

7

	
   

  	
   

  	
  Telephone:

  	
  (212) 736-1000 

  
	
   

  	
   

  	
  Facsimile:

  	
  (212) 478-7400

  
	
  If to Pledgor:

  	
   

  	
  Rafaella Corporation

  1411 Broadway

  New York, New York 10018

  
	
   

  	
   

  	
  Attention:

  	
  Chad Spooner 

  
	
   

  	
   

  	
  Telephone:

  	
  212 403-0300 

  
	
   

  	
   

  	
  Facsimile:

  	
  212 764-9275

  
	
   

  	
   

  	
   

  
	
  with a copy to:

  	
   

  	
  Schulte Roth & Zabel LLP

  919 Third Avenue 

  New York, New York 10022

  
	
   

  	
   

  	
  Attention:

  	
  Stuart Freedman, Esq. 

  
	
   

  	
   

  	
  Telephone:

  	
  212-756-2000 

  
	
   

  	
   

  	
  Facsimile:

  	
  212-593-5955

  
						

 

16.       Governing Law.

 

This Agreement and all
rights and obligations hereunder shall be governed by and construed and
enforced in all respects in accordance with the laws of the State of New York
applied to contracts to be performed wholly within the State of New York.

 

17.       Waivers.

 

PLEDGOR AND AGENT HEREBY
EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN
ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES
HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE
TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND
PLEDGOR AND AGENT HEREBY CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE
OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT PLEDGOR AND
AGENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT
AS WRITTEN EVIDENCE OF THEIR CONSENTS HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.

 

18.       Litigation.

 

ANY JUDICIAL PROCEEDING
BROUGHT BY OR AGAINST PLEDGOR OR AGENT WITH RESPECT TO ANY OF THE OBLIGATIONS,
THIS AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN ANY COURT OF
COMPETENT JURISDICTION IN NEW YORK COUNTY, STATE OF NEW YORK, UNITED STATES OF

 

8

 

AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF
PLEDGOR AND AGENT ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID
COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN
CONNECTION WITH THIS AGREEMENT. EACH OF PLEDGOR AND AGENT HEREBY WAIVE PERSONAL
SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENT THAT ALL SUCH SERVICE OF
PROCESS MAY BE MADE BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO
EACH OF PLEDGOR AND AGENT AT ITS ADDRESS SET FORTH IN SECTION 15 ABOVE AND
SERVICE SO MADE SHALL BE DEEMED COMPLETED FIVE (5) DAYS AFTER THE SAME SHALL
HAVE BEEN SO DEPOSITED IN THE MAILS OF THE UNITED STATES OF AMERICA. NOTHING
HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW
OR SHALL LIMIT THE RIGHT OF AGENT TO BRING PROCEEDINGS AGAINST PLEDGOR IN THE
COURTS OF ANY OTHER JURISDICTION. PLEDGOR AND AGENT WAIVE ANY OBJECTION TO
JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER AND SHALL NOT ASSERT
ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON
CONVENIENS. ANY JUDICIAL PROCEEDING BY PLEDGOR AGAINST AGENT INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED
TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, SHALL BE BROUGHT
ONLY IN A FEDERAL OR STATE COURT LOCATED IN THE CITY OF NEW YORK, STATE OF NEW
YORK.

 

19.       No Waiver; Cumulative
Remedies.

 

Any and all of Agent’s
and Lenders’ rights with respect to the Liens granted under this Agreement
shall continue unimpaired, and Pledgor shall be and remain obligated in
accordance with the terms hereof, notwithstanding (a) the bankruptcy,
insolvency or reorganization of Pledgor, (b) the release or substitution of any
item of the Collateral at any time, or of any rights or interests therein, or
(c) any delay, extension of time, renewal, compromise or other indulgence
granted by Agent and Lenders in reference to any of the Indebtedness. Pledgor
hereby waives all notice of any such delay, extension, release, substitution,
renewal, compromise or other indulgence, and hereby consents to be bound hereby
as fully and effectively as if Pledgor had expressly agreed thereto in advance.
No failure on the part of Agent or Lenders to exercise, and no delay in
exercising, any right, power or remedy hereunder shall operate as a waiver
thereof nor shall any single or partial exercise of any such right, power or
remedy by Agent and Lenders preclude any other or further exercise thereof or
the exercise of any right, power or remedy. All remedies hereunder are
cumulative and are not exclusive of any other remedies provided by law.

 

20.       Severability.

 

In case any security
interest or other right of Agent and/or any Lender shall be held to be invalid,
illegal or unenforceable, such invalidity, illegality or unenforceability shall
not affect any other security interest or other right, privilege or power
granted under this Agreement. In the event that any provision of this Agreement
or the application thereof to Pledgor or any circumstance in any jurisdiction
governing this Agreement shall, to any extent, be invalid or

 

9

 

unenforceable under any applicable statute, regulation, or rule of law,
such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform to such statute, regulation
or rule of law, and the remainder of this Agreement and the application of any
such invalid or unenforceable provision to parties, jurisdictions, or
circumstances other than to whom or to which it is held invalid or
unenforceable shall not be affected thereby, nor shall same affect the validity
or enforceability of any other provision of this Agreement.

 

21.       Counterparts; Facsimiles.

 

This Agreement may be
executed in one or more counterparts, each of which shall be deemed an original
and all of which when taken together shall constitute one and the same
instrument. Any signature delivered by a party by facsimile transmission or
electronic mail shall be deemed an original signature hereto.

 

22.       Miscellaneous.

 

(a)       This Agreement constitutes
the entire and final agreement among the parties with respect to the subject
matter hereof and neither this Agreement nor any term hereof may be changed,
discharged or terminated orally, but only by an instrument in writing, signed
by Agent and Pledgor. No waiver of any term or condition of this Agreement,
whether by delay, omission or otherwise, shall be effective unless in writing
and signed by the party sought to be charged, and then such waiver shall be
effective only in the specific instance and for the purpose for which given.

 

(b)       This Agreement shall be
binding upon Pledgor, and Pledgor’s successors and assigns, and shall inure to
the benefit of Agent, Lenders and their successors and assigns. The term “Agent”,
as used herein, shall include any successor or assign of Agent at the time
entitled to the pledged interest in the Collateral.

 

(c)       The headings and captions
in this Agreement are for purposes of reference only and shall not constitute
part of this Agreement for any other purpose.

 

23.       Expenses.

 

The Collateral shall also
secure, and Pledgor shall pay to Agent on demand, from time to time, all
reasonable costs and expenses (including but not limited to, reasonable
attorneys’ fees and costs, taxes, and all transfer, recording, filing and other
charges) of or incidental to, the custody, care, transfer, administration of
the Collateral or any other collateral, or in any way relating to the
enforcement, protection or preservation of the rights or remedies of Agent and
Lenders under this Agreement or with respect to any of the Indebtedness.

 

24.       Recapture

 

Anything in this
Agreement to the contrary notwithstanding, if Agent and/or Lenders receives any
payment or payments on account of the Indebtedness, which payment or payments
or any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set

 

10

 

aside and/or required to be repaid to a trustee, receiver, or any other
party under the United States Bankruptcy Code, as amended, or any other federal
or state bankruptcy, reorganization, moratorium or insolvency law relating to
or affecting the enforcement of creditors’ rights generally, common law or
equitable doctrine, then to the extent of any sum not finally retained by Agent
and/or Lenders, Pledgor’s obligations to Agent and Lenders shall be reinstated
and this Agreement shall remain in full force and effect (or be reinstated)
until payment shall have been made to Agent, which payment shall be due on
demand.

 

11

 

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

 

 

	
   

  	
   

  	
  RAFAELLA APPAREL GROUP, INC., as Pledgor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Glenn S. Palmer

  	
   

  
	
   

  	
   

  	
   

  	
  Name: Glenn S. Palmer

  
	
   

  	
   

  	
   

  	
  Its: Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  HSBC BANK USA, NATIONAL ASSOCIATION,

  as Agent

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Lisa H. Augustus

  	
   

  
	
   

  	
   

  	
   

  	
  Name: Lisa H. Augustus

  
	
   

  	
   

  	
   

  	
  Its: Vice PresidentExhibit
10.7

CONTINUING LETTER
OF CREDIT AGREEMENT

 

	
   

  	
   

  	
  Date  June 20,
  2005

  

 

	
  TO:

  	
   

  	
  HSBC Bank USA, National
  Association

  452 Fifth Avenue

  New York, New York 10018

  

Gentlemen:

Unless otherwise agreed
in writing, the following Terms and Conditions shall apply to our application
for and your issuance of each letter of credit on our behalf, including
amendments or modifications thereto. Each such letter of credit shall
hereinafter be referred to as the “Credit”. These Terms and Conditions are
being entered into in connection with the Financing Agreement dated the date
hereof among us, Verrazano, Inc, any of our other subsidiaries that become
guarantors of our obligations thereunder from time to time, you and the other
lenders now or hereafter a party thereto, and you, as agent for such lenders
(as amended, restated, modified or supplemented from time to time, the
“Financing Agreement”). Defined terms used in these Terms and Conditions but
not defined herein shall have the meanings specified in the Financing Agreement.
If any provision of these Terms and Conditions is inconsistent with any
provision of the Financing Agreement or any security agreement delivered
pursuant thereto, the term of the Financing Agreement or such security
agreement shall control.

1.                         Prepayment/Reimbursement. We agree in the
case of each Draft, whether or not the Credit calls for Deferred Payments, to
reimburse you at your principal banking office at the above address or at such
other banking office of yours as you and we may agree upon in writing, at once,
in United States currency in immediately available funds, the amount paid on
such Draft, or, if so demanded by you, to pay to you at your office in advance,
at least in time for cover to reach the place of payment at maturity, in United
States currency in immediately available funds, the amount required to pay such
Draft.

2.                         (a) Commissions.
We agree to pay you, on demand, (i) your commission in connection with the
Credit, at your customary rates in effect at the time of the Application (or at
any special rate on which you shall agree with us, in writing), as well as (ii)
the commission(s) of any correspondent, confirming, paying, accepting or
negotiating banks at their customary rates in effect at the time of their
taking any action in connection with the Credit. (b) Interest. Except as expressly provided for elsewhere in this
Agreement or otherwise in writing signed or accepted by you, any and all
amounts due you from us under this Agreement and/or the Application, including
without limitation our obligations under paragraph 1 of this Agreement, shall
bear interest at the rate and be payable at the times specified in the
Financing Agreement. (c) Fees, Costs and
Expenses. We agree to pay or reimburse you and your correspondents
on demand for, and to indemnify and hold harmless you and your correspondents
from and against, all costs, charges, and expenses, including reasonable
attorneys’ fees and expenses incurred by you and your correspondents arising in
any manner, from, out of, or in connection with (i) the Application, (ii) this
Agreement, (iii) the Credit, (iv) compliance with governmental exchange
regulations applicable to the purchase of foreign currency, (v) collection of
our Liabilities, (vi) protection of any of your or your correspondents’ rights
or interests in connection with any of the foregoing, and (vii) any litigation
in connection with any of the foregoing. The foregoing obligation to pay,
reimburse and indemnify shall not apply to the extent that any such costs,
charges or expenses result from your or your correspondents’ own gross
negligence or bad faith. (d) Payments Free of
Taxes. Except to the extent qualified or otherwise provided in the
Financing Agreement, any and all payments made to you under this Agreement
shall be made free and clear of and without deduction for any present or future
taxes, levies, imposts, deductions, charges, or withholdings, and all
liabilities with respect thereto, in any jurisdiction worldwide, excluding
taxes imposed on your net income and all income and franchise taxes imposed on
you. All such non-excluded taxes, levies, imposts, deductions, charges,
withholdings and liabilities which are imposed with respect to this Agreement
or any amount payable under it are hereinafter called “Taxes”. Except as otherwise
provided in the Financing Agreement, if we shall be required by law to deduct
any Taxes from or in respect of any sum payable under this Agreement, (i) the
sum payable shall be increased as may be necessary so that, after making all
required deductions (including deductions applicable to additional sums payable
under this subparagraph), you shall receive an amount equal to the sum you
would have received had no such deductions been made, (ii) we shall make such
deductions, and (iii)

 

 

we shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable law. We
will indemnify you for the full amount of Taxes to the extent provided for
herein and in the Financing Agreement, whether or not such Taxes were correctly
or legally asserted. Payment pursuant to this indemnification shall be made
upon written demand therefor. Within 30 days after the date of any payment of
Taxes we will furnish you with evidence thereof. (e) Reserves, Assessment Charges, Capital Requirements and Other Regulatory
Costs. Except to the extent qualified or otherwise provided in the
Financing Agreement, in the event that you are required by, or as a result of
any action or policy position taken by, any regulatory authority, to pay,
institute, increase, maintain at any particular level or otherwise to incur any
reserves, assessment charges or capital requirements or other regulatory costs
in connection with or as a result of this Agreement or the Credit, in order for
you to be in compliance with any present or future applicable law or
governmental, regulation, guideline, order, interpretation (including but not
limited to an interpretation by a court or any regulatory authority that any
law or regulation requires or permits the imposition of such specified costs in
connection with or as a result of this Agreement or the Credit) or request
(whether or not having the force of law), we agree to pay you on demand and to
indemnify and hold you harmless from and against all costs and expenses of, or
of establishing or maintaining, such specified costs, as such costs and
expenses shall be reasonably determined by you.

3.                         Definitions.
As used in this Agreement: (a) “Bank Affiliate” shall include any person, firm
or entity acting as nominee or agent for you, and any corporation which is
directly or indirectly owned or controlled by, or under common control with
you; (b) “Deferred Payment” shall mean an arrangement provided for in the
Credit pursuant to which the Beneficiary shall have the right or obligation to
present Documents for examination by you in advance of presenting a Drafts or
Draft drawn under the Credit; (c) “Documents” shall mean any and all
certificates, documents and statements accompanying or relating to the Credit
and/or to Drafts drawn under the Credit, but shall not mean Drafts; (d) “Draft”
shall mean a written request, order or demand for the payment of money, whether
or not negotiable; (e) “Liabilities” shall include any and all of the
obligations and liabilities under or with reference to the Credit, the
Application, this Agreement, any other letter of credit issued by you; (f)
“Party” shall include (i) us, (ii) any guarantor, surety or accommodation party
with respect to, or any party that provides any collateral as security for, or
any party that provides a comfort letter, letter of awareness, letter of intent
or similar document with respect to any of the Liabilities, and (iii) if any
Party is a partnership, any general partner of such Party; (g) “Property” shall
mean any and all goods, merchandise, securities, funds, chosen in action, and
any and all other forms of property whether real, personal or mixed, tangible
or intangible, and any right or interest therein; (h) “UCC” shall mean the New
York Uniform Commercial Code, as in effect from time to time; and (i) “UCP”
shall mean the Uniform Customs and Practice for Documentary Credits adopted by
the Congress of the International Chamber of Commerce (“ICC”), 1993 revision,
ICC Publication No. 500 as amended or substituted for and as in effect from
time to time.

4.                         Acceptable
Documents Under the Credit; Administrative Agreements. (a) Substantial Compliance. Except as
expressly provided otherwise on the Application, we authorize you to accept as
complying with the Credit any Drafts and/or Documents which are in substantial
but not strict compliance with the Credit without affecting or relieving us of
any of our Liabilities under this Agreement. Nevertheless, you may in your
discretion, refuse to accept any or all such Drafts and/or Documents unless
they are in strict compliance with the Credit. (b) Applicant’s Instructions. In administering the Credit, you and
your correspondents may act in reliance upon any oral, telephonic, telegraphic,
facsimile, electronic or written request, agreement, notice, consent, waiver or
other communication believed in good faith to have been authorized by us,
whether or not actually given or signed by an authorized person. (c) Applicable Standards. Except as otherwise
expressly provided, you and/or your correspondents may, to the extent that you
or they deem appropriate: (i) consider applicable to the Credit and any or all
transactions thereunder any laws, regulations, customs, or usages, foreign or
domestic, deemed appropriate and not inconsistent with the UCP; (ii) accept as
“bills of lading” documents acknowledging receipt of property, for
transportation by or on behalf of carriers, and, as “steamer bills of lading,”
such documents of carriers whether or not the entire transportation is by
water; (iii) accept bills of lading not marked “notify the account party named
in the Credit” or not indicating the letter of credit number notwithstanding
anything herein specified to the contrary. (d) Insurance. We will cause the properly covered by the Credit to
be insured in accordance with the Financing Agreement and the Other Documents.
(e) Compliance with Regulations.
We shall procure promptly necessary import, export or shipping licenses for the
property

 

 

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covered by the Credit, comply with all governmental
regulations, foreign or domestic (including exchange regulations) with regard
thereto or the financing thereof, and furnish to you, at your request,
certificates evidencing the foregoing, and on demand, pay to you, any amount(s)
you may be required to expend in respect thereto. (f) Release of Property or Documents - Trust Receipts.
If you deliver to us or upon our order any of the property, documents or
instruments relative to the Credit, or held by you as security hereunder, prior
to payment in full of all of our obligations secured thereby, we will deliver
to you trust receipts therefor, or other security agreements and statements of
trust receipt financing, or other financing statements, complying with
applicable law and in such form as you may request, and pay all necessary
filing fees, it being understood that any such delivery is made in reliance
upon this Agreement and that your rights specified herein shall be in addition
to your rights under any such applicable law, trust receipt or security
agreement. (g) Steamship Guaranty, Etc.
(i) In case we ask you, orally or by written request, at any time prior to your
receipt of documents relative to the Credit, to issue your Steamship Guaranty,
Delivery Order or Air Release to the carrier company or its agent to enable us
to receive the property covered by the Credit, we hereby indemnify and hold you
harmless from all consequences of the delivery of said Guaranty, Delivery Order
or Air Release and agree to pay you on demand any and all claims, losses and/or
expenses that may arise under or in respect of said Guaranty, Delivery Order or
Air Release. You also may at any time pay, compromise or adjust any such claim
and we agree to pay you on demand any amount required or expended by you for
such purpose. We will immediately upon receipt of the original bill(s) of
lading arrange for the prompt release or return to you of any guaranty or
release issued by you in connection with the Credit.

5.                         Modifications, Extensions and Increases.
Any agreement to modify the Credit shall require the Beneficiary’s consent. In
your discretion, the Beneficiary’s consent need not be in writing and may be
indicated by the Beneficiary’s acquiescence in modifications communicated to and
received by the Beneficiary.

6.                         Division of Responsibilities. (a) Applicant’s Responsibilities. In the event
you are compelled by any binding judgment, decree, order or award to make any
payment under the Credit or to honor any Drafts or Documents as complying with
the Credit, our obligations arising under this Agreement to reimburse you shall
continue to apply or, if previously expired, shall be immediately restored,
upon the rendering of any such judgment, decree, order or award, regardless of
whether or not such judgment, decree, order or award shall be rendered, or any
payment pursuant thereto shall be made, after the expiration of the Credit. (b)
Non-responsibility of Banks.
Subject to paragraph 7 of this Agreement, neither you nor your correspondents
shall be liable for any of the following: (i) Lack
of Control. Any matter or event beyond your or your correspondents’
reasonable control; (ii) Documents.
The truthfulness or accuracy of any statement contained in any Document, or the
validity, sufficiency, or genuineness of Documents or Drafts, even if such
Documents or Drafts should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged; (iii) Parties
Issuing Documents. The solvency or responsibility of any party
issuing any Document; (iv) Arrival of
Documents. Any delay in arrival or failure to arrive of any
Documents relating to the Credit; (v) Notices.
Any delay in giving or failure to give any notice; (vi) Local Laws. Any laws, acts, decrees,
customs or regulations, legal or illegal, of any government or governmental
agency or of any authority actually in control, of or which may be effective
in, places of negotiation and/or payment of the Credit or otherwise relating to
the Credit, Documents, or Drafts under the Credit; (vii) War. Any declared or undeclared war or any
military, guerrilla or terrorist operation; (viii) Compliance With Credit Terms. Failure of any Draft or Document
to bear any reference or adequate reference to the Credit; failure of Documents
to accompany any Draft at negotiation; or failure of any person to note the
amount of any Draft on the reverse of the Credit or to surrender or take up the
Credit or to send or forward Documents apart from Drafts as requited by the
terms of the Credit; it is agreed that each of the provisions referred to in
this subparagraph 6(b)(viii), if appearing as a requirement in the Credit
itself, may be waived by you; (ix) Communications.
Errors, omissions, mutilations, losses, failures, defaults, interruptions or
delays in transmission, delivery, receipt, or recording of any messages, by
mail, telex, cable, telegraph, wireless, facsimile, SWIFT, or otherwise,
whether or not arising out of the use of codes; (x) Correspondents. Any act, error, neglect, default, insolvency
or failure in business of any of your correspondents, or of correspondents of
your correspondents except that any such correspondent shall be liable, if at
all, solely for its own bad faith or gross negligence, or if and solely to the
extent required by law and not disclaimable, for its own negligence; (xi) Invalid Instructions. Any consequence
resulting from the fact that any instructions, oral or written, given to you
purporting to be by us or on our behalf and believed by you in good faith and
in the exercise of ordinary care to be valid, which pertain to the

 

 

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opening of the Credit, payments against Documents
despite discrepancies, any modification of the Credit or any other action to be
taken or omitted in connection with the Credit were, wholly or in part,
unauthorized, fraudulent or otherwise invalid; (xii) Uniform Customs and Practice. Any matter as to which banks
assume no liability or responsibility pursuant to the UCP; (xiii) Translations. Any consequence resulting
from errors in or inadequacy of any translation of or in connection with: (A)
the Application, if not entirely written in English, (B) the Credit, if the
Credit is requested to be written in any language other than English, or (C)
any Document or Draft not entirely written in English; or (xiv) Good Faith. Without limiting the foregoing,
any act or omission of you or your correspondents in good faith except,
respectively, solely for your or your correspondent’s own gross negligence or
bad faith or, if and solely to the extent required by law and not disclaimable,
for your or its own negligence. In any event, neither you nor any correspondent
shall have any liability for any special, consequential or punitive damages.
(c) Payments by Correspondents; Failure to
Receive Transmitted Documents. If the Credit provides that payment
is to be made by your correspondent, neither you nor such correspondent shall
be responsible for your failure to receive any of the Documents specified in
the Credit or for any delay in connection with them. Our obligation to make
reimbursement shall not be affected by any such failure or delay. (d) Delivery of Documents. (i) if the Credit
calls for sight Drafts without providing for Deferred Payments, Documents
presented under the Credit shall be released by you to us or at our instruction
promptly after you pay the respective Draft, once we shall have complied with
paragraph 1; (ii) if the Credit calls for Deferred Payments, Documents
presented under the Credit in advance of Drafts shall be released by you to us
or at our instruction promptly after you examine the Documents, provided they
conform to the terms and conditions of the Credit, but such release shall not
affect or reduce our obligations under paragraph 1.

7.                         Indemnity. In addition to our obligations
under other provisions of this Agreement, we hereby agree to indemnify and hold
you harmless from and against any and all costs, expenses (including reasonable
attorneys’ fees and expenses), losses, claims, obligations and liabilities
arising in any manner from, out of, or in connection with, the Application,
this Agreement or the Credit, and your issuing the Credit or acting thereunder
or hereunder, or in connection with any action, suit or proceeding seeking to
enjoin or restrain you from acting pursuant to the Credit, the Application or
this Agreement, including but not limited to all obligations and
responsibilities imposed by foreign law and usages and any and all claims
resulting from the endorsement and/or Transfer to us or at our request of any
Documents and/or your acting in accordance with our instructions, unless caused
by your gross negligence or bad faith or, if and solely to the extent required
by law and not disclaimable, for your negligence. We hereby similarly indemnify
and hold harmless each and every correspondent acting in connection with the
Credit, except with respect to any such correspondent’s gross negligence or bad
faith or, if and solely to the extent required by law and not disclaimable,
negligence.

8.                         Governmental Compliance. (a) Compliance. We agree: (i) to comply with
all applicable foreign and United States governmental laws, rules, regulations,
orders and other requirements, including without limitation those arising under
or relating to international agreements, relating to the transactions in
connection with the Credit, and (ii) to furnish such documentation and
certificates regarding compliance with governmental requirements as you may at
any time require; (b) Import and Export
Restrictions, etc. Without limiting the foregoing, we warrant and
represent that every transaction in connection with the Credit will be in
compliance with, and will not be prohibited under, any applicable governmental
law, rule, regulation, licensing requirement or order regarding foreign asset
controls, export controls, import controls, antiboycott requirements, foreign
funds controls and foreign sanctions.

9.                         Rules Governing Credit. The Credit applied
for by the Application shall be subject to and interpreted in accordance with
the UCP as in effect on the date the Credit shall be issued and, if and to the
extent so provided by you in your discretion in the Credit and to the extent
not inconsistent with the UCP, to the internal law (excluding conflict of laws
rules) of the State of New York including without limitation Article 5 of the
UCC.

10.                   Warranties and Representations. We warrant
and represent to you: (a) If we purport to be a partnership or corporation,
that we have been duly formed under applicable law and are in good standing in
the jurisdiction where we have been organized. (b) That we are authorized to do
business in each jurisdiction where we are doing business, unless the failure
to be qualified would not have a Material Adverse Effect. (c) That the Application
and this Agreement have been and are duly

 

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authorized and validly executed in accordance with
applicable law and all governing documents and agreements. (d) That the
Application and this Agreement are our legal, valid and binding obligations and
are enforceable against us in accordance with their terms. (e) That no
authorization, consent or approval of any governmental or regulatory authority
is or will be required or, if required, that each such authorization, consent
or approval has been duly acquired, in connection with all matters relating to
the Application, this Agreement and the Credit. (f) That no document executed
or thing done in connection with the Application, this Agreement or the Credit
is or shall be in conflict with or constitute a default under any agreement,
instrument or applicable law to which we are a party or by which we are bound.

11.                   [Intentionally
Omitted].

12.                   Security Interest; Set-Off. You shall have
a continuing lien and right of set-off on, and are hereby granted a first
priority security interest in, all of our deposits (general and special) and
credits at any time maintained with you or any Bank Affiliate, and may apply
all or part of the same to any Liabilities, at any time or times, without prior
notice. As security for the prompt and unconditional payment of any and all
Liabilities, you have been granted a continuing lien on, and a first priority
security interest in, all of our the Collateral under the Financing Agreement
and the Other Documents; including, without limitation: (i) all documents or
instruments accompanying or relative to drafts under the Credit and all
property shipped, stored or otherwise disposed of in connection with the Credit
or in any way relating thereto and all proceeds of the foregoing; and (ii) all
our rights and causes of action against all parties arising from or in
connection with the contract of sale or purchase of the property covered by the
Credit, or any guarantees, agreements or other undertakings (including those in
effect between us and any other account party or the beneficiary named in the
Credit), credits, policies of insurance or other assurances in connection
therewith. When an Event of Default has occurred and is continuing, you shall
thereupon have, in addition to all other rights and remedies under applicable
law, the rights and remedies of a secured party under the Uniform Commercial
Code of New York. Your rights and remedies provided for hereunder (including
but not limited to the right to accelerate Liabilities and to realize on any
security for Liabilities) are cumulative with your rights and remedies
available under any other instrument or agreement or under applicable law.

13.                   Charge to Deposit Account. Each amount
which may become due and payable to you under this Agreement may, in your
discretion and if not otherwise paid, be charged by you to any account of ours
with you, without prior notice to us, either against any available funds then
in such account, or creating an overdraft. The amount of any overdraft shall
bear interest, payable on demand, in accordance with subparagraph 2(b) of this
Agreement.

14.                   Events of Default. An Event of Default
under the Financing Agreement constitutes an Event of Default under this
Agreement.

15.                   Consequences of Default. If any Event of
Default shall occur, then you shall have the rights and remedies provided in
the Financing Agreement and the Other Documents.

16.                   Number of Parties. One Applicant. If this
Agreement is signed by one individual, the terms “we,” “our,” and “us” shall be
read throughout as “I,” “my,” and “me”, as the case may be. (b) Joint and Several Liability. If this
Agreement is signed by two or more parties, it shall be the joint and several
agreement of such parties and they shall be jointly and severally liable.

17.                   Transfers, Successors and Assigns. (a) Continuing Obligations. The Liabilities
shall bind us, our heirs, executors, administrators, successors and permitted
assigns and shall continue after the expiration or cancellation of the Credit
and until all of the Liabilities shall have been paid, satisfied and performed
in full. (b) Transfers by Bank; Waiver of
Defenses. (i) All rights, benefits and privileges hereby conferred
on you shall be and hereby are extended to and conferred upon and may be
enforced by your successors and assigns. Without limiting your rights
hereunder, to the extent and in the manner provided in the Financing Agreement,
you may transfer the Credit and whether or not in connection therewith, you may
transfer all or part of your rights and obligations under (A) this Agreement
(B) any collateral, mortgage, lien or security interest, however denominated,
securing this Agreement, (C) any guaranty of, any subordination to, and any
other of your rights against any third party(ies) in connection with this
Agreement, and/or (D) any document or instrument evidencing or relating to the
foregoing.

 

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(ii) In connection with any such transfer transaction,
we authorize you to disclose any information you may have or acquire about us
to any prospective or actual transferee, subject to compliance with the
confidentiality terms of the Financing Agreement, (iii) We hereby waive all
defenses (except such defenses as may be asserted against a holder in due
course of a negotiable instrument) which we may have or acquire against any
transferee who takes this Agreement, or any complete or partial interest in it,
for value, in good faith and without notice that any of our obligations
hereunder are overdue or have been dishonored or of any defense against or
claim to it on the part of any person. (c) No
Transfers by Applicant. Without your express written permission, we
shall have no right to assign any of our rights or delegate any of our
obligations and any such purported assignment or delegation shall be void. (d) Partnership Applicants. The obligations of
this Agreement shall continue in force and shall apply, notwithstanding any
change in the membership of any partnership executing this Agreement, whether
arising from the death or retirement of one or more partners or the admission
of one or more new partners.

18.                   Partial Unenforceability. Any provision of
this Agreement which is prohibited, unenforceable or not authorized in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition, unenforceability or non-authorization, without invalidating
the remaining provisions hereof in that or any other jurisdiction and without
affecting the validity, enforceability or legality of such provision in any
other jurisdiction.

19.                   Submission to Jurisdiction; Applicable Law.
This Agreement and all rights, obligations and liabilities arising hereunder
shall be construed according to the internal laws of the State of New York,
without giving effect to conflict of laws principles. (a) Submission. We hereby submit to the
non-exclusive jurisdiction of the federal and state courts sitting in the
County of New York, State of New York, with respect to any dispute arising
from, out of, or in connection with the Application, the Credit, this Agreement
or any Document. (b) Sovereign Immunity
Waiver. In connection with any action, suit or proceeding we hereby
irrevocably waive any sovereign immunity we may have or hereafter acquire,
including but not limited to immunity from jurisdiction of any court, from any
legal process (whether through service, notice or otherwise) from attachment
prior to judgment, from attachment in aid of execution, from execution or
otherwise, with respect to ourselves or our Property. (c) Service of Process. Service may be made on
us by mailing a copy of the legal process to us at the Applicant’s address
appearing on the Application (unless your department handling the transaction
shall have received notice of change of address, in which case such legal
process shall be mailed to us at such changed address). (d) New York Law. This Agreement and all
rights, obligations and liabilities arising hereunder shall be construed
according to the internal laws of the State of New York, without giving effect
to conflict of laws principles.

20.                   Your Right to Arbitration. (a) WE AGREE
THAT ANY ACTION, DISPUTE, PROCEEDING, CLAIM OR CONTROVERSY BETWEEN OR AMONG YOU
AND US WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE (“DISPUTE” OR
“DISPUTES”) SHALL, AT YOUR ELECTION, WHICH ELECTION MAY BE MADE AT ANY TIME
PRIOR TO THE COMMENCEMENT OF A JUDICIAL PROCEEDING BY YOU, OR IN THE EVENT OF A
JUDICIAL PROCEEDING INSTITUTED BY US AT ANY TIME PRIOR TO THE LAST DAY TO ANSWER
AND/OR RESPOND TO A SUMMONS AND/OR COMPLAINT MADE BY YOU, BE RESOLVED BY
ARBITRATION IN NEW YORK, NEW YORK IN ACCORDANCE WITH THE PROVISIONS OF THIS
PARAGRAPH 21 AND SHALL, AT YOUR ELECTION, INCLUDE ALL DISPUTES ARISING OUT OF
OR IN CONNECTION WITH (I) THIS AGREEMENT OR ANY RELATED AGREEMENTS OR
INSTRUMENTS, (II) ALL PAST, PRESENT AND FUTURE AGREEMENTS INVOLVING THE
PARTIES, (III) THE CREDIT OR ANY OTHER TRANSACTION CONTEMPLATED HEREBY AND ALL
PAST AND FUTURE TRANSACTIONS INVOLVING THE PARTIES, AND (IV) ANY ASPECT OF THE
PAST, PRESENT OR FUTURE RELATIONSHIP OF THE PARTIES. You may elect to require
arbitration of any Dispute with us without thereby being required to arbitrate
all Disputes between you and us. Any such Dispute shall be resolved by binding arbitration
in accordance with Title 9 of the U.S. Code and the Commercial Arbitration
Rules of the American Arbitration Association (“AAA”). In the event of any
inconsistency between such Rules and these arbitration provisions, these
provisions shall supersede such Rules. All statutes of limitations which would
otherwise be applicable shall apply to any arbitration proceeding under this
subparagraph 21(a). In any arbitration proceeding subject to these provisions,
the arbitration panel (the “arbitrator”) is specifically empowered to decide
(by

 

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documents only, or with a hearing, at the arbitrator’s
sole discretion) pre-hearing motions which are substantially similar to
pre-hearing motions to dismiss and motions for summary adjudication. In any
such arbitration proceeding, the arbitrator shall not have the power or
authority to award punitive damages to any party. Judgment upon the award
rendered may be entered in any court having jurisdiction. Whenever an arbitration
is required, the parties shall select an arbitrator in the manner provided in
subparagraph 2l(d). (b) No provision of, nor the exercise of any rights under,
subparagraph 21(a) shall limit the right of any party (i) to foreclose against
any real or personal property collateral through judicial foreclosure, by the
exercise of a power of sale under a deed of trust, mortgage or other security
agreement or instrument, pursuant to applicable provisions of the Uniform
Commercial Code, or otherwise pursuant to applicable law, (ii) to exercise self
help remedies including but not limited to setoff and repossession, or (iii) to
request and obtain from a court having jurisdiction before, during or after the
pendency of any arbitration, provisional or ancillary remedies and relief
including but not limited to injunctive or mandatory relief or the appointment
of a receiver. The institution and maintenance of an action or judicial
proceeding for, or pursuit of, provisional or ancillary remedies or exercise of
self help remedies shall not constitute a waiver of your right, even if you are
the plaintiff, to submit the Dispute to arbitration if you would otherwise have
such right. (c) You may require arbitration of any Dispute(s) concerning the
lawfulness, unconscionableness, propriety, or reasonableness of any exercise by
you of your right to take or dispose of any collateral or your exercise of any
other right in connection with collateral including, without limitation,
judicial foreclosure, exercising a power of sale under a deed of trust or
mortgage, obtaining or executing a writ of attachment, taking or disposing of
property with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code or otherwise as permitted by applicable law, notwithstanding
any such exercise by you. (d) Whenever an arbitration is required under
subparagraph 21(a), the arbitrator shall be selected, except as otherwise
herein provided, in accordance with the Commercial Arbitration Rules of the
AAA. A single arbitrator shall decide any claim of $100,000 or less and he or
she shall be an attorney with at least five years’ experience. Where the claim
of any party exceeds $100,000, the Dispute shall be decided by a majority vote
of three arbitrators, at least two of whom shall be attorneys (at least one of
whom shall have not less than five years’ experience representing commercial
banks). The arbitrator shall have the power to award recovery of all costs and
fees (including attorneys’ fees, administrative fees, arbitrator’s fees, and
court costs) to the prevailing party. In the event of any Dispute governed by
this paragraph 21, each of the parties shall, subject to the award of the
arbitrator, pay an equal share of the arbitrator’s fees.

21.                   Notices. Any notice to you shall be deemed
effective only if sent to and when received at your department conducting the
transaction or transactions in question relating to the Credit, the Application
or this Agreement. Any notice to or demand on any of us shall be binding on all
of us and shall be deemed effective when first delivered by hand or when sent
to the Applicant named on the Application by mail, telegraph, telex, facsimile,
SWIFT, cable, radio, telephone or otherwise to the Applicant’s address or
telephone number appearing on the Application or to such other address as we
shall have notified you. Each of us hereby irrevocably designates the Applicant
as agent to receive notice hereunder on his or its behalf.

 

7

 

22.                   Changes, Captions. This Agreement and the
Application may not be changed or terminated orally. Except as provided in
subparagraph 4(c), this Agreement and the Application may not be supplemented
by any oral agreement whatsoever. The captions in this Agreement are inserted for
reference only and shall not modify the text of any provision or be considered
parts of this Agreement.

23.                   Jury Trial Waiver; Other Waivers. (a) YOU
AND EACH OF US HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING, IN
RESPECT OF OR ARISING OUT OF THIS AGREEMENT, THE CREDIT, OR ANY RELATED
DOCUMENTS OR INSTRUMENTS AND EACH OF US ALSO WAIVES THE RIGHT TO INTERPOSE ANY
SETOFF OR COUNTERCLAIM OF ANY NATURE OR DESCRIPTION, ANY OBJECTION BASED ON
FORUM NON CONVENIENS OR VENUE, AND ANY CLAIM FOR CONSEQUENTIAL, PUNITIVE OR
SPECIAL DAMAGES. (b) No provision hereof and no right or remedy of yours may be
waived by any future action or course of dealing. You shall not be deemed to
have waived any of your rights hereunder, unless you or your authorized agent
shall have signed an express waiver in writing. No such waiver, unless
expressly stated, otherwise therein, shall be effective as to any transaction
which occurs subsequent to the date of such waiver, nor as to any continuance
of a breach after such waiver. (c) Neither your failure nor any delay to
exercise any right in connection with this Agreement shall operate as a waiver
thereof or preclude any other or further exercise thereof, nor shall any single
or partial waiver of any such right preclude any other or further exercise
thereof, or the exercise of any other right, which is hereby waived.

The opening of the Credit shall be subject to the
foregoing Application and the terms and conditions of this Agreement.

 

	
   

  	
   

  	
  AGREED TO:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Applicant’s
  Name: 

  	
  Glenn S. Palmer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Signature) By: 

  	
  /s/ Glenn S.
  Palmer

  
	
   

  	
   

  	
  Print Name: 

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Print Title: 

  	
  Chief Executive
  Officer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Applicant’s
  Taxpayer Identification/

  	
   

  
	
   

  	
   

  	
  Social Security
  Number:

  	
   

  
							

 

 

8

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