Document:

pei_8k-ex1003.htm

    EXHBIIT
10.3

       

      
        SECURITY
AGREEMENT

         

        THIS
SECURITY AGREEMENT (this “Agreement”) is dated
as of November 7, 2008, by and between PACIFIC AG. PRODUCTS, LLC, a California
limited liability company (“PAP”) and LYLES
UNITED, LLC, a Delaware limited liability company (the “Secured
Party”).

         

        WITNESSETH:

         

        WHEREAS,
pursuant to a Restructuring Agreement (“Restructuring Agreement”) dated as of
the date hereof by and among Pacific Ethanol Imperial, LLC (“PE Imperial”),
Pacific Ethanol, Inc. (the “Company”), Pacific
Ethanol California, Inc. (“PECA”) and the
Secured Party, such parties have agreed that the Company shall assume all
obligations of PE Imperial under the First Note and Second Note (as defined in
the Restructuring Agreement”), and such First Note and Second Note shall be
amended and restated as a single new note (the “New Note,” as defined
in the Restructuring Agreement) executed by the Company in favor of Secured
Party, thereby causing the Company to become the direct obligor as to the
amounts originally borrowed by PE Imperial from Secured Party.

         

        WHEREAS,
the recitals set forth in the Restructuring Agreement are incorporated herein by
this reference.

         

        WHEREAS,
in order to induce the Secured Party to allow the assignment and assumption of
the First Note and the Second Note, and the cancellation thereof upon issuance
of the New Note and for other good and valuable consideration, including as set
forth in the Restructuring Agreement, PAP has agreed to execute and deliver to
the Secured Party this Agreement for the benefit of the Secured Party and to
grant to it a first-priority security interest in certain assets to secure the
prompt payment, performance and discharge in full of all of the Company’s
obligations under the New Note and PAP’s obligations under this
Agreement.

         

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

         

        1. Certain
Definitions.  As used in this Agreement, the following terms
shall have the meanings set forth in this Section 1.  Terms
used but not otherwise defined in this Agreement that are defined in Article 9
of the UCC (such as “general intangibles”
and “proceeds”)
shall have the respective meanings given such terms in Article 9 of the
UCC.

         

        (a) “Collateral” means the
collateral in which the Secured Party is granted a security interest by this
Agreement and which shall include the following, and all improvements or
betterments thereof, and all proceeds thereof, including, without limitation,
all proceeds from the sale or transfer of the Collateral and of insurance
covering the same and of any tort claims in connection therewith:  all
tangible and intangible assets of PAP, including, but not limited to, all
inventory, accounts receivable, furniture, fixtures, equipment, patents, patent
applications, trademarks, copyrights, trade secrets, and any other property
interest (whether real or personal) or proprietary right or general intangible,
as well as any document, instrument or drawings embodying the same, and all
additions and accessions thereto, substitutions and replacements therefor, and
all proceeds thereof.

        
          
             

          

          
             

            
              

            

          

          
             

          

        

         

        (b) “Obligations” shall
mean and include all loans, advances, debts, liabilities and obligations owed by
the Company to the Secured Party and by PAP to the Secured Party of every kind
and description, now existing or hereafter arising under or pursuant to the
terms of the New Note or this Agreement, respectively, including, all interest,
fees, charges, reasonable expenses, reasonable attorneys’ fees and costs and
accountants’ fees and costs chargeable to and payable by the Company under the
New Note and PAP hereunder, in each case, whether direct or indirect, absolute
or contingent, due or to become due, and whether or not arising after the
commencement of a proceeding under Title 11 of the United States Code (11
U. S. C. Paragraph 101 et seq.), as amended
from time to time (including post-petition interest) and whether or not allowed
or allowable as a claim in any such proceeding.

         

        (c) “UCC” means the
Uniform Commercial Code, as currently in effect in the State of
California.

         

        2. Grant of Security
Interest.  In order to induce the Secured Party to allow the
assignment and assumption of the First Note and the Second Note, and the
cancellation thereof upon issuance of the New Note and for other good and
valuable consideration, including as set forth in the Restructuring Agreement,
and to secure the complete and timely payment, performance and discharge in
full, as the case may be, of all of the Obligations, PAP hereby, unconditionally
and irrevocably, pledges, grants and hypothecates to the Secured Party, a
continuing first-priority security interest in all of PAP’s right, title and
interest of whatsoever kind and nature in and to the Collateral (the “Security
Interest”).

         

        3. Representations, Warranties,
Covenants and Agreements of PAP.  PAP represents and warrants
to, and covenants and agrees with, the Secured Party as follows:

         

        (a) Authority.  PAP
has the requisite corporate power and authority to enter into this Agreement and
otherwise to carry out its obligations thereunder.  The execution,
delivery and performance by PAP of this Agreement and the filings contemplated
therein have been duly authorized by all necessary action on the part of PAP and
no further action is required by PAP.  This Agreement constitutes a
legal, valid and binding obligation of PAP enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditor’s rights generally.

         

        (b) Place of
Business.  PAP represents and warrants that it has no places of
business or offices where its respective books of account and records are kept
(other than temporarily at the offices of its attorneys or accountants) or
places where Collateral is stored or located, except for the location for
notices to PAP set forth in Section 13
below.

        
          
             

          

          
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        (c) Ownership.  PAP
is the sole owner of the Collateral free and clear of any liens, security
interests, encumbrances, rights or claims, and is fully authorized to grant the
Security Interest in and to pledge the Collateral.  There is not on
file in any governmental or regulatory authority, agency or recording office an
effective financing statement, security agreement, license or transfer or any
notice of any of the foregoing (other than those that have been filed in favor
of the Secured Party pursuant to this Agreement) covering or affecting any of
the Collateral.  Subject to the terms of this Agreement, so long as
this Agreement shall be in effect, PAP shall not execute and shall not knowingly
permit to be on file in any such office or agency any such financing statement
or other document or instrument (except to the extent filed or recorded in favor
of the Secured Party pursuant to the terms of this Agreement).

         

        (d) No
Litigation.  No part of the Collateral has been judged invalid
or unenforceable.  No written claim has been received that any
Collateral or PAP’s use of any Collateral violates the rights of any third
party. There has been no adverse decision to PAP’s claim of ownership rights in
or exclusive rights to use the Collateral in any jurisdiction or to PAP’s right
to keep and maintain such Collateral in full force and effect, and there is no
proceeding involving said rights pending or, to the best knowledge of PAP,
threatened before any court, judicial body, administrative or regulatory agency,
arbitrator or other governmental authority.

         

        (e) Relocation of
Business.  PAP shall at all times maintain its books of account
and records relating to the Collateral at its principal place of business and
its Collateral at the location set forth for notices to PAP in Section 13 below and
may not relocate such books of account and records or tangible Collateral unless
it delivers to the Secured Party at least ten (10) days prior to such relocation
(i) written notice of such relocation and the new location thereof (which must
be within the contiguous United States), and (ii) evidence that appropriate
financing statements and other necessary documents have been filed and recorded
and other steps have been taken to perfect the Security Interest to create in
favor of the Secured Party valid, perfected and continuing first-priority liens
in the Collateral.

         

        (f) Consents;
Appraisals.  This Agreement creates in favor of the Secured
Party a valid security interest in the Collateral securing the payment and
performance of the Obligations and, upon making the filings described in the
immediately following sentence, a perfected first-priority security interest in
such Collateral.  Except for the filing of financing statements on
Form-1 under the UCC in the State of California, no authorization or approval of
or filing with or notice to any governmental authority or regulatory body is
required either (i) for the grant by PAP of, or the effectiveness of, the
Security Interest granted hereby or for the execution, delivery and performance
of this Agreement by PAP, or (ii) for the perfection of or exercise by the
Secured Party of its rights and remedies hereunder.

         

        (g) Jurisdiction.  On
the date of execution of this Agreement, PAP will deliver to the Secured Party
one or more executed UCC financing statements on Form-1 with respect to the
Security Interest for filing in the State of California and in such other
jurisdictions as may be requested by the Secured Party.

        
          
             

          

          
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        (h) No
Conflict.  The execution, delivery and performance of this
Agreement does not conflict with or cause a breach or default, or an event that
with or without the passage of time or notice, shall constitute a breach or
default, under any agreement to which PAP is a party or by which PAP is
bound.  No consent (including, without limitation, from stock holders
or creditors of PAP) is required for PAP to enter into and perform its
obligations hereunder.

         

        (i) Maintenance of
Collateral.  Subject to the terms of this Agreement, PAP shall
at all times maintain Security Interest provided for hereunder as a valid and
perfected first-priority security interest in the Collateral in favor of the
Secured Party until this Agreement and the Security Interest hereunder shall
terminate pursuant to Section 11.  PAP
shall safeguard and protect all Collateral for the account of the Secured
Party.  At the request of the Secured Party, PAP will sign and deliver
to the Secured Party at any time or from time to time one or more financing
statements pursuant to the UCC (or any other applicable statute) in form
reasonably satisfactory to the Secured Party and will pay the cost of filing the
same in all public offices wherever filing is, or is deemed by the Secured Party
to be, necessary or desirable to effect the rights and obligations provided for
herein.

         

        (j) No
Transfer.  PAP will not transfer, pledge, hypothecate,
encumber, license (except for non-exclusive licenses granted by PAP in the
ordinary course of business), sell or otherwise dispose of any of the Collateral
without the prior written consent of the Secured Party.

         

        (k) Condition of
Collateral.  PAP shall keep and preserve the Collateral in good
condition, repair and order and shall not operate or locate any such Collateral
(or cause to be operated or located) in any area excluded from insurance
coverage.

         

        (l) Change in
Collateral.  PAP shall, within ten (10) days of obtaining
knowledge thereof, advise the Secured Party promptly, in sufficient detail, of
any substantial change in the Collateral, and of the occurrence of any event
which would have a material adverse effect on the value of the Collateral or on
the Secured Party’s security interest therein.

         

        (m) Inspection of
Collateral.  PAP shall permit the Secured Party and its
representatives and agents to inspect the Collateral at any time, and to make
copies of records pertaining to the Collateral as may be requested by the
Secured Party from time to time.

         

        (n) Best
Efforts.  PAP will take all steps reasonably necessary to
diligently pursue and seek to preserve, enforce and collect any rights, claims,
causes of action and accounts receivable in respect of the
Collateral.

         

        (o) Levy.  PAP
shall promptly notify the Secured Party in sufficient detail upon becoming aware
of any attachment, garnishment, execution or other legal process levied against
any Collateral and of any other information received by PAP that may materially
affect the value of the Collateral, the Security Interest or the rights and
remedies of the Secured Party hereunder.

        
          
             

          

          
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        4. Defaults.  The
following events shall be “Events of
Default”:

         

        (a) Any
representation or warranty of PAP in this Agreement or in the New Note is
incorrect in any material respect when made; or

         

        (b) Any
“Event of Default” under the New Note.

         

        5. Duty To Hold In
Trust.  Upon the occurrence of any Event of Default and at any
time thereafter, PAP shall, upon receipt by it of any revenue, income or other
sums subject to the Security Interest, whether payable pursuant to the New Note
or otherwise, or of any check, draft, note, trade acceptance or other instrument
evidencing an obligation to pay any such sum, hold the same in trust for the
Secured Party and shall forthwith endorse and transfer any such sums or
instruments, or both, to the Secured Party for application to the satisfaction
of the Obligations.

         

        6. Rights and Remedies Upon
Default.  Upon occurrence of any Event of Default and at any
time thereafter, the Secured Party shall have the right to exercise all of the
remedies conferred hereunder and under the New Note, and the Secured Party shall
have all the rights and remedies of a secured party under the UCC and/or any
other applicable law (including the Uniform Commercial Code of any jurisdiction
in which any Collateral is then located).  Without limitation, the
Secured Party shall have the following rights and powers:

         

        (a) The
Secured Party shall have the right to take possession of the Collateral and, for
that purpose, enter, with the aid and assistance of any person, any premises
where the Collateral, or any part thereof, is or may be placed and remove the
same, and PAP shall assemble the Collateral and make it available to the Secured
Party at places which the Secured Party shall reasonably select, whether at
PAP’s premises or elsewhere, and make available to the Secured Party, without
rent, all of PAP’s respective premises and facilities for the purpose of the
Secured Party taking possession of, removing or putting the Collateral in
saleable or disposable form.

         

        (b) The
Secured Party shall have the right to assign, sell, lease or otherwise dispose
of and deliver all or any part of the Collateral, at public or private sale or
otherwise, either with or without special conditions or stipulations, for cash
or on credit or for future delivery, in such parcel or parcels and at such time
or times and at such place or places, and upon such terms and conditions as the
Secured Party may deem commercially reasonable, all without (except as shall be
required by applicable statute and cannot be waived) advertisement or demand
upon or notice to PAP or right of redemption of PAP, which are hereby expressly
waived.  Upon each such sale, lease, assignment or other transfer of
Collateral, the Secured Party may, unless prohibited by applicable law which
cannot be waived, purchase all or any part of the Collateral being sold, free
from and discharged of all trusts, claims, right of redemption and equities of
PAP, which are hereby waived and released.

        
          
             

          

          
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        7. Applications of
Proceeds.  The proceeds of any such sale, lease or other
disposition of the Collateral hereunder shall be applied first, to the expenses
of retaking, holding, storing, processing and preparing for sale, selling, and
the like (including, without limitation, any taxes, fees and other costs
incurred in connection therewith) of the Collateral, to the reasonable
attorneys’ fees and expenses incurred by the Secured Party in enforcing its
rights hereunder and in connection with collecting, storing and disposing of the
Collateral, and then to satisfaction of the Obligations, and to the payment of
any other amounts required by applicable law, after which the Secured Party
shall pay to PAP any surplus proceeds.  If, upon the sale, license or
other disposition of the Collateral, the proceeds thereof are insufficient to
pay all amounts to which the Secured Party is legally entitled, the Company will
remain liable for the deficiency and the reasonable fees of any attorneys
employed by the Secured Party to collect such deficiency.  To the
extent permitted by applicable law, PAP waives all claims, damages and demands
against the Secured Party arising out of the repossession, removal, retention or
sale of the Collateral, unless due to the gross negligence or willful misconduct
of the Secured Party.

         

        8. Costs and
Expenses.  PAP agrees to pay all out-of-pocket fees, costs and
expenses incurred in connection with any filing required hereunder, including
without limitation, any financing statements, continuation statements, partial
releases and/or termination statements related thereto or any expenses of any
searches reasonably required by the Secured Party.  PAP will also,
upon demand, pay to the Secured Party the amount of any and all reasonable
expenses, including the reasonable fees and expenses of its counsel and of any
experts and agents, which the Secured Party may incur in connection with (i) the
enforcement of this Agreement, or (ii) the custody or preservation of, or the
sale of, collection from, or other realization upon, any of the Collateral.
Until so paid, any fees payable hereunder shall be added to the principal amount
of the New Note.

         

        9. Responsibility for
Collateral.  PAP assumes all liabilities and responsibility in
connection with all Collateral, and the obligations of PAP hereunder or the
obligations of the Company under the New Note shall in no way be affected or
diminished by reason of the loss, destruction, damage or theft of any of the
Collateral or its unavailability for any reason.

         

        10. Security Interest
Absolute.  All rights of the Secured Party and all Obligations
of PAP hereunder, shall be absolute and unconditional, irrespective of: (i) any
lack of validity or enforceability of this Agreement, the New Note or any
agreement entered into in connection with the foregoing, or any portion hereof
or thereof; (ii) any change in the time, manner or place of payment or
performance of, or in any other term of, all or any of the Obligations, or any
other amendment or waiver of or any consent to any departure from the New Note
or any other agreement entered into in connection with the foregoing; (iii) any
exchange, release or nonperfection of any of the Collateral, or any release or
amendment or waiver of or consent to departure from any other collateral for, or
any guaranty, or any other security, for all or any of the Obligations; (iv) any
action by the Secured Party to obtain, adjust, settle and cancel in its sole
discretion any insurance claims or matters made or arising in connection with
the Collateral; or (v) any other circumstance which might otherwise constitute
any legal or equitable defense available to PAP, or a discharge of all or any
part of the Security Interest granted hereby.  Until the Obligations
shall have been paid and performed in full, the rights of the Secured Party
shall continue even if the Obligations are barred for any reason, including,
without limitation, the running of the statute of limitations or
bankruptcy.

        
          
             

          

          
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        PAP
expressly waives presentment, protest, notice of protest, demand, notice of
nonpayment and demand for performance. In the event that at any time any
transfer of any Collateral or any payment received by the Secured Party
hereunder shall be deemed by final order of a court of competent jurisdiction to
have been a voidable preference or fraudulent conveyance under the bankruptcy or
insolvency laws of the United States, or shall be deemed to be otherwise due to
any party other than the Secured Party, then, in any such event, PAP’s
obligations hereunder shall survive cancellation of this Agreement, and shall
not be discharged or satisfied by any prior payment thereof and/or cancellation
of this Agreement, but shall remain a valid and binding obligation enforceable
in accordance with the terms and provisions hereof.  PAP waives all
right to require the Secured Party to proceed against any other person or to
apply any Collateral which the Secured Party may hold at any time, or to marshal
assets, or to pursue any other remedy.  PAP waives any defense arising
by reason of the application of the statute of limitations to any obligation
secured hereby.

         

        11. Term of
Agreement.  This Agreement and the Security Interest shall
terminate on the date on which all payments under the New Note have been made in
full and all other Obligations have been paid or discharged.  Upon
such termination, the Secured Party, at the request and at the expense of PAP,
will join in executing any termination statement with respect to any financing
statement executed and filed pursuant to this Agreement.

         

        12. Power of Attorney; Further
Assurances.

         

        (a) PAP
authorizes the Secured Party, and does hereby make, constitute and appoint it,
and its respective officers, agents, successors or assigns with full power of
substitution, as PAP’s true and lawful attorney-in-fact, with power, in its own
name or in the name of PAP, to, after the occurrence and during the continuance
of an Event of Default, (i) endorse any notes, checks, drafts, money orders, or
other instruments of payment (including payments payable under or in respect of
any policy of insurance) in respect of the Collateral that may come into
possession of the Secured Party; (ii) to sign and endorse any UCC financing
statement or any invoice, freight or express bill, bill of lading, storage or
warehouse receipts, drafts against debtors, assignments, verifications and
notices in connection with accounts, and other documents relating to the
Collateral; (iii) to pay or discharge taxes, liens, security interests or other
encumbrances at any time levied or placed on or threatened against the
Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for
monies due in respect of the Collateral; and (v) generally, to do, at the option
of the Secured Party, and at PAP’s expense, at any time, or from time to time,
all acts and things which the Secured Party reasonably deems necessary to
protect, preserve and realize upon the Collateral and the Security Interest
granted therein in order to effect the intent of this Agreement and the New
Note, all as fully and effectually as PAP might or could do; and PAP hereby
ratifies all that said attorney shall lawfully do or cause to be done by virtue
hereof.  This power of attorney is coupled with an interest and shall
be irrevocable for the term of this Agreement and thereafter as long as any of
the Obligations shall be outstanding.

        
          
             

          

          
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        (b) On a
continuing basis, PAP will make, execute, acknowledge, deliver, file and record,
as the case may be, in the proper filing and recording places in any
jurisdiction, including, without limitation, the State of California, all such
instruments, and take all such action as may reasonably be deemed necessary or
advisable, or as reasonably requested by the Secured Party, to perfect the
Security Interest granted hereunder and otherwise to carry out the intent and
purposes of this Agreement, or for assuring and confirming to the Secured Party
the grant or perfection of a security interest in all the
Collateral.

         

        (c) PAP
hereby irrevocably appoints the Secured Party as PAP’s attorney-in-fact, with
full authority in the place and stead of PAP and in the name of PAP, from time
to time in the Secured Party’s discretion, to take any action and to execute any
instrument which the Secured Party may deem necessary or advisable to accomplish
the purposes of this Agreement, including the filing, in its sole discretion, of
one or more financing or continuation statements and amendments thereto,
relative to any of the Collateral without the signature of PAP where permitted
by law.

         

        13. Notices.  All
notices, requests, demands, approvals, consents, waivers and other
communications required or permitted to be given hereunder shall be in writing,
with copies to all the other parties hereto, and shall be deemed to have been
duly given when (i) if delivered by hand, upon receipt, (ii) if sent by
nationally recognized overnight delivery service (receipt requested), the next
business day or (iii) if mailed by first-class registered or certified mail,
return receipt requested, postage prepaid, four days after posting in the U.S.
mails, in each case if delivered to the following addresses:

         

        If to
PAP:                                              400
Capitol Mall, Suite 2060

        Sacramento, California
95814

        Attn:  Chief
Financial Officer

        AND

        Attn:  General
Counsel

         

        If to the
Secured
Party:                        Lyles
United, LLC

        1210 West Olive Ave.

        Fresno, California 93728

        Attn:  Will
Lyles, Vice President

         

        or such
other address or facsimile number as either party may designate to the other
party hereto in accordance with the aforesaid procedure. Each party shall
provide notice to the other party of any change in address or facsimile
number.

         

        14. Other
Security.  To the extent that the Obligations are now or
hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity,
then the Secured Party shall have the right, in its sole discretion, to pursue,
relinquish, subordinate, modify or take any other action with respect thereto,
without in any way modifying or affecting any of the Secured Party’s rights and
remedies hereunder.

        
          
             

          

          
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        15. Miscellaneous.

         

        (a) No
Waiver.  No course of dealing between PAP and the Secured
Party, nor any failure to exercise, nor any delay in exercising, on the part of
the Secured Party, any right, power or privilege hereunder or under the New Note
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege hereunder or thereunder preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege.

         

        (b) Rights
Cumulative.  All of the rights and remedies of the Secured
Party with respect to the Collateral, whether established hereby or by the New
Note or by any other agreements, instruments or documents or by law shall be
cumulative and may be exercised singly or concurrently.

         

        (c) Entire
Agreement.  This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and is intended to
supersede all prior negotiations, understandings and agreements with respect
thereto.  Except as specifically set forth in this Agreement, no
provision of this Agreement may be modified or amended except by a written
agreement specifically referring to this Agreement and signed by the parties
hereto.

         

        (d) Severability.  In
the event that any provision of this Agreement is held to be invalid, prohibited
or unenforceable in any jurisdiction for any reason, unless such provision is
narrowed by judicial construction, this Agreement shall, as to such
jurisdiction, be construed as if such invalid, prohibited or unenforceable
provision had been more narrowly drawn so as not to be invalid, prohibited or
unenforceable.  If, notwithstanding the foregoing, any provision of
this Agreement is held to be invalid, prohibited or unenforceable in any
jurisdiction, such provision, as to such jurisdiction, shall be ineffective to
the extent of such invalidity, prohibition or unenforceability without
invalidating the remaining portion of such provision or the other provisions of
this Agreement and without affecting the validity or enforceability of such
provision or the other provisions of this Agreement in any other
jurisdiction.

         

        (e) Headings. The
headings of the Sections and subsections of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or
to affect the construction hereof.

         

        (f) Waiver of Breach or
Default.  No waiver of any breach or default or any right under
this Agreement shall be considered valid unless in writing and signed by the
party giving such waiver, and no such waiver shall be deemed a waiver of any
subsequent breach or default or right, whether of the same or similar nature or
otherwise.

         

        (g) Binding on
Successors.  This Agreement shall be binding upon and inure to
the benefit of each party hereto and its successors and assigns.

         

        (h) Best
Efforts.  Each party shall take such further action and execute
and deliver such further documents as may be necessary or appropriate in order
to carry out the provisions and purposes of this Agreement.

        
          
             

          

          
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        (i) Governing
Law.  This Agreement shall be construed in accordance with the
laws of the State of California, except to the extent the validity, perfection
or enforcement of a security interest hereunder in respect of any particular
Collateral which are governed by a jurisdiction other than the State of
California in which case such law shall govern.  Each of the parties
hereto irrevocably submit to the exclusive jurisdiction of any California State
or United States Federal court sitting in Fresno County, California over any
action or proceeding arising out of or relating to this Agreement, and the
parties hereto hereby irrevocably agree that all claims in respect of such
action or proceeding may be heard and determined in such California State or
Federal court.  The parties hereto agree that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by
law.  The parties hereto further waive any objection to venue in the
State of California and any objection to an action or proceeding in the State of
California on the basis of forum non conveniens.  The parties further
agree that the successful or prevailing party in any proceeding shall be
entitled to recover reasonable attorneys’ fees and other costs incurred in such
proceeding.

         

        (j) Waiver of Jury
Trial.  EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL
ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO
THE SUBJECT MATER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND
STATUTORY CLAIMS.  EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS
A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT
EACH PARTY HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND
THAT EACH PARTY WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE
DEALINGS. EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND VOLUNTARILY
WAIVES ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION.  THIS
WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE
CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT.  IN THE EVENT OF A LITIGATION, THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.

         

        (k) Counterparts.  This
Agreement may be executed in any number of counterparts, each of which when so
executed shall be deemed to be an original and, all of which taken together
shall constitute one and the same Agreement.  In the event that any
signature is delivered by facsimile transmission, such signature shall create a
valid binding obligation of the party executing (or on whose behalf such
signature is executed) the same with the same force and effect as if such
facsimile signature were the original thereof.

         

        (Signature
page follows.)

        
          
             

          

          
            -10-

            
              

            

          

          
             

          

        

         

        IN
WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be
duly executed on the day and year first above written.

         

         

        
          
            
              	
                      PAP:

                    	
                      

                        PACIFIC
      AG. PRODUCTS, LLC,

                      

                    
	 
      	
                      

                        a
      California limited liability company

                      

                    
	 
      	 
      
	 
      	
                      By:
      /s/ JOHN T. MILLER

                    
	 
      	
                             John
      T. Miller, COO

                    
	 
      	 
      
	 
      	 
      
	 
      	 
      
	
                      SECURED
      PARTY:

                    	
                      LYLES
      UNITED, LLC,

                    
	 
      	
                      a
      Delaware limited liability company

                    
	 
      	 
      
	 
      	
                      By:
      /s/ WILL LYLES

                    
	 
      	
                            
      Will Lyles, Vice
President

                    

            

          

        

      

    

     

     

     

     

     

     

    -11-pei_8k-ex1004.htm

    EXHIBIT
10.4

     

    
      LIMITED
RECOURSE GUARANTY

       

      BORROWER:                                   PACIFIC
ETHANOL, INC.

       

      GUARANTOR:                                PACIFIC
ETHANOL CALIFORNIA, INC.

       

      LENDER:                                           LYLES
UNITED, LLC

       

      LOAN
AMOUNT:                           $30,000,000.00

       

      DATE:                                               
NOVEMBER 7, 2008

       

      THIS
LIMITED RECOURSE GUARANTY (“Guaranty”) is
executed by the above-named Guarantor in favor of LYLES UNITED, LLC, a Delaware
limited liability company (“Lender”), as of the
date set forth above.

       

      1. Lender
made a loan to Pacific Ethanol Imperial, LLC (“PE Imperial”) in the
Loan Amount set forth above (the “Loan”), which Loan
was guaranteed by the Borrower and secured by the assets of PE
Imperial.  Lender has agreed to release its security interest in the
assets of PE Imperial and to permit PE Imperial to assign its obligations under
the Loan to Borrower, in consideration of, among other things, the execution and
delivery of this Guaranty by Guarantor.  Guarantor is willing to enter
into this Guaranty because it owns 100% of the ownership interests of PE
Imperial and is benefited by the release of Lender’s security interest in the
assets of PE Imperial and by PE Imperial’s assignment of the Loan to
Borrower.  The Loan is to be evidenced by an Amended and Restated
Promissory Note in said principal sum (the “Note”).

       

      2. For and
in consideration of the recitations contained herein and to induce Lender to
consent to the assignment of the Loan by PE Imperial to Borrower and to release
its security interest in the assets of PE Imperial and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Guarantor hereby irrevocably and absolutely guarantees to and for
the benefit of Lender or order, the full and faithful payment and performance of
all of Borrower’s present and future indebtedness and obligations, direct or
indirect, to Lender arising under or with respect to the Note (collectively, the
“Obligations”).

       

      3. This
Guaranty is, and is intended to be, a guaranty of the Obligations, in addition
to any other guaranty, endorsement or collateral held by Lender therefor,
whether or not furnished by Guarantor.  Guarantor shall have no right
of subrogation with respect to any payments made by Guarantor hereunder until
all of the Obligations are paid or performed in full.

       

      4. NOTWITHSTANDING
THE FOREGOING OR ANY OTHER PROVISION OF THIS GUARANTY, IT IS AGREED AND
UNDERSTOOD THAT THE LIABILITY OF GUARANTOR HEREUNDER SHALL BE LIMITED SOLELY TO
THE AMOUNT OF FUTURE CASH DISTRIBUTIONS RECEIVED BY GUARANTOR ON ACCOUNT OF
GUARANTOR’S OWNERSHIP INTEREST IN PE IMPERIAL AND FRONT RANGE ENERGY, LLC,
A COLORADO LIMITED LIABILITY COMPANY, AS CONTEMPLATED BY THAT CERTAIN
IRREVOCABLE JOINT INSTRUCTION LETTER OF EVEN DATE HEREWITH BY BORROWER AND
LENDER AND ACKNOWLEDGED AND AGREED TO BY GUARANTOR, AND THERE SHALL BE NO OTHER
RECOURSE AGAINST GUARANTOR OR ANY OTHER ASSETS OR PROPERTY OF
GUARANTOR.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      5. Guarantor
authorizes Lender, without notice or demand and without affecting Guarantor’s
obligations hereunder, from time to time:  (i) to renew, extend,
increase, accelerate or otherwise change the time for payment of, the terms of
or the interest on the Obligations or any part thereof; (ii) to take from any
party and hold collateral for the payment and performance of the Obligations or
any part thereof; (iii) to accept and hold any endorsement or guaranty of
payment and performance of the Obligations or any part thereof and to release or
substitute any such endorser or guarantor, or any party who has given any
security interest in any collateral as security for the payment and performance
of the Obligations or any part thereof, or any other party in any way obligated
to pay or perform the Obligations or any part thereof; (iv) to direct the order
or manner of the disposition of any and all collateral and the enforcement of
any and all endorsements and guaranties relating to the Obligations or any part
thereof as Lender, in its sole discretion, may determine; and (v) to determine
how, when and what application of payments and credits, if any, shall be made on
the Obligations or any part thereof, and to apply the same upon principal or
interest or the portion thereof, if any, in excess of the amounts guaranteed
under this Guaranty.

       

      6. No delay
or omission by Lender in exercising any right or remedy hereunder shall operate
as a waiver thereof or of any other right or remedy, and no single or partial
exercise thereof shall preclude any other or further exercise thereof or the
exercise of any other right or remedy.  All rights and remedies of
Lender hereunder are cumulative.  No invalidity, illegality or
unenforceability of the Obligations shall release, diminish, or extinguish the
liability of Guarantor hereunder.  This Guaranty shall remain in full
force and effect until the date on which all Obligations shall be paid in
full.

       

      7. Guarantor
agrees that in the event all or any part of the liability of Borrower in respect
of the Obligations hereafter ceases as a result of a non-judicial foreclosure by
Lender of any or all of any collateral delivered to secure the Obligations,
Guarantor nevertheless expressly assumes liability for the Obligations,
notwithstanding that the effect of any applicable statutes or other governing
law, may limit or prohibit Guarantor’s right to proceed or pursue any remedies
against Borrower, and notwithstanding that Guarantor may not be permitted to
subrogate to Lender’s position.  Guarantor hereby waives any defense
to the obligations and liabilities of Guarantor hereunder and any and all rights
with respect thereto that Guarantor may otherwise have under the provisions of
applicable statutes or other governing law as a result of Lender’s election of
any remedy which impairs or alters the rights of Guarantor against Borrower or
any collateral held by Lender, and Guarantor expressly acknowledges and agrees
that Lender may, in its sole discretion, elect to foreclose upon any collateral
Lender holds by non-judicial foreclosure rather than by judicial foreclosure
without impairing or affecting in any way whatsoever Lender’s rights under this
Guaranty, including the right to proceed against Guarantor for any deficiency
following a non-judicial foreclosure sale.  Guarantor understands and
agrees that upon any foreclosure or assignment in lieu of foreclosure of any
security held by Lender:  (i) such security will no longer exist and
that any right that Guarantor might otherwise have, upon full payment and
performance of the Obligations to Lender by Guarantor, to participate in any
such security or to be subrogated to any rights of Lender with respect to any
such security, will be nonexistent; and (ii) Guarantor shall be deemed to have
waived any right, title, interest or claim under any circumstances in or to any
real or personal property held by Lender or any third party following any
foreclosure or assignment in lieu of foreclosure of any such
security.

      
        
           

        

        
          -2-

          
            

          

        

        
           

        

      

       

      8. Guarantor
waives all rights to exoneration from any and all of their liabilities hereunder
pursuant to the provisions of the California Civil Code and/or under any other
applicable statutes or other governing law.

       

      9. Guarantor
waives any right to require Lender to:  (i) proceed against Borrower;
(ii) proceed against or exhaust any security held from Borrower; or (iii) pursue
any other remedy Lender may have whatsoever.  Until all Obligations of
Borrower to Lender shall have been paid or performed in full, Guarantor shall
have no right of subrogation, and waives any right to enforce any remedy which
Lender now has or may hereinafter have against Borrower, and waives any benefit
of and any right to participate in any security now or hereinafter held by
Lender.  Guarantor waives all presentments, demands for performance,
notices of non-performance, protests, notices of protest, notices of dishonor
and notices of acceptance of this Guaranty and of the existence, creation or
incurring of new or additional Obligations.  Guarantor’s obligations
and liabilities hereunder shall be separate and distinct from those of
Borrower.  If Borrower defaults under any of the Obligations, Lender,
at its option, may proceed directly against Guarantor, without having commenced
any action or obtained any judgment against Borrower or any other guarantor, and
without applying any property of Borrower (or any other person) held as security
for the payment and performance of the Obligations.  The liability of
Guarantor hereunder shall not be released, diminished, or extinguished by
Lender’s failure or delay in enforcing any of its rights.

       

      10. It shall
not be necessary for Lender to inquire into the powers of Borrower or its
officers, directors, partners, or agent acting or purporting to act on its
behalf, and any indebtedness made or created in reliance upon the professed
exercise of such powers shall be guaranteed hereunder.

       

      11. Guarantor
further agrees to pay all reasonable costs and expenses, including, without
limitation, reasonable attorneys’ fees, at any time paid or incurred by Lender
in endeavoring to enforce this Guaranty.

       

      12. This
Guaranty is absolute and unconditional and shall not be affected by any act or
thing whatsoever, except as herein provided.  This Guaranty is not an
accommodation, but rather a material consideration bargained for by Lender in
agreeing to make the Loan.  No modification or amendment of any
provision of this Guaranty shall be effective unless in writing and subscribed
by a duly authorized officer of Lender.

       

      13. This
Guaranty and the transactions evidenced hereby shall be construed and
interpreted under the laws of the State of California, without regard to
conflicts of laws principles.  Guarantor irrevocably submits to the
exclusive jurisdiction of any California State or United States Federal court
sitting in Fresno County, California over any action or proceeding arising out
of or relating to this Guaranty, and irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined in such
California State or Federal court.  Guarantor agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.  Guarantor waives any objection to venue in the State
of California and any objection to an action or proceeding in the State of
California on the basis of forum non conveniens.

      
        
           

        

        
          -3-

          
            

          

        

        
           

        

      

       

      14. Nothing
herein shall be construed to constitute Guarantor as a maker, co-maker or
principal debtor.

       

      15. If any
provision of this Guaranty or portion of such provision, or the application
thereof to any person or circumstance, shall, to any extent, be held invalid or
unenforceable, the remainder of this Guaranty or the remainder of such provision
and the application thereof to other persons or circumstances, other than those
as to which it is held invalid or unenforceable, shall not be affected thereby,
and each term and provision of this Guaranty shall be valid and be enforced to
the fullest extent permitted by the law.  Unless the context otherwise
requires, the masculine, feminine and neuter genders and the singular and the
plural shall each be deemed to include one another, as appropriate.

       

      16. Lender
may, upon written notice to Guarantor, assign this Guaranty in whole or in
part.

       

      IN
WITNESS WHEREOF, this Guaranty has been executed by Guarantor at Sacramento,
California, as of the date first set forth above.

       

      
        	
                GUARANTOR:

              	
                PACIFIC
      ETHANOL CALIFORNIA, INC.

                 

                 

                 

                
                  By:
      /s/ JOHN T.
      MILLER 

                

              
	 	Title:
      COO 

      

       

       

       

       

       

      .

      -4-

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