Document:

Exhibit 10.50

 

CERTAIN INFORMATION INDICATED BY [ * * * ] HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.

 

MASTER NETTING, SETOFF, CREDIT AND SECURITY AGREEMENT

(HERON LAKE, MINNESOTA)

 

THIS MASTER NETTING, SETOFF, CREDIT AND SECURITY AGREEMENT (the “Master Agreement”) is dated and made effective as of September 1, 2011, by and between HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company (“Producer”), and GAVILON, LLC, a Delaware limited liability company (“Gavilon”) (each of Producer and Gavilon is a “Party” and together they are collectively referred to as the “Parties.”)

 

RECITALS:

 

(a)                                  Producer and Gavilon are Parties to a certain Corn Supply Agreement (“Corn Supply Agreement”) and a certain Ethanol and Distiller’s Grains Marketing Agreement (“Ethanol and DDG Agreement”), each of even date herewith (collectively, the “Supply Agreements”).

 

(b)                                 The Supply Agreements require each Party to make payment to, and to perform various supply and other obligations for, the other Party.

 

(c)                                  Gavilon, Producer and Producer’s wholly-owned subsidiary Lakefield Farmers Elevator, LLC, are parties to that certain Corn Storage Agreement, of even date herewith (“Storage Agreement”).

 

(d)                                 Each Party desires to have the right to setoff, net, liquidate and complete the transactions under the Supply Agreements and the Storage Agreement in accordance with the terms hereof, and this Master Agreement is entered into in reliance on the Parties’ agreements herein.

 

(e)                                  The Parties further desire to set forth and establish certain credit and security obligations required in connection with the Supply Agreements and Storage Agreement (if applicable).

 

AGREEMENT:

 

NOW, THEREFORE, in consideration of the above recitals and the mutual promises and covenants set forth herein, Gavilon and Producer mutually agree as follows:

 

1.                                       Definitions.  Except as defined herein or on Exhibit “A”, all capitalized terms shall have the meanings given to them in the Supply Agreements.

 

2.                                       Netting of Payments.

 

2.1                                 Payment Dates.  Any invoices received and owed by the Parties pursuant to the Supply Agreements during each week shall be due and payable five (5) Business Days following receipt of the Netting Statement, in each case subject to the provisions set forth in Section 2.5 (each a “Payment Date”).

 

 

2.2                                 Netting Statements.  Each week Gavilon shall provide Producer with a netting statement which identifies the Parties’ respective payment obligations under the Supply Agreements for the prior week (the “Netting Statement”), and the difference of the greater amount owed by either Party less the amount owed by the other Party (the “Net Settlement”).  By way of example and not limitation, any invoices received and owed by the Parties pursuant to the Supply Agreements during the week of January 1-7, 2012 shall be identified in a Netting Statement issued by Gavilon during the week of January 8—14, 2012.  Gavilon shall determine the day of the week that Netting Statements shall be issued and shall thereafter maintain the same day of the week for issuing such Statements, in each case subject to the provisions set forth in Section 2.5.  Each Netting Statement shall include the cost of the Corn to Producer for any Limited Sales (as defined in the Corn Supply Agreement) made by Producer during the applicable payment period.  The Net Settlement shall be paid by the Party owing the greater amount.  Payment shall be made via wire transfer to the other Party on the applicable Payment Date.

 

2.3                                 [ * * * ].

 

2.4                                 Disputed Amounts.  Producer may, within three (3) Business Days of receiving a Netting Statement, notify Gavilon of any initial disputes it may have with respect to such Netting Statement.  If any portion of the Net Settlement remains subject to dispute as of an applicable Payment Date, the disputed amount shall nonetheless be paid and then resolved pursuant to the terms of the applicable Supply Agreement.  Any refund or additional amounts owed by either Party to the other Party shall be promptly paid upon resolution of the dispute.  In the event that any disputed amount is not resolved within thirty (30) days after the Payment Date applicable to the disputed amount, then interest shall begin to accrue on the refund or additional amounts determined to be owed by either Party to the other Party until paid in full at the per annum rate equal to the lesser of (A) [ * * * ] plus [ * * * ] basis points or (B) [ * * * ], whereby such interest rate shall be adjusted periodically based upon rates then in effect.  Notwithstanding the foregoing procedures, no failure on the part of Producer to notify Gavilon of any initial dispute it may have with respect to a Netting Statement within three (3) Business Days of receiving such Netting Statement shall operate as a waiver of Producer’s right to finally and fully dispute a Netting Statement within one (1) year of the date of any Netting Statement, and the Parties acknowledge and agree that such one-year period is reasonable regardless of any audit rights under the Supply Agreements.

 

2.5                                 Holidays.  If the Payment Date falls on a Saturday or Holiday other than a Monday, payment shall be made on the preceding banking day.  If the Payment Date falls on a Sunday or Monday Holiday, payment shall be made on the succeeding banking day.  In addition, the second Payment Date in the month of February shall occur on the last day of such month (for deliveries occurring during days 14 through 26 of such month).

 

3.                                       Credit and Security Requirements.

 

3.1                                 Credit Requirements.  If at any time and from time to time during the Term (and notwithstanding whether an event of default has occurred under the Supply Agreements) a Party’s (the “Secured Party”) Exposure, as determined by the

 

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Valuation Agent, exceeds the Threshold Amount applicable to the other Party (the “Pledgor”) (such excess amount herein called the “Delivery Amount”), the Secured Party may provide notice of such Delivery Amount to the Pledgor.  Upon receipt of written notice of the existence of a Delivery Amount, the Pledgor shall deliver Margin to the Secured Party in an amount equal to the Delivery Amount (less the amount of any other Margin then held by Secured Party in excess of the Threshold Amount), subject to the Margin rounding provisions in Section 3.2 of this Master Agreement.  Such Delivery Amount shall be due by 5:00 p.m. on the Business Day following the Pledgor’s receipt of the Secured Party’s request for such Delivery Amount, if such request is received by 12:00 p.m.  If such request is received after 12:00 p.m., then such Delivery Amount shall be due by 5:00 p.m. on the second Business Day following the Pledgor’s receipt of such demand.

 

On any Business Day (but no more frequently than weekly with respect to any Letters of Credit and daily with respect to cash), the Pledgor, at its sole cost, may request that the amount of Margin held by the Secured Party be reduced by the amount (the “Return Amount”) by which the Margin previously delivered by the Pledgor exceeds (i) the amount corresponding to the Secured Party’s Exposure (as determined by the Valuation Agent), minus (ii) the Pledgor’s Threshold Amount.  Any Return Amount shall (i) be rounded as provided herein, and (ii) be delivered to the Pledgor within two (2) Business Days of the Pledgor’s request therefor.

 

3.2                                 Rounding.  Any Delivery Amount shall be rounded upwards to the next whole multiple of $10,000 and any Return Amount shall be rounded downward to the next whole multiple of $10,000 unless the Return Amount is $9,999.99 or less, in which case the Return Amount shall be rounded to zero.

 

3.3                                 Security Interests.

 

3.3.1                        Posted Margin.  Each Party, as the Pledgor, hereby pledges and grants to the other Party, as the Secured Party, as security for its obligations under this Master Agreement, a first priority continuing security interest in all Margin transferred to or received by the Secured Party hereunder and all distributions and proceeds and products of any non-cash Margin (collectively, the “Posted Margin”).  Upon the transfer by the Secured Party back to the Pledgor of any amount of Posted Margin, the security interest granted hereunder in that amount of Posted Margin will be released immediately and, to the extent possible, without any further action by either Party.  Upon demand made by the Secured Party, the Pledgor shall execute, deliver, file and record any financing statement, specific assignment or other document and take any other action that may be necessary or desirable and reasonably requested by the Secured Party to create, preserve, perfect or validate any security interest or lien granted hereunder, to enable the Secured Party to exercise or enforce its rights hereunder with respect to Posted Margin or to effect or document a release of a security interest in Posted Margin.  The Pledgor will promptly give notice to the Secured Party of, and defend against, any suit, action, proceeding or lien that involves Posted Margin transferred by the Pledgor or that could adversely affect the security interest granted by it hereunder.

 

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The Secured Party will exercise due care to assure the safe custody of all Posted Margin under laws applicable to custodians of funds.  Except as specified in the preceding sentence, the Secured Party will have no duty with respect to Posted Margin, including, without limitation, any duty to collect any distributions, or to enforce or preserve any rights pertaining thereto.  The Secured Party will be entitled to hold Posted Margin in accordance with the terms hereof so long as it is not a defaulting Party and, in such event, shall appoint a non-affiliate independent custodian in the business of acting as custodian of funds to hold such Posted Margin on its behalf; provided, however, the long-term unsubordinated unsecured debt of the custodian is rated at least “A” by S&P or at least “A2” by Moody’s.  Posted Margin shall in any case be held only in the continental United States.

 

3.3.2                        Producer’s Non-Fixed Assets.  Subject to obtaining consent from Producer’s senior lender(s) in the form of either Exhibit “C” attached hereto or an intercreditor agreement mutually agreed upon between Gavilon and such senior lender(s), Producer hereby grants to Gavilon a first priority continuing security interest in, and a right to set off against, any and all right, title and interest of Producer in and to all of the following, whether now owned or existing or owned, acquired or arising hereafter (collectively, the “Non-Fixed Assets”): (i) the Corn (as defined in the Corn Supply Agreement), (ii) the Ethanol Product and Co-Product (each as defined in the Ethanol and DDG Agreement), (iii) the Grain (as defined in the Storage Agreement), if applicable, (iv) the work in process at the Plant, (v) the transactions arising under the Supply Agreements and (vi) all accounts, claims, general intangibles, letter-of-credit rights, money, receivables, accessions or other proceeds arising from any or all of the foregoing, with each such term in this provision (vi) having the meaning as set forth in the UCC.  Upon demand made by Gavilon, Producer shall execute, deliver, file and record any financing statement, specific assignment or other document and take any other action that may be necessary or desirable and reasonably requested by Gavilon to create, preserve, perfect or validate any security interest or lien granted hereunder, to enable Gavilon to exercise or enforce its rights hereunder with respect to Non-Fixed Assets or to effect or document a release of a security interest in Non-Fixed Assets.  Producer will promptly give notice to Gavilon of, and defend against, any suit, action, proceeding or lien that involves Non-Fixed Assets transferred by Producer or that could adversely affect the security interest granted by it hereunder.

 

Gavilon will exercise reasonable care to assure the safe custody of all Non-Fixed Assets, and, in any event, Gavilon will be deemed to have exercised reasonable care if it exercises at least the same degree of care as it would exercise with respect to its own property.  Except as specified in the preceding sentence, Gavilon will have no duty with respect to the Non-Fixed Assets, including, without limitation, any duty to collect any distributions, or to enforce or preserve any rights pertaining thereto.  Gavilon will be entitled to hold Non-Fixed Assets so long as it is not a defaulting Party and, in such event, shall appoint a custodian to hold such Non-Fixed Assets on its behalf; provided, however, the long-term unsubordinated unsecured debt of the custodian is rated at least “A” by

 

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S&P or at least “A2” by Moody’s.  Non-Fixed Assets shall in any case be held only in the continental United States.

 

3.4                                 Representations, Warranties and Covenants.  Each of Producer and Gavilon (as applicable) represents, warrants and covenants to the other that:

 

(a)                                  Except as set forth in Sections 3.3.1 and 3.3.2 and as allowed under Section 5.3, it has not assigned, transferred, created or permitted to exist any lien or other encumbrance on, or otherwise disposed of, or purported to assign, transfer, create or permit to exist any lien or other encumbrance on, or otherwise dispose of, the Posted Margin, the Non-Fixed Assets or any of its rights to any amounts that may be owed to it under the Supply Agreements to any third party, and covenants that, so long as this Master Agreement is in effect, it will not assign, transfer, create or permit to exist any lien or other encumbrance on, or otherwise dispose of or purport to assign, transfer, create or permit to exist any lien or other encumbrance on, or otherwise dispose of, the Posted Margin, the Non-Fixed Assets or any of its rights to any amounts that may be owed to it under the Supply Agreements, to any third party; provided, however, Producer may dispose of the Ethanol Product and Co-Product to a third party under certain circumstances as allowed under the Supply Agreements;

 

(b)                                 Subject to Gavilon entering into an intercreditor agreement with Producer’s senior lender(s) as described in Section 3.3.2 above, this Agreement creates a valid security interest in favor of Gavilon, for the benefit of Gavilon, in the Non-Fixed Assets and Posted Margin of Producer and, when properly perfected by filing, shall constitute a valid and perfected, first priority security interest in the Non-Fixed Assets and Posted Margin to the extent such security interest can be perfected by filing under the UCC;

 

(c)                                  It shall not, without providing ten (10) days prior written notice to the other Party, (i) change its name or state of formation or (ii) use any trade name other than as set forth on Schedule 3.4(c) hereto;

 

(d)                                 It is not relying upon any representations of the other Party other than those expressly set forth in this Master Agreement, the Supply Agreements or any confirmation issued pursuant thereto;

 

(e)                                  It has entered into this Master Agreement with a full understanding of the material terms and risks of the same, and it is capable of assuming those risks; and

 

(f)                                    The Parties agree that this Master Agreement, the Supply Agreements, and the transactions thereunder form a single integrated agreement.  Each Party has received consideration hereunder for its agreement to treat each of the Supply Agreements and this Master Agreement as one integrated agreement.

 

3.5                                 Interest on Margin.  Assuming no event of default has occurred as set forth in Section 4.1 with respect to the Pledgor, the Secured Party will transfer to the Pledgor, by no later than the tenth (10th) day of each month, the interest amount (calculated at a percentage equal to the lesser of (i) [ * * * ] plus [ * * * ] basis points, or (ii) [ * * * ], whereby such interest rate shall be adjusted periodically based upon rates then in effect), attributable to any cash Margin posted by the Pledgor during the time such Margin is held by the Secured Party during the

 

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previous month, as calculated by the Valuation Agent.  Any such interest amount or portion thereof which is not transferred to the Pledgor pursuant to this Section 3.5 will constitute Posted Margin and will be subject to the security interest granted under Section 3.3.1 of this Master Agreement.

 

3.6                                 Financial Information.  Each Party shall deliver to the other Party within forty-five (45) days following the end of each fiscal quarter and within one hundred twenty (120) days following the end of each fiscal year, as applicable, a copy of its quarterly financial statements and its annual report containing audited consolidated financial statements certified by independent certified public accountants.  In all cases the statements shall be for the most recent accounting period and prepared in accordance with generally accepted accounting principles, consistently applied.

 

4.                                       Close-Out/Remedies/Settlement.

 

4.1                                 Right to Close-Out Transactions; Remedies.  Upon the occurrence of an event of default or termination event set forth in (i) any or either of Sections 8.2 or 8.3 of the Corn Supply Agreement, (ii) Article 13 of the Ethanol and DDG Agreement , or (iii) Section 15 of the Storage Agreement, or (iv) upon a default of any payment obligation under this Master Agreement, and after the expiration of any applicable cure periods in any of the foregoing, if any, without the required cure being provided or undertaken (as applicable), the non-defaulting Party shall immediately have the right to close out (i.e., accelerate, terminate, liquidate and cancel) all (but not less than all) of the transactions under the Supply Agreements, other than those which in the commercially reasonable judgment of the non-defaulting Party are commercially impracticable or illegal to terminate, by providing written notice to the defaulting Party; however, no notice shall be required for the close-out of any transaction that has been closed out by its own terms prior to the delivery of such notice.

 

If an above-described event of default or termination event occurs (and following expiration of any applicable cure period), the non-defaulting Party shall have the right to: (i) withhold any payments and/or suspend performance for transactions under the applicable Supply Agreement, provided, however, that the right to suspend payment and/or performance under such transactions shall be limited to a single fourteen (14) day period, unless the non-defaulting Party has provided notice of close-out specifying an earlier termination date (in which event suspension of payment and performance may continue until such date); (ii) exercise rights of setoff, netting, recoupment and otherwise pursuant to the terms of this Master Agreement; (iii) retain, draw on, liquidate and apply any Margin delivered by the defaulting Party against amounts owed to the non-defaulting Party; and (iv) give notice to the defaulting Party specifying the relevant event of default and that the non-defaulting Party is exercising its rights pursuant to this Master Agreement by declaring the defaulting Party in default under the Supply Agreements or the Storage Agreement and all transactions thereunder, and designating a day, no earlier than three (3) days after the day such notice is effective and no later than twenty (20) days after such notice is effective, as the close-out date for all such transactions.  The non-defaulting Party’s exercise of rights pursuant to the terms hereof shall be without prejudice to any other or further exercise of rights or remedies which the non-defaulting

 

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Party may possess, including, but not limited to, maintaining an action for breach of contract.

 

4.2                                 Additional Remedies.  In addition to the rights and remedies set forth in Section 4.1 above, upon the occurrence of an event of default and during the continuation thereof, Gavilon shall have the rights and remedies of a secured party under the UCC (regardless of whether the UCC is the law of the jurisdiction where the rights and remedies are asserted and regardless of whether the UCC applies to the affected collateral) and, further, Gavilon may, with or without judicial process or the aid and assistance of others, (i) enter on any premises owned by Producer or its wholly-owned subsidiary Lakefield Farmers Elevator, LLC, or (to the extent lawful or permitted) any leased premises on which any of the Non-Fixed Assets may be located and, without resistance or interference by Producer, take possession of the Non-Fixed Assets, (ii) liquidate any Non-Fixed Assets on any such premises, (iii) require Producer to assemble and make available to Gavilon or its assigns at the expense of Producer any Non-Fixed Assets at any place and time designated by Gavilon that is reasonably convenient to both parties, (iv) remove any Non-Fixed Assets from any such premises for the purpose of effecting sale or other disposition thereof, and/or (v) without demand and without advertisement, notice, hearing or process of law, all of which Producer hereby waives to the fullest extent permitted by law, at any place and time or times, sell and deliver any or all Non-Fixed Assets held by or for it at public or private sale, at any exchange or broker’s board or elsewhere, by one or more contracts, in one or more parcels, for money, upon credit or otherwise, at such prices and upon such terms as Gavilon deems advisable, in its sole discretion (subject to any and all mandatory legal requirements).  Producer acknowledges that any private sale referenced above may be at prices and on terms less favorable to the seller than the prices and terms that might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sale shall be deemed to have been made in a commercially reasonable manner, provided such private sale is conducted and completed in accordance with applicable law under UCC (except as otherwise waived herein).  Gavilon’s disclaimer of warranties relating to the Non-Fixed Assets shall not be considered to adversely affect the commercial reasonableness of any sale.  In addition to all other sums due to Gavilon under this Master Agreement or the Supply Agreements, Producer shall pay Gavilon all reasonable out-of-pocket costs and expenses incurred by Gavilon, including, but not limited to, reasonable and documented attorneys’ fees of outside counsel and court costs, in obtaining or liquidating the Non-Fixed Assets or in enforcing payment of the secured obligations.  Producer agrees that any requirement of reasonable notice shall be met if such notice is personally served on or mailed, postage prepaid, to Producer in accordance with the notice provisions of the Corn Supply Agreement at least ten (10) days before the time of sale or other event giving rise to the requirement of such notice.  Gavilon shall not be obligated to make any sale or other disposition of the Non-Fixed Assets regardless of notice having been given.  To the extent permitted by applicable law, Producer hereby waives all of its rights of redemption with respect to any such sale.

 

4.3                                 Determination and Settlement of Settlement Amounts.  As of the close-out date specified by the non-defaulting Party: (i) all the transactions under the Supply Agreements shall be closed out (or, to the extent that in the commercially reasonable judgment of the non-defaulting Party it is impractical or illegal to close out certain of such transactions, such transactions shall instead be closed out on the date or dates determined by the non-defaulting Party occurring as soon after

 

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the close-out date as is reasonably practicable), subject to the rights of setoff, netting, recoupment, and otherwise as may be provided for herein or at law; provided, however, that if an obligation is unascertainable, the non-defaulting Party may, acting in a commercially reasonable manner, estimate the amount of such obligation and setoff, netting or recoup in respect of the estimate, subject to accounting to the defaulting Party when the obligation is ascertained; and (ii) the non-defaulting Party shall calculate the Settlement Amount for each terminated transaction or group of terminated transactions and determine the Settlement Amount with respect to each of the Supply Agreements, and shall calculate the resulting Final Net Settlement Amount.

 

Promptly after determination of the Final Net Settlement Amount, the non-defaulting Party shall determine the single amount (if any) payable by one Party to the other Party hereunder and provide the defaulting Party with a statement showing (in commercially reasonable detail) the calculation of the Final Net Settlement Amount.  If the Final Net Settlement Amount is a positive amount, then such amount shall be owed by the defaulting Party to the non-defaulting Party; and if the Final Net Settlement Amount is a negative amount, then the absolute value of such amount shall be owed by the non-defaulting Party to the defaulting Party, subject to the rights of the non-defaulting Party to setoff, recoup, withhold or suspend payment as set forth in this Master Agreement or at law.  The Final Net Settlement Amount shall be payable by the Party from whom such payment is due on the second (2nd) Business Day after which the statement is provided by the non-defaulting Party.  If all or any portion of the Final Net Settlement Amount is not paid on or before such date, then the unpaid amount shall bear interest at a rate equal to the lesser of (A) the Wall Street Journal Prime Rate of interest plus 175 basis points or (B) Gavilon’s internal rate of interest, whereby such interest rate shall be adjusted periodically based upon rates then in effect.

 

4.4                                 Setoff.  In the event the Final Net Settlement Amount is payable to the defaulting Party, the non-defaulting Party may, at its option and without prior notice to the defaulting Party, set off the Final Net Settlement Amount or any part thereof against any payment obligation of the defaulting Party (whether or not matured, contingent or invoiced) under any agreements, instruments or undertakings (including, but not limited to, any amounts owing under the Supply Agreements).  This right of setoff shall be without prejudice and in addition to any right of setoff, netting, recoupment, combination of accounts, lien, charge or other right to which the non-defaulting Party is at any time otherwise entitled (whether by operation of law, by contract or otherwise).  If an amount is unascertained, the non-defaulting Party may reasonably estimate the amount to be setoff.

 

4.5                                 Termination Due to Force Majeure.  The rights available to the non-defaulting Party under this Section 4 shall also be available to the Party that terminates any of the Supply Agreements due to Force Majeure.

 

5.                                       Miscellaneous.

 

5.1                                 Term.  This Master Agreement shall commence on the date hereof and continue in effect until the Supply Agreements and Storage Agreement have been terminated and all amounts owing thereunder or hereunder shall have been fully and indefeasibly paid.

 

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5.2                                 Board of Governors.  As a material inducement for Gavilon to enter into this Master Agreement and the Supply Agreements, Producer hereby grants Gavilon the right to appoint one (1) observer (“Observer”) to each of (i) the Producer’s Board of Governors and (ii) the Producer’s Risk Management Committee as established by the Board of Governors.  Producer acknowledges that the primary objective for the Observer is to allow the Observer to learn more detailed information about Producer that would not otherwise be available to Gavilon by simply receiving the various financials and other reports as set forth in this Master Agreement and/or the Supply Agreements.  The Observer shall be allowed to participate in all meetings and discussions of the Board of Governors and the Risk Management Committee, and Producer shall provide the Observer with notice of all such meetings in accordance with the underlying organizational documents of the Producer which govern the Board of Governors and the Risk Management Committee; provided, however, the Observer shall not have any voting rights on the Board of Governors or the Risk Management Committee.  By appointing the Observer, Gavilon acknowledges that the Observer shall be allowed to ask questions during meetings of the Board of Governors and the Risk Management Committee, but as such will not normally contribute to the discussions of the Board of Governors or the Risk Management Committee unless called upon or otherwise encouraged to do so by the Chairman or other participants.  Producer and Gavilon each acknowledge and agree that, except as set forth in this Section 5.2, the Observer will not have any of the rights, duties or obligations of a regular member of the Board of Governors or the Risk Management Committee.  By entering into this Agreement, Gavilon acknowledges that its Observer shall maintain the confidentiality provisions as set forth in Section 5.18 hereof with regard to any information it receives from Producer while attending Board of Governors meetings.

 

5.3                                 Assignment.  Except as set forth herein, neither Party may assign this Master Agreement or any of its rights or obligations hereunder without the prior written consent of the other Party.  A Change in Control of Producer or Gavilon shall be construed to be an assignment for purposes of this Section.  The above notwithstanding, (a) Producer may assign its rights under this Master Agreement and to receive any Net Settlement or Final Net Settlement Amount to a lender that provides working capital financing to Producer so long as such lender first executes the Consent attached as Exhibit “B” or enters into an intercreditor agreement with Gavilon upon terms deemed acceptable to Gavilon, and (b) Gavilon may: (i) transfer, sell, pledge, encumber or assign this Master Agreement in connection with any financing arrangements; or (ii) transfer or assign this Master Agreement to an affiliate.  In the event the Plant is sold by Producer, Producer shall assign this Master Agreement to the purchaser of the Plant and require the purchaser to assume all of Producer’s obligations hereunder, provided that such purchaser is reasonably acceptable to Gavilon.  No such assignment shall affect the rights or obligations of the Parties (including those with respect to netting and setoff) under this Master Agreement or any Confirmed Orders.  It is further agreed that no such assignment shall be permitted unless the Supply Agreements are similarly assigned in accordance with their terms.

 

5.4                                 Notices.  Any written notices required hereunder shall be given in accordance with the terms of the Supply Agreements.

 

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5.5                                 Inurement.  This Master Agreement will inure to the benefit of and be binding upon the respective successors and permitted assigns of the Parties.

 

5.6                                 Entire Agreement.  This Master Agreement, the Exhibits attached hereto, and the Supply Agreements (including Confirmed Orders issued pursuant thereto), constitute the entire agreement between the Parties with respect to the subject matter contained herein and any and all previous agreements, written or oral, express or implied, between the Parties or on their behalf relating to the matters contained herein are hereby terminated and canceled.  In the event of any conflict between the terms of this Master Agreement and any of the Supply Agreements, this Master Agreement shall govern.

 

5.7                                 Waiver.  No delay or omission in the exercise of any right, power or remedy hereunder shall impair such right, power or remedy or be construed to be a waiver of any default or acquiescence therein.

 

5.8                                 Amendments.  There will be no modification of the terms and provisions hereof except by the mutual agreement in writing signed by the Parties.  Any attempt to so modify this Agreement in the absence of such writing signed by the Parties shall be considered void and of no effect.

 

5.9                                 Governing Law; Venue.  The Agreement will be interpreted, construed and enforced in accordance with the procedural, substantive and other laws of the State of Nebraska without giving effect to principles and provisions thereof relating to conflict or choice of law even though one or more of the Parties is now or may do business in or become a resident of a different state.  Subject to the dispute resolution provisions in the Supply Agreements, all disputes arising out of this Master Agreement shall be resolved exclusively by state or federal courts located in Omaha, Nebraska, and each of the Parties waives any objection that it has to the bringing of an action in any such court.

 

5.10                           Cumulative Remedies.  Unless otherwise specifically provided in this Master Agreement, the rights, powers and remedies of each of the Parties provided in this Master Agreement are cumulative and the exercise of any right, power or remedy under this Master Agreement does not affect any other right, power or remedy that may be available to either Party under this Master Agreement, the Supply Agreements, or otherwise at law or in equity.

 

5.11                           Forward Contract/Forward Contract Merchants.  The Parties agree that each of them is a forward contract merchant as set forth in 11 U.S.C. §101(26).  The Parties also agree that this Master Agreement, along with the Supply Agreements, are all forward contracts as defined in 11 U.S.C. §101(25).  The payments and transfers described herein shall constitute “Settlement Payments” or “Margin Payments” as set forth in 11 U.S.C. §§ 101(51A) and (38).

 

5.12                           No Partnership; Relationship.  This Master Agreement shall not create or be construed to create in any respect a partnership or any agency or joint venture relationship between the Parties.  The relationship of Gavilon and Producer established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed: to give either Party the power to unilaterally direct and control the day-to-day activities of the other or to be considered an agent of the other; to constitute the Parties as partners, joint

 

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ventures, co-owners or otherwise; or to allow either Party to create or assume any obligation on behalf of the other Party for any purpose whatsoever.  Except as otherwise provided herein, nothing contained in this Agreement shall be construed as conferring any right or benefit on a person not a Party to this Agreement.

 

5.13                           Costs To Be Borne by Each Party.  Except as otherwise provided herein, Producer and Gavilon shall pay its own costs and expenses incurred in the negotiation, preparation and execution of this Master Agreement and of all documents referred to in it.  In the event of any dispute between the Parties with regard to this Master Agreement, the prevailing party shall be entitled to reimbursement for all reasonable out-of-pocket costs and expenses incurred by such Party, including, but not limited to, reasonable and documented attorneys’ fees of outside counsel and court costs.

 

5.14                           Counterparts.  This Master Agreement may be executed in multiple counterparts with the same effect as if Producer and Gavilon had signed the same document and all counterparts will be construed together and constituted as one and the same instrument.  Each counterpart signature may be executed and delivered to the other Party by facsimile machine or electronic transfer, and the signature as so transmitted shall be as binding upon the executing Party as its original signature, without the necessity of the recipient Party to establish original execution or the existence of such original signature or the document to which affixed, all of which shall be deemed waived.

 

5.15                           Severability. Any provision of this Master Agreement, which is or becomes prohibited or unenforceable in any jurisdiction, shall not invalidate or impair the remaining provisions of this Master Agreement, and the remaining terms of this Master Agreement shall continue in full force and effect, or if allowed by the law of the applicable jurisdiction, it shall be amended so as to most closely conform to the original intent of this Agreement without the offending provision, and as so amended shall continue in full force and effect.

 

5.16                           Headings; Interpretations.  The article and section headings used herein are for convenience of reference only and shall not affect the construction or interpretation of this Master Agreement.  Unless the context of this Master Agreement otherwise requires, (i) words of any gender shall be deemed to include each other gender; (ii) words using the singular or plural number shall also include the plural or singular number, respectively; and (iii) the terms “hereof,” “herein,” “hereby,” “hereto,” and derivative or similar words shall refer to this entire Master Agreement.  This Master Agreement is the product of negotiation by and among the Parties hereto.  This Master Agreement shall be interpreted and construed neutrally as to all Parties, without any Party deemed to be the drafter of this Master Agreement.

 

5.17                           Time.  Except as otherwise specified herein, all times described herein will be local time in Omaha, Nebraska.

 

5.18                           Confidentiality.  The term “Confidential Information” and the related confidentiality obligations of Producer and Gavilon, respectively, as set forth in Article 9 of the Corn Supply Agreement shall apply to the terms of this Master Agreement and the information exchanged hereunder.

 

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5.19                           Dispute Resolution.  Except for a different dispute resolution mechanism as specified herein, in the event a dispute arises in connection with the performance or non-performance of this Agreement which the Parties are unable to mutually resolve, the Parties shall submit such matter to arbitration in a neutral geographic location using the arbitration provisions of the Trade Rules, provided such matter involves commercial aspects covered by the Trade Rules and is accepted by the NGFA for resolution; otherwise the Parties shall have available whatever rights or remedies exist at law or equity.  The arbitrator(s) shall have no power to award damages inconsistent with this Agreement.  All aspects of the arbitration shall be treated as confidential and judgment on the arbitrator’s award may be entered in any court having jurisdiction.  The expenses of the arbitrator(s) shall be shared equally by the Parties, and each Party shall bear its own legal costs, unless the arbitrators determine that legal costs shall be otherwise assessed.  Nothing contained in any indemnification provision hereunder shall be construed as having any bearing on the award of attorney’s fees under this Section.  The foregoing dispute-resolution process shall in no event be deemed to excuse either Party from continuing to fulfill its respective obligations under, or to prevent or impede either Party from exercising its rights or remedies set forth in, this Agreement.

 

[The remainder of this page intentionally left blank; signature page follows.]

 

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IN WITNESS WHEREOF, the Parties have each executed this Master Agreement on the date first above written.

 

 

	
GAVILON, LLC
    	
 
    	
HERON LAKE BIOENERGY, LLC
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
By:   
    	
/s/   John W. Neppl
    	
 
    	
By:
    	
/s/   Robert J. Ferguson
    
	
Name:
    	
John   W. Neppl
    	
 
    	
Name:
    	
Robert   J. Ferguson 
    
	
Title:   
    	
CFO
    	
 
    	
Title:
    	
CEO
    

 

Master Netting, Setoff, Credit and Security Agreement

(Heron Lake, Minnesota)

Signature Page

 

 

EXHIBIT “A”

 

DEFINITIONS

 

For purposes of this Master Agreement:

 

“Business Day” or “Business Days” means the hours from 8:00 a.m. to 5:00 p.m. Central Time excluding Saturdays, Sundays, and scheduled holidays observed by the Chicago Board of Trade, Chicago, Illinois, USA.

 

“Change in Control” means a change in the ownership of a Party, whereby such change results in any person or group (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), other than Project Viking, L.L.C. or any affiliates owned or controlled by Ron and Diane Fagen with respect to Producer, directly or indirectly, having the ability to control the governing body of such Party.

 

“Delivery Amount” has the meaning as set forth in Section 3.1.

 

“Exposure” means an amount equal to the amount that would result from closing-out each then-existing transaction for the purchase or sale of ethanol, co-products or corn under the Supply Agreements and calculating the Gain or Loss, if any, for each such transaction, and aggregating or netting such amounts, without duplication, against any or all other amounts owing under the Supply Agreements to a single liquidated settlement payment; provided that the Exposure shall be deemed to be zero whenever the above calculation yields a number less than zero.

 

“Final Net Settlement Amount” means the sum of the Settlement Amounts, provided that in the event the sum of the Settlement Amounts is positive, it shall be reduced by any amount received by the non-defaulting Party (if any) to the extent the non-defaulting Party shall exercise its rights to apply Margin delivered by the defaulting Party.

 

“Gain(s)” means, with respect to any transaction or group of transactions, an amount determined by the non-defaulting Party in a commercially reasonable manner and expressed as a negative number equal to the present value as of the close-out date (discounted at the rate determined in a commercially reasonable manner by the non-defaulting Party for the period between the close-out date and the date on which amounts under the transaction or group of transactions would have otherwise been due) of the economic benefit (exclusive of costs and expenses) to the non-defaulting Party, if any, resulting from the termination of such transaction or group of transactions pursuant to this Master Agreement.  Nothing herein shall require the non-defaulting Party to enter into a replacement transaction in order to determine its Gains.

 

“Holiday” means a nationally recognized or state recognized holiday on which date commercial banks are authorized to close under the laws of, or are in fact closed in, the state where each Party’s office is located.

 

“Letter of Credit” means an irrevocable, non-transferable standby letter of credit, issued by a major U.S. commercial bank, and in a form, reasonably acceptable to the Secured Party.

 

Exhibit A-1

 

“LIBOR” means the per annum rate of interest equal to the London Interbank Offered Rate for overnight deposits at 11:00 a.m. (London time), from time to time in effect, as reported on Telerate.

 

“Loss(es)” means, with respect to any transaction or group of transactions, an amount determined by the non-defaulting Party in a commercially reasonable manner and expressed as a positive number equal to the present value as of the close-out date (discounted at the rate determined in a commercially reasonable manner by the non-defaulting Party for the period between the close-out date and the date on which amounts under the transaction or group of transactions would have otherwise been due) of the economic loss (exclusive of costs and expenses), to the non-defaulting Party, if any, resulting from the termination of such transaction or group of transactions pursuant to this Master Agreement.  Nothing herein shall require the non-defaulting Party to enter into a replacement transaction in order to determine its Losses.

 

“Margin” means with respect to Gavilon: (a) cash, or (b) Letter of Credit; and with respect to Producer: (a) cash, or (b) Letter of Credit (excluding the Standby Letter of Credit).

 

“Netting Statement” has the meaning as set forth in Section 2.2.

 

“Net Settlement” has the meaning as set forth in Section 2.2.

 

“NGFA” “ means the National Grain and Feed Association.

 

“Payment Date” has the meaning as set forth in Section 2.1.

 

“Plant” means the Producer’s ethanol plant located at Heron Lake, Minnesota.

 

“Pledgor” has the meaning as set forth in Section 3.1.

 

“Posted Margin” has the meaning as set forth in Section 3.3.

 

“Return Amount” has the meaning as set forth in Section 3.1.

 

“Secured Party” has the meaning as set forth in Section 3.1.

 

“Settlement Amount” means, with respect to a terminated transaction or group of terminated transactions: (i) the sum of (a) Losses or Gains, as applicable, plus (b) without duplication of any amounts included in the foregoing, costs and expenses incurred by the non-defaulting Party, plus (c) without duplication of any amounts included in the foregoing, any unpaid amounts owed by the defaulting Party to the non-defaulting Party with respect to such terminated transaction or group of terminated transactions, less (ii) without duplication of any amounts included in the foregoing, any unpaid amounts owed by the non-defaulting Party to the defaulting Party with respect to such terminated transaction or group of terminated transactions.  Each Settlement Amount may be either a positive amount (if owed to the non-defaulting Party) or a negative amount (if owed to the defaulting Party).

 

“Threshold Amount” means, with respect to Gavilon, $[ * * * ], and with respect to Producer, $[ * * * ]; provided that notwithstanding anything to the contrary contained herein, Gavilon may in its sole and reasonable discretion modify such Threshold Amount upon no less than sixty (60) days written notice to Producer; provided further, however, that if an event of default has occurred and is continuing with respect to a Party, then such Party’s Threshold Amount shall be $0.

 

Exhibit A-2

 

“Trade Rules” means the trade rules of the NGFA Trade Rules and Arbitration Rules Booklet, as amended March 5, 2010, and as otherwise amended or restated from time to time.  Any reference to the Trade Rules in this Agreement shall be a reference to the specific portions of the Trade Rules which are applicable to such reference.  By way of example and not limitation, any reference to arbitration in accordance with the terms of the Trade Rules shall be a specific reference to the arbitration provisions of the Trade Rules.

 

“UCC” means the Uniform Commercial Code of the State of Nebraska, as it currently exists or is hereafter revised.

 

“Valuation Agent” means Gavilon or, if an event of default has occurred and is continuing with respect to Gavilon, Producer or a mutually-agreed third party.

 

Exhibit A-3

 

EXHIBIT “B”

 

LENDER’S CONSENT AND ACKNOWLEDGMENT

 

The undersigned (“Lender”) hereby acknowledges and agrees as follows:

 

1.             Heron Lake BioEnergy, LLC (“Counterparty”) and Gavilon, LLC (“Gavilon”) have entered into a certain Master Netting, Setoff, Credit and Security Agreement dated September 1, 2011 (“Netting Agreement”), pursuant to which such Parties will periodically determine and pay the net amount that is owed by one Party to the other.

 

2.             Lender has been provided with a copy of the Netting Agreement.

 

3.             The Lender hereby consents to Counterparty’s execution and full performance of the Netting Agreement.

 

4.             Lender acknowledges that any right, title and interest that it may hold in Counterparty’s receivables (a) do not include any amounts payable by Gavilon to Counterparty except for the amounts of any Net Settlement payment and Final Net Settlement Amount (each as defined in the Netting Agreement), and (b) are otherwise subject and subordinate to Gavilon’s rights, and Counterparty’s obligations, under the Netting Agreement.

 

	
 
    	
LENDER
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
 
    
	
 
    	
Its:
    	
 
    
	
 
    	
Date:
    	
 
    

 

 

EXHIBIT “C”

 

LENDER’S CONSENT AND ACKNOWLEDGMENT

 

The undersigned (“Lender”) hereby acknowledges and agrees as follows:

 

1.             Heron Lake BioEnergy, LLC (“Counterparty”) and Gavilon, LLC (“Gavilon”) have entered into a certain Master Netting, Setoff, Credit and Security Agreement dated September 1, 2011 (“Netting Agreement”), pursuant to which such Parties will periodically determine and pay the net amount that is owed by one Party to the other.

 

1.             Lakefield Farmers Elevator, LLC, a wholly-owned subsidiary of Counterparty (“Lakefield”), Counterparty and Gavilon, LLC (“Gavilon”) have entered into a certain Corn Storage Agreement, dated September 1, 2011 (“Storage Agreement”), pursuant to which Lakefield and Counterparty shall receive, store and ship Grain for Gavilon in accordance with terms set forth therein.

 

2.             Lender has been provided with a copy of the Netting Agreement and Storage Agreement.

 

3.             Lender hereby consents to Counterparty’s execution and full performance of the Netting Agreement and Lakefield’s and Counterparty’s execution and full performance of the Storage Agreement.

 

4.             Lender acknowledges that any right, title and interest that it may hold in Counterparty’s Non-Fixed Assets or in Lakefield’s or Counterparty’s real estate, fixtures, equipment, inventory, receivables or other forms of collateral shall be subordinate to (i) the security interest held by Gavilon in the Non-Fixed Assets pledged by Counterparty under the Netting Agreement and (ii) the title to the Grain owned by Gavilon and stored in the Elevators (as defined in the Storage Agreement), and any security interest Lender may have in the collateral of Counterparty or Lakefield shall be subject and subordinate to Gavilon’s rights, and Counterparty’s and Lakefield’s obligations, under the Netting Agreement and Storage Agreement.

 

	
 
    	
LENDER
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
 
    
	
 
    	
Its:
    	
 
    
	
 
    	
Date:Exhibit 10.51

 

CORN STORAGE AGREEMENT

 

This Corn Storage Agreement (this “Agreement”) is dated and made effective as of September 1, 2011, by and among Lakefield Farmers Elevator, LLC, a Minnesota limited liability company (“Contractor”), Heron Lake BioEnergy, LLC, a Minnesota limited liability company (“Producer”), and Gavilon, LLC, a Delaware limited liability company (“Gavilon”) (each of Contractor, Producer and Gavilon is a “Party” and together they are collectively referred to as the “Parties”).

 

R E C I T A L S :

 

WHEREAS, Contractor is a wholly-owned subsidiary of Producer;

 

WHEREAS, Gavilon and Producer have entered into certain agreements, including (i) a “Corn Supply Agreement”, (ii) an “Ethanol and Distiller’s Grains Marketing Agreement” and (iii) a “Master Netting, Setoff, Credit and Security Agreement” (collectively, the “Ethanol Plant Agreements”), whereby Gavilon provides Producer with corn for use in Producer’s ethanol plant, and Producer then sells the bi-product consisting of ethanol, dry distiller’s grains and wet distiller’s grains to Gavilon, all in accordance with the terms of such agreements;

 

WHEREAS, as a condition to Gavilon providing corn to Producer under the terms of the Corn Supply Agreement, Contractor and Producer agreed to provide Gavilon with certain storage space and personnel necessary for the storage and delivery of corn, all as set forth in this Agreement; and

 

WHEREAS, Contractor and Producer each desire to store corn for Gavilon, and Gavilon desires to store corn in certain elevators or storage facilities owned by Contractor and Producer, all upon the terms set forth in this Agreement.

 

NOW, THEREFORE, in consideration of the above premises and the mutual covenants, conditions and agreements contained herein, the Parties agree as follows:

 

1.             Elevator Facilities; Contractor and Producer Responsibilities.  Contractor owns and operates (i) a grain elevator located in Lakefield, Minnesota, which holds up to 1,872,000 bushels, and (ii) a grain elevator located in Wilder, Minnesota, which holds up to 920,000 bushels (“Contractor’s Elevators”).  Producer owns and operates a storage facility located in Heron Lake, Minnesota, which holds up to 550,000 bushels and is utilized for temporary grain storage prior to use at Producer’s ethanol plant (“Producer’s Elevator”) (each of the Contractor’s Elevators and Producer’s Elevator shall sometimes be referred to individually as an “Elevator” and collectively the “Elevators”).  As consideration for Gavilon entering into the Ethanol Plant Agreements with Producer, Contractor and Producer agree that the Elevators shall hereafter be used exclusively for the storing and handling of corn purchased by Gavilon (the “Grain”) for purposes of fulfilling Producer’s requirements for corn under the Corn Supply Agreement.  Contractor and Producer shall maintain their respective Elevators for Gavilon’s sole use for storage of the Grain, and the Grain shall not be co-mingled at the Elevators with any other corn or other grain or products unless Gavilon, Contractor and Producer first agree in writing that the Grain may be co-mingled.  Contractor and Producer each represent and warrant that their respective Elevators are in good working order and repair, and Contractor and Producer each hereby covenant and agree to maintain all personnel, utilities and equipment necessary to operate and maintain the Elevators in a manner which allows for the Grain to be (i) unloaded from trucks or railcars and placed in the Elevators during each Party’s normal business hours, (ii) stored in a manner acceptable to industry standards with minimal spoilage, (iii) with regard to Contractor, unloaded from the Elevators into trucks or railcars for purposes of delivery to Producer or other third parties when and as directed by Gavilon or pursuant to a Limited Sale, and (iv) with regard to Producer, unloaded from the Producer’s Elevator for use at the ethanol plant.

 

 

2.                                       Term.  The term of this Agreement shall be as of the date set forth above and shall continue until the later to occur of (i) the delivery of all Grain stored in the Elevators as directed by Gavilon and (ii) the termination of the Ethanol Plant Agreements.

 

3.                                       Rates and Charges; Demurrage.  As consideration for entering into this Agreement, Contractor and Producer each acknowledge that it shall receive a direct benefit from Producer’s use of the Grain at Producer’s ethanol plant.  Contractor and Producer each further acknowledge that Gavilon shall provide a discounted supply fee to Producer under the terms of the Ethanol Plant Agreements in exchange for Contractor and Producer providing the Elevators to Gavilon for storage of the Grain.  As a wholly-owned subsidiary  of Producer, Contractor hereby acknowledges and agrees that it shall receive adequate consideration from Gavilon under the terms of the Ethanol Plant Agreements and Contractor shall not charge any additional consideration to Gavilon for Contractor’s services at, and Gavilon’s use of, the Contractor’s Elevators to store Grain as set forth in this Agreement.  Additionally, Producer hereby acknowledges and agrees that it shall receive adequate consideration from Gavilon under the terms of the Ethanol Plant Agreements and Producer shall not charge any additional consideration to Gavilon for Producer’s services at, and Gavilon’s use of, the Producer’s Elevator to store Grain as set forth in this Agreement.  Contractor shall be responsible for any demurrage charges incurred by Gavilon due to Contractor’s failure to timely unload or load Grain from (or into) trucks or rail cars in accordance with the contracts received from Gavilon and approved by Producer.

 

4.                                       Setoff.  Contractor agrees that it shall have no right of setoff against Gavilon with regard to any failure by Gavilon to perform its obligations under this Agreement or under the terms of the Ethanol Plant Agreements.  To the extent any setoff rights may be claimed against Gavilon arising under the terms of this Agreement, Contractor agrees that such setoff rights shall belong to Producer and shall be handled in accordance with the terms set forth in the Ethanol Plant Agreements.

 

5.                                       Services to Be Performed; Direction Given.

 

a.                                       Contractor shall receive, store and ship the Grain at and from the Contractor’s Elevators in accordance with the terms of any corn contracts entered into by Gavilon or Producer under the terms of the Corn Supply Agreement.  Contractor shall be responsible for selecting the area within the Contractor’s Elevators for storing the Grain and may, without notice, move the Grain between or within the Contractor’s Elevators, but shall not, without Gavilon’s prior consent, move the Grain to any other location.  Contractor shall at all times maintain functional scales at the Contractor’s Elevators and shall weigh all incoming and outgoing Grain within industry tolerances and maintain accurate records of the same.  Contractor’s scales shall be certified on an annual basis in accordance with the then-current NGFA Grain Trade Rules, whereupon Contractor shall provide the certification certificate to Gavilon.  In the event that either Contractor or Gavilon reasonably believes that Contractor’s scales are not working properly, either Party may request that such scales be tested and re-certified.  Gavilon shall have the right to inspect the Contractor’s Elevators and Contractor’s records at any time during normal business hours or, if outside of normal business hours, after giving written notice at least 24 hours in advance.  Contractor shall comply with all regulatory requirements mandated by federal, state or local municipalities for owning and operating the Contractor’s Elevators.  Contractor acknowledges that all Grain received at the Contractor’s Elevators under corn contracts arising under the Corn Supply Agreement shall be stored, shipped or otherwise disposed of in accordance with directions received from Gavilon, and Producer shall have no right or authority to direct Contractor with regard to the storage, shipment or other disposition of the Grain.  In the event that Contractor receives directions from Producer with regard to taking any actions (or not taking actions) related to the Grain, Contractor shall notify Gavilon of such directions and

 

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Gavilon shall direct Contractor on how to proceed with the same.  In no event shall Contractor sell or ship or otherwise dispose of any Grain based upon directions received by Producer.

 

b.                                      Producer shall receive, store and ship the Grain at and from the Producer’s Elevator in accordance with the terms of any corn contracts entered into by Gavilon or Producer under the terms of the Corn Supply Agreement.  Producer shall be responsible for selecting the area within the Producer’s Elevator for storing the Grain, but shall not, without Gavilon’s prior consent, move the Grain to any other location except for Producer’s use of such Grain in the ordinary course of business to produce ethanol.  Producer shall at all times maintain functional scales at the Producer’s Elevator and shall weigh all incoming and outgoing Grain within industry tolerances and maintain accurate records of the same.  Producer’s scales shall be certified on an annual basis in accordance with the Trade Rules (as defined in Section 16), whereupon Producer shall provide the certification certificate to Gavilon.  In the event that either Producer or Gavilon reasonably believes that Producer’s scales are not working properly, either Party may request that such scales be tested and re-certified.  Gavilon shall have the right to inspect the Producer’s Elevator and Producer’s records at any time during normal business hours or, if outside of normal business hours, after giving written notice at least 24 hours in advance.  Producer shall comply with all regulatory requirements mandated by federal, state or local municipalities for owning and operating the Producer’s Elevator.  Unless otherwise agreed upon by Gavilon in accordance with the terms of the Corn Supply Agreement, Producer acknowledges that all Grain received at the Producer’s Elevator under corn contracts arising under the Corn Supply Agreement shall be stored, shipped or otherwise disposed of in accordance with directions received from Gavilon in accordance with the Corn Supply Agreement, and Producer shall have no right or authority to otherwise direct shipment or other disposition of the Grain.

 

6.                                       Grain.  Gavilon represents and warrants that Gavilon shall lawfully possess any Grain shipped to the Elevators at Gavilon’s direction and Gavilon has the right and authority to store the Grain with Contractor or Producer, as applicable.  Each of Contractor and Producer shall provide Gavilon with daily reports showing the amount of Grain received at, or removed from, the Elevators.  Additionally, Contractor and Producer, as applicable, each agrees to provide Gavilon with a calculation of the Grain remaining in the Elevators as of the last day of each month.  Additionally, each of Contractor and Producer shall work in good faith to true-up such amounts and account for the same on a monthly basis based upon measurements taken at the Elevators to determine the amount of Grain remaining at the end of each month.  In the event that there is a discrepancy between the estimated amount of Grain remaining in each Elevator at the end of each month based upon shipments of Grain received or shipped when compared with the estimated amount of Grain remaining at each Elevator based upon measurements taken at the Elevators, Contractor and Producer shall work in good faith to resolve such issues with Gavilon with the actual estimated measurements to be determinative unless otherwise agreed upon by the Parties.  Each of Contractor and Producer shall notify Gavilon immediately of any errors, problems or complaints relating to the Grain, including any matters related to Grain contracts (i.e., specification issues or delivery issues) or related to storage of the Grain (i.e., any damage or spoilage).

 

7.                                       Liability.

 

a.                                       Contractor and Producer shall each be liable for loss of or injury to the Grain while under its care, custody and control when caused by its failure to exercise such care in regard to the Grain as a reasonably careful man would exercise under like circumstances.  Except as otherwise set forth in the Corn Supply Agreement, Contractor and Producer shall not be liable for damages which could not have been avoided by the exercise of such care.

 

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b.                                      Contractor and Producer shall each be liable for any loss or injury suffered by Gavilon due to Contractor’s or Producer’s breach of the terms of this Agreement.

 

c.                                       Contractor and Producer shall not be liable for any loss of profit or special, indirect or consequential damages of any kind.

 

d.                                      Contractor and Producer acknowledge that any risk of loss for the Grain as between Gavilon and Producer shall be as set forth in the Ethanol Plant Agreements, and at no time shall Contractor or Producer have title to the Grain while it is stored in the Elevators.

 

8.                                       Insurance.  Contractor shall provide policies and limits of insurance as set forth on Exhibit “A”.  The policies shall be with carriers who are “A” rated by Best’s Insurance Reports.  Contractor shall provide Gavilon with insurance certificates reflecting such coverage, which certificates shall provide that the carrier will not terminate or reduce the coverage without first giving Gavilon 30 days’ prior written notice.  Contractor shall provide Gavilon with the policies for inspection upon Gavilon’s request.  Producer shall provide policies and limits of insurance as set forth in the Ethanol Plant Agreements, and such insurance shall also cover the Grain stored in Producer’s Elevator.

 

9.                                       Independent Contractor.  Contractor and Producer shall each act as an independent contractor under this Agreement.  Each shall perform its obligations under this Agreement using its own employees or agents.  Each shall decide on the manner and means of accomplishing those obligations and shall direct, control and supervise its employees.  Each shall comply with all payroll tax, withholding, social security, unemployment and related employer obligations.  Neither Contractor nor Producer shall hold itself out as an agent of or joint venturer with Gavilon, and neither Contractor nor Producer shall have any authority to act on behalf of Gavilon except to the extent necessary to accomplish its obligations under this Agreement.

 

10.                                 Title; Subordination.  Contractor and Producer shall not permit any lien or other encumbrance to be placed against the Grain while it is in Contractor’s or Producer’s possession, as applicable.  Title to the Grain shall at all times remain in Gavilon, and at no time shall Contractor or Producer have any claim to title for the Grain.  Neither Contractor nor Producer shall have a general warehouseman’s lien on the Grain for any claims or unpaid charges arising under this Agreement or under the Ethanol Plant Agreements, and Contractor and Producer each hereby waive any and all rights to place a lien on the Grain arising from Contractor’s or Producer’s (as applicable) performance under the terms of this Agreement.  As a condition to entering into this Agreement, Contractor and Producer each acknowledge that any lender(s) it may have with regard to the Elevators or any equipment or operations related thereto, shall enter into a Lender’s Consent and Acknowledgement in the form attached hereto as Exhibit “B”.  Contractor hereby acknowledges and agrees that any fees or charges due to Contractor shall be paid by Producer, or received as a benefit from Producer based upon Contractor being a wholly-owned subsidiary of Producer, and Gavilon shall have no responsibility or liability for paying any such amounts to Contractor.

 

11.                                 Security Interests.  In the event that any mediation, arbitration or court proceeding shall determine that any Grain owned by Gavilon under the terms of the Corn Supply Agreement was instead owned by Producer, then Contractor and Producer each hereby acknowledge that Gavilon shall have a first priority lien in the Grain in accordance with the terms of the Ethanol Plant Agreements and Contractor and Producer shall follow the directions of Gavilon with regard to receiving, storing and shipping the Grain until such time as a court with proper jurisdiction determines (after all appeals are time barred or have otherwise been completed) to the contrary.

 

12.                                 Force Majeure.  No Party shall be liable to the other Parties for failure to perform its obligations under this Agreement if prevented from doing so because of an act of God, strikes, fire, flood, war, civil disturbance, interference by civil or military authority or other causes beyond the reasonable control of the Party.  Upon the occurrence of such an event the Party seeking to rely on this provision shall promptly give written notice to the other Parties of the nature and consequences

 

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of the cause.  If the cause is one which nevertheless requires Contractor or Producer to continue to protect the Grain, Contractor and Producer each agree that any expenditures made by Contractor or Producer to protect the Grain shall be paid by Producer as partial consideration for Gavilon entering into the Ethanol Plant Agreements.

 

13.           Indemnification.  Each Party (the “Indemnitor”) shall indemnify and hold the other Parties (the “Indemnitee) harmless from and against all liabilities, claims, suits, fines, damages, losses, costs and expenses (including reasonable attorneys’ fees) arising out of injury to or death of any person or damage to or loss or destruction of any property (except for the Grain where liability is covered in Section 7 above) caused by or performance resulting from any parties’ default, improper performance or nonperformance of obligations hereunder by the Indemnitor, its employees or agents. The Indemnitee shall provide prompt notice of any claim or liability, shall tender defense or settlement to the Indemnitor, and shall fully cooperate in defense of the claim.  Should the Indemnitor fail to honor a timely request for indemnification, then the Indemnitee shall be entitled to all costs (including reasonable attorney’s fees) incurred in the enforcement of the right of indemnification hereunder, which enforcement results in a legal judgment in its favor or an acknowledgement by the Indemnitor that the claimed indemnification is valid in a settlement of such claim.

 

14.           Assignment.  Except as otherwise set forth in the Ethanol Plant Agreements as between Producer and Gavilon, no Party shall assign or transfer this Agreement or any of its rights or obligations hereunder without the prior written consent of the other Parties.  It is further agreed that no such assignment of this Agreement shall be permitted unless the Ethanol Plant Agreements and all other agreements referenced therein are similarly assigned in accordance with their terms unless otherwise waived or approved in writing by the Parties.

 

15.           Default.  If Contractor or Producer shall fail to perform any of the covenants or obligations of performance and payment imposed upon it under and by virtue of this Agreement (except where such failure is excused under other provisions of this Agreement), Gavilon shall have the right to either (i) perform such obligations or make such necessary payments, in which case Contractor or Producer (as applicable) shall be responsible for immediately reimbursing Gavilion for its documented expenses, or (ii) give Contractor or Producer written notice, stating specifically the cause for which the notice of default is given and the time within which the default must be cured.  If Gavilon chooses to provide notice under provision (ii) of the prior sentence and Contactor or Producer fails to commence with diligence to remove and remedy the default, then Gavilon may either perform such obligations under provision (i) of the prior sentence or terminate this Agreement without any further obligation to Contractor or Producer.  Additionally, Contractor or Producer shall be deemed to be in default under the terms of this Agreement if either Contractor or Producer shall become insolvent or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors, or if either of such Parties shall file a voluntary petition in bankruptcy, or seek reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Code, Title 11 of the United States Code, as amended or recodified from time to time, or under any state or federal law granting a relief to debtors.

 

In addition to the provisions of the previous paragraph, the occurrence and continuance of any event of default under the Ethanol Plant Agreements by Producer shall constitute an event of default under this Agreement for both Contractor and Producer.  Upon the occurrence of any event of default as set forth in this paragraph, Gavilon shall have the right to terminate this Agreement without any further obligation to Contractor or Producer under the terms of this Agreement, whereupon Contractor and Producer shall work in good faith with Gavilon to ship any Grain remaining at the Elevators as per directions received from Gavilon.

 

5

 

16.                                 Dispute Resolution.  Except where a different dispute resolution mechanism is specified herein, in the event a dispute arises in connection with the performance or non-performance of this Agreement which the Parties are unable to mutually resolve, the Parties shall submit such matter to arbitration in a neutral geographic location using the National Grain and Feed Association’s (“NGFA”) Trade Rules and Arbitration Rules Booklet, as amended March 5, 2010, and as otherwise amended or restated from time to time (the “Trade Rules”), provided such matter involves commercial aspects of the delivery of Grain and is accepted by the NGFA for resolution; otherwise the Parties shall have available whatever rights or remedies exist at law or equity. The arbitrator(s) shall have no power to award damages inconsistent with this Agreement.  All aspects of the arbitration shall be treated as confidential and judgment on the arbitrator’s award may be entered in any court having jurisdiction.  The expenses of the arbitrator(s) shall be shared equally by the Parties, and each Party shall bear its own legal costs, unless the arbitrators determine that legal costs shall be otherwise assessed.  Nothing contained in any indemnification provision hereunder shall be construed as having any bearing on the award of attorney’s fees under this Section.  The foregoing dispute-resolution process shall in no event be deemed to excuse either Party from continuing to fulfill its respective obligations under, or to prevent or impede either Party from exercising its rights or remedies set forth in, this Agreement.  By entering into this Agreement, each Party hereby waives its rights to trial by jury in any judicial proceeding involving, directly or indirectly, any matter (whether sounding in tort, contract or otherwise) in any way arising out of, related to, or connected with this Agreement or the Ethanol Plant Agreements.

 

17.                                 Notices.  Any notice to any Party to this Agreement by the other Parties shall be deemed to have been properly given if mailed to said Parties by certified mail return receipt requested to such other address or person as any Party may designate by notice to the other Parties hereunder.  A notice hereunder shall be deemed to have been given as of the date it was received.

 

If to Gavilon, at:

Gavilon, LLC

Eleven ConAgra Drive

Omaha, NE  68102-5011

Attn:       Legal Department

Phone:    (402) 889-4000

 

and if to Contractor, at:

Lakefield Farmers Elevator, LLC

102 South Main Street

Lakefield, MN  56150

Attn: Tyronne Bialas

Phone:  (507) 793-0077

 

and if to Producer, at:

Heron Lake BioEnergy, LLC

91246 390th Avenue

Heron Lake, MN  68301

Attn: Bob Ferguson

Phone: (507) 793-0077

 

18.                                 Modification.  Any amendment or modification to this Agreement shall be effective only if in writing and signed by each Party hereto.

 

19.                                 Entire Agreement.  The attached Exhibit is incorporated into and is made part of this Agreement.  This Agreement embodies the entire agreement and understanding between the Parties and supersedes all prior agreements and understandings between them relating to the subject matter hereof.

 

6

 

20.           Governing Law; Venue. This Agreement will be interpreted, construed and enforced in accordance with the procedural, substantive and other laws of the State of Nebraska without giving effect to principles and provisions thereof relating to conflict or choice of law even though one or more of the Parties is now or may do business in or become a resident of a different state.  Subject to Section 16, all disputes arising out of this Agreement shall be resolved exclusively by state or federal courts located in Omaha, Nebraska, and each of the Parties waives any objection that it may have to the bringing of an action in any such court.

 

21.           Severability.  If any term or provision of this Agreement or any application thereof shall be invalid or unenforceable, the remainder of this Agreement or any other application of such term or provision shall not be affected thereby.

 

[The Remainder of This Page Intentionally Left Blank; Signature Page Follows.]

 

7

 

IN WITNESS WHEREOF, the Parties have executed this Agreement effective as of the date and year first above written.

 

	
 
    	
GAVILON,   LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By
    	
John   W. Neppl
    
	
 
    	
Its
    	
CFO
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
LAKEFIELD   FARMERS ELEVATOR, LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By
    	
Robert   J. Ferguson
    
	
 
    	
Its
    	
Manager
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
HERON   LAKE BIOENERGY, LLC
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By
    	
Robert   J. Ferguson
    
	
 
    	
Its
    	
CEO
    

 

Corn Storage Agreement

Signature Page

 

 

EXHIBIT “A”

 

INSURANCE

 

Workers’ Compensation with statutory limits as required by the State of Minnesota.  Employers liability with limits of $1 million per accident, $1 million disease - each employee and $1 million policy limits

 

Commercial Automobile Liability Insurance - $1 Million Combined Single Limit

Policy shall include coverage for liability resulting from the operation of all owned, non-owned and hired automobiles.

Such insurance shall be on an occurrence basis.

 

All Risk Property insurance coverage for the Grain in storage under the terms of this Agreement.  All Grain shall be insured for the full market value and property insurance coverage will include, but not be limited to, perils of wind, fire, lightning, flood, theft and infestation.

 

 

EXHIBIT “B”

 

LENDER’S CONSENT AND ACKNOWLEDGMENT

 

The undersigned (“Lender”) hereby acknowledges and agrees as follows:

 

1.             Lakefield Farmers Elevator, LLC and Heron Lake BioEnergy, LLC (each, a “Counterparty”) and Gavilon, LLC (“Gavilon”) have entered into a certain Corn Storage Agreement, dated September         , 2011 (“Storage Agreement”), pursuant to which each Counterparty shall receive, store and ship Grain for Gavilon in accordance with terms set forth therein.

 

2.             Lender has been provided with a copy of the Storage Agreement.

 

3.             Lender hereby consents to Counterparty’s execution and full performance of the Storage Agreement.

 

4.             Lender acknowledges that any right, title and interest that it may hold in Counterparty’s real estate, fixtures, equipment, inventory, receivables or other forms of collateral shall not include any Grain stored by Gavilon in the Elevators (as defined in the Storage Agreement), and any security interest Lender may have in the collateral of Counterparty shall be subject and subordinate to Gavilon’s rights, and Counterparty’s obligations, under the Storage Agreement.

 

	
 
    	
LENDER
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
 
    
	
 
    	
Its:
    	
 
    
	
 
    	
Date:

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