Document:

Execution
      Copy

    

    

    

    SECOND
      SUPPLEMENTAL INDENTURE

    

    KH
      FUNDING COMPANY, a Maryland corporation,

    as
      obligor 

    

    

    Series
      3 Senior Secured Investment Debt Securities

    

    $220,000,000.00

    

    and

    

    Series
      4 Subordinated Unsecured Investment Debt Securities

    

    $30,000,000.00

    

    WELLS
      FARGO BANK, National Association, a National Banking
      Association,

    as
      trustee

    

    

    Dated
      as of August 11, 2006

    

    

    Supplementing
      the Indenture

    Dated
      as of August 2, 2004

    as
      supplemented and amended by a 

    First
      Supplemental Indenture 

    Dated
      as of July 1, 2005

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
 

    TABLE
      OF
      CONTENTS

     

    

    
      	
              ARTICLE
                I. DEFINITIONS AND INCORPORATION BY REFERENCE

            	
              1

            
	 	
              Section
                1.5

            	
              Recitals;
                Duties of Trustee

            	
              2

            
	 	
              Section
                1.6

            	
              Relationship
                to Original Indenture and Additional Supplemental
                Indentures

            	
              2

            
	 	 
	
              ARTICLE
                II. THE SECURITIES

            	
              2

            
	 	
              Section
                2.1(B)

            	
              Amount;
                Accounts; Interest; Maturity - Additional Securities

            	
              2

            
	 	 
	
              ARTICLE
                XI. MISCELLANEOUS

            	
              3

            
	 	
              Section
                11.17

            	
              Incorporation
                of Second Supplemental Indenture into Indenture

            	
              3

            

    

     

     

     

     

    
      
        
        

      

      
        -
          i
          -

        
          

        

      

      
        
        

      

    

     

     

    

    CROSS-REFERENCE
      TABLE*

     

    

      
        	 Trust
                Indenture Act	
                Indenture

              
	 Section	Section
	 	 
	
                305(a)(1)
                  

              	
                7.10

              
	
                  (a)(2)
                  

              	
                7.10

              
	
                  (a)(3)
                  

              	
                NA

              
	
                  (a)(4)
                  

              	
                NA

              
	
                  (a)(5)
                  

              	
                NA

              
	
                  (b)

              	
                7.8,
                  7.10

              
	
                  (c)
                  

              	
                NA

              
	
                311(a)
                  

              	
                7.11

              
	
                  (b)
                  

              	
                7.11

              
	
                  (c)
                  

              	
                NA

              
	
                312(a)
                  

              	
                2.5

              
	
                  (b)
                  

              	
                11.3

              
	
                  (c)
                  

              	
                11.3

              
	
                313(a)
                  

              	
                7.6

              
	
                  (b)(1)
                  

              	
                NA

              
	
                  (b)(2)
                  

              	
                7.6

              
	
                  (c)
                  

              	
                7.6,
                  11.2

              
	
                  (d)
                  

              	
                7.6

              
	
                314(a)
                  

              	
                4.3,
                  4.4, 11.2

              
	
                  (b)
                  

              	
                4.4

              
	
                  (c)(1)
                  

              	
                11.4

              
	
                  (c)(2)
                  

              	
                11.4

              
	
                  (c)(3)
                  

              	
                NA

              
	
                  (d)
                  

              	
                NA

              
	
                  (e)
                  

              	
                11.5

              
	
                  (f)
                  

              	
                NA

              
	
                315(a)
                  

              	
                7.1(b)

              
	
                  (b)
                  

              	
                7.5,
                  11.2

              
	
                  (c)
                  

              	
                7.1(a)

              
	
                  (d)
                  

              	
                7.1(c)

              
	
                  (e)
                  

              	
                6.11

              
	
                316(a)(last
                  sentence) 

              	
                2.10

              
	
                  (a)(1)(A)
                  

              	
                6.5

              
	
                  (a)(1)(B)
                  

              	
                6.4

              
	
                  (a)(2)
                  

              	
                NA

              
	
                  (b)
                  

              	
                6.7

              
	
                  (c)
                  

              	
                NA

              
	
                317(a)(1)
                  

              	
                6.8

              
	
                  (a)(2)
                  

              	
                6.9

              
	
                  (b)
                  

              	
                2.4

              
	
                318(a)
                  

              	
                11.1

              

      

    

     

    NA
      means
      not applicable

    *
      This
      Cross Reference Table is not part of the Indenture

    

    

    
      
        
        

      

      
        -
          ii
          -

        
          

        

      

      
        
        

      

    

    

     

    THIS
      SECOND SUPPLEMENTAL INDENTURE dated as of August 11, 2006 (the “Second
      Supplemental Indenture”) between KH Funding Company, a Maryland corporation, as
      issuer (the “Company”), and Wells Fargo Bank, National Association, a national
      banking association, as trustee (the “Trustee”), supplements and amends the
      Indenture dated as of August 2, 2004 (the “Indenture”), as supplemented and
      amended by a First Supplemental Indenture dated as of July 1, 2005 (the “First
      Supplemental Indenture”) (the Indenture, as supplemented and amended by the
      First Supplemental Indenture, is hereafter referred to as the ( “Original
      Indenture”).

    

    WITNESSETH
      THAT:

    

    WHEREAS,
      the Company and the Trustee have heretofore executed and delivered the Original
      Indenture to provide for the issuance of the Company’s debt securities to be
      issued in one or more series;

    

    WHEREAS,
      Section 2.1 of the Original Indenture provides, among other things, that the
      Company may issue, from time to time in accordance with the provisions of the
      Original Indenture, Additional Securities;

    

    WHEREAS,
      the Company desires to provide for the issuance of Additional Securities and
      to
      set forth the terms that will be applicable thereto;

    

    WHEREAS,
      all action on the part of the Company necessary to authorize the issuance of
      the
      Additional Securities under the Original Indenture and this Second Supplemental
      Indenture has been duly taken; and

    

    WHEREAS,
      all acts and things necessary to make the Additional Securities, when executed
      by the Company and authenticated and delivered by the Trustee as provided in
      the
      Original Indenture, the legal, valid and binding obligations of the Company,
      and
      to constitute these presents a valid and binding supplemental indenture
      according to its terms and binding on the Company, have been done and performed,
      and the Company in the exercise of the legal right and power vested in it,
      executes this Second Supplemental Indenture and proposes to create, execute,
      issue and deliver the Additional Securities. 

    

    NOW,
      THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH: 

    

    That,
      in
      order to establish the terms and provisions of, and to authorize the
      authentication and delivery of, the Additional Securities, the Company and
      the
      Trustee agree to supplement the Original Indenture as follows for the benefit
      of
      each other and for the equal and ratable benefit of the Holders of the
      Additional Securities issued pursuant to the Company's registration statement
      on
      Form SB-2 declared effective by the Securities and Exchange Commission on or
      about August 11, 2006:

    

    

    ARTICLE
      I.

    DEFINITIONS
      AND INCORPORATION

    BY
      REFERENCE

    

    Article
      I
      is supplemented by deleting Sections 1.5 and 1.6 and substituting the following
      in their stead:

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
 

    
      Section
        1.5. Recitals; Duties of Trustee. 

      

      The
        recitals contained in this Second Supplemental Indenture are made by the
        Company
        and not by the Trustee; and all of the provisions contained in the Original
        Indenture in respect of the rights, privileges, immunities, powers and duties
        of
        the Trustee shall be applicable in respect hereof as fully and with like
        effect
        as if set forth herein in full.

      

      Section
        1.6. Relationship to Original Indenture and Additional Supplemental
        Indentures.

      

      (a)    The
        Original Indenture and this Second Supplemental Indenture shall be read,
        taken,
        and construed as one and the same instrument. However, in the event of a
        conflict or a difference between the provisions of the Original Indenture
        and
        this Second Supplemental Indenture, the provisions of this Second Supplemental
        Indenture shall control. The provisions hereof shall remain in effect and
        shall
        be deemed a part of the Original Indenture for so long as the Investment
        Debt
        Securities remain outstanding. Except as amended and supplemented hereby,
        the
        provisions of the Original Indenture shall remain in full force and
        effect.

      

      (b)    Additional
        indentures supplemental may be executed and delivered in accordance with
        the
        provisions of the Original Indenture. Nothing herein contained shall be deemed
        to relieve the Company from its obligations under any such indentures
        supplemental for so long as each remains in effect and, except as expressly
        provided in the Original Indenture, no provision of any such indentures
        supplemental shall be deemed to relieve the Company from its respective
        obligations under this Second Supplemental Indenture for so long as it remains
        in effect.

    

     

    

    ARTICLE
      II.

    THE
      SECURITIES

     

    Article
      II is supplemented to amend and restate Section 2.1(A) as follows:

    

    Section
      2.1(A). Amount; Accounts; Interest; Maturity - Additional
      Securities.

    

    The
      aggregate principal amount of Additional Securities that may be authenticated
      and delivered under this Indenture is $150,000,000 (the “Additional
      Securities”). The
      Additional Securities may be subject to notations, legends or endorsements
      required by law, applicable rules and regulations and agreements to which the
      Company is subject or usage. 

     

    The
      Company shall issue the Additional Securities as provided in Section 2.12 of
      the
      Original Indenture. The record of beneficial ownership of the Additional
      Securities shall be maintained and updated by the Company through the
      establishment and maintenance of Accounts. Each Additional Security shall be
      in
      such denominations as may be designated from time to time by the Company but
      in
      no event in an original denomination less than $5,000. This minimum amount
      may
      be increased or decreased from time to time by the Company and the Company,
      in
      its sole discretion, may accept a lesser amount from any Holder. The Investment
      Debt Securities shall be Fixed Term Notes and Demand Notes. The Fixed Term
      Notes
      shall have maturity dates of one year, three years and five years. The Demand
      Notes shall have demand periods of one day or thirty days. 

     

    Each
      Additional Security shall bear interest from and commencing on its Interest
      Accrual Date at such rate of interest as the Company shall determine from time
      to time; provided, however, that (i) the Series 3 Senior Secured Security One
      Year Fixed Term Notes, Three Year Fixed Term Notes and Five Year Fixed Term
      Notes shall pay interest at an annual interest rate fixed at the time of
      issuance with the initial interest rates being 7.25%, 7.60% and 7.85%
      respectively, (ii) the Series 3 Senior Secured Security One Day Demand Notes
      and
      the Thirty Day Demand Notes shall pay interest at a variable annual interest
      rate with the initial rates being 6.00% and 6.25% respectively, and (iii) the
      Series 4 Subordinated Unsecured Security One Year Fixed Term Notes, Three Year
      Fixed Term Notes and Five Year Fixed Term Notes shall pay interest at an annual
      interest rate fixed at the time of issuance with the initial interest rates
      being 8.00%, 8.25% and 8.75% respectively. The Company may change the interest
      rates from time to time by filing a supplement to the Company's prospectus.
      

     

     

    
      
        
        

      

      
        -
          2 -

        
          

        

      

      
        
        

      

    

     

     

    Interest
      on an Investment Debt Security will compound daily and will have interest paid,
      at the election of the Holder, either (i) monthly, quarterly, semi-annually
      or
      annually, or (ii) accrued and credited as principal to the Holder's Account.
      To
      the extent any applicable interest payment date is not a Business Day, then
      interest shall be paid instead on the next succeeding Business Day. All interest
      payments on the Investment Debt Securities shall be approved prior to payment
      by
      the Company's Treasurer. 

    

    The
      Company will give each Holder of a Fixed Term Note (existing as of the
      applicable Maturity Record Date) a written notice at least seven days prior
      to
      the Maturity Date of the Fixed Term Note held by such Holder reminding such
      Holder of the pending maturity of the Fixed Term Note and noticing the Holder
      of
      the Company's intention to repay, or if the Company does not intend to repay
      the
      Fixed Term Note, reminding the Holder that they must choose to either (i) redeem
      the Fixed Term Note, (ii) extend the Fixed Term Note, or (iii) transition the
      Fixed Term Note into a new Account. If the Company gives notice to a Holder
      of
      the Company's intention to repay a Fixed Term Note at maturity, no interest
      will
      accrue after the Maturity Date for such Fixed Term Note if payment is timely
      made. Otherwise, if a Holder requests repayment within seven days after the
      Maturity Date, the Company will pay interest on the Fixed Term Note during
      the
      period after the Fixed Term Note's Maturity Date and prior to redemption at
      the
      rate being paid on such Fixed Term Note immediately prior to its
      maturity.

    

    The
      terms
      and provisions contained in the Investment Debt Securities shall constitute,
      and
      are hereby expressly made a part of, this Second Supplemental Indenture and,
      to
      the extent applicable, the Company and the Trustee, by their execution and
      delivery of this Second Supplemental Indenture, and the Holders by accepting
      the
      Investment Debt Securities, expressly agree to such terms and provisions and
      to
      be bound thereby. In case of a conflict, the provisions of this Second
      Supplemental Indenture shall control. 

    

    ARTICLE
      XI

    MISCELLANEOUS

    

    Article
      XI is supplemented to add new Section 11.17 as follows:

    

    Section
      11.17. Incorporation of Second Supplemental Indenture into Indenture.

    

    This
      Second Supplemental Indenture is executed by the Company and the Trustee
      pursuant to the provisions of Section 2.1 of the Original Indenture, and the
      terms and conditions hereof shall be deemed to be a part thereof for all
      purposes upon the effectiveness of this Second Supplemental Indenture. The
      Original Indenture, as amended and supplemented by the First Supplemental
      Indenture and the Second Supplemental Indenture, is in all respects hereby
      adopted, ratified and confirmed.

    

    [Remainder
      of Page Intentionally Left Blank]

    
 

    
      
        
        

      

      
        -
          3 -

        
          

        

      

      
        
        

      

    

     

    

    SIGNATURES

    

    

    IN
      WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
      Indenture to be duly executed as of the day and year first written
      above.

    
 

    
      	 	 	 	 
	 ATTEST:	 	 	 KH
              FUNDING
              COMPANY
	 	 	 	 
	/s/ James
              E.
              Parker	 	 	/s/ Robert
              L.
              Harris
	
              

            	 	 	
              
Robert
              L. Harris
President
	 	 	 	 

    

     

    

      
        	 	 	 	 
	 ATTEST	 	 	WELLS
                FARGO BANK,
                NATIONAL ASSOCIATION
	 	 	 	as Trustee
	 	 	 	 
	/s/ Nedine
                A.
                Pelesi	 	 	Robert
                L.
                Reynolds
	
                

              	 	 	
                
Robert
                L. Reynolds
Vice President
	 	 	 	 

      

       

      

        [SIGNATURE
          PAGE TO SECOND SUPPLEMENTAL INDENTURE]DEPOSIT
      ACCOUNT CONTROL AGREEMENT

    

    This
      Agreement is entered into as of October 17, 2006, among KH Funding Company
      (“Company”), Wells Fargo Bank, N.A. (“the Secured Party”), solely in its
      capacity as trustee under the Indenture dated as of August 2, 2004, as amended
      (the “Indenture”) between the Company and the Secured Party, and Bank of
      America, N.A. (“Bank”) with respect to the following:

    

    A.    Bank
      has
      agreed to establish and maintain for Company deposit account number ____________
      (the “Account”). 

    

    B.    Company
      has assigned to Secured Party a security interest in the Account and in checks
      and other payment instructions (“Checks”) deposited in the Account.

    

    C.    Company,
      Secured Party and Bank are entering into this Agreement to evidence Secured
      Party’s security interest in the Account and such Checks and to provide for the
      disposition of net proceeds of Checks deposited in the Account. 

    

    Accordingly,
      Company, Secured Party and Bank agree as follows:
      

    

    1.    (a)    This
      Agreement evidences Secured Party’s control over the Account. Notwithstanding
      anything to the contrary in the agreement between Bank and Company governing
      the
      Account, Bank will comply with instructions originated by Secured Party as
      set
      forth herein directing the disposition of funds in the Account without further
      consent of the Company. 

    

    (b)    Company
      represents and warrants to Secured Party and Bank that it has not assigned
      or
      granted a security interest in the Account or any Check deposited in the
      Account, except to Secured Party. 

    

    (c)    Company
      will not permit the Account to become subject to any other pledge, assignment,
      lien, charge or encumbrance of any kind, other than Secured Party’s security
      interest referred to herein. 

    

    (d)    The
      Account may receive merchant card deposits and chargebacks. Company acknowledges
      and agrees that during the Activation Period (defined below), chargebacks will
      be blocked from debiting the Account. Company further acknowledges and agrees
      that, prior to the Activation Period, it will arrange with its merchant card
      vendor for chargebacks to be directed towards an unblocked account.

    

    2.    During
      the Activation Period (as defined below), Bank shall prevent Company from making
      any withdrawals from the Account. Prior to the Activation Period, Company may
      operate and transact business through the Account in its normal fashion,
      including making withdrawals from the Account, but the Company covenants herein
      to Secured Party it will not close the Account. Bank shall have no liability
      in
      the event Company breaches this covenant to Secured Party. 

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
 

    Company
      and Secured Party acknowledge and agree that Bank may debit the Account for
      any
      ACH credit entries that may have been originated by Company but that have not
      settled at the time of Bank’s receipt of the Notice (defined below) or for any
      entries, whether credit or debit, that are subsequently returned thereafter.
      

    

    Following
      the commencement of the Activation Period, and continuing on each Business
      Day
      thereafter, Bank shall transfer all collected and available balances in the
      Account to Secured Party at its account specified in the Notice (as defined
      below). The “Activation Period” means the period which commences within a
      reasonable period of time not to exceed two Business Days following Bank’s
      receipt of a written notice from Secured Party in the form of Exhibit A (the
      “Notice”). A “Business Day” is each day except Saturdays, Sundays and Bank
      holidays. Funds are not available if, in the reasonable determination of Bank,
      they are subject to a hold, dispute or legal process preventing their
      withdrawal. 

    

    3.    Bank
      agrees it shall not offset, charge, deduct or otherwise withdraw funds from
      the
      Account, except as permitted by section 4, until it has been advised in writing
      by Secured Party that all of Company’s obligations that are secured by the
      Checks and the Account are paid in full. Secured Party shall notify Bank
      promptly in writing upon payment in full of Company’s obligations by means of a
      letter substantially in the form of the Termination Notice (defined below).
      

    

    4.    Bank
      is
      permitted to charge the Account at any time, whether before or after the
      Activation Period commences:

    

    (a)    for
      its
      fees and charges relating to the Account or associated with this Agreement;
      and

    

    (b)    the
      face
      amount of a Check, draft, money order, instrument, wire transfer of funds,
      automated clearing house entry, credit from a merchant card transaction, other
      electronic transfer of funds or other item (i) deposited in or credited to
      the Account and returned unpaid or otherwise uncollected or subject to an
      adjustment entry, whether for insufficient funds or for any other reason and
      without regard to the timeliness of the return or adjustment or the occurrence
      or timeliness of any other person’s notice of nonpayment or adjustment,
      (ii) subject to a claim against the Bank for breach of transfer,
      presentment, encoding, retention, any other warranty or chargeback under any
      regulations or operating circulars of the Federal Reserve Board, clearing house
      rules, the Uniform Commercial Code or other applicable law or customary bank
      practice, (iii) for a merchant card transaction, against which a
      contractual demand for chargeback has been made; or (iv) any adjustments or
      corrections of any posting or encoding errors.

     

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

     

     

    To
      the
      extent any such charges set forth in this section 4 occur after the commencement
      of the Activation Period, the charges so incurred shall be subject to the
      indemnification provisions of section 8 below. 

    

    5.    (a)    If
      the
      balances in the Account are not sufficient to compensate Bank for any fees
      or
      charges due Bank in connection with the Account or this Agreement, Company
      agrees to pay Bank on demand the amount due Bank. Company will have breached
      this Agreement if it has not paid Bank, within five days after such demand,
      the
      amount due Bank. 

    

    (b)    If
      the
      balances in the Account are not sufficient to compensate Bank for any returned
      Check, Company agrees to pay Bank on demand the amount due Bank. If Company
      fails to so pay Bank immediately upon demand, Secured Party agrees to pay Bank
      within five days after Bank’s demand to Secured Party to pay the amount received
      by Secured Party with respect to such returned Check not to exceed the value
      of
      assets then held by Secured Party as trustee under the terms of the Indenture.
      The failure to so pay Bank shall constitute a breach of this Agreement.

    

    (c)    Company
      hereby authorizes Bank, without prior notice, from time to time to debit any
      other account Company may have with Bank for the amount or amounts due Bank
      under subsection 5(a) or 5(b). 

    

    6.    (a)    Upon
      request of the Secured Party, the Bank will send information regarding deposits
      to the Account to the address specified below for Company or as otherwise
      specified in writing by Company to Bank, and will send a copy of each such
      deposit advice to the address specified below for Secured Party. 

    

    (b)    Upon
      request of the Secured Party, the Bank will provide Secured Party with a
      duplicate of each monthly statement for the Account. 

    

    7.    (a)    Bank
      will
      not be liable to Company or Secured Party for any expense, claim, loss, damage
      or cost (“Damages”) arising out of or relating to its performance under this
      Agreement other than those Damages which result directly from its acts or
      omissions constituting negligence or intentional misconduct. 

    

    (b)    In
      no
      event will Bank be liable for any special, indirect, exemplary or consequential
      damages, including but not limited to lost profits. 

    

    (c)    Bank
      will
      be excused from failing to act or delay in acting, and no such failure to act
      or
      delay shall constitute a breach of this Agreement or otherwise give rise to
      any
      liability of Bank, if (i) such failure or delay is caused by circumstances
      beyond Bank’s reasonable control, including but not limited to legal constraint,
      emergency conditions, action or inaction of governmental, civil or military
      authority, fire, strike, lockout or other labor dispute, war, riot, theft,
      flood, earthquake or other natural disaster, breakdown of public or private
      or
      common carrier communications or transmission facilities, equipment failure,
      or
      negligence or default of Company or Secured Party or (ii) such failure or delay
      resulted from Bank’s reasonable belief that the action would have violated any
      guideline, rule or regulation of any governmental authority. 

     

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    
 

    (d)    Bank
      shall have no duty to inquire or determine whether Company’s obligations to
      Secured Party are in default or whether Secured Party is entitled to provide
      the
      Notice to Bank. Bank may rely on notices and communications it believes in
      good
      faith to be genuine and given by the appropriate party. 

    

    (e)    Notwithstanding
      any of the other provisions in this agreement, in the event of the commencement
      of a case pursuant to Title 11, United States Code, filed by or against Company,
      or in the event of the commencement of any similar case under then applicable
      federal or state law providing for the relief of debtors or the protection
      of
      creditors by or against Company, Bank may act as Bank deems necessary to comply
      with all applicable provisions of governing statutes and shall not be in
      violation of this Agreement as a result.

    

    (f)    Bank
      shall be permitted to comply with any writ, levy order or other similar judicial
      or regulatory order or process concerning the Account or any Check and shall
      not
      be in violation of this Agreement for so doing.

    

    8.    (a)    Company
      and Secured Party shall jointly and severally indemnify Bank against, and hold
      it harmless from, any and all liabilities, claims, costs, expenses and damages
      of any nature (including but not limited to allocated costs of staff counsel,
      other reasonable attorney’s fees and any fees and expenses) in any way arising
      out of or relating to disputes or legal actions concerning Bank’s provision of
      the services described in this Agreement. This section does not apply to any
      cost or damage attributable to the gross negligence or intentional misconduct
      of
      Bank. Company’s and Secured Party’s obligations under this section shall survive
      termination of this Agreement. 

    

    (b)    In
      no
      event will Secured Party be liable for any special, indirect, exemplary or
      consequential damages, including but not limited to lost profits. Any obligation
      of Secured Party under this Agreement, including specifically sections 8 and
      9,
      is limited to the assets held by it as trustee under the Indenture at the time
      of the claim for indemnification is made against Secured Party.

     

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    
 

    9.    Company
      and Secured Party shall jointly and severally pay to Bank, upon receipt of
      Bank’s invoice, all costs, expenses and attorneys’ fees (including allocated
      costs for in-house legal services) incurred by Bank in connection with the
      enforcement of this Agreement and any instrument or agreement required
      hereunder, including but not limited to any such costs, expenses and fees
      arising out of the resolution of any conflict, dispute, motion regarding
      entitlement to rights or rights of action, or other action to enforce Bank’s
      rights in a case arising under Title 11, United States Code. Company agrees
      to
      pay Bank, upon receipt of Bank’s invoice, all costs, expenses and attorneys’
fees (including allocated costs for in-house legal services) incurred by Bank
      in
      the preparation and administration of this Agreement (including any amendments
      hereto or instruments or agreements required hereunder). 

    

    10.    Termination
      and Assignment of this Agreement shall be as follows:

    

    (a)    Secured
      Party may terminate this Agreement by providing notice substantially in the
      form
      of Attachment I (“Termination Notice”) to Company and Bank that all of Company’s
      obligations which are secured by Checks and the Account are paid in full.
      Secured Party may also terminate or it may assign this Agreement upon 30 days’
prior written notice to Company and Bank. Bank may terminate this Agreement
      upon
      30 days’ prior written notice to Company and Secured Party. Company may not
      terminate this Agreement except with the written consent of Secured Party and
      upon prior written notice to Bank.

    

    (b)    Notwithstanding
      subsection 10(a), Bank may terminate this Agreement at any time by written
      notice to Company and Secured Party if either Company or Secured Party breaches
      any of the terms of this Agreement, or any other agreement with
      Bank.

    

    11.   (a)    Each
      party represents and warrants to the other parties that (i) this Agreement
      constitutes its duly authorized, legal, valid, binding and enforceable
      obligation; (ii) the performance of its obligations under this Agreement and
      the
      consummation of the transactions contemplated hereunder will not (A) constitute
      or result in a breach of its certificate or articles of incorporation, by-laws
      or partnership agreement, as applicable, or the provisions of any material
      contract to which it is a party or by which it is bound or (B) result in the
      violation of any law, regulation, judgment, decree or governmental order
      applicable to it; and (iii) all approvals and authorizations required to permit
      the execution, delivery, performance and consummation of this Agreement and
      the
      transactions contemplated hereunder have been obtained.

    

    (b)    The
      parties each agree that it shall be deemed to make and renew each representation
      and warranty in subsection 11(a) on and as of each day on which Company uses
      the
      services set forth in this Agreement.

     

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    
 

    12.   (a)    This
      Agreement may be amended only by a writing signed by Company, Secured Party
      and
      Bank; except that Bank’s charges are subject to change by Bank upon 30 days’
prior written notice to Company.

    

    (b)    This
      Agreement may be executed in counterparts; all such counterparts shall
      constitute but one and the same agreement.

    

    (c)    This
      Agreement controls in the event of any conflict between this Agreement and
      any
      other document or written or oral statement. This Agreement supersedes all
      prior
      understandings, writings, proposals, representations and communications, oral
      or
      written, of any party relating to the subject matter hereof.

    

    (d)    This
      Agreement shall be interpreted in accordance with Maryland law without reference
      to that state’s principles of conflicts of law.

    

    13.    Any
      written notice or other written communication to be given under this Agreement
      shall be addressed to each party at its address set forth on the signature
      page
      of this Agreement or to such other address as a party may specify in writing.
      Except as otherwise expressly provided herein, any such notice shall be
      effective upon receipt.

    

    14.    Nothing
      contained in the Agreement shall create any agency, fiduciary, joint venture
      or
      partnership relationship between Bank and Company or Secured Party. Company
      and
      Secured Party agree that nothing contained in this Agreement, nor any course
      of
      dealing among the parties to this Agreement, shall constitute a commitment
      or
      other obligation on the part of Bank to extend credit to Company or Secured
      Party.

    

    15.    Each
      of
      the Company, Secured Party and the Bank respectively agrees that it shall not
      cite or refer to this Agreement as a precedent in any negotiation of any other
      Deposit Account Control Agreement to which the Company, Secured Party or any
      of
      its affiliates and the Bank shall be party.

    

    

    

    [remainder
      of page intentionally left blank]

     

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    
 

    In
      Witness Whereof, the parties hereto have executed this Agreement by their duly
      authorized officers as of the day and year first above written.

     

    
      	 KH FUNDING
              COMPANY	 	 	Address for notices:
	 (“Company”)	 	 	10801 Lockwood Drive
	 	 	 	Suite
              370
	By:
              /s/ Robert L. Harris	 	 	Silver
              Spring,
              Maryland 20901
	
              
Name:
              Robert L. Harris	 	 	
              Attn: Robert L. Harris

                        President

            
	Title: 
              President and Chief Executive Officer 	 	 	 

    

    
 

    
       

      
        	WELLS FARGO BANK, N.A., solely
                in
                its	 	 	Address for notices:
	capacity as Trustee (“Secured
                Party”)	 	 	213 Court Street
	 	 	 	Suite
                703
	By:
                /s/ Robert L. Reynolds	 	 	Middletown,
                Connecticut 06457
	
                
Name:
                Robert L. Reynolds	 	 	
                Attn: Robert L. Reynolds

                 

              
	Title: 
Vice
                President	 	 	 

      

      

        
           

          
            	BANK OF AMERICA, N.A.
                    (“Bank”)	 	 	Address for notices:
	 	 	 	_________________________________
	By:
                    /s/ Connie Bales	 	 	_________________________________
	
                    
Name:
                    Connie Bales	 	 	
                    _________________________________

                    _________________________________

                  
	Title: 
                    Assistant Vice President	 	 	 

          

          
 

        

      

    

    

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

     

     

    EXHIBIT
      A

    DEPOSIT
      ACCOUNT CONTROL AGREEMENT

     

     

    [Letterhead
      of Secured Party]

    

    

    To:    Bank
      of
      America, N.A.

         [Address]

     

           Re:    [Name
      of
      Company]

                      Account
      No. ____________________________ 

     

    Ladies
      and Gentlemen:

    

    Reference
      is made to the Deposit Account Control Agreement dated ____________ (the
“Agreement”) among [Company Name], us and you regarding the above-described
      account (the “Account”). In accordance with section 2 of the Agreement, we
      hereby give you notice of our exercise of control of the Account and we hereby
      instruct you to transfer funds to our account as follows:

    
       

       

      
        	
                Bank
                  Name:

              	
                ________________________

              
	
                Bank
                  Address:

              	
                ________________________

              
	
                ABA
                  No.:

              	
                ________________________

              
	
                Account
                  Name:

              	
                ________________________

              
	
                Account
                  No.:

              	
                ________________________

              
	
                Beneficiary’s
                  Name:

              	
                ________________________

              

      

      
 

    

    

      
        	 	
                Very
                  truly yours,

              
	 	 
	 	
                ________________________________

              
	 	
                as
                  Secured Party

              
	 	 
	 	
                By:
                  _____________________________

              
	 	
                Name:
                  ___________________________

              
	 	
                Title:
                  ____________________________

              

      

    

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
 

    ATTACHMENT
      I

    DEPOSIT
      ACCOUNT CONTROL AGREEMENT

    

    [Letterhead
      of Secured Party]

    

    ________________,
      200_

    

    

    Bank
      of
      America, National Association

    _____________________________

    _____________________________

    Attn:
      _________________________

    

    Re: Termination
      of Deposit Account Control Agreement

    

    Ladies
      and Gentlemen:

    

    Reference
      is made to that certain _____________________________ dated as of ________,
      2000_ (as amended, supplemented, amended and restated or otherwise modified
      from
      time to time, the “Agreement”
among
      you, ______________ (the “Company”), and us as (“Secured Party”). You are hereby
      notified that the Agreement is terminated with respect to the undersigned,
      and
      you have no further obligations to the undersigned thereunder. Notwithstanding
      any previous instructions to you, you are hereby instructed to accept all future
      directions with respect to the Account from the Company. This notice terminates
      any obligations you may have to the undersigned with respect to the
      Account.

     

    
      	 	 	 
	 	 Very truly yours,
	 	 
	 	WELLS
              FARGO BANK,
              N.A.
	 	as Secured Party
	 
 	 
 	 
 
	 	By:  	 
	 	
              
Name:
	 	Title: 

    

     

    
      
        	 	 
	ACKNOWLEDGED AND AGREED:
	BANK
                OF AMERICA,
                N. A.
	as Bank
	 
 	 
 
	By:  	 
	 	
                
                  

                

                Name:

                Title:

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