EXHIBIT 10.1
GUARANTEE AGREEMENT
Hallmark Financial Services, Inc.
Dated as of June 21, 2005
TABLE OF CONTENTS
Page
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ARTICLE I
DEFINITIONS AND INTERPRETATION
SECTION 1.1. Definitions and Interpretation....................... 1
ARTICLE II
POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE
SECTION 2.1. Powers and Duties of the Guarantee Trustee........... 4
SECTION 2.2. Certain Rights of the Guarantee Trustee.............. 5
SECTION 2.3. Not Responsible for Recitals or Issuance of Guarantee 7
SECTION 2.4. Events of Default; Waiver............................ 7
SECTION 2.5. Events of Default; Notice............................ 8
ARTICLE III
THE GUARANTEE TRUSTEE
SECTION 3.1. The Guarantee Trustee; Eligibility................... 8
SECTION 3.2. Appointment, Removal and Resignation of the Guarantee
Trustee.............................................. 9
ARTICLE IV
GUARANTEE
SECTION 4.1. Guarantee............................................ 9
SECTION 4.2. Waiver of Notice and Demand.......................... 10
SECTION 4.3. Obligations Not Affected............................. 10
SECTION 4.4. Rights of Holders.................................... 11
SECTION 4.5. Guarantee of Payment................................. 11
SECTION 4.6. Subrogation.......................................... 11
SECTION 4.7. Independent Obligations.............................. 12
SECTION 4.8. Enforcement.......................................... 12
ARTICLE V
LIMITATION OF TRANSACTIONS; SUBORDINATION
SECTION 5.1. Limitation of Transactions........................... 12
SECTION 5.2. Ranking.............................................. 13
ARTICLE VI
TERMINATION
SECTION 6.1. Termination.......................................... 13
ARTICLE VII
INDEMNIFICATION
SECTION 7.1. Exculpation.......................................... 14
SECTION 7.2. Indemnification...................................... 14
SECTION 7.3. Compensation; Reimbursement of Expenses.............. 15
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1. Successors and Assigns............................... 16
SECTION 8.2. Amendments........................................... 16
SECTION 8.3. Notices.............................................. 16
SECTION 8.4. Benefit.............................................. 17
SECTION 8.5. Governing Law........................................ 17
SECTION 8.6. Counterparts......................................... 17
GUARANTEE AGREEMENT
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This GUARANTEE AGREEMENT (the "Guarantee"), dated as of June 21,
2005, is executed and delivered by Hallmark Financial Services, Inc., a
Nevada corporation (the "Guarantor"), and JPMorgan Chase Bank, National
Association, as trustee (the "Guarantee Trustee"), for the benefit of the
Holders (as defined herein) from time to time of the Capital Securities (as
defined herein) of Hallmark Statutory Trust I, a Delaware statutory trust
(the "Issuer").
WHEREAS, pursuant to an Amended and Restated Declaration of Trust
(the "Declaration"), dated as of June 21, 2005, among the administrators
named therein of the Issuer, Hallmark Financial Services, Inc., as sponsor,
JPMorgan Chase Bank, National Association, as Institutional Trustee, and the
Holders from time to time of undivided beneficial interests in the assets of
the Issuer, the Issuer is issuing on the date hereof securities, having an
aggregate liquidation amount of up to $30,000,000, designated the capital
securities (the "Capital Securities"); and
WHEREAS, as incentive for the Holders to purchase the Capital
Securities, the Guarantor desires irrevocably and unconditionally to agree,
to the extent set forth in this Guarantee, to pay to the Holders of Capital
Securities the Guarantee Payments (as defined herein) and to make certain
other payments on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the purchase by each Holder of
the Capital Securities, which purchase the Guarantor hereby agrees shall
benefit the Guarantor, the Guarantor executes and delivers this Guarantee
for the benefit of the Holders.
ARTICLE I
DEFINITIONS AND INTERPRETATION
SECTION 1.1. Definitions and Interpretation.
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In this Guarantee, unless the context otherwise requires:
(a) capitalized terms used in this Guarantee but not defined in
the preamble above have the respective meanings assigned to them in
this Section 1.1;
(b) a term defined anywhere in this Guarantee has the same meaning
throughout;
(c) all references to "the Guarantee" or "this Guarantee" are to
this Guarantee as modified, supplemented or amended from time to time;
(d) all references in this Guarantee to Articles and Sections are
to Articles and Sections of this Guarantee, unless otherwise specified;
(e) terms defined in the Declaration as of the date of execution
of this Guarantee have the same meanings when used in this Guarantee,
unless otherwise defined in this Guarantee or unless the context
otherwise requires; and
(f) a reference to the singular includes the plural and vice
versa.
"Beneficiaries" means any Person to whom the Issuer is or
hereafter becomes indebted or liable.
"Corporate Trust Office" means the office of the Guarantee Trustee
at which the corporate trust business of the Guarantee Trustee shall, at any
particular time, be principally administered.
"Covered Person" means any Holder of Capital Securities.
"Debentures" means the junior subordinated debentures of Hallmark
Financial Services, Inc., designated the Junior Subordinated Debt Securities
due 2035, held by the Institutional Trustee (as defined in the Declaration)
of the Issuer.
"Event of Default" has the meaning set forth in Section 2.4.
"Guarantee Payments" means the following payments or
distributions, without duplication, with respect to the Capital Securities,
to the extent not paid or made by the Issuer: (i) any accrued and unpaid
Distributions (as defined in the Declaration) which are required to be paid
on such Capital Securities to the extent the Issuer has funds available in
the Property Account (as defined in the Declaration) therefor at such time,
(ii) price payable upon the redemption of any Capital Securities to the
extent the Issuer has funds available in the Property Account therefor at
such time, with respect to any Capital Securities that are (1) called for
redemption by the Issuer, or (2) mandatorily redeemed by the Issuer, in each
case, in accordance with the terms of such Capital Securities, and (iii)
upon a voluntary or involuntary liquidation, dissolution, winding-up or
termination of the Issuer (other than in connection with the distribution of
Debentures to the Holders of the Capital Securities in exchange therefor as
provided in the Declaration), the lesser of (a) the aggregate of the
liquidation amount of the Capital Securities and all accrued and unpaid
Distributions on the Capital Securities to the date of payment, to the
extent the Issuer has funds available in the Property Account therefor at
such time, and (b) the amount of assets of the Issuer remaining available
for distribution to Holders in liquidation of the Issuer after satisfaction
of liabilities to creditors of the Issuer as required by applicable law (in
either case, the "Liquidation Distribution").
"Guarantee Trustee" means JPMorgan Chase Bank, National
Association, until a Successor Guarantee Trustee has been appointed and has
accepted such appointment pursuant to the terms of this Guarantee and
thereafter means each such Successor Guarantee Trustee.
"Holder" means any Person in whose name any Capital Securities are
registered on the books and records of the Issuer; provided, however, that,
in determining whether the holders of the requisite percentage of Capital
Securities have given any request, notice, consent or waiver hereunder,
"Holder" shall not include the Guarantor or any Affiliate of the Guarantor.
"Indemnified Person" means the Guarantee Trustee (including
in its individual capacity), any Affiliate of the Guarantee Trustee,
or any officers, directors, shareholders, members, partners, employees,
representatives, nominees, custodians or agents of the Guarantee Trustee.
"Indenture" means the Indenture, dated as of June 21, 2005,
between the Guarantor and JPMorgan Chase Bank, National Association, as
trustee, and any indenture supplemental thereto pursuant to which the
Debentures are to be issued to the Institutional Trustee of the Issuer.
"Liquidation Distribution" has the meaning set forth in the
definition of "Guarantee Payments" herein.
"Majority in liquidation amount of the Capital Securities" means
Holder(s) of outstanding Capital Securities, voting together as a class, but
separately from the holders of Common Securities, of more than 50% of the
aggregate liquidation amount (including the stated amount that would be
paid on redemption, liquidation or otherwise, plus accrued and unpaid
Distributions to, but excluding, the date upon which the voting percentages
are determined) of all Capital Securities then outstanding.
"Obligations" means any costs, expenses or liabilities (but not
including liabilities related to taxes) of the Issuer, other than
obligations of the Issuer to pay to holders of any Trust Securities the
amounts due such holders pursuant to the terms of the Trust Securities.
"Officer's Certificate" means, with respect to any Person, a
certificate signed by one Authorized Officer of such Person. Any Officer's
Certificate delivered with respect to compliance with a condition or
covenant provided for in this Guarantee shall include:
(g) a statement that each officer signing the Officer's
Certificate has read the covenant or condition and the definitions
relating thereto;
(h) a brief statement of the nature and scope of the examination
or investigation undertaken by each officer in rendering the Officer's
Certificate;
(i) a statement that each such officer has made such examination
or investigation as, in such officer's opinion, is necessary to enable
such officer to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(j) a statement as to whether, in the opinion of each such
officer, such condition or covenant has been complied with.
"Person" means a legal person, including any individual,
corporation, estate, partnership, joint venture, association, joint stock
company, limited liability company, trust, unincorporated association, or
government or any agency or political subdivision thereof, or any other
entity of whatever nature.
"Responsible Officer" means, with respect to the Guarantee
Trustee, any officer within the Corporate Trust Office of the Guarantee
Trustee with direct responsibility for the administration of any matters
relating to this Guarantee, including any vice president, any assistant vice
president, any secretary, any assistant secretary, the treasurer, any
assistant treasurer, any trust officer or other officer of the Corporate
Trust Office of the Guarantee Trustee customarily performing functions
similar to those performed by any of the above designated officers and also
means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of that officer's knowledge
of and familiarity with the particular subject.
"Successor Guarantee Trustee" means a successor Guarantee Trustee
possessing the qualifications to act as Guarantee Trustee under Section 3.1.
"Trust Securities" means the Common Securities and the Capital
Securities collectively.
ARTICLE II
POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE
SECTION 2.1. Powers and Duties of the Guarantee Trustee.
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(a) This Guarantee shall be held by the Guarantee Trustee for the
benefit of the Holders of the Capital Securities, and the Guarantee
Trustee shall not transfer this Guarantee to any Person except a Holder
of Capital Securities exercising his or her rights pursuant to Section
4.4(b) or to a Successor Guarantee Trustee on acceptance by such
Successor Guarantee Trustee of its appointment to act as Successor
Guarantee Trustee. The right, title and interest of the Guarantee
Trustee shall automatically vest in any Successor Guarantee Trustee,
and such vesting and cessation of title shall be effective whether or
not conveyancing documents have been executed and delivered pursuant to
the appointment of such Successor Guarantee Trustee.
(b) If an Event of Default actually known to a Responsible Officer
of the Guarantee Trustee has occurred and is continuing, the Guarantee
Trustee shall enforce this Guarantee for the benefit of the Holders of
the Capital Securities.
(c) The Guarantee Trustee, before the occurrence of any Event of
Default and after the curing or waiving of all Events of Default that
may have occurred, shall undertake to perform only such duties as are
specifically set forth in this Guarantee, and no implied covenants
shall be read into this Guarantee against the Guarantee Trustee. In
case an Event of Default has occurred (that has not been cured or
waived pursuant to Section 2.4(b)) and is actually known to a
Responsible Officer of the Guarantee Trustee, the Guarantee Trustee
shall exercise such of the rights and powers vested in it by this
Guarantee, and use the same degree of care and skill in its exercise
thereof, as a prudent person would exercise or use under the
circumstances in the conduct of his or her own affairs.
(d) No provision of this Guarantee shall be construed to relieve
the Guarantee Trustee from liability for its own negligent action, its
own negligent failure to act, or its own willful misconduct, except
that:
(i) prior to the occurrence of any Event of Default and after
the curing or waiving of all Events of Default that may have
occurred:
(A) the duties and obligations of the Guarantee Trustee
shall be determined solely by the express provisions of this
Guarantee, and the Guarantee Trustee shall not be liable
except for the performance of such duties and obligations as
are specifically set forth in this Guarantee, and no implied
covenants or obligations shall be read into this Guarantee
against the Guarantee Trustee; and
(B) in the absence of bad faith on the part of the
Guarantee Trustee, the Guarantee Trustee may conclusively
rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon any certificates or
opinions furnished to the Guarantee Trustee and conforming to
the requirements of this Guarantee; but in the case of any
such certificates or opinions furnished to the Guarantee
Trustee, the Guarantee Trustee shall be under a duty to
examine the same to determine whether or not on their face
they conform to the requirements of this Guarantee;
(ii) the Guarantee Trustee shall not be liable for any error
of judgment made in good faith by a Responsible Officer of the
Guarantee Trustee, unless it shall be proved that such Responsible
Officer of the Guarantee Trustee or the Guarantee Trustee was
negligent in ascertaining the pertinent facts upon which such
judgment was made;
(iii) the Guarantee Trustee shall not be liable with respect
to any action taken or omitted to be taken by it in good faith in
accordance with the written direction of the Holders of a Majority
in liquidation amount of the Capital Securities relating to the
time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee, or exercising any trust or
power conferred upon the Guarantee Trustee under this Guarantee;
and
(iv) no provision of this Guarantee shall require the
Guarantee Trustee to expend or risk its own funds or otherwise
incur personal financial liability in the performance of any of
its duties or in the exercise of any of its rights or powers, if
the Guarantee Trustee shall have reasonable grounds for believing
that the repayment of such funds is not reasonably assured to it
under the terms of this Guarantee, or security and indemnity,
reasonably satisfactory to the Guarantee Trustee, against such
risk or liability is not reasonably assured to it.
SECTION 2.2. Certain Rights of the Guarantee Trustee.
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(a) Subject to the provisions of Section 2.1:
(i) The Guarantee Trustee may conclusively rely on, and shall
be fully protected in acting or refraining from acting upon, any
resolution, certificate, statement, instrument, opinion, report,
notice, request, direction, consent, order, bond, debenture, note,
other evidence of indebtedness or other paper or document believed
by it to be genuine and to have been signed, sent or presented by
the proper party or parties.
(ii) Any direction or act of the Guarantor contemplated by
this Guarantee shall be sufficiently evidenced by an Officer's
Certificate.
(iii) Whenever, in the administration of this Guarantee, the
Guarantee Trustee shall deem it desirable that a matter be proved
or established before taking, suffering or omitting any action
hereunder, the Guarantee Trustee (unless other evidence is herein
specifically prescribed) may, in the absence of bad faith on its
part, request and conclusively rely upon an Officer's Certificate
of the Guarantor which, upon receipt of such request, shall be
promptly delivered by the Guarantor.
(iv) The Guarantee Trustee shall have no duty to see to any
recording, filing or registration of any instrument or other
writing (or any rerecording, refiling or reregistration thereof).
(v) The Guarantee Trustee may consult with counsel of its
selection, and the advice or opinion of such counsel with respect
to legal matters shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by
it hereunder in good faith and in accordance with such advice or
opinion. Such counsel may be counsel to the Guarantor or any of
its Affiliates and may include any of its employees. The Guarantee
Trustee shall have the right at any time to seek instructions
concerning the administration of this Guarantee from any court of
competent jurisdiction.
(vi) The Guarantee Trustee shall be under no obligation to
exercise any of the rights or powers vested in it by this
Guarantee at the request or direction of any Holder, unless such
Holder shall have provided to the Guarantee Trustee such security
and indemnity, reasonably satisfactory to the Guarantee Trustee,
against the costs, expenses (including attorneys' fees and
expenses and the expenses of the Guarantee Trustee's agents,
nominees or custodians) and liabilities that might be incurred by
it in complying with such request or direction, including such
reasonable advances as may be requested by the Guarantee Trustee;
provided, however, that nothing contained in this Section
2.2(a)(vi) shall be taken to relieve the Guarantee Trustee, upon
the occurrence of an Event of Default, of its obligation to
exercise the rights and powers vested in it by this Guarantee.
(vii) The Guarantee Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice,
request, direction, consent, order, bond, debenture, note, other
evidence of indebtedness or other paper or document, but the
Guarantee Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see
fit.
(viii) The Guarantee Trustee may execute any of the trusts or
powers hereunder or perform any duties hereunder either directly
or by or through agents, nominees, custodians or attorneys, and
the Guarantee Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with
due care by it hereunder.
(ix) Any action taken by the Guarantee Trustee or its agents
hereunder shall bind the Holders of the Capital Securities, and
the signature of the Guarantee Trustee or its agents alone shall
be sufficient and effective to perform any such action. No third
party shall be required to inquire as to the authority of the
Guarantee Trustee to so act or as to its compliance with any of
the terms and provisions of this Guarantee, both of which shall be
conclusively evidenced by the Guarantee Trustee's or its agent's
taking such action.
(x) Whenever in the administration of this Guarantee the
Guarantee Trustee shall deem it desirable to receive instructions
with respect to enforcing any remedy or right or taking any other
action hereunder, the Guarantee Trustee (A) may request
instructions from the Holders of a Majority in liquidation amount
of the Capital Securities, (B) may refrain from enforcing such
remedy or right or taking such other action until such
instructions are received and (C) shall be protected in
conclusively relying on or acting in accordance with such
instructions.
(xi) The Guarantee Trustee shall not be liable for any action
taken, suffered, or omitted to be taken by it in good faith and
reasonably believed by it to be authorized or within the
discretion or rights or powers conferred upon it by this
Guarantee.
(b) No provision of this Guarantee shall be deemed to impose any
duty or obligation on the Guarantee Trustee to perform any act or acts
or exercise any right, power, duty or obligation conferred or imposed
on it, in any jurisdiction in which it shall be illegal or in which the
Guarantee Trustee shall be unqualified or incompetent in accordance
with applicable law to perform any such act or acts or to exercise any
such right, power, duty or obligation. No permissive power or authority
available to the Guarantee Trustee shall be construed to be a duty.
SECTION 2.3. Not Responsible for Recitals or Issuance of Guarantee.
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The recitals contained in this Guarantee shall be taken as the
statements of the Guarantor, and the Guarantee Trustee does not assume any
responsibility for their correctness. The Guarantee Trustee makes no
representation as to the validity or sufficiency of this Guarantee.
SECTION 2.4. Events of Default; Waiver.
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(a) An Event of Default under this Guarantee will occur upon the
failure of the Guarantor to perform any of its payment or other
obligations hereunder.
(b) The Holders of a Majority in liquidation amount of the Capital
Securities may, voting or consenting as a class, on behalf of the
Holders of all of the Capital Securities, waive any past Event of
Default and its consequences. Upon such waiver, any such Event of
Default shall cease to exist, and shall be deemed to have been cured,
for every purpose of this Guarantee, but no such waiver shall extend to
any subsequent or other default or Event of Default or impair any right
consequent thereon.
SECTION 2.5. Events of Default; Notice.
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(a) The Guarantee Trustee shall, within 90 days after the
occurrence of an Event of Default, transmit by mail, first class
postage prepaid, to the Holders of the Capital Securities, notices of
all Events of Default actually known to a Responsible Officer of the
Guarantee Trustee, unless such defaults have been cured before the
giving of such notice; provided, however, that the Guarantee Trustee
shall be protected in withholding such notice if and so long as a
Responsible Officer of the Guarantee Trustee in good faith determines
that the withholding of such notice is in the interests of the Holders
of the Capital Securities.
(b) The Guarantee Trustee shall not be charged with knowledge of
any Event of Default unless the Guarantee Trustee shall have received
written notice thereof from the Guarantor or a Holder of the Capital
Securities, or a Responsible Officer of the Guarantee Trustee charged
with the administration of this Guarantee shall have actual knowledge
thereof.
ARTICLE III
THE GUARANTEE TRUSTEE
SECTION 3.1. The Guarantee Trustee; Eligibility.
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(a) There shall at all times be a Guarantee Trustee which shall:
(i) not be an Affiliate of the Guarantor; and
(ii) be a corporation or national association organized and
doing business under the laws of the United States of America or
any state or territory thereof or of the District of Columbia, or
Person authorized under such laws to exercise corporate trust
powers, having a combined capital and surplus of at least Fifty
million U.S. dollars ($50,000,000), and subject to supervision or
examination by federal, state, territorial or District of Columbia
authority. If such corporation or national association publishes
reports of condition at least annually, pursuant to law or to the
requirements of the supervising or examining authority referred to
above, then, for the purposes of this Section 3.1(a)(ii), the
combined capital and surplus of such corporation or national
association shall be deemed to be its combined capital and surplus
as set forth in its most recent report of condition so published.
(b) If at any time the Guarantee Trustee shall cease to be
eligible to so act under Section 3.1(a), the Guarantee Trustee shall
immediately resign in the manner and with the effect set forth in
Section 3.2(c).
(c) If the Guarantee Trustee has or shall acquire any "conflicting
interest' within the meaning of Section 310(b) of the Trust Indenture
Act, the Guarantee Trustee shall either eliminate such interest or
resign to the extent and in the manner provided by, and subject to,
this Guarantee.
SECTION 3.2. Appointment, Removal and Resignation of the Guarantee Trustee.
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(a) Subject to Section 3.2(b), the Guarantee Trustee may be
appointed or removed without cause at any time by the Guarantor except
during an Event of Default.
(b) The Guarantee Trustee shall not be removed in accordance with
Section 3.2(a) until a Successor Guarantee Trustee has been appointed
and has accepted such appointment by written instrument executed by
such Successor Guarantee Trustee and delivered to the Guarantor.
(c) The Guarantee Trustee appointed to office shall hold office
until a Successor Guarantee Trustee shall have been appointed or until
its removal or resignation. The Guarantee Trustee may resign from
office (without need for prior or subsequent accounting) by an
instrument in writing executed by the Guarantee Trustee and delivered
to the Guarantor, which resignation shall not take effect until a
Successor Guarantee Trustee has been appointed and has accepted such
appointment by an instrument in writing executed by such Successor
Guarantee Trustee and delivered to the Guarantor and the resigning
Guarantee Trustee.
(d) If no Successor Guarantee Trustee shall have been appointed
and accepted appointment as provided in this Section 3.2 within 60 days
after delivery of an instrument of removal or resignation, the
Guarantee Trustee resigning or being removed may petition any court of
competent jurisdiction for appointment of a Successor Guarantee
Trustee. Such court may thereupon, after prescribing such notice, if
any, as it may deem proper, appoint a Successor Guarantee Trustee.
(e) No Guarantee Trustee shall be liable for the acts or omissions
to act of any Successor Guarantee Trustee.
(f) Upon termination of this Guarantee or removal or resignation
of the Guarantee Trustee pursuant to this Section 3.2, the Guarantor
shall pay to the Guarantee Trustee all amounts owing to the Guarantee
Trustee under Sections 7.2 and 7.3 accrued to the date of such
termination, removal or resignation.
ARTICLE IV
GUARANTEE
SECTION 4.1. Guarantee.
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(a) The Guarantor irrevocably and unconditionally agrees to pay in
full to the Holders the Guarantee Payments (without duplication of
amounts theretofore paid by the Issuer), as and when due, regardless of
any defense (except as defense of payment by the Issuer), right of set-
off or counterclaim that the Issuer may have or assert. The Guarantor's
obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Guarantor to the Holders or by
causing the Issuer to pay such amounts to the Holders.
(b) The Guarantor hereby also agrees to assume any and all
Obligations of the Issuer and, in the event any such Obligation is not
so assumed, subject to the terms and conditions hereof, the Guarantor
hereby irrevocably and unconditionally guarantees to each Beneficiary
the full payment, when and as due, of any and all Obligations to such
Beneficiaries. This Guarantee is intended to be for the Beneficiaries
who have received notice hereof.
SECTION 4.2. Waiver of Notice and Demand.
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The Guarantor hereby waives notice of acceptance of this Guarantee
and of any liability to which it applies or may apply, presentment, demand
for payment, any right to require a proceeding first against the Issuer or
any other Person before proceeding against the Guarantor, protest, notice of
nonpayment, notice of dishonor, notice of redemption and all other notices
and demands.
SECTION 4.3. Obligations Not Affected.
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The obligations, covenants, agreements and duties of the Guarantor
under this Guarantee shall in no way be affected or impaired by reason of
the happening from time to time of any of the following:
(a) the release or waiver, by operation of law or otherwise, of
the performance or observance by the Issuer of any express or implied
agreement, covenant, term or condition relating to the Capital
Securities to be performed or observed by the Issuer;
(b) the extension of time for the payment by the Issuer of all or
any portion of the Distributions, the price payable upon the redemption
of the Capital Securities, the Liquidation Distribution or any other
sums payable under the terms of the Capital Securities or the extension
of time for the performance of any other obligation under, arising out
of, or in connection with, the Capital Securities (other than an
extension of time for the payment of the Distributions, the price
payable upon the redemption of the Capital Securities, the Liquidation
Distribution or other sums payable that results from the extension of
any interest payment period on the Debentures);
(c) any failure, omission, delay or lack of diligence on the part
of the Holders to enforce, assert or exercise any right, privilege,
power or remedy conferred on the Holders pursuant to the terms of the
Capital Securities, or any action on the part of the Issuer granting
indulgence or extension of any kind;
(d) the voluntary or involuntary liquidation, dissolution, sale of
any collateral, receivership, insolvency, bankruptcy, assignment for
the benefit of creditors, reorganization, arrangement, composition or
readjustment of debt of, or other similar proceedings affecting, the
Issuer or any of the assets of the Issuer;
(e) any invalidity of, or defect or deficiency in, the Capital
Securities;
(f) the settlement or compromise of any obligation guaranteed
hereby or hereby incurred; or
(g) any other circumstance whatsoever that might otherwise
constitute a legal or equitable discharge or defense of a guarantor, it
being the intent of this Section 4.3 that the obligations of the
Guarantor hereunder shall be absolute and unconditional under any and
all circumstances.
There shall be no obligation of the Holders to give notice to, or
obtain consent of, the Guarantor with respect to the happening of any of the
foregoing.
SECTION 4.4. Rights of Holders.
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(a) The Holders of a Majority in liquidation amount of the Capital
Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of this Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under this
Guarantee; provided, however, that (subject to Sections 2.1 and 2.2)
the Guarantee Trustee shall have the right to decline to follow any
such direction if the Guarantee Trustee shall determine that the
actions so directed would be unjustly prejudicial to the Holders not
taking part in such direction or if the Guarantee Trustee being advised
by legal counsel determines that the action or proceeding so directed
may not lawfully be taken or if the Guarantee Trustee in good faith by
its board of directors or trustees, executive committee or a trust
committee of directors or trustees and/or Responsible Officers shall
determine that the action or proceeding so directed would involve the
Guarantee Trustee in personal liability.
(b) Any Holder of Capital Securities may institute a legal
proceeding directly against the Guarantor to enforce the Guarantee
Trustee's rights under this Guarantee, without first instituting a
legal proceeding against the Issuer, the Guarantee Trustee or any other
Person. The Guarantor waives any right or remedy to require that any
such action be brought first against the Issuer, the Guarantee Trustee
or any other Person before so proceeding directly against the
Guarantor.
SECTION 4.5. Guarantee of Payment.
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This Guarantee creates a guarantee of payment and not of
collection.
SECTION 4.6. Subrogation.
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The Guarantor shall be subrogated to all (if any) rights of the
Holders of Capital Securities against the Issuer in respect of any amounts
paid to such Holders by the Guarantor under this Guarantee; provided,
however, that the Guarantor shall not (except to the extent required by
applicable provisions of law) be entitled to enforce or exercise any right
that it may acquire by way of subrogation or any indemnity, reimbursement or
other agreement, in all cases as a result of payment under this Guarantee,
if, after giving effect to any such payment, any amounts are due and unpaid
under this Guarantee. If any amount shall be paid to the Guarantor in
violation of the preceding sentence, the Guarantor agrees to hold such
amount in trust for the Holders and to pay over such amount to the Holders.
SECTION 4.7. Independent Obligations.
------------------------
The Guarantor acknowledges that its obligations hereunder are
independent of the obligations of the Issuer with respect to the Capital
Securities and that the Guarantor shall be liable as principal and as debtor
hereunder to make Guarantee Payments pursuant to the terms of this Guarantee
notwithstanding the occurrence of any event referred to in subsections (a)
through (g), inclusive, of Section 4.3 hereof.
SECTION 4.8. Enforcement.
------------
A Beneficiary may enforce the Obligations of the Guarantor
contained in Section 4.1(b) directly against the Guarantor, and the
Guarantor waives any right or remedy to require that any action be brought
against the Issuer or any other person or entity before proceeding against
the Guarantor.
The Guarantor shall be subrogated to all rights (if any) of any
Beneficiary against the Issuer in respect of any amounts paid to the
Beneficiaries by the Guarantor under this Guarantee; provided, however, that
the Guarantor shall not (except to the extent required by applicable
provisions of law) be entitled to enforce or exercise any rights that it may
acquire by way of subrogation or any indemnity, reimbursement or other
agreement, in all cases as a result of payment under this Guarantee, if,
after giving effect to such payment, any amounts are due and unpaid under
this Guarantee.
ARTICLE V
LIMITATION OF TRANSACTIONS; SUBORDINATION
SECTION 5.1. Limitation of Transactions.
---------------------------
So long as any Capital Securities remain outstanding, if (a) there
shall have occurred and be continuing an Event of Default or (b) the
Guarantor shall have selected an Extension Period as provided in the
Declaration and such period, or any extension thereof, shall have commenced
and be continuing, then the Guarantor may not (x) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Guarantor's capital stock or
(y) make any payment of principal of or interest or premium, if any, on or
repay, repurchase or redeem any debt securities of the Guarantor that rank
pari passu in all respects with or junior in interest to the Debentures
(other than (i) payments under this Guarantee, (ii) repurchases, redemptions
or other acquisitions of shares of capital stock of the Guarantor (A) in
connection with any employment contract, benefit plan or other similar
arrangement with or for the benefit of one or more employees, officers,
directors, or consultants, (B) in connection with a dividend reinvestment or
stockholder stock purchase plan or (C) in connection with the issuance of
capital stock of the Guarantor (or securities convertible into or
exercisable for such capital stock), as consideration in an acquisition
transaction entered into prior to the occurrence of the Event of Default or
the applicable Extension Period, (iii) as a result of any exchange,
reclassification, combination or conversion of any class or series of the
Guarantor's capital stock (or any capital stock of a subsidiary of the
Guarantor) for any class or series of the Guarantor's capital stock or of
any class or series of the Guarantor's indebtedness for any class or series
of the Guarantor's capital stock, (iv) the purchase of fractional interests
in shares of the Guarantor's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged, (v) any declaration of a dividend in connection with any
stockholder's rights plan, or the issuance of rights, stock or other
property under any stockholder's rights plan, or the redemption or
repurchase of rights pursuant thereto, or (vi) any dividend in the form of
stock, warrants, options or other rights where the dividend stock or the
stock issuable upon exercise of such warrants, options or other rights is
the same stock as that on which the dividend is being paid or ranks pari
passu with or junior to such stock).
SECTION 5.2. Ranking.
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This Guarantee will constitute an unsecured obligation of the
Guarantor and will rank subordinate and junior in right of payment to all
present and future Senior Indebtedness (as defined in the Indenture) of the
Guarantor. By their acceptance thereof, each Holder of Capital Securities
agrees to the foregoing provisions of this Guarantee and the other terms set
forth herein.
The right of the Guarantor to participate in any distribution of
assets of any of its subsidiaries upon any such subsidiary's liquidation or
reorganization or otherwise is subject to the prior claims of creditors of
that subsidiary, except to the extent the Guarantor may itself be recognized
as a creditor of that subsidiary. Accordingly, the Guarantor's obligations
under this Guarantee will be effectively subordinated to all existing and
future liabilities of the Guarantor's subsidiaries, and claimants should
look only to the assets of the Guarantor for payments thereunder. This
Guarantee does not limit the incurrence or issuance of other secured or
unsecured debt of the Guarantor, including Senior Indebtedness of the
Guarantor, under any indenture or agreement that the Guarantor may enter
into in the future or otherwise.
ARTICLE VI
TERMINATION
SECTION 6.1. Termination.
------------
This Guarantee shall terminate as to the Capital Securities (i)
upon full payment of the price payable upon redemption of all Capital
Securities then outstanding, (ii) upon the distribution of all of the
Debentures to the Holders of all of the Capital Securities or (iii) upon
full payment of the amounts payable in accordance with the Declaration upon
dissolution of the Issuer. This Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any Holder of Capital
Securities must restore payment of any sums paid under the Capital
Securities or under this Guarantee.
ARTICLE VII
INDEMNIFICATION
SECTION 7.1. Exculpation.
------------
(a) No Indemnified Person shall be liable, responsible or
accountable in damages or otherwise to the Guarantor or any Covered
Person for any loss, damage or claim incurred by reason of any act or
omission of such Indemnified Person in good faith in accordance with
this Guarantee and in a manner that such Indemnified Person reasonably
believed to be within the scope of the authority conferred on such
Indemnified Person by this Guarantee or by law, except that an
Indemnified Person shall be liable for any such loss, damage or claim
incurred by reason of such Indemnified Person's negligence or willful
misconduct with respect to such acts or omissions.
(b) An Indemnified Person shall be fully protected in relying in
good faith upon the records of the Issuer or the Guarantor and upon
such information, opinions, reports or statements presented to the
Issuer or the Guarantor by any Person as to matters the Indemnified
Person reasonably believes are within such other Person's professional
or expert competence and who, if selected by such Indemnified Person,
has been selected with reasonable care by such Indemnified Person,
including information, opinions, reports or statements as to the value
and amount of the assets, liabilities, profits, losses, or any other
facts pertinent to the existence and amount of assets from which
Distributions to Holders of Capital Securities might properly be paid.
SECTION 7.2. Indemnification.
----------------
(a) The Guarantor agrees to indemnify each Indemnified Person for,
and to hold each Indemnified Person harmless against, any and all loss,
liability, damage, claim or expense incurred without negligence or
willful misconduct on the part of the Indemnified Person, arising out
of or in connection with the acceptance or administration of the trust
or trusts hereunder, including but not limited to the costs and
expenses (including reasonable legal fees and expenses) of the
Indemnified Person defending itself against, or investigating, any
claim or liability in connection with the exercise or performance of
any of the Indemnified Person's powers or duties hereunder. The
obligation to indemnify as set forth in this Section 7.2 shall survive
the resignation or removal of the Guarantee Trustee and the termination
of this Guarantee.
(b) Promptly after receipt by an Indemnified Person under this
Section 7.2 of notice of the commencement of any action, such
Indemnified Person will, if a claim in respect thereof is to be made
against the Guarantor under this Section 7.2, notify the Guarantor in
writing of the commencement thereof; but the failure so to notify the
Guarantor (i) will not relieve the Guarantor from liability under
paragraph (a) above unless and to the extent that the Guarantor did not
otherwise learn of such action and such failure results in the
forfeiture by the Guarantor of substantial rights and defenses and (ii)
will not, in any event, relieve the Guarantor from any obligations to
any Indemnified Person other than the indemnification obligation
provided in paragraph (a) above. The Guarantor shall be entitled to
appoint counsel of the Guarantor's choice at the Guarantor's expense
to represent the Indemnified Person in any action for which
indemnification is sought (in which case the Guarantor shall not
thereafter be responsible for the fees and expenses of any separate
counsel retained by the Indemnified Person or Persons except as set
forth below); provided, however, that such counsel shall be reasonably
satisfactory to the Indemnified Person. Notwithstanding the Guarantor's
election to appoint counsel to represent the Indemnified Person in any
action, the Indemnified Person shall have the right to employ separate
counsel (including local counsel), and the Guarantor shall bear the
reasonable fees, costs and expenses of such separate counsel (and local
counsel), if (i) the use of counsel chosen by the Guarantor to
represent the Indemnified Person would present such counsel with a
conflict of interest, (ii) the actual or potential defendants in, or
targets of, any such action include both the Indemnified Person and the
Guarantor and the Indemnified Person shall have reasonably concluded
that there may be legal defenses available to it and/or other
Indemnified Persons which are different from or additional to those
available to the Guarantor, (iii) the Guarantor shall not have employed
counsel reasonably satisfactory to the Indemnified Person to represent
the Indemnified Person within a reasonable time after notice of the
institution of such action or (iv) the Guarantor shall authorize the
Indemnified Person to employ separate counsel at the expense of the
Guarantor. The Guarantor will not, without the prior written consent of
the Indemnified Persons, settle or compromise or consent to the entry
of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not the Indemnified
Persons are actual or potential parties to such claim or action) unless
such settlement, compromise or consent includes an unconditional
release of each Indemnified Person from all liability arising out of
such claim, action, suit or proceeding.
SECTION 7.3. Compensation; Reimbursement of Expenses.
----------------------------------------
The Guarantor agrees:
(a) to pay to the Guarantee Trustee from time to time such
compensation for all services rendered by it hereunder as the parties
shall agree to from time to time (which compensation shall not be
limited by any provision of law in regard to the compensation of a
trustee of an express trust); and
(b) except as otherwise expressly provided herein, to reimburse
the Guarantee Trustee upon request for all reasonable expenses,
disbursements and advances incurred or made by it in accordance with
any provision of this Guarantee (including the reasonable compensation
and the expenses and disbursements of its agents and counsel), except
any such expense, disbursement or advance as may be attributable to the
negligence or willful misconduct of the Guarantee Trustee.
The provisions of this Section 7.3 shall survive the resignation
or removal of the Guarantee Trustee and the termination of this Guarantee.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1. Successors and Assigns.
-----------------------
All guarantees and agreements contained in this Guarantee shall
bind the successors, assigns, receivers, trustees and representatives of the
Guarantor and shall inure to the benefit of the Holders of the Capital
Securities then outstanding. Except in connection with any merger or
consolidation of the Guarantor with or into another entity or any sale,
transfer or lease of the Guarantor's assets or capital stock to another
entity, in each case to the extent permitted under the Indenture, the
Guarantor may not assign its rights or delegate its obligations under this
Guarantee without the prior approval of the Holders of a Majority in
liquidation amount of the Capital Securities.
SECTION 8.2. Amendments.
-----------
Except with respect to any changes that do not adversely affect
the powers, preferences, rights or interests of Holders of the Capital
Securities in any material respect (in which case no consent of Holders will
be required), this Guarantee may be amended only with the prior approval of
the Holders of a Majority in liquidation amount of the Capital Securities.
The provisions of the Declaration with respect to amendments thereof shall
apply equally with respect to amendments of the Guarantee.
SECTION 8.3. Notices.
--------
All notices provided for in this Guarantee shall be in writing,
duly signed by the party giving such notice, and shall be delivered,
telecopied or mailed by first class mail, as follows:
(a) If given to the Guarantee Trustee, at the Guarantee Trustee's
mailing address set forth below (or such other address as the Guarantee
Trustee may give notice of to the Holders of the Capital Securities):
JPMorgan Chase Bank, National Association
600 Travis Street, 50th Floor
Houston, Texas 77002
Attention: Worldwide Securities Services
Hallmark Statutory Trust I
Telecopy: (713) 216-2101
Telephone: (713) 216-4181
(b) If given to the Guarantor, at the Guarantor's mailing address
set forth below (or such other address as the Guarantor may give notice
of to the Holders of the Capital Securities and to the Guarantee
Trustee):
Hallmark Financial Services, Inc.
777 Main Street, Suite 1000
Fort Worth, TX 76102
Attention: Mark J. Morrison
Telecopy: 817-348-1815
Telephone: 817-348-1728
(c) If given to any Holder of the Capital Securities, at the
address set forth on the books and records of the Issuer.
All such notices shall be deemed to have been given when received
in person, telecopied with receipt confirmed, or mailed by first class mail,
postage prepaid, except that if a notice or other document is refused
delivery or cannot be delivered because of a changed address of which no
notice was given, such notice or other document shall be deemed to have been
delivered on the date of such refusal or inability to deliver.
SECTION 8.4. Benefit.
--------
This Guarantee is solely for the benefit of the Holders of the
Capital Securities and, subject to Section 2.1(a), is not separately
transferable from the Capital Securities.
SECTION 8.5. Governing Law.
--------------
THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS
PRINCIPLES THEREOF.
SECTION 8.6. Counterparts.
-------------
This Guarantee may contain more than one counterpart of the
signature page and this Guarantee may be executed by the affixing of the
signature of the Guarantor and the Guarantee Trustee to any of such
counterpart signature pages. All of such counterpart signature pages shall
be read as though one, and they shall have the same force and effect as
though all of the signers had signed a single signature page.
THIS GUARANTEE is executed as of the day and year first above
written.
Hallmark Financial Services, Inc.,
as Guarantor
By: ______________________________
Name: ____________________________
Title: ___________________________
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION,
as Guarantee Trustee
By: ______________________________
Name: ____________________________
Title: ___________________________