SETTLEMENTAGREEMENT AND MUTUAL RELEASE

 

 

This Settlement Agreement and Mutual Release (“AGREEMENT”) is entered by and between American Spectrum Realty, Inc., American Spectrum Dunham Properties LLC and American Spectrum Realty Operating Partnership LP, on the one hand, and Dunham & Associates Holdings, Inc., Asset Managers, Inc., D&A Daily Mortgage Fund III, L.P., D&A Semi-Annual Mortgage Fund III, L.P. and D&A Intermediate-Term Mortgage Fund III, L.P., on the other hand, as follows:

The following definitions shall apply to this AGREEMENT:

(a)      The term “AMERICAN SPECTRUM” shall collectively refer to American Spectrum Realty, Inc., a Maryland corporation, American Spectrum Dunham Properties LLC, a Delaware limited liability company, and American Spectrum Realty Operating Partnership LP, a limited partnership, each of which has its principal place of business at 2041 Fountain View, Suite 750, Houston, Texas 77057.

 

(b)      The term “DUNHAM”  shall  collectively  refer  to  Dunham & Associates Holdings, Inc., a California corporation, Asset Managers, Inc., a California corporation, D&A Daily Mortgage Fund III, L.P., a California limited partnership (the “Daily  Fund”), D&A Semi-Annual Mortgage Fund III, L.P., a California limited partnership (the “Semi-Annual Fund”) and D&A Intermediate-Term Mortgage Fund III, L.P., a California limited partnership (the “Intermediate Fund,” and together with the Daily Fund and Semi-Annual Fund, the “DUNHAM FUNDS”), each of which has its principal place of business at 10251 Vista Sorrento Parkway, Suite 200, San Diego, California 92121.

 

(c)      The terms “PARTY” or “the PARTIES” shall refer to AMERICAN SPECTRUM and DUNHAM, and each of their current or former partners, agents, representatives, employees, attorneys, insurers, successors-in-interest, predecessors-in-interest, parent corporations, subsidiary corporations, affiliated companies, officers, directors and shareholders, and each of them, collectively.

(d)      The term “EFFECTIVE DATE” shall refer to the date that the AGREEMENT is executed by the PARTIES.

(e)      The term “CONTRIBUTION AGREEMENT” shall refer to Contribution Agreement and Joint Escrow Instructions by and among Asset Managers, Inc., D&A Daily Mortgage Fund III, L.P., D&A Semi-Annual Mortgage Fund III, L.P., D&A Intermediate-Term Mortgage Fund III, L.P., American Spectrum Realty, Inc., American Spectrum Dunham Properties LLC and American Spectrum Operating Partnership, L.P. dated December __, 2013.

(f)       The term “LOAN AGREEMENT” shall refer to the letter agreement between Dunham & Associates Holdings, Inc. and American Spectrum Realty, Inc. and American Spectrum Dunham Properties LLC dated December __, 2013.

 

(g)       The term “ACTION” shall refer to the claims by AMERICAN SPECTRUM against DUNHAM for Breach of Contract, Fraud, Tortious Interference, Lender Liability and Control, Breach of Fiduciary Duty and Conspiracy, relating to DUNHAM’s obligations under the CONTRIBUTION AGREEMENT AND LOAN AGREEMENT, filed by AMERICAN SPECTRUM in the District Court of Harris County, Texas, entitled American Spectrum et al. v. Dunham & Associates Holdings, Inc. et al., Case No. 2014-24363.

 

The PARTIES agree to amend certain agreements between them and resolve the ACTION as follows:

1.         AMERICAN SPECTRUM and DUNHAM agree to amend the CONTRIBUTION AGREEMENT and LOAN AGREEMENT as follows:

 

a.

DUNHAM FUNDS will repurchase the 14 Projects (as defined in Section 1.26 of the CONTRIBUTION AGREEMENT) shown in the Return Stock column on Exhibit A, attached hereto, effective the later of two (2) weeks from mutual execution of this AGREEMENT or June 30, 2014 (the “Closing Date”) for the same Net Contribution Value (as defined in Section 1.20 of the CONTRIBUTION AGREEMENT) as they were originally sold by tendering Senior Preferred Stock (as defined in Section 3.2.2 of the CONTRIBUTION AGREEMENT) it received pursuant to the CONTRIBUTION AGREEMENT equal to the same amount (collectively, the “Exchange Preferred Stock”).  Each Project shall be returned free and clear of all liens (other than rights with respect to the Project incurred in the ordinary course of business, such as leases) or otherwise in the same condition as when the Project was contributed.  DUNHAM acknowledges and agrees that, upon the Closing Date, AMERICAN SPECTRUM shall sell and convey to DUNHAM and DUNHAM shall accept the Projects “as is, where is, with all faults,” except to the extent expressly provided otherwise in this AGREEMENT.  With respect to the Project commonly referred to as “Castaic,” which is currently in escrow, DUNHAM agrees to review and approve (such approval shall not be unreasonably withheld) the Purchase and Sale Agreement and Joint Escrow Instructions dated May 16, 2014 by and between CV Communities, LLC and American Spectrum Dunham Properties LLC and Integrity Capital Castaic LLC (the “Castaic Purchase and Sale Agreement”) by the Closing Date provided the terms of such sale are market and assume the obligations of AMERICAN SPECTRUM under the Castaic Purchase and Sale Agreement after the Closing Date, provided such approval is granted by DUNHAM.  If and only when the Castaic transaction closes, DUNHAM agrees to pay $12,500 to AMERICAN SPECTRUM for payment of legal fees incurred with respect to the Castaic Purchase and Sale Agreement.

b.

DUNHAM shall retain Warrants (as defined in the LOAN AGREEMENT) to purchase up to 300,000 shares of the common stock of American Spectrum Realty, Inc. at any time prior to December 31, 2018 at a price per share of two dollars ($2.00) for providing and arranging the advance to AMERICAN SPECTRUM of $3,000,000 on December __, 2013 (the “Tranche 1 Loan”).  If the Tranche 1 Loan is paid off prior to January 1, 2017, DUNHAM will have the later of thirty (30) days from the date of repayment or the ninetieth (90th) day (following the date of repayment) in which AMERICAN SPECTRUM common stock has continually traded on the NYSE (currently trading is halted) or other exchange or over-the-counter market where the common stock trades and is quoted on a daily basis to exercise the Warrants or they will expire.  Other than the early expiration date discussed in the preceding sentence, the other terms of such Warrants remains unchanged and shall be governed by the terms of the Warrant to Purchase Common Stock of American Spectrum Realty, Inc.

 

 

c.

Lender under the Tranche 1 Loan (“Lender”) shall release the Project commonly referred to as “San Jacinto” from the lien of the applicable deed of trust on the condition that AMERICAN SPECTRUM grants to lender first liens on substitute real property commonly referred to as “IB Hotel” and “Calimesa” to secure repayment of the Tranche 1 Note (as defined in the LOAN AGREEMENT) in place of the released Project.  If and when “IB Hotel” and/or “Calimesa” are sold after the Closing Date to a person unrelated to American Spectrum (excluding the granting of any deed of trust or mortgage to secure the repayment of any financing or refinancing), American Spectrum shall pay Lender at the closing of such sale(s) the net proceeds of such sale(s) in repayment of the Tranche 1 Loan and Lender shall release the first lien on the subject property being sold.  To the extent that the net proceeds from the second of such sale is insufficient to pay off the original principal amount of $3,000,000 and all accrued and unpaid interest on the Tranche 1 Loan, then American Spectrum will be obligated to pay the remaining balance to the Lender as a condition of the release of the first lien on the subject property being sold.  The Tranche 1 Loan Secured Promissory Note and LOAN AGREEMENT are hereby amended to delete Borrower’s right to substitute “Substitute Property,” which right shall be null and void after the Closing Date.

d.	The LOAN AGREEMENT is amended to delete all references to the advance to AMERICAN SPECTRUM of an additional $3,000,000 (the “Tranche 2 Loan”) and corresponding note and that the PARTIES acknowledge and agree that DUNHAM is under no obligation to arrange or advance the Tranche 2 Loan.

e.	Sections 3.2.2(a) and (b) and Section 3.5 of the CONTRIBUTION AGREEMENT is amended in its entirety as set forth in Exhibit B, attached hereto and incorporated each by reference.

f.	The Articles Supplementary for 8% Cumulative Preferred Stock, Series B of American Spectrum Realty, Inc. are amended and restated as set forth in Exhibit C, attached hereto (“Amended and Restated Articles”).

g.

All rents, all operating expenses/accruals, security deposits, etc. will be prorated as normal as of close of escrow.  Insurance and property taxes must be current.  Standard title insurance (same form and coverage as originally issued) to be paid for by seller.  Any unpaid dividends on existing Senior Preferred Stock pursuant to the Amended and Restated Articles and any unpaid interest on the Tranche 1 Loan will be paid on the Closing Date.  AMERICAN SPECTRUM agrees to cooperate in taking such actions as may be necessary to prefect good title in the DUNHAM FUNDS with respect to the Projects to be repurchased by the DUNHAM FUNDS, including assignment of the membership interest relating to Nevada Treasure RV Resort LLC.

 

 

 

 

11.       The PARTIES may not waive any provision of this AGREEMENT except by a written agreement that all of the PARTIES have signed.  A waiver of any provision of this AGREEMENT will not constitute a waiver of any other provision. The PARTIES may modify or amend this AGREEMENT only by a written agreement that all of the PARTIES have signed.

12.       This AGREEMENT constitutes the entire agreement of the parties with respect to the matters covered by this AGREEMENT and the ACTION, and no promise made by any PARTY or by an officer, attorney, or agent of any PARTY that is not expressly contained in this AGREEMENT shall be binding or valid.  Additionally, any modification of any provision of this AGREEMENT, to be effective must be in writing and signed by the PARTIES.

13.       The PARTIES may execute this AGREEMENT in one or more identical counterparts, each of which constitutes an original, and all of which constitute one and the same AGREEMENT.  A facsimile or copy of this AGREEMENT executed by the PARTIES, whether complete or in counterparts, will constitute sufficient evidence of the executed original of this AGREEMENT for all purposes.

14.       The PARTIES agree that this AGREEMENT shall be binding upon their parent corporations, subsidiary corporations, affiliated companies, related entities, representatives, principals, officers, directors, shareholders, employees, members, contractors, successors-in-interest, predecessors-in-interest, assigns, agents and estates.

15.       In the event that any of the terms, conditions or provisions of this AGREEMENT is held to be illegal, unenforceable or invalid by any court of competent jurisdiction, the legality, validity and enforceability of the remaining terms, conditions or provisions shall not be affected.

16.       The PARTIES agree that this AGREEMENT effects the settlement of claims which are denied and contested, and that this AGREEMENT is done entirely for the purpose of compromise and settlement of disputed claims.

17.       EXCEPT FOR THE RIGHTS AND OBLIGATIONS CREATED BY THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS CONTINUING UNDER THE CONTRIBUTION AGREEMENT, LOAN AGREEMENT, TRANCHE 1 LOAN AND AMENDED AND RESTATED ARTICLES AND ALL RELATED DOCUMENTS RELATED TO THE FOREGOING, UPON EXECUTION OF THIS AGREEMENT BY THE PARTIES, AMERICAN SPECTRUM, ON BEHALF OF ITSELF, AND EACH OF AMERICAN SPECTRUM’S PRESENT AND FORMER PRINCIPALS, AGENTS, OFFICERS, DIRECTORS, SHAREHOLDERS, MEMBERS, EMPLOYEES, HEIRS, ASSIGNS, ATTORNEYS, REPRESENTATIVES, LIMITED PARTNERS, PARENTS, SUBSIDIARIES, RELATED ENTITIES, AFFILIATED CORPORATIONS, PREDECESSOR AND SUCCESSOR CORPORATIONS AND EACH OF THEM, RELEASES AND DISCHARGES DUNHAM, AND EACH OF ITS PRESENT AND FORMER PRINCIPALS, AGENTS, OFFICERS, DIRECTORS, SHAREHOLDERS, MEMBERS, EMPLOYEES, HEIRS, ASSIGNS, ATTORNEYS, REPRESENTATIVES, LIMITED PARTNERS, PARENTS, SUBSIDIARIES, RELATED ENTITIES, AFFILIATE CORPORATIONS, PREDECESSOR AND SUCCESSOR CORPORATIONS AND EACH OF THEM, FROM ALL CLAIMS THAT WERE OR COULD HAVE BEEN ASSERTED IN THE ACTION EXPRESSLY (INCLUDING BUT NOT LIMITED TO ANY CLAIM THAT DUNHAM NOT FUNDING THE $3 MILLION TRANCHE 2 LOAN ADVERSELY EFFECTED AMERICAN SPECTRUM IN ANY MANNER), FROM THE BEGINNING OF TIME THROUGH THE EFFECTIVE DATE OF THIS AGREEMENT.

 

 

18.       EXCEPT FOR THE RIGHTS AND OBLIGATIONS CREATED BY THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS CONTINUING UNDER THE CONTRIBUTION AGREEMENT, LOAN AGREEMENT, TRANCHE 1 LOAN AND AMENDED AND RESTATED ARTICLES AND ALL RELATED DOCUMENTS RELATED TO THE FOREGOING, UPON EXECUTION OF THIS AGREEMENT BY THE PARTIES, DUNHAM, ON BEHALF OF ITSELF, AND EACH OF DUNHAM’S PRESENT AND FORMER PRINCIPALS, AGENTS, OFFICERS, DIRECTORS, SHAREHOLDERS, MEMBERS, EMPLOYEES, HEIRS, ASSIGNS, ATTORNEYS, REPRESENTATIVES, LIMITED PARTNERS, PARENTS, SUBSIDIARIES, RELATED ENTITIES, AFFILIATE CORPORATIONS, PREDECESSOR AND SUCCESSOR CORPORATIONS AND EACH OF THEM, HEREBY RELEASES AND DISCHARGES AMERICAN SPECTRUM, AND EACH OF ITS PRESENT AND FORMER PRINCIPALS, AGENTS, OFFICERS, DIRECTORS, SHAREHOLDERS, MEMBERS, EMPLOYEES, HEIRS, ASSIGNS, ATTORNEYS, REPRESENTATIVES, LIMITED PARTNERS, PARENT, SUBSIDIARIES, RELATED ENTITIES, AFFILIATE CORPORATIONS, PREDECESSOR AND SUCCESSOR CORPORATIONS AND EACH OF THEM, FROM ALL CLAIMS THAT WERE OR COULD HAVE BEEN ASSERTED BY DUNHAM ARISING OUT OF A DEFAULT BY AMERICAN SPECTRUM THROUGH THE DATE HEREOF.

19.       THE PARTIES AGREE AND ACKNOWLEDGE THE RELEASES SET FORTH IN THIS AGREEMENT ARE A GENERAL RELEASE. THE PARTIES EXPRESSLY WAIVE, AND ASSUME THE RISK OF, ANY AND ALL CLAIMS FOR DAMAGES AGAINST ANY OF THE OTHER PARTIES ARISING OUT OF, BASED UPON OR RELATING TO THE ACTION WHICH EXIST AS OF THIS DATE WHICH THE PARTIES DO NOT KNOW OR SUSPECT TO EXIST, WHETHER THROUGH IGNORANCE, OVERSIGHT, ERROR, NEGLIGENCE, OR OTHERWISE WHICH, IF KNOWN, WOULD MATERIALLY AFFECT THEIR DECISION TO ENTER INTO THIS AGREEMENT.  THE PARTIES FURTHER AGREE THAT IF THE LAW OR FACTS WITH RESPECT TO WHICH THIS AGREEMENT IS EXECUTED ARE FOUND TO BE OTHER THAN, OR DIFFERENT FROM, THE LAW AND FACTS NOW BELIEVED BY THE PARTIES TO BE TRUE, THE PARTIES EXPRESSLY ACCEPT AND ASSUME THE RISK OF SUCH POSSIBLE DIFFERENCES IN LAW OR FACTS, AND AGREE THAT THIS AGREEMENT SHALL BE AND REMAIN EFFECTIVE NOTWITHSTANDING ANY SUCH DIFFERENCES.   THE PARTIES AGREE AND ACKNOWLEDGE THAT ALL RIGHTS UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE ARE HEREBY EXPRESSLY WAIVED.  SECTION 1542 PROVIDES AS FOLLOWS:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

 

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EXHIBIT A

 

 

 

 

EXHIBIT B

Section 3.2.2         Senior Preferred Stock.

(a)           Senior Preferred Stock Dividend.  As set forth in more detail in the Articles Supplementary, the Senior Preferred Stock shall earn a dividend calculated like simple interest as follows: (i) at the rate of eight percent (8%) per annum on the then outstanding Net Contribution Value for the period commencing on the Closing Date and terminating on December 31, 2014 (the “Initial Interest Period”), and (ii) thereafter until the Senior Preferred Stock has been redeemed in full, at the rate of twelve percent (12%) per annum on the then outstanding Net Contribution Value.  The accrued and outstanding dividend shall be paid monthly on the first business day of each calendar month commencing January 1, 2014 (each, a “Dividend Payment”); provided, however, that in connection with each Dividend Payment attributable to the Initial Interest Period, only fifty percent (50%) of the accrued dividend payable with respect each Dividend Payment shall be payable in connection with the applicable Dividend Payment and the balance of such dividend shall accrue and be paid in one lump sum payment on December 1, 2015, which accrued amount shall earn simple interest at the same rate as the then applicable dividend rate of the Senior Preferred Stock.  All Dividend Payments shall be paid electronically via wire transfer of immediately available funds to account(s) designated by Dunham.  Notwithstanding the foregoing, from and after April 1, 2014 no dividends shall accrue and be payable on the Senior Preferred Stock tendered to the Corporation on the “Closing Date” under the Settlement Agreement (collectively, the "Exchange Preferred Stock").  For the avoidance of doubt, all dividends accrued and deferred on all shares of Series B through March 31, 2014 shall be payable when and as due.

(b)           Redemption of Senior Preferred Stock.  As set forth more fully in the Amended and Restated Articles Supplementary, American Spectrum Realty shall be obligated to redeem the Senior Preferred Stock issued to each of the Dunham Funds, pro rata in accordance with the Senior Preferred Stock held by each of the Dunham Funds, as follows: (i) an aggregate of Three Million Ten Thousand Six Hundred and Eighty Six Dollars ($3,010,686) on December 1, 2014 in consideration of approximately fifteen percent (15%) of the Senior Preferred Stock, (ii) an aggregate of Seven Million Twenty Four Thousand Nine Hundred and Thirty Four Dollars ($7,024,934) on June 1, 2015 in consideration of thirty-five percent (35%) of the Senior Preferred Stock and (iii) on December 1, 2015 an amount equal to the Net Contribution Value less the amounts theretofore paid in consideration of the redemption of Senior Preferred Stock in consideration of the balance of the unredeemed Senior Preferred Stock (each a "Redemption Payment").  Upon redemption of any of the Senior Preferred Stock (A) the accrued but unpaid dividend with respect to such redeemed Senior Preferred Stock shall also be paid to the holder of the Senior Preferred Stock being so redeemed and (B) the Net Contribution Value shall be reduced for purposes of determining the dividend to be earned thereon.  Notwithstanding the foregoing, the accrued and unpaid dividend on the Senior Preferred Stock that would not otherwise be payable until December 1, 2015 shall continue to accrue and earn interest as herein provided and be payable on December 1, 2015.  Any Sale Payments (herein below defined) paid with respect to the Senior Preferred Stock pursuant to this Agreement (x) shall reduce the Net Contribution Value by the amount of such Sale Payment when such Sale Payment is made and (y) shall be credited to the next Redemption Payment required to be made by American Spectrum Realty.  Participation Payments (herein below defined) shall not reduce the Net Contribution Value or be credited to any Redemption Payment.  All Redemption Payments, Sale Payments and Participation Payments shall be paid electronically via wire transfer of immediately available funds to account(s) designated by Dunham.

 

 

Section 3.5             Board Observer Rights.  For so long as Dunham Funds hold (and continue to hold) any of the Senior Preferred Stock and either an Event of Default has occurred under the Amended and Restated Articles Supplementary or “Regulatory Event” (as defined below) has occurred, American Spectrum Realty shall permit a designee of Dunham Funds, reasonably approved by the Board of Directors (the "Observer"), to attend all meetings of its Board of Directors (whether in person, telephonic or other) (other than meetings of a committee of the Board of Directors, unless other observers of the Board of Directors are permitted to attend such meetings) in a nonvoting observer capacity and, in this respect, shall provide the Observer, concurrently with the members of the Board of Directors, with copies of all notices, minutes, consents, and other materials that it provided to such members (other than in meetings of a committee of the Board of Directors, unless other observers of the Board of Directors are provided such materials); provided, however, that the Observer agrees to hold in confidence and trust all information so provided to it or learned by it in connection with its rights hereunder; it being understood and agreed that, notwithstanding the foregoing, the Observer shall be permitted to use or disclose such information to Dunham Funds and its affiliates in connection with managing its investment in American Spectrum Realty; and provided, further, that American Spectrum Realty reserves the right to withhold any information or to exclude the Observer from any meeting or portion thereof if (i) access to such information or attendance at such meeting could adversely affect the attorney-client privilege between American Spectrum Realty and its counsel; or (ii) access to such information or attendance at such meeting could result in a conflict of interest between Dunham Funds or its representative and American Spectrum Realty.  If requested, the Observer shall execute a standard non-disclosure agreement with respect to the information disclosed in any such board meeting.  The initial Observer shall be Jeffrey Dunham, who may be replaced at any time by unanimous consent of the Dunham Funds, provided, however, that the replacement of Jeffrey Dunham by anybody other than Denise Iverson shall require the consent of American Spectrum Realty (which may not be unreasonably withheld).  A “Regulatory Event” shall mean a governmental regulatory investigation or action with respect to American Spectrum, one of its officers, or American Spectrum’s failure to timely file any SEC Reports (other than Forms 3, 4, and 5, and the quarterly report on Form 10-Q for the quarter ended March 31, 2014) and fails to make such filing within thirty (30) days of the due date for such filing required to be filed by American Spectrum from and after June 30, 2014.  To the extent that American Spectrum has filed and is current on all SEC Reports (other than Forms 3, 4, and 5, and the quarterly report on Form 10-Q for the quarter ended March 31, 2014), the board observer rights will cease going forward unless and until American Spectrum fails to timely file any SEC Reports (and fails to make such filing within thirty (30) days of the due date for such filing) in the future.

 

 

EXHIBIT C