Environmental Indemnity Agreement

ENVIRONMENTAL INDEMNITY AGREEMENT


THIS ENVIRONMENTAL INDEMNITY AGREEMENT (this "AGREEMENT"), made as of November 9, 2006, Quaker Fabric Corporation of Fall River, a Massachusetts corporation (the "BORROWER"), Quaker Textile Corporation, a Massachusetts corporation ("QUAKER TEXTILE"), Quaker Fabric Mexico, S.A. de C.V., a Mexico corporation ("QUAKER MEXICO"), and Quaker Fabric Corporation, a Delaware corporation (the "PARENT", and together with Quaker Textile and Quaker Mexico, the "GUARANTORS") (each of the Borrower and Guarantors being sometimes referred to herein as an "INDEMNITOR" and collectively, as the "INDEMNITORS"), to GB Merchant Partners, LLC, as Administrative Agent and 1903 Debt Fund, LP and the other financial institutions from time to time party thereto (collectively, the "LENDERS" and the Administrative Agent, collectively, together with their officers, directors, employees, shareholders, members, successors and assigns, the "INDEMNITEES").


RECITALS


WHEREAS, Indemnitor is the owner and/or lessee of the Real Property described on Exhibit A attached hereto, together with all improvements dated thereon (the "REAL PROPERTY") and has the exclusive rights to manage, control and operate the Real Property;


WHEREAS, pursuant to that certain Term Loan Agreement, dated as of the date hereof, by and among the Borrower, the Parent, the Administrative Agent, the Lenders and the Indemnitees (as amended, modified and supplemented and in effect from time to time, the "CREDIT AGREEMENT", all capitalized terms used herein without definitions shall have the respective meanings ascribed to such terms in the Credit Agreement), at the request of the Borrower, the Indemnitees agreed to make loans (the "Term Loans") to the Borrower, which Term Loans are secured, in part, by those certain mortgages, dated as of the date hereof, by the Borrower to the Indemnitees encumbering the Real Property (as the same may be amended, modified, supplemented or restated and in effect from time to time, collectively, the "SECURITY INSTRUMENTS") ;


WHEREAS, the Borrower has disclosed to the Indemnitees the existence of certain Environmental Conditions at the Real Property; and


WHEREAS, the Indemnitees are unwilling to make the Term Loans unless the Indemnitors indemnify the Indemnitees against liabilities arising under Environmental Laws (as herein defined), relating to those disclosed and any undisclosed Environmental Conditions at the Real Property.


NOW, THEREFORE, in consideration of the making of the Term Loans by the Indemnitees and the covenants, agreements, representations and warranties set forth in this Agreement and the Term Loan Agreement, the parties hereby covenant, agree, represent and warrant as follows:


1. Defined Terms. Unless the context otherwise requires, capitalized terms used but not otherwise defined herein shall have the meanings provided therefore in the Term Loan Agreement, and the following terms shall have the following meanings:


"ENVIRONMENTAL CLAIM" means any notice, notification, claim, administrative, regulatory or judicial action, suit, judgment, demand, decree or other communication by any Person or Governmental Authority requiring, alleging or asserting liability with respect to the Indemnitors or the Real Property pursuant to Environmental Laws, whether for damages, contribution, indemnification, cost recovery, compensation, injunctive relief, investigatory, assessment, monitoring, response, remedial or cleanup costs, damages to natural resources, real property damage, personal injuries, fines or penalties arising out of, based on or resulting from or related to (a) the presence or alleged presence, Use, Release or threatened Release of any Hazardous Substances originating, at or from, migrating to or from or otherwise affecting, the Real Property or any part thereof, (b) any fact, circumstance, condition or occurrence forming the basis of any violation, or alleged violation, of any Environmental Law by the Indemnitors, the Real Property or any part thereof, or (c) any alleged injury or threat of injury to health, safety or the environment by the Indemnitors or relating the Real Property or any part thereof.


"ENVIRONMENTAL CONDITIONS" means any environmental condition (a) constituting or which with the passage of time or lack of Remediation would or would likely constitute a violation of Environmental Laws, including but not limited to the presence of any Hazardous Substances requiring reporting and/or the performance of response actions under Massachusetts General Laws Chapter 21E, or (b) that requires reporting, investigation, assessment, monitoring, remediation or other response actions or would allow any Governmental Authority to record a lien or encumbrance in the land records with respect to the Real Property or an Environmental Claim. Submission to the Massachusetts Department of Environmental Protection of a Class A or B Response Action Outcome Statement by a Licensed Site Professional (as defined in Mass. Gen. L. ch. 21E, ss.2) pursuant to, and in compliance with, the Massachusetts Contingency Plan (310 CMR 40.0000) shall be deemed confirmation that any Environmental Condition(s) addressed in such Response Action Outcome Statement no longer exists.


"ENVIRONMENTAL LAWS" means any judgment, decree, order, law, license, rule, permit or regulation pertaining to environmental matters, including without limitation, those arising under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any other state, local, foreign or common law, statute, regulation, ordinance, order, decree or any other binding requirement of any Governmental Authority relating to health, safety or the environment.


"FORECLOSURE DATE" has the meaning provided in Section 2(e) hereof.


"HAZARDOUS SUBSTANCE" means any hazardous waste, as defined by 42 U.S.C. Section 6903(5), any hazardous substances as defined by 42 U.S.C. Section 9601(14), any pollutant or contaminant as defined by 42 U.S.C. Section 9601(33) and any toxic substances, oil or hazardous materials or other chemicals or substances regulated by any Environmental Laws


"KNOWN ENVIRONMENTAL CONDITIONS" has the meaning provided in Section 2(d) hereof.


"LOSSES" has the meaning provided in Section 2(a) hereof.


"PERSON" means any individual, corporation, limited liability company, partnership, joint venture, estate, trust, unincorporated association, or any other entity, any federal, state, county or municipal government or any bureau, department or agency thereof and any fiduciary acting in such capacity on behalf of any of the foregoing.


"RELEASE" means any past or present release, spill, emission, leaking, pumping, injecting, pouring, emptying, escaping, dumping, deposit, disposal, discharge, dispersal, leaching, migration into the indoor or outdoor environment of Hazardous Substances, including, without limitation, the movement of Hazardous Substances through ambient air, soil, surface water, sediments, ground water, wetlands, land or subsurface strata.


"REMEDIATION" The investigation, assessment, monitoring, removal, abatement, treatment, risk assessment, institutional controls, deed restrictions and/or activity and use limitations, containment, payment of compliance or oversight fees, and all other activities required under Environmental Laws to respond to an Environmental Condition.


"USE" means, with respect to any Hazardous Substance, the generation, manufacture, processing, distribution, handling, use, treatment, recycling or storage of such Hazardous Substances or transportation to or from the Real Property by any Person of such Hazardous Substances.


2. Indemnification.


(a) The Indemnitors agree to indemnify, reimburse, defend (with counsel reasonably satisfactory to Indemnitees), and hold harmless the Indemnitees from and against all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, interest, reasonable costs and expenses, including, without limitation, interest, penalties, reasonable attorneys' fees, reasonable disbursements and expenses, diminution in the value of the Real Property (subject to subsection (e) below) and reasonable consultants' and expert witness fees, disbursements, fines, penalties, fees and expenses, including costs of reporting, investigation, assessment, monitoring, remediation or other response actions (collectively, the "LOSSES"), asserted against, resulting to, imposed on, or incurred by Indemnitees directly or indirectly in connection with any of the following:


(i) any events, circumstances, or conditions which
relate to, form or are alleged to form the basis for an Environmental
Claim;


(ii) the presence, Use, Release, or threatened
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