Exhibit 10.2

COLLATERAL AGREEMENT

This Collateral Agreement dated as of the 31st day of December, 2010
(“Collateral Agreement”), is entered into by Qinghuan Wu (“Guarantor”), China
Energy Recovery, Inc., a Delaware corporation ( “CER”), and Hold and Opt
Investments Limited, a Bahamas company (“Lender”).  Golenbock Eiseman Assor Bell
& Peskoe LLP, a limited liability partnership ("Collateral Agent”) shall enter
into this Collateral Agreement not earlier than the date that the Collateral (as
herein defined) shall be free and clear of all encumbrances, including the terms
of that certain loan for US$4,000,000 for which the Collateral is currently
pledged.

RECITALS

WHEREAS, CER is borrowing the principal sum of US$5,000,000 from the Lender for
the purpose of repaying a loan for an equal amount of principal entered into as
of May 21, 2009.  As a condition to the loan agreement between the Lender and
CER (“Loan Agreement”), Mr. Wu, the Guarantor, will place with the Collateral
Agent, 8,000,006 shares (“Shares”) of common stock of CER, which will be
available as a guarantee of the repayment of all or a portion of the amounts due
to the Lender under the Loan Agreement, which payment will depend on the market
value, from time to time, of the Shares.

WHEREAS, this Collateral Agreement shall apply to the Shares, and any
distributions of additional shares or property in respect of the Shares
(together being included in the definition of the “Shares”).  As part of the
delivery of the Shares, the Guarantor will also deliver stock powers signed in
blank.

WHEREAS, the Shares are a limited guarantee of only the principal amount due
under the Loan Agreement, and is not a general guarantee by the Guarantor or a
complete guarantee of all the payments due under the Loan Agreement.

In consideration of the promises and agreements of the parties and for other
good and valuable consideration, the receipt of which is acknowledged, the
parties agree as follows:

 
ARTICLE 1
 

DEPOSIT OF COLLATERAL

1.01       Deposit.  Guarantor, promptly upon receipt of notice of signing of
this Collateral Agreement by all the parties thereto and prior to the funding of
the Loan Agreement, shall deposit the Shares and the stock powers executed in
blank (signature guaranteed as required by the CER  transfer agent) with the
Collateral Agent.  Collateral Agent hereby agrees to act as Collateral Agent and
to hold and disburse the Shares only pursuant to the terms and conditions
hereof.  The Guarantor, upon request from the Collateral Agent, shall provide
additional stock powers executed in blank to the Collateral Agent, with such
forms of signature guarantee as may be required by the CER transfer agent, time
being of the essence.  The Guarantor also will deposit under this Collateral
Agreement any distributions of property or shares made in respect of the Shares
then held hereunder that are made after the date of this Collateral Agreement
until the termination of this Collateral Agreement.  For purposes of determining
any Shares to be distributed, the pro rata portion of the distributions of
property or shares made in respect of the Shares will be distributed along with
any Shares.
 
 
 

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ARTICLE 2
 
 2.01       Delivery of Shares to Lender.  The Lender may give written
(electronic, fax or otherwise) notice to the Collateral Agent that a sum is due
and unpaid under the Loan Agreement and request distribution of some or all the
Shares, as provided herein, to the Lender as specified in the notice.  A copy of
the written notice shall simultaneously be sent to the Guarantor.  If the
Guarantor objects either in whole or in part, to the specific distribution of
the Shares requested in the notice, then such objection shall be in writing to
the Lender and the Collateral Agent. If the Collateral Agent does not receive
any objection from the Guarantor to a distribution of the Shares within seven
business days of the date of the notice requesting distribution received from
the Lender, then the Collateral Agent shall deliver that number of the Shares
representing the market value equivalent of the amount stated in the notice as
due and unpaid under the Loan Agreement, using as the market value the closing
price of a Share on the last trading date on which a Share traded immediately
before the date of the notice from the Lender.  If there is an objection to a
distribution made by the Guarantor, then the Collateral Agent will not make any
distribution of the Shares with respect to a notice being contested until there
is a resolution of whether or not a distribution shall be made as to the amount
of Shares and distributees, as agreed between the Guarantor and the Lender,
which is communicated jointly in writing to the Collateral Agent.

2.02.       Delivery of Shares to Guarantor. The Guarantor, on or within 20
business days after the payment of any principal amount, interest due on such
principal amount or other sums then due under the Loan Agreement may give notice
(electronic, fax or otherwise) to the Collateral Agent requesting that a portion
of the Shares be returned to the Guarantor, as provided herein.  The portion of
the Shares that may be returned to the Guarantor is as follows:  (a) if the
principal paid was the full amount due and all the other financial obligations
then due are paid in full under the terms of the Loan Agreement, then all the
Shares shall be returned to the Guarantor, and (b) if the principal paid was a
prepayment thereof but the principal is not paid in full, then the distribution
of Shares will be that number of Shares representing the market value of 50% of
the principal prepaid under the Loan Agreement, where the market value of the
Shares is measured by the closing price of a Share on the last trading date on
which a Share traded immediately before the date of the written notice for the
release of Shares is given by the Guarantor.  A copy of the written notice will
simultaneously be sent to the Lender. If the Lender objects to a distribution of
the Shares, then such objection shall be in writing to the Guarantor, and the
Collateral Agent. If the Collateral Agent does not receive any objection to a
distribution of the Shares from the Lender within seven business days of the
date of the notice from the Guarantor, then the Collateral Agent shall deliver
that number of the Shares as requested by the Guarantor and specified
herein.  If there is an objection to a distribution to the Guarantor, then the
Collateral Agent will not make any distribution until there is a resolution of
whether or not a distribution shall be made and the amount of Shares to be
distributed betweem the Guarantor and the Lender, of which the Collateral Agent
is notified in a joint writing.
 
 
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2.04       Satisfaction of Guarantee.  Upon Collateral Agent's delivery of the
Shares after receipt of any notice pursuant to Section 2.01 above of this
Collateral Agreement, the Lender receiving the Shares hereby agrees that said
portion of the amounts due under the Loan Agreement will have been paid in full
and all guaranties and security therefore represented by the Shares shall have
been released without the necessity of further action by any party.  However,
all parties hereto agree to cooperate, without cost to the Lender or the
Collateral Agent, to execute such other documents reasonably requested by any
other party hereto to effect the foregoing.

2.05.       Objections to Notices Unique.  For purposes of clarity, objection to
a notice for a distribution given hereunder by any party will not be considered
an objection to any other or subsequent notice for a distribution.  Each notice
will be considered a separate procedure requiring its own objection and
resolution in the event of a controversy.

ARTICLE 3

DUTIES AND OBLIGATIONS OF COLLATERAL AGENT

3.01       General Duties and Obligations of Collateral Agent.

(a)       This Collateral Agreement expressly sets forth all the duties of
Collateral Agent with respect to any and all matters pertinent hereto. No
implied duties or obligations shall be read into this Collateral Agreement
against Collateral Agent.

(b)       Collateral Agent shall not be under any duty to give the Shares held
by it hereunder any greater degree of care than it gives similar property of its
clients.

(c)       Collateral Agent shall not be liable for actions or omissions
hereunder, except for its own gross negligence or willful misconduct and, except
with respect to claims based upon such gross negligence or willful misconduct
that are successfully asserted against Collateral Agent, the other parties
hereto shall jointly and severally indemnify and hold harmless Collateral Agent
(and any successor Collateral Agent) from and against any and all losses,
liabilities, claims, actions, damages and expenses, including reasonable
attorneys' fees and disbursements, arising out of and in connection with this
Collateral Agreement.

(d)       In the event of any doubt or uncertainty by Collateral Agent as to its
duties or rights hereunder, the Collateral Agent shall be entitled to tender the
Shares and stock powers into a court of competent jurisdiction for a
determination of the rights of interested parties, and shall be entitled to
recover from the Guarantor or the Lender, jointly and severally, its attorneys'
fees and costs in connection therewith.

(e)       The Collateral Agent shall be entitled to rely upon any order,
judgment, certification, demand, notice, instrument or other writing delivered
to it hereunder without being required to determine the authenticity or the
correctness of any fact stated therein or the propriety or validity of the
service thereof. The Collateral Agent may act in reliance upon any instrument or
signature believed by it to be genuine and may assume that the person purporting
to give receipt or advice or make any statement or execute any document in
connection with the provisions hereof has been duly authorized to do so.
Collateral Agent may conclusively presume that the undersigned representative of
any party hereto which is an entity other than a natural person has full power
and authority to instruct Collateral Agent on behalf of that party unless
written notice to the contrary is delivered to Collateral Agent.
 
 
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(f)       Collateral Agent may act pursuant to the advice of counsel with
respect to any matter relating to this Collateral Agreement and shall not be
liable for any action taken or omitted by it in good faith in accordance with
such advice.

(g)       Collateral Agent does not have any interest in the Shares deposited
hereunder but is serving as the holder of collateral for the benefit of the
Lender only and has only possession thereof.

(h)       Collateral Agent makes no representation as to the validity, value,
genuineness or collectability of any security or other document or instrument
held by or delivered to it.

(i)       Collateral Agent (and any successor Collateral Agent) may at any time
resign as such by delivering the Shares and stock powers to any successor
Collateral Agent jointly designated by the other parties hereto in writing, or
to any court of competent jurisdiction, whereupon Collateral Agent shall be
discharged of and from any and all further obligations arising in connection
with this Collateral Agreement. The resignation of Collateral Agent will take
effect on the earlier of (i) the appointment of a successor (including a court
of competent jurisdiction) or (ii) the day which is thirty (30) days after the
date of delivery of its written notice of resignation to the other parties
hereto. If, at that time, Collateral Agent has not received a designation of a
successor Collateral Agent, Collateral Agent's sole responsibility after that
time shall be to retain and safeguard the Shares and stock powers until receipt
of a designation of successor Collateral Agent or a joint written disposition
instruction by the other parties hereto or a final, non-appealable order of a
court of competent jurisdiction.

(j)       Collateral Agent is not a party to and is not bound by or charged with
notice of, and is not responsible or liable in any manner whatsoever for the
sufficiency, correctness, genuineness or validity of, any agreement or document
out of which this Collateral Agreement may arise; nor is Collateral Agent liable
in any manner for the identity or authority of any person executing the
Collateral Agreement or any other document out of which this Collateral
Agreement may arise.

3.02       Collateral Agent’s Representation of CER and Others. Guarantor, CER
and the Lender are aware or have been informed and acknowledge that the
Collateral Agent is one of several counsel for CER and its affiliated and
subsidiary corporations and of the Lender and its affiliates and agree that
Collateral Agent may continue to represent CER and its affiliated and subsidiary
corporations and the Lender and its affiliates after the date hereof in all
matters notwithstanding the performance of its duties and obligations hereunder,
including, without limitation, representation with respect to the this
Collateral Agreement, the Loan Agreement and the transactions contemplated
hereunder and thereunder.  Guarantor, CER and the Lender each hereby waive any
claim of conflict of interest relating to Collateral Agent’s duties, obligations
and acts hereunder and waive any right or claim to object to such continued
legal representation by Collateral Agent of CER and its affiliated and
subsidiary corporations and of the Lender and its affiliates on or after the
date hereof.
 
 
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ARTICLE 4

MISCELLANEOUS

4.01       Successors and Assigns; Survival.  This Collateral Agreement shall be
binding on and inure to the benefit of the parties to this Collateral Agreement
and their respective heirs, executors, administrators, successors and permitted
assigns.  Other than the specified third party beneficiaries, no other persons
shall have any rights under this Collateral Agreement.  Any and all rights of
any Collateral Agent hereunder shall terminate upon the termination of this
Collateral Agreement, the distribution of the Shares or the resignation of such
Collateral Agent.

4.02       Third Party Beneficiaries.  This Collateral Agreement shall be for
the benefit of the Lender pursuant to the terms of the Loan Agreement with CER,
and the Lender shall have the right to enforce this Collateral Agreement for its
benefit pursuant to the terms of the Loan Agreement with CER.

4.03       Notices.  All notices, requests, demands, and other communications
required or desired to be given hereunder shall be in writing and shall be
deemed to have been given:  (i) if personally delivered, upon such delivery;
(ii) if mailed by certified mail, return receipt requested, postage pre-paid,
addressed as follows (to the extent applicable for mailing), three (3) business
days after deposit in the mail as aforesaid; or (iii) if sent by regularly
scheduled overnight delivery service with delivery charges prepaid or an
arrangement, satisfactory with such service, made for the payment of such fees,
addressed as follows (to the extent applicable for overnight delivery), on the
next business day (as hereafter defined) after being so sent; upon confirmed
receipt when sent by telefax to the following numbers or by email or other
electronic transmission to the following addresses:

If to Guarantor:
Mr. Qinghuan Wu
c/o 7F, No. 267 Quyang Road, Hongkou District
Shanghai, China 200081
Fax Number: 86-21-6508-2138
Telephone Number: 86-21-5556-0020
Email Address:

If to CER:

CER Energy Recovery (Shanghai) Co., Ltd.
7F, No. 267 Quyang Road, Hongkou District
Shanghai, China 200081
Fax Number: 86-21-6508-2138
Telephone Number: 86-21-5556-0020
Email Address:

 
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If to Collateral Agent:
Golenbock Eiseman Assor Bell & Peskoe LLP
 
Attn: Andrew D. Hudders
 
437 Madison Avenue
 
New York, NY 10022
 
Telephone:  (212) 907-7349
 
Telefax:  (212) 754-0330
 
Email:     ahudders@golenbock.com

If to the Lender:
Hold and Opt Investments Limited
 
Attn: Timothy Fraser-Smith
 
Deltec House
 
P.O. Box N-3229
 
Lyford Cay
 
Nassau, New Providence, Bahamas
 
Telephone: (242) 302-4100
 
Fax: (242) 362-4623
 
E-mail: tis@deltec-bahamas.com

or to any other address that any party shall designate in writing to the other
parties in accordance with this provision.

4.03       Governing Law.  This Collateral Agreement shall be governed by and
construed in accordance with the laws of the State of New York without reference
to its conflict of laws principles.

4.04       Waiver.  The rights and remedies of the parties to this Collateral
Agreement are cumulative and not alternative. Neither the failure nor any delay
by any party in exercising any right, power or privilege under this Collateral
Agreement or the documents referred to in this Collateral Agreement will operate
as a waiver of such right, power or privilege, and no single or partial exercise
of any such right, power or privilege will preclude any other or further
exercise of such right, power or privilege or the exercise of any other right,
power or privilege. To the maximum extent permitted by applicable law, (a) no
claim or right arising out of this Collateral Agreement or the documents
referred to in this Collateral Agreement can be discharged by one party, in
whole or in part, by waiver or renunciation of the claim or right unless in
writing signed by the other party; (b) no waiver that may be given by a party
will be applicable except in the specific instance for which it is given; and
(c) no notice to or demand on one party will be deemed to be a waiver of any
obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Collateral Agreement or the documents referred to in this Collateral Agreement.
 
 
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4.05       Entire Agreement and Modification. This Collateral Agreement
supersedes all prior agreements among the parties with respect to its subject
matter and constitutes (along with the documents referred to in this Collateral
Agreement) a complete and exclusive statement of the terms of the agreement
between the parties with respect to its subject matter. This Collateral
Agreement may not be amended except by a written agreement executed by all
parties hereto.

4.06       Severability.  If any article, paragraph, section or portion of this
Collateral Agreement shall be determined to be unenforceable or invalid, it
shall not affect the remainder of this Collateral Agreement, which shall be and
remain binding and effective as against all parties hereto.

4.07       Execution in Counterparts.  This Collateral Agreement and any
amendments hereto may be executed in any number of counterparts, either by the
parties hereto and their successors, or their duly authorized attorneys-in-fact,
with the same effect as if all parties had signed the same document.  All
counterparts shall be construed as and shall constitute one and the same
instrument.  An executed copy of this Collateral Agreement may be delivered by
one or more parties hereto by facsimile or other electronic transmission
pursuant to which the signature of or on behalf of such party can be seen, and
such execution and delivery shall be considered valid, binding and effective for
all purposes.  At the request of any party hereto, all parties hereto agree to
execute and deliver promptly an original of this Collateral Agreement as well as
any facsimile or other reproduction hereof.

Signature page follows:
 
 
 
 
 
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The parties to this Collateral Agreement have duly executed this Agreement as of
the date first written above.

 
GUARANTOR:
   
_____________________________________
Wu Qinghuan
     
CHINA ENERGY RECOVERY, INC.:
   
By:__________________________________
       Wu Qinghuan
        Chief Financial Officer
   
HOLD AND OPT INVESTMENTS LIMITED:
   
By:__________________________________
       Timothy Fraser-Smith
        Authorized Signatory

COLLATERAL AGENT:
 
Golenbock Eiseman Assor Bell & Peskoe LLP
   
By:__________________________________
Name: _______________________________
Title: ________________________________

 
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