**EXHIBIT 10.9**

 

Execution Version

 

**SUBORDINATED GUARANTY AGREEMENT**

 

ThisSubordinated Guaranty Agreement dated as of March 17, 2008 (this “Guaranty”)is executed by each of the undersigned (individually a “Guarantor” andcollectively, the “Guarantors”), in favor of UnionBanCal Equities, Inc.,as Administrative Agent for the ratable benefit of itself, the Lenders (asdefined below) (together with the Administrative Agent and the Lenders,individually a “Beneficiary”, and collectively, the “Beneficiaries”).

 

**INTRODUCTION**

 

A.            This Guaranty is givenin connection with that certain Subordinated Credit Agreement dated as of March 17,2008 (as it has been or may be amended, supplemented, restated or otherwisemodified from time to time, the “Credit Agreement”), among CanoPetroleum, Inc., a Delaware corporation (the “Borrower”), thelenders party thereto from time to time (individually a “Lender” andcollectively, the “Lenders”), and UnionBanCal Equities, Inc. asadministrative agent (“Administrative Agent”) for such Lenders.

 

B.            Each Guarantor is aSubsidiary of the Borrower and will derive substantial direct and indirectbenefit from the transactions contemplated by the Credit Agreement and theother Loan Documents (as defined in the Credit Agreement).

 

C.            Each Guarantor isexecuting and delivering this Guaranty (i) to induce the Lenders toprovide the Advances and the other considerations under the Credit Agreement,and (ii) intending it to be a legal, valid, binding, enforceable andcontinuing obligation of such Guarantor, whether or not such Guarantor derivesany benefit from the Credit Agreement or from any other Loan Document.

 

NOW,THEREFORE, in consideration of the premises, each Guarantor hereby agrees asfollows:

 

Section 1.         Definitions.  All capitalized terms not otherwise definedin this Guaranty that are defined in the Credit Agreement shall have themeanings assigned to such terms by the Credit Agreement.

 

Section 2.         Guaranty.

 

(a)      EachGuarantor hereby absolutely, unconditionally and irrevocably guarantees thepunctual payment and performance, when due, whether at stated maturity, byacceleration or otherwise, of all Obligations, whether absolute or contingentand whether for principal, interest (including, without limitation, interestthat but for the existence of a bankruptcy, reorganization or similarproceeding would accrue), fees, amounts required to be provided as collateral,indemnities, expenses or otherwise (collectively, the “GuaranteedObligations”). Without limiting the generality of the foregoing, eachGuarantor’s liability shall extend to all amounts that constitute part of theGuaranteed Obligations and would be owed by the Borrower to the AdministrativeAgent or any Lender under the Loan Documents and by the Borrower or any of itsSubsidiaries but for the fact that they are unenforceable or not allowable 

 

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due to insolvency or the existence of a bankruptcy,reorganization or similar proceeding involving the Borrower or such otherSubsidiary.

 

(b)      Itis the intention of the Guarantors and each Beneficiary that the amount of theGuaranteed Obligations guaranteed by each Guarantor shall be in, but not inexcess of, the maximum amount permitted by fraudulent conveyance, fraudulenttransfer or similar Legal Requirements applicable to such Guarantor.Accordingly, notwithstanding anything to the contrary contained in thisGuaranty or in any other agreement or instrument executed in connection withthe payment of any of the Guaranteed Obligations, the amount of the GuaranteedObligations guaranteed by a Guarantor under this Guaranty shall be limited toan aggregate amount equal to the largest amount that would not render suchGuarantor’s obligations hereunder subject to avoidance under Section 548of the United States Bankruptcy Code or any comparable provision of any otherapplicable law.

 

Section 3.         Guaranty Absolute.  Each Guarantor guarantees that the GuaranteedObligations will be paid strictly in accordance with the terms of the LoanDocuments, regardless of any law, regulation or order now or hereafter ineffect in any jurisdiction affecting any of such terms or the rights of theAdministrative Agent or any Lender with respect thereto but subject to Section 2(b) above.  The obligations of each Guarantor under thisGuaranty are independent of the Guaranteed Obligations or any other obligationsof any other Person under the Loan Documents, and a separate action or actionsmay be brought and prosecuted against any Guarantor to enforce this Guaranty,irrespective of whether any action is brought against the Borrower, any otherGuarantor or any other Person or whether the Borrower, any other Guarantor orany other Person is joined in any such action or actions. The liability of eachGuarantor under this Guaranty shall be irrevocable, absolute and unconditionalirrespective of, and each Guarantor hereby irrevocably waives any defenses itmay now or hereafter have in any way relating to, any or all of the following:

 

(a)      anylack of validity or enforceability of any Loan Document or any agreement orinstrument relating thereto or any part of the Guaranteed Obligations beingirrecoverable;

 

(b)      anychange in the time, manner or place of payment of, or in any other term of, allor any of the Guaranteed Obligations or any other obligations of any Personunder the Loan Documents, or any other amendment or waiver of or any consent todeparture from any Loan Document, including, without limitation, any increasein the Guaranteed Obligations resulting from the extension of additional creditto the Borrower or otherwise;

 

(c)      anytaking, exchange, release or non-perfection of any collateral, or any taking,release or amendment or waiver of or consent to departure from any otherguaranty, for all or any of the Guaranteed Obligations;

 

(d)      anymanner of application of collateral, or proceeds thereof, to all or any of theGuaranteed Obligations, or any manner of sale or other disposition of anycollateral for all or any of the Guaranteed Obligations or any otherobligations of any other Person under the Loan Documents or any other assets ofthe Borrower or any of its Subsidiaries;

 

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(e)      anychange, restructuring or termination of the corporate structure or existence ofthe Borrower or any of its Subsidiaries;

 

(f)       anyfailure of any Beneficiary to disclose to the Borrower or any Guarantor anyinformation relating to the business, condition (financial or otherwise),operations, properties or prospects of any Person now or in the future known toany Beneficiary (and each Guarantor hereby irrevocably waives any duty on thepart of any Beneficiary to disclose such information);

 

(g)      anysignature of any officer of the Borrower or any other Person being mechanicallyreproduced in facsimile or otherwise; or

 

(h)      anyother circumstance or any existence of or reliance on any representation by anyBeneficiary that might otherwise constitute a defense available to, or adischarge of, the Borrower, any Guarantor or any other guarantor, surety orother Person.

 

Section 4.         Continuationand Reinstatement, Etc.  EachGuarantor agrees that, to the extent that payments of any of the GuaranteedObligations are made, or any Lender or the Administrative Agent receives anyproceeds of collateral, and such payments or proceeds or any part thereof aresubsequently invalidated, declared to be fraudulent or preferential, set aside,or otherwise required to be repaid, then to the extent of such repayment theGuaranteed Obligations shall be reinstated and continued in full force andeffect as of the date such initial payment or collection of proceedsoccurred.  **EACH GUARANTOR SHALL DEFEND AND INDEMNIFY EACH BENEFICIARY FROM ANDAGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 4(INCLUDING REASONABLE ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCHACTION OR SUIT INCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSEARISING AS A RESULT OF THE INDEMNIFIED BENEFICIARY’S OWN NEGLIGENCE BUTEXCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUNDIN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TOHAVE RESULTED FROM SUCH INDEMNIFIED BENEFICIARY’S GROSS NEGLIGENCE OR WILLFULMISCONDUCT.**

 

Section 5.         Waivers and Acknowledgments.

 

(a)      EachGuarantor hereby waives promptness, diligence, presentment, notice ofacceptance and any other notice with respect to any of the GuaranteedObligations and this Guaranty and any requirement that any Beneficiary protect,secure, perfect or insure any Lien or any Property or exhaust any right or takeany action against the Borrower or any other Person or any collateral.

 

(b)      EachGuarantor hereby irrevocably waives any right to revoke this Guaranty, andacknowledges that this Guaranty is continuing in nature and applies to allGuaranteed Obligations, whether existing now or in the future.

 

(c)      EachGuarantor acknowledges that it will receive substantial direct and indirectbenefits from the financing arrangements involving the Borrower and itsSubsidiaries 

 

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contemplated by the Loan Documents and that thewaivers set forth in this Guaranty are knowingly made in contemplation of suchbenefits.

 

Section 6.         Subrogation. No Guarantor will exerciseany rights that it may now have or hereafter acquire against the Borrower orany other Person to the extent that such rights arise from the existence,payment, performance or enforcement of such Guarantor’s obligations under thisGuaranty or any other Loan Document, including, without limitation, any rightof subrogation, reimbursement, exoneration, contribution or indemnification andany right to participate in any claim or remedy of any Beneficiary against theBorrower or any other Person, whether or not such claim, remedy or right arisesin equity or under contract, statute or common law, including, withoutlimitation, the right to take or receive from the Borrower or any other Person,directly or indirectly, in cash or other property or by set-off or in any othermanner, payment or security on account of such claim, remedy or right, unlessand until all of the Guaranteed Obligations and any and all other amountspayable by the Guarantors under this Guaranty shall have been paid in full incash, all Commitments shall have expired or terminated, and the CreditAgreement has been terminated in writing. If any amount shall be paid to a Guarantor in violation of the precedingsentence at any time prior to (a) the payment in full in cash of theGuaranteed Obligations and any and all other amounts payable by the Guarantorsunder this Guaranty, and (b) the termination of the Commitments, suchamount shall be held in trust for the benefit of the Beneficiaries and shallforthwith be paid to the Administrative Agent to be credited and applied to theGuaranteed Obligations and any and all other amounts payable by the Guarantorsunder this Guaranty, whether matured or unmatured, in accordance with the termsof the Loan Documents.

 

Section 7.         Representations and Warranties.  Each Guarantor hereby represents and warrantsas follows:

 

(a)      Thereare no conditions precedent to the effectiveness of this Guaranty.  Such Guarantor benefits from executing thisGuaranty.

 

(b)      SuchGuarantor has, independently and without reliance upon the Administrative Agentor any Lender and based on such documents and information as it has deemedappropriate, made its own credit analysis and decision to enter into thisGuaranty, and such Guarantor has established adequate means of obtaining fromthe Borrower and each other relevant Person on a continuing basis informationpertaining to, and is now and on a continuing basis will be completely familiarwith, the business, condition (financial and otherwise), operations, propertiesand prospects of the Borrower and each other relevant Person.

 

(c)      Theobligations of such Guarantor under this Guaranty are the valid, binding andlegally enforceable obligations of such Guarantor, and the execution anddelivery of this Guaranty by such Guarantor has been duly and validlyauthorized in all respects by such Guarantor, and the Person who is executingand delivering this Guaranty on behalf of such Guarantor has full power,authority and legal right to so do, and to observe and perform all of the termsand conditions of this Guaranty on such Guarantor’s part to be observed orperformed.

 

Section 8.         Right of Set-Off.  Upon the occurrence and during thecontinuance of any Event of Default, any Beneficiary is hereby authorized atany time, to the fullest extent permitted 

 

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by law, to set off and apply any deposits (general orspecial, time or demand, provisional or final) and other indebtedness owing bysuch Beneficiary to the account of each Guarantor against any and all of theobligations of the Guarantors under this Guaranty, irrespective of whether ornot such Beneficiary shall have made any demand under this Guaranty andalthough such obligations may be contingent and unmatured.  Such Beneficiary shall promptly notify theaffected Guarantor after any such set-off and application is made, providedthat the failure to give such notice shall not affect the validity of suchset-off and application.  The rights ofthe Beneficiaries under this Section 8 are in addition to other rights andremedies (including, without limitation, other rights of set-off) which anyBeneficiary may have.

 

Section 9.         Amendments, Etc.  No amendment or waiver of any provision ofthis Guaranty and no consent to any departure by any Guarantor therefrom shallin any event be effective unless the same shall be in writing and signed by theaffected Guarantor, the Administrative Agent and the Required Lenders, and thensuch waiver or consent shall be effective only in the specific instance and forthe specific purpose for which given; provided that no amendment, waiveror consent shall, unless in writing and signed by all of the Lenders, (a) otherthan to the extent expressly provided in such amendment, waiver or consent,limit the liability of any Guarantor hereunder (it being understood that waiversand amendments permitted to be made under the Credit Agreement by the RequiredLenders with respect to any of the underlying obligations guaranteed hereundershall not be deemed to limit the liability of any Guarantor within the meaningof this clause (a)), (b) postpone any date fixed for payment hereunder inrespect of any of the Guaranteed Obligations that is principal of, or intereston, the Notes or any fees, or (c) change the percentage of the Commitmentsor of the aggregate unpaid principal amount of the Notes required to take anyaction hereunder.

 

Section 10.             Notices, Etc.  All notices and other communications providedfor hereunder shall be sent in the manner provided for in Section 9.02 ofthe Credit Agreement and if to a Guarantor, at its address specified on thesignature page hereto and if to the Administrative Agent or any Lender, atits address specified in or pursuant to the Credit Agreement.  All such notices and communications shall beeffective when delivered, except that notices and communications to theAdministrative Agent shall not be effective until received by theAdministrative Agent.

 

Section 11.             No Waiver: Remedies.  No failure on the part of any Beneficiary toexercise, and no delay in exercising, any right hereunder shall operate as awaiver thereof; nor shall any single or partial exercise of any right hereunderpreclude any other or further exercise thereof or the exercise of any otherright. The remedies herein provided are cumulative and not exclusive of anyremedies provided by law.

 

Section 12.             Continuing Guaranty: Assignments underthe Credit Agreement.  This Guarantyis a continuing guaranty and shall (a) remain in full force and effectuntil the payment in full of all Guaranteed Obligations and all other amountspayable under the Loan Documents and the termination of all the Commitments, (b) bebinding upon each Guarantor and its successors and assigns, and (c) inureto the benefit of and be enforceable by the Administrative Agent and eachLender, and, in the case of transfers and assignments made in accordance withthe Credit Agreement, transferees and assigns. Without limiting the generality of the foregoing clause (c), subject to Section 9.06of the Credit Agreement, any Lender may assign or otherwise 

 

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transfer all or any portion of its rights andobligations under the Credit Agreement (including, without limitation, all orany portion of its Commitment, the Advances owing to it and the Note or Notesheld by it) to any other Person, and such other Person shall thereupon becomevested with all the benefits in respect thereof granted to such Lender hereinor otherwise, subject, however, in all respects to the provisions of the CreditAgreement.  Each Guarantor acknowledgesthat upon any Person becoming a Lender, the Administrative Agent in accordancewith the Credit Agreement, such Person shall be entitled to the benefitshereof.

 

Section 13.             Governing Law.  This Guaranty shall be governed by, andconstrued and enforced in accordance with, the laws of the State of Texas.  Each Guarantor hereby irrevocably submits tothe jurisdiction of any Texas state or federal court sitting in Dallas, Texasin any action or proceeding arising out of or relating to this Guaranty and theother Loan Documents, and each Guarantor hereby irrevocably agrees that allclaims in respect of such action or proceeding may be heard and determined insuch court.  Each Guarantor herebyirrevocably waives, to the fullest extent it may effectively do so, any rightit may have to the defense of an inconvenient forum to the maintenance of suchaction or proceeding.  Each Guarantorhereby agrees that service of copies of the summons and complaint and any otherprocess which may be served in any such action or proceeding may be made bymailing or delivering a copy of such process to such Guarantor at its addressset forth in the Credit Agreement or set forth on the signature page ofthis Guaranty.  Each Guarantor agreesthat a final judgment in any such action or proceeding shall be conclusive andmay be enforced in other jurisdictions by suit on the judgment or in any othermanner provided by law.  Nothing in this Section shallaffect the rights of any Beneficiary to serve legal process in any other mannerpermitted by the law or affect the right of any Beneficiary to bring any actionor proceeding against any Guarantor or its Property in the courts of any otherjurisdiction.

 

Section 14.             **INDEMNIFICATION.  EACH GUARANTOR SHALL INDEMNIFY EACH OF THE BENEFICIARIES,AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, ANDDISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALLLIABILITIES, OBLIGATIONS, LOSSES, CLAIMS, EXPENSES, OR DAMAGES OF ANY KIND ORNATURE WHATSOEVER TO WHICH ANY OF THEM MAY BECOME SUBJECT RELATING TO ORARISING OUT OF THIS GUARANTY, INCLUDING ANY LIABILITIES, OBLIGATIONS, LOSSES,CLAIMS, EXPENSES, OR DAMAGES WHICH ARISE OUT OF OR RESULT FROM (A) ANYACTUAL OR PROPOSED USE BY THE BORROWER, ANY GUARANTOR OR ANY AFFILIATE OF THEBORROWER OR ANY GUARANTOR OF THE PROCEEDS OF THE ADVANCES, (B) ANY BREACHBY THE BORROWER OR ANY GUARANTOR OF ANY PROVISION OF THE CREDIT AGREEMENT ORANY OTHER LOAN DOCUMENT, (C) ANY INVESTIGATION, LITIGATION OR OTHERPROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TOTHE FOREGOING, (D) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTALLAWS CONCERNING OR RELATING TO THE PRESENT OR PREVIOUSLY-OWNED OR OPERATEDPROPERTIES OF THE BORROWER, ANY GUARANTOR OR THE OPERATIONS OR BUSINESS, OF THEBORROWER OR ANY GUARANTOR INCLUDING ANY MATTERS DISCLOSED WITHIN THE CREDITAGREEMENT, OR (E) ANY ENVIRONMENTAL CLAIM OR**

 

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**REQUIREMENT OF ENVIRONMENTAL LAWSCONCERNING OR RELATED TO THE BORROWER’S OR ANY GUARANTOR’S PROPERTIES AND EACHGUARANTOR SHALL REIMBURSE THE BENEFICIARIES AND THEIR RESPECTIVE DIRECTORS,OFFICERS, EMPLOYEES AND AGENTS, UPON DEMAND FOR ANY REASONABLE OUT-OF-POCKETEXPENSES (INCLUDING REASONABLE OUTSIDE LEGAL FEES) INCURRED IN CONNECTION WITHANY SUCH INVESTIGATION, LITIGATION OR OTHER PROCEEDING; AND EXPRESSLY INCLUDINGANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE INCURRED BY REASON OFTHE PERSON BEING INDEMNIFIED’S OWN NEGLIGENCE,****BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS,DAMAGES OR EXPENSES THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY ACOURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED PERSON’SGROSS NEGLIGENCE OR WILLFUL MISCONDUCT.**

 

Section 15.             **WAIVER OF JURY TRIAL.  EACH GUARANTOR HEREBY ACKNOWLEDGES THAT ITHAS BEEN REPRESENTED BY AND HAS CONSULTED WITH COUNSEL OF ITS CHOICE, ANDHEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVES ANY ANDALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDING ARISING OUT OF ORRELATING TO THIS GUARANTY, ANY OTHER LOAN DOCUMENT, OR ANY OF THE TRANSACTIONSCONTEMPLATED HEREBY OR THEREBY.**

 

Section 16.             Additional Guarantors.  Pursuant to Section 6.15 of the CreditAgreement, each Subsidiary of the Borrower that was not in existence on thedate of the Credit Agreement is required to enter into this Guaranty as aGuarantor upon becoming a Subsidiary. After the date hereof, upon execution and delivery after the date hereofby the Administrative Agent and such Subsidiary of an instrument in the form ofAnnex 1, such Subsidiary shall become a Guarantor hereunder with the sameforce and effect as if originally named as a Guarantor herein.  The execution and delivery of any instrumentadding an additional Guarantor as a party to this Guaranty shall not requirethe consent of any other Guarantor hereunder. The rights and obligations of each Guarantor hereunder shall remain infull force and effect notwithstanding the addition of any new Guarantor as aparty to this Guaranty.

 

Section 17.             Subordination and IntercreditorAgreement.  Reference is made to theSubordination and Intercreditor Agreement dated of even date herewith (asamended, restated, supplemented or otherwise modified from time to time, the “Subordinationand*******Intercreditor Agreement***”),among Union Bank of California, N.A., as Senior Agent, and ****UnionBanCal Equities, Inc.,****as Subordinated Agent, and certain other persons,party or that may become party thereto from time to time.  Notwithstanding anything herein to thecontrary, this Guaranty, the obligations of the Guarantors hereunder and therights and remedies of the Beneficiaries hereunder are subject to theprovisions of the Subordination and Intercreditor Agreement.  In the event of any conflict between theterms of the Subordination and Intercreditor Agreement and this Guaranty, theterms of the Subordination and Intercreditor Agreement shall govern andcontrol.

 

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Section 18.             **NOTICE OF FINAL AGREEMENTS.  PURSUANTTO SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE, AN AGREEMENT INWHICH THE AMOUNT INVOLVED IN AGREEMENT EXCEEDS $50,000 IN VALUE IS NOTENFORCEABLE UNLESS THE AGREEMENT IS IN WRITING AND SIGNED BY THE PARTY TO BEBOUND OR THAT PARTY’S AUTHORIZED REPRESENTATIVE.**

 

**THE RIGHTS AND OBLIGATIONS OF THE PARTIES TOAN AGREEMENT SUBJECT TO THE PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROMTHE WRITTEN AGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARESUPERSEDED BY AND MERGED INTO THIS GURANTY. THIS GUARANTY AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENTAMONG THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORALAGREEMENTS OF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORALAGREEMENTS AMONG THE PARTIES.**

 

**[Remainder of this page intentionallyleft blank.]**

 

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Each Guarantorhas caused this Guaranty to be duly executed as of the date first abovewritten.

 
| Address for each Guarantor:        | **GUARANTORS:**                               |
|------------------------------------|-----------------------------------------------|
| c/o Cano Petroleum, Inc.      |                                          |
| 801 Cherry Street, Suite 3200 | **LADDER COMPANIES, INC.**                    |
| Fort Worth, Texas 76102            | **SQUARE ONE ENERGY, INC.**                   |
| Attention: Morris B. Smith, CFO    | **W.O. ENERGY OF NEVADA, INC.**               |
| Facsimile: (817) 334-0222          | **WO ENERGY, INC.**                           |
| ** **                         | **CANO PETRO OF NEW MEXICO, INC.**            |
| ** **                         | **PANTWIST, LLC**                             |
| ** **                         | ** **                                    |
| ** **                         | ** **                                    |
|                               | Each by:                                      | /s/ Morris B. Smith |
|                               |                                          | Morris B. Smith |
|                               |                                          | Vice President |
|                               |                                          |   |
|                               | **W.O. OPERATING COMPANY, LTD.**              |
|                               | By: WO Energy, Inc., its general partner |
|                               |                                          |
|                               |                                          |
|                               |   By: :                             | /s/ Morris B. Smith |
|                               |                                          | Morris B. Smith |
|                               |                                          | Vice President |
|                               |                                          |   |
|                               | **W.O. PRODUCTION COMPANY, LTD.**             |
|                               | By: WO Energy, Inc., its general partner |
|                               |                                          |
|                               |                                          |
|                               |   By:                               | /s/ Morris B. Smith |
|                               |                                          | Morris B. Smith |
|                               |                                          | Vice President |
|                                    |                                               |  |  |  |  |

 

 

*Signature Page to Subordinated GuarantyAgreement*

 

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Execution Version

** **

Annex 1 to the

Subordinated Guaranty Agreement

 

SUPPLEMENTNO.          dated as of                            (the*“Supplement*”),to the Subordinated Guaranty Agreement dated as of March       ,2008 (as amended, supplemented or otherwise modified from time to time, the *“Guaranty Agreement”*),among each of the subsidiaries party thereto (each such subsidiaryindividually, a *“Guarantor”* and collectively, the *“Guarantors”*) of CANO PETROLEUM,INC., a Delaware corporation (the *“Borrower”*) in favor ofUNIONBANCAL EQUITIES, INC., as Administrative Agent (the *“Administrative Agent”*) for thebenefit of the Beneficiaries (as defined in the Guaranty Agreement).

 

A.            Reference is made tothe Subordinated Credit Agreement dated as of March       ,2008 (as amended, supplemented or otherwise modified from time to time, the *“Credit Agreement”*),among the Borrower, the lenders from time to time party thereto (the *“Lenders”*),and the Administrative Agent.

 

B.            Capitalized terms usedherein and not otherwise defined herein shall have the meanings assigned tosuch terms in the Guaranty Agreement and the Credit Agreement.

 

C.            The Guarantors haveentered into the Guaranty Agreement in order to induce the Lenders to makeAdvances.  Pursuant to Section 6.15of the Credit Agreement, the Subsidiaries of the Borrower are required to enterinto the Guaranty Agreement as Guarantors. Section 16 of the Guaranty Agreement provides that additionalSubsidiaries of the Borrower may become Guarantors under the Guaranty Agreementby execution and delivery of an instrument in the form of this Supplement.  The undersigned Subsidiary of the Borrower(the *“NewGuarantor”*) is executing this Supplement in accordance with therequirements of the Credit Agreement to become a Guarantor under the GuarantyAgreement.

 

Accordingly,the Administrative Agent and the New Guarantor agree as follows:

 

SECTION 1.     In accordance with Section 16of the Guaranty Agreement, the New Guarantor by its signature below becomes aGuarantor under the Guaranty Agreement with the same force and effect as iforiginally named therein as a Guarantor and the New Guarantor hereby (a) agreesto all the terms and provisions of the Guaranty Agreement applicable to it as aGuarantor thereunder and (b) represents and warrants that therepresentations and warranties made by it as a Guarantor thereunder are trueand correct in all material respects on and as of the date hereof.  Each reference to a “Guarantor” in theGuaranty Agreement shall be deemed to include the New Guarantor.  The Guaranty Agreement is hereby incorporatedherein by reference.

 

SECTION 2.     The New Guarantor representsand warrants to the Administrative Agent and the other Beneficiaries that thisSupplement has been duly authorized, executed and delivered by it andconstitutes its legal, valid and binding obligation, enforceable against it inaccordance with its terms (subject to applicable bankruptcy, reorganization,insolvency, moratorium or similar laws affecting creditors’ rights generallyand subject, as to enforceability, 

 

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to equitable principlesof general application (regardless of whether enforcement is sought in aproceeding in equity or at law)).

 

SECTION 3.     This Supplement may beexecuted in counterparts, each of which shall constitute an original, but allof which when taken together shall constitute a single contract.  This Supplement shall become effective whenthe Administrative Agent shall have received counterparts of this Supplementthat, when taken together, bear the signatures of the New Guarantor and theAdministrative Agent. Delivery of an executed signature page to thisSupplement by fax transmission shall be as effective as delivery of a manuallyexecuted counterpart of this Supplement.

 

SECTION 4.     Except as expresslysupplemented hereby, the Guaranty Agreement shall remain in full force andeffect.

 

SECTION 5.     THIS SUPPLEMENT SHALL BEGOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THESTATE OF TEXAS.  The New Guarantor herebyirrevocably submits to the jurisdiction of any Texas state or federal courtsitting in Dallas, Texas in any action or proceeding arising out of or relatingto this Supplement or the Guaranty Agreement and the other Loan Documents, andthe New Guarantor hereby irrevocably agrees that all claims in respect of suchaction or proceeding may be heard and determined in such court.  The New Guarantor hereby irrevocably waives,to the fullest extent it may effectively do so, any right it may have to thedefense of an inconvenient forum to the maintenance of such action orproceeding.  The New Guarantor herebyagrees that service of copies of the summons and complaint and any otherprocess which may be served in any such action or proceeding may be made bymailing or delivering a copy of such process to such Guarantor at its addressset forth on the signature page hereof. The New Guarantor agrees that a final judgment in any such action orproceeding shall be conclusive and may be enforced in other jurisdictions bysuit on the judgment or in any other manner provided by law.  Nothing in this Section shall affect therights of any Beneficiary to serve legal process in any other manner permittedby the law or affect the right of any Beneficiary to bring any action orproceeding against the New Guarantor or its Property in the courts of any otherjurisdiction.

 

SECTION 6.     In case any one or more ofthe provisions contained in this Supplement should be held invalid, illegal orunenforceable in any respect, the validity, legality and enforceability of theremaining provisions contained herein and in the Guaranty Agreement shall notin any way be affected or impaired thereby (it being understood that theinvalidity of a particular provision hereof in a particular jurisdiction shallnot in and of itself affect the validity of such provision in any otherjurisdiction).  The parties hereto shallendeavor in good-faith negotiations to replace the invalid, illegal or unenforceableprovisions with valid provisions the economic effect of which comes as close aspossible to that of the invalid, illegal or unenforceable provisions.

 

SECTION 7.     All communications andnotices hereunder shall be in writing and given as provided in Section 10of the Guaranty Agreement.  Allcommunications and notices hereunder to the New Guarantor shall be given to itat the address set forth under its signature below.

 

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SECTION 8.     The New Guarantor agrees toreimburse the Administrative Agent for its reasonable out-of-pocket expenses inconnection with this Supplement, including the fees, disbursements and othercharges of counsel for the Administrative Agent.

 

SECTION 9.     **PURSUANT TO SECTION 26.02OF THE TEXAS BUSINESS AND COMMERCE CODE, AN AGREEMENT IN WHICH THE AMOUNTINVOLVED IN AGREEMENT EXCEEDS $50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THEAGREEMENT IS IN WRITING AND SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY’SAUTHORIZED REPRESENTATIVE.**

 

**THE RIGHTS AND OBLIGATIONS OF THE PARTIES TOAN AGREEMENT SUBJECT TO THE PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROMTHE WRITTEN AGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARESUPERSEDED BY AND MERGED INTO THIS GURANTY. THIS SUPPLEMENT, THE GUARANTY AGREEMENT AND THE OTHER LOAN DOCUMENTSREPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE SUBJECTMATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.**

 

IN WITNESSWHEREOF, the New Guarantor and the Administrative Agent have duly executed thisSupplement to the Guaranty Agreement as of the day and year first abovewritten.

 
|   | [Name of New Guarantor]                              |
|--------|------------------------------------------------------|
|   |                                                 |
|   |                                                 |
|   | By:                                                  |   |
|   | Name:                                                |   |
|   | Title:                                               |   |
|   |                                                 |
|   | AddressofGuarantor:                                  |
|   |                                                 |
|   |                                                 |
|   |                                                 |
|   |                                                 |
|   |                                                 |
|   | **ADMINISTRATIVE AGENT:**                            |
|   | ** **                                           |
|   | UNIONBANCAL EQUITIES, INC., as  Administrative Agent |
|   |                                                 |
|   | By:                                                  |   |
|   | Name:                                                |   |
|   | Title:                                               |   |
|        |                                                      |  |  |  |  |  |  |

 

3

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|   | By:    |   |
|--------|--------|--------|
|   | Name:  |   |
|   | Title: |   |
|        |        |        |  |  |

 

4

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