Exhibit 10.1


 


CONSULTING AGREEMENT


 


THIS CONSULTING AGREEMENT (this “Agreement”)
is made and entered into as of October 1, 2008 (the “Effective
Date”) by and between Cano Petroleum, Inc., a Delaware
corporation (the “Company”), and Morris B.
Smith (“Consultant”).  The Company and Consultant are referred to in
this Agreement as the “Parties.”


 


RECITALS


 


WHEREAS, Consultant has agreed to undertake certain duties and
responsibilities and to perform certain consulting services for the period
beginning on the Effective Date and ending September 30, 2009, all as more
fully described in this Agreement; and


 


WHEREAS, the Company desires to engage Consultant to undertake certain
duties and responsibilities and to perform certain consulting services, all as
more fully described in this Agreement.


 


AGREEMENT


 


NOW, THEREFORE, for and in consideration of the foregoing premises and
the provisions hereof and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties agree as follows:


 


1.                                      Position and Services.


 


a.             Consulting Services.  During the period commencing on the Effective
Date and ending on September 30, 2009 (the “Consulting
Period”), subject to the terms of this Agreement (including the
extension and early termination provisions set for in Section 3.a.
below), the Company agrees to retain Consultant and Consultant agrees to serve,
as a consultant to the Company for the purpose of providing advice and offering
other assistance to the Company’s Chief Executive Officer (“CEO”), consistent with the resources
of Consultant, on matters as the CEO reasonably requests (the “Consulting Services”).  The Company has agreed to retain Consultant
as a consultant in reliance on the special and unique abilities of Consultant
in rendering the Consulting Services and Consultant will use Consultant’s
reasonable efforts, skills, judgment and abilities in rendering the Consulting
Services.  Consultant shall perform the
Consulting Services in a diligent, trustworthy, and businesslike manner, with
the purpose of advancing the business of the Company.  Consultant’s duties during the Consulting
Period shall require Consultant to perform Consulting Services for the Company
at least fifteen (15) hours per month. 
Consultant shall not perform non-Company related tasks on the Company’s
property.


 


b.             Nature of Relationship Between Parties.  During the Consulting Period, Consultant
shall render the Consulting Services in this Agreement as an independent
contractor.  Except as otherwise agreed
by the Company, Consultant will have no authority or power to bind the Company
regarding third parties or to represent to third parties that Consultant has
authority or power to bind the Company. 
It is not the intention of the Parties to create, by virtue of this
Agreement, any employment relationship, trust, partnership or joint venture
between Consultant and the Company or any of its affiliates or, except as
specifically provided herein, to make them legal representatives or agents of
each other or to create any fiduciary relationship or additional contractual
relationship among them for the duration of the Consulting Period.  As an independent contractor, Consultant will
not be eligible for any Company-provided benefits, including, without
limitation, medical, retirement, short term disability and long term
disability.


 

















 


2.                                      Consideration.


 


a.                                       Consulting Fee. 
During the Consulting Period, the Company shall pay Consultant a monthly
consulting fee of: (a) three thousand dollars ($3,000) for up to the first
fifteen (15) hours of service rendered by Consultant during such month; and (b) two
hundred dollars ($200) for each hour of service above fifteen (15) hours of
service provided by Consultant during such month (the “Consulting
Fees”), which shall be payable in accordance with the following
schedule:


 


i.              For the period beginning on the Effective Date and
ending on March 15, 2009, the Consulting Fees shall be payable in
bi-weekly installment payments in accordance with the Company’s payroll
practices;


 


ii.             For the period beginning on March 16, 2009 and
ending on April 1, 2009, the Consulting Fees shall be payable in one lump
sum payment on April 2, 2009; and


 


iii.            For all periods during the Consulting Period after April 1,
2009, the Consulting Fees shall be payable in bi-weekly installment payments in
accordance with the Company’s payroll practices.


 


Each payment made pursuant to this Section 2.a. shall be
treated as a separate payment for purposes of Section 409A of the Internal
Revenue Code of 1986, as amended (the “Code”).  For purposes of clarity, any amounts earned
during the period beginning on March 16, 2009 and ending on the last day
of the sixth month following the Effective Date shall not be paid until the
first day of the seventh month following the Effective Date.


 


b.             Payments. 
The consideration described in this Section 2 shall be the
sole compensation to which Consultant shall be entitled for performance of the
Consulting Services.


 


c.             Reimbursement of Expenses. Consultant shall be
entitled to receive reimbursement for all reasonable expenses incurred by
Consultant in performing his duties and responsibilities under this Agreement,
consistent with the Company’s policies or practices for reimbursement of
expenses incurred by its independent contractors.


 


d.             Payment of Taxes. 
With respect to the Consulting Services, Consultant agrees to be solely
responsible for withholding taxes or necessary payments to any taxing authority
based on the Company’s payment of the consideration for the Consulting Services
under this Agreement.  Consultant further
agrees not to seek or make any claim against the Company, its subsidiaries or
any of their directors or employees for compensation, damages, costs, interest,
fees, assessments, withholdings, penalties or other losses, should a claim or
determination be made that Consultant has failed to withhold or make the
payments contemplated by the preceding sentence.  The withholdings referenced in this Section 2.d.
include, without limitation, Federal and State income taxes, FICA, and
Medicare.


 


e.             Facilities. 
During the Consulting Period, the Company will furnish Consultant with
office space, equipment, supplies, and such other facilities and personnel as
the Company deems necessary or appropriate for the performance of the Consulting
Services.


 

















 


f.              2005 LTIP Benefits.  Exhibit A, attached hereto and
incorporated herein, sets forth as of September 30, 2008, all outstanding
and unvested awards of restricted stock (the “Restricted
Stock Awards”)  previously
granted to Consultant under the Cano Petroleum, Inc. 2005 Long-Term
Incentive Plan (the “2005 LTIP”).  The Parties both acknowledge and agree that,
other than the Restricted Stock Awards, as of the Effective Date, there are no
other outstanding and unvested awards that were previously granted to
Consultant.  As additional consideration
for Consultant’s agreement to perform the Consulting Services, on September 30,
2008, the Company’s Compensation Committee vested certain shares subject to the
Restricted Stock Awards, as shown on Exhibit A.  With respect to Restricted Stock Awards, the
Parties further agree and acknowledge that Consultant’s performance of the
Consulting Services shall not be sufficient to prevent a “Termination of
Service” (as defined in the 2005 LTIP) for purposes of such awards, and, except
to the extent otherwise provided in this Section 2.f., the Parties
agree that all unvested shares subject to the Restricted Stock Awards
terminated and were forfeited as of the date Consultant ceased providing
services to the Company as an employee.


 


3.                                      Termination.


 


a.             Termination. 
Except as otherwise provided in this Section 3.a., this
Agreement shall be effective for the Consulting Period described in Section 1.a.
above, provided, however, that the Consulting Period shall be automatically
extended for successive one-year terms unless and until terminated (upon the
earliest of the following): (a) by the death or Disability (defined below)
of Consultant, in which case the Consulting Period and this Agreement shall
terminate immediately; or (b) by any party hereto for any reason, pursuant
to a written notice provided by such party to the other party at least thirty
(30) days prior to the date of termination, in which case this Agreement, and
the Consulting Period shall terminate as of the date of termination provided in
such written notice.  Upon termination of
the Consulting Period, the Company will have no obligation whatsoever to
Consultant, except for the payment of accrued but unpaid Consulting Fees for
Consulting Services rendered prior to the termination date.  For purposes hereof, “Disability”
shall mean the inability, as determined in good faith by the Company, of
Consultant to provide the Consulting Services as a result of any illness or
physical, mental, or emotional incapacity or limitation that continues for at
least thirty (30) consecutive days or exists for at least thirty (30) aggregate
days during any consecutive twelve (12) month period.


 


b.             Survival. 
The provisions of Section 4 and Section 5 of
this Agreement shall survive termination or expiration of this Agreement.  In addition, all provisions of this Agreement
that expressly continue to operate after the Agreement’s termination shall
survive the Agreement’s termination or expiration in accordance with the terms
of such provisions.


 


4.                                      Confidentiality. 
Consultant shall not, during the Consulting Period or at any time
thereafter, disclose to anyone, or publish, use for any purpose, exploit, nor
solicit, allow or assist another person to use, disclose or exploit, except for
the benefit of the Company, without prior written authorization of the Company,
any information regarding the business affairs of the Company, strategies and
plans, business information, financial information, personnel information or
any other confidential or non-public information regarding the Company, except
as:  (1) required for Consultant’s
work for the Company; (2) required by law; or (3) directed and
authorized in writing by the Company. 
Consultant agrees to keep the terms of the Consulting Agreement
confidential.


 


5.                                      Non-disparagement. 
During the Consulting Period and any time thereafter, in consideration
for the obligations of the Company to Consultant hereunder, neither Consultant
nor any affiliate, associate, partner, or agent of Consultant shall orally or
in writing disparage, denigrate, or comment negatively upon the Company
(including any subsidiary of the Company) or any director, 


 

















 


officer, employee, agent, or representatives
of the Company to or in the presence of any Person, except as required by a
valid subpoena or other Order (as defined below) (but only as and to the extent
actually required as determined in good faith by legal counsel to Consultant);
provided, however, that, if Consultant receives any subpoena or other Order,
Consultant shall (if possible) provide the Company with a copy of such subpoena
or other Order at least five (5) business days prior to the date on which
Consultant shall be required to make the disclosure(s).  Consultant acknowledges that in executing
this Agreement, Consultant has knowingly, voluntarily, and intelligently waived
any free speech, free association, free press or First Amendment to the United
States Constitution (including, without limitation, any counterpart or similar
provision or right under the Texas Constitution) rights to disclose,
communicate, or publish disparaging information concerning or related to the
Company.  Consultant also understands and
agrees that he has had a reasonable period of time to consider this
non-disparagement clause, to review the non-disparagement clause with his
attorney, and to knowingly and voluntarily consent to its terms. For purposes
hereof, “Order” shall
mean any order, including, without limitation, any permanent or temporary
restraining order, award, decision, injunction, writ, judgment, settlement,
ruling, subpoena, decree, or verdict entered, issued, made, or rendered by any
governmental authority.


 


6.             Remedies.  Consultant acknowledges that the protections
and restrictions in this Agreement, in view of the nature of the Company’s
business, are reasonable and necessary to protect the Company’s legitimate
business interests and that any violation of this Agreement would result in
irreparable injury to the Company for which there is no adequate remedy at
law.  In the event of a breach or a
threatened breach by Consultant of any provision in this Agreement, the Company
shall be entitled to a temporary restraining order and injunctive relief
restraining Consultant from the commission of any breach, and to recover the
Company’s attorneys’ fees, costs and expenses related to the breach or
threatened breach.  Nothing contained in
this Agreement shall be construed as prohibiting the Company from pursuing any
other remedies available to it for any breach or threatened breach, including,
without limitation, the recovery of money damages, equitable relief, attorneys’
fees, and costs.


 


7.             Consultant’s
Representations. 
Consultant represents and warrants to the Company that the execution and
delivery by Consultant of this Agreement do not, and the performance by
Consultant of Consultant’s obligations hereunder will not, with or without the
giving of notice or the passage of time, or both (a) violate any judgment,
writ, injunction, or order of any court, arbitrator, or governmental authority
applicable to Consultant, or (b) conflict with, result in the breach of
any provision of or the termination of, or constitute a default under, any
agreement to which Consultant is a party or by which Consultant is or may be
bound.


 


8.             Indemnity of
Company.  Company hereby indemnifies and agrees to hold
harmless Consultant and his heirs and assigns (each an “Indemnified Person”)
from and against any and all liabilities, obligations, claims, losses, damages,
penalties, actions, judgments, suits, costs, expenses, or disbursements of any
kind or nature as a result of a Claim of a third party (collectively, the “Third
Party Claims”), which may be imposed on, incurred by or asserted against any
Indemnified Person arising in connection with the subject matter hereof
(including, without limitation, the defense of any Indemnified Person’s actions
and/or inactions in connection with the subject matter hereof), unless such
Third Party Claims were the result of the gross negligence or willful conduct
of the Consultant.


 


9.             Indemnity of
Consultant.  Consultant hereby indemnifies and agrees to
hold harmless the Company and its officers, directors, employees, agents and
representatives (each an “Indemnified Person”) from and against all Third Party
Claims which may be imposed on, incurred by or asserted against any Indemnified
Person arising in connection with the subject matter hereof, which is solely
attributable to the gross negligence and/or willful conduct of the Consultant.


 

















 


10.          Choice of Law.  This Agreement has been executed and  delivered in and shall be interpreted, construed and
enforced pursuant to and in accordance with the laws of the State of Texas,
without giving effect to the conflicts of law principles thereof.


 


11.          Waiver.  The forbearance or failure to pursue any
legal or equitable remedy or right available to any party hereto upon default
under, or upon a breach of, this Agreement shall not constitute waiver of such
right, nor shall any such forbearance, failure or actual waiver imply or
constitute waiver of a subsequent default or breach.


 


12.          Severability.  If any provision or provisions of this
Agreement shall be held to be invalid, illegal, or unenforceable for any reason
whatsoever, (a) the validity, legality and unenforceability of the
remaining provisions of this Agreement (including without limitation, all
portions of any sections
containing any such provision held to be invalid, illegal or unenforceable,
that are not themselves invalid, illegal or unenforceable), shall not in any
way be affected or impaired thereby, and (b) such provision or provisions
held to be invalid, illegal or unenforceable shall be limited or modified in
its or their application to the minimum extent necessary to avoid such
invalidity, illegality or unenforceability, and, as so limited or modified,
such provision or provisions and the balance of this Agreement shall be
enforceable in accordance with their terms.


 


13.          Headings.  The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.


 


14.          Counterparts.  This
Agreement and amendments thereto shall be in writing and may be executed in
counterparts.  Each such counterpart
shall be deemed an original, but both counterparts together shall constitute
one and the same instrument.


 


15.          Further Assurances.  Each
party hereto shall execute and deliver such documents, and take all such other
actions, as may be reasonably required or reasonably requested by any other party
hereto to effect this Agreement and each transaction contemplated hereby.


 


16.          Entire Agreement;
Modification.  This Agreement constitutes the entire
agreement and understanding of the Parties hereto with respect to the subject
matter hereof and supersede all other prior agreements, arrangements, and
understandings with respect to the subject matter hereof.  No understanding, promise, inducement,
statement of intention, representation, warranty, covenant, or condition,
written or oral, express or implied, whether by statute or otherwise, has been
made by any party hereto with respect to the subject matter hereof which is not
embodied in this Agreement and no party hereto shall be bound by or liable for
any such alleged understanding, promise, inducement, statement, representation,
warranty, covenant, or condition not set forth herein with respect to the
subject matter hereof.  This Agreement
may only be amended or otherwise modified by written instrument duly executed
by each party hereto.


 


17.          Binding Effect;
Assignment; No Third Party Beneficiary.  This Agreement shall inure to the benefit of,
and be binding upon, each party hereto and each heir, executor, administrator,
legal representative, and permitted assignee of such party.  Except as otherwise provided hereby, this
Agreement, and the rights and obligations created hereunder, may not be
transferred or assigned by any party hereto without the prior consent of each
other party hereto.  The Company may
assign this Agreement upon written notice to Consultant, provided that the
assignee assumes all of the obligations of the Company under this
Agreement.  Except as otherwise expressly
provided hereby, there shall be no 


 

















 


third party beneficiary of this Agreement and
this Agreement shall not inure to the benefit of, be enforceable by, or create
any right or cause of action in any Person other than the parties hereto and
their heirs, executors, administrators, legal representatives, successors, and
permitted assigns.  Neither the
availability of, nor any limit on, any remedy hereunder shall limit the
remedies of any party hereto against third parties.


 


18.          Code Section 409A;
Delay of Payments.  The terms of this Agreement have been
designed to comply with the requirements of Section 409A of the Code, where
applicable, and shall be interpreted and administered in a manner consistent
with such intent.  If deferral of any
amounts payable under this Agreement is necessary in order to prevent any
accelerated or additional tax under Section 409A of the Code, then (a) the
Company will defer the payment of any such amounts hereunder until the date
that is six (6) months and one (1) day following the Effective Date
at which time any such delayed amounts will be paid to Consultant in a single
lump sum, and (b) if any other payments of money or other benefits due to
Consultant hereunder could cause the application of an accelerated or
additional tax under Section 409A of the Code, such payments or other
benefits shall be deferred if deferral will make such payment or other benefits
compliant under Section 409A of the Code.


 


19.          Notice.  Any notice required or permitted to be
delivered hereunder shall be deemed to be delivered only when actually received
by the Company or Consultant, as the case may be, at the addresses set forth
below, or at such other addresses as they have theretofore specified by written
notice delivered in accordance herewith:


 


	
  a.

  	
   

  	
  Notice to the Company
  shall be addressed and delivered as follows:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Cano Petroleum, Inc.

  
	
   

  	
   

  	
  801 Cherry Street

  
	
   

  	
   

  	
  Unit 25, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, TX 76102

  
	
   

  	
   

  	
  Attn: General Counsel

  
	
   

  	
   

  	
  Facsimile: (817) 698-0796

  
	
   

  	
   

  	
   

  
	
  b.

  	
   

  	
  Notice to Consultant shall
  be addressed and delivered as set forth on the signature page.

  



 


*
* * * * * * * * * *


 

















 


IN WITNESS WHEREOF, each party hereto has caused this Agreement to be
executed, delivered, and effective as of the date first written above.


 


	
   

  	
  THE COMPANY:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
  Name:

  	
  S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
  Chairman and Chief
  Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CONSULTANT:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Morris B. Smith

  
	
   

  	
  Name:

  	
  Morris B. Smith

  
	
   

  	
   

  
	
   

  	
  Address:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
				



 

















 


EXHIBIT
A


 


	
  Grant

  Date

  	
   

  	
  Original

  Grant

  Vesting

  Date

  	
   

  	
  Number of

  Shares

  Unvested as of

  9/29/2008

  	
   

  	
  Vesting

  Period

  (Months)

  	
   

  	
  Earned

  Through

  9/30/2008

  (Months)

  	
   

  	
  Total Shares Vested as of

  9/30/2008

  	
   

  
	
  6/1/06

  	
   

  	
  5/30/09

  	
   

  	
  20,000

  	
   

  	
  36

  	
   

  	
  28

  	
   

  	
  15,556

  	
   

  
	
  7/2/07

  	
   

  	
  7/2/09

  	
   

  	
  38,333

  	
   

  	
  24

  	
   

  	
  15

  	
   

  	
  23,958

  	
   

  
	
  7/2/07

  	
   

  	
  7/2/10

  	
   

  	
  38,334

  	
   

  	
  36

  	
   

  	
  15

  	
   

  	
  15,973

  	
   

  
	
  5/12/08

  	
   

  	
  5/12/09

  	
   

  	
  40,000

  	
   

  	
  12

  	
   

  	
  5

  	
   

  	
  16,667

  	
   

  
	
  5/12/08

  	
   

  	
  5/12/10

  	
   

  	
  40,000

  	
   

  	
  24

  	
   

  	
  5

  	
   

  	
  8,333

  	
   

  
	
  5/12/08

  	
   

  	
  5/12/11

  	
   

  	
  40,000

  	
   

  	
  36

  	
   

  	
  5

  	
   

  	
  5,556

  	
   

  
	
  TOTAL

  	
   

  	
   

  	
   

  	
  216,667

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  86,043