EX-10.9






LOAN AGREEMENT




This Loan Agreement (this “Agreement”) is made and entered into on the 28th day of September,
2006 by and between BaseLine Capital, Inc. (“Lender”) and Esconde Resources LP (“Borrower”) and
Esconde Energy LLC (the “Guarantor”), with reference to the following facts:



A. Contemporaneously with the execution of this Agreement, Borrower is acquiring interests in
certain oil and gas properties from Charles W. Darter, Jr. (the “Acquisition”).



B. A portion of the purchase price in the Acquisition is being funded by the proceeds of a
loan from American State Bank (the “Bank”) to Borrower (the “Senior Debt”).



C. Borrower and Guarantor have requested that Lender loan to Borrower $500,000.00 to fund a
portion of the purchase price in the Acquisition, and Lender has agreed to make such loan pursuant
and subject to the terms of this Agreement and the other Loan Documents (as defined herein).



NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual promises, covenants and agreements set
forth herein and in the other Loan Documents, the parties hereto agree as follows:



1. Closing.




(a) Closing of the loan contemplated hereby (“Closing”) shall occur contemporaneously
with the closing of the Acquisition. Closing shall occur at the offices of Lender, or at
such other time or place as agreed upon by the parties. At Closing, Borrower and Guarantor
shall deliver to Lender the following fully executed documents (as such capitalized terms
are defined herein):




(i) This Agreement.




(ii) The Notes.




(iii) The Unit Option in the name(s) of Lender and its designees (if
applicable).




(iv) The Guaranty.




(v) A copy of the corporate resolutions of Borrower and Guarantor authorizing
this transaction and the Acquisition, certified by the general partner of Borrower.




(b) Closing shall be conditioned upon Lender’s receipt of the foregoing documents and
upon the following:




(i) Borrower obtaining the loan from Bank constituting the Senior Debt pursuant
to loan documents acceptable to Lender.




(ii) The contemporaneous consummation of the Acquisition.




(iii) Lender shall have received certificates of existence and good standing of
Borrower and Guarantor.



2. Loan and Collateral.




(a) In conjunction with the execution of this Agreement, Borrower will execute and
deliver to Lender (i) Promissory Note No. 1 dated as of the date of this Agreement in the
original principal amount of $325,000.00 payable to Lender in substantially the form
attached hereto as Exhibit “A”, and (ii) Promissory Note No. 2 dated as of the date
of this Agreement in the original principal amount of $175,000.00 payable to Lender in
substantially the form attached hereto as Exhibit “B” (which Promissory Notes along
with any renewals, extensions and amendments thereto are hereinafter referred to as the
“Notes”). Borrower shall only be entitled to a single advance of the entire original
principal amount under each of the Notes at Closing.




(b) In consideration of the advancement of credit under the Notes and to secure all
amounts owing under the Notes and any other indebtedness now or hereafter owed by Borrower
to Lender (collectively, the “Indebtedness”), Guarantor will execute and deliver to Lender a
guaranty of the Indebtedness (the “Guaranty”). The Notes, this Agreement, the Guaranty and
all other documents or instruments related thereto, are referred to herein as the “Loan
Documents”.



3. Senior Debt. So long as any Indebtedness is owed to Lender by Borrower, Borrower
agrees not to seek or agree to an increase of the total amount owed or available to be borrowed
under a borrowing base or otherwise by Borrower from Bank to a total amount in excess of
$650,000.00 without the prior written consent of Lender.



4. Equity Interest. Upon execution and delivery of this Agreement, Borrower shall
grant and issue to Lender (or Lender’s designees if and as requested by Lender) an option for the
purchase of 100,000 limited partner units of Borrower (“Units”), exercisable at any time after the
date the Indebtedness represented by the Notes is paid in full, at an exercise price of $0.0001 per
Unit, in substantially the form attached hereto as Exhibit “C” (the “Unit Option”).



In the event of a Change of Control (as defined herein) of Borrower, a sale of all or
substantially all of the assets of Borrower, an Event of Default (as defined herein), or any
merger, consolidation or similar transaction involving Borrower or Guarantor, the Unit Option shall
be automatically and fully exercisable. Upon any such transaction or other event in which the
holders of Units are entitled to receive any consideration, the holder(s) of the Unit Option shall
be entitled to the same consideration per Unit paid with respect to the outstanding Units
multiplied by the number of Units covered by the Unit Option (less the exercise price therefor).
The Unit Option shall be transferable to any participant of Lender under Section 17(h) hereof.
Borrower has reserved, and shall continue to reserve, for issuance a sufficient number of Units for
the full exercise of the Unit Option, and the number of such Units shall be subject to adjustment
upon the occurrence of certain events, including without limitation the issuance of any additional
securities by Borrower, pursuant to the terms of the Unit Option.



5. Adverse Condition or Event. Each of Borrower and Guarantor agrees to promptly
advise Lender in writing of (i) any condition, event or act which comes to its attention that would
or might materially adversely affect the financial condition or operations of Borrower or
Guarantor, or Lender’s rights under the Loan Documents, (ii) any litigation filed by or against
Borrower or Guarantor, (iii) any event that has occurred that would constitute a default or event
of default under any Loan Document, and (iv) any event that has occurred that would constitute a
default or an event of default under any other indebtedness or material agreement of Borrower or
Guarantor.



6. [Reserved]



7. Representations and Warranties. Each of Borrower and Guarantor represents and
warrants to Lender as follows:




(a) Good Standing. Borrower is a limited partnership, duly organized, validly
existing and in good standing under the laws of the state of its organization. Guarantor is
a limited liability company duly organized, validly existing and in good standing under the
laws of the state of its organization. Each of Borrower and Guarantor has qualified as a
foreign entity and is in good standing in each other state or jurisdiction wherein its
operations, transaction of business or ownership of property make such qualification
necessary.




(b) Authority and Consents. Each of Borrower and Guarantor has full power and
authority to execute and deliver the Loan Documents to which it is a party and to perform
the obligations provided for therein, all of which have been duly authorized by all proper
and necessary action of the appropriate governing body of Borrower and Guarantor. No
consent or approval of or notice to any public authority or other third party is required in
connection with any Loan Document, the transaction contemplated by the Loan Documents or the
Acquisition.




(c) Binding Agreement. This Agreement and the other Loan Documents executed by
each of Borrower and Guarantor constitute valid and legally binding obligations of each of
Borrower and Guarantor, as applicable, enforceable in accordance with their terms.




(d) Litigation. There is no litigation or similar proceeding involving
Borrower or Guarantor pending or, to the knowledge of Borrower and Guarantor, threatened
before any court or governmental authority, agency or arbitration authority, except that
certain case styled Norman Rockmaker, et.al. v. Ronnie Steinocher, et.al., Cause No.
CV 45,624 in the District Court of Midland County, Texas, in which Borrower and Guarantor
are defendants.




(e) No Conflicting Agreements. There is no provision in any agreement or other
document pertaining to the organization, power or authority of either Borrower or Guarantor
and no provision of any existing agreement, mortgage, indenture or contract binding on
either Borrower or Guarantor, which would conflict with or in any way prevent the execution,
delivery or carrying out of the terms of this Agreement and the other Loan Documents.




(f) Ownership of Assets. Borrower has good and defensible title to all of its
assets free and clear of liens, claims and other encumbrances, except liens securing the
Senior Debt.




(g) Taxes. All taxes and assessments due and payable by each of Borrower and
Guarantor have been paid or are being contested in good faith by appropriate proceedings.
Borrower and Guarantor have filed all tax returns which they are required to file.




(h) Financial Statements. The financial statements of each of Borrower and
Guarantor heretofore delivered to Lender have been prepared on a consistent basis throughout
the period involved and fairly present Borrower’s and Guarantor’s financial condition as of
the date or dates thereof, and there has been no material adverse change in its financial
condition or operations since the dates of such financial statements. There are no
liabilities of Borrower or Guarantor which are not reflected in such financial statements.




(i) Information. The recitals set forth at the beginning of this Agreement and
all factual information furnished by Borrower and Guarantor to Lender in connection with
this Agreement and the other Loan Documents is and will be accurate and complete on the date
as of which such information is delivered to Lender and is not and will not be incomplete by
the omission of any material fact necessary to make such information not misleading.




(j) Environmental. The conduct of Borrower’s and Guarantor’s business
operations and the condition of their assets does not and will not violate any federal laws,
rules or ordinances for environmental protection, any applicable local or state law, rule,
regulation or rule of common law or any judicial interpretation thereof relating primarily
to the environment, except where such matter would not have a material adverse effect on
Borrower or Guarantor.




(k) Permits. Each of Borrower and Guarantor has all permits, licenses,
certifications and similar authorizations, has made all filings and obtained all consents
(collectively, the “Permits”) necessary and appropriate for the conduct of its business and
ownership of its assets.




(l) Compliance. Each of Borrower and Guarantor is in compliance with all laws,
rules and regulations applicable to its business, properties or transactions.




(m) Capitalization. The capitalization of Borrower consists of 333,333,333
Units issued and outstanding as of the date of this Agreement. There are no other classes
of ownership interest, nor any other securities of or options, warrants or rights
convertible or exercisable into any securities of, Borrower issued or outstanding as of the
date hereof, other than the Unit Option in favor of Lender described in Section 4 hereof.



8. Affirmative Covenants. Until full payment and performance of all obligations of
Borrower and Guarantor under the Loan Documents, each of Borrower and Guarantor will, unless Lender
consents otherwise in writing (and without limiting any obligation of Borrower and Guarantor under
any other Loan Document):




(a) Financial Statements and Other Information.




(i) Furnish to Lender unaudited financial statements (including a balance sheet
and profit and loss statement) of Borrower and Guarantor, prepared in accordance
with generally accepted accounting practices for each fiscal year within 90 days
after the close of each such fiscal year, which shall include a statement of cash
flow and contingent obligations.




(ii) If financial statements in addition to annual financial statements are
delivered or required to be delivered to Bank, Borrower shall furnish to Lender
unaudited financial statements (including a balance sheet and profit and loss
statement) of Borrower and Guarantor for each month within 30 days after the close
of each fiscal quarter, which shall include a statement of cash flow and contingent
obligations and a certification by the general partner of Borrower as to accuracy,
completeness and consistent application of generally accepted accounting principles.




(iii) Furnish to Lender copies of Borrower’s and Guarantor’s tax returns.




(iv) If an oil and gas reserve evaluation is delivered or required to be
delivered to Bank, Borrower shall furnish to Lender upon (A) any default hereunder,
and (B) at the same time(s) Borrower delivers or is required to deliver the same to
Bank, an oil and gas reserve evaluation as of said dates covering Borrower’s oil and
gas properties, prepared by independent petroleum engineers acceptable to Lender at
Borrower’s expense.




(v) Furnish to Lender copies of all agreements, documents and correspondence
between Borrower and Guarantor and Bank related to the Senior Debt.




(vi) Furnish to Lender promptly such additional information, reports and
statements respecting the business operations and financial condition of Borrower
and Guarantor, from time to time, as Lender may reasonably request.




(b) Insurance. Maintain insurance with responsible insurance companies and in
such amounts as are satisfactory to Lender and providing for at least 30 days prior notice
to Lender before any cancellation thereof. Satisfactory evidence of such insurance will be
supplied to Lender upon request.




(c) Existence and Compliance. Maintain its existence, good standing and
qualification to do business where required and comply with all laws, regulations and
governmental requirements including, without limitation, environmental laws applicable to it
or to any of its property, business operations and transactions.




(d) Taxes and Other Obligations. Pay all of its taxes, assessments and other
obligations, including, but not limited to taxes, costs or other expenses arising out of
this transaction, as the same become due and payable, except to the extent the same are
being contested in good faith by appropriate proceedings in a diligent manner. Promptly
upon payment and otherwise upon request of Lender, Borrower and Guarantor shall provide to
Lender evidence of payment of all taxes.




(e) Maintenance and Inspection. Maintain its assets in good condition and
repair, and provide access to Lender, upon reasonable prior notice by Lender and during
normal business hours, to inspect its assets and all records of Borrower and Guarantor or
any representations, covenants or other terms herein regarding Borrower or Guarantor.




(f) Environmental. Immediately advise Lender in writing of (i) any and all
enforcement, cleanup, remedial, removal, or other governmental or regulatory actions
instituted, completed or threatened pursuant to any applicable federal, state, or local
laws, ordinances or regulations relating to any hazardous materials affecting either
Borrower or Guarantor or their respective assets; and (ii) all claims made or threatened by
any third party against it relating to damages, contribution, cost recovery, compensation,
loss or injury resulting from any hazardous materials. Borrower and Guarantor shall
immediately notify Lender of any remedial action taken by it under environmental laws,
regulations or agreements. Neither Borrower nor Guarantor will use or permit any other
party to use any hazardous materials at their respective premises except such materials as
are incidental to its normal course of business, maintenance and repairs and which are
handled in compliance with all applicable environmental laws. Each of Borrower and
Guarantor agrees to (I) permit Lender, its agents, contractors, employees and
representatives to enter and inspect its premises at any reasonable times upon three (3)
days prior notice for the purposes of conducting an environmental investigation and audit
(including taking physical samples) to insure compliance with this covenant and Borrower and
Guarantor shall reimburse Lender on demand for the costs of any such environmental
investigation and audit; and (II) provide Lender, its agents, contractors, employees and
representatives with access to and copies of any and all data and documents relating to or
dealing with any hazardous materials used, generated, manufactured, stored or disposed of by
its business operations within five (5) days of Lender’s request therefor.




(g) Title to Assets. Each of Borrower and Guarantor shall maintain good and
defensible title to all of their respective assets, free and clear of all liens, claims and
other encumbrances except for those securing the Senior Debt, and shall provide to Lender
evidence of such title upon request.




(h) Permits. Each of Borrower and Guarantor shall maintain all Permits
necessary and appropriate for the conduct of its business and ownership of its assets.




(i) Use of Proceeds. Borrower agrees to use the loan proceeds along with the
loan proceeds under the Senior Debt for the purpose of completing the Acquisition.



9. Negative Covenants. Until full payment and performance of all obligations of
Borrower and Guarantor under the Loan Documents, each of Borrower and Guarantor will not, without
the prior written consent of Lender (and without limiting any obligation of Borrower and Guarantor
under any other Loan Documents):




(a) Transfer of Assets or Change of Control. (i) Sell, lease, assign or
otherwise dispose of or transfer any interest in any of its assets, other than in the
ordinary course of business, (ii) enter into any merger, consolidation or similar
transaction, or (iii) allow a Change of Control (as defined herein) of Borrower or
Guarantor. As used herein, “Change of Control” means, with respect to Borrower or
Guarantor, an event or series of events by which the holders of the ownership interests of
Borrower or Guarantor as of the date of this Agreement cease to own and control, directly
and indirectly, at least fifty-one percent (51%) of such ownership interests of either
Borrower or Guarantor (excluding any transfer of Units owned by Lender) or a change of the
general partner of Borrower, or more than 50% of the managing members of Guarantor, in
office as of the date of this Agreement.




(b) Liens. Grant, suffer or permit any contractual or noncontractual lien on
or security interest in its assets, except for liens securing the Senior Debt and liens
granted to the seller in connection with the Acquisition on certain properties in Garza
County, Texas, fail to promptly pay when due all lawful claims, whether for labor, materials
or otherwise, or incur or permit any indebtedness to be secured by its assets other than the
Senior Debt to Bank permitted by Section 3.




(c) Restrictions on Dividends, Distributions and Payments. Upon any Event of
Default, Borrower and Guarantor shall not make any dividends, distributions, compensation or
other payments to any of its partners, members or other equity holders, directly or
indirectly.




(d) Extensions of Credit, Investments. Make any loan or advance to any person
or entity, or purchase or otherwise acquire, any capital stock, assets, obligations or other
securities or make any capital contribution to, or otherwise invest or acquire any interest
in any entity, or participate as a partner or joint venturer with any person or entity,
except for the purchase of direct obligations of the United States or any agency thereof
with maturities of less than one year.




(e) Other Debt. Create, incur, assume or become liable in any manner for any
indebtedness (for borrowed money, deferred payment for the purchase of assets, lease
payments, a surety or guarantor for the debt of another or otherwise), except for normal
trade debts incurred in the ordinary course of business, the Indebtedness and the Senior
Debt.




(f) Character of Business. Change the general character of its business as
conducted on the date of this Agreement, or engage in any type of business not reasonably
related to its business as presently conducted.




(g) Transfer of Securities/Change of Control. Guarantor shall not transfer any
of its ownership interests in Borrower, and there shall not be any Change of Control of
Borrower or Guarantor, without the prior written consent of Lender, which shall not be
unreasonably withheld, and the execution and delivery of such guaranties, Loan Document
amendments, and other documents and instruments as are requested by Lender.



10. Arbitration. Lender, Borrower and Guarantor agree that upon the written demand of
either party, whether made before or after the institution of any legal proceedings, but prior to
the rendering of any judgment in that proceeding, all disputes, claims and controversies between
them, whether individual, joint, or class in nature, arising from this Agreement, any other Loan
Document or otherwise, including without limitation contract disputes and tort claims, shall be
resolved by binding arbitration pursuant to the Commercial Rules of the American Arbitration
Association (“AAA”). Any arbitration proceeding held pursuant to this arbitration provision shall
be conducted in Midland, Texas. No act to take or dispose of any Collateral shall constitute a
waiver of this arbitration agreement or be prohibited by this arbitration agreement. This
arbitration provision shall not limit the right of either party during any dispute, claim or
controversy to seek, use, and employ ancillary, or preliminary rights and/or remedies, judicial or
otherwise, for the purposes of realizing upon, preserving, protecting, foreclosing upon or
proceeding under forcible entry and detainer for possession of, any real or personal property, and
any such action shall not be deemed an election of remedies. Such remedies include, without
limitation, obtaining injunctive relief or a temporary restraining order, invoking a power of sale
under any security agreement, deed of trust or mortgage, obtaining a writ of attachment or
imposition of a receivership, or exercising any rights relating to personal property, including
exercising the right of set-off, or taking or disposing of such property with or without judicial
process pursuant to the Uniform Commercial Code. Any disputes, claims or controversies concerning
the lawfulness of reasonableness of an act, or exercise of any right or remedy concerning any
Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to
the Collateral, shall also be arbitrated; provided, however that no arbitrator shall have the right
or the power to enjoin or restrain any act of either party. Judgment upon any award rendered by
any arbitrator may be entered in any court having jurisdiction. The statute of limitations,
estoppel, waiver, laches and similar doctrines which would otherwise be applicable in an action
brought by a party shall be applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of any action for these purposes. The
Federal Arbitration Act (Title 9 of the United States Code) shall apply to the construction,
interpretation, and enforcement of this arbitration provision.



11. Default. Borrower and Guarantor shall be in default under this Agreement and
under each of the other Loan Documents upon the occurrence of any of the following (an “Event of
Default”):




(a) Borrower defaults in the payment of any amounts due and owing under the Notes;




(b) either Borrower or Guarantor fails to timely and properly observe, keep or perform
any term, covenant, agreement or condition of this Agreement or in any other Loan Document
or in any other loan agreement, promissory note, security agreement, deed of trust,
mortgage, assignment or other contract securing, guaranteeing or evidencing payment of any
indebtedness of Borrower or Guarantor to Lender, or if a default or an event of default
shall occur under any Loan Document, or if a default or an event of default shall occur
under any material agreement of Borrower or Guarantor;




(c) a default or an event of default shall occur under or in connection with the Senior
Debt from Bank;




(d) any representation, warranty or statement made by Borrower or Guarantor herein, in
any of the other Loan Documents or in any certificate furnished to Lender hereunder shall be
breached or shall prove to be untrue or misleading in any material respect at the time when
made;




(e) Borrower or Guarantor shall (i) apply for or consent to the appointment of a
receiver, trustee or liquidator of it or of all or a substantial part of its assets; (ii) be
unable, or admit in writing its inability, to pay its debts as they become due; (iii) make a
general assignment for the benefit of creditors; (iv) be adjudicated as bankrupt or
insolvent or file a voluntary petition in bankruptcy; (v) file a petition or an answer
seeking reorganization or an arrangement with creditors or to take advantage of any
bankruptcy or insolvency law; (vi) file an answer admitting the material allegations of, or
consent to, or default in answering, a petition filed against it in any bankruptcy,
reorganization or insolvency proceedings; or (vii) take any action (corporate or otherwise)
for the purpose of effecting any of the foregoing;




(f) an order, judgment or decree shall be entered by any court of competent
jurisdiction approving a petition seeking reorganization of Borrower or Guarantor or
appointing a receiver, trustee or liquidator of Borrower or Guarantor or of all or a
substantial part of their respective assets, and such order, judgment or decree shall
continue unstayed in effect for any period of forty-five (45) consecutive days;




(g) any lien for failure to pay income, payroll, FICA or similar taxes shall be filed
by any governmental authority against Borrower or Guarantor or any of their respective
assets;




(h) default shall occur in the payment of any indebtedness of Borrower or Guarantor
aggregating $50,000.00 or more under any note, loan agreement or credit agreement and such
default shall continue for more than the period of grace, if any, specified therein, or any
such indebtedness shall become due before its stated maturity by acceleration of the
maturity thereof or shall become due by its terms and shall not be promptly paid or
extended;




(i) any final judgment or judgments for the payment of money in the amount of
$50,000.00 or more, in the aggregate, shall be rendered against Borrower or Guarantor and
shall not be satisfied or discharged at least thirty (30) days prior to the date on which
any of its assets could be lawfully sold to satisfy such judgment or judgments;




(j) a Change of Control shall occur;




(k) any event that, in the reasonable good faith estimation of Lender, threatens the
value of any collateral securing the Indebtedness or casts doubt on the ability of Borrower
to repay the Indebtedness; or




(l) the dissolution of Borrower or Guarantor.



12. Remedies Upon Default. If an Event of Default shall occur, Lender shall have all
rights, powers and remedies available under each of the Loan Documents as well as all rights and
remedies available at law or in equity, including, without limitation, the right to declare the
Indebtedness immediately due and payable; provided, that in connection with any default or Event of
Default related to the insolvency of Borrower or Guarantor or any debtor relief laws, the full
amount of the Indebtedness shall automatically become fully due and payable.



13. Notices. All notices, requests or demands which any party is required or may
desire to give to any other party under any provision of this Agreement or any other Loan Document
must be in writing delivered to the other party at the following address:



	 	 	 
	Borrower

and

Guarantor:
	 	Esconde Resources LP

415 W. Wall, Suite 625

Midland, Texas 79701

Fax: (432) 684-5942

	Lender:
	 	BaseLine Capital, Inc.

508 West Wall Street, Suite 775

Midland, Texas 79701

Fax: (432) 687-1372







or to such other address as any party may designate by written notice to the other party. Each
such notice, request and demand shall be deemed given or made (a) if sent by mail, upon the earlier
of the date of receipt or five (5) days after deposit in the U.S. Mail, first class postage
prepaid; or (b) if sent by any other means, upon delivery.



14. Costs, Expenses and Attorneys’ Fees. Borrower shall pay to Lender immediately
upon demand the full amount of all reasonable costs and expenses, including reasonable attorneys’
fees incurred at any time by Lender (whether before, after or during the loan closing) in
connection with (a) the Loan, (b) the negotiation and preparation of this Agreement and each of the
Loan Documents and any rights, remedies or interests hereunder or thereunder, (c) the maintenance,
renewal or collection of the Loan or any rights or remedies under any Loan Documents, and (d) all
other costs and attorneys’ fees incurred by Lender for which Borrower is obligated to reimburse
Lender in accordance with the terms of the Loan Documents.



15. Savings Clause. All agreements between Borrower, Guarantor and Lender, whether
now existing or hereafter arising and whether written or oral, are hereby limited so that in no
contingency shall the interest paid or agreed to be paid to Lender exceed the maximum amount
permitted under applicable law. If, under any circumstance whatsoever, interest would otherwise be
payable to Lender at a rate in excess of the highest lawful rate, then the interest payable to
Lender shall be reduced to the maximum amount permitted under applicable law, and if under any
circumstance whatsoever Lender shall ever receive anything of value deemed interest by applicable
law which would exceed interest at the highest lawful rate, then any excessive interest paid shall
be applied to the reduction of the aggregate principal amount of the Notes and any other obligation
owing under the Loan Documents and not to the payment of interest or if such excess interest
exceeds all amounts due and owing under the Loan Documents, such excess shall be refunded to
Borrower. All interest paid or agreed to be paid to Lender shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and spread throughout the full term of the
obligations of Borrower to Lender (including the period of any renewal or extension).



16. Unitholder Rights. In the event Lender exercises the Unit Option under Section 4
of this Agreement and becomes a Unitholder of Borrower, Borrower shall make any and all dividends,
distributions or other payments to its partners based only upon proportionate Unit ownership,
except for reasonable salaries paid to partners who are employees of Borrower or Guarantor for
services actually rendered to Borrower or Guarantor (in its capacity as general partner of
Borrower.



17. Miscellaneous. Borrower, Guarantor and Lender further covenant and agree as
follows, without limiting any obligation of Borrower and Guarantor of any other Loan Document:




(a) Cumulative Rights and Waiver of Notice. Each and every right granted to
Lender under any Loan Document, or allowed it by law or equity shall be cumulative of each
other and may be exercised in addition to any and all other rights of Lender, and no delay
in exercising any right shall operate as a waiver thereof, nor shall any single or partial
exercise by Lender of any right preclude any other or future exercise thereof or the
exercise of any other right. Each of Borrower and Guarantor expressly waives any
presentment, demand, protest or other notice of any kind, including but not limited to
notice of intent to accelerate and notice of acceleration. No notice to or demand on
Borrower or Guarantor shall, of itself, entitle Borrower or Guarantor to any other or future
notice or demand in similar or other circumstances.




(b) APPLICABLE LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF TEXAS, AND ARE PERFORMABLE IN MIDLAND, MIDLAND COUNTY, TEXAS.




(c) Amendment and Binding Effect. No modification, consent, amendment or
waiver of any provision of this Agreement, nor consent to any departure by Borrower or
Guarantor therefrom, shall be effective unless the same shall be in writing and signed by an
officer of Lender, and then shall be effective only in the specified instance and for the
purpose for which given. This Agreement is binding upon each of Borrower and Guarantor and
its respective successors and assigns, and inures to the benefit of Lender, its
participants, successors and assigns; however, no assignment or other transfer of Borrower’s
or Guarantor’s rights or obligations hereunder shall be made or be effective without
Lender’s prior written consent, nor shall it relieve Borrower or Guarantor of any
obligations hereunder.




(d) Documents and Further Assurances. All documents, certificates and other
items required under this Agreement to be executed and/or delivered to Lender shall be in
form and content satisfactory to Lender and its counsel. Each of Borrower and Guarantor
agrees to execute and deliver to Lender such additional documents and instruments as Lender
may request to evidence and complete the transactions contemplated hereby.




(e) Partial Invalidity. The unenforceability or invalidity of any provision of
this Agreement shall not affect the enforceability or validity of any other provision herein
and the invalidity or unenforceability of any provision of any Loan Document to any person
or circumstance shall not affect the enforceability or validity of such provision as it may
apply to other persons or circumstances.




(f) INDEMNIFICATION. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, BORROWER
AND GUARANTOR SHALL INDEMNIFY, DEFEND AND HOLD LENDER AND ITS OFFICERS, EMPLOYEES, AGENTS,
SHAREHOLDERS, DIRECTORS, SUCCESSORS AND ASSIGNS (COLLECTIVELY, THE “BASELINE PARTIES”)
HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, SUITS, LOSSES, DAMAGES, ASSESSMENTS,
FINES, PENALTIES, COSTS OR OTHER EXPENSES (INCLUDING REASONABLE ATTORNEYS’ FEES AND COURT
COSTS) ARISING FROM OR IN ANY WAY RELATED TO ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY,
INCLUDING BUT NOT LIMITED TO ANY OPERATIONS OR OPERATIONAL DECISIONS, OR ACTUAL OR
THREATENED DAMAGE TO THE ENVIRONMENT, AGENCY COSTS OF INVESTIGATION, PERSONAL INJURY OR
DEATH, OR PROPERTY DAMAGE, DUE TO A RELEASE OR ALLEGED RELEASE OF HAZARDOUS MATERIALS,
ARISING FROM BORROWER’S OR GUARANTOR’S BUSINESS OPERATIONS, ANY OTHER PROPERTY OWNED BY
BORROWER OR GUARANTOR OR IN THE SURFACE OR GROUND WATER ARISING FROM BORROWER’S OR
GUARANTOR’S BUSINESS OPERATIONS, OR GASEOUS EMISSIONS ARISING FROM BORROWER’S OR GUARANTOR’S
BUSINESS OPERATIONS OR ANY OTHER CONDITION EXISTING OR ARISING FROM BORROWER’S OR
GUARANTOR’S BUSINESS OPERATIONS RESULTING FROM THE USE OR EXISTENCE OF HAZARDOUS MATERIALS,
WHETHER SUCH CLAIM PROVES TO BE TRUE OR FALSE. EACH OF BORROWER AND GUARANTOR FURTHER
AGREES THAT ITS INDEMNITY OBLIGATIONS SHALL INCLUDE, BUT ARE NOT LIMITED TO, LIABILITY FOR
DAMAGES RESULTING FROM THE PERSONAL INJURY OR DEATH OF AN EMPLOYEE OF BORROWER OR GUARANTOR,
REGARDLESS OF WHETHER BORROWER OR GUARANTOR HAS PAID THE EMPLOYEE UNDER THE WORKMEN’S
COMPENSATION LAWS OF ANY STATE OR OTHER SIMILAR FEDERAL OR STATE LEGISLATION FOR THE
PROTECTION OF EMPLOYEES. THE TERM “PROPERTY DAMAGE” AS USED IN THIS PARAGRAPH INCLUDES, BUT
IS NOT LIMITED TO, DAMAGE TO ANY REAL OR PERSONAL PROPERTY OF BORROWER OR GUARANTOR, THE
LENDER, THE BASELINE PARTIES AND OF ANY THIRD PARTIES. THE BORROWER’S OR GUARANTOR’S
OBLIGATIONS UNDER THIS PARAGRAPH SHALL SURVIVE THE REPAYMENT OF THE INDEBTEDNESS AND ANY
DEED IN LIEU OF FORECLOSURE OR FORECLOSURE OF ANY DEED OF TRUST, SECURITY AGREEMENT OR
MORTGAGE SECURING THE INDEBTEDNESS. THE PARTIES HERETO INTEND FOR THE PROVISIONS OF THIS
PARAGRAPH TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM THE CONSEQUENCES OF ITS OWN
NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR CONCURRING CAUSE OF
ANY CLAIMS INDEMNIFIED AGAINST IN THIS PARAGRAPH.




(g) Survivability. All covenants, agreements, representations and warranties
made herein or in the other Loan Documents shall survive the making of the Indebtedness and
shall continue in full force and effect so long as the Indebtedness is outstanding.




(h) Participation of Loan. Borrower and Guarantor agree and consent to Lender
transferring participation interests in this Agreement, the Notes, the Unit Option and the
other Loan Documents to participants selected by Lender in its sole discretion, and to
Lender providing any information or documents to any such participant. Participated
interests may be held in the name of the participants or in Lender’s name on behalf of such
participants, and each of Borrower and Guarantor agrees to execute and deliver such
documents and instruments as Lender may request in connection with such participations.




(i) Entire Agreement. This Agreement along with the Notes, the Guaranty and
the other Loan Documents contain the entire understanding between the Borrower and Lender
with respect to the subject matter contained herein. Neither this Agreement nor a portion
of the provisions hereof maybe changed, modified, amended, waived, supplemented, discharged,
canceled or terminated by any course of conduct or in the manner other than an agreement in
writing. If there are any conflicts or inconsistencies between this Agreement, the Notes or
any of the other Loan Documents, this Agreement shall prevail and control.




(j) Qualified Commercial Loan. Borrower and Guarantor acknowledge, confirm and
agree that (i) the transaction contemplated by this Agreement constitutes a “qualified
commercial loan” under Section 306.001, et. seq. of the Texas Finance Code, (ii) Borrower
and Guarantor shall execute such documents and take such other action as Lender may
reasonably request for this transaction to constitute such “qualified commercial loan”, and
(iii) Lender has advised Borrower to, and Borrower has had the opportunity to, seek the
advice of an attorney and an accountant in connection with the transaction contemplated by
this Agreement.




(k) Counterpart Execution. This Agreement may be executed in any number of
counterparts with the same effect as if all of the parties had signed the same document.
All counterparts shall be construed together and shall constitute one Agreement. Faxed
signatures shall be treated as and deemed original signatures and shall be binding for all
purposes.



[Remainder of Page Intentionally Left Blank]






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NOTICE OF FINAL AGREEMENT




THIS AGREEMENT, THE NOTE, THE GUARANTY AND/OR ANY AND ALL OTHER DOCUMENTS EXECUTED AT OR NEAR
THE TIME OF EXECUTION OF THIS DOCUMENT CONSTITUTE A “LOAN AGREEMENT” AS DEFINED IN SECTION 26.02(a)
OF THE TEXAS BUSINESS & COMMERCE CODE, AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.




LENDER:




BASELINE CAPITAL, INC., a Texas corporation



	 	 	 
	By: /s/
	 	Karl J. Reiter

	 
	 	 

	 	 	Karl J. Reiter, President








	 	 	BORROWER:






ESCONDE RESOURCES LP




By: Esconde Energy LLC, its general partner



	 	 	 
	By: /s/
	 	Paul W. Heard

	 
	 	 

	 	 	Paul W. Heard, Managing Member

	By: /s/
	 	Ronnie L. Steinocher

	 
	 	 

	 	 	Ronnie L. Steinocher, Managing Member








	 	 	By: Pierce-Hamilton Energy Partners LP,






Managing Member




By: Muscoda Hill Energy LLC,




its general partner



	 	 	 
	By: /s/
	 	Lisa P. Hamilton

	 
	 	 

	 	 	Lisa P. Hamilton, President







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	 	 	GUARANTOR:






ESCONDE ENERGY LLC



	 	 	 
	By: /s/
	 	Paul W. Heard

	 
	 	 

	 	 	Paul W. Heard, Managing Member

	By: /s/
	 	Ronnie L. Steinocher

	 
	 	 

	 	 	Ronnie L. Steinocher, Managing Member








	 	 	By: Pierce-Hamilton Energy Partners LP,






Managing Member




By: Muscoda Hill Energy LLC,




its general partner



	 	 	 
	By: /s/
	 	Lisa P. Hamilton

	 
	 	 

	 	 	Lisa P. Hamilton, President








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