exh101.htm


    Exhibit
      10.1

     

    
      	
              BMO
                CAPITAL MARKETS CORP.

              700
                Louisiana, Suite 4400

              Houston,
                TX 77002

               

            	
              BANK
                OF MONTREAL

              700
                Louisiana, Suite 4400

              Houston,
                TX 77002

               

            


    

     

    CONFIDENTIAL

     

    July
      19,
      2007

    TXCO
      Resources Inc.

    777
      E.
      Sonterra Blvd., Suite 350

    San
      Antonio, Texas 78258

    Attention:  P.
      Mark Stark, Chief Financial Officer

    


    Senior
      Secured Second Lien Term Loan
      Facility

     

    $20,000,000
      Increased Facility Amount

     

    Supplemental
      Commitment Letter

     

    Ladies
      and Gentlemen:

     

    You
      have
      advised BMO Capital Markets Corp. ("BMO Capital
      Markets") and Bank of Montreal (the "Bank of
      Montreal", and, together with BMO Capital Markets and the Bank of
      Montreal's other affiliates, "we",
      "our" or "us") that you (the
      "Borrower") propose to amend and restate the Term Loan
      Agreement dated as of April 2, 2007 among the Borrower, the Guarantors and
      the
      Lenders party thereto, Bank of Montreal, as Administrative Agent, and BMO
      Capital Markets, as Arranger (the "Second Lien Term Loan
      Agreement"), to, among other things, increase the aggregate
      Commitments thereunder by $20.0 million (the "Increased Facility
      Amount"), from $80.0 million to $100.0 million.  Each
      capitalized term used but not defined herein shall have the meaning assigned
      to
      such term in the Second Lien Term Loan Agreement.

     

    In
      that
      connection, you have requested that BMO Capital Markets agree to structure,
      arrange and syndicate the Increased Facility Amount.

     

    1.           Commitments.

     

    In
      connection with the foregoing, (a) BMO Capital Markets is pleased to advise
      you
      that it is willing to act as exclusive advisor and arranger for the Increased
      Facility Amount and (b) Bank of Montreal is pleased to inform you of its
      commitment to provide the Increased Facility Amount to you, upon the terms
      and
      subject to the conditions set forth or referred to in this supplemental
      commitment letter (this
      "SupplementalCommitment
      Letter").

     

    2.           Titles
      and Roles.

     

    You
      hereby appoint BMO Capital Markets to act, and BMO Capital Markets hereby agrees
      to act, as sole and exclusive bookrunner and sole and exclusive arranger for
      the
      Increased Facility Amount, upon the terms and subject to the conditions set
      forth or referred to in this Supplemental Commitment Letter.  BMO
      Capital Markets in such capacities will perform the duties and exercise the
      authority customarily performed and exercised by it in such
      roles.  You further agree that no other titles will be awarded
      and no compensation (other than that expressly contemplated by this Supplemental
      Commitment Letter) will be paid in connection with the Increased Facility Amount
      unless you and we shall so agree.

     

    3.           Syndication.

     

    (A)  We
      intend
      to commence efforts to syndicate all or a portion of Bank of Montreal's
      commitment with respect to the Increased Facility Amount to a group of banks,
      financial institutions and other institutional lenders (together with Bank
      of
      Montreal, the "Lenders") identified by us in
      consultation with you, promptly upon the execution of this Supplemental
      Commitment Letter, and you agree until 30 days after the restatement effective
      date (the "Closing Date") actively to assist us in
      completing a satisfactory syndication.  Such assistance shall include
      those efforts and activities described in clauses (A), (B) and (C) of Paragraph
      3 of the Commitment Letter dated February 13, 2007 among you and the undersigned
      (the "OriginalCommitment
      Letter").

     

    (B)  BMO
      Capital Markets will manage all aspects of the syndication in consultation
      with
      you, including decisions as to the selection of institutions to be approached
      and when they will be approached, when their commitments will be accepted,
      which
      institutions will participate, the allocation of the commitments to the
      Increased Facility Amount among the Lenders, any naming rights and the amount
      and distribution of fees among the Lenders.

     

    4.           Information.

     

    You
      hereby represent and covenant (and it shall be a condition to Bank of Montreal's
      commitment hereunder and BMO Capital Markets' agreements to perform the services
      described herein) that (a) all Information (as defined in the Original
      Commitment Letter) that has been or will be made available to us by or on behalf
      of you or any of your representatives is or will be, when furnished, complete
      and correct in all material respects and does not or will not, when furnished,
      contain any untrue statement of a material fact or omit to state a material
      fact
      necessary in order to make the statements contained therein not materially
      misleading in light of the circumstances under which such statements are made
      and (b) the Projections (as defined in the Original Commitment Letter) that
      have
      been or will be made available to us by or on behalf of you or any of your
      representatives have been or will be prepared in good faith based upon
      accounting principles consistent with the historical audited financial
      statements of the Borrower and upon assumptions that are reasonable at the
      time
      made and at the time the related Projections are made available to
      us.  You agree that if at any time prior to the closing of the
      Increased Facility Amount any of the representations in the preceding sentence
      would be incorrect if the Information and Projections were being furnished,
      and
      such representations were being made, at such time, then you will promptly
      supplement the Information and the Projections so that such representations
      will
      be correct under those circumstances.  In arranging and syndicating
      the Increased Facility Amount, we may use and rely on the Information and the
      Projections without independent verification thereof.

     

    5.           Clear
      Market.

     

    To
      ensure
      an orderly and effective syndication of the Increased Facility Amount, you
      agree
      that, from the date hereof until the Termination Date (as defined below), except
      for the simultaneous first amendment to the Amended and Restated Credit
      Agreement dated as of April 2, 2007 among the borrower, the guarantors and
      the
      lenders party thereto, Bank of Montreal, as administrative agent and BMO Capital
      Markets, as arranger (the "First Lien Credit
      Agreement") to, among other things, reduce the Initial Borrowing
      Base (as defined therein) to $50,000,000 and the amendment and restatement
      of
      the Second Lien Term Loan Agreement, and related syndication efforts with
      respect to the respective credit facilities provided under each thereof, you
      will not and will not permit any of your subsidiaries to, syndicate or issue,
      attempt to syndicate or issue, announce or authorize the announcement of the
      syndication or issuance of any debt securities, commercial bank or other credit
      facility, unless otherwise mutually agreed between you and BMO Capital
      Markets.  For purposes of this Supplemental Commitment Letter,
      "Termination Date" means the termination of the
      syndication (as determined by BMO Capital Markets in its sole discretion),
      which
      date in any event shall not be later than 30 days after the Closing
      Date.

     

    6.           Fees.

     

    As
      consideration for BMO Capital Markets' agreements to perform the services
      described herein, you agree to pay to BMO Capital Markets an arrangement fee
      equal to 1.75% of the Increased Facility Amount (the
      "SupplementalArrangement
      Fee").  The Supplemental Arrangement Fee will be payable
      in full at the Closing Date.

     

    7.           Conditions
      Precedent.

     

    Bank
      of
      Montreal's commitment hereunder and BMO Capital Markets' agreements to perform
      the services described herein are subject to (a) our not having discovered
      or
      otherwise become aware of any information not previously disclosed to us that
      we
      believe to be inconsistent in a material and adverse manner with our
      understanding, based on the information provided to us prior to the date hereof,
      of the business, assets, liabilities, operations, condition (financial or
      otherwise), operating results, Projections or prospects of
      the Borrower and its subsidiaries, taken as a whole (excluding
      events, developments or circumstances generally affecting the industry in which
      the Borrower and its subsidiaries operate or arising from changes in general
      business or economic conditions, so long as the foregoing do not
      disproportionately adversely affect the Borrower or its subsidiaries), (b)
      there
      not having occurred any event, change or condition since the date of the most
      recent audited financial statements of the Borrower and its subsidiaries, on
      a
      consolidated basis, delivered to us on or prior to the date of this Supplemental
      Commitment Letter that, individually or in the aggregate, has had, or could
      reasonably be expected to have, a material adverse effect on the business,
      assets, liabilities, operations, condition (financial or otherwise), operating
      results, Projections or prospects of the Borrower and its subsidiaries, taken
      as
      a whole (excluding events, developments or circumstances generally affecting
      the
      industry in which the Borrower and its subsidiaries operate or arising from
      changes in general business or economic conditions, so long as the foregoing
      do
      not disproportionately adversely affect the Borrower or its subsidiaries),
      (c)
      the negotiation, execution and delivery of definitive documentation with respect
      to the Increased Facility Amount and the first amendment to the First Lien
      Credit Agreement referred to in Paragraph 5 of this Supplemental Commitment
      Letter (the "First Amendment") satisfactory to us and
      our counsel and the Lenders, including without limitation amendments to the
      Mortgages as determined by us and our counsel to be necessary for perfection
      of
      Liens in favor of the Administrative Agent for the Lenders to secure the
      Increased Facility Amount and your obligations with respect thereto (the
      "Mortgage Amendments") and (d) your compliance with
      the terms of this Supplemental Commitment Letter, the Commitment Letter and
      the
      Fee Letter.

     

    8.           Indemnification;
      Expenses.

     

    You
      agree
      (a) to indemnify and hold harmless us and our officers, directors, employees,
      agents, advisors, controlling persons, members and successors and assigns (each,
      an "Indemnified Person") from and against any and all
      losses, claims, damages, liabilities and expenses, joint or several, to which
      any such Indemnified Person may become subject arising out of or in connection
      with this Supplemental Commitment Letter, the Increased Facility Amount or
      any
      related transaction or any claim, litigation, investigation or relating to
      any
      of the foregoing, regardless of whether any such Indemnified Person is a party
      thereto (and regardless of whether such matter is initiated by a third party
      or
      by the Borrower or any of its affiliates), and to reimburse each such
      Indemnified Person upon demand for any reasonable legal or other expenses
      incurred in connection with investigating or defending any of the foregoing;
      provided, however, that the foregoing indemnity will not, as to
      any Indemnified Person, apply to losses, claims, damages, liabilities or related
      expenses to the extent they are found in a final, non-appealable judgment of
      a
      court of competent jurisdiction to have resulted solely from the willful
      misconduct or gross negligence of such Indemnified Person, or in our case,
      any
      of our affiliates or any of our or their respective officers, directors,
      employees, agents, advisors, controlling persons or members and (b) to reimburse
      us, from time to time, on demand, for all reasonable and documented
      out-of-pocket expenses (including but not limited to reasonable expenses of
      our
      due diligence investigation, consultants' fees, syndication expenses, travel
      expenses and reasonable fees, disbursements and other charges of counsel),
      in
      each case, incurred in connection with the Increased Facility Amount and the
      preparation, negotiation and enforcement of this Supplemental Commitment Letter,
      the definitive documentation for the Increased Facility Amount, the First
      Amendment, the Mortgage Amendments and any other ancillary documents or security
      arrangements in connection therewith.  Notwithstanding any other
      provision of this Supplemental Commitment Letter, no Indemnified Person shall
      be
      liable for any indirect, special, punitive or consequential damages in
      connection with its activities related to the Increased Facility Amount and
      the
      Mortgage Amendments.

     

    9.           Sharing
      Information; Absence of Fiduciary Relationship; Affiliate
      Activities.

     

    You
      acknowledge that any of us may be providing debt financing, equity capital
      or
      other services (including financial advisory services) to other companies in
      respect of which you may have conflicting interests regarding the transactions
      described herein or otherwise.  Neither of us will use confidential
      information obtained from you by virtue of the transactions contemplated hereby
      or its other relationships with you in connection with the performance by either
      of us of services for other companies, and neither of us will furnish any such
      information to other companies.  You also acknowledge that we do not
      have any obligation to use in connection with the transactions contemplated
      by
      this Supplemental Commitment Letter, or to furnish to you, confidential
      information obtained by us from other companies.

     

    You
      further acknowledge and agree that (a) no fiduciary, advisory or agency
      relationship between you and any of us is intended to be or has been created
      in
      respect of any of the transactions contemplated by this Supplemental Commitment
      Letter, irrespective of whether we have advised or are advising you on other
      matters, (b) we, on the one hand, and you, on the other hand, have an
      arms-length business relationship that does not directly or indirectly give
      rise
      to, nor do you rely on, any fiduciary duty on the part of any of us, (c) you
      are
      capable of evaluating and understanding, and you understand and accept, the
      terms, risks and conditions of the transactions contemplated by this
      Supplemental Commitment Letter, (d) you have been advised that each of us is
      engaged in a broad range of transactions that may involve interests that differ
      from your interests and that each of us has no obligation to disclose such
      interests and transactions to you by virtue of any fiduciary, advisory or agency
      relationship, and (e) you waive, to the fullest extent permitted by law, any
      claims you may have against any of us for breach of fiduciary duty or alleged
      breach of fiduciary duty and agree that none of us shall have any liability
      (whether direct or indirect) to you in respect of such a fiduciary duty claim
      or
      to any person asserting a fiduciary duty claim on behalf of or in right of
      you,
      including your stockholders, employees or creditors.

     

    10.           Assignments,
      Amendments, Governing Law, Etc.

     

    This
      Supplemental Commitment Letter shall not be assignable by you without the prior
      written consent of BMO Capital Markets and Bank of Montreal (and any attempted
      assignment without such consent shall be null and void), is intended to be
      solely for the benefit of the parties hereto (and Indemnified Persons), and
      is
      not intended to confer any benefits upon, or create any rights in favor of,
      any
      person other than the parties hereto (and Indemnified Persons).  Any
      and all obligations of, and services to be provided by, BMO Capital Markets
      or
      Bank of Montreal hereunder may be performed and any and all of rights of BMO
      Capital Markets or Bank of Montreal hereunder may be exercised by or through
      any
      of their respective affiliates or branches.  This Supplemental
      Commitment Letter may not be amended or any provision hereof waived or modified
      except by an instrument in writing signed by BMO Capital Markets, Bank of
      Montreal and you.  This Supplemental Commitment Letter may be executed
      in any number of counterparts, each of which shall be an original and all of
      which, when taken together, shall constitute one agreement.  Delivery
      of an executed counterpart of a signature page of this Supplemental Commitment
      Letter by facsimile transmission shall be effective as delivery of a manually
      executed counterpart hereof.  Paragraph headings used herein are for
      convenience of reference only, are not part of this Supplemental Commitment
      Letter and are not to affect the construction of, or to be taken into
      consideration in interpreting, this Supplemental Commitment
      Letter.  You acknowledge that information and documents relating to
      the Increased Facility Amount, the First Amendment, the Mortgage Amendments
      and
      any other documents ancillary thereto may be transmitted through Syndtrak,
      Intralinks, the Internet, e-mail, or similar electronic transmission systems,
      and that none of us shall be liable for any damages arising from the
      unauthorized use by others of information or documents transmitted in such
      manner.  We may place advertisements in financial and other newspapers
      and periodicals or on a home page or similar place for dissemination of
      information on the Internet or worldwide web as we may choose, and circulate
      similar promotional materials, after the closing of the Transactions in the
      form
      of a "tombstone" or otherwise describing the names of the Borrower and its
      affiliates (or any of them), and the amount, type and closing date of such
      Transactions, all at our expense.  This Supplemental Commitment Letter
      does not supersede the Commitment Letter or the Fee Letter, or any provision
      thereof, and your and our respective rights and obligations with respect to
      the
      syndication of the Facilities (other than the Increased Facility
      Amount).  This Supplemental Commitment Letter supersedes all prior
      understandings, whether written or oral, between us with respect to the
      Increased Facility Amount.  THIS SUPPLEMENTAL COMMITMENT
      LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
      THE
      STATE OF NEW YORK.

     

    11.           Jurisdiction.

     

    Each
      of
      the parties hereto hereby irrevocably and unconditionally (a) submits, for
      itself and its property, to the exclusive jurisdiction of any New York State
      court or Federal court of the United States of America sitting in New York
      City,
      and any appellate court from any thereof, in any action or proceeding arising
      out of or relating to this Supplemental Commitment Letter or the transactions
      contemplated hereby or thereby, and agrees that all claims in respect of any
      such action or proceeding may be heard and determined only in such New York
      State court or, to the extent permitted by law, in such Federal court, (b)
      waives, to the fullest extent it may legally and effectively do so, any
      objection which it may now or hereafter have to the laying of venue of any
      suit,
      action or proceeding arising out of or relating to this Supplemental Commitment
      Letter or the transactions contemplated hereby or thereby in any New York State
      court or in any such Federal court, (c) waives, to the fullest extent permitted
      by law, the defense of an inconvenient forum to the maintenance of such action
      or proceeding in any such court, and (d) agrees that a final judgment in any
      such action or proceeding shall be conclusive and may be enforced in other
      jurisdictions by suit on the judgment or in any other manner provided by
      law.

     

    12.           Waiver
      of Jury Trial.

     

    EACH
      OF THE PARTIES HERETO IRREVOCABLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY
      ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY OR ON BEHALF OF ANY PARTY
      RELATED TO OR ARISING OUT OF THIS SUPPLEMENTAL COMMITMENT LETTER OR THE
      PERFORMANCE OF SERVICES HEREUNDER OR THEREUNDER.

     

    13.           Confidentiality.

     

    This
      Supplemental Commitment Letter is delivered to you on the understanding that
      neither this Supplemental Commitment Letter nor any of its terms or substance,
      nor the activities of any of us pursuant hereto, shall be disclosed, directly
      or
      indirectly, to any other person except (a) to your officers, directors,
      employees, attorneys, accountants and advisors on a confidential and
      need-to-know basis or (b) as required by applicable law or compulsory legal
      process (in which case you agree to inform us promptly thereof).

     

    14.           Surviving
      Provisions.

     

    The
      compensation, reimbursement, indemnification, confidentiality, syndication,
      jurisdiction, governing law and waiver of jury trial provisions contained herein
      shall remain in full force and effect regardless of whether definitive financing
      documentation for the Increased Facility Amount and the First Amendment shall
      be
      executed and delivered and notwithstanding the termination of this Supplemental
      Commitment Letter, or Bank of Montreal's commitment hereunder or BMO Capital
      Markets' agreements to perform the services described herein; provided, however,
      that the compensation, reimbursement and indemnification provisions shall be
      superseded by the definitive financing documentation.

     

    15.           PATRIOT
      Act Notification.

     

    We
      hereby
      notify you that, pursuant to the requirements of the USA PATRIOT Act, Title
      III
      of Pub. L. 107-56 (signed into law October 26, 2001) (the "PATRIOT
      Act"), we and each Lender are required to obtain, verify and
      record information that identifies the Borrower, which information includes
      the
      name, address, tax identification number and other information regarding the
      Borrower that will allow us or such Lender to identify the Borrower in
      accordance with the PATRIOT Act.  This notice is given in accordance
      with the requirements of the PATRIOT Act and is effective as to us and each
      Lender.

     

    16.           Acceptance
      and Termination.

     

    If
      the
      foregoing correctly sets forth our agreement with you, please indicate your
      acceptance of the terms of this Supplemental Commitment Letter by returning
      to
      BMO Capital Markets and Bank of Montreal executed counterparts hereof not later
      than 5:00 p.m., Houston, Texas time, on July 20,
      2007.  BMO Capital Markets' and Bank of Montreal's agreements to
      perform the services described herein will expire automatically and without
      further action or notice and without further obligation to you at such time
      in
      the event that BMO Capital Markets or Bank of Montreal has not received such
      executed counterparts in accordance with the immediately preceding
      sentence.  In the event that the Closing Date does not occur on or
      before 5:00 p.m., New York City time, on August 31, 2007, then this Supplemental
      Commitment Letter, and Bank of Montreal's commitment hereunder and BMO Capital
      Markets' agreements to perform the services described herein shall automatically
      terminate without further action or notice and without further obligation to
      you
      unless each of BMO Capital Markets and Bank of Montreal shall, in its respective
      discretion, mutually agree to an extension.  Before such date, BMO
      Capital Markets or Bank of Montreal may terminate this Supplemental Commitment
      Letter, and Bank of Montreal's commitment hereunder and BMO Capital Markets'
      agreements to perform the services described herein, as applicable, if any
      event
      occurs or information becomes available that, in our respective judgment,
      results or is likely to result in the failure to satisfy any condition precedent
      set forth or referred to in this Supplemental Commitment Letter.

     

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      of this page intentionally left blank

     


    
      
         

      

      
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    We
      are
      pleased to have been given the opportunity to assist you in connection with
      the
      financing described above.

     

    Very
      truly yours,

     

    


     

    BMO
      CAPITAL MARKETS CORP.

     

    By           /s/
      Tod Benton

     

    Tod
      Benton

     

    Managing
      Director

     

    


     

    BANK
      OF
      MONTREAL, acting through its U.S. branches and agencies, including its Chicago,
      Illinois branch

     

    By           /s/
      James V. Ducote

     

    James
      V. Ducote

     

    Director

     

    


    Accepted
      and agreed to as of

    the
      date
      first above written:

     

    TXCO
      RESOURCES INC.

     

    By:           /s/
      P. Mark
      Stark                                

    P.
      Mark Stark

    Chief
      Financial Officer

    



    
      
         

      

      
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