Exhibit 10.5


 


ESCROW AGREEMENT


 


This
Escrow Agreement, dated as of November 29, 2005, is entered into by and
among Cano Petroleum, Inc. (“Purchaser”), Miles O’Loughlin and Scott White
(collectively, the “Sellers”) and The Bank of New York Trust Company, N.A., a
national banking association, as escrow agent (“Escrow Agent”).


 


This
is the Escrow Agreement referred to as the “Cash Escrow Agreement” in the Stock
Purchase Agreement dated as of November 29, 2005, ( the “Purchase
Agreement”) among  the Purchaser, W.O.
Energy of Nevada, Inc. (“W.O.”), 
and the Sellers. Capitalized terms used in this agreement without
definition shall have the respective meanings given to them in the Purchase
Agreement.


 


The
parties, intending to be legally bound, hereby agree as follows:


 


1.            ESTABLISHMENT OF ESCROW


 


(a)           Purchaser
is depositing with Escrow Agent an amount equal to $2,000,000 in immediately
available funds (as increased by any earnings thereon and as reduced by any
disbursements, or losses on investments, the “Escrow Fund”). Escrow Agent
acknowledges receipt thereof.


 


(b)           Escrow
Agent hereby agrees to act as escrow agent and to hold, safeguard and disburse
the Escrow Fund pursuant to the terms and conditions hereof.


 


2.            INVESTMENT OF FUNDS


 


Except
as Purchaser and Sellers may from time to time jointly instruct Escrow Agent in
writing, the Escrow Fund shall be deposited and maintained in a money market
deposit account with Escrow Agent, until disbursement of the entire Escrow
Fund. Escrow Agent is authorized to liquidate in accordance with its customary
procedures any portion of the Escrow Fund consisting of investments to provide
for payments required to be made under this Escrow Agreement.


 


3.            PAYMENTS


 


(a)           At
any time that there are remaining funds in the Escrow Fund, upon a final
determination of a claim by Purchaser pursuant to Article X of the
Purchase Agreement (an “Agreed Escrow Payment”), Purchaser and Sellers shall
provide a joint instruction to the Escrow Agent (an “Agreed Escrow Payment
Notice”) to release to Purchaser from the Escrow Fund the amount of the Agreed
Escrow Payment.  Within 3 business days
of receipt of an Agreed Escrow Payment Notice, Escrow Agent shall pay to the
Purchaser the dollar amount set forth in the Agreed Escrow Payment Notice from
(and only to the extent of) the Escrow Fund.


 


(b)           Upon
the later to occur of (i) the two (2) year anniversary of the Closing
Date and (ii) the date of the full and final disposition of the OneOK Gas
Litigation and all claims related thereto, whether on appeal or otherwise, the
Purchaser shall give a written notice signed by the Purchaser (a “Release of
Funds Notice”) to Escrow Agent authorizing the Escrow Agent to release to
Sellers the remaining aggregate amount of the Escrow Fund (after taking into
account 


 


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any
prior Agreed Escrow Payments) less the aggregate amount of all claims made by
Purchaser pursuant to Article X of the Stock Purchase Agreement that are
still pending and have not been paid to Purchaser from the Escrow Fund (the “Pending
Claims”) (the aggregate remaining amount less the Pending Claims being the “Released
Funds”).  Within 3 business days of
receipt of an Release of Funds Notice, Escrow Agent shall pay to the Sellers,
as a whole, the dollar amount set forth in the Release of Funds Notice from
(and only to the extent of) the Escrow Fund.


 


(c)           To
the extent that after the Released Funds are paid to Sellers there remains any
amount in the Escrow Fund due to Pending Claims and upon a final determination
of any Pending Claims and the payment of all final Agreed Escrow Payments
relating to such Pending Claims, there remains any amount in the Escrow Fund
(the “Final Released Amount”), the Purchaser shall give a written notice signed
by the Purchaser (a “Final Release of Funds Notice”) to Escrow Agent
authorizing the Escrow Agent to release to Sellers the Final Released
Amount.  Within 3 business days of
receipt of a Final Release of Funds Notice, Escrow Agent shall pay to the
Sellers, as a whole, the dollar amount set forth in the Release of Funds Notice
from (and only to the extent of) the Escrow Fund.


 


4.            TERMINATION OF ESCROW


 


Once
the Escrow Fund has been paid by the Escrow Agent in its entirety, this Escrow
Agreement shall terminate.  Section 5(e) and
Section 5(b) shall survive notwithstanding any termination of this
Escrow Agreement or the resignation of Escrow Agent.


 


5.            DUTIES OF ESCROW AGENT


 


(a)           Escrow
Agent shall not be under any duty to give the Escrow Fund held by it hereunder
any greater degree of care than it gives its own similar property and shall not
be required to invest any funds held hereunder except as directed in this
Escrow Agreement.


 


(b)           Escrow
Agent shall not be liable, except for its own negligence, gross negligence or
willful misconduct and, except with respect to claims based upon such
negligence, gross negligence or willful misconduct that are successfully
asserted against Escrow Agent, the other parties hereto shall jointly and
severally indemnify and hold harmless Escrow Agent (and any successor Escrow
Agent) from and against any and all losses, liabilities, claims, actions,
damages and expenses, including reasonable attorneys’ fees and disbursements,
arising out of and in connection with this Escrow Agreement.   Without limiting the foregoing, Escrow Agent
shall in no event be liable in connection with its investment or reinvestment
of any cash held by it hereunder in good faith, in accordance with the terms
hereof, including, without limitation, any liability for any delays (not
resulting from its negligence, gross negligence or willful misconduct) in the
investment or reinvestment of the Escrow Fund, or any loss of interest incident
to any such delays.


 


(c)           Escrow
Agent shall be entitled to rely upon any order, judgment, certification,
demand, notice, instrument or other writing delivered to it in connection
herewith without being required to determine the authenticity or the
correctness of any fact stated therein or the propriety or validity of the
service thereof. Escrow Agent may act in reliance upon any instrument or
signature believed by it to be genuine and may assume that the person
purporting to give receipt 


 


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or
advice or make any statement or execute any document in connection with the
provisions hereof has been duly authorized to do so. Escrow Agent may
conclusively presume that the undersigned representative of any party hereto
which is an entity has full power and authority to instruct Escrow Agent on
behalf of that party unless written notice to the contrary is delivered to
Escrow Agent.


 


(d)           Escrow
Agent may act pursuant to the advice of counsel with respect to any matter
relating to this Escrow Agreement and shall not be liable for any action taken
or omitted by it in good faith in accordance with such advice.


 


(e)           Escrow
Agent does not have any interest in the Escrow Fund deposited hereunder but is
serving as escrow holder only and having only possession thereof. It is not
acting in a fiduciary capacity. Any payments of income from this Escrow Fund
shall be subject to withholding regulations then in force with respect to
United States taxes. The parties hereto will provide Escrow Agent with
appropriate Internal Revenue Service Forms W-9 for tax identification number
certification or non-resident alien certifications.  During the term of this Escrow Agreement,
Escrow Agent shall provide Purchaser and Sellers such information and reports
concerning the Escrow Fund as any of them may reasonably request.  Promptly after the termination of this Escrow
Agreement or the resignation of Escrow Agent, 
Escrow Agent shall make an accounting of the Escrow Fund to Purchaser
and Sellers.  The fees and expenses of
Escrow Agent with respect to such reports and accountings shall be borne by
Purchaser and Sellers as provided in Section 5(j).


 


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


 


(g)           Escrow
Agent shall not be called upon to advise any party as to the wisdom in selling
or retaining or taking or refraining from any action with respect to any
securities or other property deposited hereunder.


 


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


 


(i)            In
the event of any disagreement between the other parties hereto resulting in
adverse claims or demands being made in connection with the Escrow Fund or in
the event that Escrow Agent is in doubt as to what action it should take
hereunder, Escrow Agent shall be entitled to retain the Escrow Fund until
Escrow Agent shall have received (i) a final non-appealable order of a
court of competent jurisdiction directing delivery of the Escrow Fund or (ii) 


 


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a
written agreement executed by the other parties hereto directing delivery of
the Escrow Fund, in which event Escrow Agent shall disburse the Escrow Fund in
accordance with such order or agreement. Any court order shall be accompanied
by a legal opinion by counsel for the presenting party satisfactory to Escrow
Agent to the effect that the order is final and non-appealable. Escrow Agent
shall act on such court order and legal opinion without further question.


 


(j)            Purchaser
and Sellers shall pay Escrow Agent compensation (as payment in full) for the
services to be rendered by Escrow Agent hereunder in the amount of $1,750 at
the time of execution of this Escrow Agreement to be paid by Buyer, $1,750 to
be retained by Escrow Agent from the Escrow Fund as payment by Seller and $3,500
in the aggregate annually thereafter and agree to reimburse Escrow Agent for
all reasonable expenses, disbursements and advances incurred or made by Escrow
Agent in performance of its duties hereunder (including reasonable fees,
expenses and disbursements of its counsel). Except as specifically set forth
above, any such compensation and reimbursement to which Escrow Agent is
entitled shall be borne 50% by Purchaser and 50% by Sellers.


 


(k)           No
printed or other matter in any language (including, without limitation,  prospectuses, notices, reports and
promotional material) that mentions Escrow Agent’s name or the rights, powers,
or duties of Escrow Agent shall be issued by the other parties hereto or on
such parties’ behalf unless Escrow Agent shall first have given its specific
written consent thereto.


 


(l)            The
other parties hereto authorize Escrow Agent, for any securities held hereunder,
to use the services of any United States central securities depository it
reasonably deems appropriate, including, without limitation, the Depositary
Trust Company and the Federal Reserve Book Entry System.


 


6.            LIMITED RESPONSIBILITY


 


This
Escrow Agreement expressly sets forth all the duties of Escrow Agent with
respect to any and all matters pertinent hereto. No implied duties or
obligations shall be read into this Escrow Agreement against Escrow Agent.
Escrow Agent shall not be bound by the provisions of any agreement among the
other parties hereto except this Escrow Agreement.


 


7.            OWNERSHIP FOR TAX PURPOSES


 


Sellers
agrees that, for purposes of federal and other taxes based on income, Sellers
will be treated as the owner of the Escrow Fund and that Sellers will report
all income, if any, that is earned on, or derived from, the Escrow Fund as its
income in the taxable year or years in which such income is properly includible
and pay any taxes attributable thereto.


 


8.            NOTICES


 


All
notices, consents, waivers and other communications under this Escrow Agreement
must be in writing and will be deemed to have been duly given when (a) delivered
by hand (with written confirmation of receipt), (b) sent by telecopier
(with confirmation of receipt) provided that a copy is mailed by registered
mail, return receipt requested, or (c) received by the addressee, if sent
by a nationally 


 


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recognized overnight
delivery service, in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):


 


To
Buyer:


 


Cano
Petroleum, Inc.


The
Oil and Gas Commerce Building


309
West Seventh Street, Suite 1600


Fort
Worth, TX 76102


Attention:  James K. Teringo, Jr. 


Facsimile
No.:  817-698-0796


 


with
copies to:


 


Haynes
and Boone, LLP


901
Main Street, Suite 3100


Dallas,
TX 75202


Attention:  W. Bruce Newsome


Facsimile
No.:  214-200-0636


 


To  Sellers:


 


Miles
O’Loughlin


Scott
White


Hwy
152 West


P.O. Box
960


Pampa,
TX 79066


Facsimile
No.:  806-665-1960


 


To the
Escrow Agent:


 


The
Bank Of New York Trust Company Of Florida, N.A.


600
North Pearl Street, Suite 420


Dallas,
TX 75201


Attention:
Corporate Trust; John C. Stohlmann


Facsimile:
(214) 880-8253


 


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9.            JURISDICTION; SERVICE OF PROCESS


 


Any
action or proceeding seeking to enforce any provision of, or based on any right
arising out of, this Escrow Agreement may be brought against any of the parties
in the courts of the State of Texas, County of Tarrant, or, if it has or can
acquire jurisdiction, in the United States District Court for the Northern
District of Texas, and each of the parties consents to the jurisdiction of such
courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any
action or proceeding referred to in the preceding sentence may be served on any
party anywhere in the world.


 


10.          COUNTERPARTS


 


This
Escrow Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original and all of which, when taken together, will be
deemed to constitute one and the same.


 


11.          SECTION HEADINGS


 


The
headings of sections in this Escrow Agreement are provided for convenience only
and will not affect its construction or interpretation.


 


12.          WAIVER


 


The
rights and remedies of the parties to this Escrow Agreement are cumulative and
not alternative. Neither the failure nor any delay by any party in exercising
any right, power, or privilege under this Escrow Agreement or the documents
referred to in this Escrow Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right,
power, or privilege will preclude any other or further exercise of such right,
power, or privilege or the exercise of any other right, power, or privilege. To
the maximum extent permitted by applicable law, (a) no claim or right
arising out  of this Escrow Agreement or
the documents referred to in this Escrow Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other party, (b) no waiver that may be
given by a party will be applicable except in the specific instance for which
it is given, and (c) no notice to or demand on one party will be deemed to
be a waiver of any obligation of such party or of the right of the party giving
such notice or demand to take further action without notice or demand as
provided in this Escrow Agreement or the documents referred to in this Escrow
Agreement.


 


13.          EXCLUSIVE AGREEMENT AND MODIFICATION


 


This
Escrow Agreement supersedes all prior agreements among the parties with respect
to its subject matter and constitutes (along with the documents referred to in
this Escrow Agreement) a complete and exclusive statement of the terms of the
agreement between the parties with respect to its subject matter. This Escrow
Agreement may not be amended except by a written agreement executed by
Purchaser, Sellers and Escrow Agent. 
Other than with respect to the escrow of the Escrow Fund as set forth
herein, nothing herein shall supersede or affect the rights and obligations of
Purchaser, Sellers and their successors and assigns under the Purchase
Agreement.


 


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14.          GOVERNING LAW


 


This
Escrow Agreement shall be governed by the laws of the State of Texas, without
regard to conflicts of law principles.


 


* * * * *


 


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IN WITNESS WHEREOF, the parties have executed and
delivered this Escrow Agreement as of the date first written above.


 


 


	
   

  	
  BUYER

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM,
  INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
       /s/
  S. Jeffrey Johnson

  
	
   

  	
   

  	
  Name:

  	
    S. Jeffrey
  Johnson

  
	
   

  	
   

  	
  Title:

  	
    Chief
  Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SELLERS

  
	
   

  	
   

  
	
   

  	
             /s/
  Miles O’Loughlin

  
	
   

  	
   

  	
  Miles O’Loughlin

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
             /s/
  Scott White

  
	
   

  	
   

  	
  Scott White

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ESCROW
  AGENT

  
	
   

  	
   

  
	
   

  	
  THE BANK OF NEW
  YORK TRUST COMPANY, N.A., as Escrow Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
        /s/
  John C. Stohlmann

  
	
   

  	
   

  	
   

  	
  John C. Stohlmann, Vice President

  



 


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