EXHIBIT
10.1


SEPARATION
AGREEMENT,

GENERAL RELEASE AND COVENANT NOT TO SUE


This
Separation Agreement, General Release and Covenant Not to Sue (“Agreement”) is
entered into as of the 22nd day of May, 2007, by and between James K. Teringo, Jr.  (“Employee”)
and Cano Petroleum, Inc. (“Cano”),
hereinafter collectively referred to as the “parties” or individually as “party.”  The “Effective Date” of this Agreement shall
be on the eighth (8th)
day after this Agreement has been signed by Employee and so long as he has not
exercised his right of revocation during the period provided for same herein.


RECITALS


WHEREAS,
Employee has been employed by Cano as Senior Vice President, General Counsel
and Corporate Secretary;


WHEREAS,
Employee and Cano executed an Employment Agreement on July 11, 2005, which
covered the terms and conditions of Employee’s employment with Cano, as amended
by First Amendment to Employment Agreement on January 1, 2006, and Second
Amendment to Employment Agreement on June 1, 2006 (as amended, the “Employment
Agreement”);


WHEREAS,
Employee and Cano desire to mutually terminate Employee’s employment with Cano
as Senior Vice President, General Counsel and Corporate Secretary, effective
May 22, 2007 (the “Termination Date”); and


WHEREAS,
the parties desire to settle fully and finally, in the manner set forth herein,
all differences between them which have arisen, or which may arise, prior to,
or at the time of the execution of this Agreement, including, but in no way
limited to, any and all claims and controversies arising out of the employment
relationship between Employee and Cano, including, but not limited to, the
Employment Agreement, Employee Restricted Stock Award, two (2) Nonqualified
Stock Option Agreements, and Employee’s and Cano’s mutual termination of
Employee’s employment with Cano;


NOW,
THEREFORE, in consideration of the Recitals and the mutual promises, covenants
and agreements set forth herein, the parties covenant and agree as follows:


1.             Except as otherwise provided
herein, Employee, for himself and on behalf of his attorneys, heirs, assigns,
successors, executors, and administrators IRREVOCABLY AND UNCONDITIONALLY
RELEASES, ACQUITS, AND FOREVER DISCHARGES Cano, its current and former parent,
subsidiaries, affiliated, and related corporations, firms, associations,
partnerships, and entities, their successors and assigns, and the current and
former owners, shareholders, directors, officers, employees, agents, attorneys
and representatives of said corporations, firms, associations, partnerships,
and entities, and their guardians, successors, assigns, heirs, executors, and
administrators (hereinafter collectively referred to as the “Releasees”) from
any and all claims, complaints, grievances, liabilities, obligations, promises,
agreements, damages, causes of action, rights, debts, demands, controversies,
costs, losses, and 



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expenses
(including attorneys’ fees and expenses) whatsoever, other than any arising
under this Agreement, and other than attributable to claims arising out of
fraud or illegal activity, under any municipal, local, state, or federal law,
common or statutory — including, but in no way limited to, claims arising under
the Employment Agreement between the parties, the Age Discrimination in
Employment Act of 1967, 29 U.S.C. § 621, et. seq.; Title
VII of the Civil Rights Act of 1964, 42 U.S.C. §2000e et seq.,
as amended; and, the Texas Commission on Human Rights Act, Tex. Labor Code
§21.001, et seq. — for any
actions or omissions whatsoever, whether known or unknown and whether connected
with the employment of Employee by Cano, or the mutual termination therefrom,
or not, which existed or may have existed prior to, or contemporaneously with,
the execution of this Agreement.


2.             Cano, for itself and on behalf of
its current and former parent, subsidiaries, affiliated and related
corporations, firms, associations, partnerships, and entities, their successors
and assigns, and the current and former owners, shareholders, directors,
officers, employees, agents, attorneys, representatives, and insurers of said
corporations, firms, associations, partnerships, and entities, and their
guardians, successors, assigns, heirs, executors, and administrators hereby
IRREVOCABLY AND UNCONDITIONALLY RELEASES, ACQUITS, AND FOREVER DISCHARGES
Employee, from any and all claims, complaints, grievances, liabilities,
obligations, promises, agreements, damages, causes of action, rights, debts,
demands, controversies, costs, losses, and expenses (including attorneys’ fees
and expenses) whatsoever, other than any arising under this Agreement and other
than attributable to claims arising out of fraud or illegal activity, under any
municipal, local, state, or federal law, common or statutory — including, but
in no way limited to, claims arising under the Employment Agreement between the
parties — for any actions or omissions whatsoever, whether known or unknown and
whether connected with the employment of Employee by Cano, or the mutual
termination therefrom, or not, which existed or may have existed prior to, or contemporaneously
with, the execution of this Agreement.


3.             Employee, for himself and on behalf
of his attorneys, heirs, assigns, successors, executors, and administrators,
COVENANTS NOT TO SUE, OR OTHERWISE CONSENT TO PARTICIPATE IN ANY ACTION AGAINST
any of the Releasees, based upon any of the claims released in paragraph 1 of
this Agreement.


4.             Cano, for itself and on behalf of
all Releasees, COVENANTS NOT TO SUE, OR OTHERWISE CONSENT TO PARTICIPATE IN ANY
ACTION AGAINST Employee, based upon any of the claims released in paragraph 2
of this Agreement.


5.             While the parties acknowledge that
this Agreement may be filed as public record pursuant to applicable law, rule
and regulation, if asked about the Agreement, the parties agree that their
response will be that they do not care to discuss any of such matters or
indicate no comment to any such inquiry unless requested or required by the
Securities and Exchange Commission (“SEC”) or other governmental agency.


6.             Employee waives and releases
forever any right or rights he might have to employment, reemployment, or
reinstatement with Cano or any of the other Releasees.



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7.             Employee agrees that in addition to
resigning as Senior Vice President, General Counsel and Corporate Secretary of
Cano, he shall also resign, effective May 22, 2007 from any other positions he
holds as a director or officer with any of the Releasees, including, but not
limited to, any membership on the Board of Directors of Cano.  Employee agrees that the effectiveness of
this Agreement constitutes his written resignation from any such
positions.  Employee and Cano agree that
the last day of Employee’s employment as a salaried employee of Cano will be
May 22, 2007.


8.             Employee and Cano specifically
agree that following the Effective Date of this Agreement, neither party shall
be bound by any of the terms of the Employment Agreement.  However, if facts are discovered after the
execution of this Agreement that would constitute “cause” for termination — specifically
for fraud or illegal activity — under the previously executed Employment
Agreement or fraud or illegal activity on the part of Cano, then the matter
will be immediately subject to arbitration for equitable adjustment to the
future obligations under the terms of this Agreement..


9.             Upon the Effective Date, the
parties agree as follows:


(a)           Cano agrees to pay Employee (or
Employee’s estate in the event of Employee’s death) a payment of $250,000.00 (“Severance
Payment”), less any agreed deductions and less withholdings, taxes and
deductions required by law, in consideration for the promises, covenants,
agreements, and releases set forth herein. 
The Severance Payment described in this paragraph shall be paid to
Employee in twelve (12) monthly installments until paid, with a first monthly
installment of $66,666.66 paid on or before the third (3rd) day following the Effective
Date and the remaining eleven monthly installments of $16,666.66 paid on the
first day of each month thereafter until the Severance Payment has been fully
paid.


(b)           Cano agrees to provide a positive
employment reference to any potential employers of Employee if requested.  Cano and Employee agree not to engage in any
disparagement of the other party.


(c)           Cano agrees to timely make all
necessary and required regulatory filings resulting from or required as a
result of the execution of this Agreement.


(d)           Employee agrees to release and
relinquish any and all stock options and restricted shares provided by Cano,
including, without limitation, the following Employee Restricted Stock Award
and Nonqualified Stock Option Agreements:


(i)            50,000 options at $3.98 per option;


(ii)           20,000 restricted shares; and


(iii)
         40,000 options at $5.42 per
option.


Cano
and Employee agree that Employee shall have no right, interest or title to any
other stock option or restricted stock grant under any plan.



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(e)           Employee agrees to be personally
responsible for all COBRA payments which he may elect, to continue his family
medical and/or other insurance benefits provided by Cano.


(f)            Unless instructed by Cano otherwise,
Employee agrees to return to Cano or its attorneys or, in the case of
information, destroy, immediately upon the Effective Date, all equipment and
property, including confidential information, written or electronic, as well as
any and all documents, notes, memoranda or other materials in his possession
which relate or refer to Cano or its Affiliates and to retain no copies or
notes relating to same.


10.           Nothing in this Agreement is intended
to nor shall be deemed to release any rights Employee has regarding claims
respecting matters for which the Employee is entitled to be defended and/or
indemnified by Cano, respecting any claims which may be asserted by any
shareholder, director, any governmental entity or any third party or derivative
or any litigation pending, threatened or filed in the future against
Employee.  Such indemnification rights
cannot be revoked in the future.


11.           Nothing in this Agreement is intended
to release or relinquish Employee’s right to defense or coverage under any past,
present or future of Cano’s Directors’ and Officers’ Liability Insurance
coverages or any other insurance policies (the “Policies”) regarding claims
respecting matters for which Employee is entitled to defense or coverage under
the Policies.


12.           Employee acknowledges that he has had
access to and become familiar with various trade secrets and proprietary and
confidential information of Cano, its subsidiaries and affiliates, including,
but not limited to, processes, computer programs, compilations of information,
records, sales procedures, customer requirements, pricing techniques, customer
lists, methods of doing business, identities and compensation levels of
employees in key positions, and other confidential information (collectively,
referred to as “Trade Secrets”) which are owned by Cano, its subsidiaries
and/or affiliates and regularly used in the operation of its business, and as
to which Cano, its subsidiaries and/or affiliates take precautions to prevent
dissemination to persons other than certain directors, officers and
employees.  Employee acknowledges and
agrees that the Trade Secrets (1) are secret and not known in the industry; (2)
give the Company or its subsidiaries and/or affiliates an advantage over
competitors who do not know or use the Trade Secrets; (3) are of such value and
nature as to make it reasonable and necessary to protect and preserve the
confidentiality and secrecy of the Trade Secrets; and (4) are valuable and
special and unique assets of Cano or its subsidiaries and/or affiliates, the
disclosure of which could cause substantial injury and loss of profits and
goodwill to Cano or its subsidiaries and/or affiliates.  Employee may not use in any way or disclose
any of the Trade Secrets, directly or indirectly, at any time in the future,
except as required in connection with a judicial or administrative proceeding,
or if the information becomes public knowledge other than as a result of an
unauthorized disclosure by the Employee. 
All files, records, documents, information, data, and similar items
relating to the business of Cano, whether prepared by Employee or otherwise
coming into his possession, will remain the exclusive property of Cano, and in
any event must be promptly delivered to Cano or destroyed upon the Effective
Date.  Employee agrees upon his receipt
of any subpoena, process, or other request to produce or divulge, directly or
indirectly, any Trade Secrets to any entity, agency, tribunal, or person,
Employee shall timely notify and promptly deliver a copy of the subpoena,
process or other 



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request to
Cano.  Cano shall solely bear any and all
cost and expense, including attorneys’ fees and costs related to the protection
of such Trade Secrets in such event. 
This paragraph shall not apply to any information which is or becomes
public knowledge or which was known by Employee prior to his employment with
Cano.


13.           Employee agrees to provide reasonable
transition assistance for a reasonable period after the Termination Date and
cooperate fully with Cano, specifically including any attorney retained by
Cano, in connection with any pending or future litigation, business, or
investigatory matter.  The parties
acknowledge and agree that such cooperation may include, but shall in no way be
limited to, Employee’s making himself available for interview by Cano, or any
attorney retained by Cano, and providing to Cano any documents in his
possession or under his control relating to the litigation, business, or
investigatory matter. Cano agrees to provide Employee with reasonable notice of
the need for assistance when feasible. 
Cano additionally agrees to schedule such assistance in such a manner as
not to interfere with any alternative employment obtained by Employee when
possible and further agrees to bear any expenses of Employee incurred in
association with such assistance.


14.           The parties hereto recognize that, by
entering into this Agreement, the parties do not admit, and do specifically
deny, any violation of any contract, local, state, or federal law, common or
statutory.  The parties further recognize
that this Agreement has been entered into in release and compromise of any
claims which might be asserted by the parties against one another in connection
with the Employment Agreement, Employee Restricted Stock Agreement, Nonqualified
Stock Agreement, Employee’s employment by Cano, or the resignation thereof, or
any other matter or claim, and to avoid the expense and burden of any
litigation related thereto.


15.           The parties acknowledge and agree
that, in the event either party to this Agreement breaches any provision of
this Agreement, the Party claiming breach will be entitled to such relief as is
available to it at law or equity.  The
prevailing party in any litigation or arbitration resulting from any such claim
shall be entitled to recover attorney’s fees and expenses of litigation or
arbitration from the losing party.


16.           The parties agree that the exclusive
remedy or method of resolving all disputes or questions arising out of or
related to this Agreement shall be arbitration. 
Arbitration shall be held in Dallas, Texas, by three arbitrators, one to
be appointed by Cano, a second to be appointed by Employee, and a third to be
appointed by those two arbitrators.  The
third arbitrator shall act as chairman. 
Any arbitration may be initiated by either party upon written notice (“Arbitration
Notice”) to the other party, specifying the subject of the requested
arbitration and appointing that party’s arbitrator.


(a)           If (i) the non-initiating party fails
to appoint an arbitrator by written notice to the initiating party within ten
days after the Arbitration Notice, or (ii) the two arbitrators appointed by the
Parties fail to appoint a third arbitrator within ten days after the date of
the appointment of the second arbitrator, the American Arbitration Association,
upon application of the initiating party, shall appoint an arbitrator to fill
that position.



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(b)           The arbitration proceeding shall be
conducted in accordance with the rules of the American Arbitration
Association.  A determination or award
made or approved by at least two of the arbitrators shall be the valid and
binding action of the arbitrators.   The
costs of arbitration (exclusive of the expense in obtaining and presenting
evidence and attending the arbitration and of the fees and expenses of legal
counsel to a party, all of which shall be borne by that party) shall be borne
by Cano only if Employee receives substantially the relief sought by him in the
arbitration, whether by settlement, award, or judgment; otherwise, the costs
shall be borne equally between the Parties. 
The arbitration determination or award shall be final and conclusive on
the parties, and judgment upon such award may be entered and enforced in any
court of competent jurisdiction.


17.           One or more waivers of a breach of
any covenant, term, or provision of this Agreement by any party shall not be
construed as a waiver of a subsequent breach of the same covenant, term, or
provision, nor shall it be considered a waiver of any other then existing or
subsequent breach of a different covenant, term, or provision.


18.           If any provision or term of this
Agreement is held to be illegal, invalid, or unenforceable, such provision or
term shall be fully severable; this Agreement shall be construed and enforced
as if such illegal, invalid, or unenforceable provision had never comprised
part of this Agreement; and the remaining provisions of this Agreement shall
remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance from this
Agreement.  Furthermore, in lieu of each
such illegal, invalid, or unenforceable provision or term there shall be added
automatically as a part of this Agreement another provision or term as similar
to the illegal, invalid, or unenforceable provision, as may be possible and
that is legal, valid, and enforceable.


19.           Employee may revoke this Agreement by
notice to Cano, in writing, within seven (7) days of the date of its execution
by Employee (the “Revocation Period”). 
The parties agree that this Agreement shall not be effective in the
event Employee revokes this Agreement. 
Employee also acknowledges and agrees that if Cano has not received from
him written notice of his revocation of this Agreement prior to the expiration
of the Revocation Period, Employee will have forever waived his right to revoke
this Agreement and this Agreement shall thereafter be effective, enforceable
and have full force and effect.


20.           This Agreement constitutes the entire
Agreement of the parties, and supersedes all prior and contemporaneous
negotiations and agreements, oral or written. 
All prior and contemporaneous negotiations and agreements are deemed
incorporated and merged into this Agreement and are deemed to have been
abandoned if not so incorporated.  No
representations, oral or written, are being relied upon by either party in
executing this Agreement other than the express representations of this
Agreement.  This Agreement cannot be
changed or terminated without the express written consent of the parties.


21.           This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas, except where
preempted by federal law.



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22.           By executing this Agreement, Employee
acknowledges that (a) this Agreement has been reviewed with him by a
representative of Cano; (b) he has had at least twenty-one (21) days to
consider the terms of this Agreement and has considered its terms for that
period of time or has knowingly and voluntarily waived his right to do so; (c)
he has been advised by Cano to consult with an attorney regarding the terms of
this Agreement; (d) he has consulted with, or has had sufficient opportunity to
consult with, an attorney of his own choosing regarding the terms of this
Agreement; (e) any and all questions regarding the terms of this Agreement have
been asked and answered to his complete satisfaction; (f) he has read this
Agreement and fully understands its terms and their import; (g) except as
provided by this Agreement, he has no contractual right or claim to the benefits
described herein; (h) the consideration provided for herein is good and
valuable; and (i) he is entering into this
Agreement voluntarily, of his own free will, and without any coercion, undue
influence, threat, or intimidation of any kind or type whatsoever.


	
  

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  CANO PETROLEUM, INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
   

  	
  /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Its:

  	
   

  	
  CEO

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  /s/ James K. Teringo, Jr.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  James K. Teringo, Jr.

  	
   

  



 



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