Document:

Exhibit 10.12

 

SUBORDINATED
PLEDGE AGREEMENT

 

THIS SUBORDINATED PLEDGE AGREEMENT dated as of December 17, 2008
(this “Pledge Agreement”) is by and among CANO PETROLEUM, INC., a
Delaware corporation (“Borrower”), each subsidiary of the Borrower
signatory hereto (together with the Borrower, the “Pledgors” and
individually, each a “Pledgor”) and UnionBanCal Equities, Inc. as
Administrative Agent (in such capacity the “Administrative Agent”) under
the Credit Agreement (as hereinafter defined), for its benefit and the benefit
of the Lenders (as hereinafter defined).

 

RECITALS

 

A.                                   The
Borrower, the lenders party thereto from time to time (the “Lenders”;
together with the Administrative Agent, the “‘Secured Parties”), and the
Administrative Agent have entered into that certain Subordinated Credit
Agreement dated of even date herewith (as it may be amended, restated,
supplemented or otherwise modified from time to time, the “Credit Agreement”).

 

B.                                     It
is a condition precedent to the extension of credit to the Borrower under the
Credit Agreement that the Pledgors and the Administrative Agent, on behalf of
the Lenders, execute and deliver this Pledge Agreement.

 

C.                                     Each
Pledgor (other than the Borrower) is a subsidiary of the Borrower, and
therefore shall derive direct and indirect benefits from the transactions
contemplated by the Credit Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the
foregoing and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged and confessed, each Pledgor hereby
agrees with the Administrative Agent for the benefit of the Secured Parties as
follows:

 

Section 1.  Definitions.  All capitalized terms not otherwise defined
in this Pledge Agreement that are defined in the Credit Agreement shall have
the meanings assigned to such terms by the Credit Agreement.  Any terms used in this Pledge Agreement that
are defined in the Uniform Commercial Code in effect in the State of Texas from
time to time (the “UCC”) and not otherwise defined herein or in the Credit
Agreement, shall have the meanings assigned to those terms by the UCC.  All meanings to defined terms, unless
otherwise indicated, are to be equally applicable to both the singular and
plural forms of the terms defined. 
Article, Section, Schedule, and Exhibit references are to Articles
and Sections of and Schedules and Exhibits to this Pledge Agreement, unless
otherwise specified.  All references to
instruments, documents, contracts, and agreements are references to such instruments,
documents, contracts, and agreements as the same may be amended, supplemented,
and otherwise modified from time to time, unless otherwise specified.  The words “hereof”, “herein” and “hereunder”
and words of similar import when used in this Pledge Agreement shall refer to
this Pledge Agreement as a whole and not to any particular provision of this
Pledge Agreement.  As used herein, the
term “including” means “including, without limitation,”. Paragraph headings
have been inserted in this Pledge Agreement as a matter of convenience for
reference only and it is agreed that such paragraph headings are 

 

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not a part of this Pledge
Agreement and shall not be used in the interpretation of any provision of this
Pledge Agreement.

 

Section 2.  Pledge.

 

2.01.                        Grant
of Pledge.

 

(a)                                  Each
Pledgor hereby pledges to the Administrative Agent, and grants to the
Administrative Agent, for the benefit of the Secured Parties, a continuing
security interest in, the Pledged Collateral, as defined in Section 2.02
below.  This Pledge Agreement shall
secure (i) all Obligations (as defined in the Credit Agreement) now or
hereafter existing (ii) all other amounts now or hereafter owed by the
Borrower, any Pledgor, or any of their respective Subsidiaries under this
Pledge Agreement or the other Loan Documents to the Administrative Agent or any
other Lender, and (iii) any increases, extensions, modifications,
substitutions, amendments, restatements and renewals of any of the foregoing
obligations, whether for principal, interest, fees, expenses, indemnification
or otherwise.   All such obligations shall be referred to in
this Pledge Agreement as the “Secured Obligations”.

 

(b)                                 Notwithstanding
anything contained herein to the contrary, it is the intention of each Pledgor,
the Administrative Agent and the Lenders that the amount of the Secured
Obligation secured by each Pledgor’s interests in any of its property or assets
(whether real or personal, or mixed, tangible or intangible) (“Property”)
shall be in, but not in excess of, the maximum amount permitted by fraudulent
conveyance, fraudulent transfer and other similar law, rule or regulation
of any Governmental Authority applicable to such Pledgor.  Accordingly, notwithstanding anything to the
contrary contained in this Pledge Agreement or in any other agreement or
instrument executed in connection with the payment of any of the Secured
Obligations, the amount of the Secured Obligations secured by each Pledgor’s
interests in any of its Property pursuant to this Pledge Agreement shall be
limited to an aggregate amount equal to the largest amount that would not
render such Pledgor’s obligations hereunder or the liens and security interest
granted to the Administrative Agent hereunder subject to avoidance under Section 548
of the United States Bankruptcy Code or any comparable provision of any other
applicable law.

 

2.02.                        Pledged
Collateral.  “Pledged Collateral”
shall mean all of each Pledgor’s right, title, and interest in the following,
whether now owned or hereafter acquired:

 

(a)                                  (i) all
of the membership interests listed in the attached Schedule 2.02(a) issued
to such Pledgor and all such additional membership interests of any issuer of
such interests hereafter acquired by such Pledgor (the “Membership Interests”),
(ii) the certificates representing the Membership Interests, if any, and (iii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Membership Interests, 
including, without limitation, (A) any proceeds from a sale by or
on behalf of such Pledgor of any of the Membership Interests, and (B) any
distributions, dividends, cash, instruments and other property from
time-to-time received or otherwise distributed in respect of the Membership
Interests, whether regular, special or made in connection 

 

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with the partial or total liquidation of the issuer and whether
attributable to profits, the return of any contribution or investment or
otherwise attributable to the Membership Interests or the ownership thereof
(collectively, the “Membership Interests Distributions”);

 

(b)                                 (i) all
of the general and limited partnership interests listed in the attached
Schedule 2.02(b) issued to such Pledgor and all such additional limited or
general partnership interests of any issuer of such interests hereafter
acquired by such Pledgor (the “Partnership Interests”), and (ii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Partnership Interests, 
including, without limitation, (A) any proceeds from a sale by or
on behalf of such Pledgor of any of the Partnership Interests, and (B) any
distributions, dividends, cash, instruments and other property from
time-to-time received or otherwise distributed in respect of the Partnership
Interests, whether regular, special or made in connection with the partial or
total liquidation of the issuer and whether attributable to profits, the return
of any contribution or investment or otherwise attributable to the Partnership
Interests or the ownership thereof (collectively, the “Partnership Interests
Distributions”);

 

(c)                                  (i) all
of the shares of stock listed in the attached Schedule 2.02(c) issued to
such Pledgor and all such additional shares of stock of any issuer of such
shares of stock hereafter issued to such Pledgor (the “Pledged Shares”),
(ii) the certificates representing the Pledged Shares, and (iii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Pledged Shares, including, without limitation, (A) any
proceeds from a sale by or on behalf of such Pledgor of any of the Pledged
Shares, and (B) any distributions, dividends, cash, instruments and other
property from time-to-time received or otherwise distributed in respect of the
Pledged Shares, whether regular, special or made in connection with the partial
or total liquidation of the issuer and whether attributable to profits, the
return of any contribution or investment or otherwise attributable to the
Pledged Shares or the ownership thereof (collectively, the “Pledged Shares
Distributions”; together with the Membership Interests Distributions and
the Partnership Interest Distributions, the “Distributions”); and

 

(d)                                 all
proceeds from the Pledged Collateral described in paragraphs (a), (b) and (c) of
this Section 2.02.

 

2.03.                        Delivery
of Pledged Collateral.  All
certificates or instruments, if any, representing the Pledged Collateral shall
be delivered to the Administrative Agent and shall be in suitable form for
transfer by delivery, or shall be accompanied by duly executed instruments of
transfer or assignment in blank, all in form and substance reasonably
satisfactory to the Administrative Agent. 
After the occurrence and during the continuance of an Event of Default,
the Administrative Agent shall have the right, upon prior written notice to the
applicable Pledgor, to transfer to or to register in the name of the
Administrative Agent or any of its nominees any of the Pledged Collateral,
subject to the rights specified in Section 2.04.  In addition, after the occurrence and during
the continuance of an Event of Default, the Administrative Agent shall have the
right at any time to exchange the certificates or instruments representing the
Pledged Collateral for certificates or instruments of smaller or larger
denominations.

 

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2.04.                        Rights
Retained by Pledgor.  Notwithstanding
the pledge in Section 2.01,

 

(a)                                  so
long as no Event of Default shall have occurred and remain uncured or unwaived
and except as otherwise provided in the Credit Agreement, (i) each Pledgor
shall be entitled to receive and retain any dividends and other Distributions
paid on or in respect of the Pledged Collateral and the proceeds of any sale of
the Pledged Collateral; and (ii) each Pledgor shall be entitled to
exercise any voting and other consensual rights pertaining to its Pledged
Collateral for any purpose not inconsistent with the terms of this Pledge
Agreement or the Credit Agreement; provided, however, that no
Pledgor shall exercise nor shall it refrain from exercising any such right if
such action or inaction, as applicable, would have a materially adverse effect
on the value of the Pledged Collateral; and

 

(b)                                 if
an Event of Default shall have occurred and remain uncured or unwaived,

 

(i)                                     until
such time thereafter as the Administrative Agent gives written notice of its
election to exercise such voting and other consensual rights pursuant to Section 5.02
hereof, each Pledgor shall be entitled to exercise any voting and other
consensual rights pertaining to its Pledged Collateral for any purpose not
inconsistent with the terms of this Pledge Agreement or the Credit Agreement; provided,
however, that no Pledgor shall exercise nor shall it refrain from
exercising any such right if such action or inaction, as applicable, would have
a materially adverse effect on the value of the Pledged Collateral; and

 

(ii)                                  at
and after such time as the Administrative Agent gives written notice of its
election to exercise such voting and other consensual rights pursuant to Section 5.02
hereof, each Pledgor shall execute and deliver (or cause to be executed and
delivered) to the Administrative Agent all proxies and other instruments as the
Administrative Agent may reasonably request to enable the Administrative Agent
to (A) exercise the voting and other rights which such Pledgor is entitled
to exercise pursuant to paragraph (a) or paragraph (b)(i) of
this Section 2.04, and (B) receive any Distributions and proceeds of
sale of the Pledged Collateral which such Pledgor is authorized to receive and
retain pursuant to paragraph (a)(i) of this Section 2.04.

 

Section 3.  Pledgor’s
Representations and Warranties.  Each
Pledgor represents and warrants to the Administrative Agent and the Lenders as
follows:

 

(a)                                  The
Pledged Collateral applicable to such Pledgor listed on the attached
Schedules 2.02(a), 2.02(b) and 2.02(c) have been duly authorized
and validly issued to such Pledgor and are fully paid and nonassessable.

 

(b)                                 Such
Pledgor is the legal and beneficial owner of the Pledged Collateral free and
clear of any Lien or option, except for (i) the security interest created
by this Pledge Agreement and (ii) other Liens permitted under the Credit
Agreement ( the “Permitted Liens”).

 

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(c)                                  No
authorization, authentication, approval, or other action by, and no notice to
or filing with, any Governmental Authority or regulatory body is required
either (a) for the pledge by such Pledgor of the Pledged Collateral
pursuant to this Pledge Agreement or for the execution, delivery, or
performance of this Pledge Agreement by such Pledgor or (b) for the
exercise by the Administrative Agent or any Secured Party of the voting or
other rights provided for in this Pledge Agreement or the remedies in respect
of the Pledged Collateral pursuant to this Pledge Agreement (except as may be
required in connection with such disposition by laws affecting the offering and
sale of securities generally).

 

(d)                                 Such
Pledgor has the full right, power and authority to deliver, pledge, assign and
transfer the Pledged Collateral to the Administrative Agent.

 

(e)                                  The
Membership Interests listed on the attached Schedule 2.02(a) constitute
the percentage of the issued and outstanding membership interests of the
respective issuer thereof set forth on Schedule 2.02(a) and all of the
Equity Interest in such issuer in which the Pledgor has any ownership interest.

 

(f)                                    The
Partnership Interests listed on the attached Schedule 2.02(b) constitute
the percentage of the issued and outstanding general and limited partnership
interests of the respective issuer thereof set forth on Schedule 2.02(b) and
all of the Equity Interest in such issuer in which the Pledgor has any
ownership interest.

 

(g)                                 The
Pledged Shares list on the attached Schedule 2.02(c) constitute the
percentage of the issued and outstanding shares of capital stock of the
respective issuer thereof set forth on Schedule 2.02(c) and all of the
Equity Interest in such issuer in which the Pledgor has any ownership interest.

 

(h)                                 Schedule
3 sets forth its sole jurisdiction of formation, type of organization, federal
tax identification number, the organizational number, and all names used by it
during the last five years prior to the date of this Pledge Agreement.

 

Section 4.  Pledgor’s
Covenants.  During the term of this
Pledge Agreement and until all of the Secured Obligations have been fully and
finally paid and discharged in full, the Commitments under the Credit Agreement
have been terminated or expired, and the Credit Agreement has been terminated
in writing, each Pledgor covenants and agrees with the Administrative Agent
that:

 

4.01.                        Protect
Collateral; Further Assurances.  Each
Pledgor will warrant and defend the rights and title herein granted unto the
Administrative Agent in and to the Pledged Collateral (and all right, title,
and interest represented by the Pledged Collateral) against the claims and
demands of all Persons whomsoever.  Each
Pledgor agrees that, at the expense of such Pledgor, such Pledgor will promptly
execute and deliver all further instruments and documents, and take all further
action, that may be reasonably necessary and that the Administrative Agent or
any Secured Party may reasonably request, in order to perfect and protect any
security interest granted or purported to be granted hereby or to enable the
Administrative Agent or any Secured Party to exercise and enforce its rights
and remedies hereunder with respect to any Pledged 

 

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Collateral.  Each Pledgor hereby authorizes the
Administrative Agent to file any financing statements, amendments or
continuations without the signature of such Pledgor to the extent permitted by
applicable law in order to perfect or maintain the perfection of any security
interest granted under this Pledge Agreement.

 

4.02.                        Transfer,
Other Liens, and Additional Shares. 
Each Pledgor agrees that it will not (a) except as otherwise
permitted by the Credit Agreement, sell or otherwise dispose of, or grant any
option with respect to, any of the Pledged Collateral or (b) create or
permit to exist any Lien upon or with respect to any of the Pledged Collateral,
except for Permitted Liens.  Each Pledgor
agrees that it will (i) cause each issuer of the Pledged Collateral that
is a Subsidiary of such Pledgor not to issue any other Equity Interests in
addition to or in substitution for the Pledged Collateral issued by such
issuer, except to such Pledgor or any other Pledgor and (ii) pledge
hereunder, immediately upon its acquisition (directly or indirectly) thereof,
any additional Equity Interests of an issuer acquired by such Pledgor.  No Pledgor shall approve any amendment or
modification of any of the Pledged Collateral without the Administrative Agent’s
prior written consent.

 

4.03.                        Jurisdiction
of Formation; Name Change.  Each
Pledgor shall give the Administrative Agent at least 30 days’ prior written
notice before it (i) in the case of a Pledgor that is not a “registered
organization” (as defined in Section 9-102 of the UCC) changes the
location of its principal place of business and chief executive office, or (ii) uses
a trade name other than its current name used on the date hereof.  Other than as permitted by Section 6.11
of the respective Credit Agreement, no Pledgor shall amend, supplement, modify
or restate its articles or certificate of incorporation, bylaws, limited
liability company agreements, or other equivalent organizational documents, nor
amend its name or change its jurisdiction of incorporation, organization or
formation.

 

Section 5.  Remedies
upon Default.  If any Event of
Default shall have occurred and be continuing:

 

5.01.                        UCC
Remedies.  To the extent permitted by
law, the Administrative Agent may exercise in respect of the Pledged
Collateral, in addition to other rights and remedies provided for in this
Pledge Agreement or otherwise available to it, all the rights and remedies of a
Administrative Agent under the UCC (whether or not the UCC applies to the
affected Pledged Collateral).

 

5.02.                        Dividends
and Other Rights.

 

(a)                                  All
rights of the Pledgors to exercise the voting and other consensual rights which
it would otherwise be entitled to exercise pursuant to Section 2.04(a) may
be exercised by the Administrative Agent if the Administrative Agent so elects
and gives written notice of such election to the affected Pledgor and all
rights of the Pledgors to receive any Distributions on or in respect of the
Pledged Collateral and the proceeds of sale of the Pledged Collateral which it
would otherwise be authorized to receive and retain pursuant to Section 2.04(b) shall
cease.

 

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(b)                                 All
Distributions on or in respect of the Pledged Collateral and the proceeds of
sale of the Pledged Collateral which are received by any Pledgor shall be
received in trust for the benefit of the Administrative Agent, shall be
segregated from other funds of such Pledgor, and shall be promptly paid over to
the Administrative Agent as Pledged Collateral in the same form as so received
(with any necessary indorsement).

 

5.03.                        Sale
of Pledged Collateral. The Administrative Agent may sell all or part of the
Pledged Collateral at public or private sale, at any of the Administrative Agent’s
offices or elsewhere, for cash, on credit, or for future delivery, and upon
such other terms as the Administrative Agent may deem commercially reasonable
in accordance with applicable laws.  Each
Pledgor agrees that to the extent permitted by law such sales may be made
without notice.  If notice is required by
law, each Pledgor hereby deems 10 days’ advance notice of the time and place of
any public sale or the time after which any private sale is to be made
reasonable notification, recognizing that if the Pledged Collateral threatens
to decline speedily in value or is of a type customarily sold on a recognized
market shorter notice may be reasonable. 
The Administrative Agent shall not be obligated to make any sale of the
Pledged Collateral regardless of notice of sale having been given.  The Administrative Agent may adjourn any
public or private sale from time-to-time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned. 
Each Pledgor shall fully cooperate with Administrative Agent in selling
or realizing upon all or any part of the Pledged Collateral.  In addition, each Pledgor shall fully comply
with the securities laws of the United States, the State of Texas, and other
states and take such actions as may be necessary to permit Administrative Agent
to sell or otherwise dispose of any securities representing the Pledged
Collateral in compliance with such laws.

 

5.04.                        Exempt
Sale.  If, in the opinion of the
Administrative Agent, there is any question that a public or semipublic sale or
distribution of any Pledged Collateral will violate any state or federal
securities law, the Administrative Agent in its reasonable discretion (a) may
offer and sell securities privately to purchasers who will agree to take them
for investment purposes and not with a view to distribution and who will agree
to imposition of restrictive legends on the certificates representing the
security, or (b) may sell such securities in an intrastate offering under Section 3(a)(11)
of the Securities Act of 1933, as amended, and no sale so made in good faith by
the Administrative Agent shall be deemed to be not “commercially reasonable”
solely because so made.  Each Pledgor
shall cooperate fully with the Administrative Agent in selling or realizing
upon all or any part of the Pledged Collateral.

 

5.05.                        Application
of Collateral. The proceeds of any sale, or other realization (other than
that received from a sale or other realization permitted by the Credit
Agreement) upon all or any part of the Pledged Collateral pledged by the
Pledgors shall be applied by the Administrative Agent as set forth in Section 7.06
of the Credit Agreement.

 

5.06.                        Cumulative
Remedies.  Each right, power and
remedy herein specifically granted to the Administrative Agent or otherwise
available to it shall be cumulative, and shall be in addition to every other
right, power and remedy herein specifically given or now or hereafter existing
at law, in equity, or otherwise, and each such right, power and remedy, whether
specifically granted herein or otherwise existing, may be exercised at any time
and from time-to-time as often and in such order as may be deemed expedient by
the Administrative Agent in its 

 

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sole discretion.  No failure on the part of the Administrative
Agent to exercise, and no delay in exercising, and no course of dealing with
respect to, any such right, power or remedy, shall operate as a waiver thereof,
nor shall any single or partial exercise of any such rights, power or remedy
preclude any other or further exercise thereof or the exercise of any other
right.

 

Section 6.  Administrative
Agent as Attorney-in-Fact for Pledgor.

 

6.01.                        Administrative
Agent Appointed Attorney-in-Fact. 
Each Pledgor hereby irrevocably appoints the Administrative Agent as
such Pledgor’s attorney-in-fact, with full authority after the occurrence and
during the continuance of an Event of Default to act for such Pledgor and in the
name of such Pledgor, and, in the Administrative Agent’s discretion, to take
any action and to execute any instrument which the Administrative Agent may
deem reasonably necessary or advisable to accomplish the purposes of this
Pledge Agreement, including, without limitation, to receive, indorse, and
collect all instruments made payable to such Pledgor representing any dividend,
or the proceeds of the sale of the Pledged Collateral, or other distribution in
respect of the Pledged Collateral and to give full discharge for the same.  Each
Pledgor hereby acknowledges, consents and agrees that the power of attorney
granted pursuant to this Section is irrevocable and coupled with an
interest.

 

6.02.                        Administrative
Agent May Perform. The Administrative Agent may from time-to-time, at
its option but at the Pledgors’ expense, perform any act which any Pledgor
agrees hereunder to perform and which such Pledgor shall fail to perform after
being requested in writing so to perform (it being understood that no such request
need be given after the occurrence and during the continuance of any Event of
Default and after notice thereof by the Administrative Agent to the affected
Pledgor) and the Administrative Agent may from time-to-time take any other
action which the Administrative Agent reasonably deems necessary for the
maintenance, preservation or protection of any of the Pledged Collateral or of
its security interest therein.  The
Administrative Agent shall provide notice to the affected Pledgor of any action
taken hereunder; provided however, the failure to provide such notice shall not
be construed as a waiver of any rights of the Administrative Agent provided
under this Pledge Agreement or under applicable law.

 

6.03.                        Administrative
Agent Has No Duty.  The powers conferred
on the Administrative Agent hereunder are solely to protect its interest in the
Pledged Collateral and shall not impose any duty on it to exercise any such
powers.  Except for reasonable care of
any Pledged Collateral in its possession and the accounting for moneys actually
received by it hereunder, the Administrative Agent shall have no duty as to any
Pledged Collateral or responsibility for taking any necessary steps to preserve
rights against prior parties or any other rights pertaining to any Pledged
Collateral.

 

6.04.                        Reasonable
Care.  The Administrative Agent shall
be deemed to have exercised reasonable care in the custody and preservation of
the Pledged Collateral in its possession if the Pledged Collateral is accorded
treatment substantially equal to that which the Administrative Agent accords
its own property, it being understood that the Administrative Agent shall have
no responsibility for (a) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders, or other matters relative
to any Pledged Collateral, whether or not the 

 

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Administrative Agent has
or is deemed to have knowledge of such matters, or (b) taking any
necessary steps to preserve rights against any parties with respect to any
Pledged Collateral.

 

Section 7.  Miscellaneous.

 

7.01.                        Expenses.  The Pledgors will upon demand pay to the
Administrative Agent for its benefit and the benefit of the other Secured
Parties the amount of any reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of its counsel and of any experts, which the
Administrative Agent and the other Lenders may incur in connection with (a) the
custody, preservation, use, or operation of, or the sale, collection, or other
realization of, any of the Pledged Collateral, (b) the exercise or
enforcement of any of the rights of the Administrative Agent or any Lender or
any other Lenders hereunder, and (c) the failure by any Pledgor to perform
or observe any of the provisions hereof.

 

7.02.                        Amendments,
Etc.  No amendment or waiver of any
provision of this Pledge Agreement nor consent to any departure by any Pledgor
herefrom shall be effective unless made in writing and executed by the affected
Pledgor and the Administrative Agent, and such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.

 

7.03.                        Addresses
for Notices.  All notices and other
communications provided for hereunder shall be in the manner and to the
addresses set forth in the Credit Agreement.

 

7.04.                        Continuing Security
Interest; Transfer of Interest.

 

(a)                                  This
Pledge Agreement shall create a continuing security interest in the Pledged
Collateral and, unless expressly released by the Administrative Agent, shall (i) remain
in full force and effect until the indefeasible payment in full in cash of, and
termination of, the Secured Obligations and the termination of the Commitments
under the Credit Agreement, (ii) be binding upon the Pledgors, the Administrative
Agent, the Lenders and their successors, and assigns, and (iii) inure,
together with the rights and remedies of the Administrative Agent hereunder, to
the benefit of and be binding upon, the Administrative Agent, and the Lenders
and their respective successors, transferees, and assigns.  Without limiting the generality of the
foregoing clause, when any Secured Party assigns or otherwise transfers any
interest held by it under either the Credit Agreement or other Loan Document to
any other Person pursuant to the terms of the Credit Agreement or such other
Loan Document, that other Person shall thereupon become vested with all the
benefits held by such Secured Party under this Pledge Agreement.

 

(b)                                 Upon
the indefeasible payment in full and termination of the Secured Obligations,
the termination of all Commitments under the Credit Agreement, and the
termination of the Credit Agreement in writing, the security interest granted
hereby shall terminate and all rights to the Pledged Collateral shall revert to
the applicable Pledgor to the extent such Pledged Collateral shall not have
been sold or otherwise applied pursuant to the terms hereof.  Upon any such termination, the Administrative
Agent will, at the Pledgors’ expense, deliver all Pledged Collateral to the
applicable Pledgor, execute and 

 

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deliver to the applicable Pledgor such documents as such Pledgor shall
reasonably request and take any other actions reasonably requested to evidence
or effect such termination.

 

7.05.                        Waivers.  Each Pledgor hereby waives:

 

(a)                                  promptness,
diligence, notice of acceptance, and any other notice with respect to any of
the Secured Obligations and this Pledge Agreement;

 

(b)                                 any
requirement that the Administrative Agent or any Secured Party protect, secure,
perfect, or insure any Lien or any Property subject thereto or exhaust any
right or take any action against any Pledgor, any Guarantor, or any other
Person or any collateral; and

 

(c)                                  any
duty on the part of the Administrative Agent to disclose to any Pledgor any
matter, fact, or thing relating to the business, operation, or condition of any
Pledgor, any Guarantor, or any other Person and their respective assets now
known or hereafter known by such Person.

 

7.06.                        Severability.  Wherever possible each provision of this
Pledge Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Pledge Agreement shall
be prohibited by or invalid under such law, such provision shall be ineffective
to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Pledge
Agreement.

 

7.07.                        Choice
of Law.  This Pledge Agreement shall
be governed by and construed and enforced in accordance with the laws of the
State of Texas, except to the extent that the validity or perfection of the
security interests hereunder, or remedies hereunder, in respect of any
particular Pledged Collateral are governed by the laws of a jurisdiction other
than the State of Texas.

 

7.08.                        Counterparts.  The parties may execute this Pledge Agreement
in counterparts, each of which constitutes an original, and all of which,
collectively, constitute only one agreement. 
Delivery of an executed counterpart signature page by facsimile is
as effective as executing and delivering this Pledge Agreement in the presence
of the other parties to this Pledge Agreement. 
In proving this Pledge Agreement, a party must produce or account only
for the executed counterpart of the party to be charged.

 

7.09.                        Headings.  Paragraph headings have been inserted in this
Pledge Agreement as a matter of convenience for reference only and it is agreed
that such paragraph headings are not a part of this Pledge Agreement and shall
not be used in the interpretation of any provision of this Pledge Agreement.

 

7.10.                        Reinstatement.  If, at any time after payment in full of all
Secured Obligations and termination of the Administrative Agent’s security
interest, any payments on the Secured Obligations previously made must be
disgorged by any Secured Party for any reason whatsoever, including, without
limitation, the insolvency, bankruptcy or reorganization of any Pledgor or any
other Person, this Pledge Agreement and the Administrative Agent’s security
interests herein 

 

10

 

shall be reinstated as to
all disgorged payments as though such payments had not been made, and each
Pledgor shall sign and deliver to the Administrative Agent all documents, and
shall do such other acts and things, as may be necessary to reinstate and
perfect the Administrative Agent’s security interest.  EACH
PLEDGOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH OTHER SECURED PARTY FROM AND
AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 7.10
(INCLUDING REASONABLE ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCH
ACTION OR SUIT INCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE
ARISING AS A RESULT OF THE INDEMNIFIED SECURED PARTY’S  OWN
NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE
THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT
JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED SECURED PARTY’S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.

 

7.11.                        Conflicts.  In the event of any explicit or implicit
conflict between any provisions of this Pledge Agreement and any provision of
the Credit Agreement, the terms of the Credit Agreement shall be controlling.

 

7.12.                        Additional
Pledgors.  Pursuant to Section 6.15 of the Credit
Agreement, certain Subsidiaries of the Borrower that were not in existence on
the date of the Credit Agreement are required to enter into this Pledge
Agreement as Pledgors.  Upon execution
and delivery after the date hereof by the Administrative Agent and such
Subsidiary of an instrument in the form of Annex 1, such Subsidiary shall
become a Pledgor hereunder with the same force and effect as if originally
named as a Pledgor herein.  The execution
and delivery of any instrument adding an additional Pledgor as a party to this
Pledge Agreement shall not require the consent of any other Pledgor
hereunder.  The rights and obligations of
each Pledgor hereunder shall remain in full force and effect notwithstanding
the addition of any new Pledgor as a party to this Pledge Agreement.

 

7.13.                        Subordination and Intercreditor Agreement.  Reference is made to the Subordination and
Intercreditor Agreement, dated as of December 17, 2008 (as amended,
restated, supplemented or otherwise modified from time to time, the “Subordination
and Intercreditor Agreement”),
among Union Bank of California, N.A., as Senior Agent, and UnionBanCal
Equities, Inc.,  as
Subordinated Agent, and certain other persons, party or that may become party
thereto from time to time.  Notwithstanding
anything herein to the contrary, this Pledge Agreement, the Liens granted
to the Administrative Agent pursuant to this Pledge Agreement and the exercise
of any right or remedy by the Administrative Agent or any of the Lenders
hereunder are subject to the provisions of the Subordination and Intercreditor
Agreement.  In the event of any conflict
between the terms of the Subordination and Intercreditor Agreement and this
Pledge Agreement, the terms of the Subordination and Intercreditor Agreement
shall govern and control.

 

7.14.                        Entire
Agreement.  THIS PLEDGE AGREEMENT, THE CREDIT AGREEMENT AND THE
OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT
BE CONTRADICTED BY 

 

11

 

EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

 

THERE
ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

[SIGNATURE PAGES FOLLOW]

 

12

 

The parties
hereto have caused this Pledge Agreement to be duly executed as of the date
first above written.

 

	
   

  	
  PLEDGORS:

  
	
   

  	
   

  
	
   

  	
  CANO
  PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Benjamin Daitch

  
	
   

  	
   

  	
  Benjamin Daitch

  
	
   

  	
   

  	
  Senior Vice President and Chief Financial Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  W.O.
  ENERGY, INC.

  
	
   

  	
  W.O.
  ENERGY OF NEVADA, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Each by: 

  	
  /s/ Benjamin Daitch

  
	
   

  	
   

  	
  Benjamin Daitch

  
	
   

  	
   

  	
  Vice President and Chief Financial Officer

  
				

 

Signature
Page to Subordinated Pledge Agreement

 

 

	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC., as 

  
	
   

  	
  Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
    Ted A. McNulty

  
	
   

  	
   

  	
    Ted A. McNulty

  
	
   

  	
   

  	
    Senior Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
    /s/ Derrick Pan

  
	
   

  	
  Name:   
  Derrick Pan

  
	
   

  	
  Title:   
  Vice President

  
				

 

Signature Page to
Subordinated Pledge Agreement

 

 

SCHEDULE
2.02(a)

 

PLEDGED
COLLATERAL

 

Attached to
and forming a part of that certain Subordinated Pledge Agreement dated December 17,
2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WO
Energy, Inc., as Pledgors, to UnionBanCal Equities, Inc., as the
Administrative Agent.

 

	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Type of Membership 

  Interest

  	
   

  	
  % of Membership Interest 

  Owned

  
	
  None

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Schedule 2.02(a) to Subordinated Pledge Agreement

 

 

SCHEDULE
2.02(b)

 

PLEDGED COLLATERAL

 

Attached to
and forming a part of that certain Subordinated Pledge Agreement dated December 17,
2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WO
Energy, Inc., as Pledgors, to UnionBanCal Equities, Inc., as the
Administrative Agent.

 

	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Type of Partnership

  Interest

  	
   

  	
  % of Partnership Interest

  Owned

  
	
  W.O. Energy
  of Nevada, Inc.

  	
   

  	
  W.O.
  Operating Company, Ltd.

  	
   

  	
  Limited
  Partnership Interest

  	
   

  	
  95% Limited
  Partnership Interest

  
	
  W.O. Energy
  of Nevada, Inc.

  	
   

  	
  W.O.
  Production Company, Ltd.

  	
   

  	
  Limited
  Partnership Interest

  	
   

  	
  95% Limited
  Partnership Interest

  
	
  WO
  Energy, Inc.

  	
   

  	
  W.O.
  Operating Company, Ltd.

  	
   

  	
  General
  Partnership Interest

  	
   

  	
  5% General
  Partnership Interest

  
	
  WO
  Energy, Inc.

  	
   

  	
  W.O.
  Production Company, Ltd.

  	
   

  	
  General
  Partnership Interest

  	
   

  	
  5% General
  Partnership Interest

  

 

Schedule
2.02(b) to Subordinated Pledge Agreement

 

 

SCHEDULE
2.02(c)

 

PLEDGED COLLATERAL

 

Attached to
and forming a part of that certain Subordinated Pledge Agreement dated December 17,
2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WO
Energy, Inc., as Pledgors, to UnionBanCal Equities, Inc., as the
Administrative Agent.

 

	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Type of Shares

  	
   

  	
  Number of 

  Shares

  	
   

  	
  % of

  Shares

  Owned

  	
   

  	
  Certificate

  No.

  	
   

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Square One
  Energy, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,500

  	
   

  	
  100

  	
  %

  	
  4

  	
   

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Ladder
  Companies, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,000

  	
   

  	
  100

  	
   

  	
  7

  	
   

  
	
  Cano Petroleum, Inc.

  	
   

  	
  W.O. Energy
  of Nevada, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,200

  	
   

  	
  100

  	
  %

  	
  5

  	
   

  
	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  WO
  Energy, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,100

  	
   

  	
  100

  	
  %

  	
  6

  	
   

  
	
  Cano Petroleum Inc.

  	
   

  	
  Cano Petro
  of New Mexico, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  100

  	
   

  	
  100

  	
  %

  	
  1

  	
   

  

 

Schedule
2.02(c) to Subordinated Pledge Agreement

 

 

SCHEDULE 3

 

PLEDGOR INFORMATION

 

	
  Grantor:

  	
   

  	
  Cano Petroleum, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Delaware

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  3664494

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  77-0635673

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  Huron Ventures, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  WO Energy, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  113518200

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  75-2303966

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  W.O. Energy of Nevada, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Nevada

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  

 

Schedule
3 to Subordinated Pledge Agreement

 

 

	
  Organizational Number:

  	
   

  	
  C20757-1996-001

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  88-0369151

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  

 

 

Annex 1 to the

Subordinated Pledge Agreement

 

SUPPLEMENT
NO. 
[            ]  dated as of
[               ]
(the “Supplement”), to the Subordinated Pledge Agreement dated as of December 17,
2008 (as amended, supplemented or otherwise modified from time to time, the “Pledge
Agreement”) by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),
each other party signatory hereto (together with the Borrower, the “Pledgors”
and individually, each a “Pledgor”) and UnionBanCal Equities, Inc.
as Administrative Agent (in such capacity, the “Administrative Agent”) under
the Credit Agreement (as hereinafter defined) for the benefit of the Lenders
(as hereinafter defined).

 

RECITALS

 

A.                                   Reference
is made to that certain Subordinated Credit Agreement dated as of December 17,
2008 (as it may be amended, restated or otherwise modified from time to time,
the “Credit Agreement”, among the Borrower, the lenders party thereto
from time to time (the “Lenders”), and the Administrative Agent; and

 

B.                                     The
Pledgors have entered into the Pledge Agreement in order to induce the Lenders
to make the Advances under the Credit Agreement.  Pursuant to Section 6.15 of the Credit
Agreement, each Subsidiary of the Borrower that was not in existence on the
date of the respective Master Debt Agreement is required to enter into the
Pledge Agreement as a Pledgor upon becoming a Subsidiary.  Section 7.12 of the Pledge Agreement
provides that additional Subsidiaries of the Borrower may become Pledgors under
the Pledge Agreement by execution and delivery of an instrument in the form of
this Supplement.  The undersigned
Subsidiary of the Borrower (the “New Pledgor”) is executing this
Supplement in accordance with the requirements of the Senior Credit Agreement
to become a Pledgor under the Pledge Agreement.

 

C.                                     Capitalized
terms used herein and not otherwise defined herein shall have the meanings
assigned to such terms in the Pledge Agreement and the Credit Agreement.

 

Accordingly,
the Administrative Agent and the New Pledgor agree as follows:

 

SECTION 1.                                In
accordance with Section 7.12 of the Pledge Agreement, the New Pledgor by
its signature below becomes a Pledgor under the Pledge Agreement with the same
force and effect as if originally named therein as a Pledgor and the New
Pledgor hereby agrees (a) to all the terms and provisions of the Pledge
Agreement applicable to it as a Pledgor thereunder and (b) represents and
warrants that the representations and warranties made by it as a Pledgor
thereunder are true and correct on and as of the date hereof in all material
respects.  In furtherance of the
foregoing, the New Pledgor, as security for the payment and performance in full
of the Secured Obligations, does hereby create and grant to the Administrative
Agent, its successors and assigns, for the benefit of the Secured Parties,
their successors and assigns, a continuing security interest in and lien on all
of the New Pledgor’s right, title and interest in and to the Pledged Collateral
of the New Pledgor.  Each reference to a “Pledgor”
in the Pledge Agreement shall be deemed to include the New Pledgor.  The Pledge Agreement is hereby incorporated
herein by reference.

 

Annex 1 to Subordinated Pledge Agreement

 

 

SECTION 2.                                The
New Pledgor represents and warrants to the Administrative Agent and the other
Secured Parties that this Supplement has been duly authorized, executed and
delivered by it and constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms (subject to applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting creditors’
rights generally and subject, as to enforceability, to equitable principles of
general application (regardless of whether enforcement is sought in a
proceeding in equity or at law)).

 

SECTION 3.                                This
Supplement may be executed in counterparts, each of which shall constitute an
original, but all of which when taken together shall constitute a single
contract.  This Supplement shall become
effective when the Administrative Agent shall have received counterparts of
this Supplement that, when taken together, bear the signatures of the New
Pledgor and the Administrative Agent. 
Delivery of an executed signature page to this Supplement by
facsimile transmission shall be as effective as delivery of a manually signed
counterpart of this Supplement.

 

SECTION 4.                                The
New Pledgor hereby represents and warrants that (a) set forth on Schedules
2.02(a), 2.02(b), and 2.02(c) attached hereto are true and correct
schedules of all its Membership Interests, Partnership Interests and Pledged
Shares, as each term is defined in the Pledge Agreement, and (b) set forth
on Schedule 3 attached hereto are its sole jurisdiction of formation, type of
organization, its federal tax identification number and the organizational
number, and all names used by it during the last five years prior to the date
of this Supplement.

 

SECTION 5.                                Except
as expressly supplemented hereby, the Pledge Agreement shall remain in full
force and effect.

 

SECTION 6.                                THIS
SUPPLEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR
PERFECTION OF THE SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN
RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF TEXAS.

 

SECTION 7.                                In
case any one or more of the provisions contained in this Supplement should be
held invalid, illegal or unenforceable in any respect, neither party hereto
shall be required to comply with such provision for so long as such provision
is held to be invalid, illegal or unenforceable, but the validity, legality and
enforceability of the remaining provisions contained herein and in the Pledge
Agreement shall not in any way be affected or impaired.  The parties hereto shall endeavor in
good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.

 

SECTION 8.                                All
communications and notices hereunder shall be in writing and given as provided
in the Pledge Agreement.  All
communications and notices hereunder to the New Pledgor shall be given to it at
the address set forth under its signature hereto.

 

 

SECTION 9.                                The
New Pledgor agrees to reimburse the Administrative Agent for its reasonable
out-of-pocket expenses in connection with this Supplement, including the
reasonable fees, other charges and disbursements of counsel for the
Administrative Agent.

 

THIS
SUPPLEMENT, THE PLEDGE AGREEMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG 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 AMONG
THE PARTIES HERETO.

 

[SIGNATURES PAGES FOLLOW]

 

 

IN WITNESS WHEREOF, the New Pledgor and the Administrative Agent have
duly executed this Supplement to the Pledge Agreement as of the day and year
first above written.

 

	
   

  	
  NEW
  PLEDGOR:

  
	
   

  	
   

  
	
   

  	
  [                                                                                                         ]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

 

Schedules

Supplement No.     

to the Pledge Agreement

 

Pledged Collateral of the New Pledgor

 

SCHEDULE 2.02(a)

 

	
  Issuer

  	
   

  	
  Type of Membership

  Interest

  	
   

  	
  % of Membership Interest

  Owned

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

SCHEDULE 2.02(b)

 

	
  Issuer

  	
   

  	
  Type of Partnership Interest

  	
   

  	
  % of Partnership Interest

  Owned

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

SCHEDULE 2.02(c)

 

	
  Issuer

  	
   

  	
  Type of Shares

  	
   

  	
  Number of

  Shares

  	
   

  	
  % of Shares

  Owned

  	
   

  	
  Certificate No.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

SCHEDULE 3

 

	
  New Pledgor:

  	
   

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  
	
   

  	
   

  
	
  Type of Organization:

  	
   

  
	
   

  	
   

  
	
  Organizational Number:

  	
   

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  
	
   

  	
   

  
	
  Prior Names:Exhibit 10.13

 

AMENDED AND RESTATED SECURITY AGREEMENT

 

THIS AMENDED AND RESTATED SECURITY AGREEMENT dated as of December 17,
2008 (this “Security Agreement”) is by and among CANO PETROLEUM, INC., a
Delaware corporation (“Borrower”), each subsidiary of the Borrower
signatory hereto (together with the Borrower, the “Grantors” and
individually, each a “Grantor”) and Union Bank of California, N.A. as
Administrative Agent (as hereinafter defined) for the ratable benefit of
itself, the Issuing Lender (as hereinafter defined), the Lenders (as
hereinafter defined), and the Swap Counterparties (as defined in the Credit
Agreement referred to below, and together with the Administrative Agent, the
Issuing Lender, and the Lenders collectively referred to herein as the “Secured
Parties” and individually, a “Secured Party”).

 

RECITALS

 

A.                                   The
Borrower has previously entered into that certain Credit Agreement dated November 29,
2005 (as it has been amended, restated, supplemented or otherwise modified from
time to time, the “Existing Credit Agreement”), among Borrower, the
Lenders (as hereinafter defined), the Administrative Agent (as hereinafter
defined) and the Issuing Lender (as hereinafter defined).

 

B.                                     In
order to secure the full and punctual payment and performance of the
obligations under the Existing Credit Agreement and the other Loan Documents
(as defined in the Existing Credit Agreement), the Borrower executed and
delivered to the Administrative Agent that certain Security Agreement dated as
of November 29, 2005 (as heretofore amended and supplemented, the “Existing
Security Agreement”).

 

C.                                     The
parties to the Existing Credit Agreement have agreed to amend and restate the
Existing Credit Agreement in its entirety pursuant to that certain Amended and
Restated Credit Agreement dated as of December 17, 2008 (as amended,
restated, supplemented or otherwise modified from time to time, the “Credit
Agreement”), among the Borrower, the lenders party thereto from time to
time (the “Lenders”), and Union Bank of California, N.A., as
administrative agent (in such capacity, the “Administrative Agent”) and
as issuing lender (in such capacity, the “Issuing Lender”).

 

D.                                    It
is a requirement under the Credit Agreement that (i) the Borrower shall
continue to secure the due payment and performance of all Obligations (as
defined in the Credit Agreement) by amending and restating in its entirety the
Existing Security Agreement as set forth herein, and (ii) the other
Grantors shall continue to secure the due payment and performance of all Obligations
(as defined in the Credit Agreement) by executing and delivering this Security
Agreement, in each case, in favor of the Administrative Agent for the ratable
benefit of the Secured Parties.

 

E.                                      Each
Grantor (other than the Borrower) is a subsidiary of the Borrower and will
derive substantial direct and indirect benefits from (i) the transactions
contemplated by the Credit Agreement and the other Loan Documents (as defined
the Credit Agreement) and (ii) the Hedge Contracts (as defined in the
Credit Agreement) entered into by the Borrower or any of its subsidiaries with
a Swap Counterparty.

 

1

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the
foregoing and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged and confessed, each Grantor hereby
agrees with the Administrative Agent for its benefit and the benefit of the
Secured Parties as follows:

 

Section 1.                                            Definitions;
Interpretation.  (a) All
capitalized terms not otherwise defined in this Security Agreement that are
defined in the Credit Agreement shall have the meanings assigned to such terms
by the Credit Agreement.  Any terms used
in this Security Agreement that are defined in the UCC (as defined below) and
not otherwise defined herein or in the Credit Agreement, shall have the
meanings assigned to those terms by the UCC. 
All meanings to defined terms, unless otherwise indicated, are to be
equally applicable to both the singular and plural forms of the terms
defined.  The following terms shall have
the meanings specified below:

 

“Accounts”
means an “account” as defined in the UCC, including, without limitation, all of
any Grantor’s rights to payment for goods sold or leased, services performed,
or otherwise, whether now in existence or arising from time to time hereafter,
including, without limitation, rights arising under any of the Contracts or
evidenced by an account, note, contract, security agreement, Chattel Paper
(including, without limitation, tangible Chattel Paper and electronic Chattel
Paper), or other evidence of indebtedness or security, together with all of the
right, title and interest of any Grantor in and to (i) all security
pledged, assigned, hypothecated or granted to or held by any Grantor to secure
the foregoing, (ii) all of any Grantor’s right, title and interest in and
to any goods or services, the sale of which gave rise thereto, (iii) all
guarantees, endorsements and indemnifications on, or of, any of the foregoing, (iv) all
powers of attorney granted to any Grantor for the execution of any evidence of
indebtedness or security or other writing in connection therewith, (v) all
books, correspondence, credit files, records, ledger cards, invoices, and other
papers relating thereto, including without limitation all similar information
stored on a magnetic medium or other similar storage device and other papers
and documents in the possession or under the control of any Grantor or any
computer bureau from time to time acting for any Grantor, (vi) all
evidences of the filing of financing statements and other statements granted to
any Grantor and the registration of other instruments in connection therewith
and amendments thereto, notices to other creditors or secured parties, and
certificates from filing or other registration officers, (vii) all credit
information, reports and memoranda relating thereto, and (viii) all other
writings related in any way to the foregoing.

 

“Cash
Collateral” means all amounts from time to time held in any checking,
savings, deposit or other account of such Grantor, including, if applicable,
the Cash Collateral Account, all monies, proceeds or sums due or to become due
therefrom or thereon and all documents (including, but not limited to
passbooks, certificates and receipts) evidencing all funds and investments held
in such accounts.

 

“Chattel Paper”
has the meaning set forth in the UCC.

 

“Collateral”
has the meaning set forth in Section 2 of this Security Agreement.

 

2

 

“Commitments”
shall have the meaning assigned to such term in the Credit Agreement.

 

“Contracts”
means all contracts to which any Grantor now is, or hereafter will be bound, or
to which such Grantor is or hereafter will be a party, beneficiary or assignee,
all Insurance Contracts, and all exhibits, schedules and other attachments to
such contracts, as the same may be amended, supplemented or otherwise modified
or replaced from time to time.

 

“Contract
Documents” means all Instruments, Chattel Paper, letters of credit, bonds,
guarantees or similar documents evidencing, representing, arising from or
existing in respect of, relating to, securing or otherwise supporting the
payment of, the Contract Rights.

 

“Contract
Rights” means (i) all (A) of any Grantor’s rights to payment
under any Contract or Contract Document and (B) payments due and to become
due to any Grantor under any Contract or Contract Document, in each case
whether as contractual obligations, damages or otherwise; (ii) all of any
Grantor’s claims, rights, powers, or privileges and remedies under any Contract
or Contract Document; and (iii) all of any Grantor’s rights under any
Contract or Contract Document to make determinations, to exercise any election
(including, but not limited to, election of remedies) or option or to give or
receive any notice, consent, waiver or approval together with full power and
authority with respect to any Contract or Contract Document to demand, receive,
enforce or collect any of the foregoing rights or any property which is the
subject of any Contract or Contract Document, to enforce or execute any checks,
or other instruments or orders, to file any claims and to take any action
which, in the opinion of the Secured Parties, may be necessary or advisable in
connection with any of the foregoing.

 

“Document”
means a bill of lading, dock warrant, dock receipt, warehouse receipt or order
for the delivery of goods, and also any other document which in the regular
course of business or financing is treated as adequately evidencing that the
person in possession of it is entitled to receive, hold and dispose of the
document and the goods it covers.

 

“Equipment”
means any equipment now or hereafter owned or leased by any Grantor, or in
which any Grantor holds or acquires any other right, title or interest,
constituting “equipment” under the UCC, including, without limitation, all
surface or subsurface machinery, equipment, facilities, supplies, or other
tangible personal property, including tubing, rods, pumps, pumping units and
engines, pipe, pipelines, meters, apparatus, boilers, compressors, liquid
extractors, connectors, valves, fittings, power plants, poles, lines, cables,
wires, transformers, starters and controllers, machine shops, tools, machinery
and parts, storage yards and equipment stored therein, buildings and camps,
telegraph, telephone, and other communication systems, loading docks, loading
racks, and shipping facilities, and any manuals, instructions, blueprints,
computer software (including software that is imbedded in and part of the
equipment), and similar items which relate to the above, and any and all
additions, substitutions and replacements of any of the foregoing, wherever
located together with all improvements thereon and all attachments, components,
parts, equipment and accessories installed thereon or affixed thereto.

 

3

 

“Fixtures”
means any fixtures now or hereafter owned or leased by any Grantor, or in which
any Grantor holds or acquires any other right, title or interest, constituting “fixtures”
under the UCC, including without limitation any and all additions,
substitutions and replacements of any of the foregoing, wherever located
together with all improvements thereon and all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto.

 

“General
Intangibles” means all general intangibles now or hereafter owned by any
Grantor, or in which any Grantor holds or acquires any other right, title or
interest, constituting “general intangibles” or “payment intangibles” under the
UCC, including, but not limited to, all trademarks, trademark applications,
trademark registrations, tradenames, fictitious business names, business names,
company names, business identifiers, prints, labels, trade styles and service
marks (whether or not registered), trade dress, including logos and/or designs,
copyrights, patents, patent applications, goodwill of any Grantor’s business
symbolized by any of the foregoing, trade secrets, license rights, license
agreements, permits, franchises, and any rights to tax refunds to which any
Grantor is now or hereafter may be entitled.

 

“Hedge Contract”
shall have the meaning assigned to such term in the Credit Agreement.

 

“Instrument”
means an “instrument” as defined in the UCC, including, without limitation, any
Negotiable Instrument, or any other writing which evidences a right to the
payment of money and is not itself a security agreement or lease and is of a
type which is in the ordinary course of business transferred by delivery with
any necessary endorsement or assignment (other than Instruments constituting
Chattel Paper).

 

“Insurance
Contracts” means all contracts and policies of insurance and re-insurance
maintained or required to be maintained by or on behalf of any Grantor under
the Loan Documents.

 

“Inventory”
means all of the inventory of any Grantor, or in which any Grantor holds or
acquires any right, title or interest, of every type or description, now owned
or hereafter acquired and wherever located, whether raw, in process or
finished, and all materials usable in processing the same and all documents of
title covering any inventory, including, without limitation, work in process,
materials used or consumed in any Grantor’s business, now owned or hereafter
acquired or manufactured by any Grantor and held for sale in the ordinary
course of its business, all present and future substitutions therefor, parts
and accessories thereof and all additions thereto, all Proceeds thereof and
products of such inventory in any form whatsoever, and any other item
constituting “inventory” under the UCC.

 

“Investment
Property” means “investment property” as defined in the UCC, including,
without limitation, all securities (whether certificated or uncertificated), security
entitlements, securities accounts, commodity contracts, and commodity accounts.

 

“Loan Documents”
shall have the meaning assigned to such term in the Credit Agreement.

 

4

 

“Negotiable
Instrument” means a “negotiable instrument” as defined in the UCC.

 

“Permitted
Liens” shall have the meaning assigned to such term in the Credit
Agreement.

 

“Proceeds”
means all proceeds (as defined in the UCC) of any or all of the Collateral,
including without limitation (i) any and all proceeds of, all claims for,
and all rights of any Grantor to receive the return of any premiums for, any
insurance, indemnity, warranty or guaranty payable from time to time with
respect to any of the Collateral, (ii) any and all payments (in any form
whatsoever) made or due and payable from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any Governmental Authority (or any Person acting
under color of any Governmental Authority), (iii) all proceeds received or
receivable when any or all of the Collateral is sold, exchanged or otherwise
disposed, whether voluntarily, involuntarily, in foreclosure or otherwise, (iv) all
claims of any Grantor for damages arising out of, or for breach of or default
under, any Collateral, (v) all rights of any Grantor to terminate, amend,
supplement, modify or waive performance under any Contracts, to perform
thereunder and to compel performance and otherwise exercise all remedies
thereunder, and (vi) any and all other amounts from time to time paid or
payable under or in connection with any of the Collateral.

 

“Secured
Obligations” means, collectively, all of the following: (i) all
Obligations (as defined in the Credit Agreement) now or hereafter owed by the
Borrower, any Guarantor, or any of their respective Subsidiaries to the Secured
Parties, (ii) all amounts now or hereafter owed by the Borrower, any
Debtor, or any of their respective Subsidiaries under this Security Agreement
or the other Loan Documents to the Administrative Agent, and (iii) any
increases, extensions, modifications, substitutions, amendments and renewals
thereof, whether for principal, interest, fees, expenses, indemnification, or
otherwise, including any post-petition interest in the event of a bankruptcy,
to the extent such interest is enforceable by law.  All such obligations shall be referred to in
this Security Agreement as the “Secured Obligations”.

 

“Security
Agreement” means this Security Agreement, as the same may be modified,
supplemented or amended from time to time in accordance with its terms.

 

“UCC” shall
mean the Uniform Commercial Code as the same may, from time to time, be in
effect in the State of Texas; provided, however, in the event that, by reason
of mandatory provisions of law, any or all of the attachment, perfection or
priority of the security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of Texas,
the term “UCC” shall mean the Uniform Commercial Code as in effect in such
other jurisdiction for purposes of the provisions hereof relating to such
attachment, perfection or priority and for purposes of definitions related to
such provisions.

 

(b)                                 All
meanings to defined terms, unless otherwise indicated, are to be equally
applicable to both the singular and plural forms of the terms defined.  Article, Section, Schedule, and Exhibit references
are to Articles and Sections of and Schedules and Exhibits to this Security
Agreement, unless otherwise specified. 
All references to instruments, documents, contracts, and 

 

5

 

agreements are references to such instruments, documents, contracts,
and agreements as the same may be amended, supplemented, and otherwise modified
from time to time, unless otherwise specified. 
The words “hereof”, “herein” and “hereunder” and words of similar import
when used in this Security Agreement shall refer to this Security Agreement as
a whole and not to any particular provision of this Security Agreement.  As used herein, the term “including” means “including,
without limitation,”. Paragraph headings have been inserted in this Security
Agreement as a matter of convenience for reference only and it is agreed that
such paragraph headings are not a part of this Security Agreement and shall not
be used in the interpretation of any provision of this Security Agreement.

 

Section 2.                                            Assignment,
Pledge and Grant of Security Interest.

 

(a)                                  As
collateral security for the prompt and complete payment and performance when
due of all Secured Obligations, each Grantor hereby assigns, pledges, and
grants to the Administrative Agent for the benefit of the Secured Parties a
lien on and continuing security interest in all of such Grantor’s right, title
and interest in, to and under, all items described in this Section 2,
whether now owned or hereafter acquired by such Grantor and wherever located
and whether now or hereafter existing or arising (collectively, the “Collateral”):

 

	
  (i)

  	
   

  	
  all
  Contracts, all Contract Rights, Contract Documents and Accounts associated
  with such Contracts and each and every document granting security to such
  Grantor under any such Contract;

  
	
   

  	
   

  	
   

  
	
  (ii)

  	
   

  	
  all
  Accounts;

  
	
   

  	
   

  	
   

  
	
  (iii)

  	
   

  	
  all
  Inventory;

  
	
   

  	
   

  	
   

  
	
  (iv)

  	
   

  	
  all
  Equipment;

  
	
   

  	
   

  	
   

  
	
  (v)

  	
   

  	
  all
  General Intangibles;

  
	
   

  	
   

  	
   

  
	
  (vi)

  	
   

  	
  all
  Investment Property;

  
	
   

  	
   

  	
   

  
	
  (vii)

  	
   

  	
  all
  Fixtures;

  
	
   

  	
   

  	
   

  
	
  (viii)

  	
   

  	
  all
  Cash Collateral;

  
	
   

  	
   

  	
   

  
	
  (ix)

  	
   

  	
  any
  Legal Requirements now or hereafter held by such Grantor (except that any
  Legal Requirement which would by its terms or under applicable law become
  void, voidable, terminable or revocable by being subjected to the Lien of
  this Security Agreement or in which a Lien is not permitted to be granted
  under applicable law, is hereby excluded from such Lien to the extent
  necessary so as to avoid such voidness, voidability, terminability or
  revocability);

  
	
   

  	
   

  	
   

  
	
  (x)

  	
   

  	
  any
  right to receive a payment under any Hedge Contract in connection with a
  termination thereof;

  

 

6

 

	
  (xi)

  	
   

  	
  (A) all
  policies of insurance and Insurance Contracts, now or hereafter held by or on
  behalf of such Grantor, including casualty and liability, business
  interruption, and any title insurance, (B) all Proceeds of insurance,
  and (C) all rights, now or hereafter held by such Grantor to any
  warranties of any manufacturer or contractor of any other Person;

  
	
   

  	
   

  	
   

  
	
  (xii)

  	
   

  	
  any
  and all liens and security interests (together with the documents evidencing
  such security interests) granted to such Grantor by an obligor to secure such
  obligor’s obligations owing under any Instrument, Chattel Paper, or Contract
  which is pledged hereunder or with respect to which a security interest in
  such Grantor’s rights in such Instrument, Chattel Paper, or Contract is
  granted hereunder;

  
	
   

  	
   

  	
   

  
	
  (xiii)

  	
   

  	
  any
  and all guaranties given by any Person for the benefit of such Grantor which
  guarantees the obligations of an obligor under any Instrument, Chattel Paper
  or Contract, which are pledged hereunder;

  
	
   

  	
   

  	
   

  
	
  (xiv)

  	
   

  	
  without
  limiting the generality of the foregoing, all other personal property, goods,
  Instruments, Chattel Paper, Documents, Fixtures, credits, claims, demands and
  assets of such Grantor whether now existing or hereafter acquired from time
  to time; and

  
	
   

  	
   

  	
   

  
	
  (xv)

  	
   

  	
  any
  and all additions, accessions and improvements to, all substitutions and
  replacements for and all products and Proceeds of or derived from all of the
  items described above in this Section 2.

  

 

(b)                                 Notwithstanding
anything contained herein to the contrary, it is the intention of each Grantor,
the Administrative Agent, and the Secured Parties that the amount of the
Secured Obligation secured by each Grantor’s interests in any of its Property
shall be in, but not in excess of, the maximum amount permitted by fraudulent
conveyance, fraudulent transfer and other similar law, rule or regulation
of any Governmental Authority applicable to such Grantor. Accordingly,
notwithstanding anything to the contrary contained in this Security Agreement
in any other agreement or instrument executed in connection with the payment of
any of the Secured Obligations, the amount of the Secured Obligations secured
by each Grantor’s interests in any of its Property pursuant to this Security
Agreement shall be limited to an aggregate amount equal to the largest amount
that would not render such Grantor’s obligations hereunder or the liens and
security interest granted to the Administrative Agent hereunder subject to
avoidance under Section 548 of the United States Bankruptcy Code or any
comparable provision of any other applicable law.

 

Section 3.                                            Representations
and Warranties.  Each Grantor hereby
represents and warrants the following to the Administrative Agent and the other
Secured Parties:

 

(a)                                  Records.  Such Grantor’s sole jurisdiction of formation
and type of organization are as set forth in Schedule 1 attached
hereto.  All records concerning the
Accounts, General Intangibles, or any other Collateral applicable to such
Grantor are located at the address for such 

 

7

 

Grantor on such Schedule 1.  None of the Accounts is evidenced by a
promissory note or other instrument.

 

(b)                               Other
Liens.  Such Grantor is, and will be
the record, legal, and beneficial owner of all of the Collateral pledged by
such Grantor free and clear of any Lien, except for the Permitted Liens.  No effective financing statement or other
instrument similar in effect covering all or any part of the Collateral is, or
will be, on file in any recording office, except such as may be filed in
connection with this Security Agreement or in connection with other Permitted
Liens or for which satisfactory releases have been received by the
Administrative Agent.

 

(c)                                Lien
Priority and Perfection.

 

(i)                                     Subject
only to Permitted Liens, this Security Agreement creates valid and continuing
security interests in the Collateral, securing the payment and performance of
all the Secured Obligations.  Upon the
filing of financing statements with the jurisdiction listed in Schedule 1,
the security interests granted to the Secured Parties hereunder will constitute
valid first-priority perfected security interests in all Collateral with
respect to which a security interest can be perfected by the filing of a
financing statement, subject only to Permitted Liens.

 

(ii)                                  No
consent of any other Person and no authorization, approval, or other action by,
and no notice to or filing with any Governmental Authority is required (A) for
the grant by such Grantor of the pledge, assignment, and security interest
granted hereby or for the execution, delivery, or performance of this Security
Agreement by such Grantor, (B) for the validity, perfection, or
maintenance of the pledge, assignment, lien, and security interest created
hereby (including the first-priority (subject to Permitted Liens) nature
thereof), except for security interests that cannot be perfected by filing
under the UCC, or (C) for the exercise by the Administrative Agent of the
rights provided for in this Security Agreement or the remedies in respect of
the Collateral pursuant to this Security Agreement, except (1) those
consents to assignment of licenses, permits, approvals, and other rights that
are as a matter of law not assignable, (2) those consents, approvals,
authorizations, actions, notices or filings which have been duly obtained or
made and, in the case of the maintenance of perfection, the filing of
continuation statements under the UCC, and (3) those filings and actions
described in Section 3(c)(i).

 

(d)                               Tax
Identification Number and Organizational Number.  The federal tax identification number of such
Grantor and the organizational number of such Grantor are as set forth in Schedule
1.

 

(e)                                Tradenames;
Prior Names.  Except as set forth on Schedule
1, such Grantor has not conducted business under any name other than its
current name during the last five years prior to the date of this Security
Agreement.

 

(f)                                  Exclusive
Control.  Such Grantor has exclusive
possession and control of its respective Equipment and Inventory.

 

8

 

Section 4.                                            Covenants.

 

(a)                                Further
Assurances.

 

(i)                                     Each
Grantor agrees that from time to time, at its expense, such Grantor shall
promptly execute and deliver all instruments and documents, and take all
action, that may be reasonably necessary or desirable, or that the
Administrative Agent may reasonably request, in order to perfect and protect
any pledge, assignment, or security interest granted or intended to be granted
hereby or to enable the Administrative Agent to exercise and enforce its rights
and remedies hereunder with respect to any Collateral.  Without limiting the generality of the
foregoing, each Grantor (A) at the request of the Administrative Agent,
shall execute such instruments, endorsements or notices, as may be reasonably
necessary or desirable or as the Administrative Agent may reasonably request,
in order to perfect and preserve the assignments and security interests granted
or purported to be granted hereby, (B) shall, at the reasonable request of
the Administrative Agent, mark conspicuously each material document included in
the Collateral, each Chattel Paper included in the Accounts, and each of its
records pertaining to the Collateral with a legend, in form and substance
satisfactory to the Administrative Agent, including that such document, Chattel
Paper, or record is subject to the pledge, assignment, and security interest
granted hereby, (C) shall, if any Collateral shall be evidenced by a
promissory note or other instrument or chattel paper, deliver and pledge to the
Administrative Agent hereunder such note or instrument or chattel paper duly
endorsed and accompanied by duly executed instruments of transfer or
assignment, all in form and substance satisfactory to the Administrative Agent,
and (D) authorizes the Administrative Agent to file any financing
statements, amendments or continuations without the signature of such Grantor
to the extent permitted by applicable law in order to perfect or maintain the
perfection of any security interest granted under this Security Agreement
(including, without limitation, financing statements using an “all assets” or “all
personal property” collateral description).

 

(ii)                                  Each
Grantor shall pay all filing, registration and recording fees and all refiling,
re-registration and re-recording fees, and all other reasonable expenses
incident to the execution and acknowledgment of this Security Agreement, any
assurance, and all federal, state, county and municipal stamp taxes and other
taxes, duties, imports, assessments and charges arising out of or in connection
with the execution and delivery of this Security Agreement, any agreement
supplemental hereto, any financing statements, and any instruments of further
assurance.

 

(iii)                               Each Grantor shall
promptly provide to the Administrative Agent all information and evidence the
Administrative Agent may reasonably request concerning the Collateral to enable
the Administrative Agent to enforce the provisions of this Security Agreement.

 

(b)                               Change
of Name; State of Formation.  Each
Grantor shall give the Administrative Agent at least 30 days’ prior written
notice before it (i) in the case of any Grantor that is not a “registered
organization” (as such term is defined in Section 9-102 of the UCC),
changes the location of its principal place of business and chief executive
office, (ii) changes the location of its jurisdiction of formation or
organization, (iii) changes the location of the Equipment, Inventory, or
original copies of any Chattel Paper evidencing Accounts, or (iv) uses a
trade name other than its current name used on the date hereof.  Other than as permitted by Section 6.11
of the Credit Agreement, no Grantor shall amend, supplement, modify or restate
its articles or certificate of incorporation, bylaws, limited liability company
agreements, or other equivalent 

 

9

 

organizational documents, nor amend its name or change
its jurisdiction of incorporation, organization or formation.

 

(c)                                  Right
of Inspection.  Each Grantor shall
hold and preserve, at its own cost and expense satisfactory and complete
records of the Collateral, including, but not limited to, Instruments, Chattel
Paper, Contracts, and records with respect to the Accounts, and will permit
representatives of the Administrative Agent, upon reasonable advance notice, at
any time during normal business hours to inspect and copy them.  Upon the occurrence and during the
continuation of any Event of Default, at the Administrative Agent’s request,
each Grantor shall promptly deliver copies of any and all such records to the
Administrative Agent.

 

(d)                                 Liability
Under Contracts and Accounts. 
Notwithstanding anything in this Security Agreement to the contrary, (i) the
execution of this Security Agreement shall not release any Grantor from its
obligations and duties under any of the Contract Documents, or any other
contract or instrument which are part of the Collateral and Accounts included
in the Collateral, (ii) the exercise by the Administrative Agent of any of
its rights hereunder shall not release any Grantor from any of its duties or
obligations under any Contract Documents, or any other Contract or Instrument
which are part of the Collateral and Accounts included in the Collateral, and (iii) the
Administrative Agent shall not have any obligation or liability under any
Contract Documents, or any other contract or instrument which are part of the
Collateral and Accounts included in the Collateral by reason of the execution
and delivery of this Security Agreement, nor shall the Administrative Agent be
obligated to perform any of the obligations or duties of any Grantor thereunder
or to take any action to collect or enforce any claim for payment assigned
hereunder.

 

(e)                                  Transfer
of Certain Collateral; Release of Certain Security Interest.  Each Grantor agrees that it shall not sell,
assign, or otherwise dispose of any Collateral, except as otherwise permitted
under the Credit Agreement.  The
Administrative Agent shall promptly, at the Grantors’ expense, execute and
deliver all further instruments and documents, and take all further action that
a Grantor may reasonably request in order to release its security interest in
any Collateral which is disposed of in accordance with the terms of the Credit
Agreement.

 

(f)                                    Accounts.  Each Grantor agrees that it will use
commercially reasonable efforts to ensure that each Account (i) is and
will be, in all material respects, the genuine, legal, valid, and binding
obligations of the account debtor in respect thereof, representing an unsatisfied
obligation of such account debtor, (ii) is and will be, in all material
respects, enforceable in accordance with its terms, (iii) is not and will
not be subject to any setoffs, defenses, taxes, counterclaims, except in the
ordinary course of business, (iv) is and will be, in all material
respects, in compliance with all applicable laws, whether federal, state, local
or foreign, and (v) which if evidenced by Chattel Paper, will not require
the consent of the account debtor in respect thereof in connection with its
assignment hereunder.

 

(g)                                 Negotiable
Instrument.  If any Grantor shall at
any time hold or acquire any Negotiable Instruments, including promissory
notes, such Grantor shall forthwith endorse, assign and deliver the same to the
Administrative Agent, accompanied by such instruments of transfer or assignment
duly executed in blank as the Administrative Agent may from time to time
reasonably request.

 

10

 

(h)                                 Other
Covenants of Grantor.  Each Grantor
agrees that (i) any action or proceeding to enforce this Security
Agreement may be taken by the Administrative Agent either in such Grantor’s
name or in the Administrative Agent’s name, as the Administrative Agent may
deem necessary, and (ii) such Grantor will, until the indefeasible payment
in full in cash of the Secured Obligations (including all Letter of Credit
Obligations), the termination of all obligations of the Issuing Lender and the
Lenders in respect of Letters of Credit, the termination of the Hedge Contracts
with the Secured Parties and the termination or expiration of the Commitments,
warrant and defend its title to the Collateral and the interest of the
Administrative Agent in the Collateral against any claim or demand of any
Persons (other than Permitted Liens) which could reasonably be expected to
materially adversely affect such Grantor’s title to, or the Administrative
Agent’s right or interest in, such Collateral.

 

Section 5.                                            Termination
of Security Interest.  Upon the
indefeasible payment in full in cash of the Secured Obligations (including all
Letter of Credit Obligations), the termination or expiration of all Letters of
Credit and the termination of all obligations of the Issuing Lender and the
Lenders in respect of Letters of Credit, the termination of the Hedge Contracts
with the Secured Parties and the termination or expiration of the Commitments,
the security interest granted hereby shall terminate and all rights to the
Collateral shall revert to the applicable Grantor to the extent such Collateral
shall not have been sold or otherwise applied pursuant to the terms
hereof.  Upon any such termination, the
Administrative Agent will, at the Grantors’ expense, execute and deliver to the
applicable Grantor such documents (including, without limitation, UCC-3
termination statements) as such Grantor shall reasonably request to evidence
such termination.

 

Section 6.                                            Reinstatement.
If, at any time after payment in full of all Secured Obligations and
termination of the Administrative Agent’s security interest, any payments on
the Secured Obligations previously made must be disgorged by any Secured Party
for any reason whatsoever, including, without limitation, the insolvency,
bankruptcy or reorganization of any Grantor or any other Person, this Security
Agreement and the Administrative Agent’s security interests herein shall be
reinstated as to all disgorged payments as though such payments had not been
made, and each Grantor shall sign and deliver to the Administrative Agent all
documents, and shall do such other acts and things, as may be necessary to
reinstate and perfect the Administrative Agent’s security interest.  EACH
GRANTOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH OTHER
SECURED PARTY FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR
EXPENSE UNDER THIS SECTION 6 (INCLUDING REASONABLE ATTORNEYS’ FEES AND
EXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING SUCH CLAIM,
DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF THE
INDEMNIFIED SECURED PARTY’S OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE,
LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL, NON-APPEALABLE
JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH
INDEMNIFIED SECURED PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

 

11

 

Section 7.                                            Remedies
upon Event of Default.

 

(a)                                  If
any Event of Default has occurred and is continuing, the Administrative Agent
may (and shall at the written request of the Majority Lenders or all Lenders,
as applicable), (i) proceed to protect and enforce the rights vested in it
by this Security Agreement or otherwise available to it, including but not
limited to, the right to cause all revenues and other moneys pledged hereby as
Collateral to be paid directly to it, and to enforce its rights hereunder to
such payments and all other rights hereunder by such appropriate judicial
proceedings as it shall deem most effective to protect and enforce any of such
rights, either at law or in equity or otherwise, whether for specific
enforcement of any covenant or agreement contained in any of the Contract
Documents, or in aid of the exercise of any power therein or herein granted, or
for any foreclosure hereunder and sale under a judgment or decree in any
judicial proceeding, or to enforce any other legal or equitable right vested in
it by this Security Agreement or by law; (ii) cause any action at law or
suit in equity or other proceeding to be instituted and prosecuted and enforce
any rights hereunder or included in the Collateral, subject to the provisions
and requirements thereof; (iii) sell or otherwise dispose of any or all of
the Collateral or cause the Collateral to be sold or otherwise disposed of in
one or more sales or transactions, at such prices and in such manner as may be
commercially reasonable, and for cash or on credit or for future delivery,
without assumption of any credit risk, at public or private sale, without
demand of performance or notice of intention to sell or of time or place of
sale (except such notice as is required by applicable statute and cannot be
waived), it being agreed that the Administrative Agent may be a purchaser on
behalf of the Secured Parties or on its own behalf at any such sale and that
the Administrative Agent, any other Secured Party, or any other Person who may
be a bona fide purchaser for value and without notice of any claims of any or
all of the Collateral so sold shall thereafter hold the same absolutely free
from any claim or right of whatsoever kind, including any equity of redemption
of any Grantor, any such demand, notice or right and equity being hereby
expressly waived and released to the extent permitted by law; (iv) incur
reasonable expenses, including reasonable attorneys’ fees, reasonable
consultants’ fees, and other costs appropriate to the exercise of any right or
power under this Security Agreement; (v) perform any obligation of any
Grantor hereunder and make payments, purchase, contest or compromise any
encumbrance, charge or lien, and pay taxes and expenses, without, however, any
obligation to do so; (vi) in connection with any acceleration and
foreclosure, take possession of the Collateral and render it usable and repair
and renovate the same, without, however, any obligation to do so, and enter
upon any location where the Collateral may be located for that purpose,
control, manage, operate, rent and lease the Collateral, collect all rents and
income from the Collateral and apply the same to reimburse the Secured Parties
for any cost or expenses incurred hereunder or under any of the Loan Documents
and to the payment or performance of any Grantor’s obligations hereunder or
under any of the Loan Documents, and apply the balance to the other Secured
Obligations and any remaining excess balance to whomsoever is legally entitled
thereto; (vii) secure the appointment of a receiver for the Collateral or
any part thereof; (viii) require any Grantor to, and each Grantor hereby
agrees that it will at its expense and upon request of the Administrative Agent
forthwith, assemble all or part of the Collateral as directed by the
Administrative Agent and make it available to the Administrative Agent at a
place to be designated by the Administrative Agent which is reasonably
convenient to both parties; (ix) exercise any other or additional rights
or remedies granted to a secured party under the UCC; or (x) occupy any
premises owned or leased by any Grantor where the Collateral or any part
thereof is assembled for a reasonable period in order to effectuate its rights
and remedies hereunder or 

 

12

 

under law, without obligation to any Grantor in
respect of such occupation.  If, pursuant
to applicable law, prior notice of sale of the Collateral under this Section is
required to be given to any Grantor, each Grantor hereby acknowledges that the
minimum time required by such applicable law, or if no minimum time is
specified, 10 days, shall be deemed a reasonable notice period.   The Administrative Agent shall not be
obligated to make any sale of Collateral regardless of notice of sale having
been given.  The Administrative Agent may
adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned.

 

(b)                                 All reasonable costs
and expenses (including reasonable attorneys’ fees and expenses) incurred by
the Administrative Agent in connection with any suit or proceeding in connection
with the performance by the Administrative Agent of any of the agreements
contained in any of the Contract Documents, or in connection with any exercise
of its rights or remedies hereunder, pursuant to the terms of this Security
Agreement, shall constitute additional indebtedness secured by this Security
Agreement and shall be paid on demand by the Grantors to the Administrative
Agent on behalf of the Secured Parties.

 

Section 8.                                            Remedies
Cumulative; Delay Not Waiver.

 

(a)                                  No
right, power or remedy herein conferred upon or reserved to the Administrative
Agent is intended to be exclusive of any other right, power or remedy and every
such right, power and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right, power and remedy given
hereunder or now or hereafter existing at law or in equity or otherwise.  The assertion or employment of any right or
remedy hereunder or otherwise shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.  Resort to any or all security now or
hereafter held by the Administrative Agent may be taken concurrently or
successively and in one or several consolidated or independent judicial actions
or lawfully taken nonjudicial proceedings, or both.

 

(b)                                 No delay or omission
of the Administrative Agent to exercise any right or power accruing upon the
occurrence and during the continuance of any Event of Default as aforesaid
shall impair any such right or power or shall be construed to be a waiver of
any such Event of Default or an acquiescence therein; and every power and
remedy given by this Security Agreement may be exercised from time to time, and
as often as shall be deemed expedient, by the Administrative Agent.

 

Section 9.                                            Contract
Rights.  After the occurrence and during the continuance of an Event of Default,
the Administrative Agent may exercise any of the Contract Rights and
remedies of any Grantor under or in connection with the Instruments, Chattel
Paper, or Contracts which represent Accounts, the General Intangibles, or which
otherwise relate to the Collateral, including, without limitation, any rights
of any Grantor to demand or otherwise require payment of any amount under, or
performance of any provisions of, the Instruments, Chattel Paper, or Contracts
which represent Accounts, or the General Intangibles.

 

13

 

Section 10.                                      Accounts.

 

(a)                                  After the occurrence
and during the continuance of an Event of Default, the Administrative Agent
may, or may direct any Grantor to, take any action the Administrative Agent
deems necessary or advisable to enforce collection of the Accounts, including,
without limitation, notifying the account debtors or obligors under any
Accounts of the assignment of such Accounts to the Administrative Agent and
directing such account debtors or obligors to make payment of all amounts due
or to become due directly to the Administrative Agent.  Upon such notification and direction, and at
the expense of the Grantors, the Administrative Agent may enforce collection of
any such Accounts, and adjust, settle, or compromise the amount or payment
thereof in the same manner and to the same extent as any Grantor might have
done.

 

(b)                                 After receipt by any
Grantor of the notice referred to in Section 10(a) above that an
Event of Default has occurred and is continuing, all amounts and Proceeds
(including instruments) received by such Grantor in respect of the Accounts
shall be received in trust for the benefit of the Administrative Agent
hereunder, shall be segregated from other funds of such Grantor, and shall
promptly be paid over to the Administrative Agent in the same form as so
received (with any necessary indorsement) to be held as Collateral.  No Grantor shall adjust, settle, or compromise
the amount or payment of any Account, nor release wholly or partly any account
debtor or obligor thereof, nor allow any credit or discount thereon other than
in the ordinary course of business and consistent with past practices.

 

Section 11.                                      Application
of Collateral.  The proceeds of any
sale, or other realization (other than that received from a sale or other
realization permitted by the Credit Agreement) upon all or any part of the
Collateral pledged by any Grantor shall be applied by the Administrative Agent
as set forth in Section 7.06 of the Credit Agreement.

 

Section 12.                                      Administrative
Agent as Attorney-in-Fact for Grantor. 
Each Grantor hereby constitutes and irrevocably appoints the
Administrative Agent, acting for and on behalf of itself and the Secured
Parties and each successor or assign of the Administrative Agent and the
Secured Parties, the true and lawful attorney-in-fact of such Grantor, with
full power and authority in the place and stead of such Grantor and in the name
of such Grantor, the Administrative Agent or otherwise to, following the
occurrence and during the continuation of an Event of Default, take any action
and execute any instrument at the written direction of the Secured Parties and
enforce all rights, interests and remedies of such Grantor with respect to the
Collateral, including the right:

 

(a)                                  to
ask, require, demand, receive and give acquittance for any and all moneys and
claims for moneys due and to become due under or arising out of the any of the
other Collateral, including without limitation, any Insurance Contracts;

 

(b)                                 to
elect remedies thereunder and to endorse any checks or other instruments or
orders in connection therewith;

 

(c)                                  to
file any claims or take any action or institute any proceedings in connection
therewith which the Administrative Agent may deem to be necessary or advisable;

 

14

 

(d)                                 to
pay, settle or compromise all bills and claims which may be or become liens or
security interests against any or all of the Collateral, or any part thereof,
unless a bond or other security satisfactory to the Administrative Agent has
been provided; and

 

(e)                                  upon
foreclosure, to do any and every act which any Grantor may do on its behalf
with respect to the Collateral or any part thereof and to exercise any or all
of such Grantor’s rights and remedies under any or all of the Collateral;

 

provided, however,
that the Administrative Agent shall not exercise any such rights except upon
the occurrence and continuation of an Event of Default.  This power of attorney is
a power coupled with an interest and shall be irrevocable.

 

Section 13.                                      Administrative
Agent May Perform.  The
Administrative Agent may from time-to-time perform any act which any Grantor
has agreed hereunder to perform and which such Grantor shall fail to perform
after being requested in writing so to perform (it being understood that no
such request need be given after the occurrence and during the continuance of
any Event of Default and after notice thereof by the Administrative Agent to
any Grantor) and the Administrative Agent may from time-to-time take any other
action which the Administrative Agent deems necessary for the maintenance,
preservation or protection of any of the Collateral or of its security interest
therein, and the reasonable expenses of the Administrative Agent incurred in
connection therewith shall be part of the Secured Obligations and shall be
secured hereby.

 

Section 14.                                      Administrative
Agent Has No Duty.  The powers
conferred on the Administrative Agent hereunder are solely to protect its
interest in the Collateral and shall not impose any duty on it to exercise any
such powers.  Except for reasonable care
of any Collateral in its possession and the accounting for moneys actually
received by it hereunder, the Administrative Agent shall have no duty as to any
Collateral or responsibility for taking any necessary steps to preserve rights
against prior parties or any other rights pertaining to any Collateral.

 

Section 15.                                      Reasonable
Care.  The Administrative Agent shall
be deemed to have exercised reasonable care in the custody and preservation of
the Collateral in its possession if the Collateral is accorded treatment
substantially equal to that which the Administrative Agent accords its own
Property.

 

Section 16.                                      Payments
Held in Trust.  During the
continuance of an Event of Default, all payments received by any Grantor under
or in connection with any Collateral shall be received in trust for the benefit
of the Administrative Agent, and shall be segregated from other funds of such
Grantor and shall be forthwith paid over to the Administrative Agent in the
same form as received (with any necessary endorsement).

 

Section 17.                                      Miscellaneous.

 

(a)                                  Expenses.  Each Grantor will upon demand pay to the
Administrative Agent for its benefit and the benefit of the Secured Parties the
amount of any reasonable out-of-pocket expenses, including the reasonable fees
and disbursements of its counsel and of any experts, which the Administrative
Agent and the Secured Parties may incur in connection with (i) the 

 

15

 

custody, preservation, use, or operation of, or the
sale, collection, or other realization of, any of the Collateral, (ii) the
exercise or enforcement of any of the rights of the Administrative Agent or any
Secured Party hereunder, and (iii) the failure by any Grantor to perform
or observe any of the provisions hereof.

 

(b)                                 Amendments;
Etc.  No amendment or waiver of any
provision of this Security Agreement nor consent to any departure by any
Grantor herefrom shall be effective unless the same shall be in writing and
executed by the affected Grantor and the Administrative Agent (acting upon the
written direction of the Majority Lenders), and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.

 

(c)                                  Addresses
for Notices.  All notices and other
communications provided for hereunder shall be made in the manner and to the
addresses set forth in the Credit Agreement.

 

(d)                                 Continuing
Security Interest; Transfer of Interest. 
This Security Agreement shall create a continuing security interest in
the Collateral and, unless expressly released by the Administrative Agent,
shall (a)  remain in full force and effect until the indefeasible payment
in full in cash of the Secured Obligations (including all Letter of Credit
Obligations), the termination or expiration of all Letters of Credit and the
termination of all obligations of the Issuing Lender and the Lenders in respect
of Letters of Credit, the termination of the Hedge Contracts with the Secured
Parties and the termination or expiration of the Commitments, (b) be
binding upon each Grantor and its successors, tranferees and assigns, and (c) inure,
together with the rights and remedies of the Administrative Agent hereunder, to
the benefit of and be binding upon, the Administrative Agent, the Issuing
Lender, the Lenders, and their respective successors, transferees, and assigns,
and to the benefit of and be binding upon, the Swap Counterparties, and each of
their respective successors, transferees, and assigns to the extent such successors,
transferees, and assigns of a Swap Counterparty is a Lender or an Affiliate of
a Lender.  Without limiting the
generality of the foregoing clause, when any Lender assigns or otherwise
transfers any interest held by it under the Credit Agreement or other Loan
Documents to any other Person pursuant to the terms of the Credit Agreement or
such other Loan Documents, that other Person shall thereupon become vested with
all the benefits held by such Lender under this Security Agreement.  Notwithstanding the foregoing, when any Swap
Counterparty assigns or otherwise transfers any interest held by it under any
Hedge Contract to any other Person pursuant to the terms of such agreement,
that other Person shall thereupon become vested with all the benefits held by
such Secured Party under this Security Agreement only if such Person is also
then a Lender or an Affiliate of a Lender.

 

(e)                                  Severability.  Wherever possible each provision of this
Security Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Security Agreement
shall be prohibited by or invalid under such law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Security Agreement.

 

(f)                                    Choice
of Law.  This Security Agreement
shall be governed by and construed and enforced in accordance with the laws of
the State of Texas, except to the extent that the validity or perfection of the
security interests hereunder, or remedies hereunder, in respect of any
particular Collateral are governed by the laws of a jurisdiction other than the
state of Texas.

 

16

 

(g)                                 Counterparts.  The parties may execute this Security
Agreement in counterparts, each of which constitutes an original, and all of
which, collectively, constitute only one agreement.  Delivery of an executed counterpart signature
page by facsimile is as effective as executing and delivering this
Security Agreement in the presence of the other parties to this Security
Agreement.  In proving this Security
Agreement, a party must produce or account only for the executed counterpart of
the party to be charged.

 

(h)                                 Headings.  Paragraph headings have been inserted in this
Security Agreement as a matter of convenience for reference only and it is
agreed that such paragraph headings are not a part of this Security Agreement
and shall not be used in the interpretation of any provision of this Security
Agreement.

 

(i)                                     Conflicts.   In the event of any explicit or
implicit conflict between any provision of this Security Agreement and any
provision of the Credit Agreement, the terms of the Credit Agreement shall be
controlling.

 

(j)                                     Additional
Grantors. 
Pursuant to Section 6.15 of the Credit Agreement, each Subsidiary
of the Borrower that was not in existence on the date of the Credit Agreement
is required to enter into this Security Agreement as a Grantor upon becoming a
Subsidiary of the Borrower.  Upon
execution and delivery after the date hereof by the Administrative Agent and
such Subsidiary of an instrument in the form of Annex 1, such
Subsidiary shall become a Grantor hereunder with the same force and effect as
if originally named as a Grantor herein. 
The execution and delivery of any instrument adding an additional
Grantor as a party to this Security Agreement shall not require the consent of
any other Grantor hereunder.  The rights
and obligations of each Grantor hereunder shall remain in full force and effect
notwithstanding the addition of any new Grantor as a party to this Security
Agreement.

 

(k)                                  Amendment
and Restatement; Confirmation of Liens. 
This Security Agreement is an amendment and restatement of the Existing
Security Agreement and supersedes the Existing Security Agreement in its
entirety; provided, however, that (i) the execution and delivery of this
Security Agreement shall not effect a novation of the Existing Security
Agreement but shall be, to the fullest extent applicable, in modification,
renewal, confirmation and extension of such Existing Security Agreement, and (ii) the
Liens, security interests and other interests in the collateral as described in
the Existing Security Agreement (the “Original Collateral”) granted
under the Existing Security Agreement are and shall remain legal, valid,
binding and enforceable with regard to such Original Collateral.  Each Grantor party to the Existing Security
Agreement hereby acknowledges and confirms the continuing existence and
effectiveness of such Liens, security interests and other interests in the
Original Collateral granted under the Existing Security Agreement, and further
agrees that the execution and delivery of this Security Agreement and the other
Loan Documents shall not in any way release, diminish, impair, reduce or
otherwise affect such Liens, security interests and other interests in the
Original Collateral granted under the Existing Security Agreement.

 

(l)                                     Entire
Agreement.  THIS
SECURITY AGREEMENT, THE CREDIT AGREEMENT, AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY 

 

17

 

EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES HERETO.

 

[SIGNATURE PAGES FOLLOW]

 

18

 

The parties
hereto have caused this Security Agreement to be duly executed as of the date
first above written.

 

	
   

  	
  GRANTORS:

  
	
   

  	
   

  
	
   

  	
  CANO
  PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Benjamin Daitch

  
	
   

  	
   

  	
    Benjamin Daitch

  
	
   

  	
   

  	
    Senior Vice President and Chief
  Financial

  
	
   

  	
   

  	
    Officer

  
	
   

  	
   

  
	
   

  	
  LADDER
  COMPANIES, INC.

  
	
   

  	
  SQUARE
  ONE ENERGY, INC.

  
	
   

  	
  W.O.
  ENERGY, INC.

  
	
   

  	
  W.O.
  ENERGY OF NEVADA, INC.

  
	
   

  	
  CANO
  PETRO OF NEW MEXICO, INC.

  
	
   

  	
   

  
	
   

  	
  Each by:

  	
    /s/ Benjamin Daitch

  
	
   

  	
   

  	
  Benjamin Daitch

  
	
   

  	
   

  	
  Vice President and Chief Financial 

  
	
   

  	
   

  	
  Officer

  
	
   

  	
   

  
	
   

  	
  W.O.
  OPERATING COMPANY, LTD.

  
	
   

  	
  W.O.
  PRODUCTION COMPANY, LTD.

  
	
   

  	
  Each By: WO Energy, Inc., as general
  partner

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
    /s/ Benjamin Daitch

  
	
   

  	
   

  	
   

  	
  Benjamin Daitch

  
	
   

  	
   

  	
   

  	
  Vice President and Chief Financial 

  Officer

  
					

 

Signature Page to Amended and Restated Security Agreement

 

 

	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A., as 

  Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Randall Osterberg

  
	
   

  	
   

  	
  Randall Osterberg

  
	
   

  	
   

  	
  Senior Vice President

  

 

Signature Page to Amended and Restated Security Agreement

 

 

SCHEDULE 1

to Security Agreement

 

	
  Grantor:

  	
  Cano Petroleum, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Delaware

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  3664494

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  77-0635673

  
	
   

  	
   

  
	
  Prior Names:

  	
  Huron Ventures, Inc.

  
	
   

  	
   

  
	
  Grantor:

  	
  Ladder Companies, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Delaware

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  2097505

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  73-1282131

  
	
   

  	
   

  
	
  Prior Names:

  	
  d/b/a Ladder Energy Company

  
	
   

  	
   

  
	
  Grantor:

  	
  Square One Energy, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  

 

Schedule 1 to Amended and Restated Security Agreement

 

 

	
  Organizational Number:

  	
  800262012

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  81-0639886

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  
	
   

  	
   

  
	
  Grantor:

  	
  WO Energy, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  113518200

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  75-2303966

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  
	
   

  	
   

  
	
  Grantor:

  	
  W.O. Energy of Nevada, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Nevada

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  C20757-1996-001

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  88-0369151

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  
	
   

  	
   

  
	
  Grantor:

  	
  W.O. Operating Company, Ltd.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  

 

 

	
  Type of Organization:

  	
  Limited Partnership

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  9373210

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  75-2675224

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  
	
   

  	
   

  
	
  Grantor:

  	
  W.O. Production Company, Ltd.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Limited Partnership

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  9295410

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  75-2675222

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  
	
   

  	
   

  
	
  Grantor:

  	
  Cano Petro of New Mexico, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  TX 800782069

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  20-8564572

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  

 

 

Annex 1 to the

Security Agreement

 

SUPPLEMENT
NO. 
[          ]  dated as of
[               ]
(the “Supplement”), to the Amended and Restated Security Agreement dated
as of December 17, 2008 (as amended, supplemented or otherwise modified
from time to time, the “Security Agreement”), by and among CANO
PETROLEUM, INC., a Delaware corporation (“Borrower”), each subsidiary of
Borrower signatory thereto (together with the Borrower, the “Grantors”
and individually, a “Grantor”) and Union Bank of California, N.A. as
administrative agent under the Credit Agreement (as hereinafter defined) for
the benefit of itself and the Secured Parties (as hereinafter defined).

 

A.                                   Reference
is made to the following documents related to extension of credit to the
Borrower:

 

(i)                                     that
certain Amended and Restated Credit Agreement dated as of December 17,
2008 (as it may be amended, restated or otherwise modified from time to time,
the “Credit Agreement”) by and among the Borrower, the lenders party
thereto from time to time (the “Lenders”), and Union Bank of California,
N.A., as administrative agent for such Lenders (in such capacity, the “Administrative
Agent”), and as issuing lender (in such capacity, the “Issuing Lender”);

 

(ii)                                  those
Hedge Contracts (as defined in the Credit Agreement) that the Borrower, the
Guarantors (as defined in the Credit Agreement), or any of their Subsidiaries
may from time to time enter into one or more with a Swap Counterparty (as
defined in the Credit Agreement), and together with the Administrative Agent,
the Issuing Lender, and the Lenders, the “Secured Parties”).

 

B.                                     Capitalized
terms used herein and not otherwise defined herein shall have the meanings
assigned to such terms in the Security Agreement and the Credit Agreement.

 

C.                                     The
Grantors have entered into the Security Agreement in order to induce the
Lenders to make loans and the Issuing Lender to issue letters of credit under
the Credit Agreement.  Pursuant to Section 6.15
of the Credit Agreement, each Subsidiary of the Borrower that was not in
existence on the date of the Credit Agreement is required to enter into the
Security Agreement as a Grantor upon becoming a Subsidiary.  Section 17(j) of the Security
Agreement provides that additional Subsidiaries of the Borrower may become
Grantors under the Security Agreement by execution and delivery of an
instrument in the form of this Supplement. 
The undersigned Subsidiary of the Borrower (the “New Grantor”) is
executing this Supplement in accordance with the requirements of the Credit
Agreement to become a Grantor under the Security Agreement in order to induce
the Lenders to make additional loans and the Issuing Lender to issue additional
letters of credit and as consideration for loans previously made and letters of
credit previously issued.

 

Accordingly,
the Administrative Agent and the New Grantor agree as follows:

 

 

SECTION 1.                                In
accordance with Section 17(j) of the Security Agreement, the New
Grantor by its signature below becomes a Grantor under the Security Agreement
with the same force and effect as if originally named therein as a Grantor and
the New Grantor hereby agrees (a) to all the terms and provisions of the
Security Agreement applicable to it as a Grantor thereunder and (b) represents
and warrants that the representations and warranties made by it as a Grantor thereunder
are true and correct on and as of the date hereof in all material
respects.  In furtherance of the
foregoing, the New Grantor, as security for the payment and performance in full
of the Secured Obligations (as defined in the Security Agreement), does hereby
create and grant to the Administrative Agent, its successors and assigns, for
the benefit of the Secured Parties, their successors and assigns, a continuing
security interest in and lien on all of the New Grantor’s right, title and
interest in and to the Collateral (as defined in the Security Agreement) of the
New Grantor.  Each reference to a “Grantor”
in the Security Agreement shall be deemed to include the New Grantor.  The Security Agreement is hereby incorporated
herein by reference.

 

SECTION 2.                                The
New Grantor represents and warrants to the Administrative Agent and the other
Secured Parties that this Supplement has been duly authorized, executed and
delivered by it and constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms (subject to applicable
bankruptcy, reorganization, insolvency, moratorium or similar laws affecting
creditors’ rights generally and subject, as to enforceability, to equitable
principles of general application (regardless of whether enforcement is sought
in a proceeding in equity or at law)).

 

SECTION 3.                                This
Supplement may be executed in counterparts, each of which shall constitute an
original, but all of which when taken together shall constitute a single
contract.  This Supplement shall become
effective when the Administrative Agent shall have received counterparts of
this Supplement that, when taken together, bear the signatures of the New
Grantor and the Administrative Agent. 
Delivery of an executed signature page to this Supplement by
facsimile transmission shall be as effective as delivery of a manually signed
counterpart of this Supplement.

 

SECTION 4.                                The
New Grantor hereby represents and warrants that set forth on Schedule 1
attached hereto are (a) its sole jurisdiction of formation and type of
organization, (b) the location of all records concerning its Accounts,
General Intangibles, or any other Collateral, (c) its federal tax
identification number and the organizational number, and (d) all names
used by it during the last five years prior to the date of this Supplement.

 

SECTION 5.                                Except
as expressly supplemented hereby, the Security Agreement shall remain in full
force and effect.

 

SECTION 6.                                THIS
SUPPLEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR
PERFECTION OF THE SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN
RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF TEXAS.

 

 

SECTION 7.                                In
case any one or more of the provisions contained in this Supplement should be
held invalid, illegal or unenforceable in any respect, neither party hereto
shall be required to comply with such provision for so long as such provision
is held to be invalid, illegal or unenforceable, but the validity, legality and
enforceability of the remaining provisions contained herein and in the Security
Agreement shall not in any way be affected or impaired.  The parties hereto shall endeavor in
good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.

 

SECTION 8.                                All
communications and notices hereunder shall be in writing and given as provided
in the Security Agreement.  All
communications and notices hereunder to the New Grantor shall be given to it at
the address set forth under its signature hereto.

 

SECTION 9.                                The
New Grantor agrees to reimburse the Administrative Agent for its reasonable
out-of-pocket expenses in connection with this Supplement, including the
reasonable fees, other charges and disbursements of counsel for the
Administrative Agent.

 

THIS SUPPLEMENT, THE SECURITY
AGREEMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS, REPRESENT THE
FINAL AGREEMENT AMONG 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 AMONG THE PARTIES HERETO.

 

IN WITNESS
WHEREOF, the New Grantor and the Administrative Agent have duly executed this
Supplement to the Security Agreement as of the day and year first above
written.

 

	
   

  	
  [Name of New Grantor],

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [ADMINISTRATIVE AGENT]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
							

 

 

Schedule 1

Supplement No.      

to the Security Agreement

 

	
  New Grantor:

  	
  [GRANTOR]

  
	
   

  	
   

  
	
  Jurisdiction of Formation / Filing:

  	
  [STATE]

  
	
   

  	
   

  
	
  Type of Organization:

  	
  [ENTITY TYPE]

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  [ADDRESS]

  
	
   

  	
  [CITY, STATE ZIP]

  
	
   

  	
   

  
	
  Organizational Number:

  	
   

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  
	
   

  	
   

  
	
  Prior Names:

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00152-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00152-of-00352.parquet"}]]