Document:

Exhibit 10.14

 

SUBORDINATED SECURITY AGREEMENT

 

THIS SUBORDINATED 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 party
hereto from time to time (together with the Borrower, the “Grantors” and
individually, each a “Grantor”) and UnionBanCal Equities, Inc. as
administrative agent (in such capacity the “Administrative  Agent”)
for the ratable benefit of itself and the Lenders (as defined below) (together
with the Lenders, individually a “Secured Party”, and collectively, the “Secured
Parties”).

 

RECITALS

 

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

 

B.            Each Grantor (other
than Borrower) is a subsidiary of the Borrower and will derive substantial
direct and indirect benefit from the transactions contemplated by the Credit
Agreement and the other Loan Documents (as defined in the Credit Agreement).

 

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

 

1

 

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.

 

“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 

 

2

 

file any claims
and to take any action which, in the opinion of any Secured Party, 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.

 

“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”
has the meaning set forth in the Senior 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 

 

3

 

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.

 

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

 

“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 all Obligations now or hereafter owed by the Borrower,
any Guarantor, or any of their respective Subsidiaries to the Secured Parties,
including any extensions, modifications, substitutions, amendments and renewals
thereof, whether for principal, interest, fees, expenses, indemnification, or
otherwise.

 

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

 

4

 

“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 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;

  

 

5

 

	
  (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;

  
	
   

  	
   

  	
   

  
	
  (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 other 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 

 

6

 

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 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 Administrative Agent 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).

 

7

 

(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.

 

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.

 

8

 

(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
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.

 

9

 

(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.

 

(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 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, the termination or
expiration of all Commitments and the termination of the Credit Agreement in
writing, 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 the Administrative Agent 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
ADMINISTRATIVE AGENT FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST
OR EXPENSE UNDER THIS SECTION 6 (INCLUDING 

 

10

 

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 ADMINISTRATIVE AGENT’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 ADMINISTRATIVE AGENT’S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.

 

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 Lender), (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 

 

11

 

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 Administrative Agent 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 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.

 

12

 

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.

 

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 Senior 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:

 

13

 

(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;

 

(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 

 

14

 

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 may incur in connection with (i) the 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 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, 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, the termination or expiration of
all Commitments, and the termination of the Credit Agreement in writing, (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 Lenders and
their respective successors, transferees, and assigns.  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 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 Lender under this Security Agreement.

 

(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.

 

15

 

(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 Senior 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)                                  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 Security Agreement, the Liens granted
to the Administrative Agent pursuant to this Security 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 Security Agreement, the terms of the Subordination and Intercreditor
Agreement shall govern and control.

 

(l)                                     Entire
Agreement.  THIS
SECURITY 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.

 

16

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES HERETO.

 

[SIGNATURE PAGES FOLLOW]

 

17

 

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 Subordinated Security Agreement

 

 

	
   

  	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  UNIONBANCAL EQUITIES, INC., as 

  Administrative Agent

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
    /s/ Ted A. McNulty

  
	
   

  	
   

  	
   

  	
    Ted A. McNulty

  
	
   

  	
   

  	
   

  	
    Senior Vice President

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
    /s/ Derrick Pan

  
	
   

  	
   

  	
  Name:

  	
  Derrick Pan

  
	
   

  	
   

  	
  Title: 
  

  	
   Vice
  President

  
						

 

Signature Page
to Subordinated 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 Subordinated 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 Subordinated 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 UnionBanCal Equities, Inc., as
administrative agent (the “Administrative Agent”) for the ratable
benefit of itself, the Lenders (as defined below) (together with the Lenders,
individually a “Secured Party”, and collectively, the “Secured
Parties”).

 

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

 

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 Advances.  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.

 

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.

 

Annex 1 to Subordinated Security Agreement

 

 

SECTION 2.                                The
New Grantor represents and warrants to the Administrative Agent 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 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:

  	
   

  
	
   

  	
   

  
	
   

  	
  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:Exhibit 10.15

 

SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

 

THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (“Amendment”)
is made and entered into by and between Cano Petroleum, Inc.,
a Delaware corporation with its principal executive offices in Fort Worth, Texas
(the “Company”), and S. Jeffrey Johnson,
an individual currently residing in Tarrant County, Texas (“Executive”),
effective as of the 31st day of December, 2008 (the “Amendment
Effective Date”).

 

WHEREAS, the Company and Executive entered into that certain
Employment Agreement dated January 1, 2006, as amended by First Amendment
to Employment Agreement effective May 31, 2008 (the “Agreement”);

 

WHEREAS, the Company and Executive desire to amend, alter,
modify, and change the provisions of the Agreement to bring the provisions into
compliance with Section 409A of the Internal Revenue Code of 1986, as
amended.

 

NOW THEREFORE, for and in consideration of the mutual
benefits to be obtained hereunder and other good and valuation consideration,
the receipt and sufficiency of which are hereby acknowledged and confessed, the
Company and Executive do hereby agree to amend, alter, modify and change the
Agreement, as of the Amendment Effective Date as follows:

 

1.             Section 12 of
the Agreement is hereby adding the following new sentence at the end of the
first paragraph of said Section:

 

Subject
to Section 25 below, all payments made pursuant to this Section 12
shall be paid in a single lump sum within ten (10) days following
Executive’s termination of employment, and any provision of in-kind benefits
hereunder shall not affect the in-kind benefits provided in any other taxable
year.

 

2.             The Agreement is
hereby amended by adding the following new Section 25:

 

25.           Code Section 409A.  The terms of this Agreement have been
designed to comply with the requirements of Section 409A of the Internal
Revenue Code of 1986, as amended (“Code Section 409A”), where applicable,
and shall be interpreted and administered in a manner consistent with such
intent.

 

Notwithstanding anything to the contrary in this Agreement, (i) if
upon the date of Executive’s termination of employment with the Company,
Executive is a “specified employee” within the meaning of Code Section 409A,
and the deferral of any amounts otherwise payable under this Agreement as a
result of Executive’s termination of employment is necessary in order to
prevent any accelerated or additional tax to Executive under Code Section 409A,
then the Company will defer the payment of any such amounts hereunder until the
date that is six (6) months and one day following the date of Executive’s
termination of employment with the Company (or, if earlier, upon the Executive’s
death) at which time any such delayed amounts will be paid to Executive in a
single lump sum, with interest from the date otherwise payable at the prime
rate as published in The Wall Street Journal on the date of Executive’s
termination of employment with the Company, and (ii) if any other payments
of money or other benefits due to Executive hereunder could cause the
application of an accelerated or additional tax under Code Section 409A,
such payments or other benefits shall be deferred if deferral will make such
payment or other benefits compliant under Code Section 409A.

 

1

 

Except as specifically
amended hereby, the Agreement remains in full force and effect as originally
written.

 

Signatures

 

To
evidence the binding effect of the covenants and agreements described above,
the parties hereto have executed this Amendment effective as of the date first
written above.

 

 

	
   

  	
   

  	
  THE
  COMPANY:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CANO
  PETROLEUM, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Donald W. Niemiec

  
	
   

  	
   

  	
   

  	
  Donald
  W. Niemiec

  
	
   

  	
   

  	
   

  	
  Chairman
  of the Compensation Committee

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  EXECUTIVE:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
     /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
  S.
  Jeffrey Johnson

  

 

D-1706635_1.DOC

 

2

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