Document:

EXHIBIT 10.8

 

Execution
Version

 

SUBORDINATED
PLEDGE AGREEMENT

 

THIS SUBORDINATED PLEDGE AGREEMENT dated as of March 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 

 

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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.

 

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 

 

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in respect of the Membership 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 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 March 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/ Morris B. Smith

  	
   

  
	
   

  	
   

  	
  Morris B. Smith

  
	
   

  	
   

  	
  Senior Vice President and Chief Financial 

  Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  W.O.
  ENERGY, INC.

  
	
   

  	
  W.O.
  ENERGY OF NEVADA, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Each by:

  	
  /s/ Morris B. Smith

  	
   

  
	
   

  	
   

  	
  Morris B. Smith

  
	
   

  	
   

  	
  Vice President

  
					

 

 

Signature Page to
Subordinated Pledge Agreement

 

 

	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/
  Henry Park

  	
   

  
	
   

  	
   

  	
  Henry Park

  
	
   

  	
   

  	
  Senior Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Tom Thompson

  	
   

  
	
   

  	
   

  	
  Tom Thompson

  
	
   

  	
   

  	
  Senior 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 March 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

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Pantwist, LLC

  	
   

  	
  Limited Liability

  	
   

  	
  100%

  

 

 

SCHEDULE
2.02(b)

 

PLEDGED COLLATERAL

 

Attached to and forming a
part of that certain Subordinated Pledge Agreement dated March 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(c)

 

PLEDGED COLLATERAL

 

Attached to and forming a
part of that certain Subordinated Pledge Agreement dated March 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 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

  
	
   

  	
   

  	
   

  
	
  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 Pledge Agreement dated as of March       ,
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 March       ,
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 respective 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.

 

1

 

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.

 

2

 

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]

 

3

 

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:

  	
   

  
										

 

4

 

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:

  	
   

  

 

5EXHIBIT 10.9

 

Execution Version

 

SUBORDINATED GUARANTY AGREEMENT

 

This
Subordinated Guaranty Agreement dated as of March 17, 2008 (this “Guaranty”)
is executed by each of the undersigned (individually a “Guarantor” and
collectively, the “Guarantors”), in favor of UnionBanCal Equities, Inc.,
as Administrative Agent for the ratable benefit of itself, the Lenders (as
defined below) (together with the Administrative Agent and the Lenders,
individually a “Beneficiary”, and collectively, the “Beneficiaries”).

 

INTRODUCTION

 

A.            This Guaranty is given
in connection with that certain Subordinated Credit Agreement dated as of March 17,
2008 (as it has been or may be amended, supplemented, restated or otherwise
modified from time to time, the “Credit Agreement”), among Cano
Petroleum, Inc., a Delaware corporation (the “Borrower”), the
lenders party thereto from time to time (individually a “Lender” and
collectively, the “Lenders”), and UnionBanCal Equities, Inc. as
administrative agent (“Administrative Agent”) for such Lenders.

 

B.            Each Guarantor 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.            Each Guarantor is
executing and delivering this Guaranty (i) to induce the Lenders to
provide the Advances and the other considerations under the Credit Agreement,
and (ii) intending it to be a legal, valid, binding, enforceable and
continuing obligation of such Guarantor, whether or not such Guarantor derives
any benefit from the Credit Agreement or from any other Loan Document.

 

NOW,
THEREFORE, in consideration of the premises, each Guarantor hereby agrees as
follows:

 

Section 1.         Definitions.  All capitalized terms not otherwise defined
in this Guaranty that are defined in the Credit Agreement shall have the
meanings assigned to such terms by the Credit Agreement.

 

Section 2.         Guaranty.

 

(a)      Each
Guarantor hereby absolutely, unconditionally and irrevocably guarantees the
punctual payment and performance, when due, whether at stated maturity, by
acceleration or otherwise, of all Obligations, whether absolute or contingent
and whether for principal, interest (including, without limitation, interest
that but for the existence of a bankruptcy, reorganization or similar
proceeding would accrue), fees, amounts required to be provided as collateral,
indemnities, expenses or otherwise (collectively, the “Guaranteed
Obligations”). Without limiting the generality of the foregoing, each
Guarantor’s liability shall extend to all amounts that constitute part of the
Guaranteed Obligations and would be owed by the Borrower to the Administrative
Agent or any Lender under the Loan Documents and by the Borrower or any of its
Subsidiaries but for the fact that they are unenforceable or not allowable 

 

 

due to insolvency or the existence of a bankruptcy,
reorganization or similar proceeding involving the Borrower or such other
Subsidiary.

 

(b)      It
is the intention of the Guarantors and each Beneficiary that the amount of the
Guaranteed Obligations guaranteed by each Guarantor shall be in, but not in
excess of, the maximum amount permitted by fraudulent conveyance, fraudulent
transfer or similar Legal Requirements applicable to such Guarantor.
Accordingly, notwithstanding anything to the contrary contained in this
Guaranty or in any other agreement or instrument executed in connection with
the payment of any of the Guaranteed Obligations, the amount of the Guaranteed
Obligations guaranteed by a Guarantor under this Guaranty shall be limited to
an aggregate amount equal to the largest amount that would not render such
Guarantor’s obligations hereunder subject to avoidance under Section 548
of the United States Bankruptcy Code or any comparable provision of any other
applicable law.

 

Section 3.         Guaranty Absolute.  Each Guarantor guarantees that the Guaranteed
Obligations will be paid strictly in accordance with the terms of the Loan
Documents, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the rights of the
Administrative Agent or any Lender with respect thereto but subject to Section 2(b) above.  The obligations of each Guarantor under this
Guaranty are independent of the Guaranteed Obligations or any other obligations
of any other Person under the Loan Documents, and a separate action or actions
may be brought and prosecuted against any Guarantor to enforce this Guaranty,
irrespective of whether any action is brought against the Borrower, any other
Guarantor or any other Person or whether the Borrower, any other Guarantor or
any other Person is joined in any such action or actions. The liability of each
Guarantor under this Guaranty shall be irrevocable, absolute and unconditional
irrespective of, and each Guarantor hereby irrevocably waives any defenses it
may now or hereafter have in any way relating to, any or all of the following:

 

(a)      any
lack of validity or enforceability of any Loan Document or any agreement or
instrument relating thereto or any part of the Guaranteed Obligations being
irrecoverable;

 

(b)      any
change in the time, manner or place of payment of, or in any other term of, all
or any of the Guaranteed Obligations or any other obligations of any Person
under the Loan Documents, or any other amendment or waiver of or any consent to
departure from any Loan Document, including, without limitation, any increase
in the Guaranteed Obligations resulting from the extension of additional credit
to the Borrower or otherwise;

 

(c)      any
taking, exchange, release or non-perfection of any collateral, or any taking,
release or amendment or waiver of or consent to departure from any other
guaranty, for all or any of the Guaranteed Obligations;

 

(d)      any
manner of application of collateral, or proceeds thereof, to all or any of the
Guaranteed Obligations, or any manner of sale or other disposition of any
collateral for all or any of the Guaranteed Obligations or any other
obligations of any other Person under the Loan Documents or any other assets of
the Borrower or any of its Subsidiaries;

 

2

 

(e)      any
change, restructuring or termination of the corporate structure or existence of
the Borrower or any of its Subsidiaries;

 

(f)       any
failure of any Beneficiary to disclose to the Borrower or any Guarantor any
information relating to the business, condition (financial or otherwise),
operations, properties or prospects of any Person now or in the future known to
any Beneficiary (and each Guarantor hereby irrevocably waives any duty on the
part of any Beneficiary to disclose such information);

 

(g)      any
signature of any officer of the Borrower or any other Person being mechanically
reproduced in facsimile or otherwise; or

 

(h)      any
other circumstance or any existence of or reliance on any representation by any
Beneficiary that might otherwise constitute a defense available to, or a
discharge of, the Borrower, any Guarantor or any other guarantor, surety or
other Person.

 

Section 4.         Continuation
and Reinstatement, Etc.  Each
Guarantor agrees that, to the extent that payments of any of the Guaranteed
Obligations are made, or any Lender or the Administrative Agent receives any
proceeds of collateral, and such payments or proceeds or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
or otherwise required to be repaid, then to the extent of such repayment the
Guaranteed Obligations shall be reinstated and continued in full force and
effect as of the date such initial payment or collection of proceeds
occurred.  EACH GUARANTOR SHALL DEFEND AND INDEMNIFY EACH BENEFICIARY FROM AND
AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 4
(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 BENEFICIARY’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 BENEFICIARY’S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.

 

Section 5.         Waivers and Acknowledgments.

 

(a)      Each
Guarantor hereby waives promptness, diligence, presentment, notice of
acceptance and any other notice with respect to any of the Guaranteed
Obligations and this Guaranty and any requirement that any Beneficiary protect,
secure, perfect or insure any Lien or any Property or exhaust any right or take
any action against the Borrower or any other Person or any collateral.

 

(b)      Each
Guarantor hereby irrevocably waives any right to revoke this Guaranty, and
acknowledges that this Guaranty is continuing in nature and applies to all
Guaranteed Obligations, whether existing now or in the future.

 

(c)      Each
Guarantor acknowledges that it will receive substantial direct and indirect
benefits from the financing arrangements involving the Borrower and its
Subsidiaries 

 

3

 

contemplated by the Loan Documents and that the
waivers set forth in this Guaranty are knowingly made in contemplation of such
benefits.

 

Section 6.         Subrogation. No Guarantor will exercise
any rights that it may now have or hereafter acquire against the Borrower or
any other Person to the extent that such rights arise from the existence,
payment, performance or enforcement of such Guarantor’s obligations under this
Guaranty or any other Loan Document, including, without limitation, any right
of subrogation, reimbursement, exoneration, contribution or indemnification and
any right to participate in any claim or remedy of any Beneficiary against the
Borrower or any other Person, whether or not such claim, remedy or right arises
in equity or under contract, statute or common law, including, without
limitation, the right to take or receive from the Borrower or any other Person,
directly or indirectly, in cash or other property or by set-off or in any other
manner, payment or security on account of such claim, remedy or right, unless
and until all of the Guaranteed Obligations and any and all other amounts
payable by the Guarantors under this Guaranty shall have been paid in full in
cash, all Commitments shall have expired or terminated, and the Credit
Agreement has been terminated in writing. 
If any amount shall be paid to a Guarantor in violation of the preceding
sentence at any time prior to (a) the payment in full in cash of the
Guaranteed Obligations and any and all other amounts payable by the Guarantors
under this Guaranty, and (b) the termination of the Commitments, such
amount shall be held in trust for the benefit of the Beneficiaries and shall
forthwith be paid to the Administrative Agent to be credited and applied to the
Guaranteed Obligations and any and all other amounts payable by the Guarantors
under this Guaranty, whether matured or unmatured, in accordance with the terms
of the Loan Documents.

 

Section 7.         Representations and Warranties.  Each Guarantor hereby represents and warrants
as follows:

 

(a)      There
are no conditions precedent to the effectiveness of this Guaranty.  Such Guarantor benefits from executing this
Guaranty.

 

(b)      Such
Guarantor has, independently and without reliance upon the Administrative Agent
or any Lender and based on such documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Guaranty, and such Guarantor has established adequate means of obtaining from
the Borrower and each other relevant Person on a continuing basis information
pertaining to, and is now and on a continuing basis will be completely familiar
with, the business, condition (financial and otherwise), operations, properties
and prospects of the Borrower and each other relevant Person.

 

(c)      The
obligations of such Guarantor under this Guaranty are the valid, binding and
legally enforceable obligations of such Guarantor, and the execution and
delivery of this Guaranty by such Guarantor has been duly and validly
authorized in all respects by such Guarantor, and the Person who is executing
and delivering this Guaranty on behalf of such Guarantor has full power,
authority and legal right to so do, and to observe and perform all of the terms
and conditions of this Guaranty on such Guarantor’s part to be observed or
performed.

 

Section 8.         Right of Set-Off.  Upon the occurrence and during the
continuance of any Event of Default, any Beneficiary is hereby authorized at
any time, to the fullest extent permitted 

 

4

 

by law, to set off and apply any deposits (general or
special, time or demand, provisional or final) and other indebtedness owing by
such Beneficiary to the account of each Guarantor against any and all of the
obligations of the Guarantors under this Guaranty, irrespective of whether or
not such Beneficiary shall have made any demand under this Guaranty and
although such obligations may be contingent and unmatured.  Such Beneficiary shall promptly notify the
affected Guarantor after any such set-off and application is made, provided
that the failure to give such notice shall not affect the validity of such
set-off and application.  The rights of
the Beneficiaries under this Section 8 are in addition to other rights and
remedies (including, without limitation, other rights of set-off) which any
Beneficiary may have.

 

Section 9.         Amendments, Etc.  No amendment or waiver of any provision of
this Guaranty and no consent to any departure by any Guarantor therefrom shall
in any event be effective unless the same shall be in writing and signed by the
affected Guarantor, the Administrative Agent and the Required Lenders, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given; provided that no amendment, waiver
or consent shall, unless in writing and signed by all of the Lenders, (a) other
than to the extent expressly provided in such amendment, waiver or consent,
limit the liability of any Guarantor hereunder (it being understood that waivers
and amendments permitted to be made under the Credit Agreement by the Required
Lenders with respect to any of the underlying obligations guaranteed hereunder
shall not be deemed to limit the liability of any Guarantor within the meaning
of this clause (a)), (b) postpone any date fixed for payment hereunder in
respect of any of the Guaranteed Obligations that is principal of, or interest
on, the Notes or any fees, or (c) change the percentage of the Commitments
or of the aggregate unpaid principal amount of the Notes required to take any
action hereunder.

 

Section 10.             Notices, Etc.  All notices and other communications provided
for hereunder shall be sent in the manner provided for in Section 9.02 of
the Credit Agreement and if to a Guarantor, at its address specified on the
signature page hereto and if to the Administrative Agent or any Lender, at
its address specified in or pursuant to the Credit Agreement.  All such notices and communications shall be
effective when delivered, except that notices and communications to the
Administrative Agent shall not be effective until received by the
Administrative Agent.

 

Section 11.             No Waiver: Remedies.  No failure on the part of any Beneficiary to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.

 

Section 12.             Continuing Guaranty: Assignments under
the Credit Agreement.  This Guaranty
is a continuing guaranty and shall (a) remain in full force and effect
until the payment in full of all Guaranteed Obligations and all other amounts
payable under the Loan Documents and the termination of all the Commitments, (b) be
binding upon each Guarantor and its successors and assigns, and (c) inure
to the benefit of and be enforceable by the Administrative Agent and each
Lender, and, in the case of transfers and assignments made in accordance with
the Credit Agreement, transferees and assigns. 
Without limiting the generality of the foregoing clause (c), subject to Section 9.06
of the Credit Agreement, any Lender may assign or otherwise 

 

5

 

transfer all or any portion of its rights and
obligations under the Credit Agreement (including, without limitation, all or
any portion of its Commitment, the Advances owing to it and the Note or Notes
held by it) to any other Person, and such other Person shall thereupon become
vested with all the benefits in respect thereof granted to such Lender herein
or otherwise, subject, however, in all respects to the provisions of the Credit
Agreement.  Each Guarantor acknowledges
that upon any Person becoming a Lender, the Administrative Agent in accordance
with the Credit Agreement, such Person shall be entitled to the benefits
hereof.

 

Section 13.             Governing Law.  This Guaranty shall be governed by, and
construed and enforced in accordance with, the laws of the State of Texas.  Each Guarantor hereby irrevocably submits to
the jurisdiction of any Texas state or federal court sitting in Dallas, Texas
in any action or proceeding arising out of or relating to this Guaranty and the
other Loan Documents, and each Guarantor hereby irrevocably agrees that all
claims in respect of such action or proceeding may be heard and determined in
such court.  Each Guarantor hereby
irrevocably waives, to the fullest extent it may effectively do so, any right
it may have to the defense of an inconvenient forum to the maintenance of such
action or proceeding.  Each Guarantor
hereby agrees that service of copies of the summons and complaint and any other
process which may be served in any such action or proceeding may be made by
mailing or delivering a copy of such process to such Guarantor at its address
set forth in the Credit Agreement or set forth on the signature page of
this Guaranty.  Each Guarantor agrees
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law.  Nothing in this Section shall
affect the rights of any Beneficiary to serve legal process in any other manner
permitted by the law or affect the right of any Beneficiary to bring any action
or proceeding against any Guarantor or its Property in the courts of any other
jurisdiction.

 

Section 14.             INDEMNIFICATION.  EACH GUARANTOR SHALL INDEMNIFY EACH OF THE BENEFICIARIES,
AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND
DISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL
LIABILITIES, OBLIGATIONS, LOSSES, CLAIMS, EXPENSES, OR DAMAGES OF ANY KIND OR
NATURE WHATSOEVER TO WHICH ANY OF THEM MAY BECOME SUBJECT RELATING TO OR
ARISING OUT OF THIS GUARANTY, INCLUDING ANY LIABILITIES, OBLIGATIONS, LOSSES,
CLAIMS, EXPENSES, OR DAMAGES WHICH ARISE OUT OF OR RESULT FROM (A) ANY
ACTUAL OR PROPOSED USE BY THE BORROWER, ANY GUARANTOR OR ANY AFFILIATE OF THE
BORROWER OR ANY GUARANTOR OF THE PROCEEDS OF THE ADVANCES, (B) ANY BREACH
BY THE BORROWER OR ANY GUARANTOR OF ANY PROVISION OF THE CREDIT AGREEMENT OR
ANY OTHER LOAN DOCUMENT, (C) ANY INVESTIGATION, LITIGATION OR OTHER
PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO
THE FOREGOING, (D) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL
LAWS CONCERNING OR RELATING TO THE PRESENT OR PREVIOUSLY-OWNED OR OPERATED
PROPERTIES OF THE BORROWER, ANY GUARANTOR OR THE OPERATIONS OR BUSINESS, OF THE
BORROWER OR ANY GUARANTOR INCLUDING ANY MATTERS DISCLOSED WITHIN THE CREDIT
AGREEMENT, OR (E) ANY ENVIRONMENTAL CLAIM OR 

 

6

 

REQUIREMENT OF ENVIRONMENTAL LAWS
CONCERNING OR RELATED TO THE BORROWER’S OR ANY GUARANTOR’S PROPERTIES AND EACH
GUARANTOR SHALL REIMBURSE THE BENEFICIARIES AND THEIR RESPECTIVE DIRECTORS,
OFFICERS, EMPLOYEES AND AGENTS, UPON DEMAND FOR ANY REASONABLE OUT-OF-POCKET
EXPENSES (INCLUDING REASONABLE OUTSIDE LEGAL FEES) INCURRED IN CONNECTION WITH
ANY SUCH INVESTIGATION, LITIGATION OR OTHER PROCEEDING; AND EXPRESSLY INCLUDING
ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE INCURRED BY REASON OF
THE PERSON BEING INDEMNIFIED’S OWN NEGLIGENCE,  BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS,
DAMAGES OR EXPENSES THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A
COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED PERSON’S
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

 

Section 15.             WAIVER OF JURY TRIAL.  EACH GUARANTOR HEREBY ACKNOWLEDGES THAT IT
HAS BEEN REPRESENTED BY AND HAS CONSULTED WITH COUNSEL OF ITS CHOICE, AND
HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVES ANY AND
ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS GUARANTY, ANY OTHER LOAN DOCUMENT, OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.

 

Section 16.             Additional Guarantors.  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 Guaranty as a
Guarantor upon becoming a Subsidiary. 
After the date hereof, 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 Guarantor hereunder with the same
force and effect as if originally named as a Guarantor herein.  The execution and delivery of any instrument
adding an additional Guarantor as a party to this Guaranty shall not require
the consent of any other Guarantor hereunder. 
The rights and obligations of each Guarantor hereunder shall remain in
full force and effect notwithstanding the addition of any new Guarantor as a
party to this Guaranty.

 

Section 17.             Subordination and Intercreditor
Agreement.  Reference is made to the
Subordination and Intercreditor Agreement dated of even date herewith (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 Guaranty, the obligations of the Guarantors hereunder and the
rights and remedies of the Beneficiaries 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 Guaranty, the
terms of the Subordination and Intercreditor Agreement shall govern and
control.

 

7

 

Section 18.             NOTICE OF FINAL AGREEMENTS.  PURSUANT
TO SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE, AN AGREEMENT IN
WHICH THE AMOUNT INVOLVED IN AGREEMENT EXCEEDS $50,000 IN VALUE IS NOT
ENFORCEABLE UNLESS THE AGREEMENT IS IN WRITING AND SIGNED BY THE PARTY TO BE
BOUND OR THAT PARTY’S AUTHORIZED REPRESENTATIVE.

 

THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO
AN AGREEMENT SUBJECT TO THE PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROM
THE WRITTEN AGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE
SUPERSEDED BY AND MERGED INTO THIS GURANTY. 
THIS GUARANTY AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
AMONG THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF 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.

 

[Remainder of this page intentionally
left blank.]

 

8

 

Each Guarantor
has caused this Guaranty to be duly executed as of the date first above
written.

 

	
  Address for each Guarantor:

  	
  GUARANTORS:

  
	
  c/o Cano Petroleum, Inc.

  	
   

  
	
  801 Cherry Street, Suite 3200

  	
  LADDER COMPANIES, INC.

  
	
  Fort Worth, Texas 76102

  	
  SQUARE ONE ENERGY, INC.

  
	
  Attention: Morris B. Smith, CFO

  	
  W.O. ENERGY OF NEVADA, INC.

  
	
  Facsimile: (817) 334-0222

  	
  WO ENERGY, INC.

  
	
   

  	
  CANO PETRO OF NEW MEXICO, INC.

  
	
   

  	
  PANTWIST, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Each by:

  	
  /s/ Morris B. Smith

  
	
   

  	
   

  	
  Morris B. Smith

  
	
   

  	
   

  	
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
  W.O. OPERATING COMPANY, LTD.

  
	
   

  	
  By: WO Energy, Inc., its general partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
    By: :

  	
  /s/ Morris B. Smith

  
	
   

  	
   

  	
  Morris B. Smith

  
	
   

  	
   

  	
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
  W.O. PRODUCTION COMPANY, LTD.

  
	
   

  	
  By: WO Energy, Inc., its general partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
    By:

  	
  /s/ Morris B. Smith

  
	
   

  	
   

  	
  Morris B. Smith

  
	
   

  	
   

  	
  Vice President

  
						

 

 

Signature Page to Subordinated Guaranty
Agreement

 

 

Execution Version

 

Annex 1 to the

Subordinated Guaranty Agreement

 

SUPPLEMENT
NO.          dated as of
                            (the
“Supplement”),
to the Subordinated Guaranty Agreement dated as of March       ,
2008 (as amended, supplemented or otherwise modified from time to time, the “Guaranty Agreement”),
among each of the subsidiaries party thereto (each such subsidiary
individually, a “Guarantor” and collectively, the “Guarantors”) of CANO PETROLEUM,
INC., a Delaware corporation (the “Borrower”) in favor of
UNIONBANCAL EQUITIES, INC., as Administrative Agent (the “Administrative Agent”) for the
benefit of the Beneficiaries (as defined in the Guaranty Agreement).

 

A.            Reference is made to
the Subordinated Credit Agreement dated as of March       ,
2008 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”),
among the Borrower, the lenders from time to time party thereto (the “Lenders”),
and the Administrative Agent.

 

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

 

C.            The Guarantors have
entered into the Guaranty Agreement in order to induce the Lenders to make
Advances.  Pursuant to Section 6.15
of the Credit Agreement, the Subsidiaries of the Borrower are required to enter
into the Guaranty Agreement as Guarantors. 
Section 16 of the Guaranty Agreement provides that additional
Subsidiaries of the Borrower may become Guarantors under the Guaranty Agreement
by execution and delivery of an instrument in the form of this Supplement.  The undersigned Subsidiary of the Borrower
(the “New
Guarantor”) is executing this Supplement in accordance with the
requirements of the Credit Agreement to become a Guarantor under the Guaranty
Agreement.

 

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

 

SECTION 1.     In accordance with Section 16
of the Guaranty Agreement, the New Guarantor by its signature below becomes a
Guarantor under the Guaranty Agreement with the same force and effect as if
originally named therein as a Guarantor and the New Guarantor hereby (a) agrees
to all the terms and provisions of the Guaranty Agreement applicable to it as a
Guarantor thereunder and (b) represents and warrants that the
representations and warranties made by it as a Guarantor thereunder are true
and correct in all material respects on and as of the date hereof.  Each reference to a “Guarantor” in the
Guaranty Agreement shall be deemed to include the New Guarantor.  The Guaranty Agreement is hereby incorporated
herein by reference.

 

SECTION 2.     The New Guarantor represents
and warrants to the Administrative Agent and the other Beneficiaries 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, 

 

1

 

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 Guarantor and the
Administrative Agent. Delivery of an executed signature page to this
Supplement by fax transmission shall be as effective as delivery of a manually
executed counterpart of this Supplement.

 

SECTION 4.     Except as expressly
supplemented hereby, the Guaranty Agreement shall remain in full force and
effect.

 

SECTION 5.     THIS SUPPLEMENT SHALL BE
GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF TEXAS.  The New Guarantor hereby
irrevocably submits to the jurisdiction of any Texas state or federal court
sitting in Dallas, Texas in any action or proceeding arising out of or relating
to this Supplement or the Guaranty Agreement and the other Loan Documents, and
the New Guarantor hereby irrevocably agrees that all claims in respect of such
action or proceeding may be heard and determined in such court.  The New Guarantor hereby irrevocably waives,
to the fullest extent it may effectively do so, any right it may have to the
defense of an inconvenient forum to the maintenance of such action or
proceeding.  The New Guarantor hereby
agrees that service of copies of the summons and complaint and any other
process which may be served in any such action or proceeding may be made by
mailing or delivering a copy of such process to such Guarantor at its address
set forth on the signature page hereof. 
The New Guarantor agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.  Nothing in this Section shall affect the
rights of any Beneficiary to serve legal process in any other manner permitted
by the law or affect the right of any Beneficiary to bring any action or
proceeding against the New Guarantor or its Property in the courts of any other
jurisdiction.

 

SECTION 6.     In case any one or more of
the provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and in the Guaranty Agreement shall not
in any way be affected or impaired thereby (it being understood that the
invalidity of a particular provision hereof in a particular jurisdiction shall
not in and of itself affect the validity of such provision in any other
jurisdiction).  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 7.     All communications and
notices hereunder shall be in writing and given as provided in Section 10
of the Guaranty Agreement.  All
communications and notices hereunder to the New Guarantor shall be given to it
at the address set forth under its signature below.

 

2

 

SECTION 8.     The New Guarantor agrees to
reimburse the Administrative Agent for its reasonable out-of-pocket expenses in
connection with this Supplement, including the fees, disbursements and other
charges of counsel for the Administrative Agent.

 

SECTION 9.     PURSUANT TO SECTION 26.02
OF THE TEXAS BUSINESS AND COMMERCE CODE, AN AGREEMENT IN WHICH THE AMOUNT
INVOLVED IN AGREEMENT EXCEEDS $50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE
AGREEMENT IS IN WRITING AND SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY’S
AUTHORIZED REPRESENTATIVE.

 

THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO
AN AGREEMENT SUBJECT TO THE PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROM
THE WRITTEN AGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE
SUPERSEDED BY AND MERGED INTO THIS GURANTY. 
THIS SUPPLEMENT, THE GUARANTY AGREEMENT AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE SUBJECT
MATTER HEREOF 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.

 

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

 

	
   

  	
  [Name of New Guarantor]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address  of  Guarantor:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE AGENT:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC., as

  Administrative Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
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