MORTGAGE, SECURITY AGREEMENT,
ASSIGNMENT AND FINANCING STATEMENT
This Instrument contains After Acquired Property Provisions
This
MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT AND FINANCING
STATEMENT,
dated as of March 16, 2007 (this "Mortgage"), is granted and
entered into by
BASELINE OIL & GAS CORP., a Nevada corporation (the "Company"),
to and for the
benefit of LAKEWOOD GROUP, LLC, the holder (the "Holder") of the
Company's
Senior Secured Debenture dated March 15, 2007, in the original
aggregate
principal amount of ONE MILLION SEVEN HUNDRED THOUSAND Dollars
($1,700,000) (the
"Debenture").
W I T N E S S E T H:
WHEREAS,
pursuant to the Debenture, the Holder has agreed to extend a
loan
to the Company evidenced by the Debenture; and
WHEREAS,
in order to induce the Holder to extend the loan evidenced by
the
Debenture, the Company has agreed to execute and deliver to the
Holder this
Mortgage and to grant the Holder, a mortgage and security interest
in certain
property of the Company to secure the prompt payment, performance
and discharge
in full of all of the Company's obligations under the
Debenture;
NOW,
THEREFORE, in consideration of the agreements herein contained
and
for other good and valuable consideration, the receipt and
sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Certain
Definitions. As used in this Mortgage, the following terms
shall have the meanings set forth in this Section 1. Terms used but
not
otherwise defined in this Mortgage that are defined in Article 9 of
the UCC
(such as "account", "chattel paper", "commercial tort claim",
"deposit account",
"document", "equipment", "fixtures", "general intangibles",
"goods",
"instruments", "inventory", "investment property",
"letter-of-credit rights",
"proceeds" and "supporting obligations") shall have the respective
meanings
given such terms in Article 9 of the UCC. In addition capitalized
terms not
otherwise defined herein shall have the meaning set forth in the
Debenture.
(a)
"Agent" means the Person appointed as Agent pursuant to the terms
of
Section 15 of this Mortgage and Annex 1 attached hereto and
incorporated herein.
It is permissible for the Lender to be appointed and serve as the
Agent.
(b) "Areas
of Interest" means, collectively, the "Contract Area" as
defined in that certain Operating Agreement dated May 1, 2006,
between El Paso
Production Company, as Operator, and Pogo Producing Company, Aurora
Energy,
Ltd., Aurora Operating, L.L.C., and New Albany-Indiana, LLC, as
Non-Operators,
covering the South Lyons Prospect Area (Initial Test - Bogard
1-10H), Green
County, Indiana, without regard to any subsequent amendment
thereof; the "Area
of Mutual Interest" as defined in that certain Exploration
Agreement Dated
January 27, 2006, effective as of November 1, 2005, between Aurora
Energy, Ltd.,
and New Albany - Indiana, LLC without regard to any subsequent
amendment
thereof; and the "Area of Mutual Interest" as defined in that
certain
Exploration Agreement dated April 7, 2006, by and among Source Rock
Resources,
Inc., New Albany-Indiana, LLC, and Aurora Energy, Ltd. without
regard to any
subsequent amendment thereof.
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(c) "Contracts" has
the meaning set forth in clause (vi) of the definition
of the Mortgaged Property.
(d)
"Environmental Laws" means all applicable statutes, laws,
ordinances,
regulations, rules, rulings, orders, restrictions, requirements,
writs,
injunctions, decrees or other official acts relating to the
environment or
hazardous substances, whether now or hereafter enacted or imposed
by (a) the
United States of America, (b) any state, commonwealth, county,
parish,
municipality, territory, possession or other governmental
subdivision within the
United States of America or under the jurisdiction of the United
States of
America, or (c) any Tribunal; and including, without limitation,
the following:
The Resource Conservation and Recovery Act of 1976 (42 U.S.C.
ss.ss.6901, et.
seq.), The Comprehensive Environmental Response, Compensation, and
Liability Act
of 1980, as amended by The Superfund Amendments and Reauthorization
Act of 1986
(42 U.S.C. ss.ss.9601, et. seq.), Title III of The Superfund
Amendments and
Reauthorization Act of 1986, such Title III being also referred to
as The
Emergency Planning and Community Right to Know Act (42 U.S.C.
ss.ss.11001, et.
seq.), The Clean Water Act (33 U.S.C. ss.ss.1251, et. seq.), The
Safe Drinking
Water Act (42 U.S.C. ss.ss.201, et. seq.), The Clean Air Act (42
U.S.C.
ss.ss.7401, et. seq.), The Hazardous Material Transportation Act
(49 U.S.C.
ss.ss.1801, et. seq.), as each of such Acts is in effect at the
date of this
Mortgage, and to any subsequent provisions of any such Act,
amendatory thereof,
supplemental thereto or substitute therefor.
(e)
"General Laws" means all applicable statutes, laws, ordinances,
regulations, rules, rulings, orders, restrictions, requirements,
writs,
injunctions, decrees or other official acts of (a) the United
States of America,
(b) any state, commonwealth, county, parish, municipality,
territory, possession
or other governmental subdivision within the United States of
America or under
the jurisdiction of the United States of America, or (c) any
Tribunal; except
such term shall not include Environmental Laws, ERISA, Hydrocarbon
Laws and Tax
Laws.
(f)
"Hazardous Materials" means any "hazardous waste" or "hazardous
substance" defined in any Environmental Law, asbestos,
polychlorinated
biphenyls, underground storage tanks (whether empty, filled or
partially filled
with any substance), any substance the presence of which on any
Lease is
prohibited by any Environmental Law, and any other substances which
by any
Environmental Law requires special handling or notification of any
Tribunal.
(g)
"Hazardous Materials Contamination" means the contamination
(whether
now existing or hereafter occurring) of any improvements,
facilities, soil,
groundwater, air or other elements on or of any Leases or the
contamination of
any improvements, facilities, soil, groundwater, air or other
elements on or of
any other lands as a result of Hazardous Materials at any time
(before or after
the date of this Mortgage) emanating from any Leases.
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<PAGE>
(h)
"Hydrocarbon Laws" means all applicable statutes, laws,
ordinances,
regulations, rules, rulings, orders, restrictions, requirements,
writs,
injunctions, decrees or other official acts relating to
exploration,
development, pooling, unitization, production, treating, storing,
transporting,
handling, marketing, re-injecting or processing Hydrocarbons, and
now or
hereafter enacted or imposed by (a) the United States of America,
(b) any state,
commonwealth, county, parish, municipality, territory, possession
or other
governmental subdivision within the United States of America or
under the
jurisdiction of the United States of America, or (c) any
Tribunal.
(i)
"Leases" has the meaning set forth in clause (i) of the definition
of
Mortgaged Property.
(j)
"Liens" shall mean a lien, pledge, charge, security interest,
encumbrance, right of first refusal, preemptive right or other
restriction.
(k)
"Mineral Interests" has the meaning set forth in clause (i) of
the
definition of Mortgaged Property.
(l)
"Mortgaged Property" means,
(i) all of the rights, titles, and interests of the Company
(including
in each case, without limitation, fee mineral interests,
leasehold
interests, royalty interests, overriding royalty interests,
production
payments, net profits interests, carried interests,
reversionary interests, possibilities of reverter, and conversion
rights
and
options) in, to, under, or derived from (a) the oil and gas
leases
described
more particularly on Exhibit A or in which the Company
hereafter
acquires
an interest with respect to any lands within the Areas of
Interest,
the leasehold estates created thereby, as to all lands and
depths
covered thereby or the applicable part or portion thereof if
specifically limited in depth and/or areal extent in Exhibit A
(whether
one or
more, the "Leases"), (b) the lands covered by the Leases or
otherwise
described on Exhibit A, (c) all units created by the pooling,
unitization, and communitization agreements in effect with respect
to the
Leases and
the lands covered thereby or otherwise described on Exhibit A,
and (d)
the oil and gas leases and lands included in any units with
which
the Leases
or the lands covered thereby or otherwise described on Exhibit
A may have
been pooled, unitized, or communitized, and all other rights,
interests,
privileges, benefits, and powers of any kind or character
conferred
upon Assignor as the owner of any of such interests, it being
the
express intent that, notwithstanding any description in Exhibit
A
setting
forth working interests, fractional leasehold interests,
overriding
royalty interests, net profits interests or other interests,
the
Mortgaged Property shall include all such interests of the
Company
conveyed
or intended to be conveyed to the Company by New Albany -
Indiana,
LLC pursuant to the redemption of the Company's membership
interest
therein or in which the Company hereafter acquires an interest
with
respect to any lands within the Areas of Interest (all such
rights,
estates
and interests described in this clause (i) of the definition of
Mortgaged
Property, the "Mineral Interests");
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<PAGE>
(ii) all of the rights, titles, and interests of the Company in
and
to the
wells for the production of Hydrocarbons that are located on or
within the
Mineral Interests, whether now existing or hereafter installed
(collectively, the "Wells");
(iii) all of the rights, titles, and interests of the Company in
and
to all
crude oil, natural gas, condensate, distillate, natural
gasoline,
natural
gas liquids, other liquid or gaseous hydrocarbons, sulphur, and
every
other mineral or substance, or any of them, the right to explore
for
which, or
an interest in which, is granted pursuant to the Mineral
Interests
("Hydrocarbons") produced from or allocable to the Mineral
Interests
or the Wells;
(iv) all of the rights, titles, and interests of the Company in
and
to all fee
surface interests in land, surface leases, easements,
rights-of-way, servitudes, licenses, franchises, road, railroad,
and other
surface
use permits or agreements, and similar rights and interests (if
any)
located on the lands covered by or related to the Mineral
Interests
or the
Wells;
(v) all of the rights, titles, and interests of the Company in
and
to all
equipment, machinery, fixtures, inventory, improvements, and
other
personal,
mixed, or movable property located on the lands covered by the
Mineral
Interests or used in connection with or attributable to the
Mineral
Interests or the Wells, including, without limitation: water
wells;
saltwater disposal wells and facilities; injection wells and
facilities; well equipment; casing; rods; tanks and tank
batteries;
boilers;
tubing; pumps; pumping units and engines; platforms; Christmas
trees;
production facilities; compression facilities; dehydration
units
and
facilities; heater-treaters; processing, fractionation, treatment,
and
separation
plants and facilities; testing and sampling equipment; sulfur
recovery
units and facilities; valves; gauges; meters; generators;
motors;
gun
barrels; flow lines; water lines; gas lines; gathering lines,
laterals
and trunk lines,
and other pipe lines; gas systems (for gathering,
treatment,
and compression); chemicals; solutions; water systems (for
treatment,
disposal, and injection); power plants; poles; lines;
transformers; starters and controllers; whether now owned or
hereafter
acquired
and any and all additions or accessions to, substitutions for,
and
replacements of any of the foregoing, together with all
attachments,
components, parts, equipment, and accessories installed thereon or
affixed
thereto
(collectively, the "Operating Equipment");
(vi) all of the rights, titles, and interests of the Company in,
to,
and under
the contracts, agreements, options, leases, licenses, and other
rights
owned by the Company, in whole or in part, or to which the
Company
is a
party, that are (x) appurtenant to or affect the properties and
rights
comprising the items otherwise listed in this definition of
Mortgaged
Property, or (y) used or held for use in connection with the
use,
ownership, or operation thereof, including all presently existing
and
future
Hydrocarbon purchase, sale or exchange agreements, farm out
agreements, farm in agreements, exploration agreements,
participation
agreements, option agreements, division and transfer orders,
advance
payment
agreements, processing contracts, plant agreements, operating
agreements, gas balancing or deferred production agreements,
pooling,
unitization or communitization agreements, pipeline, gathering
or
transportation agreements, platform agreements, drilling
contracts,
injection
or repressuring agreements, cycling agreements, construction
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<PAGE>
agreements, salt water or other disposal agreements, leases or
rental
agreements
and any and all other contracts or agreements covering, arising
out of,
used or useful in connection with or otherwise pertaining to
the
exploration, development, operation, production, sale, use,
purchase,
exchange,
storage, separation, dehydration, treatment, compression,
gathering,
transportation, processing, improvement, marketing, disposal or
handling
of applicable to the Mineral Interests or Wells or Hydrocarbons
produced
therefrom or allocable thereto, in each case whether the
Company
may now be
a party thereto or may acquire rights therein in the future
(collectively, the "Contracts") including without limitation
those
Contracts
described more particularly on Exhibit B (the "Scheduled
Contracts");
(vii) all permits, licenses, authorizations, certificates,
registrations, or other approvals granted by any Governmental
Authority
that
pertain or relate in any way to the items listed in this
definition
of
Mortgaged Property, and that may be pledged, assigned or are
otherwise
transferable by the Company;
(viii) all of the Company's intangible rights, inchoate rights,
transferable rights under warranties made by prior owners,
manufacturers,
vendors,
and third Persons, and rights accruing under applicable
statutes
of
limitation or prescription, insofar only as the foregoing rights
and
interests
relate or are attributable to the items otherwise listed in
this
definition
of Mortgaged Property;
(ix) all maps, logs, geological, geophysical, reserve
engineering,
and other
scientific and technical information, reports, and data
(including, without limitation, conventional and 3-D seismic data)
that
relate to
the items listed in this definition of Mortgaged Property, are
owned by
the Company, and the pledge or assignment of which is not
prohibited
by confidentiality or other contractual arrangements;
(x) all rights, titles and interests of the Company in and to
all
Proceeds
of and other rights relating to insurance or condemnation
payable
or
accruing by reason of the loss of, damage to, or taking of all or
any
part of
the properties or interests otherwise described in this
definition
of
Mortgaged Property; and
(xi) all rights, titles and interests of the Company in and to
all
documents,
instruments, drafts, acceptances, general intangibles, chattel
paper,
accounts, causes of action and all the Proceeds therefrom or
attributable thereto, whether now or hereafter existing, arising
out of or
relating
to the sale, use, exchange, exploration, development,
operation,
production, storage, gathering, transportation, dehydration,
separation,
processing, treatment, improvement, marketing, disposal, lease,
handling,
or other
dealings with or of all or any portion of the properties or
interests
otherwise described in this definition of Mortgaged Property;
(xii) all right, title and interest of the Company in and to
the
Proceeds
from or attributable to the rights, titles and interests
hereinabove referred to in this definition of the Mortgaged
Property, all
guarantees
and suretyship agreements relating to any such Proceeds, or
such
rights, titles and interests of the Company therein, and all
security
for
payment or performance thereof, now or hereafter existing or
arising.
5
<PAGE>
(m)
"Obligations" means all of the liabilities and obligations
(primary,
secondary, direct, contingent, sole, joint or several) due or to
become due, or
that are now or may be hereafter contracted or acquired, or owing,
of the
Company to the Holder under this Mortgage, the Debenture, and any
other
instruments, agreements or other documents executed and/or
delivered in
connection herewith or therewith, in each case, whether now or
hereafter
existing, voluntary or involuntary, direct or indirect, absolute or
contingent,
liquidated or unliquidated, whether or not jointly owed with
others, and whether
or not from time to time decreased or extinguished and later
increased, created
or incurred, and all or any portion of such obligations or
liabilities that are
paid, to the extent all or any part of such payment is avoided or
recovered
directly or indirectly from the Holder as a preference, fraudulent
transfer or
otherwise as such obligations may be amended, supplemented,
converted, extended
or modified from time to time. Without limiting the generality of
the foregoing,
the term "Obligations" shall include, without limitation: (i)
principal of, and
interest on the Debenture and the loan extended pursuant thereto;
(ii) any and
all other fees, indemnities, costs, obligations and liabilities of
the Company
from time to time under or in connection with this Mortgage, the
Debenture, and
any other instruments, agreements or other documents executed
and/or delivered
in connection herewith or therewith; and (iii) all amounts
(including but not
limited to post-petition interest) in respect of the foregoing that
would be
payable but for the fact that the obligations to pay such amounts
are
unenforceable or not allowable due to the existence of a
bankruptcy,
reorganization or similar proceeding involving the Company.
(n)
"Operating Equipment" has the meaning set forth in clause (v) of
the
definition of Mortgaged Property.
(o) "Organizational
Documents" means the Company's Articles of
Incorporation and Bylaws.
(p)
"Permitted Liens" means the individual and collective reference to
the
following: (i) Liens for taxes, assessments and other governmental
charges or
levies not yet due or Liens for taxes, assessments and other
governmental
charges or levies being contested in good faith and by appropriate
proceedings
for which adequate reserves (in the good faith judgment of the
management of the
Company) have been established in accordance with GAAP; (ii) the
Mineral
Interests, the Scheduled Contracts and any joint operating
agreement applicable
to all or a portion of the Mineral Interests as expressly
contemplated in, and
in the form required by, the applicable exploration agreement set
forth in the
Scheduled Contracts, including any operator's liens and liens
contained in
leases securing performance of the lessee's obligations; (iii)
Liens imposed by
law which were incurred in the ordinary course of the Company's
business, such
as carriers', warehousemen's and mechanics' Liens, statutory
landlords' Liens,
operator's Liens, and other similar Liens arising in the ordinary
course of the
Company's business, and which (x) do not individually or in the
aggregate
materially detract from the value of such property or assets or
materially
impair the use thereof in the operation of the business of the
Company and its
consolidated Subsidiaries or (y) are being contested in good faith
by
appropriate proceedings, which proceedings have the effect of
preventing for the
foreseeable future the forfeiture or sale of the property or asset
subject to
such Lien; and (iv) Liens granted by the Company to secure the
Debenture.
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<PAGE>
(q)
"Proceeds" means all of the following: (i) monies, rents,
revenues,
royalties, accounts receivable, profits, income, securities,
proceeds and other
sums; (ii) services to be performed by parties other than the
Company under any
Contract; and (c) products and benefits.
(r)
"Scheduled Contracts" has the meaning set forth in clause (vi) of
the
definition of Mortgaged Property.
(s)
"Taxes" means all taxes, assessments, fees, levies, imposts,
duties,
deductions, withholdings, or other charges, together with any
interest and
penalties payable in connection therewith, from time to time or at
any time
imposed or assessed by any statute, law, ordinance, regulation,
rule, ruling,
order, writ, injunction, decree or other official act of (a) the
United States
of America, (b) any state, commonwealth, county, parish,
municipality,
territory, possession or other governmental subdivision, body
politic or
corporate within the United States of America or under the
jurisdiction of the
United States of America, or (c) any Tribunal, (a) against the
Company by reason
of the Company's ownership, sale or other disposition of all or any
part of the
Mortgaged Properties, (b) upon or with respect to, measured by or
charged
against, required to be deducted or withheld from or otherwise
attributable to
all or any part of the Mortgaged Properties (or the sale or other
disposition
thereof), or (c) upon or against this Mortgage or the Holder or the
Agent by
reason of this Mortgage or the liens, assignments or security
interests
hereunder, including, without limitation, franchise, sales,
transfer, gross
receipts, profits, income, property, ad valorem, production,
severance and
windfall profit excise taxes.
(t) "Tax
Laws" means all applicable statutes, laws, ordinances,
regulations, rules, rulings, orders, restrictions, requirements,
writs,
injunctions, decrees or other official acts relating to the
reporting,
imposition, rendition, collection, enforcement, or other aspects of
Taxes, of
every kind or character now imposed or hereafter enacted by (a) the
United
States of America, (b) any state, commonwealth, county, parish,
municipality,
territory, possession or other governmental subdivision within the
United States
of America or under the jurisdiction of the United States of
America, or (c) any
Tribunal.
(u)
"Transaction Documents" means the Debenture and the Mortgage, and
the
exhibits and schedules thereto.
(v)
"Tribunal" means any court or any governmental department,
commission,
board, bureau, agency, or instrumentality of the United States of
America or of
any state, commonwealth, territory, possession, county, parish,
municipality or
other governmental subdivision within the United States of America
or under the
jurisdiction of the United States of America, whether now or
hereafter
constituted or existing.
(w) "UCC"
means the Uniform Commercial Code of the state of Indiana and
or
any other applicable law of any state or states which has
jurisdiction with
respect to all, or any portion of, the Mortgaged Property or this
Mortgage, from
time to time. It is the intent of the parties that defined terms in
the UCC
should be construed in their broadest sense so that the term
"Mortgaged
Property" will be construed in its broadest sense. Accordingly if
there are,
from time to time, changes to defined terms in the UCC that broaden
the
definitions, they are incorporated herein and if existing
definitions in the UCC
are broader than the amended definitions, the existing ones shall
be
controlling.
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<PAGE>
2. Grant
of Mortgage and Security Interest in Mortgaged Property. As an
inducement for the Holder to extend the loan as evidenced by the
Debenture and
to secure the complete and timely payment, performance and
discharge in full, as
the case may be, of all of the Obligations, the Company hereby
unconditionally
and irrevocably, mortgages, grants, warrants, pledges and
hypothecates to the
Holder a mortgage and security interest in the Mortgaged
Property.
3.
Representations, Warranties, Covenants and Agreements of the
Company.
The Company represents and warrants to, and covenants and agrees
with, the
Mortgagees as follows:
(a) The Company has the requisite corporate power and authority
to
enter into
this Mortgage and otherwise to carry out its obligations
hereunder.
The execution, delivery and performance by the Company of this
Mortgage
and the filings contemplated herein have been duly authorized
by
all
necessary action on the part of the Company and no further action
is
required
by the Company. This Mortgage has been duly executed and
delivered
by the Company. This Mortgage constitutes the legal, valid and
binding
obligation of the Company, enforceable against it in accordance
with its
terms except as such enforceability may be limited by
applicable
bankruptcy, insolvency, reorganization and similar laws of
general
application relating to or affecting the rights and remedies of
creditors
and by
general principles of equity.
(b) The Company has no place of business or offices where their
respective
books of account and records are kept (other than temporarily
at the
offices of its attorneys or accountants) or places where
portions
of
Mortgaged Property constituting personal property is stored or
located,
except as
set forth on Schedule I attached hereto. The organizational
identification number of the Company is as set forth on Schedule
I
attached
hereto. There exists no mortgage or other Liens on any of the
Mortgaged
Property except for Permitted Liens. None of such Mortgaged
Property
is in the possession of any consignee, bailee, warehouseman,
agent or
processor.
(c) The Company is fully authorized to grant the mortgage and
security
interests contemplated herein, and is the sole owner of the
Mortgaged
Property free and clear of any Liens, except for Permitted
Liens.
Except for memoranda of applicable joint operating agreements
in
the form
contemplated by the applicable exploration agreements listed in
the
Scheduled Contracts, there is not on file in any governmental
or
regulatory
authority, agency or recording office an effective financing
statement,
security agreement, notice or memorandum of interest, license
or
transfer or any notice of any of the foregoing (other than those
that
will be
filed in favor of the Holder pursuant to this Mortgage)
covering
or
affecting any of the Mortgaged Property. Except pursuant to
this
Mortgage,
or with respect to memoranda of joint operating agreements in
the form
contemplated by the applicable exploration agreements listed in
the
Scheduled Contracts, as long as this Mortgage shall be in effect,
the
Company
shall not, with respect to the Mortgaged Property, execute and
shall not
knowingly permit to be on file in any such office or agency any
other
financing statement or other document or instrument (except to
the
extent
filed or recorded in favor of the Holder pursuant to the terms
of
this
Mortgage). Without limiting the warranties set forth hereinabove
and
elsewhere
in that Mortgage, the Agent, on behalf of the Holder, is hereby
granted full power of
substitution and subrogation in and to all covenants
and
warranties of all predecessors in title of the Company in and to
the
Mortgaged
Property.
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<PAGE>
(d) No written claim has been received that any Mortgaged
Property
or the
Company's use of any Mortgaged Property violates the rights of
any
third
party. There has been no adverse decision to the Company's claim
of
ownership
rights in or exclusive rights to use the Mortgaged Property in
any
jurisdiction or to the Company's right to keep and maintain
such
Mortgaged
Property in full force and effect, and there is no proceeding
involving
said rights pending or, to the best knowledge of the Company,
threatened
before any Tribunal.
(e) The Company shall at all times maintain its books of account
and
records
relating to the Mortgaged Property at its principal place of
business
as set forth on Schedule I and its Mortgaged Property at the
locations
set forth on Schedule I attached hereto and may not relocate
such books
of account and records or tangible Mortgaged Property unless it
delivers
to the Agent and the Holder at least thirty (30) days prior to
such
relocation (i) written notice of such relocation and the new
location
thereof
(which must be within the United States) and (ii) evidence that
appropriate financing statements under the UCC and other
necessary
documents
have been filed and recorded and other steps have been taken to
perfect
the security interests of the Holder to continue within the
Holder
a valid,
perfected and continuing perfected Lien in the Mortgaged
Property.
(f) This Mortgage creates in favor of the Holder a valid first
mortgage
and security interest in the Mortgaged Property, subject only
to
Permitted
Liens, securing the payment and performance of the Obligations.
Upon
making the filings described in the immediately following
paragraph,
all
security interests created hereunder in any Mortgaged Property
which
may be
perfected by filing Uniform Commercial Code financing
statements
shall have
been duly perfected. Except for the recording of this Mortgage
with the
Recorders of Clay, Greene, Knox, Owen and Sullivan Counties,
Indiana,
and any other such County in which any of the Mineral Interests
may be
situated, and the filing of this Uniform Commercial Code
financing
statements referred to
in the immediately following paragraph, no action
is
necessary to create, perfect or protect the mortgage and
security
interests
created hereunder. Without limiting the generality of the
foregoing,
except for the filing of this Mortgage and said financing
statements
as referenced herein, no consent of any third parties and no
authorization, approval or other action by, and no notice to or
filing
with, any
governmental authority or regulatory body is required for (i)
the
execution, delivery and performance of this Mortgage, (ii) the
creation
or perfection of the mortgage and security interests created
hereunder
in the Mortgaged Property or (iii) the enforcement of the
rights
of the Agent and the
Holder hereunder.
9
<PAGE>
(g) The Company hereby authorizes the Agent to file one or more
financing
statements under the UCC, with respect to the security
interests
of the
Holder in the Mortgaged Property with the proper filing and
recording
agencies in any jurisdiction deemed proper by it.
(h) The execution, delivery and performance of this Mortgage by
the
Company
does not (i) violate any of the provisions of any
Organizational
Documents
of the Company or any judgment, decree, order or award of any
Tribunal
or any applicable law, rule or regulation applicable to the
Company,
or (ii) conflict with, or constitute a default (or an event
that
with
notice or lapse of time or both would become a default) under,
or
give to
others any rights of termination, amendment, acceleration or
cancellation (with or without notice, lapse of time or both) of,
any
agreement,
credit facility, debt or other instrument (evidencing the
Company's
debt or otherwise) or other understanding to which the Company
is a party
or by which any property or asset of the Company is bound or
affected.
If any, all required consents (including, without limitation,
from
stockholders or creditors of the Company) necessary for the
Company
to enter
into and perform its obligations hereunder have been obtained.
(i) The Company shall at all times maintain the mortgage and
security
interests provided for hereunder as valid and perfected Liens
in
the
Mortgaged Property, in favor of the Holder until this Mortgage and
the
security
interests hereunder shall be terminated pursuant to Section 12
hereof. The Company
hereby agrees to defend the same against the claims of
any and
all persons and entities. The Company shall safeguard and
protect
all
Mortgaged Property for the account of the Holder. At the request
of
the Agent,
the Company will sign and deliver to the Agent on behalf of the
Holder at
any time or from time to time one or more financing statements
pursuant
to the UCC or recordable instruments evidencing the existence
and
terms of
this Mortgage in form reasonably satisfactory to the Agent and
will pay
the cost of filing the same in all public offices wherever
filing
or
recording is, or is deemed by the Agent to be, necessary or
desirable
to effect
the rights and obligations provided for herein. Without
limiting
the
generality of the foregoing, the Company shall pay all fees, Taxes
and
other
amounts necessary to maintain the Mortgaged Property and the
mortgage
and security interests hereunder, and the Company shall obtain
and
furnish to the Agent from time to time, upon demand, such
releases
and/or
subordinations of claims and liens which may be required to
maintain
the priority of the mortgage and security interests hereunder.
(j) The Company will not transfer, pledge, hypothecate,
encumber,
license,
sell or otherwise dispose of any of the Mortgaged Property
(except
for sales of Hydrocarbons in its ordinary course of business
and
Permitted
Liens incurred in the ordinary course of business) or surrender
or permit
the termination of any of the Leases (except for terminations
at
the
conclusion of the primary term, as permissibly extended, of a
Lease,
as
permitted by Section 4(ii) hereof) without the prior written
consent of
the
Holder.
10
<PAGE>
(k) To the extent applicable, the Company shall maintain with
financially sound and reputable insurers, insurance with respect to
the
Mortgaged
Property, including Mortgaged Property hereafter acquired,
against
loss or damage of the kinds and in the amounts customarily
insured
against by
entities of established reputation having similar properties
similarly
situated and in such amounts as are customarily carried under
similar
circumstances by other such entities and otherwise as is
prudent
for
entities engaged in similar businesses but in any event sufficient
to
cover the
full replacement cost thereof. The Company shall cause each
insurance
policy issued in connection herewith to provide, and the
insurer
issuing
such policy to certify to the Agent that (i) the Agent will be
named as
lender loss payee and additional insured under each such
insurance
policy; (ii) if such insurance be proposed to be cancelled or
materially
changed for any reason whatsoever, such insurer will promptly
notify the
Agent and such cancellation or change shall not be effective as
to the
Agent for at least thirty (30) days after receipt by the Agent
of
such
notice, unless the effect of such change is to extend or
increase
coverage
under the policy; and (iii) the Agent will have the right (but
no
obligation) at its election to remedy any default in the payment
of
premiums
within thirty (30) days of notice from the insurer of such
default.
If no Event of Default exists and if the proceeds arising out
of
any claim
or series of related claims do not exceed $100,000, loss
payments in each
instance will be applied by the Company to the repair
and/or
replacement of property with respect to which the loss was
incurred
to the
extent reasonably feasible, and any loss payments or the
balance
thereof
remaining, to the extent not so applied, shall be payable to
the
Company,
provided, however, that payments received by the Company after
an
Event of
Default occurs and is continuing or in excess of $50,000 for
any
occurrence
or series of related occurrences shall be paid to the Agent on
behalf of
the Holder and, if received by the Company, shall be held in
trust for
the Holder and immediately paid over to the Agent unless
otherwise
directed in writing by the Agent. Copies of such policies or
the
related
certificates, in each case, naming the Agent as lender loss
payee
and
additional insured shall be delivered to the Agent at least
annually
and at the
time any new policy of insurance is issued. To the extent that,
immediately following the date of this Mortgage, the Company has
not yet
obtained
such insurance and is relying on the applicable operator's
insurance,
the Company shall cause, to the extent permissible, the Agent
to be
named as lender loss payee and additional insured with respect
to
the
Company's interest in such insurance.
(l) The Company shall, within ten (10) days of obtaining
knowledge
thereof,
advise the Agent and the Holder, in sufficient detail, of any
material
adverse change in the Mortgaged Property, and of the occurrence
of any
event which would have a material adverse effect on the value
of
the
Mortgaged Property or on the Holder's security interest
therein.
(m) The Company shall promptly execute and deliver to the Agent
and
the Holder
such further deeds, mortgages, assignments, security
agreements, financing statements or other instruments,
documents,
certificates and assurances and take such further action as the
Agent may
from time
to time request and may in its sole discretion deem necessary
to
perfect,
protect or enforce the Holder's mortgage and security interest
in
the
Mortgaged Property.
11
<PAGE>
(n) The Company shall permit the Agent and its representatives
and
agents to
inspect the Mortgaged Property during normal business hours and
upon
reasonable prior notice, and to make copies of records pertaining
to
the Mortgaged
Property as may be reasonably requested by the Agent from
time to
time.
(o) The Company shall timely observe and duly perform all
obligations under the Contracts, shall diligently enforce all
rights under
the
Contracts (unless waiver thereof is consented to by the Holder)
and
shall take
all steps reasonably necessary to diligently pursue and seek to
preserve,
enforce and collect any rights, claims, causes of action and
accounts
receivable in respect of the Mortgaged Property.
(p) The Company shall promptly notify the Agent and the Holder
in
sufficient
detail upon becoming aware of any attachment, garnishment,
execution
or other legal process levied against any Mortgaged Property
and
of any
other information received by the Company that may materially
affect the
value of the Mortgaged Property, the mortgage and security
interests
granted herein or the rights and remedies of the Holder
hereunder.
(q) All information heretofore, herein or hereafter supplied to
the
Holder by
or on behalf of the Company with respect to the Mortgaged
Property
is and shall be accurate and complete in all material respects
as
of the
date furnished.
(r) The Company shall at all times preserve and keep in full
force
and effect
its valid existence and good standing and any rights and
franchises
material to its business.
(s) Except as set forth on Schedule II, the Company has never
conducted
business under any name other than Baseline Oil & Gas Corp.
and
has not
changed its organization identification number (if applicable).
The
Company will not change its name, type of organization,
jurisdiction
of
organization, organizational identification number (if
applicable),
legal or
corporate structure, or identity, or add any new fictitious
name
unless it
provides at least thirty (30) days prior written notice to the
Mortgagees
of such change and, at the time of such written notification,
the
Company provides any financing statements or fixture filings
necessary
to perfect
and continue the perfection of the mortgage and security
interests
granted and evidenced by this Mortgage.
(t) To the extent applicable, except in the ordinary course of
business,
the Company may not consign any of its inventory or sell any of
its
inventory on bill and hold, sale or return, sale on approval, or
other
conditional terms of sale without the consent of the Agent which
shall not
be
unreasonably withheld.
(u) At any time and from time to time that any Mortgaged
Property
consists
of instruments, certificated securities or other items that
require or
permit possession by the secured party to perfect the security
interest
created hereby, the Company shall deliver such Mortgaged
Property
to the
Agent.
12
<PAGE>
(v) The Company shall
cause all tangible chattel paper constituting
Mortgaged
Property to be delivered to the Agent, or, if such delivery is
not
possible, then to cause such tangible chattel paper to contain
a
legend
noting that it is subject to the security interest created by
this
Mortgage.
To the extent that any Mortgaged Property consists of
electronic
chattel
paper, the Company shall cause the underlying chattel paper to
be
"marked"
within the meaning of Section 9-105 of the UCC (or successor
section
thereto).
(w) If there is any investment property or deposit account
included
as
Mortgaged Property that can be perfected by "control" through
an
account
control Mortgage, the Company shall cause such an account
control
Mortgage,
in form and substance in each case satisfactory to the Agent,
to
be entered
into and delivered to the Agent for the benefit of the Holder.
(x) To the extent that any Mortgaged Property consists of
letter-of-credit rights, the Company shall cause the issuer of
each
underlying
letter of credit to consent to an assignment of the proceeds
thereof to
the Holder.
(y) To the extent that any Mortgaged Property is in the
possession
of any
third party, the Company shall join with the Agent in notifying
such third
party of the Holder's security interest in such Mortgaged
Property
and shall use its best efforts to obtain an acknowledgement and
Mortgage
from such third party with respect to the Mortgaged Property,
in
form and
substance reasonably satisfactory to the Agent.
(z) If the Company shall at any time hold or acquire a
commercial
tort claim
applicable in whole or part to the Mortgaged Property, the
Company
shall promptly notify the Holder in a writing signed by the
Company of
the particulars thereof and grant to the Holder in such writing
a security
interest therein and in the proceeds thereof, all upon the
terms of
this Mortgage, with such writing to be in form and substance
satisfactory to the Agent.
(aa) The Company shall immediately provide written notice to
the
Holder and
the Agent of any and all accounts which arise out of contracts
with any
governmental authority and, to the extent necessary to perfect
or
continue
the perfected status of the security interests in such accounts
and
proceeds thereof, shall execute and deliver to the Agent an
assignment
of claims
for such accounts and cooperate with the Agent in taking any
other
steps required, in its judgment, under the Federal Assignment
of
Claims Act
or any similar federal, state or local statute or rule to
perfect or
continue the perfected status of the security interests in such
accounts
and proceeds thereof.
(bb) The Company shall from time to time, at the its expense,
promptly
execute and deliver all such further instruments and documents,
and take
all such further action as may be necessary or desirable, or as
the Agent
may reasonably request, in order to perfect and protect any
security
interest granted or purported to be granted hereby or to enable
the Holder
to exercise and enforce their rights and remedies hereunder and
with
respect to any Mortgaged Property or to otherwise carry out the
purposes
of this Mortgage.
13
<PAGE>
(cc) None of the account debtors or other persons or entities
obligated
on any of the Mortgaged Property is a governmental authority
covered by
the Federal Assignment of Claims Act or any similar federal,
state or
local statute or rule in respect of such Mortgaged Property.
(dd) [Reserved]
(ee) All bonuses, ren
