SECURITY AGREEMENT
Exhibit
10.7
SECURITY
AGREEMENT (as amended, restated, supplemented or otherwise modified from time
to
time in accordance herewith and including all attachments, exhibits and
schedules hereto, the “Agreement”),
dated
as of September 30, 2005, made by Quest Oil Corporation, a Nevada corporation
(“Quest”),
and
its wholly owned subsidiaries, Quest Canada Corp., a Canadian company
(“Quest
Canada”),
Wallstin Petroleum, LLC, a Texas limited liability company (“Wallstin”),
and
Petrostar Oil Services, Inc. , a Texas corporation (“Petrostar”
and,
together with Quest, Quest Canada and Wallstin, the “Grantor”),
in
favor of the secured parties listed on Exhibit
A
to this
Agreement and their permitted successors and assigns (collectively, the
“Secured
Parties”).
WHEREAS,
Quest has issued or will issue separate senior secured convertible promissory
notes to the Secured Parties (the“Notes”)
pursuant to a Note and Warrant Purchase Agreement, dated as of September 30,
2005 (the “Purchase
Agreement”),
by
and among Quest and the Secured Parties; and
WHEREAS,
the Secured Parties and the Grantor agree that the Grantor execute and deliver
to the Secured Parties a security agreement providing for the grant to the
Secured Parties of a continuing security interest in all personal property
and
assets of the Grantor, all in substantially the form hereof to secure all
Obligations (hereinafter defined).
NOW,
THEREFORE, the parties agree as follows:
ARTICLE
I. Definitions
Section
1.1. Definition
of Terms Used Herein.
All
capitalized terms used herein and not defined herein have the respective
meanings provided therefor in the Purchase Agreement or the Notes, as
applicable. All terms defined in the Uniform Commercial Code (hereinafter
defined) as in effect from time to time and used herein and not otherwise
defined herein (whether or not such terms are capitalized) have the same
definitions herein as specified therein.
Section
1.2. Definition
of Certain Terms Used Herein.
As used
herein, the following terms have the following meanings:
"Collateral"
means
all accounts receivable of the Grantor and all personal and fixed property
of
every kind and nature, including, without limitation, all furniture, fixtures,
equipment, raw materials, inventory, as extracted collateral, or other goods,
accounts, contract rights, rights to the payment of money, insurance refund
claims and all other insurance claims and proceeds, tort claims, chattel paper,
documents, instruments, securities and other investment property, deposit
accounts, rights to proceeds of letters of credit and all general intangibles
including, without limitation, all tax refund claims, license fees, patents,
patent licenses, patent applications, trademarks, trademark licenses, trademark
applications, trade names, copyrights, copyright licenses, copyright
applications, rights to xxx and recover for past infringement of patents,
trademarks and copyrights, computer programs, computer software, engineering
drawings, service marks, customer lists, goodwill, and all licenses, permits,
agreements of any kind or nature pursuant to which the Grantor possesses, uses
or has authority to possess or use property (whether tangible or intangible)
of
others or others possess, use or have authority to possess or use property
(whether tangible or intangible) of the Grantor, and all recorded data of any
kind or nature, regardless of the medium of recording including, without
limitation, all books and records, software, writings, plans, specifications
and
schematics, whether now owned or hereinafter acquired by the Grantor; and all
proceeds and products of each of the foregoing.
“Default”
means
any event or circumstance which, with the giving of notice, the lapse of time,
or both, would (if not cured, waived, or otherwise remedied during such time)
constitute an Event of Default.
“Event
of Default”
has the
meaning specified in the Notes.
“Indemnitees”
has the
meaning specified in Section 7.5(b).
“Lien”
means:
(i) any interest in property securing an obligation owed to, or a claim
by,
a Person other than the owner of the property, whether such interest is based
on
the common law, statute, or contract, and including a security interest, charge,
claim, or lien arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, agreement, security agreement,
conditional sale or trust receipt or a lease, consignment or bailment for
security purposes; (ii) to the extent not included under clause (i),
any
reservation, exception, encroachment, easement, right-of-way, covenant,
condition, restriction, lease or other title exception or encumbrance affecting
property; and (iii) any contingent or other agreement to provide any of the
foregoing.
"Notes"
has the
meaning assigned to such term in the first recital of this
Agreement.
"Obligations"
means
all indebtedness, liabilities, obligations, covenants and duties of the Grantor
to the Secured Parties of every kind, nature and description, direct or
indirect, absolute or contingent, due or not due, contractual or tortious,
liquidated or unliquidated, arising by operation of law or otherwise, now
existing of hereafter arising under or in connection with the Notes, this
Agreement or the other Transaction Documents.
“Registered
Organization”means
an
entity formed by filing a registration document with a United States
Governmental Authority, such as a corporation, limited partnership or limited
liability company.
"Security
Interest"
has the
meaning specified in Section 2.1 of this Agreement.
“Uniform
Commercial Code”
means
the Uniform Commercial Code from time to time in effect in the State of New
York.
1
ARTICLE
II. Security
Interest
Section
2.1. Security
Interest.
As
security for the payment and performance, in full of the Obligations, and any
extensions, renewals, modifications or refinancings of the Obligations, the
Grantor hereby bargains, sells, conveys, assigns, sets over, mortgages, pledges,
hypothecates and transfers to the Secured Parties, and hereby grants to the
Secured Parties, their successors and assigns, a security interest in, all
of
such Grantor's right, title and interest in, to and under the Collateral and
all
hereinafter acquired Collateral (the "Security
Interest").
Section
2.2. No
Assumption of Liability.
The
Security Interest is granted as security only and shall not subject the Secured
Parties to, or in any way alter or modify, any obligation or liability of the
Grantor with respect to or arising out of the Collateral.
ARTICLE
III. Representations
and Warranties
The
Grantor represents and warrants to the Secured Parties that:
Section
3.1. Title
and Authority.
The
Grantor has good and valid rights in and title to the Collateral with respect
to
which it has purported to grant a security interest hereunder and has full
power
and authority to grant to the Secured Parties the Security Interest and to
execute, deliver and perform its obligations in accordance with the terms of
this Agreement, without the consent or approval of any other Person other than
any consent or approval which has been obtained.
Section
3.2. Filings;
Actions to Achieve Perfection.
Fully
executed Uniform Commercial Code financing statements (including fixture
filings, as applicable) or other appropriate filings, recordings or
registrations containing a description of the Collateral have been delivered
to
the Secured Parties for filing in each United States governmental, municipal
or
other office specified in Schedule A, which are all the filings, recordings
and
registrations that are necessary to publish notice of and protect the validity
of and to establish a legal, valid and first priority perfected security
interest in favor of the Secured Parties in respect of all Collateral in which
the Security Interest may be perfected by filing, recording or registration
in
the United States (or any political subdivision thereof) and its territories
and
possessions, and no further or subsequent filing, refiling, recording,
rerecording, registration or reregistration is necessary in any such
jurisdiction, except as provided under applicable law with respect to the filing
of continuation statements or with respect to the filing of amendments or new
filings to reflect the change of the Grantor's name, location, identity or
corporate structure. The Grantor’s name is listed in the preamble of this
Agreement identically to how it appears on its articles of incorporation or
other organizational documents.
Section
3.3. Validity
and Priority of Security Interest.
The
Security Interest constitutes (a) a legal and valid first priority security
interest in all the Collateral securing the payment and performance of the
Obligations, (b) subject only to the filings described in Section 3.2 above
and
other previously perfected security interests in the Collateral listed on
Schedule 3.3 to this Agreement (“Existing Liens”), a perfected first priority
security interest in all Collateral in which a security interest may be
perfected by filing, recording or registration in the United States pursuant
to
the Uniform Commercial Code or other applicable law in the United States (or
any
political subdivision thereof) and its territories and possessions or any other
country, state or nation (or any political subdivision thereof). The Security
Interest is and shall be subordinate to any other Existing Lien on any of the
Collateral.
Section
3.4. Absence
of Other Liens.
The
Grantor's Collateral is owned by the Grantor free and clear of any Lien other
than Existing Liens. Without limiting the foregoing and except as set forth
on
Schedule 3.4 to this Agreement, the Grantor has not filed or consented to any
filing of any financing statement or similar filing in favor of any Person
other
than the Secured Parties, nor permitted the granting or assignment of a security
interest or permitted perfection of any security interest in the Collateral
in
favor of any Person other than the Secured Parties. The Grantor’s having
possession of all instruments, certificates and cash constituting Collateral
from time to time and the filing of financing statements in the offices referred
to in Schedule A hereto results in the perfection of such security interest.
Such Security Interest is, or in the case of Collateral in which the Grantor
obtain rights after the date hereof, will be, a perfected, first priority
security interest. Such notices, filings and all other action necessary or
desirable to perfect and protect such security interest have been duly
taken.
Section
3.5. Valid
and Binding Obligation.
This Agreement constitutes the legal, valid and binding obligation of the
Grantor, enforceable against the Grantor in accordance with its terms, except
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
and other laws of general application affecting enforcement of creditors’ rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies, and (iii) to the
extent the indemnification provisions contained in this Agreement may be limited
by applicable federal or state securities laws.
2
ARTICLE
IV. Covenants
Section
4.1. Change
of Name; Location of Collateral; Place of Business, State of Formation or
Organization.
The
Grantor shall notify the Secured Parties in writing at least eleven (11) days
prior to any change (i) in its corporate name or in any trade name used to
identify it in the conduct of its business or in the ownership of its
properties, (ii) in the location of its chief executive office, its principal
place of business, any office in which it maintains books or records relating
to
Collateral owned by it (including the establishment of any such new office
or
facility), (iii) in its identity or corporate structure such that a filed filing
made under the Uniform Commercial Code becomes misleading or (iv) in its Federal
Taxpayer Identification Number. Furthermore, the Grantor shall not effect or
permit any change referred to in the preceding sentence unless all filings
have
been made under the Uniform Commercial Code or otherwise that are required
in
order for the Secured Parties to continue at all times following such change
to
have a valid, legal and perfected first priority security interest in all the
Collateral.
Without
limiting Section 4.1(a), without the prior written consent of the Secured
Parties in each instance, the Grantor shall not change its (i) principal
residence, if it is an individual, (ii) place of business, if it has only one
place of business and is not a Registered Organization, (iii) principal place
of
business, if it has more than one place of business and is not a Registered
Organization, or (iv) state of incorporation, formation or organization, if
it
is a Registered Organization.
Section
4.2. Records.
The
Grantor shall maintain, at its own cost and expense, such complete and accurate
records with respect to the Collateral owned by it as is consistent with its
current practices and in accordance with such prudent and standard practices
used in industries that are the same as or similar to those in which the Grantor
is engaged, but in any event to include complete accounting records indicating
all payments and proceeds received with respect to any part of the Collateral,
and, at such time or times as the Secured Parties may reasonably request,
promptly to prepare and deliver to the Secured Parties a duly certified schedule
or schedules in form and detail satisfactory to the Secured Parties showing
the
identity, amount and location of any and all Collateral.
Section
4.3. Periodic
Certification; Notice of Xxxxxxx.Xx
the
event there should at any time be any change in the information represented
and
warranted herein or in the documents and instruments executed and delivered
in
connection herewith, the Grantor shall immediately notify the Secured Parties
in
writing of such change (this notice requirement shall be in extension of and
shall not limit or relieve the Grantor of any other covenants
hereunder).
Section
4.4. Protection
of Security.The
Grantor shall, at its own cost and expense, take any and all actions necessary
to defend title to the Collateral against all persons and to defend the Security
Interest of the Secured Parties in the Collateral and the priority thereof
against any Lien.
Section
4.5. Inspection
and Verification. The
Secured Parties and such persons as the Secured Parties may reasonably designate
shall have the right to inspect the Collateral, all records related thereto
(and
to make extracts and copies from such records) and the premises upon which
any
of the Collateral is located, to discuss the Grantor's affairs with the officers
of the Grantor and its independent accountants and to verify under reasonable
procedures the validity, amount, quality, quantity, value, condition and status
of, or any other matter relating to, the Collateral, including, in the case
of
collateral in the possession of any third Person, by contacting any account
debtor or third Person possessing such Collateral for the purpose of making
such
a verification. Out-of-pocket expenses in connection with any inspections by
representatives of the Secured Parties shall be (a) the obligations of the
Grantor with respect to any inspection after the Secured Parties’ demand payment
of the Notes or (b) the obligation of the Secured Parties in any other case.
Section
4.6. Taxes;
Encumbrances. At
their
option, the Secured Parties may discharge, Liens other than Existing Liens
at
any time levied or placed on the Collateral and may pay for the maintenance
and
preservation of the Collateral to the extent the Grantor fails to do so and
the
Grantor shall reimburse the Secured Parties on demand for any payment made
or
any expense incurred by the Secured Parties pursuant to the foregoing
authorization; provided, however, that nothing in this Section shall be
interpreted as excusing the Grantor from the performance of, or imposing any
obligation on the Secured Parties to cure or perform, any covenants or other
obligation of the Grantor with respect to any Lien or maintenance or
preservation of Collateral as set forth herein.
Section
4.7. Use
and Disposition of Collateral. The
Grantor shall not make or permit to be made an assignment, pledge or
hypothecation of any Collateral or shall grant any other Lien in respect of
the
Collateral without the prior written consent of the Secured Parties. The Grantor
shall not make or permit to be made any transfer of any Collateral other than
with respect to Existing Liens and other liens approved by the Secured Parties
and the Grantor shall remain at all times in possession of the Collateral owned
by it.
Section
4.8. Insurance/Notice
of Loss.
Within a
reasonable period of time following the date of this Agreement, Grantor, at
its
own expense, shall maintain or cause to be maintained insurance covering
physical loss or damage to the Collateral as described on Schedule 4.8 to this
Agreement. In extension of the foregoing and without limitation, such insurance
shall be payable to the Secured Parties as loss payee under a “standard” loss
payee clause, and the Secured Parties shall be listed as an “additional insured”
on Grantor’s general liability insurance. Such insurance shall not be
terminated, cancelled or not renewed for any reason, including non-payment
of
insurance premiums, unless the insurer shall have provided the Secured Parties
at least 30 days prior written notice. Grantor irrevocably makes, constitutes
and appoints the Secured Parties (and all officers, employees or agents
designated by the Secured Parties) as its true and lawful agent and
attorney-in-fact for the purpose, at any time following the Secured Parties’
demand for payment of the Notes, of making, settling and adjusting claims in
respect of Collateral under policies of insurance, endorsing the name of Grantor
on any check, draft, instrument or other item of payment for the proceeds of
such policies of insurance and for making all determinations and decisions
with
respect thereto. In the event that Grantor at any time or times shall fail
to
obtain or maintain any of the policies of insurance required hereby or to pay
any premium in whole or part relating thereto, the Secured Parties may, without
waiving or releasing any obligation or liability of Grantor hereunder, in their
sole discretion, obtain and maintain such policies of insurance and pay such
premium and take any other actions with respect thereto as the Secured Parties
deem advisable. All sums disbursed by the Secured Parties in connection and
in
accordance with this Section, including reasonable attorneys' fees, court costs,
expenses and other charges relating thereto, shall be payable upon demand,
by
Grantor to the Secured Parties and shall be additional Obligations secured
hereby. Grantor shall promptly notify the Secured Parties if any material
portion of the Collateral owned or held by Grantor is damaged or destroyed.
The
proceeds of any casualty insurance in respect of any casualty loss of any of
the
Collateral shall (i) so long as the Secured Parties have not demanded payment
of
the Notes, be disbursed to Grantor for direct application by Grantor solely
to
the repair or replacement of Grantor’s property so damaged or destroyed, and
(ii) in all other circumstances, be held by the Secured Parties as cash
collateral for the Obligations. The Secured Parties may, at their sole option,
disburse from time to time all or any part of such proceeds so held as cash
collateral, upon such terms and conditions as the Secured Parties may reasonably
prescribe, for direct application by the Secured Parties solely to the repair
or
replacement of Grantor’s property so damaged or destroyed, or Grantor may apply
all or any part of such proceeds to the Obligations.
Section
4.9. Legend.
Grantor
shall legend, in form and manner satisfactory to the Secured Parties, its
accounts and its books, records and documents evidencing or pertaining thereto
with an appropriate reference to the fact that such accounts have been assigned
to the Secured Parties and that the Secured Parties have a security interest
therein.
3
ARTICLE
V. Further
Assurances; Power of Attorney
Section
5.1. Further
Assurances.
Grantor
shall, at its own expense, execute, acknowledge, deliver and cause to be duly
filed all such further instruments and documents and take all such actions
as
the Secured Parties may from time to time reasonably request to better assure,
preserve, protect and perfect the Security Interest and the rights and remedies
created hereby, including the payment of any fees and taxes required in
connection with the execution and delivery of this Agreement, the granting
of
the Security Interest and the filing of any financing statements (including
fixture filings) or other documents in connection herewith or therewith. If
any
amount payable under or in connection with any of the Collateral shall be or
become evidenced by any promissory note or other instrument, such note or
instrument shall be immediately pledged and delivered to the Secured Parties,
duly endorsed in a manner satisfactory to the Secured Parties.
Section
5.2. Power
of Attorney.
Grantor
hereby irrevocably (as a power coupled with an interest) constitutes and
appoints the Secured Parties (and all officers, employees or agents designated
by the Secured Parties), its attorney-in-fact with full power of substitution,
for the benefit of the Secured Parties,
(i)
to
take
all appropriate action and to execute all documents and instruments that may
be
necessary or desirable to accomplish the purposes of this Agreement, and without
limiting the generality of the foregoing, Grantor hereby grants the power to
file one or more financing statements (including fixture filings), continuation
statements, filings with the United States Patent and Trademark Office or United
States Copyright Office (or any successor office or any similar office in any
other country) or other documents for the purpose of perfecting, confirming,
continuing, enforcing or protecting the Security Interest granted by Grantor,
without the signature of Grantor, and naming Grantor as debtor and the Secured
Parties as secured party; and
(ii)
at
any
time following the Secured Parties’ demand for payment of the Notes (i) to
receive, endorse, assign and/or deliver any and all notes, acceptances, checks,
drafts, money orders or other evidences of payment relating to the Collateral
or
any part thereof; (ii) to demand, collect, receive payment of, give receipt
for
and give discharges and releases of all or any of the Collateral; (iii) to
sign
the name of Grantor on any invoice or xxxx of lading relating to any of the
Collateral; (iv) to send verifications of accounts to any account debtor or
any
other Person liable for an account; (v) to commence and prosecute any and all
suits, actions or proceedings at law or in equity in any court of competent
jurisdiction to collect or otherwise realize on all or any of the Collateral
or
to enforce any rights in respect of any Collateral; (vi) to settle, compromise,
compound, adjust or defend any actions, suits or proceeding relating to all
or
any of the Collateral; and (vii) to use, sell, assign, transfer, pledge, make
any agreement with respect to or otherwise deal with all or any of the
Collateral, and to do all other acts and things necessary to carry out the
purposes of this Agree-ment, as fully and completely as though the Secured
Parties were the absolute owner of the Collateral for all purposes; provided,
however, that
nothing herein contained shall be construed as requiring or obligating the
Secured Parties to make any commitment or to make any inquiry as to the nature
or sufficiency of any payment received by the Secured Parties, or to present
or
file any claim or notice, or to take any action with respect to the Collateral
or any part thereof or the moneys due or to become due in respect thereof or
any
property covered thereby, and no action taken or omitted to be taken by the
Secured Parties with respect to the Collateral or any part thereof shall give
rise to any defense, counterclaim or offset in favor of Grantor or to any claim
or action against the Secured Parties.
The
provisions of this Article shall in no event relieve Grantor of any of its
obligations hereunder with respect to the Collateral or any part thereof or
impose any obligation on the Secured Parties to proceed in any particular manner
with respect to the Collateral or any part thereof, or in any way limit the
exercise by the Secured Parties of any other or further right which it may
have
on the date of this Agreement or hereafter, whether hereunder, by law or
otherwise.
4
ARTICLE
VI. Remedies
Section
6.1. Remedies
upon Default.
Upon
the
occurrence and during the continuance of an Event of Default, Grantor agrees
to
deliver each item of its Collateral to the Secured Parties on demand, and it
is
agreed that the Secured Parties shall have the right to take any of or all
the
following actions at the same or different times (but at all times subject
to
any Existing Liens): with or without legal process and with or without prior
notice or demand for performance, to take possession of the Collateral and
without liability for trespass to enter any premises where the Collateral may
be
located for the purpose of taking possession of or removing the Collateral,
exercise Grantor's right to xxxx and receive payment for completed work and,
generally, to exercise any and all rights afforded to a secured party under
the
Uniform Commercial Code or other applicable law. Without limiting the generality
of the foregoing, Grantor agrees that the Secured Parties shall have the right,
subject to the mandatory requirements of applicable law, to sell or otherwise
dispose of all or any part of the Collateral, at public or private sale or
at
any broker's board or on any securities exchange, for cash, upon credit or
for
future delivery as the Secured Parties shall deem appropriate. The Secured
Parties shall be authorized at any such sale (if it deems it advisable to do
so)
to restrict the prospective bidders or purchasers to persons who will represent
and agree that they are purchasing the Collateral for their own account for
investment and not with a view to the distribution or sale thereof, and upon
consum-mation of any such sale the Secured Parties shall have the right to
assign, transfer and deliver to the purchaser or purchasers thereof the
Collateral so sold. Each such purchaser at any such sale shall hold the property
sold absolutely, free from any claim or right on the part of Grantor, and
Grantor hereby waives (to the extent permitted by law) all rights of redemption,
stay and appraisal which Grantor now has or may at any time in the future have
under any rule of law or statute now existing or hereafter enacted.
The
Secured Parties shall give Grantor ten (10) days' written notice (which Grantor
agrees is reasonable notice within the meaning of Section 9-504(3) of the
Uniform Commercial Code) of the Secured Parties’ intention to make any sale of
Collateral. Such notice, in the case of a public sale, shall state the time
and
place for such sale and, in the case of a sale at a broker's board or on a
securities exchange, shall state the board or exchange at which such sale is
to
be made and the day on which the Collateral, or portion thereof, will first
be
offered for sale at such board or exchange. Any such public sale shall be held
at such time or times within ordinary business hours and at such place or places
as the Secured Parties may fix and state in the notice (if any) of such sale.
At
any such sale, the Collateral, or portion thereof, to be sold may be sold in
one
lot as an entirety or in separate parcels, as the Secured Parties may (in their
sole and absolute discretion) determine. The Secured Parties shall not be
obligated to make any sale of any Collateral if it shall determine not to do
so,
regardless of the fact that notice of sale of such Collateral shall have been
given. The Secured Parties may, without notice or publication, adjourn any
public or private sale or cause the same to be adjourned from time to time
by
announcement at the time and place fixed for sale, and such sale may, without
further notice, be made at the time and place to which the same was so
adjourned. In case any sale of all or any part of the Collateral is made on
credit or for future delivery, the Collateral so sold may be retained by the
Secured Parties until the sale price is paid by the purchaser or purchasers
thereof, but the Secured Parties shall not incur any liability in case any
such
purchaser or purchasers shall fail to take up and pay for the Collateral so
sold
and, in case of any such failure, such Collateral may be sold again upon like
notice. At any public (or, to the extent permitted by law, private) sale made
pursuant to this Section, the Secured Parties may bid for or purchase, free
(to
the extent permitted by law) from any right of redemption, stay, valuation
or
appraisal on the part of Grantor (all said rights being also hereby waived
and
released to the extent permitted by law), the Collateral or any part thereof
offered for sale and may make payment on account thereof by using any claim
then
due and payable to the Secured Parties from Grantor as a credit against the
purchase price, and the Secured Parties may, upon compliance with the terms
of
sale, hold, retain and dispose of such property without further accountability
to Grantor therefor. For purposes hereof, a written agreement to purchase the
Collateral or any portion thereof shall be treated as a sale thereof; the
Secured Parties shall be free to carry out such sale pursuant to such agreement
and Grantor shall not be entitled to the return of the Collateral or any portion
thereof subject thereto, notwithstanding the fact that after the Secured Parties
shall have entered into such an agreement all Obligations have been paid in
full. As an alternative to exercising the power of sale herein conferred upon
it, the Secured Parties may proceed by a suit or suits at law or in equity
to
foreclose this Agreement and to sell the Collateral or any portion thereof
pursuant to a judgment or decree of a court or courts having competent
jurisdiction or pursuant to a proceeding by a court-appointed
receiver.
Section
6.2. Application
of Proceeds.
The
Secured Parties shall apply the proceeds of any collection or sale of the
Collateral, as well as any Collateral consisting of cash, as follows:
FIRST,
to
the payment of all costs and expenses incurred by the Secured Parties in
connection with such collection or sale or otherwise in connection with this
Agreement or any of the Obligations, including all court costs and the fees
and
expenses of its agents and legal counsel, and any other costs or expenses
incurred in connection with the exercise of any right or remedy hereunder,
under
the Purchase Agreement, the Notes and the other Transaction
Documents;
SECOND,
to the payment in full of the Obligations; and
THIRD,
to
Grantor, its successors or assigns, or to whomsoever may be lawfully entitled
to
receive the same, or as a court of competent jurisdiction may otherwise
direct.
Subject
to the foregoing, the Secured Parties shall have absolute discretion as to
the
time of application of such proceeds, moneys or balances in accordance with
this
Agreement. Upon any sale of the Collateral by the Secured Parties (including
pursuant to a power of sale granted by statute or under a judicial proceeding),
the receipt of any such proceeds, moneys or balances by the Secured Parties
or
of the officer making the sale shall be a sufficient discharge to the purchaser
or purchasers of the Collateral so sold and such purchaser or purchasers shall
not be obligated to see to the application of any part of the purchase money
paid over to the Secured Parties or such officer or be answerable in any way
for
the misapplication thereof.
Section
6.3. Grant
of License to Use Intellectual Property.
For the
purpose of enabling the Secured Parties to exercise rights and remedies under
this Article at such time as the Secured Parties shall be lawfully entitled
to
exercise such rights and remedies, Grantor hereby grants to the Secured Parties
an irrevocable, non-exclusive license (exercisable without payment of royalty
or
other compensation to Grantor) to use, license or sub-license any of the
Collateral consisting of intellectual property now owned or hereafter acquired
by Grantor, and wherever the same may be located, and including in such license
reasonable access to all media in which any of the licensed items may be
recorded or stored and to all computer software and programs used for the
compilation or printout thereof. The use of such license by the Secured Parties
may be exercised, at the option of the Secured Parties, only following the
Secured Parties’ demand for payment of the Notes.
5
ARTICLE
VII. Miscellaneous
Section
7.1. Notices.
All
communications and notices hereunder to the Grantor and to the Secured Parties
shall (except as otherwise expressly permitted herein) be in writing and
delivered to the Grantor or the Secured Parties, as the case may be, as provided
in the Purchase Agreement.
Section
7.2. Security
Interest Absolute.
All rights of the Secured Parties hereunder, the Security Interest and all
obligations of Grantor hereunder shall be absolute and unconditional
irrespective of (a) any lack of validity or enforceability of the Purchase
Agreement, the Notes, any Transaction Document or any agreement with respect
to
any of the Obligations or any other agreement or instrument relating to any
of
the foregoing, (b) any change in the time, manner or place of payment of, or
in
any other term of, all or any of the Obligations, or any other amendment or
waiver of or any consent to any departure from the Purchase Agreement, the
Notes, any Transaction Document or any other agreement or instrument, (c) any
exchange, release or non-perfection of any Lien on other collateral, or any
release or amendment or waiver of or consent under or departure from any
guarantee, securing or guaranteeing all or any of the Obligations, or (d) any
other circumstance that might otherwise constitute a defense available to,
or a
discharge of, Grantor in respect of the Obligations or this Agreement.
Section
7.3. Survival
of Agreement.
All covenants, agreements, representations and warranties made by Grantor herein
and in the certificates or other instruments prepared or delivered in connection
with or pursuant to this Agreement shall be considered to have been relied
upon
by the Secured Parties and shall survive the making of the loan and the
execution and delivery to the Secured Parties of the Notes, regardless of any
investigation made by the Secured Parties or on their behalf; and shall continue
in full force and effect until this Agreement shall terminate.
Section
7.4. Binding
Effect; Several Agreement; Successors and Assigns.
This
Agreement shall become effective as to Grantor when a counterpart hereof
executed on behalf of Grantor shall have been delivered to the Secured Parties
and a counterpart hereof shall have been executed on behalf of the Secured
Parties, and thereafter shall be binding upon Grantor and the Secured Parties
and their respective successors and assigns, and shall inure to the benefit
of
Grantor, the Secured Parties and their respective successors and assigns, except
that Grantor shall not have the right to assign or transfer its rights or
obligations hereunder or any interest herein or in the Collateral (and any
such
assignment or transfer shall be void) except as expressly contemplated by this
Agreement, the Purchase Agreement, the Notes or the other Transaction Documents.
Section
7.5. Secured
Parties’ Fees and Expense; Indemnification.
Grantor
agrees to pay upon demand to the Secured Parties the amount of any and all
reasonable expenses, including all reasonable fees, disbursements and other
charges of its counsel and of any experts or agents, which the Secured Parties
may incur in connection with (i) the administration of this Agreement (including
the customary fees and charges of the Secured Parties for any audits conducted
by them or on their behalf with respect to the accounts inventory), (ii) the
custody or preservation of, or the sale of, collection from or other realization
upon any of the Collateral, (iii) the exercise, enforcement or protection of
any
of the rights of the Secured Parties hereunder or (iv) the failure of Grantor
to
perform or observe any of the provisions hereof.
Grantor
agrees to indemnify the Secured Parties and the agent, contractors and employees
of the Secured Parties (collectively, the “Indemnitees”)
against, and hold each of them harmless from, any and all losses, claims,
damages, liabilities and related expenses, including reasonable fees,
disbursements and other charges of counsel, incurred by or asserted against
any
of them arising out of, in any way connected with, or as a result of, the
execution, delivery, or performance of this Agreement or any agreement or
instrument contemplated hereby or any claim, litigation, investigation or
proceeding relating hereto or to the Collateral, whether or not any Indemnitee
is a party thereto; provided that such indemnity shall not, as to any
Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the
gross
negligence or willful misconduct of such Indemnitee.
Any
such
amounts payable as provided hereunder shall be additional Obligations secured
hereby. The provisions of this Section shall remain operative and in full force
and effect regardless of the termination of this Agreement, the Purchase
Agreement, the Notes or the other Transaction Documents, the consummation of
the
transactions contemplated hereby, the repayment of any of the Obligations,
the
invalidity or unenforceability of any term or provision of this Agreement,
the
Purchase Agreement, the Notes or the other Transaction Documents, or any
investigation made by or on behalf of the Secured Parties. All amounts due
under
this Section shall be payable on written demand therefor.
Section
7.6. GOVERNING
LAW.
THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL
LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY OF THE CONFLICTS
OF
LAW PRINCIPLES WHICH WOULD RESULT IN THE APPLICATION OF THE SUBSTANTIVE LAW
OF
ANOTHER JURISDICTION. THIS AGREEMENT SHALL NOT BE INTERPRETED OR CONSTRUED
WITH
ANY PRESUMPTION AGAINST THE PARTY CAUSING THIS AGREEMENT TO BE
DRAFTED.
Section
7.7. Waivers;
Amendment.
No
failure or delay of the Secured Parties in exercising any power or right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. The rights and remedies
of
the Secured Parties hereunder and under the Purchase Agreement are cumulative
and are not exclusive of any rights or remedies that they would otherwise have.
No waiver of any provisions of this Agreement, the Purchase Agreement, the
Notes
or the other Transaction Documents or consent to any departure by Grantor
therefrom shall in any event be effective unless the same shall be permitted
by
paragraph (b) below, and then such waiver or consent shall be effective only
in
the specific instance and for the purpose for which given. No notice to or
demand on Grantor in any case shall entitle Grantor to any other or further
notice or demand in similar or other circumstances.
Neither
this Agreement nor any provision hereof may be waived, amended or modified
except pursuant to an agreement or agreements, in writing entered into by the
Secured Parties and Grantor.
Section
7.8. WAIVER
OF JURY TRIAL.
EACH
PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY
OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE
PURCHASE AGREEMENT OR THE NOTES. EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION,
SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE PURCHASE
AGREEMENT AND THE NOTES, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION.
Section
7.9. Severability.
In the event any one or more of the provisions contained in this Agreement
should be held invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby (it being understood that the
invalidity of a particular provision in a particular jurisdiction shall not
in
and of itself affect the validity of such provision in any other jurisdiction).
The parties 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
7.10. Counterparts.
This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original but all of which when taken together shall constitute
but
one contract. Each party shall be entitled to rely on a facsimile signature
of
any other party hereunder as if it were an original.
Section
7.11. Jurisdiction;
Consent to Service of Process.
Grantor
hereby irrevocably and unconditionally submits, for itself and its property,
to
the nonexclusive jurisdiction of any New York State court or Federal court
of
the United States of America sitting in New York City, and any appellate court
from any thereof, in any action or proceeding arising out of or relating to
this
Agreement, the Purchase Agreement or the Notes, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto 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 Agreement shall affect any right that the
Secured Parties may otherwise have to bring any action or proceeding relating
to
this Agreement, the Purchase Agreement, the Notes or the other Transaction
Documents against Grantor or its properties in the courts of any
jurisdiction.
Grantor
hereby irrevocably and unconditionally waives, to the fullest extent it may
legally and effectively do so, any objection which it may now or hereafter
have
to the laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement, the Purchase Agreement, the Notes or the other
Transaction Documents in any New York State or Federal court. Each of the
parties hereto hereby irrevocably waives, to the fullest extent permitted by
law, the defense of an inconvenient forum to the maintenance of such action
or
proceeding in any such court.
Each
party to this Agreement irrevocably consents to service of process in the manner
provided for notices in Section 7.1. Nothing in this Agreement will affect
the
right of any party to this Agreement to process in any other manner permitted
by
law.
Section
7.12. Termination.
This
Agreement and the Security Interest shall terminate when all the Obligations
have been paid in full, at which time the Secured Parties shall execute and
deliver to Grantor, at Grantor’s expense, all Uniform Commercial Code
termination statements and similar documents which Grantor shall reasonably
request to evidence such termination. Any execution and delivery of termination
statements or documents pursuant to this Section shall be without recourse
to or
warranty by the Secured Parties.
Section
7.13. Prejudgment
Remedy Waiver.
Grantor acknowledges that this Agreement, the Purchase Agreement, the Notes
and
the other Transaction Documents evidence a commercial transaction and that
it
could, under certain circumstances have the right, to notice of and hearing
on
the right of the Secured Parties to obtain a prejudgment remedy, such as
attachment, garnishment and/or replevin, upon commencing any litigation against
Grantor. Notwithstanding, Grantor hereby waives all rights to notice, judicial
hearing or prior court order to which it might otherwise have the right under
any state or federal statute or constitution in connection with the obtaining
by
the Secured Parties of any prejudgment remedy by reason of this Agreement,
the
Purchase Agreement, the Notes, the other Transaction Documents or by reason
of
the Obligations or any renewals or extensions of the same. Grantor also waives
any and all objection which it might otherwise assert, now or in the future,
to
the exercise or use by the Secured Parties of any right of setoff, repossession
or self help as may presently exist under statute or common law.
6
Section
7.14. Collateral
Agent.
(a) Each
Secured Party hereby
appoints [________________] as the Collateral Agent hereunder and each Secured
Party authorizes the Collateral Agent to take such action as agent on its behalf
and to exercise such powers under this Agreement and the other Transaction
Documents as are delegated to the Collateral Agent under such agreements and
to
exercise such powers as are reasonably incidental thereto. Without limiting
the
foregoing, each Secured Party hereby authorizes the Collateral Agent to execute
and deliver, and to perform its obligations under, each of the documents to
which the Collateral Agent is a party relating to security for the obligations
under the Notes, to exercise all rights, powers and remedies that the Collateral
Agent may have under such Transaction Documents and, in the case of the
Transaction Documents, to act as agent for the Secured Parties under such
Transaction Documents.
(b) As
to any matters not
expressly provided for by this Agreement and the other document relating thereto
(including enforcement or collection), the Collateral Agent shall not be
required to exercise any discretion or take any action, but shall be required
to
act or to refrain from acting (and shall be fully protected in so acting or
refraining from acting) upon the instructions of the Secured Parties, and such
instructions shall be binding upon all Secured Parties; provided,
however,
that the
Collateral Agent shall not be required to take any action that (i) the
Collateral Agent in good faith believes exposes it to personal liability unless
the Collateral Agent receives an indemnification satisfactory to it from the
Secured Parties with respect to such action or (ii) is contrary to this
Agreement or applicable law. The Collateral Agent agrees to give to each Secured
Party prompt notice of each notice given to it by the Company pursuant to the
terms of this Agreement or the other Transaction Documents.
(c) In
performing its
functions and duties hereunder and under the Transaction Documents and the
other
documents required to be executed or delivered in connection therewith, the
Collateral Agent is acting solely on behalf of the Secured Parties and its
duties are entirely administrative in nature. The Collateral Agent does not
assume and shall not be deemed to have assumed any obligation other than as
expressly set forth herein, in the Transaction Documents and any other documents
required to be executed or delivered in connection therewith related hereto
or
any other relationship as the agent, fiduciary or trustee of or for any Secured
Party or holder of any other obligation under this Agreement or the Notes.
The
Collateral Agent may perform any of its duties under any Transaction Document
by
or through its agents or employees.
(d) None
of the Collateral
Agent, any of its affiliates or any of their respective directors, officers,
agents or employees shall be liable for any action taken or omitted to be taken
by it, him, her or them under or in connection with this Agreement or the other
Transaction Documents, except for its, his, her or their own gross negligence
or
willful misconduct.
(e) Each
Secured Party
acknowledges that it shall, independently and without reliance upon the
Collateral Agent or any other Secured Party conduct its own independent
investigation of the financial condition and affairs of the Company and its
Subsidiaries in connection with the issuance of the Securities. Each Secured
Party also acknowledges that it shall, independently and without reliance upon
the Collateral Agent or any other Secured Party and based on such documents
and
information as it shall deem appropriate at the time, continue to make its
own
credit decisions in taking or not taking action under this Agreement and other
Transaction Documents.
(f) Each
Secured Party agrees
to indemnify the Collateral Agent and each of its affiliates, and each of their
respective directors, officers, employees, agents and advisors (to the extent
not reimbursed by the Borrower), from any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses and
disbursements (including fees, expenses and disbursements of financial and
legal
advisors) of any kind or nature whatsoever that may be imposed on, incurred
by,
or asserted against, the Collateral Agent or any of its affiliates, directors,
officers, employees, agents and advisors in any way relating to or arising
out
of this Agreement or the other Transaction Documents or any action taken or
omitted by the Collateral Agent under this Agreement or the document related
thereto; provided,
however,
that no
Secured Party shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the Collateral Agent’s or such Affiliate’s gross
negligence or willful misconduct.
(g) The
Collateral Agent may
resign at any time by giving written notice thereof to the Secured Parties
and
the Company. Upon any such resignation, the Secured Parties shall have the
right
to appoint a successor Collateral Agent. If no successor Collateral Agent shall
have been so appointed by the Secured Parties, and shall have accepted such
appointment, within 30 days after the retiring Collateral Agent’s giving of
notice of resignation, then the retiring Collateral Agent may, on behalf of
the
Secured Parties, appoint a successor Collateral Agent, selected from among
the
Secured Parties. Upon the acceptance of any appointment as Collateral Agent
by a
successor Collateral Agent, such successor Collateral Agent shall succeed to,
and become vested with, all the rights, powers, privileges and duties of the
retiring Collateral Agent, and the retiring Collateral Agent shall be discharged
from its duties and obligations under this Agreement, the Transaction Documents
and any other documents required to be executed or delivered in connection
therewith. Prior to any retiring Collateral Agent’s resignation hereunder as
Collateral Agent, the retiring Collateral Agent shall take such action as may
be
reasonably necessary to assign to the successor Collateral Agent its rights
as
Collateral Agent under the Transaction Documents. After such resignation, the
retiring Collateral Agent shall continue to have the benefit of this Agreement
as to any actions taken or omitted to be taken by it while it was Collateral
Agent under this Agreement, the Transaction Documents and any other documents
required to be executed or delivered in connection therewith.
(h) Each
Secured Party agrees
that any action taken by the Collateral Agent in accordance with the provisions
of this Agreement or of the other document relating thereto, and the exercise
by
the Collateral Agent or the Secured Parties of the powers set forth herein
or
therein, together with such other powers as are reasonably incidental thereto,
shall be authorized and binding upon all of the Secured Parties.
(i) Each
of the Secured
Parties hereby directs, in accordance with the terms hereof, the Collateral
Agent to release (or in the case of clause
(ii)
below,
release or subordinate) any Lien held by the Collateral Agent for the benefit
of
the Secured Parties against any of the following: (i) all of the Collateral
upon
payment and satisfaction in full of all obligations under the Notes and all
other obligations under the Transaction Documents that the Collateral Agent
has
been notified in writing are then due and payable; (ii) any assets that are
subject to a Lien permitted by Section 3.2);
and
(iii) any part of the Collateral sold or disposed of by the Company or any
Subsidiary if such sale or disposition is permitted by this Agreement and the
Notes (or permitted pursuant to a waiver or consent of a transaction otherwise
prohibited by this Agreement and the Notes). Each of the Secured Parties hereby
directs the Collateral Agent to execute and deliver or file such termination
and
partial release statements and do such other things as are necessary to release
Liens to be released pursuant to this Section 7.14 promptly upon the
effectiveness of any such release.
[SIGNATURE
PAGES FOLLOW]
KL2:2407596.4
7
IN
WITNESS WHEREOF, the parties have duly executed this Security Agreement as
of
the day and year first written above.
QUEST
OIL CORPORATION
By:_____________________________________
Name:
Title:
QUEST
CANADA CORP.
By:_____________________________________
Name:
Title:
WALLSTIN
PETROLEUM, LLC
By:_____________________________________
Name:
Title:
PETROSTAR
OIL SERVICES, INC.
By:_____________________________________
Name:
Title:
SECURED
PARTY:
By:_____________________________________
Name:
Title:
KL2:2407596.4
8
18
Acknowledged
and agreed:
Collateral
Agent:
By:_____________________________________
Name:
Title:
9
