EXHIBIT 10.2 SUBORDINATION AGREEMENT DATEDDECEMBER 28, 2007 SUBORDINATION AGREEMENT

 

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EXHIBIT 10.2

 

SUBORDINATION AGREEMENT DATED DECEMBER 28, 2007

 

 

 

 

This SUBORDINATION AGREEMENT (this “Agreement”), dated as of December 28, 2007 is among GALAXY ENERGY CORPORATION, a Colorado corporation (“Borrower”), DOLPHIN ENERGY CORPORATION, a Nevada corporation, and PANNONIAN INTERNATIONAL, LTD., a Colorado corporation (each such corporation, including Borrower, and together with each other obligor who becomes a party to this Agreement each an “Obligor” and, together, “Obligors”), PARTNER MARKETING AG (“Partner Marketing”, together with any transferees or holders from time to time of the Subordinated Note (as defined below), each a “Subordinated Creditor”, and collectively the “Subordinated Creditors”), and HFTP INVESTMENTS LLC, PROMETHEAN II MASTER, L.P., PROMETHEAN I MASTER LTD., CAERUS PARTNERS LLC, AG OFFSHORE CONVERTIBLES, LTD., and LEONARDO, L.P., (collectively, and together with any transferees or holders from time to time of the Notes (as defined below), hereinafter, the “Lenders”), and PROMETHEAN ASSET MANAGEMENT L.L.C., a Delaware limited liability company, in its capacity as collateral agent for itself and for the Lenders (including any successor agent, hereinafter, the “Agent”).

 

 

 

 

 

 

 

 

 

 

Enforcement Action is defined in subsection 2.7.

 

Lender or Lenders shall mean any holder of Senior Indebtedness including, without limitation, any holder of any Senior Indebtedness after the consummation of any Permitted Refinancing.

 

Loan Documents means the collective reference to the Purchase Agreement, the Notes, the Warrants, Registration Rights Agreement, the Irrevocable Transfer Agent Instructions, the Conveyances of Overriding Royalty Interests, the USBIT Account Control Agreement, the ANB Amendment and the ANB Account Control Agreement as amended thereby, the First Amendment and the Security Agreement as amended thereby, the Guaranty as amended thereby and the Pledge Agreement as amended thereby, the 2004 Amendment, the Mortgage Amendments and the Mortgages as amended thereby, the Colorado Mortgage and each of the other agreements to which any Obligor is a party or is bound in connection with the transactions contemplated under the Purchase Agreement and the Notes.

 

Paid in Full or Payment in Full shall mean the indefeasible payment in full in cash of all Senior Indebtedness and termination of all commitments to lend under the Loan Documents and Permitted Refinancing Loan Documents.

Permitted Refinancing means any refinancing of the Senior Indebtedness.

 

Permitted Refinancing Loan Documents means any and all agreements, documents and instruments executed in connection with a Permitted Refinancing of Senior Indebtedness.

 

Proceeding is defined in subsection 2.3.

 

Senior Indebtedness shall mean the obligations, liabilities and other amounts owed under the Purchase Agreement, the Notes or any other Loan Document including all interest, fees, expenses, indemnities and enforcements costs, whether before or after the commencement of a Proceeding and without regard to whether or not an allowed claim, and all obligations and liabilities incurred with respect to Permitted Refinancings,

 

together with any amendments, restatements, modifications, renewals or extensions of any thereof.

 

Subordinated Creditor shall mean Partner Marketing, each “Subordinated Creditor” which is signatory to this Agreement from time to time and any other holders of a Subordinated Note or any other Subordinated Indebtedness from time to time.

 

Subordinated Default shall mean a default in the payment of the Subordinated Indebtedness, or performance of any term, covenant or condition contained in the Subordinated Indebtedness Documents or the occurrence of any event or condition, which default, event or condition permits any Subordinated Creditor to accelerate or demand payment of all or any portion of the Subordinated Indebtedness.

 

Subordinated Default Notice shall mean a written notice to Agent pursuant to which Agent is notified of the existence of a Subordinated Default, which notice incorporates a reasonably detailed description of such Subordinated Default.

 

Subordinated Indebtedness shall mean all of the obligations of Obligors (including Subordinated Obligor) to Subordinated Creditors pursuant to or evidenced by the Subordinated Note and the other Subordinated Indebtedness Documents.

 

Subordinated Indebtedness Documents shall mean the Subordinated Note and all other documents and instruments executed in connection with the Subordinated Note or otherwise evidencing or pertaining to any portion of the Subordinated Indebtedness, as amended, supplemented, restated or otherwise modified from time to time as permitted hereunder.

 

2.  Subordination of Subordinated Indebtedness to Senior Indebtedness.

 

 

 

 

(i)           the Lenders shall be entitled to receive Payment in Full in cash of the Senior Indebtedness before any Subordinated Creditor is entitled to receive any payment upon the Subordinated Indebtedness, and Lenders shall be entitled to receive for application in payment of such Senior Indebtedness any payment or distribution of any kind or character, whether in cash, property or securities or by set-off or otherwise, which may be payable or deliverable in any such Proceedings in respect of the Subordinated Indebtedness;

 

(ii)           any payment or distribution of assets of any Obligor of any kind or character, whether in cash, property or securities, by set-off or otherwise, to which any Subordinated Creditor would be entitled pursuant to the Subordinated Indebtedness but for the provisions hereof shall be paid by the liquidating trustee or agent or other Person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the Lenders until the Senior Indebtedness shall have been Paid in Full, and each Subordinated Creditor acknowledges and agrees that such payment or distribution may, particularly with respect to interest on Senior Indebtedness after the commencement of a Proceeding, result in such Subordinated Creditor receiving less than it would otherwise receive;

 

(iii)          each Subordinated Creditor hereby irrevocably (x) authorizes, empowers and directs all receivers, trustees, debtors in possession, liquidators, custodians, conservators and others having authority in the premises to effect all such payments and deliveries, and each Subordinated Creditor also irrevocably authorizes, empowers and directs, the Agent and the Lenders until the Senior Indebtedness shall have been Paid in Full, to demand, sue for, collect and receive every such payment or distribution, and (y) agrees to execute and deliver to the Agent and the Lenders all such further instruments confirming the authorization referred to in the foregoing clause (x); and

 

(iv)           each Subordinated Creditor hereby irrevocably authorizes, empowers and appoints Agent and the Lenders (until the Senior Indebtedness shall have been Paid in Full) as its agent and attorney in fact to (x) execute, verify, deliver and file such proofs of claim upon the failure of any Subordinated Creditor promptly to do so (and in any event prior to thirty (30) days before the expiration of the time to file any proof) and (y) vote such claims in any such Proceeding; provided that no holder of Senior Indebtedness shall have any obligation to execute, verify, deliver and/or file any such proof of claim or vote such claim.  In the event the

 

Agent or any Lender (or any agent, designee or nominee thereof) votes any claim in accordance with the authority granted hereby, such Subordinated Creditor shall not be entitled to change or withdraw such vote.

 

The Senior Indebtedness shall continue to be treated as Senior Indebtedness and the provisions hereof shall continue to govern the relative rights and priorities of Lenders and the Subordinated Creditors even if all or part of the Senior Indebtedness or the security interests securing the Senior Indebtedness are subordinated, set aside, avoided or disallowed in connection with any such Proceeding and the provisions hereof shall be reinstated if at any time any payment of any of the Senior Indebtedness is rescinded or must otherwise be returned by Agent, any Lender or any agent, designee or nominee of such holder.

 

2.4  Incorrect Payments.  If any payment (whether made in cash, securities or other property) not permitted under this Agreement is received by any Subordinated Creditor on account of the Subordinated Indebtedness before all Senior Indebtedness is Paid in Full, such payment shall not be commingled with any asset of such Subordinated Creditor, shall be held in trust by such Subordinated Creditor for the benefit of the Lenders and shall promptly be paid over to the Lenders, or their respective designated representatives, for application (in accordance with the Purchase Agreement, the Notes or the Permitted Refinancing Loan Documents) to the payment of the Senior Indebtedness then remaining unpaid, until all of the Senior Indebtedness is Paid in Full.

 

2.5  Sale, Transfer.  No Subordinated Creditor shall sell, assign, dispose of or otherwise transfer all or any portion of the Subordinated Indebtedness or any Subordinated Note or other Subordinated Indebtedness Document (a) without giving prior written notice of such action to Agent, (b) unless prior to the consummation of any such action, the transferee thereof shall execute and deliver to Agent and the Lenders a joinder to this Agreement, or an agreement substantially identical to this Agreement and acceptable to Agent and the Lenders, in either case providing for the continued subordination and forbearance of the Subordinated Indebtedness to the Senior Indebtedness as provided herein and for the continued effectiveness of all of the rights of Agent and Lenders arising under this Agreement and (c) unless following such sale, assignment, pledge, disposition or other transfer, there shall either be (i) no more than two more than the number of  holders of Subordinated Indebtedness on the date hereof or (ii) one Person acting as agent for all holders of the Subordinated Indebtedness pursuant to documentation reasonably satisfactory to Agent, such that any notices and communications to be delivered to Subordinated Creditors hereunder and any consents required by Subordinated Creditors shall be made to or obtained from such agent and shall be binding on each Subordinated Creditor as if directly obtained from such Subordinated Creditor.  In the event of a permitted sale, assignment, disposition or other transfer, each Subordinated Creditor engaging in such sale, assignment, disposition or other transfer, prior to the consummation of any such action, shall cause the transferee thereof to execute and deliver to Agent and the Lenders a joinder to this Agreement, or an agreement substantially identical to this Agreement and acceptable to the Lenders, in either case providing for the continued subordination and forbearance of the

 

 

Subordinated Indebtedness to the Senior Indebtedness as provided herein and for the continued effectiveness of all of the rights of Lenders and Agent arising under this Agreement.  Notwithstanding the failure to execute or deliver any such agreement, the subordination effected hereby shall survive any sale, assignment, disposition or other transfer of all or any portion of the Subordinated Indebtedness, and the terms of this Agreement shall be binding upon the successors and assigns of each Subordinated Creditor, as provided in Section 10 below.

 

 

 

2.7  Restriction on Action by Subordinated Creditors.

 

 

 

 

 

(c)           Until the Senior Indebtedness is Paid in Full, any Liens of Subordinated Creditors in the Collateral which may exist in breach of each Subordinated Creditor's agreement pursuant to subsection 2.7(a)(vii) or Section 18 of this Agreement shall be and hereby are subordinated for all purposes and in all respects to the Liens of Agent and Lenders in the Collateral, regardless of the time, manner or order of perfection of any such Liens.  In the event that any Subordinated Creditor obtains any Liens in the Collateral in violation of subsection 2.7(a)(vii) or Section 18 of this Agreement, Subordinated Creditors (i) shall (or shall cause their agent to) promptly execute and deliver to Agent such termination statements and releases as Agent shall request to effect the release of the Liens of such Subordinated Creditor in such Collateral and (ii) shall be deemed to have authorized Agent to file any and all termination statements required by Agent in respect of such Liens. In furtherance of the foregoing, each Subordinated Creditor hereby irrevocably appoints Agent its attorney-in-fact, with full authority in the place and stead of such Subordinated Creditor and in the name of such Subordinated Creditor or otherwise, to execute and deliver any document or instrument which such Subordinated Creditor may be required to deliver pursuant to this subsection 2.7(c).

 

3.  Continued Effectiveness of this Agreement; Modifications to Senior Indebtedness.

 

(a) The terms of this Agreement, the subordination effected hereby, and the rights and the obligations of Subordinated Creditors, Agent and Lenders arising hereunder, shall not be affected, modified or impaired in any manner or to any extent by: (i) any amendment or modification of or supplement to the Purchase Agreement, any other Loan Document or any Permitted Refinancing Loan Document or any Subordinated Indebtedness Document; (ii) the validity or enforceability of any of such documents; or (iii) any exercise or non-exercise of any right, power or remedy under or in respect of the

 

 

(b)  Agent and Lenders may at any time and from time to time in their sole discretion, renew, amend, refinance, extend or otherwise modify the terms and provisions of Senior Indebtedness (including, without limitation, the terms and provisions relating to the principal amount outstanding thereunder, the rate of interest thereof, the payment terms thereof and the provisions thereof regarding default or any other matter) or exercise (or refrain from exercising) any of their rights under the Loan Documents, all without notice to or consent from the Subordinated Creditors and without incurring liability to any Subordinated Creditor and without impairing or releasing the obligations of any Subordinated Creditor under this Agreement.  No compromise, alteration, amendment, renewal, restatement, refinancing or other change of, or waiver, consent or other action in respect of any liability or obligation under or in respect of, any terms, covenants or conditions of Senior Indebtedness or the Loan Documents, whether or not in accordance with the provisions of the Senior Indebtedness, shall in any way alter or affect any of the subordination provisions hereof.

4.  Representations and Warranties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If to Partner Marketing:	Partner Marketing AG Wylstrasse 7 6052 Hergiswil Switzerland Attention: Telecopy:
If to any other Subordinated               Creditor:	To the address of such Subordinated Creditor set forth on the joinder to this Agreement executed by such Subordinated Creditor
If to any Obligor:	Galaxy Energy Corporation 1331 17th Street, Suite 1050 Denver, Colorado 80202 Attention:  Marc E. Bruner Telecopy: (303) 293-2417
with a copy to:	Dill Dill Carr Stonbraker & Hutchings, P.C. 455 Sherman Street, Suite 300 Denver, Colorado 80203 Attention:  Fay M. Matsukage Telecopy: (303) 777-3823
If to Agent:	Promethean Asset Management L.L.C. 55 Fifth Avenue, 17th Floor New York, New York 10003 Attention: James F. O’Brien Telephone: (212) 702-5200 Facsimile: (212) 758-9334
with a copy to:	Katten Muchin Rosenman LLP 525 West Monroe Street Chicago, Illinois 60661-3693 Attn: Mark D. Wood, Esq. Telecopy: (312) 902-1061

 

 

 

 

If to a Lender:	To the address of such Lender set forth on the Schedule I hereto

 

 

 

 

12.  Defines Rights of Creditors; Subrogation.

 

 

 

 

Agreement to the payment of Senior Indebtedness, then and in each such event, the holders of the Subordinated Indebtedness shall be subrogated to the rights of each holder of Senior Indebtedness to receive any further payment or distribution in respect of or applicable to the Senior Indebtedness; and, for the purposes of such subrogation, no payment or distribution to the holders of Senior Indebtedness of any cash, property or securities to which any holder of Subordinated Indebtedness would be entitled except for the provisions of this Agreement shall, and no payment over pursuant to the provisions of this Agreement to the holders of Senior Indebtedness by the holders of the Subordinated Indebtedness shall, as between any Obligor, its creditors other than the holders of Senior Indebtedness and the holders of Subordinated Indebtedness, be deemed to be a payment by such Obligor to or on account of Senior Indebtedness.

 

13.  Conflict.  In the event of any conflict between any term, covenant or condition of this Agreement and any term, covenant or condition of any of the Subordinated Indebtedness Documents, the provisions of this Agreement shall control and govern.  For purposes of this Section 13, to the extent that any provisions of any of the Subordinated Indebtedness Documents provide rights, remedies and benefits to Agent or Lenders that exceed the rights, remedies and benefits provided to Agent or Lenders under this Agreement, such provisions of the applicable Subordinated Indebtedness Documents shall be deemed to supplement (and not to conflict with) the provisions hereof.

 

14.  Statement of Indebtedness to Subordinated Creditors.  Borrower will furnish to Agent upon demand, a statement of the indebtedness owing from Obligors to Subordinated Creditors, and will give Agent access to the books of Obligors in accordance with the Purchase Agreement so that Agent can make a full examination of the status of such indebtedness.

 

 

16.  Termination.  This Agreement shall terminate upon the Payment in Full of the Senior Indebtedness.

 

 

18.  No Contest of Senior Indebtedness or Liens; No Security for Subordinated Indebtedness.  Each Subordinated Creditor agrees that it will not, and will not encourage any other Person to, at any time, contest the validity, perfection, priority or enforceability of the Senior Indebtedness or Liens in the Collateral granted to Agent and the Lenders pursuant to the Purchase Agreement, the other Loan Documents or the Permitted Refinancing Loan Documents or accept or take any collateral security for the Subordinated Indebtedness.  In furtherance of the foregoing, on the date hereof, each Subordinated Creditor hereby represents and warrants that it has not taken or received a security interest in, or lien upon, any asset of any Obligor, whether in respect of the Subordinated Indebtedness or otherwise.

 

 

20.  Waiver of Consolidation.  Each Subordinated Creditor acknowledges and agrees that (i) Obligors are each separate and distinct entities; and (ii) it will not at any time insist upon, plead or seek advantage of any substantive consolidation, piercing the corporate veil or any other order or judgment that causes an effective combination of the assets and liabilities of Obligors in any case or proceeding under Title 11 of the United States Code or other similar proceeding.

 

 

IN WITNESS WHEREOF, Subordinated Creditor, each Obligor, Agent and each Lender has caused this Agreement to be executed as of the date first above written.

 

	SUBORDINATED CREDITOR:
	PARTNER MARKETING AG
	By:	/s/ Karl Volger
		Name:  Karl Volger
		Title:

 

	OBLIGORS:
	GALAXY ENERGY CORPORATION, a Colorado corporation
	By:	/s/  Christopher S. Hardesty
		Name:  Christopher S. Hardesty
		Title:   SVP & CFO

 

	DOLPHIN ENERGY CORPORATION, a Nevada corporation
	By:	/s/ Christopher S. Hardesty
		Name:  Christopher S. Hardesty
		Title: Secretary & Treasurer

 

	PANNONIAN INTERNATIONAL, LTD., a Colorado corporation
	By:	/s/  Cecil D. Gritz
		Name:  Cecil D. Gritz
		Title:  COO

 

	AGENT:
	PROMETHEAN ASSET MANAGEMENT L.L.C. in its capacity as agent for all Lenders
	By:
		Name:
		Title:

 

	LENDERS:
	HFTP INVESTMENTS, LLC
	By:
		Name:
		Title:

 

	PROMETHEAN II MASTER, L.P.
	By:	Promethean Asset Management L.L.C.
	Its:	Investment Manager
	By:
		Name:
		Title:

 

Buyer’s Name	Buyer Address and Facsimile Number	Investor’s Legal Representative’s Address and Facsimile Number
HFTP Investments LLC	℅Promethean Asset Management L.L.C. 55 Fifth Avenue  17th Floor New York, New York 10003 Attention: James F. O’Brien Telephone: (212) 702-5200 Facsimile: (212) 758-9334 Residence: Delaware	Katten Muchin Rosenman LLP 525 W. Monroe Street Chicago, Illinois 60661-3693 Attention: Mark D. Wood, Esq. Telephone: (312) 902-5200 Facsimile: (312) 902-1061
Promethean II Master, L.P.	℅Promethean Asset Management L.L.C. 55 Fifth Avenue  17th Floor New York, New York 10003 Attention: James F. O’Brien Telephone: (212) 702-5200 Facsimile: (212) 758-9334 Residence: Cayman Islands	Katten Muchin Rosenman LLP 525 W. Monroe Street Chicago, Illinois 60661-3693 Attention: Mark D. Wood, Esq. Telephone: (312) 902-5200 Facsimile: (312) 902-1061
Promethean I Master Ltd.	℅Promethean Asset Management L.L.C. 55 Fifth Avenue  17th Floor New York, New York 10003 Attention: James F. O’Brien Telephone: (212) 702-5200 Facsimile: (212) 758-9334 Residence: Cayman Islands	Katten Muchin Rosenman LLP 525 W. Monroe Street Chicago, Illinois 60661-3693 Attention: Mark D. Wood, Esq. Telephone: (312) 902-5200 Facsimile: (312) 902-1061
Caerus Partners LLC	℅Promethean Asset Management L.L.C. 55 Fifth Avenue 17th Floor New York, New York 10003 Attention: James F. O’Brien Telephone: (212) 702-5200 Facsimile: (212) 758-9334 Residence: Delaware	Katten Muchin Rosenman LLP 525 W. Monroe Street Chicago, Illinois 60661-3693 Attention: Mark D. Wood, Esq. Telephone: (312) 902-5200 Facsimile: (312) 902-1061
AG Offshore Convertibles, Ltd.	c/o Angelo, Gordon & Co. 245 Park Avenue New York, New York 10167 Attention:  Gary I. Wolf Telephone: (212) 692-2058 Facsimile:   ###-###-#### Residence:  Cayman Islands	Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas New York, New York 10019-6064 Attention:  Douglas A. Cifu, Esq. Telephone: (212) 373-3000 Facsimile:   (212)   ###-###-####

 

 

 

Buyer's Name	Buyer Address and Facsimile Number	Investor's Legal Representative's Address and Facsimile Number
Leonardo, L.P.	c/o Angelo, Gordon & Co. 245 Park Avenue New York, New York 10167 Attention:  Gary I. Wolf Telephone: (212) 692-2058 Facsimile:   ###-###-#### Residence:  Cayman Islands	Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas New York, New York 10019-6064 Attention:  Douglas A. Cifu, Esq. Telephone: (212) 373-3000 Facsimile:   (212)   ###-###-####

 

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