Deed of Trust

EXHIBit 10.5


RECORDING REQUESTED BY:


WHEN RECORDED MAIL TO:


LORD BISSELL & BROOK LLP 300 S. Grand Ave., 8th Floor Los Angeles, CA 90071-3147 Attn: Alfred M. Clark, III, Esq.


(Space Above For Recorder's Use)


DEED OF TRUST,
SECURITY AGREEMENT, ASSIGNMENT OF PRODUCTION AND FIXTURE FILING


Dated: September 30, 2004


CUBIC ENERGY, INC., a Texas corporation, , as Trustor
(Borrower)


to
Alex Montano, as Trustee
(Trustee)


for the benefit of


C. K. Cooper & Company, on behalf of Investors of
7% Senior Secured Convertible Debentures,
as Beneficiary (Lender)


THIS SECURITY INSTRUMENT IS, AMONG OTHER THINGS, A FINANCING STATEMENT UNDER THE UNIFORM COMMERCIAL CODE COVERING MINERALS AND THE LIKE (INCLUDING OIL AND GAS) ACCOUNTS RESULTING FROM THE SALE OF MINERALS AND THE LIKE (INCLUDING OIL AND GAS), INVENTORY, GOODS, EQUIPMENT, GENERAL INTANGIBLES AND GOODS WHICH ARE OR ARE TO BECOME FIXTURES ON THE REAL PROPERTY HEREIN DESCRIBED. THIS SECURITY INSTRUMENT IS TO BE RECORDED IN THE REAL ESTATE RECORDS OF THE COUNTY CLERK OR RECORDER OF EACH COUNTY IN EACH STATE IN WHICH IS SITUATED ANY OF THE COLLATERAL COVERED HEREBY. THE REAL PROPERTY SUBJECT HERETO IS DESCRIBED IN EXHIBIT A ATTACHED HERETO. THIS SECURITY INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS AND COVERS PROCEEDS OF COLLATERAL.


A POWER OF SALE HAS BEEN GRANTED IN THIS SECURITY INSTRUMENT. A POWER OF SALE MAY ALLOW THE LENDER OR THE TRUSTEE TO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY BORROWER UNDER THIS SECURITY INSTRUMENT.


Exhibit 10.5 - Page 1


TABLE OF CONTENTS


Page
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ARTICLE 1 - GRANTS OF SECURITY.................................................7
SECTION 1.1 PROPERTY MORTGAGED...........................................7
SECTION 1.2 ADDITIONAL PROPERTY MORTGAGED AND CONVEYED...................9
SECTION 1.3 ASSIGNMENT OF PRODUCTION....................................11
SECTION 1.3 SECURITY AGREEMENT..........................................13
SECTION 1.4 SECURITY AGREEMENT..........................................13
SECTION 1.5 FIXTURE FILING..............................................13 ARTICLE 2 - DEBT AND OBLIGATIONS SECURED......................................15
SECTION 2.1 DEBT........................................................15
SECTION 2.2 OTHER OBLIGATIONS...........................................15
SECTION 2.3 DEBT AND OTHER OBLIGATIONS..................................15
SECTION 2.4 PAYMENTS....................................................15 ARTICLE 3 - BORROWER COVENANTS................................................16
SECTION 3.1 PAYMENT OF DEBT.............................................16
SECTION 3.2 INCORPORATION BY REFERENCE..................................16
SECTION 3.3 TITLE TO PROPERTY...........................................16
SECTION 3.5 INSURANCE...................................................20
SECTION 3.6 CONDEMNATION................................................21
SECTION 3.6 MAINTENANCE OF PROPERTY.....................................21
SECTION 3.7 WASTE.......................................................21
SECTION 3.8 COMPLIANCE WITH LAWS........................................22
SECTION 3.11 BOOKS AND RECORDS...........................................22
SECTION 3.9 BOOKS AND RECORDS...........................................22
SECTION 3.12 PAYMENT FOR LABOR AND MATERIALS.............................23
SECTION 3.10 PAYMENT FOR LABOR AND MATERIALS.............................23
SECTION 3.13 PERFORMANCE OF OTHER AGREEMENTS.............................23
SECTION 3.11 PERFORMANCE OF OTHER AGREEMENTS.............................23
SECTION 3.14 CHANGE OF NAME, IDENTITY OR STRUCTURE.......................23
SECTION 3.12 CHANGE OF NAME, IDENTITY OR STRUCTURE.......................23
SECTION 3.15 EXISTENCE...................................................23
SECTION 3.13 EXISTENCE...................................................23 ARTICLE 4 - SPECIAL COVENANTS.................................................23
SECTION 4.1 DEFENSE OF TITLE............................................23
SECTION 4.2 ERISA.......................................................24
SECTION 4.3 LEASE PROVISION.............................................24 ARTICLE 5 - REPRESENTATIONS AND WARRANTIES....................................25
SECTION 5.1 AUTHORITY...................................................25
SECTION 5.1 AUTHORITY...................................................25
SECTION 5.2 LEGAL STATUS AND AUTHORITY..................................25
SECTION 5.2 LEGAL STATUS AND AUTHORITY..................................25
SECTION 5.3 VALIDITY OF DOCUMENTS.......................................26
SECTION 5.3 VALIDITY OF DOCUMENTS.......................................26
SECTION 5.4 LITIGATION..................................................26
SECTION 5.4 LITIGATION..................................................26
SECTION 5.5 NO FOREIGN PERSON...........................................26
SECTION 5.5 NO FOREIGN PERSON...........................................26
SECTION 5.6 ERISA COMPLIANCE............................................26
SECTION 5.6 ERISA COMPLIANCE............................................26
SECTION 5.7 FINANCIAL CONDITION.........................................27


Exhibit 10.5 - Page 2


SECTION 5.7 FINANCIAL CONDITION.........................................27
SECTION 5.8 BUSINESS PURPOSES...........................................27
SECTION 5.8 BUSINESS PURPOSES...........................................27
SECTION 5.9 TAXES.......................................................27
SECTION 5.9 TAXES.......................................................27
SECTION 5.10 MAILING ADDRESS.............................................27
SECTION 5.10 MAILING ADDRESS.............................................27
SECTION 5.11 NO CHANGE IN FACTS OR CIRCUMSTANCES.........................27
SECTION 5.11 NO CHANGE IN FACTS OR CIRCUMSTANCES.........................27
SECTION 5.12 DISCLOSURE..................................................27
SECTION 5.12 DISCLOSURE..................................................27
SECTION 5.13 ILLEGAL ACTIVITY............................................27
SECTION 5.13 ILLEGAL ACTIVITY............................................27 ARTICLE 6 - DEBTOR/CREDITOR RELATIONSHIP......................................27
SECTION 6.1 RELATIONSHIP OF BORROWER AND LENDER.........................27
SECTION 6.2 SERVICING OF THE LOAN.......................................27 ARTICLE 7 - FURTHER ASSURANCES................................................28
SECTION 7.1 RECORDING OF SECURITY INSTRUMENT, ETC.......................28
SECTION 7.2 FURTHER ACTS, ETC...........................................28
SECTION 7.3 CHANGES IN TAX, DEBT CREDIT AND DOCUMENTARY STAMP LAWS......28
SECTION 7.4 ESTOPPEL CERTIFICATES.......................................29
SECTION 7.6 SPLITTING OF SECURITY INSTRUMENT............................29
SECTION 7.5 SPLITTING OF SECURITY INSTRUMENT............................29
SECTION 7.7 REPLACEMENT DOCUMENTS.......................................29
SECTION 7.8 AMENDED FINANCING STATEMENTS................................29
SECTION 7.7 AMENDED FINANCING STATEMENTS................................29 ARTICLE 8 - DUE ON SALE/ENCUMBRANCE...........................................30
SECTION 8.1 NO SALE/ENCUMBRANCE.........................................30
SECTION 8.2 SALE/ENCUMBRANCE DEFINED....................................30
SECTION 8.3 LENDER'S RIGHTS.............................................30 ARTICLE 9 - PREPAYMENT........................................................31 ARTICLE 10 - DEFAULT..........................................................31
SECTION 10.1 EVENTS OF DEFAULT...........................................31 ARTICLE 11 - RIGHTS AND REMEDIES..............................................32
SECTION 11.1 REMEDIES....................................................32
SECTION 11.2 APPLICATION OF PROCEEDS.....................................35
SECTION 11.3 RIGHT TO CURE DEFAULTS......................................35
SECTION 11.4 ACTIONS AND PROCEEDINGS.....................................35
SECTION 11.5 RECOVERY OF SUMS REQUIRED TO BE PAID........................35
SECTION 11.6 EXAMINATION OF BOOKS AND RECORDS............................35
SECTION 11.7 OTHER RIGHTS, ETC...........................................35
SECTION 11.8 RIGHT TO RELEASE ANY PORTION OF THE PROPERTY................36
SECTION 11.9 VIOLATION OF LAWS...........................................36
SECTION 11.10 RIGHT OF ENTRY..............................................36 ARTICLE 12 - ENVIRONMENTAL HAZARDS............................................36
SECTION 12.1 ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES................37
SECTION 12.2 ENVIRONMENTAL COVENANTS.....................................38
SECTION 12.3 LENDER'S RIGHTS.............................................39 ARTICLE 13 - INDEMNIFICATION..................................................39
SECTION 13.1 GENERAL INDEMNIFICATION.....................................39 ARTICLE 14 - WAIVERS..........................................................39
SECTION 14.1 WAIVER OF COUNTERCLAIM......................................39
SECTION 14.2 MARSHALING AND OTHER MATTERS................................39
SECTION 14.3 WAIVER OF NOTICE............................................40
SECTION 14.4 WAIVER OF STATUTE OF LIMITATIONS............................40


Exhibit 10.5 - Page 3


SECTION 14.5 SOLE DISCRETION OF LENDER...................................40
SECTION 14.6 SURVIVAL....................................................40
SECTION 14.7 WAIVER OF TRIAL BY JURY.....................................40 ARTICLE 15 - INTENTIONALLY OMITTED............................................40 ARTICLE 16 - NOTICES..........................................................41
SECTION 16.1 NOTICES.....................................................41 ARTICLE 17 - APPLICABLE LAW...................................................41
SECTION 17.1 CHOICE OF LAW...............................................41
SECTION 17.2 USURY LAWS..................................................41
SECTION 17.3 PROVISIONS SUBJECT TO APPLICABLE LAW........................42
SECTION 17.4 INAPPLICABLE PROVISION......................................42 ARTICLE 18 - SECONDARY MARKET.................................................42
SECTION 18.1 DISSEMINATION OF INFORMATION................................42 ARTICLE 19 - COSTS............................................................43
SECTION 19.1 PERFORMANCE AT BORROWER'S EXPENSE...........................43
SECTION 19.2 ATTORNEYS' FEES FOR ENFORCEMENT.............................43 ARTICLE 20 - DEFINITIONS......................................................43
SECTION 20.1 GENERAL DEFINITIONS.........................................43
SECTION 20.2 HEADINGS, ETC...............................................43 ARTICLE 21 - MISCELLANEOUS PROVISIONS.........................................44
SECTION 21.1 NO ORAL CHANGE..............................................44
SECTION 21.1 LIABILITY...................................................44
SECTION 21.3 DUPLICATE ORIGINALS; COUNTERPARTS...........................44
SECTION 21.4 NUMBER AND GENDER...........................................44
SECTION 21.5 SUBROGATION.................................................44
SECTION 21.6 ENTIRE AGREEMENT............................................44 ARTICLE 22 - TRUSTEE PROVISIONS...............................................45
SECTION 22.1 THE TRUSTEE.................................................45 ARTICLE 23 - LOCAL LAW PROVISIONS.............................................46


EXHIBITS -


Exhibit A - Description of Land
Exhibit B - Local Law Provisions


DEFINITIONS


The terms set forth below are defined in the following Sections of this Security Instrument:


Accounts: Subsection 1.1(h)
ADA: Subsection 3.10(a);
Applicable Law: Subsection 3.10(a);
Attorneys' Fees/Counsel Fees: Section 20.1;
Borrower: Preamble;
Business Day: Section 16.1;
Casualty Consultant: Subsection 4.4(b)(iii);
Casualty Retainage: Subsection 4.4(b)(iv);
Collateral: Section 1.4;
Debt: Section 2.1;
Default Rate: Section 11.3;
Demised Premises: Section 4.3(b)
Environmental Indemnity: Subsection 10.1(c);


Exhibit 10.5 - Page 4


Environmental Law: Section 12.1;
Environmental Liens: Section 12.2;
Environmental Report: Section 12.1;
ERISA: Subsection 4.2(a);
Event: Section 19.1;
Event of Default: Section 10.1;
Hazardous Substances: Section 12.1;
Hydrocarbons: Subsection 1.1(c);
Impositions: Section 4.3(b)
Indemnified Parties: Section 13.1;
Indemnitor: Subsection 10.1(c);
Insurance Premiums: Subsection 3.3(b);
Investor: Section 18.1;
Lands: Subsection 1.1(f);
Lease: Section 4.3
Lender: Preamble;
Loan Application: Section 5.15;
Losses: Section 13.1;
Net Proceeds: Subsection 4.4(b);
Net Proceeds Deficiency: Subsection 4.4(b)(vi);
Notes: Recitals;
Obligations: Section 2.3;
Other Charges: Subsection 3.4(a);
Other Obligations: Section 2.2;
Other Minerals: Subsection 1.1(d);
Other Personal Property: Subsection 1.2(c)
Other Security Documents: Section 3.2;
Participations: 18.1;
Permitted Exceptions: Section 5.1;
Person: Section 20.1;
Personal Property: Subsection 1.1(e);
Policies/Policy: Subsection 3.3(b);
Property: Section 1.1;
Purchase Agreement: Recitals
Property Records: Subsection 1.2(g);
Qualified Insurer: Subsection 3.3(b);
Rating Agency: Subsection 3.3(b);
Release: Section 12.1;
Remediation: Section 12.1;
Rents: Subsection 1.1(f);
Restoration: Subsection 3.3(d);
Securities: Section 18.1;
Securitization: Section 18.1;
Security Instrument: Preamble;
Servicer: Section 6.2;
Subject Contracts: Subsection 1.1(g);
Subject Interests: Subsection 1.1(a);
Subject Interest Personal Property: Subsection 1.1(f);
Surface Rights: Subsection 1.1(e)


Exhibit 10.5 - Page 5


Taxes: Subsection 3.4(a);
Trustee: Preamble; and
Uniform Commercial Code: Subsection 1.1(e).


Exhibit 10.5 - Page 6


THIS DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF PRODUCTION AND FIXTURE FILING (the "Security Instrument") is made as of the 30th day of September, 2004, by CUBIC ENERGY, INC., a Texas corporation, having its principal place of business at 9870 Plano Road, Dallas, Texas 75238, as trustor ("Borrower"), to Alex Montano, having an address at 18300 Von Karman Avenue, Suite 440, Irvina, California 92612, as trustee ("Trustee"), for the benefit of C. K. Cooper & Company, on behalf of the investors of 7% Senior Secured Convertible Debentures, having an address at 18300 Von Karman Avenue, Suite 440, Irvine, California 92612, as beneficiary (collectively "Lender").


RECITALS:


Borrower, by its Senior Secured Convertible Debentures of even date herewith issued by Borrower to Lender is indebted to Lender in the principal sum of $2,585,000 in lawful money of the United States of America. The Debentures, together with all extensions, renewals, modifications, consolidations, substitutions, replacements, restatements and increases thereof, all as more particularly described in that certain Securities Purchase Agreement by and among Borrower, as issuer, and Lender, as purchaser (the "Purchase Agreement") shall collectively be referred to as the "Notes"). Interest accrues on the Notes from the date thereof at the rates set forth in the Notes, principal and interest to be payable in accordance with the terms and conditions provided in the Notes. The references to Lender herein are in the singular for convenience only, and the rights and liens created by this instrument are for the ratable benefit of all holders of the Obligations, or any part thereof, all to the extent contemplated in the Purchase Agreement.


Borrower desires to secure the payment of the Debt (as defined in Article 2) and the performance of all of its obligations under the Notes and the Other Obligations (as defined in Article 2).


Article 1 - GRANTS OF SECURITY


Section 1.1 Property Mortgaged. Borrower does hereby irrevocably (i) mortgage, grant, bargain, sell, pledge, assign, warrant, transfer and convey to Trustee and to its successors and assigns in trust with power of sale in accordance with the terms and conditions hereof, for the use and benefit of Lender, and (ii) grant a security interest to Lender and to its successors and assigns in, the following property, rights, interests and estates now owned, or hereafter acquired by Borrower (collectively, the "Property"):


(a) All those certain oil, gas and mineral leases, rights of use, easements, servitudes and the estates created thereby, royalty interests, mineral interests, mineral properties, overriding royalty interests, production payments, net profits interests, fee interests, carried interests, reversionary interests and all other rights described or referred to in Exhibit A attached hereto and made a part hereof (or described in any of the instruments described or referred to in Exhibit A), whether such rights, titles, interests and estates are correctly described therein or not, or a description be inadvertently deleted form Exhibit A and further without regard to depth or other limitations that may be set forth in Exhibit A (all of which rights, titles, interests and estates described in this Paragraph are hereinafter collectively referred to as the "Subject Interests"). The term "oil, gas and mineral leases" as used in this Security Instrument and in Exhibit A includes, in addition to oil, gas and mineral leases, oil and gas leases, oil, gas and sulphur leases, other mineral leases, co-lessor's agreements and extensions, amendments, ratifications and subleases of all of the foregoing, all as may be appropriate;


(b) All present and future rights, titles, interests and estates in and to present and future drilling, spacing, proration or production units, as created by the terms of any unitization, communitization and pooling agreements,


Exhibit 10.5 - Page 7


and all properties, property rights and estates created thereby which include, belong or appertain to the Subject Interests, including, without limitation, all such units formed or re-formed voluntarily or under or pursuant to any Law relating to any of the Subject Interests (all of which rights, titles, interests and estates described in this subsection (b) are hereinafter included within the term "Subject Interests");


(c) All present and future oil, gas, coal seam gas, casinghead gas, drip gasoline, natural gasoline, distillate, all other liquid or gaseous hydrocarbons produced or to be produced in conjunction therewith, all products, by-products and all other substances derived therefrom or the processing thereof, and all other similar minerals now or hereafter accruing to, attributable to or produced from the Subject Interests or the Subject Contracts (hereinafter defined) or to which Borrower now or hereafter may be entitled as a result or by virtue of Borrower's ownership of the Subject Interests or rights or interests under the Subject Contracts (collectively "Hydrocarbons") ;


(d) All present and future sulphur, lignite, coal, uranium, thorium, iron, geothermal steam, water, carbon dioxide, helium and all other minerals, ores or substances of value (whether similar to the foregoing or not), and the products and proceeds therefrom, including, without limitation, all gas resulting from the in-situ combustion of coal or lignite now or hereafter accruing to, attributable to or produced from the Subject Interests or the Subject Contracts or to which Borrower now or hereafter may be entitled as a result of or by virtue of Borrower's ownership of the Subject Interests or rights or interests under the Subject Contracts (collectively, "Other Minerals");


(e) All present and future rights, titles and interest in and to all surface fees, fee estates, easements, permits, licenses, rights-of-way, rights of use, surface leases, servitudes, plant sites, compressor sites, treating facility sites, and all property and fixtures located thereon which relate to or are used or held for use in connection with the Subject Interests, including without limitation those described or referred to on Exhibit A, whether such surface fees, fee estates, easements, permits, licenses, rights-of-way, rights of use, surface leases, compressor sites or treating facility sites are fee simple estates, leasehold estates or otherwise (all of such rights, titles, interests and estates referred to or described in this subsection (e) are hereinafter collectively referred to as the "Surface Rights");


(f) All present and future oil and/or gas wells, disposal and injection wells, rigs, improvements, fixtures, machinery and other equipment, inventory and articles of personal property of any kind or character whatsoever, wherever located, which are appurtenant to, or used or held for use in connection with, the production, gathering or transporting of Hydrocarbons or Other Minerals, or now or hereafter located on any of the lands encumbered by any of the Subject Interests (the "Lands"), or used on or about the Lands in connection with the operations thereon with respect to the production of Hydrocarbons or Other Minerals, including, without limitation, connections and flow lines from wells to tanks, wells, pipelines, gathering lines, trunk lines, lateral lines, flow lines, compressor, dehydration and pumping equipment, pumping plants, gas plants, processing plants, treating facilities, pumps, dehydration units, separators, heater treaters, valves, gauges, meters, derricks, rig substructures, buildings, tanks, reservoirs, tubing, rods, liquid extractors, engines, boilers, tools, appliances, cables, wires, tubular goods, machinery, supplies, together with all present and future improvements or products of, accessions, attachments and other additions to, tools, parts and equipment used in connection with, and substitutes and replacements for, all or any part of the foregoing (all of the types of items of property and interests described in this subsection (f) are hereinafter collectively referred to as the "Subject Interest Personal Property");


Exhibit 10.5 - Page 8


(g) All present and future rights, titles, interests and estates (including, without limitation, all rights to receive payments) under or by virtue of all easements, permits, licenses, rights-of-way, rights of use, surface leases, underground storage leases agreements, certificates of public convenience and necessity, franchises, servitudes, division orders, production sales contracts, processing agreements, gathering agreements, transportation agreements, transfer orders and other contracts and agreements relating or pertaining to purchasing, selling, exchanging, exploring for, developing, operating, treating, processing, storing, marketing, gathering or transporting Hydrocarbons or Other Minerals or any other contract or agreement relating in any way to all or any part of the Property otherwise described herein, including, without limitation, farmout contracts, farm-in contracts, operating or joint operating agreements, trade letter agreements and all agreements creating rights-of-way for ingress and egress to and from the Subject Interests or the Surface Rights (all of such rights, titles, interests and estates referred to or described in this subsection (g) are hereinafter collectively referred to as the "Subject Contracts");


(h) All present and future accounts (including, but not limited to, all open accounts receivable and accounts receivable arising under or pursuant to any of the Subject Contracts), general intangibles, contract rights, chattel paper, documents, instruments, cash and noncash proceeds and other rights relating to, arising from, by virtue of, or from the voluntary or involuntary sale of other disposition of, or collections with respect to, or insurance proceeds payable with respect to, or proceeds payable by virtue of warranty or other claims against manufacturers of, or claims against any other person or entity with respect to, all or any part of the Property described in this subsection (h) or any of the preceding subsections (a) through (g) (all of which types and items of property and interests described in this subsection (h) are hereinafter collectively referred to as the "Accounts");


(i) All present and future tenements, hereditaments, appurtenances, profits and properties in anywise appertaining, belonging, affixed or incidental to, or used or useful in connection with, all or any part of the Subject Interests or the Surface Rights, including, without limitation, all reversions, remainders, carried interests, tolls, rents, revenues, issues, proceeds, deposits, tax refunds other than income tax refunds (and claims for tax refunds other than income tax refunds), easements, permits, licenses, servitudes, surface leases, rights-of-way and franchises (to the extent any of the foregoing are assignable or transferable), relating to all or any part of the Property;


(j) All of the following collateral, now owned or hereafter acquired, in connection with any and all of the Subject Interests: oil and gas equipment (including accessions), oil, gas, as-extracted collateral, casinghead gas, and other hydrocarbons; accounts, documents, instruments, contract rights and general intangibles relating to the sale thereof; together with all proceeds thereof; and


(k) All other interests of every kind and c ...