April 1st 2008

By John Driscoll
The Times-Standard
April 1, 2008

The Pacific Lumber Co. and its creditors will jockey for position today as its bankruptcy enters what may be its final stage.

Unsecured creditors voted enthusiastically for a reorganization plan filed by key debtor Marathon Structured Finance Fund and the Mendocino Redwood Co. That's crucial for the court to consider whether the plan could be imposed on creditors for Palco subsidiary Scotia Pacific, whose timberlands secure the lion's share of the companies' debt.

Those creditors did not view Palco's three plans favorably. Based on that result, the timber noteholders asked Judge Richard Schmidt to scrap two of those plans. A plan to reorganize Palco alone didn't get votes from any unsecured creditors, the noteholders wrote in a motion, and should be tossed out. Another to restructure both Palco and Scotia Pacific can't be confirmed by the court, the noteholders contend, and can't be imposed on other creditors.

Mendocino and Marathon joined in that motion.

Schmidt ordered an expedited hearing on the matter for today.

Palco filed for bankruptcy in January 2007 after failing to make a payment on its large debt.

Mendocino Redwood's plan looks to blend Palco and Scotia Pacific's operations, reduce the rate of logging, seek Forest Stewardship Council certification and allow Scotia residents to buy their homes. It expects that 250 employees will be needed to run the new company. Experts have questioned whether Mendocino and Marathon bring enough money to the table to satisfy the noteholders' secured debt of $714 million. Testimony on the value of the 210,000 acres of timberland is likely to be vital.

Mendocino and the noteholders' differ significantly on that value. Mendocino and Marathon are offering $500 million in cash and notes. The noteholders, represented by the Bank of New York, believe the land to be worth $600 million or more, and would hold an auction for the whole property.

That plan doesn't apply to Palco and the Scotia sawmill or the town, although The Nature Conservancy, the Save-the-Redwoods League, Atlas Holdings and local environmental groups called the Community Forestry Team have said they would be interested in bidding to run a sustainable timber and lumber operation.

Palco estimated the land to be worth up to $1.4 billion, but that depended on the sale of 22,000 acres for an exclusive resort-type subdivision, and thousands of acres protected for endangered marbled murrelets.

Schmidt has scheduled a hearing to confirm bankruptcy plans for April 8 in his Corpus Christi, Texas court.