April 9th 2008

By John Driscoll
The Times-Standard
April 9, 2008

Tempers flared the first day of bankruptcy hearings on how the Pacific Lumber Co. will be reorganized, revealing what appeared to be irreconcilable differences even at the looming end of the case.

Attorneys for Palco and its creditors on Tuesday staked their claims to the company's assets, with Judge Richard Schmidt pointing out potential hurdles for each of three remaining restructuring plans. The parties made their opening cases in U.S. Bankruptcy Court in Corpus Christi, Texas that each of their plans was the best for the company, the community or the creditors owed hundreds of millions of dollars.

Attorney John Fiero with the Unsecured Creditors Committee said the community has rallied for change during the bankruptcy, forging alliances among interests who once fought each other in the timber wars. The only thing that might rekindle those battles is allowing Palco parent company Maxxam and its CEO Charles Hurwitz to retain an interest in the timber company, he said.

"It was the opportunity to rid the county of its most notorious corporate citizen that brought this alliance together," Fiero said.

Unsecured creditors have overwhelmingly supported a plan by Palco creditor Marathon Structured Finance Fund and Mendocino Redwood Co. that appears to provide the most certain outcome for the Scotia mill's operation and the town's future. Gov. Arnold Schwarzenegger, federal resource agencies and some lawmakers have also offered support.

Late last night, a bid came in that may provide some weight to another plan pitched by the bond holders who hold a $714 million claim against Palco subsidiary Scotia Pacific's 210,000 acres. Attorney Bill Greendyke with Bank of New York, representing the noteholders, said a company called Scotia Redwood Foundation has made a hard offer of $603 million, substantially more than what Marathon is willing to put up for the land. He said that Marathon and Mendocino Redwood are trying to force a plan on the bond holders.

"They don't have standing to do what they want to do," Greendyke said.

It later became clear that Scotia Redwood Foundation is a company formed by billionaire investor Andy Beal, who owns more of the timber bonds than anyone else. Scotia Pacific attorney Richard Doren said the Bank of New York suddenly increased its estimated value of the timberlands only after Mendocino Redwood entered the case -- and then had one of its own noteholders come up with a perfect bid to match.

"It is the perfect Goldilocks evaluation," Doren said.

He admitted that Palco's initial proposal to raise money by carving out 22,000 acres to build an exclusive ranch subdivision caused a furor, but said the concept has since changed. It is now proposing to build on 500 of the 22,000 acres, with the open land available for logging to the benefit of the homeowners. That could raised $970 million in five years, Doren said.

Marathon attorney David Neier said that Palco and the noteholders appear to be locked in a pitched battle, with one side pushing a highly speculative residential development and the other looking to glorify a liquidation scheme. Neier said that Marathon has the most support, is contributing the most new money to the reorganization, and is ready to take the reins, pay creditors and operate the company in an environmentally sustainable way.

"We're ready to close," Neier said, which would give employees and vendors a degree of certainty unattainable through the other plans.

Schmidt told Neier that Marathon will have to prove that its low value of the timberlands is correct, and Neier agreed that if that value is larger, Marathon would have to meet it.

Two other plans, one by Palco to reorganize both Palco and Scotia Pacific, and another by Palco only to restructure Palco, have been deemed unconfirmable.

The proceedings continue today, with expert testimony to be presented. The hearings are expected to last through the end of the week.