April 8th 2008

By Nathan Rushton
The Eureka Reporter
April 8, 2008

Attorneys in the Pacific Lumber Co. bankruptcy proceeding offered their opening statements to the Texas judge Tuesday to begin the confirmation phase of the 15-month-long bankruptcy proceeding.

The hearings scheduled every day for the rest of this week, which a re anticipated to spill over into another week, are expected to determine which, if any of the five submitted plans for reorganization will get the nod from the court.

What all of the attorneys in the matter agree is key to resolving the case is determining the most accurate value of the 210,000 acres of Scotia Pacific Co.'s forested lands.

Judge Richard Schmidt will have to make a call as to whether that values is closer to the $400 million low-end estimate from Mendocino Redwood Company or the approximately $1 billion estimated value on the other end by PALCO.

The hearing Tuesday focused on testimony describing, supporting or discrediting the plans for reorganization for PALCO and the other MAXXAM subsidiaries, which filed for Chapter 11 bankruptcy on Jan. 18 last year.

Attorneys for MRC and PALCO creditor Marathon Structured Finance Fund were the first to describe their plan before the court.

"We have the support of everyone in California that regulates this business," said David Neier, an attorney for Marathon.

MRC/Marathon plan has garnered the support from a bevy of local, state and federal elected representatives, state agencies, environmental groups, nearly all of the unsecured creditors and even Gov. Arnold Schwarzenegger.

In arguing for why its plan should be chosen over the others, Neier said the other plans were stuck between two extreme positions that couldn't be approved by the court.

On one side is what he described as PALCO's unrealistic and speculative cash generating scheme to turn some of its property into $5 million kingdoms.

And on the other, Neier said is a competing plan by Scotia Pacific Co.'s largest creditor that is owed nearly $800 million and whose plan calls for the liquidation of the timberlands with no regard to Scotia and its mill.

Testimony was presented by financial consultant Matthew Breckenridge for Marathon who laid out its plan that would leave MRC with 85 percent and Marathon with the remaining 15 percent control of the company if their plan was confirmed.

Also taking the stand Tuesday was forestry consultant Richard Lamont, who was hired by MRC to appraise the value of the redwood and Douglas fir timber.

Under questions from PALCO and other attorneys, Lamont defended his method for calculating the fair market value of SCOPAC's lands he put at $430 million.

Attorneys disputed his method of determining the costs of timber, the anticipated harvest levels, tree growth calculations, political and regulatory pressures and what type of trees would be selected for harvest.

Lamont told the court that PALCO's plan for the trophy homes was infeasible due to the terrain and other restrictions.

Another concern raised in court was PALCO's parent company MAXXAM's recent announcement that it lost nearly $50 million last year, as well as missed a key federal financial reporting deadlines.

After MAXXAM backed out of a $10 million log purchase agreement in February, Neier said he believes MAXXAM is out of the picture and is in no position to help out the debtors.

"They pretty much left the scene," Neier told the court.

Shelby Jordan, a lawyer for PALCO, disputed Neier's claim and said MAXXAM was still involved and has recently made a pledge to help secure $150 million in exit financing for PALCO and the other debtors.

After signaling last week that former California Gov. Pete Wilson would head up its reorganization effort, attorney's for the Timber Noteholders apologized to the court that Wilson couldn't be present in the courtroom because of prior commitments.

Raising the issue of competing governors — with Schwarzenegger backing MRC's plan and Wilson fronting the Timber Noteholders' plan — Jordan warned the court it shouldn't be influenced by the political statements.

In an effort to get the court to help facilitate a deal that lawyers in the case have said could come in the final hours, Jordan asked judge Schmidt to give an indication from the bench for what the court's belief of what the value is for the lands.

"We believe this case will not compromise ever without an indication of value," Jordan said.

In concluding for the more eight hours of testimony, Schmidt did tell the parties that they should find a way to come to some agreement over the differences of appraisals and hinted at where the court was likely to land in upcoming days.

"It doesn't look like there is a lot of equity in this case," Schmidt said.