May 3rd 2008

By John Driscoll
The Times-Standard
May 3, 2008

The stage is set for the final volleys in the Pacific Lumber Co.'s bankruptcy case, and the judge has signaled that the key issue remains how much the company's vast timberlands are worth.

U.S. Bankruptcy Judge Richard Schmidt scheduled a final date of May 15 to hear closing arguments from the parties in the complex case. Schmidt has signaled that it boils down to a fight between two plans: one to auction off the 210,000 acres of timberlands that secure $714 million in debt, and the other a plan to reorganize the Scotia mill and tie it to the timberlands.

The timber noteholders have pitched a plan to auction the land, which has garnered interest from the largest bondholder, Beal Bank, owned by tycoon Andy Beal, which is suggesting a bid of $603 million. It has also attracted attention from Harvard University's endowment fund and Sierra Pacific Industries, and a so-far anonymous potential bidder represented by an attorney Friday that would offer $565 to $590 million for the land. Schmidt said they could have their chance if the auction plan is confirmed, but could not be party to the current proceeding.

Palco creditor Marathon Structured Finance Fund has joined with Mendocino Redwood Co. to submit a plan recently revised to pay $530 million in cash for the timberlands, and to run and improve the Scotia sawmill. It also reorganizes the town of Scotia into a separate entity. That plan has garnered the support of most creditors, state and federal agencies and Palco and its parent company Maxxam Inc.

Schmidt acknowledged that the case needs to be resolved quickly, since both Palco and its timber-holding subsidiary Scotia Pacific are fast running out of cash. All but the timber noteholders on Friday argued that the evidence phase of the case should be closed to prevent delays.

While waiting for a witness to arrive, Schmidt questioned the parties on how the case might proceed. If Mendocino and Marathon are paying cash for the noteholders claims, he asked, isn't the remaining issue how much the timberlands are worth?

Noteholders' attorney Bill Greendyke argued that the Marathon plan would deprive the bond holders of their right to credit bid, or bid the value of what they're owed at auction. But Schmidt said that's irrelevant if Marathon and Mendocino are paying the entirety of the claim.

"If it's one dollar short, they lose," Schmidt said of the Mendocino Redwood plan.

On the other hand, Greendyke said his client had heard the judge's concern over Palco's rapidly evaporating cash, and said they want to resolve the concerns by coming up with financing to float the company through an auction process. That could take six months or more.

But that drew a rebuke from Palco attorney Shelby Jordan, who said it's ridiculous to allow the noteholders to continue submitting evidence because they want to "think about" a potential financing deal.

"They've been thinking about that since October," Jordan said.

Schmidt must now decide which plan to confirm. While it is unclear how or when Schmidt may rule, Palco's precarious financial position does not appear to be lost on him. After more than 15 months in court, he seems resolved to wrap up the case soon.