May 3rd 2008

By Nathan Rushton
The Eureka Reporter
May 3, 2008

There were no surprise deals or breakthroughs in the Pacific Lumber Co. bankruptcy proceedings Friday that wound down uneventfully with the end of testimony in support of the surviving reorganization plans.

It was the shortest day of the week-long hearings in Corpus Christi, Texas, which often ran late into the evenings to hear expert testimony as Judge Richard Schmidt stayed determined to resolve the 15-month bankruptcy case as soon as possible.

Schmidt closed the admission period for evidence in preparation for the closing arguments scheduled for a hearing on May 15 after another lengthy break.

Concerns linger over PALCO and Scotia Pacific Co.'s ability to stay afloat financially while the court moves toward finalizing a plan, that even if approved, could be many months away from being implemented.

In the testimony of Gary Clark, the chief financial officer for PALCO on Thursday, Clark testified that the bankrupt companies are rapidly running out of available operating cash, which threatens to halt mill and other operations by July.

Attorneys have repeatedly raised the possibility that such an outcome could force the current Chapter 11 bankruptcy reorganization into a Chapter 7 bankruptcy liquidation.

"Delays will only make that worse," said John Fiero for the Official Committee of the Unsecured Creditors.

Going into the two-week break, Schmidt asked that the parties focus their attention on the one issue all the parties have agreed is the central issue.

That issue is the value of SCOPAC's 210,000 acres of timberlands, which is held as collateral by the SCOPAC's largest creditor, the Timber Noteholders that are owed more than $700 million in loans.

Because he said there are some many factual issues regarding valuation, Schmidt asked that each plan proponent prepare their comments on those aspects of their expert testimony and why they are right, as well as relate what the other experts said and why they are wrong.

While there are range of valuations given for SCOPAC's lands -- from $430 million to $940 million -- Schmidt indicated that there were essentially only two viable plans competing for the court's approval.

The Mendocino Redwood Co. and Marathon Structured Finance Fund plan, which offers $530 million cash for the timberlands and seeks to consolidate the debtor companies into a single entity to continue timber and milling operations.

That plan has received the support of PALCO and MAXXAM as part of a deal reached Friday in trade for $2.5 million in cash to MAXXAM, a log purchase agreement and protection from litigation for PALCO and MAXXAM executives.

The other viable plan is from the Noteholders, which aims to sell the timberlands on the open market.

In response to Schmidt's comments that the best plan would address both the mill and the forest assets, Timber Noteholder attorney William Greendyke told the court his clients were looking into interim financing to continue the operations while the sale of the lands were completed.

Greendyke said the Noteholders were also looking at an alternative course that if their plan is confirmed, would resolve the concerns about the mill, although no specifics were offered after he notified the court previously that Arcata-based Sierra Pacific Industries was also a serious partner to run the mill and was working with one of the purchasers.

Waiting in the wings to potentially purchase the property under the Noteholders' plan are Beal Bank, which offered $603 million, as well as the Nature Conservancy and the Harvard Endowment Fund.

Still more prospective bidders for SCOPAC's timberlands continued to make themselves known in court Friday.

A man who identified himself via telephone conference call as "Neal Wolf" told the judge his client was working hard to finalize a written proposal for $565 to $590 million for the purchase of the lands and a 20-year log supply agreement for the Scotia mill.

"We are for real," Wolf said. "We are genuinely interested in making a bid."

Wolf said his client -- apparently the Atlanta-based TimberSTAR -- is a partnership entity that owns more than a million acres of timberlands in Maine, Texas, Louisiana and elsewhere worth more than $1 billion.

But a comment that his client would be looking at securing $300 million in financing to broker the deal brought laughter from many of the attorneys in the courtroom.

Schmidt told Wolf that if the Noteholders' plan is approved and the property went on the market for auction, Wolf's client could make a bid.

"If the MRC plan is confirmed, you are pretty much out of luck," Schmidt said.

Before concluding court Friday, Schmidt told the lawyers they should all be commended for what they have done on behalf of their clients.

"It has been very enjoyable on the quality of the lawyering," Schmidt said.