June 29th 2008

By John Driscoll
The Times-Standard
June 29, 2008

The U.S. Bankruptcy Court judge presiding over the Pacific Lumber Co. case will consider significant remaining issues beginning Monday, issues that may profoundly affect a reorganization plan for the timber giant proposed by Mendocino Redwood Co.

Creditors owed $714 million secured by Palco's timberlands have submitted a barrage of objections to the court's pending order to confirm the Mendocino Redwood plan and scuttle their own. They are seeking a stay on the closure of the case until an appeal can be heard in another court. The noteholders are also looking to secure a claim on a purported devaluation of the timberlands, which the judge has valued at $510 million.

The bond holders have filed a literal A to Z list of objections to Judge Richard Schmidt's decision earlier this month. They claim his intention to allow Mendocino Redwood and Palco creditor Marathon Structured Finance Fund to pay $530 million for the 210,000 acres is not fair, improperly transfers assets without liens, and doesn't account for the potential value of Palco's suit against the state of California.

The Mendocino plan would merge the timberlands and sawmilling operations, allow Palco to take advantage of Mendocino's distribution network, while Marathon restructures the timber town. Mendocino Redwoods is owned by the Fisher family, of Gap chain fame. It would also eliminate hundreds of millions in debt, commits to reducing the rate of harvest on the Palco lands, and take on Palco's Habitat Conservation Plan.

Mendocino Redwood and Marathon told Schmidt that modifications the judge required for their plan to be confirmed could break the deal. Allowing the noteholders a "super-priority" claim for the supposed devaluation of property on top of the $530 million, they said, would be a deal killer.

Schmidt wrote in his earlier opinion that the noteholders' plan wasn't confirmable, and was rife with conflicts of interest from the largest noteholder, Beal Bank, which had bid $603 million for the timberlands.

The hearing on the super-priority claim is set for Monday, while the stay issue is set for July 1-3.