June 16th 2008

By Patrick Fitzgerald
Dow Jones Newswires
June 16, 2008

Pacific Lumber Co. and its new owners want the company's bondholders to give up more than $10 million in fees and expenses racked up by their lawyers in the company's bankruptcy case, the latest shot in a long-running dispute between the timber company and its investors.

The company's new owners - hedge fund Marathon Asset Management and lumber company Mendocino Redwood Co. - said in papers filed Friday in U.S. Bankruptcy Court in Corpus Christi, Texas, that Bank of New York, which represents the bondholders, must cough up the $5.5 million its been paid as reimbursement for its legal fees and expenses.

The bank, according Marathon and Mendocino, must also forgo some $5 million in unpaid legal fees and expenses.

The bondholders say that $20 million of their cash collateral - cash pledged as collateral securing the bonds - has been spent to pay advisers for Pacific Lumber subsidiary Scotia Pacific.

(This article also appears in Daily Bankruptcy Review, a publication from Dow Jones & Co.)

Marathon and Mendocino have been battling bondholders for months over control of Pacific Lumber's assets, including more than 200,000 acres of timberlands in Humboldt County, Calif.

Earlier this month, a bankruptcy judge ruled that the Marathon-Mendocino plan should be confirmed with some modifications. The plan called for bondholders to be paid $530 million in cash, well below the $900 million they were demanding.

In his ruling, Judge Richard Schmidt said that based on the value of the timberlands - the bondholders' collateral - Marathon and Mendocino only had to pay bondholders $510 million. The bondholders had fought to auction off the timberlands and say they will appeal.

But the bondholders say they are owed additional money, more than $300 million, because they say the value of their collateral dropped during the bankruptcy. That claim has put the Marathon-Mendocino plan in doubt.

Since the bondholders are undersecured - meaning their claim is more than the value of the timberlands - Pacific Lumber's new owners say, the bank must give up any cash Pacific Lumber paid to reimburse them for their legal fees. Under bankruptcy law, creditors whose claims are undersecured aren't entitled to receive reimbursement of their legal fees and expenses.

Schmidt scheduled a June 30 hearing on the claim, which would be paid on top of the $510 million they would receive under the Marathon-Mendocino plan.

Pacific Lumber, based in Humboldt County, Calif., filed for Chapter 11 bankruptcy protection in January 2007. The company, which has been logging in Northern California for more than 130 years, had backed the Marathon-Mendocino plan. Houston conglomerate Maxxam Inc. (MXM) acquired the company in 1986.

Pacific Lumber abandoned its own Chapter 11 proposal midway through the bankruptcy contest and threw its weight behind Marathon and Mendocino.

Mendocino, owned primarily by the family that founded the Gap retail chain, operates a comparable forest in Mendocino County, Calif., just south of the timberlands at issue in Pacific Lumber's case.