July 11th 2008

By John Driscoll
The Times-Standard
July 11, 2008

Major creditors tried to convince a federal bankruptcy judge Thursday that requiring a substantial bond while they take the Mendocino Redwood Co.'s reorganization plan for the Pacific Lumber Co. to a higher court would thwart their right to appeal.

The proponents of the plan, Mendocino Redwood and Marathon Structured Finance Fund, said that a lengthy stay without the protection of a large bond threatens to see the Scotia mill closed and possibly undo the deal approved by the court earlier this week.

U.S. Bankruptcy Judge Richard Schmidt continues to signal that he will require a bond, and pressed the parties in the case to determine what amount it will be.

"Whatever bond I require they have to post it," Schmidt said of the bond holders, who lost their bid to sell Palco's timberlands to recoup their credit.

Schmidt said in his Corpus Christi, Texas, court that Scotia employees and residents and the overall public interest could be harmed while the noteholders seek an appeal of his Tuesday ruling confirming the Mendocino Redwood plan. The plan would merge the Palco entities into a single company -- to be called the Humboldt Redwood Co., according to court documents.

Noteholder attorney Richard Krumholtz argued that the largest creditors are the only ones likely to be harmed if the judge doesn't stay the plan until an appeal can be considered. Krumholtz said a proposal for Palco subsidiary Scotia Pacific to provide logs "free" to the mill and a $20 million financing deal would preserve the status quo until the appeal can be heard.

But when Schmidt asked if Krumholtz was so certain of that, would the noteholders provide a guarantee by putting up a bond, Krumholtz dodged the question, and said that if Mendocino bailed out of the plan months later due to changing conditions, that was a self-inflicted wound.

Palco attorney Lucky McDowell told the judge that the risk to the company would be exponentially greater with a stay, whether the noteholders were successful in an appeal or not. He also raised concerns about whether the Scotia Pacific board of directors would even approve the plan to supply logs to Palco without payment.

"Palco needs certainty and they really need certainty now," McDowell said.

Mendocino attorney Alan Brilliant said that postponing the implementation of the plan would prevent improvements at the mills, put off forming relationships with customers, risk seeing employees leave because of uncertainty, and potentially leave the company to seek financing at higher rates down the road. He asked that a large bond be put up for protection.

Scotia Pacific CEO Jeff Barrett testified that he believed the financing and log deal could get Scotia Pacific and Palco through the end of the year, but also that it would leave Scotia Pacific with a precariously low bank account in December. He said that while the board of Scotia Pacific hadn't approved the log deal, he believed it would not be difficult to get that clearance.

The hearing continues today.