July 29th 2008

By Mike Geniella
The Press Democrat
July 29, 2008

A Texas federal judge Monday warned a consortium of East Coast banks that they risk contempt charges if they don't comply with his court-ordered takeover of Pacific Lumber Co.

The disgruntled lenders, led by the Bank of New York Mellon Trust, have mounted a last-ditch effort to block a $530 million deal surrounding the North Coast's oldest timber company.

Pacific Lumber filed bankruptcy 18 months ago, owing the lenders in excess of $700 million. The debt was secured by 210,000 acres of Humboldt County timberland owned by Pacific Lumber, as well as the historic mill town of Scotia. Lenders argue the land and town are being sold to Mendocino Redwood Co. and its partner, Marathon Structured Finance, at bargain-basement prices.

Judge Richard Schmidt of the U.S. Bankruptcy Court in Corpus Christi, Texas, on Monday had harsh words for the lenders' latest tactics.

Schmidt refused to stop the takeover, and he ripped the banks for their repeated attempts to "forestall or disrupt" the deal.

Schmidt pointedly reminded lenders that any failure to comply with his takeover order "risks contempt."

Lenders nevertheless turned again to a U.S. District Court in Louisiana, asking for an immediate halt to the bankruptcy court-approved takeover. The banks contend Schmidt lacks jurisdiction over a case that is now under appeal.

Last week, the Louisiana court refused to halt the takeover, but it agreed to expedite hearing the lenders' appeal.

Monday's legal squabbling stalled plans by Mendocino Redwood and Marathon, a New York hedge fund, to immediately close escrow and take over Pacific Lumber's day-to-day management.

Mendocino Redwood executives declined Monday to comment on their next move in the face of Schmidt's favorable ruling.

If its takeover of Pacific Lumber is successful, Mendocino Redwood would become one of the largest timberland owners on the North Coast. Together, Mendocino Redwood and the proposed Humboldt Redwood Co. would own and manage about 435,000 acres of timber.

Mendocino Redwood, a Ukiah-based timber company, was formed 10 years ago by members of San Francisco's Fisher family, founders of The Gap clothing chain. At the time, the Fishers bought 225,000 acres of Mendocino County timberland once owned by Louisiana-Pacific Corp. Now the Fishers seek to acquire Pacific Lumber's 210,000 acres of land, and a mill complex at Scotia. Partner Marathon would acquire the town's company-owned housing, its retail core, a co-generation power plant, and industrial properties in Fortuna, Carlotta and Arcata.

Pacific Lumber, founded in 1869, would become known as Humboldt Redwood under the plan.