February 29th 2008

By John Driscoll
The Times-Standard
February 29, 2008

The Pacific Lumber Co.'s plan to split up 22,000 acres of timberland for an exclusive development hangs by a thread in the bankruptcy process quickly drawing to a close.

Palco's proposal to raise more than $1 billion through the development and through the sale of 6,600 acres of timberland restricted from logging appeared to have virtually no support.

U.S. Bankruptcy Judge Richard Schmidt seemed willing to scrap the plan during a Thursday hearing in his Corpus Christi, Texas courtroom. By the end of the hearing, he salvaged the plan, agreeing with Palco that it would not likely confuse the slew of creditors who must vote for or against any or all of the plans submitted.

Schmidt said the plan -- which almost certainly won't gain the necessary support -- could potentially serve as a negotiating platform before or after April 1, when the court considers which plan should go forward.

"The point is, plans change," said Katherine Coleman, attorney for Palco subsidiary Scotia Pacific, "peoples' minds change."

The effort to solicit votes for the plans will begin shortly. Creditors will have to choose which plans they support.

On the ballot is a plan by creditor Marathon Structured Finance Fund and Mendocino Redwood Co., which wants to run the company and seek Forest Stewardship Council certification, and reduce harvest rates for at least 15 years. Unsecured creditors would get about 75 to 90 percent of what they're owed.

But the committee appointed to oversee the unsecured creditors is strongly recommending that they approve only the Mendocino Redwood plan. Another plan pitched by timber noteholders may pay more but pension and litigation claims represent a significant risk, committee attorney Maxim Litvak said.

The noteholders -- owed $714 million secured by Scotia Pacific's 210,000 acres -- are proposing a sale, with the proceeds going to pay off the debt. Their attorney said the Marathon plan doesn't treat the most heavily invested creditors fairly.

But the plan doesn't address Palco's needed reorganization, which would have to occur separately. Noteholder attorneys insisted that there could still be a synergy between a new Palco and a new Scotia Pacific, and the company could end up in operation after the sale takes place.

Lastly is Palco's plan, which is unlikely to be confirmed by Schmidt, since it doesn't have the support of Marathon, a key creditor with a veto right.

"We know right now that this plan is a dead letter," said creditor's committee attorney John Fiero.

Palco has also submitted two other plans, one for Palco and the other for Scotia Pacific, and both call for parent company Maxxam Inc. to maintain a toehold in the companies. One would transfer timberlands other than the 22,000 acres proposed for development to the timber noteholders, and the other would turn over Scotia and the Scotia mill to Marathon.

With little more than a month before the April confirmation hearing, Scotia Pacific told the court it is seeking financing to carry it through the remainder of the bankruptcy process. Bank of America has agreed in a commitment letter to provide financing, Scotia Pacific attorneys said.

While the company has 24 million board feet of lumber in its yard, worth $15 million, it's running low on cash and is behind on receiving money for logs from Palco. Scotia Pacific attorney Shelby Jordan said that Maxxam has not agreed to fund lumber sales.

Attorneys for the noteholders raised concerns about the financing, which is expected to come before the court next week.

Schmidt said that if Scotia Pacific really wants to sign on for financing with 36 days to go in bankruptcy, it would have to make extraordinary efforts to be ready by next week.