April 18th 2008

By John Driscoll
The Times-Standard
April 18, 2008

U.S. Bankruptcy Judge Richard Schmidt outlined the grave risks creditors in the Pacific Lumber Co. case are taking if they cannot reach an agreement by the end of the month.

But a representative of Beal Bank -- the largest holder of timber notes that has proposed paying $603 million for Palco's 210,000 acres -- asked the judge not to order mediation for the parties. He said that previous attempts to negotiate a deal with Palco creditor Marathon Structured Finance Fund have always resulted in a huge transfer of noteholder assets to Marathon.

Marathon has teamed up with Mendocino Redwood Co. to pitch a strongly backed restructuring plan to blend timber and lumber operations.

"Marathon and Mendocino are in a no-lose situation," said Jacob Cherner, representative for Beal Bank, owned by billionaire real estate investor, poker player and chess master Andy Beal.

Schmidt disagreed, saying there remains a risk that he might not approve Mendocino Redwood's plan, leaving Marathon with the Scotia mill -- but no forest to provide a sufficient guaranteed supply of logs. Schmidt referred to the noteholders' plan as a liquidation plan that leaves the Palco mill with an uncertain future, unlike Mendocino Redwood's plan, which has received support because of that company's solid record.

Schmidt also cautioned the parties against leaving it up to him to choose a plan, calling himself a "loose cannon" to make clear that the outcome would be beyond the creditors' control.

Cherner argued that the value of the timberlands should be determined by putting them to auction, and that Mendocino Redwood could be a bidder.

But Marathon attorney David Neier said that the timberlands have been for sale since 2005, and despite marketing efforts, no one has stepped forward to make a real bid. If the noteholders end up with the timberlands, Marathon attorneys said, it will be difficult to convince its investors to support a mill that's losing $2 million a month.

"It will be an unmitigated disaster," said Marathon attorney David Neier.

Both plans have problems, the court said again: The noteholders' plan does not deal with the mill and the town of Scotia; the Marathon plan offers about $100 million less for the timberlands than the noteholders believe they are worth. Schmidt has previously signaled that if he could find both plans confirmable, he would likely adopt the Marathon plan. Palco's plans for reorganization have been sidelined by the judge, although he has no offered a final ruling on that.

Cherner agreed later that Beal Bank would engage in direct negotiations with Marathon, but pushed against mediation. Marathon and Mendocino Redwood said they would be willing to go through the mediation process.

He suggested all the parties prepare their plans to meet his scrutiny, and any appeal that may follow. But he said that it's really Beal Bank and Marathon that need to reach an agreement.

"Obviously this case, the best solution for this case, is a solution that deals with all of this case, not just the trees," Schmidt said.

Confirmation hearings are set to restart on April 29.