July 11th 2008

By David McLaughlin
Dow Jones Newswires
July 11, 2008

A federal judge has confirmed a plan to bring Pacific Lumber Co. out of bankruptcy under new ownership, but the takeover of the logging company could be delayed by an appeal from bondholders in the case.

Bondholders are planning to fight the court ruling allowing hedge fund Marathon Asset Management and California lumber business Mendocino Redwood Co. to take control of Pacific Lumber.

On Thursday, they will ask Judge Richard Schmidt of the U.S. Bankruptcy Court in Corpus Christi, Texas, who approved the plan, to hold up the Marathon-Mendocino takeover while the appeal is considered.

They will argue that if Marathon and Mendocino carry out their plan and take Pacific Lumber out of bankruptcy, a successful appeal later on would be moot because the transactions involved will be complete.

"In bankruptcy, once you close, it's very tough to undo it," said one person involved in the case who declined to be named because it remains tied up in litigation.

Schmidt is not expected to delay the plan indefinitely, according to people familiar with the case. Instead, he will likely hold up the plan, possibly 10 days or less, to give bondholders enough time to bring their request for a stay to district court.

At a hearing Tuesday, Schmidt said he would give bondholders a "reasonable" amount of time to get in front of a district court judge.

Schmidt in early June said he would approve the Marathon-Mendocino plan with some modifications. He formally approved the plan Tuesday night after rejecting a bid by bondholders to increase their recovery.

"We're very pleased with the judge's ruling and hope we can complete our plan of reorganization soon," said Sandy Dean, the chairman of Mendocino Redwood.

A lawyer for the bondholders declined to comment.

Schmidt's June ruling was a blow to bondholders, who fought to auction their collateral -- the 200,000 acres of California timberlands owned by Pacific Lumber subsidiary Scotia Pacific. Schmidt rejected the proposal.

Under the Marathon-Mendocino plan, they will recover $513.6 million. The bondholders said they were owed more than $700 million when Pacific Lumber filed for bankruptcy protection last year.

Lawyers for Marathon-Mendocino warned Schmidt Tuesday that a lengthy delay could cause their plan to collapse. Pacific Lumber is running out of cash and faces a July 20 deadline to pay Scotia Pacific for logs.

"There is a point in time when the transaction could never be consummated because the assets have been so damaged," said Marathon attorney David Neier.