July 29th 2008

By David McLaughlin

Dow Jones Newswires

July 29, 2008

Corporate officers of a Pacific Lumber Co. subsidiary, facing contempt citations for failing to abide by a federal court order, agreed Tuesday to turn over the company to hedge fund Marathon Asset Management and California lumber business Mendocino Redwood Co.

A lawyer for the subsidiary, Scotia Pacific Co., said at a hearing Tuesday afternoon in U.S. Bankruptcy Court in Corpus Christi, Texas, the company has agreed to sign over its timberlands in northern California, appearing to clear the way for Pacific Lumber to exit bankruptcy under the control of Marathon and Mendocino.

Bankruptcy Judge Richard S. Schmidt signed off on the agreement, which calls for the Marathon-Mendocino plan to take effect more than a month after Schmidt approved their proposal for Pacific Lumber and rejected a rival plan from bondholders.

Last month Schmidt said he would approve the Marathon-Mendocino plan, but bondholders, led by The Bank of New York Mellon Corp., teamed with Scotia Pacific - whose senior management will be replaced under the plan - to stop it while their appeal seeking to overturn Schmidt's ruling is pending.

The contempt hearing came hours after the 5th U.S. Circuit Court of Appeals in New Orleans said it wouldn't reconsider its ruling rejecting a bondholders' bid to delay the Marathon-Mendocino plan.

That decision prompted lawyers for Marathon, Mendocino and Pacific Lumber to seek a contempt ruling against Scotia Pacific and its corporate officers and directors.

Lawyers for Marathon and Scotia Pacific weren't immediately available for comment.

Last week the appeals court said the bondholders and Scotia Pacific could appeal Schmidt's order approving the Marathon-Mendocino plan, but couldn't hold it up its implementation pending their appeal.

The bondholders had argued that if Marathon and Mendocino take over Pacific Lumber, based in Humboldt County, Calif., their appeal will be moot because all of the transactions involved in the takeover will have been completed.

Lawyers for Marathon, Mendocino and Pacific Lumber blasted the bondholders' and Scotia Pacific's tactics and asked Schmidt to enforce his confirmation order, allowing the new owners to take over Pacific Lumber's lumber mill and its 200,000 acres of timberlands in northern California.

Schmidt approved the Marathon-Mendocino bankruptcy plan over a rival proposal from the bondholders, who fought to sell the timberlands at an auction.

Bondholders are slated to recover $513 million under the Marathon-Mendocino plan, less than the $740 million that was outstanding on their notes when Pacific Lumber filed for bankruptcy last year. Their recovery was based on what Schmidt decided was the value of the timberlands, their collateral.

Pacific Lumber, filed for Chapter 11 bankruptcy protection in January 2007. The company, which has been logging in Northern California for more than 130 years, was owned by Houston conglomerate Maxxam Inc. (MXM), which acquired the company in 1986. Maxxam later bowed out of Pacific Lumber's Chapter 11 reorganization and threw its support behind the Marathon-Mendocino plan.