July 1st 2008

By John Driscoll
The Times-Standard
July 1, 2008

Major creditors' attorneys in the Pacific Lumber Co. case tried to paint a picture of conspiracy between Mendocino Redwood Co. and another Palco creditor, suggesting they were looking to plunder the value of the Scotia company's timberlands.

Bondholder attorney Richard Krumholz rifled questions at Mendocino Redwood Chairman Sandy Dean, bringing up a Sept. 2007 e-mail between Dean and a representative of creditor Marathon Structured Finance Fund. Krumholz posed questions to suggest that Mendocino and Marathon were looking for a way to recoup Marathon's undersecured debt by going after the value of the timberlands, held by Palco subsidiary Scotia Pacific.

But Dean said the conversation the e-mail related to was well before Mendocino teamed up with Marathon, which Dean said he had to educate regarding the value of the Palco lands. Marathon at the time had an inflated view of that value, he said.

Value is what it's all about, as the case lurches into its latest, final chapter. The bond holders who are owed $714 million secured by the timberlands are trying to show the court that they should be allowed a claim in the amount that their collateral has depreciated since the start of the case. If they are allowed that claim, Mendocino Redwood says, the deal that the U.S. Bankruptcy Court approved in April would be crushed.

"It's still all about value," said noteholder attorney Louis Strubeck in the Corpus Christi, Texas courtroom.

He argued that the value of the timberlands has declined by at least $170 million since the Jan. 2007 bankruptcy filing date. Strubeck said that the noteholders entered the case believing they were oversecured, but in June the judge determined the land was worth no more than $510 million. The bondholders are due some of that difference, Strubeck said.

But Marathon attorney David Neier said that the noteholders were misreading the law, saying the "superpriority" provision was meant to deal with a reduction in value from the use of collateral during the case. That's different, he said, from saying the forest -- which has been growing at a rate higher than it's harvested -- has declined in value.

John Fiero for the Unsecured Creditors Committee said that the notion that the timberlands were worth more than Scotia Pacific's debt at the time the company filed for bankruptcy isn't supported by any evidence submitted in the case. Fiero said the court must consider that evidence.

"It isn't the kind of thing that anyone should take at face value," Fiero said.

The hearings continue today.