January 16th 2008

by David Elman
The Deal.com
January 16, 2008

The offer from a coalition including the Nature Conservancy and Bank of America will vie with other reorganization plans.

Parties continue to line up for the assets of Pacific Lumber Co. and its affiliates, even though they retain limited exclusivity.

A coalition of environmental groups announced Wednesday, Jan. 16, they would try to take control of Palco's land through an alliance with investment and forestry partners.

The group, comprising the Nature Conservancy, Save-the-Redwoods League, local conservation group Community Forestry Team, paper mill operator Atlas Holdings LLC, Bank of America Corp., Conservation Forestry LLC and Redwood Forest Foundation Inc., would ensure sustainable timber management for 197,000 acres of redwoods and preserve 12,000 acres of old-growth forest and other environmentally significant habitat, a statement said.

"We want to keep the majority of the land in permanent sustainable timber management," said Nature Conservancy representative Jordan Peavey.

According to the statement, Atlas Holdings would fund and support operations at Palco's sawmill in Scotia, Calif. Bank of America, Conservation Forestry and Redwood Forest Foundation would supply the capital for a sustainable timber operation.

Peavey said the coalition was still putting together its proposal, which it would submit through a reorganization plan with Bank of New York Trust Co. NA, the indenture trustee for $713.8 million in collateralized notes. Palco affiliate Scotia Pacific Co. LLC issued the securities.

Court documents show that plan could be one of up to four that Judge Richard S. Schmidt of the U.S. Bankruptcy Court for the Southern District of Texas in Corpus Christi may have to consider.

On Dec. 21, Schmidt agreed to terminate the debtors' exclusive right to file a reorganization plan. His Jan. 4 order, however, preserved exclusivity through Feb. 29 for parties other than the official committee of unsecured creditors; postpetition lender Marathon Structured Finance Fund LP; and BNY.

Those creditors and the debtors have until Jan. 30 to file reorganization plans. Schmidt set a disclosure statement hearing for Feb. 28 and a confirmation hearing for April 1.

One plan apparently will come from Marathon and Mendocino Redwood Co. LLC. According to court documents, MRC or an affiliate would invest $200 million in Palco for control of its timberland, with Marathon adding an unspecified amount of cash and converting most of $160 million in debt into equity.

Sansome Partners, an investment vehicle controlled by Gap Inc. founder Don Fisher and his family, owns most of MRC and its 228,800 acres of timberland in California's Mendocino County, just to the south of Palco's land.

MRC chairman and Sansome partner Sandy Dean said MRC would bring forestry practices that have worked well and been certified by the Forest Stewardship Council, an independent forestry management group. In addition, he said, MRC has a management team that would try to preserve jobs, and the Marathon plan would not seek any public or philanthropic funds to accomplish its goals.

Dean would not speculate on when a reorganization plan might be filed. "We're working to try and comply with [the Jan. 30] deadline," he said.

Palco and parent Maxxam Inc. withdrew their joint amended reorganization plan on Jan. 4, leaving them to file a new plan by the end of the month.

Key to the entire plan process is the value of the debtors' timberland, which would underlie any reorganization plan. Palco has called the land, largely held by Scopac, "by far the most significant asset of these estates." The timberland also is the collateral base for the Scopac noteholders, and as such its value has been hotly debated since Palco, Scopac and their affiliates filed for Chapter 11 on Jan. 18, 2007.

Earlier in the case, BNY had sought to have the debtors' exclusivity terminated so the indenture trustee could propose its own plan, which would have kept Scopac's assets separate from those of the other debtors. The proposal would have sold the timberland through a Section 363 sale.

Following failed mediation talks between the debtors and bondholders, Palco and its affiliates sought to obtain a trial date for estimating the value of the timberland, but at a hearing Tuesday, Schmidt took the matter under advisement and issued no ruling, documents show.

The creditors' committee, Marathon and BNY all objected to the valuation motion.

BNY said a valuation trial would not save expenses and added that Scopac incurred $17.15 million in professional fees through Nov. 30 -- more than 72% of gross revenue.

The indenture trustee lashed out at the cash management of Scopac management in a motion filed Monday seeking the appointment of a trustee.

According to BNY, "The persons entrusted with managing the business and financial affairs of Scopac have abdicated their independent control of Scopac, failed to preserve the corporate independence of Scopac, and engaged in financial and business activities which have caused substantial harm to the Scopac estate and its creditors."

BNY alleges that by the end of March, Scopac may be $7 million short of the cash projection it made three months ago. Furthermore, according to BNY, because the debtor has said it may need postpetition financing from Bank of America to pay administrative expenses, Scopac has "for all intents and purposes" admitted it may be administratively insolvent.

Schmidt, in fact, on Thursday will consider approving a $150,000 due diligence fee for a potential debtor-in-possession loan from Bank of America.

A hearing on the trustee motion is set for Feb. 19.

Palco, meanwhile, has recently moved to sell certain assets.

Schmidt on Tuesday entered a final order approving the sale of $2 million in redwood logs to Maxxam affiliate Mirada Property Co. Palco is scheduled to return to court Thursday to seek permission for the $4 million sale of redwood lumber to Mirada.

And Palco on Jan. 10 filed a motion seeking to sell 5.86 acres of land in Scotia, Calif., to the Scotia Union School District for $3.13 million. The parcel contains the Stanwood A. Murphy Elementary School, a recreation center building and related facilities. Palco has owned the town of Scotia, one of the last two company owned and operated towns in California, since the 1880s. No hearing date has been set.

Palco spokesman Michael Claes, creditors' committee counsel Maxim B. Litvak of Pachulski Stang Ziehl & Jones LLP and Marathon counsel David Neier of Winston & Strawn LLP did not return calls for comment.