July 3rd 2008

By Nathan Rushton
The Eureka Reporter
July 3, 2008

After endings the week's scheduled hearings a day early on Wednesday, the federal judge in the Pacific Lumber Co. bankruptcy case said he will make his final ruling Monday to move the case forward.

Judge Richard Schmidt is expected to resolve whether the reorganization plan put forward by Mendocino Redwood Co. and PALCO creditor Marathon Structured Finance Fund that he already ruled was confirmable will require an additional "super-priority administrative claim" to be paid to Scotia Pacific's largest creditor -- the Timber Noteholders.

The Noteholders, who are owed more than $700 million and hold SCOPAC's 210,000 acres of timberlands as collateral, argue that the $510 million MRC must pay them under the confirmed plan doesn't take into account the decrease in their protected collateral during the 18-month bankruptcy proceedings.

While the Noteholders' attorneys contend the decrease in land value and loss of their other cash assets amounts to as much as $200 million, MRC and Marathon lawyers argued that the potentially deal-breaking administrative claim wasn't legal.

The case is all but assured to be appealed.

"It doesn't take a rocket scientist to figure out what the next step is going to be," Schmidt told the court at the conclusion of the testimony.

Whether it's a "motion to reconsider" or a "motion for a stay pending appeal," Schmidt said those issues would be handled in order and weighed accordingly in a hearing on Tuesday.

As was the case the previous day, attorneys grilled witnesses in a rehash of well-covered valuation testimony and did their best to discredit or bolster their experts' testimony.

But in a last-minute objection filed Wednesday, the Noteholders attorneys raised concerns in court regarding an e-mail they discovered late in June from MRC executives they said undermines the credibility of MRC's plan they said can't be confirmed.

The Noteholders introduced the confidential e-mail in court Wednesday that was sent by MRC Chairman Sandy Dean on Sept. 14, 2007 to several key MRC executives, including Chief Executive Officer Richard Higgenbottom and Mendocino Forest Products President John Russell.

The e-mail is a description of a 90-minute office meeting and subsequent 90-minute lunch meeting with Dean and Marathon representatives Richard Ronzetti and Gary Lembo.

The lawyers argued the e-mail from Dean offers a glimpse into what the MRC's top executives had in mind for PALCO and its lands:

"Talked about our specific interests -- land, and perhaps mill, ability to bring management and capital to the equation. Told them we have very limited interest in town and other assets (better for guys from New York to sell off all those houses, as opposed to guys in S.F.). Told them we had followed closely and had been waiting fro the right time to make an investment. They asked when would right time be and I said when we could invest without being behind underwater debt and when our investment could be accompanied by ability to set direction of the company. They got this I think."

In subsequent passages, the Noteholders' lawyers argued that the Dean e-mail demonstrates a "lack of good faith among MRC and Marathon" in submitting its reorganization plan and an intent to "manipulate" and "mislead" the valuation process to harm SCOPAC's creditors by offering a "bogus appraisal" to the court for the purpose of "tapp(ing) into equity at SCOPAC" to "bolster (t)heir (Marathon's) collateral position."

Dean denied Tuesday that there was any effort by him or MRC to facilitate any scheme and said there was no plan to get at the Noteholders' collateral.

MRC attorneys told the judge that the Dean e-mail was taken out of context and represented a discussion early in the case before MRC and Marathon were working together.

John Fiero, an attorney for the Committee of Unsecured Creditors, called the e-mail a sideshow, but said the allegations raised by the Noteholders that there has been some nefarious act will likely arise in an appeals court.

"It's been a murmur," Fiero said. "But it's going to be a roar."