July 12th 2008

By John Driscoll
The Times-Standard
July 12, 2008

The federal judge overseeing the Pacific Lumber Co.'s bankruptcy intends to rule next week on a request to delay the Mendocino Redwood Co.'s plan to reorganize the company while creditors seek an appeal.

The bitter battle over Palco's future stretched out over another full day Friday, highlighting the prospect that an appeals process -- if an appeal is allowed to be heard -- could last a very long time. The court is also considering a request to have the matter appealed directly to the 5th Circuit Court of Appeals, bypassing the district court in Corpus Christi, Texas.

Responding to U.S. Bankruptcy Court Judge Richard Schmidt's concerns about the condition of the company as time wears on, the major creditors in the case have come up with a plan to provide $20 million in financing and an arrangement to "give" logs to Palco to keep the mill running through Dec. 31. Noteholders' attorneys on Friday tacked an additional $5 million onto the deal to somehow get the company through another six months.

But Mendocino Redwood and the creditor it's teamed up with, Marathon Structured Finance Fund, accused the noteholders of putting up an unwritten, "half-baked" proposal at the last minute in an effort to convince the court that somehow a status quo situation at Palco would protect their interest.

"The status quo is very, very bad," said Marathon attorney David Neier.

A representative of creditor Bank of America also questioned whether a majority of noteholders could even approve the financing deal, saying it's likely to require a unanimous vote of the bond holders.

Noteholders' attorney Richard Krumholtz argued that Schmidt should not require a major bond to protect against the potential failure of the Mendocino deal he approved in June, calling suggestions that Mendocino might walk away if it ends up in a lengthy appeal a "wild idea."

"We don't believe there's anything lost in the course of the appeal," Krumholtz said.

Testimony from Palco and Scopac officials Friday went toward showing that the mill and the timber arm of Palco -- Scotia Pacific -- could continue operating with the financing deal proposed. But they also admitted that were the mill to shut down it would have dramatic consequences in the Scotia area, and that pension obligations and the payment of a $500,000 fine for an environmental violation were not fully calculated as part of the arrangement.

Schmidt directed the parties to file by Monday an estimate of how large a bond should be required to protect Mendocino and Marathon in the event he orders a stay while noteholders appeal. He also ordered the noteholders to provide a full accounting in writing of the financing arrangement they are proposing.