July 3rd 2008

By John Driscoll
The Times-Standard
July 3, 2008

The U.S. Bankruptcy Court judge overseeing the Pacific Lumber Co.'s bankruptcy case intends to rule on a pivotal issue Monday, and informed the parties in the matter to be ready to move quickly after he does.

Judge Richard Schmidt expressed frustration with the proceedings' pace, and told attorneys that he'd work over the weekend to button up a decision on a huge potential claim requested by Palco's largest creditors. The claim threatens to undo a plan Schmidt confirmed in early June that would have Mendocino Redwood Co. and Palco creditor Marathon Structured Finance Fund reorganize the Scotia company.

"I've been telling you for three weeks now that we're going to move quickly," Schmidt said.

He repeated his disappointment that the claim wasn't raised as an issue before his June confirmation ruling, but made clear his intention to begin dealing on Tuesday with a motion for a stay while the timber noteholders -- the creditors owed $714 million -- or Mendocino and Marathon appeal, depending on how he rules on the claim.

Schmidt heard the closing arguments of attorneys on the claim Wednesday, hearing from the noteholders that they should get a "superpriority" claim of at least $170 million for a purported reduction in its collateral since the January 2007 Chapter 11 filing.

The noteholders' attorneys spent time trying to convince the judge that the evidence showed the value of its collateral -- the timberlands that secure their debt -- had declined over the about 18 months. But they also took shots at witnesses put up by Mendocino and Marathon, including Mendocino's Chairman Sandy Dean, trying to suggest they were involved in a conspiracy to suck value from the timberlands to make up for Palco's debt.

Noteholders attorney Richard Krumholtz said that Mendocino and Marathon had changed their story, and even accused them of lying in court.

"What we have seen is both appalling and offensive," Krumholtz said.

But Mendocino Redwood attorney Alan Brilliant said that the noteholders had failed to prove that they were due anything through the claim, and said they had sprung e-mails -- from well before Mendocino and Marathon began a relationship -- on the court out of context.

"If you don't have the facts on your side, and you don't have the law on your side, we'll attack the character of the people on your side," Brilliant said, outlining the noteholders' strategy.

Sierra Pacific Industries has recently reexpressed its interest in rebuilding the Scotia sawmill in the event the Mendocino Redwood plan falls through, and the noteholders have tried to convince the judge that the larger company's interest would make their plan work.

But in an interesting exchange, when Chuck Gibbs, an attorney for the largest noteholder, started his arguments saying the confirmation of Mendocino's plan was unfair, Schmidt fired back.

Schmidt asked why the noteholders hadn't found Sierra Pacific months ago when he'd ruled that parties other than Palco could propose a restructuring plan. He said at that point, anybody could have taken over the company.

"It's a new game," Schmidt said, "it's capitalism at its finest."

Schmidt said that the noteholders had more than enough leverage to make Marathon take less than it was owed-- instead of the other way around -- and appeared to suggest that the noteholders didn't believe their own position in the case.

Gibbs only said he felt that was an unfair assessment.

Schmidt said he would begin taking up the next matters in the case, including the stay pending an appeal, on Tuesday.