July 9th 2008

By Nathan Rushton
The Eureka Reporter
July 9, 2008

After months of contentious legal wrangling, a federal judge Tuesday confirmed the plan by Mendocino Redwood Co. to transform the bankrupt Pacific Lumber Co. and its sister companies into Humboldt Redwood Co.

Judge Richard Schmidt signed the plan confirmation order for MRC and PALCO creditor Marathon Structured Finance Fund's reorganization plan late Tuesday afternoon after attorneys for the parties spent much of the day hashing out the final details.

But more legal battles are likely in the case, which has already embroiled dozens of lawyers from across the country in the Corpus Christi, Texas, courtroom for nearly 18 months.

Attorneys for the Timber Noteholders, which lost a key ruling Monday and whose rival reorganization plan was not chosen by the court, argued for and received the automatic time usually granted in bankruptcy cases to allow them to file an appeal for the confirmed plan they guaranteed was coming.

Schmidt wrote that the confirmation order was final and effective immediately, but granted a stay of 10 days to allow parties a "reasonable opportunity to seek an extension" of the stay, which he indicated was conditional on the Noteholders filing a notice of appeal and a motion for stay pending appeal no later than 5 p.m. today.

In a separate order filed Tuesday, Schmidt also finalized his decision from the previous day denying the Noteholders' motion for the superpriority claim for as much as $200 million that their lawyers argued was owed as a result of a decrease in value of the 210,000 acres of timberlands they held as collateral for the more than $700 million in Scotia Pacific's outstanding debt in the bankruptcy case.

Schmidt also granted a stay of 10 days for an appeal for that ruling as well.

A hearing is scheduled for Thursday to consider those appeal matters, which could be the final time the parties appear before Schmidt, as the matter is likely headed to an appeals court.

If there was any doubt whether or not MRC and Marathon intended to move forward with their hard-won plan, it was quickly laid to rest at the opening of the hearing.

"We have every intention of consummating our plan if the court confirms it," Marathon attorney David Neier told the courtroom.

It was later discussed in court that MRC and Marathon were ready to deliver the $513.6 million ordered in the plan to the Bank of New York as soon as the effective date was clear of any stays.

While Schmidt worked through the unresolved issues, he warned the parties to be prepared to move quickly with their appeal and related motions.

"I've put everyone on notice it is going to happen fast," Schmidt said.

Although he acknowledged there had been some uncertainty as to how the case would end, Schmidt told the attorneys on all sides that they have had plenty of time to figure out their strategies.

"I'm holding your feet to the fire," Schmidt said, advising the attorneys he would be communicating to the appellate court that there was a "hot issue" headed its way.

One of the most contested issues resolved Tuesday was PALCO's ongoing litigation against California and several of its state agencies over an alleged breach of contract of the historic Headwaters Agreement PALCO's attorneys said cost it hundreds of millions of dollars in lost revenue from decreased harvesting it was promised.

While it was largely ignored during the majority of the proceedings by nearly all of the parties, the "Headwaters Litigation" garnered considerable attention in recent days as the Timber Noteholders tried to wrestle control of the potential source of revenue from MRC, which was in line to inherit the lawsuit.

Noteholder attorney Isaac Pachulski vigorously argued that because SCOPAC had defaulted on its loans by $200 million more than the Noteholders were receiving under the bankruptcy plan, they were entitled to handle the litigation to recoup any potential settlement.

Pachulski argued it was a due process issue and that if the court were to grant control of the litigation to MRC, which he accused of having a conflict of interest because the timber company was likely to abandon the lawsuit for political favors, Schmidt would be handing him an appeal issue on a "silver platter."

Schmidt called the Headwaters Litigation issue a red herring.

"I don't think there is a lot to the litigation," said Schmidt, who acknowledged he hadn't studied the issues.

In the end, MRC agreed to transfer the SCOPAC portion of the Headwaters Litigation to an independent trust to handle the litigation.

MRC and Marathon representatives have said in previous public forums that MRC intends to move quickly to revamp the company when its plan is confirmed.