June 30th 2008

By Nathan Rushton
The Eureka Reporter
June 30, 2008

After seemingly closing the deal earlier this month on the Pacific Lumber Co.'s bankruptcy case, the attorneys for the various parties were back in court Monday arguing over the latest roadblock.

Monday's proceedings in Corpus Christi, Texas, followed a two-week break in the on-again, off-again confirmation hearings stretching back to April.

After Judge Richard Schmidt had all but assured Mendocino Redwood Co. and PALCO creditor Marathon Structured Finance Fund's plan was to be confirmed, Scotia Pacific's largest creditor -- the Timber Noteholders -- filed a motion asking for a payment to make up for the loss of value to their collateral during the 18-month-long case.

Attorneys reopened testimony Monday to argue for and against the Timber Noteholders' request to be paid the "superpriority administrative claim" attorneys said previously could be as much as $290 million.

Schmidt told the court previously that he felt "snookered" when the Noteholders' attorneys raised the issue after his ruling that the MRC/Marathon plan was confirmable.

Schmidt repeated Monday that someone should have said something about the claim that could be more than $200 million, which could sink MRC's plan.

"Nobody said that," Schmidt said.

Noteholder attorney Louis R. Strubeck told the court in his opening statement that the superpriority claim sounds complicated.

"But it really is simple," Strubeck said. "It is still all about valuation."

Strubeck said the value of the Noteholders' collateral, approximately $760 million secured by SCOPAC's 210,000 acres of timberlands, had significantly declined between 2007 and the confirmation hearings.

Strubeck told the court it was at least $170 million, but that it could be more.

Testimony is scheduled through Thursday, with experts likely to testify by how much the value has supposedly declined.

David Neier, an attorney for Marathon, argued the claim should be denied because, if anything, PALCO and SCOPAC's assets have increased substantially.

"There are more trees now than there were before," Neier said, adding that the trees grow faster than they are being cut.

But it was the testimony of MRC Chairman Sandy Dean, who appeared first on the witness stand, that gave a glimpse into the rival timber company's strategy behind the scenes.

Dean was grilled over e-mails one attorney said cast "great doubt" on the bankruptcy proceedings and pointed to an alleged plan by MRC to acquire SCOPAC's timberlands, "tap into" the Noteholders' equity and close down Scotia's mill.

Although Dean admitted he testified previously in court that he believed SCOPAC's timber growth actually outpaced harvesting in 2007 and estimated the value of the growth was approximately $5 million to $15 million, Noteholders attorney Richard Krumholz introduced a number of e-mail exchanges that he said contradicted those statements.

The e-mails began in the summer of last year between Dean and other MRC executives and expert witnesses and consultants, as well as Marathon's financial consultant Matthew Breckenridge, who later testified in the case.

In the e-mails, Dean apparently said SCOPAC had cut all of the harvestable redwoods and that the value of what remained was small -- noting that the market value of the remaining Douglas fir was less than what it would cost to cut it.

Krumholz said the e-mails didn't include forestry consultant Richard Lamont, who was hired by MRC to appraise the value of the redwood and Douglas fir timber and who stated under oath that the value of the timber growth could be between $5 million and $15 million.

Krumholz said it wasn't the first time Dean said something different in court than what was discussed elsewhere.

"I don't think so," Dean responded.

Krumholz argued that PALCO's creditors tried from "Day 1" to tap into the equity from a "bogus" appraisal he said Dean was aware of before the confirmation hearings, which Dean denied.

Dean told the court that Marathon never suggested to him there was a sham appraisal and denied there was ever a scheme with Marathon to get at SCOPAC's creditors' assets.

The proceedings continue today.