July 25th 2008

By John Driscoll
The Times-Standard
July 25, 2008

The 5th U.S. Circuit Court of Appeals has denied a stay blocking the Mendocino Redwood Co.'s plans to rebuild the Pacific Lumber Co.

"We're extremely pleased with the 5th Circuit ruling and we hope to be able to complete the reorganization plan as soon as possible," said Sandy Dean, chairman of the Mendocino Redwood Co. "We can say more after we close the deal."

But in a separate ruling, the court granted a motion to hear an expedited appeal by the Scotia company's largest creditors.

While Mendocino Redwood has indicated they would close as soon as possible if the stay was denied, it is unclear if an expedited appeal could delay the move to form the new Humboldt Redwood Co. Sources said that the creditors appealing the case sent an e-mail to parties in the case suggesting that a clause in the Mendocino plan would not allow it to close.

The noteholders appear to be hanging their hat on a technicality in the Mendocino plan, which defines the term "final order" as one that is not being challenged on appeal. But in the segment of the plan that outlines the conditions that must be met for the plan to become effective, it says only that there can be no court order restraining or staying the confirmation of the plan.

The bond holders -- which have lost their case in U.S. Bankruptcy Court, in district court, and now on the stay in the appellate court -- may simply be launching a last-ditch effort to prevent Mendocino from closing, which would make their appeal essentially moot. While the 5th Circuit granted an expedited appeal, such an appeal could still take weeks or months to get under way.

Palco shipping supervisor Bert Silva said there is a general mood of happiness in town that the long bankruptcy is drawing to a close, but that in a way it is bittersweet to see Palco dissolved to make way for the future. The longtime employee said he feels a certain kinship with Mendocino Redwood personnel.

"They're timber people," Silva said. "They're not just in it for the bottom line."

Palco filed for Chapter 11 bankruptcy protection in January 2007, and the Corpus Christi, Texas bankruptcy judge overseeing the case ruled in June to approve Mendocino Redwood's plan to restructure the company, with Palco creditor Marathon Structured Finance Fund to take over the town and the power plant. Judge Richard Schmidt later turned down a bond holder claim of nearly $200 million that threatened to capsize the reorganization.

Mendocino began holding meetings this week in Fortuna with Palco employees in what it said was an effort to smooth the transition for Humboldt Redwood. If Mendocino does decide to close, it could occur as soon as Monday.