May 12th 2008

By David McLaughlin
The Wall Street Journal
May 12, 2008

Bondholders in Pacific Lumber Co.'s bankruptcy-protection proceeding said they want to investigate possible fraud in a settlement that calls for the company to abandon its reorganization plan and support a rival proposal.

Bank of New York Mellon Corp., which represents the bondholders, said it wants to probe several aspects of the agreement. The bank wants to look into whether the deal, a key development in the 15-month-old Chapter 11 proceeding, is "the product of fraud or collusion and was forced on" Pacific Lumber, according to documents filed Thursday with the U.S. Bankruptcy Court in Corpus Christi, Texas.

At a court hearing Friday, Richard Krumholz, a lawyer for the bank, didn't elaborate on the alleged fraud but said the bank had several questions about details of the settlement. "What is striking is how much is ambiguous," Mr. Krumholz said. He didn't return a telephone call seeking comment.

Bankruptcy Court Judge Richard Schmidt will consider approving the agreement at a hearing Thursday. The bank is requesting documents before he rules.

Pacific Lumber agreed to support a reorganization plan offered by Marathon Asset Management and California lumber company Mendocino Redwood Co. Marathon and Mendocino proposed pumping new money into Pacific Lumber and taking over its operations in Humboldt County, Calif. They first would have to defeat a plan supported by Bank of New York, which wants to auction the bondholders' collateral -- more than 200,000 acres of timberland owned by subsidiary Scotia Pacific.

Write to David McLaughlin at david.mclaughlin@dowjones.com.