January 31st 2008

By David McLaughlin
Dow Jones Newswires
January 31, 2008

Pacific Lumber Co.'s biggest creditors have offered competing bankruptcy plans for the logging company, setting up a fight over its future and the fate of more than 200,000 acres of California forests.

The new plans - filed separately by the Bank of New York Mellon (BK) and Marathon Asset Management LLC - will vie against Pacific Lumber's latest proposal to reorganize and repay creditors. All three offer drastically different options, from selling the timberlands to the highest bidder to having a rival logging company take over the business.

The proponents now have to win over Judge Richard Schmidt of the U.S. Bankruptcy Court in Corpus Christi, Texas, who is overseeing the bankruptcy case. Schmidt will have to approve the summaries of each plan before they can be sent to creditors for voting.

Pacific Lumber is pressing ahead with its proposal to pay down its debt, in part by building homes on thousands of acres of its timberlands, which the Bank of New York and Marathon criticized in court papers.

Pacific Lumber's plan to pay creditors in full "is essentially based on the transformation of the redwood forest into a vacation paradise for the wealthy," Marathon said in court papers..

(This article also appears in Daily Bankruptcy Review, a publication from Dow Jones & Co.)

Marathon, which provided a $75 million bankruptcy loan to Pacific Lumber, has teamed up with Mendocino Redwood Co. LLC, a logging company founded and controlled by the family that started Gap Inc. (GPS), the clothing retailer. They plan to invest $225 million and take control of the reorganized company.

Under the plan, Marathon, owed $160 million in pre- and post-bankruptcy debt, would win full ownership of the town of Scotia, Calif., which Pacific Lumber now owns, as well as a 15% stake in the reorganized company and a $25 million promissory note.

Maxxam Inc. (MXM), the Houston-based investment company that owns Pacific Lumber, does not fare well in the plan proposed by Marathon and Mendocino. According to court documents, the plan wipes out all equity interests and provides no distribution to Maxxam.

Pacific Lumber General Counsel Frank Bacik could not immediately comment about the rival plans on Thursday, but Maxxam said in court papers this week that any plan that eliminates its equity is unlawful because Pacific Lumber is not insolvent.

A spokesman for Marathon declined to comment. A spokesman for Mendocino Redwood Co. could not be reached for comment.

Their joint plan does not specify the recoveries for unsecured creditors. It also does not currently promise to pay secured noteholders in full.

The Bank of New York represents the noteholders, who the bank says are owed about $790 million. Marathon's plan would pay then $175 million in cash, $325 million in new notes, and make them "eligible for further distributions."

"Most creditors would not receive a full recovery, but will receive a substantial recovery," Marathon and Mendocino said.

The Bank of New York is offering a plan to liquidate the assets of Pacific Lumber subsidiary Scotia Pacific, which owns more than 200,000 acres of timberlands and has the exclusive right to harvest another 10,000 acres owned by Pacific Lumber. The bank says it has received preliminary offers up to $600 million for the land.

Pacific Lumber warned in its plan that a forced liquidation would wreck the business, eliminate jobs and wipe out recoveries for all creditors except the noteholders.

It says it can pay all creditors in full over an 11-year period by selling 6,600 acres of old-growth redwoods and building and selling homes on another 22,000 acres.

Those sales, it says, will raise $550 million, about half the amount estimated in its original plan filed in September. Pacific Lumber would also reduce its bankruptcy-exit financing from up to $350 million in the first plan to $40 million.

- David McLaughlin; Dow Jones Newswires; 202-862-3542; david.mclaughlin@dowjones.com

Copyright (c) 2008 Dow Jones & Company, Inc.