April 12th 2008

By Nathan Rushton
The Eureka Reporter
April 11, 2008, Updated: April 12, 2008

If there ever was a bankruptcy case where Texas judge Richard Schmidt said he would like to lock all the attorneys in a room until they resolved their differences, "This would be the one," he said.

After four days of exhaustive witness testimony and angry flare-ups between the lawyers in the contentious Pacific Lumber Co.'s bankruptcy confirmation hearings, Schmidt offered them on Friday what appeared to be the clearest indication of how he was likely to rule.

Schmidt told the court what he though was obvious from the testimony so far was that the value of SCOPAC's 210,000 acres of timberlands are likely to be somewhere between $500- and $600 million.

But Schmidt said there were plenty of areas to find problems and potential weaknesses in the valuation estimates presented by both the Timber Noteholder plan proponents and the Mendocino Redwood Co., which teemed up with PALCO creditor Marathon Structured Finance Fund to offer a competing bid.

Although he said there were some -- but not insurmountable -- legal problems with MRC and Marathon's reorganization plan he said was likely too low a bid, Schmidt pointed out the practical problems with the Noteholders plan that doesn't address PALCO or its mill.

One matter Schmidt said he was clear on was PALCO's plan to generate revenue by developing portions of its timberlands as trophy mansions, which he said was "dead in the water."

In his final words to the lawyers, Schmidt wished the parties good luck in working together to find agreement.

Frank Bacik, PALCO vice president and general counsel who attended the trial proceedings, said in a telephone interview from Texas after the hearing that it wasn't over for PALCO and its three valuation experts who will testify the lands are worth upwards of $900 million.

PALCO officials aren't ruling out the residential development proposal that Bacik said provides for a range of development options, including an affordable housing component.

And Bacik said he is confident there will be an 11th-hour surprise.

"I don't believe this case is going to be resolved on any of the plans presently on the table," Bacik said.

Taking the stand on Friday was SCOPAC vice president Jeff Barrett, who described his role overseeing the day-to-day operations of the timber company since 2005.

But it was the testimony of Jacob Cherner, representing the business interest of Texas billionaire Andy Beal, who announced a last-minute bid to the Timber Noteholders for SCOPAC's lands for $603 million that riled attorneys.

Questioning Beal's motives, attorneys grilled Cherner, who heads up the Scotia Redwoods Foundation business Beal formed to facilitate the land purchase, suggesting that Beal was never serious about the bid he formalized in writing in a non-binding statement of interest that conspicuously appeared the same day the plans were due to the court in January.

The attorney argued that Beal, who owns 38 percent of the SCOPAC's Timber Notes and stands to gain under their plan, offered the bid only to give credibility to the valuation and the plan submitted by the Noteholders.

Cherner defended Beal's bid, based on an interest in purchasing the property dating back to 2001, as ready to go if the plan was confirmed

Under questioning, Cherner admitted Beal hadn't performed much analysis on actually running the "tree farm" he intended to purchase, including researching timber harvest levels, timber marketing and securing a timber workforce.

Cherner told the court that Beal did have timberland holdings in the northern European country of Estonia.

According to federal financial 10-K405 forms, that property is 48 acres of timber lands Beal purchased in 1995 for $25,178.

Attorneys representing the numerous California agencies that regulate PALCO wanted Beal's commitment to comply with all the environmental regulations SCOPAC's lands were subject to, which Cherner agreed would be followed.

But attorney Paul Pascuzzi took issue with Cherner's repeated use of "tree farm" to refer to the redwood forests he pointed out that Gov. Arnold Schwarzenegger described as one of the state's most precious natural resources.

"I'll look for a better word," Cherner told him.

The confirmation hearings are set to resume April 29 when PALCO will present testimony for its plan.