May 16th 2008

John Driscoll
The Times-Standard
May 16, 2008

Parties in the Pacific Lumber Co. bankruptcy case on Thursday launched their final salvos in the 16-month war over how the 140-year old timber giant will be reorganized.

The arguments had Judge Richard Schmidt of Corpus Christi, Texas, frustrated and apparently torn between a plan he seems to want to approve and one he can confirm as a matter of law.

Schmidt changed his earlier protocol of allowing attorneys to argue their cases largely uninterrupted, instead grilling lawyers representing bond holders with hundreds of millions of dollars invested in Palco's 210,000 acres of timber.

With a nod to a plan submitted by Palco creditor Marathon Structured Finance Fund and Mendocino Redwood Co., Schmidt said the court wants to put in place a plan that deals with Scotia, the Palco mill and the timberlands together.

"There's no doubt that if your plan is confirmable, it's going to get confirmed," Schmidt said to Mendocino Redwood attorney Allan Brilliant.

It was unclear by deadline exactly when Schmidt would rule, but he has said he's aware of Palco's financial position.

But Schmidt also listened to -- and questioned -- noteholder attorneys trying to convince him that even if Mendocino Redwood's plan seems more attractive, it isn't allowed under bankruptcy law. Attorney Bill Greendyke argued that even Marathon's all-cash offer to pay off the timber notes wouldn't make bond holders whole, because it wouldn't allow them to hold a lien on the property and potentially benefit from the investment down the road.

"I'm telling you that the law is that you can't do that," Greendyke told the court.

Greendyke said that he believes Mendocino's plan would illegally transfer value from timber-holding Scotia Pacific to Palco, stripping away some bondholder assets.

"Everybody who gets crammed down in a bankruptcy case thinks their property is being taken away," Schmidt commented.

The Mendocino plan calls for a merging of the timber and lumber operations of Palco, and a reorganization of the timber town of Scotia. It is looking to pay the noteholders $530 million in cash for the land. That plan has been recognized by the court as being the cleanest transition to getting the company operating normally again.

It also has won the support of Palco and its parent company Maxxam, unsecured creditors, the state of California, and state regulators and legislators.

But bondholders want to hold an auction for the timberlands, which they claim are worth $603 million, based largely on a bid by Texas investor and poker player Andy Beal -- which incidentally expires today. They have held that an auction is the only way to determine the true value of the property.

Palco attorney Shelby Jordan said that the noteholders months ago put a $440 million value on the land when it suited them, then later found other experts to cook the books to find "$150 million of trees." He also pointed out that Beal refused to show up to testify that his offer was for real.

Timber baron Red Emerson's Sierra Pacific Industries recently put forward an offer to buy the mill and power plant for $27 million plus $18 million in capital, and sink $70 million into improvements. But Sierra Pacific's offer is contingent on a 15-year log supply agreement that would take all logs with whomever ends up owning the timberlands. That's something Beal Bank previously has been unwilling to consider.

Marathon attorney David Neier said that with an uncertain months-long auction that requires additional financing under the noteholders' plan, bondholders could realize far less than they would get under Marathon's plan. He said that Beal's plan is nothing but a liquidation plan.

"It's Mr. Beal's own version of a Texas chainsaw massacre," Neier said.

Throughout the lengthy proceedings, Schmidt has signaled that the value of the timberlands would be key to determining how the case is resolved. He has said that if he determines a value for the claims, it can be forced on other creditors, and that bankruptcy often involves changing the structure of debt.

At the same time, Schmidt acknowledged that the support of any one plan -- or its benefits to a community -- could not override the law.

"I can't bend the law to make it better for Humboldt County," Schmidt said.