October 10th 2008

By Nathan Rushton

Eureka Reporter

October 10, 2008

While Humboldt Redwood Co. continues to plow ahead with its court-approved plan to reform the bankrupt Pacific Lumber Co, the U. S. 5th Circuit Court of Appeals in Louisiana heard arguments Monday for why the long-fought reorganization should be undone.

The bankruptcy plan that allowed Mendocino Redwood Co. to take over PALCO was approved in late July by federal bankruptcy judge Richard Schmidt, but was appealed immediately by the largest creditor group, which argued it was owed more money.

Roy Englert, an attorney representing the Timber Noteholders group that was owed more than $700 million and held 210,000 acres of Scotia Pacific Co. lands as collateral, said the appeal comes down to one issue.

"When lenders make loans — secured by collateral — they bargain to be able to either foreclose on the collateral or to be repaid in full," Englert said.

Or, as Chief Judge Edith H. Jones said in court recordings released this week, to be paid the "indubitable equivalent."

Englert said that Schmidt’s key error was to say the "indubitable equivalent" was met when there was a sale of the assets free of any liens and the secured creditor was not given a chance to credit bid to get the highest value for the lands.

In addition, Enlgert argued that the inexact value of the timberlands was "notorious" in this case and valuation experts differed by hundreds of millions of dollars.

"We do think the valuation was too low and we were ready to back that up with credit bidding," Englert said.

Under the current market conditions, Jones said that the $530 million paid by MRC that is being held in an escrow account wasn’t that bad of a deal.

"It looks like you are just trying to gain leverage to renegotiate," Jones said.

Repeating arguments filed with the appellate court, MRC attorney Allan Brilliant told the court that the Noteholders’ appeal should be dismissed because of "equitably mootness," which is a legal option for when a reorganization plan is "so substantially consummated that it would be inappropriate to order relief, even if a live dispute remains."

In question for the court is why the date for the when plan went effective was inconsistent with the plan and whether the plan was effective before or after the appellate court completed its review.

Although a clause in the plan states, it isn’t effective until all appeals are resolved, Brilliant argued Schmidt ruled it was final, which drew sharp criticism from Jones.

"And then you fellows have done about as speedy a job of trying to undermine our appellate review as I have ever seen in nearly 25 years on the bench," Jones said.

Jones also raised the point that Schmidt might have "misinterpreted the plan."

If the court agreed with the Noteholders on the merits of the its appeal, Englert offered two solutions, including a full reversal of the entire confirmation order, the return of the money and the reconstitution of PALCO and SCOPAC until a lawful order could be confirmed.

Englert said the court could also reinstate the Noteholders’ lien.

"That a lien has been stripped in violation of bankruptcy law — and behind that stands the Constitution — is to me, a pretty serious argument," Jones said.

When asked what a lien would do to the plan, Brilliant said it would put the company back in bankruptcy.

"That would basically put the company back to the same level of debt before it filed bankruptcy," Brilliant said.

"But you all knew that when you were rushing to confirm this," Jones said.

Brilliant argued that the debtors had $13 million in backlogged environmental remediation obligations that put water, streams, fish and wildlife in jeopardy.

"From a mootness perspective, one of the things you should keep in mind is that any kind of changing of the plan ... that will upset the success of the plan, will have large potential environmental affects," Brilliant said.

But another judge indicated there was a lot to the issue of equitable mootness and asked if the court could find parts of the court order moot and alter others that weren’t too disruptive.

Brilliant said that was possible if the main part of the plan remained intact.

There was no indication when the court will rule on the appeal.