Mendocino Humboldt Redwood Company, LLC
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PALCO

Bankruptcy judge denies Noteholders’ claim

By Nathan Rushton
The Eureka Reporter
July 7, 2008

The judge in the Pacific Lumber Co. bankruptcy case issued a costly setback Monday for the creditor group that said it was owed tens of millions of dollars more as part the reorganization plan tentatively approved last month.

Judge Richard Schmidt ruled against the “superpriority administrative claim” for as much as $200 million filed by the Timber Noteholders, which had threatened to derail Mendocino Redwoods Co. and creditor Marathon Structured Finance Fund’s plan to reorganize PALCO if approved.

In his previous ruling in June, Schmidt found the Noteholders — which loaned more than $700 million against Scotia Pacific’s 210,000 acres of timberlands — would be paid $510 million as part of the MRC/Marathon reorganization plan Schmidt said could be confirmed.

That ruling was quickly followed by a surprise claim from the Noteholders demanding as much as $200 million more based on what the attorneys argued was a decrease of value of the timberland collateral and other secured assets after PALCO filed for bankruptcy on Jan. 18 last year.

But after listening to weeks of expert testimony regarding land value, tree growth and capital improvements during the confirmation hearings in April and May and than again in a condensed version last week, Schmidt apparently wasn’t swayed.

“There was no evidence that the property had declined in value,” Schmidt said, but did change his previous ruling in favor of the Noteholders on the issue of the other assets.

Schmidt said Monday that the Noteholders had $522.5 million in secured collateral as of the bankruptcy filing.

After taking into account the $8.9 million already paid for attorney and other professional fees, Schmidt found there was still a $3 million deficiency.

Schmidt told the parties he was changing his ruling to indicate Marathon/MRC must now pay the Noteholders $513 — not $510 — as part of their reorganization plan he said he would confirm.

Regarding the value of SCOPAC’s 210,000 acres of timberlands, Schmidt indicated it was all speculative.

While he said the value of the PALCO’s timberlands and assets as of the confirmation hearings is unclear, Schmidt said the court believes the value has remained relatively constant during the 18-month proceeding.

Schmidt also addressed Monday the Noteholders’ attorney’s recent assertions that Marathon and MRC’s conduct was aimed at deceiving the court as evidenced by e-mail correspondences they introduced in court.

If the e-mail were taken out of context, Schmidt said it could sound bad.

“However, they have to be kept in mind of the context of this case,” Schmidt said, referring to the e-mail correspondence by MRC Chairman Sandy Dean to other MRC executives.

As far as the allegations that MRC and Marathon were relying on a “bogus” appraisal to manipulate the bankruptcy, Schmidt said that is why he lifted exclusivity to allow all the parties in the bankruptcy to proceeding to protect their interests by being allowed to submit a reorganization plan.

A hearing today is scheduled to handle any of the expected motions to have Schmidt reconsider his confirmation ruling and possibly a motion for a stay in the case so that parties might appeal his decision.

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