Mendocino Humboldt Redwood Company, LLC
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PALCO

Bankruptcy judge denies stay in PALCO case

By Nathan Rushton,
The Eureka Reporter
July 16, 2008

A federal judge overseeing the Pacific Lumber Co.’s denied on Tuesday an emergency motion by a creditor group to put a stay in place while it appealed the plan the court approved last week that allows Mendocino Redwood Co. to rebuild the bankrupt timber company.

It was the latest in a string of unfavorable rulings for the Timber Noteholders, who are owed more than $700 million in loans to Scotia Pacific, and were seeking additional money they said they are due because of the devaluing of the 210,000 acres of SCOPAC lands they hold as collateral.

Judge Richard Schmidt did give the financiers enough wiggle room to potentially plead their case to a higher court.

Schmidt did grant the Noteholders its petition for a direct appeal to the Fifth Circuit Court of Appeals of his confirmation order for MRC and Marathon Structured Finance Fund’s reorganization plan, as well as left in place a 10-day stay granted last week that is set to expire July 25.

In addition to a bond in the amount of $176 million needed to provide security to the parties in the case, Schmidt said that if the court were to grant a stay pending an appeal, it would condition the stay on the Noteholders agreeing to facilitate a $30 million loan arrangement for PALCO and SCOPAC and the log discount program the Noteholders agreed to last week in lieu of a bond.

In his conclusions for denying the stay, Schmidt said the Noteholders attorneys didn’t meet the burden for proving to the court its necessity — noting that the issues the Noteholders intends to raise on appeal were already covered during the confirmation hearings.

And to their assertion that there would be irreparable injury to the Noteholders if the stay is not granted because the appeal might become moot if MRC was able to take over and effectively change the company before the appeal was settled, Schmidt said a majority of courts have ruled that’s not sufficient.

Schmidt said testimony during preceding hearings demonstrated other parties will be irreparably harmed if a stay is granted, including a risk that the MRC/Marathon plan could collapse or that put PALCO at risk of being liquidated by creditors recouping their tens of millions of dollars in outstanding loans.

Schmidt indicated that the public interest weighs strongly against a stay pending appeal, given the amount of support for the MRC/Marathon plan by North Coast residents and the bevy of federal, state and local wildlife and other government agencies.

In arriving at his figure for how much a bond should be, Schmidt wrote that he considered the risk that MRC/Marathon’s plan would not be consummated as a result of a stay pending appeal, as well as the impact to various parties in the case.

The Noteholders raising adequate capital to post a substantial bond was not the issue for Schmidt, according to his ruling.

“The Noteholders only asserted that a large bond would be the target for future damage claims that may not be meritorious,” Schmidt wrote. “The very purpose of the bond is to ensure payment of actual damages suffered as a result of a stay and this court will ensure that any such damages claims receive a fair and appropriate hearing.”

Schmidt determined that an appropriate bond amount for any stay pending an appeal of his confirmation order is $141 million, which he based on money due to unsecured creditors, litigation trust funding, various claims, administrative claims, employee bonus plan compensation, an estimated reduction of PALCO liquidation value and money for backlogged road work and potential fines.

Schmidt multiplied that number by 125 percent to reach the $176 million bond number to take into consideration additional risks from the increased harvesting Scotia Pacific executives intended above what MRC’s business model entailed, as well as the risk of losing more key employees, who have left in recent months.

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