Mendocino Humboldt Redwood Company, LLC


Judge hears arguments for PALCO reorganization

By Nathan Rushton
The Eureka Reporter
July 11, 2008

The judge in the Pacific Lumber Co. bankruptcy case listened on Thursday to the first of two days of scheduled hearings aimed at convincing him why he should put the reorganization plan he approved Monday on hold while a creditor group appeals.

Scotia Pacific’s largest creditor, the Timber Noteholders, argue they are owed millions more than they were granted under the PALCO reorganization plan approved by the court for Mendocino Redwood Co. and creditor Marathon Structured Finance.

The Noteholders filed an appeal to the 5th Circuit Court of Appeals on Wednesday and filed a motion asking for a stay from bankruptcy judge Richard Schmidt to allow time for the appellate court to hear those arguments for why they believe Schmidt’s recent rulings were wrong.

Beside fronting money to protect the contentious deal, Schmidt asked what he could do to protect MRC and Marathon, who he warned could back out for any number of reasons.

“A bond isn’t going to help,” Schmidt said.

David Neier, an attorney for Marathon, which is set to receive its $75 million post-bankruptcy loan to PALCO next month, opposes the stay and asked Schmidt to require the Noteholders to put up at least $400 million.

“The only way we can go forward is to have this reorganization plan go forward,” Neier said.

Noteholders attorney Isaac Pachulski told the judge they would push for an expedited appeal and hoped to have the issue resolved by the end of the year.

“It would be inappropriate to destroy our appellate rights with a prohibitive bond,” Pachulski said.

Schmidt raised two primary concerns.

Where is the bankrupt company going to get the cash needed to operate while the appeal worked its way through the appellate court — a prospect that some attorneys argued could take years.

Second, Schmidt asked how MRC and Marathon would be compensated for any potential loss in value of the property — such as from a wildfire or market downfall — during that period.

Schmidt said he can’t grant a stay pending appeal that prevents Marathon/MRC to back out.

Rather than putting up a bond, the Noteholders attorneys pitched a plan that allows for a $20 million loan to SCOPAC from third-party lender — a loss the Noteholders would be willing to absorb in the event they didn’t prevail in the appeal.

In addition, the Noteholders said they would transfer to PALCO until the end of the year 5 million board feet of logs each month free of charge, which is the minimum needed to run its mill and satisfy its customers.

Jeff Barrett, chief executive officer for SCOPAC, testified that both companies could survive under such a plan.

With 29 million board feet already cut, Barrett said SCOPAC is on pace to harvest the remainder of the estimated 75 million board feet it is permitted to cut this year.

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