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PALCO

Judge hears closing arguments in PALCO bankruptcy

By Nathan Rushton
The Eureka Reporter
May 16 2008

The Pacific Lumber Co. bankruptcy case is out of the hands of the lawyers and now rests with the Texas judge who will decide which, if any, of the two remaining reorganization plans he’ll approve.

Thursday’s final day of scheduled hearings, which dipped into the evening to finish all the various parties’ closing arguments, concluded with an unusually reticent Judge Richard Schmidt, who has overseen the roughly $1 billion-dollar bankruptcy case for more than 15 months.

“I hope I can give justice to the hard work you’ve done,” Schmidt told the lawyers, offering no indication of how or when he might rule as he dismissed the courtroom.

The reaction to the end of the day’s events in Scotia from PALCO’s top legal counsel, who listened in to the proceedings via a court conference call, was that Schmidt did little to tip his hand.

“It strikes me that it ended unceremoniously,” said Frank Bacik, PALCO vice president and general counsel.

Bacik speculated it will likely take Schmidt at least a week to pull together and review the voluminous briefs and other legal filings submitted to the court before ruling to confirm either the plan submitted by Mendocino Redwood Co. and PALCO creditor Marathon Structured Finance, or the plan from Timber Noteholders ’Äî Scotia Pacific Co.’s secured creditor who is owed more than $700 million.

Lawyers from the various parties spent much of the day rehashing familiar arguments related to the one issue that has polarized the various parties through several unsuccessful mediations ’Äî the values conflicting experts have given for Scotia Pacific Co.’s 210,000 acres of redwood timberlands that range from approximately $400 million to $1 billion.

While the closing statements offered little new information or legal arguments, there were several key developments.

Over the objections of MRC and Marathon’s attorneys, Schmidt allowed new evidence to be submitted through the Timber Noteholders’ plan to the court that included the late-arriving $45 million offer from timber giant Red Emerson’s Sierra Pacific Industries for Scotia’s mill and power plant.

Redding-based SPI, the nation’s second-largest manufacturer of lumber, filed the documents in federal bankruptcy court Monday highlighting its bid and pledge to invest more than $75 million to enhance the performance of Scotia’s sawmill, as well as to relocate to Scotia SPI’s Arcata mill facility, which it has owned and operated continuously for more than 50 years.

The Noteholders argued the SPI bid shows that their plan offers a solution that can keep the timberlands and the mill operations whole.

Emerson took the stand briefly to answer questions from Schmidt.

Although Schmidt said evidence isn’t reopened under normal circumstances, he said he would allow it this time because of concerns that SCOPAC and PALCO are rapidly running out of money.

“This is not an ordinary trial,” Schmidt said.

Schmidt also allowed into evidence the late filings from the Timber Noteholders indicating they had secured up to $10 million in financing from Lehman Commercial Paper Inc. to fund SCOPAC’s operations and administrative costs during the post-confirmation, pre-sale period as contemplated in their plan.

However, Schmidt declined to rule from the bench Thursday on whether to approve the last-minute deal struck between PALCO-parent company MAXXAM, Inc., PALCO, MRC and Marathon that removed the PALCO plan from consideration in trade for their support of the MRC/Marathon plan and concessions that give protections to MAXXAM and PALCO executives.

PALCO attorney Luckey McDowell said the purpose of the deal was to allow MAXXAM, which loses its control of PALCO under either of the two remaining plans, to walk away at the end of the day and be free from the threat of litigation.

“The intent was to achieve global peace among all of the parties,” McDowell said.

Although Schmidt acknowledged there hadn’t been any allegations of any improper upstream transfers of money from PALCO to MAXXAM or threats of litigation, one Timber Noteholders attorney who opposed the deal said MAXXAM had dominated and controlled PALCO into bankruptcy and he left open the possibility that something illegal could have occurred.

PALCO vice president and chief financial officer Gary Clark briefly took the stand to defend those insinuations and said he conducted a review and he didn’t see any improper financial transactions during his tenure.

“I don’t believe there is anything there,” Clark said.

Timber Noteholders attorney Todd Shields said Clark’s investigation didn’t amount to an independent query.

Schmidt characterized the agreement as “a minor deal” if the MRC/Marathon plan was confirmed.

Representatives from federal and California resource agencies continued to lend their support to the court Thursday for the MRC/Marathon plan they said is most consistent with environmental protections for endangered marbled murrelet birds that inhabit the timberlands.

Schmidt said that even if he wanted to confirm a plan that had the support of all of the California agencies, he couldn’t under bankruptcy law if it isn’t confirmable.

As to which way Schmidt will rule is anyone’s guess, although both plan proponents argued vigorously that the competing plans couldn’t be confirmed by law.

MRC attorney Allan Brilliant said under his clients plan, the Noteholders will be given $530 million, which is significantly more than the combined value that his experts give the lands.

“The plan is confirmable and it should be confirmed,” Brilliant said.

William Greendyke, representing the Indenture Trustee for the Timber Noteholders said the overwhelming majority of creditor votes were for his plan, but acknowledged the Noteholders didn’t receive a recommendation from California’s governor, Congressional representatives or the unsecured creditors.

“But if you’re counting noses and you’re counting dollars, the preference of creditors is going to be for our plan,” Greendyke said.

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