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PALCO

Value battle continues in PALCO case

By Nathan Rushton
The Eureka Reporter
July 2, 2008

Attorneys and witnesses in the Pacific Lumber Co. bankruptcy proceedings returned to court Tuesday in Corpus Christi, Texas to continue in the battle of experts witnesses that is hoped will resolve a surprise multi-million-dollar snag in the case.

Judge Richard Schmidt, who has overseen the 18-month case, ruled in June that Mendocino Redwood Co. and PALCO creditor Marathon Structured Finance Fund’s reorganization plan for PALCO was to be confirmed, which would have allowed the two companies to take over the timber and mill operations.

But Scotia Pacific’s largest creditor — the Timber Noteholders — filed a motion seeking payment to make up for the loss of value of their approximately $760 million in secured collateral — the 210,000 acres of timberland — that they say plummeted since the bankruptcy.

Under its plan tentatively approved by the court, MRC would only have had to pay the Noteholders $510 million.

The Noteholder’s attorney argued MRC and Marathon has to pay an additional “superpriority administrative claim” that could be worth more than $200 million.

The ultimate price tag for the claim — which Schmidt must decide — is based on the contentious value and any subsequent decrease of that value of the lands that has been the heart of the case.

Taking the stand Tuesday was Joseph Radecki, a financial analyst hired by the parties to assess the unprecedented national housing market downfall, as well as James Fleming, a consulting forester and valuation expert hired by the Noteholders to estimate the value of SCOPAC’s forestlands.

Fleming repeated his previous testimony that the market value of the approximately 210,000 acres of timberlands was $605 million as of October 2007 — a decrease of approximately $40 million since PALCO filed for bankruptcy in January that same year.

Fleming said a log price drop for redwood and increased annual harvest rate by SCOPAC were to blame.

Todd Shields, for the Noteholders, asked whether Fleming agreed with MRC and Marathon’s experts who argued the value of SCOPAC’s lands would increase automatically if the growth rate exceeded harvest.

“Absolutely not,” Fleming said. “It is just one factor to be considered in determining the value.”

Richard Lamont, a timber consultant hired by Marathon, repeated his testimony that despite a decrease in log prices, the value of the land increased by approximately $10 million.

Lamont was questioned on his appraisal methods, which he admitted used log pricing data unfamiliar to him that was provided by MRC, but was correct.

Attorneys on the various sides showed obvious frustration Tuesday as tempers flared at each other and at times with witnesses who failed to give answers that satisfied the lawyers, prompting Schmidt to admonish the lawyers several times after repeated yelling.

John Young, Jr., the interim chief financial officer for SCOPAC hired to replace former CFO Gary Clark who retired in May, answered a litany of questions related to the his filing of monthly operating reports that showed the company’s dwindling cash and assets.

Young said SCOPAC had lost approximately $46.9 million since the bankruptcy began.

In addition to paying millions in professional fees, Young said $25 million in auction rate securities — thought to be good as cash — have been essentially frozen because the bonds can no longer be sold on the market.

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