July 16th 2008

The Times-Standard
July 16, 2008

The federal judge overseeing the Pacific Lumber Co.'s bankruptcy has denied a stay to the largest creditors in the case, but given them time to seek relief from an appeals court.

In a 23-page ruling Tuesday, U.S. Bankruptcy Court Judge Richard Schmidt denied the stay on the reorganization plan he approved in early June. The Mendocino Redwood Co. and Palco creditor Marathon Structured Finance Fund plan won out over another by bond holders whose credit is secured by Palco's timberlands.

Schmidt will allow the noteholders until July 25 to seek a stay from the 5th U.S. Circuit Court of Appeals.

Schmidt found that granting a stay while the noteholders sought an appeal could derail Mendocino Redwood's plan, which he said ensures that an environmentally conscious operator will run the Scotia mill and the 210,000 acres of timberland. A stay would risk a liquidation of Palco, hundreds of jobs, recovery of claims by unsecured creditors and damage to the local economy, Schmidt wrote.

"It is fair to say that for the community, an entire way of life is at risk," Schmidt wrote.

A plan by bond holders to provide $25 million in financing and have Palco subsidiary Scotia Pacific provide logs at a discount to the mill while an appeal is considered was dismissed by Schmidt as insufficient to keep the company operating and to protect other creditors.

Schmidt wrote that the noteholders had pushed for the stay by trying to turn factual issues into legal issues, and determined they had little chance of succeeding in an appeal.

Unless the noteholders can secure a stay from the appellate court, it is possible that Mendocino Redwood will move to close the deal shortly after Schmidt's July 25 date for its plan to be final.