John Driscoll
The Times-Standard
December 22, 2007

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A federal bankruptcy judge on Friday set a schedule to complete the Pacific Lumber Co.'s bankruptcy case, saying he intends to see it finished -- one way or another -- by around the beginning of April.

U.S. Bankruptcy Judge Richard Schmidt also cleared the way for other parties in the proceedings to file reorganization plans, ending Palco's exclusive right to file a proposal. Ruling in his Corpus Christi, Texas, courtroom, Schmidt also freed up enough cash for Palco to stay operating at least until March 21.

"I have a plan for the future of this case," Schmidt said.

Schmidt's decisions follow the parties' emergence from mediation without an agreement on how to retool the company. They clears the way for Palco's main creditors -- who are owed $714 million secured by the company's timberland -- to submit their plan, which has called for a market sale of the assets.

It also opens the door for Palco creditor Marathon Structured Finance Fund and the Mendocino Redwood Co. to put into the running their plan to take over the company and operate it. Mendocino Redwood said this week it would put $200 million up for new equity and pay down debt, in what it says would be the best arrangement for employees, creditors and Scotia residents.

"If we can find the right combination of cash, debt and equity, we will have a settlement," said Marathon attorney David Neier.

Reached by phone Friday afternoon, Mendocino Redwood Chairman Sandy Dean said that the company is familiar with Palco and understands the challenges facing its operations.

Mendocino Redwood is owned by the Fisher family of GAP, Inc. fame, and owns 230,000 acres of timberland in that county. It's certified by the Forest Stewardship Council, which certifies companies whose operations meet stringent environmental standards. Dean said that Palco's habitat conservation plan would likely fit within the bounds of that certification.

"We want to bring the philosophy, the practices, and the policies that have worked well with Mendocino Redwood Co. to the Pacific Lumber Co.," Dean said.

Dean said Mendocino Redwood hopes to combine Palco's sawmill and timber operations and work to find a way for the Scotia sawmill to operate profitably.

What route the plans will take to the planned April 1 confirmation hearing, is up in the air. Lawyers from all sides argued bitterly over whether hearings should be held to determine the value of Palco's assets before or during the April 1 hearing. The parties' plans are due Jan. 30.

Palco attorney Shelby Jordan argued that the asset value is the essential issue, and that plans should be crafted around that figure. Without it, he said, Schmidt could end up considering four or more plans with such widely different values that they can't be approved. He also said the parties could re-enter negotiation if a value was determined.

"We are not going to abandon the idea that we can come up with a consensual plan," Jordan said.

But attorneys for the timber noteholders shot back that the feasibility of the plans was the more important issue. The noteholders have scoffed at Palco's proposal to sell 22,000 acres for 138 exclusive estates and its belief that it can get $300 million for 6,600 acres of timber protected for threatened marbled murrelets.

Palco also submitted some changes to its plan Thursday, including Maxxam providing $10 million in liquidity by purchasing logs for Palco; keeping Palco and timber holding subsidiary Scotia Pacific separate; and reducing Scotia Pacific's exit financing from $275 million to $150 million.

Schmidt approved Palco's budget going forward, allowing the company to dip into an account meant to pay principal to noteholders to fund operations. That followed the opposition of noteholders' attorney Zack Clement, who said Palco has run out of cash and would be using the noteholders' money from the account to continue its litigation.

"I am offended by this," Clement said.

Palco attorney Katherine Coleman said it's not the noteholders' money, it's Palco's, and the noteholders have a lien on it. The creditors wouldn't be losing anything of value, she said.

But the judge said that with a new schedule going forward, the case is back on track, and Palco would need cash to continue operating.

"I'm not prepared to close down the debtor," Schmidt said.