the town dandy / By Hank Sims

Boys making noise

(April 5, 2007)  This case is not going to languish very long,” said Corpus Christi attorney Shelby Jordan, representing the Maxxam Corp.’s interests at the Pacific Lumber bankruptcy trial Friday morning. “Everyone who comes here is aware that you’re in and out with all due speed.”

Ho, was that a slip of the tongue, counselor? You meant it one way, but could it be read in another? You were ostensibly praising the efficiency ofRichard S. Schmidt, the Texas-based federal bankruptcy judge in whose lap you arranged the Pacific Lumber case to fall. But might it also be interpreted as a blueprint to your client’s strategy?

The hearing Friday morning was all about real estate — specifically, the 200,000 acres of Humboldt County timber land that the Scotia-based Pacific Lumber Co. put up for hock in 1998. Maxxam, Pacific Lumber’s corporate parent, wanted to reorganize its debt, so it created a holding company - “Scotia Pacific,” or Scopac - to take title to the land. With the corporation organized thusly, Maxxam could go out and borrow against the Scopac real estate, selling secured bonds to the tune of $720 million. Fast forward to 2007. In January, the company stopped making its payments on those timber bonds. So, naturally enough, the holders of the bonds want to foreclose on the Scopac lands. But Maxxam has decided that it wants to keep the lands, despite not paying its debt.

Those were the sides, and that was the fight, in Friday’s hearing. In legal terms, what it boiled down to was the question of whether Scopac is simply a financial instrument, as the noteholders were promised in 1998, or whether it is an independent company in its own right, as Maxxam is now arguing. If the latter, then the noteholders cannot immediately foreclose - the Scopac company would be entitled the same “fresh start” opportunity that all companies receive in bankruptcy.

In trial, Evan Flaschen, the attorney for the noteholders, referenced the Pacific Lumber’s briefs in the run-up to the case. The company argued that to allow the noteholders the ability to foreclose would ruin Palco - that Palco and Scopac are inseparable entities. Flaschen, remembering 1998, professed astonishment: “Why did you separate them, then. Palco? Why did you do that?” In any case, he said, there was no evidence that Pacific Lumber, which operates the Scotia mill, would be harmed - the owners of the Scopac timberlands would still have to get their trees to a mill, and Scotia is the closest mill.

Attorney Kathryn Coleman, representing Scopac, made the astonishing claim that Scopac has nothing whatsoever to do with real estate - it is not a real estate company, she said, it is a timber company. “Having operations on the property is not the same as operating the property,” Coleman said. The real estate alone, she noted, produced basically no income whatsoever. The good people of Scopac are the ones who make the money; if there were no scientists counting owls and monitoring streams, the company would not be allowed to harvest any timber whatsoever. The land and the trees by themselves, therefore, are basically worthless.

Schmidt did not immediately issue a ruling. As of Tuesday evening, Schmidt had not yet ruled on another question, one that had been put to trial early last month. Namely, the question of why this case was being heard in Corpus Christi in the first place. Nearly everyone associated with the case - creditors, state regulatory agencies, the federal government - believes it should be heard in California. But Maxxam wants it in a Texas courtroom, possibly because they are confident that there they will be “in and out with all due speed.”

A quick, tidy solution to the bankruptcy is, nearly by necessity, one that keeps the company intact and Maxxam in control. Whatever happens with the motion to move the case to California (which will likely be decided this week), whatever happens with the noteholders’ motion to accelerate their ability to foreclosure, Pacific Lumber itself will file a reorganization plan with the court by the middle of next month. The plan will make a case that the company can dig itself out of its own hole, given some time and some ability to stiff its creditors. The quickest possible outcome of the case is for the judge to approve that plan. The other route - the division of the company to all the people who stupidly loaned it money - would likely take months, or years.

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