The Facts Revisited

May 27, 2008

The Pacific Lumber Company Bankruptcy Trial of 2007-2008 is over! We hope! It closed with an intense barrage of legalisms, citations of precedents and a large dose of the especially impenetrable jargon that is specific to bankruptcy law. Scheduled for two days, the event was brought to a conclusion after only one due to the effective management of Judge Richard Schmidt.

Notes on the Judge

This Judge has a dry wit that he never abuses. He brings exactly the right amount of levity to the courtroom and to make sure that it is not misunderstood as a lack of seriousness, he apologizes after almost every good joke. (This places a major limit on his future potential for professional comedy.)

He has a great respect for good attorneys. He reminds us often that this case is rich in good attorneys. His style, in fact, is to let the attorneys’ arguments run until he doesn’t understand what they’re saying and then he questions them in a straightforward fashion that’s always respectful. He will point out contradictions in their arguments on the spot, but he also seems to accept wisdom and right interpretation when he hears it.

He is a lawyers’ judge but is not afraid to cut short zealous arguments that fail to respond to correction. He more or less brushes off formal objections to witness’ testimony and lets them speak on the grounds that there’s no jury here that needs to understand, only him and he pretty much knows the law. He wants to hear what the witnesses have to say and trusts that he is not about to be deceived. He is, to all appearances, smart and decent and truly wants do the right thing for Humboldt County if the law will allow it

Some Reiterations and Additions to the Known Facts

Events in court during the last session had put the official stamp on a two-fold competition for confirmation. On May 1st PL and Maxxam swung behind one of the plans, MRC/Marathon’s and officially killed their own which for all intents and purposes were already dead. Also on May 1st, McMarathon upped their original offer to $530 million all cash. The note holders had consistently been disinterested in the prior offer that offered less cash and new notes.

The MRC/Marathon plan has many aspects that have made it attractive to both environmentalists and timber people alike in Humboldt County. Both the regulatory agencies and the politicians have spoken out clearly in support of this plan in an entirely unprecedented effort to influence the outcome of a bankruptcy proceeding.

The note holders’ plan calls for an auction, a far less popular alternative in Humboldt County. The ‘notes’ believe that only through free competitive bidding can the real value of the property be realized. They use as evidence in support of the effectiveness of an auction the number of parties that have expressed an interest in an auction.

One of those is the Harvard University endowment, the Harvard Management Corporation, a major timber investor. The manager of Harvard’s timber portfolio was in court on May 1st when they formally announced their interest and their partnership with Sierra Pacific Industries (SPI). Red Emmerson, head of SPI was also present for the announcement which offered terms by which SPI hoped to take control of the Scotia mill.

The ‘notes’ had been using Harvard’s interest as part of their rationale for the ability of an auction to increase the level of their recovery. Word filtered out over the next week that when Harvard learned of the new, increased price offered for the land by McMarathon, they did the wise thing and stepped down. They’d supposedly done most of their due diligence investigations of the Scopac inventory and they had a fairly clear idea of what the land was worth to them.

The question of whether smart old Harvard and their advisor, Jim Rinehart were wise when it came to timber investing was answered in the affirmative. Whether the ‘notes’ were right about their surmise that an auction would produce a lot more money for them was at least partly answered in the negative.

There was another partnership of investors sniffing around. They’d jumped in through the phone respondents’ connection in court two weeks ago and made their interest known. They were ready, they said, to bid somewhere between $565 and $ 590 million, but, they slipped in, they were still waiting for the last $ 300 million of their funding to fall into place. That massive uncertainty elicited a small guffaw from the assembly listening to this on the courtroom’s speaker phone the next morning No certainty there.

This is important because the Judge is indicating a clear preference for the McMarathon plan if, and this is a big “if”, the confirmation of their plan can happen within the constraints of bankruptcy law. He said over and over that he’d prefer to do what the community wants—and the community as a whole seems to want McMarathon–but that he must do it within the law. What, one might interpret, is really at stake here is the danger that confirming the McMarathon plan might produce a vibrant appeal.

An appeal would be problematic all around. The odds against a successful appeal are quite low. Judges higher up in the Federal system overturn bankruptcy decisions maybe 10% of the time tops. Rarely does such a suit have sufficient merit to warrant issuing a temporary Stay that would keep a confirmed party from implementing their business plan on the property. The Judge is no doubt being cautious and looking at all available precedents and existing guidance that the statutes offer. Filing an appeal that produced a Stay in a relatively short time would throw the whole deal into a new depth of chaos which would be brutal to the working people in Humboldt. Did I say the ‘notes’ were tone deaf? Say what?

Meanwhile, never resting, the ‘notes’ managed between the 2nd of May, the last day of the previous session, and the 16th, to turn two tricks. Everyone knew they were working to develop a partnership with someone who could run the mill. They had stubbornly sustained the position that it wasn’t their problem even though everybody and their sister had told them it was–that the land itself would be worth considerably less without an operating sawmill in Scotia to process Scopac’s log. Other mills in the area could potentially pick up the slack if Scotia went down but there would be added transportation costs and generally a less friendly operating environment.

The powerful desire by the community itself to sustain mill jobs in Humboldt was another factor, but not one the “notes’ had seemed to be overly concerned with. This is where they first earned their reputation as being tone deaf. It took the Judge himself to beat on them a politely, always politely, about the importance of the mill in his deliberations before they went to work at it.

Even then, the best the ‘notes’ could produce in this area until this week was a lot of lip service. Finally, though, just before the startup of the closing session, they came up with a partner—the ever-mobile bargain seeker, SPI. Freed in a few short days of a Harvard entanglement, they’d come back in as a partner of the note holders with an offer of $ 40 to $ 45 million for the mill and a promise to sink another $ 30 million or so into moving their Samoa mill to Scotia and upgrading PL’s, giving them the capacity to handle both large and small logs.

Concomitant with that, they planned to close their Samoa facility and meld their work forces into one with 300 employees all at Scotia, producing, it seemed, a net loss of timber employment in the county. This could create a public relations problem for them were not McMarathon likely to produce, at least in the short run, a similar loss of jobs.

The Sierra Pacific consolidation would also potentially create problems for local producers. Options for the selling of their logs would be reduced to only two, SPI. It could result in a reduction of the price that these small producers received. Any negative economic impacts on these producers could play out in terms of conversion of more timberland.

Above and beyond its impact on the County, there are major problems with the SPI offer that renders it considerable less than perfect. A main one is that they will inherit with the mill an equity fund of $ 18+ million which reduces the offer in reality to as little as $ 25 million. A representatives of Marathon, who holds the PL notes and thus must approve the deal, says this would mean that after you subtract the established value of the cogeneration plant, the deal for the mill is worth about $ 7 million. Marathon, the major creditor for the mill, isn’t about to accept that and neither is PL, the owner of record

There are also problems with the 100% supply agreement SPI demands of whoever wins the timberlands in the auction. Not having access to more than one market for logs deprives a producer of the ability to establish fair market value. Speak of “chilling an auction”!

The ‘notes’ had a second announcement, They’d engaged Lehman Brothers, a well-heeled investment bank, to provide up to $ 20 million in DIP funding (Debtor in Possession) for Scopac, enough to keep the company operating for the six to 8 months that completing an auction would require. So at least on paper the ‘notes’ have responded to basic requirement that the judge has tacitly established. Any deal that doesn’t promise to maintain a ‘going concern’ at both Scotia and in the woods isn’t likely to get his support. Of course, were either the woods operation or the mill to fail before or during an auction, the value of the entire deal would be reduced so protecting the “going concerns” was simply good business. Why this had been hard for the ‘notes’ to grasp earlier in the process is hard to say.

The morning’s session on Thursday, May 16th, was dedicated to cleaning up details. One of them was the reopening of the evidentiary stage of the trial so that the note holders new proposal with SPI and Lehman Brothers’ participation could be formally admitted. Zack Clement had made the formal announcement of the new partnership for the ‘notes’ and Texas Todd Shields had actually called Red Emmerson (who was in court with his entourage again) and a representative of Lehman Borthers, to testify. There were no questions from McMarathon for either witness and they were allowed to step down.

Another contentious issue emerged in the morning that related to the formal acceptance by the court of the Maxxam-Palco motion to drop their plan and support MRC’s. (This had been formally announced to the court on May 1st.) The note holders claimed they were going to be disadvantaged if the Court approved the release of Maxxam from obligations to Palco. The Judge didn’t concur and the plan was accepted as had been expected.

During arguments concerning this issue, Todd Shield for the ‘notes’ called the Maxxam-PL deal with McMarathon a “collusive agreement” one of many crisp-sounding but vague legal phrases that were to be employed this last day especially by the ‘notes’ in their closing arguments. Their strategy seemed to weigh more heavily on legal arguments rather than on the question of the value of the land which, after all, was what they sought to increase in an auction. Nothing in this posture would lead one away from the assumption that they are preparing for an appeal down the line.

The Close

Avoidance of appeal or other post-confirmation legal action that would test his coming decision was clearly on Judge Schmidt’s mind in the afternoon when closing arguments were finally delivered. He repeatedly suggested his willingness to support the alternative desired by the community but it had to meet all requirements of the law.

That meant, at least, that the confirmed plan had to be “fair and equitable” to all parties. Given that approval of the McMarathon plan had to be a “cram down”–i.e. a plan confirmed against the desires of one major class of creditors–very careful attention had to be paid to legal procedure and precedent.

Attorneys for both sides were keenly aware of this. The arguments offered, as mentioned above, had to do both with value and with the law. Argument about value were central in most of the closing statements by the attorneys, especially those for McMarathon. The basic tactic employed by both sides relative to questions of value was first to discredit the opponent’s expert witnesses and their valuations and then to espouse one’s own.

New York attorney, Allen Brilliant, opened for McMarathon with a list of the many supporters of their plan. These include but are not limited to:

n The Unsecured Creditors Committee

n The trade creditors

n The Bank of America

n The Pension Guarantee Corporation

n The State of California regulatory agencies and Governor

n Federal regulatory agencies, especially US Fish and Wildlife

n Palco

n Maxxam

n The Joint Committee for the Scopac-Palco Estate

Brilliant went on to open the day’s discussion about value and how the $530 million McMarathon offer was not only substantial but might indeed be the best game in town. Many of the other players, he pointed out, had dropped back. Harvard was for the moment not a factor, all was quiet on the The Nature Conservancy consortium had not been heard from in a while and even the Beal deal seemed to be lapsing. The suggestion was that the McMarathon offer might be the best they were going to get. The note holders’ attorneys gave appearance, though, that they held firm to the position that there were buyers out there willing to pay a good deal more than the current offer.

Brilliant went on to note the deficiencies in the new SPI plan which to the unknowing might seem a very good deal but in essence, he claimed, was just bargain seeking. He also pointed out the discrepancy between one set of the note holders ’experts’ and another both from Houlihan Lokey, Chris De Mauro from Houlihan had originally testified to a considerably lower range of value than Managing Director, Greg Daniels, did months later.

David Neier for Marathon then pointed out that the Beal offer for $ 603 million was a gross offer while the McMarathon was a net. After you subtracted several hidden costs, especially the time value of money for the six to 8 month auction period. the Beal Deal was only worth $ 507 million. So MRC, according to these calculations, gave more distributable value to the ‘notes’ than other options. Of course, Neier reminded the Court, the McMarathon deal also paid off the unsecured creditors at least for 70% of their debt, a high percentage in bankruptcies and considerably more than the “notes’ had ndicated they would be willing to pay.

The note holders had two big guns working for them that day, Bill Greendyke, a soft spoken but eloquent lawyer from Fulbright’s Houston office and Isaac Pachulski, a principal in a Los Angeles law firm noted as one of the most powerful bankruptcy practitioners in America..

They were like fire and ice, Greendyke’s well-researched presentation, mostly on issues of the law, hid steel in its quiet delivery. He had the capacity to make heavily contradicted positions appear seamless and opposition to his own professional opinion seem understandable but at least a little foolish

Pachulski, equally scrupulous in his study of precedents, swung his sword with both hands. His grey beard and hair made him seem like he had been dragged out of retirement, but his delivery was that of a man at the top of his game, His oratorical zeal seemed to represent a deep conviction of the righteousness of his position. He spoke in clipped, passionate tones and with what seemed an encyclopedic knowledge of bankruptcy law. He was smart enough to be effective and annoying at the same time. Both lawyers had formidable approached; Greendyke soothingly urged while Pachulski browbeat and blasted off barrages of precedent and opinion.

All that being said, their positions were legalistic and highly technical. Value entered in only as an aspect of form and process. Terms such as “substantive consolidation”, “separateness”, “indubitable equivalent” “deficiency claim” and ”absolute priority rule” were flew around the courtroom. It was almost like the note holders’ argument were in a starkly revealing black and white while the McMarathon team based their hopes on living color with all its potential blemishes.

One thing Greendyke suggested was that by accepting the McMarathon plan, the ‘notes’ would be forgoing a so-called secured claim for more than $ 200 million. This would be a powerful argument if bankruptcy trials regularly returned 100% of debt. It would, in fact, obviate the original decision to end PL’s exclusivity, or maybe even the bankruptcy itself since the value of the firm would admittedly be at least equal to the debt.

Greendyke concluded his presentation by reminding the Court that “the world was watching” and that the Judge should ignore all the public pressure and vote for the note holders’ plan. It reminded us yet again of the curiosity of such a proceedings being carried out in such a public arena and how rare it was that such an enormous public predilection in support of one side was present in bankruptcy court. It all served to multiply the challenge the the Judge faced.

Together, the observations of the two note holders’ lawyer read something like a menu of legal issues upon which an appeal could be produced. Since Pachulski had appeared in this Court only recently, one might assume that he had been brought in specifically to prepare the legal ground for an appeal or at least to send a shot over the bow of the Judge warning him that his decision, if it went against the ‘notes’, should be extremely well-reasoned.

If nothing else, the sheer weight of money the notes were willing to throw into the lawyering of this project that must ultimately come from the asset they sought to control spoke voumes about their ambitions and intentions. fv

Kathleen Coleman for Scopac, now aligned with the note holders, was up next. She took something of a beating, always politely, from the Judge who seemed to find her thinking slightly mushy. He reminded the assembly that the note holders were taking a risk here as Allan Brilliant had suggested. Her client and its new allies, the ‘notes’, could end up not finsing a higher bidder. They might have to credit bid for what is essentially their own property. This would be in essence a foreclosure.

The Judge also made a clear point in response to Ms. Coleman’s arguments about the legality of confirming MRC/Marathon. He asked her straight out, “When can a court place a value on assets and cram down?” She had no compelling answer.

Then came the surprise of the day, for some, anyway. The next speaker for the MRC/Marathon plan was one who had been possible it’s most effective critic just two weeks ago—Shelby Jordan for PL, now aligned with McMarathon. This fast-talking, homey old Texas boy was a treat to listen to if you liked music of the spoken word and weren’t too fussy about its meaning.

Jordan and Texas Todd Shields of the Fulbright team have to share the Blue Ribbon for Best Regional Accents. With Shields, though, the drawl is so pronounced that one suspects a mild exaggeration for impact. Not with Shelby. His accent was as one with the cut of his suit, the sweep of his hair and the power of the boat in which you cannot fail to imagine him cruising happily through his weekends. He was the one active attorney on this case that actually lived in Corpus Christi. It will be a sweet irony to some if Jordan’s summation was a key in winning for Humboldt the alternative it seeks.

Indeed he turned out to be arguably McMarathon’s most eloquent defender. He slowed down the rapid but mellifluous flow of his words just enough to be very clear. He reminded the ‘notes’ that when they wanted the Judge to declare an end to “exclusivity” (the period during which only the plan of the debtor, PL/Scopac could be considered), they ridiculed PL/Scopac’s billion dollar plus real-estate dominated plan and claimed the land was worth no more than $ 430 million.

Jordan reiterated the position that the MRC plan takes no money from the note holder nor does it violate any of the rules. He claimed that “Pachulski doesn’t care what happens to Humboldt” at which point the Judge reminded him that “I (the Judge) cannot bend the rules”.

The next to the last attorney to present a closing argument was Paul Pascuzzi representing the agencies of the State of California. Earlier, Allen Tannenbaum, on the phone for the US Fish and Wildlige Agency, had said earlier that though they have some problems with all the plans, MRC’s presented the least problems for maintaining the HCP.)

Pascuzzi did not beat around the bush. He made clear several simple points. They, the Agencies, strongly support the MRC/Marathon plan and strongly disagree with the idea that the offer is too low.

The Agencies warned that considering the Headwaters litigation as black ink on the ‘note holders’ balance sheet is to misunderstand the situation. They believe that the litigation “is in its infancy”. They vigorously oppose the suit and feel that it is hard to determine that it is worth anything at all.

They agencies also feel that the ‘notes’ are guilsty of a failure of credibility in terms of being able to set up a working outfit in 60 to 90 days. “We don’t want an inexperienced company coming in there and making a mess,” he concluded. The message here is about the odds for Scopac/Palco surviving in tact through the next few months if an auction is confirmed. According to the State of California, they are not too good.

The very last attorney to argue was Evan Jones of Bank of America, the current PL liquidity provider. He provided the last note of humor to this 16+ month-long process. He said that B of A can’t get paid until a plan is confirmed. He said they are eager to get paid but that his experience in getting “taken out” in this trial so far has been about as good as it was in High School.

When the he Judge’s made final remarks, the room, was absolutely still even though people were fidgety after sitting through more than 6 straight hours of arguments. He asked “Have we not indeded had a market test (without the need of an auction)? His answer was in the affirmative. He said that he believed that the since exclusivity had been lifted for the past several months bidders had been given an ample opportunity to emerge.

At this point Pachulski leapt back into the fray, spitting and clawing like a cornered wolverine, demanding to know what the valid process for the establishment of value actually actually is implying that it had not yet taken place in this courtroom. His unstated lament thought lingered in the stale air of the court; “It’s just not fair.”

In the Hands of the Judge

Now it is in the hand of Judge Richard Schmidt. His path forward, precarious and exceedingly narrow, will require a great deal of practical wisdom. The baby could as easily perish from inaction as from whacking it in half. If the Judge confirms MRC, the local public’s favorite, there is a likelihood that the ‘notes’ will appeal based on a charge that there has been a collusive and unfair reduction in the value of their secured asset. The appeal could potentially shut down both Scopac and Palco. It could take 6 months or more to legally resolve. Both companies are within days of running out of the capital necessary to run the operations.

In order for them to keep running, either the ‘notes’ partnership, now with SPI and Lehman Brothers, must be put into place almost immediately or the McMarathon plan must be. Closing operations for any length of time would reduce the value of the whole business so either side would suffer losses.

Either decision is a “cram down’ . One or another major class of creditor will be forced to accept a deal in which their asset sells for a good deal less than they think it is worth.

In the case of Palco and its creditor, Marathon, it is difficult to see how they can be forced in the short run to turn over the asset of the mill and cogenera-tion plant to SPI for the price offered without a prolonged legal battle. There is a question of process as of yet unanswered as to whether the mill and plant are to be auctioned off separately from the Scopac lands or are expected to be handed willy-nilly to the entity chosen by Scopac? Or is the recipient of the mill to be determined by the winner of the auction?

There is a great deal of ambiguity here. One criteria at least for us in Humboldt, produces a painful contradiction to the Judge. If an auction results in a considerably higher price, the higher financing costs comes from the woods. It is unlikely, is seems, that other buyers will have access to cheaper capital than MRC enjoys or can develop in the short run as efficient a product distribution capacity. It is not hard, though, to imagine an overeager buyer ignoring their own due diligence and overbidding just to win. The history of American business is riddled with such dangerous optimism.

So an auction, if successful for the note holders, potentially heaps a greater burden on the already overburdened productive capacities of the land. Hirwitz’ original sin (see below) will be replicated which makes it unoriginal and even less forgivable. It is instructive to recall the Scopac and Palco are themselves already saddled with a total of almost $ 45 million in legal costs from this bankruptcy, also payable from the proceeds of selling logs and lumber in the future. Who could envy Judge Schmidt his tasl?

What’s Good for Business : An Epilogue

Observations on Place and Value

The Federal courthouse in Corpus Christi is a stately three story brick and plaster edifice with red-tiled hmip roofs in the mansard style. Built in 2000, it is serenely solid, tasteful and, at least on the surface, constructed with care using first-rate materials, perhaps not the norm for modern day government construction. The tarnished brass plate to the right of the main entrance has in raised letters an enlarged facsimile of then-President Willliam Clinton’s signature.

The building sits on its own city block at the edge of Corpus Christi’s rarely busy downtown. Just across Shoreline Drive from the courthouse, the protected waters of Corpus Christi Bay lap against a long rock-armored shore. Off across the water, a hazy semi-industrialized skyline indicates where the long narrow barriers of Mustang and Padre Islands separate the Bay from the Gulf of Mexico itself. Off to the east, the channel at Point Aransas allows boats of all sizes access past the barriers, to open waters.

This setting, both the man-made and natural, has a breadth that lends dignity to the business taking place within the courthouse no matter what inherent dignity that business actually might have.

Between the Courthouse and the closest of the two Omni Hotel towers, where most of the participants in the Pacific Lumber Company bankruptcy proceeding stay is a stretch of sidewalk that runs along an empty field across from the bay. Had they been able to see themselves from a distance, the 50 to 80 lawyers and consultants who daily perambulated across this no man’s land might have been forced to ingest a small portion of modesty, medicinal for those who are charged with such a dearly bought sense of mission. Dressed almost uniformly in black and trailing their wheeled briefcases like mother ducks leading their lone duckling, these men of the law and the supporting cast seemed to cling together, humbled by the relative vastness of the broad bay, the great stately bulk of the courthouse and the Omni tower thrusting into an endless sky.

Humility, though, is not the primary qualities that brought together this particular cast of characters for what most hope will be the last time. And it will not be modesty that will force them back into each other’s company if indeed that were to happen. It would be an oversimplification to say, though, that it was only the money. Indeed there are hundreds of millions of dollars at stake here, but the value of Pacific Lumber Company has never been reducible to such a simple a measure as dollars. Nor for that matter is real quality always available to those who pay for it only in dollars.

We have arrived at last, as Judge Schmidt must in his deliberations, at questions of value. There is, of course, value, and then there is Value just as there is character and Character and place and Place.

As for the Place, it is an oddity that the debate to determine the fate of this last whole vestige of the greatest temperate rainforest in the world with its capacity to throw up trees of an almost incomprehensible magnitude, should be carried out not only so far away but in a place surrounded on three sides by a wide, flat and almost treeless plain. The only trees immediately visible were scattered coastal palms bending by ancient design to the breezes off the Gulf. These seem as alien to the giant redwoods in their deep shaded mountainous groves as any tree species can be.

This inevitably leads one to wonder why we could not take Scopac’s timber consultant, Don Reimers’ ideas for maximum ecosystem flexibility in service of cash flow, by planting improved redwood cultivars not in the Doug Fir canyons of Humdoldt’s Mattole Valley, but right out onto those flat Corpus Christi plains. Imagine the convenience Hurwitz could have gained by having not just the trial but the forest itself in south Texas. There are far fewer eco-radicals and protestors to worry abut down in down there, and it might have freed up his Humboldt real estate ambitions. The world’s steepest golf course, though, was always going to be a hard sell.

Like Judge Schmidt, I must beg tolerance for my cheap jokes. There is a serious point here that needs to be articulated and jokes can be a lubricant for the process. Charles Hurwitz came raging out of southeast Texas back in l985, a free market pistelero full of perversely exalting notions of avarice and with the basest of investment tools (high yield debt instruments i.e. junk bonds) in his holster.

Hurwitz joined with the leading financial hustlers of the age and snatched up this last and greatest jewel of a disappearing biome, also the mainstay of a whole local economy, and accelerated the process of extraction several-fold. He translated as much of its value into cash as was humanly possible and exported the cash to bank accounts in Texas and, one would imagine, offshore. From the perspective of today, not itself necessarily the most enlightened of times, the level of exploitation of place and people seems painfully anachronistic.

Maybe, though, that’s how business is done in Texas. Or maybe not. Maybe Andy Beal and the note holders are considerably more responsible than that. After all, they have been making what seems to be a real effort to find a way to keep mill and forest operations alive though one could suspect that such responsiveness has been at the point of a gun. Certainly one could argue that they have a right to be paid back as much of what they loaned PL as possible within the constraints of what’s there to repay them.

The problem is that the level of debt Hurwitz incurred in the name of Pacific Lumber Company and the cost of servicing that debt, were and are in excess of what the land can produce for long. Once creditors are contractually promised a certain return on their investment, the die is cast; someone is going to get hurt. So Hurwitz committed the original sin, the one from which we can recover only by continuing to beat up PL lands and our community– or someone losing some money. The sin of the note holders was that they failed to avail themselves of real knowledge of the nature of their investment both in terms of the dependability of the debtor and the nature of the asset which secured their investment.

It is easy for us in Humboldt to choose the losing of someone else’s money rather than suffering further losses to our land and community. It all depends on where you live and what you value, I guess. Preventing silt from coming off steep slopes damaged by bad logging and the consequent damage to rivers, salmon runs, farms and the economy is a difficult criteria to get people on the coastal plain of South Texas to care a lot about. Lack of a stable base of decent jobs in Humboldt and all the social ills that follow is hardly is high on the list of social ills in Corpus Christi. The losses are distant, but that doesn’t make them any less real.

There seems to be no recourse but to fall back on the laws for determining where things are at. Unfortunately, many of the things most at stake in this bankruptcy are not yet protected by law. They might find accommodation, though, under the simple rubric of “Good Business.” That means good for the investors and, if not outright good for the world which we all share, then at least not destructive to it. There’s a non partisan criteria we may be able to live with or may not in the long run be able to live without. Is that too much to ask?

What Happened and What Didn’t

May 15, 2008

A NOTE

On the eve of the final confirmation hearing in Corpus Christi: a 20 knot SE wind right off the Gulf is whipping the palm trees at the beachfront back and forth. Lawyers arrive at the Omni Hotel, two blocks from the Courthouse, in clumps or alone. They look less than perfectly enthusiastic but no doubt by tomorrow morning they shall have girded their loins for one last, God willing, battle. There was actually a chance that it could all be over by Friday, all but the Judge’s final decision as to which plan to confirm.

The following report was written over the last week and a half, intermittently as time allowed. Its progress was much slowed by the temporary loss of a notebook in which details of the last four days of the hearing were recorded. That notebook endured a remarkable odyssey of its own after it’s sometimes owner left it in the pocket of a Southwest aircraft in San Francisco. After crisscrossing vast reaches of North American terrain entrained without will or comment into Southwest’s wild but efficient routing of its airplanes, the notebook gained the notice of a gentleman on his way home to Olive Branch, Mississippi as he deplaned in Memphis. A quick review of the information on its cover informed him of its owner’s whereabouts and the last leg of the notebook’s circuitous journey home was accomplished, thanks to the kindly Mississippian, through the auspices of the US Postal Service.

So here are some incomplete musings about the hearings on May 1st and 2nd.

What Happened in Corpus Christi and What Didn’t

May 1st and 2nd

Part 1

At the beginning of the week in the US Bankruptcy Court in Corpus Christi, it was clear that the ultimate resolution of the long, complex process to determine PL’s future was going to be the confirmation of either the Mendocino Redwood/Marathon Structured Finance plan to operate a recombined company or that of an auction desired by the Scopac note holders. At the end of a week of great drama and consequence during which winds of titanic force swirled and eddied through Judge Schmidt’s court, the choice was still exactly the same.

At the very outset of the proceedings on Thursday, PL attorney Shelby Jordan delivered the message that all in court had eagerly awaited since preliminary announcements two days before. PL and parent company Maxxam were stepping down, throwing in the towel, but not in the snarly, resentful fashion one might have expected. It came across, in fact, as a gracious act.

All week, Maxxam had maintained a presence in the courtroom in the persons of CFO Emily Madison and, less frequently, Kenny Friedman, member of the Maxxam Board. Having lived through 23 years of justifiable fear and loathing where Maxxam was concerned, seeing that these two ordinary, apparently well-disposed humans were actually dreaded Maxxamites was a little like encountering advanced scouts of Ghengis Khan’s golden horde bearing down in a Prius.

It was, in fact, the attractive Ms. Madison’s choice of Sandy Dean as a bench mate on Tuesday morning that had first tipped those who knew the players to the possibility that a commercial romance was budding. Now, it was presented to the entire assembly in full bloom, a veritable betrothal of trust and commitment.

The news was simple. Maxxam and PL knew their plan wouldn’t “cash flow.” They knew they’d have to continue to fight to “reach the voting classes” and they didn’t feel they could “get there.” They felt that they owed a fiduciary duty to “every creditor,” and they were “motivated by a desire to preserve the town (of Scotia), their employees and the mill. They wanted to accomplish an exit that would meet the needs of all parties and they thought the MRC/Marathon plan was the most likely to do that

In this light, they were standing down and withdrawing their plans, leaving Scopac free to deal with the noteholders. They would remove all objections to the MRC/Marathon plan and would support it actively. There were some various exchanges of indemnity and a commitment by MRC to buy 5 million board feet of logs from Maxxam and a few other relatively minor (as far as can be told) odds and ends.

It seemed so out of keeping with prior Maxxam behavior that skepticism was not easily allayed. When news got out, antennae went up all over Humboldt County trying to sense the telltale vibrations of new treachery. Was MRC, the current timber heartthrob of our vulnerable community, really holding hands with Huston’s heartless seducer himself? Was McMarathon being played? Were they joining up to collectively play us? The more friendly and mutually respectful the terms of the agreement Jordan announced, the more suspicious some were bound to became.

Few in Humboldt County are willing to entirely let their guard against Maxxam down yet. One heard many expressions of concern that if Maxxam and MRC were not up to some skullduggery, than certainly Beal and Hurwitz were. Two such stalwart Texas moneymakers just had to have some working relationship with each other if they were not in fact outright buddies

Maybe, though, the deal has to be taken at face value. Maybe it is what it is, Maxxam was getting out while they could still set at least a minimum term for their withdrawal, and MRC/Marathon was positioning itself closer to their goal for relatively small considerations. It may be that Maxxam and Palco actually chose a graceful tune for their swan song. In so doing, they doffed the weighty mantle of chief villain and dumped it unceremoniously on the shoulders of the noteholders.

A Note on Court Structure

You have to refer back to what was the basic structure of the proceedings since the first hearing in order to understand the magnitude of the shift that this announcement brought. There has been up to this moment three tables at which all the principal lawyers sat. At the bench to the far right, the attorneys for the noteholders had been and were still sitting.

The middle table was originally occupied by attorneys who represented Marathon, creditors to Palco (which owned the mill and Scotia) and attorneys representing the unsecured creditors’ committee (these creditors were the mostly small contractors, service or materials providers and other who were owed a total estimated to be approximately $14 million. (In MRC’s plan, they were to recover $10 million which is over 70 cents on the dollar, very good by bankruptcy standards.) Later when MRC came to a formal agreement with Marathon, their lawyers took seats at that table, too.

The third table, at the left facing the Judge, sat attorneys for Maxxam, Palco and Scopac. Three position, three tables. Now all of a sudden there were only two positions. Maxxam and Palco had abandoned Scopac and by rights should be seated with reps of the position they now support, McMarathons. Scopac’s attorneys should go over and crowd the noteholders table. A bit of chaos was to be reflected also in some of the cross examination to come, PL’s lawyers now participating along with McMarthons in the grilling of Scopac’s witnesses. Testifying on the behalf of Scopac. (One other set of lawyers sat in the room as will be explained in the discussion of Harvard’s entry to follow.)

This mantle of bad guy, to be truthful wasn’t exactly a gift to its recipient, the ‘notes’. They’d worked hard for it. They had been solidifying their position as bully boys since last November or December when they started ignoring good advice from friends and competitors alike. (Their apparent ill-advised use of the Nature Conservancy Consortium, whatever the motivation, came across as treacherous.) They had over the months proven themselves tone deaf to the other values or ambitions than getting as much money out of the deal as possible. In bankruptcy court, they say, this is normally the only motive involved. Clearly, what was in progress was something more than a normal bankruptcy.

Here in this trial in Texas “other values” had been competing fiercely for the Court’s attention. There had been a plethora of communications from Humboldt County, in favor of the McMarathon plan. The working people wanted it and the politicians wanted it—urgings had come from the Governor of California, a powerful Congressman and a senior US Senator. Judge Schmidt himself had left a considerable trail of utterances expressing his concern for the health of the forest and the well being of the community.

No way was this your usual bankruptcy proceeding. One could see now a compelling reason the Judge had summarily dismissed the change of venue motion early last year—this case promised to be too much fun. Now it was living up to that promise. The Judge said as much in court on Thursday when the old three-table structure had been spun and shuffled by the announcement of the new partnership. Even the ‘notes’ attorneys seemed to be having a good time though the most serious of the Fulbright team, Bill Greendyke, kept pulling his people back from anything that could compromise its single minded pursuit.

One has to pause to wonder what would have happened had the case been litigated anywhere in Northern California. There might well have been a circus out in front of the courthouse each day of the hearing. Angry doggerel first denouncing Maxxam’s demise and then the compromise of the note holders might have been chanted. Caricatures of the attorneys could have appeared bobbing up and down on posters. Shelby Jordan’s slicked back hair and rambling rhetorical style would have been rendered infamous until the day his team went over to McMarathon and then it could have been absolutely cannonized, leaving Fulbright’s Richie Crumholtz or TexasTodd Shields as prime candidates for temporary demonization. One can also see as clear as if it stood in front of one’s nose right now the ten-foot high two-headed puppet leading the parade around the court house, one head Charles, Hurwitz’, the other, Andy Beal’s. It would have been a hell of a show.

Still, it would be wrong to vilify the ‘notes’ beyond a point or to impute purely malicious motivations to them. Their motives were just plain old mercenary ones and, again, wasn’t that what bankruptcy court is all about anyway? Isn’t that what Texas commerce is supposed to be all about? At least from a Northern California perspective. Of course there is always that age-old lawyerly desire to kick ass lurking behind many a fine silk tie.

Above all that, the noteholders’ efforts at valuation over the last months contained a brutal contradiction. On the one hand, they needed to discredit Scopac-Maxxam’s overheated, real estate-driven estimate of the land’s value. On the other, they needed to inflate the perception of that value to justify the appropriateness of an auction over and above the McMarathon offer. In the best of all possible worlds for the ‘notes’ they’d like to see the price top off just below the level of the debt—$714 million in the service of which the company had failed in the first place—the cause of the bankruptcy. Andy Beal’s offer, which could force the bidding to start at $624 million, was driving the price ever-closer to that maximum. Now they no longer had to worry about discrediting PL/Scopac/Maxxam’s plan. It had fallen by the weight of its own absurdity not unlike the Berlin Wall.

The dust had not had a chance to settle from the Maxxam/Palco announcement when Allen Brilliant for MRC and David Neier for Marathon dropped the next bomb. They announced to the Court that McMarathon was changing its offer. The original price they’d stuck on—$175 million in cash and $325 million in notes totaling, at face value, $500,million (a price that had left the noteholders very cold)—was being replaced by a new offer of $530 million in cash. The deal actually involved $580 million after all obligations, including those to the unsecured creditors were met. It was a big step up but seemed to breed no excitement among the auction-obsessed ‘notes’

Part 2

Each morning of the PL Bankruptcy proceedings in the Federal Bankruptcy Court in Corpus Christi, events begins with a common little courtroom ritual, the introduction of the lawyers. Attorneys who are there actively representing a client with official standing in court line up and then march to the podium one at a time. They say “Good Morning, your Honor” and give their name, the name of their firm and finally the name of the client they represent. Those firms who will have more than one attorney in the game that day allow a single rep to step before the Judge and he or she points out by name the other lawyers on their teams. These in turn stand up at their table and bow or otherwise acknowledge their presence. It is, dare I say, a courtly little ritual. Given the large numbers of practitioners of the law involved in this case, the ritual in Corpus Christi is literally a parade of lawyers.

Lawyers representing clients with interests less central than those of the debtor and the major creditors also join the march but usually take positions at the end of the line. This group consists of representatives of the State of California Attorney General’s office, one for Bank of America and the United States Trustee.

These bearers of smaller legal weight sit on a slightly elevated bench running along the left side of the inner court. It was referred to as the “Peanut Gallery’ by Evan Young, the upbeat attorney for B of A. His cheery attitude may have related to the fact that his client as the lender during the bankruptcy automatically stands at the head of any lineup of those who get paid. (Except, of course, the lineup of the lawyers themselves who, one must remember, are unvaryingly paid first in bankruptcies.)

Last Thursday, there were two aberrations to this ritual. The first was, of course, Maxxam/PL’s announcement that preceded the main parade and had delayed the main march of introduction. The second modification came when the parade finally resumed. The last lawyer in line, who had been unchallenged the day before when he assumed a quasi official seat in the “Peanut Gallery,” today came to the podium as if his was a foreordained part of the ritual. It turned out it was not. (By rights, he should have been in the audience in the outer courtroom with the lawyers representing clients without standing, various financial advisors and other relative peasants in the proceeding one of whom is writing this report).

The PL secretariat, the four leading executives, had for the first days taken seats in the first row of the audience but had gravitated forward after a day or two to more privileged positions on the other side of the bar, more or less behind their lawyers’ table. The real privilege in this was the padded swivel chairs they were allowed to use on the other side of the bar, a major step up from the severe pew-like benches the rest us rode like masochistic Presbyterians trapped in a basically Anglican affair. (Given how brutalized these PL guys must have felt after seeing their employment dissipate in a most public fashion, they deserved those padded chairs.)

The one benefit, it seems, that those on the hardback benches have is that one has the relative obscurity to pay more attention to their Blackberries. These devices for quiet communication with clients are ubiquitous in the legal world. At any one moment in the proceeding, less than 1/3 of those on the benches are really present in this world. The rest are caught in Blackberry Land, an alternative reality, sort of like Oz but with billing and no witches.

The upstart lawyer’s name was Steven Hoort, and he announced that he represented the Harvard Management Corporation (HMC), the esteemed University’s entity that dealt with its vast endowment, the largest in the nation by far. Hoort proceeded to inform the court of Harvard’s ambition to participate as a potential buyer of the property.

The MRC/Marathon table, obviously taken by surprise, sprang to life. Allan Brilliant for MRC and David Neier for Marathon (two lawyers you want with you in a legal battle, or in the case of the barrel-shaped combative Neier, in a brawl) stated with force that they had a problem with Hoort’s message. (Brilliant, by the way, had provided one of the trial’s most effective displays of cross-examinatory virulence when he penetrated Houlihan Lokey managing director, Glen Daniels’s protectively sour veneer to reveal major weaknesses in his valuation.) Who was this guy, they demanded to know, that comes in here without standing or prior introduction and baldly announces that his client is going to bid on the property? Since there hasn’t been a decision to confirm an auction, what does he want, to be admitted without standing into the process?

Judge Schmidt, perhaps worn down by contention and eager to have this whole bankruptcy concluded, ruled that, yes, this abrupt entree into the procedure was out of order, but that he, the Judge, needed all the information he could get before he had to confirm a plan which was likely to be required of him in a very short time. (The Judge had by this time already opined that it was unlikely, given the amount of material still necessary to cover, that the Confirmation trial was to be concluded by the end of the week.) He let Hoort speak.

It was a brief introduction. Harvard was to be a major player. They had plenty of money and also had a plan which, though still general, was much like MRC’s, based on a solid conservation scenario and a concern for the community. The Harvard offering, though, was going to come in with a higher offer. A company from Washington, Olympic Natural Resources, was slated to operate the land for the Endowment.

The real kicker Hoort threw out was that Harvard had a mill partner, none other than Red Emmerson’s fearsome Sierra Pacific Industry. Thus was the reason for the surprise appearance on Wednesday of Red, son Mark and the lawyer, made clear. The SPI crew had resumed their seats in the audience at the beginning of day’s hearing before the fireworks began. They had been joined by a newcomer to the hearings this morning, Terry Wiltshire, head of the HMC’s Forestry program which has over $5 billion already invested in timber projects.

SPI, of course, is a giant in the California forest products industry, an enormous family-owned private enterprise spread throughout the northern Sierra Nevada range and over to the coast with 17 wood processing facilities and cogeneration plants. SPI employs over 4400 people at 17 wood processing facilities and administrative offices throughout the State. The company operates one of Humboldt’s few remaining sawmills.

Word had been out for some time that Harvard was looking for a way into the game. They had not only found a respected land manager, Olympic, but had also hooked up with the largest and most experienced mill operator in California. This was a testament to the seriousness of their purpose and to the dedicated work of Jim Rinehart, the well-respected San Francisco-based forest investment advisor.

Giants were suddenly striding in Judge Schmidt’s court. Add to this the procession of the California Governor and you start to wonder what it is about these particular timberlands that attract such attention. (Ex Gov. Pete Wilson, the “plan agent,” had been in court for less than an hour and a half on Tuesday of this session. He had sat quietly at the noteholders table surrounded by the Fulbright fellows, hoping, perhaps, to further the notion that he was worth his substantial retainer

Not long after the Harvard bomb had been dropped there was an impromptu but perhaps critical meeting in the hallway outside the courtroom. It was between the entire Harvard entourage (by this point no more than one or two short of a NFL football starting team) and Sandy Dean, with only an attorney or two at his back. No one knew at the time what exactly was said or decided but soon after, the entire Harvard/SPI crew left so quietly that few knew they were gone. Jim Rinehart said on his way out that they’d accomplished what they had set out to do.

One does not readily make book against so august an institution as Harvard when it comes to the reliability of their knowledge base. They may have actually hoped, though, for something they could not get—official status in the court proceedings. What they ended up with at that stage was a right that any other party had—to be free to bid in an auction were it to happen. Red Emmerson may have come East eager to write a check. When that opportunity was denied him, he flew off back toward less tropical climes. It was unlikely that he, at least, was gone for good.

For the rest of the day and into the morning’s session of Friday, May 2nd, additional witnesses for Scopac were called and cross-examined.

The most important of these witnesses was Gary Clark, suddenly reduced to the status of “former CFO” to Scotia Pacific. He did admit, though, that he had a service agreement that kept him acting in his official capacity until formally replaced.

Clark made very clear that neither Scopac nor Palco could long keep operating without an infusion of cash. Palco had only its cash flow produced from the sale of timber, but could not keep going into the season in which they needed to buy a lot of logs to get thought the winter. They needed a minimum of a million dollars in May if they had to pay $2 to $3 million for “professional services” (lawyers and expert witnesses in Corpus Christi).

There would be an additional shortfall in June and it got worse from there

Scopac, if anything, was in worse shape, relying on the SAAR account to subsidize operations. When on Friday, Clark was brought back to inform the court that he had just discovered that Scopac had been denied further access to the SAAR, (the account had been established by court order from proceeds of the Headwaters deal), it became clear that there were severe limits on how long operations could go on without major change.

The session closed with the Judge leading speculation as to how this whole deal could finally come to a conclusion. Clearly it would take at least two more days. (The new MRC/Marthon/Maxxam/Palco amended plan had to be subjected to a 9019 hearing to gain formal status in the process and final arguments had to be heard.)

For the Judge, the issues surrounding his decision as to which plan to confirm had boiled down to valuation. Bill Greendyke for the noteholders voiced some skepticism. In the end, the Judge formally closed the evidentiary stage of the hearing. Greendyke suggested that the “notes” might need to submit a motion to reopen that stage if new and critical evidence came in. Greendyke’s suggestion masked the beginning of what will be an intense behind-the-scenes week and a half effort by the attorneys for the “notes” to create the capacity or the illusion of the capacity to operate the mill and the land at least during the next 6 to 8 months. It would take that long to manage an auction and for a new owner to close a deal and take over.

Without a plan in place to keep the mill and timberland operations going, Judge Schmidt was unlikely to be able to confirm the plan for an auction. Even with that capacity in place, Schmidt was going to be challenged to overlook the overwhelming support for MRC in Humboldt County. Whatever the “notes” came up with, it would have to be good. It seems that May 15th and 16th will not close the whole process without a few more fireworks. Announcements were to come.

Tedium and Action in Corpus Christi

May 5, 2008

Just as for Shakepeare’s Prospero “Our little life is rounded with a sleep”, so too is the intense drama of the later stages of this bankruptcy proceeding surrounded by a tedium– bursts of glory in the middle of sludge-like hours of inaction where only a robust exercise of will keeps one from visibly napping. I don’t know how the lawyers or the Judge, for that matter, stay awake. (Do they teach a course in Law School about staying awake while bored silly?)

The Tuesday morning testimony of the Indentured Trustee, Chris Mathews, had a humdrum quality sparked only by the curiosity one could mount to see just how partisan a dignified witness could let himself be. He was a man unused to being on public display and showed it. He became more animated only on the subject of Beal and an auction. This was a person clearly enamored, like his fellow note-holder reps, with the notion that only an auction could reveal fair market value—a ‘free market’ approach by which alone could the value of timberland or anything else, I suppose, be righteously established.

Not apparently calculated into these equations is how the practice of forestry in Humboldt County manifests a refined and far more threatening aspect of the concept of “buyer beware”. If it weren’t for the potential damage that a dumb buyer would likely end up doing in our watersheds, we would gladly let the bidders hammer away at their own thumbs. We have an obligation, though, to our well-being to do more than just take our chances with whatever comes down the line.

No matter how badly someone might not want to think of themselves as another Hurwitz, they will walk right into his still-warm shoes if their expectations, and the price they pay, do not allow management consonant with Humboldt ecology, society and history. It is hard to emphasize this fact too much. It was the smooth operation of the free market that brought us the go-go eighties and financial tricksters like Charles Hurwitz and now we know how rationale that process was in terms of its effect on real watersheds and real communities. Like they say, love is blind.

As mentioned earlier, we had returned from lunch, that first of four scheduled hearing days, prepared to sit through the more or less symbolic exercise of PL/Scopac/Maxxam. trying to sell their plan to the Court. They were to present witnesses in support of the administrative dead zone their reorganization plans had become. It was like trying to resuscitate a zombie but it was their turn in the confirmation trial and as the debtors still in possession, they had standing

It was to be PL’s last stab at what the Maxxam Team has truly excelled, literally the trademark of their survival—litigation. The standard elements of this enterprise were gathered; the squad of first-rate lawyers, the expert witnesses nervous outside their professional purview, the PL brass, also slightly at loose ends in the courtroom, the lawyers’ native habitat but not theirs

It was different this time only in scale. All the brass was there, George O’Brien, Gary Clark, Frank Basic, Jeff Barrett. The lawyers were now at full battalion strength. It was a veritable armada, an invasion fleet, the attorneys like sleek, protective destroyers circling the lumbering PL Executive battleships with their big guns, the aircraft carriers with the consulting experts like dive bombers ready to drop their deadly charges of impenetrable data. It was a seasoned attack force on its last mission under the PL flag, steaming toward glorious if tedious battle, obeying a fearsome battle plan that had worked so well so many times on the past.

The only problem was that this time the island they were preparing to invade had long ago been taken. And then, as if to add insult to injury, what had already been reduced to nothing more than a symbolic exercise was suddenly to be cut short. Few in the courtroom were aware of the pathos of the moment or maybe didn’t really care, but by Thursday, we now know, the solid tripartite phalanx of Maxxam’s teams would be broken and shattered, the leadership in disarray, not knowing who exactly they worked for or what their instructions. I suppose there are many workers out there who would say to their ‘maybe’ bosses, “Join the crowd.”

Shelby Jordan, Counsel to the Palco debtors delivered the shock. He led off the afternoon session with his announcement of an impending deal with MRC/Marathon and the possibility of it rendering the PL presentation unnecessary. The Judge granted a continuance until the next morning, Wednesday.

Some in the courtroom were delighted, a delight based on a combination of getting out of school early and the thrill at the possibility that the whole trial could be over by the end of the week, hopefully with an outcome that we could all live with This would have saved a lot of people the time and expense involved in coming back to Corpus Christi. When all was said and done, who really wanted to put in more time than necessary sitting on those handsome but torturous benches just to the watch the PL juggernaut march toward nowhere?

So we came into the Courtroom for the second day, Wednesday, filled with anticipation, ready for a dose of real drama, an antidote to the background level of tedium. We were again let down. Jordan apologetically told the Judge that the parties had been negotiating most of the night but that the deal was not yet complete. The continuance and unnecessary surrender of Tuesday afternoon’s session had not been a waste, he claimed. Headway had been made. It was taking more time than they’d hoped. For sure they’d have something by the end of the day.

There were niggling suspicions on several fronts. Could this be another twist in Maxxam’s oft applied strategy of obfuscation and delay? Were they leading MRC/Marathon on? Were they going to end up back, stronger again, still in the game? For we who for years have felt the bite of Maxxam’s manipulative tactics—common practice, no doubt in some circles—not to be suspicious would be foolhardy. “Fool me once” and all that. Only time would tell.

So we were back to what we had hoped was to be avoided a day of testimony by PL’s expert witnesses and cross-examination. Of all the four days, this was the one where the effort to stay awake hurt the most. The combination of forest jargon, sleight of hand economics and bankruptcy procedural discussion that were parts of the PL effort to sell the unsellable was entertaining if at all only to the well-rested. There were few in the room who could claim to be that. Some had been up most of the night feverishly working on the new “deal” coming down the line.

The expert witnesses were forest valuation professionals, Kim Isles, Don Reimers and Jim Yerges. A fourth witness, Tom Lumsen’s expertise was in corporate finance valuations. His job was to figure out the true cost of various transactions for his clients, few of which had been timber firms. For PL he was to calculate the value to the company’s pending law suit against the State for breach of contract and other violations related to the HCP and the Water Board’s added environmental restrictions.

It was with the three forestry boys that the bankruptcy attorneys proved their mettle. The questions they asked about the practice of forestry and forest economics were of such an informed and complex nature that it could lead one to think that in a pinch one could hire the lawyers to do the forest valuation work themselves. This is one of the appeals of the practice of bankruptcy law. You have to become relatively expert at whole new occupations every case. Many involved in this hearing admitted, though, that forestry was a lot more interesting than most of the other businesses they had to deal with. Imagine the fight to keep you eyes open during a bankruptcy proceeding for, let’s say, a financial services corporation.

(A note on attorney expertise: earlier it had been stated that the lawyers as a whole did an excellent job of learning the basics of forestry and forest economics. It was impressive. There were moments, though, when this capacity for quick study went astray. Pontificating with great certainty on subjects one has only half-understood can reverse progress or at least waste a lot of time.)

The Reimers plan was central because it seems that it was built in good part on one of the more preposterous confabulations related to future value that had been run out during the hearings. It was an idea that for all its absurdity the other two experts seemed to take dead seriously, too.

It is this: you plant genetically improved redwood cultivars over approximately 25% of the Mattole-Bear River unit and maybe a few other other places in 2008 or ’09. In the year 2046 when these trees “mature’ your harvest rate over the entirety of PL lands jumps from the previous 40 year average of around 90 million board feet./year to 165 million. And 99% of that harvest is redwood.

Besides the huge unjustified economic leaps that seem to be required to make this concept work, there is a major ecological issue here. There may be leeway in indigenous mixed stands to emphasize in a replanting program a more commercially valuable species that already exists in the native stands. It’s done frequently and often with good results, but there are limits to what levels of change ecosystems will tolerate without loss of productivity. In this case, the unit they’re talking about is very large and also almost entirely Douglas fir and tan oak ground. To alter species composition so entirely is outright dangerous from the point of view of both biodiversity and guaranteeing return on investment.

There are, of course, solid reasons of biology and climate that the Mattole and Bear River are Doug fir and tan oak. They’ve thrived there for many generations, unimproved and unrepentant. It is high country, hot and dry I[n the summer. You might get a decent stand of redwoods going, but you just as likely might not, and in the process you might lose your opportunity to regenerate a stand of Douglas fir with some value.

This is a radical experiment the results of which are entirely unpredictable. If all or most of the redwood fails or fails to thrive, there goes your plan and those future profits on which you’ve built your calculations of present value. Trying to bank on it today as Mr. Reimers recommends, is a little like betting that the New York Yankees will be win the World Series in 2046 if they moved to, lets say, Corpus Christy, Texas today.

Mr. Lumsen’s contribution to the rational process of establishing value was equally lacking in modesty. He set out to determine what were the combined losses suffered by Scopac and Palco due to the reduction of the allowable cut by new post-HCP regulations of the California Water Quality Board. These losses were to the potential volume of timber that could have been cut in Freshwater and Elk River. The figure Lumsen settle on was approximately

$ 630 million. That’s what he figured the State should owe the company if the State loses the lawsuit. This is far more than the cost of public acquisition of the Headwaters Forest was10 years ago and more than the whole Company is worth now.

A corollary calculation Lumsen made is that without the new regulations Scopac could have harvested 154 million Brd. Ft./year for several more years instead of the paltry 80 to 100 that has since been established as their target. (Remember, MRC plans to cut only 53 million per year the first 10 years if they are confirmed.) This Lumsen is a guy you want calculating the worth of your assexzts, except maybe for tax purposes.

Even if all the regulatory agencies together would have tolerated this, which is very unlikely, Freshwater and Elk River where some of the highest value inventory resides would be producing even more sediment than the already aroused citizenry in the neighborhood could possibly tolerate. The litigation they would no doubt launch would burden Scopac or whoever owns the land with bills for ‘professional services’ (i.e. lawyers and expert witnesses) dwarfing even those for the bankruptcy we are sitting through. The only way the bills could be paid would be to cut trees that are no longer there.

Welcome to the world of Rational Forest Planning. Sounds sustainable to me. Altogether Lumsen and the other witnesses provided a level of expertise that, if accepted and made the basis of management strategy, would guarantee our continued trajectory toward a steep cliff. It’s exaggerations were consistently grand and entirely unachievable. They served, at least, as a reminder of why we need another kind of deal in the woods, one based on candor and modesty. Just the qualities least regularly available among the billionaires who are competing for this property. Can the next one do better? Couldn’t they just all buy Baseball teams instead? I hear there might be one for sale in a few years in Corpus Christi.

So the Company, in its last great show, proved true to its history, propound-ing the irrational in the service of the unjustifiable. The background level of tedium this process and it pointless testimony and cross-examination produced in the courtroom that day was also true to form. That tedium, though, would have been instantly blown away had anyone realized who the group of people were that walked quietly into the courtroom late in the day and took seats in the audience.

Red Emerson, California’s largest private landowner and head of Sierra Pacific Industries had come unannounced and unrecognized to Corpus Christi with his son, Mark and several advisors. Part of this team, San Francisco-based forest investment consultant, Jim Rinehart and another attorney, had arrived the day before. In the hall after the day’s proceeding, Sandy Dean of MRC greeted the whole entourage with a warmth that might have taken an effort to muster. The odds that Thursday was going to be less dull had just improved considerably.

Speculations on Law, Lawyers and the Process

May 2, 2008

The drama promised at the beginning of the Tuesday afternoon session did not play out quite as expected. Major moves were indeed made, (See “Tedium and Great Drama”) but what they actually add up to is still a little mysterious. It turns out, in fact, that even at this late stage, prediction is a fool’s game in a bankruptcy proceeding of this magnitude and complexity. There are rules, of course, and conventions, but as Judge Richard Schmidt (“Open mind is my middle name”) informed all present today, there are many situations that don’t easily fit the rules. What we all seem to be up against here is a business structure that was patched together arbitrarily and inconsistently, out of motives not to build value but to extract it, not to try to follow the rules but to circumvent them.

Timber is such a beautiful deal, really. It has the capacity to define an environmentally righteous capitalism like no other industry. Investors’ assets grow and increase in value more or less of their own accord.. You have options to manage more or less actively and invest in treatments and biotechnologies which will enhance future production and profits significantly. If you are careful and patient, the asset will sustain you indefinitely.

There is one basic fact, though, that is extremely simple but still so hard for some people to grasp. You, the investor, don’t set the basic limits, nature does. You can play along with it, divert it thoughtfully, augment it, enhance it, restore it and you can take quite a lot from it, but if you fail to adhere to its limits as if it is yours to do with absolutely as you please, you lose. That’s the rule. Sorry. I assure you I take no pleasure in sounding like a pious earth thumper (the environmental equivalent of a bible beater) but that’s the way it is.

One should never forget, after all, that many if not most people in Humboldt predicted back in late l985 when Houston-based Maxxam took over PL, that it would end this way. The debt burden they took on and the rates by which they promised to service that debt doomed the enterprise from the start. What few of us could have foreseen, though, is into just how complex a ball of knots this grand old jewel of Humboldt could be tied in the process of depleting the timber base.

Charles Hurwitz’ unwavering determination to extract maximum value from land and trees and his uncanny strategic capacity produced an end result which must confound his advisors now. Every effort, often wildly creative, to sidestep restrictions and game the rules added another layer of complexity, another knot.. When it finally came to the long-predicted conclusion what we were left with was a structure and a history so ornate, so lacking in rationality that it would take the combined mental weight of scores of the nation’s best lawyers (and one smart, open minded Judge) to even begin the unraveling.

There have been a few less than perfectly uncharitable words in these reports about the substantial tribes of barristers gathered here in Corpus Christo to do battle. Most troublesome, perhaps, is how many of them there seem to have been. Could the $40,000 to $ 50,000 that’s getting burned up daily in a trial that goes on and on really be justified? It seems especially troubling relative to the fact that many working people in Humboldt are waiting in anxious uncertainty to learn their futures.

It must be said, though, in defense of the lawyers that it has taken a combination of patience, nimble-footed intelligence and long research on the their parts and those of their firms and staffs to get us even to this point.

They have learned, these guys, the almost Talmudic complexity of forest financing and regulation (Talmudic because it takes the arcane wisdom of a wise old Rebbe to sort though dense data and misleading opinion to penetrate to the value of a piece of timberland). They have learned the language and the metrics of forestry and logging enough to be able to dig into abstruse expert testimony and ferret out contradiction and misinformation. For most of them, this was Timber 101, a medium-to-advanced course in forestry, forest finance and forest-speak. It takes a certain gall—something good lawyers do not lack—to challenge conclusions and underlying assumptions of expert witnesses, with long schooling and, say, 30 years or more of professional experience.

Can a process still governed by an ardent competition and desire for profit—driven by the potent will of advocates to protect their clients’ economic interests– achieve the rationality necessary to sever the great Hurwitzian knot and release us into the future? How much, after all, can we expect of the Invisible Hand? But if in the end it works out right for land and people and gives our community a second try at it without too great damage to investors, the lawyers will have earned their pay and this long expensive process vindicated itself, One must keep in mind, by the way, that no one forced the investors to put their money in these bonds. They should have done a little research, maybe even asked us hicks from Humboldt. Run, we’d have told them. Don’t walk away, Run! But what do the hicks know about business?

.

April 29th – The Spiral Begins

April 30, 2008

The closing spiral, it seems, has begun–as of yesterday at 2 PM. We won’t really know what’s going on until tomorrow, Wednesday, morning and then we will likely only know half the story What we do know is that MRC/Marathon has recently entered into a direct negotiation with the debtor, Pacific Lumber Company and its corporate parent, Maxxam,

This was revealed in Judge Richard Schmidt’s court in Corpus Christi at the beginning of the afternoon session that was supposed to be PL’s last hurrah, a more or less rote presentation to court of their usual gang of expert witnesses who would prove to u hat all was well in the woods and there was a lot of timber left. It was the Company’s last stab at justifying the impossible—their plan for reorganization.

The objective for the McMarathon forces in this particular negotiation is control of Palco, the entity in this almost impenetrable corporate goulash that actually owns the mill, the town of Scotia and the cogeneration plant that produces electricity from wood waste. Anyone who has visited Scotia or driven on U.S. 101 along the site knows that this is not an unsubstantial piece of real estate.

The larger prize, though, the 210,000 acres of timberland, is not yet directly entrained in this negotiation though this new negotiation provides a stronger tidal pull in that direction. Scotia Pacific, the landowning component of the Hurwitz stew is still in the hands, for the most part, of the note holders. They’re owed $ 714 million by the Company if you don’t count the tens of millions of dollars in interest that has accrued since bankruptcy was filed a year ago January.

Yesterday morning’s session, almost forgotten in the wake of later developments, was a test for the note holders’ latest scheme to force up the price of the land. At the end of the last confirmation session, two weeks ago, Texas entrepreneur, Andy Beal, made a leap from his lowly position of only owning $270 million worth of notes to the enlarged status of potential Stalking Horse bidder. His $ 603 million bid offer for the land trumped its closest rival, McMarathon, by a whopping $ 100 million. But was it a real bid? Would Beal really run a timber company if no one would outbid him in an auction? Or was it a poker move, a bluff, by Beal, the high stakes Texas Hold’em devotee?

To defend the Beal plan as something other than a price-inflating chimera, the Indentured Trustee himself was called in. Chris Mathews represents the Bank of New York that is formally the trustee assigned to manage the note holders interests. Mathews was cross- examined aggressively by a succession of McMarathon lawyers with a brief additional grilling by a Solicitor for the unsecured creditors’ committee and one for the Bank of America.

Mathews’ assignment was almost as difficult as that of the PL legal team–defend the indefensible. If PL’s plan, based on vastly overvalued real estate, was “dead in the water” as the Judge had suggested, then the Beal plan should sink to the bottom of a sunless sea. It’s corporate front, Scotia Redwood Foundation, seems every bit as illusory as Maxxam’s empty Scotia Development LLC and its empty office in Corpus Christi. That ruse rationalized a legal venue thousands of miles distant from our own modest but very real Scotia where the forest resources had by some happy accident been permanently situated.

What was even more distressing than Mathew’s obviously calculated defense of the Beal Deal was the fact that the Beallies had come up with an Amended Term Sheet, a new statement of the range of terms that they were offering the various parties who had an interest. The allotment designated for paying off the unsecured creditors had dropped from 100%, around $ 14 million, in the first Term Sheet to a measly $ 1.4 million, These are mostly local folks, little guys.

The $ 1.4 million pittance had actually been the note holders original Scrooge-like commitment. Beal seems to have come to the frightening realization that the generous offer in the original Term Sheet made him the potential heir to millions of dollars of obligations of which he wanted no part. Word has it that once these other obligations were officially wiped off the books by the new Sheet, the Beallies might offer the creditors a little more than the10% on the dollar. The problem is that in the interim, the employees would face losing all their benefits—all of them.

There was a neat twist in the logic of jettisoning benefits. The Beal Deal, given the vast inexperience of its two (as in ‘2’, not even 3 or 4) current employees was to be made possible by hiring all the old PL staff and workers (except the top 4 or 5 top guys who are the walking dead right now, knowing they’ve been singled out for termination). How do the Beal team plan to deal with the workers? Sorry, no more benefits, no 401 K, no pension, no medical insurance, no sick leave or vacation pay. None of that costly stuff but we really want you guys to work for us because we can’t do it without you. This is why Marathon Attorney, the combative David Neier, stated at the conclusion of the morning session that this plan was “patently unconfirmable” It just doesn’t add up yet.

One other interesting moment came out of that session. MRC attorney, Brian Hail, discussed the “waterfall” of money that would come to the note holders when the auction was done and the deal had finally closed. But there were all the ‘beaks’ that would be dipping into this waterfall and getting wet before the cascade reached its final goal.

The list was long. A substantial industry has developed around the carcass of the old PL like scavengers with appetites that would make buzzards blanch: this bank– that bank, this lender, that service provider, financial advisors of many stripes, experts, experts to advise the experts, the Plan Agent (Pete Wilson putting away a tidy $125,000/month for doing something he knows nothing about), the Special Plan Agent, the assistant Plan Agent, the ranks of lawyers with their casual avarice, Mathews himself—the list goes on.

And here we sit in humble old Humboldt, all of us average people, working hard, happily settling for what the hotshots think of as chump change, to make a decent life in our place, for our kids, for the land. Who are all these birds dipping into a ‘waterfall’ of wealth whose headwaters as far as I can tell are here in our watersheds, our trees, our community. There is a valid place for responsible capital investment, an honorable profit to be had. This isn’t quite it. We have to be grateful though that the Judge grasps what’s at stake. One hopes.

As Far As We Could Get

April 27, 2008

This is a report about the last two days of the Pacific Lumber Company bankruptcy hearings that were held in Corpus Christi, Texas, from April 8th-11th. By rights, it should have been the final of the series of reports on those hearings and been published on the 13h or soon thereafter. Instead, it comes more or less as a preface to the next series of hearings scheduled for April 29th-May 2nd (unless there is a mediated settlement first). The report is in enough detail so that parties with only a passing interest might well tire before the conclusion. For them, the drafter of the report has tried to tell the story in as interesting a fashion as possible. To those whose lives will be affected by the outcome, it is doubtful that much about the events discussed here will lack interest or drama.

I ended what turned out to be the first week, rather than the only week, of the PL confirmation trial sharing drinks accidentally (in terms of the company, not the alcohol; after four days of riding that brutal cherry wood bench, a drink was in order) with a semi-jubilant crew of Fulbright and Jaworski lawyers at the bar of the Omni Hotel in Corpus Christi. Their good cheer, I supposed, had to do with the facts that a draining week was over, their billing was going to be even more substantial and a modest smell of success was in the air. What’s not to celebrate? They were at the top of their game, an elite team from one of the nation’s most prestigious law firms gathered in the luxury of Corpus Christi’s best hotel, about to head home to no doubt similar comfort.

The only problems with this scenario were mine, not theirs. Our community’s hopes for a better deal in the post-Hurwitz era had just been presented with a major new challenge engineered at least n part by these attorneys The price someone pays for timberland is not the only determinant of how much has to be cut. It is, though, the most important one, and it looked like the price had just gone up in one 20%, $100 million leap.

During the prior two days of the hearing–the last in the first session–a series of witnesses called by the note holder had been paraded before the judge. During the first two days of the hearing, witnesses had been called by MRC/Marathon. PL’s witnesses are to be heard and cross-examined starting on April 29th, though this ‘day in court’ for them is considered procedural rather than substantive.

Jim Fleming, long-time forest evaluator from Sacramento, gave the initial testimony for the ‘notes’. His was to establish the “fair market value” for the Scopac lands. Using the ‘income’ method which is a discounted cash flow analysis as to how much money in today’s dollars one could make selling trees off the land over a certain period, he had arrived at $ 605 million. Keep I mind that valuation is everything here. If the Judge could be convinced as to what fair value was, he’d have no problem confirming the plan that was based on it. Of course, there were as many ideas about value as there were evaluators

The date Flemming originally delivered the completed estimate to his clients had been January 30th. That was one day before the drop dead date of January 31st that Judge Schmidt had decreed for the submission of plans to the Court–by participants with standing. It also came, miraculously, a day before the Beal ‘family’ of entities stealth submission of a letter of interest to the Court suggesting that they might be willing, in the event of an auction, to submit a bid for $603 million, a hair’s breadth from the Fleming figure. “Stealth is the functional word here because no one seemed to be aware until this week that such an ‘interest’ had been formally indicated.

These coincidences point at a major complexity in the new deal, dare I say the Beal Deal.

Beal is the major creditor among the note holders—since 2001 he has held approximately 38% of the total notes secured by the Scopac lands. That’s about $280 million. (All of it was acquired on secondary markets a few years after original sale.) Word has it he “wants his trees” and that Beal is used to getting what he wants. (Many people down in Texas calls him ‘Andy”, often with a hint of ill-contained reverence. (I will resist the temptation to worship), It is important to try to understand that he is both the major Scopac creditor as well as an independent bidder in the note holders auction process if indeed that process is confirmed by the Judge. What, one might ask, does this mean? I think there is a win-win somewhere in here.

If Flemming’s valuation, meanwhile, was to be the basis for Beal’s plan—and there is no reason to think that it might not be—there are distinct problems. In his calculation as to value, 1678 acres a year are to be clearcut. He also sees the Marbled Murrelet Conservation Areas as candidates for clear cutting down the line. “It is environmentally sound to cut old growth,” he said. This would make him a kind of dinosaur among Humboldt loggers who have long ago understood that they would forebear from these practices in the future.

Another aspect of how Flemming got to $605 million is rate of cut. His discounted cash flow analysis only goes 10 years out. In the first 9 years he foresees harvesting 81 million board ft. per year–more than the 71 million Scopac managed to get in 2007 and almost 30 million feet more than the 53 million MRC/Marathon has committed to log in the first 10 years of their plan if it is confirmed. Cut per annum may be the simplest criteria, beneath all the hype and financial flimflammery, to determine what’s up and what’s down in the morally fluid environment of the bankruptcy proceeding.

Next to testify was Lynn Daniel, Managing Director of Houlihan Lokey. Houlihan serves as financial advisers to the note holders. With offices in 8 cities in America and more in Asia, Houlihan offers a reputable if high end way to determine the value of an asset. High or low, Mr. Daniel seemed a man somewhat pained by the nature of his work. It was hard to tell whether he had greater contempt for the process, the lawyers who interrogated him or for his own role.

Daniel’s idea of the timberland’s value, determined by averaging three different methods. was a low of $ 575 million and a high pf $676 million with an average of $ 622 million.

He also said that in Houlihan’s conceptualization, near term cash flows would be heavier than those that came later, the exact opposite way to stack payment than others projected, including MRC/Marathon’s. He talked about “investment characteristics” but admitted he knew nothing about the redwood markets or timber for that matter.

More important, Daniel contradicted himself in a major way. He said that it was “rational” to limit harvest for a few years and then go to 100 million Board Ft. per year in perpetuity. But under grilling by Marathon’s bulldog lead attorney, David Neier, he said “If you chose not to cut the trees, you don’t get the cash flow. {Under these circumstances} the note holders have the right to get the full value.” In other words, it’s nice to limit harvest for a while but we have a right, then, to the value of the timber you leave on the stump and it’s growth. Since the Notes do not seem to be looking to sustain an investment into the distant future when the regeneration will start being available to expand harvest levels, it is safe to assume they want that value in front. This in turn means that you have to cut more timber early on to pay the added price. Then there will be no long-term bonus from rebuilt inventory for anyone. It’s a major twist of forestry logic.

Jeff Barrett, PL’s Vice President and chief ‘scientist’ testified next. I suppose the Notes had to try to make it clear that PL was entirely out of the running. Under those circumstances, Barrett conducted himself well, giving cautious but essentially honest answers as to the likelihood of his company’s real estate ambitions with their monumentally inflated sense of the value—approaching a billion dollars. He was eminently polite and managed to escape with a shred of his dignity still in tact. While his science had often been impugned, his swan song, if this is what it was, was marked with a few grace notes. He even went so far as to compliment MRC’s intentions as ‘appropriate’, even ‘beneficial’.

The other PL executives, huddled behind their table-full of lawyers, sat stoically through this testimony that rang as a penultimate blow to their employment. One was almost tempted to feel sympathy. Almost. PL/Maxxam will need a legal miracle to come out of these hearings with control over much of anything. It is hard to imagine “Golden Rule” Charles Hurwitz humbly bent in prayer for that miracle, but it is, after all, the Passover season, a celebration of freedom. If only he hadn’t taken up the role of Pharaoh quite so whole-heartedly.

That was the morning of the hearing’s last day. It was in the afternoon that the real bombshell was dropped. Jacob Cherner, President of Beal Financial Corporation (do not hold me to this title–there seem to be a slew of legally constructed entities the names of which start with ‘Beal”) took the stand.

Cherner, from the back of the courtroom, looked to be of medium height and above average breadth, not overweight, just chunky, a block of a man, probably strong. A first impression ran toward the shy or phlegmatic but once he’d relaxed into his seat, and his testimony, a basic intelligence came through.

Cherner made it clear that the $ 603 million price mentioned in the Jan. 31st Letter of Interest was now something more formal—not quite a purchase agreement but close to binding. A “Term Sheet’ had been developed upon request of Houlihan in early March.

At first, it was a challenge to take the whole thing seriously. Cherner kept talking about the “tree farm’ and “tree farming”, a far cry from the mildly hyperbolic “Great Redwood Forest” that The Nature Conservancy uses

He also announced the existence of “Scotia Redwood Company” which has two employees, Andy Beal and himself, and will soon have a treasury that may or may not have total deposits somewhere between $ 40,000 and $40,000,000. It was hard to tell.

The financial mumbo jumbo he went through to substantiate that Beal had the cash and where and in what form was over my head.

It was one of several moments at the hearing where one had to admit defeat in the ongoing battle to penetrate the dense legal business-speak. With only an MBA one might have been able to determine when the language was a smokescreen hiding hogwash—which it often was–and when it added up to something that might be of substance. This mental struggle to grasp the meaning of these arcane bits of information and perceive underlying patterns easily surpasses Ambien as a guarantor of sleep.

The moment with the greatest potential for outright comedy came when Mr. Cherner was asked how much experience in owning and operating a timber company Mr Beal and he had. His answer–they once owned and operated timber land in….Estonia! A new Global Timber Giant is born, ranging from Humboldt County to Eastern Europe.

Assurances that Beal had dedicated staff resources to manage this timber empire starting on 2003, were not altogether effective. When asked of the details, Cherner said that those staff resources resided in the hands of a “Mr. Irwin” who’ he admitted, was not a forester. nor had yet conferred with representatives of any regulatory agencies.

The sum total of this testimony did not give one great confidence in the ability of the Beal team to take on the responsibility for PL, the single most important economic asset in our community. In fact, a sense of dread began to grip the hearts of those who cared for Humboldt’s future, a sense, dare we say, of déjà vu.

I asked the closest Texas lawyer, who was two feet to my right (there was another two feet to my left, but I’m right-handed) whether he found this thin soup a comforting perspective for those hoping for successful management. His answer was, “Andy went onto Aerospace without knowing anything about it and he made a fortune at it.” Could this be a defining feature of billionaires? They think they can do anything, no matter how little their previous experience or training, that they can buy all the expertise they need. How might this chutzpah play out in the lives of the thousands of us “little” people whose futures are intertwined with that of Pacific Lumber Company?

McMarathon’s lawyers launched an attack at Mr. Cherner based on the understandable surmise that the plan he represented was not credible, that it was in reality a gambit to drive up the price. This interpretation is favored by the fact that Mr. Beal is well-known as maybe the highest stakes poker player in the United States, McMarathon’s attack dog, Neier, called the Beal Deal a “Round Trip” that does not do what the note holders have insisted all along only an auction can do—establish fair market value. In other words, it’s a gambit, maybe even a bluff. Is he prepared to run the company if they (he) do not get a price they can live with? Is he just trying to pressure McMarathon into enriching their bid?

All this being said–the ironies, the thin soup, the miniscule experience in timber–the Beal Deal has to be taken absolutely seriously if for no other reason than that any way you cut it, the ultimate price that will be paid for PL is going up. As we said, price and rate of borrowing determine how much timber must be cut. Beal and his representatives have tried to assure us that they know what happened with Hurwitz and they will not under any circumstances repeat that history, but if they or anyone pays too much, what is to make a difference? We’re back to Maxxamville. Beal has also said that if this process reverts to a Chapter 7 Liquidation, he will still bid the same amount meaning that he believes that’s the bottom-line value of the land and timber–maybe

Beal’s and Cherner’s is now the Stalking Horse Bid, a position that at one point The Nature Conservancy’s consortium were designated to hold (before MRC hooked up with Marthon when an auction seemed like the only possibility). The advantage of this position is that in order to trump their price, the next bidder must increase his offer by $21 million. That means bidding starts at $ 624 million. So if they are serious and there is an auction–or even if there isn’t–the price is going up substantially, perhaps well beyond what many feel can allow any other options but the most intensive management regimes. We all know how that plays out,

There is also the credit bid issue. The Indentured Trustee is required by law to assure the note holders that their asset cannot be sold for less than what is owed on the property. The debt on the Scopac lands, without adding interest for the last 16 months, is around

$ 714 million, depending on who you listen to. If no one meets that price, which no one will, the note holders can bid on the property using credit equal to the debt their owerdf and easily outbid everyone else. If 2/3rds of the creditors don’t want the property, they can vote to allow a sale at a lesser price to go through. Since Beal controls more than 1/3 of the property, he can block a vote to allow a sale priced below the debt to go through. It gives him even more leverage in the situation. It is stated as Beal having a “Blocking Interest”.

A last gasp before the Judge put the hearing to bed—Shelby Jordan, an attormey for PL, got up and said, “Your honor. We’re not out of it yet.” The Judge promised they’d have their turn when the hearings resumed on April 29th.

Finally, Judge Schmitz wrapped it up. He talked briefly about the potential conflict of interest posed by Beal the note holder versus Beal the bidder, but basically he turned again to the “two tables”—the Notes and McMarathon. He said the land is probably worth somewhere between what one side says its worth and what the other side says.

There are legal problems if he confirms either side, he suggested, and appeals can damage the winner’s ability to operate or borrow. It is perhaps the worst alternative. He was pretty specific about what he’d like to see. The property, he thought, was clearly worth the two bids—basically between $500 million and $ 600 million. Could MRC enrich its bid? Could the Notes come down? Could they, perchance, accept an equity position promising returns in the future rather than getting notes that had to be written down? Or do they just want the maximum amount of cash they can squeeze out of it right now?

He made it clear that he needed to be sure that the note holders were getting fair value for their notes before confirming a plan and he suggested a few ways by which that value could be assured. He was also clear that the McMarathon plan had strong community support even though the price they were offering might be too low.

He reiterated that this was an important piece of land and that he took this case absolutely seriously. He knew there were issues either way and dissatisfaction leading to an appeal could “kill the cure”. Judge Schmidt urged, almost begged, both sides to see how close they could come.

He concluded by making it clear that PL would have their final say. “I haven’t hear your side. I’m not ruling yet.” Then all went out of the courthouse, pleased to be momentarily released from the tedium of this event, looking blearily toward the next sessions two weeks off knowing that during the interim, serious conversations must take place.

So we wait. The battle is MRC’s to win or lose. If they do not come up with an offer that will work for the note holders it will probably be because they don’t think they can manage at those costs. There is no dishonor in that. (Remember, McMarathon has promised to cut at a level that conservationists and the community as a whole find very attractive—a level that will allow significant regeneration over the next 10 years. If they have to pay more for the land, they may well need to up the harvest which, as we outlined earlier, lowers the potential regeneration.)

An auction that would ensue upon failure to negotiate a settlement will probably take six months. How will the company survive and the jobs be sustained during that interim period? Rumor has it that the Notes are out there looking for someone willing to take on the mill.

There is also the Plan Agent, a position established by the Notes ostensibly for the express purpose of dealing with this situation. That exalted Agent, of course, is none other than former Governor, Pete Wilson. One might well ask how much does he know about running a timber company and is that worth the $ 150,000 per month he’s rumored to be receiving for his ‘expert’ interventions. Add that tidy amount to the vastly proliferating legal fees—all of which must come from the trees–and one wonders how much is going to be left for Humboldt County?

Addendum: As of April 27th, rumors of a connection or friendship between Andy Beal and Charles Hurwitz that could affect the outcome of events have not been corroborated.

Day 2

April 12, 2008

Wednesday, day two of the PL confirmation trial, belonged to Sandy Dean. Judge Schmidt announced the day before, Tuesday, that he’d be absent for the morning session. This left the legal power squads leisurely milling around the halls of the comfortable Omni hotel, where they closeted their suits and ties. The Omni is Corpus Christi’s best, only two blocks from the Federal Courthouse. The latent legal power in the Omni lobby may have rivaled that of any similar equal square footage in the nation that day. It was all running on Humboldt trees, but if you think that might result in a little humility among your average Texas lawyer, you’re not familiar with the breed.

The afternoon session started at 2:00 PM and finished at 8:00 with only one short break approximately half way through. Word had come down that the Judge would be even later so the barristers paraded in well after 2:00. Even then, we all sat waiting for many minutes more until Judge Schmidt showed up.

The first part of the session was dedicated to the testimony and cross-examination of another of the MRC Marathon witnesses, Jeffrey Johnson, who evaluated Newco’s businesses plan and compared it to PL’s. Johnson’s study had determined the “enterprise value” of the freshly minted MRC/Marathon entity if it were to take charge of the PL timber operation. That value was $540,000,000. Whatever this figure actually stood for, it came under attack from the combined might of PL and MRC/Marathon’s legal teams (lets call it McMarathon so we can remember it). Neither the attack nor the testimony seemed telling and, for the most, part, the courtroom air went unstirred and observers were left to squirm on the handsome but painfully hard cherry wood benches or to discretely nap.

The somnolent afternoon was hardly disturbed when Johnson stepped down from the witness stand and the MRC CEO, Sandy Dean, was sworn in. Mr. Dean is not cut from the same cloth as the average PL executive if we can assume there is such a thing. Trying to typify on one’s mind the executive class at PL over recent years, one sees a line of rather imposing, characters, large men all, menacing in the instance of John Manne or bluff like Aussie, John Campbell or the substantial but mannerly CFO, Gary Clark or, in the case of current CEO, George O’Brien, almost cuddly. Erstwhile legal head and VP, Frank Basic is nothing if not true to the mold and stands somewhere between the menacing and the cuddly depending on his mood and yours or whether you’re sitting accross from him in court

Sandy Dean is in no ways beefy. ’Wiry’ fits. ‘Scrawny’ might have a few years ago. The thick glasses, the narrow chest, the drawn cheeks and the antic energy are combined with a razor sharp intelligence that bursts out almost beside himself. If he were in a police lineup, you might peg him for a hacker, never a timber beast. And yet he is currently CEO of a major timber company and by all estimates capable, He stands right now only a step and a half away from becoming the CEO of the second largest Redwood company in the world. If one were looking to symbolize a paradigm shift, you’d only have to compare the hulking avuncular O’Brien with Sandy Dean, the perennial kid brother, mercurial, always with the tricky moves.

But the paradigm is not shifting all that easily. There are major resentments against McMarathon on the parts of the ‘Notes’. (PL bankruptcy slang for the Scopac note holders) that carries over to their lawyers. It occasionally breaks into flat out conflict when one or another attorney tries to push the envelope trying get useful testimony from the other side’s witness. The objecting and yelling and carrying on is first-rate entertainment. The Judge tolerates it, and then brings it gently under control. He reminds them that this is not a jury trial; it’s only him they’re talking to and he’s not going to be fooled by bombast. No one would dare disrespect this Judge. He’s very calm, well-intended and smart.

The game for Dean and indeed the way the whole trial worked was: a lawyer for one side introduces and brags about a witness for their side and then lawyers from other two tables take turns beating him up. (A note here on gender composition, At the height of the hearings crowd-wise, when over 90 people filled the room, there were 6 women. One of them was a fully functioning attorney, Janice Coleman for PL. Two were legal aides or acted as such, and three were randomly scattered in the gallery doing God know what for God knows who. During the four days, not one woman, even the “real’ attorney spoke or was called as a witness. Is this a testimony to sexism in timber? In the legal profession? In Texas? All three, I suspect.

Dean got a good going over from several lawyers for both the Notes and for PL. His was not a popular cause in the inner courtroom. The Notes believe with some conviction that McMarathon is trying to get the property, their property, on the cheap and by many estimates they are. The problem is that we want them to get it cheap. The county wants to see the debt burden sufficiently reduced to allow for a management regime that limits new cutting and allows inventories—and watersheds—to rebuild.

Sandy Deane handled himself handsomely. He was never rattled, never without a good answer, but he was also never overconfident or less than respectful of the situation he was in. He was, of course, quite knowledgeable about forestry especially compared to the hungry lawyers who were seeking holes in McMarathon’s valuation and their overall plan,

McMarathon has two distinct advantage right now. One is that they are taking on the mill. No one else immediately in this fray is doing that. The Notes pay lip service to keeping the mill open but make no larger commitment than guaranteeing that the mill will have a level of supply of logs off the timberland. The second advantage is that McMarathon is ready to move in and start running the mill and lands right after confirmation. There will be little or no loss of work for the employees. Beyond this, the harvest schedule, starting with 53,000,000 board feet per years for the first 10 years, is compelling because it allows the forest to grow and damaged land to stabilize

This also created a problem for Dean in the cross-examination. One of the high powered attorney for the Notes, Zack Clement, caught on all by himself to the fact that if you reduce the cut and leave some trees alone for a while, inventory grows and there is more potential income when you harvest it and the growth rate itself goes up as well as the value of the land itself. Clement thinks that some of that should be shared with the Notes now. He has an argument, but its not one that hasyet been resolved even by the timber industry.

Onward to day three.

Lawyers Gala

April 10, 2008

The lawyers’ gala that the Pacific Lumber Company bankruptcy proceeding has turned into experienced yet another new twist today—as if it wasn’t already convoluted enough. The new lines of demarcation established after the Mendocino Redwood Company’s entrance into the deal were stretched thin if not indeed obliterated. It took the advent of the latest world-beating ego into the fray.

Word quickly spread through the halls of the stately new courthouse facing the Gold coast in Corpus Christi; the Beal Bank had announced that in the eventuality of an auction, they were offering $ 603 million, 20% more than called for by the Mendocino Redwood Company/Marathon Structured Finance partnership. The Beal bank is the heart of the Fortune 500 corporate empire controlled by entrepreneur, poker champion and chess master Andy Beal.

It was the MRC/Marathon partnership that gave the ongoing proceedings a first shake last December. When they announced their partnership—which gained MRC standing in the Bankruptcy proceeding–MRC/Marathon quickly jumped into the position of favorite. This was especially true after a very successful campaign, just concluded, to inform people in Humboldt County of their plan in considerable detail. The strategy of the MRC outreach was to amass so much support in the county, the region and the State, even reaching out at the Federal level, that they would gain ownership through judicial confirmation rather than through an auction.

Both the note holders and the debtor, PL, virulently attacked the MRC/Marathon position. For the note holders, it was an end run around their legally protected efforts to retrieve as much as possible of the $800 million debt owed them by Scopac for the land. For PL, the MRC/Marathon plan amounted to of the land only it was not really mother land any more,

This background helps sets the stage for the confirmation hearings currently in progress. Where last October there had been basically two power centers–the note holders with our initiative in tow, and the Company, still strong at least on the surface—there was now a very complex dynamic. PL was still in it but it was almost symbolic. Indeed, they had their own phalanx of lawyers yesterday lined up along the debtor’s table in the center of the inner courtroom and their lawyers’ rhetoric gave no indication of reduced status. They were as vehement and certain of their clients’ rights as PL’s attorneys have always been—and just as meretricious. Leading the pack was Shelby Jordan and Richard Doran. Dorn put his all into a strong presentation while Jordan stands out as  a classic, his black hair slicked back, his voice oily and rich. He spoke with such authority—and so fast—that you could be mislead into thinking that he actually might be saying something.

Marathon led off the opening statements. Several lawyers for each of the three participants followed. Each participant was allowed a total of 40 minutes to be decided between their lawyers. Their arguments for the most part were candid and clear and followed similar paths. Each claimed the logic and legality of their position on ownership and the illogic and injustice of their opponents’. Each was scrupulous in support of their client’s interests

Statements in support of the MRC/Marathon plan were given by David Neier for Marathon, Allan Brilliant for MRC and John Fierro for the creditors’ committee. They made a telling point. An auction would delay a conclusion to the process by as much as six months while potential bidders were allowed to review and field check inventory information. How, the lawyers asked, would the company survive during that period? They also stressed again the fact that their plan alone assured the survival of the mill. MRC was ready to start operating immediately after confirmation. This is a great plus to the people who work at PL and their suppliers.

The note holders’ attorneys, led by the sotto voiced William Greendyke of the vaunted Houston firm, Fullbirght and Jawarski, stressed the righteousness of the auction, through which alone could they achieve anything resembling fair market value. They suggested that no owner of the land would in their right mind let the mill go down but they indeed did not make a concrete proposal as to how, in their initiative, its survival would be guaranteed.

The avalanche of support for the MRC plan was impressive, especially when the lawyer from the California Attorney General’s office stood up and followed suit. (The Judge had mentioned all the mail he’d received in his opening comments, even telling of a CD the “Hurwitz in Handcuffs in Humboldt” songs.) Perhaps the strongest speech in the morning’s session was provided by a lawyer for the Unsecured Creditors’ Committee. He blasted both PL and the note holders and said that clearly PL can’t continue. They simply don’t know how to make a profit. He also blasted the Maxxam scientists and the Maxxam reorganization plan itself, it’s intent and its absurdly stretched valuations. In the end, he said, we have reached the moment of a “paradigm shift,” a new beginning.

One cannot argue with him about the momentousness of the occasion but whether we are on the lip of a major transformation in how things are done or just seeing another change of ownership, plucked from the hands of one distant lord and dumped in another, is still a question. Before the announcement of the new bid, it was easier to be optimistic that real change was about to make its entrance—either though MRC’s management regimes or those of the TNC/CFT consortium.

The afternoon session featured a systematic and largely unsuccessful effort by the attorneys for PL and the note holders to discredit through cross examination an Oregon appraiser, Rich Lamont, who had come up with a valuation of the timberland for Marathon last year of approximately $430 million. Needless opponents could easily accept that low figure. The issue of value, always central, has become increasingly crucial to the ultimate dispensation of the company.

This was hammered home at the end when Judge Schmidt closed the day with the most important comments yet spoken. He said, with a kind of wistful, look, that he hoped somehow that the two tables could get together. By this he meant that he wanted the note holders and MRC/Marathon to reach an agreement that would allow him a clear confirmation that would not provoke further litigation. He said that there had been a very large show of support for one party and that the other had a very strong legal position. He hated to have to choose between them.

This meant two things. One was that for this proceeding to finally reach a resolution and for all the lawyers retire to spending the fruits of their ungodly billings, the two parties, MRC/Marathon and the note holders–had to reach an agreement. Most likely it meant MR/Marathon enriching the pot—depending upon which valuation was finally determined to be most accurate–and the note holders giving up their idea of an auction which we know now would start at $ 603 million. If an agreement was not reached and since both parties had sufficient votes for confirmation as well as met the basic standards for confirmation, the Judge would have to make the decision. He clearly did not want to do that. Whether he was willing to actually get forceful with both parties about working out an agreement is one of the remaining dramas.

One thing was perfectly clear in the Judge’s offhand wish that the two tables would come together to make confirmation easier, the third table, where Jordan and Doran sat with Hurwitz’s standing legal army, was not mentioned. PL was out of the running. Charles Hurwitz and Maxxam Corporation are quickly on their way out of Humboldt County

A note on this festival of lawyers- Over 90 people packed in to the relatively small courtroom at peak attendance this morning. There were two security people and a smattering of PL executives, forester Bill Kleiner from Humboldt and I. That’s pretty much it for the non-solicitor presence. There were well over 40 lawyers in the inner court itself and a least another 10 or maybe even 20 more outside.

That makes close to 60 lawyers. Some represented PL, some the note holders or MRC or Marathonn—all on the meter, all being compensated at an average rate maybe of  $500 an hour.  If they clocked in six hours just for their courtroom efforts, it could add up to over $300,000 for the one day in a multi-day event. And it all comes out of the trees. Our trees! The lawyers in a bankruptcy, one should remember, get paid first no matter who wins or losses or what happens to the land or our community.


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