April 29th – The Spiral Begins

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

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-11^th. By rights, it should have been the final of the series of reports on those hearings and been published on the 13^h or soon thereafter. Instead, it comes more or less as a preface to the next series of hearings scheduled for April 29^th-May 2^nd (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 29^th, 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 30^th. That was one day before the drop dead date of January 31^st 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. 31^st 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 2/3^rds 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 29^th.

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 27^th, 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

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

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.