What Happened and What Didn’t

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.

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