In The Matter Of: Scopac v. Pac. Lumber Co.

• Decision Date: 19 October 2010
• Docket Number: No. 09-40307.,09-40307.
• Citation: 624 F.3d 274
• Parties: In the Matter of: SCOPAC; Scotia Development LLC; Salmon Creek LLC; Scotia Inn, Inc.; Britt Lumber Company, Inc.; The Pacific Lumber Company; Steve Wills Trucking and Logging LLC, Debtors. Bank of New York Trust Company NA, as Indenture trustee for the Timber Notes (“Indenture Trustee”); CSG Investments, Inc.; Angelo, Gordon & Company L.P.; Aurelius Capital Management, L.P.; Davidson Kempner Capital Management LLC; Scotia Redwood Foundation, Inc., Appellants, v. Pacific Lumber Company; Scotia Pacific LLC; Marathon Structured Finance Fund LP; Mendocino Redwood Company LLC; Committee of Unsecured Creditors; Bank of America, Appellees. Angelo, Gordon & Co. LP; Aurelius Capital Management LP; Davidson Kempner Capital Management LLC, Appellants, v. Marathon Structured Finance Fund LP; Mendocino Redwood Company LLC; Committee of Unsecured Creditors; Bank of America; Scotia Pacific LLC; Pacific Lumber Company, Appellees. CSG Investments, Inc., Appellant, v. Scotia Pacific LLC; Pacific Lumber Company, Appellees. Scotia Redwood Foundation, Inc., Appellant, v. Scotia Pacific LLC; Pacific Lumber Company, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

624 F.3d 274

In the Matter of: SCOPAC; Scotia Development LLC; Salmon Creek LLC; Scotia Inn, Inc.; Britt Lumber Company, Inc.; The Pacific Lumber Company; Steve Wills Trucking and Logging LLC, Debtors.

Bank of New York Trust Company NA, as Indenture trustee for the Timber Notes (“Indenture Trustee”); CSG Investments, Inc.; Angelo, Gordon & Company L.P.; Aurelius Capital Management, L.P.; Davidson Kempner Capital Management LLC; Scotia Redwood Foundation, Inc., Appellants,

v.Pacific Lumber Company; Scotia Pacific LLC; Marathon Structured Finance Fund LP; Mendocino Redwood Company LLC; Committee of Unsecured Creditors; Bank of America, Appellees.

Angelo, Gordon & Co. LP; Aurelius Capital Management LP; Davidson Kempner Capital Management LLC, Appellants,

v.Marathon Structured Finance Fund LP; Mendocino Redwood Company LLC; Committee of Unsecured Creditors; Bank of America; Scotia Pacific LLC; Pacific Lumber Company, Appellees.

CSG Investments, Inc., Appellant,

v.Scotia Pacific LLC; Pacific Lumber Company, Appellees.

Scotia Redwood Foundation, Inc., Appellant,

v.Scotia Pacific LLC; Pacific Lumber Company, Appellees.

No. 09-40307.

United States Court of Appeals,Fifth Circuit.

Oct. 19, 2010.

COPYRIGHT MATERIAL OMITTED.

Roy Theodore Englert, Jr. (argued), Robbins, Russell, Englert, Orseck, Untereiner & Sauber, L.L.P., Washington, DC, Robert Andrew Black, Zack A. CLement, Fulbright & Jaworski, L.L.P., Houston, TX, Toby L. Gerber, William Richard Greendyke, Oscar Rey Rodriguez, Louis Raymond, Strubeck, Jr., Fulbright & Jaworski, L.L.P., Dallas, TX, for Bank of New York Trust Co. NA.

Murry B. Cohen, Akin, Gump, Strauss, Hauer & Feld, L.L.P., Houston, TX, Charles R. Gibbs, Akin, Gump, Strauss, Hauer & Feld, L.L.P., Dallas, TX, for CSG Investments and Scotia Redwood Found., Inc.

Isaac M. Pachulski, Jeffrey H. Davidson, Eric D. Winston, Stutman, Treister & Glatt, Los Angeles, CA, for Angelo, Gordon & Co. L.P., Aurelius Capital Management, L.P. and Davidson Kempner Capital Management LLC.

Shelby Arthur Jordan, Jordan, Hyden, Womble, Culbreth & Holzer, P.C., Corpus Christi, TX, for Pac. Lumber Co.

Kathryn A. Coleman, Gibson, Dunn & Crutcher, L.L.P., New York City, for Scotia Pac. LLC.

Steven Michael Schwartz, Counsel, David Neier, Bankruptcy Counsel, Winston & Stawn, L.L.P., New York City, John David Penn, Haynes & Boone, L.L.P., Fort Worth, TX, for Marathon Structured Finance Fund LP.

Allan S. Brilliant (argued), Dechert, L.L.P., New York City, Frederick Craig Schafrick, Richard Michaels Wyner, Goodwin Procter, L.L.P., Washington, DC, for Mendocini Redwood Co. LLC.

Maxim Boris Litvak, Pachulski, Stang, Ziehl & Jones, L.L.P., San Francisco, CA, for Committee of Unsecured Creditors.

Evan M. Jones, O'Melveny & Myers, L.L.P., Los Angeles, CA, for Bank of America.

Appeal from the United States District Court for the Southern District of Texas.

Before JONES, Chief Judge, PRADO, Circuit Judge, and OZERDEN, ^* District Judge.

EDITH H. JONES, Chief Judge:

This appeal involves a dispute over compensation for diminution in the value of collateral during the pendency of a Chapter 11 bankruptcy. The appellants, holders of notes secured by the timber and non-timber assets of the Scotia Pacific Co., LLC (“Scopac”), seek review of the district court's dismissal of their appeal for lack of subject matter jurisdiction and contend that the bankruptcy court erred in denying their “superpriority” administrative claim on the bankruptcy estate. 11 U.S.C. § 507(b). The Appellees, supporters of Scopac's reorganization plan, argue that the district court lacked jurisdiction due to the Noteholders' separate appeal of the plan confirmation order, an order this court affirmed, in large part, last year. See In re Pacific Lumber Co., 584 F.3d 229 (5th Cir.2009) (Jones, C.J.). They further assert that the bankruptcy court correctly calculated the value of the Noteholders' administrative claim: zero. We hold that jurisdiction exists and, on the merits, uphold an administrative priority claim of $29.7 million.

I. BACKGROUND

In January 2007, the Pacific Lumber Company (“Palco”) and several of its subsidiaries, including Scopac, filed petitions for relief under Chapter 11 of the Bankruptcy Code. Scopac's principal assets were 200,000 acres of redwood timberland and cash and cash equivalents on hand. There were three major creditors: the Noteholders were owed $714 million and had a lien on substantially all of Scopac's assets; Bank of America was owed $36.2 million and had a senior lien on the same assets; and Marathon, a private equity fund, was owed $160 million.

While the automatic stay was in place, the bankruptcy court entered a series of cash collateral orders authorizing Palco to employ creditors' assets for the purpose of preserving the value of the estate and requiring it to provide adequate protection to those creditors in return. ¹ These orders granted Bank of America and the Noteholders a lien on all property of the estate not already subject to their existing liens and a superpriority administrative claim to the extent of the post-petition diminution of their interests.

In January 2008, the bankruptcy court entered an order terminating the period of exclusivity during which only the debtors had been allowed to propose plans for reorganization. See 11 U.S.C. § 1121. Marathon partnered with the Mendocino Redwood Company, Inc., a timber company, to propose a reorganization plan for Palco and Scopac. Their plan allowed for the payment of the current value of the Noteholders' secured claim on the collateral, the payment of the principal and non-default interest on the Bank of America claim, the payment of a portion of Scopac's trade creditors' debt, and the payment of a portion of the debt owed to Palco's unsecured creditors. Marathon would convert the $160 million debt owed to it into equity, and Marathon and MRC would contribute $580 million in cash to the new companies. Ultimately, this plan, with slight amendments, was confirmed, and Marathon and MRC effectively purchased the reorganized companies out of bankruptcy.

The major sticking point at confirmation was the confirmation-date value of Scopac's timberland and, by extension, the value of the Noteholders' secured claim. In April and May of 2008, the bankruptcy court held several hearings on the proposed plan, at which both MRC/Marathon and the Noteholders presented expert testimony on the value of the timberland at the time of confirmation. The higher the value, the more that MRC and Marathon would have to pay to satisfy the Noteholders' claim.

In partial response to the proposed plan's low-ball valuation of the timberland, the Noteholders filed a motion for a superpriority administrative expense claim pursuant to 11 U.S.C. § 507(b). They contended that the value placed on their timberland under the terms of the MRC/Marathon plan reflected a substantial post-petition decline for which they should be compensated. See 11 U.S.C. §§ 363(e), 361.

In June, the bankruptcy court issued a 119-page decision containing findings of fact and conclusions of law on the MRC/Marathon plan. The court found that the timberland was worth no more than $510 million-far less than the face value of the debt held by the Noteholders. (The value of the timberland at confirmation, a subject of the prior appeal, is not at issue in the present action. ² ) It delayed entry of the confirmation order, however, to consider the Noteholders' § 507(b) claim.

To that end, the court conducted hearings in late June and early July at which the parties presented evidence and expert testimony on the value of Scopac's timberland and other assets on the petition date. According to undisputed testimony, the Noteholders' collateral included Scopac's $48.7 million in non-timber assets, both cash and equivalents, on the petition date. From this, the court deducted $36.2 million for Bank of America's higher-priority claim and the $8.9 million that Scopac had paid the Noteholders' representatives for services during the bankruptcy. That left the Noteholders with a net secured interest of $3.6 million in non-timber collateral.

The parties' experts clashed over the value of the timberland on the petition date. The Noteholders' expert, James Fleming, testified that its value had dropped significantly over the pendency of the bankruptcy due to a sharp decline in timber prices and reduced harvest estimates. He proposed a petition-date value of $646 million-still less than the full value of the Noteholders' claim. The appellees' expert, Richard LaMont, testified that the timberland had actually appreciated since Scopac filed for bankruptcy due to a decline in the discount rate applicable to long-term timber investments.

The bankruptcy court denied the Noteholders' § 507(b) motion. It largely credited LaMont's testimony, concluding that the timberland had not declined in value during the bankruptcy. Thus, the Noteholders were, on net, entitled to $513.6 million: $510 million for the timberland and $3.6 million for other collateral. MRC/Marathon agreed to modify its plan to provide for payment of that amount, rendering unnecessary § 507(b) relief because the value of the claim was zero.

On July 8, the modified MRC/Marathon plan was confirmed. The court also entered a separate “Final Order” denying the § 507(b) motion.

The Noteholders filed separate notices of appeal to the district court from the confirmation order and the § 507(b) order. In bankruptcy court, the Noteholders also petitioned for a stay of confirmation, as well as direct appeal of the confirmation order to this court. The stay was not granted; direct appeal was. ³

In February 2009, the district court dismissed the Noteholders' appeal of the § 507(b) order. This court's consideration of the appeal of the confirmation order, it held, divested it of jurisdiction over the appeal of the § 507(b) order, because the § 507(b) order “is an integral part of the Confirmation...