In re Pacific Lumber Co.

• Decision Date: 29 September 2009
• Docket Number: No. 08-40746.,08-40746.
• Citation: In re Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009)
• Parties: In the Matter of: THE PACIFIC LUMBER CO.; Scotia Pacific Company, LLC, Debtors. Bank of New York Trust Company, NA, as Indenture Trustee for the Timber Notes; Angelo Gordon & Co., LP, Aurelius Capital Management, LP, and Davidson Kempner Capital Management, LLC; Scotia Pacific Company, LLC; CSG Investments; Scotia Redwood Foundation, Inc., Appellants, v. Official Unsecured Creditors' Committee; Official Unsecured Creditors' Committee Appellee, Marathon Structured Finance Fund, LP; Mendocino Redwood Company, LLC; The Pacific Lumber Co.; United States Justice Department; California State Agencies, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

584 F.3d 229

In the Matter of: THE PACIFIC LUMBER CO.; Scotia Pacific Company, LLC, Debtors Bank of New York Trust Company, NA, as Indenture Trustee for the Timber Notes; Angelo Gordon & Co., LP, Aurelius Capital Management, LP, and Davidson Kempner Capital Management, LLC; Scotia Pacific Company, LLC; CSG Investments; Scotia Redwood Foundation, Inc., Appellants, v. Official Unsecured Creditors' Committee; Official Unsecured Creditors' Committee Appellee, Marathon Structured Finance Fund, LP; Mendocino Redwood Company, LLC; The Pacific Lumber Co.; United States Justice Department; California State Agencies, Appellees.

No. 08-40746.

United States Court of Appeals, Fifth Circuit.

September 29, 2009.

Oscar Rey Rodriguez, Toby L. Gerber, Ryan E. Manns, Louis Raymond Strubeck, Jr., Greg Michael Wilkes, Fulbright & Jaworski, L.L.P., Dallas, TX, R. Andrew Black, Zack A. Clement, William Richard Greendyke, Fulbright & Jaworski, L.L.P., Houston, TX, Roy Theodore Englert, Jr. (argued), Robbins, Russell, Englert, Orseck & Untereiner, Washington, DC, for Bank of New York Trust Co., NA, Appellant.

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

Eric J. Fromme, Gibson, Dunn & Crutcher, L.L.P., Irvine, CA, for Scotia Pacific Co., LLC, Appellant.

Murry B. Cohen, Akin, Gump, Strauss, Hauer & Feld, Roger Dale Townsend, Alexander, Dubose & Townsend, LLP, Houston, TX, Joseph Carl Cecere, Charles R. Gibbs, Akin, Gump, Strauss, Hauer & Feld, L.L.P., Dallas, TX, for CSG Investments and Scotia Redwood Foundation, Inc. Appellants.

Maxim Boris Litvak, Pachulski, Stang, Ziehl, Young, Jones, San Francisco, CA, for Official Unsecured Creditors Committee, Appellee.

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

Allan S. Brilliant (argued), Brian D. Hail, Goodwin Procter, New York City, Frederick Craig Schafrick, Richard Michaels Wyner, Goodwin Procter, Washington, DC, for Mendocino Redwood Co., LLC, Appellee.

Nathaniel Peter Holzer, Jordan, Hyden, Womble, Culbreth & Holzer, Corpus Christi, TX, for Pacific Lumber Co., Appellee.

Bradford T. McLane, James C. Kilbourne, Alan S. Tenenbaum, U.S. Dept. of Justice, Environment & Natural Resources Div., Washington, DC, for U.S. Justice Dept., Appellee.

Paul J. Pascuzzi, Felderstein, Fitzgerald, Willoughby & Pascuzzi, LLP, Sacramento, CA, Michael W. Neville, San Francisco, CA, for California State Agencies, Appellee.

Hugh Matthew McDonald, Thacher, Proffitt & Wood, New York City, for The

American Securitization Forum, Amicus Curiae.

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

Before JONES, Chief Judge, and OWEN and SOUTHWICK, Circuit Judges:

EDITH H. JONES, Chief Judge:

In this direct appeal from the bankruptcy court, The Bank of New York ("Indenture Trustee") and certain Noteholders¹ challenge the legality of a confirmed Chapter 11 reorganization plan ("plan"). Neither the bankruptcy court nor a motions panel of this court stayed plan confirmation pending appeal. In the brief interval between confirmation and oral argument in this court, the plan was substantially consummated. Plan proponents and current owners of the reorganized debtors, Mendocino Redwood Company ("MRC") and Marathon Structured Finance ("Marathon"), moved to dismiss this appeal as equitably moot due to their intervening actions.

We hold that equitable mootness does not bar review of issues raised on appeal concerning the treatment of the Noteholders' secured claims; nor does it bar re-evaluation of whether their administrative priority claim was correctly calculated; nor does it bar review of the plan's release clauses insulating multiple parties from liability. Equitable mootness does foreclose our review of issues related to the treatment of impaired and unsecured classes. Finally, we reject the Noteholders' complaints against the plan's payout of cash in full for their allowed secured claim, but we remand the administrative priority claim. We also reverse in part the broad non-debtor releases.

BACKGROUND

Six affiliated entities ("the Debtors") involved in the growing, harvesting, and processing of redwood timber in Humboldt County, California, filed separate Chapter 11 bankruptcy petitions on January 18, 2007, in the Southern District of Texas (a venue not known for its redwood forests). The six petitions were procedurally, but not substantively, consolidated and jointly administered by the bankruptcy court. This appeal concerns the reorganization of the principal debtors, Pacific Lumber Company ("Palco") and Scotia Pacific LLC ("Scopac").²

Palco owned and operated a sawmill, a power plant, and the town of Scotia, California. Marathon held a secured claim against Palco's assets, which ultimately rose to about $160 million including pre- and post-petition financing. Marathon estimated Palco's assets were worth only $110 million at the date of filing.

Scopac was a Delaware special purpose entity wholly owned by Palco. In 1998, Palco transferred ownership of more than 200,000 acres of prime redwood timberland ("Timberlands") to Scopac to facilitate the sale of $867.2 million in notes secured by the Timberlands and Scopac's other assets. Pursuant to an indenture agreement, the Bank of New York represents the Noteholders in the bankruptcy cases, but certain Noteholders retained their own counsel and are named appellants. On the petition date, Scopac owed the Noteholders approximately $740 million in principal and interest on the notes. Scopac also owed $36.2 million to Bank of America on a secured line of credit with a right to payment ahead of the Noteholders.

Palco and Scopac maintained separate corporate structures but were an integrated company. One of Scopac's three directors sat on Palco's board, and the companies had the same CEO, CFO, and General Counsel for substantially all of the relevant period. Palco had the sole right to harvest Scopac's timber, which Palco then processed and sold. Scopac was to repay the Noteholders with proceeds from its sales to Palco.

The Timberlands are heavily regulated by federal and state agencies. The U.S. Fish and Wildlife Service, the National Marine Fisheries Service, and the California Department of Fish and Game vigorously administer federal and state endangered species regulations. Any new owner of the Timberlands must obtain Regional Water Quality Control Board permits that regulate waste discharge, clean-up and abatement, and site remediation. The California Department of Forestry and Fire Protection requires a timber harvesting plan covering issues like restocking, mitigating the effects of harvesting and erosion, road maintenance and sustainable yield requirements. Under the Timberlands' conservation plan, a transfer of ownership must run the gamut of pre-approval by all of these agencies.

After a year passed without sufficient progress toward a reorganization plan, the bankruptcy court terminated the debtors' exclusivity period (11 U.S.C. § 1121) and allowed the filing of five competing proposed plans. The court approved a joint disclosure statement for the plans and expedited solicitation and voting so that a confirmation hearing could begin in early April 2008. During the extended hearing, the Debtors withdrew their plans, leaving only two. The Indenture Trustee's plan covered the assets of Scopac alone, while that proposed by Marathon and MRC, the latter entity a competitor of Palco, sought to reorganize all of the Debtors.

On June 6, the bankruptcy court held the MRC/Marathon plan confirmable but the Indenture Trustee's plan not confirmable.³ The Indenture Trustee has not appealed the court's rejection of its plan. The MRC/Marathon plan proposed to dissolve all six entities, cancel intercompany debts, and create two new entities, Townco and Newco. Almost all of Palco's assets, including the town of Scotia, California, would be transferred to Townco. The Timberlands and assets of the sawmill would be placed in Newco. MRC and Marathon proposed to contribute $580 million to Newco to pay claims against Scopac. Marathon would also convert its $160 million senior secured claim against Palco's assets into equity, giving it full ownership of Townco, a 15% stake in Newco, and a new note for the amount of the sawmill's working capital. MRC would own the other 85% of Newco and would manage and run the company.

The plan created 12 classes, seven of which were eligible to vote,⁴ and four of which contained claims against Scopac. Class 5 proposed to pay Bank of America, the sole class member, $37.6 million, consisting of the principal ($36.2 million), accrued post-petition interest, unpaid fees, and approximately $1 million in default interest paid over 12 months, thus impairing the class.⁵ Class 6 proposed to pay the Noteholders' secured claim the value of their collateral and a lien on proceeds from pending unrelated litigation against the state of California, which the parties refer to as the Headwaters Litigation.⁶ Class 8 proposed to pay unsecured claims against Scopac by former employees and trade vendors not previously deemed "critical,"⁷ but these amounts were exposed to ongoing litigation regarding assumption and rejection of executory contracts, thus impairing the class. Class 9 was tailored to pay Scopac's remaining general unsecured claims, consisting of the Noteholders' deficiency claim⁸ for over $200 million with a recovery estimated as "unknown."

At least one impaired Scopac class had to vote in favor of the plan for it to be confirmable as to Scopac. 11 U.S.C. § 1129(a). Classes 5 and 8 voted for the plan. Class 6 (the Noteholders' secured claim) and Class 9 (the Noteholders' deficiency claim) voted against...