December 27th 2007

By Hank Sims
The North Coast Journal
December 27, 2007

You couldn't have made it any prettier without wrapping a ribbon around it. Last Friday's hearing in the Pacific Lumber bankruptcy case beautifully bookended 2007. The year began with the 150-year-old Humboldt County institution out of gas, having suffered from 20 years of combative ownership by the Houston-based Maxxam Corp. (Charles Hurwitz, chairman, CEO and principal stockholder). Hurwitz had piloted the ship on fumes for years and years, lading the company with crippling debt in order that it might pay for the pleasure of being owned by him. Everyone knew it was going to explode; finally, in January, it did so.

A riotous few months ensued, in which the crafty Hurwitz, a veteran of the Silver Age of high financial fraudulence that swept the country in the 1980s, deployed a myriad of bleeding-edge legal maneuvers, all designed to keep hold of the Humboldt County assets he acquired back then, which might yet retain some wringable value. Those maneuvers were well chronicled here and elsewhere. In order that the bankruptcy case might be heard by a Texas judge, Maxxam rolled Pacific Lumber and its sister companies, with assets valued at least in the high hundreds of millions of dollars, into an empty vessel of a firm it had established in Corpus Christi, Texas, a few months earlier.

Everything went swimmingly for Maxxam for most of the year, but then things started to fall apart, and the judge that Hurwitz's team schemed to get, Richard S. Schmidt of the federal bankruptcy bench in Corpus Christi, started to grow impatient. Listening into the morning session of Friday's hearing by telephone, one could hardly blame him. Dozens of attorneys participated, either in the courtroom or by telephone, and though all were well-spoken and were careful to comport themselves according to Southern good manners, there wasn't much they could agree on. They had just spent a few days in mediation, in an attempt to find common ground about what should become of Pacific Lumber, but nothing came of it.

But Judge Schmidt came prepared with his own agenda this time around, and his agenda was the one that was set in place, by and large. Schmidt threw open the doors to allow all interested parties to file their own plans for the company's recovery, and he named Jan. 30 as the deadline for filing such plans. One way or another, he hopes to have the case concluded with one of the plans adopted by early April.

Up until Schmidt's ruling Friday, only Maxxam had been able to submit a plan for recovery. It involved selling 6,600 acres of mostly old-growth redwood forest to the government for between $300 million and $400 million, and undertaking a "trophy" subdivision of 22,000 additional acres for residential purposes. The plan was widely mocked and reviled, and now it's been tweaked somewhat. But now the other players are set to enter the game. As of this writing, there seem to be four factions gathering, each with radically different ideas for how to pay off the nearly $1 billion the company owes.

Maxxam. The first version of Maxxam's recovery plan was largely based on the idea that the company could build an ultra-luxury subdivision -- the so-called "Redwood Ranch Development" -- on a broad swath of its northern holdings, stretching from Fortuna up the hill to Kneeland and skirting the Headwaters Forest Preserve. When it heard of the plan, Humboldt County government took quick action to torpedo it, passing an emergency moratorium on building in lands zoned for timber production. It was an attempt to let Schmidt know that the plan would never fly, and it was successful.

Now Maxxam is back with a revised plan. Rather than an upscale subdivision of 160-acre parcels, it proposes to undertake "clustered" development of a type designed to appeal to smart-growth advocates. The "Redwood Ranch Development" has become the "Redwood Village Development." Though details are sketchy, it appears that the company envisions building whole new towns way the hell out in the hills. This, the company says, will net it around $700 million, which it can use to pay down old debt.

The Eureka Reporter has quoted the Humboldt County planning department making approving noises about the revised development; still, it's hard to see how it's any more politically or economically feasible than the Redwood Ranch. Assume, for the moment, that a new "Redwood Village" home would retail for $400,000. The company would have to sell 1,750 of them to get to $700 million, and that's not taking into account the costs of building or the massive infrastructure that would be required. This at a time when population growth in Humboldt County has been essentially flat for years and years. There's another issue, too. The Maxxam plan still envisions selling those 6,600 acres -- which it calls the "Ancient Forests" -- for $300 million, which is difficult to figure. The land is already protected from regular timber operations for the next 50 years or so. Who would pay top dollar to protect it again?

Timber noteholders. The holders of Maxxam's timber bonds are principally composed of a conglomeration of Wall Street firms. They own over $700 million of the company's debt, and are theoretically secured through a lien on its Humboldt County timber holdings. They have long signaled their intention to file a competing reorganization plan.

Though the final details have not yet become public, it would seem that the noteholders are looking at a parceling-out of Pacific Lumber assets. They have stated that they are in talks with the Nature Conservancy, and have said that the preservation outfit is interested in acquiring the "Ancient Forests" (though at a price nowhere near $300 million). Apparently, the rest of the assets would be sold to the highest bidder.

If the noteholders' final plans do conform to this outline, they will likely dash the hopes of those who have held out for some sort of "community forestry"-based outcome. Local advocates of the community forestry model had reportedly been in talks with the noteholders, and seemed to think that they could find a place at the table for the future management of Pacific Lumber lands. But it would seem that the noteholders have little intention of holding on to the forest and managing it -- which would only make sense, considering who they are.

Unsecured creditors. Though no details of the plan have yet come forth, it was announced at Friday's hearing that the committee of unsecured creditors intends to file its own recovery plan. The committee represents those who were owed money by Pacific Lumber or one of its sister companies at the time of bankruptcy, but who have no collateral.

Mendocino Redwood Company. Marathon Asset Management is owed about $160 million, which is secured by assets belonging to Pacific Lumber proper (not the timberlands). In court papers filed last week, it signaled that it would be filing a reorganization plan that would keep Pacific Lumber assets intact, as a working timber company.

Marathon said that it would partner with Mendocino Redwood Company, which came into being when the family that built The Gap's clothing empire bought Mendocino and Sonoma county timberlands from Louisiana Pacific. Mendocino Redwood now has 230,000 acres. It doesn't harvest old growth trees, and it uses a minimum of clear-cutting. Its products are certified by the Forest Stewardship Council, which, though not completely uncontroversial, is the greenest of the various programs for "green" forestry certification.

When the Jan. 30 deadline comes and all the plans are in, there will be a period of jockeying. Determining which plan is chosen involves a complicated voting procedure amongst the parties. Since the noteholders own the bulk of the debt, they seem to be in the driver's seat. But whatever the case, come April Pacific Lumber will be a very different company, and Humboldt County will be a substantially different place.