April 3rd 2008

by John Howard
The Capitol Weekly
April 3, 2008

Out of the mists of California's North Coast comes an issue that defined a generation of environmental activism and forced protections for the spectacular Headwaters forest. This time, the fight is not being waged among the trees but in a Texas bankruptcy courtroom, and the decision could come as early as next week.

Up for grabs are more than 210,000 acres of Northern California forests and the picturesque company town of Scotia, as an array of logging interests, creditors and environmentalists grapple in federal bankruptcy court over the assets of the once-mighty Pacific Lumber Company.

For those who are owed money, the basic question is how much can be repaid. For environmentalists, the top concern is whether the existing protections - the fruit of negotiations that consumed the Capitol and the North Coast for years - will remain intact.

"If you want to bring the full fury of the state and federal governments down on you, just try and walk away from the deal that we all spent half a billion dollars on less than a decade ago," said Paul Mason of the Sierra Club.

The legal fight is the latest chapter in the strange story of the venerable company, known as PalCo, which was established nearly 140 years ago and which, until it was purchased in a hostile takeover by Texas-based financier Charles Hurwitz in 1986, was viewed generally as environmentally friendly - a rarity among timber companies.

But in the years after the sale to Hurwitz's Maxxam Corp., amid protests from environmentalists, the company steadily increased the level of its harvesting, tripling the yield to 4.5 million board-feet annually, which fueled years of local environmental protests that ultimately drew national attention. The employee strength, once over 1,600, dipped to about 350. Some 3,000 acres of company-owned ancient redwoods east of Fortuna, the Headwaters forest, was set aside under protections in March 1999 as a federal reserve, following months of negotiations between Hurwitz and state and federal officials. The accord was announced minutes before a midnight deadline.

The Headwaters forest is not part of the bankruptcy proceedings, but other timber that serves as a habitat for the endangered marbeled murrelet, which builds its nests in old-growth trees, is included, as is Scotia, which is owned by the timber company. Scotia, with about 1,000 inhabitants, is one of the last remaining company towns in the country and home to a mammoth, now-shuttered lumber mill.

In the end, financial reverses forced Pacific Lumber, unable to make payments on $714 million worth of bonds that included debt dating from the company's takeover 15 years earlier, sought protections from creditors in January 2007. The case is being heard in U.S. Bankruptcy Court in Corpus Christi, Texas. A decision from Judge Richard Schmidt is expected by April 11, although it could come earlier.

The new fight is multi-pronged.

One faction is the company itself, which has proposed several plans that would allow it to retain control and sell off some of its property for development. Another proposal is a $500 million buyout headed by Mendocino Redwoods Co. of Ukiah and the Marathon asset fund, financed largely by the Donald Fisher family of San Francisco, founders of the Gap retail chain. A third is a blend of investors, the Bank of America and conservation groups that include the Save the Redwoods League and the Nature Conservancy.

One proposal represents the note holders on PalCo's debt and calls for selling off the company's assets at market value - a move that its supporters say stands the best chance of recouping losses. If Schmidt selects this option, former Gov. Pete Wilson would assume a crucial role: Wilson would temporarily take command of the company as he oversees an auction of the assets. Wilson is described by his supporters as a moderate Republican sensitive to both business and the environment, and they note that he worked on timber protections with U.S. Sen. Dianne Feinstein, a key player in the final Headwaters agreement.

"He's a perfect fit," said Sean Walsh, who was Wilson's deputy chief of staff. He said Wilson would guarantee environmental safeguards, "generate the maximum amount of revenue" from the sale of assets, and would "send a strong signal to the infrastructure investment community that California will treat them with respect and that the welcome mat is out for investing in the state." Wilson's tenure would likely be six to nine months, perhaps more, as the sale unfolds. Walsh is a consultant with the communications arm of the Bingham McCutchen law firm, which has handled legal work in the case. Wilson heads the unit's Sacramento office.

Ironically, Wilson's role could put him at odds with his political protege, Gov. Arnold Schwarzenegger. Fisher, too, is a Schwarzenegger supporter and an active political player, donating some $1.6 million to causes over the past two years that include education reform, local political campaigns and the governor.

Some environmentalists, at least so far, favor the Mendocino Redwoods Co. buyout - as does the major local paper in the area, the Eureka Times-Standard, which noted that the Mendocino company knows logging and would continue the industry in the economically depressed Eel River Valley. The Environmental Protection Information Center, the North Coast group that played a major role in the Headwaters protests, also supports the Mendocino Redwoods buyout. EPIC is a member of the Unsecured Debtors Committee, along with truckers, geologists, steelworkers and others. The committee, in a letter sent Friday to the Schwarzenegger administration, urged support for the Mendocino plan.

"Those are really the only two proposals that have legs - the MRC plan and the note holders' plan. We have been openly supportive of the MRC plan, but in their proposal they seem to be unwilling to do conservation easements to prevent future development. They seem to want to hold out the ability to do development in the future," Mason said.

Schwarzenegger already has weighed in. His Resources Agency submitted a letter to the bankruptcy court on Jan. 29. The Republican governor urged the judge to make sure that the final choice include environmental protections contained in the Habitat Conservation Plan, the document that governs virtually every aspect of a logging company's operations. Schwarzenegger also said the local economy should be protected, along with safeguards for wildlife habitats and watersheds. "This is an issue of paramount importance to all Californians," the governor said, calling for assurances that "our interests are protected and the public trust secured."

The state, currently studying the rival plans, intends to make a recommendation by the end of the week, said Resources Agency spokesman Sandy Cooney. "The state has a vested interest to protect the Headwaters, and we want to make sure that whatever the outcome, the state's interests are safeguarded," Cooney said. Representatives of the various proposals met two weeks ago with state Resources Secretary Mike Chrisman to pitch their plans, Cooney added.

Backers of the auction believe the sale is the fairest way to assure that people who suffered out-of-pocket losses can be made at least partially whole. They note that their proposals include all the environmental safeguards that were negotiated a decade ago - negotiations in which Wilson had an early role - plus revisions approved since then.

Some believe that whoever wins in court, just about any change would be for the better if Maxxam no longer has a role in north state timber harvesting.

"It's been hammered so badly for the past 20 years that it's going to need a gentle touch for the next half century to rebuild a mature forest," Mason said.