April 30th 2008

By Kelly Zito, Chronicle Staff Writer

San Francisco Chronicle

April 30, 2008

The saga of Pacific Lumber Co., which spans its takeover in the 1980s, a dramatic protest by tree-sitter Julia Butterfly Hill and the failure of a logging town, could conclude this week in a Texas Bankruptcy Court.

On Tuesday, shortly after the monthlong bankruptcy trial of Pacific Lumber resumed in Corpus Christi, the company opened settlement talks with a group backed by Gap Inc. founders Donald and Doris Fisher.

However, the absence at the negotiating table of one critical bloc of creditors could hamper any deal or split Pacific Lumber's holdings.

The outcome of the legal wrangling will determine the fate of Pacific Lumber's most valuable assets - more than 200,000 acres of Douglas fir and redwood forests in Humboldt County and the company town of Scotia, home to Pacific Lumber's headquarters and its mainstay sawmill. It could also mark a new chapter for a community and a company mired in two decades of legal, regulatory, environmental and financial battles.

Vying for control of 145-year-old Pacific Lumber are the Fishers, billionaire San Francisco philanthropists; Andy Beal, a Texas banker who is also a high-stakes poker champion; and Pacific Lumber's parent firm Maxxam Inc., whose management of the forest land has been a lighting rod for environmental demonstrations since corporate raider Charles Hurwitz bought out the company in 1986.

Pacific Lumber officials confirmed the negotiations Tuesday but would not comment further.

Debt and protests

Plagued by a mountain of debt, strict limits on its logging and a legacy of high-profile environmental protests, Pacific Lumber filed for bankruptcy in January 2007. Early this month, suitors for the company's property and facilities met in front of U.S. Judge Richard Schmidt in Texas to determine which of their plans would satisfy the various stakeholders, including creditors, environmentalists, the local community and state regulators.

Each plan has its supporters and detractors.

The Fisher proposal seeks to balance business and environmental interests. Mendocino Redwood Co., the 9-year-old logging company in Mendocino County controlled by the Fisher clan, has a lower offer price than the others, but its plan would allow it to harvest timber at a reduced rate and thereby appease the community and environmentalists.

"Because we have family ownership, we can operate the land with a longer-term horizon, which has allowed us to make a strong emphasis on stewardship," said Sandy Dean, spokesman for the Mendocino Redwood Co. "This is an effort to duplicate that success ... while at the same time operating a business without seeking philanthropic or governmental assistance."

In the lead-up to the trial, the plan proffered by Mendocino and its partner, creditor Marathon Structured Finance Fund, appeared to have a broad base of support, including Gov. Arnold Schwarzenegger, regulators, environmental groups and the Humboldt County community.

The Mendocino plan offers $500 million for the company and the promise to keep the Scotia sawmill running - albeit with a workforce of about 250, down from more than 350 now.

In addition, the company would harvest more than 50 million board feet of timber each year for an initial period, down significantly from more than 100 million board feet several years ago. Mendocino also seeks certification from the Forest Stewardship Council, which advocates sustainable forestry.

Environmentalists in the past have objected to Mendocino's cutting of old-growth trees and use of herbicides. However, the company's proposal hews to some of the primary goals of groups such as the Nature Conservancy, such as eliminating traditional clear-cutting. But the plan has one glaring omission: a conservation easement that would limit development and manage the forest in an ecologically friendly way.

Sustainable plan needed

"We want to make sure that regardless of who ends up with the property, there is a sustainable, permanent timber management over the property," said Jordan Peavey, spokesperson for the Nature Conservancy's California chapter, which has its own plan in the wings if the assets go to auction.

Mendocino has critical support from Pacific Lumber creditor Marathon Structured Finance Fund. But it does not have backing from the bond holders - whose debt of $700 million-plus is secured by the 210,000 acres of forest - and who have significant say over the future of the land. The bond holders favor a higher-priced bid by Beal, which has pledged $603 million for the acreage should it go up for auction.

Dean confirmed that the bond holders were not at the negotiating table Tuesday; representatives for Beal and the bond holders could not be reached.

However, Dean emphasized that getting Pacific Lumber and its subsidiaries to the settlement table could be a significant step toward some resolution.

Though Beal offers a higher price, critics contend he has little experience running a timber company. What's more, observers raise the specter of Hurwitz, the Texas financier whose Maxxam company kept Pacific Lumber awash in debt, doubled logging levels and drew the radical protest from Julia Butterfly Hill.

Two-year protest

In the late 1990s, Hill waged a two-year demonstration against clear-cutting of virgin redwoods from her perch in an ancient tree she dubbed "Luna."

That same period birthed the so-called Headwaters Agreement, in which state and federal agencies paid about $500 million to preserve more than 7,000 acres of old-growth forest as park land. The pact also regulated more stringently how and where the company could harvest timber on the remaining 210,000 acres.

Pacific Lumber was scheduled to lay out its plan on Tuesday but instead asked the judge for a continuance to engage in settlement talks.

Panned by the judge earlier in the trial, Pacific Lumber's own reorganization plan valued its lands at roughly $1 billion and called for developing about 22,000 acres into multimillion-dollar luxury estates.

Given the alternatives, David Simpson, an environmentalist and longtime Pacific Lumber observer, said the Mendocino plan might present the best shot at economic viability and assurances to the community.

"People are so urgent for change, they want to see something happen," Simpson said. "The workers, families, suppliers - they've been hiding under a cloud of uncertainty for so long because of the practices of Maxxam. They're looking for rays of light and they see that in Mendocino Redwood Co."

This article appeared on page A - 1 of the San Francisco Chronicle