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Bankruptcy court’s Pacific Lumber ruling expected soon

By Mike Geniella
The Press Democrat
May 19, 2008

The fate of Pacific Lumber Co., the 145-year-old aristocrat of West Coast timber companies, is expected to be decided within days by a federal bankruptcy court in Texas.

The anticipated decision will culminate months of legal wrangling among institutional investors, hedge fund managers, timber interests and creditors in a Corpus Christi courtroom more than 2,000 miles from the redwood forests of the North Coast.

“From a community perspective, the scenario is very surreal,” said Jill Geist, chairwoman of the Humboldt County Board of Supervisors.

Geist said she still sometimes shakes her head in disbelief over the fact that “the fate of a major local employer, two mills and even a town is in the hands of a judge in Texas.”

Still, Geist believes Humboldt County is ready for a decision, whatever it may be.

“The uncertainty has been very difficult,” she said.

At stake is the future ownership of a historic timber company that’s mired in $700 million of debt and struggling to survive in an era of slumping construction, growing global competition and increased environmental restraints. The situation is so dire that Pacific Lumber this week could run out of cash to keep operating, according to statements company executives have made to the bankruptcy court.

The company’s current situation is a far cry from times past when Pacific Lumber was touted for its environmentally sensitive timber management practices, and its ownership revered for creating a safe haven for workers and their families in the mill town of Scotia.

Before a hostile 1986 corporate takeover, Pacific Lumber built affordable employee housing for 1,000 Scotia residents, along with the town’s elementary school, hospital, a collection of local stores, skating rink and a theater. Generations of employees retired with pensions, and were provided free life insurance. Every worker’s child who decided to go to college received a company scholarship.

The celebrated way of life, touted nationally in a former Life magazine centerpiece called “Life in the Peace Zone,” began to slip away 22 years ago.

In a 1986 Wall Street move that stunned the North Coast timber industry, Houston financier Charles Hurwitz used junk bond financing to seize control of Pacific Lumber.

Hurwitz’s Maxxam Inc. quickly accelerated the company’s pace of logging to meet annual interest payments on an estimated $850 million debt. The move triggered an environmental war that raged for nearly two decades and ultimately cost taxpayers nearly $500 million to keep company loggers out of the last large grove of privately owned ancient redwoods.

In January 2007, a struggling Pacific Lumber filed for bankruptcy, unable to meet the interest payments on debt owed to a consortium of East Coast investment banks.

After 16 months, the most concrete proposal to emerge in bankruptcy court is a joint venture involving Mendocino Redwood Co., owned by San Francisco’s Fisher family, and an East Coast hedge fund whose loan to Pacific Lumber is secured by the company-owned mill town of Scotia. The Mendocino-Marathon Asset Management venture is offering $530 million in cash to pay off debtors.

Under the plan, Pacific Lumber’s primary assets would be kept intact, especially the 210,000 acres of surrounding forestlands and lumber production facilities at Scotia and Arcata. A permanent work force of around 300 is envisioned, down from 850 when the company was taken over by Hurwitz. Unsecured creditors owed another $11 million would be paid, and environmental restraints imposed by state and federal regulators in past years would be honored.

While the Mendocino-Marathon proposal is widely applauded by local community leaders, state and federal lawmakers and environmental groups, it has run into a buzzsaw of opposition from the consortium of debtors. They want Pacific Lumber’s timberlands put on the auction block, and sold to the highest bidder.

The debtors argued to Judge Richard Schmidt that Mendocino-Marathon is trying to foist a bargain-basement deal upon them. They claim potential bidders include Harvard University’s Endowment Fund, a coalition of environmental groups led by the Nature Conservancy, and a Texas banker who declared he’s willing to pay $603 million cash for the Pacific Lumber timberlands.

A Mendocino-Marathon attorney told the bankruptcy court last Thursday that such an auction would lead to “another Texas chainsaw massacre.”

Mendocino Redwoods Chairman Sandy Dean said he’s confident the court has been convinced the Mendocino-Marathon proposal “does the best job possible to address all the stakeholders’ interests.”

Supervisor Geist echoed those sentiments, saying she’s hopeful the judge is aware of impacts locally from any decision he makes.

“I feel Judge Schmidt during the process has demonstrated that he’s a thoughtful and deliberative man, and that he recognizes the magnitude of any decision on not just the creditors but on our county,” said Geist.

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