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Scotia’s future on hold – Pacific Lumber Mill Town Awaits Bankruptcy Judge’s Decision

By Mike Geniella
The Press Democrat
May 22, 2008

Newspaper_SRPressDemocrat_20080522 mill photo.jpg

KENT PORTER / The Press Democrat. Shift change at the remaining lumber mill at the Pacific Lumber Company in Scotia, Wednesday May 21, 2008 in Humboldt County.

For 34 years, butcher Mel Berti has toiled behind the meat counter at Hoby’s Market, the community center of historic Scotia.

“From my vantage point, I’ve seen it all,” Berti said.

He witnessed the good times when a booming Pacific Lumber Co. employed up to 1,200 workers, and the truckloads of redwood logs from surrounding forests seemed endless.

But Berti also saw the suffering as the town’s employment base rapidly shrank in recent years to fewer than 300 in face of escalating economic woes for the 125-year-old timber company.

“The Friday massacres as we called them got pretty dark,” Berti said.

Yet nothing prepared him or Scotia for the emotional roller coaster of the past 17 months.

Stomachs have churned since January 2007, when Pacific Lumber filed for bankruptcy protection. The former aristocrat of West Coast timber companies was unable to meet interest-only payments on $714 million in debt still owed after 22 years of ownership by Texas financier Charles Hurwitz.

Now Scotia agonizes while it waits for a federal bankruptcy court decision that will determine the fate of Pacific Lumber, and a town where generations of families have lived and worked since 1883.

Butcher Berti said just about everyone in town is on “pins and needles.”

Scotia and the company’s 210,000 acres of timberland will have a new owner if the court accepts a formal $575 million bid by Mendocino Redwood Co., a timber company owned by San Francisco’s Fisher family and an East Coast hedge fund.

Or the uncertainty could continue for several more months if the bankruptcy court orders the land auctioned, a move pushed by a group of large investment banks holding the company debt. A diverse range of potential bidders — from Harvard University’s endowment fund to the state’s biggest timberland owner — have expressed interest in the land and the town.

A decision could be issued any day by federal bankruptcy Judge Richard Schmidt, who last week concluded a month of sometimes-stormy hearings in his Corpus Christi, Texas, courtroom.

“It’s like waiting for an ax to fall,” Berti said.

Berti, a city councilman in neighboring Fortuna, said Scotia folk are long overdue for a period where they can “just relax and look to the future.”

“I sure hope they get it soon,” Berti said.

Melba Jones owns Scotia’s Hair Heaven, a beauty shop just down Main Street from the meat market Berti manages. Jones grew up in Scotia. Her father worked nearly 40 years at Pacific Lumber before retiring, and when she married her husband in the 1960s, he was working in the mills too.

“I think just about everybody in town would like to get this over with. Whatever the decision, let’s just have it,” Jones said.

Retiree Michael Lozano said he hopes for the best but is braced for more turmoil. “I hope we can live with it,” he said of the impending decision.

Scotia is one of the last true mill towns in the nation. Its trim little wood-frame houses are still rented to employees, although the cash-hungry company two years ago announced a plan to divide up the town and sell the residences to current occupants, or retirees.

Company executives also put Scotia’s 3-acre business core up for sale for $4.2 million, but Coldwell Banker agent Dave Wells said that’s on hold pending the court decision.

“We’re all in a wait-and-see mode,” Wells said.

Pacific Lumber’s current crisis stems from a nearly $1 billion hostile takeover completed in 1986 by Maxxam Inc., a Houston-based conglomerate owned by Hurwitz. Maxxam quickly netted $60 million in excess pension funding, and made an additional $150 million by selling a profitable tool company owned by Pacific Lumber and the timber firm’s San Francisco headquarters.

None of that money, however, was used to pay down the $850 million in junk bond debt Pacific Lumber was carrying.

Maxxam instead ordered sharply increased logging across Pacific Lumber timberlands. The company, once honored nationally for its conservative timber harvest practices, found itself at the center of an environmental storm.

Nine years ago, state and federal agencies agreed to pay Maxxam nearly $500 million to keep company loggers out of the last large grove of privately owned ancient redwoods called Headwaters Forest. Despite public assurances by some company executives, none of that money was used to pay down Pacific Lumber debt.

The staggering debt load combined with increasing environmental restrictions, a slowing housing market and depletion of the company’s timber inventory eventually forced Pacific Lumber to seek bankruptcy protection.

Local community leaders, major North Coast environmental groups, and state and federal political leaders, including Gov. Arnold Schwarzenegger and Sen. Dianne Feinstein, D-Calif., are backing the bankruptcy reorganization proposed by Mendocino Redwood. The Ukiah-based company owns 225,000 acres of Mendocino County timberlands. Its partner is Marathon Asset Management, a hedge fund that holds about $175 million in bonded debt secured by Scotia as collateral.

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