Opportunities For Change Abound
Around Pacific Lumber Bankruptcy
February 2007 Update
NOTE: Although this Forest Activist newsletter was produced a year ago, much
of the information remains relevant, particularly the information regarding what
led to the now-filed bankruptcy (Maxxam's Bleeding of Humboldt County), and
sections about the workers and sustainability and economic pressures for
conversation of land. We distribute it with this insert and other information while
our new newsletter is in production. Further info can be found on our website
http://www.HeadwatersPreserve and http://www.asje.org/Plbankruptcy.html
This newsletter talks about Pacific Lumber's (PL) threats of bankruptcy, which they
were putting forth in order to get more logging approved. On January 18, 2007, PL
did file a Chapter 11 bankruptcy. One thing that is important to know about Chapter
11 is that it is bankruptcy protection, which means that it triggers a corporate
reorganization to "protect" the debtor from debts that it cannot meet. Chapter 11
corporate reorganization takes place under the oversight of the federal bankruptcy
court. For more information on corporate bankruptcy, see
www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter11.html.
When PL filed for bankruptcy, it didn't surprise many people. In fact, forest and
community activists had begun meeting to strategize, more than a year and a half ago
after PL had been rather loudly and pointedly threatening bankruptcy to pressure
regulatory agencies to give them more logging capability. A lot has happened since
Jan. 18.
On the positive side, there are some indications that state officials will resist PL's
manipulative moves to make even the bankruptcy work for those at the top of the
corporation. PL's initial posturing with regards to tossing overboard provisions of the
Headwaters Deal Habitat Conservation Plan have been rebuffed by comments from
agency and elected officials, and the California Attorney General's office filed a
motion to move the bankruptcy proceedings, from corpus Christi, Texas to a
California court. The only reason it is currently in a Texas court is because Maxxam
"created" a bogus company--Scotia Development LLC--in June 2006 "based" in
Corpus Christi, Texas. Scotia Development occupies 344 square feet in an office
building with an answering machine. There is no lease on the $500/month office
cubby hole, and the name on the answering machine is James Shanks, former president
of MCO Properties, a subsidiary of Maxxam. Shanks was transferred to Puerto Rico
in September 2005 to oversee a $200 million development in Maxxam's exclusive
Palmas del Mar community, but is now listed as president and CEO of Scotia
Development. Hurwitz's shenanigans continue to the end.
On the negative side, PL and its subsidiaries, Scotia Pacific and Britt Lumber has over
500 employees who are owed wages and benefits that will now only be paid on the
approval of the bankruptcy court, and those employees have an underfunded pension
fund. Severance checks for the 90 workers laid off just before Christmas 2006 are on
hold. A large percentage of PL employees have 30 or 40 years of service to the
company, and the fate of the company-owned town where many of the current and
laid-off employees live, is also uncertain. PL owns their homes--a good deal until 4
weeks ago. The assets (timber base) are depleted, the streams are trashed from
upstream clearcuts, and a large number of residents face regular flooding and
landslides that have ruined crops and homes, with no relief in sight. Finally, the
company is burdened by about $714 million in debt, thanks to refinancing that sent
dividends to Maxxam in Houston but kept boosting the debt burden back up to a
figure close to the purchase debt incurred in 1985 when Maxxam took over PL. It was
a $27 million unmet interest payment on that debt, due on January 20, that finally
brought the house of cards tumbling down.
Maxxam's 1993 refinancing of the debt took hundreds of millions of dollars out of PL
while returning the debt to its 1985 level. The forest acreage was again mortgaged in
1998 to sell $867 million in bonds, keeping the debt level nearly on par with the debt
incurred in the purchase. That refinancing in 1998 also restructured the company so
that ScoPac holds the entire debt burden and the 205,000 acres of timberland while
Pacific Lumber owns the mills and about 12,000 acres of land. That linking of the
mammoth debt and the forestland meant that the harvest rate is directly driven by the
payments required on the debt.
It is reorganization, not a shut-down, that is triggered by Chapter 11 corporate
bankruptcy.
The principal light at the end of the tunnel is the likely emergence of a company that
will be Hurwitz-free and Maxxam-free. That is not guaranteed in bankruptcy
proceedings, but it is inconceivable that the creditors and bondholders would want
management decisions to continue to be made by the same corporate raider who sent
the company and the north coast economy down this disaster-strewn path for the past
2 decades. The outcome will be determined by debates, discussions and negotiations
over the next year and a half or longer, as the court-facilitated corporate
reorganization takes place.
The bankruptcy process also brings stakeholders to revised roles and reveals more
information about who the bondholders are. Over 90 percent of the Scopac timber
bonds are owned by big-name Wall Street firms: Banc of America, Citigroup,
Deutsche Bank, J.P. Morgan, and others. Some others include Camulos Capital LP,
which has ties to George Soros, and Avenue Capital Group, which news reports call a
"major Democratic Party donor."
Recent response from the community and stakeholders:
In their pleading, the bondholders make a strong argument for their rights to
repossess, independent of any other considerations. The bondholders' motion ends with
this startling language:
"Even if Scopac's secured creditors decide to do nothing other than to let the trees
grow a few years while they seek to repair the relationships with the California
regulators, legislators and environmental organizations that Palco has utterly
destroyed, they should be entitled to do so ... Palco and Scopac seek to position
themselves as the victims of overzealous regulators, legislators and environmental `tree
huggers.' In fact, all of the California constituents agree that responsible, sustainable
harvesting of Scopac's Timberlands is a good thing, not an evil ... The key words,
however, are `responsible' and `sustainable,' and what the California constituents
strenuously object to is over-harvesting of new-growth timber and irresponsible harvesting of old-growth timber, particularly Scopac's ancient redwood stands. "
Andrea Tuttle, former director of the California Department of Forestry:
"There's still huge value in the forest lands and the mill, but the problem is the debt. If
this really is the end of the Maxxam chapter, then we should hope for new owners who
respect the history and importance of Palco to Humboldt. They need to bring a
commitment to truly sustainable production and conservation."
David Foster, Executive Director, Blue Green Alliance, and former Chair of the
USW Negotiating Committee with Kaiser Aluminum and member of the
Unsecured Committee of Creditors at Kaiser Aluminum, and former Dist. 11
Director of the Steelworkers union:
"Bankruptcy was a painful experience for the employees of Kaiser Aluminum, but in
one respect they are much better off today--the bankruptcy wiped out Charles Hurwitz'
stock in the company. When Kaiser emerged from the bankruptcy, the creditors of the
company, including the union employees, were awarded all the stock and elected a new
board of directors, 40% of which were selected by the union. It's now a company that
is truly run for the benefit of its new shareholders and employees, not a single insider."
Mark Lovelace, president of the Humboldt Watershed Council:
"This crushing debt forced the company to ignore science, violate regulations, log
unsustainably, destroy the watersheds in which it operates, and to deplete the resource
upon which it depends. Palco's filing should come as no surprise to anyone familiar
with the company's finances. The combined companies' debt stands at well over $800
million, yet its collective assets are valued at closer to $540 million. There is simply no
way the company could ever get back on a stable footing without doing something to
reconcile that massive discrepancy. That is what this reorganization should seek to
accomplish. Palco would like to claim that this bankruptcy is the result of reduced
harvests due to over-regulation, but this is simply not the case. The company's own
filings show that they have been within 2% of their planned harvest rate over the last 6
years. The problem is not the cash flow in, but rather the cash flow out to Maxxam."
Karen Pickett, director of the Bay Area Coalition for Headwaters.
"The money that could have staved off bankruptcy has enriched Charles Hurwitz's
coffers. It is the river of money that flows from Humboldt to Houston. In short, the
bulldozer named Maxxam, driven by a corporate raider drunk with his own power to
manipulate, has cut an ugly and long-lasting swath through the redwood forest in
California and through the lives of the working people of Humboldt County. The one
thing we can look forward to ultimately is a Maxxam-free and Hurwitz-free
company."
In 2005, economist and geologist Michael Gjerde wrote a scathing reply to Pacific
Lumber's "Economic White Paper" for the state Water Resources Board, reflecting
much of what watershed and forest activists had been saying all along. He found the
debt burden remaining from the purchase so heavy that even if every remaining tree
was cut, it would not likely yield sufficient funds to pay down the debt. (See
http://www.wildcalifornia.org/cgi-files/0/pdfs/1115337104_Private_Land_State_Water_Board_Report_on_PL_Finances.pdf)
