April 26, 2007

Larger than life

by HANK SIMS

"Why is it that we honor the Great Thieves of Whitehall, for Acts that in Whitechapel would merit hanging? Why admire the one sort of Thief, and despise the other? I suggest, 'tis because of the Scale of the Crime.-- What we of the Mobility love to watch, is any of the Great Matices, Greed, Lust, Revenge, taken out of all measure, brought quite past the scale of the ev'ryday world, approaching what we always knew were the true Dimensions of Desire. Let Anthony lose the world for Cleopatra, to be sure,-- not Dick his Day's Wages, at the Tavern."

-- Thomas Pynchon, Mason & Dixon

Well, baby, it's all done -- don't expect the Hon. Richard S. Schmidt, he of the Corpus Christi branch of federal bankruptcy court, to rule for anyone but Charles Hurwitz from here on in. There'll be a lot of jabber for quite a few months to come. Everyone will go through the "motions," if you'll pardon me. As for myself, I'm willing to stake all that remains of my tattered reputation on the proposition that Hurwitz and his Maxxam Corp. -- parent company of the Pacific Lumber Company for the past 20-odd (very odd) years -- will get everything they desire out of Judge Schmidt. That, no doubt, is the reason Hurwitz and his people chose him in the first place. Well played, sir.

What remains to be seen is whether a biddable judge will be enough.

The preliminaries in the Pacific Lumber bankruptcy case are out of the way. Everyone has cleared his throat, so to speak. The opening movement ended last week, when Schmidt released the long-anticipated ruling that the company's creditors, the state of California and the Office of the U.S Bankruptcy Trustee were all wrong, wrong, wrong in asserting that the interests of justice would demand that the case be moved to California.

The ruling was expected -- when the trial on the question was held a month and a half ago, Schmidt didn't bother to conceal much of his hand. The question, for spectators, was how he'd go about justifying his decision. Would he accept Maxxam's "nerve center" argument? This one went: Despite the fact that Pacific Lumber's 200,000 acres of timberland, all its operations and most of its creditors reside in California, a small coterie of company directors make their home in Texas, making venue proper there. Or would he go with the ludicrous "phone booth" defense? In other words, would he rule that he should get to keep this entertaining matter in his own courtroom because a few months prior to filing bankruptcy, Maxxam set up a fake company five blocks from the courthouse, and then proceeded to pour all of its California assets into this empty vessel on the day before bankruptcy was declared?

In keeping with this week's text, Schmidt favored the more outlandish argument. Yes, Palco's true brain trust was in Texas, he allowed. As evidence, the learned jurist approvingly cited a 1988 "Houston Chronical" [sic] article that named Hurwitz "Houston's only World-Class Corporate raider." But this was more or less beside the point. The main thing was the nothing company Maxxam recently set up in Schmidt's home town -- the company code-named "Scotia Development" -- was no sham. And since "Scotia Development" was in Corpus Christi, the whole show gets to stay in Corpus Christi.

But all Scotia Development ever was was a 350-square-foot office, empty but for the rented furniture, you say! Right, says Schmidt, but big deal. What about me? "first office," he writes in a footnote. Haw haw! Dry your eyes, folks -- an affiliated business is an affiliated business, and that fact lets Palco go bankrupt on Hurwitz's home turf.

But Scotia Development only ever performed a piddling amount of real-world business, amounting to something less than a tenth of the annual revenues of the North Coast Journal! This compared with Pacific Lumber's $140 million in revenues in 2006! Oh, but the company, in its eight months of existence, did have such a bright, bright future, right up until the day it accepted all of Pacific Lumber's debt and promptly went kaput.

So much for Judge Schmidt. Hurwitz chose his venue well. The question now is how in the world Maxxam intends to turn its operation into a going concern. The company's own annual report, filed earlier this month, admits that the company will likely only be able to harvest 95 million board feet per year over the next 10 years -- a little more than half of what it insists is its due. That level of harvest last year resulted in a $78 million loss. So how, with those kinds of numbers, is Hurwitz going to pay down a $1 billion debt? With every asset mortgaged to the max, who is going to be dumb enough to loan him money next time?

The company will provide its answers to these questions when it files its reorganization plan with the bankruptcy court. Despite earlier assurances that the company wants to get in and out with all due speed, it recently asked the court to delay its deadline for the reorganization plan by four months. If this is approved -- why wouldn't it be? -- Palco will have until September to come up with something.

There's surely plenty of Texans who max out their credit cards and find themselves relegated to Judge Schmidt's courtroom. We wonder -- do you think they have it as good?

One more note: Now it's easier than ever for the Mobility to follow goings-on in Corpus Christi. The committee representing Pacific Lumber's unsecured creditors -- those luckless souls who mistakenly floated the company goods or services until the next payday, or who are owed money from winning lawsuits -- have set up a web site that republishes, for free, many of the court documents filed in the case. Find it at plbankruptcy.com.

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We note, too, the whistleblower lawsuit against Maxxam brought by Richard Wilson, the former head of the California Department of Forestry and Chris Maranto, a forester employed by that agency. The suit, which was filed in December 2006, was unsealed only last week; it accuses Maxxam, Pacific Lumber and Hurwitz as an individual of defrauding the state of California during the negotiations over the 1999 purchase of Headwaters Forest.

The suit alleges that Maxxam gave the state forestry data from a computer model that it knew to be false or misleading. The data ended up influencing the amount of timber the company could harvest under the "Sustained Yield Plan," the document that would govern Palco's harvest on the rest of its lands, post-Headwaters. In short, Wilson and Maranto allege that the company fudged the numbers relating to how quickly forests grow back, post-cut, by throwing the growth of hardwood species like oak and madrone. This bit of sleight-of-hand, Wilson and Maranto say, led to a Sustained Yield Plan that allowed for greatly accelerated rates of harvest for redwood and Douglas Fir.

If the case sounds a bit familiar, it should; the lawsuit brought by District Attorney Paul Gallegos in 2003, the one that later led to all that fuss, covers similar territory. The difference is that the DA's suit, which currently languishes in the appellate system following its defeat in Humboldt County Superior Court, alleges that at the same time, and for the same purpose, Palco cooked the books relating to the relationship between logging and landslides.

And now it's clear that the cases may face similar obstacles. Early on in the DA's case, then-Assistant District Attorney Tim Stoen had to switch up his game plan because the statute of limitations on the charge he had originally intended to file had already expired. As an unusually sharp-eyed commenter on the Humboldt Herald blog noted earlier this week, the Wilson/Maranto suit appeared to have some statute of limitations issues as well. The suit states that Maranto first became aware of the monkeyed harvesting model in 2002. The statute of limitations -- aptly acronymed "SOL" -- in such cases is three years. Therefore, wasn't this case filed too late?

Reached Tuesday, Eureka attorney Bill Bertain, one of the three firms representing the Wilson/Maranto in the present case, acknowledged that there were some issues, but he was confident that the case would survive any SOL challenges. He said that the calculation of the SOL was a tricky matter in such cases.

"Clearly, Richard Wilson didn't learn about this fraud until last year -- and we believe that Maranto's knowledge is within the statute as well," said Bertain Tuesday.

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