the town dandy / By Hank Sims

The Cram-down

(Feb. 14, 2008)  It’s now been just over a year since the Pacific Lumber Co. and its various subsidiaries declared bankruptcy in a backwater courthouse in Corpus Christi, Texas. The past 12 months have mostly kept us both appalled and entertained. It was thrilling to watch the high-flying legal stuntwork deployed by the team over at Palco’s parent corporation, Maxxam, Inc. Maxxam main man Charles Hurwitz turned out to be just as breathtakingly malevolent in the courtroom as he is in business and politics, and the result was a bankruptcy case that moved from audacity to audacity almost without pause.

Lately the sense has been that springtime is about to descend upon Corpus Christi, and by extension onto Humboldt County, where the future of the Pacific Lumber Co. is of immense moment. There is a spreading feeling of joy and relief — a feeling that after 22 dark years the vitally important company will finally be wrested from Hurwitz’s grasping hands and given to someone a little less evil. This buoyancy even made it to the editorial page of the Sunday San Francisco Chronicle, where the paper’s high priests got a little bit giddy at the prospect of a brighter, more sustainable, more cheerful Palco.

Well maybe, maybe. We concede that things look brighter than they have done for some time. At the same time, though, it’s hard not to feel like we’re re-watching that scene from The Lord of the Rings — the victorious wizard pauses on the bridge to give a smiling thumbs-up to his crew; meanwhile, a tentacle of the vanquished monster rises unseen and plucks him into the abyss. For our part, we’ve long suspected that Hurwitz — crafty old bastard that he is — would keep one final move in reserve. Now we think we might know what it is.

Let’s take a look at the state of play. Right now, various players have filed their plans for taking the company out of bankruptcy and moving it forward. There are three main plans on the table — one from Maxxam, one from Marathon Capital and Mendocino Redwoods, and one from the high finance Wall Street firms that own around $730 million in Pacific Lumber bonds. Maxxam’s plan is fairly simple. It would sell some of its most ecologically valuable land to the government at astronomical prices, and it would develop a bunch more of its land at equally astronomical prices. The creditors would be paid off, mostly, and everything would go on as before, with Maxxam still in the driver’s seat.

It’s the second two options that set the San Francisco Chronicle editorial board’s mouth to watering, and which have local Palco-watchers of all stripes feeling hopeful. Marathon Capital, which loaned a bunch of money to Palco and took the town of Scotia as collateral, proposes to take over the company and run it in conjunction with Mendocino Redwoods, a much more eco-friendly company than Maxxam. In contrast, the bondholders propose to sell the company at auction, which doesn’t sound too good except for a catch: The Nature Conservancy has put together a coalition that would keep the great majority of Palco’s 200,000-odd acres in low-level timber production, conserving the rest. This coalition would be prepared to bid in the event an auction came to pass.

Everyone thinks Maxxam’s plan is daffy, not least because it’s counting on generating some $400 million in profits from real estate development at a time when the real estate market is deader than dead. The judge in the bankruptcy case could easily disqualify the plan on these grounds alone. So it seems to come down to one of the two nice-sounding plans. And that sounds nice.

But what no one talks about is that Maxxam has filed a second plan — what it calls “the alternative plans” (one for Palco, one for sister company Scotia Pacific). These alternative plans are much starker, and it seems that Maxxam is throwing them out there in the belief that squabbling amongst Marathon and the bondholders will prevent them from coming to accord. Under the “alternative plans,” everyone gets something. Marathon takes the town of Scotia and the mill. The bondholders get most of the forest. But Maxxam walks away with the 6,600 acres it calls “The Ancient Forests” — the most mature, highest value stands in the company’s stock.

What would it do with those stands? Perhaps it would continue to try to sell them to the government at highly inflated costs, leaving Hurwitz with one final payday. Perhaps it would simply log them, or threaten to. Though the assumption is that the stands are protected through the Headwaters Agreement, Palco argues in its paperwork with the court that it can do all kinds of stuff to them: “road use, upgrading, and construction; blasting; drilling and mining; hunting; thinning; timber removal; and related land-use activities.”

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