ON THE COVER North Coast Journal Weekly

Eel River Sawmills: Going, Going, Gone? A dried-up log supply and two lawsuits threaten company with extinction.

story & photos by  ARNO HOLSCHUH


The flooded Eel River ruined the sawmill. The company's already-milled timber and the stockpile of cut trees waiting to be processed -- the log deck -- were washed away. After the waters receded, the company had lost so much money that it had a negative net worth.

Mel McLean, Eel River's founder and owner, borrowed heavily to rebuild the operation, putting up everything he owned as collateral. By 1973, the company had achieved a complete recovery, with both output and employment up 50 percent.

Today, the company is again facing possible closure. But this time, there is no flood to blame.

[photo of sawmill entrance]A slow decline reduced the number of employees from an all-time high of around 450 in the late 1980s to 320 earlier this year. Then, early this summer, came the biggest cuts: 200 workers were laid off. The remaining workers have been told they will probably be laid off next month and there's a good chance never be called back. The company is $45 million in debt and management claims it is unlikely to produce a profit in the near future.

This isn't the way employees thought things would happen. McLean, who died in 1999, had promised the mill would be a source of jobs and prosperity for generations to come. Part of that promise was the idea, manifested in a stock ownership plan, that the workers should eventually gain ownership of the facilities.

What went wrong? Some say it is the market for finished lumber, depressed for the last two years, down even further since the Sept. 11 attacks and flooded with cheap imports. Some say it is the dwindling flow of logs coming out of national forests. Some workers allege management is to blame and have filed a lawsuit to that effect.

One thing is clear, however. Unless circumstances change or a sale is arranged -- and soon -- a company that was presented as a workers' paradise will shut its doors.

[photo of Dennis Scott]

"I' ve been here 24 years, so I've seen a lot of different cycles of recession and a lot of good times," said Dennis Scott, Eel River's president. [photo at right] During his tenure, the timber industry has busted and boomed.

"We've had some awfully good years," he said.

And why not? As Scott points out, Eel River Sawmills is a modern and efficient facility. The mill is ideal for processing second-growth logs with a minimum of waste. Drying kilns, added during the 1990s, allow the company to sell its product at a premium.

"We have a good sawmill," Scott said, "but we have to have an adequate supply of properly priced logs. And we don't."

Eel River Sawmills, like many of Humboldt County's once numerous small mills, relied on outside sources for almost all its logs. Until 1990, that meant logs harvested from national forests -- primarily Six Rivers National Forest. "When I came here [in 1977], we hardly had any timberland of our own and relied on the Forest Service timber," Scott said.

It was a sweet deal for mills like Eel River. Fifty-one percent of Forest Service timber was set aside for small mills to protect them from competition from timber giants like Louisiana Pacific or Simpson Timber. The volume was huge -- around 150 million board feet were sold out of Six Rivers every year into the 1980s.

[Graph: Six Rivers National Forest Harvest Volumes 1980-2001]

No cash was required up front, meaning that the small mills without capital reserves didn't have to incur large debt to secure a log supply. "Those were the days when we were a very good company," Scott said. "Then the spotted owl was listed."

When the northern spotted owl was listed as threatened under the federal Endangered Species Act in 1990, it touched off an intense debate over what was permissible and sensible land use. While private landowners wanting to harvest timber fought for what they considered to be their property rights, the land that was most severely affected was in the National Forest system.

"In the early 1990s. we started to run into situations with the spotted owl, and that started to affect volumes," said Jim Hall, timber management officer with Six Rivers National Forest. It became clear that the effects of the owl listing would be profound when the forests were asked to set aside "management areas" to protect the birds.

"We had to set aside 2,300 acres for every known spotted owl pair," Hall said. That cut the volume of timber taken out of the forest to about one-third its previous size. Sales dropped to less than 60 million board feet of timber being sold every year.

In 1992, lawsuits cut sales even further, to around 11 million board feet. In 1993, that number dropped again to just over 5 million. That was also the year the Clinton administration crafted the Northwest Forest Plan, which was designed to allow for at least some timber harvesting while protecting spotted owl habitat. Timber sales crept back up -- 1996 saw almost 10 million board feet of timber sold out of Six Rivers.

As the Forest Plan was implemented and litigation was resolved, it became easier to harvest some timber. By 1999, close to 30 million board feet was being sold annually -- far below historic harvest levels, but still a significant number. But in 2000, with new legal challenges, the number dropped back to 4.4 million.

When the spotted owl was first listed, "we knew there was going to be a reduction in timber from Forest Service land. So we tripled our private timberland holdings," Scott said. But that land came at a cost.

"Of course, when you buy land and timber, you have to incur debt, whereas forest service timber didn't require cash." This, he said, is where the $45 million in red ink comes from -- buying land on credit to cushion against the blow of reduced national forest sales.

But Eel River's private land holdings -- estimated at their height to be about 50,000 acres -- weren't enough. "You may have acres and acres in timberland, but you'll still have trouble getting enough plans through the regulatory process to supply the mill," Scott said.

And Eel River has steadily sold off pieces of the timberland base it acquired in the early 1990s. Today the company owns some 24,000 acres, far from enough, it says, to keep the mill running. The company's log deck, filled to capacity in good times, looks like a deserted parking lot. The mill doesn't have any logs, Scott said.

"And a sawmill without logs isn't any good."

"The problem is not the spotted owl or the environmentalists," said Clifford Crowl, a 32-year veteran of Eel River Sawmills. The problem, Crowl said, is the way the company is being run. "Management has to take responsibility."

Crowl is one of several current and former Eel River Sawmill employees who say the dream of a prosperous, employee-owned mill was achievable. But they believe that dream has been bungled -- or sabotaged -- by management.

In 1988, the employees were told they owned 46 percent of the company through the employee stock ownership plan, or ESOP. Long before the idea came into vogue in Silicon Valley, McLean had decided to use company stock in addition to salaries to compensate his employees. Majority ownership was supposed to follow at McLean's death. Many at the company viewed the stock plan as their retirement.

That transfer of ownership to the employees never happened. When talks about a sale began recently, Crowl and other employees learned the ESOP only owned the equivalent of 21 percent because the shares were purchased with a loan and that loan wasn't fully paid off.

Feeling betrayed, Crowl and fellow Eel River veteran Tom Swain decided in the fall of 2000 that they wanted to go to court.

"We realized we had to file a lawsuit because they are going to sell the mill and we're supposed to own it," Crowl said.

Eureka attorney Bill Bertain, who represents Swain and Crowl, said, "Promises were made to the employees that they would own the majority of the stock in the Eel River Sawmills. We want the promise kept."

That promise's clearest form, according to Bertain, is a June 9, 1999, memo from Scott to Eel River employees. In the memo Scott states that there "is a plan in place which will transfer the majority of the voting stock to employees over time."

That, said Bertain, amounts to a legally binding promise. "Not all enforceable promises have to be written documents signed by both parties," he said.

With Eel River Sawmills apparently diving toward bankruptcy, one might wonder why employees would be so eager for ownership. The answer came in a second complaint, filed by two other Eel River employees with Bertain as their attorney in June.

In the second complaint, plaintiffs Colin Dazzi, Dean Blake and Jerry Milburn -- all of whom had worked at least 20 years at Eel River -- allege the company was driven into the ground by Scott's bad management.

In eight pages the complaint alleges that Scott sold timberland for less than market value, imported pine logs from New Zealand for more than market value and generally "engaged in gross mismanagement."

But the complaint claims Scott is more than incompetent. He is also alleged to have enriched himself through real estate dealings and to have built a luxury home for himself near Willits with company funds. The complaint also contends Scott "fostered the toleration of sexual harassment" in the workplace and used Eel River's money to settle sexual harassment claims.

"Not true," said Bill Bragg, Scott's attorney. "In any business the size of Eel River, there are going to be incidences of alleged sexual harassment in isolated circumstances. The responsibility of the company is to respond in a professional manner, and this is what Eel River did." Bragg also denied all other allegations of impropriety and gross mismanagement.

The lawsuits' most immediate effect was to put a halt to the sale of Eel River Sawmills to the Pacific Lumber Co. PL had expressed interest in purchasing some of Eel River's assets as early as February. Negotiations were chilled when Bertain filed for a lis pendis, a legal tool that calls the ownership of a piece of property into question.

Eel River is "a very good operation," said John Campbell, PL's former president and current chairman of the PL board. "That's why we were showing an interest in it." However, "No one wants to go into an operation that is being litigated," Campbell added.

That was exactly what Bertain and his clients wanted -- to prevent a sale that could have dismantled the company and "preserve the assets so they could be operated as a company under their corporate structure" -- in short, to keep Eel River Sawmills in existence.

Bertain and his clients still believe the company is salvageable. The cutbacks in Forest Service logging, Bertain said, are "a factor, but we note that other former buyers of National Forest timber are still operating -- Blue Lake Forest Products and Schmidbauer Lumber, for instance."

Those mills may be operating, but they certainly aren't thriving. Bruce Taylor Sr., president, founder and co-owner of Blue Lake Forest products, said, "It is a difficult and trying time for all mills. We buy logs wherever we can." He said his mill survives on a combination of logs from tree farms, small landowners, tribal lands and timber imported by barge from Washington.

"This is one of the toughest businesses around," said Mark Anderson, a silviculturist with Schmidbauer Lumber. "You aren't allowed many mistakes." What's happening at Eel River "is no different from what's happening to mills up and down the coast."

That argument doesn't faze Crowl. "Business is tough, yeah, but it's tough all over." There's no reason Eel River can't survive if other mills are, he said.

Crowl isn't alone in his thinking. A group of investors known as Englewood Forest Products has continued negotiations for the purchase of the entire Eel River Sawmills, betting they can operate it at a profit. And some sources in the industry say there is still enough timber available from small landowners to feed the mill.

All that's missing, Crowl said, was the leadership.

"With the right management, the men can get ahold of that mill and run it and we'd all have jobs."

[photo of Kevin Wicke]

After being told they were going to be laid off at the end of November, some Eel River employees have resigned themselves to the fact that they are likely to lose their jobs.

"The way it looks now, it's not just a temporary layoff," said Kevin Wicke, who has worked for Eel River for 15 years. [in photo at left]

Wicke and many like him face some tough choices if they lose their jobs. As a trained saw filer, Wicke made a good salary at Eel Rivers. If and when the company closes, he will have to find another means of supporting his family.

"I haven't looked for a job in 15 years," he said. "I could go other places -- get a job in a saw shop, maybe. But I might have to leave the area, and I wasn't really prepared to do that." Even if he did find work in a saw shop, Wicke said, he is likely to face "a big pay cut."

Even so, Wicke considers himself "one of the lucky ones."

"My wife works and has really good [health] insurance. She doesn't get paid a whole lot, but at least we'll have insurance." Others are going to have to face the responsibility of supporting and insuring their families in a job environment that is both unfamiliar and, since the economic downturn, increasingly harsh.

"A lot of people are going to wake up one morning and realize they don't have a job. It will be hard on a lot of people."

The hardship will be faced by more than Eel River's employees and their families. Scott estimated Eel River contributed $3 million annually to the local economy through wages.

"Most of those folks [working at Eel River] live in Fortuna, and it's hard to replace that income," said Cliff Chapman, executive director of the Fortuna Chamber of Commerce. "I'm sure there will be a ripple effect."

One man waiting to feel that ripple is Jerry Austin, who owns and runs the Oak Place, a discount furniture store in Fortuna.

"A lot of people from Eel River spent money at my business," he said. As mill workers lose their jobs and leave town, their homes will likely be taken over by young retirees.

"And those people don't really need any furniture. Maybe if a lampshade got broken during the move, OK, but they already have their furniture," Austin said. "This could definitely push me out of business."


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