Redwood forest up for grabs

The fate of 210,000 acres of prime California timberland, much of it redwood, may be decided next month in a Corpus Christi, Texas, courtroom. That’s where Judge Richard Schmidt will try to pick one of several reorganization plans for Pacific Lumber (Palco), a 130-year-old logging company now facing bankruptcy in Scotia, Calif.

How the Palco case ended up in a Texas courthouse is a long story involving a corporate raider and $800 million in overdue bonds. But the resolution could unite one of the state’s two biggest redwood producers and substantially increase the amount of FSC-certified redwood on the market.

Mendocino Redwood Co., a lumber producer and distributor based in Ukiah, Calif., owns and manages 228,000 acres of timberland just south of the Palco lands. All of its land is certified by the Forest Stewardship Council. The company’s chief investor is the Fisher family of San Francisco, who founded the apparel retailer Gap.

Mendocino Redwood has partnered with one of the principal creditors in the Palco case, a New York hedge fund named Marathon. In their joint venture, both companies would invest in funds in the company, which Mendocino would operate. The plan contains safeguards for tracts of old growth redwoods whose fate also hangs in the balance.

“Marathon came to us asking for help with the reorganization plan,” explained Sandy Dean, chairman of Mendocino Redwood Co. If the bankruptcy court ultimately approves the Marathon/Mendocino plan, “We would bring our forestry management practices to [Palco’s timberland] immediately,” Dean said. Other changes would include equipment upgrades to Palco’s mill in Scotia.

Not all the creditors agree with this plan, however. Some of the principal noteholders want to sell the 210,000 acres of redwood and Doug fir. Palco has come up with several reorganization plans of its own, including one that would raise $550 million by selling some of the company’s redwood groves on the open market and developing another 22,000-acre tract.

A coalition of environmentalists, conservationists, the Bank of America, and Atlas Holdings, an East Coast-based investment group that operates a number of wood and paper mills, has also made a bid for Palco’s assets.

Complicating matters further is the fact that Palco really only owns the sawmill and the surrounding town of Scotia; all the timberland belongs to a Palco affiliate called Scotia Pacific Co. At the very top is Maxxam, the Houston company that purchased Palco with junk bonds in 1986. None of the five reorganization plans seem to agree on what, if anything, Maxxam’s shareholders should get.

What’s a Texas judge to do?

Judge Schmidt, who opened Pandora’s Box by allowing Palco’s creditors to come up with their own reorganization plans, will send a consolidated summary to creditors for a vote on March 25. Starting on April 8, the proponents of each plan will get to argue their case in court. The final decision will be made by Judge Schmidt.

Gov. Arnold Schwarzenegger will probably be in Sacramento, 1,800 miles away, when the court hands down its ruling. Some environmentalists wanted the California govern or to seek assurances that any reorganization plan would protect the 1986 Headwaters Agreement, where Maxxam and Pacific Lumber sold the state and federal government a large grove of old-growth redwoods for $380 million. The agreement also specified that Palco would develop a habitat conservation and sustained yield plan on the remainder of its 210,000 acres.

Schwarzenegger has weighed in on the Palco case, however. Although he didn’t support any one plan, the govern or sent a letter in January to the U.S. Bankruptcy Court in Corpus Christi, urging the court to protect jobs and the local economy in Humboldt County, where Palco is located, by maintaining harvest levels that ensure “sustainable, high-quality timber production over the long term.”

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