Bankruptcy Threat With an Edge

Times Staff Writer

Timber giant Pacific Lumber Co. has told the Schwarzenegger administration that unless it is allowed to cut more trees, the firm may file for bankruptcy, which it says would likely terminate environmental safeguards promised as part of a $480-million deal struck more than five years ago.

The federal and state governments paid the company that money to protect several thousand of acres of ancient redwoods under a 1999 agreement preserving the Headwaters Forest in Humboldt County.

But now Pacific Lumber, owned by Houston-based Maxxam Inc., says it faces financial ruin because it is starting to run out of marketable timber. Unless the state grants permission for logging on a dozen areas of flood-prone watersheds the company still owns near Eureka, it says, it will have to file for bankruptcy, closing mills and laying off workers.

In the event of bankruptcy, the company asserts, the rights of Pacific Lumber’s bondholders would take precedence over the provisions of the Headwaters deal. Those creditors, who hold the timber as collateral, could waive the logging restrictions.


The additional logging would not involve cutting trees in the 7,000-acre Headwaters Reserve, which the company sold to the state and federal governments as part of the 1999 deal. Instead, Pacific Lumber seeks to increase allowable logging on the 200,000 acres it still owns.

The logging permits sought by the company are particularly controversial because dozens of local residents contend that for years, they have been subjected to flooding caused by Pacific Lumber’s logging. The residents say that as rivers and streams fill with silt from freshly logged hillsides, homes and belongings have been damaged, wells have been fouled and sediment has piled up in pastures and orchards. Some homeowners say rising waters have stranded them during severe rainstorms.

Charles Hurwitz, chairman and CEO of Maxxam, and other company officials made their case for new logging permits at a private Jan. 11 meeting at the governor’s office with Schwarzenegger’s top environmental deputies.

In their presentation, the Pacific Lumber delegation argued that the company needs new permits to avoid shutting down its mills and laying off hundreds of its nearly 900 employees.

“If the situation continues, [Pacific Lumber] will likely have to file for bankruptcy which, in turn, will likely lead to termination of ... environmental protections of the Headwaters agreement,” according to the presentation, which was recently obtained by The Times.

Schwarzenegger spokeswoman Ashley Snee said the governor’s office would not discuss the session because it was a private meeting.

However, Nathan Barankin, a spokesman for state Atty. Gen. Bill Lockyer, said, “I am sure if Pacific Lumber Co. sought to evade the requirements of the deal with California, there would be a fierce legal battle to prevent it.” Barankin was not aware of Pacific Lumber’s warning until contacted by The Times on Monday.

As part of Pacific Lumber’s sale of the Headwaters Forest, the company agreed to operate according to a restrictive conservation plan on its 200,000 acres.


In May, the company moved to revise that plan to allow logging closer to waterways. But the recent bankruptcy warning raises the specter of wholesale abandonment of the tough safeguards in the hard-won Headwaters pact, allowing the company’s timber management to revert to less protective rules.

Environmentalists allege that Pacific Lumber is exaggerating its financial condition to pressure state regulators into granting what it wants. “They are using their employees as human shields, and they are threatening to shut down the whole company if the governor does not intervene,” said Paul Mason, a Sierra Club forestry representative.

Pacific Lumber has been battling environmentalists since Maxxam bought the company in 1986 and substantially increased its logging. During the last several years, residents who found themselves on the receiving end of floodwaters and mud joined the fray.

In the most recent skirmish, the state Water Resources Control Board last week upheld a decision by its regional arm to grant Pacific Lumber four logging permits on two watersheds. But the company is seeking at least 11 more.


At a hearing on Wednesday, Mark Lovelace of the Humboldt Watershed Council argued that additional logging in the Freshwater Creek and Elk River watersheds would exacerbate the suffering of residents. “It is a very small amount and the dire harm [claimed by Pacific Lumber] makes no sense,” he said. “Residents are increasingly trapped on their property.”

In upholding the four permits last week, Peter S. Silva, vice chairman of the resources control board, said he questioned the company’s financial warnings but concluded that no one had presented evidence that the additional logging would add significantly to silting problems.

The water board has some jurisdiction because logging can disrupt earth that can be washed into waterways, affecting water quality and wildlife.

Pacific Lumber officials argued that they have been exemplary environmental citizens and said the vast majority of silting results from logging by previous owners, dating back 140 years. Without the four permits, they said, the company could not harvest more than 8 million board feet of redwood and fir -- and would lose $8 million in sales.


“We are running out of logs,” said Gary Clark, vice president of finance and administration, noting that the company two days earlier laid off 38 employees at a Fortuna mill and reassigned 11 others. Steve Will, a log hauler and timber cutter who contracts with Pacific Lumber, said his business alone stood to lose hundreds of thousands of dollars. “There is nowhere else for us to log,” he said. “We need these plans to ... keep our people going and feeding their families.”

On Jan. 11, according to state officials, Hurwitz, Pacific Lumber president Robert E. Manne and two other company representatives met with Schwarzenegger Cabinet secretary Terry Tamminen and Cal EPA general counsel Maureen Gorsen. Two days later, Catherine Kuhlman, executive director of the North Coast Regional Water Quality Control Board, said she received a phone call from Cal EPA, the agency that oversees her own. She said in an interview that she was asked “fair and legitimate questions” about Pacific Lumber’s permit requests.

“No pressure,” she said in response to a question. “No pushing. No shoving. Lots of questions.”

Lovelace, of the Humboldt Watershed Council, asked for and received a meeting with Tamminen -- himself a former Cal EPA secretary -- and a deputy. Lovelace made his own presentation. “I was alone and tried to make them versed in the subject, not knowing they had been briefed by the other side.”


If the timber harvest permits granted or pending were carried out, state officials said, it would amount to the equivalent of about 750 clear-cut acres.

But Pacific Lumber’s director of science programs, Jeff Barrett, said the company’s ability to continue getting logging permits is essential for its survival and for paying for costly environmental conditions of the Headwaters deal. “For now this life-and-death struggle comes down to this limited number of permits.”

Kuhlman, who is a federal EPA employee on loan to California, said there are 11 additional permit applications on her desk. She added it is “highly doubtful all 11 will be approved, because of the [cumulative] sediment impacts.”

Meanwhile, people such as Jack Quirey are hoping that the rest of this winter is relatively dry. The retiree said he once had to raise the foundation of his house on Freshwater Creek by three feet after a major flood. “We had 12 inches of water in the house in 1995-1996,” he said in a telephone interview. “It causes mold and fills it with silt -- and maybe snakes -- and is impossible to clean completely....There are still marks on the furniture.”