6.13.2008

NYT - A Legal Thicket Amid the Redwoods

A Legal Thicket Amid the Redwoods
By JOHN MARKOFF,
Published: June 4, 1993
In a cluttered office overflowing with filing boxes and legal briefs, William H. Bertain is standing fast in his quixotic campaign to wrest back control of the Pacific Lumber Company, which was acquired in 1986 by Charles E. Hurwitz, a Houston financier.

A child of the lush redwood forests in this fog-shrouded country, Mr. Bertain has dedicated the last seven years to a legal fight that few believe can be won, returning the company to the Murphy family that had managed it since the turn of the century. Seeking to Undo a Buyout

Mr. Hurwitz's Maxxam Inc. bought Pacific Lumber for about $900 million in a buyout financed largely with junk bonds handled by Drexel Burnham Lambert, and three members of the Murphy family have retained Mr. Bertain to have the buyout undone, asserting that shareholders were defrauded. Maxxam also faces a barrage of lawsuits from employees, shareholders and environmentalists seeking to halt the harvesting of old-growth timber.

Despite demoralizing odds, Mr. Bertain says he carries on the crusade because outside investors -- whom he calls "corporados" -- are threatening to destroy a way of life.

"This was the crown jewel of the North American timber industry," he said. "I was just stunned for four months after the takeover, but then I set out by committing to do everything that was legal and moral to stop this."

Mr. Bertain's campaign has set him at odds with John Campbell, the president of Pacific Lumber and a 24-year veteran of the company, the world's largest holder of virgin redwood forests. "He's barking up the wrong tree," Mr. Campbell said in a telephone interview. "He's a zealot and he has his emotions and his ego involved."

Pacific Lumber is not practicing cut-and-run forestry, the Australian-born lumberman insists. Countering critics who charge that Mr. Hurwitz had to increase the company's cutting rate to pay nearly $800 million of debt incurred when it was taken over, Mr. Campbell says the company has shown that it intends to be a positive long-term economic force here in Humboldt County, on the Northern California coast nearly 300 miles north of San Francisco. At Center of Regional Conflicts

Seven years after Mr. Hurwitz's takeover, the dispute shows no signs of ending soon. Indeed, Pacific Lumber has increasingly found itself at the center of economic and environmental conflicts boiling over in the Pacific Northwest. In April, both sides of the Pacific Lumber hostilities were prominently represented at President Clinton's meeting in Portland, Ore., on forest use.

In this logging town of 27,000, the controversy has turned neighbor against neighbor and left the community bitterly divided over whether its future lies in timber or in diversifying into recreation and tourism.

And Pacific Lumber's unwillingness to compromise on environmental issues has made new enemies in this town, which once saw itself as having a one-crop economy.

"For a long time, the timber industry has controlled this area," said Phil Jurick, a Eureka developer. "They've had far too much influence."

For many residents of this community, the Pacific Lumber takeover has come to epitomize the social and environmental costs of the junk bond era of the 1980's. But beyond being vilified as a corporate raider, Mr. Hurwitz has never been charged with violating any laws, and in the short run at least, his company has increased employment in the region. Mr. Bertain's supporters include members of labor unions, community leaders and environmentalists. Nevertheless, it has not been a comfortable time for the bearded and outspoken 46-year-old lawyer, the youngest of 10 children who grew up in nearby Scotia, the company town for Pacific Lumber, where his family had run a small laundry since 1920.

Today Mr. Bertain -- who spends most of his time and much of his money on the legal battle with Mr. Hurwitz -- is more than a half-million dollars in debt. At times he has been unable to meet his house payments, and his health has deterioriated.

The dispute may soon move to a national stage. Legislation is expected to be introduced in Congress this month to clear the way for the Government to acquire more than 30,000 acres of Pacific Lumber's old-growth timber in an area known as the Headwaters. While company officials say that the fair market value is likely to exceed $400 million, Congressional staff members and environmentalists argue that because environmental restrictions prohibit logging there, the actual value may be much less.

Environmentalists have used Pacific Lumber's logging practices as the rallying point in their battle to save the remaining stands of California's old-growth redwood forests. "This is in-your-face forestry," said Joshua Kaufman, a Humboldt County paleontologist who helped form an environmental coalition after he saw Pacific Lumber trucks rolling up and down the road on which he lives. The group has brought suits against the company and hopes to force it to sell its remaining old-growth lands for a new national park.

Mr. Bertain maintains that returning Pacific Lumber to its original owners would be a perfect compromise between the environmentalists and the logging industry. Under its previous owners, the company cut about 2 percent of the trees on its land annually -- no more than the forest's annual growth rate.

In his lawsuits against the Pacific Lumber takeover, Mr. Bertain has asserted that Mr. Hurwitz conspired with other investors to defraud the company's shareholders when he acquired the company. To date, those suits have generally been rejected by Federal courts, but more than a dozen shareholder, employee and environmental suits remain to be settled.

Few people give the small-town lawyer much chance of returning the company to its former owners. But Mr. Bertain is optimistic that he will prevail in his $1 billion-plus claim against the dealings of Drexel Burnham Lambert and its fallen junk bond specialist, Michael R. Milken. Words Unspoken

Mr. Bertain and Mr. Hurwitz have testified at the same Congressional hearing, but they have never spoken to each other. Mr. Hurwitz, a Texan who rarely speaks to the press, refused to comment on Mr. Bertain.

Unfazed by the various lawsuits against his holdings, Mr. Hurwitz has forged ahead, moving to reduce the debt load of Pacific Lumber. He recently refinanced Pacific Lumber's $510 million debt and split the company into three concerns, leading many industry executives to say -- and even some environmentalists to concede -- that the Houston financier had pulled off a business coup.

"They got a phenomenal decrease in the cost of capital," said Craig Gilmore, a financial analyst at Gilmore & Company in Carlsbad, Calif.

In a daring stroke, Mr. Hurwitz shifted Pacific Lumber's timber assets to two new companies, Scotia Pacific and Salmon Creek, cutting back on the company's short-term debt, financed by junk bonds, and replacing it with bonds backed by 179,000 acres of redwood and Douglas fir timberland. Many Lawsuits

Nonetheless, Mr. Hurwitz still faces imposing legal challenges:

*Pacific Lumber and Maxxam are named in lawsuits in both Humboldt County and New York City by former Pacific Lumber shareholders seeking damages of more than $1 billion.

*The logging company faces at least 10 lawsuits brought by environmentalists who charge that its accelerated logging endangers species like the spotted owl and the marbled murrelet and damages forest watersheds.

*In 1991, the United States Department of Labor filed a civil suit against Pacific Lumber in response to the company's 1986 termination of its pension plan, which it replaced with annuities from Executive Life, an insurance company that Mr. Hurwitz controlled and whose parent later went bankrupt.

*In May 1992, the Federal Deposit Insurance Corporation indicated that it was moving toward suing United Financial Group, stemming from the 1988 collapse of the United Savings Association. Mr. Hurwitz once owned 24 percent of the failed savings and loan, which purchased $1.4 billion worth of Drexel's junk bonds in exchange for $1.8 billion in financing for the acquisitions of Pacific Lumber and Kaiser Aluminum.

*In April, Representative Pete Stark, Democrat of California, introduced legislation that would impose a 75 percent tax on the value of old-growth redwood timber that is used as security for bonds.

Through it all, Mr. Bertain has shown no signs of caving in.

"He's a bulldog of a human being," said David Harris, an author and researcher who is working on a book about the corporate takeover. "Nobody else would be where he is today, but he's still after these guys."

The article also referred incompletely to Pacific Lumber's stance on issues that have angered environmentalists. The company said it had compromised on some matters.

Correction: June 10, 1993, Thursday

An article in Business Day on Friday about a legal battle for control of the Pacific Lumber Company misstated the relationship between Charles E. Hurwitz, chairman of Pacific's parent, Maxxam Inc., and the Executive Life Insurance Company, a California insurer that supplied annuities for Pacific Lumber's pension plan. Mr. Hurwitz did not control Executive Life.

The article also omitted attribution for allegations that the United Savings Association bought junk bonds from Drexel Burnham Lambert Inc. in return for Drexel's financing of acquisitions. That assertion was made in a lawsuit by the Federal Deposit Insurance Corporation against Michael R. Milken, Drexel's junk-bond specialist. Because Mr. Milken and Drexel Burnham settled the suit for $1.3 billion, no court ruled on the F.D.I.C. allegations.