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March 8, 2007
Body of Christ
by HANK SIMS
Despite all the new evidence that has come to light,
despite the credible threats of legal action against key company
officers, despite the overwhelming sentiment in favor of moving
the case to California, my spidey sense is now telling me that
there's about a 50-50 chance that the omnibus Pacific Lumber
bankruptcy proceedings will stay put in Corpus Christi, Texas,
for the duration.
Why is this? Well, because as Tuesday's court hearing
on the matter showed plainly, Palco's parent company (Houston's
Maxxam Corp.) and its head honcho (Charles Hurwitz)
are some crafty sons-a-bitches, and they don't skimp on the attorney's
fees. Also, there is a chance that those who oppose Hurwitz aren't
keeping their eyes on the ball.
Let's back up a sec for those readers who aren't
intimately involved in the day-to-day drama of this extraordinary
case, the closest thing to a good ol' genuine Wall Street scandal
that this county -- maybe this country -- has seen for quite
some time. The Pacific Lumber Company, the 130-year-old Scotia-based
timber giant that Maxxam acquired through a leveraged buyout
in 1985, declared bankruptcy on Jan. 18. The date was not accidental:
It occurred right on the eve of the company's scheduled $27 million
interest-only payment to its main debtors, the owners of the
so-called "Timber Bonds." These bonds, which amount
to around $720 million in face value, are the direct legacy of
Maxxam's takeover of the company 22 years ago.
Initially, there was one major curiosity about
Pacific Lumber's bankruptcy filing. (More have since emerged.)
This was the fact that the case was filed in the federal bankruptcy
court's Southern District of Texas -- specifically, Corpus Christi
-- rather than right here in Northern California. The sole justification
for this was that Maxxam had formed a sister company, known as
"Scotia Development," a few months previous, and "Scotia
Development" had declared bankruptcy at the same time. That
gave Hurwitz a hook into a court on his Texas home turf, where
it would be difficult for those affected by the bankruptcy to
participate in, or even watch, the proceedings.
Now, there's already been plenty of reporting done
on the essential fakeness of this "Scotia Development"
firm -- see "Dandy"s passim and the Times-Standard's
John Driscoll -- and no one much bothers to argue anymore
that it was ever a legitimate business at all, except perhaps
for Palco spokesperson Andrea Arnot. Formed in June, it
rented a 350-square-foot office five blocks from Corpus Christi's
bankruptcy court, for which it paid $500 on a month-to-month
basis. It had no employees. Its landlord, it turns out, was a
client of the Corpus Christi bankruptcy law firm of Jordan, Hyden,
Womble, Culbreth & Holzer, whom Maxxam had contacted a few
weeks before inventing "Scotia Development."
All this has been previously aired. The main argument
put forth by parties who would like to see the case transferred
to California -- parties including the U.S. Bankruptcy Trustee,
California regulatory agencies, the holders of the Timber Bonds,
most other creditors, and the City of Rio Dell -- is that "Scotia
Development" was a sham from the get-go, invented solely
to place the actual bankrupt companies in the hands of a Texas
judge and jury, and far away from California. This, they alleged,
was illegal, or at least improper, and should not be countenanced
by a federal judge. A mini-trial on the question began Tuesday,
and in the run-up to that even more damaging information about
"Scotia Development" was discovered.
In the Corpus Christi courtroom of Judge Richard
S. Schmidt Tuesday afternoon, attorneys for the pro-California
faction laid out their new findings. On Jan. 18, the day that
Pacific Lumber declared bankruptcy (along with its subsidiary,
Scotia Pacific, and other affiliated firms, including
Arcata's Britt Lumber) there was some curious tinkering
done with Maxxam's corporate tree. Before Jan. 18, the shell
company, "Scotia Development," had been a sister company
to Pacific Lumber, sitting alongside it in the hierarchy. But
on the very day bankruptcy was declared, ScoDev's position was
altered. On that very day, ScoDev was suddenly made a wholly
owned subsidiary of Pacific Lumber. What's more, it suddenly
assumed all responsibility for some $120 million of Pacific Lumber's
short-term line-of-credit debt. As one attorney pointed out Tuesday,
if this "Scotia Development" were an actual business
rather than a con, its shareholders and its actual debtors would
no doubt wonder at the wisdom of a company with no assets taking
on $120 million in debt in exchange for nothing at all.
Damning stuff, but the company is not retreating.
Rather, it now insists that in the eyes of the law it makes no
difference at all whether or not "Scotia Development"
is a sham -- that legal precedent allows them to sham the court
in this way, and that all on that front is fine and dandy. But
it also has a backup argument, and that is: Hey, Pacific Lumber
is a Texas company! It's been a Texas company for the last 22
years! Because why? Because three of the five members of its
board of directors live in Texas, making Texas the "nerve
center" of all the company's operations.
This last assertion sent Connecticut attorney Evan
Flaschen, representing the Timber Bond holders, through the
roof. In response, he submitted a characteristically fiery brief
to the court noting that in its representation to his clients
(a list of which reads like a Who's Who of Wall Street), the
company has always noted its place of business as Scotia, Calif.
In all of its filings with the Security and Exchange Commission,
it has always noted its place of business as Scotia, Calif. In
the multiple lawsuits filed by and against it over the years,
it has always given its place of business as Scotia, Calif. In
the original offer of its Timber Bonds, it noted its place of
business as Scotia, Calif., and it agreed in contract that it
would not change its place of business without 30 days prior
notice.
So, Flaschen concluded, the company is either committing
fraud on the bankruptcy court by asserting that its place of
business is Texas, or it has committed fraud on the bondholders
ever since the bonds were first issued. And if Judge Schmidt
concludes that the company's place of business is, in fact, the
Southern District of Texas, then Flaschen promised that a legal
wrath of Biblical proportions would descend upon it. The company's
directors and its officers -- including a few Humboldt County
locals -- would be sued for fraud, and the plaintiffs would be
the likes of J.P. Morgan, Citibank, Lehman Brothers,
Deutsche Bank and Bank of America. Hard hitters,
needless to say. It should give anyone a chill.
So, to return to the top, what's the concern? Simply
that Flaschen's passion, though admirable in any other context,
may yet be his undoing. His briefs are astounding reads -- they
seethe with rage at the legal maneuvers that Maxxam has employed
heretofore. What's more, they continuously excoriate Pacific
Lumber's past performance, both in environmental terms and in
terms of the company's destroyed relations with other stakeholders.
He actually opens one of his briefs with a goddamn epigraph,
taken from an anti-Hurwitz Seattle Times editorial.
To put it bluntly, the court does not care about
such things, alas. Flaschen's opening arguments Tuesday afternoon
were filled with this stuff -- absolutely stirring stuff, stuff
that could have been penned by the late Judi Bari (who
passed away 10 years ago last week). As regards the Californicity
of Pacific Lumber, he said this: "Get up in the morning
in Scotia, California. Walk out in to the woods. You have owls,
you have the marbled murrelet, you have the mist coming in from
across the ocean. It is in their blood."
If Judge Schmidt was at all moved by this sylvan
scene, he gave no indication of it. Rather, on several occasions
he hinted that Flaschen had lost the plot. The bondholders, who
would like to foreclose on Pacific Lumber's 200,000 acres, promised
truly sustainable, sensitive forestry, he said. Schmidt cut him
off: "We're not going to be discussing that in bankruptcy
court." Luckily, Paul Pascuzzi, representing California
regulatory agencies, stepped in and made the more prosaic case:
The court must take into account the interest of all creditors,
who are overwhelmingly based here in California, and appearance
by telephone is not the same as appearance in the flesh.
Meanwhile, Palco's attorneys operate on the principal
that slow and steady wins the race. The mini-trial on moving
the case concludes Thursday, and its outcome will likely indicate
the way the rest of the bankruptcy will go.
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