Pacific Lumber Company Reorganization

Sewall played an important role in the reorganization of The Pacific Lumber Company (PALCO). Representing creditors in the bankruptcy proceedings, Sewall offered expert consulting services in a process that enabled a new company to chart a path forward as a leading grower of coast redwood and producer of redwood building products. In the early 1990s, Julia Butterfly Hill grabbed media attention by living 738 days 180 feet high in the canopy of “Luna,” a 1,000-year old redwood in PALCO’s forest. Luna was slated for harvest, and became a surrogate for the old growth logging controversy that spawned environmental legislation aimed to protect old growth timber, spotted owls, and marbled murrelets.

Prior to 2007, PALCO filed suit against the State of California, charging that unreasonable regulation had prevented the company from harvesting timber at annual rates anticipated in the famed “Headwaters” agreement, which included a habitat conservation plan outlining forest management and protection of habitat for owls, marbled murrelets, and salmon. Regional water quality control boards, along with the State, must approve timber harvest permits (THPs), and PALCO’s experience with the boards was that they were not accountable to the State and acted capriciously in denying THPs. Few experts would deny that the coast redwood region of northern California poses the greatest regulatory challenge of any forest management region in the U.S. This, coupled with the sharp decline in housing markets, caused PALCO to slip deep into the red and ultimately file for Chapter 11 in early 2007.

Multiple stakeholders emerged once the reorganization process began. Financial stakeholders included PALCO and its subsidiaries, the Official Committee for Unsecured Creditors (Committee), note holders, and lenders. Each of these groups hired attorneys and consultants to represent them in the process. In addition, public stakeholders included the State of California and environmental groups. As the reorganization process culminated, there emerged multiple financial investors looking for opportunities to acquire and operate the PALCO assets under various plans ranging from splitting the mills and timberlands to operating these combined assets as an integrated but scaled-down company.

Pachulski Stang Ziehl & Jones LLP (Pachulski), a nationally recognized law firm specializing in bankruptcy, represented the Committee. Pachulski hired Sewall to be the Committee’s consulting expert in matters related to the 209,000 acres of timberlands at stake. As lead consultant, Sewall partnered with Stuntzner Engineering and Forestry (Coos Bay, OR), Able Forestry Consulting (Eureka, CA), and Mason, Bruce & Girard (Portland, OR) to assist with various tasks. The Sewall team provided independent fieldwork, research, and general expertise in forest inventory, modeling, regulation, and market analysis. The team also provided litigation support, assisting with depositions and hearings and reviewing expert reports prepared by other parties.

The Eureka Times Standard provided daily color commentary via a reporter who attended the hearings, which took place through spring of 2008. By early July the Federal Bankruptcy Court in Corpus Christi, Texas, had confirmed the reorganization plan put forth by one of the principal lenders. The plan, also backed by the Committee, resulted in Mendocino Redwood Company assuming the forest and mill assets of PALCO, and operating former PALCO assets under the name Humboldt Redwood Company. This plan, which included bringing the assets under Forest Stewardship Council (FSC) certification, was backed by the Committee, and enjoyed the endorsement of the State of California, environmental groups, former PALCO employees, the general public, and the press.

Mendocino Redwood Company (MRC) formed in 1998 when it acquired 230,000 acres, mostly in nearby Mendocino County, from Louisiana Pacific. MRC is largely held by San Francisco’s Fisher family of Gap clothing, and has garnered significant goodwill with the State, the public, and environmental groups during their tenure as owners and managers of redwood forestlands and a large sawmill in Ukiah, CA. The company is FSC certified and has a well-established customer base, including Home Depot.

The successful reorganization of PALCO is a relief after years of turmoil with regulators. Local residents and businesses welcome the new ownership. The tiny hamlet of Scotia was created by PALCO for its employees and their families. Employees, contractors, and suppliers are relieved to feel more secure, and the public at large looks forward to a new mindset toward environmental stewardship.

Sewall is proud to have played a role in the reorganization process. Bret Vicary, Sewall VP of Forestry & Natural Resource Consulting, commented: “This is historic. It represents the best of what Sewall brings to complex projects, and the results could not be more rewarding. We pride ourselves in being tops in our fields of expertise, and relish opportunities to provide objective, ethical analysis and guidance. The icing on the cake with this project is that we contributed to a process leading to a better way of life in Humboldt County, and to superior stewardship of a unique forest resource.” Dr. Vicary oversaw the project and was Sewall’s principal litigation consultant for Pachulski.

The project marked the first bankruptcy case for Sewall’s litigation team. Tim Mack, Sewall’s biometrician/appraiser in International Falls, Minnesota, managed the PALCO project and provided analysis and litigation support. “This was a big project requiring a multi-disciplinary team. Our partners offered local expertise that proved invaluable,” said Mr. Mack.

At times the courtroom was a three-ring circus, with dozens of stakeholders, attorneys, witnesses, experts, and investors on hand. “I was extremely impressed with the Pachulski litigation team,” remarked Dr. Vicary. “John Fiero and Max Litvak fielded our input, and John, as lead litigator, showed his mettle when the case came to crucial turning points – of which there were many.”