ConnectingCalifornia.org

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More on the Aftermath of the Texas Tycoon's Takeover of Pacific Lumber

excerpted from http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/03/18/BURB16GOHM.DTL

3/18/2009--Financier Charles Hurwitz, who took over Pacific Lumber Co. in 1986 and touched off a storm of protest with his tree-cutting practices, must go to trial in a lawsuit filed by a former state forestry director accusing him of defrauding the federal government into paying $250 million for the pristine Headwaters Forest, a federal judge has ruled.

The case, scheduled for trial April 20 in Oakland, centers on the company's sale in 1999 of the 3,000-acre Humboldt County forest, the nation's largest privately owned old-growth redwood grove. In a deal brokered by Sen. Dianne Feinstein, D-Calif., Pacific Lumber also promised to follow stringent logging practices and preserve the habitat of endangered creatures on its remaining 210,000 acres of timberland in Northern California.

The suit alleges that Hurwitz, in order to increase logging and pay off his company's debts, presented a study, known as a sustained-yield plan, that overstated the amount of timber his company could cut each year without causing lasting damage. Pacific Lumber denied the allegations after the suit was filed in 2006.

State forestry officials agreed to allow more logging on Pacific Lumber property after the company submitted the sustained-yield plan and Hurwitz threatened to back out of the deal unless the state raised the tree-cutting limits it had initially proposed....

Plaintiffs in the current lawsuit are Richard Wilson, the state Department of Forestry director who approved the plan in 1999, and Chris Maranto, a state forester who detected the alleged fraud several years later. They are suing under a whistle-blower law that would entitle them to 15 percent or more of the damages awarded to the government. Hurwitz could be ordered to pay damages equal to three times the government's losses.

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Texas Tycoon's Company lost $92 million in 2008, and wrote off nearly entire Pacific Lumber investment...

http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20090331006870&newsLang=en

MAXXAM Inc. (AMEX: MXM) reported a net loss of $92.4 million, or $19.67 per share loss for the twelve months ended December 31, 2008, compared to a net loss of $46.9 million, or $8.93 per share loss, for the same period of 2007....

Reorganization Proceedings of Palco and its Subsidiaries (the Bankruptcy Cases) In January 2007, Palco and its subsidiaries (the Debtors) filed separate voluntary petitions in the United States Bankruptcy Court for the Southern District of Texas for reorganization under Chapter 11 of the Bankruptcy Code. On July 8, 2008, the Bankruptcy Court confirmed the MRC/Marathon Plan, a plan of reorganization that had been filed by Palco’s principal creditor and a third party. Following further bankruptcy and appellate court proceedings, the MRC/Marathon Plan was consummated on July 30, 2008 and the Debtors emerged from bankruptcy. Under the MRC/Marathon Plan, the debtor companies were reorganized and continued under two new companies, with substantial cash payments being made to all of the creditor classes other than Palco’s principal creditor. The consummation of the MRC/Marathon Plan resulted in the loss entirely of the Company’s indirect equity interest in Palco and its subsidiaries, including Scopac. At the time the MRC/Marathon Plan was consummated, the Company received cash consideration of $3.5 million from the MRC/Marathon Plan proponents. Various third parties have appealed confirmation of the MRC/Marathon Plan to the Fifth Circuit Court of Appeals. Oral arguments on the appeal have been held before the Fifth Circuit and the court’s decision is pending. It is uncertain when the Fifth Circuit will rule. It is possible that the MRC/Marathon Plan could be overturned and unwound as a result of the pending appeal. If that occurs, the Company would be required to return $2.25 million of the cash consideration received upon consummation of the MRC/Marathon Plan and the assumption of the Palco pension plan by the reorganized entity would no longer be effective, among other things. As a result of uncertainties surrounding the appeal, the Company has not reversed any portion of its investment in the Debtors. The Company will reevaluate the accounting treatment of its investment in the Debtors when the Fifth Circuit renders its decision. The consummation of the MRC/Marathon Plan is expected to result in the utilization of a substantial portion of the Company’s net operating losses and other tax attributes for federal income tax purposes. The Company was required to record the estimated tax impacts of the MRC/Marathon Plan in its 2008 federal income tax return and, consequently, was required to record the estimated tax impacts of the reorganization in the Company’s 2008 statement of operations. Included in the Company’s consolidated tax provision is a $67.9 million provision for federal incomes taxes reflecting the estimated utilization of tax attributes resulting from the consummation of the MRC/Marathon Plan. It is possible these estimates could change materially in the future should facts and circumstances change.

The Wilson Actions

On December 7, 2006, an action entitled State of California, ex rel. Richard Wilson and Chris Maranto v. MAXXAM Inc., The Pacific Lumber Company, Scotia Pacific Company, LLC, Salmon Creek LLC, Charles E. Hurwitz and Does 1 through 50 (the Wilson state action) was filed under seal in the Superior Court of San Francisco, California,

and on the same day, an action entitled United States of America ex rel. Richard Wilson and Chris Maranto v. MAXXAM Inc., The Pacific Lumber Company, Scotia Pacific Company, LLC, Salmon Creek LLC and Charles E. Hurwitz (the Wilson federal action) was filed under seal in the U.S. District Court for the Northern District of California.

The original defendants in the Wilson actions included certain of the Debtors, the Company and Mr. Charles E. Hurwitz, the Company’s Chairman of the Board and Chief Executive Officer. The Wilson actions allege violations of the California False Claims Act and the Federal False Claims Act, respectively, and are qui tam actions (actions ostensibly brought by the government, but on the information and at the instigation of a private individual, who would receive a portion of any amount recovered). As the State of California declined to participate in the Wilson state action and the United States declined to participate in the Wilson federal action, the seal on each case was lifted and the private individuals are entitled to proceed with the suits. Both suits allege that the defendants made false claims by submitting to a California agency a sustained yield plan misrepresenting as sustainable the projected harvest yields of the timberlands of Palco and Scopac. The remedies being sought are actual damages (essentially based on over $300.0 million of cash and approximately 7,700 acres of timberlands transferred by the United States and California in exchange for various timberlands purchased from Palco and its subsidiaries), as well as treble damages and civil penalties of up to $10,000 for every violation of the California False Claims Act and the Federal False Claims Act, respectively. On February 28, 2008, the plaintiffs settled for nominal amounts the Wilson actions as to the Debtor defendants. The actions are proceeding as to the Company and Mr. Hurwitz. The Wilson federal action is scheduled for trial beginning on April 20, 2009. The Wilson state action was dismissed in September 2008, but the plaintiffs have appealed this decision. As the plaintiffs are claiming damages in the Wilson actions that, on a combined basis, exceed a billion dollars, an adverse decision in either Wilson action would likely have a material adverse effect on the Company’s consolidated financial condition, results of operations and liquidity.