Legal Strategy Could Boost Cost of Saving Timberlands : Forests: Environmentalists are warning that proposed restructuring of Pacific Lumber may be designed to get more money for old-growth redwoods.

The Sierra Club, the Audubon Society and the Wilderness Society will deliver a warning today to the Securities and Exchange Commission that a proposed restructuring of Pacific Lumber Co. could greatly raise the cost of saving California’s last big private stand of old-growth redwoods.

The SEC is reviewing a plan by Houston-based Maxxam Inc., parent of Pacific Lumber, to split the company. Pacific Lumber would spawn a new subsidiary, Scotia Pacific Holding Co.

Pacific Lumber would retain 11,000 acres of old-growth redwood stands, including the 3,000-acre Headwaters Forest, southeast of Eureka in Humboldt County, long proposed by environmentalists for preservation. Nearly 200,000 acres of second-growth redwoods would be owned by Scotia Pacific.

The move is part of Pacific Lumber’s refinancing of junk bond debt that Texas financier Charles Hurwitz incurred when he took over the venerable Northern California timber firm in 1985.

Maxxam executives describe the new arrangement as a “normal” business structure and decline to detail reasons for the split while it is under SEC review, which is to be completed in February. But environmentalists say it could also be a ploy to enable the company to leverage a higher price in government attempts to acquire the Headwaters Forest for preservation.

The new structure would leave a smaller Pacific Lumber with a much larger share of its value attributable to its old-growth trees. Because of a controversial and potentially far-ranging area of developing law, the environmental groups worry that government attempts to preserve these trees could be portrayed as causing much larger economic harm to the new Pacific Lumber.

In their letter to the SEC, the groups say they see this as “potentially enhancing corporate claims” for compensation for any tracts of timber put off-limits to cutting.

Environmentalists and other observers of the Northern California timber battles predict that the federal and state governments will eventually force Pacific Lumber to set aside much of Headwaters Forest to stabilize the population of the marbled murrelet, a small bird listed as an endangered species.

The environmental groups note that “both the state and federal government . . . have apparent authority to require a substantial portion of Pacific Lumber’s virgin old growth to be set aside without compensation to protect key habitat for the endangered murrelet.”

The U.S. Congress also wants to acquire Headwaters Forest, preferably by swapping it for federal land. One swapping candidate mentioned is Ft. Ord, an Army base in Monterey County.

But the so-called takings clause of the U.S. Constitution’s 5th Amendment guarantees that private property will not be “taken for public use, without just compensation.” As environmental regulations have proliferated, business interests have raised a storm of protest, arguing that rules limiting use of resources on private land constitute an illegal “taking.”

Environmentalists respond that businesses have the same obligation as individuals to conform to rules required for the public good--from laws that mandate sidewalks to endangered species protection--whether or not they are compensated for it.

But a widely watched U.S. Supreme Court ruling last summer found that South Carolina committed an illegal taking of land bought by a developer. The state denied David H. Lucas permission to build houses on coastal land, citing new environmental regulations to control beach erosion. Lucas said the state action made his land virtually worthless.

Many business leaders hope the ruling will lead to compensation not only for other developers but for many businesses that profit from harvesting natural resources.

William Davis, an attorney with Dun & Martinek in Eureka, Calif., has looked closely at the takings concept for clients who extract gravel from Northern California stream beds. Davis believes that while legal precedents have yet to be set--and each application of the 5th Amendment guarantee must be litigated on a case-by-case basis--the environmentalists could have grounds for their fears.

“If Pacific Lumber or any company was to diversify for normal business purposes,” Davis says, “and then the government should destroy . . . entirely the value of one distinct and separate portion of the business, then (the Lucas case) would clearly appear to apply.” Other attorneys familiar with the Lucas decision say it is too narrow to constitute a precedent. Glenn P. Sugameli, a Wilderness Society attorney who co-wrote a friend-of-the-court brief in the Lucas Supreme Court appeal, says a computer search of federal cases since June shows none using the Lucas arguments in a takings lawsuit.

Pacific Lumber executives also say that the case did not prompt their effort to split off the new subsidiary.

“The Lucas case was not the motivation here,” says Anthony R. Pierno, general counsel for both Maxxam and Pacific Lumber, although he agrees that “the Lucas decision says that if the government takes your land they have to pay for it.”

Several industry observers see a more obvious motive to the split: It could allow Pacific Lumber to refinance its debt at a lower cost than under one company.

In the company’s restructuring, $510 million in junk bonds at 12% to 12.5% interest would be paid off by new bonds expected to be issued at substantially lower interest. Pacific Lumber would offer $215 million in new bonds. But the new subsidiary, Scotia Pacific, would do the lion’s share of the refinancing, offering $364 million in new bonds at an even lower expected rate. Scotia Pacific could do this because it will be isolated from the environmental disputes surrounding the old-growth trees and will use its vast holdings of cuttable trees as collateral. The Pacific Lumber bonds will be unsecured.