SACRAMENTO, Calif. (CN) - California and the federal government did not break any promise to a lumber company regarding timber harvest levels because this issue was never part of their agreement, a state appeals court ruled.
Pacific Lumber began cutting down old-growth redwood forests on its land in Humboldt County at an increased rate in 1989 to pay off debts associated with its buyout by Maxxam Inc.
After several lawsuits protesting the deforestation were filed at the state and federal levels, the government enjoined Pacific from harvesting forest that served as habitat to the endangered marbled murrelet. Pacific said the government had unlawfully taken its land by declaring it unsuitable for timber harvesting.
To resolve the conflict, the parties created the Headwaters Agreement in 1996 and completed the negotiations in 1999. Among other things, Pacific agreed to sell 7,000 acres of its timberland to the federal government and California in exchange for other timberlands and $495 million, as well as regulatory approvals allowing it to harvest its remaining 211,000 acres.
Pacific and a subsidiary that is now represented by Avidity Partners, the litigation trustee for its bankruptcy estate, nevertheless filed suit for breach of contract, bad faith and promissory estoppel. The complaint concerned an alleged promise in the agreement that allowed Pacific to harvest 176.2 million board-feet of lumber per year for the first 10 years of the agreement. Pacific also claimed that it relied on the fact that state and regional water boards have waived waste discharge requirements for timber operations since 1987 when negotiating the agreement.
After the agreement closed, however, the Senate passed bills 390 and 810, which required all waste discharge waivers to end in January 2003, capped new waivers at five years, and required timber companies to get certification from both the State Water Resources Control Board and the Environmental Protection Agency to gain exemption from certain waste discharge requirements, according to the complaint.
The North Coast Regional Water Quality Control Board used the bills to mandate development of watershed-wide waste discharge requirements for Pacific's timber harvesting plans, though it gave other companies' plans categorical waivers under its general requirements. It initially granted coverage to a few of Pacific's plans, but in December 2005 refused to approve any additional plans until the watershed-wide requirements were complete.
Pacific and Avidity claimed the government used these legislative and environmental challenges to delay approval of Pacific's timber harvesting plans, preventing it from harvesting the allegedly promised 176.2 million board feet per year.
The government moved to dismiss, arguing that, among other things, the agreement did not ensure the contract's economic viability or exempt Pacific from complying with state water quality laws and regulations.
A discovery referee appointed by the trial court recommended denying the government's motion, but the court instead granted the government summary judgment on the grounds that the agreement prevents any party from seeking monetary damages for breach of agreement.
A three-judge panel of California's Third Appellate District affirmed Wednesday, finding that the Headwaters agreement did not guarantee Pacific a specific timber harvest level.
"There is no provision in any of the tendered documents assuring the state would allow Pacific Lumber to harvest a set amount, nor is there any provision from which such an assurance can be implied," Justice Cole Blease wrote for the panel.
Pacific and Avidity relied on the contract provisions as proof of a harvest guarantee, but these provisions were subject to the damages waiver or taken from the trial court referee's report, "and not evidence of any contract term whatsoever," the 36-page ruling states.
The companies also based their argument for guaranteed harvest on the fact that the state approved the sustained yield plan (SYP) for Pacific's operations, which was included as appendix Q in the final environmental impact report and contained a table estimating harvests at 1,761,516 million board feet per year per decade.
This reasoning failed to sway the panel.
"Approval of the SYP is simply an acknowledgment that the plan complies with the Forest Practice Rules and that the plan will permit a certain annual rate of harvest. But, as CDF [California Department of Forestry and Fire Protection] was careful to point out in its approval letter, the permitted amount was the 'maximum amount' allowed," Blease wrote (italics in ruling). "This cannot be construed as an unqualified approval by the state that Pacific Lumber could harvest that amount."
Pointing to several statements from the trial court referee's report citing sections from the implementation agreement and the habitat conservation plan, Pacific and Avidity said the state breached the agreement by imposing additional water quality restrictions beyond those set forth in the habitat conservation plan, and that the state had promised Pacific a specific annual harvest yield.
The court concluded, however, that any statements referring to the implementation agreement or habitat conservation plan are not actionable because of the damages waiver. Even among the actionable statements, none of the documents that comprise the contract contain an explicit agreement about timber harvest yields, the ruling states.
"The parties were sophisticated players with knowledgeable legal counsel engaged in high-profile negotiations," Blease wrote. "We have no doubt they knew how to draft a provision assuring a minimum harvest level and foreclosing any further regulatory review if that was their mutual intent. That they did not draft such a provision is a clear indication that there was no mutual agreement on the issue, and we will not cobble together such an agreement from miscellaneous provisions in the documents tendered in this action."
The bad faith claims also fail because the Headwaters agreement contains no language ensuring that the state would approve a specific number of timber harvest plans within a certain time frame, according to the ruling.
"We cannot assume that the state would have promised to approve Pacific Lumber's THP's [plans] in a timely manner if its attention had been called to the issue, when there is evidence that the issue was actually considered and rejected as part of the agreement," Blease wrote. "Pacific Lumber could have had no justifiable expectations in that regard. Also, there is no legal necessity to imply such a covenant because the agreement is otherwise supported by adequate consideration and is not illusory."
Robert Wallan, John Grenfell and Kimberly Buffington with Pillsbury Winthrop Shaw Pittman in Los Angeles argued the case for the plaintiffs.
State Attorney General Kamala Harris represented California, along with Department of Justice attorneys Kathleen Kenealy, Robert Byrne, Denise Ferkich Hoffman, Daniel Harris and Jan Zabriskie.
Subscribe to Closing Arguments
Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.