Million Dollar Bluff
Douglas T. Kendall
appeared in the Sacramento Bee,
Houston Chronicle, San Francisco Examiner, San Jose
Mercury News, Riverside Press-Enterprise, Monterey County
Herald
You'd hope it would take more than a bluff to rob the
U.S. and California taxpayers of $495 million. But by
sealing a pact with Maxxam Corporation to buy 9,500 acres
around the Headwaters Grove - an old-growth redwood
forest in Northern California - at a cost of over $50,000
an acre, the U.S. and California have signaled that the
coffers are open to any corporate raider with a poker
face and a pair of deuces.
 Yet "bluff" is a generous
description of the suit Maxxam Corporation and its
subsidiary, Pacific Lumber, brandished to pressure state
and federal officials into signing the Headwaters deal.
Maxxam insisted that if state and federal officials
required it to leave any of its trees unlogged to protect
the endangered coho salmon and marbled murellet, Maxxam
would sue and win. Maxxam's legal basis for this threat
was the so-called "takings clause" of the U.S.
Constitution.
Luckily for taxpayers, that is not the way
the takings clause works. The framers drafted the clause
only to ensure compensation when the government
physically takes possession of property to build a road
or to quarter soldiers. The Supreme Court has expanded
the clause to require compensation for extreme
regulations that are the functional equivalent of
physical expropriations. The clause was never intended
and has never been interpreted to require compensation
when the government requires a corporation to leave a
small portion of a large parcel of property undeveloped.
Indeed, three specific, fatal flaws stood
between Maxxam and victory on its takings claim. First,
to prevail, Maxxam would have had to distinguish the
trees in the Headwaters Grove from the trees it owns in
surrounding areas. But large corporations are not allowed
to divide their assets and claim a "taking" of
only those assets that are impacted by a regulation. As
the Supreme Court ruled unanimously in 1993, "a
claimant's parcel [can] not first be divided into what
was taken and what was left for the purpose of
demonstrating a taking of the former to be complete and
hence compensable."
The logging restrictions necessary to
protect the marbled murrelet and coho salmon encompassed
a small portion of the contiguous timberland Maxxam owns
in Northern California. Maxxam's claim was thus directly
analogous to the failed claim made by the Keystone Coal
Company in a 1987 Supreme Court case. Keystone was forced
to leave 27 million of its 1.5 billion tons of coal in
place to protect above the mines and argued that its
"parcel" should be defined as only as this 27
million ton "support estate." The Court flatly
rejected Keystone's argument and denied its claim.
Second, Maxxam could not show any cognizable
impact on its "reasonable investment-backed
expectations." The Supreme Court looks closely at
the impact of a regulation on a corporation's bottom line
and finds property taken only when a corporation's
expectations are reasonable and the regulatory impact on
those expectations is extreme.
Because of its aggressive clearcutting,
Maxxam has already realized an estimated $2 billion in
profits since its acquisition of Pacific Lumber, nearly
three times the $850 million it spent to purchase the
company in 1985. Maxxam would not have succeeded in
transforming the takings clause into a vehicle that
guarantees it every dime it could possibly extract from
its timberland.
Finally, courts frown on speculators who buy
restricted property at a discount and then seek to extort
from taxpayers the market value of the property without
restrictions. The Supreme Court in Lucas v. South
Carolina Coastal Council, for example, ruled that
restrictions that "inhere in the title"
obtained by a developer can never be considered takings.
Numerous lower courts have interpreted Lucas
to prohibit corporations from obtaining compensation for
environmental regulations that were in place upon
purchase.
Maxxam purchased the Headwaters Grove and
the other Pacific Lumber acres in 1985, fully aware of
the environmental restrictions that applied to the
property. Accordingly, Maxxam paid a highly discounted
price. Courts disfavor claims, like Maxxam's, that seek
constitutional protection for a corporation's desire to
have its cake and to eat it too.
By caving to Maxxam's bluff, the U.S. and
California have set an awful precedent. Developers and
resource extraction companies will demand more and
threaten suit earlier. One can hear the boardroom talk:
"Maxxam got $500 million, and they didn't even have
a case!" Ironically, a deal signed to avoid
litigation will result in far more cases filed against
federal, state and local governments.
There are reasons to cheer the purchase of
the Headwaters Grove. The sale removes a remarkably
beautiful and ecologically critical stand of redwoods
from the grasps of a corporate raider and opens the
property to visits by the public. But the price paid, in
taxpayer dollars and in precedent, was far too high.
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