By Bethany McLean

(FORTUNE Magazine) – AMID THE DEVASTATION CAUSED BY Hurricane Katrina, it's perhaps not surprising that a major ruling in one of the longest-running and downright weirdest legal battles between a businessman and the government in U.S. history would have passed almost unnoticed. On Aug. 23, Judge Lynn Hughes of the U.S. District Court for the Southern District of Texas ordered the Federal Deposit Insurance Corp. (FDIC) to pay $72 million to Texas tycoon Charles Hurwitz and his company Maxxam. Not only is it the largest judgment against any government agency ever, but the 133-page ruling is replete with descriptive phrases that aren't usually publicly applied to a government agency. Among other things, Hughes noted the FDIC's "predilection for deceit" and wrote that Hurwitz and Maxxam were "subjected to an unprecedented governmental assault." If this bizarre case has a lesson, it's this: Sometimes when the government and corporations clash, it's hard to identify the good guys.

The saga began more than two decades ago in 1982, when Hurwitz's company invested in a Texas thrift called United Savings. Hurwitz made a fortune via takeovers in the '70s and '80s. He also became the target of so many lawsuits that one reporter wrote, "Everything he touches seems to turn to litigation." But it was the unlikely combination of his United Savings stake with Maxxam's 1986 buyout of Pacific Lumber, the largest private owner of unprotected virgin redwood forests along the Northern California coast, that would land him in the wildest lawsuit of all.

In 1988, United Savings, like so many Texas S&Ls, was declared insolvent, and Hurwitz was swept up in the national scandal that followed. Two outside law firms as well as the FDIC's own staff concluded that a lawsuit against him did not stand a good chance of success. And yet, almost seven years after the bankruptcy, in 1995, the FDIC sued Hurwitz, blaming him for, among other things, failing to put more capital into United Savings. A short time later the Office of Thrift Supervision, or OTS, filed its own claim, which brought the total the government was seeking to $1.11 billion. In 2000 the combative Hurwitz moved to force the FDIC to pay his legal bills.

Now for the weird part. Today, after the production of some two million pages of documents and tens of millions in legal bills, something that sounds utterly insane seems difficult to deny: The FDIC sued Hurwitz at least partly because members of Congress and influential environmentalists wanted to use the prospect of a billion-dollar payment to force Hurwitz to give his redwood trees to the government. (He had accelerated the chopping down of old-growth trees to pay off the debt that the Pacific Lumber deal incurred.)

The FDIC has always denied it, but--in a possibly unfortunate choice of words--Kent "Kenny" Friedman, Maxxam's general counsel, says, "We had so many smoking guns we could have started a forest fire." Among other things, one FDIC official wrote in 1994, "we are mindful of the possibility that ... issues involving the redwood forests might be brought into play." Right before the suit was filed, another official noted, "Calif deleg. Is really putting the pressure on." Judge Hughes also opines that the FDIC "surreptitiously paid" the OTS to bring its suit in part to up Hurwitz's potential liability. "The FDIC cannot pay the Navy to shell Hurwitz's beach house, even if it would advance agency objectives," Hughes wrote in his decision, adding, "Hurwitz should be glad that the FDIC did not think of that."

So a decade after the FDIC filed suit, the tale is finally dribbling to an end. In 1999 the government actually bought the redwoods from Maxxam for $480 million. In 2001 a judge ruled against the OTS on every count, and soon afterward the FDIC dropped its suit. But the agency is appealing Hughes's decision that it is liable for Hurwitz's bills. "The opinion is without basis in fact or law," says a spokesperson.

Hurwitz, for his part, still doesn't get why people had a problem with his redwood-harvesting venture. "We just thought it would be a fantastic way of having assets grow daily and tax-free," he says. Maybe so, but it appears that at least part of his timber operations may have to file for bankruptcy. Hurwitz is careful not to criticize the government. But he does offer a reminder that sometimes when the government gets involved, things "may get blown out of proportion somewhat." -- Bethany McLean