Smurfit-Stone Container Corp. ("Smurfit"), the $7.5 billion paper-based packaging manufacturer, filed for bankruptcy in the Delaware Bankruptcy Court on Monday, January 26, 2009. Smurfit is one of the world’s largest manufacturers of container board and corrugated containers used to ship, store and display products. According to Smurfit’s Affidavit in support of its bankruptcy motions, Smurfit’s bankruptcy was the result of an "unprecedented decline in demand" for the company’s products, as well as a drop in prices due to increased competition and volatility in the pulp and paper industry. Further, recent changes in the capital markets reduced the company’s prospects for refinancing its debt outside of bankruptcy.
Smurfit’s Motion to Continue Customer Programs
To successfully reorganize, Smurfit needs to maintain its client relationships. To do this, one of the first motions Smurfit filed in its bankruptcy was its Motion to Continue Customer Programs. As stated in its motion, Smurfit seeks to continue customer programs its believes are beneficial. The customer programs Smurfit wants to continue include rebates, pre-payments, adjustments, performance and volume rebates, as well as early payment discounts.
Smurfit filed its customer programs motion under sections 105 and 363 of the Bankruptcy Code. Under section 105(a), courts may issue "any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." Bankruptcy courts may invoke their equitable authority under section 105 to allow debtors to pay prepetition debts, if doing so will assist the debtor in its reorganization. Under 363, a debtor may "use, sell, or lease, other than in the ordinary course of business, property of the estate." Like section 105, courts may also authorize debtors to pay prepetition claims under section 363 of the Bankruptcy Code.
Payment of Prepetition Critical Vendor Claims
Smurfit’s "first day motions" also included a Motion Authorizing the Payment of Prepetition Critical Vendor Claims. Under the critical vendor motion, Smurfit seeks authority to pay prepetition claims of vendors it deems "critical" to its operations. Smurfit proposes setting aside $60 million for the payment of such claims. One of the methods the Debtors propose to pay critical vendors is through "cancellation," whereby the Debtors cancel out amounts that are owed post-petition by the vendors. Creditors who are likely to benefit from the critical vendor motion include wood and recycled fiber suppliers, chemical producers who provide the solutions necessary for making pulp, ink suppliers, plant maintenance and parts vendors, and certain customers Smurfit classifies as "trading partners."
Smurfit has over 21,000 employees and operates 160 production facilities. Despite having over $7 billion in revenue and $5.5 billion in assets, the company reported a $115 million loss for 2007. By any standard, this is a large debtor.
According to Smurfit’s bankruptcy petition, Smurfit’s largest unsecured trade creditors include BP ($22mm), International Paper ($13mm), Georgia Pacific ($5mm), Corn Products International ($4mm) and BHS Corrugated ($3mm). This bankruptcy proceeding is before the Honorable Brendan L. Shannon.