Official Board Market - January 15, 2011

CHAPTER 11 AFTERMATH

SSCC Subsidiary Noteholders Lose Out

Holders of notes issued by a Canadian finance subsidiary of reorganized Smurfit-Stone Container Corp. (SSCC) were losers in an opinion filed by U.S. Bankruptcy Judge Brendan L. Shannon in the now-completed Chapter 11 case, Bloomberg reports.

The opinion didn’t decide an issue that has been arising in bankruptcies involving companies straddling the border between the U.S. and Canada. Other SSCC creditors stand to receive the stock that would have gone to the Canadian noteholders.

The dispute involved a Smurfit Canadian finance subsidiary named Stone Container Finance Co. of Canada II, a so-called unlimited limited liability company under Canadian law. Unlike ordinary corporations where owners have no liability for company debt, the shareholders of an unlimited limited liability company are liable for all of the company debt. The indenture governing the 7.375 percent notes issued by Finance II contained a provision immunizing the owner, SSCC, from liability. SSCC nonetheless guaranteed the notes. Finance II was to be one of the companies reorganized under the Smurfit Chapter 11 plan, but when noteholders objected, Finance II was dropped from the plan and its Chapter 11 petition was later dismissed.

Meanwhile, Finance II went into bankruptcy in Canada, and a trustee was appointed. The bankruptcy trustee for Finance II filed a $222 million claim against SSCC based on the company’s status as an unlimited limited liability corporation.

The SSCC plan called for making distributions to Finance II noteholders based on SSCC’s guarantee. The distributions were made, and Shannon said that noteholders received new stock with an estimated value equal to 70 percent on the notes. He denied the allegedly separate claim by the trustee for Finance II. He based his ruling on the plain meaning of the note indenture releasing any claims against SSCC as shareholder.

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