Section 1102 of the Bankruptcy Code directs and authorizes the United States Trustee to appoint an official unsecured creditors' committee and provides the United States Trustee with the discretion to appoint additional committees, including equity security holders' committees. The United States Trustee must endeavor to appoint a committee of creditors holding unsecured claims "as soon as practicable after the order for relief. . . and may appoint additional committees of creditors or of equity security holders as the United States trustee deems appropriate." 11 U.S.C. § 1102(a)(1). "On request of a party in interest, the court may order the appointment of additional committees . . . if necessary to assure adequate representation of creditors or of equity security holders." 11 U.S.C. § 1102(a)(2). "On request of a party in interest in a case in which the debtor is a small business [as defined in 11 U.S.C. § 101(51C)] and for cause, the court may order that a committee of creditors not be appointed." 11 U.S.C. § 1102(a)(3).

It has been held that a court could not use its equitable powers to override the United States Trustee's decision to appoint an additional committee. In re New Life Fellowship, Inc., 202 B.R. 994 (Bankr. W.D. Okla. 1996).

Section 1102(b)(1) of the Bankruptcy Code provides that "a committee of creditors . . . shall ordinarily consist of the persons, willing to serve, that hold the seven largest claims against the debtor of the kinds represented on such committee . . . ." The legislative history, as well as the context of the statute itself, makes clear that this is precatory language. H.R. Rep. No. 595, 95th Cong., 1st Sess. 401 (1977).

The powers and duties of a creditors' committee are set forth in 11 U.S.C. § 1103(c). As part of those powers and duties, the committee may: (1) review and investigate the acts, conduct, and financial condition of the debtor; (2) consult with the debtor concerning the administration of the case; and (3) participate in the formulation of the plan of reorganization. 11 U.S.C. § 1103. As part of their obligation to represent creditor interests as a whole, members of a committee have fiduciary obligations. See Woods v. City Nat'l Bank & Trust Co., 312 U.S. 262, 268-269 (1941), reh'g denied, 312 U.S. 715 (1941).

The debtor should be invited (but it is not required) to the organizational meeting to give a short presentation concerning the events that led to the filing of the case, as well as to respond to limited inquiries by creditors regarding the case. Given the close-knit associations that often exist in the credit community, it is not unusual for more creditors to appear than have been invited to attend. Any creditor who expresses interest should be provided a notice and questionnaire and permitted to attend the formation meeting.

The purpose of the formation meeting is to allow the United States Trustee to obtain information and deliberate as to the proper structure of the creditors' committee. Accordingly, these meetings should not be treated as public meetings and should not be opened to the press.

Generally, the questionnaire distributed by the United States Trustee will solicit all of the information ordinarily necessary to evaluate a creditor's candidacy for committee membership; therefore, great detail on the sign-in sheet is duplicative and unnecessary.

While the committee is usually composed of non-lawyer employees of creditors, there may be situations in which outside counsel or other professional persons seek appointment to the committee in their own right (and not as representatives of specific creditors) as "agents" of the creditor. See generally In re A.H. Robins Co., 65 B.R. 160 (E.D. Va. 1986); In re Dow Corning Corp., 194 B.R. 121 (Bankr. E.D. Mich. 1996), rev'd, 212 B.R. 258 (E.D. Mich. 1997); In re Celotex Corp., 123 B.R. 917 (Bankr. M.D. Fla. 1991); In re Johns-Manville Corp., 36 B.R. 743 (Bankr. S.D.N.Y. 1984); In re M.H. Corp., 30 B.R. 266 (Bankr. S.D. Ohio 1983).

It is not uncommon for attorneys, accountants, and other professional persons to attend a formation meeting even though they do not have a client who is a party in interest in the case. These professionals usually wish to solicit representation of the committee. In larger cases or cases of notoriety, a significant number of professionals may fall into this category. It is helpful to the committee if the United States Trustee has all of these professionals sign in on a separate sheet, colloquially referred to as a "pitch sheet." This may assist the committee in determining whom it will interview.

The representative of the United States Trustee should identify him or herself, announce the style of the case(s), introduce the debtor's representative(s) and counsel, and indicate that invitations to the meeting were extended to the unsecured creditors holding the 20 largest claims in the case. It should be stated that this meeting is not the statutory meeting of creditors that will be held on notice to all creditors pursuant to 11 U.S.C. § 341(a). If it has already been established, the date, time and location of the section 341 meeting may be announced. The United States Trustee should also indicate the purpose of the meeting and the agenda to be followed. It is also helpful to reiterate the "ground rules" for active participation in the meeting, including the query regarding the presence of the media.

The United States Trustee should explain the role of the United States Trustee in chapter 11 cases, as well as the separate role and function of the bankruptcy court as the forum for dispute resolution in the process. It should be emphasized that in supervising the administration of a case certain concerns of the United States Trustee parallel those of the appointed creditors' committee (e.g., concerns about the administrative expenses of the case, maintenance and adequacy of insurance, timely payments of postpetition obligations, and review of financial statements). It is in the interest of both the United States Trustee and the creditors' committee to ensure that the case moves promptly towards resolution.

The United States Trustee should explain that members of a creditors' committee are fiduciaries and represent the entire unsecured creditor body. See Woods v. City Nat'l Bank & Trust Co., 312 U.S. 262, 268 (1941); In re Celotex Corp., 123 B.R. 917, 920 (Bankr. M.D. Fla. 1991) (fiduciary duty of committee and, by extension, committee's counsel); In re El Paso Refinery L.P., 196 B.R. 58, 74, sp; (Bankr. W.D. Tex. 1996) (comparing the committee member's fiduciary duty with the member's legitimate right to pursue self-interest). The United States Trustee should inform the creditors of the responsibilities and remedies available to a committee as set forth in 11 U.S.C. § 1103(c).

After the roles of the United States Trustee and the creditors' committee have been explained, the debtor should be given an opportunity to make a brief presentation concerning the reasons for the filing and what the debtor hopes to accomplish during the course of the case. A principal of the debtor or other knowledgeable officer customarily delivers this presentation, although sometimes debtor's counsel fulfills this role. After the presentation is concluded, the representative of the debtor can be allowed to respond to questions regarding the status of the case; however, the attendees should be cautioned that this is not the section 341 meeting. The questioning should be kept brief, so as not to unduly delay the meeting. The United States Trustee must be mindful that sometimes professionals attempt to use the question/answer period as a showcase to demonstrate their skills and zeal to the creditors who will in short order be selecting professionals to assist the committee.

After consideration of the information gathered at the meeting, the United States Trustee should announce the composition of the committee. Following the announcement, the newly selected committee should be asked to remain, the general formation meeting should be adjourned, and all non-selected attendees should be excused. Consideration should be given to inviting the debtor and counsel to briefly remain in attendance, but outside of the meeting room, in case the committee has any specific need to deal immediately with the debtor. The United States Trustee should then meet with the members of the creditors' committee and advise them regarding actions that should be undertaken. The following items should be discussed:

1. 1. Selection of one or more chairperson(s).
2. Adoption of procedural rules or by-laws (e.g., quorum, voting).
3. Selection of professionals. The committee, under 11 U.S.C. § 1103(a), may select and authorize the employment of an attorney(s), an accountant(s), or other agents, if approved by the court. The United States Trustee may discuss the payment of the committee's professionals' fees by the estate and comment upon the availability, or lack thereof, of a "carve out" for fees in any debtor in possession financing facility that may be proposed or in place.
4. Allowance of expenses of a committee (see 11 U.S.C. § 503(b) and applicable case law).

The United States Trustee should not attempt to exclude attorneys representing individual committee members from this meeting; however, these attorneys should not be permitted to utilize the meeting as a forum to campaign for selection as the committee's counsel.

At the conclusion of the meeting, the United States Trustee should prepare a Notice of Appointment which should include the names, addresses, and telephone and facsimile numbers of the committee members. The notice of appointment should be filed with the bankruptcy court and copies forwarded to debtor's counsel and each member of the committee.

The selection of professional assistance is often the first major decision that a creditors' committee will make. A great degree of care should be exercised in the selection process, as the professionals selected will be the standard bearers for the community of interests represented by the committee. The committee may wish to interview various firms before making its decision. The United States Trustee should not promote or encourage the selection of any particular individual or firm. The committee should be made aware of its obligation to oversee and direct the efforts of its professionals, as well as to scrutinize their fees and expenses.

Decisions regarding the employment of professionals should be made as soon as prudently possible. Many major events can occur during the early days and weeks of a case that may have ramifications throughout the entire pendency of the case. It is not unusual for a committee to recess for a short period of time after the organizational meeting, reconvene at a mutually acceptable place and time, and decide on the retention of professionals at that subsequent meeting.

The professionals selected to be retained by the committee must be approved by the court. 11 U.S.C. § 1103(a). As with the appointment of debtors' professionals, it is incumbent on a person being employed by a committee to disclose any circumstances that raise conflict of interest issues at the time of retention. Fed. R. Bankr. P. 2014. 11 U.S.C. § 1103 does not specifically require professionals employed by a committee to be "disinterested persons" (as defined in 11 U.S.C. § 101(14)); however, 11 U.S.C. § 1103(b) provides that an attorney or accountant employed to represent the creditors' committee may not, at the same time, represent an entity having an "adverse interest" in connection with the case. Representation of a creditor of the same class, i.e., unsecured, does not per se constitute an adverse interest. See In re National Liquidators, Inc., 182 B.R. 186, 192 (S.D. Ohio 1995). 11 U.S.C. § 1103(b) seeks to draw a distinction between potential conflicts and actual conflicts. In re Levy, 54 B.R. 805 (Bankr. S.D.N.Y. 1985); see also In re Oliver's Stores, Inc., 79 B.R. 588 (Bankr. D.N.J. 1987). For example, an actual conflict is presented when counsel seeks to represent the committee while simultaneously representing an individual member of the committee in claims objection litigation concerning its particular claim against the debtor. See In re Caldor, Inc. - NY, 193 B.R. 165 (Bankr. S.D.N.Y. 1996) (A creditor committee's retention of legal and accounting professionals who were simultaneously representing the creditors' committee of the debtor's competitor in a separate bankruptcy case was not barred by section 1103(b), where neither debtor was a creditor of the other. The court, overruling the United States Trustee's objection, found that an "adverse interest in connection with the case" means a competing claim in the same bankruptcy case).

The committee should be informed of the potential for excessive costs that may arise if large numbers of professionals are employed in a case. The legislative history of the Bankruptcy Code indicates that, absent unusual circumstances (such as a very large and complex case), appointment of co-counsel is not warranted, as it greatly increases the likelihood of duplication of services between the two attorneys. The duplication will work either to the detriment of the estate by increasing administrative costs or to the detriment of the professionals since both will not be compensated for services rendered. See In re Electrical Materials Co., 160 B.R. 1016, 1017 (Bankr. W.D. Mo. 1993) ("If the work of a second professional will be clearly duplicative and wasteful, the court should deny the committee's request for employment of another professional . . . ."). Furthermore, one of the two attorneys may be more likely to consent to proposed conduct by a debtor which may lead to a situation where the debtor seeks to avoid one attorney and submit all matters to the other. The United States Trustee should carefully review applications to employ co-counsel to ensure that appropriate justification has been demonstrated. For example, if lead counsel for the committee is an out of town firm, the employment of local counsel to assist with the case may well be justified and it may be required by local rules. Applications to employ co-counsel should clearly delineate the responsibilities and duties of each applicant. The United States Trustee should object to deficient applications.

The United States Trustee should advise the creditors' committee that the fees to be paid to the counsel it selects will be paid from the debtor's estate upon appropriate application and approval of the bankruptcy court (see 11 U.S.C. § 330(a)), provided funds are available because they are unencumbered or are carved out. The committee should manage and guide the efforts of its professionals to control the level of fees and expenses incurred. The committee should be informed that the United States Trustee will review the fee applications of professionals and may support or object to such applications in accordance with the United States Trustee's guidelines and any local court guidelines on fees.

Prior to the enactment of the Bankruptcy Reform Act of 1994, there was a split in the case law regarding the recovery of expenses by members of a creditors' committee. In the majority of jurisdictions, committee members could recover their out-of-pocket expenses from the debtor's estate following application and order of the bankruptcy court. See In re George Worthington Co., 921 F.2d 626, 632-33 (6th Cir. 1990). Effective October 22, 1994, 11 U.S.C. § 503(b)(3)(F) was enacted which specifically permits members of committees to receive court-approved reimbursement of their out-of-pocket expenses. The expenses must be actual, necessary, and reasonable. See In re Western Co. of North America, 123 B.R. 546, 548 (N.D. Tex. 1991); In re Fireside Office Supply, Inc., 17 B.R. 43, 46 (Bankr. D. Minn. 1981).

Certain cases may warrant alternative committee formation procedures. When time is of the essence, a conference telephone call with prospective committee members may be organized. If time is available, solicitation of the creditor group in writing, using express mail service, facsimile transmission, or electronic transmission is appropriate. Solicitation materials should include a letter from the United States Trustee informing creditors of the filing and providing them with basic information regarding the duties and responsibilities of a creditors' committee. A questionnaire that can be completed and returned to the United States Trustee by creditors willing to serve on a committee should also be provided. The questionnaire should capture basic information regarding the identity of the creditor and the nature of its claim, as well as whether the creditor is an insider or a competitor.

Once the questionnaires have been collected and a decision regarding the composition of the committee made, the United States Trustee must give notice to the individuals appointed and encourage them to schedule a committee meeting amongst themselves and to employ counsel, if necessary, at the earliest possible date. The United States Trustee may choose to convene the first meeting for these purposes, or alternatively offer the offices of the United States Trustee as an initial meeting site should the committee so require.

Most routine chapter 11 cases lack significant creditor participation and, as a result, the United States Trustee may be compelled to expend considerable time and resources in order to form a committee. On the other hand, in large cases where there is often significant creditor participation, the United States Trustee must carefully evaluate the existing debt structure and seek to balance the interests of the various creditor groups in selecting committee members.

The goal in the creditors' committee formation process is to structure a committee representative of the unsecured creditor body that can assist in moving the case toward resolution in an expeditious manner. The resolution of issues regarding the number and composition of creditors' committees is fundamental to the proper discharge of the United States Trustee's responsibilities in this area. While the law provides no set formula for determining the number of committees to be appointed, the policy is to limit the number of committees, preferably to one, and to confine the size of the committee to under ten creditors. The United States Trustee should not ordinarily appoint a committee of two members and should never appoint a committee of one. The membership of creditors' committees should be the subject of ongoing review throughout a case. As the circumstances of a case change, so may the factors that determine the committee's structure. The United States Trustee, in the exercise of his/her statutory discretion, may modify the composition of the committee without leave of court.

The United States Trustee should not simply appoint the seven largest creditors to serve on a committee, but should appoint, after thorough analysis of the interests of the constituencies and discussions with parties in interest, representatives reflecting those interests. A thorough comprehension of the interests at stake in a case must be gained through an examination of the debtor's financial structure, as well as through discussions with the debtor and creditors. Only then will the United States Trustee be in a position to exercise appropriately the discretion accorded by 11 U.S.C. § 1102.

The Bankruptcy Code's demand that creditors' committees provide for adequate representation of the creditor class implicitly recognizes that creditors will disagree on strategy and objectives. The committee's decision-making process in its fiduciary role can provide a method for resolution of these conflicts. The mere presence of a conflict between creditor interests does not mandate the appointment of separate committees. The United States Trustee must determine whether the various classes of unsecured debt have divergent interests that may require different treatment under either the reorganization plan or at some other particular segment of the case, thereby warranting the appointment of separate committees. See In re The Drexel Burnham Lambert Group, Inc., 118 B.R. 209, 212 (Bankr. S.D.N.Y. 1990). This may be unclear at the commencement of the case, thereby providing an initial bias toward the appointment of a single committee.

The committee must adequately represent the diverse unsecured creditor interests involved. This does not require that all interests be represented on the committee. The committee should reflect the reality of the debt structure, and the position of those holding comparatively small claims should not be enhanced by over-representation. Similarly, under-representation of significant creditor interests can impede the reorganization effort. The courts have recognized the need to structure a committee that is reflective of the various unsecured creditor interests. See In re Sharon Steel Corp., 100 B.R. 767, 778 (Bankr. W.D. Pa. 1989). See also In re Dow Corning Corp., 194 B.R. 121, 141 (Bankr. E.D. Mich. 1996) ("For a particular group of creditors to be adequately represented by an existing committee, it is not necessary for the committee to be an exact reflection of that committee's designated constituents. Instead, adequate representation exists if the interests of that particular group of creditors have a meaningful voice on the committee in relation to their posture in the case. . .".), rev'd on other grounds, 212 B.R. 258 (E.D. Mich. 1997); In re Public Service Co. of New Hampshire, 89 B.R. 1014, 1020 (Bankr. D.N.H. 1988); In re Grynberg, 10 B.R. 256, 257 (Bankr. D. Colo. 1981).

Unions are eligible for appointment to creditors' committees. See In re Altair Airlines, Inc., 727 F.2d 88 (3d Cir. 1984); In re Enduro Stainless, Inc., 59 B.R. 603 (Bankr. N.D. Ohio 1986); In re Northeast Dairy Coop. Fed., Inc., 59 B.R. 531 (Bankr. N.D.N.Y. 1986). If the union's entire claim is entitled to priority treatment pursuant to 11 U.S.C. § 507(a)(3) and(4), however, then the union should not be appointed to the unsecured creditors' committee, as its interest is fundamentally different from that of the general unsecured creditors. But see In re Plabell Rubber Prods., 140 B.R. 179 (Bankr. N.D. Ohio 1992) (United States Trustee ordered under section 105 to add union to committee, where none of the extant members represented a similar claim.) See USTM 3-4.8.4 for a discussion of a bankruptcy court's ability to alter committee membership since the repeal of 11 U.S.C. § 1102(c).

When considering the appointment of labor representatives to the committee, the United States Trustee must consider the impact of any "first day orders" that may permit the debtor in possession to pay prepetition wages in the ordinary course of the debtor's postpetition operations and which may permit the debtor in possession to honor prepetition obligations for employee benefits in the ordinary course. In In re Barney's, Inc., 197 B.R. 431, (Bankr. S.D.N.Y. 1996), a benefit fund representative was appointed. See USTM 3-4.4.1.6 for a discussion of the participation of the Pension Benefit Guarantee Corporation ("PBGC") on creditors' committees.

The claims of landlords for unpaid rent may be substantial in certain cases (e.g., a department store chain). These claims may increase if leases are rejected pursuant to 11 U.S.C. § 365. To the extent the debtor intends to reject of a number of its leases in the bankruptcy proceeding, the presence of a landlord will be helpful to the committee in analyzing particular dispositions. If, however, the particular landlord's lease is assumed and all defaults are cured, the landlord is no longer a creditor. The landlord should be informed by the United States Trustee that if the landlord's lease is assumed, the landlord should resign from the committee. This analysis is equally applicable when dealing with franchisers, licensors, and other parties to executory contracts.

When analyzing the candidacy of landlords for committee membership, the United States Trustee may wish to consider three distinct types of landlord claims: claims for rent that is actually delinquent as of the petition date; claims for items other than base rent, e.g., CAM payments or percentage rents, which are actually delinquent as of the petition date; and the likelihood that the particular candidate will incur rejection damages later in the case.

Secured creditors should, of course, not be appointed to a committee of unsecured creditors. Accord In re America West Airlines, 142 B.R. 901, 903 (Bankr. D. Ariz. 1992) (United States Trustee acted properly in removing a creditor from the creditors' committee after it extended postpetition financing on terms which effectively secured most of its prepetition claim. Creditor's motion for reinstatement was denied because creditor no longer represented an unsecured claim). Creditors holding claims that are only partially secured, however, are eligible. In re Walat Farms, Inc., 64 B.R. 65 (Bankr. E.D. Mich. 1986).

The fact that a creditor is a competitor of the debtor does not disqualify the creditor from membership on the creditors' committee, but the better part of wisdom may be not to make such an appointment. In re MAP Int'l., Inc., 105 B.R. 5 (Bankr. E.D. Pa. 1989); In re Plant Specialties, Inc., 59 B.R. 1 (Bankr. W.D. La. 1986). But see In re Wilson Foods Corp., 31 B.R. 272 (Bankr. W.D. Okla. 1983). If the debtor expresses concern about such an appointment, the United States Trustee should emphasize the fiduciary obligations of committee members and highlight that information received at committee meetings is generally confidential and may not be used for an individual's pecuniary gain. The party seeking to exclude a creditor from serving on the creditors' committee bears the burden of proving that the creditor's appointment will be detrimental to the debtor's reorganization. See In re MAP Int'l, Inc., 105 B.R. at 6. A violation of this standard of conduct may subject the creditor to sanctions similar to the damages awarded plaintiffs in cases involving violations of the "insider trading" provisions of the securities laws. In order to guard against this problem, the committee by-laws can allow for particular members to be excluded from certain deliberations.

Former counsel to a debtor may be a significant creditor in a case. If such counsel is one of the largest creditors and wishes to serve on the creditors' committee, the United States Trustee should caution counsel concerning certain issues that may arise. For example, the attorney may have information that is subject to the attorney-client privilege. This places the attorney in an awkward position vis-a-vis meeting his/her fiduciary obligation as a member of the creditors' committee. Of course, the debtor may waive the privilege. This same analysis is applicable to accountants, even though no accountant-client privilege exists under federal law.

A governmental unit is generally ineligible to serve on a creditors' committee unless it qualifies as a "person." Only persons are eligible to serve pursuant to 11 U.S.C. § 1102(b)(1), and the term "person" is defined to exclude governmental units, except to the extent that a governmental unit (1) has acquired an asset from a person as a result of a loan guarantee agreement or as a receiver or liquidating agent of a person; (2) is a guarantor of a pension benefit payable by or on behalf of a debtor or an affiliate of the debtor; or (3) is the legal or beneficial owner of an asset of an employee pension benefit plan that is a governmental plan as defined by the Internal Revenue Code ("IRC") or an eligible deferred compensation plan as defined in the IRC. 11 U.S.C. § 101(41). See also In re Mansfield Tire & Rubber Co., 39 B.R. 974 (N.D. Ohio 1983); In re VTN, Inc., 65 B.R. 278 (Bankr. S.D. Fla. 1986); In re Baldwin-United Corp., 38 B.R. 802, 806 (Bankr. S.D. Ohio 1984).

As a practical matter, this exception usually comes into play with regard to the participation of the Pension Benefit Guarantee Corporation ("PBGC") on unsecured creditors' committees. The claims of the PBGC, and certain analogous state agencies, are oftentimes of two types. The first is a prepetition claim for actual underfunding of a benefit plan, i.e., prepetition arrearages. The second type of claim is for "termination liability," i.e., the long term exposure suffered by the PBGC should the benefit plan be terminated in the bankruptcy case. Since this sum represents a long term stream of payments to a group of beneficiaries, the amount of the claim oftentimes dwarfs other claims against the estate. When analyzing the candidacy of this type of entity, the United States Trustee may wish to consider the probability of plan termination.

Unless there is current under funding, the debtor in possession may not identify the PBGC as one of the twenty largest unsecured creditors at the commencement of the case. If the United States Trustee determines that the bankruptcy case will likely be a liquidation and that there are potential pension plan issues, the United States Trustee may wish to consider inviting the PBGC to consider candidacy.

The claims of insiders are not required to be listed among the twenty largest unsecured creditors (Fed. R. Bankr. P. 1007(d)) because insider claims are generally not representative of the kinds found on the committee. In considering the formation and role of committees, Congress considered the natural tension that exists between the debtor and its creditors, a tension absent if the creditor is an insider. The presence of insiders on the committee would permit the debtor, in effect, to negotiate a plan with itself. In re Swolsky, 55 B.R. 144 (Bankr. N.D. Ohio 1985); In re Glendale Woods Apartments, Ltd., 25 B.R. 414 (Bankr. D. Md. 1982). But see In re Vermont Real Estate Inv. Trust, 20 B.R. 33 (Bankr. D. Vt. 1982).

The mere fact that a creditor holds a claim that is contingent, unliquidated, or disputed does not disqualify the creditor from appointment to the committee. This is clear from the definitions of "claim" and "creditor" set forth in the Code, 11 U.S.C. § 101(5), (10). See generally In re Barney's, Inc., 197 B.R. 431 (Bankr. S.D.N.Y. 1996).

The Trust Indenture Act of 1939 (15 U.S.C. § 77aaa-77bbbb) defines an "indenture" as any mortgage, deed of trust, trust, or other indenture under which securities are outstanding or are to be issued, whether or not any property, real or personal, is or is to be pledged, mortgaged, assigned, or conveyed thereunder. 15 U.S.C. § 77ccc(7). The Bankruptcy Code defines an indenture similarly at 11 U.S.C. § 101(28). The indenture defines the relationship between an issuer of securities (often a debtor in bankruptcy) and the indenture trustee, typically a financial institution that has agreed to serve for the equal and ratable benefit of the holders of the securities. In the event of a default by the issuing company under the indenture, the indenture trustee typically undertakes to exercise the rights given it by contract with the same degree of care and skill as a prudent person in the conduct of his/her own affairs. The failure to exercise this degree of care on behalf of the holders can subject the indenture trustee to liability for negligence.

The indenture trustee rarely has a direct claim of any consequence against the debtor at the time the case is commenced, except perhaps for certain expenses incurred incident to its trusteeship. However, given the indenture trustee's potential exposure to liability, the indenture trustee is typically one of the first volunteers to serve on an unsecured creditors' committee. The Bankruptcy Code recognizes that an indenture trustee may often make a substantial contribution to a chapter 11 case. See 11 U.S.C. § 503(b)(3)(D) and (b)(5). It may be useful to communicate with the indenture trustee in connection with the committee formation process to determine the amounts outstanding under the given indenture, the ; relative priority of the debt, whether there is any collateral securing repayment of the issue, and who are the holders of record. Frequently, it will be difficult to penetrate beyond the "street name" holders of record to the real beneficial owners of the securities. If beneficial owners of significant amounts of the ; outstanding debt can be identified, the participation of the indenture trustee as a voting member of the creditors' committee may not be necessary. The United States Trustee may wish to attempt to place actual holders of the securities on the committee given the precatory language of 11 U.S.C. § 1102(b)(1).

On the other hand, the appointment of an indenture trustee as a voting member (the United States Trustee does not appoint non-voting (ex-officio) members to a committee) may be the only way to assure adequate representation of the public debt holders where large institutional investors cannot be identified or do not exist. Accordingly, the policy with respect to the appointment of indenture trustees to unsecured creditors' committees as members cannot be expressed as a per se rule, but rather must depend on the circumstances of the case and the need to include or exclude indenture trustees in order to assure adequate representation. See In re Value Merchants, Inc., 202 B.R. 280, 290 (E.D. Wis. 1990) (district court affirmed bankruptcy court's finding that United States Trustee acted arbitrarily and capriciously in excluding indenture trustees from voting membership on unsecured creditors' committee).

It certain cases, large unsecured creditors who also hold stock of the debtor will seek membership on the committee. In this type of situation, the United States Trustee may wish to undertake an analysis akin to that utilized for undersecured creditor candidates and discussed in In re Walat Farms, Inc., 64 B.R. 65 (Bankr. E.D. Mich. 1986). Factors that may be relevant include, but are not limited to, the type of stock held, e.g., preferred or common, voting or non-voting, the size of the shareholding relative to all issued and outstanding shares, the value of the shares, and the length of time held.

The trading of claims against bankruptcy estates has become commonplace. Many types of claims are routinely transferred including "trade claims," distressed bonds, and "bank debt." The United States Trustee may wish to consider certain attributes of traded claims when evaluating a claim purchaser's candidacy for committee membership.

1. Closing Date

The questionnaire for service on the committee oftentimes asks whether the candidate holds an unsecured claim against the estate and, if so, the amount of the claim. For prepetition claims, no further inquiry may be necessary. If a claim was acquired after the date of the commencement of the bankruptcy case, it may be prudent to inquire of the creditor as to the date of the closing on the transfer and the consideration paid for the claim.

Generally, trades of distressed bonds close quickly because these transactions are governed by the rules and requirements of the exchange on which they are offered. Such trades are usually "final." Trade claims are not subject to the same administrative requirements and the agreement of sale may contain contingencies that would permit the purchaser to undo the transaction. Specifically, some agreements for the transfer of trade claims contain a "put" provision under which the seller must repurchase the claim for the full amount paid by the purchaser and, in addition, pay interest on the purchase price. This transaction structure may be significant to the committee selection process in two ways. First, if a transaction has not become final, the beneficial ownership of the claim may be difficult to ascertain. Second, if a purchaser can escape an unsatisfactory transaction by "putting" the claim back to the seller, thereby limiting or eliminating the amount at risk, one may question whether such a holder would be truly representative of general unsecured creditors.

2. Purchase Price

Distressed claims of all sorts are usually traded at a discount. The discounts may vary depending on certain attributes of a claim and the date when the sale was made. For instance, if a trade claim contains both a reclamation component (11 U.S.C. § 546(c)) as well as a general unsecured component, the discount rate for the reclamation component may be much less than for the general unsecured component (which may be deeply discounted), due to the protections that a reclamation claim receives. Also, because market forces are at work, the value of a distressed claim (measured by its discount rate) may vary periodically to reflect the market's perception of the bankruptcy case. The United States Trustee may wish to obtain specific facts regarding purchase price in order to determine whether or not a particular committee candidate would adequately represent the general unsecured creditor body. An entity that speculates in claims makes its profit on the difference between what it pays for the claim and the ultimate dividend paid under a plan of reorganization. A speculator who pays a small percentage of the face value of a claim has proportionally less at risk than a creditor whose exposure is at the full face value. Having much less at risk, such a speculator may profit handsomely from, and vote to support, a plan that pays much less than would be acceptable to those creditors whose exposure is measured by the full face amount of the claim. See In re Four Seasons Nursing Ctrs., Inc., 472 F.2d 747 (10th Cir. 1973).

Creditors may form a committee prior to the commencement of a case. If such a committee was fairly chosen and is representative of the various kinds of claims presented, the United States Trustee must give strong consideration to appointing the members of the prepetition committee to the committee of unsecured creditors in the case. 11 U.S.C. § 1102(b)(1). The standards for determining whether a prepetition committee was fairly chosen are set forth in Fed. R. Bankr. P. 2007(b) and require a consideration of factors including:

1. whether a meeting was called;
2. who called the meeting;
3. who was invited to the meeting;
4. what creditors were told regarding the purpose of the meeting;
5. who attended the meeting;
6. what transpired at the meeting;
7. who expressed a desire to serve on the creditors' committee; and
8. who was selected and why.

As a practical matter, the "safe harbor" provisions of Fed. R. Bankr. P. 2007(b) are so difficult for the creditors to satisfy--and the United States Trustee to verify--that it is more temporally expedient for the United States Trustee to merely schedule a formation meeting following the standard procedures and invite the prepetition committee members to declare themselves as candidates. Care should be exercised to ensure that creditors who did not participate on the prepetition ad hoc committee are not dissuaded from becoming candidates for the official committee.

The information set out above should be supplied to the United States Trustee in affidavit form by member(s) of the prepetition committee. Other documentation may be relied upon, e.g., a copy of the sign-in sheet for the meeting may be used to determine who was in attendance.

The appointment of a prepetition committee as the official committee of unsecured creditors can greatly facilitate efficient case administration during the period immediately following the filing of a petition. The members of the committee are already familiar with the circumstances confronting the debtor and can immediately apply their knowledge and expertise to the reorganization effort. Conversely, if a prepetition committee was not fairly chosen or is not adequately representative, its appointment as the official committee may significantly impede early case administration efforts.

If the United States Trustee appoints the prepetition committee and an objection is raised, the court, after notice and hearing, may determine whether the requirements of 11 U.S.C. § 1102(b)(1) have been met. Fed. R. Bankr. P. 2007(a). If a determination is made that the requirements of 11 U.S.C.§ 1102(b)(1) have not been met, the court will direct the United States Trustee to vacate the appointment of the committee. Fed. R. Bankr. P. 2007(c).

Creditor attempts to preempt the United States Trustee's role in the appointment process following the entry of an order for relief in a voluntary case should be closely scrutinized. These attempts are often organized by attorneys seeking employment as committee counsel and, as a result, are not entitled to great deference by the United States Trustee.

The new 11 U.S.C. § 1102(a)(3) provides:

On request of a party in interest in a case in which the debtor is a small business and for cause, the court may order that a committee of creditors not be appointed.

Under the new 11 U.S.C. § 1102(a)(3), which was added by the Bankruptcy Reform Act of 1994, a party in interest in the chapter 11 case of a small business (defined under 11 U.S.C. § 101(51C) as ". . . a person engaged in commercial or business activities [but does not include a person whose primary activity is the business of owning or operating real property and activities incidental thereto] whose aggregate non-contingent liquidated secured and unsecured debts as of the date of the petition do not exceed $2,000,000") may move the bankruptcy court to enter an order, for cause, prohibiting the United States Trustee from forming a creditors' committee. It is the Program's policy, however, to appoint creditors' committees in all cases, including those of small business debtors, where holders of unsecured claims express an interest in forming one.

In the only reported decision to date, a bankruptcy court found that the debtor's unsubstantiated allegations that the formation of a creditors' committee would increase administrative expenses, delay its reorganization, and dilute the ultimate dividend to unsecured creditors did not constitute "cause" for purposes of 11 U.S.C. § 1102(a)(3). The court further found that the monetary benefits to be gained by a committee in negotiating a larger dividend with the debtor would likely outweigh the fees and expenses its professionals would incur and that a committee could assist in resolving obstacles to plan confirmation. See In re Haskell-Dawes, Inc., 188 B.R. 515 (Bankr. E.D. Pa. 1995).

Creditors may organize meetings after the commencement of an involuntary case, but before the entry of an order for relief. The United States Trustee's authority to appoint an official committee is operative only after the entry of an order for relief. 11 U.S.C. § 1102(a)(1).

The Bankruptcy Code mandates that the United States Trustee form a committee of unsecured creditors in all chapter 11 cases and permits the United States Trustee to appoint additional committees of creditors or equity security holders as appropriate. See 11 U.S.C. § 1102(a)(1). Usually, one committee will be sufficient. But other committees can be appointed to represent varieties of or significantly different interests. See 11 U.S.C. § 1102(a)(2). See also In re Wang Labs., Inc., 149 B.R. 1 (Bankr. D. Mass. 1992).

As noted, tension among creditors is inherent in all cases and is necessary for the case to move forward. See In re Baldwin-United Corp., 45 B.R. 375, 376 (Bankr. S.D. Ohio 1983). The mere presence of a potential conflict of interest among creditors does not automatically require the appointment of separate committees. See In re McLean Indus., Inc., 70 B.R. 852, 861 (Bankr. S.D.N.Y. 1987). See also In re Salant Corp., 53 B.R. 158 (Bankr. S.D.N.Y. 1985); In re Baldwin-United Corp., 45 B.R. at 376.

The appointment of several separate committees can lead to posturing among the creditor groups that nbsp; might not otherwise arise. Moreover, counsel for a single committee may be more apt to encourage creditors to resolve their differences, as opposed to counsel for separate committees who may be inclined to litigate such matters. The proliferation of committees to serve special interests has an adverse impact on the efficient administration of a case. See In re Baldwin-United Corp., 45 B.R. at 376. Rather than striving to resolve creditor differences, separate committees tend to prolong the process of reconciling differences into a consensus in support of a plan of reorganization. Compelling creditors with diverse interests to serve on the same committee may create opportunities for creditors to resolve their differences consensually.

Another important factor militating against appointing separate committees is the cost factor. The appointment of additional committees inevitably means the retention of additional attorneys, accountants, and other professionals. See In re Saxon Indus., Inc., 39 B.R. 945, 947 (Bankr. S.D.N.Y. 1984). With the increase in the number of professionals comes a concomitant decrease in the accountability and delineation of responsibility. Courts have denied requests for additional committees based in large part upon their concern for escalating administrative costs. See In re Sharon Steel Corp., 100 B.R. 767, 778 (Bankr. W.D. Pa. 1989); In re Texaco, Inc., 79 B.R. 560, 567 (Bankr. S.D.N.Y. 1987); In re Baldwin-United Corp., 45 B.R. at 376. But see In re Beker Indus. Corp., 55 B.R. 945, 949 (Bankr. S.D.N.Y. 1985).

The appointment of a separate committee may be appropriate, however, if conflicts among creditors are of such a magnitude as to impair the ability of a committee to function effectively. In re McLean Indus., Inc., 70 B.R. 852, 861 (Bankr. S.D.N.Y. 1987). See also In re Johns-Manville Corp., 38 B.R. 331 (Bankr. S.D.N.Y. 1983). This is especially true in a large, complex case in which the debtor's business is extremely unstable. As such a case progresses, the interests of creditors may diverge and they may take more extreme positions than would otherwise be expected. For example, in the Beker Indus. Corp. case, the debtor's survival depended upon obtaining additional financing. 55 B.R. at 949. The financing agreement would have impacted various creditor groups in materially different ways. The court, therefore, directed the appointment of an additional committee of debenture holders due to the unstable nature of the case and the need for the active participation of the debenture holders to protect their interests. Accord In re Dow Corning Corp., 194 B.R. 121, 143-45 (Bankr. E.D. Mich. 1996) (a case involving trade creditors, tort claimants, and insurance and indemnity claims relating to breast implants merited appointment of multiple committees because no single committee could adequately represent all of their conflicting interests). Cf. In re Hills Stores Co., 137 B.R. 4 (Bankr. S.D.N.Y. 1992) (court denied request to appoint separate committee of subordinated bondholders absent evidence that a conflict among creditors would impede extant committee's ability to function).

If more than one committee is appointed, they should be advised that no two committees should retain the same counsel. See In re Proof of the Pudding, Inc., 3 B.R. 645 (Bankr. S.D.N.Y. 1980). With regard to accountants, the United States Trustee might suggest that, if appropriate under the facts of the case, provisions be made for the free flow of information between the accountants for the separate committees.

The Bankruptcy Code (11 U.S.C. § 1102(a)(1)) authorizes the appointment by the United States Trustee of additional committees, including a committee of equity security holders. If the United States Trustee declines to exercise the discretion to appoint a supernumerary committee, the court may order the appointment of a committee by the United States Trustee. 11 U.S.C. § 1102(a)(2). While there is no statutory requirement to do so, practitioners should be encouraged to submit requests for additional committees first to the United States Trustee prior to moving for relief from the court, as this may achieve the desired result without the need for litigation. If a party in interest moves the court for an order directing the appointment of a committee, the court can grant the relief only upon finding that the appointment of the additional committee is "necessary to assure adequate representation" of the movant's interests. In re Edison Bros. Stores, Inc., 1996 WL 534853 (D. Del. Sept. 17, 1996); In re Lykes Bros. S.S. Co., 200 B.R. 933 (M.D. Fla. 1996). If the court directs the appointment, the United States Trustee actually selects and appoints the committee.

The appointment of an equity committee is the exception rather than the rule, with the burden on the requesting party in interest to demonstrate the need for adequate representation. See Edison Bros, Stores, Inc., supra; In re Johns-Manville Corp., 68 B.R. 155, 158 (S.D.N.Y. 1986). While equity holders clearly have an interest different from that of unsecured creditors, this is not a sufficient reason to routinely establish an equity committee. There are many sources of adequate representation aside from the appointment of an official committee. See Johns-Manville, 68 B.R. at 163; In re Hills Stores Co., 137 B.R. 4 (Bankr. S.D.N.Y. 1992). Generally, the board of directors acts for the shareholders. Once a company becomes insolvent, the directors still owe a fiduciary duty to the shareholders. Commodities Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 355 (1985); In re Bush Terminal Co., 78 F.2d 662, 665 (2d Cir. 1935); In re Lionel, 30 B.R. 327 (Bankr. S.D.N.Y. 1983). Upon commencement of a bankruptcy case, the board's fiduciary duty is extended to the creditors. Commodities Futures Trading Comm'n v. Weintraub, supra. Pure speculation that a debtor's board and management will sacrifice equity to placate the creditors is insufficient to establish the need for an equity committee. Edison Bros. Stores, Inc., supra.

The United States Trustee may consider all relevant factors in determining whether or not to appoint an equity committee. Factors to consider may include whether the debtor is hopelessly insolvent (In re Emons Indus, Inc., 50 B.R. 692 (Bankr. S.D.N.Y. 1985)); whether the stock is publicly traded and widely held (In re Wang Labs., Inc., 149 B.R. 1 (Bankr. D. Mass. 1992) and In re Johns-Manville Corp., 68 B.R. 155 (S.D.N.Y. 1986)); whether a case is complex (financially as compared with operationally) (In re Edison Bros. Stores, Inc., 1996 WL 534853 (D. Del. Sept. 17, 1996)); timeliness of the request for the committee (In re Kalvar Microfilm, Inc., 195 B.R. 599 (Bankr. D. Del. 1996)); additional cost to the estate, id.; and alternative sources of adequate representation (Edison Bros. Stores, Inc., supra; In re Hills Stores Co., 137 B.R. 4 (Bankr. S.D.N.Y. 1992)).

If an equity security holders' committee is to be appointed, the United States Trustee should seek to obtain a list of the largest beneficial holders of the debtor's securities. Large blocks of stock are often held in a "street name" by brokerage houses or "in trust" at financial institutions, making it difficult to determine the identity of the beneficial interest holders. The regional office of the U.S. Securities and Exchange Commission may be able to assist in this process. The list should contain the names of at least the forty largest beneficial holders, as potential members often reside throughout the country and it may, therefore, be difficult to find stockholders willing to serve.

Section 1102(b)(2) of the Bankruptcy Code provides that committees of equity security holders will ordinarily consist of the persons who hold the seven largest amounts of equity securities of the debtor. When appointing members to a committee of shareholders, inquiry should be made concerning whether the holders acquired their interest before or after the commencement of the case. If the interest was acquired postpetition, the holder may well be designated as a "speculator" and potentially afforded different treatment under a plan. See In re Four Seasons Nursing Ctrs., Inc., 472 F.2d 747 (10th Cir. 1973). Since the appointment of these members may distort the "representativeness" of the committee, this circumstance should be considered by the United States Trustee in making the appointment.

Proper supervision of an estate requires a continuing review of its circumstances. A modification of a committee's structure may at some point become necessary. Although the court retains authority under the current version of 11 U.S.C. § 1102(a)(2) to order the appointment of additional committees, the deletion of subsection (c) from that section in the 1986 Amendments reflects the relocation of administrative responsibility for modifying creditors' committees to the United States Trustee. Since the repeal of 11 U.S.C. § 1102(c), the court has no authority to appoint specific members to a committee. In re Wheeler Tech., Inc., 139 B.R. 235 (B.A.P. 9th Cir.1992); In re Doehler-Jarvis, Inc., Bankr. L. Rep. (BNA) 1384 (D. Del. Oct. 7, 1997); In re Victory Mkts., Inc., 196 B.R. 1 (Bankr. N.D.N.Y. 1995), appeal dismissed, 195 B.R. 9 (N.D.N.Y. 1996), reh'g denied, 1996 WL 365675 (N.D.N.Y. June 21, 1996); In re Drexel Burnham Lambert Group, Inc., 118 B.R. 209 (Bankr. S.D.N.Y. 1990); In re Gates Eng'g Co., 104 B.R. 653 (Bankr. D. Del. 1989); In re First RepublicBank Corp., 95 B.R. 58 (Bankr. N.D. Tex. 1988).

Many courts have nonetheless held that the decisions of the United States Trustee regarding committee composition may be reviewed under an abuse of discretion standard. See Doehler-Jarvis, Inc., supra; In re Barney's, Inc., 197 B.R. 431 (Bankr. S.D.N.Y. 1996); In re Trans World Airlines, Inc., 1992 WL 168152 (Bankr. D. Del. Mar. 20, 1992 ); In re Columbia Gas Sys., Inc., 133 B.R. 174 (Bankr. D .Del. 1991). Those courts which have considered the issue focus on two concepts: whether or not the committee related decisions of the United States Trustee are at all subject to any judicial scrutiny and, if they are, what is the scope of relief that the court may direct. Courts that believe they can review generally rely on 11 U.S.C. § 105(a). Committee related decisions of the United States Trustee are not subject to review under the "agency discretion" exception to the Administrative Procedures Act, 5 U.S.C. § 701(a)(2). See generally Shaltry v. U.S., 87 F.3d 1322 (9th Cir. 1996)(chapter 7 trustee removal by United States Trustee not subject to APA); Richman v. Straley, 48 F.3d 1139 (10th Cir. 1995)(chapter 13 trustee has no property interest in continuing trusteeship, therefore no statutory right of review).

Creditors seeking to modify a committee should be urged to first request such modification from the United States Trustee. Indeed, absent an issue of adequacy of representation, it has been held that questions concerning committee membership must, in the first instance, be directed to the United States Trustee. In re First RepublicBank Corp., 95 B.R. 58 (Bankr. N.D. Tex. 1988). When reviewing such requests, the United States Trustee should consider the same factors that are relevant to the initial appointment of the committee, e.g., the representativeness of the committee, the ability of its members to cooperate effectively in pursuing a reorganization, the impact financially on the estate, and any disruption that may result. A paramount consideration is whether the committee structure is moving the case forward, e.g., the effect of a modification on the operation of the current committee and on the conduct of the case. Before reconstituting or adding a committee, a determination must be made that the change will move the case toward resolution.

Being ever mindful of the statutory requirement that the official unsecured creditors' committee be representative of the entire body of unsecured creditors entitled to such representation, in those cases where a creditor resigns or no longer wishes to serve, the United States Trustee may substitute another creditor with a similar claim if to do so would preserve the necessary balance of the committee's membership. A creditor who resigns from the committee should notify the United States Trustee in writing of its resignation, so that the United States Trustee may undertake any actions that may be appropriate.

The United States Trustee has the authority to remove, as well as to appoint, members of official committees. In re America West Airlines, 142 B.R. 901 (Bankr. D. Ariz. 1992). The decision to sp; remove a member should be premised upon a change in status as a creditor, or a breach of or inability to perform fiduciary duties. Conflicts within a committee on issues of strategy or objectives ordinarily would not constitute cause for removal. These conflicts are intrinsic to the committee process and should be resolved within the committee.

The decision to remove or not to remove a committee member is committed to the discretion of the United States Trustee. No court approval of the removal is required. Unless that discretion is exercised arbitrarily or capriciously, the scope of judicial review of the United States Trustee's decisions in this area is extremely limited. See Campos-Guardado v. I.N.S. 809 F.2d 285, 289 (5th Cir. 1987), reh'g denied, 814 F. 2d 658 (5th Cir. 1987), cert. denied, 484 U.S. 826 (1987).

The Bankruptcy Judges, United States Trustees and Family Farmer Bankruptcy Act of 1986, Pub. L. No. 99-554 (Oct. 27, 1986), repealed 11 U.S.C. § 1102(c). That subsection had provided:

(c) On request of a party in interest and after notice and a hearing, the court may change the membership or the size of a committee appointed under subsection (a) of this section if the membership of such committee is not representative of the different kinds of claims or interests to be represented.

The legislative history accompanying this repeal makes it clear that the appointment of a creditors' committee is an administrative task to be performed by the United States Trustee and not the court. H.R. Rep. No. 764, 99th Cong., 2d Sess. 28 (1986). The court in In re Drexel, Burnham Lambert Group, Inc., 118 B.R. 209, 210 (Bankr. S.D.N.Y. 1990), found it noteworthy that the 1986 amendments left no indication in the statute that the court had any power left to add to or delete an unsecured creditor from a committee. The court in In re Victory Mkts., Inc., 196 B.R. 1 (Bankr. N.D.N.Y. 1995), appeal dismissed, 195 B.R. 9 (N.D.N.Y. 1996), reh'g denied, 1996 WL 365675 (N.D.N.Y. June 21, 1996), rejected case authority holding that 11 U.S.C. § 105(a) gives the court power to order the United States Trustee to appoint a creditor to a committee because "it is in derogation of the express statutory language of Code § 1102." Accord In re New Life Fellowship, Inc., 202 B.R. 994 (Bankr. W.D. Okla. 1996)(court could not upset the decision of the United States Trustee to appoint a separate bondholders' committee).

Fed. R. Bankr. P. 2020, which became effective August 1, 1991, provides for judicial review of the United States Trustee's acts or failures to act. It must be stressed, however, that rules of court do not create substantive rights that do not already exist elsewhere. In re Barney's, Inc., 197 B.R. 431, 438 (Bankr. S.D.N.Y. 1996) (citing 28 U.S.C. § 2075); In re Columbia Gas Sys., Inc., 133 B.R. 174, 176 (Bankr. D. Del. 1991). The Committee Note to this Rule expressly states that the Rule "is not intended to limit the discretion of the United States trustee, provided that the United States trustee's act is authorized by, and in compliance with, the Code, title 28, these rules, and other applicable law." The appointment of individual members of a creditors' committee is eminently a matter committed to the discretion of the United States Trustee. Neither title 11 nor title 28 state as a matter of substantive law who the United States Trustee must appoint to a creditors' committee. In re Gates Eng'g Co., 104 B.R. 655, 656 (Bankr. D. Del. 1989). Accordingly, the United States Trustee's decisions in this area are entitled to deference. Notwithstanding several cases finding de novo review appropriate (see, e.g., In re Sharon Steel Corp., 100 B.R. 767 (Bankr. W.D. Pa. 1989); In re Public Service Co. of New Hampshire, 89 B.R. 1014 (Bankr. D.N.H. 1988); In re Texaco, 79 B.R. 560 (Bankr. S.D.N.Y. 1987); In re McLean Indus., 70 B.R. 852 (Bankr. S.D.N.Y. 1987)), the correct standard of review where adequacy of representation is not the issue is the arbitrary and capricious standard applicable to administrative review. See In re Value Merchants, Inc., 202 B.R. 280 (E.D. Wis. 1996); In re Barney's, Inc., 197 B.R. 431 (Bankr. S.D.N.Y. 1996); In re America West Airlines, 142 B.R. 901, 902 (Bankr. D. Ariz. 1992); In re Plabell Rubber Prods., 140 B.R. 179 (Bankr. N.D. Ohio 1992); In re First Republic Bank Corp., 95 B.R. at 60; In re Public Service Co. of New Hampshire, 89 B.R. 1014 (Bankr. D.N.H. 1988).

On the other hand, the court may order the appointment of additional committees "if necessary to assure adequate representation of creditors." 11 U.S.C. § 1102(a)(2). The issue of adequate representation is a question of substantive law and may be determined by the court de novo. The United States Trustee, however, would actually appoint the members of any additional committees which the court found necessary. First Republic Bank Corp., 95 B.R. at 59.

There is no statutory authority for the proposition stated in In re Public Service Co., supra, that the power to order the appointment of additional committees includes the inherent power to provide the "lesser included remedy" of altering the composition of an existing committee. In re Public Service Co., 89 B.R. at 1021. The actual composition of the membership of any committee is an administrative task entrusted solely to the United States Trustee by statute. Committee composition may not be disturbed unless it is arbitrary and capricious.