In ordering reconstitution of an official creditors’ committee, Bankruptcy Judge Brian F. Kenney of Alexandria, Va., decided that at least one indenture trustee should serve on the committee although holders of 78% and 95% percent of two issues of bonds had signed a restructuring support agreement, or RSA.

The chapter 11 debtor owed $1.1 billion in funded debt, including $750 million on one issue of bonds and $250 million on another. In the larger bond issue, holders of 95% had signed the RSA. On the smaller issue, holders of 78% had signed the RSA.

The U.S. Trustee had appointed three unsecured creditors to the official committee. Evidently, none were bondholders, but one was a competitor. One committee member said it was selling the claim and would resign from the committee. It wasn’t clear whether the buyer would wish to serve on the committee.

The indenture trustee for the larger bond issue filed a motion asking Judge Kenney to reconstitute the committee by appointing it to the committee. The U.S. Trustee opposed, believing that the court would be intruding on its prerogative in forming a committee.

In his May 22 opinion, Judge Kenney pointed out how Congress amended Section 1102(a)(4) in 2005. Today, it reads in pertinent part:

On request of a party in interest and after notice and a hearing, the court may order the United States trustee to change the membership of a committee appointed under this subsection, if the court determines that the change is necessary to ensure adequate representation of creditors or equity security holders.

Judge Kenney noted how courts take several approaches to the interpretation of Section 1102(a)(4). He parted company with those that will not order the U.S. Trustee to change membership of the committee absent a showing of abuse of discretion by the government functionary. He said that “such a standard is not implied by the text of Section 1102(a)(4).”

Judge Kenney concluded that “adequate representation” requires having at least one of the indenture trustees on the committee, given how the “overwhelming majority of the debt” was held by bondholders. “Without at least one Indenture Trustee,” he said that “the Committee is simply not representative of the type of debt in this case.”

Judge Kenney held that the “RSAs are not a reason to exclude either of the Indenture Trustees from the Committee.” He overlooked the RSAs because neither indenture trustee was a signatory, and there was “no evidence, with respect to either Indenture Trustee, that the holders of the bonds who have signed the RSA will attempt to improperly influence the decisions of the Indenture Trustees as members of the Committee with fiduciary obligations to all the creditors.”

With regard to who should be on the committee, the U.S. Trustee argued that the court could not direct the appointment of an individual committee member. Although Section 1102(a)(4) now allows the court to “change the membership of a committee,” Judge Kenney decided that “the appointment of individual committee members is statutorily allocated to the U.S. Trustee, at least in the first instance.”

Judge Kenney directed the U.S. Trustee to appoint one or both of the indenture trustees to the committee, without telling the U.S. Trustee which one to appoint if there is only one new appointment.