## Facts

- Daig Corporation (Daig) filed for Chapter 11 bankruptcy and continued operating as debtor-in-possession.
- In this U.S. Trustee district, the United States Trustee appointed an unsecured creditors’ committee.
- The initial committee included, among others, representatives of Taping, Inc., Centraire, Inc., INCO Electro Energy Corporation (INCO), and Lake Region Manufacturing Company (Lake Region).
- INCO asserted an unsecured claim against Daig that exceeded the total of all other secured and unsecured claims combined.
- Lake Region held the largest claim among Daig’s suppliers.
- After appointing Lake Region, the Trustee learned that Lake Region’s committee representative and principal operating officer, Joseph Fleischacker, was the father of Daig’s chairman, John Fleischacker.
- Based on that insider connection, the Trustee removed Lake Region from the committee.
- Daig moved under 11 U.S.C. § 1102(c) to change committee membership by (i) restoring Lake Region to the committee and (ii) removing INCO (and initially also Taping and Centraire).
- Daig argued Lake Region’s participation would be important in dealings with supplying creditors and suggested Lake Region could participate through a different representative (such as counsel) instead of Joseph Fleischacker.
- Daig also sought INCO’s removal because Daig disputed INCO’s claim and contended the claim’s size and origin (a stock purchase transaction) meant INCO should be negotiated with separately.
- By the hearing, Taping and Centraire had withdrawn from the committee, leaving only the requested restoration of Lake Region and removal of INCO for decision.

## Issues

1. In a U.S. Trustee district, may the bankruptcy court order the Trustee to restore Lake Region to the unsecured creditors’ committee after the Trustee removed it due to an insider connection, including by allowing a substitute, non-insider representative?
2. May the court remove INCO from the unsecured creditors’ committee under § 1102(c) based on the unusually large and disputed nature of its claim, absent proof that INCO’s interests actually conflict with those of other general unsecured creditors?

## Decision

- The court denied Daig’s request to restore Lake Region to the unsecured creditors’ committee.
- The court denied Daig’s request to remove INCO from the unsecured creditors’ committee.
- The motion was dismissed as moot as to Taping and Centraire because they had already withdrawn from the committee.

## Legal Principles

- In a U.S. Trustee district, the Trustee—not the bankruptcy court—has the primary responsibility to appoint and adjust membership of the unsecured creditors’ committee; the court should not replace the Trustee’s judgment without a strong showing that the committee is improperly constituted or not representative.
- An insider connection between the debtor and a committee member (or the member’s key officer/representative) can justify excluding that creditor from committee service because it risks the confidentiality and candor needed for committee discussions.
- Substituting a different individual to attend meetings may not cure the problem where the creditor’s participation still raises concerns about committee communications and divided loyalties.
- The fact that a creditor holds a very large claim, that the debtor disputes the claim, or that the claim arises from a different type of transaction does not alone justify removal from the committee under § 1102(c) without evidence of an actual divergence from the interests of general unsecured creditors.
- The committee is ordinarily composed of the largest unsecured claimholders willing to serve, and § 1102(c) is not a tool for a debtor to reshape the committee merely because it prefers separate negotiations with a particular creditor.

## Conclusion

The bankruptcy court declined to alter the U.S. Trustee’s committee decisions, refusing to restore Lake Region after the Trustee removed it due to an insider family relationship and refusing to remove INCO despite its massive, disputed claim, because Daig did not show that the committee was unrepresentative or that INCO’s interests actually conflicted with the general unsecured creditor class.


In re Daig Corp., 17 B.R. 41 (1981)