## Facts

- Hills Stores Co. and related entities filed voluntary Chapter 11 petitions and continued operating as debtor-in-possession.
- The U.S. Trustee appointed a 15-member official unsecured creditors’ committee including banks, senior noteholders, trade creditors, and subordinated bondholders.
- Subordinated bondholders held four seats on the committee and had representation on each committee subcommittee.
- Nearly a year into the Chapter 11 case, certain subordinated bondholders moved under 11 U.S.C. § 1102(a)(2) for (a) appointment of a separate official subordinated bondholders’ committee or (b) an official subcommittee consisting solely of subordinated bondholders.
- The bondholders asserted their interests diverged from senior and trade creditors, claiming those groups would favor an early payout over maximizing long-term enterprise value.
- The bondholders also argued the committee failed to investigate preference actions and potential lender-liability claims against senior creditors.
- Opponents argued subordinated bondholders were already represented, the debtor was conducting preference analysis, and a new official body would add cost and disrupt negotiations.
- The parties proceeded on affidavits and waived live testimony; the court decided on the written record.

## Issues

1. Whether subordinated bondholders were “inadequately represented” by the existing official unsecured creditors’ committee such that § 1102(a)(2) required appointment of a separate official committee or official subcommittee for subordinated bondholders.

## Decision

- The court denied the motion.
- The court held subordinated bondholders were adequately represented on the existing official committee and its subcommittees.
- The court found asserted conflicts were common in Chapter 11 and, without concrete proof of actual inadequate representation, did not justify an additional official committee.
- The court concluded the record did not support a finding that the committee breached fiduciary duties by failing to investigate claims.
- The court gave weight to the late timing of the request and the administrative cost and disruption associated with adding an estate-funded official body.
- The court noted subordinated bondholders could protect their interests through informal organization and participation without creation of a new official committee.

## Legal Principles

- Under 11 U.S.C. § 1102(a)(2), appointment of additional committees is discretionary and warranted only when necessary to assure “adequate representation.”
- Divergent economic interests within an official creditors’ committee, standing alone, do not establish inadequate representation.
- An official creditors’ committee owes fiduciary duties to its constituency; a proven failure to investigate potentially valuable causes of action may constitute a breach in appropriate circumstances.
- A request for an additional official committee is less likely to be granted when brought late in the case and when it would increase administrative expense and risk delaying or complicating reorganization.
- Availability of non-official coordination and participation mechanisms weighs against creating an additional official committee funded by the estate.

## Conclusion

The court refused to create a separate official committee or official subcommittee for subordinated bondholders because they already had meaningful representation on the existing unsecured creditors’ committee, their allegations of conflict and investigative failure were not substantiated on the record, and the late-stage request threatened added cost and disruption without a sufficient showing of inadequate representation under § 1102(a)(2).


In re Hills Stores Co., 137 B.R. 4 (Bankr. S.D.N.Y. 1992)