By: Donald L Swanson
This is the second in a series of four articles on why Fed.R.Bankr.P. 9031, titled “Masters Not Authorized,” needs to be amended to authorize the utilization of special masters in complex bankruptcy cases.
The focus of this second article is on how the exclusion of special masters from bankruptcy cases: (i) is without a sound reason, and (ii) is based on a history of haste and uncertainty.[Fn. 1]
Bankruptcy Rule 9031—The Prohibition
Fed.R.Bankr.P. 9031 is titled “Masters Not Authorized.”
And the one-sentence language of the entire rule is this:
- “Rule 53, F. R. Civ. P. does not apply in cases under the Code.”
Rule 53, F. R. Civ. P. is the Rule, titled “Masters,” that authorizes district courts to appoint special masters in complex cases to assist with case management tasks.
The Bankruptcy Code does not prohibit the use of special masters in bankruptcy. The only source of that prohibition is Rule 9031.
Reasons for the Rule 9031 Prohibition?
Rule 9031 provides neither guidance nor explanation on why its prohibition of special masters in bankruptcy cases exists. And there is precious little explanation from any other source.
–Committee Note
A Committee Note to Rule 9031 provide this one-sentence explanation:
- ”This rule precludes the appointment of masters in cases and proceedings under the Code.”
Such explanation merely adds the word “proceedings” to the word “cases” from the one-sentence language of Rule 9031—it adds no other information.
–A Bizarre Effect
A bizarre effect of the one-sentence language of Rule 9031, and the Committee’s one-sentence explanation, is this:
- they call into question the authority of even district courts to appoint special masters in bankruptcy cases.
It is difficult to believe that this was the intended result of Rule 9031, but it is the necessary result when the clear and unambiguous language of the rule is applied as written.
–Committee Preface
The only other published and official explanation for Rule 9031 comes from the Preface provided by the Advisory Committee to the then-proposed Rules of Bankruptcy Procedure.
In its discussion of Rule 9031, the Advisory Committee points to a completely-opposite provision in former Bankruptcy Rule 513, which makes FRCP 53 applicable in bankruptcy cases under the Bankruptcy Act of 1898.
Former Bankruptcy Rule 513 (promulgated under the Bankruptcy Act of 1898) said:
- “If a reference is made in a bankruptcy case by a judge to a special master, the Federal Rules of Civil Procedure applicable to masters apply.”
In proposing to reverse Rule 513 under the Bankruptcy Act, by Rule 9031 under the Bankruptcy Code, the Advisory Committee gives these two conclusory declarations as its sole explanation:
- “There does not appear to be any need for the appointment of special masters in bankruptcy cases by bankruptcy judges”; and
- “The Advisory Committee, therefore, has decided that former Rule 513 not be continued in the rules and that Rule 53 F. R. Civ. P. not be made applicable.”
The Advisory Committee gives us nothing more. Nothing.
Evolution of Bankruptcy Rules—Some History
The history of the Bankruptcy Rules may help explain why:
- there is not a more complete discussion from the Committee; and
- the Committee failed to recognize that the language of the rule is broad enough to prevent even district court judges from exercising its inherent power.
–Rules under Bankruptcy Act of 1898
The concept of having a formal, separately published set of rules to govern procedures in bankruptcy courts is a relatively recent one.
- Initially, the Bankruptcy Act of 1898 contains all the substantive and procedural rules of bankruptcy law—i.e., there are no separate bankruptcy rules of procedure.
- In 1964, Congress grants bankruptcy rulemaking authority to the Supreme Court—and for the first time, it was possible to draft a set of procedural rules for bankruptcy cases.
- Twelve years later (in 1976), the Supreme Court finally promulgates bankruptcy rules for the Bankruptcy Act (under Congress’s 1964 authorization), including Rule 513 and its special masters authorization for bankruptcy cases.
–Bankruptcy Code Creates Need for New Rules
The enactment of the Bankruptcy Code, with its extensive changes to bankruptcy laws, makes revisions to the 1976 bankruptcy rules an absolute necessity.
But the new bankruptcy rules must be hastily drawn (unlike the 12-years process for creating the prior set of bankruptcy rules). Here’s why.
- The Bankruptcy Code is enacted in 1978, with an effective date of October 1, 1979.
- The new Advisory Committee for creating a new set of bankruptcy rules begins its work on January 1, 1979—a mere nine months before the new rules must go into effect.
- To meet that urgency, the Advisory Committee proposes a set of interim rules in August of 1979—which are adopted as local rules and used to bridge the gap between the effective date of the Bankruptcy Code and the promulgation of a final set of bankruptcy rules.
- The Advisory Committee makes no effort—none whatsoever—at a detailed study of the prior rules to determine what modifications or deletions are needed.
—Northern Pipeline Intervenes
While the Advisory Committee is taking comments on its interim rules, the United States Supreme Court decides the landmark bankruptcy case of Northern Pipeline Construction Co. v. Marathon Pipe Line Co.[fn. 2].
In Northern Pipeline, the Supreme Court comes within one vote of declaring the entire Bankruptcy Code unconstitutional because of concerns over bankruptcy court jurisdiction issues.
Northern Pipeline causes great concern among the bankruptcy bench and bar.
But the Advisory Committee is unphased by Northern Pipeline and makes no changes because:
- it does not think its bankruptcy rules pertain to the jurisdiction issues raised by Norther Pipeline; and
- it hopes that proposed legislation will resolve the entire problem.
Had the Advisory Committee reviewed its work more thoroughly in light of Northern Pipeline, before sending the proposed rules to the Judicial Conference and the Supreme Court for review, it’s possible that matters, like the appointment of special masters, might have been discussed more thoroughly and different decisions made.
Rule 9031 Prohibition Applied
Efforts have been made to utilize special masters in bankruptcy cases, notwithstanding the Rule 9031 prohibition. But those efforts are almost entirely unsuccessful.
What follows are two examples of those efforts.
–In re White, An Unsuccessful Example
In re White Motor Credit Corp.[fn. 3] is a Chapter 11 case for a corporation and five affiliates facing 160 products liability suits in state and federal courts and the potential for many more suits to be filed.
The bankruptcy court wants to appoint a special master to develop a program for, (i) resolving the pending lawsuits, (ii) identifying and resolving the yet to be filed lawsuits, and (iii) conducting hearings on non-settled claims.
The court cites these reasons for wanting a special master:
- the inordinate amount of judicial time already being consumed by this case on a daily basis;
- the potential need for traveling to the residences of the parties and the witnesses; and
- the inappropriate use of judicial time for addressing matters of account and difficult computations of damages.
Such are the same types of reasons commonly used by district courts for appointing special masters.
Ultimately, the In re White bankruptcy court’s efforts to appoint a special master fail.
—In re American Colonial, A Positive Example
A case in which a bankruptcy court successfully appoints a special master is in the Puerto Rican bankruptcy, In re American Colonial Broadcasting Corp.[Fn. 4] The American Colonial Bankruptcy Court appoints a special master, at the creditor committee’s request, to negotiate and conduct the sale of two television stations.
Such a sale requires special expertise, and the court sees the need for a special master with that expertise.
The court appoints a special master but retains the power to make final decisions on whether to allow the sale and on what terms.
The appointment order is appealed by the losing bidder. But the appeal is unsuccessful because the order is not final and, thus, cannot be appealed without an applicable exception (and the Court of Appeals holds that no such exception exists).
In re American Colonial stands alone among reported bankruptcy cases (as of the 2002 date of the Delk article) in which a special master is appointed and actually performs the designated services.
Special Masters are Needed in Complex Bankruptcy Cases
Like district courts in non-bankruptcy cases, bankruptcy courts could benefit from utilizing special masters in complex cases.
In many different types of complex bankruptcy cases, there is a need for special master services like:
- estimating claims;
- computing damages;
- reviewing valuations; and
- addressing highly technical matters.
And when a highly technical element is involved, a special master with expertise in that element could be invaluable to the court.
The authority to meet such needs should not be denied in bankruptcy cases,
Conclusion
The history of bankruptcy rules in general, and of Fed.R.Bankr.P. 9031 in particular, create little-to-no confidence in the wisdom of Rule 9031’s prohibition against using special masters in bankruptcy.
And many complex cases appear in bankruptcy courts that could benefit from using special masters.
Accordingly, the Rule 9031 prohibition against special masters needs to be revisited and revoked.
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Footnote 1. Each of the articles in this series summarizes of a portion of this fascinating article by Paulette J. Delk: Special Masters in Bankruptcy The Case against Bankruptcy Rule 9031, 67 Mo. L. Rev., at 29-58 (2002).
Footnote 2. Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).
Footnote 3. In re White Motor Credit Corp, 11 B.R. 294 (Bankr., N.D. Ohio 1981).
Footnote 4. In re American Colonial Broadcasting Corp., 758 F.2d 794 (1st Cir. 1985).
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