By: Donald L Swanson
This is the third 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 third article is on how the evolution of the old bankruptcy referees into today’s bankruptcy courts shows why special masters are needed in complex bankruptcy cases—and should not have been prohibited.[Fn. 1]
The Evolution of Bankruptcy
The role and status of bankruptcy judges under the Bankruptcy Act of 1898 provides background for understanding:
- today’s Rule 9031 prohibition against special masters in bankruptcy cases; and
- why the Committee thought that there would be no need to make FRCP 53 applicable under the Bankruptcy Code.
Bankruptcy Referee as Special Master
Under the Bankruptcy Act, the person presiding over bankruptcy cases is the “referee in bankruptcy,” whose jurisdiction is limited:
- in corporate reorganizations, the “referee” serves only as a special master—to hear and report generally or upon specified matters to the district court judge.
So, former Bankruptcy Rule 513 under the Bankruptcy Act of 1898 made FRCP 53 applicable, rendering the “referee in bankruptcy” a special master appointed by the district court.
Bankruptcy Law Changes
Under a bankruptcy amendment in 1938, the duties and workload of the “referee in bankruptcy” increase tremendously, but the jurisdiction of the court remains limited.
In 1973, the title “referee in bankruptcy” changes to “United States bankruptcy judge” due, in part, to a recognition of the increased duties required of this position. Nevertheless, the new bankruptcy judges still have the same limited jurisdiction as the “referees” they are succeeding.
In 1978, Congress enacts the Bankruptcy Code—a dramatically new bankruptcy legislation that creates and confers very broad jurisdiction on the bankruptcy courts.
In enacting the Bankruptcy Code, Congress wants a more efficient bankruptcy system—and, therefore, vests broad powers and jurisdiction directly in the bankruptcy courts.
–Supreme Court
The U.S. Supreme Court doesn’t like, from the very beginning, the broad jurisdiction and powers granted by the Bankruptcy Code to bankruptcy courts . . . and the Supreme Court comes within one vote of declaring the entire Bankruptcy Code unconstitutional—in Northern Pipeline.[Fn. 2]
The Supreme Court’s plurality opinion in Northern Pipeline holds that the jurisdictional provisions of the Bankruptcy Code are unconstitutional—as a violation of the separation of powers. That’s because, the Supreme Court declares, the Bankruptcy Code vests Article III power in non-Article III judges. Under the Bankruptcy Code, bankruptcy judges:
- are not Article III judges because they lack lifetime tenure and protection against salary diminution; but
- have the power to do such Article III things as hear jury trials and issue final judgments.
–Code Amendments
In 1984, Congress amends the Bankruptcy Code to address the jurisdiction issues raised by Northern Pipeline.
The 1984 Amendments give federal district courts exclusive jurisdiction “over all cases under title 11” and nonexclusive jurisdiction “of all civil proceedings arising under title 11, or arising in or related to cases under title 11 .”
Such amendments:
- give the district courts exclusive jurisdiction over all property of the bankruptcy estate;
- declare each bankruptcy judge and court to be a “unit” of its district court;
- permit district courts to refer bankruptcy cases to bankruptcy courts; and
- allow bankruptcy courts to enter final judgments only in “core” proceedings.
–Rules Drafting
Meanwhile, bankruptcy courts are operating under, (i) rules adopted under the former Bankruptcy Act, and (ii) interim rules. And permanent Bankruptcy Rules are being drafted.
Northern Pipeline throws a wrench into that rules drafting process:
- the permanent Rules now need to consider issues raised by Northern Pipeline; and
- so, it may have been the haste and confusion of the day that led to the unexplained conclusion that special masters should not be appointed in bankruptcy cases.
Whatever the reason, Rule 9031 and its prohibition against special masters are the result, with no adequate explanation.
–The Result
And so . . . we have an important tool for managing complex cases, the special master, eliminated for bankruptcy cases:
- with virtually no explanation or justification;
- in a hastily-drafted Rule; and
- without consideration of the Rule’s significant impact.
No Comparable Role Exists in Bankruptcy
The Bankruptcy Code does not provide a position comparable to the special master.
Trustees and examiners are not special masters.
- Trustees are appointed because of a debtor’s bad acts—which wrests control of the bankruptcy case from the debtor in possession and places that control in the trustee; and
- Examiners are appointed to examine and report—that’s what they do. There is no other case-management role for an examiner.
Mediators can be appointed under the Federal Mediation Act (28 U.S.C. § 651 et seq.) and under local rules promulgated thereunder. But the role of a mediator is usually passive—i.e., limited to helping parties reach settlements of issues the parties identify and bring before the mediator for assistance. And a mediator acts independently from the court.
- Whereas, a special settlement master can be much more active and serves as an assistant to the court.
Conclusion
Special masters are needed in complex bankruptcy cases.
The history of bankruptcy court evolution shows why the prohibition against special masters in bankruptcy is unfounded and should be revoked.
——————
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).
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