Special Masters Are Needed In Bankruptcy, Part 4: Inherent Authority Should Not Be Denied

By: Donald L Swanson

This is the fourth 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 fourth article is on how federal courts have inherent authority to appoint special masters—and why that inherent authority should not be denied in bankruptcy cases.[Fn. 1]

Inherent Authority of Courts of Equity

The authority of courts to manage their dockets soundly and efficiently flows from the very nature of a judicial body and requires no special grant of power.

In fact, much of what courts do on a day-to-day basis is not even mentioned in any rule or statute—necessarily relying on inherent authority.  And courts have significant leeway under their inherent authority.

This inherent authority is well established and widely accepted in the federal judiciary.  And it includes the appointment of special masters.

Some History

The inherent authority of a court to appoint special masters began in English courts of equity.

In these United States, such authority became codified in the early 1800s: in Equity Rule 68, “Appointment and Compensation of Master,” and in Equity Rule 59, “Reference to Master-Exception, Not Usual.”  

And Fed.R.Civ.P. 53, titled “Masters,” developed as a modification of those equity rules.

Courts and Commentators

Courts and commentators have emphasized that, beyond Fed.R.Civ.P. 53, courts of equity have inherent power to appoint special masters.  Some commentators even suggest that Rule 53 is not applicable to pretrial phases of a civil lawsuit—but observe that federal courts have inherent authority to appoint special masters in pretrial matters, nonetheless.

As to the purpose behind Fed.R.Civ.P. 53, one commentator observes:

• “the Advisory Committee’s intent in drafting Rule 53 was to preserve the essentials of the system of referencing as it existed under the Federal Equity Rules between 1912 and 1938”; and
• the “essentials” of that system include appointing special masters to provide well-defined assistance to the courts on specific, narrow issues.

Need in Bankruptcy

Bankruptcy courts in complex cases need the very kind of assistance that special masters provide. 

And since bankruptcy courts are recognized as courts of equity, they have inherent authority to appoint special masters.

Bankruptcy courts have not relied upon this inherent authority to appoint special masters—presumably because of Fed.R.Bankr.P. 9031, since there is no other prohibition in any applicable law. 

The Bankruptcy Code does not prohibit the appointment of special masters.  Notably:

• the Bankruptcy Code expressly prohibits the appointment of receivers in § 105(b) (“a court may not appoint a receiver in a case under this title”); and
• so, if the drafters of the Bankruptcy Code had intended that special masters not be appointed in bankruptcy cases, Congress knew how to draft an express statutory prohibition to that effect—but it chose to not create such a prohibition.

There are many reasons for appointing special masters in complex bankruptcy cases.

Conversely, there are few-to-no sound reasons for denying the benefit of special masters in bankruptcy cases.

In fact, Rule 9031, which provides the sole prohibition against appointing special masters in bankruptcy, cites no reason for its denial—none whatsoever.

And many authorities conclude that no express grant of such authority is required because of the inherent authority held by every court.

The practical effect of Fed.R.Bankr.P. 9031 is to deny both the district courts and the bankruptcy courts the right to appoint a special master in bankruptcy cases.  Such denial:

• abridges the inherent power of both district and bankruptcy courts to utilize, as courts of equity, a traditional tool available to courts of equity; and
• more significantly, deprives debtors and creditors of the benefits of a traditional judicial resource.

No Authority to Prohibit Special Masters by Rule

Congress expressly authorizes the Supreme Court to prescribe rules for bankruptcy cases.  However, that Congressional authorization provides:

• “[s]uch rules shall not abridge, enlarge, or modify any substantive right.”

And the inherent power to appoint special masters is a long-standing and well-accepted substantive right.

Such substantive right is abridged, arguably without authority, by a procedural rule.

Conclusion

Accordingly, Fed.R.Bankr.P. 9031 should be abrogated and replaced by a new rule that permits the appointment of special masters in complex bankruptcy cases.

Such a change would:

• be consistent with the substantive and inherent rights of a court of equity; and
• correct the erroneous abrogation of a substantive right by procedural rule,  

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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).

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