Puerto Rico v. Franklin California Tax-Free Trust

PETITIONER: Commonwealth of Puerto Rico, et al.
RESPONDENT: Franklin California Tax-Free Trust, et al.
LOCATION: U.S. District Court for the District of Puerto Rico

DOCKET NO.: 15-233
DECIDED BY: Roberts Court (2016- )
LOWER COURT: United States Court of Appeals for the First Circuit

CITATION: 579 US (2016)
GRANTED: Dec 04, 2015
ARGUED: Mar 22, 2016
DECIDED: Jun 13, 2016

ADVOCATES:
Christopher Landau - for the petitioners
Matthew D. McGill - for the respondents

Facts of the case

Unlike states, the Commonwealth of Puerto Rico may not authorize its municipalities, including utilities, to declare bankruptcy and seek relief under Chapter 9 of the U.S. Bankruptcy Code. In June 2014, Puerto Rico enacted the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (Recovery Act), which expressly provided different protections for creditors than Chapter 9 of the U.S. Bankruptcy Code.

The plaintiffs in this case are a group of investors who collectively hold nearly two billion dollars in bonds issued by one of Puerto Rico’s public utilities, the Puerto Rico Electric Power Authority (PREPA), which could potentially file for bankruptcy under the Recovery Act. The plaintiffs sued Puerto Rico in district court and argued that Chapter 9 of the U.S. Bankruptcy Code, which prohibits state municipal debt restructuring laws from binding creditors without their consent, preempts the Recovery Act. The district court found in favor of the plaintiffs and enjoined the enforcement of the Recovery Act. The U.S. Court of Appeals for the First Circuit affirmed.

Question

Does Chapter 9 of the U.S. Bankruptcy Code, which doesn’t apply to Puerto Rico, nonetheless preempt the Puerto Rico statute that created a mechanism for public utilities to restructure their debts?

Media for Puerto Rico v. Franklin California Tax-Free Trust

Audio Transcription for Oral Argument - March 22, 2016 in Puerto Rico v. Franklin California Tax-Free Trust

Audio Transcription for Opinion Announcement - June 13, 2016 in Puerto Rico v. Franklin California Tax-Free Trust

John G. Roberts, Jr.:

Justice Thomas has our opinion this morning in case 15-233, Puerto Rico versus Franklin California Tax-Free Trust and the consolidated case.

Clarence Thomas:

This case comes to us on the Writ of Certiorari to United States Court of Appeals for the First Circuit.

In 2014, the Commonwealth of Puerto Rico enacted the Puerto Rico Corporation Debt Enforcement and Recovery Act.

The Recovery Act would permit Puerto Rico's insolvent public corporations to restructure their debts.

A group of investment funds and an investment manager filed two lawsuits alleging that the Recovery Act was preempted by Chapter 9 of the Federal Bankruptcy Code.

Chapter 9 governs municipal bankruptcies and it expressly prohibits states from enacting their own municipal bankruptcy schemes.

Both the District Court and the Court of Appeals held that Chapter 9 preempts the act.

In an opinion on file with the clerk today we affirm.

The definition of a state in the bankruptcy code includes Puerto Rico, except for the limited purpose of defining who maybe a debtor under Chapter 9 of this title, and that is a quote from Chapter 9 of course.

This limited exception unmistakably refers to who may be a debtor, the who may be a debtor provision, a provision that requires states to authorize their municipalities for bankruptcy, to file for bankruptcy.

Without that authorization a municipality does not qualify as a debtor for the purposes of Chapter 9.

The code's definition of a state clearly excludes Puerto Rico for purposes of that provision.

Puerto Rico, therefore, may not authorize its municipalities to seek Chapter 9 relief but the definition of a state does not exclude Puerto Rico for other provisions of the code.

Accordingly we hold that Puerto Rico is a state for the purposes of Chapter 9's preemption provision and we conclude that this preemption provisions preempts Puerto Rico's Recovery Act.

For these reasons and others set forth in our opinion we affirm the judgment of the First Circuit.

Justice Sotomayor has filed a dissenting opinion in which Justice Ginsburg has joined.

Justice Alito took no part in the consideration of this case.