Puerto Rico v. Franklin California Tax-Free Trust

579 U.S. 115, 195 L. Ed. 2d 298, 136 S. Ct. 1938, 2016 U.S. LEXIS 3777
CourtSupreme Court of the United States
DecidedJune 13, 2016
Docket15-233, 15-255
StatusPublished
Cited by191 cases

This text of 579 U.S. 115 (Puerto Rico v. Franklin California Tax-Free Trust) is published on Counsel Stack Legal Research, covering Supreme Court of the United States primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

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Puerto Rico v. Franklin California Tax-Free Trust, 579 U.S. 115, 195 L. Ed. 2d 298, 136 S. Ct. 1938, 2016 U.S. LEXIS 3777 (2016).

Opinions

Justice THOMAS

delivered the opinion of the Court.

The Federal Bankruptcy Code preempts state bankruptcy laws that enable insolvent municipalities to restructure their debts over the objections of creditors and instead requires municipalities to restructure such debts under Chapter 9 of the Code. 11 U.S.C. § 903(1). We must decide whether Puerto Rico is a “State” for purposes of this pre-emption provision. We hold that it is.

The Bankruptcy Code has long included Puerto Rico as a “State,” but in 1984 Congress amended the definition of “State” to exclude Puerto Rico “for the purpose of defining who may be a debtor under chapter 9.” Bankruptcy Amendments and Federal Judgeship Act, § 421(j)(6), 98 Stat. 368, now'codified at 11 U.S.C. § 101(52). Puerto Rico interprets this amended definition to mean that Chapter 9 no longer applies to it, so it is no longer a “State” for purposes of Chapter 9’s pre-emption provision. We hold that Congress’ exclusion of Puerto Rico from the definition of a “State” in the amended definition does not sweep so broadly. By excluding Puerto Rico “for the purpose of defining who may be a debtor under chapter 9,” § 101(52) (emphasis added), the Code prevents Puer-to Rico from authorizing its municipalities to seek Chapter 9 relief. Without that authorization, Puerto Rico’s municipalities cannot qualify as Chapter 9 debtors. § 109(c)(2). But Puerto Rico remains a “State” for other purposes related to Chapter 9, including that chapter’s preemption provision. That provision bars Puerto Rico from enacting its own municipal bankruptcy scheme to restructure the debt of its insolvent public utilities companies.

I

A

Puerto Rico and its instrumentalities are in the midst of a fiscal crisis. More than $20 billion of Puerto Rico’s climbing debt is shared by three government-owned public utilities companies: the Puerto Rico Electric Power Authority, the Puerto Rico Aqueduct and Sewer Authority, and the Puerto Rico Highways and Transportation Authority. For the fiscal year ending in 2013, the three public utilities operated with a combined deficit of $800 million. The Government Development Bank for Puerto Rico (Bank) — the Commonwealth’s government-owned bank and fiscal agent— has previously provided financing to enable the utilities to continue operating without defaulting on their debt obligations. But the Bank now faces a fiscal crisis of its own. As of fiscal year 2013, it had loaned nearly half of its assets to Puerto Rico and its public utilities. Puerto Rico’s access to capital markets has also been severely compromised since ratings agencies downgraded Puerto Rican bonds, including the utilities’, to noninvestment grade in 2014.

Puerto Rico responded to the fiscal crisis by enacting the Puerto Rico Corpora[1943]*1943tion Debt Enforcement and Recovery Act (Recovery Act) in 2014, which enables the Commonwealth’s public utilities to implement a recovery or restructuring "plan for their debt. 2014 Laws P.R. p. 371. See generally McGowen, Puerto Rico Adopts A Debt Recovery Act For Its Public Corporations, 10 Pratt’s J. Bkrtcy. Law 453 (2014). Chapter 2 of the Recovery Act creates a “consensual” debt modification procedure that permits the public utilities to propose changes to the terms of the outstanding debt instruments, for example, changing the interest rate or the maturity date of the debt. 2014 Laws P. R., at 428-429. In conjunction with the debt modification, the public utility must also propose a Bank-approved recovery plan to bring it back to financial self-sufficiency. Ibid. The debt modification binds all creditors so long as those holding at least 50% of affected debt participate in (or consent to) a vote regarding the modifications, and the participating creditors holding at least 75% of affected debt approve the modifications. Id., at 430. Chapter 3 of the Recovery Act, on the other hand, mirrors Chapters 9 and 11 of the Federal Bankruptcy Code by creating a court-supervised restructuring process intended to offer the best solution for the broadest group of creditors. See id., at 448-449. Creditors holding two-thirds of an affected class of debt must participate in the vote to approve the restructuring plan, and half of those participants must agree to the plan. Id., at 449.

B

A group of investment funds, including the Franklin California Tax-Free Trust,' and BlueMountain Capital Management, LLC, brought separate suits against Puer-to Rico and various government officials, including agents of the Bank, to enjoin the enforcement of the Recovery Act. Collectively, the plaintiffs hold nearly $2 billion in bonds issued by the Electric Power Authority, one of the distressed utilities. The complaints alleged, among other claims, that the Federal Bankruptcy Code prohibited Puerto Rico from implementing its own municipal bankruptcy scheme.

The District Court consolidated the suits and ruled in the plaintiffs’ favor on their pre-emption claim. 85 F.Supp.3d 577 (P R 2015). The court concluded that the preemption provision in Chapter 9 of the Federal Bankruptcy Code, 11 U.S.C. § 903(1), precluded Puerto Rico from implementing the Recovery Act and enjoined its enforcement. 85 F.Supp.3d, at 601, 614.

The First Circuit affirmed. 805 F.3d 322 (2015). The court examined the 1984 amendment to the definition of “State” in the Federal Bankruptcy Code, which includes Puerto Rico as a “State” for purposes of the Code “ ‘except for the purpose of defining who may be a debtor under chapter 9.’ ” Id., at 330-331 (quoting § 101(52); emphasis added). The court concluded that the amendment did not remove Puerto Rico from the scope of the pre-emption provision and held that the pre-emption provision barred the Recovery Act. Id., at 336-337. The court opined that it was up to Congress, not Puerto Rico, to decide when the government-owned companies could seek bankruptcy relief. Id., at 345.

We granted the Commonwealth’s petitions for writs of certiorari. 577 U.S. -, 136 S.Ct. 582, 193 L.Ed.2d 465 (2015).

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579 U.S. 115, 195 L. Ed. 2d 298, 136 S. Ct. 1938, 2016 U.S. LEXIS 3777, Counsel Stack Legal Research, https://law.counselstack.com/opinion/puerto-rico-v-franklin-california-tax-free-trust-scotus-2016.