Franklin California Tax-Free Trust v. Puerto Rico
85 F. Supp. 3d 577
D.P.R.2015Background
- Puerto Rico enacted the Public Corporation Debt Enforcement and Recovery Act ("Recovery Act") in June 2014 to provide two in‑statute restructuring procedures for Commonwealth public corporations (Chapters 2 and 3) and created a special court to confirm plans and bind classes of creditors.
- Plaintiffs (large holders of PREPA bonds totaling nearly $2 billion) hold bonds issued under the Puerto Rico Electric Power Authority Act (the "Authority Act") and a 1974 Trust Agreement that promise timely payment, liens on PREPA revenues, acceleration and receivership remedies, and prohibit senior liens.
- The Recovery Act: authorizes restructuring without unanimous creditor consent, annuls certain insolvency/receivership provisions, allows priming of existing liens in some circumstances, and contains suspension/automatic‑stay provisions that temporarily bar creditors’ remedies.
- Plaintiffs sued Commonwealth officials and PREPA seeking declaratory relief that the Recovery Act is (1) preempted by federal bankruptcy law (Bankruptcy Code §903), (2) violates the U.S. and Puerto Rico Contract Clauses, and (3) effects Takings; they also challenged provisions authorizing stays of federal proceedings.
- Court consolidated two cases, dismissed PREPA as a defendant for lack of standing (no imminent PREPA action), found stay‑of‑federal‑proceedings claims unripe, and proceeded to decide preemption, Contract Clause, and Takings issues.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Recovery Act is preempted by federal Bankruptcy Code §903(1) | §903(1) expressly forbids state laws that prescribe composition of municipal indebtedness that bind nonconsenting creditors; Recovery Act binds nonconsenting creditors | §101(52) and Chapter 9 structure show Puerto Rico was excluded or §903(1) applies only when a Chapter 9 case exists; Congress did not intend to reach Puerto Rico laws here | Recovery Act is expressly preempted by §903(1); summary judgment for plaintiffs on preemption; Recovery Act void under Supremacy Clause |
| Whether the Contract Clause is violated by the Recovery Act's impairments | Recovery Act substantially impairs contractual and statutory rights (payment promise, lien priority, receivership, remedies, ipso‑facto protections) and alternatives were available | Injury speculative until Act is invoked; impairment may not be substantial or central | Plaintiffs plausibly plead substantial impairment and that impairment is not shown to be reasonable and necessary given alleged alternatives; Contract Clause claims survive dismissal |
| Whether provisions suspending or staying federal court proceedings are unconstitutional | Such provisions could bar plaintiffs from federal forums; they seek declaration against any application that would enjoin federal suits | Claims are premature—no petition filed, and constitutional scope depends on particular application | Claims challenging suspension/stay provisions are unripe; dismissed without prejudice |
| Whether the Recovery Act effects a Takings (contract rights or lien) without compensation | Section 108(b) annuls right to seek receivership; §§129(d)/322(c) allow priming liens — both amount to takings | Right to receivership triggers only on default; lien priming hypothetical until actually ordered by special court | Takings claim based on receivership right states a plausible facial takings claim and survives dismissal; takings claim as to lien priming is not ripe as‑applied and facial claim fails because no present invasion |
Key Cases Cited
- Abbott Labs. v. Gardner, 387 U.S. 136 (legal ripeness framework)
- Texas v. United States, 523 U.S. 296 (ripeness; advisory‑opinion / hypothetical application limits)
- Aetna Life Ins. Co. of Hartford v. Haworth, 300 U.S. 227 (standing / concrete relief principle)
- U.S. Trust Co. of New York v. New Jersey, 431 U.S. 1 (Contract Clause and contractual property rights analysis)
- Faitoute Iron & Steel Co. v. City of Asbury Park, 316 U.S. 502 (historical municipal insolvency precedent and limits)
- Sturges v. Crowninshield, 17 U.S. 122 (early Contract Clause/insolvency principle)
- Keystone Bituminous Coal Ass'n v. DeBenedictis, 480 U.S. 470 (facial vs as‑applied takings)
- Williamson County Regional Planning Comm'n v. Hamilton Bank, 473 U.S. 172 (ripeness for as‑applied takings claims)
- Lingle v. Chevron U.S.A. Inc., 544 U.S. 528 (Takings Clause principles)
- Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400 (Contract Clause substantial‑impairment framework)