Franklin California Tax-Free v. Commonwealth of Puerto Rico
805 F.3d 322
1st Cir.2015Background
- Puerto Rico enacted the Recovery Act in June 2014 to create a local debt-enforcement and restructuring regime for its public corporations, including PREPA, attempting to provide Chapter 9-like relief without Congress authorization.
- Plaintiffs hold nearly $2 billion in PREPA bonds and challenged the Recovery Act as preempted by the federal Bankruptcy Code, seeking declaratory relief and an injunction.
- The district court permanently enjoined the Recovery Act, ruling §903(1) preempts state municipal debt adjustment laws that bind creditors without consent.
- The 1984 Bankruptcy Amendments defined State to include Puerto Rico except for defining who may be a debtor under Chapter 9, creating a dispute whether §903(1) preemption applies to Puerto Rico post-amendment.
- The court held §903(1) preempts the Recovery Act, Puerto Rico may seek relief only through Congress, and §101(52) does not remove Puerto Rico from §903(1)’s reach.
- Concluding, the majority affirms the preemption and rejection of Puerto Rico’s self-styled gap-filling act, while noting Congress retains options for addressing Puerto Rico’s municipal insolvency.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does §903(1) preempt Puerto Rico’s Recovery Act? | §903(1) requires a federal remedy; Recovery Act binds creditors without consent. | Puerto Rico is outside Chapter 9; §903(1) shouldn't preempt island laws. | Yes, §903(1) preempts the Recovery Act. |
| Is Recovery Act a “State law” under §903(1) despite Puerto Rico’s 1984 amendment status? | Recovery Act fits §903(1) prohibition as a State law affecting creditor rights. | §903(1) does not apply cleanly due to Puerto Rico’s post-1984 status under §101(52). | Recovery Act remains preempted; §903(1) applies to Puerto Rico. |
| Does the 1984 amendment transform §903(1)’s preemption or otherwise immunize Puerto Rico? | Congress intended to allow Puerto Rico to have alternative solutions; no change to preemption.” | The 1984 amendments altered who could be a debtor, potentially affecting preemption. | No, the 1984 amendment does not eliminate §903(1)’s preemption. |
| Do conflict preemption or the Tenth Amendment alter the ruling? | Federal law should fully preempt Puerto Rico’s act. | State sovereignty concerns may be implicated; Tenth Amendment issues unresolved. | Conflict preemption supports preemption; Tenth Amendment concerns not necessary to resolve here. |
Key Cases Cited
- Cohen v. de la Cruz, 523 U.S. 213 (U.S. 1998) (preemption/read of statutory text; past bankruptcy practice not eroded without clear intent)
- Kellogg Brown & Root Servs. Inc. v. United States ex rel. Carter, 135 S. Ct. 1970 (U.S. 2015) (fundamental changes in scope not accomplished by subtle moves; textual clarity preferred)
- Dan’s City Used Cars, Inc. v. Pelkey, 133 S. Ct. 1769 (U.S. 2013) (illustrates preemption and the role of Congressional intent in overlapping schemes)
- CSX Transp., Inc. v. Easterwood, 507 U.S. 658 (U.S. 1993) (standard for preemption: conflict with federal law)
- Mass. Delivery Ass’n v. Coakley, 769 F.3d 11 (1st Cir. 2014) (preemption analysis in complex statutory schemes)