Puerto Rico v. Franklin California Tax-Free Trust
136 S. Ct. 1938
| SCOTUS | 2016Background
- Puerto Rico and three government-owned utilities faced >$20 billion debt and declining access to capital; the Commonwealth’s Government Development Bank was fiscally strained.
- Puerto Rico enacted the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (Recovery Act, 2014) to permit court-supervised restructurings of public utilities’ debt, including mechanisms to bind holdout creditors upon specified creditor-approval thresholds.
- Holders of Puerto Rico Electric Power Authority bonds (investment funds) sued to enjoin enforcement, arguing federal bankruptcy law preempts the Recovery Act.
- The District Court enjoined the Recovery Act on preemption grounds; the First Circuit affirmed. The Supreme Court granted review.
- Central statutory provisions: Chapter 9 preemption clause (§ 903(1)); Chapter 9 eligibility/gateway (§ 109(c)); and the Bankruptcy Code definition of “State” (§ 101(52)), which includes Puerto Rico except “for the purpose of defining who may be a debtor under chapter 9.”
Issues
| Issue | Petitioner’s Argument (Puerto Rico) | Respondent’s Argument (Creditors/Government) | Held |
|---|---|---|---|
| Whether Puerto Rico is a “State” for purposes of Chapter 9’s preemption (§ 903(1)) | §101(52) excludes PR from Chapter 9; therefore §903(1) does not reach PR and Recovery Act is permissible | The §101(52) exception applies only to the §109 gateway (who may be a debtor); PR remains a “State” for other Chapter 9 purposes, including §903(1) | Puerto Rico is a “State” for §903(1); §903(1) preempts the Recovery Act |
| Scope of §101(52): does exclusion remove Puerto Rico from all of Chapter 9 or only from the §109 gateway? | The exclusion removes PR (and its municipalities) from Chapter 9 entirely, so Chapter 9 cannot affect PR | The exception targets the gateway function (state authorization under §109); it prevents PR from authorizing municipal Chapter 9 filings but does not remove PR from other Chapter 9 provisions | The exclusion is limited to the gateway: PR cannot authorize Chapter 9 debtors, but remains a “State” for other Chapter 9 provisions |
| Whether the Recovery Act binds “creditors” within the meaning of §903(1) (argument that without Chapter 9 debtors there are no federal “creditors”) | Because PR’s municipalities cannot commence Chapter 9 cases, they are not federal “debtors,” so federal definitions of “creditor” do not apply; §903(1) therefore does not prohibit the Recovery Act | Allowing that reading would nullify §903(1): States could evade federal preemption by barring municipal Chapter 9 access; the statutory definitions do not plausibly effect such a fundamental change | The Court rejects the argument; §903(1) still preempts state laws that bind nonconsenting creditors |
| Proper interpretive approach (textual/plain-meaning vs. contextual/scheme-based) | Context and Chapter structure show Congress removed PR from Chapter 9 entirely; preemption should not be read to strip PR of its only restructuring option | The statute’s plain text confines the §101(52) exception to the gateway; long-standing §903(1) preemption remains intact absent explicit congressional language | The Court applies textual/plain-meaning reading and holds the exception is narrow and limited to §109 gateway |
Key Cases Cited
- United States v. Ron Pair Enterprises, 489 U.S. 235 (statutory language controls where text is plain)
- Toibb v. Radloff, 501 U.S. 157 (statutory gateway provisions define which chapter applies)
- United States v. Bekins, 304 U.S. 27 (State authorization relevant to municipal bankruptcy constitutionality)
- Faitoute Iron & Steel Co. v. Asbury Park, 316 U.S. 502 (pre-1946 decision on state municipal composition schemes)
- Whitman v. American Trucking Assns., Inc., 531 U.S. 457 (courts should not infer major statutory changes absent clear text)
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (purposes and effects of bankruptcy relief)
- Utility Air Regulatory Group v. EPA, 573 U.S. 302 (statutory language read in context of statutory scheme)