FRANKLIN CALIFORNIA TAX-FREE TRUST, et al., Plaintiffs, Appellees, v. COMMONWEALTH OF PUERTO RICO, et al., Defendants, Appellants, PUERTO RICO ELECTRIC POWER AUTHORITY (PREPA), Defendant.
Nos. 15-1218, 15-1221, 15-1271, 15-1272
United States Court of Appeals For the First Circuit
July 6, 2015
Before Howard, Chief Judge, Torruella and Lynch, Circuit Judges.
APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO [Hon. Francisco A. Besosa, U.S. District Judge]
Martin J. Bienenstock, with whom John E. Roberts, Andrea G. Miller, Proskauer Rose LLP, Mark D. Harris, Sigal P. Mandelker, Philip M. Abelson, and Ehud Barak were on brief, for Melba Acosta-Febo and John Doe, appellants.
Gabriel R. Avilés-Aponte and Tapia & Avilés on brief for Clayton P. Gillette and David A. Skeel, Jr., amici curiae.
Edilberto Berríos-Pérez and Berríos & Longo Law Office, P.S.C. on brief for Edilberto Berríos-Pérez, amicus curiae.
Matthew D. McGill, with whom David C. Indiano, Jeffrey M. Williams, Leticia Casalduc-Rabell, Indiano & Williams, PSC, Theodore B. Olson, Scott G. Stewart, Matthew J. Williams, and Gibson, Dunn & Crutcher LLP were on brief, for BlueMountain Capital Management, LLC, appellee.
Thomas Moers Mayer, with whom Kramer Levin Naftalis & Frankel LLP, Philip Bentley, David E. Blabey, Jr., Toro, Colón, Mullet, Rivera & Sifre, P.S.C., Manuel Fernández-Bared, and Linette Figueroa-Torres were on brief, for Franklin California Tax-Free Trust et al., appellees.
Marc E. Kasowitz, with whom Daniel R. Benson, Hon. Joseph I. Lieberman (ret.), Hon. Clarine Nardi Riddle (ret.), Andrew K. Glenn, and Kasowitz, Benson, Torres & Friedman LLP were on brief, for the Association of Financial Guaranty Insurers, amicus curiae.
Kate Comerford Todd, Steven P. Lehotsky, U.S. Chamber Litigation Center, Inc., William S. Consovoy, Thomas R. McCarthy, J. Michael Connolly, and Consovoy McCarthy PLLC on brief for the Chamber of Commerce of the United States of America, amicus curiae.
LYNCH, Circuit Judge. The defendants, the Commonwealth of Puerto Rico, its Governor, its Secretary of Justice, and the Government Development Bank (“GDB“), assert that Puerto Rico is facing the most serious fiscal crisis in its history, and that its public utilities risk becoming insolvent. Puerto Rico, unlike states, may not authorize its municipalities, including these utilities, to seek federal bankruptcy relief under Chapter 9 of the U.S. Bankruptcy Code.
Plaintiffs are investors who collectively hold nearly two billion dollars of bonds issued by one of the distressed public utilities, the Puerto Rico Electric Power Authority (“PREPA“). Fearing that a PREPA filing under the Recovery Act was imminent, they brought suit in summer 2014 to challenge the Recovery Act‘s validity and enjoin its implementation. The district court found in their favor and permanently enjoined the Recovery Act on the ground that it is preempted under
The primary legal issue on appeal is whether
We hold that
Defendants argue that this leaves Puerto Rico without relief. Although
I.
Procedural History
Two groups of PREPA bondholders sued almost immediately following the Recovery Act‘s passage to prevent its enforcement. PREPA had issued their bonds pursuant to a trust agreement with the U.S. Bank National Association. The bondholders allege that the very enactment of the Recovery Act impaired these contractual obligations by abrogating certain protections that were promised in the event of default.
Management, LLC (“BlueMountain“), for itself and on behalf of the funds it manages, filed on July 22, 2014. Together, the Franklin plaintiffs and BlueMountain hold nearly two billion dollars in PREPA bonds.
Both the Franklin plaintiffs and BlueMountain sought declaratory relief under
The district court issued an order and opinion in both cases on February 6, 2015, resolving the motions to dismiss and the
Franklin plaintiffs’ outstanding cross-motion for summary judgment. Franklin Cal. Tax-Free Trust, 2015 WL 522183, at *1. It entered judgment in the Franklin case on February 10, 2015. Franklin Cal. Tax-Free Trust, 2015 WL 574008, at *1.
As relevant here, the district court held that the Recovery Act was preempted by federal law and permanently enjoined its enforcement. It also denied the motion to dismiss the Contracts Clause claim and one of the Franklin plaintiffs’ Takings claims.
II.
Because the appeal presents a narrow legal issue, we summarize only those facts as are necessary. We do not address in any detail the extent of the fiscal crisis facing the Commonwealth, PREPA, or other Commonwealth entities. We begin with the considerations shaping the state-authorization requirement of
A. The History of Federal Municipal Bankruptcy Relief, and the State-Authorization Requirement
Modern municipal bankruptcy relief is shaped by two features: the difficulties inherent in enforcing payment of municipal debt, and the historic understanding of constitutional limits on fashioning relief. M.W. McConnell & R.C. Picker, When Cities Go Broke: A Conceptual Introduction to Municipal Bankruptcy, 60 U. Chi. L. Rev. 425, 426-28 (1993). The difficulties arise because municipalities are government entities, and so the methods for addressing their insolvency are limited in ways that the methods for addressing individual or corporate insolvency are not.
For these reasons, municipalities remained completely outside any bankruptcy regime for much of the nation‘s history. See id. at 427-28. Indeed, the prevailing assumption was that the constitutional limitations precluded either level of government, state or federal, from enacting a municipal bankruptcy regime. See id. States could not provide an effective solution to the “holdout problem” presented by insolvency because doing so “would [require] impair[ing] the obligation of contracts” in violation of the Contracts Clause.
on the other hand, might interfere with states’ rights under the Tenth
The problems created by this absence of municipal bankruptcy relief became acute during the Great Depression. And so, in 1933, Congress enacted Chapter 9‘s predecessor to provide to states a mechanism for addressing municipal insolvency that they could not create themselves. See McConnell & Picker, 60 U. Chi. L. Rev. at 427-29, 450-54 (summarizing the history).
Although it had a rocky start, see, e.g., Ashton, 298 U.S. at 530-32 (invalidating the initial act), Congress eventually succeeded in avoiding a Tenth Amendment problem. It did so in part by requiring a state‘s consent in the federal municipal bankruptcy regime before permitting municipalities of that state to seek relief under it, and in part by emphasizing that the statute did not effect “‘any restriction on the powers of the States or their arms of government in the exercise of their sovereign rights and duties.‘” See, e.g., United States v. Bekins, 304 U.S. 27, 49-54 (1938) (quoting H.R. Rep. No. 75-517, at 2 (1937); S. Rep. No. 75-911, at 2 (1937)) (recognizing that this created a “cooperati[ve]” scheme); cf. McConnell & Picker, 60 U. Chi. L. Rev. at 452-53.
This is the origin of the state-authorization requirement of
This requirement of state consent is based on reason: a state might instead decide to bail out an ailing municipality, if its own fiscal situation permits, to avoid the negative impact that a municipal bankruptcy would have on that state‘s еconomy and other municipalities. See C.P. Gillette, Fiscal Federalism, Political Will, and Strategic Use of Municipal Bankruptcy, 79 U. Chi. L. Rev. 281, 302-08 (2012) (explaining the problem of “debt contagion“).
requirement not only addresses constitutional difficulties by making Chapter 9 a “cooperati[ve]” state-federal scheme, Bekins, 304 U.S. at 49-54, it also promotes state sovereignty by preventing municipalities from strategically seeking (or threatening to seek) federal municipal relief to “reduce the conditions that states place on a proposed bailout,” Gillette, 79 U. Chi. L. Rev. at 285-86.
B. Puerto Rico Municipalities Under the Code: 1938-1984
Puerto Rico was granted the authority to issue bonds, and to authorize its municipalities to issue bonds, in 1917.
of Mar. 2, 1917, ch. 145, § 3, 39 Stat. 951, 953 (codified as amended at
although the modern Code omitted a definition of the term “State” from its enactment in 1978 until it was re-introduced in 1984, most commentators agree that this did not affect Puerto Rico‘s ability during that time to provide its municipalities authorization.
(codified as amended at
This changed in 1984, when Congress re-introduced a definition of “State” to the Code.
Compare id., with Act of June 22, 1938, Pub. L. No. 696, ch. 575, § 1(29), 52 Stat. 840, 842. As a result of this exception, Puerto Rico municipalities became expressly (though indirectly) forbidden from filing under Chapter 9 absent further congressional action: the change deprived Puerto Rico of the power to grant its municipalities the authorization required by
C. The Recovery Act: Puerto Rico‘s Stated Attempt to “Fill the Gap”
Facing a fiscal crisis and lacking the power to authorize its municipalities to seek Chapter 9 relief, the Commonwealth enacted the Recovery Act in June 2014, to take effect immediately. Somewhat modeled after Chapter 9, but with significant differences, the Recovery Act “establish[ed] a debt enforcement, recovery, and restructuring regime for the public corporations and other instrumentalities of the Commonwealth of Puerto Rico during an economic emergency.” Recovery Act, Preamble (translation provided by the parties); id., Stmt. of Motives, § E. In particular, the Act was intended to ameliorate the fiscal situations of several distressed Puerto Rican public corporations whose combined deficit in 2013 totaled $800 million, and whose combined debt reaches $20 billion: PREPA, the Aqueduct and Sewer Authority (“PRASA“), and the Highways and Transportation Authority (“PRHTA“). Id., Stmt. of Motives, § A.
The Recovery Act provides two methods for restructuring debt: Chapter 2 “Consensual Debt Relief,” and Chapter 3 “Debt Enforcement.” Id., Preamble. Although defendants say these serve as a substitute for Chapter 9, both Chapter 2 and Chapter 3 relief under the Recovery Act appear to provide less protection for creditors than the federal Chapter 9 counterpart. See L.S. McGowen, Puerto Rico Adopts a Debt Recovery Act for Its Public Corporations, 10 Pratt‘s J. Bankr. L. 453, 460-62 (2014). This is one form of harm that plaintiffs say the Recovery Act has caused them.
For example, Chapter 2 relief under the Recovery Act purports to offer a “consensual debt modification procedure” leading to a recovery plan that would only become binding “with the consent of a supermajority” of creditors. Recovery Act, Stmt. of Motives, § E. But this is belied by the provisions: Chapter 2 permits a binding
Chapter 3 relief, on the other hand, is a court-supervised process designed to mirror, in some ways, Chapter 9 and Chapter 11 of the federal Code. Id., Stmt. of Motives, § E. But while Chapter 3 debtors, like federal Chapter 9 debtors, may avoid certain contractual claims, protections for creditors are again reduced. Compare, e.g., id. §§ 325, 326, with
Municipalities that the Commonwealth may not authorize for federal Chapter 9 relief are nonetheless purportedly made eligible by the Recovery Act to seek both Chapter 2 and 3 relief, either simultaneously or sequentially, with approval from the GDB.
Recovery Act, §§ 112, 201(b), 301(a). Unlike the federal Code, the Recovery Act also expressly permits the Governor to institute an involuntary proceeding if the GDB determines that doing so is in the best interest of both the distressed entity and the Commonwealth.
Plaintiffs argue that the very enactment of these and other provisions cause them harm in several ways: by denying them the protection for which they bargained under the Trust Agreement, by denying them the protection to which they would be entitled under federal relief, and by injecting uncertainty into the bond market that reduces their bargaining position to address pending default. See McGowen, 10 Pratt‘s J. Bankr. L. at 460-61 (discussing other examples, including the lack of protection for holders of liens on revenue should the municipality need to obtain credit to perform public functions).
III.
A. Jurisdiction
We have appellate jurisdiction over the final judgment granting summary judgment and issuing a permanent injunction in favor of the Franklin plaintiffs under
We conclude that the defendants were correct in conceding ripeness: The plaintiffs allege that the Recovery Act itself impairs the terms of the agreements governing the PREPA bonds. Compare, e.g., Authority Act,
B. Preemption under § 903(1)
Puerto Rico may not enact its own municipal bankruptcy laws to cover the purported gap created by the 1984 amendment if such laws are preempted by the federal Bankruptcy Code.
Whether a federal law preempts a state law “is a question of congressional intent.” Hawaiian Airlines, Inc. v. Norris, 512 U.S. 246, 252 (1994). We begin with the statutory language, which often “contains the best evidence of Congress’ pre-emptive intent.” Mass. Delivery Ass‘n, 769 F.3d at 17 (quoting Dan‘s City Used Cars, Inc. v. Pelkey, 133 S. Ct. 1769, 1778 (2013)) (internal quotation marks omitted). We also consider “the clause‘s purpose, history, and the surrounding statutory scheme.” Id.
The relevant provision,
There is no disputing that the Recovery Act is a “law prescribing a method of composition of indebtedness” of eligible Puerto Rico municipalities that may “bind” said municipalities’ creditors without those creditors’ “consent.” And, because “State” is defined to include Puerto Rico under
The context and history of this provision confirm this construction -- that this provision was intended to have a preemptive effect. Cf. Dan‘s City, 133 S. Ct. at 1778; Cohen v. de la Cruz, 523 U.S. 213, 221 (1998). Context and history also cоnfirm that our construction is consistent with the previous constructions of this provision, and so, absent clear congressional intention to modify the bankruptcy law, we “will not read the Bankruptcy Code to erode past bankruptcy practice.” Cohen, 523 U.S. at 221 (citation and internal quotation marks omitted); see also Dewsnup, 502 U.S. at 419 (“When Congress amends the bankruptcy laws, it does not write ‘on a clean slate.‘” (quoting Emil, 318 U.S. at 521)).
The Code, at
Congress enacted Section 83(i) to restore what had been believed to be the pre-Faitoute status quo by expressly prohibiting state municipal bankruptcy laws adjusting creditors’ debts without their consent.19 See, e.g., H.R. Rep. No. 79-2246, at 4 (1946) (“State adjustment acts have been held to be valid, but [o]nly under a Federal law should a creditor be forced to accept such an adjustment without his consent.” (emphasis added)). And Congress sought to preserve Section 83(i) when it re-codified the section as
These provisions on their face barred Puerto Rico and the Territories, just as they did the states, from enacting their own versions of Chapter 9 creditor debt adjustment. From the time of its enactment in 1946, Section 83(i)‘s prohibition on “State law[s] prescribing a method of composition of indebtedness” expressly applied to Puerto Rico law because “State” had been defined tо include the “Territories and possessions,” like Puerto Rico, to which the Bankruptcy Act was applicable. See Act of June 22, 1938, Pub. L. No. 696, ch. 575, § 1(29), 52 Stat. at 842 (defining “States“); Act of July 1, 1946, Pub. L. No. 481, ch. 532, sec. 83(i), 60 Stat. 409, 415 (prohibiting “State law[s] prescribing a
The re-codification of this provision,
There is little doubt that
The question is whether the preemption provision of
The legislative history is silent as to the reason for the exception set forth in the 1984 amendment. One apparent possibility concerns the different constitutional status of Puerto Rico. Because of this different status, the limitations on Congress‘s ability to address municipal insolvency in the states discussed above are not directly applicable to Puerto Rico. United States v. Rivera Torres, 826 F.2d 151, 154 (1st Cir. 1987); see also Harris v. Rosario, 446 U.S. 651, 651-52 (1980) (per curiam). Accordingly, Congress may wish to adopt other -- and possibly better -- options to address the insolvency of Puerto Rico municipalities that are not available to it when addressing similar problems in the states. See Rivera Torres, 826 F.2d at 154; cf. McConnell & Picker, 60 U. Chi. L. Rev. at 494-95 (arguing that because Chapter 9 “leaves control in the hands of the state” and because “[t]he bankruptcy court lacks the powers typically given to state municipal receivers,” “[t]he structure for making decisions that led to financial problems continues“).
Our construction is consistent with a congressional choice to exercise such other options “pursuant to the plenary powers conferred by the Territorial Clause.” Rivera Torres, 826 F.2d at 154. If Puerto Rico could determine the availability of Chapter 9 for Puerto Rico municipalities, that might undermine Congress‘s ability to do so. Cf. Gillette, 79 U. Chi. L. Rev. at 285-86 (discussing the strategic use of municipal bankruptcy relief to avoid other solutions). Similarly, Congress‘s ability to exercise such other options would also be undermined if Puerto Rico could fashion its own municipal bankruptcy relief. Cf. id. The 1984 amendment ensures that these options remain open to Congress by denying Puerto Rico the power to do either.24 Cf. id.
Our construction follows straightforwardly from the plain text and is confirmed by both statutory history and legislative history. Nonetheless, the defendants object to it on two grounds.
First, they offer a novel argument in light of the Bankruptcy Code‘s definition of “creditor” that the provision only applies to сreditors of entities who have or could have filed for Chapter 9 relief: because Puerto Rico cannot authorize its municipalities to become “debtors,” those municipalities’ bondholders cannot be “creditors,” and so the Recovery Act does not bind “creditors” in violation of
Neither attempt succeeds. If Congress had wanted to exclude Puerto Rico from
1. Who May Be “Creditors” under § 903(1)
Ignoring other language in the Code, the defendants’ first argument begins by observing that the Bankruptcy Code defines “creditor” in relation to “debtor.”
This argument ignores congressional language choices, as well as context, and proves too much.26 Although “[s]tatutory definitions control the meaning of statutory words . . . in the usual case,” Burgess, 553 U.S. at 129-30 (second alteration in original) (quoting Lawson v. Suwannee Fruit & S.S. Co., 336 U.S. 198, 201 (1949)), we should not apply statutory definitions in a manner that directly undermines the legislation, Philko Aviation, Inc. v. Shacket, 462 U.S. 406, 411-12 (1983) (citing Lawson, 336 U.S. at 201). But that is exactly what defendants ask us to do.27
Construing “creditor” in
Nor does a reference to the changes in 1978 or 1984 make this argument any more plausible. The 1978 version similarly defined “debtor” as a “person or municipality concerning which a case under this title has been commenced,” and “creditor” in relation to a “debtor” against whom the creditor had a claim “that arose at the time of or before the order for relief.” Bankruptcy Reform Act of 1978, §§ 101(9), 101(12), 92 Stat. at 2550-51 (codified at
Where statutory definitions give rise to such problems, a term may be given its ordinary meaning.28 Philko Aviation, 462 U.S. at 411-12. Doing so resolves the problem: a “creditor” is simply “[o]ne to whom a debt is owed.”29
As a final effort, the defendants resort to the presumption against preemption. See Antilles Cement Corp. v. Fortuño, 670 F.3d 310, 323 (1st Cir. 2012). But “[p]reemption is not a matter of semantics.” Wos v. E.M.A. ex rel. Johnson, 133 S. Ct. 1391, 1398 (2013). Puerto Rico “may not evade the preemptive force of federal law by resorting to a creative statutory interpretation or description at odds with the statute‘s intended operation and effect.” Id. This is particularly true where, as here, the presumption is weak, if present at all. See United States v. Locke, 529 U.S. 89, 108 (2000) (citing Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977)) (holding that the presumption is weaker, if triggered at all, where there is not a tradition of state legislation); Ry. Labor Execs.’ Ass‘n v. Gibbons, 455 U.S. 457, 472-73 & n.14 (1982) (noting the nearly exclusive federal presence in the bankruptcy field because of Contracts Clause); see also McConnell & Picker, 60 U. Chi. L. Rev. at 427-28 (noting that for much of the nation‘s history it was thought that states were precluded from enacting municipal bankruptcy legislation). In any event, Congress was quite clear in the Bankruptcy Code that Puerto Rico was to be treated like a state, except for the power to authorize its municipalities to file under Chapter 9.
2. “State law” under § 903(1)
Defendants’ second argument is that Puerto Rico laws, like the Recovery Act, are not really “State law[s]” for purposes of
The terms of
Relying on the context of
The defendants further argue that the presumption against preemption bolsters this reasoning and provides a reason to adopt this argument. See Antilles Cement, 670 F.3d at 323. Indeed, they argue that the presumption applies to this case with particular force because “Title 11 suspends the operation of state insolvency laws except as to those classes of persons specifically excluded from being debtors under the Code.” In re Cash Currency Exch., Inc., 762 F.2d 542, 552 (7th Cir. 1985) (holding that currency exchanges were not excluded from being debtors under the Code, such that their filing under Chapter 11 was permitted, and rejecting the argument that a state insolvency law might preclude such exchanges from filing). “[T]o permit the blocking of [a] state reorganization herein,” defendants argue, “would be tantamount to imposing a federal reorganization which is clearly forbidden by the Act‘s exemption” of Puerto Rico municipalities, and is “inconsistent with the congressional scheme of the Bankruptcy Act” which sought to provide to states a mechanism that was unavailable under the Contracts Clause. In re Bankers Trust Co., 566 F.2d 1281, 1288 (5th Cir. 1978) (discussing the Bankruptcy Act‘s “exemption of savings and loan associations“); see generally McConnell & Picker, 60 U. Chi. L. Rev. 425 (explaining how the federal law attempts to provide states with a mechanism to solve the holdout problem of municipal bankruptcy).
To accept the defendants’ reading, we must accept one of the two following propositions: Either states that do not authorize their municipalities to file for Chapter 9 relief are similarly “exempted,” and so not barred by
We have already rejected the first proposition, for the reasons stated above. The second is undermined by the very presumption against preemption that defendants seek to employ: field preemption is generally disfavored absent clear intent, and is, in any event, unnecessary in light of
Defendants’ second argument fails for another, related reason. For if field preemption of municipal bankruptcy exists by virtue of the availability of Chapter 9, the defendants must show that it does not apply to Puerto Rico. This they cannot do.
Unlike state bankruptcy laws governing banks and insurance companies, which are not preempted by the federal Code in light of congressional language which directly and expressly excludes them from the Code,
3. Conflict Preemption
Before moving on, we pause to note that defendants’ arguments fail in any event, for they assume that a law containing the provisions of the Recovery Act, so long as it is passed by either Puerto Rico or the District of Columbia, is not otherwise preempted. But even where an express preemрtion provision does not apply, federal law preempts state laws that “stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” See Pac. Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm‘n, 461 U.S. 190, 204 (1983) (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)) (internal quotation marks omitted). Where this occurs, conflict preemption also applies. See In re Celexa & Lexapro Mktg. & Sales Practices Litig., 779 F.3d 34, 40 (1st Cir. 2015) (citing Freightliner Corp. v. Myrick, 514 U.S. 280, 287 (1995)).
Conflict preemption applies here because the Recovery Act frustrates Congress‘s undeniable purpose in enacting
That conflict preemption applies confirms our conclusion that Congress did not remove Puerto Rico and the District of Columbia from the express reach of
D. Tenth Amendment Concerns
Finally, defendants argue that the canon of constitutional avoidance weighs against our view of congressional intent as to preemption. They argue that if
If a state composition procedure does not run afoul of the [C]ontracts [C]lause, then municipal financial adjustment under a state procedure should be a permissible exercise of state power, and a congressional enactment prohibiting that exercise would be congressional overreaching in violation of the
Tenth Amendment .
Id.; cf. City of Pontiac Retired Emps. Ass‘n v. Schimmel, 751 F.3d 427, 430-31 (6th Cir. 2014) (en banc) (per curiam) (declining to reach the issue on appeal).
Our construction leaves this question open and we need not resolve it in this case.32 The limits of the
IV.
We observe, in closing, that municipal bankruptcy regimes run a particularly difficult gauntlet between remedying the “holdout problem” among creditors that bankruptcy is designed to resolve, and avoiding the “moral hazard” problem presented by the availability of bankruptcy relief -- namely, “the tendency of debtors to prefer to devote their resources to their own interests instead of repaying their debts.” See McConnell & Picker, 60 U. Chi. L. Rev. at 426.
In creating federal Chapter 9 relief for states, Congress‘s ability to effectively run this gauntlet was constrained by our federalist structure and the limitations posed by the
In denying Puerto Rico the power to choose federal Chapter 9 relief, Congress has retained for itself the authority to decide which solution best navigates the gauntlet in Puerto Rico‘s case. The 1984 amendment ensures Congress‘s ability to do so by preventing Puerto Rico from strategically employing federal Chapter 9 relief under
We affirm. No costs are awarded.
- Concurring Opinion Follows -
TORRUELLA, Circuit Judge (Concurring in the judgment).
Since at least 1938, the definition of the term “States” in § 1(29) of the Bankruptcy Act included the Territories and possessions of the United States, making Puerto Rico‘s municipalities eligible for federal bankruptcy protection.33 All parties to this case agree that this is so. As provided in
Because there is no dispute that under the pre-1984 federal bankruptcy laws, Puerto Rico had -- as did all the states -- the power to authorize its municipalities to file for the protection of Chapter 9, I agree with the majority‘s conclusion that the 1984 Amendments are the “key to this case.”
Although I also agree that Puerto Rico‘s Recovery Act contravenes
Furthermore, to assume that the 1984 Amendments are a valid exercise of Congress‘s powers to manage the local financial affairs of Puerto Rico‘s municipalities is inconsistent with this court‘s long-lasting Commonwealth-endorsing case law. Finally, I also take issue with the majority‘s proposal that Puerto Rico simply ask Congress for relief; such a suggestion is preposterous given Puerto Rico‘s exclusion from the federal political process.
I. Congress‘s Uniform Power under the Bankruptcy Clause
In enacting the 1984 Amendments, Congress acted pursuant to the power enumerated in the Bankruptcy Clause, which states that “Congress shall have the power . . . [t]o establish . . . uniform laws on the subject of bankruptcies throughout the United States.”
Even if we did turn to legislative history, there is little in the Federalist Papers, or elsewhere in our canonical sources, to aid us in finding any hidden meaning to the clear language of the Bankruptcy Clause.41 This gives added weight to the conclusion that the language in the Clause means what it unequivocally states: bankruptcy laws must be uniform throughout the United States or else are invalid. See Daniel A. Austin, Bankruptcy and the Myth of “Uniform Laws“, 42 Seton Hall L. Rev. 1081, 1141-47 (2012); Judith Schenck Koffler, The Bankruptcy Clause and Exemption Laws: A Reexamination of the Doctrine of Geographic Uniformity, 58 N.Y.U. L. Rev. 22, 99 (1983).
Although Congress‘s powers under the Bankruptcy Clause are broad,42 they are nonetheless limited by the Clause‘s uniformity requirement, which is geographical in nature. Ry. Labor Execs. Ass‘n v. Gibbons, 455 U.S. 457, 471 (1982) (“A law can hardly be said to be uniform throughout the country if it applies only to one debtor and can be enforced only by the one bankruptcy court having jurisdiction over the debtor.” (citing In Re Sink, 27 F.2d 361, 363 (W.D. Va. 1928), appeal dismissed per stipulation, 30 F.2d 1019 (4th Cir. 1929))). “The uniformity requirement . . . prohibits Congress from enacting a bankruptcy law that . . . applies only to one regional debtor. To
II. The 1984 Amendments Fail the Rational Basis Requirement
The non-uniform treatment of Puerto Rico under the bankruptcy laws not only violates the Bankruptcy Clause, but also fails the rational basis requirement. As explained above, Harris, 446 U.S. at 651-52, and Califano, 435 U.S. at 5, held that Congress may legislate differently for Puerto Rico, as long as it has a rational basis for such disparate treatment. These were equal protection and substantive due process cases brought by U.S. citizens of Puerto Rico who challenged Congress‘s discriminatory treatment in certain welfare programs. The plaintiffs in these cases claimed to have been discriminated against based on their classification as Puerto Ricans, an insular minority purportedly subject to heightened scrutiny. However, the Supreme Court rejected their argument, holding that, pursuant to Congress‘s powers under the Territorial Clause, only rational basis review is warranted when considering thе validity of a statute that treats Puerto Rico differently. Harris, 446 U.S. at 651-52; Califano, 435 U.S. at 5.43
It is black letter law that this tier of scrutiny “is a paradigm of judicial restraint,” FCC v. Beach Commc‘ns, Inc., 508 U.S. 307, 314 (1993), and courts should not question “[r]emedial choices made by . . . legislative . . . bod[ies] [unless] ‘there exists no fairly conceivable set of facts that could ground a rational relationship between the challenged classification and the government‘s legitimate goals.‘” Medeiros v. Vincent, 431 F.3d 25, 29 (1st Cir. 2005) (quoting Wine and Spirits Retailers, Inc. v. Rhode Island, 418 F.3d 36, 54 (1st Cir. 2005)).
This implies that Congress‘s justification for its legislative actions need not be expressly articulated, and thus the action of removing Puerto Rico‘s power to authorize its municipalities to file under Chapter 9 must be allowed if there is any set of conceivable reasons rationally related to a legitimate interest of Congress. See Beach Commc‘ns, 508 U.S. at 313 (“[A] statutory classification that neither proceeds along suspect lines nor infringes fundamental constitutional rights must be upheld against equal protection challenges if there is any reasonably conceivable state of facts that could provide a rational basis for the classification.“). Furthermore, in order to pass rational basis review, legislation cannot be arbitrary or irrational. See City of Cleburne, Tex. v. Cleburne Living Ctr., 473 U.S. 432, 446 (1985) (“The State may not rely on a classification whose relationship to an asserted goal is so attenuated as to render the distinction arbitrary or irrational.“). Here, there is no conceivable set of facts rationally related to a legitimate purpose of Congress in these amendments, and thus these amendments are invalid.
This legislation unreasonably and arbitrarily removed a power delegated to Puerto Rico by the previous legislation. Had there been any justification for not
A. The 1984 Amendments Lack any Record or Justification
As previously stated, there is no legislative record on which to rely for determining Congress‘s reasons behind the 1984 Amendments. A tracing of its trаvels through the halls of Congress sheds less light than a piece of coal on a moonless night regarding the reason for its enactment. Thus, the majority‘s statement that “Congress [sought to] preserve to itself th[e] power to authorize Puerto Rican municipalities to seek Chapter 9 relief,”44 is pure fiction. There is absolutely nothing in the record of the 1984 Amendments to justify this statement or Congress‘s legitimate purpose in adopting them.
The Puerto Rico exception actually predates the 1984 Act. It appeared out of thin air during the 96th Congress in 1980 in a House Report, accompanying S. 658. See H.R. Rep. No. 96-1195, at 38 (1980). That proposal was a failed bill similar in substance to Pub. L. No. 98-353, which later became the Bankruptcy Amendments and Federal Judgeship Act of 1984, 98 Stat. 333. See 98 Stat. 368-69 (containing the Puerto Rico language under “Subtitle H -- Miscellaneous Amendments to Title 11“). When S. 658 arrived in the House from the Senate, on September 11, 1979, it did not contain the Puerto Rico-excluding language. The Puerto Rico provision was, however, included in the version that emerged from the House Committee on the Judiciary on July 25, 1980. There is no legislative history on the Puerto Rico clause, as hearings from the House Committee on the Judiciary from 1979-1980 reveal nothing about the amendment‘s purpose or justification.
The story was not very different with regard to the 1984 Amendments. On March 21, 1984, the House passed H.R. 5174 without the Chapter 9 debtor eligibility exclusion for Puerto Rico. On that same day, Senator Strom Thurmond (R-SC) introduced S. Amdt. 3083. Subtitle I, section 421(j)(6) of the amendment proposed altering Section 101 of Title 11 to provide that “(44) ‘State’ includes the District of Columbia and Puerto Rico, except for the purpose of defining who may be a debtor under chapter 9 of this title.” 130 Cong. Rec. S6118 (daily ed. May 21, 1984) (statements of Sen. Thurmond). And that is how we got the current text of
The original S. 1013 also did not contain the Puerto Rico exclusion when it was reported in the Senate on April 7, 1983. Senators Dole, Thurmond, and Hefflin introduced Amendment 1208 on April 27, 1983, which contained the Puerto Rico Chapter 9 debtor eligibility exclusion. 129 Cong. Rec. S5441 (daily ed. Apr. 27, 1983). The Senators gave no explanation for the
The House adopted the Conference Report, including the Puerto Rico exclusion, without specific mention or comment on June 28, 1984, with a vote of 394 yeas, 0 nays, and 39 abstentions. The Senate also voted for the Conference Report, thereby making H.R. 5174 into Public Law No. 98-353. Congress never articulated a reason for the Puerto Rico-excluding language.
To ignore this silence is striking given that the central task for courts when interpreting changes to the bankruptcy
statutes is to carefully examine Congress‘s statutory text and justifications. See Cohen v. de la Cruz, 523 U.S. 213, 221 (1998) (“We . . . ‘will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.‘” (citation omitted)); United Sav. Ass‘n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 380 (1980) (“Such a major change in the existing rules would not likely have been made without specific provision in the text of the statute; it is most improbable that it would have been made without even any mention in the legislative history.” (citation omitted)); cf. Kellogg Brown & Root Servs. Inc. v. United States ex rel. Carter, 135 S. Ct. 1970, 1977 (2015) (“Fundamental changes in the scope of a statute are not typically accomрlished with so subtle a move.“).Tellingly, the parties do not dispute this absolute lack of Congressional justification for the Puerto Rico language in the 1984 Amendments. See also Frank R. Kennedy, The Commencement of a Case under the New Bankruptcy Code, 36 Wash. & Lee L. Rev. 977, 991 n.75 (1979) (“While there may be special reasons why Washington, D.C., should not be eligible for relief under Chapter 9, it is not self-evident why all political subdivisions, public agencies, and instrumentalities in Puerto Rico, Guam, and other territories and possessions of the United States should be precluded from relief under the chapter.“).
And yet, there is one undisputed fact that is self-evident in all this: no one proposed a need for the 1984 change, or protested the efficacy of the Code as it existed without this amendment. There is hermetic silence regarding all of the issues or questions that would normally arise and be discussed when a provision that was on the Bankruptcy Code for close to half a century, and whose elimination would affect millions of U.S. citizens, is deleted.
B. Congress‘s Power over Puerto Rico‘s Internal Affairs
The 1984 Amendments deprived Puerto Rico of a fundamental and inherently managerial function over its municipalities that has no connection to any articulated or discernible Congressional interest. See Bennet v. City of Holyoke, 362 F.3d 1, 12 (1st Cir. 2004) (explaining that “municipalities are creatures of the state” subject to control of the state‘s legislature). All the states and territories -- including Puerto Rico before 1984 -- had the power to control, manage, and regulate the local financial
Can it be that a power that . . . was carefully circumscribed to reserve full freedom to the states, has now been completely absorbed by the federal government -- that a stаte which . . . has . . . elaborate[d] machinery for the autonomous regulation of problems as peculiarly local as the fiscal management of its own household, is powerless in this field? We think not.
316 U.S. at 508-09; see also New York v. United States, 505 U.S. 144, 156-57 (1992) (explaining that the structure of the Constitution protects the rights of the states to control their internal affairs). Puerto Rico has the same level of authority over its municipalities. See United States v. Laboy-Torres, 553 F.3d 715, 722-23 (3d Cir. 2009) (O‘Connor, J., sitting by designation) (“[C]ongress has accorded the Commonwealth of Puerto Rico ‘the degree of autonomy and independence normally associated with States of the Union.‘“) (quoting United States v. Cirino, 419 F.3d 1001, 1003-04 (9th Cir. 2005) (per curiam)).
When the Supreme Court held in 1976 that Puerto Rico has “[t]he degree of autonomy and independence normally associated with States of the Union,”45 it reaffirmed this proposition, which had longstanding vitality even before the 1984 Amendments or the enactment of the Federal Relations Act46 and the creation of the so-called “Commonwealth status.” See Puerto Rico v. Shell Co., 302 U.S. 253, 261-62 (1937) (“The aim of the Foraker Act and the Organic Act was to give Puerto Rico full power of local self-determination with an autonomy similar to that of the states and incorporated territories.“).
Even this court has questioned the basis for Congress‘s power to legislate over Puerto Rico local affairs. In one of its Commonwealth-endorsing decisions dealing with the question of whether Congress had the intention to limit Puerto Rico‘s powers to regulate internal antitrust violations through the Sherman Act‘s control of purely local affairs of the territories, the court held that “[t]he states are clearly able to adopt such variations as to purely local matters. And, there is no reason of policy discernible in the Sherman Act for treating Puerto Rico differently.” Cordova, 649 F.2d at 42 (emphasis added).47 The court went on to explain how Congress‘s power to legislate purely local affairs
In the instant case, there are no articulated or conceivable “clear policy reasons.” And while the “specific evidence” requirement could be met by the clear statutory text of the 1984 Amendments, this court has stated that Congress‘s powers to legislate differently for Puerto Rico under the Territorial Clause are also subject to some “outer limits,” in addition to the rational-basis constraints of Harris and Califano. See Jusino-Mercado, 214 F.3d at 44. At a minimum, there should be some explanation as to why Congress‘s enactment of the 1984 Amendments fits within those “outer limits” given the complete absence of clear policy reasons.
Congress has expressly delegated to Puerto Rico the power to manage its municipalities. Section 37 of the Federal Relations Act provides:
That the legislative authority herein provided shall extend to all matters of a legislative character not locally inapplicable, including power to create, consolidate, and reorganize the municipalities so far as may be necessary, and to provide and repeal laws and ordinances therefor; also the power to alter, amend, modify, or repeal any or all laws and ordinances of every character now in force in Puerto Rico or municipality or district thereof, insofar as such alteration, amendment, modification, or repeal may be consistent with the provisions of this Act.
This court has further reiterated the norm that Puerto Rico has authority to control its internal affairs in several other Commonwealth-endorsing decisions. See, e.g., United States v. Quiñones, 758 F.2d 40, 42 (1st Cir. 1985) (“Puerto Rico ceased being a territory of the United States subject to the plenary powers of Congress as provided in the Federal Constitution. . . . [T]he government of Puerto Rico is no longer a federal government agency exercising delegated power.“); Córdova, 649 F.2d at 41. Because Congress was precluded from enacting the 1984 Amendments, they cannot serve a legitimate purpose and аre therefore irrational.
The degree of authority granted to Puerto Rico to regulate its local affairs is very different from Congress‘s exclusive powers over the District of Columbia, the other territory excluded by
Any comparison of Puerto Rico to the District of Columbia, therefore, including the proposition made by the majority that Congress may have intended to retain plenary powers to regulate the local affairs of Puerto Rico as it does for the seat of the Federal Government, fundamentally changes the current nature of Puerto Rico-federal relations. To argue that Congress‘s rationale for the disparate treatment enacted in the 1984 Amendments is that it may have wanted to adopt “other -- and possibly better -- options to address the insolvency of Puerto Rico municipalities”49 overturns over half a century of binding case law that purported to recognize that Congress delegated to Puerto Rico the power to control its municipalities and legislate for its local affairs. Congress‘s solution to the budgetary and fiscal crisis faced by the District of Columbia during the mid-1990s, through the enactment of the District of Columbia Financial Responsibility and Management Assistance Act of 1995, Pub. L. No. 104-8, 109 Stat. 97, could have bеen taken for granted considering that the Federal Government and Congress itself would be directly affected by the District‘s financial crisis. But, the circumstances here are very different, since no such sense of urgency is evident in Congress, nor is the requisite political clout available to Puerto Ricans. And, even if it were, instituting direct Congressional control of Puerto Rico‘s finances through a financial control board would require fundamentally redefining Puerto Rico‘s relationship to the United States. See Flores de Otero, 426 U.S. at 594.
Without an adequate explanation, the majority chooses to ignore our own binding case law and suggests that Congress chose to unreasonably interfere with a managerial decision affecting Puerto Rico‘s local municipal affairs. Although Congress may, in special circumstances, legislate to amend or repeal uniform bankruptcy legislation, such an act, on a totally silent record, cannot be rational considering the long and substantiated jurisprudence that militates to the contrary.
C. Rational Basis Review After Harris and Califano
This is an extraordinary case involving extraordinary circumstances, in which the economic life of Puerto Rico‘s three-and-a-half million U.S. citizens hangs in the balance; this court should not turn a blind eye to this critical situation by ignoring Congress‘s constraints to legislate differently for Puerto Rico.50 Besides being irrational and arbitrary, the exclusion of Puerto Rico‘s power to authorize its municipalities to request federal bankruptcy
A less-deferential rational basis review should also be performed in light of the aforementioned considerations regarding the well-settled law of Puerto Rico‘s authority over its internal matters. See Dep‘t of Health & Human Servs., 682 F.3d at 11-12 (“Supreme Court precedent relating to federalism-based challenges to federal laws reinforce the need for closer than usual scrutiny . . . and diminish somewhat the deference ordinarily accorded.“).
III. This Court Now Sends Puerto Ricans to Congress
The justification for the degree of judicial deference afforded by our constitutional jurisprudence under the typical rational basis review is founded on the basic democratic tenet that, “absent some reason to infer antipathy,” courts should not intervene with legislative choices because “even improvident decisions will eventually be rectified by the democratic process . . . .” Beach Commc‘ns, 508 U.S. at 314 (quoting Vance v. Bradley, 440 U.S. 93, 97 (1979)). And, while the democratic process was equally foreclosed to Puerto Ricans at the time Harris and Califano were resolved, here the situation is different because, contrary to the Supreme Court‘s statеments in those two cases, we have not been presented with a single plausible explanation of why Congress opted for the disparate treatment of Puerto Rico.
The majority offers Puerto Rico the alternative to seek a political solution in Congress and cites proposed changes in the relevant legislation pending before Congress to show that Puerto Rico is advancing in that direction. While I acknowledge that, in some contexts, the fact
IV. The “Business-as-Usual” Colonial Treatment Continues
The majority‘s disregard for the arbitrary and unreasonable nature of the legislation enacted in the 1984 Amendments showcases again this court‘s approval of a relationship under which Puerto Rico lacks any national political representation in both Houses of Congress and is wanting of electoral rights for the offices of President and Vice-President. That discriminatory relationship allows legislation -- such as the 1984 Amendments -- to be enacted and applied to the millions of U.S. citizens residing in Puerto Rico without their participation in the democratic process. This is clearly a colonial relationship, one which violates our Constitution and the Law of the Land as established in ratified treaties.53 Given the vulnerability of these citizens before the political branches of government, it is a special duty of the courts of the United States to be watchful in their defense. As the Supreme Court pronounced in United States v. Carolene Products Co., 304 U.S. 144, 152 n.4 (1938), “prejudice against insular minorities may be a special condition, which tends seriously to curtail the operation of those political processes ordinarily to be relied upon to protect minorities, and which may call for a correspondingly more seаrching judicial inquiry.” I am sorry to say this special duty to perform a “more searching inquiry” has been woefully and consistently shirked by this court when it comes to Puerto Rico, with the majority opinion just being the latest in a series of such examples.54
When the economic crisis arose, after considering Congress‘s cryptic revocation
Even if one ignores the uncertain outcome of any proposed legislation, questions still remain: why would Congress intentionally take away a remedy from Puerto Rico that it had before 1984 and leave it at the sole mercy of its creditors? What legitimate purpose can such an action serve, other than putting Puerto Rico‘s creditors in a position that no other creditors enjoy in the United States? While favoring particular economic interests -- i.e., Puerto Rico creditors -- to the detriment of three-and-a-half million U.S. citizens, is perhaps “business as usual” in some political circles, one would think it hardly qualifies as a rational constitutional basis for such discriminatory legislation.
V. Conclusion
The 1984 Amendments are unconstitutional. Puerto Rico should be free to authorize its municipalities to file for bankruptcy protection under the existing Chapter 9 of the Bankruptcy Code if that is the judgment of its Legislature.
I concur in the Judgment.
Notes
This chapter does not limit or impair the power of a State to control, by legislation or otherwise, a municipality of or in such State in the exercise of the political or governmental powers of such municipality, including expenditures for such exercise, but--
- a State law prescribing a method of composition of indebtedness of such municipality may not bind any creditor that does not consent to such composition; and
- a judgment entered under such a law may not bind а creditor that does not consent to such composition.
Act of July 1, 1946, Pub. L. No. 481, ch. 532, sec. 83(i), 60 Stat. 409, 415.Nothing contained in this chapter shall be construed to limit or impair the power of any State to control, by legislation or otherwise, any municipality or any political subdivision of or in such State . . . . Provided, however, That no State law prescribing a method of composition of indebtedness of such agencies shall be binding upon any creditor who does not consent to such composition, and no judgment shall be entered under such State law which would bind a creditor to such composition without his consent.
S. Rep. No. 95-989 at 110.Section 903 is derived, with stylistic changes, from section 83 of current Chapter IX. It sets forth the primary authority of a State, through its constitution, laws, and other powers, over its municipalities. The proviso in section 83, prohibiting State composition procedures for municipalities, is retained. Deletion of the provision would “permit all States to enact their own versions of Chapter IX“, Municipal Insolvency, 50 Am. Bankr. L.J. 55, 65, which would frustrate the constitutional mandate of uniform bankruptcy laws. Constitution of the United States. Art. I, Sec. 8.
First, defendants’ reliance on a congressional report stating that it was “not prepared to admit that the situation presents a legislative no-man‘s land” reveals nothing about Congress‘s intent in enacting
Second, any reliance on Guss v. Utah Labor Relations Bd., 353 U.S. 1 (1957), is misplaced. Far from creating a rule against the creation of a no-man‘s land -- here, understood as the absence of laws providing relief -- the Supreme Court held that where “Congress’ power in the area . . . is plenary, its judgment must be respected whatever policy objections there may be to [the] creation of a no-man‘s-land.” Id. at 11.
The Court‘s reasoning in Guss is fully applicable here: Congress, through the provisions of
In any event, these cases do not provide a reason to construe the statute differently. However remarkable a no-man‘s land might be, assuming dubitante that there is one under our construction, it would be even more remarkable to find that Congress decided to abandon -- without comment and through a definition -- its forty-year old prohibition on local insolvency laws that bind creditors without their consent. See Cohen, 523 U.S. at 221-22. The former can at least be reconciled with congressional purpose to retain its authority, and, if the literature on incentives is correct, may have been the only way for Congress to do so efficaciously. Cf. Gillette, 79 U. Chi. L. Rev. at 285-86. Unlike defendants, we cannot “ignore[] [this] more plausible explanation” of Congress‘s decision. Kellogg, 135 S. Ct. at 1977-78.
The difficulty is that the Professors’ construction cannot be squared with either the history of this provision, or the legislative intent in enacting it, of barring states from enacting their own municipal bankruptcy laws. To the contrary, it would undermine the applicability of this provision to states.a State composition law could not be used to alter a creditor‘s claim against a municipality that has filed for Chapter 9[:] [a]ny prior or concurrent State law composition proceeding would be superseded pursuant to section 903(1) [upon filing], and any judgment previously obtained would be reopened under section 903(2).
Similarly,
Following defendants’ proffered strict construction would also create mischief for other portions of
The GDB defendants’ argument that the district court erred by ignoring the “order for relief” language in the definition of creditor fails for similar reasons.