June 13, 2016

Supreme Court Decides Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust

On June 13, 2016, the Supreme Court of the United States decided Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust, No. 15-233, holding that Chapter 9 of the federal bankruptcy code preempts Puerto Rico’s municipal-debt restructuring law.

In 2014, Puerto Rico enacted a law allowing its public utilities to restructure more than $20 billion in debt. A group of investment funds sought an injunction against the debt-restructuring law, arguing that it was preempted by the federal bankruptcy code.

Chapter 9 of the federal bankruptcy code addresses municipal bankruptcies. It expressly preempts states from applying their own municipal bankruptcy laws to non-consenting creditors. 11 U.S.C. § 903(1). But it permits municipalities to use the restructuring provisions of Chapter 9 only if they have been authorized do so by their organizing state. 11 U.S.C. § 109(c). Puerto Rico is defined to be a “State” under the bankruptcy code, “except for the purposes of defining who may be a debtor under Chapter 9.” 11 U.S.C. § 101(52). Puerto Rico argued that this provision removed it from the scope of the preemption provision and allowed it to apply its own municipal bankruptcy law to non-consenting creditors.

The Supreme Court held that Chapter 9’s preemption provision did in fact apply to Puerto Rico. The Court’s opinion started—and ended—with the provision’s plain text. Because the definition’s exception “unmistakably” exempts Puerto Rico from the definition of a “State” only for purposes of allowing it to define which municipalities may be a debtor, it does not exempt Puerto Rico for any other purpose. Had Congress intended to exclude Puerto Rico from preemption, it would have said so. Congress does not “hide elephants in mouseholes.”

Justice Thomas delivered the opinion of the Court, in which Chief Justice Roberts and Justices Kennedy, Breyer, and Kagan joined. Justice Sotomayor filed a dissenting opinion, in which Justice Ginsburg joined. Justice Alito took no part in the case.

Download the Opinion of the Court.

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