Facts
- Puerto Rico faced a debt crisis involving its public corporations, including public utilities with large bond obligations.
- In 2014 Puerto Rico enacted the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (Recovery Act), creating a restructuring regime for public corporation debts that resembled federal municipal and reorganization bankruptcy mechanisms.
- Bondholders, including Franklin California Tax-Free Trust and other investors in Puerto Rico public corporation debt, challenged the Recovery Act.
- The bondholders alleged the Recovery Act was expressly preempted by 11 U.S.C. § 903(1), which limits state municipal debt-adjustment laws that bind nonconsenting creditors.
- The U.S. District Court for the District of Puerto Rico enjoined enforcement of the Recovery Act.
- The First Circuit affirmed, concluding Puerto Rico remained a “State” for purposes of § 903(1) even though Puerto Rico could not authorize Chapter 9 filings.
- The Supreme Court granted certiorari and affirmed; Justice Thomas wrote the opinion; Justice Sotomayor dissented (joined by Justice Ginsburg); Justice Alito did not participate.
Issues
- Whether 11 U.S.C. § 903(1) preempts Puerto Rico’s Recovery Act.
- Whether Puerto Rico’s exclusion from “State” status “for the purpose of defining who may be a debtor under chapter 9” removes Puerto Rico from Chapter 9’s preemption clause.
- Whether the Recovery Act falls within § 903(1) as a “State law” governing municipal-type debt restructuring over creditor objection.
Decision
- The Supreme Court held that § 903(1) preempts Puerto Rico’s Recovery Act.
- The Court concluded Puerto Rico is a “State” for purposes of Chapter 9’s preemption provision even though it is excluded from the definition of “State” for the limited purpose of Chapter 9 debtor eligibility.
- Because the Recovery Act authorized debt adjustment binding nonconsenting creditors, it was barred by § 903(1).
- The Court rejected arguments that technical definitional provisions removed the Recovery Act from § 903(1)’s reach.
Legal Principles
- Under 11 U.S.C. § 101(52), Puerto Rico is excluded from the definition of “State” only for the specific purpose of determining who may be a Chapter 9 debtor; the exclusion does not extend to other Chapter 9 provisions.
- Under 11 U.S.C. § 109(c), Puerto Rico cannot authorize its municipalities to be Chapter 9 debtors because it is not a “State” for that debtor-eligibility purpose.
- Under 11 U.S.C. § 903(1), a “State” may not enact a municipal debt-adjustment law that binds nonconsenting creditors; municipalities must proceed, if at all, under Chapter 9 rather than under state-law analogues.
- A statutory carveout limited by its stated purpose is applied as written; courts do not expand it to impliedly eliminate other statutory rules such as express preemption.
Conclusion
The Court held that the Bankruptcy Code’s express preemption provision, § 903(1), invalidates Puerto Rico’s Recovery Act because Puerto Rico remains a “State” for preemption purposes even though Congress barred Puerto Rico from authorizing Chapter 9 municipal filings.