Franklin California Tax-Free v. Commonwealth of Puerto Rico, No. 15-1218 (1st Cir. 2015)
Annotate this CasePuerto Rico may not authorize its municipalities, including public utilities, to seek federal bankruptcy relief under Chapter 9 of the U.S. Bankruptcy Code. In 2014, the Commonwealth attempted to allow its utilities, which were at risk of becoming insolvent, to restructure their debt by enacting its own municipal bankruptcy law, the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (Recovery Act). Plaintiffs, investors who collectively held nearly two billion dollars of bonds issued by one of the distressed utilities, brought suit to challenge the Recovery Act’s validity and to enjoin its implementation. The district court entered judgment in favor of Plaintiffs and permanently enjoined the Recovery Act on the ground that it was preempted under 11 U.S.C. 903(1), which ensures the uniformity of federal bankruptcy laws by prohibiting state municipal debt restructuring laws that bind creditors without their consent. The First Circuit affirmed, holding that section 903(1) preempts the Recovery Act, as the statute does not read that Puerto Rico is outside the reach of its prohibitions and the Recovery Act would frustrate the precise purpose underlying the enactment of section 903(1).
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