Puerto Rico v. Franklin California Tax-Free Trust

Puerto Rico and GDB argue that Puerto Rico can pass its own bankruptcy laws, because Congress has not passed laws that directly conflict with Puerto Rico’s laws. See Brief for Petitioner, Puerto Rico at 17; Brief for Petitioner, GDB at 19. But Blue Mountain and Franklin California contend that section 903(1), which bars states from legislating municipal bankruptcy laws, also prohibits federal territories from passing such laws. See Brief for Respondent, Blue Mountain at 18; Brief for Respondent, Franklin California at 14.

DO THE BANKRUPTCY CLAUSE AND FEDERAL BANKRUPTCY CODE CATEGORICALLY PREEMPT ALL STATE AND TERRITORY RESTRUCTURING LAWS?

Puerto Rico and GDB contend that the Bankruptcy Clause of the Constitution and the federal Bankruptcy Code do not preempt all state and territorial restructuring laws. See Brief for Petitioner, Puerto Rico at 15; See Brief for Petitioner, GDB at 19. While the Bankruptcy Clause permits Congress to regulate bankruptcy on a national scale, states and territories may still pass laws to regulate the restructuring of debts when Congress has chosen not to. See Brief for Petitioner, Puerto Rico at 21; Brief for Petitioner, GDB at 35. Puerto Rico contends that there have been long periods in history when there was no federal bankruptcy law in place, during which states and territories enacted their own bankruptcy litigation. See Brief for Petitioner, Puerto Rico at 16. Puerto Rico concedes that once federal bankruptcy laws were in place, they displaced conflicting state laws under the Supremacy Clause. See Id. at 17. Nonetheless, the lack of a federal bankruptcy law does not in itself preclude states’ from legislating on the issue. See Id. at 17. Accordingly, Puerto Rico and GDB conclude that the lack of municipal bankruptcy regulations for territories such as Puerto Rico means the territories may legally create bankruptcy regimes. See Id. at 17-19, Brief for Petitioner, GDB at 21-22.

Blue Mountain and Franklin California disagree. They argue that Congress has retained authority over the field of municipal-debt restructuring. See Brief for Respondent, Blue Mountain at 54; Brief for Respondent, Franklin California at 25. Municipal bankruptcy regulation is comprehensive, so Blue Mountain maintains that Congress intended for the federal regulation to be exclusive. See Brief for Respondent, Blue Mountain at 55. Accordingly, Blue Mountain and Franklin California maintain that the Recovery Act conflicts with the congressional objectives of section 903(1) and is therefore preempted. See Brief for Respondent, See Blue Mountain at 57-59; Brief for Respondent, Franklin California at 12.

IS PUERTO RICO CONSIDERED A STATE UNDER SECTION 903(1)?

Puerto Rico and GDB argue that Puerto Rico falls outside of the limitations on states imposed by section 903(1), and thus Puerto Rico was free to pass its own laws. See Brief for Petitioner, Puerto Rico at 23–24; Brief for Petitioner, GDB at 27. Section 903(1) bars states from legislating their own municipal bankruptcy laws. See Brief for Petitioner, Puerto Rico at 22. Puerto Rico contends that it is excluded generally from Chapter 9 of the Bankruptcy Code, the broader chapter in which Section 903(1) lies. See Id. at 26–27. Moreover, Puerto Rico contends that section 903 explicitly states that it should not affect the ability of a state to control its municipalities, which Blue Mountain’s reading of the statute would require. See Id. at 25. Under Blue Mountain’s reading, Puerto Rico would nonsensically be forced to bear the burden of prohibiting state municipal bankruptcy laws, without receiving the benefit of coverage from federal municipal bankruptcy laws. See Id. at 27. In the alternative, GDB argues that Puerto Rico is not a debtor under Chapter 9 and therefore it cannot have creditors, as referenced in section 903(1). See Brief for Petitioner, GDB at 31–32. Consequently, GDB argues, Puerto Rico would not be bound by the restrictions of section 903(1), which only prohibits municipal bankruptcy laws that bind creditors without their consent. See Id. at 32.

However, Blue Mountain and Franklin California contend that Puerto Rico is considered a state throughout the Bankruptcy Code, and therefore it is precluded, like a state, from passing its own municipal bankruptcy laws under section 903(1). See Brief for Respondent, Blue Mountain at 18-19; Brief for Respondent, Franklin California at 25. Blue Mountain and Franklin California assert that “state” under section 903(1) is defined in section 101(52) of the Bankruptcy Code as including Puerto Rico. See Brief for Respondent, Blue Mountain at 18-19; Brief for Respondent, Franklin California at 24-25. Puerto Rico’s exclusion as a “state” is limited solely to the definition of debtor in Chapter 9 of the Bankruptcy Code. See Brief for Respondent, Blue Mountain at 18-19; Brief for Respondent, Franklin California at 15.

IF SECTION 903(1) IS AMBIGUOUS, WHAT INTERPRETATION CONTROLS?

Puerto Rico and GDB argue that there is a strong presumption against finding that state law is preempted when a federal statute’s preemptive effect is ambiguous. See Brief for Petitioner, Puerto Rico at 28; Brief for Petitioner, GDB at 19. They contend that this presumption also applies to Puerto Rico in the valid exercise of its powers as a territory. See Brief for Petitioner, Puerto Rico at 28; Brief for Petitioner, GDB at 20. GDB and Puerto Rico assert that the Recovery Act was a valid use of the territory’s police powers: the Act was a necessary action to protect Puerto Rico’s depressed economy and promote the public welfare. See Brief for Petitioner, Puerto Rico at 36; Brief for Petitioner, GDB at 20. Moreover, GDB argues that the presumption against preemption extends, in particular, to instances in which a subject would be immune from both federal and state law, a so-called “no man’s land.” See Brief for Petitioner, GDB at 28. Puerto Rico also contends that the doctrine of constitutional avoidance counsels against construing section 903(1) to preempt Puerto Rican law. Holding that section 903(1) preempts the Recovery Act might implicate states’ rights to control their fiscal affairs, even if it doesn’t implicate Puerto Rico directly. See Brief for Petitioner, Puerto Rico at 41.

Blue Mountain argues that Puerto Rico and GDB’s reliance on preemption-avoiding doctrines is misguided. See Brief for Respondent, Blue Mountain at 44. Blue Mountain argues that regardless of how section 903(1) is interpreted, the Court’s decision will skirt constitutional issues and thus the doctrine of constitutional avoidance does not necessarily favor Puerto Rico. See Id. at 41-42. Moreover, Blue Mountain asserts that the presumption against preemption is not applicable. See Id. at 45. The presumption does not apply when Congress has made its intention to preempt apparent. See Id. at 46. Blue Mountain argues that there is clear evidence of congressional intent for section 903(1) to preempt state law. Most significantly, after the Court found the first version of the Chapter 9 municipal-bankruptcy law was unconstitutional, Congress passed the current version of Section 9 to ensure there was a constitutionally-valid means to preempt states’ laws. See Id. at 47. Furthermore, Blue Mountain contends that the law does not create a “no man’s land”. See Id. at 49. Instead, Congress chose to reserve the right to legislate municipal bankruptcy laws for territories such as Puerto Rico. See Id.