On March 22, 2016, the Supreme Court heard oral argument in Puerto Rico v. Franklin California Tax-Free Trust (consolidated with its companion case, Acosta-Febo v. Franklin California Tax-Free Trust).
Concerned that its public utilities were on the verge of insolvency but could not obtain Chapter 9 bankruptcy relief under federal law, the Commonwealth of Puerto Rico attempted to circumvent this obstacle by passing its own municipal bankruptcy law. This law, the Puerto Rico Public Corporation Debt Enforcement and Recovery Act expressly provides different protections for creditors than those in federal Chapter 9.
Investors who collectively hold nearly two billion dollars in bonds issued by one of Puerto Rico’s public utilities worried that it might seek relief under the new Puerto Rico law and sued in federal court, challenging the law’s validity and seeking injunctive relief. The district court enjoined the enforcement of the new law and the U.S. Court of Appeals for the First Circuit affirmed. Puerto Rico sought certiorari.
The question before the Supreme Court is whether Chapter 9 of the federal Bankruptcy Code, although it does not apply to Puerto Rico, nevertheless preempts the Puerto Rico statute creating a mechanism for the Commonwealth’s public utilities to restructure their debts. Justice Alito is recused from this case.
To discuss the case, we have David Skeel, who is the S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Law School, and who submitted an amicus brief in support of the Commonwealth of Puerto Rico.