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On June 13, 2016, the Supreme Court decided 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 was whether Chapter 9 of the federal Bankruptcy Code preempts the Puerto Rico statute creating a mechanism for the Commonwealth’s public utilities to restructure their debts.

By a vote of 5-2, the Supreme Court affirmed the judgment of the First Circuit. Justice Thomas delivered the opinion of the Court, which held that in excluding Puerto Rico from the definition of a “state” for purposes of defining who may be a Chapter 9 debtor, Congress prevented Puerto Rico from authorizing its municipalities to seek Chapter 9 relief. But because Puerto Rico remains a “state” for other purposes of Chapter 9, the Court indicated, Chapter 9’s preemption provision still bars Puerto Rico from enacting its own municipal bankruptcy scheme to restructure the debt of its insolvent public utilities companies.

Justice Thomas’s majority opinion was joined by the Chief Justice and Justices Kennedy, Breyer, and Kagan. Justice Sotomayor filed a dissenting opinion, which was joined by Justice Ginsburg. Justice Alito took no part in the consideration or decision of the cases.

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.

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