Franklin Cal. Tax-Free Trust v. Puerto Rico

Decision Date06 July 2015
Docket Number15–1272.,15–1221,15–1271,Nos. 15–1218,s. 15–1218
Citation805 F.3d 322
PartiesFRANKLIN CALIFORNIA TAX–FREE TRUST, et al., Plaintiffs, Appellees, v. Commonwealth of Puerto Rico, et al., Defendants, Appellants, PUERTO RICO Electric Power Authority (PREPA), Defendant.
CourtU.S. Court of Appeals — First Circuit

805 F.3d 322

FRANKLIN CALIFORNIA TAX–FREE TRUST, et al., Plaintiffs, Appellees
v.
Commonwealth of Puerto Rico, et al., Defendants, Appellants
PUERTO RICO Electric Power Authority (PREPA), Defendant.

Nos. 15–1218
15–1221
15–1271
15–1272.

United States Court of Appeals, First Circuit.

July 6, 2015.


805 F.3d 323

Christopher Landau, with whom Margarita Mercado–Echegaray, Solicitor General for the Commonwealth of Puerto Rico, Beth A. Williams, Michael A. Glick, Claire M. Murray, and Kirkland & Ellis LLP, were on brief, for the Commonwealth of Puerto Rico, Governor Alejandro García–Padilla, and César R. Miranda–Rodríguez, appellants.

Martin J. Bienenstock, with whom John E. Roberts, Andrea G. Miller, Proskauer Rose, LLP, Mark D. Harris, Sigal P. Mandelker, Philip M. Abelson, and Ehud Barak, were on brief, for Melba Acosta–Febo and John Doe, appellants.

805 F.3d 324

Lewis J. Liman, with whom Jorge R. Roig, Joanne A. Tomasini–Muñiz, González, Machado & Roig, LLC, Lawrence B. Friedman, Richard J. Cooper, Sean A. O'Neal, and Cleary Gottlieb Steen & Hamilton, LLP, were on brief, for the Puerto Rico Electric Power Authority (PREPA), amicus curiae.

Gabriel R. Avilés–Aponte and Tapia & Avilés, on brief, for Clayton P. Gillette and David A. Skeel, Jr., amici curiae.

Edilberto Berríos–Pérez and Berríos & Longo Law Office, P.S.C., on brief, for Edilberto Berríos–Pérez, amicus curiae.

Matthew D. McGill, with whom David C. Indiano, Jeffrey M. Williams, Leticia Casalduc–Rabell, Indiano & Williams, PSC, Theodore B. Olson, Scott G. Stewart, Matthew J. Williams, and Gibson, Dunn & Crutcher, LLP, were on brief, for BlueMountain Capital Management, LLC, appellee.

Thomas Moers Mayer, with whom Kramer Levin Naftalis & Frankel LLP, Philip Bentley, David E. Blabey, Jr., Toro, Colón, Mullet, Rivera & Sifre, P.S.C., Manuel Fernández–Bared, and Linette Figueroa–Torres, were on brief, for Franklin California Tax–Free Trust et al., appellees.

Marc E. Kasowitz, with whom Daniel R. Benson, Hon. Joseph I. Lieberman (ret.), Hon. Clarine Nardi Riddle (ret.), Andrew K. Glenn, and Kasowitz, Benson, Torres & Friedman, LLP, were on brief, for the Association of Financial Guaranty Insurers, amicus curiae.

Kate Comerford Todd, Steven P. Lehotsky, U.S. Chamber Litigation Center, Inc., William S. Consovoy, Thomas R. McCarthy, J. Michael Connolly, and Consovoy McCarthy, PLLC, on brief, for the Chamber of Commerce of the United States of America, amicus curiae.

Before HOWARD, Chief Judge, TORRUELLA and LYNCH, Circuit Judges.

Opinion

LYNCH, Circuit Judge.

The defendants, the Commonwealth of Puerto Rico, its Governor, its Secretary of Justice, and the Government Development Bank (“GDB”), assert that Puerto Rico is facing the most serious fiscal crisis in its history, and that its public utilities risk becoming insolvent. Puerto Rico, unlike states, may not authorize its municipalities, including these utilities, to seek federal bankruptcy relief under Chapter 9 of the U.S. Bankruptcy Code. 11 U.S.C. §§ 101(40), 101(52), 109(c). In June 2014, the Commonwealth attempted to allow its utilities to restructure their debt by enacting its own municipal bankruptcy law, the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (“Recovery Act”), which expressly provides different protections for creditors than does the federal Chapter 9.

Plaintiffs are investors who collectively hold nearly two billion dollars of bonds issued by one of the distressed public utilities, the Puerto Rico Electric Power Authority (“PREPA”). Fearing that a PREPA filing under the Recovery Act was imminent, they brought suit in summer 2014 to challenge the Recovery Act's validity and enjoin its implementation. The district court found in their favor and permanently enjoined the Recovery Act on the ground that it is preempted under 11 U.S.C. § 903(1). See Franklin Cal. Tax–Free Trust v. Puerto Rico, Nos. 14–1518, 14–1569, 2015 WL 522183, at *1, *12–18, *29 (D.P.R. Feb. 6, 2015); Franklin Cal. Tax–Free Trust v. Puerto Rico, No. 14–1518, 2015 WL 574008, at *1 (D.P.R. Feb. 10, 2015). That provision, § 903(1), ensures the uniformity of federal bankruptcy laws by prohibiting state municipal debt

805 F.3d 325

restructuring laws that bind creditors without their consent. 11 U.S.C. § 903(1) ; see S.Rep. No. 95–989, at 110 (1978).

The primary legal issue on appeal is whether § 903(1) preempts Puerto Rico's Recovery Act. That question turns on whether the definition of “State” in the federal Bankruptcy Code—as amended in 1984—renders § 903(1)'s preemptive effect inapplicable to Puerto Rico. Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98–353, sec. 421(j)(6), § 101(44), 98 Stat. 333, 368–39 (codified as amended at 11 U.S.C. § 101(52) ). The post–1984 definition of “State” includes Puerto Rico, “except ” for the purpose of “defining” a municipal debtor under § 109(c). 11 U.S.C. §§ 101(52), 109(c) (emphasis added). All parties agree that Puerto Rico now lacks the power it once had been granted by Congress to authorize its municipalities to file for Chapter 9 relief.

We hold that § 903(1) preempts the Recovery Act. The prohibition now codified at § 903(1) has applied to Puerto Rico since the predecessor of that section's enactment in 1946. The statute does not currently read, nor does anything about the 1984 amendment suggest, that Puerto Rico is outside the reach of § 903(1)'s prohibitions. See Cohen v. de la Cruz, 523 U.S. 213, 221, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) (“We ... ‘will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.’ ” (citation omitted)); cf. Kellogg Brown & Root Servs. Inc. v. United States ex rel. Carter, –––U.S. ––––, 135 S.Ct. 1970, 1977, 191 L.Ed.2d 899 (2015) (“Fundamental changes in the scope of a statute are not typically accomplished with so subtle a move.”). Indeed, the Recovery Act would frustrate the precise purpose underlying the enactment of § 903(1). Accordingly, we affirm.

Defendants argue that this leaves Puerto Rico without relief. Although § 101(52) denies to Puerto Rico the power to authorize its municipalities to pursue federal Chapter 9 relief, Puerto Rico may turn to Congress for recourse. Indeed, Congress preserved to itself that power to authorize Puerto Rican municipalities to seek Chapter 9 relief. Puerto Rico is presently seeking authorization or other relief directly from Congress. See Puerto Rico Chapter 9 Uniformity Act of 2015, H.R. 870, 114th Cong. (2015).

I.

Procedural History

Two groups of PREPA bondholders sued almost immediately following the Recovery Act's passage to prevent its enforcement. PREPA had issued their bonds pursuant to a trust agreement with the U.S. Bank National Association. The bondholders allege that the very enactment of the Recovery Act impaired these contractual obligations by abrogating certain protections that were promised in the event of default.1 The first group, the Franklin plaintiffs,2 filed on June 28, 2014,

805 F.3d 326

and cross-motioned for summary judgment on August 11, 2014. The second group, BlueMountain Capital Management, LLC (“BlueMountain”), for itself and on behalf of the funds it manages, filed on July 22, 2014. Together, the Franklin plaintiffs and BlueMountain hold nearly two billion dollars in PREPA bonds.

Both the Franklin plaintiffs and BlueMountain sought declaratory relief under 28 U.S.C. §§ 2201 –02 that the Recovery Act is preempted by the federal Bankruptcy Code, violates the Contracts Clause, violates the Bankruptcy Clause, and unconstitutionally authorizes a stay of federal court proceedings. The Franklin plaintiffs (but not BlueMountain) also brought a Takings Claim under the Fifth and Fourteenth Amendments. And BlueMountain (but not the Franklin plaintiffs) brought a claim under the contracts clause of the Puerto Rico constitution. These claims were brought against the Commonwealth of Puerto Rico, Governor Alejandro García–Padilla, and various Commonwealth officials, including GDB agents.3 The district court consolidated the cases and aligned the briefing on August 20, 2014, but did not merge the suits.

The district court issued an order and opinion in both cases on February 6, 2015, resolving the motions to dismiss and the Franklin plaintiffs' outstanding cross-motion for summary judgment. Franklin Cal. Tax–Free Trust, 85 F.Supp.3d 577, 2015 WL 522183, at *1. It entered judgment in the Franklin case on February 10, 2015. Franklin Cal. Tax–Free Trust, 2015 WL 574008, at *1.

As relevant here, the district court held that the Recovery Act was preempted by federal law and permanently enjoined its enforcement. It also denied the motion to dismiss the Contracts Clause claim and one of the Franklin plaintiffs' Takings claims.4

805 F.3d 327

The Commonwealth defendants appeal from the permanent injunction, the grant of summary judgment to the Franklin plaintiffs, and further argue that the district court erred by reaching the Contracts Clause and...

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