Chapter 9 Bankruptcy—Preemption of Puerto Rico Recovery Act

Puerto Rico v. Franklin CA Tax-Free Trust, No. 15-233
Acosta-Febo v. Franklin CA Tax-Free Trust, No. 15-255

The fifty United States may restructure the debts of their public utilities under Chapter 9 of the Bankruptcy Code. The Commonwealth of Puerto Rico, however, is excluded from restructuring its public utilities’ debts under Chapter 9. Facing a mounting fiscal crisis, Puerto Rico passed a Recovery Act on June 25, 2014, which provides a mechanism for its public corporations to restructure their debts. Bondholders of Puerto Rico’s public corporations brought suit to challenge the validity of the Recovery Act. The district and appellate courts held that Puerto Rico’s Act is preempted by Section 903(1) of the Bankruptcy Code, ruling that the provision preempting state bankruptcy laws applied to Puerto Rico even though Puerto Rico’s instrumentalities cannot restructure themselves under Chapter 9. The Supreme Court has granted certiorari to determine whether Section 903 preempts the Recovery Act.