Franklin/Blue Mountain Opinion and Order

8/9/2019 Franklin/Blue Mountain Opinion and Order

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UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

FRANKLI N CALI FORNI A TAX- FREE TRUST, et al.,

Plaintiffs,

v.

COMMONWEALTH OF PUERTO RI CO, etal.,

Defendants.

Civil No. 14- 1518 ( FAB)

BLUEMOUNTAI N CAPI TALMANAGEMENT, LLC,

Plaintiff,

v.

ALEJ ANDRO J . GARCI A- PADI LLA, etal.,

Defendants.

Civil No. 14- 1569 ( FAB)

OPINION AND ORDER

BESOSA, Di st r i ct J udge.

Pl ai nt i f f s i n t hese t wo cases seek a decl ar at or y j udgment t hat

t he Puert o Ri co Publ i c Corporat i on Debt Enf orcement and Recover y

Act ( “Recover y Act ”) i s unconst i t ut i onal . ( Ci vi l No. 14- 1518,

Docket No. 85; Ci vi l No. 14- 1569, Docket No. 20. ) Bef or e t he Cour t

ar e t hr ee mot i ons t o di smi ss pl ai nt i f f s’ compl ai nt s and one cr oss-

mot i on f or summar y j udgment .

For t he reasons expl ai ned bel ow, t he Cour t GRANTS in part and

DENIES in part t he t hr ee mot i ons t o di smi ss, ( Ci vi l No. 14- 1518,

Case 3:14-cv-01518-FAB Document 119 Filed 02/06/15 Page 1 of 75


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Docket Nos. 95 & 97; Ci vi l No. 14- 1569, Docket No. 29) , and GRANTS

in part and DENIES in part t he cr oss- mot i on f or summary j udgment ,

( Ci vi l No. 14- 1518, Docket No. 78) . Because t he Recover y Act i s

pr eempt ed by the f eder al Bankrupt cy Code, i t i s voi d pur suant t o

t he Supr emacy Cl ause of t he Uni t ed St at es Const i t ut i on.

I. BACKGROUND

Pl ai nt i f f s col l ect i vel y hol d near l y t wo bi l l i on dol l ar s of

bonds i ssued by t he Puer t o Ri co El ect r i c Power Aut hor i t y ( “PREPA”) .

As backgr ound f or t he bases of pl ai nt i f f s’ cl ai ms chal l engi ng t he

const i t ut i onal i t y of t he Recover y Act , t he Cour t f i r st summar i zes

r el evant pr ovi si ons of t he PREPA Aut hor i t y Act ( whi ch aut hor i zed

PREPA t o i ssue bonds) , t he Tr ust Agr eement ( pur suant t o whi ch PREPA

i ssued bonds t o pl ai nt i f f s) , t he Recover y Act i t sel f , and Chapt er

9 of t he f ederal Bankr upt cy Code.

A. The Authority Act of May 1941

I n May 1941, t he Commonweal t h of Puer t o Ri co ( “t he

Commonweal t h”) enacted t he Puert o Ri co El ect r i c Power Aut hor i t y Act

( “Aut hor i t y Act ”) , P. R. Laws Ann. t i t . 22 §§ 191- 239, creat i ng

PREPA and aut hor i zi ng i t t o i ssue bonds, i d. §§ 193, 206. Thr ough

t he Aut hor i t y Act , t he Commonweal t h expressl y pl edged t o PREPA

bondhol der s “t hat i t wi l l not l i mi t or al t er t he r i ght s or power s

her eby vest ed i n [ PREPA] unt i l al l such bonds at any t i me i ssued,

t oget her wi t h t he i nt er est t her eon, ar e f ul l y met and di schar ged. ”

I d. § 215. The Aut hor i t y Act al so expr essl y gi ves PREPA



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bondhol der s t he r i ght t o seek t he appoi nt ment of a recei ver i f

PREPA def aul t s on any of i t s bonds. I d. § 207.

B. The Trust Agreement of January 1974

PREPA i ssued t he bonds under l yi ng these two l awsui t s pur suant

t o a t r ust agr eement wi t h U. S. Bank Nat i onal Associ at i on as

Successor Trust ee, dat ed J anuary 1, 1974, as amended and

suppl ement ed t hr ough August 1, 2011 ( “Tr ust Agr eement ”) . The Trust

Agr eement cont r act ual l y requi r es PREPA t o pay pr i nci pal and

i nt er est on pl ai nt i f f s’ bonds pr ompt l y. Tr ust Agr eement § 701.

Pl ai nt i f f s’ bonds are secur ed by a pl edge of PREPA’ s present and

f ut ur e r evenues, i d. , and PREPA i s pr ohi bi t ed f r omcreat i ng a l i en

equal t o or seni or t o pl ai nt i f f s’ l i en on t hese r evenues, i d. §

712. Upon t he occur r ence of an “event of def aul t , ” as t he t er m i s

def i ned i n t he Tr ust Agr eement , pl ai nt i f f bondhol der s may

accel erate payment s, seek the appoi nt ment of a r ecei ver “as

aut hor i zed by the Aut hor i t y Act , ” and sue at l aw or equi t y to

enf or ce t he t er ms of t he Tr ust Agr eement . I d. §§ 802- 804. An

event of def aul t occur s when, among ot her t hi ngs, PREPA i nst i t ut es

a pr oceedi ng “f or t he pur pose of ef f ect i ng a composi t i on bet ween

[ PREPA] and i t s cr edi t or s or f or t he pur pose of adj ust i ng t he

cl ai ms of such cr edi t ors pur suant t o any f ederal or Commonweal t h

st at ut e now or her eaf t er enact ed. ” I d. § 802( g) .



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C. The Recovery Act of June 2014

On J une 25, 2014, t he Commonweal t h Senat e and House of

Repr esent at i ves appr oved t he Recover y Act , and on J une 28, 2014,

t he Governor si gned t he Recover y Act i nt o l aw. The Recover y Act ’ s

St at ement of Mot i ves i ndi cat es t hat Puer t o Ri co’ s publ i c

cor por at i ons, especi al l y PREPA, “f ace si gni f i cant oper at i onal ,

f i scal , and f i nanci al chal l enges” and ar e “bur dened wi t h a heavy

debt l oad as compar ed t o t he resour ces avai l abl e to cover t he

cor r espondi ng debt ser vi ce. ” Recover y Act , St mt . of Mot i ves, § A.

To address t hi s “st at e of f i scal emer gency, ” t he Recover y Act

est abl i shes t wo pr ocedur es f or Commonweal t h publ i c corpor at i ons t o

r est r uctur e t hei r debt . I d. , St mt . of Mot i ves, §§ A, E. I t al so

cr eat es t he Publ i c Sect or Debt Enf orcement and Recover y Act

Cour t r oom ( her ei naf t er , “speci al cour t ”) t o pr esi de over

pr oceedi ngs and cases br ought pur suant t o t hese two pr ocedur es.

I d. § 109( a) .

The f i r st r est r uct ur i ng procedur e i s set f or t h i n Chapter 2 of

t he Recover y Act and per mi t s an el i gi bl e publ i c cor por at i on t o seek

debt rel i ef f rom i t s credi t ors wi t h aut hor i zat i on f rom t he

Gover nment Devel opment Bank f or Puer t o Ri co ( “GDB”) . Recover y Act

§ 201( b) . The publ i c cor por at i on i nvoki ng t hi s appr oach pr oposes

amendment s, modi f i cat i ons, wai ver s, or exchanges t o or of a cl ass

of speci f i ed debt i nst r ument s. I d. § 202( a) . I f credi t or s

r epr esent i ng at l east f i f t y per cent of t he debt i n a gi ven cl ass



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vot e on whet her t o accept t he changes, and at l east sevent y- f i ve

per cent of par t i ci pat i ng vot er s appr ove, t hen t he speci al cour t may

i ssue an or der appr ovi ng t he t r ansact i on and bi ndi ng t he ent i r e

cl ass. I d. §§ 115( b) , 202( d) , 204.

Chapt er 3 of t he Recover y Act set s f or t h t he second

r est r uct ur i ng appr oach. Under t hi s appr oach, an el i gi bl e publ i c

cor por at i on, agai n wi t h GDB appr oval , submi t s t o the speci al cour t

a pet i t i on t hat l i st s t he amount s and t ypes of cl ai ms t hat wi l l be

af f ect ed by a r est r uct ur i ng pl an. Recover y Act § 301( d) . The

publ i c cor por at i on t hen f i l es a pr oposed r est r uct ur i ng pl an or a

pr oposed t r ansf er of t he cor por at i on’ s asset s. I d. § 310. The

speci al cour t may conf i r m t he pl an i f t he pl an meet s cer t ai n

r equi r ement s, i d. § 315, i ncl udi ng a r equi r ement t hat “at l east one

cl ass of af f ect ed debt has vot ed t o accept t he pl an by a maj or i t y

of al l vot es cast i n such cl ass and t wo- t hi r ds of t he aggr egat e

amount of af f ect ed debt i n such cl ass t hat i s vot ed, ” i d. § 315( e) .

The speci al cour t ’ s conf i r mat i on or der bi nds al l of t he publ i c

cor por at i on’ s credi t or s t o t he r est r uctur i ng pl an. I d. § 115( c) .

Chapt er 2 of t he Recover y Act pr ovi des f or a suspensi on per i od

and Chapt er 3, an aut omat i c st ay, dur i ng whi ch t i me cr edi t ors may

not asser t cl ai ms or exer ci se cont r act ual r emedi es agai nst t he

publ i c cor por at i on debt or t hat i nvokes t he Recover y Act . See

Recover y Act §§ 205, 304.



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D. Chapter 9 of the Federal Bankruptcy Code

The Recover y Act i s model ed on Ti t l e 11 of t he Uni t ed Stat es

Code ( “t he f eder al Bankrupt cy Code”) , and par t i cul ar l y on Chapt er

9 of t hat t i t l e. Recover y Act , St mt . of Mot i ves, § E. Chapt er 9

gover ns t he adj ust ment of debt s of a muni ci pal i t y, 11 U. S. C. §§ 901

et seq . , and “muni ci pal i t y” i ncl udes a publ i c agency or

i nst r ument al i t y of a st at e, i d. § 101( 40) . A muni ci pal i t y seeki ng

t o adj ust i t s debt s pur suant t o Chapt er 9 must r ecei ve speci f i c

aut hor i zat i on f r om i t s stat e. I d. § 109( c) ( 2) . Puer t o Ri co

muni ci pal i t i es ar e expr essl y pr ohi bi t ed f r om seeki ng debt

adj ust ment pur suant t o Chapt er 9. I d. § 101( 52) .

II. THE PRESENT LITIGATION

A. Franklin and Oppenheimer Rochester Plaintiffs’ Second Amended

Complaint (Civil No. 14-1518)

Frankl i n pl ai nt i f f s1

ar e Del awar e cor por at i ons or t r ust s t hat

col l ect i vel y hol d appr oxi mat el y $692, 855, 000 of PREPA bonds.

( Ci vi l No. 14- 1518, Docket No. 85 at ¶ 3. ) Oppenhei mer Rochest er

1 The Cour t r ef er s t o t he f ol l owi ng par t i es col l ecti vel y as “Fr ankl i npl ai nt i f f s”: Frankl i n Cal i f or ni a Tax- Fr ee Tr ust ( f or t he Fr ankl i n Cal i f or ni aI nt er medi at e- Ter mTax Fr ee I ncome Fund) , Frankl i n Tax- Free Tr ust ( f or t he ser i es

Frankl i n Feder al I nt er medi ate- Ter mTax- Free I ncome Fund, Frankl i n Doubl e Tax- FreeI ncome Fund, Frankl i n Col orado Tax- Fr ee I ncome Fund, Fr ankl i n Geor gi a Tax- Fr eeI ncome Fund, Frankl i n Pennsyl vani a Tax- Free I ncome Fund, Frankl i n Hi gh Yi el d

Tax- Fr ee I ncome Fund, Fr ankl i n Mi ssour i Tax- Fr ee I ncome Fund, Fr ankl i n Or egon Tax- Fr ee I ncome Fund, Fr ankl i n Vi r gi ni a Tax- Fr ee I ncome Fund, Fr ankl i n Fl or i da Tax- Fr ee I ncome Fund, Fr ankl i n Loui si ana Tax- Fr ee I ncome Fund, Fr ankl i n Mar yl and Tax- Fr ee I ncome Fund, Fr ankl i n Nor t h Car ol i na Tax- Fr ee I ncome Fund, and Fr ankl i nNew J er sey Tax- Free I ncome Fund) , Frankl i n Muni ci pal Secur i t i es Trust ( f or t heser i es Frankl i n Cal i f orni a Hi gh Yi el d Muni ci pal Bond Fund and Frankl i n TennesseeMuni ci pal Bond Fund) , Frankl i n Cal i f orni a Tax- Free I ncome Fund, Frankl i n New Yor k

Tax- Fr ee I ncome Fund, and Fr ankl i n Federal Tax- Fr ee I ncome Fund.



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pl ai nt i f f s2 ar e Del awar e st at ut or y t r ust s t hat hol d appr oxi mat el y

$866, 165, 000 of PREPA bonds. I d. at ¶ 4. On August 11, 2014, t he

Frankl i n and Oppenhei mer Rochest er pl ai nt i f f s f i l ed a second

amended compl ai nt agai nst t he Commonweal t h of Puer t o Ri co,

Al ej andr o Gar ci a- Padi l l a ( i n hi s of f i ci al capaci t y as Gover nor of

Puer t o Ri co) , Mel ba Acost a ( i n her of f i ci al capaci t y as a GDB

agent ) , and PREPA. ( Ci vi l No. 14- 1518, Docket No. 85. ) The

Frankl i n and Oppenhei mer Rochest er pl ai nt i f f s seek decl ar at or y

r el i ef on t he f ol l owi ng cl ai ms: ( 1) Pr eempt i on: t hat t he Recover y

Act i n i t s ent i r et y i s pr eempt ed by sect i on 903 of t he f eder al

Bankr upt cy Code and vi ol ates t he Bankr upt cy Cl ause of t he Uni t ed

St at es Const i t ut i on; ( 2) Cont r act Cl ause: t hat sect i ons 108, 115,

202, 312, 315, and 325 of t he Recover y Act vi ol ate t he Cont r act

Cl ause of t he Uni t ed St at es Const i t ut i on by i mpai r i ng t he

cont r act ual obl i gat i ons i mposed by t he Aut hor i t y Act and t he Tr ust

Agr eement ; ( 3) Taki ngs Cl ause: t hat t he Recover y Act vi ol at es t he

Taki ngs Cl ause of t he Uni t ed Stat es Const i t ut i on by t aki ng wi t hout

2 The Cour t r ef er s t o the f ol l owi ng par t i es col l ect i vel y as “Oppenhei merRochest er pl ai nt i f f s”: Oppenhei mer Rochest er Fund Muni ci pal s, Oppenhei merMuni ci pal Fund (on behal f of i t s ser i es Oppenhei mer Rochest er Li mi t ed Ter mMuni ci pal Fund) , Oppenhei mer Mul t i - St at e Muni ci pal Trust ( on behal f of i t s ser i esOppenhei mer Rochest er New J ersey Muni ci pal Fund, Oppenhei mer Rochest er

Pennsyl vani a Muni ci pal Fund and Oppenhei mer Rochest er Hi gh Yi el d Muni ci pal Fund) ,Oppenhei mer Rochest er Ohi o Muni ci pal Fund, Oppenhei mer Rochest er Ar i zonaMuni ci pal Fund, Oppenhei mer Rochest er Vi r gi ni a Muni ci pal Fund, Oppenhei merRochest er Maryl and Muni ci pal Fund, Oppenhei mer Rochest er Li mi t ed Ter mCal i f orni aMuni ci pal Fund, Oppenhei mer Rochest er Cal i f orni a Muni ci pal Fund, Rochest erPort f ol i o Ser i es ( on behal f of i t s seri es Oppenhei mer Rochest er Li mi t ed Ter mNew

Yor k Muni ci pal Fund) , Oppenhei mer Rochest er AMT- Fr ee Muni ci pal Fund, Oppenhei merRochest er AMT- Fr ee New York Muni ci pal Fund, Oppenhei mer Rochest er Mi chi ganMuni ci pal Fund, Oppenhei mer Rochest er Massachuset t s Muni ci pal Fund, Oppenhei merRochest er Nor t h Carol i na Muni ci pal Fund, and Oppenhei mer Rochest er Mi nnesot aMuni ci pal Fund.



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j ust compensat i on pl ai nt i f f s’ cont r act ual r i ght t o seek t he

appoi nt ment of a recei ver , see Recover y Act § 108( b) , and

pl ai nt i f f s’ l i en on PREPA r evenues, see i d. §§ 129( d) , 322( c) ; and

( 4) St ay of Feder al Cour t Pr oceedi ngs: t hat sect i on 304 of t he

Recover y Act unconst i t ut i onal l y aut hor i zes a st ay of f eder al cour t

pr oceedi ngs when a publ i c cor por at i on f i l es f or debt r el i ef

pur suant t o t he Recover y Act . ( Ci vi l No. 14- 1518, Docket No. 85 at

¶¶ 58- 71. )

B. Franklin and Oppenheimer Rochester Plaintiffs’ Cross-Motion

for Summary Judgment

On August 11, 2014, t he Fr ankl i n and Oppenhei mer Rochest er

pl ai nt i f f s f i l ed a cr oss- mot i on f or summar y j udgment on t hei r

pr eempt i on and st ay of f eder al cour t pr oceedi ngs cl ai ms ( whi l e

opposi ng or i gi nal mot i ons t o di smi ss) . ( Ci vi l No. 14- 1518, Docket

No. 78. )C. Plaintiff BlueMountain’s Amended Complaint (Civil No. 14-1569)

Bl ueMount ai n Capi t al Management , LLC ( f or i t sel f and f or and

on behal f of i nvest ment f unds f or whi ch i t act s as i nvest ment

manager ) ( “Bl ueMount ai n”) i s a Del aware company t hat hol ds PREPA

bonds and t hat manages f unds t hat hol d more t han $400, 000, 000 of

PREPA bonds. ( Ci vi l No. 14- 1569, Docket No. 20 at ¶ 6. ) On August

12, 2014, Bl ueMount ai n f i l ed an amended compl ai nt agai nst Al ej andr o

Gar ci a- Padi l l a ( i n hi s of f i ci al capaci t y as Gover nor of Puer t o

Ri co) , Cesar R. Mi r anda Rodr i guez ( i n hi s of f i ci al capaci t y as t he

At t or ney Gener al of Puer t o Ri co) , and J ohn Doe ( i n hi s of f i ci al



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capaci t y as a GDB agent ) . ( Ci vi l No. 14- 1569, Docket No. 20. )

Pl ai nt i f f Bl ueMount ai n seeks decl ar at or y r el i ef on t he f ol l owi ng

cl ai ms: ( 1) Pr eempt i on: t hat t he Recover y Act i n i t s ent i r et y i s

pr eempt ed by t he f ederal Bankr upt cy Code and vi ol ates t he

Bankrupt cy Cl ause of t he Uni t ed St at es Const i t ut i on; ( 2) Cont r act

Cl auses: t hat t he Recover y Act i mpai r s t he cont r act ual obl i gat i ons

i mposed by t he Aut hor i t y Act and the Tr ust Agr eement and theref ore

vi ol at es t he cont r act cl auses of t he Uni t ed St at es and Puer t o Ri co

const i t ut i ons; and ( 3) St ay of Feder al Cour t Pr oceedi ngs: t hat

sect i ons 205 and 304 of t he Recover y Act unconst i t ut i onal l y

aut hor i ze a st ay of f eder al cour t pr oceedi ngs when a publ i c

cor por at i on f i l es f or debt r el i ef pur suant t o t he Recover y Act .

( Ci vi l No. 14- 1569, Docket No. 20 at ¶ 83. )

D. Consolidation Order

On August 20, 2014, t he Cour t consol i dat ed Ci vi l Case Nos. 14-

1518 and 14- 1569. I n so doi ng, t he Cour t al i gned t he br i ef i ng

schedul es f or bot h cases but di d not mer ge t he sui t s i nt o a si ngl e

cause of act i on or change t he r i ght s of t he par t i es. ( Ci vi l No.

14- 1518, Docket No. 92; Ci vi l No. 14- 1569, Docket No. 26. )

The t wo cases cont ai n over l appi ng cl ai ms but ar e di st i nct i n

t hr ee sal i ent ways. Fi r st , t he Frankl i n and Oppenhei mer Rochest er

pl ai nt i f f s br i ng sui t agai nst Commonweal t h def endant s and PREPA ( i n

Ci vi l No. 14- 1518) , wher eas Bl ueMountai n names onl y Commonweal t h

def endant s ( i n Ci vi l No. 14- 1569) . Second, onl y t he Frankl i n and



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Oppenhei mer Rochest er pl ai nt i f f s r ai se a Taki ngs Cl ause cl ai m.

Thi r d, onl y Bl ueMount ai n br i ngs a Puer t o Ri co Const i t ut i on Cont r act

Cl ause cl ai m.

E. Commonwealth and PREPA Motions to Dismiss

On Sept ember 12, 2014, t he Commonweal t h def endant s3 moved t o

di smi ss t he Fr ankl i n and Oppenhei mer Rochest er pl ai nt i f f s’ second

amended compl ai nt and Bl ueMountai n’ s amended compl ai nt , and opposed

t he Frankl i n and Oppenhei mer Rochest er pl ai nt i f f s’ cr oss- mot i on f or

summary j udgment . ( Ci vi l No. 14- 1518, Docket No. 95, mem. at

Docket No. 95- 1; Ci vi l No. 14- 1569, Docket No. 29, mem. at Docket

No. 29- 1. ) 4 The Commonweal t h def endant s argue t hat pl ai nt i f f s’

cl ai ms are unr i pe and f ai l on t he mer i t s as a mat t er of l aw.

PREPA j oi ned t he Commonweal t h def endants’ mot i on t o di smi ss

t he Fr ankl i n and Oppenhei mer Rochest er pl ai nt i f f s’ second amended

compl ai nt and opposi t i on t o t he cross- mot i on f or summary j udgment .

( Ci vi l No. 14- 1518, Docket No. 97 at p. 1. ) PREPA al so f i l ed i t s

own mot i on t o di smi ss , argui ng that t he Frankl i n and Oppenhei mer

3 The f ol l owi ng part i es are col l ect i vel y r ef er r ed t o as the “Commonweal t h

def endant s”: t he Commonweal t h of Puert o Ri co, Al ej andr o Garci a- Padi l l a ( i n hi sof f i ci al capaci t y as Gover nor of Puer t o Ri co) , Cesar R. Mi r anda Rodr i guez ( i n hi sof f i ci al capaci t y as At t or ney Gener al of Puer t o Ri co) , Mel ba Acost a ( i n herof f i ci al capaci t y as a GDB agent ) , and J ohn Doe ( i n hi s of f i ci al capaci t y as aGDB agent ) .

4 These two memoranda are i dent i cal . Compar e Ci vi l No. 14- 1518, Docket No. 95- 1,wi t h Ci vi l No. 14- 1569, Docket No. 29- 1. That i s, t he Commonweal t h def endant sr ai sed i dent i cal argument s i n movi ng t o di smi ss t he Fr ankl i n and Oppenhei merRochest er pl ai nt i f f s’ second amended compl ai nt and Bl ueMountai n’ s amendedcompl ai nt .



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Rochest er pl ai nt i f f s l ack st andi ng and t hat t hei r cl ai ms ar e

unr i pe. ( Ci vi l No. 14- 1518, Docket No. 97. )

The Fr ankl i n and Oppenhei mer Rochest er pl ai nt i f f s opposed t he

Commonweal t h def endant s’ mot i on and PREPA’ s mot i on, ( Ci vi l No. 14-

1518, Docket No. 102) , and Bl ueMountai n opposed t he Commonweal t h

def endant s’ mot i on, ( Ci vi l No. 14- 1569, Docket No. 41) . The

Commonweal t h def endant s r epl i ed, ( Ci vi l No. 14- 1518, Docket No.

108; Ci vi l No. 14- 1569, Docket No. 44) , 5 as di d PREPA ( Ci vi l No.

14- 1518, Docket No. 109) .

III. SUBJECT MATTER JURISDICTION

Def endant s chal l enge t he Cour t ’ s subj ect mat t er j ur i sdi ct i on

and seek di smi ssal pur suant t o Feder al Rul e of Ci vi l Pr ocedur e

12( b) ( 1) ( “Rul e 12( b) ( 1) ”) . Def endant s ar gue t hat pl ai nt i f f s’

cl ai ms ar e unr i pe because PREPA has not sought t o rest r uct ur e i t s

debt pur suant t o t he Recover y Act . Ther ef or e, def endant s ar gue,

pl ai nt i f f s have no basi s t o cl ai m t hat t he Recover y Act i nj ur ed

pl ai nt i f f s i n t hei r capaci t y as PREPA bondhol der s. ( Ci vi l No. 14-

1518, Docket No. 95- 1 at pp. 8- 13; Ci vi l No. 14- 1569, Docket No.

29- 1 at pp. 8- 13. ) I n addi t i on t o t hi s r i peness ar gument ,

def endant PREPA argues separ atel y t hat t he Frankl i n and Oppenhei mer

Rochest er pl ai nt i f f s l ack st andi ng. ( Ci vi l No. 14- 1569, Docket No.

97 at pp. 5- 14. )

5 These t wo memoranda are i dent i cal . Compar e Ci vi l No. 14- 1518, Docket No. 108,wi t h Ci vi l No. 14- 1569, Docket No. 44.



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A. Rule 12(b)(1) Motion to Dismiss Standard

Pur suant t o Rul e 12( b) ( 1) , a def endant may seek di smi ssal of

cl ai ms by asser t i ng t hat t he Cour t l acks subj ect mat t er

j ur i sdi ct i on. Fed. R. Ci v. P. 12( b) ( 1) . The pl ai nt i f f s bear “t he

bur den of cl ear l y al l egi ng def i ni t e f act s t o demonst r at e t hat

j ur i sdi ct i on i s proper . ” Nul ankeyutmonen Nki htaqmi kon v. I mpson,

503 F. 3d 18, 25 ( 1st Ci r . 2007) . The Cour t accept s as t r ue t he

wel l - pl ed f actual al l egat i ons i n t he pl ai nt i f f s’ compl ai nt s and

makes al l r easonabl e i nf er ences i n t he pl ai nt i f f s’ f avor .

Downi ng/ Sal t Pond Par t ner s, L. P. v. Rhode I sl and & Provi dence

Pl ant at i ons, 643 F. 3d 16, 17 ( 1st Ci r . 2011) . On a Rul e 12( b) ( 1)

mot i on, t he Cour t may consi der mat er i al s out si de t he pl eadi ngs t o

det er mi ne j ur i sdi ct i on. Gonzal ez v. Uni t ed St at es, 284 F. 3d 281,

288 ( 1st Ci r . 2002) .

B. Ripeness

The r i peness doct r i ne “has r oot s i n bot h t he Ar t i cl e I I I case

or cont r over sy r equi r ement and i n pr udent i al consi der at i ons. ”

Mangual v. Rot ger - Sabat , 317 F. 3d 45, 59 ( 1st Ci r . 2003) . “The

‘ basi c rat i onal e’ of t he r i peness i nqui r y i s ‘ t o pr event t he

cour t s, t hr ough avoi dance of pr emat ur e adj udi cat i on, f r om

ent angl i ng t hemsel ves i n abst r act di sagr eement s. ’ ” Roman Cat hol i c

Bi shop of Spr i ngf i el d v. Ci t y of Spr i ngf i el d, 724 F. 3d 78, 89 ( 1st

Ci r . 2013) ( quot i ng Abbot t Labs. v. Gar dner , 387 U. S. 136, 148

( 1967) ) . The r i peness test has t wo pr ongs: “‘ t he f i t ness of t he



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i ssues f or j udi ci al deci si on’ and ‘ t he har dshi p t o t he par t i es of

wi t hhol di ng cour t consi der at i on. ’ ” Pac. Gas & El ec. Co. v. St at e

Energy Res. Conser vat i on & Dev. Comm’ n, 461 U. S. 190, 201 (1983)

( quot i ng Abbot t Labs. , 387 U. S. at 149) . Bot h t he f i t ness and

har dshi p pr ongs of t hi s t est “must be sat i sf i ed, al t hough a st r ong

showi ng on one may compensat e f or a weak one on t he ot her . ”

McI nni s- Mi senor v. Mai ne Med. Ct r . , 319 F. 3d 63, 70 ( 1st Ci r .

2003) .

The Fi r st Ci r cui t Cour t of Appeal s has r epeatedl y

caut i oned t hat r i peness i nqui r i es ar e “hi ghl y f act - dependent , such

t hat t he ‘ var i ous i nt eger s t hat ent er i nt o t he r i peness equat i on

pl ay out qui t e di f f er ent l y f r om case t o case. ’ ” Ver i zon New

Engl and, I nc. v. I nt ’ l Bhd. of El ec. Wor ker s, Local No. 2322, 651

F. 3d 176, 188 ( 1st Ci r . 2011) ( quot i ng Doe v. Bush, 323 F. 3d 133,

138 ( 1st Ci r . 2003) ( quot i ng Er nst & Young v. Deposi t or s Econ.

Pr ot . Cor p. , 45 F. 3d 530, 535 ( 1st Ci r . 1995) ) ) .

1. Plaintiffs’ Preemption and Contract Clauses Claims Are

Ripe

As di scussed bel ow, t he Cour t concl udes that pl ai nt i f f s’

pr eempt i on and cont r act cl auses cl ai ms are f i t f or r evi ew, and t hat

wi t hhol di ng j udgment on t hese cl ai ms wi l l i mpose har dshi p.

a) Fitness

“The f i t ness pr ong of t he r i peness t est has bot h

const i t ut i onal and pr udent i al component s. ” Roman Cat hol i c Bi shop

of Spr i ngf i el d, 724 F. 3d at 89. The const i t ut i onal component i s



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“gr ounded i n t he pr ohi bi t i on agai nst advi sory opi ni ons” and

“concer ns whet her t her e i s a suf f i ci ent l y l i ve case or cont r over sy,

at t he t i me of t he pr oceedi ngs, t o cr eat e j ur i sdi ct i on i n t he

f eder al cour t s. ” I d. ( i nt er nal quot at i on mar ks and ci t at i ons

omi t t ed) . A sound way t o det er mi ne const i t ut i onal f i t ness i s t o

“eval uat e t he nat ur e of t he r el i ef r equest ed; [ t ] he cont r over sy

must be such t hat i t admi t s of ‘ speci f i c r el i ef t hr ough a decr ee of

concl usi ve char act er , as di st i ngui shed f r om an opi ni on advi si ng

what t he l aw woul d be upon a hypot het i cal st at e of f acts. ’ ” Rhode

I sl and v. Nar r aganset t I ndi an Tr i be, 19 F. 3d 685, 693 ( 1st Ci r .

1994) ( quot i ng Aet na Li f e I ns. Co. of Har t f or d, Conn. v. Hawor t h,

300 U. S. 227, 241 ( 1937) ) .

Texas v. Uni t ed Stat es, 523 U. S. 296 ( 1998) ,

pr ovi des a pr i me exampl e of an unf i t case wher e the pl ai nt i f f seeks

an opi ni on advi si ng what t he l aw woul d be i n a hypothet i cal

scenar i o. I n t hat case, t he Texas Educat i on Code per mi t t ed t he

i mposi t i on of t en possi bl e sancti ons i f a school di st r i ct f ai l ed

t he st at e’ s accr edi t at i on cr i t er i a. Texas, 523 U. S. at 298. The

St at e of Texas sought a decl ar at or y j udgment t hat t he Vot i ng Ri ght s

Act “under no ci r cumst ances” woul d appl y t o t he i mposi t i on of t wo

of t hese sanct i ons. I d. at 301. The sanct i ons, however , wer e

never i mposed. I d. at 298. Thus, t he ci r cumst ances under whi ch

t he sanct i ons coul d be i mposed wer e ent i r el y hypot het i cal and

specul at i ve. As t o t he f i t ness i nqui r y, t he Uni t ed St at es Supr eme



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Cour t concl uded t hat i t woul d not empl oy i t s “power s of

i magi nat i on” and t hat t he oper at i on of t he sanct i on pr ovi si ons

woul d be “bet t er gr asped when vi ewed i n l i ght of a par t i cul ar

appl i cat i on. ” I d. at 301; see I nt ’ l Longshor emen’ s &

Warehousemen’ s Uni on, Local 37 v. Boyd, 347 U. S. 222, 224 ( 1954)

( “Det er mi nat i on of t he scope . . . of l egi sl at i on i n advance of i t s

i mmedi at e adver se ef f ect i n t he cont ext of a concr et e case i nvol ves

t oo r emot e and abst r act an i nqui r y f or t he pr oper exer ci se of t he

j udi ci al f unct i on. ”) .

Her e, pl ai nt i f f s’ pr eempt i on and cont r act cl auses

cl ai ms r el y on t he enactment of t he Recover y Act , not on i t s

application. Pl ai nt i f f s do not seek a decl ar at i on t hat t he

Recover y Act would be preempted i f enf or ced i n a hypot het i cal way.

Nor do pl ai nt i f f s seek a decl ar at i on t hat t he Recover y Act would

impair contractual obligations i f appl i ed i n a hypot het i cal

scenar i o. Rat her , t he r el i ef pl ai nt i f f s seek - a decl ar at i on t hat

t he Recover y Act i s unconst i t ut i onal because f ederal l aw pr eempt s

i t and because t he Cont r act s Cl ause pr ohi bi t s i t - i s concl usi ve i n

char act er , not dependant on hypot het i cal f act s, and compl et el y

unl i ke t he advi sory opi ni on sought i n Texas.

The prudent i al component of t he f i t ness prong

consi der s “t he extent t o whi ch r esol ut i on of t he chal l enge depends

upon f act s that may not yet be suf f i ci ent l y devel oped. ” Er nst &

Young, 45 F. 3d at 535. Accor di ngl y, cases “i nt r i nsi cal l y l egal



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nat ur e” ar e l i kel y t o be f ound f i t . Ri va v. Massachuset t s, 61 F. 3d

1003, 1010 ( 1st Ci r . 1995) ; see Thomas v. Uni on Carbi de Agr .

Pr oduct s Co. , 473 U. S. 568, 581 ( 1985) ( cl ai m t hat a l aw vi ol at ed

Ar t i cl e I I I of t he Const i t ut i on was f i t f or r evi ew because i t was

“pur el y l egal , and [ woul d] not be cl ar i f i ed by f ur t her f act ual

devel opment ”) . Cour t s ar e al so l i kel y t o f i nd cases f i t when “al l

of t he act s t hat ar e al l eged t o creat e l i abi l i t y have al r eady

occur r ed. ” Ver i zon New Engl and, 651 F. 3d at 189 ( quotat i on marks

and ci t at i on omi t t ed) ; see Roman Cat hol i c Bi shop of Spr i ngf i el d,

724 F. 3d at 91- 93 ( di smi ssi ng cl ai ms t hat r el y on a pot ent i al

f ut ur e appl i cat i on of an or di nance as unf i t f or r evi ew, but hol di ng

t hat t he cl ai ms t hat “r est sol el y on t he exi st ence of t he

Or di nance” ar e f i t f or r evi ew because “no f ur t her f act ual

devel opment i s necessar y”) ; Pust el l v. Lynn Pub. Sch. , 18 F. 3d 50,

52 ( 1st Ci r . 1994) ( f i ndi ng const i t ut i onal chal l enge f i t wher e

“[ n] o f ur t her f act ual devel opment [ was] necessary f or [ t he cour t ]

t o r esol ve t he quest i on at i ssue”) .

The i ssues present ed i n pl ai nt i f f s’ preempt i on

cl ai ms ar e pur el y l egal : t he Cour t need not consi der any f act t o

determi ne whether t he Recover y Act , on i t s f ace, i s preempt ed by

f eder al l aw. Pl ai nt i f f s’ cont r act cl auses cl ai ms i nvol ve t wo

l i mi t ed f act ual i nqui r i es: ( 1) whet her t he enact ment of t he

Recover y Act subst ant i al l y i mpai r ed t he cont r act ual r el at i onshi ps

cr eat ed i n t he Aut hor i t y Act and t he Tr ust Agr eement , and ( 2)



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whether t he enact ment of t he Recovery Act was “r easonabl e and

necessary t o serve an i mpor t ant publ i c pur pose. ” See i nf r a Par t V.

Bot h of t hese i nqui r i es i nvol ve sol el y act s t hat occur r ed and f act s

t hat exi st ed at or bef or e t he Recover y Act ’ s enact ment i n J une

2014. Thus, pl ai nt i f f s’ cont r act cl auses cl ai ms do not r equi r e

f ur t her f act ual devel opment .

The Cour t t her ef or e f i nds t hat pl ai nt i f f s’

pr eempt i on and cont r act cl auses cl ai ms ar e f i t f or r evi ew.

b) Hardship

The har dshi p prong of t he r i peness t est eval uat es

whet her “t he i mpact ” of t he chal l enged l aw upon t he pl ai nt i f f s i s

“suf f i ci ent l y di r ect and i mmedi at e as t o r ender t he i ssue

appr opr i at e f or j udi ci al r evi ew. ” Abbot t Labs. , 387 U. S. at 152.

Thi s i nqui r y shoul d al so “f ocus on t he j udgment ’ s usef ul ness” and

consi der “whet her gr ant i ng r el i ef woul d serve a usef ul pur pose, or ,

put anot her way, whet her t he sought - af t er decl ar at i on woul d be of

pr act i cal assi st ance i n set t i ng t he under l yi ng cont r over sy t o

r est . ” Rhode I sl and, 19 F. 3d at 693; accor d Ver i zon New Engl and,

651 F. 3d at 188.

Pl ai nt i f f s al l ege t hat t he enact ment of t he Recover y

Act t ot al l y el i mi nat ed sever al r emedi al and secur i t y ri ght s

pr omi sed t o t hem i n t he Aut hor i t y Act and i n t he Tr ust Agr eement .

Fi r st , i n the Aut hor i t y Act , t he Commonweal t h expr essl y pl edged

t hat i t woul d not al t er PREPA’ s r i ght s unt i l al l bonds ar e f ul l y



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sat i sf i ed and di schar ged. P. R. Laws Ann. t i t . 22 § 215. 6

Pl ai nt i f f s al l ege t hat t he Recover y Act el i mi nat es t hi s guar ant ee

by gi vi ng PREPA t he r i ght t o par t i ci pat e i n a new l egal r egi me t o

r est r uct ur e i t s debt s. Second, sect i on 17 of t he Aut hor i t y Act

gr ant s bondhol der s t he r i ght t o seek appoi nt ment of a recei ver i f

PREPA def aul t s. P. R. Laws Ann. t i t . 22 § 207. Thi s r i ght i s

i ncor por ated i nt o sect i on 804 of t he Tr ust Agr eement , whi ch

guarant ees t hat bondhol ders have t he r i ght t o seek “t he appoi nt ment

of a recei ver as aut hor i zed by t he Aut hor i t y Act ” i f PREPA

def aul t s. Tr ust Agr eement § 804. Pl ai nt i f f s al l ege t hat t he

Recover y Act expr ess l y el i mi nat es t he r i ght t o seek t he appoi nt ment

of a r ecei ver . See Recover y Act § 108( b) . 7 Thi r d, the Tr ust

Agr eement i ncl udes a guar ant ee that PREPA wi l l not cr eat e a l i en

equal t o or seni or t o the l i en on PREPA’ s r evenues t hat secur es

pl ai nt i f f s’ bonds. Tr ust Agr eement § 712. Pl ai nt i f f s al l ege t hat

t he Recover y Act el i mi nat es t hi s guar ant ee by per mi t t i ng PREPA t o

obt ai n credi t secur ed by a l i en t hat i s seni or t o pl ai nt i f f s’ l i en.

6 The Aut hori t y Act pr ovi des as f ol l ows: The Commonweal t h Government does hereby pl edge t o, and agree wi t h,

any per son, f i r m or corporat i on, or any f ederal , Commonweal t h orst at e agency, subscr i bi ng to or acqui r i ng bonds of [ PREPA] t of i nance i n whol e or i n part any under t aki ng or any part t her eof ,t hat i t wi l l not l i mi t or al t er t he r i ght s or power s her eby vest edi n [ PREPA] unt i l al l such bonds at any t i me i ssued, t oget her wi t ht he i nt er est t her eon, ar e f ul l y met and di schar ged.

P. R. Laws Ann. t i t . 22 § 215.

7 “Thi s Act super sedes and annul s any i nsol vency or cust odi al pr ovi si on i ncl udedi n t he enabl i ng or ot her act of any publ i c cor por at i on, i ncl udi ng Sect i on 17 of [ t he Aut hor i t y Act ] . ” Recover y Act § 108( b) .



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See Recover y Act §§ 129( d) , 206( a) , 322( c) . 8 Four t h, i n t he event

of def aul t , t he Tr ust Agr eement gi ves PREPA bondhol der s t he r i ght

t o accel er at e payment s. Tr ust Agr eement § 803. Pl ai nt i f f s al l ege

t hat t he Recover y Act dest r oys t hei r r i ght t o t hi s r emedy bot h

dur i ng t he suspensi on and st ay pr ovi si ons, Recover y Act §§ 205,

304, and af t er t he speci al cour t appr oves a pl an pur suant t o

8 Sect i on 322( c) of t he Recover y Act per mi t s t he speci al cour t t o aut hor i zepubl i c cor por at i ons t hat seek debt r el i ef pur suant t o Chapt er 3 t o obt ai n credi t“secur ed by a seni or or equal l i en on t he pet i t i oner ’ s pr oper t y t hat i s subj ectt o a l i en onl y i f - ( 1) t he pet i t i oner i s unabl e t o obt ai n such credi t ot her wi se;

and ( 2) ei t her ( A) t he pr oceeds are needed t o per f or m publ i c f unct i ons andsati sf y t he r equi r ement s of sect i on 128 of t hi s Act ; or ( B) t her e i s adequat epr ot ect i on of t he i nt er est of t he hol der of t he l i en on t he pr oper t y of t hepet i t i oner on whi ch such seni or or equal l i en i s pr oposed t o be gr ant ed. ”Recover y Act § 322( c) . Thi s r i ght extends t o cor porat i ons seeki ng debt r el i ef pur suant t o Chapt er 2 of t he Recovery Act . See i d. § 206( a) ( “Af t er t hecommencement of t he suspensi on per i od, an el i gi bl e obl i gor may obt ai n credi t i nt he same manner and on t he same t erms as a pet i t i oner pur suant t o sect i on 322 of t hi s Act . ”) Sect i on 129( d) of t he Recover y Act di sposes of t he “adequatepr ot ect i on” r equi r ement i n sect i on 322( c) ( 2) ( B) when “pol i ce power ” j ust i f i es i t .I d. § 129( d) .



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Chapt er 2 or 3, i d. §§ 115( b) ( 2) , 115( c) ( 3) . 9 Fi f t h, t he Tr ust

Agreement contai ns an ipso facto cl ause that pr ovi des t hat PREPA i s

deemed i n def aul t i f PREPA i nst i t ut es a pr oceedi ng “f or t he pur pose

of ef f ect i ng a composi t i on bet ween [ PREPA] and i t s cr edi t or s or f or

t he pur pose of adj ust i ng t he cl ai ms of such cr edi t or s. ” Tr ust

Agr eement § 802( g) . Pl ai nt i f f s al l ege t hat t he Recover y Act

expl i ci t l y r ender s t hi s ipso facto cl ause unenf or ceabl e i n a

9 Sect i on 205 pr ohi bi t s bondhol ders f r omexer ci si ng r emedi es dur i ng Chapt er 2’ ssuspensi on per i od. Recover y Act § 205 ( “Notwi t hst andi ng any cont r act ual

pr ovi si on or appl i cabl e l aw t o t he cont r ar y, dur i ng t he suspensi on per i od, noent i t y asser t i ng cl ai ms or ot her r i ght s, . . . i n r espect of af f ected debti nst r ument s . . . may exerci se or cont i nue to exer ci se any r emedy under acont r act or appl i cabl e l aw . . . t hat i s condi t i oned upon t he f i nanci al condi t i onof , or t he commencement of a rest r uct ur i ng, i nsol vency, bankrupt cy, or otherpr oceedi ngs ( or a si mi l ar or anal ogous process) by, t he el i gi bl e obl i gorconcer ned, i ncl udi ng a def aul t or an event of def aul t t her eunder . ”) . Sect i on 304st ays “any act t o col l ect , assess, or r ecover on a cl ai magai nst t he pet i t i oner ”dur i ng Chapt er 3’ s aut omat i c st ay per i od. I d. § 304.

Sect i on 115 pr ohi bi t s bondhol der s f r om exer ci si ng r emedi es af t er t he speci alcour t appr oves a pl an pur suant t o Chapt er 2 or 3. I d. § 115( b) ( 2) ( “Upon ent r yof an appr oval or der . . . under chapt er 2 of t hi s Act . . . no ent i t y asser t i ngcl ai ms or ot her r i ght s, i ncl udi ng a benef i ci al i nt er est , i n r espect of af f ected

debt i nst r ument s of such el i gi bl e obl i gor . . . shal l br i ng any act i on orpr oceedi ng of any ki nd or charact er f or t he enf orcement of such cl ai mor r emedi esi n r espect of such af f ect ed debt i nst r ument s, except wi t h t he per mi ssi on of t he[ speci al cour t ] and t hen onl y to recover and enf orce t he r i ght s per mi t t ed undert he amendment s, modi f i cat i ons, wai ver s, or exchanges, and t he appr oval order . ”) ;i d. § 115( c)( 3) ( “[ U] pon ent r y of a conf i r mat i on or der , . . . al l credi t or saf f ected by t he pl an . . . shal l be enj oi ned f r om, di r ectl y or i ndi r ectl y, t aki ngany act i on i nconsi st ent wi t h t he pur pose of t hi s Act , i ncl udi ng br i ngi ng anyact i on or proceedi ng of any ki nd or char act er f or t he enf orcement of such cl ai mor r emedi es i n respect of af f ect ed debt , except as each has been af f ect edpur suant t o the pl an under chapt er 3. ”) .



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Ci vi l Nos. 14- 1518 ( FAB) , 14- 1569 ( FAB) 21

sect i on t i t l ed “Unenf or ceabl e I pso Fact o Cl auses. ” See Recover y

Act § 325( a) ; see al so i d. § 205( c) . 10

The Commonweal t h’ s nul l i f i cat i on of t hi s ser i es of

st at ut or y and cont r act ual secur i t y r i ght s and r emedi al pr ovi si ons,

t hr ough i t s enact ment of t he Recover y Act , i s a “di r ect and

i mmedi at e” i nj ur y t o t he pl ai nt i f f bondhol der s. See Abbot t Labs. ,

387 U. S. at 152. Pl ai nt i f f s shoul d not be f or ced t o l i ve wi t h such

subst ant i al l y i mpai r ed cont r actual r i ght s - r i ght s t hat t hey

bar gai ned f or when t hey pur chased t he near l y t wo bi l l i on dol l ar s

wor t h of PREPA bonds t hat t hey hol d col l ect i vel y.

Thi s hardshi p i s cer t ai nl y mor e i mmedi at e and

concr et e t han t he “t hr eat t o f eder al i sm” har dshi p t hat t he

pl ai nt i f f al l eged i n Texas, whi ch t he Supr eme Cour t vi ewed as an

“abst r act i on” t hat was “i nadequat e t o suppor t sui t unl ess t he

[ pl ai nt i f f ’ s] pr i mar y conduct i s af f ect ed. ” 523 U. S. at 302.

Her e, not havi ng t he guar ant ee of r emedi al pr ovi si ons t hat t hey

10 Sect i on 325 of t he Recover y Act pr ovi des as f ol l ows i n i t s f i r st subsect i on:Not wi t hst andi ng any cont r act ual pr ovi si on or appl i cabl e l aw t o t hecont r ary, a cont r act of a pet i t i oner may not be t er mi nated ormodi f i ed, and any r i ght or obl i gat i on under such cont r act may not bet er mi nat ed or modi f i ed, at any t i me af t er t he f i l i ng of a pet i t i onunder chapt er 3 of t hi s Act sol el y because of a pr ovi si on i n suchcont r act condi t i oned on -

( 1) t he i nsol vency or f i nanci al condi t i on of t he pet i t i oner at anyt i me bef or e the cl osi ng of t he case;( 2) t he f i l i ng of a pet i t i on pur suant t o sect i on 301 of t hi s Act andal l ot her r el i ef r equest ed under t hi s Act; or( 3) a def aul t under a separ at e cont r act t hat i s due to, t r i gger edby, or as a r esul t of t he occur r ence of t he event s or mat t er s i nsubsecti ons (a) ( 1) [ t he pet i t i oner ’ s i nsol vency] or ( a) ( 2) [ t hef i l i ng of a Chapt er 3 pet i t i on] of t hi s secti on.

Recover y Act § 325( a) . Sect i on 205( c) of t he Recover y Act has nearl y i dent i call anguage and r ender s ipso facto cl auses unenf orceabl e dur i ng t he suspensi onperi od of a Chapt er 2 pr oceedi ng. I d. § 205( c) .



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wer e pr omi sed af f ect s pl ai nt i f f s’ day- t o- day busi ness as PREPA

bondhol ders, par t i cul ar l y when negot i at i ng wi t h PREPA over r emedi es

and pot ent i al r est r uct ur i ng. I ndeed, t he t hr eat of PREPA’ s

i nvocat i on of t he Recover y Act hangs over pl ai nt i f f s and di mi ni shes

t hei r bar gai ni ng power as bondhol der s. See Met r o. Wash. Ai r por t s

Aut h. v. Ci t i zens f or Abat ement of Ai r craf t Noi se, I nc. , 501 U. S.

252, 265 n. 13 ( 1991) ( concl udi ng t hat const i t ut i onal chal l enge to

“vet o power ” of admi ni st r at i ve boar d was r i pe “even i f t he vet o

power has not been exer ci sed to respondent s’ det r i ment ” because t he

“t hr eat of t he vet o hangs over t he [deci si onmaker s subj ect t o the

vet o] l i ke t he swor d over Damocl es, cr eat i ng a ‘ her e- and- now

subser vi ence’ ” t o the admi ni st r at i ve boar d) .

I n addi t i on, pl ai nt i f f s ’ sought - af t er decl ar at i on

t hat t he Recover y Act i s unconst i t ut i onal woul d “be of pr act i cal

assi st ance i n set t i ng t he under l yi ng cont r over sy t o r est ” because

i t woul d compl et el y r est or e pl ai nt i f f s’ cont r actual r i ght s. See

Rhode I sl and, 19 F. 3d at 693. I n t hi s sense, t he har dshi p her e i s

unl i ke t he har dshi p i n Er nst & Young, 45 F. 3d 530. I n t hat case,

t he pl ai nt i f f al l eged t hat a Rhode I sl and l aw l i mi t i ng nonset t l i ng

t or t f easor s’ r i ght of cont r i but i on agai nst j oi nt t or t f easor s caused

t wo har dshi ps: i ncr eased pr essure t o set t l e a negl i gence sui t and

an i nabi l i t y t o eval uat e i t s exposur e t her ei n. 45 F. 3d at 532- 33,

539. The Fi r st Ci r cui t Cour t of Appeal s, i n hol di ng t he cl ai m

unr i pe, r easoned t hat r esol vi ng t he chal l enge t o t he Rhode I sl and



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l aw woul d be of “l i mi t ed ut i l i t y” t o t he pl ai nt i f f because ( 1) t he

pl ai nt i f f woul d st i l l be f aced wi t h t he negl i gence sui t , and ( 2)

t he r i ght t o cont r i but i on was onl y one of many f act or s i nvol ved i n

t he pl ai nt i f f ’ s set t l ement cal cul at i ons. I d. at 540 ( expl ai ni ng

t hat “t he usef ul ness t hat may sat i sf y t he har dshi p pr ong . . . i s

not met by a part y showi ng t hat i t has t he opport uni t y t o move f r om

a posi t i on of ut t er conf usi on t o one of mer e bef uddl ement ”) . Her e,

t he decl ar at i on t hat pl ai nt i f f s seek on t hei r pr eempt i on and

cont r act cl auses cl ai ms - t hat t he Recover y Act i n i t s ent i r et y i s

unconst i t ut i onal - woul d be of gr eat ut i l i t y t o pl ai nt i f f s because

i t woul d compl et el y r est or e t hei r r i ght s guar ant eed i n t he

Aut hor i t y Act and t he Tr ust Agr eement .

I n sum, del ayi ng adj udi cat i on on t he mer i t s of

pl ai nt i f f s’ const i t ut i onal cl ai ms unt i l PREPA i nvokes t he Recover y

Act - t he event t hat t he Commonweal t h def endants concede woul d

r ender pl ai nt i f f s’ chal l enges r i pe, ( Ci vi l No. 14- 1518, Docket No.

95- 1 at pp. 1, 12- 13) - woul d cont i nue t o i nf l i ct har dshi p on

pl ai nt i f f s wi t h no i dent i f i abl e cor r espondi ng gai n. Thus, havi ng

sat i sf i ed t he f i t ness and har dshi p pr ongs of t he r i peness t est , t he

Cour t concl udes t hat pl ai nt i f f s’ pr eempt i on and cont r act cl auses

cl ai ms ar e r i pe f or r evi ew.

2. Plaintiffs’ Stay of Federal Court Proceedings Claims Are

Not Ripe

Pl ai nt i f f s seek a decl ar at or y j udgment t hat t he Recover y

Act vi ol at es t he Uni t ed St at es Const i t ut i on t o t he ext ent t hat



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sect i on 304 of t he Act aut hor i zes a st ay of f eder al cour t

pr oceedi ngs when a publ i c cor por at i on f i l es f or debt r el i ef .

( Ci vi l No. 14- 1518, Docket No. 85 at ¶¶ 55, 69; Ci vi l No. 14- 1569,

Docket No. 20 at ¶¶ 76, 83( d) . ) Pl ai nt i f f Bl ueMount ai n

addi t i onal l y cl ai ms t hat sect i on 205 of t he Recover y Act

unconst i t ut i onal l y aut hor i zes a suspensi on of f eder al cour t

pr oceedi ngs. ( Ci vi l No. 14- 1569, Docket No. 20 at ¶¶ 76, 83( d) . )

Pl ai nt i f f s do not i dent i f y a speci f i c pr ovi si on of t he Const i t ut i on

t hat t hese pr ovi si ons vi ol at e, but r at her r el y on t he Uni t ed St at es

Supr eme Cour t hol di ng i n Donovan v. Ci t y of Dal l as, 377 U. S. 408,

413 ( 1964) , t hat “st at e cour t s ar e compl et el y wi t hout power t o

r est r ai n f eder al - cour t pr oceedi ngs i n i n per sonam act i ons. ”

Fi r st , as t o t he cl ai ms’ f i t ness, t he Cour t eval uat es

whet her pl ai nt i f f s ar e r equest i ng “speci f i c rel i ef t hr ough a decree

of concl usi ve char act er ” as opposed t o “an opi ni on advi si ng what

t he l aw woul d be upon a hypot het i cal st at e of f act s. ” Rhode

I sl and, 19 F. 3d at 693 ( quot i ng Aet na Li f e I ns. Co. , 300 U. S. at

241) . The f ol l owi ng l anguage i n pl ai nt i f f s’ compl ai nt r eveal s t hat

t hey seek the l at t er :

To t he ext ent any provi si on of t he [ Recover y

Act ] enj oi ns, st ays, suspends or pr ecl udes[ pl ai nt i f f s ] f rom exerc i s i ng t hei r r i ght s i nf eder al cour t , i ncl udi ng t hei r r i ght t ochal l enge t he const i t ut i onal i t y of t heRecover y Act i t sel f i n f eder al cour t , t hosepr ovi si ons al so vi ol at e t he Const i t ut i on.



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( Ci vi l No. 14- 1518, Docket No. 85 at ¶ 57; Ci vi l No. 14- 1569,

Docket No. 20 at ¶ 77. ) Pl ai nt i f f s essent i al l y seek an opi ni on

that certain applications of t he suspensi on and st ay pr ovi si ons of

t he Recover y Act woul d be unconst i t ut i onal . The Cour t f i nds t hat

t hi s r equest i s aki n t o t he r el i ef sought i n Texas, and t hat t he

operat i on of sect i ons 304 and 205 of t he Recover y Act woul d be

“bet t er gr asped when vi ewed i n l i ght of a par t i cul ar appl i cat i on. ”

Texas, 523 U. S. at 301.

Second, as t o t he pr udent i al component of t he f i t ness

pr ong, t he “r emot eness and abst r act i on” of pl ai nt i f f s’ pr e-

enf or cement i nj ur y i s “i ncr eased by that f act t hat [ t he suspensi on

and st ay pr ovi si ons have] yet t o be i nt er pr et ed by the [ Puer t o

Ri co] cour t s. ” See Texas, 523 U. S. at 301. Thus, “‘ [ p] ost poni ng

consi der at i on of t he quest i ons pr esent ed, unt i l a mor e concr et e

cont r over sy ar i ses, al so has t he advant age of per mi t t i ng t he stat e

cour t s f ur t her oppor t uni t y t o const r ue’ t he pr ovi si ons, ” and i ndeed

t o const r ue t hem i n a const i t ut i onal way. See i d. ( quot i ng Renne

v. Gear y, 501 U. S. 312, 323 (1991) ) .

Fi nal l y, concer ni ng t he har dshi p pr ong, t he Cour t

exami nes whether wi t hhol di ng j udgment on t he st ay of f ederal cour t

pr oceedi ngs cl ai ms woul d creat e a “di r ect and i mmedi ate di l emma f or

t he par t i es. ” See St er n v. U. S. Di st . Cour t f or Di st . of Mass. ,

214 F. 3d 4, 10 ( 1st Ci r . 2000) . Because PREPA has not f i l ed f or

debt r el i ef pur suant t o t he Recover y Act , t he suspensi on per i od and



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Ci vi l Nos. 14- 1518 ( FAB) , 14- 1569 ( FAB) 26

aut omat i c s t ay i n sect i ons 205 and 304 of t he Recover y Act have not

been t r i gger ed. Thus, pl ai nt i f f s do not al l ege t hat any act ual

appl i cat i on of t he suspensi on or st ay pr ovi si ons has i nj ur ed t hem.

The Cour t t her ef or e t urns t o whether t he enact ment of t hese

pr ovi si ons causes a di r ect i nj ur y. Enact ment of t he suspensi on and

st ay pr ovi si ons appear s t o i mpai r pl ai nt i f f s’ cont r actual r i ght t o

sue t o enf orce t he t erms of t he Trust Agr eement , see Trust

Agr eement § 804, whi ch does i mpose hardshi p on pl ai nt i f f s. But

t hi s showi ng of hardshi p i s weak - much weaker t han t he hardshi p

creat ed by t he nul l i f i cat i on of t he ser i es of r i ght s t hat suppor t ed

j ur i sdi ct i on of pl ai nt i f f s’ preempt i on and cont r act cl auses cl ai m.

Thus, pl ai nt i f f s’ st ay of f eder al cour t proceedi ngs

cl ai ms f ai l t he f i t ness pr ong and has a weak showi ng on t he

har dshi p pr ong of t he r i peness t est . The Cour t t her ef or e concl udes

t hat t hese cl ai ms are unr i pe and GRANTS t he Commonweal t h

def endant s’ mot i ons t o di smi ss, ( Ci vi l No. 14- 1518, Docket No. 95;

Ci vi l No. 14- 1569, Docket No. 29) , as t o t he st ay of f eder al cour t

pr oceedi ngs cl ai ms.

C. Standing

The doct r i nes of r i peness and st andi ng over l ap i n many ways.

McI nni s- Mi senor , 319 F. 3d at 71. St andi ng, l i ke r i peness, has

r oot s i n Ar t i cl e I I I ’ s case or cont r over sy r equi r ement . See U. S.

Const. Ar t . I I I , § 2. To establ i sh consti t ut i onal standi ng, a

pl ai nt i f f must sat i sf y t hr ee el ement s: “a concr et e and



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par t i cul ar i zed i nj ur y i n f act , a causal connect i on t hat per mi t s

t r aci ng t he cl ai med i nj ur y to t he def endant ’ s act i ons, and a

l i kel i hood t hat pr evai l i ng i n t he act i on wi l l af f or d some r edr ess

f or t he i nj ur y. ” Weaver ’ s Cove Ener gy, LLC v. R. I . Coast al Res.

Mgmt . Counci l , 589 F. 3d 458, 467 ( 1st Ci r . 2009) ( i nt er nal

quot at i on mar ks and ci t at i ons omi t t ed) .

Pl ai nt i f f s meet t hese t hr ee el ement s as t o t hei r pr eempt i on

and cont r act cl auses cl ai ms agai nst t he Commonweal t h def endant s.

Fi r st , as di scussed above, t he Recover y Act ’ s nul l i f i cat i on of

sever al st at ut or y and cont r act ual secur i t y r i ght s i s a di r ect

i nj ur y t o t he pl ai nt i f f bondhol der s. 11 Second, t hi s i nj ur y was

caused by t he Commonweal t h’ s enact ment of t he Recover y Act . Thi r d,

pl ai nt i f f s’ desi r ed decl ar at or y j udgment t hat t he Recover y Act i s

unconst i t ut i onal wi l l af f or d pl ai nt i f f s redr ess f or t he i nj ur y

because i t wi l l nul l i f y t he Recover y Act, r est or i ng pl ai nt i f f s’

st at ut or y and cont r act ual r i ght s.

As t o the Fr ankl i n and Oppenhei mer Rochest er pl ai nt i f f s’

cl ai ms agai nst PREPA, however , t he second el ement of t he st andi ng

t est i s not met : t he el i mi nat i on of pl ai nt i f f s ’ secur i t y r i ght s i s

t r aceabl e onl y t o t he Commonweal t h’ s enact ment of t he Recover y Act

and not t o any act i on by PREPA. I f PREPA’ s f i l i ng f or debt r el i ef

pur suant t o the Recover y Act were i mmi nent , t hi s coul d be a

suf f i ci ent i nj ur y t r aceabl e t o PREPA. See Kat z v. Per shi ng, LLC,

11 See supr a Par t I I I . B. 1. b.



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672 F. 3d 64, 71 ( 1st Ci r . 2012) ( expl ai ni ng t hat an “i mmi nent

i nj ur y” can sat i sf y t he st andi ng i nj ur y- i n- f act r equi r ement i f t he

har mi s “suf f i ci ent l y t hr eat eni ng, ” but t hat “i t i s not enough t hat

t he har m mi ght occur at some f ut ur e t i me”) . To suppor t t hei r

al l egat i on t hat PREPA wi l l f i l e f or r el i ef pur suant t o t he Recover y

Act i mmi nent l y, pl ai nt i f f s poi nt t o ( 1) t he Recover y Act ’ s

St at ement of Mot i ves, whi ch i dent i f i es PREPA as t he “most dr amat i c

exampl e” of a Commonweal t h publ i c cor porat i on t hat f aces

si gni f i cant f i nanci al chal l enges, and ( 2) mar ket wat cher s’

pr edi cat i ons f r om J ul y 2014 t hat i t i s hi ghl y l i kel y t hat PREPA

wi l l seek r el i ef pur suant t o t he Recover y Act i n t he near f ut ur e.

( Ci vi l No. 14- 1518, Docket No. 85 at ¶¶ 18- 19. ) Wi t hout mor e,

t hese two f act ual al l egat i ons mer el y suppor t specul at i on t hat PREPA

wi l l f i l e f or r el i ef at some f ut ur e t i me; t hey do not suppor t t he

concl usi on t hat t he f i l i ng i s i mmi nent .

Accor di ngl y, because t he Fr ankl i n and Oppenhei mer Rochest er

pl ai nt i f f s have not suf f i ci ent l y al l eged any i nj ur y t r aceabl e t o an

act i on by PREPA, t hey l ack st andi ng t o asser t t hei r cl ai ms agai nst

PREPA. The Cour t t heref ore GRANTS PREPA’ s mot i on t o di smi ss ,

( Ci vi l No. 14- 1518, Docket No. 97) , as t o al l cl ai ms t o t he ext ent

t hat t hey ar e asser t ed agai nst PREPA, and DISMISSES PREPA f r om

Ci vi l Case No. 14- 1518.

The Cour t proceeds t o t he mer i t s of pl ai nt i f f s’ preempt i on and

cont r act cl auses cl ai ms. The Cour t wi l l t hen addr ess t he r i peness



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Ci vi l Nos. 14- 1518 ( FAB) , 14- 1569 ( FAB) 29

and mer i t s of t he Fr ankl i n and Oppenhei mer Rochest er pl ai nt i f f s’

Taki ngs Cl ause cl ai m.

IV. PREEMPTION

Pl ai nt i f f s seek a decl ar at or y j udgment t hat t he Recover y Act

i n i t s ent i r et y i s pr eempt ed by t he f eder al Bankrupt cy Code and

vi ol at es t he Bankrupt cy Cl ause of t he Uni t ed St at es Const i t ut i on.

( Ci vi l No. 14- 1518, Docket No. 85 at ¶ 59; Ci vi l No. 14- 1569,

Docket No. 20 at ¶ 83( a) . ) The Commonweal t h def endant s move t o

di smi ss, ( Ci vi l No. 14- 1518, Docket No. 95; Ci vi l No. 14- 1569,

Docket No. 29) , and the Fr ankl i n and Oppenhei mer Rochest er

pl ai nt i f f s cr oss- move f or summar y j udgment , ( Ci vi l No. 14- 1518,

Docket No. 78) . The Cour t f i r st addr esses the appr opr i at e st andar d

of r evi ew and t hen di scusses t he mer i t s of pl ai nt i f f s’ pr eempt i on

cl ai ms.

A. Rule 12(b)(6) Motion to Dismiss and Rule 56(a) Motion for

Summary Judgment Standards

The Commonweal t h def endant s’ mot i ons t o di smi ss ar e gover ned

by Feder al Rul e of Ci vi l Pr ocedur e 12( b) ( 6) ( “Rul e 12( b) ( 6) ”) . See

Fed. R. Ci v. P. 12( b) ( 6) . Pur suant t o Rul e 12( b) ( 6) , t he Cour t

const r ues t he wel l - pl eaded f act s i n t he pl ai nt i f f s’ compl ai nt s i n

t he l i ght most f avor abl e t o t he pl ai nt i f f s and wi l l di smi ss t he

compl ai nt s i f t hey f ai l t o st at e a pl ausi bl e l egal cl ai mupon whi ch

r el i ef can be gr ant ed. Ocasi o- Her nandez v. Fort uño- Bur set , 640

F. 3d 1, 7, 12- 13 ( 1st Ci r . 2011) .



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The Fr ankl i n and Oppenhei mer Rochest er pl ai nt i f f s’ mot i on f or

summary j udgment i s gover ned by Federal Rul e of Ci vi l Procedur e 56.

See Fed. R. Ci v. P. 56. The Cour t wi l l gr ant summar y j udgment i f

pl ai nt i f f s show “t hat t her e i s no genui ne di sput e as t o any

mat er i al f act ” and that t hey ar e “ent i t l ed to j udgment as a mat t er

of l aw. ” I d.

The part i es agr ee t hat t he preempt i on cl ai m i s pur el y l egal

and i nvol ves no di sput ed i ssues of mat er i al f act . ( Ci vi l No. 14-

1518, Docket Nos. 79 at p. 7 & 95- 2 at pp. 1- 2. ) The Cour t

t her ef or e r esol ves t he pr eempt i on i ssues pr esent ed i n t he par t i es’

mot i ons as ones of l aw.

B. Preemption Principles

The Supremacy Cl ause of t he Uni t ed Stat es Const i t ut i on

mandates t hat f ederal l aw “shal l be t he supr eme Law of t he Land;

and t he J udges i n ever y St at e shal l be bound t her eby, any Thi ng i n

t he Const i t ut i on or Laws of any St at e t o t he Cont r ar y

not wi t hst andi ng. ” U. S. Const . ar t . VI , cl . 2. Pur suant t o t hi s

mandate, “Congr ess has t he power t o pr eempt st ate l aw, ” Cr osby v.

Nat ’ l For ei gn Tr ade Counci l , 530 U. S. 363, 372 ( 2000) , and a “st at e

l aw t hat cont r avenes a f eder al l aw i s nul l and voi d, ” Tobi n v. Fed.

Exp. Corp. , No. 14- 1567, 2014 WL 7388805, at *4 ( 1st Ci r . Dec. 30,

2014) . “For pr eempt i on pur poses, t he l aws of Puert o Ri co ar e t he

f unct i onal equi val ent of st at e l aws. ” Ant i l l es Cement Cor p. v.

For t uño, 670 F. 3d 310, 323 ( 1st Ci r . 2012) .



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A f eder al st at ut e can pr eempt a st at e l aw i n t hr ee ways:

expr ess pr eempt i on, conf l i ct pr eempt i on, and f i el d pr eempt i on.

Ar i zona v. Uni t ed St at es, 132 S. Ct . 2492, 2500- 01 ( 2012) . Her e,

pl ai nt i f f s r ai se ar gument s pur suant t o al l t hr ee.

C. Express Preemption by Section 903(1) of the Federal Bankruptcy

Code

“Expr ess pr eempt i on occur s when congr essi onal i nt ent t o

pr eempt st at e l aw i s made expl i ci t i n t he l anguage of a f eder al

st at ut e. ” Tobi n, 2014 WL 7388805, at *4. Her e, Chapt er 9 of t he

f ederal Bankr upt cy Code cont ai ns an expr ess pr eempt i on cl ause i n

sect i on 903( 1) . Sect i on 903, i n i t s ent i r el y, pr ovi des as f ol l ows:

Thi s chapter does not l i mi t or i mpai r t hepower of a St at e t o cont r ol , by l egi sl at i on orot her wi se, a muni ci pal i t y of or i n such St at ei n t he exer ci se of t he pol i t i cal orgovernment al powers of such muni ci pal i t y,i ncl udi ng expendi t ur es f or such exer ci se, but –

(1) a State law prescribing a method of composition of indebtedness of such

municipality may not bind any

creditor that does not consent to

such composition; and

( 2) a j udgment ent ered under such a l awmay not bi nd a cr edi t or t hat doesnot consent t o such composi t i on.

11 U. S. C. § 903 ( emphasi s added) . Thus, by enact i ng sect i on

903( 1) , Congr ess expr ess l y pr eempt ed st at e l aws t hat pr escr i be a

method of composi t i on of muni ci pal i ndebt edness t hat bi nds

nonconsent i ng cr edi t or s.



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The exi st ence of t hi s expr ess preempt i on cl ause “does not

i mmedi at el y end t he i nqui r y, ” however , because t he Cour t must st i l l

ascert ai n “t he subst ance and scope of Congr ess’ di spl acement of

st at e l aw. ” See Al t r i a Gr p. , I nc. v. Good, 555 U. S. 70, 76 ( 2008) .

“Congr essi onal i nt ent i s t he pr i nci pal r esour ce t o be used i n

def i ni ng the scope and extent of an expr ess pr eempt i on cl ause, ” and

cour t s l ook t o t he cl ause’ s “t ext and cont ext ” as wel l as i t s

“pur pose and hi st or y” i n t hi s endeavor . Br own v. Uni t ed Ai r l i nes,

I nc. , 720 F. 3d 60, 63 ( 1st Ci r . 2013) .

Accordi ngl y, t o det er mi ne whet her sect i on 903( 1) pr eempt s t he

Recover y Act , t he Cour t f i r st exami nes t he cl ause’ s t ext and t hen

consi der s i t s hi st or y, pur pose, and cont ext .

1. Section 903(1) Textual Analysis

(a) “A State law”

By i t s t er ms, sect i on 903( 1) appl i es t o “St at e”

l aws. 11 U. S. C. § 903( 1) . Thus, an i ni t i al i nqui r y i s whet her

Congr ess i nt ended f or sect i on 903( 1) t o appl y t o Puer t o Ri co l aws.

The f eder al Bankr upt cy Code provi des i n sect i on 101( 52) t hat “[ t ] he

t er m ‘ St at e’ i ncl udes t he Di st r i ct of Col umbi a and Puer t o Ri co,

except f or t he pur pose of def i ni ng who may be a debt or under

chapt er 9 of t hi s t i t l e. ” I d. § 101( 52) . Ther ef or e, Puer t o Ri co

i s a “St at e” wi t hi n t he meani ng of sect i on 903( 1) unl ess sect i on

903( 1) f i t s i nt o t he nar r ow except i on of “def i ni ng who may be a

debt or under chapt er 9. ” See i d. Sect i on 903( 1) pr ohi bi t s st at e



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composi t i on l aws t hat bi nd nonconsent i ng cr edi t or s; i t says not hi ng

of who may be a Chapt er 9 debt or . I d. § 903( 1) . 12 Thus , i t i s

cl ear f r om t he t ext t hat Puer t o Ri co i s a “St at e” wi t hi n t he

meani ng of sect i on 903( 1) .

To r ef ute t hi s ver y pl ai n concl usi on, t he

Commonweal t h def endants argue t hat “t he [ Bankr upt cy] Code

speci f i cal l y excl udes Puer t o Ri co ( as wel l as t he Di st r i ct of

Col umbi a) f r om t he def i ni t i on of ‘ St at e’ f or pur poses of Chapt er

9. ” See Ci vi l No. 14- 1518, Docket No. 95- 1 at p. 16. I f Congr ess

i nt ended t o excl ude Puer t o Ri co f r omt he def i ni t i on of “St at e” f or

pur poses of al l Chapt er 9 pr ovi si ons, t hen sect i on 101( 52) woul d

l i kel y r ead as f ol l ows: “The t er m‘ St at e’ i ncl udes t he Di st r i ct of

Col umbi a and Puer t o Ri co, except under chapt er 9 of t hi s t i t l e. ”

But Congr ess i ncl uded t en more words i n sect i on 101( 52) t hat t he

Commonweal t h def endant s at t empt t o, but cannot , i gnore: “The t erm

‘ St at e’ i ncl udes t he Di st r i ct of Col umbi a and Puer t o Ri co, except

for the purpose of defining who may be a debtor under chapt er 9 of

12 Sect i on 109 of t he f ederal Bankr upt cy Code, t i t l ed “Who may be a debt or , ”cont ai ns a subsect i on def i ni ng who may be a Chapt er 9 debt or . 11 U. S. C. § 109(c)( “An ent i t y may be a debt or under chapt er 9 of t hi s t i t l e i f and onl y i f suchent i t y- - ( 1) i s a muni ci pal i t y; ( 2) i s speci f i cal l y aut hori zed, i n i t s capaci t yas a muni ci pal i t y or by name, t o be a debt or under such chapt er by St at e l aw, or

by a government al of f i cer or organi zat i on empowered by St ate l aw t o aut hor i zesuch ent i t y t o be a debt or under such chapt er ; ( 3) i s i nsol vent ; ( 4) desi r es t oef f ect a pl an t o adj ust such debt s; and (5) ( A) has obt ai ned the agr eement of cr edi t ors hol di ng at l east a maj ori t y i n amount of t he cl ai ms of each cl ass t hatsuch ent i t y i nt ends t o i mpai r under a pl an i n a case under such chapt er ; ( B) hasnegot i ated i n good f ai t h wi t h cr edi t ors and has f ai l ed t o obt ai n t he agr eementof credi t or s hol di ng at l east a maj ori t y i n amount of t he cl ai ms of each cl asst hat such ent i t y i nt ends t o i mpai r under a pl an i n a case under such chapt er ; ( C)i s unabl e t o negot i ate wi t h credi t or s because such negot i at i on i s i mpr act i cabl e;or ( D) r easonabl y bel i eves t hat a credi t or may at t empt t o obt ai n a t r ansf er t hati s avoi dabl e under secti on 547 of t hi s t i t l e. ”) .



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t hi s t i t l e. ” See 11 U. S. C. § 101( 52) ( emphasi s added) . I n ot her

wor ds, Congr ess expr essl y def i ned “St at e” as i ncl udi ng Puer t o Ri co

and t hen enumerat ed a si ngl e, speci f i c except i on wher e the ter m

“St at e” does not i ncl ude Puer t o Ri co. To i nf er t hat Congr ess

i nt ended an addi t i onal or br oader except i on - i.e., t hat Congr ess

i nt ended t o excl ude Puer t o Ri co f r omt he def i ni t i on of “St at e” f or

pur poses of sect i on 903( 1) or f or al l of Chapt er 9 - woul d vi ol at e

t he canon of expressio unius est exclusio alterius. See TRW I nc.

v. Andr ews, 534 U. S. 19, 28 ( 2001) ( expl ai ni ng t hat where Congr ess

expl i ci t l y enumer at es a si ngl e except i on, addi t i onal except i ons ar e

not t o be i mpl i ed absent evi dence of cont r ar y l egi sl at i ve i nt ent ) .

The Commonweal t h def endant s’ t ext ual ar gument on t hi s poi nt t hus

hol ds no wat er .

(b) “Prescribing a method of composition of

indebtedness”

Sect i on 903( 1) appl i es t o st at e l aws t hat

“prescr i b[ e] a met hod of composi t i on of i ndebt edness. ” 11 U. S. C.

§ 903( 1) . A “composi t i on” i s an “agreement bet ween a debt or and

t wo or mor e cr edi t ors f or t he adj ust ment or di schar ge of an

obl i gat i on f or some l esser amount . ” Bl ack’ s Law Di ct i onar y 346

( 10t h ed. 2014) .

Chapt er 2 of t he Recover y Act per mi t s an el i gi bl e

publ i c cor por at i on t o “seek debt r el i ef f r om i t s cr edi t or s, ”

Recover y Act § 201( b) , t hrough “any combi nat i on of amendment s,

modi f i cat i ons, wai ver s, or exchanges, ” whi ch may i ncl ude “i nt er est



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r at e adj ust ment s, mat ur i t y ext ensi ons, debt r el i ef , or ot her

r evi si ons t o af f ect ed debt i nst r ument s, ” i d. St mt . of Mot i ves, § E;

see i d. § 202( a) . Chapt er 3 of t he Recover y Act permi t s an

el i gi bl e publ i c cor por at i on “t o def er debt r epayment and t o

decr ease i nt er est and pr i nci pal ” owed t o cr edi t or s. I d. St mt . of

Mot i ves, § E; see i d. §§ 301, 307- 308, 310, 315.

Thus, bot h Chapter s 2 and 3 of t he Recover y Act

cr eat e pr ocedur es f or i ndebt ed publ i c cor por at i ons t o adj ust or

di schar ge t hei r obl i gat i ons to credi t or s. Ther ef or e, t he Recover y

Act pr escr i bes a met hod of composi t i on of i ndebt edness, whi ch i s

exact l y what sect i on 903( 1) pr ohi bi t s.

(c) “Of such municipality”

Sect i on 903( 1) appl i es t o st at e l aws addr essi ng t he

i ndebt edness of a st at e “muni ci pal i t y. ” 11 U. S. C. § 903( 1) . A

“muni ci pal i t y” i s a “pol i t i cal subdi vi si on or publ i c agency or

i nst r ument al i t y of a St at e.” I d. § 101( 40) .

The Recover y Act appl i es t o debt s of “any publ i c

sect or obl i gor . ” Recover y Act § 104. A “publ i c sect or obl i gor ” i s

def i ned as a “Commonweal t h Ent i t y, ” subj ect t o t hr ee excl usi ons.



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I d. § 102( 50) . 13 A “Commonweal t h Ent i t y” i ncl udes “a depar t ment ,

agency, di st r i ct, muni ci pal i t y, or i nst r ument al i t y ( i ncl udi ng a

publ i c corpor at i on) of t he Commonweal t h. ” I d. § 102( 13) .

Thus, t he Recover y Act appl i es t o t he debt s of

Commonweal t h “i nst r ument al i t i es, ” whi ch ar e “muni ci pal i t i es” f or

pur poses of sect i on 903( 1) .

(d) “May not bind any creditor that does not consent to

such composition”

Fi nal l y, sect i on 903( 1) appl i es t o st at e l aws t hat

bi nd nonconsent i ng cr edi t or s. 11 U. S. C. § 903( 1) .

Pur suant t o Chapt er 2 of t he Recover y Act , i f

credi t or s r epr esent i ng at l east f i f t y per cent of t he debt i n a

gi ven cl ass vot e on whet her t o accept t he proposed debt amendment s,

and at l east sevent y- f i ve per cent of par t i ci pat i ng vot er s appr ove,

t hen t he cour t or der appr ovi ng t he debt r el i ef t r ansact i on bi nds

t he ent i r e cl ass. Recover y Act §§ 115( b) , 202( d) , 204. Pur suant

t o Chapt er 3 of t he Recover y Act , i f “at l east one cl ass of

af f ect ed debt has vot ed t o accept t he pl an by a maj or i t y of al l

vot es cast i n such cl ass and t wo- t hi r ds of t he aggr egat e amount of

13 A “publ i c sect or obl i gor ” i s a “Commonweal t h Ent i t y, but excl udi ng: ( a) t he

Commonweal t h; ( b) t he sevent y- ei ght ( 78) muni ci pal i t i es of t he Commonweal t h; and( c) t he Chi l dr en’ s Tr ust ; t he Empl oyees Ret i r ement Syst emof t he Government of t he Commonweal t h of Puert o Ri co and i t s I nst r ument al i t i es; GDB and i t ssubsi di ar i es, af f i l i at es, and ent i t i es ascr i bed t o GDB; t he J udi ci ar y Ret i r ementSyst em; t he Muni ci pal Fi nance Agency; t he Muni ci pal Fi nance Corporat i on; t hePuer t o Ri co Publ i c Fi nance Corpor at i on; t he Puer t o Ri co I ndust r i al Devel opmentCompany, t he Puer t o Ri co I ndust r i al , Tour i st , Educat i onal , Medi cal andEnvi r onment al Cont r ol Faci l i t i es Fi nanci ng Aut hor i t y; t he Puer t o Ri coI nf r ast r uct ur e Fi nanci ng Aut hor i t y; t he Puer t o Ri co Sal es Tax Fi nanci ngCorpor ati on (COFI NA) ; t he Puer t o Ri co System of Annui t i es and Pensi ons f or

Teachers; and t he Uni ver si t y of Puer t o Ri co. ” Recover y Act § 102( 50) .



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af f ect ed debt i n such cl ass t hat i s vot ed, ” t hen t he cour t or der

conf i r mi ng t he debt enf or cement pl an bi nds al l of t he publ i c

cor por at i on’ s credi t or s, r egar dl ess of t hei r cl ass. I d. §§

115( c) , 315( e) .

Thus, because t hey do not r equi r e unani mous cr edi t or

consent , t he composi t i ons prescr i bed i n Chapt er 2 and 3 of t he

Recover y Act may bi nd nonconsent i ng credi t ors.

2. Section 903(1) History, Purpose, and Context

The l egi sl at i ve hi st or y of sect i on 903( 1) and of i t s

pr edecessor, sect i on 83( i ) of t he Bankrupt cy Act of 1937 ( “sect i on

83( i ) ”) , f ur t her suppor t s t he concl usi on t hat Congr ess i nt ended t o

pr eempt Puer t o Ri co l aws t hat cr eat e muni ci pal debt r est r uct ur i ng

pr ocedur es t hat bi nd nonconsent i ng cr edi t or s. I n 1946, Congr ess

added t he f ol l owi ng l anguage, whi ch i s near l y i dent i cal t o t he

l anguage i n sect i on 903( 1) , t o sect i on 83( i ) : “[ N] o St at e l aw

pr escr i bi ng a met hod of composi t i on of i ndebt edness of such

agenci es shal l be bi ndi ng upon any credi t or who does not consent t o

such composi t i on. ” Pub. L. No. 481, § 83( i ) , 60 St at . 409, 415

( 1946) . Congr ess expl ai ned why i t added t hi s pr ohi bi t or y l anguage

t o sect i on 83( i ) i n a House Repor t :

[ A] bankr upt cy l aw under whi ch bondhol ders of a muni ci pal i t y ar e r equi r ed t o sur r ender orcancel t hei r obl i gat i ons shoul d be uni f or mt hr oughout t he 48 St ates, as t he bonds of al most ever y muni ci pal i t y ar e wi del y hel d.Onl y under a Federal l aw shoul d a credi t or bef orced t o accept such an adj ust ment wi t houthi s consent .



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H. R. Rep. No. 79- 2246, at 4 ( 1946) . 14 Congr ess r eaf f i r med t hi s

i nt ent when i t enact ed sect i on 903( 1) t hr ee decades l at er :

The provi so i n sect i on 83, prohi bi t i ng Stat ecomposi t i on pr ocedur es f or muni ci pal i t i es, i sr et ai ned. Del et i on of t he pr ovi si on woul d“per mi t al l St at es t o enact t hei r own ver si onsof Chapt er I X”, . . . whi ch woul d f r ust r at et he const i t ut i onal mandat e of uni f or mbankr upt cy l aws.

S. Rep. No. 95- 989, at 110 ( 1978) .

I t i s evi dent f r omt hi s l egi sl at i ve hi st or y t hat , because

muni ci pal bonds are wi del y hel d acr oss t he Uni t ed St at es, Congr ess

enact ed sect i on 903( 1) t o ensur e t hat onl y a uni f or m f eder al l aw

coul d f or ce nonconsent i ng muni ci pal bondhol der s t o sur r ender or

cancel par t of t hei r i nvest ment s. Not hi ng i n i t s l egi sl at i ve

hi st or y i ndi cat es t hat Congr ess i nt ended t o exempt Puer t o Ri co f r om

sect i on 903( 1) ’ s expr essl y uni ver sal pr eempt i on pur vi ew.

The Commonweal t h def endant s nonet hel ess ar gue t hat

sect i on 903( 1) does not appl y t o Puer t o Ri co l aws. They do not

at t empt t o r ebut t he pr ovi si on’ s cl ear l egi sl at i ve hi st or y,

however , and i nst ead pr esent argument s based on l ogi c and cont ext .

Fi r st , t he Commonweal t h def endant s cont end t hat i t woul d be

“anomal ous” t o read t he f ederal Bankr upt cy Code as both pr ecl udi ng

14 See al so Hear i ngs on H. R. 4307 Bef or e the Speci al Subcomm. on Bankr. & Reorg.of t he H. Comm. on t he J udi ci ary, 79t h Cong. 10 ( 1946) ( st atement of Mi l l ardPar khur st , At t ’ y at Law, Dal l as, Tex. ) ( “Bonds of a muni ci pal i t y ar e usual l ydi st r i but ed t hr oughout t he 48 St ates. Cer t ai nl y any l aw whi ch woul d have t heef f ect of r equi r i ng t he hol der s of such bonds t o sur r ender or cancel a par t of t hei r i nvest ment s shoul d be uni f or m Feder al l aw and not a l ocal l aw. ”) .



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Ci vi l Nos. 14- 1518 ( FAB) , 14- 1569 ( FAB) 39

Puer t o Ri co muni ci pal i t i es15 f r om par t i ci pat i ng i n Chapt er 9

pr oceedi ngs and preempt i ng Puert o Ri co l aws t hat govern debt

r est r uctur i ng f or Puer t o Ri co muni ci pal i t i es. ( Ci vi l No. 14- 1518,

Docket No. 95- 1 at p. 17. ) But Puer t o Ri co muni ci pal i t i es ar e not

uni que i n t hei r i nabi l i t y t o r est r uctur e t hei r debt s. Thi s i s

because Chapt er 9 i s avai l abl e t o a muni ci pal i t y onl y i f i t

r ecei ves speci f i c aut hor i zat i on f r om i t s stat e, 11 U. S. C. §

109( c) ( 2) , and many st at es have not enact ed aut hor i zi ng

l egi s l at i on. 16 Congr ess’ s deci si on not t o per mi t Puer t o Ri co

muni ci pal i t i es t o be Chapt er 9 debt or s, see 11 U. S. C. 101( 52) , 17

r ef l ect s i t s consi der ed j udgment t o r et ai n cont r ol over any

r est r uct ur i ng of muni ci pal debt i n Puer t o Ri co. Congr ess, of

cour se, has t he power t o t r eat Puer t o Ri co di f f er ent l y t han i t

t r eat s t he f i f t y st at es. See 48 U. S. C. § 734 ( pr ovi di ng t hat

f eder al l aws “shal l have t he same f or ce and ef f ect i n Puer t o Ri co

as i n t he Uni t ed St at es” “except as . . . ot her wi se pr ovi ded”) ;

15 “Muni ci pal i t y, ” as used i n t hi s di scussi on, i ncl udes a “publ i c agency ori nst r ument al i t y. ” See 11 U. S. C. § 101( 40) .

16 See J ames E. Spi ot t o, et al . , Chapman & Cut l er LLP, Muni ci pal i t i es i nDi st r ess? How St ates and I nvest ors Deal wi t h Local Government Fi nanci alEmer genci es 51- 52 ( 2012) ( i dent i f yi ng t wel ve st ates wi t h st atut es t hat

speci f i cal l y aut hor i ze muni ci pal i t i es t o f i l e a Chapt er 9 pet i t i on, t wel ve st at est hat condi t i onal l y aut hor i ze i t , t hr ee st at es t hat gr ant l i mi t ed aut hor i zat i on,t wo st at es t hat prohi bi t f i l i ng ( al t hough one has an except i on t o t hepr ohi bi t i on) , and t went y- one st at es t hat ar e ei t her uncl ear or have not enact edspeci f i c aut hor i zat i on) .

17 Congress enact ed sect i on 101(52) as par t of t he 1984 amendment s t o t he f ederalBankr upt cy Code. Pr i or t o t hose amendment s, t he Bankr upt cy Code cont ai ned nodef i ni t i on of t he t er m“St ate. ” Compare Pub. L. No. 95- 598, 92 St at . 2549, 2549-54 ( Nov. 6, 1978) ( no def i ni t i on of “St at e”) , wi t h Pub. L. No. 98- 353, 98 St at .333, 368- 69 ( J ul y 10, 1984) ( addi ng def i ni t i on of “St at e”) .



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Ant i l l es Cement Cor p. , 670 F. 3d at 323 ( “Congr ess i s per mi t t ed t o

t r eat Puer t o Ri co di f f er ent l y despi t e i t s st at e- l i ke st at us. ”) .

Next , t he Commonweal t h def endant s cont end that sect i on

903 does not appl y t o Puert o Ri co because t hat sect i on “addr esses

t he i mpact of ‘ [ t ] hi s chapt er ’ - i.e., Chapt er 9 - on St at es’

aut hor i t y t o r egul at e t he debt r est r uct ur i ng of t hei r own

[ muni ci pal i t i es] . ” ( Ci vi l No. 14- 1518, Docket No. 95- 1 at pp. 19-

20. ) They r eason t hat because Puer t o Ri co muni ci pal i t i es ar e not

el i gi bl e t o par t i ci pat e i n Chapt er 9 bankr upt cy pr oceedi ngs, “i t

f ol l ows that [ s] ect i on 903 does not appl y. ” I d. The Commonweal t h

def endant s mi sr ead sect i on 903, whi ch f i r st cl ar i f i es t hat Chapt er

9 “does not l i mi t or i mpai r t he power of a St at e t o cont r ol ” t he

pol i t i cal or gover nment al power s of i t s muni ci pal i t i es, 11 U. S. C.

§ 903, and t hen qual i f i es t hat st at ement by pr ohi bi t i ng st at e l aws

t hat bi nd nonconsent i ng cr edi t or s t o a composi t i on of i ndebt edness

of a muni ci pal i t y, and pr ohi bi t i ng j udgment s ent er ed pur suant t o

t hose l aws t hat bi nd nonconsent i ng credi t or s, i d. § 903( 1) - ( 2) .

Not hi ng i n t he t ext , cont ext , or l egi sl at i ve hi st or y of sect i on 903

r emot el y suppor t s t he Commonweal t h def endant s’ i nf er ent i al l eap

t hat Congr ess i nt ended t he pr ohi bi t i on i n sect i on 903( 1) t o appl y



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Ci vi l Nos. 14- 1518 ( FAB) , 14- 1569 ( FAB) 41

onl y t o st at es whose muni ci pal i t i es ar e el i gi bl e t o f i l e f or

Chapt er 9 bankr upt cy. 18

Fi nal l y, t he Commonweal t h def endant s argue t hat sect i on

903 “by i t s t er ms i s l i mi t ed t o the rel at i onshi p bet ween an

‘ i ndebt ed[ ] ’ muni ci pal i t y and i t s ‘ credi t or s’ i n Chapt er 9 cases, ”

and t hat “[ u] nl ess a muni ci pal i t y can qual i f y as a ‘ debt or ’ u

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Franklin/Blue Mountain Opinion and Order