Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust

Puerto Rico (debtor) amassed more than $20 billion in debt among its government-owned public utilities, including its electric, water, sewer, and public-transportation authorities. Puerto Rico’s government development bank financed the utilities, lending them more than half its assets, before facing a fiscal crisis of its own when ratings agencies downgraded Puerto Rican bonds, including utility bonds, to noninvestment grade in 2014. Puerto Rico responded by enacting a recovery act that would enable its public utilities to propose plans to recover or restructure their debts. The act allowed utilities to propose debt modifications subject to bank and creditor approval, but the plans could bind nonconsenting creditors if those holding at least half the affected debt voted and at least 75 percent approved the modifications. A group of investment funds including the Franklin California Tax-Free Trust (creditors) holding nearly $2 billion in electric-utility bonds sued to prevent enforcement of the recovery act on multiple grounds, including that the federal Bankruptcy Code precluded Puerto Rico from implementing its own municipal-bankruptcy scheme. The district court concluded that federal law preempted the recovery act and enjoined Puerto Rico from enforcing the act, and the First Circuit affirmed. Puerto Rico appealed, and the Supreme Court granted review.