Thursday, August 6, 2020

Former Judge Gives Views on Supreme Court Case About Local Chapter 9

By on March 31, 2016

Former Bankruptcy Judge Gerardo A. Carlo-Altieri recently gave his expert legal views on the US Supreme Court oral arguments in Commonwealth of Puerto Rico ET AL. v. Franklyn California Tax Free Trust, ET AL. The case in question seeks to determine whether Chapter 9 of the federal Bankruptcy Code, which does not apply to Puerto Rico, nonetheless preempts a Puerto Rico statute creating a mechanism for the commonwealth’s public utilities to restructure their debts.

The following are Judge’s Carlo-Altieri’s notes on the matter:

Conclusions on whether Commonwealth or Franklyn California won the day, or what the ultimate decision on the appeal will be, are impossible to reach; results cannot be determined from a few questions asked at the hearing held March 22, 2016 by the justices. However, speculation about the questions asked by the justices at the recent Supreme Court hearing is flourishing.

It is safe to say, that few expected this certiorari to be accepted by the court, and nobody expected it to be heard by seven justices minus Scalia and Alito, and with a majority of them on the “liberal side”.

A seven-judge court avoids a draw, which could benefit the Commonwealth. But Scalia’s strict construction leadership is missing, which the government could have used to sell the court on their “structural” reading of the Bankruptcy Code Chapter 9 exclusion.

Either the court enters into a profound constitutional opinion probably drafted by the chief judge (if he gets the majority), affirming the Circuit on preemption and concluding that Congress has the last word on  territories; or someone else writes a simple textual interpretation along the bankruptcy code “gateway” theory and “decision tree” interpretation on which the Commonwealth hinges its case. That is, that no part of chapter 9 applies to Puerto Rico, not even 903(1) – therefore, no preemption- so Circuit should be reversed and Island has the power to legislate in this field. Of course, all subject to possible remand and that the local restructuring law in some way held not to violate the contract clause.

Chief Justice Roberts mentioned his views on the traditional paramount powers of Congress over the Island, partly because the “relationship” between Puerto Rico and Congress was of a “different sort that it has with all other States” and asked why it would be irrational that Puerto Rico should be required to go to Congress “if they want changes.” He was also intent on finding out the legislative history behind Puerto Rico’s exclusion from Chapter 9, showing an inclination to decide in favor of putting this matter in the lap of Congress, very much in line with the decision of the First Circuit Court affirming Judge Besosa.

Justice Ginsburg, from the beginning, placed her finger squarely on the crucial issue for her and probably a majority of the court – the contract impairment clause. Landau, the government’s lawyer, accepted that the impairment issue was brought up by Respondent Franklyn in the lower court, and would still need to be litigated if the Supreme Court ruled in favor of this appeal. He accepted that impairment had to be tried at the District Court level and required a remand.

If the contract impairment issue is litigated on remand, it will run again into a serious ripeness challenge, since the Puerto Rico Act has not been used yet by any Commonwealth entity. A remand also creates questions of timing for the local government and even Congress. Questions have been raised about the effect a prompt decision in favor of the Commonwealth could have on the legislative bills being considered. Whether Congress would find it necessary to continue to legislate, create a “control board” mechanism or provide a different sort of restructuring tool, including Chapter 9 or a special type of territorial Chapter 9 for the Island and DC.

If the Puerto Rico bankruptcy act is held valid by the Supreme Court, some speculate that hedge funds and other bondholder groups would lobby Congress in favor of inclusion for the island in Chapter 9 and the federal bankruptcy court system, rather than face a local court and judge on the Island.

Justice Sotomayor initially was interested in comparing the treatment by Congress of other territories and the options they all had under Chapter 9, brought up the contracts clause application issue again and questioned the Respondents counsel on the mechanical meaning of State and creditor language in 903 (1). She also made reference to the remand possibility for the remaining impairment issue. The court seems more impressed by the impairment of contract matter even though not squarely before it, than with the main subject of the appeal, which was briefed almost exclusively around the express or conflict preemption arguments.

Ginsburg phrased her initial questions carefully, asking if the the Puerto Rico Act “runs up” against impairment (doesn’t the PR Act in requiring non consenting lenders to give up or have their claims reduced violate the contracts clause?). She also stated in a concise way the constitutional tension between reserved powers of a State to manage a budget, in this case Puerto Rico, and the contract impairment prohibition.

In response to Justice Ginsburg, Landau explained that whether the contract clause even applied to Puerto Rico was still to be litigated, seeing that the political relationship of the Island was different, and that this would also be subject of consideration on remand.

Justice Kagan surprised by admitting to having changed her view as a consequence of counsel’s argument. She seemed to be more inclined at end to the interpretation offered by Landau;  mentioning that due to this “flukey thing”, that the gateway provision is located outside Chapter 9 itself, implies that once ineligible for Chapter 9, none of the provisions of this Chapter apply to the Commonwealth.

Justice Breyer questions Respondents counsel on whether the gateway requirements found in the first Chapter of the Bankruptcy Code totally excludes the Commonwealth from Chapter 9, indicative that the liberal block is moving to consider ruling along the lines of a textual approach as expounded by the Commonwealth’s lawyer.

Most impacting was justice Ginsburg’s question on why Congress would have put Puerto Rico in “this never-never land” of not having use of Chapter 9 nor being able to pass its own law to substitute Chapter 9, “so it has to take the bitter, but it doesn’t get any benefit at all.”

Respondents counsel made his point that the only choice for the Commonwealth is to go to Congress, and this he says is what is going on right now. An invitation that avoids a long controversial Tenth Amendment and preemption-federalism opinion, and a road-map that the Chief Judge and conservatives on the Court would probably prefer.

At the end, the government lawyer put the court on notice that this was a real “flesh and blood” crisis and not just a philosophical law school question, as well as framing again the question in colloquial terms: “whether people in a village in Puerto Rico will be able to get clean water”.

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