With the term ending on June 27, the Supreme Court is yet to rule in Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust, the case to decide whether Section 903 of the Bankruptcy Code prohibits the island Commonwealth from adopting a local law dealing with the insolvency of its instrumentalities.
On June 9, the high court handed down an opinion in Commonwealth of Puerto Rico v. Sanchez Valle, another case originating in Puerto Rico but one that deals instead with double jeopardy in the context of Puerto Rico’s sovereignty. Naturally, the Sanchez Valle opinion is being read to see if it sheds light on how the Court will rule in the municipal debt case.
In a 6-2 opinion for the majority in Sanchez Valle, Justice Elena Kagan predictably said that the outcome was controlled by a “narrow, historically focused” analysis of Puerto Rico’s relationship with the U.S. By the same token, the majority said that Stern v. Marshall was narrow, but that hardly turned out to be the case. The Supreme Court cannot make law in one case that does not establish policy for another.
We will therefore explore Sanchez Valle to see how it might influence the justices when they vote in the municipal debt case.
The Issues in the Puerto Rico Debt Adjustment Case
Puerto Rico could have authorized its municipalities and instrumentalities to undergo a municipal debt adjustment under chapter 9 up until the 1984 amendments to the Bankruptcy Code. For unexplained reasons, Congress amended Section 101(52) of the Code to define “States” as including Puerto Rico, except for the purpose of deciding who is eligible for chapter 9.
Consequently, Puerto Rico’s instrumentalities were no longer eligible for relief in federal bankruptcy court. Section 903(1) created an additional problem, because it says that “State law” cannot bind nonconsenting creditors to a debt adjustment.
The Supreme Court granted certiorari to decide whether the First Circuit correctly held that Puerto Rico’s local law on municipal insolvency was expressly pre-empted by the Bankruptcy Code. Whether from federal or local law, Puerto Rico needs court refuge somewhere because the island’s governor has said that its debts are “not payable.”
The Issues in the Double Jeopardy Case
Sanchez Valle involved criminal defendants who pleaded guilty to gun possession in federal court. Local courts then started prosecuting them for the same crime, to which they raised a double jeopardy defense. The Puerto Rico Supreme Court held that the subsequent prosecution violated the Double Jeopardy Clause in the U.S. Constitution because the ultimate source of local criminal laws was the U.S. Congress. The Supreme Court granted certiorari and affirmed.
As historically defined by the Supreme Court, double jeopardy only bars a subsequent prosecution by the same sovereign. Consequently, the states and the federal government can sequentially prosecute the same crime.
Throughout her majority opinion, Justice Kagan explained how the outcome in the Puerto Rico case did not turn on the traditional notion of sovereignty or the “degree to which an entity exercises self-government.” Rather, she said, the result depends on whether prosecutorial powers derive from the same “original source.” A municipal government therefore cannot punish a crime following prosecution by the state because state and municipal governments derive their powers from the same sovereign rights retained by the state.
The states, she explained, maintain sovereign rights belonging to them before they joined the Union. Those rights were preserved by the Tenth Amendment. The Double Jeopardy Clause, she said, does not apply to subsequent prosecutions by Indian tribes because they have been treated as separate sovereigns. In contrast, the ultimate source of Puerto Rico’s sovereign rights was a 1950 act of Congress, the majority held.
Justice Kagan’s majority opinion included an historical analysis of Puerto Rico’s relationship with the U.S. since it was acquired in 1898 in the Spanish-American War. Skipping over intervening occurrences, the pivotal event occurred in 1950 when Congress by statute enabled Puerto Rico to enact its own constitution. Significantly, however, Congress, not the residents of Puerto Rico alone, had to approve the island’s constitution.
Therefore, Justice Kagan said that the “ultimate source” of Puerto Rico’s prosecutorial powers is the U.S. Congress, the same authority that allowed federal prosecutors to indict and convict. Since the defendants were being prosecuted based on powers that emanated from the same source, the Double Jeopardy Clause barred the Commonwealth’s subsequent prosecution.
In a footnote, Justice Kagan indicated that Puerto Rico would become immune to the Double Jeopardy Clause if it became a state because the Supreme Court long ago ruled that new states are imbued with the same powers as the original 13.
The Dissenters in Sanchez Valle
Justice Stephen G. Breyer dissented in an opinion joined by Justice Sonia Sotomayor. They believe that the 1950 statute allowing Puerto Rico to become a commonwealth gave the island sovereign powers sufficient to enact its own criminal laws that would sidestep the Double Jeopardy Clause.
Applying Sanchez Valle to the Municipal Bankruptcy Case
Although the outcome of the double jeopardy case was not controlled by the degree of Puerto Rico’s autonomy, the island’s status might influence the outcome of the case dealing with the Commonwealth’s right to enact its own municipal debt-adjustment laws.
The majority opinion in Sanchez Valle says that Congress, in the mid-twentieth century, made Puerto Rico sovereign “in one commonly understood sense of that term.” In a statement with which the two dissenters doubtless would agree, Justice Kagan said that Puerto Rico has a “measure of autonomy comparable to that possessed by the States,” quoting a Supreme Court opinion from 1976.
Justice Kagan even said that double jeopardy would not apply if the result depended on “measuring an entity’s self-governance.”
To read the Sanchez Valle opinion, click here.
Guessing the Outcome of the Debt-Adjustment Case
The Supreme Court could base its municipal debt opinion on Puerto Rico’s sovereign powers. That should necessitate devolving even further into Puerto Rico’s historical affiliation with the U.S., unless the Court believes that the Commonwealth waived constitutional arguments.
More than a majority of the Court in Sanchez Valle seem to believe that Puerto Rico generally has powers equivalent to the states. But given the Supremacy Clause of the Constitution, was Puerto Rico’s ability to enact debt-adjustment laws overridden by the Bankruptcy Code? Sanchez Valle does not give an answer.
Near the end of oral argument in the debt case, Justice Sotomayor summed up a theory in Puerto Rico’s favor that will carry the day if only three other justices agree. She asked why Puerto Rico, and states that do not allow their instrumentalities to file under chapter 9, cannot adopt their own debt-composition laws so long as they do not violate the Contracts Clause of the federal Constitution.
Justice Sotomayor, a believer in Puerto Rico’s sovereignty as shown by her dissent in Sanchez Valle, also suggested that territories should be able to pass laws forbidding municipal power companies from being forced to shut off the lights. Her approach seems consistent with the majority in Sanchez Valle confirming that Puerto Rico has a high degree of sovereignty, perhaps equal to the states.
Will the Court Avoid Constitutional Issues?
To avoid exploring whether Puerto Rico has more, fewer, or the same sovereign powers as states when it comes to municipal insolvency, the Supreme Court might rest its debt-adjustment opinion on a plausible reading of the Bankruptcy Code.
By crafting a ruling that reads Section 903 as allowing Puerto Rico to have municipal debt laws, the Court could avoid handing down an opinion suggesting that the Bankruptcy Code is unconstitutional if it bars states from adopting local laws that bind dissenting creditors so long as there is no violation of the Contracts Clause.
At oral argument, Justice Sotomayor asked how Congress could “rob a State of the power to regulate its municipalities if you’re offering it nothing in return?” On that rationale, perhaps the Court will decide that Puerto Rico can conduct a proceeding akin to an equity receivership, so long as it does not offend the Contracts Clause.
Finding a statutory basis for enabling Puerto Rico to ensure the continuation of municipal services seems consistent with the views of more than a majority of the high court, who believe that the Commonwealth can exercise a high level of sovereign powers.
Who Will Write the Municipal Debt Opinion?
Whatever the conclusion, the forthcoming Puerto Rico decision with not be a 4-4 split because Justice Samuel Alito recused himself.
Justices Alito and Clarence Thomas are the only members of the Court yet to write opinions from the March sitting. On that basis, the upcoming decision would be assigned to Justice Thomas, who writes many bankruptcy opinions. Justice Sotomayor is another candidate for the debt opinion because she was a vocal advocate of Puerto Rico’s powers in both cases affecting the Commonwealth. Having just finished Sanchez Valle, Justice Kagan could be the writer if the opinion delves into Puerto Rico’s sovereign powers.
When Will the Decision Come Down?
Congress is working on legislation to deal with Puerto Rico’s debt crisis. It is yet to be seen whether a bill becomes law before end of the Supreme Court’s term on June 27.
The high court may not issue its opinion until the last day of the term, thus allowing Congress time to act, thereby mooting the appeal and avoiding an opinion that may raise more questions than it answers.
If the Supreme Court rules first, Congress must read the opinion carefully to ensure that a bailout law does not contain provisions violating Puerto Rico’s sovereign rights as proclaimed in this term’s two cases. The Court might even call for reargument next fall if it appears a bailout bill is inevitable.