Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 1 of 40

Transcription

1 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 1 of 40 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO The Hon. Francisco A. Besosa FRANKLIN CALIFORNIA TAX-FREE TRUST, et al., Plaintiffs, Civil Action No. 14-cv-1518-FAB vs. THE COMMONWEALTH OF PUERTO RICO, et al. Defendants. BLUEMOUNTAIN CAPITAL MANAGEMENT, LLC, for and on behalf of investment funds for which it acts as investment manager, Plaintiffs, Civil Action No. 14-cv-1569-FAB vs. ALEJANDRO J. GARCIA PADILLA, in his official capacity as Governor of Puerto Rico, et al. Defendants. MEMORANDUM OF LAW IN SUPPORT OF THE COMMONWEALTH DEFENDANTS MOTION TO DISMISS THE FRANKLIN PLAINTIFFS SECOND AMENDED COMPLAINT AND THE BLUEMOUNTAIN PLAINTIFFS AMENDED COMPLAINT, AND IN OPPOSITION TO THE FRANKLIN PLAINTIFFS CROSS-MOTION FOR SUMMARY JUDGMENT September 12, 2014 (Counsel listed on following page)

2 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 2 of 40 César R. Miranda Rodríguez Secretary of Justice Marta Elisa González Y. Jorge L. Flores De Jesús Janitza M. García-Marrero Maraliz Vázquez Marrero Joseph G. Feldstein-Del Valle DEPARTMENT OF JUSTICE GENERAL LITIGATION OFFICE Federal Litigation and Bankruptcy Division P.O. Box San Juan, PR Tel: (787) Attorneys for the Commonwealth of Puerto Rico, Alejandro García Padilla, in his official capacity as Governor of Puerto Rico, and César R. Miranda Rodríguez, in his official capacity as Secretary of Justice of Puerto Rico Alejandro Febres-Jorge GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO Roberto Sánchez Vilella Government Center De Diego Avenue No. 100 Santurce, PR Tel: (787) Attorney for John Doe, in his capacity as employee or agent of the Government Development Bank for Puerto Rico Susan M. Davies Eugene F. Assaf, P.C. Christopher Landau, P.C. Michael A. Glick Liam P. Hardy Claire M. Murray KIRKLAND & ELLIS LLP* th Street, N.W. Washington, DC Tel: (202) Paul M. Basta, P.C. KIRKLAND & ELLIS LLP* 601 Lexington Avenue New York, NY Tel: (212) James H.M. Sprayregen, P.C. KIRKLAND & ELLIS LLP* 300 North LaSalle Chicago, IL Tel: (312) Attorneys for the Commonwealth of Puerto Rico, Alejandro García Padilla, in his official capacity as Governor of Puerto Rico, César R. Miranda Rodríguez, in his official capacity as Secretary of Justice of Puerto Rico, and John Doe, in his capacity as employee or agent of the Government Development Bank for Puerto Rico * Attorneys Davies, Assaf, Glick, Hardy, Murray, Basta, and Sprayregen have been admitted pro hac vice in Case No. 14-cv Pro hac vice applications for those attorneys are forthcoming in Case No. 14-cv-1569, and for Attorney Landau in both cases.

3 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 3 of 40 TABLE OF CONTENTS Page INTRODUCTION...1 BACKGROUND...3 STANDARD OF REVIEW...6 ARGUMENT...8 I. Plaintiffs Claims Are Unripe....8 II. The Act Does Not Violate The Bankruptcy Clause Or The Supremacy Clause III. The Act Does Not Violate The Contract Clause IV. The Act Does Not Violate The Takings Clause V. The Act Does Not Violate Any Constitutional Prohibition On Staying Federal Proceedings VI. Plaintiffs Are Not Entitled To Injunctive Relief VII. The Franklin Plaintiffs Partial Cross-Motion For Summary Judgment Should Be Denied CONCLUSION...30

4 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 4 of 40 Cases TABLE OF AUTHORITIES Page(s) Abbott Labs. v. Gardner, 387 U.S. 136 (1967)... 8, 9, 10 Armstrong World Indus., Inc. v. Adams. 961 F.2d 405 (3d Cir. 1992)... 11, 12 Ashcroft v. Iqbal, 556 U.S. 662 (2009)... 6, 23 Ashton v. Cameron Cnty. Water Improvement Dist., 298 U.S. 513 (1936) Aulson v. Blanchard, 83 F.3d 1 (1st Cir. 1996)... 6 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)... 6, 23 Central Va. Cmty. College v. Katz, 546 U.S. 356 (2006) City of El Paso v. Simmons, 379 U.S. 497 (1965) Doe v. Bush, 323 F.3d 133 (1st Cir. 2003) Donovan v. City of Dallas, 377 U.S. 408 (1964)... 28, 29 Duke Power Co. v. Carolina Envtl. Study Group, Inc., 438 U.S. 59 (1978) Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400 (1983) Ernst & Young v. Depositors Econ. Prot. Corp., 45 F.3d 530 (1st Cir. 1995)... 8, 10, 12 Examining Bd. of Eng rs, Architects & Surveyors v. Flores de Otero, 426 U.S. 572 (1976) Faitoute Iron & Steel Co. v. City of Asbury Park, N.J., 316 U.S. 502 (1942)... 16, 18 ii

5 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 5 of 40 FDIC v. Torrefacción Café Cialitos, Inc., 62 F.3d 439 (1st Cir. 1995) Fideicomiso de la Tierra del Caño Martin Peña v. Fortuño, 604 F.3d 7 (1st Cir. 2010) Gardner v. New Jersey, 329 U.S. 565 (1947) Green v. Mansour, 474 U.S. 64 (1985)... 7 Hanover Nat l Bank v. Moyses, 186 U.S. 181 (1902) Highland Realty, Inc. v. Superior Court of P.R., 3 P.R. Offic. Trans. 426 (1975) Home Loan Building & Loan Ass n v. Blaisdell, 290 U.S. 398 (1934)... 22, 24 Hudson Cnty. News Co. v. Metro Assocs., Inc., 141 F.R.D. 386 (D. Mass. 1992)... 7 In re Bankers Trust Co., 566 F.2d 1281 (5th Cir. 1978) In re Cash Currency Exch., Inc., 762 F.2d 542 (7th Cir. 1985) In re Equity Funding Corp. of Am., 396 F. Supp (C.D. Cal. 1975) Israel-British Bank (London) Ltd. v. FDIC, 536 F.2d 509 (2d Cir. 1976) Lingle v. Chevron U.S.A. Inc., 544 U.S. 528 (2005) Local Div. 589 v. Massachusetts, 666 F.2d 618 (1st Cir. 1981) Maryland Cas. Co. v. Pacific Coal & Oil Co., 312 U.S. 270 (1941)... 7 McCullen v. Coakley, 571 F.3d 167 (1st Cir. 2009)... 7 iii

6 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 6 of 40 Medtronic, Inc. v. Lohr, 518 U.S. 470 (1996) Mercado-Boneta v. Administración del Fondo de Compensación al Paciente, 125 F.3d 9 (1st Cir. 1997) New York State Dep t of Social Servs. v. Dublino, 413 U.S. 405 (1972) Ogden v. Saunders, 12 Wheat. (25 U.S.) 213 (1827) Penn Cent. Transp. Co. v. City of N.Y., 438 U.S. 104 (1978) Public Serv. Comm n of Utah v. Wycoff Co., 344 U.S. 237 (1952)... 7 Redondo Constr. Corp. v. Izquierdo, 662 F.3d 42 (1st Cir. 2011) Roman Catholic Bishop of Springfield v. City of Springfield, 724 F.3d 78 (1st Cir. 2013)... 8, 9 Segal v. Rochelle, 382 U.S. 375 (1966) Sepúlveda-Villarini v. Department of Educ. of P.R., 628 F.3d 25 (1st Cir. 2010)... 6 Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005) Stellwagen v. Clum, 245 U.S. 605 (1918)... 14, 16 Sturges v. Crowninshield, 4 Wheat. (17 U.S.) 122 (1819)... 13, 15 Texas v. United States, 523 U.S. 296 (1998)... 8, 9, 10, 11, 12 Trinidad v. Commonwealth, 188 D.P.R. 828 (2013) (per curiam) UAW v. Fortuño, 633 F.3d 37 (1st Cir. 2011)... 22, 23, 24, 25 iv

7 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 7 of 40 United States v. Bekins, 304 U.S. 27 (1938)... 14, 16 United States v. Salerno, 481 U.S. 739 (1987)... 7 Veix v. Sixth Ward Bldg. & Loan Ass n of Newark, 310 U.S. 32 (1940) Verizon New England, Inc. v. International B hood of Elec. Workers, 651 F.3d 176 (1st Cir. 2011)... 7, 8 Williams v. Puerto Rico, 910 F. Supp. 2d 386 (D.P.R. 2012)... 7, 26 Winter v. NRDC, Inc., 555 U.S. 7 (2008)... 29, 30 Statutes and Rules 11 U.S.C. 101(10) U.S.C. 101(40) U.S.C. 101(41) U.S.C. 101(52)... 16, U.S.C. 103(k)(2) U.S.C. 109(b)(2) U.S.C U.S.C U.S.C. 364(d)(1) U.S.C U.S.C , 20, U.S.C U.S.C P. del S P.R. Const. art. II, v

8 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 8 of 40 Pub. L , 66 Stat. 327 (July 3, 1952) U.S. Const. amend. V U.S. Const. art. I 10 cl U.S. Const. art. I, 8, cl , 19 U.S. Const. art. V U.S. Const. art. VI cl Other Authorities Moore s Federal Practice (rev. ed. 2014) Press Release (Aug. 14, 2014), available at PressRelease_081414_FINAL.pdf Wright, Charles A. et al., Federal Practice & Procedure (rev. ed. 2014) vi

9 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 9 of 40 COME NOW, the Commonwealth of Puerto Rico, Alejandro García Padilla, in his official capacity as Governor of Puerto Rico, César R. Miranda Rodríguez, in his official capacity as Secretary of Justice of Puerto Rico, and John Doe, in his capacity as employee or agent of the Government Development Bank for Puerto Rico (collectively, the Commonwealth Defendants ), without submitting to the Court s jurisdiction and without waiving their affirmative defense to Eleventh Amendment or sovereign immunity, through the undersigned attorneys, and very respectfully STATE, AVER, and PRAY: INTRODUCTION Faced with the most severe fiscal crisis in its history, the Commonwealth of Puerto Rico has taken steps to improve the financial situation of its public corporations and thereby promote the general welfare of its people. On June 28, 2014, the Governor signed into law the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the Act ), P. del S. 1164, which creates a mechanism for Puerto Rico s public corporations to restructure their debts so that they may continue to provide vital public services like dependable electricity and clean water while at the same time protecting the collective interest of their creditors. On the very day that the Governor signed the Act into law, a group of investment funds that claim to hold bonds issued by one such public corporation, the Puerto Rico Electric Power Authority ( PREPA ), filed a lawsuit in this Court challenging the Act s constitutionality (the Franklin suit). Just over three weeks later, another group of PREPA bondholders filed a similar lawsuit (the BlueMountain suit). To this day, however, neither PREPA nor any other Puerto Rico public corporation has sought to restructure its debts under the Act. Because the Act has never been invoked, these lawsuits are more akin to a law-school issue spotter examination than a real case or controversy. Unless and until a public corporation seeks to restructure its debts under the Act, any challenge to the Act s constitutionality is unripe. Federal

10 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 10 of 40 courts exist to decide actual cases or controversies, not to issue advisory opinions on the constitutionality of legislation. In any event, plaintiffs various constitutional challenges to the Act fail on the merits. Both complaints lead with a claim that the Act is preempted not only by the Bankruptcy Clause of the U.S. Constitution but also by the federal Bankruptcy Code that Congress has enacted under that Clause. It has long been settled, however, that the Bankruptcy Clause does not divest the States of their traditional authority to enact legislation governing debt restructuring. Nor does the federal Bankruptcy Code occupy the field of debt restructuring; to the contrary, a state restructuring law is not preempted by federal law unless it conflicts with federal law. No such conflict exists here, because the Act merely creates a mechanism for the Commonwealth s agencies and instrumentalities to restructure their debts, just as the States agencies or instrumentalities may restructure their debts under Chapter 9 of the Code or their own state laws. Plaintiffs also miss the mark by alleging that the Act violates the Contract Clause and the Takings Clause. Indeed, it is impossible even to adjudicate these claims before the Act is actually invoked to restructure a public corporation s alleged debts: until then, there can be no substantial impairment of contract rights within the meaning of the Contract Clause, or taking (much less a taking without just compensation) within the meaning of the Takings Clause. Thus, plaintiffs have not alleged, and cannot allege, facts sufficient to state a plausible claim under either Clause. Finally, plaintiffs err by alleging that the Act violates a constitutional prohibition on staying federal proceedings. Once again, such a claim is manifestly unripe for adjudication unless and until the Act is actually invoked to stay some federal proceeding. In any event, such a claim fails on the merits in light of the venerable principle that a court exercising in rem jurisdiction over a debtor s 2

11 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 11 of 40 assets may stay proceedings in the courts of another sovereign to ensure that such assets are equitably allocated among the debtor s creditors. Accordingly, this Court should dismiss both complaints, and deny the Franklin plaintiffs cross-motion for summary judgment on certain claims. BACKGROUND The Current Fiscal Crisis. The fiscal situation in Puerto Rico has reached the most critical point in the Commonwealth s history. In January 2013, the deficit for fiscal year was projected to exceed $2.2 billion. Act, Stmt. of Motives, A. Even after significant budget cuts, the deficit for that fiscal year ultimately exceeded $1.2 billion. Id. And despite additional fiscal discipline measures approved by the Legislative Assembly, the deficit for the fiscal year reached $650 million. Id. Moreover, in recent years, Puerto Rico has faced a declining population and high unemployment, which have led to a declining tax base and decreases in revenue. Id. The financial situation of certain public corporations that provide essential utilities to the Commonwealth s people is equally dire. The combined deficit of the three main public corporations in fiscal year was approximately $800 million, and their overall combined debt reached $20 billion. Id. For the first time in the Commonwealth s history, the principal rating agencies have downgraded the Commonwealth s general obligation bonds (and the bonds of most of its public corporations) to below investment grade. Id. The attendant increases in interest rates, along with the reduction in access to capital markets, have further limited these corporations liquidity and financial flexibility. Id. PREPA in particular which employs over 8,000 Puerto Ricans and serves more than a million customers has experienced severe reductions in its net revenues and has incurred net losses and cash flow shortfalls due to the prolonged weakness in the Commonwealth s macroeconomic conditions; high energy, labor, and maintenance costs; and investments in capital improvements. Id. PREPA s utility rates, which reached a high of $0.31 per kilowatt hour at the 3

12 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 12 of 40 end of 2012, have crippled the Commonwealth s economic development and thwarted necessary capital improvements. Id. The Government Development Bank for Puerto Rico ( GDB ) which serves as the Government s financial adviser and fiscal agent has also seen its liquidity adversely affected as a result of financing the operational deficits of various public corporations. In its financial statements for fiscal year , GDB reported that it had $6.9 billion in outstanding loans to the Commonwealth and its public corporations. Its loans to municipalities totaled another $2.2 billion. Id. The Commonwealth has taken extraordinary steps to improve GDB s liquidity including through a $3.5 billion bond issue and limits on the circumstances in which GDB may extend loans to public corporations. Id. GDB nonetheless continues to lack sufficient financial strength to satisfy the current financing needs of the Commonwealth and its public corporations. Id. These problems have been exacerbated by recurring budget deficits, prolonged recession, high unemployment, and high levels of pension obligations. Id. Under these circumstances, the Legislative Assembly declared a state of fiscal emergency earlier this year. Id. The Puerto Rico Public Corporation Debt Enforcement and Recovery Act. The Act is a key component of the Commonwealth s response to this overwhelming fiscal emergency. As the Legislative Assembly explained, the current fiscal emergency situation requires legislation that allows public corporations, among other things, (i) to adjust their debts in the interest of all creditors affected thereby, (ii) provides procedures for the orderly enforcement and, if necessary, the restructuring of debt in a manner consistent with the Commonwealth Constitution and the U.S. Constitution, and (iii) maximizes returns to all stakeholders by providing them going concern value based on each obligor s capacity to pay. Id., Stmt. of Motives, D. The Act is patterned after the federal Bankruptcy Code under which Puerto Rico s public corporations are ineligible to seek 4

13 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 13 of 40 relief and creates a specialized court (the Public Sector Debt Enforcement and Recovery Act Courtroom of the Court of First Instance, San Juan Part) to exercise in rem jurisdiction over the property of any public corporation that seeks protection under the Act. See id. 109, 111. The Act s guiding principle is to enhance value to a public corporation s creditors while ensuring that the corporation can continue to provide critical public services. To this end, the Act contemplates two types of procedures to address a public corporation s debt burden. The first, set forth in Chapter 2, is a market-based approach with limited court involvement. The public corporation invoking this approach begins by choosing debts to renegotiate with creditors. See id. 202(a). Creditors representing at least 50 percent of the debt in a given class must participate in the vote on whether to accept those changes, and at least 75 percent of participants must approve. See id. 202(b)(d)(b)(A)-(B). GDB and the specialized court must approve any consensual debt relief transaction before any amendments, modifications, waivers, or exchanges become binding on any class of creditors. See id. 202(b)(d)(a). Once the specialized court enters an approval order, creditors may not bring a separate action to enforce their original claims. See id. 115(b). The Act also allows public corporations to seek relief under Chapter 3, which involves enhanced judicial oversight. Id., Stmt. of Motives, E. The public corporation begins by filing a petition that includes a list of affected creditors and a schedule of claims, and the act of filing stays a broad range of actions against the petitioner. See id. 301, 302, 304. Once the proceedings are underway, the specialized court may appoint committees to represent creditors. See id Either GDB or the petitioner must then file a proposed plan or proposed transfer of the petitioner s assets, which the court can confirm only if it provides for every affected creditor in each class of affected debt to receive payments and/or property having a present value of at least the amount the affected debt in the class would have received if all creditors holding claims against the petitioner 5

14 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 14 of 40 had been allowed to enforce them on the date the petition was filed. Id. 310, 315(d). At least one class of affected debt must accept the plan with a majority of all votes cast and with the support of at least two-thirds of affected debt in the class. See id. 312, 315(e). As under Chapter 2, all creditors are bound by the plan after it is approved by the specialized court. See id. 115(b)(c)(c). Chapter 3 also requires all of a public corporation s creditors to receive more value than they would receive if all creditors exercised their rights to enforce their claims simultaneously. Like Chapter 2, it does not provide for a discharge of any creditor s claim. Rather, creditors that are not paid in full are entitled to a portion of the corporation s free cash flow for up to the first ten (10) full fiscal years ending after the first anniversary of the effective date of the plan until they are paid in full. Id. 315(k). The contingent payment obligations are intended to allow all creditors to retain claims payable from the corporation s brighter future. STANDARD OF REVIEW To survive a motion to dismiss, [t]he make-or-break standard... is that the combined allegations, taken as true, must state a plausible, not a merely conceivable, case for relief. Sepúlveda-Villarini v. Department of Educ. of P.R., 628 F.3d 25, 29 (1st Cir. 2010) (citing, inter alia, Ashcroft v. Iqbal, 556 U.S. 662, (2009), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, , 570 (2007)). In doing so, a court need not, and may not, credit bald assertions, unsupportable conclusions, periphrastic circumlocutions, and the like. Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir. 1996); see also Iqbal, 556 U.S. at 678. Here, because no public corporation has invoked the Act, plaintiffs necessarily bring a facial as opposed to an as-applied challenge seeking a declaration that the Act and any prospective enforcement thereof violates the Constitution. Franklin 2d Am. Compl. 26; BlueMountain ( BM ) Am. Compl. 83(a-d). The First Circuit imposes a very heavy burden on a party who mounts a facial challenge to a state statute. McCullen v. Coakley, 571 F.3d 167, 174 (1st 6

15 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 15 of 40 Cir. 2009). Specifically, to succeed on such a challenge, a plaintiff must... establish that no set of circumstances exists under which [the challenged statute] would be valid. Williams v. Puerto Rico, 910 F. Supp. 2d 386, (D.P.R. 2012) (Besosa, J.). Given that demanding standard, [a] facial challenge to a legislative act... is considered the most difficult challenge to mount successfully. Id. at 392 (quoting United States v. Salerno, 481 U.S. 739, 745 (1987)). Courts must also exercise particular caution in entertaining declaratory-judgment actions. The preemptive and contingent nature of declaratory judgment actions spawns heightened demand for careful judicial attention to the constitutional limitations to federal jurisdiction under Article III, as well as to derivative prudential doctrines, such as ripeness. Hudson Cnty. News Co. v. Metro Assocs., Inc., 141 F.R.D. 386, 389 (D. Mass. 1992) (citing, inter alia, Public Serv. Comm n of Utah v. Wycoff Co., 344 U.S. 237, (1952), and Maryland Cas. Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941)). Because the federal declaratory-judgment statute is an enabling Act, which confers a discretion on the courts rather than an absolute right upon the litigant, Wycoff, 344 U.S. at 241, [t]he propriety of issuing a declaratory judgment may depend upon equitable considerations, and is also informed by the teachings and experience concerning the functions and extent of federal judicial power. Green v. Mansour, 474 U.S. 64, 72 (1985) (internal quotations omitted). Needless to say, the jurisprudential concerns presented by an unripe declaratory judgment action are only heightened by federalism concerns where, as here, plaintiffs ask a federal court to invalidate state or Commonwealth legislation before it has ever been invoked or enforced against them. See, e.g., id. A court s discretionary decision not to grant declaratory relief is reviewed for abuse of discretion. See Verizon New England, Inc. v. International B hood of Elec. Workers, 651 F.3d 176, (1st Cir. 2011). 7

16 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 16 of 40 ARGUMENT I. Plaintiffs Claims Are Unripe. Plaintiffs ask this Court to declare that the Act is unconstitutional before it has ever been invoked, and thus before it has caused plaintiffs any legally cognizable injury. In essence, plaintiffs are asking for an advisory opinion on the Act s constitutionality. Neither the case-or-controversy requirement of Article III nor the Declaratory Judgment Act permits this Court to grant that request. See, e.g., Roman Catholic Bishop of Springfield v. City of Springfield, 724 F.3d 78, 89 (1st Cir. 2013); Verizon, 651 F.3d at 188 ( Requests for a declaratory judgment may not be granted unless they arise in a context of a controversy ripe for judicial resolution. ). As the Supreme Court has explained, [a] claim is not ripe for adjudication if it rests upon contingent future events that may not occur as anticipated, or indeed may not occur at all. Texas v. United States, 523 U.S. 296, 300 (1998) (internal quotation omitted); see also Ernst & Young v. Depositors Econ. Prot. Corp., 45 F.3d 530, 536 (1st Cir. 1995). In analyzing ripeness, a court must evaluate both [1] the fitness of the issues for judicial decision and [2] the hardship to the parties of withholding court consideration. Texas, 523 U.S. at 301 (quoting Abbott Labs. v. Gardner, 387 U.S. 136, 149 (1967)). [B]oth prongs of the test ordinarily must be satisfied in order to establish ripeness. Ernst & Young, 45 F.3d at 535; see also Roman Catholic Bishop, 724 F.3d at 89. Neither prong is satisfied here. [T]he critical question concerning fitness for review is whether the claim involves uncertain and contingent events that may not occur as anticipated or may not occur at all. Ernst & Young, 45 F.3d at 536 (internal quotation omitted). Thus, even a claim that involves a pure issue of law is not ripe for judicial review unless and until it is appropriate for the court to undertake the task. Id. at 537; see also id. ( The notion that disputes which turn on purely legal questions are always ripe for judicial review is a myth. ). This rule prevent[s] the courts, through avoidance of 8

17 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 17 of 40 premature adjudication, from entangling themselves in abstract disagreements. Roman Catholic Bishop, 724 F.3d at 89 (quoting Abbott Labs., 387 U.S. at ). That is exactly the case here. Plaintiffs claim that the Act has injured them in their capacity as PREPA bondholders. But PREPA has not sought to restructure its debts under the Act, and may never do so. Indeed, PREPA and its bondholders have already made significant progress in addressing these issues in a consensual manner. It is a matter of public record that, on August 14, 2014, PREPA and insurers and bondholders controlling more than 60% of outstanding bonds including all plaintiffs here agreed to amend existing bond documents to provide PREPA with additional liquidity and breathing room to restructure its debts. See Press Release (Aug. 14, 2014), available at Aug14Forbearance PressRelease_081414_FINAL.pdf. Under this forbearance agreement, the insurers and bondholders will not exercise specified remedies against PREPA before March 31, See id. Given that there has been no filing under the Act, and no such filing is imminent, it is neither necessary nor appropriate for this Court to entertain plaintiffs constitutional challenges to the Act. Texas v. United States underscores that federal courts should not decide challenges to statutory provisions that have not been, and may never be, invoked. That case involved a Texas statutory scheme designed to hold elected local school boards accountable for student achievement. If a school district fell short of the statutory accreditation criteria, the State could impose a variety of sanctions, including the appointment of a master or management team to replace the local school board. Pursuant to the federal Voting Rights Act, Texas submitted the statute to the U.S. Department of Justice for a determination whether any of the sanctions required preclearance. In response, the Department of Justice warned that certain statutory sanctions might violate the federal Act. Texas then sought a declaratory judgment in federal court that those sanctions did not implicate 9

18 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 18 of 40 the Voting Rights Act as a matter of law. The Supreme Court, however, held that the claim was not ripe for adjudication because those sanctions might never be imposed. See 523 U.S. at Despite the fact that the Texas statute was on the books, the Court concluded that determination of the scope of legislation in advance of its immediate adverse effect in the context of a concrete case involves too remote and abstract an inquiry for the proper exercise of the judicial function. Id. at 301 (internal quotation omitted). Here, as in Texas, plaintiffs are asking a federal court to review a statute that has never been invoked or enforced. And because they are pursuing a facial challenge to the Act, they must prove that the Act cannot be applied to anyone under any circumstance in a constitutional manner. Just as the Supreme Court in Texas did not have sufficient confidence in [its] own powers of imagination to affirm such a negative, id., this Court should decline to adjudicate plaintiffs facial challenge to the Act. That challenge is not fit for review. Plaintiffs also fail the hardship prong of the ripeness test. That inquiry requires the court to consider the extent to which hardship looms an inquiry that typically turns upon whether the challenged action creates a direct and immediate dilemma for the parties. Ernst & Young, 45 F.3d at 535 (internal quotation omitted). Plaintiffs are subject to no such direct or immediate dilemma if this Court declines to adjudicate their challenge now. This is not a case like Abbott Laboratories v. Gardner,... where the regulation at issue had a direct effect on the day-to-day business of the plaintiffs, because they were compelled to affix required labeling to their products under threat of criminal sanction. Texas, 523 U.S. at 301. Nor is this a case like Duke Power Co. v. Carolina Envtl. Study Group, Inc., 438 U.S. 59, (1978), where the challenged statute allowed the construction of a nuclear power plant that would cause thermal pollution and emit non-natural radiation, or like Doe v. Bush, 323 F.3d 133, 138 (1st Cir. 2003), where soldiers and their families 10

19 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 19 of 40 faced mobilization during wartime. The Act is not directed at plaintiffs primary conduct, Texas, 523 U.S. at 302, and none of its provisions will affect them unless and until PREPA actually seeks protection under the Act. Plaintiffs try to avoid this point by alleging that their PREPA bonds declined in value around the time the Act was passed and afterwards, and linking that decline to the Act. See Franklin 2d Am. Compl ; BM Am. Compl. 11, 38. But that allegation does not remotely establish that plaintiffs constitutional challenges to the Act are ripe for review. Because neither PREPA nor any other public corporation has invoked the protections of the Act, it follows as a matter of law and logic that no application of the Act could have caused the value of plaintiffs bonds to decline. Plaintiffs therefore cannot recover (and do not even seek to recover) damages for the alleged decline in value of their bonds as relief in this lawsuit. The Third Circuit s decision in Armstrong World Indus., Inc. v. Adams, 961 F.2d 405 (3d Cir. 1992), is instructive in this regard. The plaintiffs there, shareholders of a company that could have been subject to a hostile takeover, challenged the constitutionality of a recently enacted state antitakeover statute. Plaintiffs argued that a drastic decline in the market value of [their] stock after the statute s enactment rendered their claims ripe for judicial review, even though no formal tender offer for the company had been initiated and thus the statute had never been invoked. Id. at 414, 417. The Court squarely rejected that argument. Even assuming the passage of [the anti-takeover statute] contributed to the decline in the market value of Armstrong stock, this would not make plaintiffs complaint justiciable. Id. at 417. As the Court explained, even though a diminution in share value may give a shareholder standing to bring a securities lawsuit, we have never suggested that diminution in share value alone is sufficient to make a shareholder challenge derivative or not to a legislative enactment ripe for judicial review. Id. at Indeed, as the Court noted, 11

20 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 20 of 40 [o]ne could argue that every rule of corporate law, not to mention tort or environmental law, affects shareholder investment, but plaintiffs have not cited any authority for the proposition that this phenomenon establishes federal jurisdiction before the challenged rule of law has been invoked. Id. at 418 (emphasis added). Here too, the alleged diminution in market value of plaintiffs PREPA bonds does not, by itself, render their various constitutional challenges to the Act ripe for adjudication. Nor can plaintiffs establish ripeness on the theory that the Act annuls or alter[s] their right to seek appointment of a receiver for PREPA under certain circumstances. BM Am. Compl. 11, 38; Franklin 2d Am. Compl. 37, 44. Plaintiffs right to seek appointment of a receiver for PREPA is triggered only if an event of default has occurred. But no event of default has occurred, and thus plaintiffs cannot seek (and have not sought) the appointment of a receiver. Accordingly, plaintiffs challenge to the alleged impairment of their right to seek appointment of a receiver is itself unripe. See generally Texas, 523 U.S. at Finally, plaintiffs cannot overcome the ripeness hurdle here by citing market watchers who predict[ed] that PREPA is highly likely to seek relief under the Act imminently. BM Am. Compl. 11, 40 (citing articles dated July 7 and 10, 2014); see also Franklin 2d Am. Compl. 19 (citing same articles). These market watchers were obviously incorrect, because several months have passed, and PREPA has not filed for relief under the Act; to the contrary, as noted above, PREPA and its bondholders (including plaintiffs) entered into a forbearance agreement in mid- August that makes an imminent filing less likely. In any event, the likelihood that a contingent future event will occur has no bearing on the ripeness of plaintiffs claims. As the First Circuit has explained, the contingent nature of [plaintiff s] claim has implications for hardship as well [as] for fitness. Ernst & Young, 45 F.3d at 540. Unless and until PREPA seeks relief under the Act, 12

21 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 21 of 40 plaintiffs various constitutional challenges to the Act are unripe, and these lawsuits must be dismissed. II. The Act Does Not Violate The Bankruptcy Clause Or The Supremacy Clause. Even if plaintiffs various constitutional challenges to the Act were ripe for adjudication (which they are not), those challenges fail on the merits. As a threshold matter, plaintiffs argue that the Act is preempted by the Bankruptcy Clause and Bankruptcy Code. BM Am. Compl. 12 (capitalization modified); see also Franklin 2d Am. Compl , That argument reflects a fundamental misunderstanding of the preemptive scope of both the Bankruptcy Clause and the Code, and completely ignores the Commonwealth s important sovereignty interests. The Bankruptcy Clause of the U.S. Constitution gives Congress the Power... [t]o establish... uniform Laws on the subject of Bankruptcies throughout the United States. U.S. Const. art. I, 8, cl. 4. At the broadest level, plaintiffs assert that this constitutional grant of authority to Congress, by itself, preempts the Act. See Franklin 2d Am. Compl. 59; BM Am. Compl. 42. That assertion is manifestly incorrect. From the earliest days of the Republic, the Supreme Court has recognized that the Bankruptcy Clause does not prevent the States from enacting laws governing the restructuring of debts. See, e.g., Sturges v. Crowninshield, 4 Wheat. (17 U.S.) 122, (1819); Ogden v. Saunders, 12 Wheat. (25 U.S.) 213, 368 (1827). Indeed, the first federal bankruptcy law was not enacted until 1800 and was repealed in 1803, the second was passed in 1841 and repealed two years later, and the third was enacted in 1867 and repealed in See Hanover Nat l Bank v. Moyses, 186 U.S. 181, 184 (1902). Thus, during the first century under the Constitution, a federal bankruptcy law was only in effect for a total of 16 years; it was not until 1898 that the precursor of the modern Bankruptcy Code was enacted. During that time, States enacted their own legislation governing restructuring of debts. Thus, there is simply no dormant Bankruptcy Clause akin to the dormant Commerce Clause that precludes States from adopting restructuring legislation absent 13

22 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 22 of 40 action by Congress. It follows that state laws in this area are suspended only to the extent of actual conflict with the system provided by the Bankruptcy Act of Congress. Stellwagen v. Clum, 245 U.S. 605, 613 (1918) (emphasis added); see also FDIC v. Torrefacción Café Cialitos, Inc., 62 F.3d 439, 443 (1st Cir. 1995) ( The provisions of the federal bankruptcy code preempt only those state laws that are in conflict with federal law. ); Highland Realty, Inc. v. Superior Court of P.R., 3 P.R. Offic. Trans. 426, 430 (1975) ( [T]he existence of a federal bankruptcy act does not annul the power of the states or of Puerto Rico of having their own legislation in any aspect which is not in conflict with the federal statute. ). Plaintiffs constitutional preemption argument is especially misplaced in the context of the restructuring of the debts of state agencies or instrumentalities. In light of background principles of federalism reflected in the Tenth Amendment, the Supreme Court long held that Congress constitutional power over bankruptcy did not even extend to this context. See, e.g., Ashton v. Cameron Cnty. Water Improvement Dist., 298 U.S. 513, (1936). Thus, it was not until 1938 that the Supreme Court first interpreted the Bankruptcy Clause to authorize Congress to enact a federal bankruptcy law governing state agencies or instrumentalities. See United States v. Bekins, 304 U.S. 27, (1938). And even then, the Court did not overrule its earlier precedents, but simply held that the statute in question (a precursor to Chapter 9 of the Bankruptcy Code) was carefully drawn so as not to impinge on the sovereignty of the State. Id. at The Court emphasized that the federal statute allowed [t]he State [to] retain[] control of its fiscal affairs and exercised the bankruptcy power only in a case where the action of the taxing agency in carrying out a plan of composition approved by the bankruptcy court is authorized by state law. Id. at 51. Puerto Rico, like a State, is entitled to exercise sovereign police powers. The Commonwealth s Constitution established by the People of Puerto Rico and approved by Congress 14

23 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 23 of 40 and the President, see Pub. L. No , 66 Stat. 327 (July 3, 1952) explicitly states that [t]he power of the Legislative Assembly to enact laws for the protection of the life, health and general welfare of the people shall... not be construed restrictively. P.R. Const. art. II, 19; see also 48 U.S.C. 821; Examining Bd. of Eng rs, Architects & Surveyors v. Flores de Otero, 426 U.S. 572, 594 (1976) ( The purpose of Congress in the 1950 and 1952 legislation was to accord to Puerto Rico the degree of autonomy and independence normally associated with States of the Union. ). There is no question that Puerto Rico, like a State, is entitled to enact legislation to protect and promote the general welfare of its people, including their economic welfare. Because the Bankruptcy Clause does not displace Puerto Rico s sovereign power to restructure the debts of its own agencies or instrumentalities, this Court can quickly dispense with plaintiffs argument that the Bankruptcy Clause, of its own force, preempts the Act. Indeed, plaintiff BlueMountain acknowledged in its original complaint (but deleted in its amended complaint) that the Bankruptcy Code coexists peaceably with state laws that do not conflict with the Code. BM Compl. 44 (quoting Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1201 (9th Cir. 2005)). The Franklin plaintiffs, however, allege that Bankruptcy Clause, by itself, preempts state laws that purport to grant a debtor a discharge from its debts. See Franklin 2d Am. Compl. 30. In particular, they assert, [i]t is well-settled that the power to grant a discharge is a unique aspect of the federal bankruptcy power. Id. But nothing in the Bankruptcy Clause remotely purports to preempt state restructuring laws that grant debtors a discharge (or any other state laws); to the contrary, the Bankruptcy Clause simply grants Congress the power to enact federal bankruptcy legislation. See, e.g., Sturges, 4 Wheat. (17 U.S.) at Accordingly, as noted above, state laws are... suspended only to the extent of actual conflict with the system provided by the Bankruptcy Act of 15

24 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 24 of 40 Congress. Stellwagen, 245 U.S. at 613 (emphasis added); see also id. at 615 ( It is only state laws which conflict with the bankruptcy laws of Congress that are suspended. ) (emphasis added). Plaintiffs preemption argument thus boils down to the proposition that, under the Supremacy Clause, U.S. Const. art. VI cl. 2, the federal Bankruptcy Code preempts the Act. At the broadest level, plaintiffs assert, the Act is preempted because it operates in a field that Congress has comprehensively occupied through a detailed [and] comprehensive Bankruptcy Code. BM Am. Compl. 42, 44; see also id. 47 ( Congress... entirely displaced state bankruptcy regulation. ). But that argument is squarely foreclosed by Faitoute Iron & Steel Co. v. City of Asbury Park, N.J., 316 U.S. 502 (1942), in which after the enactment of Chapter 9 of the federal Bankruptcy Code the Supreme Court rejected such a field preemption argument in the context of a state municipalrestructuring statute. As the Court explained, [n]ot until April 25, 1938, was the power of Congress to afford relief similar to that given by New Jersey for its municipalities clearly established. Id. at 508 (citing the date on which the Court in Bekins upheld Chapter 9 against a constitutional challenge). Can it be that a power that was not recognized until 1938, and when so recognized, was carefully circumscribed to reserve full freedom to the states, has now been completely absorbed by the federal government that a state which... has... devised elaborate machinery for the autonomous regulation of problems as peculiarly local as the fiscal management of its own household, is powerless in this field? We think not. Id. at The field preemption argument here is even weaker. Chapter 9 of the Code provides a mechanism for the public agencies and instrumentalities of States to restructure their debts. See 11 U.S.C But Chapter 9 does not cover municipalities, agencies, or instrumentalities of Puerto Rico. To the contrary, the Code specifically excludes Puerto Rico (as well as the District of Columbia) from the definition of State for purposes of Chapter 9. See 11 U.S.C. 101(52) ( The 16

25 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 25 of 40 term State includes the District of Columbia and Puerto Rico, except for the purpose of defining who may be a debtor under chapter 9 of this title. ) (emphasis added); id. 101(40) ( The term municipality means political subdivision or public agency or instrumentality of a State. ). Nor can agencies or instrumentalities of Puerto Rico restructure their debts under any other provision of the federal Bankruptcy Code: as governmental unit[s], they are expressly excluded from the definition of person under the Code, see id. 101(41), and thus cannot seek relief under Chapter 11 or any other provision. Accordingly, plaintiffs find themselves in the anomalous position of arguing that a provision of federal law that by its plain terms does not address the restructuring of the debts of public agencies or instrumentalities of Puerto Rico nonetheless preempts laws governing the restructuring of the debts of public agencies or instrumentalities of Puerto Rico. Because Chapter 9 does not apply to Puerto Rico at all, that provision does not preempt Puerto Rico from enacting its own municipal restructuring law. By parity of reasoning, courts have long upheld the application of state restructuring or liquidation proceedings to entities, such as banks and insurance companies, that are specifically excluded from other provisions of the federal Bankruptcy Code. See 11 U.S.C. 109(b) ( A person may be a debtor under chapter 7 of this title only if such person is not (1) a railroad; (2) a domestic insurance company, bank, savings bank, cooperative bank, savings and loan association,... ). Indeed, Congress passed the predecessor to 11 U.S.C. 109(b)(2) precisely to preserve the authority of States over the liquidation of insurance companies. See, e.g., In re Cash Currency Exch., Inc., 762 F.2d 542, 552 (7th Cir. 1985) ( Title 11 suspends the operation of state insolvency laws except as to those classes of persons specifically excluded from being debtors under the Code. ) (emphasis added); In re Bankers Trust Co., 566 F.2d 1281, 1288 (5th Cir. 1978) ( [T]o permit the blocking of [a] state reorganization herein would be tantamount to imposing a federal reorganization which is 17

26 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 26 of 40 clearly forbidden by the Act s exemption of savings and loan associations and inconsistent with the congressional scheme of the Bankruptcy Act. ); Israel-British Bank (London) Ltd. v. FDIC, 536 F.2d 509, 514 (2d Cir. 1976) ( The distribution of federal-state power was not between a detailed liquidation statute and no statute at all. It was between control by the state, through its courts, of the liquidation of certain quasi-public corporations, and the liquidation of all other corporations through the federal bankruptcy laws. ). In re Equity Funding Corp. of Am., 396 F. Supp. 1266, 1275 (C.D. Cal. 1975) (by exempting insurance companies from Chapter 7, Congress decided that liquidation of insurance companies should be left to the states ). The exclusion of an entity from the federal Bankruptcy Code, in other words, does not mean that Congress meant to preclude that entity from restructuring its debts, but only that the authority for any such restructuring must come, if at all, from state law. Plaintiffs insist, however, that the exclusion of Puerto Rico from Chapter 9 represents Congress s considered judgment to exclude Puerto Rico municipalities from participating in a bankruptcy regime. BM Am. Compl. 53. But that is simply another way of restating their misguided field preemption argument. If the federal Bankruptcy Code does not preempt the application of state restructuring laws to entities covered by Chapter 9, see, e.g., Faitoute, 316 U.S. at 508, then the federal Bankruptcy Code certainly does not preempt the application of state restructuring laws to entities not covered by Chapter 9. Because the federal Bankruptcy Code does not occupy the entire field of debt restructuring, an exclusion from the federal Bankruptcy Code does not consign an excluded entity to a twilight zone where it cannot restructure its debts. See, e.g., Israel-British Bank, 536 F.2d at 514. The Act simply represents Puerto Rico s considered decision to fill the gap left by the inapplicability of Chapter 9 of the federal Bankruptcy Code to public agencies of Puerto Rico, and in no way undermines the federal standards governing entities that 18

27 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 27 of 40 are covered by Chapter 9. If anything, plaintiffs arguments under which Puerto Rico would not only be excluded from Chapter 9 but also barred from enacting a parallel restructuring mechanism would raise serious constitutional concerns about whether Chapter 9 represents a valid exercise of Congress power [t]o establish... uniform Laws on the subject of Bankruptcies throughout the United States. U.S. Const. art. I, 8, cl. 4 (emphasis added). Undeterred by the failure of their general preemption arguments, plaintiffs finally argue that the Act conflicts with two specific provisions of the federal Bankruptcy Code. Again, these arguments are unavailing. First, plaintiffs contend that the Act conflicts with Section 903 of the Code, a provision of Chapter 9. In particular, they assert, the Act conflicts with the Bankruptcy Code s directive that any State law prescribing a method of composition of indebtedness of a municipality may not bind any creditor that does not consent to such composition, and that a judgment entered under such a [State] law may not bind a creditor that does not consent to such composition. BM Am. Compl. 49 (quoting 11 U.S.C. 903); see also Franklin 2d Am. Compl , 59. That assertion is plainly incorrect, and rips the relevant language of Section 903 from its statutory context. Section 903, in its entirety, provides as follows: This chapter does not limit or impair the power of a State to control, by legislation or otherwise, a municipality of or in such State in the exercise of the political or governmental powers of such municipality, including expenditures for such exercise, 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 judgment entered under such a law may not bind a creditor that does not consent to such composition. 11 U.S.C The most obvious problem with plaintiffs argument is that Section 903, by its plain terms, addresses the impact of [t]his chapter i.e., Chapter 9 on States authority to 19

28 Case 3:14-cv FAB Document 95-1 Filed 09/12/14 Page 28 of 40 regulate the debt restructuring of their own agencies and instrumentalities. Where, as here, Chapter 9 does not apply, it follows that Section 903 does not apply either. Plaintiffs respond to this straightforward point by noting that Puerto Rico is excluded from the definition of State under the federal Bankruptcy Code only for the purpose of defining who may be a debtor under chapter 9 of this title. 11 U.S.C. 101(52). In their view, that means that Puerto Rico is a State within the meaning of Section 903, because that provision does not defin[e] who may be a debtor under chapter 9 of this title. Id. But that argument is too clever by half. Section 903 by its terms is limited to the relationship between an indebted[] municipality and its creditors in Chapter 9 cases. 11 U.S.C. 903(1). Unless a municipality can qualify as a debtor under Chapter 9, it obviously cannot be an indebted[] municipality with a creditor under Chapter 9. See 11 U.S.C. 101(10) (defining creditor to mean: (1) an entity that has a claim against the debtor ; (2) an entity that has a claim against the estate ; or (3) an entity that has a community claim ). Because agencies and instrumentalities of Puerto Rico cannot be debtors under chapter 9, it follows that plaintiffs cannot be creditors of such debtors under that chapter, and Section 903 is wholly inapplicable. That provision simply prevents States covered by Chapter 9 from allowing their municipalities to restructure their debts under state law in a manner that conflicts with Chapter 9; it has no legal or logical application to municipalities of a jurisdiction, like Puerto Rico, excluded from the scope of Chapter 9 in the first place. Where Congress intends for provisions of the Bankruptcy Code to apply outside the Chapter in which they are located, it knows how to do so. See, e.g., 11 U.S.C. 103(k)(2) ( Chapter 15 applies only in a case under such chapter, except that section 1509 applies whether or not a case under this title is pending. ). Congress did not do so here. Second, the BlueMountain plaintiffs (although not the Franklin plaintiffs) contend that the Act conflicts with Section 364(d)(1) of the Bankruptcy Code, which restricts the power of a 20