COMMONWEALTH OF PUERTO RICO, ET AL., Petitioners v. FRANKLIN CALIFORNIA TAX-FREE TRUST, ET AL., Respondents
Interviewer(s): Stephen G. Breyer, Elena Kagan, John G. Roberts, Jr., Ruth Bader Ginsburg, Sonia Sotomayor
Interviewee(s): Christopher Landau, Matthew D. McGill

John G. Roberts, Jr.: We'll hear argument next in Case 15-233, the Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust and the consolidated case. Mr. Landau.

Christopher Landau: Thank you, Mr. Chief Justice, and may it please the Court: This case presents the question whether Congress has stripped Puerto Rico of access to any legal mechanism to restructure the debts of its public utilities which provide essential services to its citizens, like electricity and water. Respondents contend that Congress denied Puerto Rico access to Chapter 9 altogether, but left Puerto Rico subject to Chapter 9's preemption provision. That anomalous result can't be squared with the statute's text and structure. Congress, in 1984, defined the word "State" in the Bankruptcy Code generally to include Puerto Rico, except for the purposes of determining who may be a debtor under Chapter 9.

But that's just another way of saying that Puerto Rico's outside the scope of Chapter 9.

A State's only role in the Chapter 9 regime is to authorize its municipalities to be debtors. Indeed, Chapter 9 can't apply to Puerto Rico in light of the 1984 amendment.

That amendment categorically precludes Puerto Rico from passing through the gateway into Chapter 9, which is located in Chapter 1 in Section 109(c)(2).

Ruth Bader Ginsburg: Mr. Landau, that's true. Don't you run up against, with respect to the Puerto Rico -- Puerto Rico's legislation, the Contract Clause, the -- the bar against impairing contracts; that Puerto Rico can't impair the lenders' contracts? So apart from -- so if there's -- if we're dealing only with the Puerto Rico legislation, doesn't that, in -- in requiring nonconsenting lenders to give up or have their claims reduced, Puerto Rico is violating the Contract Clause?

Christopher Landau: Your Honor, the Respondents here have certainly brought Contract Clause claims.

And if this Court decides the preemption issue in our favor, then they would certainly be allowed to litigate those contract claims issues on appeal -- excuse me -- on remand. The -- this Court has never addressed the question whether the Contract Clause applies to Puerto Rico, which, as this Court is aware, is in a somewhat unique position in our Federal structure.

That being said, the First Circuit has traditionally assumed that the -- without deciding that the Contract Clause applies to Puerto Rico.

And again, that is an issue for remand. The question presently before this Court is the antecedent question on which the courts below ruled against us, which is to say that the -- Congress's exclusion of Puerto Rico from Chapter 9 nonetheless left them subject to Chapter 9's preemption provision.

John G. Roberts, Jr.: Why would Congress preclude Puerto Rico from Chapter 9? In other words, what -- what is the background of this provision?

Christopher Landau: Sure, Your Honor.

It is a black box -- to answer your question directly, there is no legislative history directly on point either way.

So either side here is going to be limited to speculation on that score. The one thing that we do know for sure is that the mere exclusion of an entity from Chapter 9 is not typically deemed to be a representation of intent by Congress to preclude a State law. And to answer your question more directly -- again, I am admitting this is speculation just as their position is speculation -- one thing that Congress could have been wanting to do is to put Puerto Rico and D.C. in the same boat for Chapter 9 purposes as Guam and the Virgin Islands, the other Territories that are not even within the definition of "State" in the Bankruptcy Code in the first place.

In other words, two somewhat unusual things happened in -- when this provision was added. And again, to go back to your question, I think, Mr. Chief Justice, this came about after 1978 when the definition of "State" that had been in the Bankruptcy Code going all the way back to 1898 fell out of the Code.

That definition broadly defined "State" to include Territories and possessions. In 1978, there was an overhaul of the Bankruptcy Code, and there was no definition of "State." I think Congress recognized pretty quickly, as early as 1979.

There were amendments to fix that omission of the Bankruptcy Code.

And the initial -- the initial fix that was proposed by Senator DeConcini in 1979 went back to the old definition.

It says, "All Territories and States are included" and had no exclusion.

Okay, then. In 1981, though, a -- a new definition was -- that didn't go anywhere. In 1981, Senators Dole, Heflin, and DeConcini proposed a definition of "State" that defined "States" to include Puerto Rico and D.C. only, but then to exclude them from Chapter 9.

The exclusion --

Sonia Sotomayor: Is there any compact with those other Territories that precludes them from using their Territorial power to reorganize their debts?

Christopher Landau: There is not, Your Honor.

So in other words, precisely because Guam, let's say, or the Virgin Islands, by, I think, pretty basic principles of exclusio unius, when Congress, which had long defined "States" to include all Territories and possessions, suddenly in this definition, 1984, says "State" means -- includes Puerto Rico and D.C., I think there's really no way to understand that other than to say that "State" doesn't include Guam and the Virgin Islands.

Sonia Sotomayor: I know that Guam and the Virgin Islands have Federal courts.

Christopher Landau: Yes.

Sonia Sotomayor: And they have Federal judges.

Are they subject to constitutional provisions? Is it an open question of whether they are subject to the Contract Clause as well? To the contract provision limitation, I should say?

Christopher Landau: I think that, yes, Your Honor, it is.

In other words, I -- this Court has never answered that question, as to whether or not they fall more on the Federal government-like side of that, where there's no contract laws with respect to the Federal government, or on the State-like side of that line, where there is a conflict --

Sonia Sotomayor: Well, that's the open issue that --

Christopher Landau: Yes, that is --

Sonia Sotomayor: -- has to go on remand.

Christopher Landau: -- an open issue.

Yes. So again, going back, in a sense, to the Chief Justice's question, which I think is really the question that everyone asks when they pick up this case: Why would Congress have done that? And again, I think one answer that's as plausible as any other that we've been able to come up with is that Puerto Rico and D.C., at least, even though they are included in the definition of "State," at least for Chapter 9 purposes are in the same boat as the other Territories, which don't -- which don't fall within the scope of Chapter 9 and thus don't have to -- aren't subject to the Chapter 9 preemption provision.

Elena Kagan: Mr. Landau, could I ask you to focus on the text here a little bit? Because this gateway theory of yours, I'm not sure it matches up with the text very well.

I mean, you could have a gateway provision which said something like, Puerto Rico is a State for all purposes except Chapter 9, or except for any provision in Chapter 9, or something like that.

But Chapter 9 -- but this provision, 101(52), is written much more specifically.

It says, "except for the purpose of defining who may be a debtor under Chapter 9."

So it's not any provision in Chapter 9; it's just for the purpose of defining who may be a debtor.

Christopher Landau: That is an absolutely critical point, Your Honor, and that goes to an interesting point of the structure of the Code.

The eligibility criteria for the various substantive provisions of the Code, be it Chapter 9, Chapter 11, Chapter 7, are not located in those substantive chapters.

They are located up in Chapter 1.

So in other words, if Congress were to have said Puerto Rico is not a State for purposes of Chapter 9, that would actually not solve the problem at issue here, because the authorization, the gateway provision into Chapter 9, is not in Chapter 9.

It's in Chapter 1. It's this somewhat unusual structure of the statute that I -- I really think we can't emphasize strongly enough that -- that to say that Puerto Rico is outside of Chapter 9 wouldn't have stopped Puerto Rico from authorizing its municipalities under Chapter 1 to get into the Chapter 9 regime, and then they're off to the races under Chapter 9, because then all they have to do -- all the Chapter 9 --

Sonia Sotomayor: Mr. Landau, I'm not sure I understand that argument, so you're going to have to back up a minute.

Christopher Landau: Okay.

I'm sorry.

Yeah, because it really is an important argument.

Sonia Sotomayor: It's, I think, critical to your point, which is, Justice Kagan asked a direct question: Why couldn't Congress have said much more directly, under 101, the term "State" includes the District of Columbia and Puerto Rico except for Chapter 9?

Christopher Landau: Because --

Sonia Sotomayor: If Puerto Rico is not a State for Chapter 9, then it couldn't have authorized its municipality to file under 109.

It would have reached the same end, but more clearly saying that Puerto Rico is not a State.

Christopher Landau: That 109 provision that Your Honor just referenced is not located in Chapter 9.

It's located in Chapter 1.

So for Congress to say "except for Chapter 9," it actually would not have reached that 109 provision. The way to close the gateway was to say Puerto Rico is not a State for purposes of authorizing its municipalities to be debtors under Chapter 9.

That closes the door, which is not located in Chapter 9. Once you close that door, then you don't reach -- chapter -- the provisions of Chapter 9 on which they rely and base their entire case don't come into play, because their whole argument is based on subsection 903(1). 903(1) is a proviso to 903.

If you look -- and these now are within Chapter 9, as opposed to 109(c)(2), the gateway provision, which is not in Chapter 9.

If you look at Chapter 1 -- excuse me -- Section 903, it says, "This chapter" -- i.e., Chapter 9 -- "shall not limit or impair the power of a State." If a State -- or if a jurisdiction like Puerto Rico is categorically barred by Congress from authorizing its municipalities to enter into Chapter 9, then that reservation of power makes no sense.

It -- it has no conceivable applicability to Puerto Rico.

And so therefore, the 101 -- 903(1) proviso, which refers back to "such municipality" in 903, doesn't work either. In essence, Your Honor, Respondents are asking you to look at that proviso in 903(1) in isolation, as opposed to understanding how there is a decision tree here.

Basically, the statutory definition in 101(52) sends you to 109(c)(2), which is in Chapter 1, and then that's the gateway provision.

And that says that Puerto Rico, we know, is not a State for purposes of authorizing its municipalities to enter into Chapter 9. Once you understand that that gateway is categorically closed to Puerto Rico, unlike any of the States of the union, then 903, which is the next step in the decision tree, makes no sense as -- as it purportedly applied to Puerto Rico, because what 903 says is, "This chapter shall not limit or impair the power of a State to control its municipalities."

Stephen G. Breyer: But then it has two other clauses which are the key clauses.

Christopher Landau: That's correct, Your Honor.

Stephen G. Breyer: And the trouble that I have is where it says -- the same problem that Justice Kagan raised.

I mean, you have a statute that prohibits importing a vegetable that isn't a fish, and we can't read "vegetable" as "fish." I mean, it just isn't.

And what I'm having is the problem of the language.

Christopher Landau: No -- but, Your Honor --

Stephen G. Breyer: Let -- let me show you. The term "State," just as she said it, includes the District of -- of Columbia and Puerto Rico.

Christopher Landau: Right.

Stephen G. Breyer: Where do we find that? In the first part of Title 11, which has to do with bankruptcy.

So what it seems to be doing is it's the whole Bankruptcy Code.

It's 11.

So when I see the word "State," that includes Puerto Rico. And then it says, "except for the purpose of defining who may be a debtor under Chapter 9." So I go back, I look at it, and it says -- one of the things, it says, well, a State law prescribing a method of composition of indebtedness.

That is not for the purpose of defining who is a debtor under -- under Chapter 9.

So what am I supposed to do about that?

Christopher Landau: Again, Your Honor, if you look at this as the decision tree, you're already looking down here at the third -- at the third --

Stephen G. Breyer: What the first part of the tree says is, State, nothing we say really stops you from controlling your municipality, except in one important respect.

Christopher Landau: Right.

Stephen G. Breyer: And the important respect is that you cannot have your own bankruptcy law.

Christopher Landau: But logically, that 903(1) part that you were referring to --

Stephen G. Breyer: Yeah.

Christopher Landau: -- doesn't make any sense.

Stephen G. Breyer: But I read it as a decision tree.

What am I supposed to say?

Christopher Landau: Okay.

So the decision tree starts, as you -- as you recognize, with 101(52), the definitions.

It says Puerto Rico is not a State for purposes of determining who may be a debtor under Chapter 9.

That sends us to Chapter 1, to 109(c)(2). That provision, 109(c)(2), says that an entity must -- in order to get into Chapter 9, you must have that authorization from a State. So we know that Puerto Rico is categorically precluded from authorizing its municipalities to enter into Chapter 9.

Stephen G. Breyer: I know that.

Christopher Landau: Okay.

So that -- that's the second step in the tree.

Stephen G. Breyer: They can't be a debtor.

Christopher Landau: Okay.

And so then we get to the third step, which I think is exactly what Your Honor is asking.

The third step in that decision tree says this chapter, i.e., Chapter 9, does not limit or impair the power of a State to control.

So the question right there, I think, Your Honor, is what you put your finger on, which is to say: Does that make any sense at all, to think that in this provision, when Congress is talking about "State," this chapter doesn't limit the part of the State, that Congress would have intended that to apply to a jurisdiction that Congress has not -- has categorically precluded from even authorizing its municipalities. That's the key question, in other words. And, Your Honor, it's a very big deal to assume that Congress categorically precluded Puerto Rico from access to anything.

Stephen G. Breyer: So -- so then where -- where -- where in the Code, except for this provision -- are there dozens of places? 20? A thousand? -- where the word "State" is used outside of Chapter 9's debtor provisions where then it makes sense to read Puerto Rico into it?

Christopher Landau: There's about 40.

Stephen G. Breyer: About 40?

Christopher Landau: And in fact, if you look at the legislation --

Stephen G. Breyer: And you have them in your brief?

Christopher Landau: I don't know that we have tallied them up in our --

Stephen G. Breyer: No, no, but I -- is there some reference? I can get them?

Christopher Landau: I -- I believe, yes, Your Honor, they -- they -- we --

Sonia Sotomayor: But in all those provisions, debtor, creditor, State play active roles in implementing the provisions of those chapters.

Christopher Landau: Correct.

Sonia Sotomayor: So in all the other 40 places, the State is involved --

Christopher Landau: Correct.

Sonia Sotomayor: -- by -- inherent in the definition of what a debtor and what a creditoror is, the State has rights and responsibilities under those provisions.

Christopher Landau: Yes, Your Honor.

Sonia Sotomayor: What you -- what I'm understanding you to say is, Puerto Rico has been kicked out of Chapter 9 altogether.

It doesn't even get into the gateway.

Christopher Landau: Exactly, Your Honor.

And I think --

Sonia Sotomayor: And so to read it as being involved as a State, the only other place that's used is here.

Christopher Landau: Correct.

Sonia Sotomayor: In 903, you have to be part of it in some way.

Christopher Landau: That's exactly right, Your Honor.

It's nonsensical to think that Congress having categorically shut the door on Puerto Rico, that -- that then it would mean for this to apply, Your Honor. Again, the only thing a State does under this entire Chapter 9 regime, which is not located exclusively in Chapter 9, but also in that eligibility provision up in Chapter 1 in 109(c)(2), then you just -- the question then arises -- and, Justice Breyer, if this actually did something, this would be a different case.

But all this says, again, is this chapter does not limit or impair the power of a State to control. When you're talking about a jurisdiction like Puerto Rico that is not allowed to be authorizing its municipalities, then there's nothing to be preserved here.

Sonia Sotomayor: Mr. Landau, this is not very different from what we did in -- last year in Utility Air Regulatory Group v. the EPA.

We had one general definition of a statutory term, and then we looked at it and its play within other sections, and we said can't be given the same meaning, because the definition applies to one generalized feature of the Act, and the use here is in a more specialized way.

Christopher Landau: Absolutely, Your Honor.

And that's --

Sonia Sotomayor: But you didn't cite Utility Air.

Is there a reason you didn't?

Christopher Landau: Well, Your Honor, I think we cited King v. Burwell, and there -- there are many cases for the proposition that you can't just look at one isolated provision in context and not understand -- excuse me, one isolated provision and not understand how that fits into the context. Again, I think Respondents are asking you to just pick up this case, read 903(1) and say, here it is.

Stephen G. Breyer: All I have to do is to get myself to do the following thing: I could dress it up so people couldn't understand it.

But what I would be doing is saying the following: It says a State law, and it says the chapter does not limit or impair the power of a State, okay, et cetera, et cetera.

Christopher Landau: Right.

Stephen G. Breyer: Now, all I have to say is that word "State" right there does not include Puerto Rico.

Christopher Landau: Because Puerto --

Stephen G. Breyer: My only problem with writing those words is somebody is going to direct me to the provision a little bit later where it says the word "State" in Title 11, of which this is part, means Puerto Rico.

Okay?

Christopher Landau: Well, Your Honor --

Stephen G. Breyer: Now, that -- that's hard for me to do because of that language.

Christopher Landau: But, Your Honor, I would -- Your Honor has always been so sensitive to the contextual approach to --

Stephen G. Breyer: That may be, but I can't say that an "airplane" means a horse. (Laughter.)

Christopher Landau: And I totally -- no, but, Your Honor, if -- if somebody is saying this doesn't apply to driving, and then this one is about a -- a subsequent provision is about a right turn on red regulation, you'd say, no, but driving has been taken completely out of the statute. In other words, you are in a position -- by the time you get to -- this is kind of a truism.

This is basically a federal -- 903, when I'm saying "this," is an important federalism limitation on Chapter 9. It's actually stated more descriptively than anything else. It says, "This chapter does not limit or impair the power of a State." If we know by definition that Congress has shut the door, there is no door for Puerto Rico and no key for Puerto Rico.

Then to -- to come along and say, well, it says "State" here, then I have to apply the power of State.

I think you can -- the definition of "State," but I think you have to understand that when Congress has given a definition of "State" that -- that categorically closes the door in the antecedent portion of the decision tree; you don't even reach this sensibly.

Elena Kagan: So, Mr. Landau, I -- I think I get what you're saying now, which I didn't when I started with.

You're saying they couldn't just say it's a State, except for purposes of Chapter 9, because, in fact, there's something that's outside of Chapter 9 that determines who gets into Chapter 9. So what they did was they said it's a State, except for purposes of this gateway, and then they assumed that that meant that all of Chapter 9 wouldn't apply either.

That's your basic argument.

Christopher Landau: Precisely, Your Honor.

Elena Kagan: So -- but before 1984, before this amendment, this 903(1) did apply to Puerto Rico; wasn't that right?

Christopher Landau: Yes, Your Honor, that is correct.

Elena Kagan: So you're saying that the really super significant change, which is 903(1) applies to Puerto Rico before 1984, and then doesn't apply after 1984 because of this definitional move that they made here in 101(52). What you have to admit is -- I'm not quite sure what the -- the word -- I mean, it's a -- it would be a mysterious way, it would be an extremely kind of cryptic odd way to make such a major change.

Christopher Landau: Your Honor, but the major -- let me just -- I -- I would say --

Elena Kagan: I mean, it's almost like somebody doesn't want everybody to recognize what a major change is being made --

Christopher Landau: Your Honor --

Elena Kagan: -- and figured out this way that is -- where nobody would understand that that was happening, including the judges who would have to decide what this meant. (Laughter.)

Christopher Landau: The major -- Your Honor, the major changes work both ways because the major -- the one point I would just compliment what Your Honor said, which is prior to 1984 --

Elena Kagan: Please.

Christopher Landau: -- of course -- (Laughter.)

Christopher Landau: -- Puerto Rico was within the remedial scope of Chapter 9.

In other words, Puerto Rico -- Your Honor made the point that Puerto Rico was within the preemption provision of Chapter 9, but it also got the benefits of Chapter 9. So until 1984, there was always complete symmetry between those entities that Congress gave access to Chapter 9 but then said, but you can't have your State provisions.

So the preemption provision. There was never any situation in which you couldn't do either.

You couldn't have any access to a legal mechanism. Frankly, again, both sides have elephant-in-a-mousehole provisions.

The other side has the elephant-in-the-mousehole provision that Your Honor just said, our elephant-in-the-mousehole provision, is basically the same, to say it would be a huge elephant in a mousehole if, for the first time, Congress, by simply taking Puerto Rico out of the access provision of Chapter 9, nonetheless wanted to preclude Puerto Rico to leave Puerto Rico in the preemption provision of Chapter 9.

John G. Roberts, Jr.: Well, that's -- I mean, that's your basic policy argument, and I'm not sure it carries much weight.

Why -- why would it be irrational for Congress to say, all right, this is the system we're going to apply to all the States, but when it comes to Puerto Rico, if they want changes, we want them to come to us, partly because Congress has a different sort of relationship with Puerto Rico than it has to all the other States?

Christopher Landau: Well, again, Your Honor --

Sonia Sotomayor: Why not treat it like -- why not treat it like every other Territory?

Christopher Landau: Well, exactly right.

I think --

Sonia Sotomayor: That's the mouse in -- that's the mouse in -- in the hole --

Christopher Landau: It is.

That --

Sonia Sotomayor: -- which is if you're going to treat it differently, wouldn't you expect them to say that? We're going to treat it not like a State and not like a Territory.

Christopher Landau: Absolutely.

And, frankly, it would be very anomalus, Mr. Chief Justice, in response to yours because that would be Puerto Rico in a worse position, let's say, than Guam and the Virgin Islands, and it --

John G. Roberts, Jr.: And that's a very -- you came up with a very good answer, Mr. Landau, to my question.

But I wonder why it's absurd to treat the District of Columbia and Puerto Rico different from Guam and the -- the Virgin Islands.

I mean, why would you lump those two -- those four together?

Christopher Landau: Well, again, Your Honor, Congress made this decision.

One of the things that is somewhat unusual, and I think this Court is well aware of the -- some of these constitutional status issues regarding Puerto Rico from the pending Sanchez Valle case.

I mean, the one thing that everyone in that case agreed on is that Congress, through the Puerto Rico Constitution, has -- has recognized a status that gives Puerto Rico an incredible degree of autonomy. The -- the dispute in that case is not whether Puerto Rico has this, you know, nearly State-like status.

It's -- does that come from the people of Puerto Rico or from Congress? But everyone agrees that Puerto Rico operates in that very unique situation which is really almost the opposite extreme of the spectrum from D.C. where D.C. has to have its laws submitted to Congress, and they can -- and they can veto it. So, again, we don't know why Congress -- this goes back to the black box -- chose to lump these two jurisdictions which are kind of at opposite ends of congressional oversight.

Certainly the other side came up with a theory that the First Circuit embraced that Congress was seeking to retain control over Puerto Rico's municipalities here, which is a very strange theory given that Congress has not had control over Puerto Rico's municipalities since well before the Puerto Rico -- the Commonwealth was created in 1952. That's just not the structure of the Puerto Rico government and its political relationship with the United States.

Sonia Sotomayor: Have you given up the Government Development Bank's position and that of some of the amici that the provision of 903(1) applies to States only when a debtor is in a Chapter 9 proceeding because of that provision's use of creditor?

Christopher Landau: Your Honor, we have not advanced that argument.

They make that argument.

Our position's even more fundamental, which is you don't even have to reach that argument, which --

Sonia Sotomayor: Are you rejecting the argument?

Christopher Landau: We just didn't reach it because we don't need to get there.

But we -- we don't reject it. Thank you, Your Honor.

John G. Roberts, Jr.: Thank you, counsel. Mr. McGill.

Matthew D. McGill: Mr. Chief Justice, and may it please the Court: Everyone here agrees that in 1984, Congress withdrew from Puerto Rico and the District of Columbia the power to put their municipalities into Chapter 9 bankruptcy. Petitioners' position is that by the same enactment, Congress impliedly gave Puerto Rico and the District a much greater power that no State has possessed since 1946, the power to write its own municipal laws.

Sonia Sotomayor: Well, no State has possessed the power to impair contract rights under the Constitution.

Nothing about the Bankruptcy Code changes the application of the Contract Clause.

They have to go into Chapter 9 to impair contracts --

Matthew D. McGill: Justice --

Sonia Sotomayor: -- in a meaningful way, correct?

Matthew D. McGill: Yes, but Justice Sotomayor --

Sonia Sotomayor: All right.

So what makes you think that Congress intended to let Puerto Rico and the District of Columbia have free rein in whatever they wanted to do? Wouldn't they be subject, in your judgment -- I'm sure you'd be arguing they're subject to the Contract -- Impairment Clause.

Matthew D. McGill: And they were.

Sonia Sotomayor: Exactly.

Matthew D. McGill: The Contract Clause applied directly to Puerto Rico by dint of the Jones Act from 1917.

Sonia Sotomayor: So you think Congress intended to stop Puerto Rico and the District of Columbia from passing emergency legislation that said don't shut off the lights tonight; that -- that Congress intended that that kind of temporary provision could only be subject to Congress, who may be on recess, who might be wherever it is, that it could not do that?

Matthew D. McGill: Yes, Justice Sotomayor, because in 1946 that was precisely the decision Congress made when it decided to overrule this Court's decision in Faitoute.

Sonia Sotomayor: Well, it decided to overrule it by giving States the opportunity to go into bankruptcy, and that would be a temporary state to start with.

Matthew D. McGill: So -- so the question is, as I understand it, Justice Sotomayor, is what was Congress doing in 1984? Was it -- we all know that it removed from the District and from Puerto Rico the opportunity to put its municipalities into Chapter 9 --

Sonia Sotomayor: And it never gave --

Matthew D. McGill: -- everyone agrees --

Sonia Sotomayor: And it never gave the Territories that.

So the Territories can pass a law that stops the lights from going out today until Congress comes into effect, because it can't do a permanent impairment of the contract.

Matthew D. McGill: Justice Sotomayor, that's not correct, I don't believe.

It's not presented here, and nothing turns on it, but let me explain why this argument, which shows up for the first time in the yellow brief, I think is wrong. Puerto Rico was -- was considered a State. It itself admits it was a quote/unquote State from the period of 1978 to 1984 when there was no definition of "State." Prior to 1978, all States, Territories, and possessions of the United States were States.

After 1978, all States, Territories, and possessions continued to be treated as States.

And then in 1984, Congress enacts 101(52) which says States include the District and Puerto Rico except for this one purpose, which is to defining who may be a debtor under Chapter 9. That -- so the question is whether -- you know, it doesn't say Ohio, it doesn't say "State" includes Ohio, but clearly it does, because everyone acknowledges that the old definition of State has essentially carried through. So I don't believe it's correct.

And no court I'm aware of has ever held that -- that the district -- that the Virgin Islands or Guam or the American Samoa are not States for purposes of -- of the Bankruptcy Code. What we have here, however, is a clear textural provision that says Puerto Rico is a State, and it is -- so is the District of Columbia, except for this one purpose, which is defining who may be a debtor under Chapter 9.

Sonia Sotomayor: Doesn't the definitional section of the Code tell you who qualifies as a debtor, who qualifies as a creditor, who can go into what chapter or not? It tells you if you're this kind of creditor, you go into that chapter.

If you're that kind of creditor, you go -- I'm sorry.

If you're this kind of debtor, you go to -- individual goes here, business goes there, this one goes here.

You have options. Isn't it what he describes as a gateway that tells you where you're a part or what you're a part of?

Matthew D. McGill: Today that's true, but it wasn't true when Chapter 9 was first enacted in 1934 and 1937. In 1934, the gateway provision was Section 83 -- I mean Section 81 of the '34 Act, which was then known as Chapter X or Chapter 10, and it was Section 83(a) again in 1937.

So it was the recodification of the Bankruptcy Code in 1978 that moved all of the gateway requirements to Section 109.

And no one has ever contended that that was intended to be a substantive change.

Sonia Sotomayor: Oh, but it is, because it tells you what kind of debtors can make use of what kind of provision.

Matthew D. McGill: But that was always true.

I mean --

Sonia Sotomayor: It is always.

That's what the purpose of a gateway is.

Matthew D. McGill: But -- no, no, but it was true when it was part of Chapter 9 -- old Chapter X and old Chapter IX.

It was true then that the gateway -- the gateway provisions defined who may be a debtor. It -- it excludes today, for instance, solvent municipalities, right? Solvent municipalities may not invoke Chapter 9.

That is a gateway requirement.

And it used to be that -- that the 1937 Act provided a laundry list of certain types of municipalities that were eligible for Chapter 9.

It wasn't every municipality under the sun.

It was a -- a laundry list of, you know, six or seven categories.

Sonia Sotomayor: So if the -- if the definitional section defines "State" to include Puerto Rico, and you say even though it's not a part of Chapter 9 by definition in 109, it still remains a State for purposes of this reservation of State powers? Why aren't we using "creditor" in 903 as it's used in the Bankruptcy Code?

Matthew D. McGill: As --

Sonia Sotomayor: If you're going to be literal as to "State," why aren't you literal as to "creditor"?

Matthew D. McGill: As the Commonwealth, I think, here has acknowledged, it -- it has abandoned that argument.

And it's not clear to me that even the GDB believes in it, because if you look at page 8, footnote 2 of their reply brief, they acknowledge that Puerto Rico's own bankruptcy laws were preempted, at least until 1984, which could be true only if you adopted our version or the plain meaning version of "creditor."

Sonia Sotomayor: But let's go back.

If you're going to take the literal meaning of "State" definitionally, why aren't you taking the literal meaning of "creditor"?

Matthew D. McGill: Because we are applying a principle that this Court laid down in Lawson and that it unanimously reaffirmed in Northwest Austin that when a statutory definition mechanically applied will annihilate a major purpose of the statute, then you don't apply it.

Or when it leads to absurd results, you don't apply it.

Sonia Sotomayor: So how do I read into the statute?

Matthew D. McGill: It would annihilate the major purpose of the 1946 Act, which was to -- which was to prevent States from enacting their own bankruptcy laws. And that is your --

Sonia Sotomayor: Well, you actually can't do that, meaning you can't do that according to our prior precedent.

It is inherent in State sovereignty that States have to have some method, their own method, of controlling their municipalities. You can have uniform bankruptcy laws, but if you don't make them available to a municipality because the State hasn't approved it, can you rob a State under State sovereignty of all power to regulate its municipality and to save it from -- from bankruptcy?

Matthew D. McGill: Yes.

I mean, that's always been true.

It was true in 1946 --

Sonia Sotomayor: Actually, so why do so many major commentators, bankruptcy writers, district and circuit courts, the Sixth Circuit included, have said that that's impossible; that you can't rob a State of the power to regulate its municipalities if you're offering it nothing in return?

Matthew D. McGill: In 1946, the preemptive scope of what is now Section 903(1) embraced any municipality. It barred States from enacting -- it's essentially the same language that exists today.

Any -- it barred States from binding, nonconsenting creditors to a composition if they -- of holders of municipal debt.

Sonia Sotomayor: And then we said in Faitoute that you can't force States --

Matthew D. McGill: This was --

Sonia Sotomayor: -- to go into bankruptcy.

Matthew D. McGill: I believe that was Ashton. And -- and -- and it was -- and of course, Bekins subsequently readdresses Ashton, and -- and at least narrows Ashton.

But the Tenth Amendment problem that was -- was raised in Ashton was that States -- that the Federal government was giving municipalities too much reign to go into bankruptcy themselves without the supervision of their States.

The -- the problem raised in the Ropico decision, which is a 40-year-old district court decision from the Southern District of New York, is a very different problem, which is that the Federal government is exercising too much power -- too much bankruptcy power over municipalities. And I would submit that simply, you know, to the extent Ropico was concerned about that -- and it's not a holding; it's just a straight statement at the fifteenth page of the opinion -- it's wrong.

Elena Kagan: Mr. McGill --

Matthew D. McGill: Sturges v. Crowninshield said that -- that Congress's power under the Bankruptcy Code is unlimited and supreme. I'm sorry.

Elena Kagan: Can I talk to you about Mr. Landau's textual argument? Because I came in here thinking that your best argument is straight on the text.

It's not about purpose, because I don't know what Congress's purpose here was; it's not on policy.

It's just straight on the text.

But I now have a better understanding of Mr. Landau's understanding of the text, and so I just want to engage you on that, which is: Look, Congress couldn't have just said "except for purposes of Chapter 9" because of this flukey thing, which is that the gateway provision is outside of Chapter 9.

So if it had just said "except for purposes of Chapter 9," somebody could have said, oh, well, look, I am entitled to be a debtor under Chapter 9, whether or not I'm thought of as a State.

And so they did it this other way, which said -- which attacked the gateway provision particularly.

And then in doing that, they assumed that all of Chapter 9 would follow in its wake. Once you're not eligible for Chapter 9, none of the provisions of Chapter 9 apply to you.

That's basically Mr. Landau's provision -- argument.

So tell me why that's wrong.

Matthew D. McGill: It's -- it starts -- I think the fundamental fallacy of the argument is that the gateway requirement somehow excludes you from the scope of Chapter 9 entirely.

And we know that's wrong, because if PREPA filed for Chapter 9 bankruptcy today, it's Section 921(c) of the Code, a part of Chapter 9, that would provide for the dismissal of that petition. Chapter 9 applies to all persons, all people under the compass of Federal law. So I think that that's the fundamental fallacy.

Chapter 9 does apply.

The textual argument --

Stephen G. Breyer: But it doesn't have to be just that.

He has some -- an additional string to the bow; that is, what he wants us to do is to take the words "a State" -- "this chapter does not limit or impair the power of a State," which is in 903.

Now, he wants us to read that as if there were then a parentheses, "a State that is a debtor under Chapter 9." You see? And that a State -- what States? The States that can be debtors under Chapter 9. Now, that's how he wants us to read it, and that means that that provision does not apply to Puerto Rico or D.C.

But it isn't just that no part of Chapter 9 could apply to them.

It is that if you look at the first sentence of 903, is that what it says is that those States that are referred to in that first sentence maintain all the power to control by legislation or otherwise a municipality. And he says, what could that apply to? Those entities that are not in Chapter 9 obviously have all the powers they normally had, but the ones that are in Chapter 9 might not.

And so what this Section 903 is addressed to are those States that are in Chapter 9, because there's no need to apply that first sentence to anyone else, and therefore it doesn't apply to Puerto Rico, that first sentence.

But since the key sentences, one and two, are subparts of the first sentence, they don't apply, either. I think that's the whole argument.

And it isn't requiring us to really play that much -- you don't play games with the words.

All you do is say, this is one of those parts of Chapter 9 -- not all, but one of those parts -- that even though it doesn't use the word "debtor" under Chapter 9, applies only to debtors under Chapter 9.

I think that's the argument I got, and is that -- that's, I think, probably consistent with what Justice Kagan was saying.

Matthew D. McGill: I have two --

Stephen G. Breyer: You got it? Do you see what I'm saying?

Matthew D. McGill: Two -- two responses.

Stephen G. Breyer: Good.

All right.

Matthew D. McGill: The first is the -- the textual response that you yourself, Justice Breyer, elaborated, that Congress spoke with remarkable precision here in 101(52)

It says you're not a State for one purpose only, which is defining who may be a debtor under Chapter 9, and that's an unmistakable textual reference to Section 109.

And so that tells you that Puerto Rico is a State for every other purpose under the Bankruptcy Code, because that's what Section 101 says.

Stephen G. Breyer: But not -- no.

In -- my guess is, if we go through Chapter 9, and the parts that will -- do apply to debtors under Chapter 9 --

Matthew D. McGill: But States are not debtors.

Stephen G. Breyer: -- whoa, whoa, whoa -- municipalities.

State municipalities. If we go through Chapter 9 and look at those portions of Chapter 9 that do apply to municipalities who are there legitimately as debtors, we will find some sentences that clearly apply only to those who are in there as debtors and clearly do not apply to anyone else in the world.

And he is saying this is one of those.

Matthew D. McGill: So that misapprehends what Section 903 does.

What Section 903 is, is at the time Congress is entering the field of municipal debt adjustment in 1937, Section 903 is enacted to say that Congress is not also entering the field of municipal reorganization, reorganization that could occur under Chapter 11.

This was a very important point in both the 1934 and the 1937 debates.

That adjustment was something that was seen as within Congress's purview. Reorganization of municipalities was seen as within the States' purview. So Section 903 says we are not entering the field of reorganization when we're entering the field of debt adjustment.

And then Faitoute misreads Section 903(1) -- 903, rather.

At least in the judgment of the subsequent Congress, Faitoute misread Section 903 to permit conflicting municipal bankruptcy laws. And so Congress enacts Section 903(1)

This is now nine years later.

And it enacts it for a very different purpose than Section 903 was enacted.

It enacts a separate provision specifically to overrule this Court's decision in Faitoute, and to make clear that only under a Federal law should holders of municipal bonds, which are widely held, be compelled to accept a restructured debt.

Ruth Bader Ginsburg: Mr. McGill, why would Congress put Puerto Rico in this never-never land? That is, it can't use Chapter 9, and it can't use a Puerto Rican substitute for Chapter 9.

It's locked out by the provision on which you are relying, so it has to take the bitter, but it doesn't get any benefit at all. Why in the world -- what explains Congress wanting to put Puerto Rico in this anomalous position of not being able to restructure its debt?

Matthew D. McGill: There are a few reasons, I think.

And as Mr. Landau has said, there is no legislative history that sets this forth in detail, but let me suggest a few reasons why Congress might have done what it did. First, Congress has for a long time micromanaged Puerto Rico's debt.

In the Jones Act, it specifically limited the amount of debt Puerto Rico could take on.

That actually was kept and retained through the Public Law 600.

And it was only in 1961 that Congress ended its own restriction of Puerto Rico's debt on the condition that the Puerto Rico -- Puerto Rico include that restriction in its own constitution. So there's a long history of Congress intervening on Puerto Rico debt issues. Second, Puerto Rico debt is uniquely triple tax exempt.

Congress has essentially told the nation that -- and encouraged the nation all over to buy this debt.

So there is a -- this is -- this debt, even more so than the average municipal bond, is widely disbursed throughout the nation. I think the -- third reason is that by 1984 Puerto Rico and D.C. are the two most indebted Territories by a lot.

Puerto Rico already had $9 billion of debt.

The District owed 1.6 billion, and it was about to hit the general obligation bond market for the first time in its history. So the question I -- I ask is, how would Congress, at that moment in time, actually think that this was the right time to abandon a 40-year-old policy of uniformity and preemption in the field of municipal bankruptcy, and -- and for the first time since 1946, allow the District of Columbia and Puerto Rico to write their own municipal-bankruptcy laws that may or may not treat their nationwide creditors fairly, that may or may not result in -- in decrees that are enforceable nationwide? There's no good reason or plausible reason to think that Congress actually intended that result. And under this Court's cases in Timbers of Inwood and Cohen v. de la Cruz, when there is no clear indication in the statutory text, no indication in the legislative history --

Elena Kagan: Well, Mr. -- Mr. McGill, if I could go back to Justice Breyer's question, because Justice Breyer gave you a view of the way to read this text, which is built on Mr. Landau's view, and said, what's wrong with that? And you -- you go with the gateway provision, and then even if not all of Chapter 9 follows in its wake, at least all the provisions in Chapter 9 that refer to debtors follow in its wake. And Justice Breyer said, what's wrong with that, as a way to read this text.

And then you answered him, I think this is fair to say, by giving a -- a story about what Congress meant to do in 903(1) in the wake of Faitoute. But, you know, both of you have stories about this, and it's not -- just not clear which of you is right.

And I guess what I most want to think about is this text.

Why isn't Justice Breyer's, Mr. Landau's view of the text just as good, if not better, than yours? And I didn't come in here thinking that, but now I kind of am thinking that. So talk to me about the text, why that's not just as good a view of the text?

Matthew D. McGill: Because 101(52) is an unmistakable textual reference to 109(c)

And 109(c) is telling us -- it's just -- it -- it says it's only for this one purpose, except for the purpose of defining who may be a debtor under Chapter --

Elena Kagan: But that's -- that's a purpose that tells you whether you're now in Chapter 9 as a debtor.

Matthew D. McGill: But -- but --

Elena Kagan: So what Mr. Landau is saying is once you say you're -- you're -- you're not a State, when it comes to who may be a debtor under Chapter 9, that it's a pretty natural thing to say, and that means that any provisions about being a debtor under Chapter 9 don't apply to you.

Matthew D. McGill: Let's be clear that States cannot be debtors, right? So it -- under Chapter 9.

So it's -- it's not that the State -- that the definition of "State" can't possibly track the definition of "debtor." It's the municipality that has to track the definition of "debtor." And 20-plus States categorically exclude their municipalities from seeking Chapter 9 relief.

So they -- they are in the same boat, those municipalities, as San Juan.

There is no textual distinction to be drawn from those municipalities under 109(c)(2). Des Moines is, just as much -- just as much as San Juan, lacks the authorization under state law to file a Chapter 9 petition.

Ruth Bader Ginsburg: But that's up to the State.

It's up to the State to make that decision. Puerto Rico isn't given that option.

Matthew D. McGill: Well, that -- that is, of course, true.

It is an act of Congress that does that, but -- but there are numerous exclusions that are solely by dint of federal law.

In fact, the rest of 109(c) are exclusions that have been enacted by Congress of municipalities from Chapter 9 entirely.

Stephen G. Breyer: All right.

So you're saying is -- I take it you're -- that you say -- you say -- you're just used to this.

So you don't understand that I'm not used to it.

And the -- the -- you -- you go look at 903.

There -- there are three separate sentences.

And you're saying that the -- the first sentence and second and third are really separate things.

That number 2 and 3, which are numbered 1 and 2, have a big objective. If I read the cases you cite, I will say Congress intended something very clear.

They didn't want those States who weren't in Chapter 9.

They didn't want those States who were not in Chapter 9.

They didn't want them to make rules for bankruptcy of municipalities, not binding rules, anyway.

That was their purpose. And there's just no reason to think that when they had the specific thing before, they wanted somehow to let Puerto Rico and District of Columbia do it, do what the States couldn't do.

Matthew D. McGill: It would have been --

Stephen G. Breyer: And you say, well, there is a good reason.

They said the good reason is the States can come in to 9, and they can't.

And you say, well, that isn't a good enough reason. Is that where -- have I got this?

Matthew D. McGill: Well, it -- it certainly would have been a momentous change in -- in the policy of preemption that had existed uninterrupted since 1946 that had been reaffirmed in 1976 and in 1978.

This was battleground legislation in 1976 and 1978.

It was -- the House had rejected.

It had moved to remove the preemption provision.

And the Senate --

Stephen G. Breyer: Referencing that, can you give me one more thing? Give me your best either Law Review article, treatise, legislative history, whatever it is, that will -- that will show me that, in your view, look, these are separate things.

This -- the first sentence was not meant to be just a gateway into -- into 1 and 2, that -- that it was designed to do what you say.

What do I --

Matthew D. McGill: I would look at this Court's cases in Iraq v. Beaty, Alaska v. United States, and Whitridge.

Whitridge is -- is an older opinion, but I think it's very telling here because Whitridge is a case that comes -- addresses how you read a proviso that was enacted years after the antecedent provision.

And what Whitridge says is you look to the purpose of the proviso and make sure that your -- your construction is consistent with the purpose of the proviso. Iraq v. Beaty is, of course, a unanimous decision of this Court.

And Alaska v. The United States is -- is another not unanimous opinion of this Court. So I don't think it's -- I think it's entirely possible to read section 903(1) as a general independent standalone rule, and that certainly is how Congress enacted it when it was first enacted in 1946. I have elaborated already.

I think 903 applies to every State in the sense that it demarcates where Congress is not entering and where Congress is. That is the role that 903 plays in this statutory scheme.

Sonia Sotomayor: So you believe that the States that don't permit their municipality to become debtors are limited in what they can do by 903? In other words, their -- their municipalities are not debtors? Their sovereign powers have been cut off? They cannot reorganize the debt except through Chapter 9? Then we're talking about a coercive provision.

We're saying you can't do anything about the composition of your debt.

If 98 percent of the creditors want to reorganize their debt with you and those 2 percent vultures are saying no, and a Court would say it's not an impairment of a contract to redo this debt because of the need, everything else that we've said in the past, you're saying States can't do it if -- if -- they can only do it under Chapter 9?

Matthew D. McGill: You have, in your hypothetical, Justice Sotomayor, I believe, supposed that the -- that the composition does not violate the contract clause. And the question then would be one of statutory construction whether the composition you have hypothesized fits within the term of 901.

Sonia Sotomayor: Assume -- I assume it doesn't.

Assuming.

You're saying 903 intended to preclude States, solvent States and solvent municipalities, it -- it intended to stop States from doing any reorganization of any debt, even if it doesn't impair the contract clause, it can't do it until every creditor approves, whether or not their municipality is in Chapter 9 or not?

Matthew D. McGill: Except under Chapter 9.

And what Congress --

Sonia Sotomayor: All right.

And what's not coercive about that? What's the choice for States that Congress is giving?

Matthew D. McGill: The -- the choice for States for -- that -- is Chapter 9 or nothing.

And the choice for Puerto Rico and the District is come to Congress. And what is going on right now --

Sonia Sotomayor: It's like the Tenth Amendment right of States to deal with their municipalities consistent with the Constitution.

Where does that leave -- you can make uniform-bankruptcy laws, but nothing about that permits you to impair the rights of States so drastically?

Matthew D. McGill: Well, the contract clause, I think, stands as an independent bar to any -- to any impairment of the obligation of contracts.

It was recognized at the time of Bekins that States were powerless to act in this area.

That was -- that comes right out of Bekins. Now, what's going on today with respect to Puerto Rico and D.C. is Congress is addressing right now, across the street, how to deal with Puerto Rico's fiscal crisis.

That's -- that is what's going on. Puerto --

Ruth Bader Ginsburg: Isn't there also legislation to put Puerto Rico back in Chapter 9?

Matthew D. McGill: May -- may I answer?

John G. Roberts, Jr.: Yes.

Matthew D. McGill: Yes, there is, Justice Ginsburg, just like in -- Puerto Rico is -- Congress is considering a range of options for Puerto Rico, including Chapter 9, just as Congress considered a range of options for the District of Columbia during its own financial crisis in the 1990s, which resulted in a financial control board rather than Chapter 9.

John G. Roberts, Jr.: Thank you, counsel. Mr. Landau, you have four minutes remaining.

Christopher Landau: Thank you, Mr. Chief Justice. Very quickly, I'd like to make three basic points. First, I think we've seen an example of selective textualism this morning.

For their -- for Respondents' argument to make any sense with respect to the various Territories, they have to say that these other Territories, such as the Virgin Islands and Guam, are encompassed within the definition of the word "State." They just can't say that when Congress, which had long-defined "State" to include all the possessions and Territories, in 1984, in the very provision that we are considering, said "State" includes Puerto Rico and D.C.

That is probably the clearest expressio unius one can imagine.

So for them to be saying that, well, even though it said Puerto Rico and D.C., it meant to include everything -- and again, Guam, for instance, and the Virgin Islands, have also Triple A tax-exempt bonds.

So everything that is true for Puerto Rico would be true of the Virgin Islands and -- and Guam. I guess the more fundamental point, though, is when -- when you are asking them about how this -- their argument is, if you accept our position, then any municipality that is not authorized to file under Chapter 9 is also exempt from Chapter 9.

They're trying to talk about municipalities.

But I think, as Justice Ginsburg made the point, no, here we're talking about States. Massachusetts, for instance, always has the power to authorize its municipalities to seek Chapter 9 relief.

The door is open for Massachusetts, and -- as it was for Michigan when Michigan, on the same day, authorized Detroit to file for bankruptcy, and Detroit in fact filed for bankruptcy.

So the States that haven't yet authorized just maybe haven't had a crisis that requires them to do that. But they are trying to say you have to compare San Juan to Boston.

Our point is, the relevant comparison, since we're talking about the word "State," is you have to compare Puerto Rico to Massachusetts or Michigan. Unlike Massachusetts or Michigan, which have the door -- excuse me -- the key to the doorway, to the gateway in 109(c)(2), Puerto Rico categorically does not.

Thus, when you arrive at 903 -- and the word "State" appears only three times in all of Chapter 9. It appears twice in -- in Section 903, which is reaffirming, saying this chapter, Chapter 9, does not limit or impair the power of States to control their municipalities. So that makes no sense as applied to jurisdictions like Puerto Rico that are categorically excluded from coming through the gateway of 109(c)(2), whereas it does make sense to apply that to the Massachusettses of the world, regardless of whether to date they have authorized their municipalities. Finally, the last point I'd like to make is, we've talked a lot about -- about legal principles, as is appropriate, today.

But this is also a flesh-and-blood situation in Puerto Rico. Puerto Rico enacted this Recovery Act because it is facing a crisis in providing essential services to its citizens.

It is implausible at best to think that Congress left -- by taking Puerto Rico out of Chapter 9, meant to -- and that's all we knew.

It took Puerto Rico out of Chapter 9.

To say that that precludes Puerto Rico from dealing in any way with the financial crisis for its public utilities, which in this -- for its public utilities, which provide basic services like electricity and water to its people -- that's the question: Whether people in a village in Puerto Rico will be able to get clean water. That -- this is something -- again, it's fine to talk about the generalities of the law, but when you're trying to think about congressional intent, please don't lose sight of the fact -- of the fundamental implausibility and the anomaly of saying, when Congress took Puerto Rico out of Chapter 9, that it meant to leave that Chapter 9 preemption provision in place, and thus leave Puerto Rico in the dire situation that led the Commonwealth to use its police powers to enact this Recovery Act in the first place. Thank you.

John G. Roberts, Jr.: Thank you, counsel. The case is submitted.