The US Supreme Court [official website] ruled [opinion, PDF] 5-2 Monday in Puerto Rico v. Franklin California Tax-Free Trust [SCOTUSblog materials] that Section 903(1) [text] of the Bankruptcy Code preempts Puerto Rico’s Recovery Act. The federal bankruptcy code preempts state bankuptcy laws that enable insolvent municipalities to restructure their debts over the objections of creditors and instead requires municipalities to restructure such debts under Chapter 9 of the code. The question before the court was whether Puerto Rico is a “state” for purposes of the preemption provision. In an opinion by Justice Clarence Thomas, the court held that it is. Justice Sonia Sotomayor filed a dissenting opinion, joined by Justice Ruth Bader Ginsburg. Justice Samuel Alito took no part in the consideration of the case.

Monday’s ruling puts increased pressure on Puerto Rico to resolve its financial issues. Last week members of the US House of Representatives approved bi-partisan legislation [JURIST report] to relieve financial pressure on Puerto Rico.