New York’s Highest Court Rules on Rent-Stabilized Leases in Bankruptcy

Mary Santiago-Monteverde lived in her apartment, which was rent-stabilized, for over forty years. When her husband died, she was unable to pay her credit card debts and filed for Chapter 7 bankruptcy. She initially listed her apartment lease on Schedule G of her petition as a standard unexpired lease. Shortly thereafter, the owner of the apartment approached the Chapter 7 Trustee and offered to purchase the debtor’s interest in the lease. When the Trustee advised the debtor that he planned to accept the offer, she amended her filing to list the value of her lease on Schedule B as personal property exempt from the bankruptcy estate under DCL § 282 (2) as a “local public assistance benefit.”

In response, the Trustee moved to strike the claimed exemption, arguing that a rent-stabilized lease is property of the estate and does not qualify as an exempt “local public assistance benefit” under the DCL. The Bankruptcy Court for the Southern District of New York agreed, commenting that the benefit “is a quirk of the regulatory scheme in the New York housing market, not an individual entitlement.” Thereafter, the Southern District of New York agreed and the debtor appealed to the Second Circuit Court of Appeals. On appeal, the debtor argued that the lease – or its value – qualify as a “local public assistance benefit” because “the value of the lease (in whole or in part) is traceable to the protections afforded to her under the [Rent Stabilization Code].” Since the debtor asked the Court to consider an open issue of New York law, the Second Circuit certified one question to the New York Court of Appeals, the state’s highest court – namely, “[w]hether a debtor-tenant possesses a property interest in the protected value of her rent-stabilized lease that may be exempted from her bankruptcy estate pursuant to New York State [DCL] Section 282 (2) as a ‘local public assistance benefit.’”

On November 20, 2014, with a 5-2 majority, the Court of Appeals ruled that a tenant’s rights under a rent-stabilized lease do qualify as a “local public assistance benefit.” Therefore, when such a tenant files for bankruptcy, they are able to claim their interest in such a lease as exempt. Judge Abdus-Salaam, writing for the majority, commented that rent-stabilization shares many characteristics with other public benefits because it allows low-income residents to find affordable housing. The Court also rejected the Trustee’s contention that rent stabilization is unlike other public benefits because it does not come in the form of a payment, holding that the structure of the benefit is not a prerequisite; in fact, there are many programs that are not in the form of a payment. Further, the Trustee argued, unsuccessfully, that a rent-stabilized lease cannot be a public benefit because it is not subsidized by the government. The Court of Appeals addressed this by noting that while the benefit is not paid for by the government, the government does confer such a benefit through regulation aimed at a particular group of people.  Lastly, the Court of Appeals noted that the United States Supreme Court, in Clark v. Rameker, discussed the importance of exemptions in “protecting the debtor’s essential needs” and added that exemption statutes should be construed broadly in favor of debtors. For all of the foregoing reasons, the New York Court Appeals, in a noteworthy ruling, held that the rent-stabilized leases of bankruptcy debtors are not property of the bankruptcy estate and subject to sale by a Trustee.

The full decision can be found here.

This entry was posted in Bankruptcy, Chapter 7, Exemptions. Bookmark the permalink. Follow any comments here with the RSS feed for this post. Both comments and trackbacks are currently closed.
  • LH&M is considered a debt relief agency.
    LH&M helps people file for bankruptcy relief under the Bankruptcy Code.

    Attorney advertisement. Prior results do not guarantee a similar outcome.