Wednesday, October 26, 2011

Covet Thy Neighbor’s Apartment: Chapter 7 Bankruptcy Trustees selling rent-stabilized, rent-controlled and unsold units from co-op and condo conversio

As if the economy was not bringing enough bad news to debtors, recent developments in the Southern District of New York (which covers New York (Manhattan), Bronx, Westchester, Putnam, Rockland,Orange, Dutchess, and Sullivan counties) are making it more difficult to file for personal bankruptcy. A recent case, In re Goldman, Case No. 11-11371 (SHL), involved an attempt by a Bankruptcy Trustee to sell the rent stabilized co-op unit of a long-time resident at 420 Riverside Drive in the Morningside Heights neighborhood of Manhattan. The case was a Chapter 7 bankruptcy filing assigned to Judge Lane, who recently entered a consent order permitting the Bankruptcy Trustee to have the U.S. Marshals Service evict Mr. Goldman from his apartment, and then the rights to the lease on the co-op unit would be sold back to the landlord, who would pay the Bankruptcy Trustee $60,000 when the apartment was delivered free and clear of all tenancies, including that of Mr. Goldman, the rent-stabilized tenant.

In the way of background, this is the third decision permitting a rent-stabilized apartment to be sold by a Bankruptcy Trustee to a landlord in the Southern District of New York. The other two cases are In re Stein, 281 B.R. 845 (Bankr. S.D.N.Y. 2002) and In re Toledano, 299 B.R. 284 (Bankr. S.D.N.Y. 2003). In both of these cases, the debtors lived in luxury apartments just south of Central Park–171 West 57th Street, Apartment 3C and 230 Central Park South, Apartment 9/10B.

Many people will be surprised by these decisions, however the Bankruptcy Code and Rules seem to allow the result. Section 541 of the Bankruptcy Code states that when a debtor files for bankruptcy, a hypothetical estate is created, and all property of the debtor (with certain exemptions created by state and federal statute) is owned by the Bankruptcy Trustee. Section 365 of the Bankruptcy Code allows a debtor or a Bankruptcy Trustee to assume and assign (sell) a lease to a third party. Additionally, bankruptcy is federal law, and federal law generally primes (supersedes) state law. When you put this all together, the transaction looks as follows:

A Bankruptcy Trustee will review a bankruptcy petition and determine how many years the debtor has lived in the apartment, the rent that the debtor is presently paying under the rent-stabilized lease and the market value rent if the apartment was not rent-stabilized. The Bankruptcy Trustee will then contact the landlord or owner of the unit and offer to evict the tenant and deliver the apartment broom clean for a certain sum of money.

In the Goldman case, the landlord and the Bankruptcy Trustee entered into a stipulation that was “so ordered” by the Bankruptcy Court, which provided that the landlord would pay the Bankruptcy Trustee $60,000, which would be held in escrow until the Bankruptcy Trustee had the U.S. Marshals Service evict or remove the debtor from the apartment and delivered possession of the apartment to the landlord. The Bankruptcy Trustee receives a commission and legal fees are paid to the Bankruptcy Trustee’s counsel. The balance of the monies is distributed to the debtor’s unsecured creditors. While the result may seem harsh and surprising to many, three Bankruptcy Judges have ruled that these sales are allowed. None of these cases have been appealed to the Second Circuit Court of Appeals or the Supreme Court.

An individual who is contemplating filing for bankruptcy and lives in a rent-stabilized unit must go through the following analysis:

1. How many years has the debtor lived in the apartment?
2. What rent are they paying under the rent-stabilized lease and what is the market value rent if the apartment was vacant and not rent-stabilized?
3. Is the apartment in a gentrifying area or a high income area, such as the Upper East Side, Central Park West or Central Park South?
4. Has the apartment building recently undergone a condo or co-op conversion? And did the debtor decline to buy the unit, and therefore become a non-purchasing tenant?

There is one recourse for the debtor. The Bankruptcy Code allows the debtor to match the offer (in this case, $60,000) and pay that money to the Bankruptcy trustee to keep the apartment unit. Few individuals filing for bankruptcy have that type of money, however they may be able to borrow that money from friends or family to keep the unit. Additionally, if a husband and wife are married and only one elects to file for bankruptcy, or two people who are unmarried live in the apartment and both names are on the lease, since the Bankruptcy Trustee would only be able to assign the unit for the individual who filed for bankruptcy, the result may be that a landlord would be unwilling to pay a significant sum of money in that scenario, because the other party remaining in the unit would still be rent-stabilized. However, other than those two scenarios, this situation is a significant risk, and we are seeing more and more of these cases.

It would seem that either the New York State legislature or Congress needs to address this issue, and create some type of a safe harbor. Again, debtors in rent stabilized apartments must proceed with caution and consult an experienced bankruptcy attorney before filing for bankruptcy. Any individuals who are contemplating bankruptcy and live in rent-stabilized or rent-controlled apartments or unsold rental units in buildings that are being converted to condo or co-op ownership should feel free to contact Shenwick & Associates for an analysis of their situation.

Monday, October 03, 2011

"Means test" standards vs. actual expenses

It sounds like a cliché, but here at Shenwick & Associates, every bankruptcy case really is different. Every debtor has their own unique story of how they got into debt, what type and amount of debt they have, their living conditions and many other factors, which we need to apply the law to so we can provide them with the relief they seek.

In one recent case, we had a young single man (let's call him "Doug") who lived in Brooklyn and earned a substantial income. He had filed for Chapter 7 bankruptcy a few years ago, but the case was dismissed because he was earning too much to qualify for Chapter 7 bankruptcy.

In 2005, Congress radically amended the bankruptcy laws through the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which introduced a new form, Form 22, the "Statement of Current Monthly Income." There are actually three different forms, depending upon whether the debtor is filing for relief under Chapter 7 ( Form B22A) (the "Means Test"), Chapter 11 ( Form B22B) or Chapter 13 ( Form B22C) of the Bankruptcy Code. For Chapter 7 debtors, Form B22A includes a means-test calculation, which is a complex six page calculation of expenses and disposable income that a debtor must complete if he or she is above the median income for their state and family size. If their disposable income is above $11,725 over a 60 month period, the presumption of abuse arises, which means that it would be presumptively abusive to allow them to liquidate their debts under Chapter 7 of the Bankruptcy Code. In this case, they must file for relief under Chapter 11 or Chapter 13 of the Bankruptcy Code. Form B22C includes calculations to determine the length of a Plan (36 or 60 months) and the amount of disposable income the debtor must pay into the Plan each month.

Doug came to us to determine what his disposable income would be in a Chapter 13 Plan. Although he had a condo, it was "underwater" (the liens on the condo exceeded the fair market value of the apartment), so he was going to have to surrender the unit to his secured creditors and rent an apartment. However, the rents he was being quoted by brokers far exceeded the IRS mortgage/rent standard for one person living in Brooklyn ($1,297). The question was-could we also deduct the differenhttp://www.blogger.com/img/blank.gifce between the actual rent he was going to have to pay and the mortgage/rent standard?

There is very scant case law on this question, and no appellate courts appear to have considered the issue yet, but according to the Bankruptcy Court in the Eastern District of Kentucky, the answer is no, not without special circumstances. In , 382 B.R. 85 (2008), the debtors filed a joint Chapter 7 bankruptcy petition that reported annualized current monthly income of $83,022.36 on their Means Test. The applicable median family income for 2 persons in Kentucky was $41,560. The allowable mortgage/rent standard for 1 or 2 persons living in Boone County, KY was $842/month, but the Shinkles' actual rent was $1,500/month.

So, the Shinkles claimed an adjustment of $658 on Line 21 of their Means Test, which allows debtors to claim an additional expense if they contend that the process set out in Line 20 of the Means Test does not accurately compute the amount they are due under IRS Standards. Without this adjustment, their Chapter 7 case would have been presumptively abusive. The legal issue before the Court was if the Shinkles should be entitled to claim their actual rental expenses on the Means Test, in excess of the IRS standards.

In its discussion, the Court looked to the plain language of § 7070(b)(2)(B) of the Bankruptcy Code, which provides:

"In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative. In order to establish special circumstances, the debtor shall be required to itemize each additional expense or adjustment of income and to provide - documentation for such expense or adjustment to income; and a detailed explanation of the special circumstances that make such expenses or adjustment to income necessary and reasonable."

The United States Trustee contended that the Shinkles had not demonstrated such special circumstances. The Shinkles argued that allowed amounts for rent or mortgage expenses are guidelines and not "set in stone," that a condition of Mrs. Shinkle's employment was that she reside in Boone County, and that any slight reduction in rent they could derive from moving would be offset by the costs of moving and forfeiting their opportunity to own the house they were renting.

The Court cited two cases where special circumstances were found–In re Scarafiotti, 365 B.R. 618,631 (Bankr. D.Colo. 2007) (debtors' son needed to be in a specific school to address mental and emotional difficulties, which justified a modest increase in the debtors' housing allowance) and In re Graham, 363 B.R. 844,847 (Bankr. S.D. Ohio 2007 (the debtor husband had to move 800 miles from his wife and her two children from a previous marriage in order to find gainful employment, but the debtor wife could not join her husband because of the constraints of her shared custody agreement. These debtors were allowed to claim a second set of housing expenses for the husband). The Court found no such special circumstances in the Shinkles' case.

For more information about the Means Test in Chapter 7, disposable income to fund a Plan in chapter 13 and getting relief through the bankruptcy process, please contact Jim Shenwick.

NYT: The Case for Hiring a Lawyer

By JOSEPH PLAMBECK

First-time buyers in New York City confront a series of choices: co-op or condo, high-rise or walk-up, a second bathroom or just steps from the subway? But there seems to be consensus on at least one decision — whether to hire a real estate lawyer.

In New York, unlike most places in the United States, it is customary for buyers to seek the representation of a lawyer throughout the purchasing process. Although this is not a legal requirement, some longtime real estate agents say they have never witnessed a deal completed without the buyer’s having a lawyer on hand.

“I would never, never have a situation where a buyer did not have an attorney,” said Deanna Kory, a senior vice president of the Corcoran Group. “Without question, there is too much to understand. You can’t understand it on the fly.”

Buyers in New York City rely upon lawyers because real estate transactions can be extraordinarily complicated. In addition to the usual concerns about contracts, liens and titles, New York’s numerous co-ops have financial statements and meeting minutes that require scrutiny. Buying a condo, and even a single-family home, can be equally knotty. Not to mention that the sellers on the other side of the table usually come armed with their own lawyer.

And then, of course, there is the simple fact that real estate in New York is expensive. Making a bad deal can jeopardize huge amounts of money.

“You’re signing the largest check you’ve ever signed,” said Gary L. Malin, the president of the brokerage Citi Habitats, “and you want to make sure that you’re not missing something. To not engage an attorney — you’d feel naked in the process.”

Lawyers also provide a necessary buffer in what can be an emotional process. Peter Graubard, a real estate lawyer since 1994, said lawyers were able to provide an objective assessment even while advocating for buyers.

“I’m really the only involved party whose fee doesn’t depend on the deal closing,” Mr. Graubard said. “I get paid for my lack of a conflict of interest.”

Mr. Malin, who worked for a short time as a real estate lawyer before joining Citi Habitats, says it is especially important for first-time buyers to have a lawyer on their side. A real estate agent can help with some aspects of the process, but a lawyer is the one who performs crucial due diligence and helps finish the deal.

At the start of the buying process, the lawyer helps negotiate the contract. Michael P. Kozek, a lawyer at Jeffrey S. Ween & Associates, says that most of the drafting is done by the seller’s lawyer, but that there should be a chance to review the terms and try to adjust them.

The buyer’s lawyer will also dig into the information available about a property, looking at a co-op’s finances and the minutes of its board meetings. Some buyers with a background in finance believe they can handle this part by themselves. But, Ms. Kory said, they may not know the customary tax breaks and accounting methods used by co-ops, which can lead to serious misunderstandings.

Michael W. Goldstein, a lawyer who has handled residential real estate deals for more than 20 years, says an experienced lawyer is also easily able to spot in the board’s minutes any issues that may percolate into problems. Perhaps there is talk about a loud resident who is to be the buyer’s neighbor, or discussion of a balky boiler that may need expensive repairs not accounted for in the building’s capital improvement plan.

Because experienced real estate lawyers see a lot of contracts and know the customs, they can also help cut through roadblocks. For that reason, Ms. Kory said, it is usually a mistake to hire a lawyer who does not have extensive familiarity with residential deals.

Lawyers and real estate agents both say that the best way to find a lawyer is through word of mouth, in the best case from a friend or a family member. But if that option is not available, real estate agents are often happy to refer someone with whom they have worked.

Ms. Kory says she often advises clients to talk to two or three lawyers, and then choose one, before making any offer on a home. That might seem premature, she said, but having good representation lined up can help ensure that you get the home you really want.

“Having a lawyer makes you look more capable of following through on the deal,” Ms. Kory said. “Even if you are the only one bidding, you will come across stronger if you have all your ducks in a row.”

Buyers should have a few simple questions ready for prospective lawyers. First, ask about residential real estate experience — generally, more is better. Find out about experience with closings for homes similar to yours, or even in the building you are considering. Then find out how much of the work would be done by the lawyer personally, and how much (and which parts) would be handled by a paralegal.

And ask if the charge will be a flat fee or based on an hourly rate. In general, residential real estate lawyers in New York charge a fee, often between $1,500 and $2,500. More complicated or expensive deals, like buying a multifamily brownstone, for example, can take the tab closer to $5,000.

In most cases, that fee will cover a few hours of face time with the lawyer, his or her presence at the closing and a few conversations over the phone. The lawyer will spend several additional hours examining the paperwork and performing due diligence. The buyer also receives something else: more peace of mind.

“The reality is that most people are not well versed in real estate law,” said Mr. Malin of Citi Habitats. “There are a lot of things that could potentially go wrong in the process. And you could very likely regret not spending the money.”

Copyright 2011 The New York Times Company. All rights reserved.