Monday, October 28, 2013

Santiago-Monteverde v. Pereira

As many readers of our Cooler e-mails and blog posts are aware, one of the hottest current topics in personal bankruptcy is the treatment of rent–stabilized leases in Chapter 7 personal bankruptcy cases. Earlier this month, the New York Times had an excellent front page article entitled “Widow's Bankruptcy Case Poses Risk to Rent-Stabilized Tenants.” The case is captioned Santiago-Monteverede v. Pereira and involves 79 year old Mrs. Mary Veronica Santiago-Monteverede, who has lived in a two bedroom rent stabilized apartment in the East Village for 50 years and is paying monthly rent of $703, while the market rate for the unit would be $2,000 to $2,500 per month.

Ms. Santiago-Monteverede filed Chapter 7 bankruptcy to discharge $23,000 of debt, none of which was owed to her landlord. Her landlord made an offer to purchase her lease from Chapter 7 Bankruptcy Trustee John S. Pereira, which he accepted.  The sale of the lease was subsequently challenged by Ms. Santiago-Monteverde’s attorneys.  The U.S. Bankruptcy Court for the Southern District of New York and the U.S. District Court for the Southern District of New York both ruled in favor of the Bankruptcy Trustee, and the case is now pending before the 2nd Circuit Court of Appeals, where oral arguments were held on September 23rd.

This is the first Chapter 7 personal bankruptcy rent–stabilized case to reach the 2nd Circuit Court of Appeals. Please keep monitoring our Cooler e-mails and blog, and when the 2nd Circuit Court of Appeals issues a decision and order, we will report on it. Again, debtors who live in apartments with rent–stabilized leases need to proceed with extreme caution in deciding whether to file for bankruptcy. Jim

Monday, October 21, 2013

NYT: Widow’s Bankruptcy Case Poses Risk to Rent-Stabilized Tenants

After her husband died, Mary Veronica Santiago fell behind on her bills, and the creditors began to call.

So two years ago, she took refuge in bankruptcy, hoping to have her debts wiped away. But far from providing a fresh start and peace of mind, the Chapter 7 filing thrust Mrs. Santiago, 79, who lives in the East Village, into the center of a case that bankruptcy lawyers say poses a major risk to her and the millions of other New Yorkers who live in rent-stabilized apartments.

The issue, pending before the United States Court of Appeals for the Second Circuit, is whether a rent-stabilized lease can be treated as an asset in a personal bankruptcy, just like a car or a piece of land, and used to pay off creditors.

The trustee overseeing Mrs. Santiago’s bankruptcy thinks so. If that position is upheld, bankruptcy lawyers who are closely monitoring the case say it would make it easier for landlords to evict rent-stabilized tenants if they file for bankruptcy, even when, like Mrs. Santiago, they pay their rent. At a time when housing affordability and income inequality have been driving the debate in the mayoral race, the bankruptcy case could add another element of uncertainty to New York City’s efforts to preserve housing for people with low incomes.

Mrs. Santiago has lived for 50 years in a two-bedroom apartment near Tompkins Square Park, in a neighborhood where unregulated apartments rent for thousands more a month than Mrs. Santiago’s rent of $703. Her main income is a Social Security check and, under normal bankruptcy proceedings, her lawyers said, she would have avoided repaying the $23,000 she owes because she had no assets.
“I got scared,” she said, noting that her creditors “threatened that they were going to take me to court.”

But as her case was nearing conclusion, her landlord stepped in with an offer to buy her rent-stabilized lease and produce the funds to pay off her debt. (Mrs. Santiago’s landlord is not among her creditors, but he was notified of the bankruptcy as a matter of course.) The bankruptcy trustee in charge of marshaling her assets accepted the offer, and that decision, challenged by Mrs. Santiago’s lawyers, has been upheld by both a bankruptcy court and a Federal District Court.

In New York City, there were 11,500 individual bankruptcy filings in the 12 months ending June 30, federal bankruptcy court figures show. How many of them involved people with rent-stabilized leases is not tracked by the court.

Rent stabilization laws, a defining element of New York real estate for decades, limit rent increases and allow automatic lease renewals and even survivor’s rights to tenants. In recent years, rent-stabilized leases have been deemed assets in some bankruptcy proceedings.

Now, for the first time, a federal appeals court is being asked to weigh in. The widow’s lawyers argue that a rent-stabilized lease is a public assistance benefit, just like Social Security or disability payments, and should be exempt from the bankruptcy estate. Treating it like an asset, the lawyers said in court documents, undermines the intent of rent-stabilization laws in New York designed to protect tenants deemed in need of assistance with housing.

“This is not what bankruptcy is about,” said Kathleen G. Cully, one of Mrs. Santiago two pro bono lawyers. “What’s next? Are they going to start going after food stamps?”

The case, Mary Veronica Santiago-Monteverde v. John S. Pereira, has drawn the interest of bankruptcy experts and legal aid lawyers who see it as a threat to the housing stability of many low-income New Yorkers. Mrs. Santiago’s case was argued before the appeals court last month by Ronald J. Mann, a law professor at Columbia University and a bankruptcy specialist who has argued cases before the United States Supreme Court.

New York’s unique rent laws and expensive real estate market make a rent-stabilized lease particularly prized. In New York City, 44 percent of the rental units are rent-stabilized and an additional 2 percent are governed by the more restrictive rent-control regulations, according to figures from the Furman Center for Real Estate and Urban Policy at New York University. At least 2.2 million people live in more than a million rent-regulated units in the city, the center said.

Legal aid lawyers who are also watching the Santiago case say the rent laws are essential to help maintain affordable housing in the city — the median income for rent-stabilized tenants is $37,000, compared with $52,260 for market-rate tenants, figures from the city’s Housing and Vacancy Survey show. Some bankruptcy lawyers say they are advising clients with rent-stabilized leases not to file for Chapter 7 bankruptcy or risk being left homeless.

“It’s an unfair money-grab,” said David B. Shaev, the New York state chairman of the National Association of Consumer Bankruptcy Attorneys. “To remove this foundation, this safety net, it’s unconscionable.”

The trustee in Mrs. Santiago’s case, Mr. Pereira, has an obligation to marshal all assets to get her debt paid, said his lawyer, J. David Dantzler Jr. (The trustees, who are not government employees, receive a commission on the assets they are able to gather.) He said that New York law did not intend for leases to be exempt from bankruptcy estates and that any change to that effect should be left up to the state’s lawmakers.

“This is about a fear of what could happen in the future to other tenants in rent-stabilization apartments,” he said. “Our view is that that’s a question for the New York Legislature, not the courts.”

But no one should think that bankruptcy is a painless process, he said. “If you file for bankruptcy, there are consequences.”

The trustee in Mrs. Santiago’s case has proposed an arrangement in which the landlord would pay her debt, pay the trustee and his lawyer, and allow Mrs. Santiago to live out her years in her apartment at a similar rent under a non-rent-stabilized lease “with no succession rights” that could otherwise have allowed her to pass the apartment on to her 50-year-old son, a personal trainer who lives with her and helps support her.

Her lawyers opposed the proposal.

In the realm of consumer bankruptcies, Mrs. Santiago’s is small. She owes mostly credit card companies, she said in an interview. But after her husband, Hector Santiago, died in 2011 she could not keep up with the payments.

The couple moved into their ground-floor apartment in a five-story brick building on East Seventh Street in 1963. Mr. Santiago was the superintendent of their building and of several others in the neighborhood.

The landlord is a limited-liability company whose owner, James V. Guarino, referred questions to his lawyer. The lawyer, Lawrence M. Gottlieb, said in an e-mail that the company “has no intentions of selling the lease or dispossessing Ms. Santiago or renting out the unit for market rent.”

At home, in the cluttered apartment where her family has celebrated weddings, birthdays and holidays, and where her ill husband died at age 80, Mrs. Santiago said she regretted filing for bankruptcy. Her lawyers have reassured her that she has a good chance of prevailing, but first thing every morning, Mrs. Santiago said, she checks her front door for an eviction notice.

“I’m afraid to find a white paper on my door,” she said with her head down, tearing up as she tugged at the edges of her plastic-covered chair.

Copyright 2013 The New York Times Company.  All rights reserved.

Monday, October 14, 2013

NYT: Patients Mired in Costly Credit From Doctors

The dentist set to work, tapping and probing, then put down his tools and delivered the news. His patient, Patricia Gannon, needed a partial denture. The cost: more than $5,700.

Ms. Gannon, 78, was staggered. She said she could not afford it. And her insurance would pay only a small portion. But she was barely out of the chair, her mouth still sore, when her dentist’s office held out a solution: a special line of credit to help cover her bill. Before she knew it, Ms. Gannon recalled, the office manager was taking down her financial details.

But what seemed like the perfect answer — seemed, in fact, like just what the doctor ordered — has turned into a quagmire. Her new loan ensured that the dentist, Dr. Dan A. Knellinger, would be paid in full upfront. But for Ms. Gannon, the price was steep: an annual interest rate of about 23 percent, with a 33 percent penalty rate kicking in if she missed a payment.

She said that Dr. Knellinger’s office subsequently suggested another form of financing, a medical credit card, to pay for more work. Now, her minimum monthly dental bill, roughly $214 all told, is eating up a third of her Social Security check. If she is late, she faces a penalty of about $50.

“I am worried that I will be paying for this until I die,” says Ms. Gannon, who lives in Dunedin, Fla. Dr. Knellinger, who works out of Palm Harbor, Fla., did not respond to requests for comment.

In dentists’ and doctors’ offices, hearing aid centers and pain clinics, American health care is forging a lucrative alliance with American finance. A growing number of health care professionals are urging patients to pay for treatment not covered by their insurance plans with credit cards and lines of credit that can be arranged quickly in the provider’s office. The cards and loans, which were first marketed about a decade ago for cosmetic surgery and other elective procedures, are now proliferating among older Americans, who often face large out-of-pocket expenses for basic care that is not covered by Medicare or private insurance.

The American Medical Association and the American Dental Association have no formal policy on the cards, but some practitioners refuse to use them, saying they threaten to exploit the traditional relationship between provider and patient. Doctors, dentists and others have a financial incentive to recommend the financing because it encourages patients to opt for procedures and products that they might otherwise forgo because they are not covered by insurance. It also ensures that providers are paid upfront — a fact that financial services companies promote in marketing material to providers.

One of the financing companies, iCare Financial of Atlanta, which offers financing plans through providers’ offices, asks providers on its Web site: “How much money are you losing everyday by not offering iCare to your patients?” Over the last three years, the company’s enrollment has grown 320 percent. Another company posted a video online that shows patients suddenly vanishing outside a medical office because they cannot afford treatment. The company offers a financing plan as a remedy, with the scene on the video shifting to a smiling doctor with dollar signs headed toward him.

A review by The New York Times of dozens of customer contracts for medical cards and lines of credit, as well as of hundreds of court filings in connection with civil lawsuits brought by state authorities and others, shows how perilous such financial arrangements can be for patients — and how advantageous they can be for health care providers.

Many of these cards initially charge no interest for a promotional period, typically six to 18 months, an attractive feature for people worried about whether they can afford care. But if the debt is not paid in full when that time is up, costly rates — usually 25 to 30 percent — kick in, the review by The Times found. If payments are late, patients face additional fees and, in most cases, their rates increase automatically. The higher rates are often retroactive, meaning that they are applied to patients’ original balances, rather than to the amount they still owe.

For patients, the financial consequences can be dire.

Ms. Gannon said she was happy with her dental care, despite the cost, and there was no suggestion that Dr. Knellinger had done anything wrong. But attorneys general in a several states have filed lawsuits claiming that other dentists and professionals have misled patients about the financial terms of the cards, employed high-pressure sales tactics, overcharged for treatments and billed for unauthorized work.

The New York attorney general’s office found that health care providers had pressured patients into getting credit cards from one company, CareCredit, a unit of General Electric, which gave some providers discounts based on the volume of transactions. Patients, the investigation found, were misled about the terms of the credit cards, and in some instances, duped into believing that they were agreeing to a payment plan with dental offices when, in fact, they were being pushed into high-cost credit.

In June, CareCredit reached a pact with Eric T. Schneiderman, the New York attorney general, to improve protections for consumers, and a spokeswoman said the company “does not incentivize providers to have patients open accounts” or give referral fees to providers.

In Ohio, the attorney general has sued the operators of several hearing aid clinics, claiming that they misled customers about using medical credit cards to pay for batteries and warranties.

Cameron P. Kmet, a chiropractor in Anchorage, Alaska, said he had stopped offering medical cards. “One missed payment can really ruin a patient’s life,” he said. Mr. Kmet now runs a company that administers payment plans directly between providers and patients, with annual interest rates around 8 percent.

Regarding medical credit cards, Mr. Kmet said he had urged providers to ask themselves “whether this is something that you would recommend to a family member or friend.” The answer, he said, is usually no.

While medical credit cards resemble other credit cards, there is a critical difference: they are usually marketed by caregivers to patients, often at vulnerable times, such as when those patients are in pain or when their providers have recommended care they cannot readily afford. In addition to G.E., large banks like Wells Fargo and Citibank, as well as several specialized financial services companies, offer credit through practitioners’ offices.

The growth of this form of consumer credit is difficult to quantify because data on medical credit cards specifically, as opposed to credit cards generally, is unavailable. But credit cards of all types are playing a growing role in financing medical care. In 2010, people in the United States charged about $45 billion in health care costs on credit cards, according to the consulting firm McKinsey & Company.

“When the economy got worse, our business got better,” said Katie Kessing, an iCare spokeswoman. 

In 2010, a little more than a thousand dentists offered the iCare finance plan — a program that requires patients to pay 30 percent down as well as a fee of 15 percent of the total procedure cost. The number of participating providers has since risen to 4,200. Russell A. Salton, the chief executive of Access One MedCard, a credit card company in Charlotte, N.C., said demand for specialized cards — the MedCard has an annual interest rate of 9.25 percent — is driven by providers interested in removing an “obstacle to providing valuable care.” The company says the number of hospitals offering its credit cards has grown about 25 percent a year in recent years.

While neither national medical or dental associations have formal policies, ADA Business Enterprises, a profit-making arm of the American Dental Association that connects dentists and businesses, endorses G.E.’s CareCredit, whose cards are used by more than seven million people nationwide.

“Cardholders tell us they like using CareCredit because it gives them the ability to plan, budget and pay for certain elective health care procedures over time,” said Cristy Williams, the spokeswoman for CareCredit. She said the company had improved consumer protections, going so far as to telephone “senior cardholders with significant first transactions to confirm their understanding of the program and terms.”

She said roughly 80 percent of patients who opted for the deferred interest paid off their debts before they were charged any interest. She and others in the industry said the credit cards and credit lines had helped patients afford otherwise prohibitively expensive care not paid for at all, or in its entirety, by insurance providers.

But state authorities and care advocates in California, Florida, Illinois, Michigan and elsewhere say that older people — many of them grappling with dwindling savings and mounting debt — are running into trouble with medical credit cards and loans.

“The cards prey on seniors’ trust,” said Lisa Landau, who heads the health care unit at the New York attorney general’s office.

Minnesota’s attorney general, Lori Swanson, is investigating the use of medical credit cards, which she said could come with “hidden tripwires and other perils.”

Interviews with patients, along with the review of contracts and lawsuits, show just how significant those perils can be.

Carl Dorsey, 74, recalled his experience at Aspen Dental Management, a nationwide chain that has come under scrutiny for its practices. Mr. Dorsey said that after a dentist at Aspen’s office in Seekonk, Mass., told him that he needed dentures, at a cost of $2,634, he was urged to take out a medical credit card. He was charged the full cost upfront, financial statements reviewed by The Times show. Mr. Dorsey, who made about $800 a month working as a used-car salesman, in addition to receiving Social Security, has since fallen behind on his payments. The lapse set off a penalty interest rate of nearly 30 percent. Mr. Dorsey said he was being pursued by debt collectors.

“This whole ordeal has been devastating,” said Mr. Dorsey, who along with other patients is part of a civil lawsuit filed against Aspen in a federal court in upstate New York. He said he still needed dentures, noting that the ones he received from Aspen were unusable.

Diane Koi-Thompson said that her father, Harold Koi-Than, did not realize that he had signed up for a CareCredit card during a dental visit. She said Mr. Koi-Than, 82, was shocked when a company representative called his home near Niagara Falls, N.Y., saying he had missed a payment. “My dad had no idea he had a credit card, let alone that he was behind on it,” Ms. Koi-Thompson said. She said her father was upset because he is normally meticulous with his finances and thought his memory was failing. Mr. Koi-Than, through a family member, was able to cancel the credit card.

The industry’s growth is being driven by people seeking dental care and devices like hearing aids, which are not covered by Medicare.

Dental care is a large and expensive gulf, according to Tricia Neuman, the director of Medicare policy research at the Kaiser Family Foundation. The new federal health care law, she said, will not change that. “Lack of dental coverage remains a huge concern and expense,” Ms. Neuman said.

Working with care providers, financial services companies have rushed to fill the void. To make medical cards attractive, some companies offer them without checking patients’ credit histories. The cards can be arranged in minutes, with no upfront charges. Such features are attractive selling points.

“Your patient does not require good credit,” First Health Funding of Salt Lake City, Utah says on its Web site. On the site of another lender, the words “No Credit Check” flash in bright letters. First Health Funding did not respond to requests for comment.

Lawyers and others who assist patients say such features make it easy for people who are already on a weak financial footing to take on new debt.

“Ultimately, this credit facilitates a bad financial decision that will haunt a patient because it adds to indebtedness,” said Ellen Cheek, who runs a legal help line for older people through Bay Area Legal Services in Tampa, Fla.

Such critics also say that because there are no industrywide standards for pricing care — costs vary from practice to practice — the cards could encourage providers to charge more for treatment.

Brian Cohen, the lawyer representing Mr. Dorsey, said the cards enabled providers to “bill whatever they want for care, regardless of whether the cost is reasonable.”

State authorities say health care finance in general, and medical credit cards in particular, are a growing worry. In 2010, Aspen Dental, the chain where Mr. Dorsey signed up for a card, reached a settlement with Pennsylvania authorities over claims that, among other things, it had failed to tell patients that missing a payment would mean the rate would rocket from zero to nearly 30 percent. A review of court records and online forums shows hundreds of customer complaints against Aspen, which is based in Syracuse. A civil case brought on behalf of customers is pending in a federal court in upstate New York.

Kasey Pickett, a spokeswoman for Aspen, which is fighting the lawsuit, said the accusations were “entirely without merit.”

Aspen provides mandatory training for office employees who discuss financing with patients, according to Ms. Pickett. “We know that for many patients,” she said, “the availability of third-party financing may be the only way that they are able to afford the care they need.”
Copyright 2013 The New York Times Company.  All rights reserved.

Thursday, October 03, 2013

Rent stabilized leases in Chapter 7 bankruptcy (continued)

As many readers of our e-mails and blog are aware, if an individual resides in an apartment with a rent controlled or rent stabilized lease and files for personal bankruptcy under Chapter 7 of the Bankruptcy Code, the trustee assigned to the case can assume, assign and transfer the bankruptcy estate's rights and interests in the lease to the landlord, pursuant to § 365 of the Bankruptcy Code. In other words, if an individual resides in an apartment with a rent controlled or rent stabilized lease and the fair market rent of the apartment is significantly greater than the rent paid by the rent controlled or rent stabilized tenant/debtor, a Chapter 7 bankruptcy trustee can sell the bankruptcy estate's rights and interests in the lease to the landlord and remove the debtor/tenant from the apartment.

A more complicated scenario occurs where a married couple are both signatories on a rent controlled or rent stabilized lease, but only one spouse files for Chapter 7 bankruptcy. Can the Chapter 7 bankruptcy trustee sell the bankruptcy estate's rights and interests in the rent controlled or rent stabilized to the landlord free and clear of the non-filing spouse to the landlord and remove the non-filing spouse from the apartment?

While there are no reported decisions on point in the Southern or Eastern Districts of New York, § 363(h) of the Bankruptcy Code allows a bankruptcy trustee to sell a bankruptcy estate's interest in property and the interest of a non-debtor co-owner in the property as a joint tenant, a tenant in common or a tenant by the entirety, but only if:

1. Partition in kind of the property among the bankruptcy estate and the co-owners is impracticable;

2. The sale of the bankruptcy estate's undivided interest in the property would realize significantly less for the bankruptcy estate than the sale of the property free of the interests of the co-owners;

3. The benefit to the bankruptcy estate of a sale of the property free of the interests of co-owners outweighs the detriment, if any, to the co-owners; and

4. The property is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power.

If a Chapter 7 Trustee decided to analyze the assumption, assignment and sale of a rent controlled or rent stabilized lease to which a non-debtor spouse is a party using the §363(h) factors, the lease could be at risk. A better strategy for a couple in this situation, if they want to keep the apartment, is to do an out of court workout with creditors or file for bankruptcy under Chapter 13 of the Bankruptcy Code.

Individuals or couples who are in debt and have a rent controlled or rent stabilized lease need to consult with an experienced personal bankruptcy attorney, such as Jim Shenwick.