Thursday, May 30, 2013

NYT: Because the Board Says So

No long chats with the doorman.

No umbrellas or wet boots in the hall.

No welcome mats or decorations on the front door.

No wearing flip-flops in the lobby.

These are but a few of the more extreme rules that apartment boards in New York City have imposed, or at least thought about imposing, on the residents of their buildings.

The average co-op or condominium has two dozen house rules. “Typically, they’re quality-of-life rules meant to benefit everyone in the closed community,” said Toni Hanson, a vice president and senior managing director of Douglas Elliman.

While there’s good sense behind many of these rules — don’t hang or shake things out the window; lay off the stereo before or after a certain hour — certain strictures can charitably be described as quirky, not to say capricious or overreaching. Your home is your castle? Think again.

It’s all, of course, in the interest of helping a building full of strong-minded New Yorkers coexist in (relative) harmony. Co-op boards have long issued directives about deportment and decorum, and condo boards are increasingly following suit. For the most part, they are well within their rights. Residents can either get with the program or get behind a co-op coup to remove the big-brother board members in their midst.

Generally, thanks to what’s known as the business judgment rule, boards have broad latitude in making, amending and rescinding house rules — the good, the bad and the decidedly wiggy. If board members think a situation needs to be addressed, they can address away without input from residents.

According to Steven D. Sladkus, a real estate litigator at Wolf Haldenstein Adler Freeman & Herz, one of the few exceptions is a stricture with a financial impact, for example, a proposal to institute a flip tax. “Then,” he said, “there has to be an amendment to the governing document, which requires a vote of the shareholders.”

Certain boards are more controlling than others, said Aaron Shmulewitz, who heads the co-op-condo practice at the law firm Belkin Burden Wenig & Goldman. “Some seek to regulate everything you do in a building, which I think would make it a less enjoyable building to live in,” he said. “But some residents like that, because they say it keeps inappropriate behavior out and keeps prices up.”

Rules tend to fall into several categories, including the use of shared spaces like the lobby or the elevator, pets and their comportment, and outward appearances — both of the apartment owner and the apartment itself. And then there’s the whole vetting process to even get into a building.

For one woman, an office coordinator in her late 20s who moved into a one-bedroom in the Clinton Hill section of Brooklyn last summer, it was the application request that took her by surprise.
In addition to the employment, asset, credit, reference and background checks a co-op board generally requires before scheduling The Interview, the officers of this particular building also demand that a security company check out the current residence of would-be buyers, a visit for which applicants must pick up the $50 tab.

“The lease on my rental was up, so I was staying with my parents on Long Island,” said the woman, who requested anonymity to avoid offending the co-op board. “I don’t think my childhood bedroom was going to give any clues about how I live, but if that was the policy, that was the policy. I wanted the apartment, so I was willing to do what I needed to do.”

The scrutinizing, which took 45 minutes, included questions about the number of beds in each room, the number of people who slept in the beds and the nature of the flooring. The inspector also took photos of the interior of the house, the applicant and her parents.

Reader, she passed muster — but remains puzzled. “I guess the board members wanted to make sure I was a regular person,” she said.

When it comes to the space right outside an apartment, Eva Talel, a partner at Stroock & Stroock & Lavan, said that in certain buildings (and not just those that cater to the hoity-toity), tenants who deploy welcome mats, keep the front door propped open when they’re home, decline to lock the door when they leave and hang decorations on that (unlocked) door, are guilty of inappropriate behavior — guilty, in any case, of breaching house rules.

“But one person’s decoration is another person’s religious symbol,” Ms. Talel said, referring to mezuzas, prayer cases that observant Jews affix to their door frames. “They can create controversy as well as a lawsuit. But the goal is uniformity within the building.”

That seems to be the goal at the Upper East Side building where Mr. Sladkus lives. There, it’s “a violation to leave wet umbrellas, boots, shoes, et cetera, in the hallway outside your door,” he said. Mr. Sladkus received a reminder of this stricture via a building-wide memo one wintry night after his two young daughters — “briefly,” he said — left their snowy boots and umbrellas leaning against the door jamb.

“I responded with a terse, intemperate e-mail how absurd I thought it was, since this is a family-friendly building,” Mr. Sladkus recalled. “And the response was that the building was redoing the halls and didn’t want to get them mucked up.”

He then wrote back: “I can see if we had mahogany-lined hallways it might make sense, but we’re not living in the Taj Mahal.” And, he added defiantly, he continues to leave his umbrellas in the hall. 
Lucky for Mr. Sladkus, he doesn’t live in the Midtown East co-op where Dennis Paget is the president of the board, and where the “no umbrellas and boots in the hallways” rule is also in place.
“I tell the staff people to confiscate them,” Mr. Paget said.

Other “thou shalts” and “thou shalt nots” seem like a throwback to an upstairs, downstairs world. “The more controversial rules have to do with which people are required to use the service elevator,” Ms. Talel said. “Some buildings require it of everyone but residents and their guests. Some buildings may make an exception for nannies if they’re with their charges, and home health care aides if they’re with their patients.”

Mr. Shmulewitz represents a Park Avenue building that for a few decades had a house rule barring nannies and other domestic employees from using the passenger elevators at any time. “The children had to be taken down by their caregivers in the service elevator,” he said. “It wasn’t a coincidence that they were often of a different ethnic persuasion than the shareholders.”

“I think this shocked the conscience of the residents,” Mr. Shmulewitz continued. “There was enough shareholder dissent that the law was rescinded five years ago.”

In some buildings, the double standard doesn’t involve residents and the hired help; it concerns residents and temporary residents. At a condominium on East 79th Street, people subletting apartments are not permitted to have pets, smoke or use the gym. “When a condo board imposes rules like this, they want to maintain differentiation and to keep things special for permanent residents,” said Gary Malin, the president of Citi Habitats. “They’re trying to make sure amenities like the gym don’t get overtaxed. The funny thing is that gyms rarely get used anyway.”

Dogs are another bone of contention, thus the source of some singular rules. One East Side condo allows man’s best friend but specifically bans pit bulls, Rottweilers, German shepherds, Doberman pinschers, huskies, malamutes and chow chows, and reserves the right to prohibit additional breeds.

Steven Wagner, a real estate lawyer, is on the board of a Midtown East co-op that is broad-minded about breeds but requires prospective canine residents to submit to an interview. “It’s a funny rule,” Mr. Wagner said. “I’m never sure what to ask. I just say: ‘Nice doggy,’ and I pet the dog. And then I say, ‘I have no more questions.’ No dog has bitten me yet. I think that would be a problem.”

Jeffrey S. Reich, a lawyer at Wolf Haldenstein Adler Freeman & Herz, recently encountered an Upper East Side building that allows residents with pets to ride on the passenger elevator, but requires maids or dog walkers tending resident pets to use the service elevator.

“A shareholder took offense,” Mr. Reich added, “because she didn’t think the service elevator was clean enough for her dog.”

Some board fiats are catchalls to deal with unforeseen behaviors and situations. “A lot of the rules are reactive,” Ms. Talel said. “They’re a response to a negative experience in a building or a response to something that happened in another co-op. People will hear about it and they say, ‘we can’t let that happen in our building.’ ”

That may explain the Chelsea co-op where a shareholder offered music lessons at home and the board responded with a rule that “no resident or their guests shall sing or coach another singer for more than two hours followed by a break of at least two hours — up to a maximum of six hours per day.”

Several years ago, Mr. Sladkus said, his firm did work for an Upper East Side co-op with “a nice elderly woman who enjoyed spending her days in the lobby. She would read, she would greet the children as they came in after school,” he recalled. “She was lonely is what she was. She wasn’t doing anything destructive, but the lobby wasn’t sprawling.”

Thus, some shareholders took issue and the board took action, drafting a rule prohibiting lobby visits that exceeded two hours. “It was passed,” Mr. Sladkus said, but some residents took pity on the lobby greeter and the rule was rescinded.

Similarly, Mr. Shmulewitz tells of a building whose shareholders were perturbed that a wheelchair-bound resident was spending long periods of time in the lobby. “They felt it detracted from the look of the building, so they drafted a house rule that said ‘no wheeled vehicles in the lobby,’ ” he said. In the end, the rule was not enacted. “But,” Mr. Shmulewitz said, “a crafty board with an experienced lawyer can make a rule to address something they think is objectionable without seeming to target the situation that caused the problem in the first place.”

Lobbies, it seems, are as much a flash point as elevators. Recently, Jay Molishever, a sales agent at Citi Habitats, took a client to look at an apartment on First Avenue in the high 50s. “It was a rainy day, but the doorman said there was a rule that buyers and brokers were not allowed to wait inside,” 

Mr. Molishever said. “My buyer was furious. He’s Israeli but looks Hispanic and he was concerned that it was prejudice.” When the selling broker showed up, the buyer announced he didn’t want to live in the building. “He thought the rule was rude and exclusionary and not the sort of place that merited it,” Mr. Molishever recalled. “He said: ‘This isn’t a Park Avenue building.’ ”

In some instances, house rules seem more than anything like pre-emptive strikes. An Upper West Side co-op that wanted to bar a shareholder from using his apartment to screen what Mr. Shmulewitz characterized as “a highly charged politically controversial movie.” Thus, house rule No. 33, which in addition to limiting gatherings to 20 nonresidents and demanding — in advance — the names and addresses of all guests at a gathering of more than 10 people, also prohibited any gathering with a fund-raising purpose — a key component of the event in question.

Penalties for noncompliance vary. Fines are one option for a board. “They can seem like slaps on the wrist — $50, $100,” Mr. Sladkus said. “But they do start adding up for repeat offenders.” Some buildings set at a certain amount for a first offense, with subsequent offenses carrying steeper fines.
“And some governing documents provide for unpaid fines to be treated like unpaid maintenance or common charges,” Mr. Sladkus said, which would mean that offenders could lose nonessential services like food deliveries and use of the gym. And persistent violations could land the shareholder in the cross hairs of a claim “that gets your lease terminated,” he said.

Most boards think carefully before passing a rule and take pains to look at it from all angles, said Ms. Hanson of Douglas Elliman. “They’re residents, too,” she said, “so it’s in their best interest to be judicious.”

Perhaps checking out a building’s fiats isn’t quite as important as checking out its financials. “But you do want to see if they suit your lifestyle,” Ms. Talel said. “If you’re having 100 people to a party, some buildings require you hire someone to stand at the front door to identify everyone. Some buildings even have a limit on the number of these parties you can give each year.”

Still, whether it’s the cachet of the address, the flow of the rooms or the view from the library, “if you’re in love with an apartment you’re not likely to change your mind based on a house rule,” Mr. Shmulewitz said. “There are very few egregious enough for that.” 

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

NYT: Sallie Mae WIll Split Loan Manager From Bank


The nation’s largest private student lender, Sallie Mae, is cleaving itself into two companies — a move that will create a new home for more than $100 billion of student loans amid broad concerns from federal authorities and consumer advocates that graduates hobbled by debt are increasingly falling behind on their payments.

The overhaul by Sallie Mae is playing out as college students, facing persistent unemployment and a sluggish economy, are defaulting on their loan payments at a rate of 13.4 percent, a level not seen for more than a decade, according to the latest statistics from the Department of Education. As student loan debt grows — it has outpaced total credit card debt, reaching more than $1 trillion — more loans are going to the riskiest borrowers, according to a January report by TransUnion Corporation, which provides credit information to lenders.

Federal authorities, including the Consumer Financial Protection Bureau, are worried that lenders have rekindled their dangerous infatuation with subprime borrowers, leading some to ignore lending standards and to court borrowers who cannot repay the loans.

Earlier this month, Richard Cordray, director of the consumer bureau, compared the student loan market to the market for subprime mortgages that collapsed, leading to a precipitous drop in housing prices, during the financial crisis.

“We learned a hard lesson in the wake of the mortgage meltdown,” Mr. Cordray said. “We cannot just sit by and watch this happen to people again.”

Sallie Mae, which is formally the SLM Corporation, announced the split on Wednesday. It will create dual companies and hasten the retirement of the lender’s longtime chief executive, Al Lord. One company, the education-loan management business, headed by John F. Remondi, Sallie Mae’s chief operating officer, will contain about 95 percent of the student loan giant’s assets, including $118.1 billion in federal loans and $31.6 billion of private loans. The other, fashioned as a consumer-banking business, will make student loans to fill a seemingly insatiable demand from borrowers, stoked by skyrocketing college costs.

At four-year public schools, the average net tuition and fees that in-state undergraduates pay — that is, after taking grant aid, tax benefits and inflation into consideration — climbed to $2,910 in the 2012-13 school year from $1,490 a decade earlier, according to the College Board’s annual survey of colleges. Room and board costs have also risen, to $9,200 from $7,090. Altogether, costs have risen 41 percent. At private, four-year nonprofit schools, average net tuition rose to $13,880 in the latest school year from $13,150 a decade earlier, and room and board increased to $10,460 from $8,660.

Alongside the private loans, Sallie Mae will try to bolster its banking business by offering students more traditional products like savings accounts, the company said on Wednesday. The banking company is expected to house about $9.9 billion in assets, made up of private loans, and other assets including its servicing platforms.

Until 2010, Sallie Mae occupied a plum position: it was paid by the federal government to act as a kind of middleman, making federal loans to students that were backstopped against losses. The loans, called Federal Family Education Loans, grew drastically during the heady days of the economy, swelling to $630 billion from $149 billion between 2000 and 2009.

Then in 2010, the government opted to cut out the private lenders like Sallie Mae and increase its own lending to students, effectively removing Sallie Mae’s federal subsidy. By creating a separate bank, Sallie Mae can finance new streams of loans, analysts said. The banking company will be headed by Joseph A. DePaulo, a Sallie Mae executive.

Last month, Sallie Mae reported that its first-quarter earnings had more than tripled. On a conference call with investors on Wednesday, Mr. Remondi outlined the split’s potential benefits, saying, “We see ourselves as having two distinct businesses.”

“These entities can better succeed as distinct and separate entities,” he added.

Still, Sallie Mae is at the center of a market that is roiled by trouble. More than half of outstanding student loans are in deferment because borrowers cannot afford to pay them back, according to the January report by TransUnion. Student loan balances surged by 75 percent between 2007 and 2012, the report showed.

While the housing market is showing signs of a resurgence, with the Standard & Poor’s Case-Shiller home price index on Tuesday posting its largest gains in seven years, student loan debt could dampen the recovery. Authorities from organizations like the Federal Reserve Bank of New York and the Treasury Department have warned that graduates saddled with debt will put off big purchases like houses.

Timothy Reeder and his wife, Christine, say they never imagined that after racking up almost $100,000 in student loan debt they would be struggling with low-paying jobs. The couple, who live in St. Louis, fell behind on their loan payments more than a year ago because Mr. Reeder, an Iraq veteran, and his wife, a social worker, could not cobble together enough money for nearly $400 a month in loan payments. Amplifying their distress, Mr. Reeder lost his job as a security guard in January. Struggling with the debt, the couple said they have delayed buying a home.

“I just had no idea what this debt would do to me,” Mr. Reeder said.

Whittling down student loan debt could become even more difficult. Interest rates on subsidized Stafford loans, which are currently at 3.4 percent, are poised to double to 6.8 percent on July 1 unless Congress passes legislation to stop the increase, said Mark Kantrowitz, who publishes a financial-aid information Web site called FinAid.org.

Student loans can dog borrowers for their lifetimes, consumer advocates say. Herman De Jesus, a senior program associate with the Neighborhood Economic Development Advocacy Project, works with several people 65 and older who are still burdened with debt, particularly from for-profit schools.

Josephine Soto, 65, was haunted by roughly $8,000 in federal student loan debt after enrolling in a for-profit nursing school in 1982. After she graduated, Ms. Soto, who lives in New York, was unable to find a job that paid enough to cover her loans. Ms. Soto ultimately won a disability discharge of the loan last year but says she still remembers the harassing calls from collectors.

“I just felt lost and confused as they were threatening me,” she said.

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

Tuesday, May 21, 2013

Inherited IRAs: Exempt Asset, or Not?



As many readers of our blog probably know, IRAs (Individual Retirement Accounts) are exempt under New York State Debtor and Creditor Law and the federal Bankruptcy Code. An exempt asset means that an individual can file for Chapter 7 bankruptcy and keep that asset after the bankruptcy filing. The reason for this exemption is twofold: (1) IRAs are deemed "spendthrift trusts" under New York State and federal law; and (2) the purpose of the law is to give debtors a "fresh start" with some assets, and especially to protect retirement monies for debtors.

As with many topics in bankruptcy, sometimes there is not necessarily a clear answer to an issue. While the law is clear with respect to IRAs (New York State law provides that IRAs of any value are exempt assets, with limited exceptions, and the Bankruptcy Code allows exemption of up to $1,245,475 in IRAs or Roth IRAs), what about inherited IRAs? An inherited IRA is an IRA that debtor inherits from a family member, generally a parent, and the distinction from a regular IRA is that the debtor's earnings were not used to fund the IRA, but instead the monies were rolled over from the IRA of a deceased family member, usually after the death of the family member.

Several Bankruptcy Trustees around the country have raised the issue of whether inherited IRAs should be deemed exempt in bankruptcy. In the Southern District of New York, in In re Cutignola, 450 B.R. 445 (Bankr. S.D.N.Y. 2011), the exempt IRA of a debtor who died post–petition passed to her co–debtor husband through her will. The Bankruptcy Trustee moved for turnover of the IRA to the bankruptcy estate, arguing that the IRA lost its exempt status when it was transferred to the husband. In its analysis, the Court looked at the language of Bankruptcy Code § 522 and concluded that if the funds are: (1) retirement funds; (2) in an account exempt from taxation; (3) and arrived in that account through a direct transfer, the funds remain exempt. Accordingly, the Bankruptcy Trustee's turnover motion was denied.

While the issue has not been definitively settled, this author's opinion is that in the Southern and Eastern Districts of New York, inherited IRAs are exempt.

The question of what assets are exempt in bankruptcy is very complex, depending on the asset, the jurisdiction and the type of bankruptcy relief sought. For more information, please contact Jim Shenwick.

Tuesday, May 14, 2013

NYT: Heavy Load of Student Loan Debt Is Weighing on the Economy, Too

The anemic economy has left millions of younger working Americans struggling to get ahead. The added millstone of student loan debt, which recently exceeded $1 trillion in total, is making it even harder for many of them, delaying purchases of things like homes, cars and other big-ticket items and acting as a drag on growth, economists said.

Consider Shane Gill, a 33-year-old high-school teacher in New York City. He does not have a car. He does not own a home. He is not married. And he is no anomaly: like hundreds of thousands of others in his generation, he has put off such major purchases or decisions in part because of his debts.

Mr. Gill owes about $45,000 in federal student loans, plus another $40,000 to his parents. That investment in his future has led to a secure job with decent pay and good benefits. But it has left him with tremendous financial constraints, as he faces chipping away at the debt for years on end.

“There’s this anxiety: what if I decided I wanted to get married or have children?” Mr. Gill said. “I don’t know how I would. And that adds to the sense of precariousness. There’s a persistent, buzzing kind of toothache around it.”

The Federal Reserve Bank of New York, in a new study, found that 30-year-olds with student loans were now less likely to have debts like home mortgages than 30-year-olds without student loans — even though most of those with student loans are better educated and can expect to earn more money over their lifetimes. The same pattern holds true for 25-year-olds and car loans.

“It is a new thing, a big social experiment that we’ve accidentally decided to engage in,” said Kevin Carey, the director of the Education Policy Program at the New America Foundation, a research group based in Washington. “Let’s send a whole class of people out into their professional lives with a negative net worth. Not starting at zero, but starting at a minus that is often measured in the tens of thousands of dollars. Those minus signs have psychological impact, I suspect. They might have a dollars-and-cents impact in what you can afford, too.”

The weak economy and tight credit standards remain the main culprits preventing young people just establishing themselves from making major purchases. But millions now face putting a substantial share of their take-home pay toward past debts rather than present needs. Student loan debt leaves them with less money for things like clothes and restaurant meals. And it is even more likely to suppress purchases of more expensive items that need to be bought with credit. A poor job market is compounding the problem: the educational debt burden of many so-called millennials has sharply increased even as they are being forced to get by on significantly less income than the previous generation — a decline of about 15 percent in real terms since 2000, with much of that drop coming from the recession.

According to calculations by the Pew Research Center, the measure of debt to income for households under the age of 35 has ballooned to about 1.5-to-1 in 2010 from about 1-to-1 in 2001. The composition of that debt has shifted, too: more is tied to student debts, and less to homes. “Having a lot of student loan debt makes it harder to qualify for a mortgage and harder to save for a down payment,” said Jed Kolko, the chief economist at Trulia.

With the interest rate on some federal student loans set to double on July 1, House Republicans and Senate Democrats have both put forward proposals to try to hold them down. Representative John Kline, Republican of Minnesota, has proposed tying the rate on several federal student loans to the government’s borrowing costs. Democratic senators, including Dick Durbin of Illinois, have made a similar proposal. Some have suggested going further: Senator Elizabeth Warren, Democrat of Massachusetts, has proposed letting students borrow at the same “discount rate” that the Federal Reserve charges to banks, currently 0.75 percent.

Student loan debt is not only constraining young adults, but also, at least in the near term, holding back the recovery itself, some economists say. The shadows might remain even as the economy picks up, by making young workers more cautious when it comes to decisions about their careers and their finances. Millennials might end up buying less expensive homes or more often choosing to rent than previous generations.

“The debt is shifting how much young people can spend, and it can also be a powerful psychological thing as well,” said Selma Hepp, an economist at the California Association of Realtors.
On the other side of the equation, many college graduates now in their 20s and early 30s should eventually be able to make up for lost ground. Students who take on debt to pay for higher education commit themselves to paying off huge sums, but they usually lift their lifetime earnings by substantial amounts. And they are in a better position to insulate themselves against economic bad times, given the profound rewards the job market provides to the college-educated.

Indeed, the economy is far more punishing to workers without a college degree. The college-educated earn, on average, 80 percent more than those who only completed high school, a premium that has widened over the last 30 years. Unemployment rates for the less educated are higher, too.
For most young workers, gaining a college degree remains well worth it in the long run, even if it delays some purchases in the near term. “For an individual going to college and ending up with a lot of debt — you’re still better off,” said Chris G. Christopher of the forecasting firm IHS Global Insight. There might, however, be a slice of young workers who paid huge sums for degrees that prove less valuable on the job market, saddled by a debt burden that could end up holding them back for decades.

Mr. Gill said his education remained a vital investment, even if the debt overhang has for now put white picket fences or a condo with a gleaming view out of reach. “Sometimes I think: ‘What if I were to buy an apartment?’ ” he said. “It is like asking: ‘What am I going to do when I first land on the moon? What’s the first thought that I will have when I see Earth from outer space?’”

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