Thursday, September 18, 2014

NY Times: New York State and City Join Effort to Shield Stabilized Leases

By Mireya Navarrro

New York City and state officials have thrown their weight behind an elderly widow fighting to keep her rent-stabilized lease from becoming an asset with which to pay off her creditors, arguing that it would undermine the safeguards that both bankruptcy and rent laws are supposed to provide.
In a brief filed jointly this week with the state’s Court of Appeals, lawyers from the state attorney general’s office and New York City’s Law Department said that, under current law, a lease for a rent-regulated apartment is not property that can be sold. Such a lease, they argued, amounts to a public benefit, just like disability or unemployment benefits, that is exempted from a bankruptcy estate and cannot be seized as an asset in a personal bankruptcy.

The friend of the court brief filed by the state and the city underscores the importance of a case that bankruptcy lawyers say poses a major risk to New Yorkers who seek protection and happen to live in rent-stabilized apartments. The case, the brief argues, also threatens to circumvent rent-stabilization laws enacted by both the city and the state. It comes at a time of high demand for affordable housing amid the steady loss of rent-regulated apartments to market-rate conversions.

“Rent-stabilized housing provides millions of vulnerable New Yorkers with the guarantee of an affordable place to live,” said Matt Mittenthal, a spokesman for Eric T. Schneiderman, the New York State attorney general. “State law simply does not allow the benefits that come with that crucial program to be seized and sold in a bankruptcy.”

The bankruptcy case was brought in 2011 by Mary Veronica Santiago, 79, who has lived in a two-bedroom apartment in the East Village of Manhattan for more than 50 years and who sought Chapter 7 protection after accumulating a debt of $23,000, mostly in credit card bills.

Ms. Santiago was not behind on her $703 rent, but her landlord, who was not among her creditors, stepped into her bankruptcy case with an offer to buy her rent-stabilized lease and produce the money to pay off her debt. The bankruptcy trustee in charge of marshaling her assets, John S. Pereira, accepted the offer. But Ms. Santiago, fearing her eventual eviction despite an agreement to let her stay in her apartment, challenged that decision.

After both a bankruptcy court and a Federal District Court sided with the bankruptcy trustee, Ms. Santiago appealed to the United States Court of Appeals for the Second Circuit, which for the first time will weigh in on whether a rent-stabilized lease can be treated as an asset in bankruptcy cases, like a car or a piece of land.

But before ruling on the matter, the federal court sent the case to the New York Court of Appeals in March to decide on a question of state law: whether the lease is exempt from a tenant’s assets for the purposes of bankruptcy proceedings.

A lawyer for Mr. Pereira said that trustees, who get a commission on the assets they are able to gather, have an obligation to marshal all assets to get a debt paid. Under federal bankruptcy law, states can decide which assets can be exempted from an estate. Mr. Pereira’s lawyer argues that the state does not specify rent-stabilized leases in such a list of exemptions and that the State Legislature did not intend to include them.

“If the city and state now believe that these leases should be included, the appropriate way to deal with this issue is by enacting legislation addressing rent-stabilized leases in the context of an individual’s bankruptcy estate,” the lawyer, J. David Dantzler Jr., said.

But the city and the state said that such an exemption already existed, under public benefits, and that the “state law has long barred creditors from enforcing a money judgment against the value of a rent-stabilized lease.”

In their brief, the officials noted that rent-stabilized tenants have a median income “appreciably lower” than tenants paying the market rate, and that without rent law protections, “the result would be a metropolis largely consisting of the very rich and very poor.”

The trustee has proposed an arrangement in which the landlord would pay Ms. Santiago’s debt, pay the trustee and his lawyer, and allow her to live out her years in her apartment.

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