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.