Is a rent-stabilized lease part of the debtor’s estate in bankruptcy that can be used to pay off creditors?

And the answer to that question is… we’re not sure. However, a case currently pending before the Second Circuit Court of Appeals, Mary Veronica Santiago-Monteverde v. John S. Pereira, will hopefully answer this question.

Facts of the Case

Two years ago, Mary Veronica Santiago fell behind on her rent after her husband passed away and filed for bankruptcy. Santiago was 79 and lived in the increasingly fashionable (and increasingly expensive) East Village Neighborhood of Lower Manhattan. She has lived in the same rent-controlled apartment for 50 (yes, 50!) years: she pays $703 a month for a two-bedroom. She has no other assets and she lives entirely off social security.

The trustee overseeing Santiago’s Bankruptcy asserted that the rent-controlled lease should become part of the bankruptcy estate. 11 U.S.C.§365(a) states that a bankruptcy trustee is authorized "to assume or reject … any unexpired lease of the debtor." Santiago’s landlord then offered to buy the lease from the estate (knowing that he could then charge $2600 a month to some 20-something techie with stock options and money to burn) and the funds were used to pay off the rest of her debt. Santiago’s lawyers challenged the trustee’s actions. However, the decision to make the rent-controlled lease part of the debtor’s estate was upheld by both the bankruptcy and district courts. The case is being appealed to the second circuit.

Issue

Is a rent-stabilized lease part of the debtor’s estate in bankruptcy that can be used to pay off creditors?

Analysis

This case implicates more than bankruptcy issues. This case implicates many of the issues that burden gentrifying cities like San Francisco and New York including housing affordability and income inequality. If a trustee is allowed to seize a rent-controlled lease as the property of the estate, it would be easier for landlords to evict tenants that file for bankruptcy.

Santiago argues that her rent-controlled lease is not an asset and therefore should not become part of her bankruptcy estate. She says that the lease is more a kind to a public assistance benefit because to do otherwise would undermine the intent of New York City’s rent stabilization laws. NYC’s rent stabilization laws are meant to prevent older and indigent tenants from being evicted from their homes by limiting the amount that a tenant’s rent can be increased each year and allow for automatic renewal. 

On the other hand, the trustee argues that the law does not expressly state that these types of leases are exempt from bankruptcy estates. Further, any change in policy to favor tenants should be left to the legislature.

On April 1, 2014 the Second Circuit sent certified questions to the New York Court of Appeals (remember that is New York’s highest state court) to clarify some issues of New York state law. In particular, the Second Circuit asked whether the rent-stabilized lease constituted a “local public assistance benefit” under New York Creditor and Debtor Law. Considering, it seems like the question in this case may depend heavily on interpretation of New York state law.

The ultimate issue is still pending before the Second circuit. I will do my best to keep you updated on the case.

Sources

I urge you to take a look at the NYT article if only to see a picture of Santiago in her Tchotchke-filled apartment:

http://www.nytimes.com/2013/10/21/nyregion/widows-bankruptcy-case-poses-risk-to-millions-with-rent-stabilized-leases.html

Article on Certified Question:

http://www.newyorklawjournal.com/this-weeks-news/id=1202649112206/Circuit%20Certifies%20Questions%20on%20Lease%20Value%20in%20Bankruptcy?mcode=1202615038803&curindex=0&slreturn=20140301180919