Are Rent Stabilized Leases Assets in Chapter 7 Bankruptcy Cases in New York City?

Are Rent Stabilized Leases Assets in Chapter 7 Bankruptcy Cases in New York City?

They can be, yes, but in New York City it is a complex and evolving situation still. Technically speaking, any lease could be considered an asset in a bankruptcy case, even a car lease for example, but with a car lease a bankruptcy trustee wouldn’t make any money by selling it.  A car lease is not worth anything to the bankruptcy trustee as there would be no funds to distribute to your creditors.  With a car lease you are on the hook for the balance of the lease not matter what.  It makes no sense for the car dealer to buy it back from you to sell to someone else.  You’re credit was approved so you can’t transfer it to anyone else, and the dealer doesn’t want it back from you since they will always have more cars to lease.  If you break the lease they can repossess your car and sue you for the balance (unless you file bankruptcy of course), so there is really no value to a car lease to anyone but you.

Your rent stabilized apartment lease on the other hand may have some value to your landlord.  A trustee therefore might be interested in it and could consider it an asset if you file bankruptcy.  Under normal situations a landlord can’t get you out of your rent stabilized apartment unless you stop paying rent, or otherwise voluntarily give up the lease.  Over time landlords will often try to reduce the number of rent stabilized units they have in their building to make room for more retail customers.  The difference between a rent stabilized lease and someone renting on the open market can be thousands per month, so a landlord could have a real financial interest in your rent stabilized lease.  Unlike a car dealer with an unlimited amount of cars, a landlord could stand to financially benefit by leasing a rent controlled apartment to someone else at a higher price.

We are starting to see more cases in New York City where landlords are contacting bankruptcy trustees hoping to buy up the rent stabilized leases of their tenants who have just filed bankruptcy.  In theory the trustee could take the offer and liquefy the lease like any other asset in a bankruptcy case.  However, there is some defense for this as petitioner can protect themselves if this happens by converting their Chapter 7 case to a Chapter 13.  As long as this is done in good faith and the debtor qualifies for chapter 13, every petitioner has the right to convert their filing status midstream which should effectively protect a rent stabilized lease.

This idea is being tested now with one high profile case currently in appeal in New York City.  In the bankruptcy case for Mary Veronica Santiago-Monteverde, 79, the bankruptcy trustee is arguing that the petitioner converted her case in bad faith as a way to avoid losing her rent stabilized lease. In this particular case the landlord is offering to pay off all of her debt, and will also allow her to remain in the apartment for the duration of her years; but the agreement is that when she passes, the apartment’s life estate will not pass to her son-meaning the landlord may then rent the apartment to another tenant at a higher rate.  The judge in this case seems to think this is a pretty good deal for both the creditors and the debtor in this situation.

The court is currently deciding if her converting to a Chapter 13 was done in bad faith or not.  It will be an interesting decision because on the one hand she has the right to convert her case to a 13 at anytime, but on the other hand they may find that she is trying to unduly protect her rent stabilized lease in the process.  In our opinion it will be hard for the court to rule the conversion was done in bad faith since they will have to go by the information in the original bankruptcy petition, not by any ancillary litigation to the case.  If she had tried to conceal the rent stabilized nature of her lease from the court it might be a different story, but since it is clearly itemized as such on the original petition we feel she has a strong chance of winning the decision, converting her case to a Chapter 13, and saving her rent stabilized lease outright.

In our view there is actually a bigger issue to consider with the Santiago-Monteverde case however.  Let’s assume for a moment she is successful in converting her case to a Chapter 13.  If it turns out this way the court will have to decide if she is obligated to pay for the value of the lease in her Chapter 13 plan.  If the landlord was offering, say $60,000, for the lease then her Chapter 13 plan could be no less than $1,100 per month for 60 months considering the 10% trustee fee.  To qualify for a Chapter 13 your general unsecured creditors must be able to receive over the life of your repayment plan as least as much as they would recover in a Chapter 7, or in this case $60,000 since the landlord was offering to pay.  This idea has not been litigated yet, but it could end up being a solid argument against converting Chapter 7 cases to Chapter 13 for people with rent stabilized leases.  In light of these recent developments we have been advising more and more clients with rent stabilized leases to simply file for Chapter 13 in the first place, and to do it quickly.

Not all Chapter 7 trustees will try to sell a rent stabilized apartment lease.  It’s controversial and many still find the practice abhorrent since kicking someone out of their home is not really in line with helping people get back on their feet.  Chapter 13 trustees so far in New York City have placed no value on these types of leases either, but that could potentially change.  If you have a rent stabilized apartment lease and are underwater on your bills, don’t delay in finding the bankruptcy advice you need.  As of right now, there are multiple ways to protect your rent stabilized lease through the bankruptcy process in New York but the courts are starting to realize the potential resale value of these leases.  If you are worried about your lease and financially distressed already contact the Law Offices of William Waldner online or at 212.244.2882 to arrange a free bankruptcy consultation today.  We only practice bankruptcy law and maintain a 99% Chapter 7 discharge record in New York City as of 8/31/16.

This article is intended for educational purposes only.  By reading no attorney-client privilege has been created.