Rent Stabilization and Bankruptcy in NYC: a Brief History

Rent Stabilization and Bankruptcy in NYC: a Brief History In NYC one of the big topics in Bankruptcy has been trustees selling rent-stabilized leases in Chapter 7 Bankruptcy proceedings.  The problem is that once a debtor files for Chapter 7 Bankruptcy relief they don’t have the right to stop the proceedings.  If they are eligible for Chapter 13 relief they can convert a Chapter 7 case to a 13 unless the case was filed in bad faith.  To make things worse if a case that started as a 7 is converted to a 13 there isn’t an automatic right to have that case dismissed. All of the commotion began with a case called In re Stein, 281 B.R. 845 (Bankr. S.D.N.Y. 2002).  In this case a debtor who filed for Bankruptcy had a sought-after apartment located at 171 West 57th street.  Debtor’s lease had expired prior to his Bankruptcy filing.  Similarly, the building had just begun conversion to condominium ownership.  Carl Stein (the debtor) decided not to purchase the apartment and argued that under the Martin Act he had right to occupy the apartment as a non-purchasing tenant.  When the debtor filed for Chapter 7 Bankruptcy he was approximately $40,000 in rental arrears.  Prior to the Bankruptcy case the Landlord had begun proceedings in Landlord-Tenant Court to evict Mr. Stein.  Essentially the bankruptcy case added a hurdle for the landlord to evict Mr. Stein.  The landlord received relief from the automatic stay to resume eviction proceedings and at the same time offered to pay the Chapter 7 Trustee for rights to the apartment.  Effectively, the trustee made a deal to sell the debtor’s interest in the apartment for $20,000.  The court allowed this sale.  It appears that the debtor would have been eventually evicted from the apartment for rental arrears. In re Toledano, 299 B.R. 284 (Bankr. S.D.N.Y. 2003) dealt with another central park apartment that was rent stabilized.  Here the trustee was offered $140,000 for a lease.  The court allowed the trustee to assume the lease assign it back to the landlord. More recently the In re Goldman, Case No. 11-11371 (SHL) case affirmed that rent stabilized leases can be sold by a bankruptcy trustee. Currently, In re Mary Veronica Santiago-Monteverde No. 11-15494 (S.D.N.Y. 2012) a 79 year old widow’s right to pass her rent stabilized apartment to her 50 year old son after her death is being debated.  The trustee has been offered money by the landlord to pay off all of her debts in exchange for her right to pass the lease to her son when she dies.  Debtor’s counsel argued that the rent-stabilized lease is a public benefit and thereby exempt from the bankruptcy estate.  The Bankruptcy court has sided with the trustee on this issue.  However, this matter is on appeal. All of these cases demonstrate how important it is to carefully weigh the risks of filing for chapter 7 Bankruptcy when there is a rent stabilized lease at stake.  Some of the trustees in the Southern District of New York find the process of selling these leases abhorrent while others have no issue with it.  Fortunately the Chapter 13 trustee does not believe in this process and he places no value on these leases in  chapter 13 cases, which would increase the plan payments by viewing the lease as an non-exempt asset. If you would like to look into different strategies to filing a Chapter 7 or 13 Bankruptcy and keeping your rent-stabilized apartment call my office at 212-244-2882 for a free consultation.