Victory for Rent-Stabilized Debtors in New York!

Over the last few years, the Consumer Bankruptcy Project (CBP) of the City Bar Justice Center had to advise rent-stabilized tenants considering filing for Chapter 7 bankruptcy relief in New York that there was a risk that they could lose their apartment if they filed for bankruptcy. A rent-stabilized lease protects a tenant from excessive rent increases, requires a landlord to offer renewal leases to the tenant, and allows qualified family members living with the tenant to remain in the home if the named tenant passes away or moves out. For many of CBP’s clients the possibility that filing for bankruptcy might result in being forced out of the affordable apartments where they’ve lived for many years, often for more than 30 years, was traumatic.

In a recent landmark opinion, Santiago-Monteverde v. Pereira (In re Santiago-Monteverde), 2014 NY Slip Op. 8051 (N.Y. Nov. 20, 2014), the New York State Court of Appeals, responding to a certified question from the United States Court of Appeals for the Second Circuit, has concluded that a rent-stabilized apartment is exempt from a debtor’s bankruptcy estate.

In the Monteverde case, the Chapter 7 Trustee relied on Section 365 of the United States Bankruptcy Code, allowing the Trustee to assume and assign the lease to the landlord for a value, which would have resulted in the tenant losing her apartment. The Bankruptcy Court for the Southern District of New York ruled in favor of the Trustee. The debtor in the Monteverde case appealed to the Second Circuit and that Court in turn certified the question to the NYS Court of Appeals. The NYS Court of Appeals’ opinion now makes it clear that a rent-stabilized apartment is exempt from a debtor’s bankruptcy estate as a “local public assistance benefit” defined under Section 282 of New York’s Debtor and Creditor Law, because it protects a class of tenants who could not otherwise afford skyrocketing rental prices in a limited housing market.

This opinion is scheduled to go back to the Second Circuit for inclusion in that Court’s final decision. Once this is done, rent-stabilized tenants will finally be able to take advantage of the financial relief offered by a Chapter 7 bankruptcy filing without the threat of losing their homes.

A generous grant from The New York Community Trust has enabled the CBP for the past two years to extend its reach to larger numbers of consumers considering Chapter 7 bankruptcy relief, among them many rent-stabilized tenants which it has counseled about the risk of loss of their apartments. Once the Monteverde decision is issued by the Second Circuit, CBP expects a significant increase in its caseload, as those who refrained from seeking bankruptcy relief will be able to move forward to obtain the economic fresh start they need.