Bankruptcy Case Ruling Could Put Rent-Stabilized Tenants at Risk

The case of Santiago-Monteverde v. Pereira started out like so many others our D.C. bankruptcy firm encounters. Following the death of her husband, the New York debtor began to fall behind on her bills. It wasn’t long before creditors started calling. She sought relief through a Chapter 7 bankruptcy filing.

However, the filing ended up thrusting her into the midst of a battle that could put other rent-stabilized tenants across the country at risk of being evicted if they file for bankruptcy. The U.S. Court of Appeals for the Second Circuit recently certified questions raised by the case to be answered by the New York Court of Appeals. Specifically in dispute is whether a rent-stabilized lease should be treated like an asset in a personal bankruptcy, the same way the court might treat a piece of land or a car.

The trustee overseeing the bankruptcy has answered in the affirmative.

The case is being closely watched by bankruptcy attorneys across the country because although the immediate impact would be in New York, the decision could direct future rulings in similar cases. Our bankruptcy lawyers are committed to helping our clients protect all potential assets – even those considered non-traditional – by making full use of bankruptcy property exemptions, as defined in D.C. Code 15-501.

The issue of whether rent-controlled leases should be among property considered exempt from the bankruptcy estate has not yet been raised in D.C. bankruptcy courts. It hadn’t been raised in New York either, until now.

The debtor at the center of a case is a 73-year-old woman who has lived in her two-bedroom apartment for the last 50 years. She pays $700 a month for an apartment that should rent for thousands. Her main income is a monthly Social Security check. A bankruptcy would allow her to avoid repaying the approximately $25,000 she has accrued in debt over the last several years. In any other case, that would simply be the end of it, as she had no other real assets.

However, as the case drew to a close, her landlord extended an offer to the trustee: To purchase her rent-stabilized lease for enough money that it would pay off her debts. Her landlord wasn’t one of her creditors, but he had learned of the bankruptcy. The deal would be an obvious benefit to the landlord, as he’d be able to make up the difference within a year or two – and then thereafter be able to collect several thousand dollars a month in rent from a new tenant. Meanwhile, the widow would be left homeless but debt free.

The trustee overseeing the case accepted this offer – a decision that was affirmed by both a lower bankruptcy court and a federal district court. The case went to a federal appeals court, which certified the question to the New York State Court of Appeals, to determine whether the ruling was lawful under state statutes.

Attorneys for the debtor say that her rent-stabilized lease is a form of public assistance, just like Social Security payments or disability benefits or veterans’ benefits. Therefore, they argue, it should be exempt from the bankruptcy estate. Rent stabilization laws in New York, like the ones in D.C., are intended to protect tenants who are determined to be in need of housing assistance.

If the court decides that rent-controlled leases are not exempt, it could mean that bankruptcy lawyers across the country will need to advise clients in rent-controlled units to seek other methods of debt resolution, or to be aware of the issue when filing Chapter 7 bankruptcy.

It’s important for those seeking bankruptcy relief to discuss their case – and all potential consequences – with an experienced bankruptcy attorney.

Harris Ammerman
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