Is a rent-stabilized lease in New York a “local public assistance benefit” that is exempt from property of a debtor’s bankruptcy estate, or is it merely “a quirk of the regulatory scheme in the New York housing market[?]” That was the question recently decided by the Second Circuit in In re Monteverde.

As we have covered on this blog in the past, here, and here, section 522 of the Bankruptcy Code recognizes certain types of property as “exempt” from the bankruptcy estate. Among the listed exemptions is section 522(b)(3), which exempts property that is exempt under Federal, State or local law. In turn, section 282(2) of New York Debtor and Creditor Law creates an exemption for a debtor’s interest in “a local public assistance benefit.”

Facts

The Debtor lived in a rent-stabilized apartment in lower Manhattan for over forty years. In November 2011, she filed a case under chapter 7 of the Bankruptcy Code and a Trustee was appointed. The Debtor had no assets; however, she lived in a rent-stabilized apartment. Shortly after she filed for bankruptcy, the Debtor’s landlord approached the Trustee and offered to buy the lease to the Debtor’s apartment under terms that would permit her to remain in the apartment, but would cause the apartment to lose its rent-stabilized status. The Trustee agreed to the arrangement, but the Debtor amended her bankruptcy filing to treat the value of her rent-stabilized lease as personal property that was exempt as a “local public assistance benefit.”

Procedural History

When the Trustee moved to strike the Debtor’s claim of exemption, the United States Bankruptcy Court for the Southern District of New York held that “[the] benefit of paying below market rent . . . is not a ‘public assistance benefit’ that is entitled to any exemption in bankruptcy” and that the benefit “is a quirk of the regulatory scheme in the New York housing market, not an individual entitlement.”

On appeal, the United States District Court for the Southern District of New York affirmed the bankruptcy court’s decision, holding that “the value in securing a lawful termination of the rent-stabilized lease . . . is a collateral consequence of the regulatory scheme and not a ‘local public assistance benefit’”. The Debtor appealed to the Second Circuit, which in turn certified the following question to the New York Court of Appeals:

Whether a debtor-tenant possesses a property interest in the protected value of her rent-stabilized lease that may be exempted from her bankruptcy estate pursuant to New York State Debtor and Creditor Law section 282(2) as a “local public assistance benefit”?

The New York Court of Appeals Decision

The New York Court of Appeals accepted the certification, and ruled that a rent-stabilized lease does qualify as a public assistance benefit. In arriving at its conclusion, the majority of the Court of Appeals held that New York’s rent-stabilization program has all of the characteristics of a local public assistance benefit and that a local public assistance benefit is not limited to cash payments. The majority focused on the fact that the program depends on periodic determinations by local authorities that a continuing housing emergency exists, that the program plays a crucial role in the lives of New York residents, and the purpose and effect of the program. The court also analogized rent-stabilization to Medicare, pointing out that where Medicare regulates how much doctors can charge for services in the healthcare context, in the residential leasing context, rent-stabilization programs regulate the rents property owners can charge protected tenants.

Conclusion

Applying the New York Court of Appeals’ opinion, the Second Circuit held that a rent-stabilized lease is a local public assistance benefit and therefore reversed the district court’s decision and remanded the case for further proceedings consistent with that finding. The case has potentially far reaching implications for chapter 7 debtors in New York State, as there are hundreds of thousands of rent-stabilized leases in New York City alone.