Appeals Court to Rule if Rent-Stabilized Lease Can Be Sold in a Bankruptcy

New York's highest court recently agreed to determine whether a rent-stabilized lease could be sold off in a bankruptcy or is a protected "local public assistance benefit," as outlined under New York law. Other such protected benefits include welfare and unemployment payments.

The case involves a rent-stabilized tenant who filed for bankruptcy protection in 2011. At the time, neither she nor her lawyer realized they could be jeopardizing her $703-a-month rent-stabilized apartment in the East Village, where she has lived for almost 50 years. The apartment owner agreed to acquire her rent-stabilized lease, eventually offering more than $140,000 and making a promise not to evict her. That deal, worked out with the bankruptcy trustee and the judge, however, wouldn't have allowed her son to continue to live in the apartment after her death.

But before that deal was approved, an attorney refiled the bankruptcy case and argued that her rent-stabilized lease should be considered a social-service benefit under New York state law. The U.S. Bankruptcy Code permits states to create their own lists of exemptions, and New York's list includes local public-assistance benefits.

The issue has far-reaching implications since federal bankruptcy law is applied in New York City and by extension to all of its rent-regulated apartments. In more affluent neighborhoods, rent-regulated tenants have sometimes received hundreds of thousands of dollars from their landlords to surrender their rent-regulated leases. The potential value of the leases has led bankruptcy trustees to sell some leases back to owners, a practice upheld in a 2003 bankruptcy court ruling. A decision is expected from the Court of Appeals in the fall.