NYC, NYS File Brief to Protect Stabilized Leases from Bankruptcy Cases

New York City and State officials have recently filed a joint “friend of the court” brief with the Court of Appeals urging it to shield rent-stabilized leases in bankruptcy proceedings. The case involves an elderly widow fighting to keep her rent-stabilized lease from becoming an asset with which to pay off her creditors.

The bankruptcy case was brought in 2011 by a rent-stabilized tenant who sought Chapter 7 protection after accumulating a debt of $23,000, mostly in credit card bills. The tenant wasn’t behind on her $703 rent, but her landlord, who was not among her creditors, stepped into her bankruptcy case with an offer to buy her rent-stabilized lease and produce the money to pay off her debt. The bankruptcy trustee in charge of marshaling her assets accepted the offer. But the tenant, fearing her eventual eviction despite an agreement to let her stay in her apartment, challenged that decision.

After both a bankruptcy court and a Federal District Court sided with the bankruptcy trustee, the tenant appealed to the United States Court of Appeals for the Second Circuit, which for the first time will adjudicate on whether a rent-stabilized lease can be treated as an asset in bankruptcy cases. But before ruling on the matter, the federal court sent the case to the New York Court of Appeals in March to decide on the state law issue of whether the lease is exempt from a tenant’s assets for the purposes of bankruptcy proceedings.

The recently filed brief argues that, under current law, a lease for a rent-regulated apartment is not property that can be sold. Such a lease, the city and state argues, amounts to a public benefit, just like disability or unemployment benefits, that is exempted from a bankruptcy estate and cannot be seized as an asset in a personal bankruptcy. Oral arguments are set for Oct. 14.