Rent Stablization and Bankruptcy in New York State

Tenant-guide.gifAn article in today’s New York Times discussed a case currently pending before the United States Court of Appeals for the Second Circuit. The litigation discussed involves a rent stabilized tenant who filed for Chapter 7 personal bankruptcy. Although the details of bankruptcy law are beyond the scope of this post, Chapter 7 bankruptcy involves a liquidation of the debtor’s assets, and will extinguish most debts of the debtor, making them uncollectible by the creditors.

In this case, the debtor filing bankruptcy was a tenant in a rent stabilized apartment. Rent stabilization is a type of rent regulation in larger cities in New York State that fixes the rent which a landlord may charge to tenants. It is most prevalent in New York City, but not every apartment will qualify for rent stabilization protection. For example, when one rents a cooperative apartment from the owner, rent stabilization will not apply. In addition, tenants whose income level exceeds a certain threshold may be disqualified from rent stabilization protection.

Rent stabilization protects the tenant in several ways. First, it limits the annual amount by which a landlord may increase the rent for the apartment. This amount is set each year by the Rent Guidelines Board, and their decisions are subject to annual predictable controversy as tenant groups lobby for smaller or no increases, and landlord groups request larger increases. Secondly, a tenant in a rent stabilized apartment is legally entitled to a lease renewal when their current lease expires.

These protections allow many tenants to stay in their apartments for many years at below-market rents. A tenant who may have begun their rental forty years ago will almost certainly be paying a much lower rent for an apartment in the same building than a tenant whose rental term commenced more recently. When a rent stabilized tenant vacates of their own accord, the landlord is entitled to a “vacancy increase” in the amount of rent to be charged, allowing the rent to be closer to market value.

As a result of these rent regulations, landlords have an incentive to coerce long-time tenants to vacate their units. Many landlords will track their tenants to make sure that they are using their apartments as a primary residence. Tenants who are not actually residing in their apartments may be subject to eviction and their apartments may be removed from rent stabilization. Landlords may also simply pay the tenants a lump sum to vacate their apartments. These amounts may be calculated by determining the possible legal increase in rent from a vacant apartment, and predicting the approximate life expectancy of the tenant. The tenant receives an agreed sum to vacate the apartment, and the landlord may also provide an alternative apartment which is not subject to rent stabilization.

In the case being appealed, the landlord made such an offer to the tenant. The Bankruptcy Trustee, a party who is responsible for marshaling the debtor’s assets and using them to pay off the creditors, accepted the offer. The legal question at issue is whether a rent stabilized lease is an asset which a Trustee can seize and use to pay off the creditors of the bankruptcy petitioner. The argument against such a seizure is that it leaves the Chapter 7 filer without a place to live, which may be contrary to the purpose of the rent stabilization laws. Under New York and federal law, public assistance benefits such as Social Security or disability payments are exempt from seizure in a bankruptcy filing. U.S. Bankruptcy Judge James M. Peck ruled that New York law, as currently written, does not except an interest in a rent stabilized lease from being included as an asset in the bankruptcy, and subject to seizure and sale by the Trustee. The United States Court of Appeals for the Second Circuit will decide if this decision was a correct interpretation of the law.

Although the appeal has yet to be decided, it is highly likely that the New York State Legislature may now attempt to revise the current laws to avoid such an outcome, by revising the Debtor and Creditor Law to include an interest in a rent stabilized lease as exempt property. Weiss & Weiss has extensive experience in litigating matters relating to rent stabilized apartment and welcomes inquiries from landlords and tenants.