NYS High Court To Rogue Bankruptcy Trustees, Greedy Creditors: Hands Off 80-Year Old Widow's Rent Regulated Home Of 50 Years; Declares Those Leases To Be "Public Assistance Benefit" Exempt From Creditors' Claims Under State Law

In New York City, The New York Times reports:

• In a decision with implications for millions of tenants, New York State’s highest court ruled Thursday that a lease for a rent-regulated apartment is a public benefit and cannot be seized as an asset in a personal bankruptcy.
  
  In a 5-to-2 vote, the Court of Appeals said that a rent-stabilized lease was exempted from a bankruptcy estate as a public assistance benefit, just like disability or unemployment benefits. Bankruptcy lawyers in New York who were closely monitoring the case said that not keeping the lease off limits would have made it easier for landlords to evict rent-stabilized tenants if they file for bankruptcy, even when they pay their rent.
  
  The case involved Mary Veronica Santiago, an 80-year-old widow in the East Village of Manhattan whose landlord, who was not one of her creditors, offered to buy her rent-stabilized lease and produce the money to pay off her debt of about $23,000. The bankruptcy trustee in charge of marshaling her assets, John S. Pereira, accepted the offer but Mrs. Santiago’s lawyers, fearing her eventual eviction despite an agreement to let her stay in the unit, challenged that decision.
  
  After both a bankruptcy court and a Federal District Court sided with the bankruptcy trustee, Mrs. Santiago appealed to the United States Court of Appeals for the Second Circuit. The federal court deferred to the state court as the final authority on the question of whether the lease should be exempt under New York law.(1)
  
  Mrs. Santiago’s case was the first time an appellate court in New York had ruled on whether the leases should be exempt.
  
  “When the rent-stabilization regulatory scheme is considered against the backdrop of the crucial role that it plays in the lives of New York residents, and the purpose and effect of the program,” Judge Sheila Abdus-Salam wrote for the majority, “it is evident that a tenant’s rights under a rent-stabilized lease are a local public assistance benefit.”
  
  “Affordable housing,” the majority said, “is an essential need.”
  
  Also voting with the majority were Chief Judge Jonathan Lippman and Judges Eugene F. Pigott Jr., Victoria A. Graffeo and Jenny Rivera.
  
  Both the state and New York City regarded the case as posing a major risk to New Yorkers who seek bankruptcy protection and happen to live in rent-stabilized apartments, and threw their weight behind Mrs. Santiago. In a brief filed jointly in September, the New York attorney general’s office and the city’s Law Department argued that treating a lease like property that could be sold, like a car or a piece of land, would undermine the safeguards that both bankruptcy and rent laws are supposed to provide.
  
  The case also drew the interest of lawyers who saw it as a threat to the housing stability of many low-income New Yorkers. Mrs. Santiago’s case was argued before the state court by Ronald J. Mann, a law professor at Columbia University and experienced bankruptcy specialist.
  
  “The decision finally restores the status quo that held for decades, protecting these tenants in bankruptcy so long as they pay their rent,” Mr. Mann said.
  
  John P. Campo, a lawyer for the bankruptcy trustee, said “the general consensus” before the state court ruled on the matter Thursday was that a lease was not a public benefit.
  
  “The trustee all along was simply following the law,” he said.
  
  In a dissenting opinion, Judge Robert S. Smith argued that the majority “grossly misreads” the law by treating rent regulation as public assistance. He was joined by Judge Susan Phillips Read.
  
  “I would like to try asking every rent-controlled or rent-stabilized tenant in New York: ’Do you receive public assistance?’ ” Judge Smith wrote. “I would be surprised to find even one (apart from those receiving government subsidies from other programs) who answered yes.”
  
  But Linda B. Rosenthal, a member of the State Assembly who introduced a bill two years ago to prohibit the use of rent-regulated leases as assets in bankruptcy proceedings, said she had heard from tenants who needed bankruptcy protection but were afraid to seek it.
  
  “I’m just delighted that the court got it right,” said Ms. Rosenthal, a Manhattan Democrat who also submitted a brief in the case along with 17 other state legislators on behalf of Mrs. Santiago. “People who are in the unfortunate circumstances of having to file for bankruptcy will no longer put it off for fear of losing their home.”
  
  Mrs. Santiago’s lawyers said they expected her bankruptcy case to close quickly after the federal court adopts the state court’s ruling and issues its opinion in a few months.
  
  In the two-bedroom, $703-a-month apartment where she has lived for more than 50 years, Mrs. Santiago burst into tears when she heard about the decision from her bankruptcy lawyer, Kathleen G. Cully.
  
  “It’s such a big relief,” she said in a phone interview. “I don’t have to worry about my landlord anymore.”

Source: Rent-Stabilized Leases Shielded in Bankruptcy.

For the ruling, see In re Santiago-Monteverde (Santiago-Monteverde v. Pereira) (uncorrected), No. 180 (N.Y. November 20, 2014).

For an earlier story, pre-dating this court ruling, see Widow’s Bankruptcy Case Poses Risk to Rent-Stabilized Tenants.

(1) The U.S. Supreme Court has stated that, in cases when the Federal courts are asked to rule on issues involving the interpretation and application of substantive (as opposed to procedural) state law, "the State's highest court is the best authority on its own law." Commissioner v. Estate of Bosch, 387 U.S. 456 (1967).

In deciding to ask the New York Court of Appeal (the state's highest court) to weigh in as to the nature of a rent-stabilized lease, the 2nd Circuit Court of Appeals (In re Santiago-Monteverde, 747 F. 3d 153 (2nd Cir. March 31, 2014)) gave the following analysis of the applicable law and its reasoning:

• Given the significance of these issues to landlords and tenants, as well as the complete absence of authority concerning the impact of DCL § 282(2) on rent stabilized leases, we hesitate to attempt to resolve these issues without first obtaining the views of the New York Court of Appeals.
  
  C. CERTIFICATION
  
  Pursuant to Rule 27.2 of our Local Rules and New York State law, we may certify "determinative questions of New York law [that] are involved in a case pending before [us] for which no controlling precedent of the Court of Appeals exists." N.Y. Comp.Codes R. & Regs. tit. 22, § 500.27(a); Local R. 27.2; see also N.Y. Const. art. VI, § 3(b)(9) (directing the New York Court of Appeals to adopt a rule permitting it to answer questions of New York law certified to it by, among other courts, "a court of appeals of the United States").
  
  "Before certifying such a question, we must answer three others: (1) whether the New York Court of Appeals has addressed the issue and, if not, whether the decisions of other New York courts permit us to predict how the Court of Appeals would resolve it; (2) whether the question is of importance to the state and may require value judgments and public policy choices; and (3) whether the certified question is determinative of a claim before us." In re Thelen LLP, 736 F.3d at 224 (internal quotation marks omitted). In this case, we answer all three questions in favor of certification.
  
  First, neither the Court of Appeals nor lower New York courts have addressed (1) the meaning of "local public assistance benefit" in the context of DCL § 282(2), (2) whether the protections provided by the RSC are personal or property rights, or (3) the effect of the assignment of a tenant's lease during bankruptcy on her rights under the RSC. This prevents us from making any confident prediction of how the New York Court of Appeals would resolve this issue. [Editor's note: an "Erie guess"].
  
  Second, the issue of the proper interpretation' and interaction of the DCL and RSC is "of importance to the state" and will in fact involve "value judgments and public policy choices" concerning the existence and scope of property rights, as well as the application of emergency housing legislation that was carefully designed to balance the rights and interests of renters and building owners. Manocherian, 84 N.Y.2d at 389-90, 618 N.Y.S.2d 857, 643 N.E.2d 479.
  
  Finally, the resolution of this question will determine the outcome of this appeal, as it is the only question presented to this Court.
  
  III. CONCLUSION
  
  The following question is hereby certified to the Court of Appeals of the State of New York pursuant to 2d Cir. Local R. 27.2 and N.Y. Comp.Codes R. & Regs. tit. 22, § 500.27(a), as ordered by the United States Court of Appeals for the Second Circuit.
  
  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"?
  
  In certifying this question, we understand that the New York Court of Appeals, if it accepts the case, may reformulate or expand the certified question as it deems appropriate. We do not intend this articulation of the above specified question to limit the scope of the analysis by the Court of Appeals