Rent-Stabilization Lease A “Public Benefit” For Exemption Purposes

Faced with bankruptcy, one of the foremost thoughts on an individual debtor’s mind is whether or not, upon exiting bankruptcy, the individual will retain any property he or she possessed prior to bankruptcy. Addressing this concern, the Bankruptcy Code permits the debtor to exempt certain property from his or her bankruptcy estate. Furthermore, in addition to the federal exemptions, the Bankruptcy Code permits individual states to create and implement their own list of exemptions. Exemptions provide some comfort to a debtor that, upon exiting bankruptcy, he or she can begin their respective “fresh start” without having to start – literally – from square one.

Typically, exemptions relate to such property that most would consider essential. In example, motor vehicles, clothing, equity in a primary residence, and household goods and furnishings – each limited to a reasonable value – are common exemptions. Furthermore, pensions, a portion of unpaid but unearned wages, and public benefits can also be claimed as exempt. It is the latter – public benefits – that recently resulted in a unique decision by the New York Court of Appeals.

Mary Santiago-Monteverde, following the death of her husband and with significant credit card debt, filed chapter 7 bankruptcy. At the time of filing, Mrs. Santiago-Monteverde lived in Manhattan for over 40-years in a rent-stabilized apartment. Initially, she did not list her apartment lease, or more appropriately, the value of the apartment lease, as personal property exempt from her bankruptcy estate. However, following her landlord’s offer to the chapter 7 trustee to purchase Mrs. Santiago-Monteverde’s interest in the apartment lease, Mrs. Santiago-Monteverde amended her Schedule B to include the value of the apartment lease as personal property exempt from her bankruptcy estate as a “local public assistance benefit” under New York state law exemptions. The chapter 7 trustee moved to strike the exemption and the Bankruptcy Court granted the chapter 7 trustee’s motion. The District Court affirmed the Bankruptcy Court’s ruling and, thereafter, Mrs. Santiago-Monteverde appealed to the Second Circuit.

The Court of Appeals, after reviewing the role that rent-stabilization plays in the lives of New York residents, found that a tenant’s rights under a rent-stabilized lease are a local public assistance benefit. Without the rent-stabilization programs adopted in New York, the Court of Appeals noted – while referring to New York legislative history – that the high demand and decreasing supply of apartments would eventually result in low income, working poor and the middle class being wholly unable to afford living in New York. To the Court of Appeals, rent-stabilization is inarguably local and public, provides assistance to a specific segment of the population and is highly regulated. Thus, to the Court of Appeals, rent-stabilization possessed all the characteristics of a local public assistance program.

It was the chapter 7 trustee’s argument that rent-stabilization is unlike other local public assistance benefits; namely, social security, unemployment compensation and alimony. The chapter 7 trustee’s distinction was specific – rent-stabilization, unlike those other local public assistance programs, does not involve periodic payments. The Court of Appeals found this argument to be misplaced as not all public assistance benefits involve periodic payments, specifically referencing food stamps, vouchers, medical care and discounted prescriptions. Furthermore, the Court of Appeals found the chapter 7 trustee’s additional argument that rent-stabilization cannot be a public assistance benefit because is it not subsidized by the government to be a non-starter. The Court of Appeals noted that while rent-stabilization does not provide a benefit paid by the government, it does provide a benefit conferred by the government through regulation aimed at a particular sub-section of the New York population.

In its most general sense, the takeaway from the Court of Appeals decision is that a bankrupt individual and his or her counsel must leave no stone unturned when considering what property can, arguably, be exempt from the bankruptcy estate. In its specific sense, the Court of Appeals decision, should it remain undisturbed, opens a possible additional exemption avenue for bankrupt individuals in New York. Furthermore, given that other large metropolitan areas such as Washington D.C., California, New Jersey and Maryland have enacted some form of rent-stabilization, the Court of Appeals decision could provide some guidance to individual debtors in those jurisdictions, subject, of course, to individual state law.

Matter of Santiago-Monteverde, 2014 NY Slip Op 08051 (Nov. 20, 2014).