NY Court Protects Rent-Controlled Leases from Bankruptcy

Most laws favor homeowners over renters. This is obvious from even a cursory glance at bankruptcy statutes or the federal tax code. Tenants are often hesitant about filing bankruptcy because they fear losing their homes. A recent New York court case could change that.

Mary Santiago-Monteverde was not very happy in 2001. She had incurred heavy credit card debt after her husband passed away from extensive health problems. Santiago-Monteverde filed for bankruptcy. Shortly after, Santiago-Monteverde’s landlord approached the bankruptcy trustee and offered to buy the lease of the apartment she was living in. Santiago-Monteverde had lived in the East Village with her late husband for over forty years and she was not going to give it up without a fight.

Her attorneys claimed the apartment was a form of “local public assistance benefit” and thus legally exempt from the bankruptcy proceedings. Bankruptcy and District court initially ruled against the tenant. In a surprising 5-2 decision though, Santiago-Monteverde won on appeal. In New York, rent-controlled leases can be shielded from bankruptcy.

What Does All This Mean?

When a debtor files for bankruptcy, the bankruptcy court appoints a trustee to manage the debtor’s assets. In many cases, the trustee will sell the debtor’s assets to pay off the debts. However, federal law exempts certain property from bankruptcy. Some states offer their own exemptions. If a property is exempted, it means the trustee cannot sell the property and the debtor gets to keep the property, even after the bankruptcy is over. Property is often exempt from bankruptcy so that the debtor can start fresh after bankruptcy is over.

Since homes are often exempted, homeowners may file bankruptcy knowing that part or all of their home equity will be safe. Tenants, on the other hand, have no such luxury. Leases are rarely exempted and it is not usual for landlords to buy back leases, like Santiago-Monteverde’s landlord did. Debtors who rent a home rather than outright purchase a house rarely file for bankruptcy, even when bankruptcy is financially smart.

Santiago-Monteverde’s case found a way around this problem. Even though leases are not exempt, public assistance programs, such as food stamps, are exempt. Public assistance is exempt so that if the debtor has low or no income, the debtor won’t starve. Santiago-Monteverde makes it so that rent-controlled housing is public assistance. In the court’s collective minds, the purpose of rent control is to help low-income peoples, the same purpose that other public assistance programs serve.

Future Consequences

Although this case balances the rights of homeowners and renters, it also opens the doors for further bankruptcy exemptions. If rent control is public assistance because it is designed to help low-income families, what else could qualify as a public assistance exemption? What about income from minimum wage jobs? Or government scholarships and school vouchers?  If Washington bails out a large corporation like GM, and the justification is to prevent workers from losing their jobs, does that make government bailouts public assistance programs?

I applaud that tenants can keep their homes through bankruptcy, but this kind of decision seems like it should come from legislators rather than judges. The latter often cannot control where the slippery slope will end and this case could open doors that judges cannot foresee opening.