By Ryan C. Wood
When filing for bankruptcy protection leases are what are called an executory contract. An executory contract is a contract that still has a required performance. Unexpired leases for houses or apartments are executory contracts that must be listed in the bankruptcy schedules and assumed or rejected. But is the unexpired lease an asset of the bankruptcy estate? In the Bankruptcy Court for the Southern District of New York, Mary Veronica Santiago-Monteverde, is dealing with this issue right now. Bankr. Case No. 11-15494.
First of all Ms. Santiago-Monteverde initially used an attorney, who admittedly did not know bankruptcy law, to file her Chapter 7 bankruptcy case. It begs the questions if she had consulted with experienced bankruptcy attorneys would this case have been filed ever? As you will read the Court has its suspicions as to why this case was ever filed in the first place. So, Ms. Santiago-Monteverde files a Chapter 7 case to have her approximately $37,000 in unsecured debts discharged even though she is judgment proof and there is seemingly no way for creditors to collect a penny from her outside of the Bankruptcy Court. The meeting of the creditors was concluded and the Chapter 7 Trustee, John S. Pereira, filed his report with the bankruptcy court that there are no assets of the bankruptcy estate to liquidate for the benefit of creditors.
If you have rent stabilization or rent control and file bankruptcy watch out.
But out of the woodwork Ms. Santiago-Monteverde’s landlord offers to purchase the lease from the bankruptcy estate. Under most circumstances how can a lease to occupy an apartment be an asset of the bankruptcy estate or of value to the landlord to make an offer to buy it out? Rent stabilization laws or rent control laws are the key here. Ms. Santiago-Monteverde has lived there for allegedly 38 years. Naturally the rent is very, very low.
Motion to for Authorization to Sell and Assign Lease
The Chapter 7 trustee therefore wants to file a motion pursuant to Bankruptcy Code Sections 363 and 365 for authorization to sell, assume and assign any and all of the bankruptcy estate’s rights in the residential lease to the landlord. The landlord made two different but seemingly reasonable offers. Both offers include paying all allowed claims of Ms. Santiago-Monteverde in her bankruptcy case, including the administrative costs of administering the bankruptcy estate. So in theory under both offers all of Ms. Santiago-Monteverde’s creditors get paid in full and the Chapter 7 trustee and his counsel get paid in full for their time. So far so good.
Offer #1: The first offer would grant Ms. Santiago-Monteverde a life estate to live at the apartment for the remainders of her life, but any and all succession rights or right to sublet are terminated. Succession rights mean the passing of her right to the rent stabilization or rent control to a family member. Rent or lease payments by Ms. Santiago-Monteverde would be according to the existing lease with increases in the rent as authorized by the Rent Guidelines Board of the City of New York.
So offer number one does not sound so bad for Ms. Santiago-Monteverde. Unfortunately according to Ms. Santiago-Monteverde bankruptcy attorney this agreement would result in a 150-160% increase in Ms. Santiago-Monteverde monthly payment given the rent increases calculate over 38 years. It was also alleged that the landlord later included terms that Ms. Santiago-Monteverde waive her rihts as a rent stabilized tenant.
Offer #2: In the second offer the landlord proposes to pay Ms. Santiago-Monteverde $100,000 (or possible only $10,000, as mentioned in oral arguments) to vacate the premises and forego all rights she has in the premises, including any succession rights. The landlord also agrees to use all good faith efforts to assist Ms. Santiago-Monteverde in gaining admission into an assisted living facility.
The bottom line is that Ms. Santiago-Monteverde does not believe the landlord has the legal right to purchase the lease from the Bankruptcy Estate. The debtor appealed the Bankruptcy Court’s order sustaining the Chapter 7 trustee’s objection to the debtor’s claim of exemption to protect the lease asset and lost the appeal. The Bankruptcy Court has clearly indicated that it believes it correctly ruled the lease is not exempt and that the Bankruptcy Court has the authority to sell the lease. At a hearing the Bankruptcy Court openly questioned why this case was filed in the first place and said the court did not want to see the debtor put out on the street. The Bankruptcy Court also fully recognized that the debtor’s son is attempting to claim succession rights to his mother’s rent stabilization rights. This is the heart it seems of this controversy and possibly why this case was filed in the first place. The complete truth will most likely never come out, but I question, as the Bankruptcy Court has also, the debtor’s choice to not agree to the terms the landlord proposed. Arguably the terms listed above in the two offers are not exactly the fine print regarding monthly payment increases. Surely the debtor would argue that there is much more to the offers above that make them unacceptable to her. Or again, is it her son putting pressure on her to fight so that he can try and claim succession rights to the rent stabilized apartment?
On January 15, 2014, the court entered the order approving the Chapter 7 Trustee’s motion to sell, assume and assign the bankruptcy estate’s interest in the lease. On January 28, 2014, the debtor filed her notice of appeal to the Second Circuit. The issues on appeal are did the bankruptcy court error in exercising jurisdiction over the interest of the debtor’s estate in her rent-subsidized lease while the debtor’s claim that the lease interest is exempt was still pending before the Court of appeal, whether bankruptcy court erred in denying the debtor’s motion to convert to Chapter 13, and whether the bankruptcy court erred and abused its discretion in authorizing the assumption, assignment and sale of the interest of the debtor in her rent-stabilized lease.
On January 15, 2014, the debtor attempted to obtain a stay of the Bankruptcy Court’s order approving the sale of the lease from the District Court. The District Court denied the motion and would not stay the order. See 14-00016, Southern District Court of New York. The Chapter 7 trustee requested certification of the appeal directly to the Second Circuit, but the District Court denied certification. As of right now the parties have filed their briefs regarding the issues on appeal. I will be updating this article as the case unfolds. The ongoing appeal is
