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Unprecedented Ruling Due on Rent-Stabilized Apartments in Co-ops

Frank Lovece in Legal/Financial on May 27, 2014

199 E. 7th Street, East Village, Manhattan

199-201 East Seventh Street, Manhattan, New York City
May 27, 2014

Bankrupt Widow

To briefly sum up what will be a precedent-setting case, Mary and her son Hector, a 50-year-old physical trainer, live in the $703-a-month ground-floor apartment 1A. Mary earns $1,200 monthly in Social Security plus $450 to serve, jointly with Hector, as the building's super. After her husband died, her credit-crd debut went above $20,000 — though she did continue making her rent payments. On Nov. 29, 2011, she filed for Chapter 7 bankruptcy, which allows for the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors, who take what they can get and liquidate the debt.

What's "exempt"? Your Social Security, veterans', disability and local public-assistance benefits; unemployment compensation; alimony and similar support, to a point; and stock bonuses, pensions and other such payments on account of illness, disability, death, age or length of service. If you own your home and are current on your mortgage, you can generally keep it under Chapter 7 bankruptcy due to what's called the homestead exemption.

Mary didn't own her home —the East 7th Street Development Corp., a limited liability corporation primarily managed by James Guarino did, along with several other occupied apartments it bought as investments. The LLC offered Mary (through the court-assigned trustee, the law firm Pereira & Sinisi) a buyout to give up her lease, with a promise not to evict her — so long as her son gave up the right-of-succession that would be his upon the near-octogenarian's. 

Mary was reluctant, and one of her pro bono attorneys, Kathleen G. Cully, put forth the suggestion that a rent-stabilized apartment counts as local public assistance — an exemption that the bankruptcy filing could not take from her.

Pecking Order

The court had other ideas, and on April 10, 2012, Judge James M. Peck of U.S. Bankruptcy Court for the Southern District of New York denied this interpretation, declaring that one's financial circumstances have nothing to do with having a rent-stabilized lease, scolding that, "Rent stabilization has allowed certain individuals to benefit from below-market rent simply because of the fortuitous circumstances of where they are living." Calling rent stabilization nothing more than "a quirk of the regulatory scheme" and not, as Mary's filing claim, "a local benefit provided by New York law to assist those members of the public that the legislature determined to need assistance."

It's not? It's just a random-chance lottery win? Peck agreed with the trustee that a rent-stabilized lease is not exempt as a public-assistance benefit because "[u]nlike a public assistance benefit there is no eligibility requirement to be met by the tenant as to level of income and financial resources ..."

Except — and not to tell the judge his business, since the appeals filing is doing that — there is an eligibility requirement, in that if your income hits a certain level you're no longer entitled to a rent-stabilized lease.

Appeals Court Will Rule

And the New York State Court of Appeals, which agreed in mid-May to weigh in, is expected to issue a ruling this fall. Co-op boards — who are the landlords of rent-stabilized tenants in their cooperatives, unless they've sold the leases to investors — should be keeping a careful eye on the outcome. So should the millions of New Yorkers living in the city's roughly one million rent-regulated apartments, since a decision against them means that if they file for bankruptcy, they'll be out on the streets — figuratively, one would hope, but in some cases literally.

For a 79-year-old like Mary — who worked years enough to earn the maximum Social Security benefits, whose husband worked, who raised a child who works and who still works herself, modestly, even at her age — her only crimes were growing old and not having a wealthy son to support her. If rent stabilization that keeps keeping her and her son in their home isn't local public assistance, what else would you call it?


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