In Santiago-Monteverde v. Pereira, the New York Court of Appeals held that a rent-stabilized lease is exempted from a bankruptcy estate as a public assistance benefit under New York State Debtor and Creditor Law Section 282(2) ( (N.Y. Nov. 20, 2014)).

Update: On March 2, 2015, the US Court of Appeals for the Second Circuit upheld the decision of the New York Court of Appeals, holding that an interest in a rent-stabilized lease is a local public assistance benefit under New York State Debtor and Creditor Law Section 282(2) (Santiago-Monteverde v. Pereira, (2d Cir. March 2, 2015)). These decisions ensure that rent-paying New York City tenants who file for bankruptcy cannot be evicted from their apartments.

The debtor, Mary Santiago, has lived in her New York City apartment for over 40 years. After the death of her husband in 2011, she was unable to pay her $23,000 of credit card debt and filed for Chapter 7 bankruptcy.

Santiago's landlord, who was not a creditor, offered to buy her rent-stabilized lease to pay off her debt. After the bankruptcy trustee accepted the offer, Santiago amended the filing, listing the lease on Schedule B as personal property exempt as a "local public assistance benefit" under New York State Debtor and Creditor Law Section 282(2). Section 522(b) of the Bankruptcy Code permits a debtor to exempt certain property from the bankruptcy estate if it falls under a federal or state statutory exemption.

The Bankruptcy Court granted the trustee's motion on the grounds that the value of the lease did not qualify as an exempt local public assistance benefit. The District Court affirmed. Santiago's attorney appealed to the Second Circuit, which sent the case to the New York Court of Appeals to decide this issue under New York law.

In its decision, the New York Court of Appeals considered the purpose, importance and effect of the rent-stabilization regulatory scheme. The court found that the rent-stabilization program has all of the qualifications of a local public assistance benefit. The program:

The court was not swayed by the argument that the program did not involve payments to the tenants, since the exemption refers to a public assistance benefit, not payment. In addition, although rent-stabilization laws do not provide a benefit paid for by the government, they are a benefit conferred by the government through regulation.

As a result of the court's decision, rent-regulated apartments are now classified as public benefits and cannot be seized as an asset in Chapter 7 bankruptcies. Owners of multifamily units should take note of this development, as they will no longer be able to purchase the leases of their rent-stabilized tenants who have filed for bankruptcy.