Appeal No. CTQ-2014-00004 To be argued by: ANISHA S. DASGUPTA 10 minutes requested

State of New York Court of Appeals

In the Matter of

MARY VERONICA SANTIAGO-MONTEVERDE, Debtor.

__________________________

MARY VERONICA SANTIAGO-MONTEVERDE, Appellant,

-against-

JOHN S. PEREIRA, Chapter 7 Trustee, Respondent. BRIEF FOR THE STATE OF NEW YORK AND THE CITY OF NEW YORK

AS AMICI CURIAE IN SUPPORT OF APPELLANT

ZACHARY W. CARTER Corporation Counsel of the City of New York 100 Church Street New York, New York 10007 (212) 356-2484 (212) 356-2509 (facsimile) RICHARD DEARING Chief, Appeals Division SUSAN P. GREENBERG Senior Counsel

Dated: September 15, 2014

ERIC T. SCHNEIDERMAN Attorney General of the State of New York 120 Broadway New York, New York 10271 (212) 416-8018 (212) 416-8962 (facsimile) BARBARA D. UNDERWOOD Solicitor General ANISHA S. DASGUPTA Deputy Solicitor General ANDREW KENT Senior Counsel

of Counsel

i

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ............................................................ iii

INTEREST OF AMICI CURIAE ...................................................... 1 

QUESTION CERTIFIED TO THIS COURT ................................... 4 

STATEMENT OF THE CASE .......................................................... 5 

STATEMENT OF THE CASE .......................................................... 9 

A.  Bankruptcy Procedure .................................................... 9 

B.  The Agreement Between the Bankruptcy Trustee and Landlord to Sell and Eliminate Santiago-Monteverde’s Rent Stabilization Rights ...................... 11 

C.  New York’s Rent Stabilization Laws ........................... 16 

1.  The Rent-Stabilization Rights and Protections Provided by New York State and New York City ....................................................... 16 

2.  The State and City’s Efforts to Preserve Affordable Housing By Retaining Control of Deregulation .......................................................... 20 

ARGUMENT .................................................................................. 25 

POINT I - STATE LAW PLAYS AN IMPORTANT ROLE IN THE BANKRUPTCY PROCESS ....................... 25 

POINT II - STATE LAW DOES NOT CREATE ANY MONETIZABLE PROPERTY INTEREST IN THE CIRCUMVENTION OF RENT STABILIZATION LAWS ......................................... 28

ii

TABLE OF CONTENTS (cont’d)

Page

A.  State Law Does Not Make the Succession Rights of Santiago-Monteverde’s Son the Property of Her Estate. ....................................... 30 

B.  State Law Does Not Treat Santiago-Monteverde’s Rent Stabilization Rights as a Monetizable Property Interest. .......................... 32 

POINT III - RENT STABILIZATION RIGHTS QUALIFY FOR EXEMPTION FROM THE BANKRUPTCY ESTATE UNDER DCL § 282(2) ........................................................................ 37 

A.  Rent Stabilization Rights Meet the Conditions for Exemption as a “Local Public Assistance Benefit” ............................................. 38 

B.  Like Other Public Assistance Benefits, the Rent Stabilization Laws Seek to Aid a Financially Vulnerable Population. ................... 46 

POINT IV - SANTIAGO-MONTEVERDE’S SENIOR CITIZEN RENT INCREASE EXEMPTION BENEFITS ARE PLAINLY EXEMPT UNDER DCL § 282(2) ............................................................. 51 

CONCLUSION ................................................................................ 53 

iii

TABLE OF AUTHORITIES Cases Page(s) A. E. F.’s Inc., v. City of N.Y.,

295 N.Y. 381 (1946) .................................................................... 48

Aliessa ex rel. Fayad v. Novello, 96 N.Y.2d 418 (2001) .................................................................. 47

Barnhill v. Johnson, 503 U.S. 393 (1992) ..................................................................... 28

Braschi v. Stahl Assocs. 74 N.Y. 2d 201 (1989) ................................................................. 34

Brooklyn Union Gas Co. v. N.Y. State Human Rights Appeal Bd., 41 N.Y.2d 84 (1976) .................................................................... 45

Butner v. United States, 440 U.S. 48 (1979) ..................................................... 25, 26, 28, 36

Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356 (2006) ..................................................................... 25

Clark v. Cuomo, 66 N.Y.2d 185 (1985) .................................................................. 45

Clark v. Rameker, 134 S. Ct. 2242 (2014) ................................................................. 41

Draper v. Georgia Properties, Inc., 94 N.Y.2d 809 (1999) .................................................................. 33

Genesee Valley Trust Co. v. Glazer, 295 N.Y. 219 (1946) .................................................................... 40

In re Barnes, 276 F.3d 927 (7th Cir. 2002)....................................................... 29

iv

TABLE OF AUTHORITIES (cont’d) Cases Page(s)

In re The Ground Round, Inc., 482 F.3d 15 (1st Cir. 2007) ......................................................... 29

In re Nejberger, 934 F.2d 1300 (3d Cir. 1991) ...................................................... 29

In re Sanders, 969 F.2d 591 (7th Cir. 1992) ....................................................... 30

In re Santiago-Monteverde-Monteverde, 747 F.3d 153 (2d Cir. 2014) ................................................ passim

In re Stein, 281 B.R. 845 (Bankr. S.D.N.Y. 2002) ......................................... 27

Jazilek v. Abart Holdings LLC, 10 N.Y.3d 943 (2008) ............................................................. 20, 34

Law v. Siegel, 134 S. Ct. 1188 (2014) ................................................................... 9

Manocherian v. Lenox Hill Hosp., 84 N.Y.2d 385 (1994) ................................................................... 16

Matter of Badem Bldgs. v. Abrams, 70 N.Y.2d 45 (1987) ..................................................................... 46

Matter of Tonis v. Bd. of Regents of Univ. of State of N.Y., 295 N.Y. 286 (1946) ..................................................................... 39

Murphy v. N.Y. State Div. of Hous. & Cmty. Renewal, 21 N.Y.3d 649 (2013) ................................................................... 30

Nunez v. Giuliani, 91 N.Y.2d 935 (1998) ............................................................. 50, 51

Pierson v City of N.Y., 56 N.Y.2d 950 (1982) ................................................................... 45

v

TABLE OF AUTHORITIES (cont’d) Cases Page(s)

Riverside Syndicate Inc. v. Munroe, 10 N.Y.3d 18 (2008) .............................................................. 20, 33

Surace v. Danna, 248 N.Y. 18 (1928) (Cardozo, C.J.) ............................................. 40

Thornton v. Baron, 5 N.Y.3d 175 (2005) ........................................................ 20, 33, 34

Tierney v J.C. Dowd & Co., 238 N.Y. 282 (1924) .................................................................... 45

Tillotson v Wolcott, 48 N.Y. 188 (1872) ...................................................................... 40

Toledano v. Kittay, 299 B.R. 284 (Bankr. S.D.N.Y. 2003) ......................................... 27

Yates County Nat’l Bank v. Carpenter, 119 N.Y. 550 (1890) .................................................................... 40

Constitutions

N.Y. Const. art. XVII, § 1 ................................................................ 48

U.S. Const. art. I, § 8, cl. 4 .............................................................. 25

Statutes

State

Ch. 568, McKinney’s 2010 N.Y. Laws 1461 ................................... 10

C.P.L.R. 5206 ................................................................................... 43

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TABLE OF AUTHORITIES (cont’d) Statutes Page(s)

Debtor & Creditor Law § 282 ..................................................................................... passim § 283 ............................................................................................. 26 § 285 ............................................................................................. 10

General Business Law § 352-eeee ................................................... 11

Real Property Law § 226-b(1) ......................................................... 35

Real Property Tax Law § 467-b........................................... 13, 18, 50

Social Services Law § 2(18) (1982) ............................................................................... 40 § 137 ............................................................................................. 39 § 143-b ......................................................................................... 40

Unconsol. L. (McKinney) § 8621 et seq. ............................................................................... 17 § 8622 ............................................................................... 16, 18, 38 § 8623 ........................................................................................... 19 § 8624 ........................................................................................... 17 § 8625 ........................................................................................... 21 § 8626 ..................................................................................... 17, 49 § 8628 ........................................................................................... 17 § 8631 ........................................................................................... 20 § 8632 ........................................................................................... 17

Federal

11 U.S.C. § 323 ............................................................................................... 9 § 363 ................................................................................... 9, 27, 34 § 364 ............................................................................................... 9 § 365 ............................................................................. 9, 27, 34, 35 § 522 ................................................................................. 10, 26, 37 § 541 ................................................................................. 25, 28, 30

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TABLE OF AUTHORITIES (cont’d) Statutes Page(s)

11 U.S.C. (cont’d) § 704 ........................................................................................ 9, 34 § 721 .............................................................................................. 9 § 724 .............................................................................................. 9 § 725 .............................................................................................. 9 § 726 .............................................................................................. 9 § 727 .............................................................................................. 9

Regulations

9 N.Y.C.R.R. § 2202.20 ............................................................................... 13, 18 § 2520.1 et seq. ........................................................................... 17 § 2520.6 ....................................................................................... 18 § 2520.11 ............................................................................... 21, 23 § 2521.1 ....................................................................................... 17 §§ 2522.2–2522.4 ......................................................................... 17 § 2522.4 ....................................................................................... 22 § 2522.5 ................................................................................. 17, 43 § 2522.8 ....................................................................................... 17 § 2523.2 ................................................................................. 18, 22 § 2523.3 ....................................................................................... 14 § 2523.4 ....................................................................................... 18 § 2523.5 ............................................................................... passim § 2524.1 ..................................................................... 14, 17, 42, 43 § 2524.3 ........................................................................... 17, 22, 24 § 2524.4 ................................................................................. 21, 24 § 2525.5 ........................................................................... 14, 18, 36 § 2526.1 ....................................................................................... 22

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TABLE OF AUTHORITIES (cont’d) Regulations Page(s)

N.Y.C. Admin. Code § 26-501 et seq. ........................................................................... 17 § 26-502 ....................................................................................... 19 § 26-504.1 .............................................................................. 21, 24 § 26-504.2 ............................................................................... 21-23 § 26–509 ........................................................................... 13, 18, 50 § 26-511 ........................................................................... 22, 24, 49 § 26-516(a) ................................................................................... 22

Miscellaneous Authorities

Assembly Sponsor’s Mem.in Support of Legislation, reprinted in Bill Jacket Jacket for ch. 540 (1982) ..................... 41

David U. Himmelstein et al., Medical Bankruptcy in the United States, 2007: Results of a National Study, 122 Am. J. of Med. 741 (2009) ................................................................... 41

DHCR, Fact Sheet # 21 Special Rights of Senior Citizens, www.nyshcr.org/Rent/factsheets/orafac21.htm. ........................ 50

DHCR, Fact Sheet #1: Rent Stabilization and Rent Control, www.nyshcr.org/Rent/factsheets/orafac1.htm. .................... 16, 23

DHCR, Fact Sheet #26: Guide to Rent Increases for Rent Stabilized Apartments in New York City, www.nyshcr.org/Rent/factsheets/orafac26.htm. .................. 22, 23

Gov.’s Approval Mem., reprinted in Bill Jacket for ch. 540 (1982) ........................................................................................... 41

Josh Barbanel, Bankruptcy Case Tests Tenants’ Protections, Wall St. J., May 23, 2014 ............................................................ 13

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TABLE OF AUTHORITIES (cont’d) Miscellaneous Authorities Page(s)

Letter from C. von Bruen to J. McGoldrick, Counsel to the Governor (July 2, 1982), reprinted in Bill Jacket for ch. 540 (1982) .................................................................................... 44

N.Y.C. Office of the Mayor, The CEO Poverty Measure, 2005–2012: An Annual Report (Apr. 2014), www.nyc.gov/html/ceo/downloads/pdf/ceo_poverty_measure_2005_ 2012.pdf. ........................................................................ 47

N.Y. City Dep’t of Hous. Pres. & Dev., Senior Citizen Rent Increase Exemption (SCRIE) Program Information for Tenants, http://www.nyc.gov/html/hpd/html/tenants/scrie.shtml ..... 13, 51

N.Y. City Dep’t of Finance, Senior Citizen Rent Increase Exemption (SCRIE) Program Information for Tenants, www.nyc.gov/html/dof/html/property/property_tax_reduc_drie_sc_ te.shtml. ........................................................................ 51

N.Y. City Rent Guidelines Bd., 421a and J-51 FAQ, www.nycrgb.org/html/resources/faq/421a-J51.html. ................ 24

N.Y. City Rent Guidelines Bd., Changes to the Rent Stabilized Housing Stock in New York City in 2013, www.nycrgb.org/downloads/research/pdf_reports/changes2014.pdf. ...................................................................................... 52

N.Y. City Rent Guidelines Bd., Co-ops and Condos FAQ, www.nycrgb.org/html/resources/faq/co-ops.html....................... 12

N.Y. City Rent Guidelines Bd., Housing NYC: Rents, Markets & Trends 2012, http://www.nycrgb.org/html/research/cresearch.html19, 20, 46, 47

Statutes § 291, 1 McKinney’s Cons. Laws of N.Y. ......................... 40

Statutes § 231, 1 McKinney’s Cons. Laws of N.Y. ......................... 39

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TABLE OF AUTHORITIES (cont’d) Miscellaneous Authorities Page(s)

Statutes § 236, 1 McKinney’s Cons. Laws of N.Y. ......................... 39

INTEREST OF AMICI CURIAE

This case presents the important question whether a federal

bankruptcy trustee may compel a bankrupt rent-stabilized tenant

to relinquish the protections of rent stabilization in exchange for a

payment from her landlord to the bankruptcy estate. The State of

New York and City of New York as amici curiae submit this brief

to explain that the trustee may do no such thing, both because

under New York law the protections of rent stabilization are not

property that may be transferred for value and included as part of

the bankruptcy estate, and because, assuming those protections

constitute property, they can be exempted from the bankruptcy

estate under New York law as a local public assistance benefit.

The rent stabilization laws at issue in this case were enacted

by the State of New York and City of New York. The State’s

Division of Housing and Community Renewal (DHCR) enforces

the rent stabilization laws, and the City’s Department of Housing

Preservation and Development (HPD) administers a range of

programs in which owners may be required to make dwelling

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units subject to the rent stabilization laws as a condition of

receiving tax incentives and other benefits.

In order to preserve access to affordable housing and prevent

dislocation of long term residents, the state and city rent

stabilization laws regulate the rents that can be charged for

certain apartments, confer protections on the tenants in those

apartments, provide succession rights to family members co-

residing in those apartments with the chief tenant, and establish

exclusive criteria and procedures for removing an apartment from

the rent-stabilization program. Rent stabilization laws also

provide housing security to the City’s vulnerable low-income,

senior-citizen, and disabled tenants, by giving them additional

rights and benefits aimed at preventing their dislocation, eviction,

harassment, and homelessness.

The State and City have a strong interest in protecting that

regulatory program and preventing the violation of its

requirements. In New York City, rent stabilization plays a critical

role in maintaining socioeconomic diversity and neighborhood

cohesion and continuity. Over two-thirds of city residents are

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renters rather than homeowners, and they must compete for

housing in a market characterized by high average rents and very

low vacancy rates. Without the benefits and protections of rent

regulation programs such as rent stabilization, many lower- and

middle-income New Yorkers would be priced out of the city

altogether. The result would be a metropolis largely consisting of

the very rich and very poor, and lacking in the social glue that

working class, middle class, and long-term residents tend to

provide. True to its name, rent stabilization thus stabilizes not

only individual tenancies but also the city’s neighborhoods,

families and communities.

In this case, the bankruptcy trustee, purporting to exercise

the rights of the bankrupt tenant, has entered into an agreement

with a landlord that seeks to strip the debtor of her rights under

the rent-stabilization program, eliminate the succession right of

her co-resident son, and end the rent-stabilized status of the

debtor’s apartment in contravention of the rent stabilization laws.

Amici New York State and New York City have an important

interest in ensuring that rent stabilization rights are not treated

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as property to be disposed of by a bankruptcy trustee, because the

contrary outcome would undermine the provisions and public

policies of the rent stabilization scheme.

QUESTION CERTIFIED TO THIS COURT

The Second Circuit certified the following question:

“Whether a debtor-tenant possesses a property interest in the

protected value of her rent-stabilized lease that may be exempted

from her bankruptcy estate pursuant to New York State Debtor

and Creditor Law Section 282(2) as a ‘local public assistance

benefit.’” In re Santiago-Monteverde-Monteverde, 747 F.3d 153,

159 (2d Cir. 2014).

By Order dated May 13, 2014, this Court accepted

certification of the question pursuant to § 500.27 of this Court’s

Rules.

The certified question has two parts: (a) whether a debtor-

tenant’s rent stabilization rights have the attributes of property

includable in a bankruptcy estate, and, if so, (b) whether any such

property may be exempted from the debtor-tenant’s bankruptcy

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estate as a local public assistance benefit. Amici address each of

those questions in turn. First, the protected value of a rent-

stabilized lease—i.e., the value of the protections of the rent

stabilization laws—is not monetizeable property under New York

law. And second, even if rent stabilization protections were

somehow monetizable property, they would nonetheless be exempt

from the bankruptcy estate as a local public assistance benefit.

STATEMENT OF THE CASE

This case arises out of the Chapter 7 bankruptcy proceeding

of Mary Veronica Santiago-Monteverde, a low-income, elderly

widow living in a rent-stabilized apartment in New York City.

After Santiago-Monteverde filed her bankruptcy petition, her

landlord arranged with the bankruptcy trustee to purchase

Santiago-Monteverde’s interests in her rent-stabilized lease and

associated rights under the rent stabilization laws of New York

State and New York City, for the stated purpose of terminating

rent stabilization of her apartment.

6

Santiago-Monteverde then tried to designate the rent

stabilization rights associated with her lease as property

exempted from her bankruptcy estate. She invoked New York’s

exemption statute which, by its interaction with federal

bankruptcy law, allows New York debtors to protect from creditors

and bankruptcy trustees their “local public assistance benefit[s].”

Debtor & Creditor Law (DCL) § 282(2). The lower federal courts

approved the trustee’s motion to strike her exemption.1

On appeal, the Second Circuit certified to this Court a two

part question: first, whether the protected value of Santiago-

Monteverde’s rent stabilization rights is considered property

under state law; and second, if she possessed such an interest,

whether that interest was exempted from her bankruptcy estate

by DCL § 282(2). Under federal bankruptcy law, a right cannot be

part of the debtor’s bankruptcy estate unless state law creates a

1 The bankruptcy court subsequently approved the sale of Santiago-Monteverde’s rent stabilization rights, in a separate order that is not part of the appeal from which this certified question arises. The sale is stayed pending the resolution of the proceedings in this Court and the Second Circuit. (Appendix for Appellant (“A.”) 369.)

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monetizable property interest in that right. This Court, however,

has repeatedly held that state law does not create such an interest

in a tenant’s rent stabilization rights.

The Court has made clear that agreements to evade rent

stabilization laws—including agreements to treat an apartment as

having been deregulated when neither the substantive conditions

nor procedural requirements for deregulation have been met—

violate the important state policies served by those laws and are

thus legally invalid, regardless of whether the tenant is a party to

the agreement, and regardless of whether the tenant obtains any

benefit. And an attempt to circumvent or defeat rent stabilization

is clearly the substance of the agreement at issue here. What

Santiago-Monteverde’s landlord is attempting to purchase from

the bankruptcy trustee is the ability to terminate rent

stabilization of Santiago-Monteverde’s unit, eliminate the special

protections and benefits that Santiago-Monteverde receives in

connection with rent-stabilized tenancy, and cut off the succession

rights that her son has under the rent stabilization laws.

8

Moreover, even if rent stabilization rights were regarded as

property for bankruptcy purposes, those rights have all the

characteristics needed to qualify for exemption under DCL

§ 282(2). As this Court has repeatedly recognized, the Legislature

enacted the rent stabilization laws to help vulnerable New

Yorkers secure affordable housing. The rights and protections

conferred by those laws are thus properly understood as

“assistance” provided to a “local” population by a “public”

authority.

If DCL § 282(2) were meant to cover only streams of

payments, as the trustee suggests, the Legislature could easily

have used the specific word “payment,” as it did elsewhere in

§ 282. The Legislature’s choice of the broader term “benefit”

should not be disregarded, particularly in light of this Court’s

longstanding view that exemption statutes benefitting debtors

should be liberally construed.

9

STATEMENT OF THE CASE

A. Bankruptcy Procedure

Chapter 7 of the federal bankruptcy code establishes

procedures under which an insolvent debtor like Santiago-

Monteverde may discharge her debts by liquidating her assets and

using any available funds to pay creditors. See 11 U.S.C.

§§ 704(a)(1), 726, 727. “The filing of a bankruptcy petition under

Chapter 7 creates a bankruptcy ‘estate’ generally comprising all of

the debtor’s property.” Law v. Siegel, 134 S. Ct. 1188, 1192 (2014)

(citing 11 U.S.C. § 541(a)(1)). A trustee is appointed in a

Chapter 7 bankruptcy to be “the representative of the estate.”

11 U.S.C. § 323(a). The trustee must reduce the debtor’s property

to money, distribute funds to creditors, and close up the estate.

See id. § 704(a); see also id. §§ 363, 364, 365, 704, 721, 724, 725

(authority of trustee).

The bankruptcy code authorizes the debtor to “exempt”

certain kinds of property from the estate, enabling the debtor to

keep that property out of the control of the trustee and to retain

such property postbankruptcy. See Law, 134 S. Ct. at 1192 (citing

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11 U.S.C. § 522(b)(1)). Exempt property generally “is not liable”

for the payment of “any [prepetition] debt” or “any administrative

expense.” 11 U.S.C. § 522(c), (k). Federal law permits States to

enact their own exemption statutes to replace the federal

provision. Id. § 522(b). New York has chosen to provide its own

set of permissible exemptions for debtors domiciled in the State, in

§§ 282 and 283 of New York’s Debtor and Creditor Law. Debtors

domiciled in New York have the option of choosing either the

federal exemptions or New York exemptions.2 See DCL § 285.

Santiago-Monteverde chose to claim the exemptions under New

York law.

2 Before 2010, New York debtors did not have a choice between federal and state exemptions, but were restricted to using DCL § 282 and § 283. See Ch. 568, § 5, McKinney’s 2010 N.Y. Laws 1461, 1464.

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B. The Agreement Between the Bankruptcy Trustee and Landlord to Sell and Eliminate Santiago-Monteverde’s Rent Stabilization Rights

Santiago-Monteverde’s bankruptcy petition seeks to discharge

slightly over $23,000 that she owes in consumer debt, primarily to

credit card companies. (A. 34.) She owes her landlord nothing,

and apparently has remained current on her monthly rent for her

rent-stabilized apartment. See Santiago-Monteverde, 747 F.3d at

155. When Santiago-Monteverde and her husband originally

rented the apartment, it was a rental building; several decades

later, in about 1987, the building converted to cooperative

ownership status, and the shares pertaining to Santiago-

Monteverde’s apartment were purchased by an investor. (A. 109-

10.) Santiago-Monteverde and her husband remained as nonpur-

chasing rent-stabilized tenants pursuant to the terms of a

noneviction plan and state law, General Business Law § 352-eeee.

(A. 109.) Under state law, after a co-op conversion, apartments

occupied by rent stabilized tenants become deregulated upon

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vacancy.3 Prior to Santiago-Monteverde’s bankruptcy, the landlord

had made several unsuccessful attempts to evict her and thereby

terminate the rent-stabilized status of her apartment.4 (Debtor’s

Obj. to Proposed Order Approving Sale, Exhs. B-H, Bankr. ECF

No. 101.)

During proceedings in the bankruptcy court, Santiago-

Monteverde’s landlord approached the bankruptcy trustee with an

offer to purchase Santiago-Monteverde’s interests in her rent-

stabilized lease for slightly over $140,000.5 (A. 75-76, 94-95.) Josh

3 See N.Y. City Rent Guidelines Bd., Co-ops and Condos FAQ.

4 The landlord first asserted that Santiago-Monteverde could not remain in the apartment after her husband’s death, claiming that she was not an ordinary rent-stabilized tenant but occupied the unit only as a benefit of employment as the building superintendent. Next, the landlord sought to evict Santiago-Monteverde for nonpayment of rent. It appears that both eviction attempts by the landlord were discontinued when their lack of factual foundation was demonstrated.

5 After payment of the approximately $23,000 that Santiago-

Monteverde owes to her creditors (A. 34, 40), the remainder of that amount is slated for the bankruptcy trustee’s compensation and attorney’s fees (A. 374). (Hr’g Tr. at 11, 54 (Jan. 9, 2014), Bankr. ECF No. 126.)

13

Barbanel, Bankruptcy Case Tests Tenants’ Protections, Wall St. J.,

May 23, 2014, at A17 (reporting sale price). The trustee and

landlord agreed to replace Santiago-Monteverde’s rent stabilized

lease with a non-rent-stabilized lease under which she could have

a life tenancy at her existing rate but would be ineligible for the

public benefits associated with residence in a rent stabilized

apartment, such as the rental subsidies she receives through the

Senior Citizen Rent Increase Exemption (SCRIE) program.6 (A.

110, 119, 167). See also Real Property Tax Law § 467-b; 9

N.Y.C.R.R. § 2202.20; N.Y.C. Admin. Code § 26–509. The lease

substitution would also render Santiago-Monteverde ineligible for

the special protections against harassment and eviction conferred

upon rent-stabilized tenants by the rent stabilization laws.7 See 9

N.Y.C.R.R. §§ 2524.1, 2523.3, 2525.5. (A. 358, 368.)

6 “Senior citizens who lease apartments that are not rent regulated are not eligible for SCRIE benefits.” N.Y. City Dep’t of Finance, Senior Citizen Rent Increase Exemption (SCRIE) Program Information for Tenants.

7 For example, the lease substitution would leave Santiago-Monteverde vulnerable to eviction if a creditor of her landlord foreclosed on the landlord’s co-op shares, including those

(continued on next page)

14

The trustee and landlord further agreed, as an express term

of the sale, that no relative of Santiago-Monteverde’s would be

able to exercise the succession rights conferred by the rent

stabilization laws, which permit certain co-residing family mem-

bers to accede to a rent-stabilized lease when the original tenant

vacates. (A. 358, 368.) See also 9 N.Y.C.R.R. § 2523.5(b)(1). That

term aims to eliminate the succession rights of Santiago-

Monteverde’s adult son, who has lived with her since 2006. (Hr’g

Tr. at 67-68, 73 (Nov. 12, 2013), Bankr. ECF No. 118.)

Santiago-Monteverde objected to this arrangement and

sought to amend her bankruptcy filings to exempt the value of her

rent-stabilization rights, by designating these a “local public

pertaining to Santiago-Monteverde’s apartment. (A. 127, 267-68.) The board of her building apparently has an outstanding money judgment against the landlord for nonpayment of maintenance fees. (A. 267-68.) The board has represented that it does not presently have any intent to foreclose on the shares and evict Santiago-Monteverde. (A. 356.) But that representation is not legally binding, and even if the co-op does not seek foreclosure and eviction, another current or future judgment creditor of the landlord could do so.

15

assistance benefit” protected by DCL § 282(2). (A.73, 95.) The

bankruptcy trustee moved to strike the exemption.

The bankruptcy court agreed with the trustee that an

exemption under DCL § 282(2) was not available. (A93-101.) The

district court affirmed. (A. 154-57.)

On appeal, the Second Circuit noted that the question in

dispute implicated several unsettled issues about the state law

attributes of a debtor-tenant’s rent-stabilization rights—

specifically, (1) whether rent-stabilization rights have the

characteristics of property includable in a bankruptcy estate and,

if so, (2) whether state law permits a debtor to exempt that

property from the bankruptcy estate as a local public assistance

benefit. See 747 F.3d at 157-58. Because no New York court had

directly addressed these issues, the Second Circuit certified the

question to this Court. The Second Circuit invited this Court to

“reformulate or expand the certified question as it deems

appropriate.” Id. at 159.

16

C. New York’s Rent Stabilization Laws

The central aim of rent stabilization is to protect the many

New Yorkers who struggle to afford suitable housing and thereby

promote public health, safety and welfare.8 Unconsol. L. § 8622

(McKinney) (legislative findings); Manocherian v. Lenox Hill

Hosp., 84 N.Y.2d 385, 389 (1994) (rent stabilization laws seek “to

protect dwellers who could not compete in an overheated rental

market, through no fault of their own”).

1. The Rent-Stabilization Rights and Protections Provided by New York State and New York City

In New York City, the rent stabilization scheme is a product

of state and city laws, and is administered by DHCR. State law

incorporates by reference the city’s Rent Stabilization Law (RSL)

8 Most rent stabilized units in the State are in New York City, but the program also applies in some parts of Nassau, Westchester and Rockland counties. See DHCR, Fact Sheet #1: Rent Stabilization and Rent Control.

17

of 1969, as amended.9 And state law directs DHCR to enforce rent

stabilization in New York City as “provided in” the RSL.

Unconsol. L. §§ 8628(c), 8632(b) (McKinney). Additional regula-

tions governing rents and other aspects of tenancies are set forth

in the Rent Stabilization Code (RSC), 9 N.Y.C.R.R. § 2520.1 et seq.

The RSL and RSC provide procedures for establishing the

legal maximum rent for each unit and for calculating permissible

rent increases. Id. §§ 2521.1, 2522.2–2522.4, 2522.8. They give

an occupying tenant the right to renew a rent-stabilized lease.

Id. §§ 2522.5(b), 2523.5(a) & (c)(1), 2524.1(a). And they protect

tenants against eviction, id. §§ 2524.1, 2524.3, diminution in

services by the landlord, id. §§ 2520.6(r), 2523.2, 2523.4, and

harassment, id. § 2525.5. As relevant here, the RSC also gives

certain family members the right to succeed a vacating tenant

under a new rent-stabilized lease. Id. § 2523.5(b)(1). In these

ways, rent stabilization fulfills the Legislature’s aims of

9 See Unconsol. L. § 8621 et seq. (McKinney’s) (Emergency Tenant Protection Act of 1974, as amended); id. §§ 8624(c), 8626(b)-(c); see also N.Y.C. Admin. Code § 26-501 et seq. (codifying the RSL).

18

preventing “uncertainty, hardship and dislocation” for New

Yorkers and “forestall[ing] profiteering, speculation and other

disruptive practices.” Unconsol. L. § 8622 (McKinney’s).

The rent stabilization laws give a number of additional

rights and benefits to lower-income elderly or disabled tenants

residing in rent-stabilized apartments. (See infra at 48-52.)

Santiago-Monteverde, for example, participates in the Senior

Citizen Rent Increase Exemption (SCRIE) program. (A. 110, 119,

167.) SCRIE buffers its beneficiaries against rent increases by

covering a portion of their rent. See Real Property Tax Law 467–

b; 9 N.Y.C.R.R. § 2202.20; N.Y.C. Admin. Code § 26–509.

The Legislature has provided that rent stabilization may be

implemented in a given locality only if the local legislative body

determines that there is currently “a public emergency requiring

the regulation of residential rents.” Unconsol. L. § 8623

(McKinney’s). The City Council has examined the state of the

residential rental market every three years starting in 1974, and

has on each occasion reaffirmed that New York City faces a

housing emergency. See N.Y.C. Admin. Code § 26-502.

19

At the time of the City Council’s most recent determination,

in 2012, over two-thirds of the housing units in New York City

were rentals—double the national average—and the rental

market was characterized by high average rents and low vacancy

rates. See N.Y. City Rent Guidelines Bd., Housing NYC: Rents,

Markets & Trends 2012, at 60, 71 (hereinafter Housing NYC ). A

large percentage of the City’s residents had incomes below the

poverty line (20.1 percent in 2010, about one-third higher than the

national average), id. at 59—far more than could be helped by

public housing and federal housing subsidies.10 And over half of

rental households in the City had unaffordable rent-to-income

ratios, as measured by the federal Department of Housing and

Urban Development’s benchmark for housing affordability. Id. at

61.

10 In 2014, for example, the waiting lists for these programs were in the hundreds of thousands. See Corrected Br. for Amici Curiae New York State Legislators at 9 & n.18.

20

2. The State and City’s Efforts to Preserve Affordable Housing By Retaining Control of Deregulation

To help effectuate the rent stabilization scheme’s aims of

preserving affordable housing and preventing dislocation, the

Legislature has provided that “[a]ny provision of a lease or other

rental agreement which purports to waive a tenant’s rights under

[the rent stabilization laws] or regulations promulgated pursuant

thereto shall be void as contrary to public policy.” Unconsol. L.

§ 8631 (McKinney’s). This Court’s cases have recognized and

given effect to the Legislature’s intent to make the scheme’s

deregulation rules and procedures the exclusive means for

transitioning a rent-stabilized unit into the regular residential

rental market. Thornton v. Baron, 5 N.Y.3d 175, 182 (2005); see

also Riverside Syndicate Inc. v. Munroe, 10 N.Y.3d 18, 23 (2008);

Jazilek v. Abart Holdings LLC, 10 N.Y.3d 943 (2008).

DHCR supervises the deregulation of rent-stabilized

apartments. Its preapproval or the approval of a court is required

in many instances.

21

Occupied units can be transitioned out of rent stabilization

through “high rent/high income” deregulation. The landlord must

file a petition and DHCR must certify—after an administrative

proceeding and a review by the New York State Department of

Taxation and Finance—that the legal regulated rent is over

$2,500 per month and the tenant’s income has been over $200,000

for the two preceding calendar years. See 9 N.Y.C.R.R.

§ 2520.11(s)(2); N.Y.C. Admin. Code §§ 26-504.1, 26-504.2.

Alternatively, a landlord may prove to a court that the

tenant no longer occupies the unit as a primary residence. In that

event, the rent-stabilized lease need not be renewed and the

tenant may be subject to eviction, which could then lead to

deregulation under provisions relating to vacant units. See

Unconsol. L. § 8625(a)(11) (McKinney’s); 9 N.Y.C.R.R. § 2524.4(c).

A rent-stabilized tenant may also be evicted—and vacancy

deregulation procedures made available—in the event of wrongful

acts of a tenant, see 9 N.Y.C.R.R. § 2524.3, or withdrawal of the

unit from the rental market through demolition or occupancy by

the owner, see id. §§ 2524.4, 2524.5.

22

Vacant units can be deregulated in several ways. As

relevant to this case, after a co-op conversion, apartments

occupied by rent-stabilized tenants become deregulated upon

vacancy. The most common way that a vacant unit becomes

deregulated is so-called “high rent deregulation.” N.Y.C. Admin.

Code § 26-26-504.2(a). A landlord who has improved the

individual unit or the building during the vacancy may raise the

legal regulated rent by specified amounts.11 See 9 N.Y.C.R.R. §§

2522.4(a), 2522.8; N.Y.C. Admin. Code § 26-511(c)(5-a), (c)(6)(b),

(c)(13). And landlords with a vacant rent-stabilized unit are also

entitled to specified vacancy rent increases.12 If one or more of

these approved methods of rent increase brings the legal regulated

11 A rent increase based on building improvements requires DHCR’s approval. See DHCR, Fact Sheet #26: Guide to Rent Increases for Rent Stabilized Apartments in New York City.

DHCR determines the appropriateness of rent increases based on unit improvements when and if the increases are challenged by the incoming tenant through an “overcharge complaint.” See 9 N.Y.C.R.R. § 2526.1; N.Y.C. Admin. Code § 26-516(a).

12 See DHCR, Fact Sheet #26: Guide to Rent Increases for Rent Stabilized Apartments in New York City, supra.

23

rent above $2,500 per month during a vacancy, the unit is

deregulated. See 9 N.Y.C.R.R. § 2520.11(r); N.Y.C. Admin. Code

§ 26-504.2. The incoming tenant and DHCR must be given notice

of such deregulation. See 9 N.Y.C.R.R. § 2520.11; N.Y.C. Admin.

Code § 26-504.2(b). DHCR may then review the deregulation in

an overcharge proceeding initiated by the tenant or on DHCR’s

own initiative.

Special rules apply to the deregulation of apartments that

are rent-stabilized as a condition of the owner’s or developer’s

participation in a New York City tax abatement program.13 If the

tax abatement ends when the unit is vacant, the unit becomes

deregulated. If the unit is occupied when the tax abatement ends,

the landlord may deregulate it at the end of the rent-stabilized

13 Participation in tax abatement programs is one way that units can be subject to rent stabilization. Other units are rent stabilized as a result of being built after 1947 and before 1974, or because they transitioned out of rent control. See DHCR, Fact Sheet #1: Rent Stabilization and Rent Control, supra.

24

lease term the unit providing certain notices were included in the

tenant’s lease.14

If there are no grounds for deregulating, the unit remains

subject to rent stabilization. If a tenant is in occupancy and has

not committed misconduct such as nonpayment of rent, the

landlord must offer a renewal rent-stabilized lease. See 9

N.Y.C.R.R. §§ 2524.3, 2524.4; N.Y.C Admin. Code § 26-511(c)(9).

If a unit is rented to a new tenant after a vacancy, the new tenant

is entitled to a rent stabilized lease unless the apartment has been

deregulated through one of the pathways described above.

These rules and procedures and their exclusivity seek to

conserve the stock of affordable housing, protect tenants against

illegal rent increases or harassment, and allow appropriate

agencies and courts to oversee the deregulation process.

14 N.Y.C. Admin Code § 26-504.1. See N.Y. City Rent Guidelines Bd., 421a and J-51 FAQ.

25

ARGUMENT

POINT I

STATE LAW PLAYS AN IMPORTANT ROLE IN THE BANKRUPTCY PROCESS

The U.S. Constitution gives Congress the power to make

nationally uniform law regarding bankruptcy, see U.S. Const. art.

I, § 8, cl. 4, and Congress has responded with a detailed statutory

framework that gives federal courts exclusive jurisdiction over the

bankrupt’s estate, which the code defines to include “all legal or

equitable interests of the debtor in property as of the

commencement of the case.” 11 U.S.C. § 541(a)(1); see Cent. Va.

Cmty. Coll. v. Katz, 546 U.S. 356, 363-64 (2006). Nevertheless,

States and state law have a critically important role in

determining the rights and duties of debtors, creditors, and

trustees in bankruptcy proceedings.

As relevant to Santiago-Monteverde’s case, state law is

significant in three principal areas. First, state law is the primary

source for determining what constitutes the property of the debtor

that becomes part of the bankruptcy estate. Butner v. United

States, 440 U.S. 48, 54-55 (1979). As the U.S. Supreme Court has

26

observed, “[p]roperty interests are created and defined by state

law [and] [u]nless some federal interest requires a different result,

there is no reason why such interests should be analyzed

differently simply because an interested party is involved in a

bankruptcy proceeding.” Id. at 55.

Second, state law may determine what property the debtor

can exempt from the estate and thus protect from creditors.

Federal law provides that the States may enact exemption

provisions, 11 U.S.C. § 522(b), and New York has chosen to do so,

DCL §§ 282, 283. Federal bankruptcy law gives debtors domiciled

in such states the option of choosing either the federal exemptions

or their State’s exemptions, see 11 U.S.C. § 522(b), and Santiago-

Monteverde chose to claim the exemptions allowed under New

York law.

Third, after all property that is part of the debtor’s estate is

identified, and any exempted property is put to the side, state law

helps determine whether and how the trustee may deal with the

remaining property and property interests of the debtor in order

to repay creditors. For example, state law may function to block

27

certain sales of property by the trustee, see 11 U.S.C. § 363(f), and

state law helps determine whether the trustee may “assume or

assign any executory contract or unexpired lease of the debtor,” id.

§ 365(c)(1). See, e.g., Santiago-Monteverde, 747 F.3d at 157 (noting

an unresolved question as to whether New York rent stabilization

laws may limit the bankruptcy trustee’s power to assume, assign,

or sell a debtor’s rent-stabilized lease and associated rights).

In recent years, some federal bankruptcy trustees have

sought to monetize the rent-regulated leases and rent regulation

rights of bankrupt New York tenants in order to pay creditors and

their own administrative fees. See Toledano v. Kittay, 299 B.R.

284 (Bankr. S.D.N.Y. 2003); In re Stein, 281 B.R. 845 (Bankr.

S.D.N.Y. 2002). Those federal bankruptcy proceedings were not

appealed to the Second Circuit—the only court with the power to

certify issues of state law to this Court. Accordingly, this Court

has not yet had the opportunity to consider whether state law

permits rent stabilization to be defeated by bankruptcy

proceedings.

28

POINT II

STATE LAW DOES NOT CREATE ANY MONETIZABLE PROPERTY INTEREST IN THE CIRCUMVENTION OF RENT STABILIZATION LAWS

The first part of the certified question concerns whether the

rent stabilization rights and interests that the trustee seeks to sell

are monetizable interests of the debtor under state law. If not, the

trustee seeks to sell something that is not properly treated as part

of the bankruptcy estate, and the second part of the certified

question—concerning the availability of an exemption under DCL

§ 282(2)—is never presented.

The bankruptcy estate that the trustee is authorized to

manage includes “all legal or equitable interests of the debtor in

property as of the commencement of the case.” 11 U.S.C.

§ 541(a)(1). Unless a federal statute or policy requires otherwise,

state law defines property and property interests for the purposes

of the federal bankruptcy code. See Barnhill v. Johnson, 503 U.S.

393, 398 (1992); Butner, 440 U.S. at 54-55.

Federal appellate courts treat interests created by state law

as “property” for purposes of 11 U.S.C. § 541(a) if the interest

29

potentially has monetary value. See In re The Ground Round,

Inc., 482 F.3d 15, 18 (1st Cir. 2007); In re Nejberger, 934 F.2d

1300, 1302 (3d Cir. 1991); In re Barnes, 276 F.3d 927, 928 (7th Cir.

2002). Federal courts will not necessarily defer to “‘[t]he label . . .

that state law affixes to a particular interest.’” 15 Ground Round,

482 F.3d at 17 (quoting Nejberger, 934 F.2d at 1302). “‘The

principal question is whether the substance of the right or interest

in question brings it within the scope of estate property under the

Bankruptcy [Code].’” Id. at 17 (quoting Nejberger, 934 F.2d at

1302); see also Barnes, 276 F.3d at 928 (finding that a liquor

license was property of the bankruptcy estate because it was a

“marketable asset” despite state law and state cases explicitly

providing “that liquor licenses are not ‘property’”).

Here, the record shows that the contemplated sale has two

components. The first component is the ability to cut off the rent

15 Thus, whether New York law denominates rent-stabilization rights “personal” and “statutory” as opposed to “property” rights (see Br. of Amici Curiae N.Y. City Bankruptcy Assistance Project and MYF Legal Services, Inc. at 12-16) may not affect whether those rights are part of the bankruptcy estate.

30

stabilization-based succession rights of Santiago-Montevede’s co-

resident son. The second component is the ability to terminate

Santiago-Monteverde’s rent-stabilized lease under circumstances

where the rent stabilization laws would not authorize termination.

Both components implicate rights and interests that state law

does not treat as monetizable property of Santiago-Monteverde,

the debtor.

A. State Law Does Not Make the Succession Rights of Santiago-Monteverde’s Son the Property of Her Estate.

One of the central precepts of bankruptcy law is that “a

bankruptcy trustee succeeds only to the title and rights in

property that the debtor had at the time she filed the bankruptcy

petition.” In re Sanders, 969 F.2d 591, 593 (7th Cir. 1992)

(emphasis added). But it is clear that an important part of what

the trustee is trying to sell here is the right of Santiago-

Monteverde’s son to succeed to her rent-stabilized lease. (A. 368

(“Terms of Sale”).) Under state law, that right is plainly not an

“interest[] of the debtor” Santiago-Monteverde. 11 U.S.C.

§ 541(a)(1). Cf. Murphy v. N.Y. State Div. of Hous. & Cmty.

31

Renewal, 21 N.Y.3d 649, 653 (2013) (noting that rent-regulation

succession rights serve “the important remedial purpose of

preventing dislocation of long-term residents due to the vacatur of

the head of household”).

Undisputed testimony in the bankruptcy proceeding

established that Santiago-Monteverde’s adult son has lived with

his mother since 2006. (Hr’g Tr. at at 67-68, 73 (Nov. 12, 2013),

Bankr. ECF No. 118.) And by law, when the occupying tenant

vacates a rent-stabilized unit, a family member “who has resided

with the tenant in the housing accommodation as a primary

residence for a period of no less than two years . . . shall be

entitled to be named as a tenant on the renewal lease.” 9

N.Y.C.C.R. § 2523.5(b)(1). Santiago-Monteverde’s son clearly

qualifies as such a family member. See id. § 2520.6(o)(1) (defining

“family member” to include “son . . . of the tenant”). Moreover, as

these succession rules make clear, the succession right conferred

belongs him—as a “member of [the original tenant’s] family”—not

to Santiago-Monteverde, the original tenant, id. § 2523.5(b)(1).

32

B. State Law Does Not Treat Santiago-Monteverde’s Rent Stabilization Rights as a Monetizable Property Interest.

The district court correctly understood the residual interest

that Santiago-Monteverde’s landlord seeks to purchase from the

bankruptcy trustee as “the value of terminating the rent-

stabilization regime.” (A. 156.) To be clear, the landlord is not

seeking to buy out the rent-stabilized lease itself, to rent to

another tenant at a stabilized rate, for example. Rather, the

landlord wishes to purchase the ability to terminate the rights

that the rent stabilization laws confer on Santiago-Monteverde

and her son, and to remove Santiago-Monteverde’s apartment

from the rent stabilization program under circumstances where

deregulation is not authorized by state law. (A. 358, 361, 368.)

There cannot be any property interest in the ability to evade

state law in this manner. Indeed, this Court’s cases provide

exactly the opposite, holding that transactions seeking to

circumvent rent stabilization or alter legally required terms of a

rent-stabilized tenancy violate public policy and are therefore

invalid. In Riverside Syndicate, the Court held that an agreement

33

that settled an eviction suit by permitting the landlord to charge

excess rent to tenants who were using rent-stabilized apartments

as nonprimary residences was, “on its face, one to ‘waive the

benefit’ of rent stabilization, and is therefore void.” 10 N.Y.3d at

22. Similarly, in Thornton, the Court held that a lease provision

under which tenants falsely stipulated that they were not using

the apartments as their primary residences, thereby giving the

landlord grounds to temporarily remove their apartments from

rent stabilization, “[r]eflect[ed] an attempt to circumvent the Rent

Stabilization Law in violation of the public policy of New York”

and was therefore “void at its inception.” 5 N.Y.3d at 181.

Likewise, in Draper v. Georgia Properties, Inc., this Court voided a

lease provision that required a rent-stabilized tenant to refrain

from using the apartment as her primary residence so that the

apartment could be removed from rent stabilization. 94 N.Y.2d

809, 810-811 (1999), aff’g 230 A.D.2d 455, 456 (1st Dep’t 1997).

This Court’s cases make clear that “[a]n agreement by the

tenant to waive the benefit of any provision of the [rent

stabilization laws] . . . is void” as a matter of state law. Draper, 94

34

N.Y.2d at 811 (quoting 9 N.Y.C.R.R. § 2520.13); see also Jazilek,

10 N.Y.3d at 944 (stipulation permitting an allegedly illegal

sublessee to continue residing in a rent-stabilized apartment on

condition that he waive the benefits of rent stabilization “violates

the Rent Stabilization Code and is void as against public policy”).

So too any such agreement by a bankruptcy trustee, whom federal

bankruptcy law empowers to step into the shoes of the debtor for

the purpose of certain decisions and transactions regarding the

bankruptcy estate’s property. See, e.g., 11 U.S.C. §§ 363, 365, 704.

As this Court has emphasized, any “attempt to circumvent the

Rent Stabilization Law” and its rules about how units are

deregulated violates the public policy of the state and

“undermin[es] the statute’s very purpose of preserving a stock of

affordable housing.” Thornton, 5 N.Y.3d at 181-82.

In sum, state law does not treat the rights conferred by the

rent stabilization scheme—or the ability to circumvent or alter

those rights—as monetizeable assets. Cf. Braschi v. Stahl Assocs.

74 N.Y. 2d 201, 209 (1989) (noneviction provision of rent-control

laws “does not create an alienable property right that could be

35

sold, assigned or otherwise disposed of”). Rather, it holds that

attempts to evade such rights are legally invalid and contrary to

public policy. 16 This Court’s cases thus leave no doubt that if

there were no bankruptcy proceedings, the ostensible property

interests that the landlord seeks to buy here would not exist

because state law does not permit Santiago-Monteverde to sell the

ability to alter the terms of her rent-stabilized tenancy.17

16 In providing that agreements to evade rent stabilization rights cannot be validly consented to, state law imposes an additional obstacle to the trustee’s sale of Santiago-Monteverde’s rent-stabilized lease and rent-stabilization rights. Under federal bankruptcy law, a trustee cannot take possession of a debtor’s unexpired residential lease unless the landlord consents. See 11 U.S.C. § 365(c)(1) (trustee cannot “assume” unexpired lease of the debtor without consent of third party whom state law excuses “from accepting performance from or rendering performance to an entity”); Real Property Law § 226-b(1) (excusing landlord from accepting tenant’s assignment of a residential lease). But where, as here, the object of the landlord’s consent is to enable a violation of rent stabilization laws, New York law provides that no valid consent may be given. The federal law conditions for the trustee’s assumption of the lease thus cannot be met.

17 This case does not present, and we do not address, whether state law would permit a tenant like Santiago-Monteverde to accept payment in exchange for surrendering her rent-stabilized tenancy by vacating her rent-stabilized apartment. But we note that any attempt to compel such a surrender—regardless of whether the tenant is offered a payment in

(continued on next page)

36

An interest cannot be considered property of the estate if it

comes into existence only as a result of a bankruptcy filing. As the

U.S. Supreme Court has noted, in the absence of any federal

requirement to the contrary, property interests are not “analyzed

differently simply because an interested party is involved in a

bankruptcy proceeding.” Butner, 440 U.S. at 55. Whatever label

is given to the rights and interests that the trustee is purporting

to sell here, they are entirely a creation of the federal bankruptcy

process and do not exist in state law.

exchange—would contravene the same public policies as other attempts to evade the rent stabilization laws and may also violate state law prohibitions on the harassment of rent-stabilized tenants. See 9 N.Y.C.R.R. § 2525.5.

37

POINT III

RENT STABILIZATION RIGHTS QUALIFY FOR EXEMPTION FROM THE BANKRUPTCY ESTATE UNDER DCL § 282(2)

If contrary to the argument above Santiago-Monteverde’s

and her son’s rent stabilization rights are treated as monetizable

property for bankruptcy purposes, that property would

nonetheless be exempt from Santiago-Monteverde’s bankruptcy

estate under DCL § 282(2), as a local public assistance benefit.

By interaction of federal bankruptcy law and state law,

debtors domiciled in New York may exempt from their estate,

inter alia, interests in “a local public assistance benefit.” DCL

§ 282(2)(a); see also 11 U.S.C. § 522(b) (allowing States to define

for their residents which property is exempt from the bankruptcy

estate). Although neither the Debtor and Creditor Law nor the

General Construction Law defines that phrase, the text, purpose,

and legislative history of these laws and the rent stabilization

laws confirm that rent stabilization rights qualify under DCL

§ 282(2)(a) as “assistance” provided to a “local” population by a

“public” authority..

38

A. Rent Stabilization Rights Meet the Conditions for Exemption as a “Local Public Assistance Benefit”

Rent stabilization rights have all the characteristics

necessary to qualify as an exempt “local public assistance benefit”

under DCL § 282(2)(a). There can be no dispute that the

Legislature enacted the rent stabilization laws to help vulnerable

New Yorkers secure affordable housing and thereby to promote

public welfare. See Unconsol. L. § 8622 (McKinney’s) (legislative

findings). The rights and protections conferred by those laws are

thus properly understood as “assistance” provided to a “local”

population by a “public” entity acting under its authority to

protect public welfare.

The bankruptcy court held that the term “local public

assistance benefit” covers only individualized cash “payments,”

but that view is refuted by a careful examination of the statutory

text. When the Legislature meant to refer only to “payments,” it

used that term; for example, exempting in DCL § 282(2)(e) certain

“payments” under pension and other plans. The Legislature’s use

of the different and broader term “benefit” in DCL § 282(2)(a)

39

must therefore be understood to include benefits that are not

payments, because it is a basic canon of statutory construction

that the choice to use different words within a statute should be

presumed meaningful. See Matter of Tonis v. Bd. of Regents of

Univ. of State of N.Y., 295 N.Y. 286, 293 (1946); Statutes §§ 231,

236, 1 McKinney’s Cons. Laws of N.Y. A provision of the Social

Services law in effect when DCL § 282 was enacted further

confirms that where the Legislature intended to refer to only the

cash component of a public assistance program, it knew how to do

so. See Social Services Law § 137 (exempting from levy and

execution “[a]ll moneys or orders granted to persons as public

assistance”).

The Social Services Law in effect when DCL § 282(2)(a) was

enacted in 1982 provides additional evidence that the Legislature

understood the general term “public assistance” to denote much

more than just cash transfer payments. Specifically, the

definitions section of the Social Services Law provided that

“[p]ublic assistance and care includes home relief, veteran

assistance, aid to dependent children, medical assistance for

40

needy persons, institutional care for adults and child care granted

at public expense pursuant to this chapter.” Social Services Law

§ 2(18) (1982). Another provision of the Social Services Law, also

in effect in 1982, likewise uses the term “public assistance”

broadly—in that case, to include rent assistance remitted by the

government directly to the landlord. See Social Services Law

§ 143-b(1).

Even if the plain language of the statute left room for a

different construction, it is well-established that statutes

exempting property of a debtor from collection “are to be liberally

construed” to protect the debtor. Yates County Nat’l Bank v.

Carpenter, 119 N.Y. 550, 553 (1890); accord Surace v. Danna, 248

N.Y. 18, 20-21 (1928) (Cardozo, C.J.).18 Such a liberal construction

18 See also Genesee Valley Trust Co. v. Glazer, 295 N.Y. 219, 223 (1946) (exemption statute should be “liberally construed in order to effectuate the humane purpose embodied in the statute” (quotation marks omitted)); Tillotson v Wolcott, 48 N.Y. 188, 190 (1872) (“Public policy requires such a construction of the statute as will insure its full benefit to the debtor.”); Statutes § 291, 1 McKinney’s Cons. Laws of N.Y. (exemption laws “are to be liberally construed in favor of the beneficiary in order to carry out their apparent beneficent purpose”).

41

is warranted because the overriding purpose of a bankruptcy

exemption statute, such as DCL § 282, is to preserve for debtors

what is necessary to give them a reasonable chance to get a “fresh

start.” Gov.’s Approval Mem. at 1, reprinted in Bill Jacket for ch.

540 (1982); Assembly Sponsor’s Mem.in Support of Legislation at

1, reprinted in Bill Jacket, supra; see also Clark v. Rameker, 134 S.

Ct. 2242, 2244 (2014).

If DCL § 282(2) does not provide an exemption here, rent

stabilized households—of which there are nearly one million in

New York City—will be forced to choose between housing security

and the protections of bankruptcy in the event they fall into severe

financial distress.19 Bankruptcy cannot provide a “fresh start” to

New Yorkers in rent stabilized housing if it comes at the cost of

potential homelessness.

19 A recent nationwide survey of bankruptcy filers found that a majority were educated and had solid employment histories, but had needed to seek bankruptcy protection because of illness, injury or medical bills. See David U. Himmelstein et al., Medical Bankruptcy in the United States, 2007: Results of a National Study, 122 Am. J. of Med. 741, 743 (2009).

42

The trustee is also mistaken in asserting that Santiago-

Monteverde’s rent stabilization rights cannot be exempted under

DCL § 282 unless that provision expressly references rent-

stabilized or rent-regulated leases. See Br. for Resp. at 23-24.

The Legislature enacted DCL § 282 with the background

understanding that state law independently protected rent-

stabilized leases from creditors, making it unnecessary for the

Legislature to expressly mention such leases in the DCL’s

bankruptcy exemptions.

State law has long barred creditors from enforcing a money

judgment against the value of a rent-stabilized lease. The rent

stabilization laws provide that as long as the tenant of a rent

stabilized apartment pays the legal regulated rent due, the tenant

cannot be removed, except by order of an appropriate court and for

grounds specified in the RSL, the RSC or the Real Property

Actions and Proceedings Law. See 9 N.Y.C.R.R. § 2524.1(a), (c).

Satisfaction of a money judgment is not among the listed grounds

for removal. In addition, a rent-stabilized tenant is entitled to

renew his or her lease on a rent-stabilized basis, unless certain

43

specified grounds exist for nonrenewal; those grounds do not

include indebtedness to a judgment creditor. See id. §§ 2522.5(b),

2523.5(a) & (c)(1), 2524.1(a).

Rent-stabilized leases have thus been long protected from

direct action by judgment creditors and, when DCL § 282 was

enacted in 1982, there were no reported cases in which a

bankruptcy trustee sold a rent-regulated tenant’s rights for the

benefit of the tenant’s creditors. (The few reported cases have

occurred since the early 2000s. See supra at 27.) The Legislature

that enacted DCL § 282 accordingly had no reason to believe that

the protected value of a rent-stabilized lease could be reachable in

bankruptcy.20 Indeed, as the legislative history of DCL § 282

shows, although the rights and interests of tenants were

20 The trustee argues that, because C.P.L.R. 5206, incorporated by reference into DCL § 282, caps a New York county homeowner’s homestead exemption at $150,000, “it defies reason to assume that the legislature intended to create an unlimited exemption for rent-regulated leaseholds via DCL § 282(2).” Br. for Resp. at 24. But no proper comparison can be made between the imposition of a limit on a homestead exemption and the sale of a tenant’s rights under the rent stabilization laws. Capping a homestead exemption does not change the legal status of the home so that it may be unavailable for future purchasers to reside in.

44

frequently discussed and debated during consideration of the

statute, no suggestion was ever made that rent-regulated leases

could be available to creditors in bankruptcy unless the

Legislature took specific action to prohibit that practice.21

Respondent asserts that a bill that has been pending in the

Legislature for several years, which would amend DCL § 282 to

specifically exempt rent-regulated leases and associated rights up

to $150,000, shows that the current version of the statute does not

exempt them. But that argument fails for multiple reasons. First,

the views and intentions of the current Legislature cannot be

imputed to the Legislature that enacted DCL § 282 in 1982.

Second, statutes are often amended to clarify rather than change

21 To the contrary, a private citizen who wrote to the Governor’s Counsel to comment on the bill observed that “you cannot deprive a renter of a leasehold but you can deprive a homeowner of his home in a bankruptcy proceeding and that is why the courts and the Congress set forth the homestead exemption.” Letter from C. von Bruen to J. McGoldrick, Counsel to the Governor (July 2, 1982), at 2, reprinted in Bill Jacket, supra. Senator Jay P. Rolison, the Senate bill’s sponsor, appears to have made much the same point during legislative debates. See Sen. Debate Tr. at 4054 (Bill No. S8841) (“A tenant can’t be evicted. . . .”) (see Addendum).

45

their meaning, see, e.g., Tierney v J.C. Dowd & Co., 238 N.Y. 282,

288 (1924), or to expressly overrule decisional law construing the

statute in ways the Legislature did not intend, see, e.g., Pierson v

City of N.Y., 56 N.Y.2d 950, 958 (1982) (Meyer, J., dissenting).

Third, the pending bill has not even been enacted, so the current

Legislature as a whole has not yet conveyed its views, if any. And

this Court has repeatedly cautioned that no inference can properly

be drawn from the failure to enact a bill, as inaction can result

from a wide range of causes, including that the legislature may

have regarded the bill as unnecessary, or regarded it as

undesirable, or may not yet have given the bill its full attention

and considered judgment. See, e.g., Clark v. Cuomo, 66 N.Y.2d

185, 190 (1985); Brooklyn Union Gas Co. v N.Y. State Human

Rights Appeal Bd., 41 N.Y.2d 84, 89-90 (1976).

46

B. Like Other Public Assistance Benefits, the Rent Stabilization Laws Seek to Aid a Financially Vulnerable Population.

Contrary to the bankruptcy court and trustee’s assertions,

the rent stabilization laws serve purposes similar to those of the

other public assistance benefits exempted by New York law from a

bankruptcy estate. As this Court has recognized, the central

purpose of rent stabilization is to protect New Yorkers who

struggle to afford suitable housing. See, e.g., Matter of Badem

Bldgs. v. Abrams, 70 N.Y.2d 45, 52-53 (1987).

The bankruptcy court and the trustee are thus mistaken in

assuming that rent stabilization laws are not aimed at persons in

need and hence do not provide true public assistance benefits. (A.

98-99.) See also Br. for Resp. at 6, 13 n.3. Household income

statistics for New York City further show the error of that

assumption. In 2010, the median income for rent-stabilized

households was $37,000. See Housing NYC 2012, supra, at 60.

That figure was close to the City’s poverty threshold for a family of

two adults and two children ($31,039, according to the City’s most

47

recent calculation22), and was appreciably lower than the median

income for non-rent-regulated renting households ($52,260) and

home-owning households ($75,000), id.

The important public policies served by the rent stabilization

program should not be disregarded simply because the Legislature

has concluded that program’s purposes would be served by

extending benefits to those who, though not impoverished, would

not be able to live in high rent areas such as New York City

without assistance. Without the benefits and protections of rent

stabilization, many lower- and middle-income New Yorkers would

be priced out of the City altogether, diminishing neighborhood

cohesion and socioeconomic diversity.

When establishing a social welfare program, the Legislature

has “wide discretion in defining who is needy” and how to meet

those needs. Aliessa ex rel. Fayad v. Novello, 96 N.Y.2d 418, 428

22 N.Y.C. Office of the Mayor, The CEO Poverty Measure, 2005 – 2012: An Annual Report v (Apr. 2014). The City’s measure of poverty takes into account the expenses (e.g., medical care, child care, commuting, and housing) associated with living in New York City, as well as the benefits and tax credits available to city residents. See id. at 1-5.

48

(2001); see also N.Y. Const. art. XVII, § 1 (“The aid, care and

support of the needy are public concerns and shall be provided by

the state and by such of its subdivisions, and in such manner and

by such means, as the legislature may from time to time

determine.” (emphasis added)). And the Legislature similarly has

broad discretion when acting to regulate rents and other aspects

of tenancy pursuant to its police power authority to safeguard the

welfare of state residents. See generally A. E. F.’s Inc., v. City of

N.Y., 295 N.Y. 381, 385 (1946) (the Legislature “has a wide

discretion in determining the extent and nature of the regulations

necessary” when invoking its police powers).

The rent stabilization scheme’s deregulation procedures

confirm the program’s focus on households with relatively lower

incomes. Under the provisions for “high rent/high income

deregulation,” an owner can apply to end the rent regulated status

of a unit if the unit rents for above a certain amount and the

tenants’ annual incomes in two successive years exceed a given

threshold. (See supra at 21.) Similarly, under “high rent/vacancy”

deregulation provisions, if a unit that rents for more than a

49

certain amount per month becomes vacant, the owner can apply to

have it deregulated. (See supra at 22-23.)

Other provisions of the rent stabilization laws confer special

rights, protections, and benefits on low-income tenants who are

also elderly or disabled. The amount that such tenants can be

required to pay for a security deposit is limited by law, see

Unconsol. L. § 8626(f) (McKinney’s), and they can establish

succession rights more easily, see 9 N.Y.C.R.R. § 2523.5(b). And

where a landlord seeks to displace such a tenant in order to

recover a rent-regulated apartment for personal use, the landlord

must offer the tenant “an equivalent or superior housing

accommodation at the same or lower regulated rent in a closely

proximate area.” Id. § 2524.4(a)(2); see also N.Y.C. Admin. Code §

26–511(c)(9)(b).

Elderly or disabled low-income tenants of rent-stabilized

(and rent-controlled) apartments are also eligible to participate in

the SCRIE program. SCRIE buffers such tenants against rent

increases by covering a portion of their rent. The covered amount,

which represents the difference between the amount a tenant is

50

required to pay under the SCRIE program and the actual rent, is

remitted to the tenant’s landlord through a property tax

abatement credit. See Real Property Tax Law § 467–b; N.Y.C.

Admin. Code § 26–509; see also Nunez v. Giuliani, 91 N.Y.2d 935,

937 (1998).23

Rent stabilization thus does in fact aid financially vulnerable

populations, just as other public assistance benefits schemes do.

The trustee’s hypothetical suggestion (Br. for Resp. 18) that a

“billionaire” could conceivably occupy a rent stabilized apartment

asks the Court to ignore how high income deregulation functions

in the rent stabilization scheme. But even if the trustee’s

suggestion had any basis, that would not make rent stabilization

any less a public assistance benefit. Billionaires are eligible for

Medicare, for example, and other paradigmatic schemes of public

assistance. But the possible existence of some very wealthy

outliers in the class of beneficiaries does not disqualify rent

23 Additional benefits for senior citizens under the rent stabilization laws are detailed in DHCR, Fact Sheet # 21 Special Rights of Senior Citizens.

51

stabilization benefits or any other benefits from the exemption for

local public assistance benefits.

POINT IV

SANTIAGO-MONTEVERDE’S SENIOR CITIZEN RENT INCREASE EXEMPTION BENEFITS ARE PLAINLY EXEMPT UNDER DCL § 282(2)

Even if the Court does not find that all rent stabilization

rights of tenants are exempt local public assistance benefits,

Santiago-Monteverde’s SCRIE benefits are plainly exempt.

SCRIE has the type of income eligibility requirement that the

bankruptcy court and trustee regard as the hallmark of a public

assistance benefit exempted under DCL § 282(2). See Br. for

Resp. at 6, 14-18; Nunez, 91 N.Y.2d at 937 (listing requirements

for beneficiaries detailed in the Administrative Code).24 Moreover,

it operates as a stream of payments in which the debtor has an

interest, see Nunez, 91 N.Y.2d at 937, another feature of public

24 See also N.Y. City Dep’t of Finance, Senior Citizen Rent Increase Exemption (SCRIE) Program Information for Tenants.

52

assistance benefits exempt under DCL § 282(2) according to the

trustee and bankruptcy court, see Br. for Resp. at 21.25

Santiago-Monteverde’s SCRIE rights thus qualify for

exemption under DCL § 282(2)(a) even under the bankruptcy

court’s and trustee’s view of the statute. Santiago-Monteverde

cannot receive SCRIE benefits unless she resides in rent-

regulated housing, however. That additionally shows why

Santiago-Monteverde’s general rent stabilization rights must be

understood to fall within the exemption at DCL § 282(2) as well.

25 Similar points would apply as to debtors who live in apartment units falling under programs where owners or developers elect to receive tax credits or other incentives in exchange for (1) making units subject to rent stabilization, and (2) in some cases, agreeing to devote them to low-income housing. See, e.g., N.Y. City Rent Guidelines Bd., Changes to the Rent Stabilized Housing Stock in New York City in 2013, at 9-12 (describing additions to rent stabilized housing stock through tax incentive and low-income housing programs).

53

CONCLUSION

For the foregoing reasons, this Court should hold, in answer

to the first part of the certified question, that (1) the succession

rights that the rent stabilization laws confer on a tenant’s family

are not property of the tenant and should not be put at issue if the

tenant alone files for bankruptcy, and (2) state law does not create

a monetizable property interest in the elimination by a third party

of a tenant’s rent stabilization rights and circumvention of state-

law deregulation procedures. In the alternative, if the Court

reaches the second part of the certified question, the Court should

hold that (3) DCL § 282(2) exempts both rent stabilization rights

and SCRIE benefits from bankruptcy as a “local public assistance

benefit.”

54

Dated: New York, NY September 15, 2014 BARBARA D. UNDERWOOD Solicitor General ANISHA DASGUPTA Deputy Solicitor General ANDREW KENT Senior Counsel to the Solicitor General

Respectfully submitted, ERIC T. SCHNEIDERMAN Attorney General of the State of New York

By: ____________________________ ANDREW KENT Senior Counsel to the Solicitor General

120 Broadway New York, NY 10271 (212) 416-8018

RICHARD DEARING Chief, Appeals Division SUSAN P. GREENBERG Senior Counsel of Counsel

ZACHARY W. CARTER Corporation Counsel of the City of New York 100 Church Street New York, New York 10007 (212) 356-2484

Reproduced on Recycled Paper

ADDENDUM

Pages from Senate Debate on L. 1982, ch. 540.

4053

obviously not, I think certainly owe them that . .

obligation, and I am going to oppose this.

I ·don't know who negotiated this

bill. And, Senator Rolison, your expertise on

this subject is far gre~ter than mine. But I

want you to .understand my vote is based upon what

I . understand to be very candid . and hone.st answers

on your part; but, unquestionably, this bill does

a disservice to my constituents, as I understand

it; and I would vote in the negative.

SENATOR ROLISON: Mr. President,

may I just --

ACTING PRESIDENT AUER: Senator

Rolison.

SENATOR ROLISON: May I respond

just to that for the moment. While I understand

what you are saying, Senator Gold, I don't think

if you look at the entire statut~ that that's

totally accurate, in the sense that we have

increased the automobile exemptions, for an

example, . from 1200, whi·ch was under the federal

statute, to 2400. That is a benefit.

PAULINE E . WlLLlMAN

CF.RTIJl'IED SHORTHAND REP01'TER

That's a

1.

4054

benefit that would help anyone, for example. A

tenant can't be evicted, back rent ls not

collectable. There is a number of things which I

think mitigate against the argument that you are

making, I think, in rather stark terms. While

~here may be some differences, yes, but I don't

think that it is nearly as dramatic as in those

terms as you pointed it out.

SENATOR LEICHTER: Mr. President.

ACTING PRESIDENT AUER: Senator

Leichter.

SENATOR LEICHTER: Yes, on the bill,

please. I don't think it's only a matter of

Senator Gold's constituents. I think it is a

matter of tHe people of the State of New York

bein~ injured by this bill. It's not a surprise

that the banks and that the Business Counci l is

actively push! n g for th i s bill , because- it is

definitely going to place persons who have the

misfortune of going into bankruptcy in these

economic times more and more people are going

into bankruptcy. They will have less assets,

PAU LINE E . W1LLlMAN

CERTIFIED S HORTHAND REPORT ER