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Santiago

‐ Monteverde v. Pereira



## In the 1 

# United States Court of Appeals

2



## For the Second Circuit 3

________ 4

5

August Term, 2013 6

No. 12

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8

I N RE : M ARY V ERONICA S ANTIAGO

‐ M ONTEVERDE

, 9

Debtor. 10

11

M ARY V ERONICA S ANTIAGO

‐ M ONTEVERDE

, 12

Debtor

‐ Appellant

, 13

14

v. 15

16

J OHN S. P EREIRA

, C HAPTER 7 T RUSTEE

, 17

Trustee

‐ Appellee. 18

________ 19

20

Appeal from the United States District Court 21

for the Southern District of New York. 22

No. 12 CV 4238

― P. Kevin Castel, Judge

. 23

________ 24

25

A RGUED : S EPTEMBER 23, 2013 26

D ECIDED : M ARCH 31, 2014 27

________ 28

292 No. 12

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Before: S ACK

, B.D. P ARKER

, and R AGGI

, Circuit Judges

. 1

________ 2

Appeal from a decision of the United States District Court for 3

the Southern District of New York (P. Kevin Castel, Judge ) affirming 4

a bankruptcy court’s order striking a debtor’s claim of entitlement to 5

an exemption of property from her estate. The debtor contends that 6

the value of her rent

‐ stabilized lease was exempt from her 7

bankruptcy estate as a “local public assistance benefit” within the 8

meaning of New York Debtor and Creditor Law § 282(2). The 9

bankruptcy court and district court determined that the value of a 10

rent

‐ stabilized lease did not fall within the exemption. We conclude 11

that the application of § 282(2) to New York’s rent stabilization laws 12

raises a question of New York State law that is appropriately 13

certified to the New York Court of Appeals. 14

Accordingly, we certify the question and stay resolution of 15

this appeal. 16

________ 17

R ONALD J. M ANN

, New York, NY (Kathleen G. 18

Cully, Kathleen G. Cully PLLC, New York, NY, 19

on the brief ), for Debtor

‐ Appellant

. 20

J. D AVID D ANTZLER

, J R

. (John P. Campo, Eric L. 21

Unis, on the brief ), Troutman Sanders LLP, New 22

York, NY, for Trustee

‐ Appellee

. 23

Ira L. Herman, Thompson & Knight LLP, New 24

York, NY, for Amicus Curiae New York City 25

Bankruptcy Assistance Project, supporting Debtor

‐ 26

Appellant. 273 No. 12

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Carolyn E. Coffey ( of counsel to Jeanette Zelhof), 1

MFY Legal Services, Inc., New York, NY, for 2

Amicus Curiae MFY Legal Services, Inc.

, supporting 3

Debtor

‐ Appellant. 4

________ 5

B ARRINGTON D. P ARKER

, J R

., Circuit Judge : 6

In this appeal we consider whether the value inherent in a 7

New York City tenant’s rent

‐ stabilized lease as a consequence of the 8

protections afforded by New York’s Rent Stabilization Code 9

(“RSC”), N.Y. Comp. Codes R. & Regs. tit. 9, §§ 2520.1 et seq.

, make 10

the lease, or some portion of its value, exempt from the tenant’s 11

bankruptcy estate as a “local public assistance benefit” within the 12

meaning of New York Debtor and Creditor Law (“DCL”) § 282(2). 13

We conclude that the New York Court of Appeals is better 14

positioned to resolve this unsettled issue of New York law and, 15

consequently, we certify it to that Court. 16

I. BACKGROUND 17

At some point prior to the mid

‐ 1970’s, Debtor

‐ Appellant, 18

Mary Veronica Santiago

‐ Monteverde, signed a lease with her 19

husband for an apartment in lower Manhattan. Following the 20

enactment of New York’s rent stabilization law in 1974, the 21

apartment became rent

‐ stabilized. The RSC “regulat[es] rents and 22

provid[es] occupants with statutory rights to tenancy renewals” as 23

well as occupancy and anti

‐ eviction protections. Manocherian v. 24

Lenox Hill Hosp.

, 84 N.Y.2d 385, 389 (1994); see N.Y. Comp. Codes R. 25

& Regs. tit. 9, §§ 2520.1 et seq. ; N.Y.C. Admin Code §§ 26

‐ 501 et seq. 26

New York State law also authorizes municipalities to formulate and 27

apply rent stabilization regulations and New York City has done so. 28

N.Y. Unconsol. Law § 8605 ; N.Y.C. Admin Code §§ 26

‐ 501 et seq. 294 No. 12

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After the death of her husband, Santiago

‐ Monteverde 1

experienced financial difficulties and eventually sought relief under 2

Chapter 7 of the Bankruptcy Code. During the pendency of 3

bankruptcy proceedings, she has continued to pay her rent and has 4

remained current on her lease obligations. In her initial bankruptcy 5

filing, she listed her apartment lease on Schedule G as a standard 6

unexpired lease. Shortly thereafter, the owner of her apartment 7

approached the Trustee

‐ Appellee, John S. Pereira, and offered to buy 8

Santiago

‐ Monteverde’s interest in the lease. When Pereira advised 9

Santiago

‐ Monteverde that he planned to accept the offer, she 10

amended her filing to list the value of her lease on Schedule B as 11

personal property exempt from the bankruptcy estate under DCL 12

§ 282(2) as a “local public assistance benefit.” 13

The Trustee moved to strike Santiago

‐ Monteverde’s claim of 14

exemption. The bankruptcy court granted the motion on the ground 15

that the rent

‐ stabilization program did not qualify as a “local public 16

assistance benefit.” In re Santiago

‐ Monteverde

, 466 B.R. 621 (Bankr. 17

S.D.N.Y. 2012). The bankruptcy court noted that “all of the items 18

listed in section 282(2),” such as social security, disability, and 19

unemployment benefits, “are payments of one sort or another that a 20

debtor has the right to receive or in which the debtor has an 21

interest.” Id. at 623

‐ 24. In contrast, the bankruptcy court concluded 22

that the “benefit of paying below market rent

. . . is a quirk of the 23

regulatory scheme in the New York housing market, not an 24

individual entitlement” comparable to the other items in § 282(2). Id. 25

at 625. 26

Santiago

‐ Monteverde appealed to the district court. The 27

district court affirmed the bankruptcy court. The district court 28

concluded that it was “not necessary to reach the question of 29

whether” the exempt benefits were limited only to payments to a 30

debtor, because “the value in securing a lawful termination of the 315 No. 12

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rent

‐ stabilized lease

. . . is a collateral consequence of the regulatory 1

scheme and not a ‘local public assistance benefit.’” In re Santiago

‐ 2

Monteverde

, No. 12 Civ. 4238 (PKC), 2012 WL 3966335, at *2 (S.D.N.Y. 3

Sept. 10, 2012). The district court also adverted to the absence of any 4

evidence that the legislature had “intended to confer upon the 5

tenant a public assistance benefit consisting of the value of 6

terminating the rent

‐ stabilization regime.” Id. 7

Santiago

‐ Monteverde appeals. Her principal contention is 8

that the protections of the rent stabilization program, and the 9

concomitant value created in her rent

‐ stabilized lease, amount to a 10

“local public assistance benefit” that is exempt from her bankruptcy 11

estate. 12

II. DISCUSSION 13

“We exercise plenary review over a district court’s rulings in 14

its capacity as an appellate court in bankruptcy, independently 15

reviewing the bankruptcy court’s factual findings for clear error and 16

its legal conclusions de novo .” In re Quebecor World (USA) Inc.

, 719 17

F.3d 94, 97 (2d Cir. 2013) (internal quotation marks omitted). Where 18

the case requires us to interpret state law, “[w]e review the district 19

court’s interpretation and application of state law de novo. ” In re 20

Thelen LLP

, 736 F.3d 213, 219 (2d Cir. 2013) (internal quotation marks 21

omitted), certified question accepted 22 N.Y.3d 1017 (Dec. 12, 2013). 22

Section 522(b) of the Bankruptcy Code permits the debtor to 23

exempt certain specified property from the bankruptcy estate. 24

CFCU Cmty. Credit Union v. Hayward

, 552 F.3d 253, 258 (2d Cir. 2009). 25

Section 522(d) of the Code provides a list of categories of property 26

that a debtor may exempt. However, the Code also permits states, if 27

they choose, to create their own lists of exemptions as an alternative 28

to the exemptions found in Section 522(d). “New York has ‘opted 29

out’ of the federal exemption scheme,

. . . choosing instead to 306 No. 12

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provide its own exclusive set of permissible exemptions for debtors 1

domiciled in the state.” Id. Under New York law, a debtor may 2

exempt, among other things, her “right to receive or

. . . interest in

. . 3

. a social security benefit, unemployment compensation or a local 4

public assistance benefit .” N.Y. Debt. & Cred. Law § 282(2) (emphasis 5

added). 6

The question confronting us is whether the rent stabilization 7

regime provides such a benefit. The New York Court of Appeals has 8

explained that the rent stabilization program was created “to 9

ameliorate, over time, the intractable housing emergency in the City 10

of New York” by “protect[ing] dwellers who could not compete in 11

an overheated rental market, through no fault of their own.” 12

Manocherian

, 84 N.Y.2d at 389; see also id. (rent stabilization created 13

“to remedy a persisting emergency housing shortage”). 14

The RSC “regulate[s] the two terms at the core of the landlord

‐ 15

tenant relationship: rent and duration.” Resolution Trust Corp. v. 16

Diamond

, 18 F.3d 111, 119 (2d Cir. 1994), cert. granted, judgment 17

vacated on other grounds sub nom. Solomon v. Resolution Trust Corp.

, 513 18

U.S. 801 (1994) and cert. granted, judgment vacated on other grounds sub 19

nom. Pattullo v. Resolution Trust Corp.

, 513 U.S. 801 (1994). “The 20

regulations govern the initial rent, restrict rent increases, mandate 21

lease renewal, and, upon the tenant’s vacating of the premises, allow 22

the tenancy to pass statutorily to certain members of the tenant’s 23

household,” if certain conditions are met. Id. (internal citations 24

omitted)

. “Landlord compliance with this scheme is enforced 25

chiefly by limiting the grounds for eviction

. . . .” Id. 26

Under the RSC, these terms substantially favor tenants, 27

requiring lease renewal in almost all circumstances, and affording 28

strong anti

‐ eviction protections. The implementing regulations state 29

that “[a]s long as the tenant continues to pay the rent to which the 307 No. 12

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owner is entitled, no tenant shall be denied a renewal lease or be 1

removed from any housing accommodation by action to evict or to 2

recover possession, by exclusion from possession, or otherwise, nor 3

shall any person attempt such removal or exclusion from possession, 4

except on one or more of the grounds specified in this Code.” N.Y. 5

Comp. Codes R. & Regs. tit. 9, § 2524.1(a). The “grounds specified in 6

this Code” are limited, and do not mention a debtor’s bankruptcy. 7

See id. §§ 2524.3, 2524.4. 2524.5. As a result of these provisions, rent

‐ 8

stabilized tenants who have not defaulted on their leases enjoy 9

significant protections. Santiago

‐ Monteverde’s main contention is 10

that this constellation of protections adds “value” to a rent stabilized 11

lease above the value of a market rate lease, and that the 12

concomitant value of these protections amounts to an exempt “local 13

public assistance benefit” under DCL § 282(2). 14

A bankruptcy trustee is authorized to “assume or reject 15

any

. . . unexpired lease of the debtor.” 11 U.S.C. § 365(a). We have 16

held that a rent

‐ stabilized tenancy is the product of a “lease” under 17

federal law, Diamond

, 18 F.3d at 119, and thus would appear to be 18

covered by § 365, but see B.N. Realty Assocs. v. Lichtenstein

, 238 B.R. 19

249, 254

‐ 56 (S.D.N.Y. 1999) (quoting Bankruptcy Court’s conclusion 20

that rent

‐ stabilized leases fell within an exception to § 365, but 21

resolving the case on other grounds); but see also Brief of Amicus 22

Curiae MFY Legal Services at 14

‐ 20 (arguing that the inability of a 23

creditor to reach the value of the debtor’s rent stabilized apartment 24

outside of bankruptcy bars the trustee from assuming the lease, see 25

11 U.S.C. § 365(a), (c)). 26

Moreover, New York cases have assumed that a trustee 27

possesses the authority under 11 U.S.C. § 365 to assume or reject a 28

rent

‐ stabilized debtor’s lease and have discussed the effect of a 29

rejection. See 187 Concourse Assocs. v. Bunting, 670 N.Y.S.2d 686, 688 30

(Civ. Ct. 1997) (citing several cases from New York courts discussing 318 No. 12

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the impact of a bankruptcy trustee’s rejection of a rent

‐ stabilized 1

lease). Additionally, several bankruptcy courts have held that a 2

trustee’s authority under § 365 extends to rent

‐ stabilized leases. See 3

In re Toledano

, 299 B.R. 284, 292 (Bankr. S.D.N.Y. 2003); In re Yasin

, 4

179 B.R. 43, 49 (Bankr. S.D.N.Y. 1995). Thus, there is (albeit limited) 5

authority for the proposition that a rent

‐ stabilized debtor’s lease 6

may be assumed and assigned by the trustee pursuant to 11 U.S.C. 7

§ 365(a). 8

In this appeal, however, we must consider an additional and 9

analytically different issue: May a rent

‐ stabilized tenant prevent the 10

assumption and assignment of his or her lease by claiming that the 11

lease (or its value) is a “local public assistance benefit” exempt from 12

the bankruptcy estate? The Trustee implicitly argues that his 13

assumption and assignment of the lease eliminate the protections 14

afforded under the RSC and, therefore, that he may sell the lease to 15

the landlord for the value that exists in the elimination of those 16

protections. Santiago

‐ Monteverde argues that the lease (or its value) 17

is a “local public assistance benefit” because the value of the lease (in 18

whole or in part) is traceable to the protections afforded to her under 19

the RSC. As noted by the parties and the amici

, resolving these 20

questions may implicate other questions of New York law, including 21

whether a tenant’s rights under the RSC are property or personal 22

rights. See, e.g.

, Brief of Amicus Curiae New York City Bankruptcy 23

Assistance Project at 7

‐ 13 (arguing that rent

‐ stabilized tenant’s rights 24

are statutory personal rights rather than property rights that, 25

therefore, cannot be administered as part of the bankruptcy estate). 26

No New York cases directly address these contentions. New 27

York courts addressing the interaction of the Bankruptcy Code and 28

the RSC have indicated that the rejection of a rent

‐ stabilized lease by 29

the trustee does not void or terminate the lease, and does not 30

eliminate the protections of the RSC. See 187 Concourse Assocs.

, 670 319 No. 12

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N.Y.S.2d at 688 (explaining that “bankruptcy lease rejection neither 1

voids the lease, nor terminates the lease” and that “[t]he debtor

‐ 2

tenant, with a rejected unexpired rent stabilized lease, may continue 3

to occupy the premises, unless a properly instituted summary 4

holdover proceeding occurs” (citations omitted)). But these decisions 5

do not address the assumption and assignment of a lease and, thus, 6

do not resolve this appeal. 7

No New York courts have interpreted the phrase “local public 8

assistance benefit” in the context of DCL § 282(2). Although two 9

bankruptcy court decisions have permitted the assumption and 10

assignment of rent

‐ stabilized leases or rights similar to RSC 11

protections, with the consequent elimination of tenant protections, 12

neither decision addressed the argument presented in this appeal for 13

an exemption under DCL § 282(2). See In re Toledano

, 299 B.R. at 294; 14

In re Stein

, 281 B.R. 845, 848 (Bankr. S.D.N.Y. 2002). 15

Given the significance of these issues to landlords and tenants, 16

as well as the complete absence of authority concerning the impact 17

of DCL § 282(2) on rent stabilized leases, we hesitate to attempt to 18

resolve these issues without first obtaining the views of the New 19

York Court of Appeals. 20

C. CERTIFICATION 21

Pursuant to Rule 27.2 of our Local Rules and New York State 22

law, we may certify “determinative questions of New York law 23

[that] are involved in a case pending before [us] for which no 24

controlling precedent of the Court of Appeals exists.” N.Y. Comp. 25

Codes R. & Regs. tit. 22, § 500.27(a);Local R. 27.2; see also N.Y. Const. 26

art. VI, § 3(b)(9) (directing the New York Court of Appeals to adopt a 27

rule permitting it to answer questions of New York law certified to it 28

by, among other courts, “a court of appeals of the United States”). 2910 No. 12

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“Before certifying such a question, we must answer three 1

others: (1) whether the New York Court of Appeals has addressed 2

the issue and, if not, whether the decisions of other New York courts 3

permit us to predict how the Court of Appeals would resolve it; (2) 4

whether the question is of importance to the state and may require 5

value judgments and public policy choices; and (3) whether the 6

certified question is determinative of a claim before us.” In re Thelen 7

LLP

, 736 F.3d at 224 (internal quotation marks omitted). In this case, 8

we answer all three questions in favor of certification. 9

First, neither the Court of Appeals nor lower New York courts 10

have addressed (1) the meaning of “local public assistance benefit” 11

in the context of DCL § 282(2), (2) whether the protections provided 12

by the RSC are personal or property rights, or (3) the effect of the 13

assignment of a tenant’s lease during bankruptcy on her rights 14

under the RSC. This prevents us from making any confident 15

prediction of how the New York Court of Appeals would resolve 16

this issue. 17

Second, the issue of the proper interpretation and interaction 18

of the DCL and RSC is “of importance to the state” and will in fact 19

involve “value judgments and public policy choices” concerning the 20

existence and scope of property rights, as well as the application of 21

emergency housing legislation that was carefully designed to 22

balance the rights and interests of renters and building owners. 23

Manocherian

, 84 N.Y.2d at 389

‐ 90. 24

Finally, the resolution of this question will determine the 25

outcome of this appeal, as it is the only question presented to this 26

Court. 2711 No. 12

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III. CONCLUSION 1

The following question is hereby certified to the Court of 2

Appeals of the State of New York pursuant to 2d Cir. Local R. 27.2 3

and N.Y. Comp. Codes R. & Regs. tit. 22, § 500.27(a), as ordered by 4

the United States Court of Appeals for the Second Circuit. 5

Whether a debtor

‐ tenant possesses a property interest in 6

the protected value of her rent

‐ stabilized lease that may 7

be exempted from her bankruptcy estate pursuant to 8

New York State Debtor and Creditor Law Section 282(2) 9

as a “local public assistance benefit”? 10

In certifying this question, we understand that the New York 11

Court of Appeals, if it accepts the case, may reformulate or expand 12

the certified question as it deems appropriate. We do not intend this 13

articulation of the above specified question to limit the scope of the 14

analysis by the Court of Appeals. 15

It is hereby ORDERED that the Clerk of the Court transmit to 16

the Clerk of the New York Court of Appeals this opinion as our 17

certificate together with a complete set of briefs, appendices, and the 18

record filed by the parties in this Court. This panel will retain 19

jurisdiction of the present appeal for resolution after disposition of 20

the certified question by the New York Court of Appeals or once 21

that court declines to accept certification. 22