Court decision favours bankrupt tenants

Tenants in one U.S. city won't lose their rent-controlled apartments when they file for bankruptcy, according to a new court decision.

The decision, passed down yesterday by the New York State Court of Appeals and the Manhattan-based U.S. Court of Appeals for the Second Circuit, removes the threat that tenants who file for bankrupty can be evicted from valuable apartments even though they are current with the rent.

A group that represents landlords in New York City said the decision “opens the floodgates of imposing unprecedented financial and legal obligations” on “private property owners who provide rent-controlled apartments.”

Some housing stock in the city is covered by rent-control and rent-stabilization laws that date back to World War II, allowing some renters to pay much less than market rates while simultaneously being protected from eviction.

The decision relates to a case that was brought before a federal district judge in September 2012. A New York renter, who filed for bankrupty, was told by the judge that the value of her lease was property of the bankrupty estate that the landlord could buy from the trustee.

The tenant took her case to the federal appeals court in Manhattan, which asked the state's highest court, the New York Court of Appeals, to rule on whether the right to live in a rent-controlled apartment is property that can be sold.

In November 2014, the state court ruled that rent-control rights are an exempt asset as a form of public assistance, which a bankruptcy trustee can't sell.

In light of that state-court decision, the Second Circuit ruled yesterday that a rent-controlled, below-market lease is exempt from creditor claims as a public benefit.

The landlord group called the decision a "radical interpretation" that makes the rent-stabilization system "a partial government taking without just compensation".

The landlords argued that turning a lease into a public benefit might “create unforeseen tax consequences for rent-stabilized tenants, in the form of imputed income".

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