A 78-year-old woman’s attempt to stay in her rent-stabilized apartment may depend on whether New York’s highest court finds the value of her lease can be exempt from bankruptcy.

The U.S. Court of Appeals for the Second Circuit certified questions to the New York Court of Appeals Monday, asking the state court to determine whether the value of a Mary Veronica Santiago-Monteverde’s lease constitutes a “local public assistance benefit” under New York Debtor and Creditor Law §282(2).

Santiago-Monteverde is trying to keep her apartment in lower Manhattan by claiming her rent-stabilized lease is a public assistance benefit that can’t be transferred by the bankruptcy trustee to the building’s landlord.

Santiago-Monteverde and her husband signed a lease on their two bedroom, ground-floor apartment on East 7th Street in the early 1970s. The place became rent-stabilized when the stabilization law was passed in 1974. Santiago-Monteverde, who lives on Social Security, pays $703 a month for the apartment.

Following the death of her husband and encountering financial difficulties that allegedly included threats of eviction by the landlord, Santiago-Monteverde filed in the bankruptcy court in 2011.

The trustee, John Pereira of Pereira & Sinisi, received an offer from the landlord to buy the right to the lease, but Santiago-Monteverde claimed an exemption under the Bankruptcy Code—in this case New York’s own exemption under §282(2) of the state’s Debtor & Creditor Law.

Bankruptcy Judge James Peck (See Profile), presiding over Santiago-Monteverde’s Chapter 7 bankruptcy, denied the claimed exemption in April 2012, saying the “benefit of paying below-market rent … is a quirk of the regulatory scheme in the New York housing market, not an individual entitlement…”

He later ordered a sale of the apartment, but that order has been stayed pending appeal.

Southern District Judge P. Kevin Castel (See Profile) affirmed in September 2012, holding “the value in securing a lawful termination of the rent-stabilized lease, which undoubtedly may be monetized, is a collateral consequence of the regulatory scheme and not a ‘local public assistance benefit.’”

Santiago-Monteverde appealed to the Second Circuit, where Judges Robert Sack (See Profile), Barrington Parker (See Profile) and Reena Raggi (See Profile) heard oral argument Sept. 23, 2013 in Santiago-Monteverde v. Pereira, 12-4131-bk.

Santiago-Monteverde was represented by attorneys Ronald Mann, a professor at Columbia Law School and Kathleen Cully, a bankruptcy solo practitioner. Their position that rent-stabilized leases are exempt from the bankruptcy estate drew support from two amici—the New York City Bankruptcy Assistance Project of Legal Services NYC, represented by Ira Herman of Thompson & Knight; and MFY Legal Services, represented by Carolyn Coffey, of counsel to Jeanette Zelhof.

Parker, writing for the court Monday, discussed the uncertainty of whether the value inherent in a lease can be considered a “local public assistance benefit” under the protections of the New York’s Rent Stabilization Code, (“RSC”), N.Y. Comp. Codes R. & Regs. tit. 9, §§ 2520.1.

Santiago-Monteverde, he said, argued the “significant protections” afforded tenants under the rent stabilization law, “adds ‘value’ to a rent stabilized lease above the value of a market rate lease” and amount to a public assistance benefit.

“The question confronting us is whether the rent stabilization regime provides such a benefit,” Parker said.

Under 11 U.S.C.§365(a), a bankruptcy trustee is authorized “to assume or reject … any unexpired lease of the debtor,” and Parker said “New York cases have assumed that a trustee possesses the authority” under that section “to assume or reject a rent-stabilized debtor’s lease and have discussed the effect of a rejection.”

But Parker said the issue of whether the extra value is a public assistance benefit is “an additional and analytically different issue.”

Santiago-Monteverde claimed that it is a benefit, but Pereira, the trustee, argued that the assumption and assignment of a lease eliminates the protections of the Rent Stabilization Code.

“No New York cases directly address these contentions,” Parker said. “New York courts addressing the intersection of the Bankruptcy Code and the RSC have indicated that the rejection of a rent-stabilized lease by the trustee does not void or terminate the lease, and does not eliminate the protections of the RSC.”

Nor have New York courts interpreted the phrase “local public assistance benefit” in the context of DCL§282(2), he said.

“Given the significance of these issues to landlords and tenants, as well as the complete absence of authority concerning the impact of DCL§282(2) on rent stabilized leases,” he said, “we hesitate to attempt to resolve these issues without first obtaining the views of the New York Court of Appeals.”

Cully said Monday “the entire consumer bankruptcy bar knows about this issue,” and there is a reason why it doesn’t arise frequently.

“Bankruptcy lawyers tell people who are rent stabilized that they might lose their lease if they file bankruptcy, whereupon people decide not to file,” Cully said. “It has a huge chilling effect.”

J. David Dantzler of Troutman Sanders argued for Pereira. The firm declined to comment.