Bankruptcy—Chapter 7 Trustee’s Motion to Strike Claimed Exemption for Value of Rent Stabilized Lease Granted—Rent Stabilized Lease Was Not Exempt as a “Public Assistance Benefit” Within the Meaning of Debtor and Creditor Law Section 282(2)

A debtor claimed that she was entitled to an exemption for the value of her rent-stabilized lease. A bankruptcy Chapter 7 trustee moved to strike such claim.

A rent-stabilized lease is “property of the estate and…the Trustee may ‘assume or reject any executory contract or unexpired lease of the debtor.’” The subject issue, which was “apparently one of first impression—is whether the value of Debtor’s rent-stabilized lease…is exempt as a ‘public assistance benefit’ within the meaning of section 282(2) of the New York Debtor and Creditor Law (DCL).” The court found that the lease “does not qualify as an exempt ‘public assistance benefit’” and sustained the Trustee’s application. The debtor had filed a petition for relief under Chapter 7 of the Bankruptcy Code. The debtor’s filed schedules “listed the Lease as an executory contract and unexpired lease….” “After filing a no-asset report, the Trustee received an offer from the Debtor’s landlord…, to purchase the Trustee’s right, title and interest in the Lease. The Trustee then withdrew the no-asset report” and the court had extended the trustee’s time to assume or reject the estate’s rights in the lease.

The trustee thereafter advised the debtor of the trustee’s intention to sell the lease to the landlord. The debtor then filed amended schedules “recharacterizing the Lease as personal property, electing New York’s exemptions pursuant to 11 U.S.C. §522(b)(3) and claiming an exemption for the value of the Lease under DCL section 282(2).” The debtor also submitted a statement indicating that “she intended to assume the Lease pursuant to 11 U.S.C. §365(p)(2).”

The court explained that:

Section 522(b) of the Bankruptcy Code establishes the general rule that an individual debtor may exempt certain designated assets from property of the estate and allows each state to mandate the use of its own list of exemptible assets…. A debtor domiciled in New York may elect either the exemptions available under New York law and other generally applicable federal law or the federal exemptions provided in 11 U.S.C. §522…. Debtor elected to claim exemptions under the law of New York….

Section 282 of the DCL exempts certain described benefits from administration. Specifically, DCL section 282(2) exempts:

The debtor’s right to receive or the debtor’s interest in: (a) a social security benefit, unemployment compensation or a local public assistance benefit; (b) a veterans’ benefit; (c) a disability, illness, or unemployment benefit; (d) alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor; and (e) all payments under a stock bonus, pension, profit sharing, or similar plan or contract on account of illness, disability, death, age, or length of service….

N.Y. Debt. & Cred. Law §282(2).

The debtor argued that “exemption statutes are to be liberally construed.” The court noted, however, that “all of the items listed in section 282(2) are payments of one sort or another that a debtor has the right to receive or in which the debtor has an interest. The natural inference is that the section only seeks to exempt certain kinds of qualifying payments.” DCL section 282(2) does not make a “specific reference to ‘the value of a rent-stabilized lease’ as property that is exempt from administration….” Thus, the issue was “whether the Lease fits logically within the category of a ‘public assistance benefit’ as used in DCL section 282(2).”

The trustee argued that “[u]nlike a public assistance benefit there is no eligibility requirement to be met by the tenant as to level of income and financial resources…” and “the ‘benefit’ conferred by rent stabilization depends on the characteristics of the building and apartment.” The debtor countered that “rent stabilization is a local benefit provided by New York law to assist those members of the public that the [L]egislature determined to need assistance.” The debtor also cited the Local Emergency Housing Rent Control Act of 1962, to establish that “there was ‘a serious public emergency’” in the ability to house many people and that the “rent regulation was required to ‘prevent uncertainty, hardship and dislocation.’”

The court rejected the debtor’s argument, noting that it did not “consider the phrase ‘public assistance benefit’ within its statutory context of specified payments.” Although there is no case directly in point, the court found that “there is authority that construes the purposes of DCL section 282(2) more generally, finding that ‘aside from veterans’ benefits, this provision deals only with the right to receive payments necessary for the Debtor’s support (e.g., social security or unemployment) and substitutes for future earnings (e.g., pension, disability).”

Additionally, “DCL section 282(2) is substantially similar” to the exemption provision found in 11 U.S.C. §522(d)(10), which “exempts the right to receive ‘a social security benefit, unemployment compensation, or a local public assistance benefit.’”

The court acknowledged that the lease is “plainly beneficial to the Debtor in avoiding the foreseeable incremental cost beneficial to the Debtor of renting a comparable apartment and in providing a below market rental obligation….” However, such right is “not like the right to receive a stream of future exempt payments that provide monthly support for an individual.”

The court reasoned that a “public assistance benefit” as such term is used in DCL section 282(2), “is in the nature of an individual right to receive certain exempt personal income because the debtor belongs to a class qualified to receive such payments.” The court stated that the “statutory exemptions apply to certain kinds of qualifying payments, not to favorable regulations governing Debtor’s obligation to pay rent.”

The court then observed that individuals of rent-stabilized apartments “no doubt consider themselves lucky to have the benefit of affordable housing in a city that is legendary both for its high rents and some anomalous special exceptions to the general rule of notoriously expensive housing.” The court characterized a rent stabilized lease as “not a ‘public assistance benefit’ that is entitled to any exemption in bankruptcy,” but a “quirk of the regulatory scheme in the New York housing market, not an individual entitlement.”

The court concluded that the lease “differs from the items included within DCL section 282(2) because it is an asset of the estate that by its very nature can be sold for value. As such, it is unlike any of the payments listed in this section and does not constitute a ‘public assistance benefit’ within the meaning of DCL section 282(2).” Thus, the court held that the lease was “not exempt from administration and remains property of the estate.”

In re: Mary Veronica Santiago-Monteverde, 11-15494, NYLJ 1202549245990, at *1 (SDNY, Decided April 10, 2012), Bankruptcy Judge James Peck.

Plaintiff Asserted Claims for Breach of Contract, Quantum Meruit, Fraud, Imposition of a Constructive Trust and for an Equitable Lien—Court Granted the Defendants’ Motion to Dismiss All Claims Except the Claim for a Constructive Trust

A plaintiff independent construction contractor commenced an action for breach of contract, quantum meruit, fraud, imposition of a constructive trust and imposition of an equitable lien. The defendants included a company wholly owned by decedent “A,” decedent’s estate, and “B,” the executor and sole beneficiary under the decedent’s will. The plaintiff alleged that the decedent had promised to give the plaintiff “a one-third interest in his business and/or real estate holdings in exchange for plaintiff’s management of the business.” The defendants moved to dismiss the complaint. The court granted the defendants’ motion with respect to each claim other than the constructive trust claim.

The decedent had hired the plaintiff in 1995 to do work on two of the decedent’s properties. The plaintiff and the decedent thereafter became friends and “discussed plans to jointly purchase rental properties and to open a restaurant.” In 1999, the plaintiff and the decedent opened a restaurant. Between 1999 and 2006, at the decedent’s request, the plaintiff performed several tasks for the decedent’s company, including “collecting rent, hiring ‘contractors and engineers, representing the company before the county planning board, and managing the restaurant.’” The plaintiff alleged that he performed such “services ‘in reliance upon decedent’s promises’ to give plaintiff shares in, and/or realty owned by, [decedent's company], by either an inter vivos transfer or a testamentary bequest.” During the subject time period, the plaintiff had received from the decedent “free meals at the restaurant for two-and-a-half years and free use of decedent’s 13-acre property, on which plaintiff managed an income-producing antique shop.” The decedent had “never effectuated any inter vivos or testamentary transfer to plaintiff prior to his death.”

With respect to the breach of contract claim, the court found that the plaintiff’s description of the terms of the agreement “is simply too vague and open-ended to provide the basis of a binding contract. Plaintiff’s alleged promise did not identify the specific services to be performed, nor did it specify the time or duration of such performance. The complaint describes an essentially one-sided undertaking by decedent to give plaintiff a substantial portion of decedent’s property in exchange for an undefined obligation on plaintiff’s part. Plaintiff’s failure to sufficiently define his own obligation under the alleged agreement renders such agreement unenforceable….” Thus, the court granted the defendants’ motion to dismiss the contract cause of action. The court also dismissed the fraud claim on the grounds that “[g]eneral or conclusory allegations, such as those offered by plaintiff, are insufficient to defeat a motion to dismiss a fraud claim.”

In order to state a claim for constructive trust, a plaintiff must allege a fiduciary or confidential relationship, a promise, a transfer in reliance on the promise and unjust enrichment. The courts have emphasized that such factors are “useful as guidelines” and “they are not to be applied rigidly to limit the application of the constructive trust doctrine.” Further, “some courts have imposed constructive trusts in the absence of one or more of the [afore-cited] factors” and have extended the transfer element to instances where no property is transferred, but rather “funds, time and effort are contributed in reliance on a promise to share in a result….”

The defendants argued that “a constructive trust cannot be imposed for the benefit of a party who did not have an interest in the subject property at the time the property was transferred….” However, given “the equitable and flexible nature of the constructive trust doctrine,” the court held that the plaintiff “need not have had a prior interest in [the decedent's company], or in the real property owned by [the decedent's company], in order to assert a cause of action for imposition of a constructive trust.”

Moreover, as to whether a confidential relationship existed between the decedent and the plaintiff, “the existence of a confidential relationship is usually a question of fact which cannot be determined on a motion to dismiss.” The plaintiff had described the decedent as “a ‘close friend’ and as a ‘business partner.’” Thus, the court concluded that the plaintiff had “adequately pled a basis for the imposition of a constructive trust,” and denied the defendants’ motion to dismiss such claim.

The plaintiff had also asserted that he possessed “a constructive and equitable lien/trust on defendants’ real properties…, as well as all other properties, investments, issues, profits and dividends derived therefrom and which were fraudulently and improperly obtained by defendants.” The court explained that “[t]he existence of an equitable lien requires an express or implied contract concerning specific property where there is a clear intent between the parties that such property be held, given or transferred as security for an obligation….”

The court found that the “language of the complaint does not suggest that either plaintiff or decedent ever intended that the shares of [decedent's company], or any of the real properties owned by [decedent's company], would serve as security for a debt owed by decedent to plaintiff. Rather, plaintiff alleges that decedent intended to give him an outright ownership interest, in either stock or real property, in exchange for his services.” The court therefore dismissed the claim for an equitable lien.

The court then explained that in order to state a claim for quantum meruit, the claimant must allege performance of the services in good faith, acceptance of services by the person for whom they were rendered, an expectation of compensation therefor and the reasonable value of the services. The court dismissed the quantum meruit claim because the plaintiff had failed to set forth the reasonable value of his services. However, the court granted plaintiff leave to re-plead this cause of action.

Additionally, the court noted that it was not clear whether each of the services that the plaintiff had performed was in consideration for defendant’s alleged promise. “For example, plaintiff may have performed some services in exchange for the free meals and/or the free use of decedent’s 13-acre property to operate his antique business.” The court also opined that if the parties’ positions had been reversed and the decedent had sued the plaintiff for breach of the “latter’s vague promise—the legal deficiency of the purported contract would have been obvious.” The plaintiff’s obligation were never adequately defined by the party to the alleged agreement. However, the plaintiff’s lawsuit is based “on a promise by decedent that was more definite than his own.”

Raihofer v. First Phoenix Assoc., 2006/4019, NYLJ 1202548930589, at *1 (Surr., NY, Decided April 10, 2012), Surrogate Nora Anderson.

Landlord-Tenant—Court Refuses to “So Order” a Proposed Stipulation of Settlement Involving Agreement to Vacate an Apartment

Parties to a nonpayment proceeding had submitted for “so ordering,” a proposed stipulation of settlement. The court declined to “so order” the settlement and instead, recalled the case for trial.

This case involved a rent-stabilized apartment. The monthly rent is “either $800.00, as the petition alleges, or $900.00, as was represented at the allocution of the stipulation.” The petition alleged rent arrears of $1,851.64. However, at the allocution, it was undisputed that the arrears were less than $500. Additionally, public assistance subsidized the rent at the rate of $650 per month and such arrears may only consist of the tenant’s non-subsidized share.

The proposed stipulation provided for the conversion of the proceeding from a nonpayment to a holdover, for the tenant to vacate the premises by a specified date, and for the petitioner to pay the tenant $7,100 “upon a timely vacatur.” The stipulation did not require the payment of rent, but did not preclude the petitioner “from accepting public assistance’s payments; from a practical point of view, the stipulation might be said to reduce the rent to $650.00 per month.” The court also noted that the stipulation did “not require either party to notify public assistance of respondent’s planned departure from the premises.”

At the allocution, the tenant stated that she had a place “to move” to. However, she did not offer any particulars thereof, and she did not represent that at her next address, she would have “no claims to make upon the public fisc for rental assistance either for herself or for her children.”

The court explained that “courts ‘so order’ stipulations of settlement because doing so serves the public interest. Litigation is resolved, judicial resources are conserved, and the parties gain enforceability and finality for that to which they have agreed.” Further, “[c]ourts have long favored and encouraged the fashioning of stipulations as a means of expediting and simplifying the resolution of disputes…. [U]nless public policy is affronted, parties to a civil dispute are free to chart their own litigation course….”

The court explained that ordinarily it “would not ask what the buyout was for,” i.e., what the tenant is receiving in return for the $7,100 and would not ask what the tenant is surrendering in return for the $7,100. “Here, however, the State of New York or local government would seem to have a legitimate claim to the buyout monies; see, e.g., Social Services Law §104(1) which provides in pertinent part: ‘A public welfare official may bring an action or proceeding against a person discovered to have real or personal property***if such person***received assistance and care during the preceding ten years, and shall be entitled to recover up to the value of such property the cost of such assistance or care. Any public assistance or care received by such person shall constitute an implied contract.***In all claims of the public welfare official made under this section the public welfare official shall be deemed a preferred creditor.’” The court believed that on the subject record, “‘ so ordering’ the proposed stipulation would be at odds with public policy.” Therefore, the court declined to “so order” the stipulation.

1063 EP v. Ross, 50169/12, NYLJ 1202550398947, at *1 (Civ., NY, Decided April 18, 2012), Marton, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.