Leases: The Special Case of a Governmental Landlord

In re Aikens, 503 B.R. 603 (Bankr. S.D.N.Y. 2014)

A city housing authority sought a bankruptcy court order confirming that the automatic stay did not prevent it from continuing eviction proceedings where it had obtained a judgment of possession against a tenant before she filed bankruptcy. In response, the debtor contended that the automatic stay was still applicable, and further, she was not required to make a deposit that would normally be required as a condition of continued stay relief.

The debtor was a tenant in a public housing project operated by the New York City Housing Authority. The housing authority obtained a judgment of possession for her apartment based on her failure to pay rent. Although a warrant of eviction issued, the tenant filed bankruptcy before there could be execution on the warrant.

Under Section 362(b)(22) of the Bankruptcy Code, the automatic stay of an act to obtain possession of property of the bankruptcy estate does not apply to continuation of an eviction proceeding by a landlord against a residential tenant if the landlord has obtained a judgment for possession prior to the bankruptcy filing.

But there is an exception to the exception: Under Section 362(l) the subsection (b)(22) exception to the stay does not apply for the first 30 days after a bankruptcy is filed. And it will not apply at all if, within the initial 30 days, the debtor certifies that (1) non-bankruptcy law allows the monetary default that gave rise to the judgment for possession to be cured after that judgment has been entered, and (2) the debtor has deposited with the rent that would become due during the initial 30 day period with the clerk of the court. If the debtor does not comply with these requirements, then Section 362(b)(22) automatically applies, and the landlord is not required to obtain relief from the stay to proceed with the eviction.

However, in the case of a public housing project, matters are further complicated by Section 525(a) of the Bankruptcy Code, which protects debtors against discriminatory treatment by governmental entities as follows:

[With certain limited exceptions], a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

Buried in this section is the concept that a governmental entity cannot deny a benefit on the basis that the debtor has not paid a debt that is dischargeable in bankruptcy. (Note that the non-discrimination provision applicable to private parties is limited to discrimination in the context of employment.)

In this case, although the applicable state statute provides that issuance of a warrant “cancels the agreement under which the person removed held the premises, and annuls the relationship of landlord and tenant” a court retains the power to vacate the warrant “for good cause shown” prior to execution. The bankruptcy court commented that state courts frequently vacated warrants of eviction and allowed tenants to remain in possession when they have cured their defaults before execution. Thus, the first prong of the Section 362(l)(2) test could be met.

However, the tenant argued that Section 362(b)(22) was not applicable and she was not required to meet the deposit requirements imposed under the second prong of Section 362(l)(2) because she was a public housing tenant. In particular, she argued that under Section 525(a) the housing authority could not deny her right to continue occupancy solely because she failed to pay pre-petition rent, since that debt was dischargeable.

The court looked to a 2d Circuit case that held that a public housing tenant could retain her lease after her debt for pre-petition rent was discharged based on Section 525(a). The 2d Circuit acknowledged that this conflicted with Section 365, which generally requires cure of all pre-petition defaults in order to continue under the lease. However, it concluded that Section 525(a) was the more specific provision, and thus trumped the more general Section 365.

The Aikens court decided that the same principle applied to the conflict between Section 525(a) and Section 362(b)(22). Section 362 applies to all landlords, while Section 525 applies to the subset that are governmental units. Thus, Section 525(a) is more specific and trumps Section 362(b)(22).

The court emphasized that this ruling applies only to residents of public housing, not tenants generally; and further that “this is not a get out of jail card free vis-a-vis post-petition rent.” All post-petition rent must be paid, and if the debtor does not pay she can be evicted. But the bottom line remains that a private landlord is entitled to penalize a debtor tenant for non-payment of pre-petition rent, but a governmental landlord may not.

It is interesting to note that Section 362(b) contains 28 exceptions to application of the automatic stay. Before asking a court for from relief from the stay, it would probably be worthwhile to review this list to see if any of the exceptions might be applicable.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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