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As many readers of our e-mails and blog are aware, if an individual resides in an apartment with a rent controlled or rent stabilized lease and files for personal bankruptcy under Chapter 7 of the Bankruptcy Code, the trustee assigned to the case can assume, assign and transfer the bankruptcy estate's rights and interests in the lease to the landlord, pursuant to § 365 of the Bankruptcy Code. In other words, if an individual resides in an apartment with a rent controlled or rent stabilized lease and the fair market rent of the apartment is significantly greater than the rent paid by the rent controlled or rent stabilized tenant/debtor, a Chapter 7 bankruptcy trustee can sell the bankruptcy estate's rights and interests in the lease to the landlord and remove the debtor/tenant from the apartment.

A more complicated scenario occurs where a married couple are both signatories on a rent controlled or rent stabilized lease, but only one spouse files for Chapter 7 bankruptcy. Can the Chapter 7 bankruptcy trustee sell the bankruptcy estate's rights and interests in the rent controlled or rent stabilized to the landlord free and clear of the non-filing spouse to the landlord and remove the non-filing spouse from the apartment?

While there are no reported decisions on point in the Southern or Eastern Districts of New York, § 363(h) of the Bankruptcy Codeallows a bankruptcy trustee to sell a bankruptcy estate's interest in property and the interest of a non-debtor co-owner in the property as a joint tenant, a tenant in common or a tenant by the entirety, but only if:

1. Partition in kind of the property among the bankruptcy estate and the co-owners is impracticable;

2. The sale of the bankruptcy estate's undivided interest in the property would realize significantly less for the bankruptcy estate than the sale of the property free of the interests of the co-owners;

3. The benefit to the bankruptcy estate of a sale of the property free of the interests of co-owners outweighs the detriment, if any, to the co-owners; and

4. The property is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power.

If a Chapter 7 Trustee decided to analyze the assumption, assignment and sale of a rent controlled or rent stabilized lease to which a non-debtor spouse is a party using the §363(h) factors, the lease could be at risk. A better strategy for a couple in this situation, if they want to keep the apartment, is to do an out of court workout with creditorsor file for bankruptcy under Chapter 13 of the Bankruptcy Code.

Individuals or couples who are in debt and have a rent controlled or rent stabilized lease need to consult with an experienced personal bankruptcy attorney, such as Jim Shenwick.

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.  www.bublicklaw.com

The Court in the case of James P. Driscoll, Inc., et al. v. Theodore B. Gould, 32 FLW D2467 (3rd DCA 2007) dealt with a  judgment that was not listed in chapter 11 schedules. The Defendant claimed that the post-confirmation debtor did not have standing as the judgment was not listed in the bankruptcy schedules.  Parker v. Wendy's Int'l, Inc. 365 F.3d 1268, (11th Cir. 2004). There is an independent avenue under which property may revest in the debtor at conclusion of a Chapter 11 proceeding, which is the express terms and conditions of the confirmed plan of reorganization. See In re Coastline Care, Inc., 299 B.R. 373, (Bankr. EDNC 2003). Here the plan released and revested the right to pursue the judgment to the debtor upon consummation and closure of the bankruptcy case. See In re Coastline Care, Inc. 299 B.R. at 377-78. Jordan E. Bublick is a Miami Personal Bankruptcy Lawyer with over 25 years of experience in filing chapter 13 and chapter 7 bankruptcies. Miami Personal Bankruptcy Lawyer Jordan E. Bublick has filed over 8,000 chapter 13 and chapter 7 cases.

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.  www.bublicklaw.com

In the case of In re Parada, 2008 WL 126626 (Bkrtcy.S.D.Fla. January 10, 2008)(Isicoff, J.) the court was presented with the U.S. Trustee's motion to dismiss the chapter 7 debtors' case as an abuse pursuant to section 707(b)(1) by the application of the section 707(b)(2) means test presumption and pursuant to the 707(b)(3)(B) totality of the circumstances of the financial situation test. The court found that while the debtors passed the means test, they did not pass the totality of the circumstances of the debtors' financial situation test. The major factor in this determination was the court's ruling that the deduction of the secured debt on the debtors' residence and vehicle that they intended to and did indeed surrender were deductible for purposes of the 707(b)(2) means test, but were not deductible for the 707(b)(3)(B) totality of the circumstances of the debtors' financial situation test.

The debtors' Form B22A did not indicate that the presumption of abuse under section 707(b)(2) arose. However, the U.S. Trustee filed a motion to dismiss arguing that the section 707(b)(2) presumption of abuse did indeed arise based on their assertion that the debtors' deduction of their payments on the former residence and vehicle which they intended to surrender was improper. The court noted that the debtors' statement of intentions indicated an intention to surrender their former residence which was encumbered by a mortgage of almost $500,000.00 and to surrender their BMW for which they owed almost $20,000.00. The court noted that the debtors were no longer living at their former residence and had surrendered the vehicle post-petition. Furthermore, the debtors reported monthly gross income of almost $9,000.00 and deductions for voluntary 401(k) contributions of about $400.00.

The court noted that there are two opposite interpretation of section 707(b)(2)(A)(iii) as to the allowability of secured debt payments on account of assets surrendered post-petition. One line of cases adopts a "snapshot" (or "mechanical") approach as of the petition date and allows the payments to be deducted whether or not the debtor intends to make the payments. See In re Benedetti, 372 B.R. 90 (Bankr. S.D.Fla. 2007). The other line of cases holds that only those payments the debtor reasonably expects to be made during the next sixty months may be deducted. The court adopted the "snapshot" approach and allowed the deduction for purposes of the means test calculation of amounts that would be due but which the debtor may not pay to secured creditors on account of property they intend to and in fact do surrender post-petition. The court therefore found that the section 707(b)(2) presumption of abuse did not arise.

The U.S. Trustee also sought a finding of abuse based on the totality of the circumstances of the debtors' financial situation. 11 U.S.C. section 707(b)(3)(B). The debtors argued that the totality of the circumstances, including their financial situation, did not merit dismissal. The court noted that section 707(b)(3) provides for two separate grounds for the dismissal of a debtor's case - (A) bad faith and (B) the totality of the circumstances of the debtor's financial situation. The court held that "the lack of indicia of bad faith and other factors unrelated to a debtor's financial situation are not relevant to consideration under the totality of the circumstances test of 11 U.S.C. section 707(b)(3)(B), rather, they are relevant to determining abuse under the bad faith standard of 11 U.S.C. section 707(b)(3)(A)."

The court agreed with the decision in In re Henebury, 361 B.R. 595 (Bankr.S.D.Fla.2007)(Hyman, C.J.), and held that the court should consider post-petition events in making its determination under section 707(b)(3)(B). The court further held that the cut-off date for the relevancy of post-petition circumstances is the date of the hearing on the motion to dismiss.

In determining whether the debtors' financial situation demonstrated abuse, the court applied a test of whether they had sufficient projected disposable income to fund a hypothetical chapter 13 case. In re Henebury, 361 B.R. at 611. The court noted that there were two methods used by the courts to determine a debtor's projected disposable income under the totality of the circumstances analysis - one based on the debtor's CMI and the other based on the debtor's net income based on actual anticipated income and expenses over the chapter 13 plan period which in this case would be sixty months as the debtors' CMI was above-median income. The court agreed with the U.S. Trustee and held that in calculating the debtors' ability to pay their unsecured debt under section 707(b)(3), that they may not take into account the payments with respect to the surrendered house and car. The court held that "[a]lthough these payments were properly deducted for purposes of the means test, when determining the Debtors' projected disposable income, it is appropriate to exclude these deductions as the payments clearly will not be made going forward, and therefore will not negatively impact the Debtors' disposable income." The court also agreed with the U.S. Trustee that, absent special circumstances, voluntary contributions to a 401(k) should not be considered reasonably necessary expenses under the totality of the circumstances analysis. The court did not find special circumstances in this case.

The court found that, with the exclusion of the nonallowed deductions, both methods of determining the debtors' projected disposable income (the CMI method or the net income method) indicated that the debtors' had the sufficient income to repay 100% of their unsecured debt in less than five year. The court refused to take into consideration in determining the totality of the circumstances financial situation factors that were not verifiable and too remote at the time of the hearing on the motion, such as the debtors' submission that their reconciliation had failed and that they intended to move into separate apartments.

The court found that based on the totality of the circumstances of the debtors' financial situation, that the debtors were abusing the bankruptcy code. 11 U.S.C. section 707(b)(3)(B). But the court did not find that the case was filed in bad faith under section 707(b)(3)(A) and therefore allowed the debtors ten days to convert their case to a case under chapter 13 or 11 before the court would dismiss their case. See, Marrama v. Citizens Bank of Mass., 127 S.Ct. 1105 (2007).Jordan E. Bublick is a Miami Personal Bankruptcy Lawyer with over 25 years of experience in filing chapter 13 and chapter 7 bankruptcies. Miami Personal Bankruptcy Lawyer Jordan E. Bublick has filed over 8,000 chapter 13 and chapter 7 cases.

In the case of In re Hionas, ___ B.R. ___, 2006 WL 3913760 (Bkrtcy.S.D.Fla.)(Isicoff J.) the Bankruptcy Court denied a casino's motion for summary judgment in its adversary proceeding to determine an alleged gambling debt nondischargeable. The decision also provides a review of the rules of choice of law in the 11th Circuit in the context of the allowance of a claim in a bankruptcy case.

The Court noted that normally a federal court hearing a matter pursuant to diversity jurisdiction must apply the law of the state in which the court sits pursuant to the ruling in the case of Erie Railroad v. Tompkins, 304 U.S. 64 (1938), including the conflict of law rules of the state in which the federal court sits. However, a federal court with jurisdiction over a matter by virtue of its bankruptcy jurisdiction, when considering the allowance of claims, is not sitting as a court of diversity and the court does not apply the law of the state where it sits. Bankruptcy courts must determine how and what claims should be allowed under equitable principles.

The Court stated that there is apparently a split among the courts as to whether a bankruptcy court should apply the conflicts of law provisions of the state in which it sits or whether it should apply federal law to determine which law should apply. But the Court stated that there does not appear to be a conflict when a bankruptcy court is considering allowance of claims, which is a matter subject to the bankruptcy court's core jurisdiction. The Court reviewed the Supreme Court's decision of Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156 (1946) and stated that it held that the determination by a bankruptcy court of which state law should apply in adjudicating the allowability of a claim should not be dictated by the happenstance of where the bankruptcy case is filed, but rather which law more logically relates to the claim and is most consistent with the dictates of the court's equitable jurisdiction. Furthermore this determination requires the exercise of an informed judgment in the balancing of all the interests of the states with the most significant contacts in order best to accomodate the equities among the parties to the policies of those states.

The Court further found that each of the cases that have followed Vanston in the context of the allowance of a claim have been consistent in recognizing the inapplicability of Erie and Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487 (1941) and apply a federal analysis to the choice of law issue in the claims allownace context. The Court noted that in the 11th Circuit, in order to determine which law should apply in making a decision regarding choice of law, the court must apply the "significant relationship" test although, depending on the nature of the dispute, more specific factors may have a bearing on the court's determination. See Dresdner Bank A.G v. M/V Olympia Voyager, 446 F.3d 1377 (11th Cir.2006).

The Court concluded by pointing out that whether Nevada law applies to the involved decision would be based on the significant relationships test and not solely on the language in the involved contracts.Jordan E. Bublick is a Miami Personal Bankruptcy Lawyer with over 25 years of experience in filing chapter 13 and chapter 7 bankruptcies. Miami Personal Bankruptcy Lawyer Jordan E. Bublick has filed over 8,000 chapter 13 and chapter 7 cases.