By: Kayla Dimatos
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Addressing an issue of first impression, in In re Bridge Associates of SOHO, Inc., the United States Bankruptcy Court for the Eastern District of New York denied a debtor’s motion to sell an occupied building “free and clear” of state law possessory rights under Section 363 of title 11 of the United States Code (the “Bankruptcy Code”).[1] In 2002, the debtor acquired a Manhattan residential building (“Building”), subject to the rules and regulations of the “Loft Law” and former classification as an “interim multiple dwelling.”[2] However, neither a certificate of occupancy had ever been granted to the Building nor was the debtor ever in the process of bringing the Building into compliance.[3] Despite the continued occupancy of tenants, rent was not collected for decades.[4] After filing a voluntary petition under Chapter 11 of the Bankruptcy Code, the debtor moved under Section 363(f) of the Bankruptcy Code to sell the Building “free and clear of any interest in such property of an entity other than an estate.”[5] The debtor argued that applicable non-bankruptcy law permitted the sale of the building “free and clear” of the tenants’ interests and/or such a sale was permissible because the tenants’ possessory interests were subject to a bona fide dispute.[6]
Relying on legislative intent to interpret the construction of the Loft Law,[7] the bankruptcy court found “that the rights of possession conferred by § 286 of the Multiple Dwelling Law are rights that cannot be stripped without satisfaction of the requirements of §363(f)(1) or (4).”[8] Even though rent may not be collected in buildings lacking a certificate of occupancy, the Loft Law permits a building owner to collect rent as long as it complies with Loft Law regulations.[9] Thus, in the absence of rent payment, the bankruptcy court found that state law occupancy rights are conditioned only upon whether a tenant occupies a unit as their “primary residence.”[10] Focusing on statutory construction, the bankruptcy court narrowly interpreted Section 286 of the Loft Law as “address[ing] what rents an owner may collect assuming the owner is permitted to collect rent.”[11] The bankruptcy court’s conclusion relied on Chazon LLC v. Maugenest, where the New York Court of Appeals held that “tenants under the Loft Law could not be evicted based on non-payment of rent where the owner was not in compliance with the Loft Laws.”[12] Because an owner may not collect rent from tenants of a building not in compliance with the Loft Law, an owner is also precluded from recovering possession of the building based solely on the nonpayment of rent.[13]
Additionally, the debtor attempted to evict the tenants by arguing they were holdover tenants with no legal standing to remain in the Building.[14] The bankruptcy court again cited Section 286(2) of the Loft Law that gives “Statutory Tenants rights to remain at the Property as long as it is their primary residence.”[15] Thus, the tenants could not be appropriately conferred holdover status when their occupancy rights were conferred upon them by statute.[16] Lastly, a different provision of the Loft Law,[17] permitting an owner and tenant to agree to the purchase of tenants’ possessory interests, did not indicate that the tenants could be required to accept a money satisfaction of their interests.[18]
Absent a more compelling argument sufficient to bring the tenants’ state-law possessory rights into bona fide dispute or to show that the Loft Law allowed the property to be sold free and clear of such rights, the bankruptcy court ruled that the tenants could not be evicted, forced into buyouts, or charged rent.[19] Thus, the bankruptcy court’s holding in In re Bridge Associates of SOHO, Inc. denies the use of the Bankruptcy Code to challenge the Loft Law and deprive tenants of their possessory rights, citing similar decisions regarding rent-controlled apartments.[20] This decision vests unprecedented power in the hands of tenants occupying units without payment of rent. Despite the thousands of dollars saved in unpaid rent, the debtor or any prospective owner of the Building will not be permitted to collect rent until the Building receives a certificate of occupancy, a presumably costly endeavor. As case law suggests, if it is undesirable that the rights vested in tenants by the Loft Law continue to function as a limitation on a Section 363(f) sale, this problem ought to be addressed by the Legislature.[21]
[1] In re Bridge Assoc. of Soho, Inc., No. 818-71159-reg, 2018 WL 3239825, at *1, *3 (Bankr. E.D.N.Y. July 2, 2018).
[2] Id. at *2.
[3] Id.
[4] Id. at *1.
[5] 11 U.S.C. § 363(f) (2012).
[6] In re Bridge Assoc. of Soho, Inc., 2018 WL 3239825, at * 1.
[7] See id. (discussing the purpose of the Loft Law to address buildings illegally converted from commercial to residential use and to bring such buildings into compliance with statutory, regulatory, and code requirements for residential occupancy in order to protect tenants and the public welfare); see also N.Y. Multiple Dwelling Law § 280 (McKinney 2012).
[8] In re Bridge Assoc. of Soho, Inc., 2018 WL 3239825, at *3.
[9] See id. at *2.
[10] See id.
[11] Id. at *2.
[12] Id.; see also Chazon, LLC, v. Maugenest, 971 N.E.2d 852, 855 (N.Y. 2012).
[13] In re Bridge Assoc. of Soho, Inc., 2018 WL 3239825, at *2.
[14] Id. at *3; see also Koylum, Inc. v. Peksen Realty Corp., 272 F.3d, 138, 141 (2d Cir. 2001).
[15] In re Bridge Assoc. of Soho, Inc., 2018 WL 3239825, at *3.
[16] See id.
[17] See N.Y. Multiple Dwelling Law § 280(12) (McKinney 2012) (“[A]n owner and a residential occupant may agree to the purchase by the owner of such person’s rights in a unit.”).
[18] See In re Bridge Assoc. of Soho, Inc., 2018 WL 3239825, at *3.
[19] See id.
[20] Id. (“The circumstance of ownership of buildings subject to rent control, which this debtor voluntarily assumed, may not be mitigated by the bankruptcy laws.” (quoting In re Friarton Estates Corp., 65 B.R. 586, 593-94 (Bankr. S.D.N.Y. 1986)).
[21] See id.; see also Chazon, LLC, v. Maugenest, 971 N.E.2d 852, 855 (Ct. of App. 2012).