Interplay Between the New York State Eviction Moratorium and a Bankruptcy Judge’s Authority to Enter a Dispossess Order

In 2020, New York State passed the COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020[1] (“moratorium”). With some exceptions, it suspends eviction and foreclosure proceedings for nonpayment of rent or mortgage against tenants or property owners facing financial hardship.[2] Courts have generally held that state laws imposing eviction moratoriums during the COVID-19 pandemic are constitutional exercises of the state’s police powers. For example, in Elmsford Apartments Associates LLC v. Cuomo, the district court for the Southern District of New York held that the moratorium did not violate the Contract Clause because that clause is subordinate to the power to protect the general welfare of its citizens though the exercise of its police power.[3] In considering the constitutionality of a similar statute, a Texas district court in Terkel v. CDKC not only upheld the statute as a valid exercise of the state’s police powers, but acknowledged that it was a practice with a long history.”[4]

The moratorium, which will continue in effect until at least May 1, 2021,[5] is not well-understood by tenants. Many mistakenly believe that they are immune from being removed from their homes during the COVID-19 pandemic because of the moratorium.[6] However, the moratorium does not apply to all evictions or foreclosures. For example, in Shack Collective Inc. v. Dekalb Mkt. Hall LLC, where an owner of food vendor spaces wanted to repossess the spaces from a tenant who did not maintain a letter A grade from the Department of Health, the court held that the moratorium does not bar the landlord from seeking eviction of the tenant for any reason other than nonpayment of rent.[7]

Second, there are bankruptcy scenarios in which the moratorium does not apply. For example, in In re Machevsky, the debtor resided in two condominium units that were sold by a chapter 7 trustee.[8] However, the debtor refused to move, claiming the protection of a similar eviction moratorium passed by California.[9] The court held that the California law, which was similar to the moratorium, did not prevent a bankruptcy judge from directing the U.S. Marshal to remove the debtor from the condo because the debtor was not a renter or homeowner that was struggling to pay rent or mortgage due to COVID-19.[10] He had filed a bankruptcy petition in 2014 for reasons having nothing to do with the pandemic.[11]

What if a debtor, a shopping mall owner, files a chapter 11 petition because the mall lost business due to the COVID-19 pandemic? In order to fund the reorganization, the trustee, appointed by the court, wants to sell the shopping mall. However, a former property manager of the shopping mall refuses to move out, even though the manager is neither a tenant nor an owner of the mall. The trustee can argue that a bankruptcy judge may enter an order dispossessing the manager for the following reasons.

First, dispossessing a resident under the Bankruptcy Code, which is a federal statute, is not an eviction proceeding under a state real property law. For example, the moratorium defines “eviction proceedings” as proceedings to recover possession of real property under Article 7 of the real property actions and proceedings law.[12] However, a dispossession order, as explained below, is based on the Bankruptcy Code and other federal statutes, rather than the state’s real property law. Further, the above definition does not specifically include bankruptcy proceedings as part of “eviction proceedings.”[13]

Even if the moratorium applied to bankruptcy proceedings, it will be preempted. Bankruptcy Code § 542 provides that a trustee has the right to request a debtor to turn over property that belongs to the estate (“turnover proceeding”).[14] Under Federal Rule of Bankruptcy Procedure 7070, incorporating Federal Rule of Civil Procedure 70(a) and (d), a bankruptcy judge has the authority to direct a marshal to dispossess a resident to assist the trustee in completing the turnover proceeding.[15] If the moratorium applied to the turnover proceeding, it would be an obstacle to the Bankruptcy Code, thus the trustee would not be able to effectively administer the estate.[16] Therefore, to the extent the moratorium conflicts with the Bankruptcy Code, it would be preempted.[17]

The Machevsky court found that a state’s moratorium is applicable to a federal bankruptcy proceeding through the federal eviction moratorium.[18] Although the federal eviction moratorium is extended through June 30, 2021,[19] courts disagree on whether the federal moratorium is constitutional.[20]

In summary, the moratorium is not applicable to bankruptcy proceedings in which a trustee or a debtor who manages the estate needs to dispossess a resident for reasons not related to nonpayment of rent or mortgage. Even if the moratorium is applicable to the bankruptcy proceedings, to the extent it conflicts with the Bankruptcy Code, it shall be preempted.