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Bankruptcy Code Section 525(a) provides that a governmental unit may not discriminate against a person with respect to certain grants solely because that person, inter alia, has had a debt discharged under the Bankruptcy Code.  In the public housing context, this gives rise to a conflict between Sections 525(a) and 365 of the Bankruptcy Code which arises when a debtor seeks to retain an executory contract or unexpired lease with a governmental unit, after having her debt discharged in bankruptcy without curing the related prepetition defaults.  If the public housing grant protected under Section 525(a) includes the public housing lease itself, or put another way, includes the debtor-tenant’s current right to participate in the public housing program, than the anti-discrimination provision is at odds with the executory contract provision, which would require the debtor to cure, rather than discharge, her debt to the public housing authority as a precondition to assuming the public housing lease.  However, if on the other hand, Section 525(a) is construed to only protect the debtor-tenant’s future right to participate in the public housing program, then there is no conflict between Section  525(a) and 365, and the public housing authority may proceed with the eviction.

This issue was visited in In re Stoltz, 315 F.3d 80 (2nd Cir.2002).  The Court started its analysis by noting that it was undisputed that a public housing authority is a governmental unit within the meaning of Section 525(a).  Therefore, the debate over Section 525(a) in the public housing context centered on (1) the precise contours of the “other similar grant” at stake and (2) whether a public housing authority which seeks to evict the public housing tenant is doing so “solely because” of the discharge of prepetition defaults.  In Stoltz, the court found that the eviction would revoke a protected grant, i.e., the lease, in violation of Section 525(a).  The court reached its conclusion in light of the notoriously lengthy waiting list that often exist for public housing.  As a result, a debtor-tenant along with any dependents, could quite possibly become homeless if evicted, a status not conducive to economic survival.

A debtor-tenant’s future right to participate in public housing programs — on a space available basis — would therefore be of little or no practical value upon eviction.  A debtor-tenant’s entire economic status therefore is dependent on his or her current public housing lease, which is his or her “most single significant material possession.  Eviction-induced homelessness would seriously affect the debtor’s livelihood and fresh start.  Conversely, preventing homelessness promotes the Code’s fresh start policy by helping debtors maintain steady employment and self-sufficiency.

Id. at 90.  Moreover, the court found that the text of Section 525(a) expressly proscribes revocation and suspension of a protected grant, not just denial or refusal to renew a grant upon application.  Because eviction results in revocation of the debtor-tenant’s current participation in the public housing program, eviction revokes the protected grant in violation of Section 525(a).  “Permitting the debtor only to reapply to receive future housing benefits does not ameliorate the discriminatory revocation of the debtor-tenant’s protected public housing lease.”  Id. at 91.

Section 8 Housing.

A similar issue exists with respect to Section 8 housing.  The Section 8 Program helps low-income families afford decent, safe and sanitary housing in the private market.  Under the Section 8 Program, the landlord and tenant enter into a HUD form lease, and at the same time, the landlord and public housing authority sign a Housing Assistance Payment (“HAP”) contract that runs for the same term as the lease.  The HUD form lease between the tenant and landlord lasts for one year, and the lease generally provides for automatic renewal unless the tenant defaults.  The landlord may terminate a tenant’s lease for non-compliance, failure to abide by any State or local landlord and tenant law, or other good cause.

A conflict exists among the courts as to whether Section 8 housing falls under Section 525(a).  The court in In re Watson, 610 B.R. 747 (Bankr.S.D.N.Y.2020), held that it did not.  In reaching this conclusion, it ruled that a landlord participating in a Section 8 program was not a “governmental unit.”  It stated that the Bankruptcy Code defines a “governmental unit” as “United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States …, a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.” 11 U.S.C. §101(27).  Applying such a broad construction, some courts have held that federal credit unions, transit authorities, liquor authorities, and publicly funded housing authorities qualify as governmental units under Section 101(27). Id. at 755.  Watson ruled, however, that private landlords receiving Section 8 program subsidies did not qualify as a “governmental unit” and provided the following explanation:

Pursuant to the Section 8 Program, Bryant Associates’ tenants must pay Bryant Associates a share of the apartment’s rent commensurate with their income.  The remaining rent is paid to Bryant Associates by HUD in the form of a subsidy. Bryant Associates’ tenants do not pay HUD and HUD does not pay Bryant Associates’ tenants.  Rather, if a tenant fails to pay their share of the rent, Bryant Associates suffers.  Thus, even though Bryant Associates receives public funds from HUD in the form of subsidies and is subject to government regulation, Bryant Associates does not act on behalf of or for the benefit of the government.

* * * Bryant Associates’ * * * is not a governmental unit because it is not obligated to participate in the Section 8 Program; it merely chooses to do so. Bryant Associates’ freedom to decide whether to continue participating in the Section 8 Program shows that it operates independently from the government, and only receives public funds subject to federal regulation when it renews its one-year lease with Section 8 tenants.  This arrangement is different from a public housing authority whose tenancies are subject to leases obtainable only from the government.

The Court is also mindful of the important and necessary role that Bryant Associates and other landlords play in providing affordable housing to low-income residents by choosing to participate in the Section 8 Program.  Holding that Bryant Associates is a governmental unit subject to section 525’s non-discrimination provision would threaten the Section 8 Program by discouraging private landlords from participating in the program for fear that tenants with substantial arrears could file for bankruptcy to prevent their landlords from pursuing the state law remedy of eviction.

Id. at 758-59.

Watson noted that a different conclusion was reached in In re Oksentowicz, 314 B.R. 638 (Bankr.E.D.Mich.2004).  In Oksentowicz, the court found that private entities participating in housing programs regulated by city and federal governments were “governmental units” under Section 525 because of substantial entwinement between the private entities and the government.  Watson quoted the factual predicate from Oksentowicz as follows:

(1) [The landlord] is required to provide low income-senior housing for the entire term of its [contract]; (2) [the landlord] is required to determine eligibility of applicants and rent charged according to guidelines set forth by HUD * * * (3) HUD controls the nature of the services provided in the rent, what utilities are included, and what equipment is to be provided in the apartments * * * (4) HUD sets forth the grounds for eviction and the procedures to be taken for eviction * * * (5) HUD can take over and continue the business of [the landlord] if it defaults on the contract * * * and (6) the government, through its HUD website, advertises [the landlord] for government subsidized housing.  Additionally, HUD requires property owners to participate in an Affirmative Fair Housing Marketing Plan * * * HUD requires property owners to develop and make public written tenant selection policies and procedures that include description of eligibility requirements and income limits for admission * * * HUD mandates that the Tenant Selection Plans contain screening criteria that include standards prohibiting admission of those who have engaged in drug-related criminal activity * * * HUD sets forth the procedures for rejecting a tenant application * * * HUD requires property owners to use leases that are in a form acceptable to HUD.

Oksentowicz, 314 B.R. at 641.  Thus, the private landlord carried out a governmental function by providing low income housing, and HUD had a substantial influence over the landlord’s decisions with respect to tenant eligibility, apartment maintenance, rent collection, and house rules. Id. at 641-42.

Matthew T. Gensburg
mgensburg@gcklegal.com