The Supreme Court has set the stage to flesh out the practical impact of Stern v. Marshall.   On June 24, 2013, the Court granted the petition for cert filed by the defendant in a fraudulent conveyance suit brought by a trustee in Executive Benefits Insurance Agency v. Arkison, No. 12-1200.    The case is significant because it squarely raises the issue of whether a party can waive its right to insist on a trial before an Article III tribunal and the related question of whether consent is permissible.  What HappenedAccording to the Ninth Circuit, Nicholas Paleveda and his wife “operated a welter of companies,” including Bellingham Insurance Agency, Inc.    Although Palveda did not own Bellingham, he served as its CEO and sole director until shortly before its ceased doing business.   The day after Bellingham ceased doing business, Palveda used its funds to incorporate Executive Benefits Insurance Agency, Inc.    Bellingham also irrevocably assigned its right to receive commissions from its largest client to one of its longtime employees, who subsequently paid them to EBIA.     When Bellingham filed for chapter 7 relief, the trustee sued EBIA for eighteen causes of action, including recovery of fraudulent transfers and voidable preferences and to establish EBIA as a “mere successor” of Bellingham.    EBIA filed a jury demand and request to withdraw the reference.    However, it asked the Bankruptcy Court to abate these pleadings while it considered motions for summary judgment.    The Bankruptcy Court granted summary judgment in favor of the Trustee and entered a money judgment for $373,291.28.    EBIA abandoned its request to withdraw the reference and instead appealed to the District Court.   The District Court affirmed the grant of summary judgment.    On appeal to the Ninth Circuit, EBIA asserted for the first time that Stern v. Marshall precluded the Bankruptcy Court from entering a final judgment.    The Ninth Circuit solicited amici briefs and received thirteen submissions, including one from the Solicitor General.The Ninth Circuit RulingThe Ninth Circuit rendered its decision on December 4, 2012.   Matter of Bellingham Insurance Agency, Inc., 702 F.3d 553 (9th Cir. 2012).    The Ninth Circuit affirmed the lower court judgments in a manner that placed the waiver/consent issue at center stage.   The Court concluded that bankruptcy courts generally lack the power to enter final judgments in fraudulent conveyance suits.   The Court stated:Taken together, Granfinanciera and Stern settle the question of whether bankruptcy courts have the general authority to enter final judgments on fraudulent conveyance claims against noncreditors to the bankruptcy estate.   They do not.Bellinghamat 565.    This was not a surprising conclusion.In the alternative, the Court concluded that bankruptcy courts had the authority to submit proposed findings of fact and conclusions of law to the U.S. District Courts in core matters in which they lacked authority to enter a final judgment.   This ruling addressed a statutory gap in 28 U.S.C. Sec. 157 which allowed courts to “hear and determine” core proceedings and to submit proposed findings of fact and conclusions to the District Court in non-core proceedings.   However, the statutory language did not expressly allow the Bankruptcy Court to submit proposed findings and conclusions to the District Court in core proceedings in which it was not authorized to enter a final judgment.   The Court stated:Our conclusion is consistent with the Stern Court’s tacit approval of bankruptcy courts’ continuing to hear and make recommendations about statutory core proceedings in which entry of final judgment by a non-Article III judge would be unconstitutional.Bellingham, at 566.The next section of the opinion is the most difficult part.    On the one hand, the Ninth Circuit referred to the right to determination by an Article III tribunal as “waivable.”    However, the Court also cited cases about the validity of consent and referred to “implied consent” as well.    As a matter of statutory interpretation, the Court found that section 157(c) requires only “consent simpliciter” as opposed to “express consent” as required by section 157(e).     The Ninth Circuit ultimately concluded that a party could consent to entry of a final judgment and that EBIA had done so.Having discussed the constitutional issues at great length, the Court devoted a relatively short discussion before concluding that the summary judgment should be affirmed.   Issues before the Supreme CourtThe two issues designated in EBIA’s petition for cert were:1.  Whether Article III permits the exercise of the judicial power of the United States by bankruptcy courts on the basis of litigant consent, and, if so, whether “implied consent” based on a litigant’s conduct, where the statutory scheme provides the litigant no notice that its consent is required, is sufficient to satisfy Article III.2.  Whether a bankruptcy judge may submit proposed findings of fact and conclusions of law for de novo review by a district court in a “core” proceeding under 28 U.S.C. 157(b). Waiver and ConsentThe most intriguing aspect of this case is the role that waiver or consent may play in how the bankruptcy courts administer their dockets.  The right to trial by jury is one of the most fundamental rights under the Bill of Rights and yet, it can be waived by failure to make a timely objection.  If the right to an article III tribunal can be waived, then bankruptcy courts may proceed as they did prior to Stern so long as no party makes a timely objection.   Parties may consent to having a matter heard by a U.S. Magistrate or through binding arbitration.   If affirmative consent is required, then the courts will need to implement procedural mechanisms to ensure that consent is granted or denied at an early stage.    This is the approach taken by the proposed amendments to Rules 7008, 7012, 7016, 9027 and 9033.   The proposed amendments can be found here.    Finally, there are some matters which cannot be solved by waiver or consent.    Subject matter jurisdiction cannot be created by consent and can be raised at any time.  As a result, if Stern is like subject matter jurisdiction, then courts must proceed at their own peril.     The question for the Court will be whether Stern’s Article III mandate is more like the waivable jury demand, consent to a magistrate or subject matter jurisdiction.    Authority to Submit Proposed Findings and ConclusionsIf the Court finds that waiver and consent are not available when an Article III tribunal is required, the Court may soften the blow by adopting the Ninth Circuit’s alternate holding that Bankruptcy Courts may submit proposed findings of fact and conclusions of law to the district court.    Allowing submission of proposed findings and conclusions will allow the Bankruptcy Courts to continue hearing cases and entering proposed decisions likely to be rubber stamped by the District Courts.The EBIA case is a good example of how the ability to submit proposed findings and conclusions could protect the Bankruptcy Court.    The outcome of the dispute would not have changed based upon whether the Bankruptcy Court was allowed to enter a final judgment or merely submit proposed findings and conclusions to the District Court.   The Bankruptcy Court granted summary judgment, finding that there were not any material issues of disputed fact.    The District Court reviewed the Bankruptcy Court’s conclusions of law on a de novo basis.    Thus, the standard of review for an appeal of a final summary judgment and a de novoreview of proposed findings and conclusions would be the same.   Final ThoughtsChief Justice Roberts described Stern as a narrow ruling.    While the decision relied on some big concepts, it did not flesh out how the ruling would apply as a practical matter.    The forthcoming ruling in Executive Benefits Insurance Agency v. Arkison may provide some practical guidance as to how the system can work post-Stern, or perhaps it will just make life more complicated.

Joining the Fourth and Tenth Circuits, the Fifth Circuit has ruled that BAPCPA did not implicitly repeal the absolute priority rule in individual chapter 11 cases.    Matter of Lively, No. 12-20277 (5th Cir. 5/29/13), which can be found here.What HappenedThe case involved a Debtor who initially filed chapter 13 and then converted to chapter 11 because his debts exceeded the chapter 13 debt ceiling.    The Debtor then proposed a plan in which he proposed to keep his pre-petition non-exempt property while paying creditors more than they would receive in a liquidation.   Although no creditor filed an objection to the plan and the plan was approved by more than 2/3 in dollar amount, several small creditors voted against the plan, causing it to fail to meet the majority in number test under 11 U.S.C. Sec. 1126(c).    The Bankruptcy Court found that the plan could not be confirmed based upon its failure to satisfy the absolute priority rule. The Bankruptcy Court authorized a direct appeal to the Fifth Circuit.   Because no party had objected below, the case proceeded with an Appellant but no Appellee.   Unfortunately, the lack of an opponent was not sufficient to carry the day for the Debtor.   In an opinion written by former Chief Judge Edith Jones, the Court concluded that the absolute priority remains viable in individual cases.BAPCPA Confuses Things The Debtor's argument focused on some awkward language contained within sections 1115 and 1129(b)(2)(B)(ii) which indicated that the absolute priority rule had been modified.   There are three relevant statutory sections:First, section 1115 provides that property of the estate in an individual case included property acquired post-petition, including earnings from personal services.Second, section 1129(a)(15) provides that in an individual case in which an unsecured creditor objected, the Debtor must submit his projected disposable income under the plan for a period of five years.    Finally, section 1129(b)(2)(B) provides that a plan would be fair and equitable with regard to a rejecting class of claims if: (i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property; except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14)* of this section.    (emphasis added).*--The reference to subsection (a)(14) should probably refer to subsection (a)(15) instead. The statutory provisions add certain post-petition property to the estate, require the Debtor to make payments of projected disposable income if a creditor objects and allow the Debtor to retain "property included in the estate under section 1115."     This required an examination of just what property was included by section 1115.   According to section 1115(a)  (a) In a case in which the debtor is an individual, property of the estate includes, in addition to the property specified in section 541--(1) all property of the kind specified in section 541 that the debtor acquires after the commencement of the case . . . ; and(2) earnings from services performed by the debtor after the commencement of the case. . . . . Courts which have examined this language have divided between a "narrow" interpretation holds that "property included in the estate under section 1115" refers only to the post-petition property added to the estate, while the "broad" interpretation holds that section 1115's reference to "property specified in section 541" refers to all section 541 property.   Under the broad interpretation, because section 1115 encompassed all section 541 property, the Debtor could retain all of his property without violating the absolute priority rule. The Fifth Circuit Unconfuses Things The Fifth Circuit's opinion offers a very cogent explanation of why the narrow interpretation is correct. To answer Lively's question, we use standard tools of statutory interpretation, which focus on the language of the statute taken in the context of the Bankruptcy Code of which it is a part. (citation omitted). So doing, we are inclined to agree with the bankruptcy court in this case that the "narrow" interpretation is unambiguous and correct, and the exception to the absolute priority rule plainly covers only the individual debtor's post-petition earnings and post-petition acquired property. But even if the statutory language is ambiguous, then the "narrow view" must prevail, because the opposite interpretation leads to a repeal by implication of the absolute priority rule for individual debtors. (citation omitted).A plain reading of § 1129(b)(2)(B)(ii) in light of § 1115(a) is that both provisions were adopted when BAPCPA was passed in order to coordinate individual debtor reorganization cases to some extent with Chapter 13 cases, whose debt limit may throw debtors like Lively into a Chapter 11 reorganization. See11 U.S.C. § 109(e). Had Chapter 11 remained unaltered, Lively could reorganize in Chapter 11 under more favorable terms than those available to chapter 13 debtors. Chapter 13 subjects a debtor's post-petition "disposable income," including his salary and earnings, to creditor claims as a plan confirmation requirement. Before the BAPCPA amendments, however, an individual Chapter 11 debtor would only have to satisfy the absolute priority rule with assets that were "property of the estate" at the date of filing for relief; the individual debtor's personal post-petition earnings were not subject to liability to satisfy his creditors. In § 1115, Congress remedied this potential inequity in Chapter 11 by adding to the § 541 definition the individual debtor's post-petition earnings and property acquisitions. Other effects of this amendment were to bring such property interests within the protection of the automatic stay, (citation omitted), which benefits the individual debtor, while enabling court supervision of the debtor's use of those interests.  (citation omitted).When the debtor's post-petition property and earnings were added to Chapter 11, however, Congress also had to modify the absolute priority rule so that a debtor would not be saddled with committing all post-petition property to satisfy creditors' claims. (citation omitted). This most natural reading of the amendments renders no Code provision superfluous and reveals a reasonable purpose.Opinion, pp. 6-8.It is hard to argue with the Court's logic.   While it would have been nice for individual debtors to get a pass from compliance with the absolute priority rule, the general thrust of BAPCPA was to make things more difficult rather than easier for debtors. A major liberalization of the Code's requirements would have been out of character with the rest of the legislation and would likely have been a mistake.   However, the language does not lead to this conclusion.    There are two points to take away from this opinion.   The first is that it is important to talk to creditors during the balloting process.    If two small creditors had changed their votes from no to yes, then the class would have carried and the plan would not have violated the absolute priority rule.   When small unsecured creditors vote no on a plan, sometimes they are only looking for minor accomodations.   This is part of the bargaining process envisioned by chapter 11 and should be embraced by debtor's attorneys.The second is that the Court stated that Lively violated because the plan allowed him to "retain the above-listed valuable non-exempt pre-petition assets."   Opinion, p. 3.   While this was just a comment in passing, it is some authority for the position that the absolute priority rule does not prohibit retention of exempt property.   Because exempt property is not property of the estate, it should not be considered under the absolute priority rule.

Your After Bankruptcy Credit Report  Your after bankruptcy credit report is a big part of your “fresh start” in bankruptcy. That’s why it’s my job, as your bankruptcy lawyer, to make sure your after bankruptcy credit report is right. Only a handful of bankruptcy lawyers see it that way, and I’m one of them. Mistakes [...]The post After Bankruptcy Credit Reports–Why You and Your Lawyer Need to Follow Up appeared first on Robert Weed.

     The debtor's discharge was denied under 11 U.S.C. 523(a)(6) as a willful and malicious injury against the blanket lien-holder in In re Razykowski, 2013 WL 3043410 (Bankr. E.D. Pa. 2013).  The debtor, Ms. Razykowski, purchased a children's clothing store from the creditor in April 2008, paying $1,000 down and financing $57,244 the balance with a note to the seller.  The seller took back a lien on the inventory and proceeds.  Ms. Razykowski had been collecting approximately $500/week salary from the store after the purchase, but stopped collecting this salary sometime in 2009.  In late 2010 Ms. Razykowski conducted a liquidation sale of the inventory over several months, collecting $21,519 and leaving approximately $18,000 in inventory upon the closing of the store.  The proceeds were put in a segregated bank account.    Ms. Razykowski attempted settlement with the creditors in March 2011, which was rejected.  In September 2011 a judgment was entered against her on 12 September 2011.   On 15 September Ms. Razykowski withdrew the balance of the funds from the bank account, and kept the sum as cash in her home.  These funds were then used for her personal living expenses.     The seller filed a complaint under 11 U.S.C. 523(a)(6) to deny the discharge of the debt alleging willful and malicious injury, by using funds subject to the security interest for personal expenses.  Ms. Razykowsky asserted that she simply paid another creditor with the funds, herself, for the back wages owed.    The terms of the security agreement prohibited sale, lease, or disposal of the collateral without written permission of the seller.  While there was no qualification allowing for sale of inventory in the ordinary course of business, the court concluded that the parties intended for such sales to be allowed. However, there was no basis to conclude that this consent for sale extended to out of the ordinary course of business sales, much less to disposal of the proceeds of such a sale.  Thus written consent was required from the seller to dispose of the collateral or to pay expenses from the proceeds of such sale.    Sale of collateral may be the subject of an action for conversion.   The Court then examined whether the conversion was willful as required for §523(a)(6).  The Court quoted  Davis v. Aetna Acceptance Co.:   There is no doubt that an act of conversion, if willful and malicious, is an injury to property within the scope  of this exception.... But a willful and malicious injury does not follow as of course from every act of conversion, without reference to the circumstances. There may be a conversion which is innocent or technical, an unauthorized assumption of dominion without willfulness or malice. There may be an honest, but mistaken belief, engendered by a course of dealing, that powers have been enlarged or incapacities removed. In these and like cases, what is done is a tort, but not a willful and malicious one.293 U.S. 328, 332 (1934) (citations omitted).  The Court concluded that Ms. Razykowsky understood the duty she had to preserve the sellers security interest in the proceeds of the sale of the inventory.  This conclusion was based on three factors.  First, her testimony that she read and understood the security agreement.  This puts the burden on her to produce evidence that the conversion was not willful.  Second, her segregation of the proceeds showed her understanding that she did not have the right to commingle the funds or withdraw the funds for her own benefit.  This implies her understanding of the lienholder's superior claim to such funds.  Third, the seller had sent correspondence to Ms. Razykowsky's attorney indicating that several creditors were asserting UCC liens in the proceeds.  It is fair to assume that counsel communicated these concerns to Ms. Razykowsky.  Yet she produced no evidence why she believed an unsecured claim could be paid with funds on which creditors were asserting liens. Finally, the timing of withdrawal of the funds three days after the judgment suggests that Ms. Razykowsky was placing her interests ahead of the sellers.   The court granted a judgment of nondischargeability for the amount of the sale proceeds, rather than the amount of the promissory note.  There was no evidence that the original debt arose from a willful and malicious injury, thus the nondischargable injury related to the conversion of the proceeds not the original debt.

Here at Shenwick & Associates, many of our clients have complex bankruptcy cases involving factors that often lead to increased scrutiny by the Chapter 7 Bankruptcy Trustees assigned to the cases, as well as by the United States Trustee Program (USTP), a component of the U.S. Department of Justice that oversees the administration of bankruptcy cases and Bankruptcy Trustees. Some of these factors include: • High levels of income, expenses and/or assets • Tax debts • Business debts As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the USTP established procedures for independent accounting firms to audit petitions, schedules, and other information in consumer bankruptcy cases. However, due to the federal budget sequestration that began on March 1, 2013, the USTP has indefinitely suspended its designation of cases subject to audit and notified the independent accounting firms performing the audits. At the conclusion of fiscal year 2013 (Sept. 30th), the USTP will make public information concerning the aggregate results of the debtor audits performed during fiscal year 2013. To find out how you can minimize the chances of an audit of your bankruptcy case through pre–bankruptcy planning, please contact Jim Shenwick.

In an unusual move, the Supreme Court granted cert yesterday to consider the petition of a California man who filed a pro se petition for cert seeking to review the decision of a bankruptcy court to surcharge his homestead exemption under section 105.   No. 12-5196, Law v. Siegel.   The petition for cert and other documents can be found here courtesy of scotusblog.com.   The case involves a debtor who filed bankruptcy on January 5, 2004 and claimed that his homestead was subject to two liens which consumed all of its nonexempt value.    The Trustee was skeptical about a second lien in the name of Lilli Lin and filed an adversary proceeding seeking its avoidance.   After a default judgment was granted, an attorney appeared representing a Chinese national named Lili Lin.   The Trustee also served a Lilli Lin of Artesia, California who filed a stipulated judgment that she had never loaned any money to the debtor.    Indeed, Lin of California stated that she was an acquaintance of the Debtor and that he had approached her about concocting a fake lien on his property.  Meanwhile, Lin of China, who did not speak English, filed declarations in English which supported the Debtor's position and were similar to his writing style.    The lien was avoided and the property was sold.    The Trustee then sought to "surcharge" the Debtor's homestead exemption to recover some of his expenses incurred in setting aside the bogus lien.   The Trustee claimed that he had incurred attorney's fees of $456,000, far in excess of the Debtor's exemption of $75,000.  Without citing any legal authority whatsoever, the Bankruptcy Court surcharged the Debtor's exemption to cover a portion of the Trustee's costs.   In re Law, 401 B.R. 447 (Bankr. C.D. Cal. 2009).    The Ninth Circuit BAP affirmed citing Ninth Circuit precedent allowing exemptions to be surcharged "when reasonably necessary to protect the integrity of the bankruptcy process."    Law v. Siegel (In re Law), 2009 Bankr. LEXIS 4542 (9th Cir. BAP 2009).   The Ninth Circuit affirmed with a vague reference to discovery sanctions, a factor that had not been mentioned in either of the lower court opinions.   Law v. Siegel (In re Law), 435 Fed. Appx. 635 (9th Cir. 2011).    Undeterred, Stephen Law filed a pro se petition in the Supreme Court and requested permission to proceed in forma pauperis.   The Trustee objected to the petition and the Solicitor General opined that while it might be appropriate to consider surcharges under section 105, this was not the right case.   Nevertheless, the Supreme Court granted the petition on June 17, 2013.To say this grant of cert is remarkable would be an understatement.   The Supreme Court receives over 7,000 petitions for cert each year, most of which are in forma pauperis petitions  (According to Chief Justice Roberts, 6,160 cases out of a total of 7,713 filed in the 2011 term were IFP cases).   So far, the Court has accepted 32 cases for next year, only three of which are IFP petitions.   (Extrapolating this out, the chance of an IFP case being granted is about one-tenth of one percent).   The Court also tends not to accept many bankruptcy petitions, considering anywhere from one to four in recent terms.   Thus, the probability of accepting an IFP case concerning bankruptcy is astronomical.    Given the vague rationales in the lower courts, it is hard to guess what the Supreme Court may be thinking.    However, here are a few possibilities:a.   The conservatives on the Court want to squelch the use of sec. 105 to do things that aren't authorized by the literal language of the Code.b.   The Court wants to slap the Ninth Circuit.c.   The Court wants to make a statement about bad debtors.d.   The Court wants to scold Trustees who run up big legal bills.     e.   All of the above.Come this time next year we should know the answer.    

As a Virginia bankruptcy lawyer, people ask me almost every day, do I need to file bankruptcy after foreclosure? When I try to answer that question, we look at the credit reports.  Usually, the first mortgage shows “foreclosed” with a zero balance.  Does that mean you are safe?  Does that mean you don’t owe the [...]The post Do I need to file bankruptcy after foreclosure–update! appeared first on Robert Weed.

    In In re Checiek, 2013 WL 2468865 (Bankr. M.D. Fla. 2013) Judge Williamson discussed the possibility of exempting corporate assets in an individual chapter 13 case.  The Debtor filed a chapter 7 bankruptcy, and listed as exempt under federal exemptions a 2006 Volvo truck titled in the corporate name as exempt under §522(d)(6) as a tool of the trade.  John Brook, the trustee, objected to this exemption  that could not be a tool of the trade.   Judge Williamson indicated that corporate assets might be claimed exempt under the concept of reverse corporate veil piercing.  The Court looked to Florida law since the corporation was incorporated here and the activities related to the exemption occurred here.  Veil piercing is normally used by creditors of a corporation to seek assets of the corporation shareholder, but can be used by the shareholders of a corporation to seeking to disregard the corporate form for their own benefit.   Florida law requires a finding that the corporate form was used for a fraudulent or improper purpose to enable the piercing of the corporate veil.  For example, where the lender required the borrower to incorporate in order to avoid usury laws, reverse corporate veil piercing was allowed in Gilbert v. Doris R. Corp., 111 So.2d 682, 683 (Fla. 3rd  DCA, 1959).  As there was no evidence of a fraudulent or improper purpose to the corporate form, the debtor's exemption was denied.  Further, the Debtor respected all the corporate formalities.  Finally, reverse veil piercing would prejudice third parties.However, the door is left open in limited circumstances for corporate assets to be claimed exempt in individual cases.

  When you decide to work with us to determine if Arizona bankruptcy is the right choice for you, we will want to review all of your property (assets) and your debts. To read more about the kinds of information we will want, read our article on “Gathering All the Facts.” We will also want [...]

By JOANNE KAUFMAN No long chats with the doorman. No umbrellas or wet boots in the hall. No welcome mats or decorations on the front door. No wearing flip-flops in the lobby. These are but a few of the more extreme rules that apartment boards in New York City have imposed, or at least thought about imposing, on the residents of their buildings. The average co-op or condominium has two dozen house rules. “Typically, they’re quality-of-life rules meant to benefit everyone in the closed community,” said Toni Hanson, a vice president and senior managing director of Douglas Elliman. While there’s good sense behind many of these rules — don’t hang or shake things out the window; lay off the stereo before or after a certain hour — certain strictures can charitably be described as quirky, not to say capricious or overreaching. Your home is your castle? Think again. It’s all, of course, in the interest of helping a building full of strong-minded New Yorkers coexist in (relative) harmony. Co-op boards have long issued directives about deportment and decorum, and condo boards are increasingly following suit. For the most part, they are well within their rights. Residents can either get with the program or get behind a co-op coup to remove the big-brother board members in their midst. Generally, thanks to what’s known as the business judgment rule, boards have broad latitude in making, amending and rescinding house rules — the good, the bad and the decidedly wiggy. If board members think a situation needs to be addressed, they can address away without input from residents. According to Steven D. Sladkus, a real estate litigator at Wolf Haldenstein Adler Freeman & Herz, one of the few exceptions is a stricture with a financial impact, for example, a proposal to institute a flip tax. “Then,” he said, “there has to be an amendment to the governing document, which requires a vote of the shareholders.” Certain boards are more controlling than others, said Aaron Shmulewitz, who heads the co-op-condo practice at the law firm Belkin Burden Wenig & Goldman. “Some seek to regulate everything you do in a building, which I think would make it a less enjoyable building to live in,” he said. “But some residents like that, because they say it keeps inappropriate behavior out and keeps prices up.” Rules tend to fall into several categories, including the use of shared spaces like the lobby or the elevator, pets and their comportment, and outward appearances — both of the apartment owner and the apartment itself. And then there’s the whole vetting process to even get into a building. For one woman, an office coordinator in her late 20s who moved into a one-bedroom in the Clinton Hill section of Brooklyn last summer, it was the application request that took her by surprise. In addition to the employment, asset, credit, reference and background checks a co-op board generally requires before scheduling The Interview, the officers of this particular building also demand that a security company check out the current residence of would-be buyers, a visit for which applicants must pick up the $50 tab. “The lease on my rental was up, so I was staying with my parents on Long Island,” said the woman, who requested anonymity to avoid offending the co-op board. “I don’t think my childhood bedroom was going to give any clues about how I live, but if that was the policy, that was the policy. I wanted the apartment, so I was willing to do what I needed to do.” The scrutinizing, which took 45 minutes, included questions about the number of beds in each room, the number of people who slept in the beds and the nature of the flooring. The inspector also took photos of the interior of the house, the applicant and her parents. Reader, she passed muster — but remains puzzled. “I guess the board members wanted to make sure I was a regular person,” she said. When it comes to the space right outside an apartment, Eva Talel, a partner at Stroock & Stroock & Lavan, said that in certain buildings (and not just those that cater to the hoity-toity), tenants who deploy welcome mats, keep the front door propped open when they’re home, decline to lock the door when they leave and hang decorations on that (unlocked) door, are guilty of inappropriate behavior — guilty, in any case, of breaching house rules. “But one person’s decoration is another person’s religious symbol,” Ms. Talel said, referring to mezuzas, prayer cases that observant Jews affix to their door frames. “They can create controversy as well as a lawsuit. But the goal is uniformity within the building.” That seems to be the goal at the Upper East Side building where Mr. Sladkus lives. There, it’s “a violation to leave wet umbrellas, boots, shoes, et cetera, in the hallway outside your door,” he said. Mr. Sladkus received a reminder of this stricture via a building-wide memo one wintry night after his two young daughters — “briefly,” he said — left their snowy boots and umbrellas leaning against the door jamb. “I responded with a terse, intemperate e-mail how absurd I thought it was, since this is a family-friendly building,” Mr. Sladkus recalled. “And the response was that the building was redoing the halls and didn’t want to get them mucked up.” He then wrote back: “I can see if we had mahogany-lined hallways it might make sense, but we’re not living in the Taj Mahal.” And, he added defiantly, he continues to leave his umbrellas in the hall. Lucky for Mr. Sladkus, he doesn’t live in the Midtown East co-op where Dennis Paget is the president of the board, and where the “no umbrellas and boots in the hallways” rule is also in place. “I tell the staff people to confiscate them,” Mr. Paget said. Other “thou shalts” and “thou shalt nots” seem like a throwback to an upstairs, downstairs world. “The more controversial rules have to do with which people are required to use the service elevator,” Ms. Talel said. “Some buildings require it of everyone but residents and their guests. Some buildings may make an exception for nannies if they’re with their charges, and home health care aides if they’re with their patients.” Mr. Shmulewitz represents a Park Avenue building that for a few decades had a house rule barring nannies and other domestic employees from using the passenger elevators at any time. “The children had to be taken down by their caregivers in the service elevator,” he said. “It wasn’t a coincidence that they were often of a different ethnic persuasion than the shareholders.” “I think this shocked the conscience of the residents,” Mr. Shmulewitz continued. “There was enough shareholder dissent that the law was rescinded five years ago.” In some buildings, the double standard doesn’t involve residents and the hired help; it concerns residents and temporary residents. At a condominium on East 79th Street, people subletting apartments are not permitted to have pets, smoke or use the gym. “When a condo board imposes rules like this, they want to maintain differentiation and to keep things special for permanent residents,” said Gary Malin, the president of Citi Habitats. “They’re trying to make sure amenities like the gym don’t get overtaxed. The funny thing is that gyms rarely get used anyway.” Dogs are another bone of contention, thus the source of some singular rules. One East Side condo allows man’s best friend but specifically bans pit bulls, Rottweilers, German shepherds, Doberman pinschers, huskies, malamutes and chow chows, and reserves the right to prohibit additional breeds. Steven Wagner, a real estate lawyer, is on the board of a Midtown East co-op that is broad-minded about breeds but requires prospective canine residents to submit to an interview. “It’s a funny rule,” Mr. Wagner said. “I’m never sure what to ask. I just say: ‘Nice doggy,’ and I pet the dog. And then I say, ‘I have no more questions.’ No dog has bitten me yet. I think that would be a problem.” Jeffrey S. Reich, a lawyer at Wolf Haldenstein Adler Freeman & Herz, recently encountered an Upper East Side building that allows residents with pets to ride on the passenger elevator, but requires maids or dog walkers tending resident pets to use the service elevator. “A shareholder took offense,” Mr. Reich added, “because she didn’t think the service elevator was clean enough for her dog.” Some board fiats are catchalls to deal with unforeseen behaviors and situations. “A lot of the rules are reactive,” Ms. Talel said. “They’re a response to a negative experience in a building or a response to something that happened in another co-op. People will hear about it and they say, ‘we can’t let that happen in our building.’ ” That may explain the Chelsea co-op where a shareholder offered music lessons at home and the board responded with a rule that “no resident or their guests shall sing or coach another singer for more than two hours followed by a break of at least two hours — up to a maximum of six hours per day.” Several years ago, Mr. Sladkus said, his firm did work for an Upper East Side co-op with “a nice elderly woman who enjoyed spending her days in the lobby. She would read, she would greet the children as they came in after school,” he recalled. “She was lonely is what she was. She wasn’t doing anything destructive, but the lobby wasn’t sprawling.” Thus, some shareholders took issue and the board took action, drafting a rule prohibiting lobby visits that exceeded two hours. “It was passed,” Mr. Sladkus said, but some residents took pity on the lobby greeter and the rule was rescinded. Similarly, Mr. Shmulewitz tells of a building whose shareholders were perturbed that a wheelchair-bound resident was spending long periods of time in the lobby. “They felt it detracted from the look of the building, so they drafted a house rule that said ‘no wheeled vehicles in the lobby,’ ” he said. In the end, the rule was not enacted. “But,” Mr. Shmulewitz said, “a crafty board with an experienced lawyer can make a rule to address something they think is objectionable without seeming to target the situation that caused the problem in the first place.” Lobbies, it seems, are as much a flash point as elevators. Recently, Jay Molishever, a sales agent at Citi Habitats, took a client to look at an apartment on First Avenue in the high 50s. “It was a rainy day, but the doorman said there was a rule that buyers and brokers were not allowed to wait inside,” Mr. Molishever said. “My buyer was furious. He’s Israeli but looks Hispanic and he was concerned that it was prejudice.” When the selling broker showed up, the buyer announced he didn’t want to live in the building. “He thought the rule was rude and exclusionary and not the sort of place that merited it,” Mr. Molishever recalled. “He said: ‘This isn’t a Park Avenue building.’ ” In some instances, house rules seem more than anything like pre-emptive strikes. An Upper West Side co-op that wanted to bar a shareholder from using his apartment to screen what Mr. Shmulewitz characterized as “a highly charged politically controversial movie.” Thus, house rule No. 33, which in addition to limiting gatherings to 20 nonresidents and demanding — in advance — the names and addresses of all guests at a gathering of more than 10 people, also prohibited any gathering with a fund-raising purpose — a key component of the event in question. Penalties for noncompliance vary. Fines are one option for a board. “They can seem like slaps on the wrist — $50, $100,” Mr. Sladkus said. “But they do start adding up for repeat offenders.” Some buildings set at a certain amount for a first offense, with subsequent offenses carrying steeper fines. “And some governing documents provide for unpaid fines to be treated like unpaid maintenance or common charges,” Mr. Sladkus said, which would mean that offenders could lose nonessential services like food deliveries and use of the gym. And persistent violations could land the shareholder in the cross hairs of a claim “that gets your lease terminated,” he said. Most boards think carefully before passing a rule and take pains to look at it from all angles, said Ms. Hanson of Douglas Elliman. “They’re residents, too,” she said, “so it’s in their best interest to be judicious.” Perhaps checking out a building’s fiats isn’t quite as important as checking out its financials. “But you do want to see if they suit your lifestyle,” Ms. Talel said. “If you’re having 100 people to a party, some buildings require you hire someone to stand at the front door to identify everyone. Some buildings even have a limit on the number of these parties you can give each year.” Still, whether it’s the cachet of the address, the flow of the rooms or the view from the library, “if you’re in love with an apartment you’re not likely to change your mind based on a house rule,” Mr. Shmulewitz said. “There are very few egregious enough for that.” Copyright 2013 The New York Times Company.  All rights reserved.