As this article is written, it is almost the end of the year 2010, although you will be reading the article in March 2011. It is this time of the year, when many of you are taking stock of your blessings and making your New Year’s resolutions, that I stop and take stock of the self-storage industry as a whole and think about what looms ahead (legally) for the next year in the self-storage industry. Yes, I know, I have a boring life.
Every few years Amy Campbell convinces me to write an article about what I am thinking might be top legal threats of the upcoming year and while I may lead a boring life I like to shake things up too, so this time, in David Letterman style, I will start with number five and get to number one at the end of the article. Don’t peek.
5. Selling a tenant who is in active military service. As I travel the country and meet so many of you at various shows or talk to you via e-mail or phone, I still find many operators do not know about or understand the requirements of the Service Members Civil Relief Act (“SCRA”) (which used to be called the Soldiers and Sailors Civil Relief Act.) Many of you still do not have a question in your lease agreement asking about the status of military service, as a minimum, so that you know whether to check to see if the person is still in the military, or worse, in the military and stationed overseas, before you try to enforce your lien rights. The SCRA is a Federal law which imposes upon you a requirement to know about military service of your tenants by asking about it. The Statute protects you if someone lies to you and tells you they are not in the military service when they actually are; however, the SCRA does not allow you to just “bury your head in the sand” and not ask about military service and later claim no knowledge. There are two large problems with SCRA violation: (1) you have broken a Federal law which comes with both civil and/or criminal penalties; (2) the public relations nightmare you will create for yourself by selling the goods of a soldier stationed overseas might be worse for your business than the potential of you going to prison for an SCRA violation.
If you do not understand the requirements of the Act, particularly if you are not even asking about military service in writing on your application or rental agreement, make the change today. This threat is too big and risky to continue to ignore.
While those of you at the facilities at or near military bases are probably laughing at this one, I have had several facilities near military bases tell me that they simply have all of their military personnel tenants waive their rights under the SCRA. I have looked and looked for a provision that allows you to get a waiver of rights under the SCRA and have never been able to find it. I have asked people involved in the military whether these rights can be waived and they laugh at me. Until someone shows me where in the law a service member can waive his/her rights under this Act, I do not think you can.
4. Bankruptcy. You will note above in #5 I made no prediction about the number of brave men and women who will be serving overseas in 2011 and forward. I will make a bold prediction, but an easy one, about bankruptcies. That is, the number of your tenants filing bankruptcy will skyrocket between now and 2012. How can I make such a bold prediction? Is it my knowledge of economy and market forces? The answer is a much simpler factor that allows me to make this prediction. If you remember, bankruptcy reform went into effect October 2005. There was about a year’s advanced notice that bankruptcy reform was coming, and the rumor about bankruptcy reform was that Chapter 7 bankruptcies were probably going to go away or be completely impossible to file. Therefore, everyone who even thought about filing bankruptcy filed it before the Reform Act went into effect in 2005. You can only file one Chapter 7 bankruptcy every seven years. We are coming to the end of the seven-year cycle where everyone rushed to file bankruptcy. It turns out, Chapter 7 did not go away with the Bankruptcy Reform Act and that even after the Reform Act the number of Chapter 7’s being filed have continued to grow. There is a gigantic crop of people who are coming up on their seven-year anniversary over the next year or two that you will find are, especially with the economy in as bad of shape as it is, poised and ready to file bankruptcy on the seventh year and one day after the anniversary of their last filing. These are your tenants.
If you do not understand your obligations under the bankruptcy law, now is the time to get educated and understand what you can and cannot do in the event your tenant files bankruptcy. It is my experience that facilities that have never seen a bankrupt tenant before the last three or four years are seeing several a year now. Facilities that used to have several bankruptcies are seeing many. That number is going to skyrocket over the next few years. Everyone is going to have a bankrupt tenant. The problem with bankruptcy is that the bankruptcy law is sort of written like Alice in Wonderland. Anything that would seem right or make sense to you is the opposite under bankruptcy law. It is easy, almost too easy, to accidentally violate bankruptcy laws because you proceeded in a logical manner rather than what is required under the bankruptcy code. The problem is if you violate the bankruptcy laws, particularly if you violate a bankruptcy judge’s Automatic Stay Order, you are facing the possibility of monetary sanctions, some of which can be severe against you in favor of your debtor/tenant for ignoring the court’s Order. Think of terms of contempt of court when I discuss violation of the Automatic Stay. Judges do not like to have their Orders ignored or violated. You may say it is innocently ignored but remember bankruptcy, like Alice in Wonderland, generally holds that innocently ignoring an Order is not much of a defense.
You also need to learn how to use PACER or have someone that knows how to use PACER check bankruptcies for you before you send out lien notices and before you conduct your lien sales. PACER is the Federal Court’s docketing system and allows you to get a good idea (quickly) whether or not your tenant has filed a bankruptcy. Some in the bankruptcy world argue that you are obligated to check PACER before you begin a lien sale.
3. Missing a change to your state lien laws or state lien sale procedures. Many states have undertaken changes in lien laws over the last year or two. Many more states are eyeing these types of changes in 2011 and 2012. First of all, get involved with your state associations to make sure the lien law changes that they propose are in your business’ best interest. Don’t let a committee of 12 make these decisions for you. Secondly, if and when your lien laws change make sure you have a way of being aware of those changes so that you do not sell or serve notices by a new method that is no longer permitted under your state statutes.
2. Wrongful sale verdicts. Wrongful sale lawsuit verdicts rendered against self-storage owners and some courts’ refusal to enforce the value and negligence limitations in your rental agreement continues to be of great concern. Most of the large-dollar verdicts remain cases of sales where the property should not have been sold in the first place. Several cases over the last few years have had verdicts ranging in the $1 million to almost $4 million dollar range. Many other cases that are, by comparison, lower dollar verdicts $50,000.00 to $900,000.00 are for other types of “technical violations” where the tenant may have been delinquent but the operator did not follow the statute exactly to properly have a sale. All of these cases are alarming and there are full-length articles by me and others in ISS discussing cases like Dubey v. Public Storage in depth. For the purposes of this article if you are going to conduct lien sales you must have a system of checks and balances to avoid making a mistake where you sell somebody’s unit who shouldn’t have their property sold, and you must really and truly understand how to properly conduct a lien sale. Notice â€“ understanding how to properly conduct a lien sale does not include, “I learned to do it from the old manager that way.” There are statutes that must be followed exactly in order to properly perform a lien sale. If you haven’t read your statute in a long time, or if you do not believe you are selling properly, or you are ignoring parts of the statute because they are inconvenient or difficult to deal with, then buy yourself some legal advice and learn how to do sales properly by having your attorney create a protocol for you or buying a set of pre-prepared protocols from somebody in the industry who knows what they are talking about, customized to your state and preferably to your particular operation. If you are not going to do this, get out of the business of conducting lien sales.
1. The television show Storage Wars. Give me a minute to explain and no, I’m not just jumping on the bandwagon of Storage Wars. Much has been written recently about the television show Storage Wars but I think it represents a great threat to our industry in 2011 from a perspective of an industry lawyer, rather than a fan of the show. First, if you are one of the facilities where Storage Wars is filming, you are creating Exhibit “A” in a wrongful sale trial; a videotaped, nationally televised copy of this tenant’s lien sale for tenant to pick apart. As an attorney watching the show, I see errors made in these sales and it drives me crazy. I keep wondering to myself, “When is a tenant going to watch their own goods being sold on national television, recognize that the facility did something in error, and file a lawsuit for violations,” using the taped raw or edited footage of the sale as proof positive that there were violations. That is perhaps the smaller of my two concerns that makes Storage Wars the legal threat of 2011.
My larger concern is that judges and potential jury members, as well as self-storage tenants, are starting to believe that every self-storage unit is a treasure trove, where no matter what you pay at auction you will get so much more out of the unit than what you paid for it (i.e. the operator never sells a unit for its full value.) I have had many judges, knowing my involvement in the self-storage industry, ask me if I am enjoying the show because they are, and I politely answer this question yes; however, I know that human nature dictates the judges are starting to believe that self-storage units are full of nifty and expensive items. This has bad implications. Let’s use as an example a wrongful sale at a self-storage facility. The tenants that are “victims” of the wrongful sale sue ownership and allege all sorts of missing valuable property. You can substitute out wrongful sale for theft while your overlock is on the unit, building fires, wrongful access, etc. In the old days, we would at least have an argument that a tenant who was habitually late paying their $75.00 a month in rent probably did not have $100,000.00 worth of antique guns in their unit. Judges simply didn’t believe that people who struggle to pay the bill to the self-storage facility every month would have such valuable property stored in the unit, with the exception of emotional and sentimentally important items. Now judges and juries are going to think differently. We are going to allege that what was sold at lien sale or what was in the unit when we inventoried it and put our overlock on the unit was a mattress, box spring, and some old clothing. Tenants are going to allege items like I saw on Storage Wars such as fishing poles and antique guns. I wouldn’t have thought a fishing pole was worth that much money, but the guys who found them in the unit on the last episode of Storage Wars that I saw said they were worth a lot.
From now on we are going to be in a battle to disprove the value of every item instead of trying to make the tenants prove there was value to their items.
I will say Storage Wars has done some wonderful things for the industry. If nothing else, it has put a lot more people on notice, in case they missed it, when the signed the rental agreement, that if you do not pay your rent, your goods are eventually sold to pay off your bill. That is actually a great development in our industry. However, Storage Wars should make you want to hire an independent third party like an auctioneer, even if your state does not require an auctioneer, to cut the lock, inspect the goods, evaluate the value of the goods, and sell them for what somebody else other than you deems to be fair market value lest you be in court someday with a judge who has developed what I will now coin as a new term “Storage Wars Bias” towards the value of the property in the unit.
As this industry has grown and matured it is clear that the freedom to run your business exactly the way you want it to of yesteryear is gone. You must be a smart, savvy, and aware business person with more policies and procedures as well as checks and cross-checks to avoid what have become obvious legal pitfalls to the industry in 2011. Good luck in 2011.
Jeffrey J. Greenberger is a Partner with the law firm of Katz Greenberger & Norton LLP in Cincinnati, Ohio and is licensed to practice in the states of Ohio and Kentucky. Mr. Greenberger’s practice focuses primarily on representing the owners and operators of commercial real estate, including self-storage owners and operators.
This column is for the purpose of providing general legal insight into the Self-Storage field and should not be substituted for the advice of your own attorney.
Jeffrey’s website, www.selfstoragelegal.com, contains Jeffrey’s legal opinions and insights into the self-storage industry, as well as an article archive. You can send your questions, comments, or suggestions for future topics to Jeffrey J. Greenberger at firstname.lastname@example.org, or mail them to Jeffrey J. Greenberger, c/o Katz Greenberger & Norton LLP, 105 E. Fourth Street, Suite 400, Cincinnati, Ohio 45202, or you can reach Mr. Greenberger at (513) 698-9350.