Special Report

What Self-Storage Operators Stand to Lose in Lien-Sale Battles
The Gonzales v. Personal Storage Case

By D. Carlos Kaslow

When the California Supreme Court refused to disturb the Court of Appeal decision in Gonzalesv. Personal Storage Inc. 56 Cal. App. 464 (1997), it brought down the curtain on afive-year legal battle that will forever change the self-storage business in the state ofCalifornia and perhaps the nation. The court let stand one of the largest jury verdictsever returned against a self-storage operator and made new law affecting the damagestenants may collect when storage operators do not strictly comply with lien-saleprocedures.

The Story

The suit arose when Lucy Gonzales rented a large storage unit at Personal Self Storage.Gonzales, an older woman, placed into the storage space property she had collected overher lifetime. The contents included rare furniture, heirlooms and keepsakes. According toboth Gonzales and one expert hired by Personal Storage, the replacement value of theproperty was approximately $196,000. Another Personal Storage expert said the fair-marketvalue of the property was approximately $50,000 to $60,000.

At some point during her tenancy, Gonzales became delinquent in her rent. The storageoperators sent her a notice as required by the California Self-Service Storage FacilityAct. Gonzales then made a payment, which she was told brought her account current. Whenshe became delinquent again, the facility simply advertised the property for sale and sentGonzales a copy of the advertisement by mail rather than restarting the lien process fromthe beginning.

A few days after running the ad, Personal Storage, without checking for properidentification, accepted rent payment from a woman claiming to be Gonzales. The womanremoved the contents from the space and left. A cashier's check for the amount due onGonzales' space arrived in the mail two days later. Personal Storage informed Gonzales ofthe "mix-up" and told her that all of her property was gone. She was devastatedby the loss. She withdrew from community activities, neglected her business and soughtmedical attention.

Gonzales filed suit against Personal Storage. She alleged that the company's conductconstituted negligence, conversion and violation of statute. The court found in Gonzales'favor and awarded her $59,959 for the loss of her property, $87,466 for conversion and$232,582 for emotional distress. The trial court refused to grant the plaintiff's claimfor more than $100,000 in attorney's fees, which was based upon a rental provision thatprovided for an award of attorney's fees to the prevailing party in any suit.

Personal Storage appealed the emotional-distress damages award and Gonzales appealedthe denial of attorney's fees. The court held that, under the terms of the rentalagreement's provision, an award of attorney's fees was not discretionary--as theprevailing party, Gonzales was entitled to her reasonable compensation. The total cost ofthe Gonzales suit with interest and attorney's fees exceeded $500,000.

Protecting Yourself and Your Facility

This decision was a major loss for self-storage operators. It opens a Pandora's Boxfull of speculative damages that can be awarded against a self-storage operator in anyclaim based upon the wrongful sale of a delinquent customer's property. A storage operatorwho sells just a few items can be liable for tens of thousands of dollars inemotional-distress damages if the property has "special value" to the customer.

What can storage operators do to protect themselves from emotional-distress damagesawards? First, make certain your lien-sale procedures strictly comply with your state'slaw. In most states, emotional-distress damages can only be awarded when you wrongfullyseize your customer's property. The California Court of Appeal specifically stated in theGonzales case that emotional-distress damages may not be awarded when a customer'sproperty has been stolen or damaged. Typically, the only time a storage operator takespossession of a customer's property is when tenants fail to pay rent and the operatorbegins lien-foreclosure procedures.

Second, check your insurance coverage. Standard insurance policies typically do notcover wrongful sale of tenant property. There are four specialty insurers serving theself-storage industry that provide coverage on customers' stored property and for wrongfullien sales. However, even storage operators who have the right coverages do not alwayscarry adequate limits. All too frequently, storage operators only carry limits of $10,000to $25,000 per claim when $250,000 or $500,000 are more realistic amounts in light of theloss potential.

The last step that a storage operator may want to consider is to modify the rentalagreement. Storage operators do not control the type or nature of the property theircustomers store. They do not know if the contents of a storage space are just ordinaryproperty or property to which their customer has a special attachment, the loss of whichcould have devastating effects on the customer's mental health. Since a mistake is alwayspossible in the operation of any business, it may be in the best interest of both thecustomer and the storage operator if the customer simply agrees not to store any propertyto which he may have a special attachment. A rental agreement provision along thefollowing lines may provide some protection against suits alleging emotional distress:"Tenant agrees not to store collectibles, heirlooms, jewelry, works of art or anyproperty having special or sentimental value to Tenant. Tenant waives any claim foremotional or sentimental attachment to the stored property."

This provision is untested, and we strongly recommend that it be discussed with anattorney before it is included in a rental agreement. It is impossible to predict how ajudge will rule on such a provision, but it may provide some protection against claimsthat sold, damaged or stolen property had special value or that the customer wasemotionally traumatized by its loss. Most tenants are not as emotionally fragile as theplaintiff in the Gonzales case, but we suspect that every storage operator has at leastone customer as sensitive as she is.

D. Carlos Kaslow is editor of The Self Storage Legal Review, a bimonthly newsletteron legal issues pertaining to the self-storage industry. For more information or to obtaina subscription, Mr. Kaslow may be reached at 2203 Los Angeles Ave., Berkeley CA 94707;phone (510) 528-0630.