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 Gonzales v. Personal Storage Inc. 56 Cal. App. 464 (1997), it brought down the curtain on a five-year legal battle that will forever change the self-storage business in the state of California and perhaps the nation. The court let stand one of the largest jury verdicts ever returned against a self-storage operator and made new law affecting the damages tenants may collect when storage operators do not strictly comply with lien-sale procedures.
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 over her lifetime. The contents included rare furniture, heirlooms and keepsakes. According to both Gonzales and one expert hired by Personal Storage, the replacement value of the property was approximately $196,000. Another Personal Storage expert said the fair-market value of the property was approximately $50,000 to $60,000.
At some point during her tenancy, Gonzales became delinquent in her rent. The storage operators sent her a notice as required by the California Self-Service Storage Facility Act. Gonzales then made a payment, which she was told brought her account current. When she became delinquent again, the facility simply advertised the property for sale and sent Gonzales a copy of the advertisement by mail rather than restarting the lien process from the beginning.
A few days after running the ad, Personal Storage, without checking for proper identification, accepted rent payment from a woman claiming to be Gonzales. The woman removed the contents from the space and left. A cashier's check for the amount due on Gonzales' space arrived in the mail two days later. Personal Storage informed Gonzales of the "mix-up" and told her that all of her property was gone. She was devastated by the loss. She withdrew from community activities, neglected her business and sought medical attention.
Gonzales filed suit against Personal Storage. She alleged that the company's conduct constituted 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 claim for more than $100,000 in attorney's fees, which was based upon a rental provision that provided for an award of attorney's fees to the prevailing party in any suit.
Personal Storage appealed the emotional-distress damages award and Gonzales appealed the denial of attorney's fees. The court held that, under the terms of the rental agreement's provision, an award of attorney's fees was not discretionary--as the prevailing party, Gonzales was entitled to her reasonable compensation. The total cost of the 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 Box full of speculative damages that can be awarded against a self-storage operator in any claim based upon the wrongful sale of a delinquent customer's property. A storage operator who sells just a few items can be liable for tens of thousands of dollars in emotional-distress damages if the property has "special value" to the customer.
What can storage operators do to protect themselves from emotional-distress damages awards? First, make certain your lien-sale procedures strictly comply with your state's law. In most states, emotional-distress damages can only be awarded when you wrongfully seize your customer's property. The California Court of Appeal specifically stated in the Gonzales case that emotional-distress damages may not be awarded when a customer's property has been stolen or damaged. Typically, the only time a storage operator takes possession of a customer's property is when tenants fail to pay rent and the operator begins lien-foreclosure procedures.
Second, check your insurance coverage. Standard insurance policies typically do not cover wrongful sale of tenant property. There are four specialty insurers serving the self-storage industry that provide coverage on customers' stored property and for wrongful lien sales. However, even storage operators who have the right coverages do not always carry adequate limits. All too frequently, storage operators only carry limits of $10,000 to $25,000 per claim when $250,000 or $500,000 are more realistic amounts in light of the loss potential.
The last step that a storage operator may want to consider is to modify the rental agreement. Storage operators do not control the type or nature of the property their customers store. They do not know if the contents of a storage space are just ordinary property or property to which their customer has a special attachment, the loss of which could have devastating effects on the customer's mental health. Since a mistake is always possible in the operation of any business, it may be in the best interest of both the customer and the storage operator if the customer simply agrees not to store any property to which he may have a special attachment. A rental agreement provision along the following lines may provide some protection against suits alleging emotional distress: "Tenant agrees not to store collectibles, heirlooms, jewelry, works of art or any property having special or sentimental value to Tenant. Tenant waives any claim for emotional or sentimental attachment to the stored property."
This provision is untested, and we strongly recommend that it be discussed with an attorney before it is included in a rental agreement. It is impossible to predict how a judge will rule on such a provision, but it may provide some protection against claims that sold, damaged or stolen property had special value or that the customer was emotionally traumatized by its loss. Most tenants are not as emotionally fragile as the plaintiff in the Gonzales case, but we suspect that every storage operator has at least one customer as sensitive as she is.
D. Carlos Kaslow is editor of The Self Storage Legal Review, a bimonthly newsletter on legal issues pertaining to the self-storage industry. For more information or to obtain a subscription, Mr. Kaslow may be reached at 2203 Los Angeles Ave., Berkeley CA 94707; phone (510) 528-0630.