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Warding Off a Wrongful Sale

Scott Zucker Comments

It’s been some time since the self-storage industry has seen a large judgment against a facility owner. But the recent appellate decision in the case of Barshak v. American Equity Insurance Co. has jolted the industry to recognize the risks of a wrongful foreclosure sale of a tenant’s stored property. This case has some unique facts storage operators should consider and, of course, some expensive lessons for all to learn.

The Story

The case itself arose from an August 1997 storage lease in which Jackie Barshak rented a unit from Container Storage Inc. (CSI). Because she was leaving to spend a year abroad, she paid a full year of rent in advance and provided the name and address of a local contact as the party to whom any notices should be sent during her absence.

The First Flag: This wasn’t a typical rental. Somewhere in the tenant’s file, this alternate contact information must have been placed. But when the unit went into default, CSI admittedly did not send the notices to the local contact.

The Lesson: When any unit is rented under special circumstances, it’s important to note those matters in the file. Further, where any alternate contact information is given, it should be used before the property is sold.

Due to non-payment, the unit was sold at auction in May 1998. When Barshak returned, she learned her property had been sold, and her local contact had not been notified. She sued the facility on multiple grounds including breach of contract, fraud, negligence and intentional infliction of emotional distress. She sought damages not only for the fair market value of her property but sentimental value, mental anguish and punitive damages. Barshak and CSI agreed to binding arbitration of their dispute.

The Second Flag: Assuming that CSI’s rental agreement contained any legal defenses that would have protected the facility from the claims and damages asserted in Barshak’s complaint, the case should have stayed in the courts. Instead, for whatever reason, the facility operator agreed to let an arbitrator hear the case. This is a dangerous decision when it comes to self-storage matters.

Essentially, arbitrators are not bound to make decisions based on the law. They are entitled to base decisions on equity or fairness. In this case, it was fairly certain?due to the admission by CSI that the company failed to notify Barshak’s local contact of the default and pending sale?an arbitrator would find against the facility for some amount.

But whereas a judge and jury are bound by legal principles, arbitrators can still decide what is fair as compared to what might be “legal.” So even if there was a limitation-of-value provision in the rental agreement, or a release of liability provision, or even a provision that prohibited the storage of sentimental or emotional property, arbitrators are not bound to interpret those provisions the same way a court might. Further, binding arbitration gives little opportunity for appeal; whereas the court system allows a multitude of appellate opportunities that might have given CSI a method for reducing the amount of the award against it.

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