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Contending With a Lawsuit

In this industry, like many others, it is a possibility you will be sued at some point in time. Lawsuits come in many different varieties in self- storage, but there are several types we see all the time. The first and most obvious is the lawsuit over wrongful sale (the wrongful disposal of property). The second type is the breach of contract/failure to perform (refund cases). The third type is employment-related lawsuits, such as wrongful discharge, sexual harassment, and wage and hour claims. The fourth type is the class-action lawsuit, which I have discussed so often in this column. This would involve late fees, for example.

Anyone with $200 can file a lawsuit. That does not mean the complaining party is correct. Unfortunately, there is no one in the Clerk of the Court's office who reviews cases to see if they are valid before allowing them to be filed. There are some steps you can take that will help you ward off some--but, of course, not all--of these potential lawsuits.

Wrongful Sale/Disposal of Property

To avoid suits of this nature, first ensure your lease is well-written, clear and unambiguous, especially where it outlines when rent is due and what happens if it is not paid on time. Forty-seven of the 50 states have lien-sale statutes that can give you guidance. (See the "Legal Perspectives" column in last month's issue for more details.)

It is important you review your lease and lien-sale procedures--preferably with your attorney--to ensure you are in compliance with your state's statute. If you have complied with the requirements of the statute, including minimum waiting periods, inventory, advertisements, mail notices, conspicuous language in your notices, etc., your liability to your tenant for a wrongful sale can be minimized or completely eliminated. Thus, these types of lawsuits are easy to avoid--or at least easy to win--by following your state's statute.

Breach of Contract

Most of us have run into a tenant who is simply dissatisfied with his experience at your facility. More often than not, the dissatisfaction arises from a break-in, damage to or theft of his property, roof leak, gate failure, etc. This is the type of person who, regardless of how well-written your lease is, thinks you are a baby sitter for his property and somehow responsible for his damages and losses, no matter how they occur.

While you have insurance to cover these types of claims--and while your insurance will almost always defend you and, if necessary, pay a judgment--many operators maintain policies with deductibles that might exceed the amount of the claim. Further, turning too many claims into your insurance company will result in rate increases or the insurance company dropping your coverage. Thus, there is a certain class of claims lawyers refer to as nuisance claims. These claims may or may not be valid and have demands not worth involving the insurance company. However, you and your facility cannot afford a reputation of simply paying the demand of every tenant who deems he is entitled to some type of compensation.

The universal factor we find in these types of lawsuits is, at the outset, the claim demands a sum of money, $500 for example. By the time the lawsuit is filed, the amount has often doubled or tripled. These cases have a way of multiplying, as the tenant becomes more angry when his demands are not met. We also hear from plaintiffs that if they had received an apology or some recognition of their claims, they never would have filed the lawsuit. Sometimes resolution is as simple as an apology, an agreement to transfer or a small concession that not only keeps the tenant, but keeps him out of court.

Another alternative to avoid a lawsuit is mediation. For a reasonable fee, most communities have a business-mediation service through either the court system or the chamber of commerce. Mediation is not court. It is an opportunity for both sides to meet with an impartial person--the mediator--who is trained to assist with the resolution of disputes by exploring options. While you may not be able to negotiate with an irate tenant and settle a case for an apology and a couple of months of discounted rent, an impartial mediator, after allowing the tenant to vent and helping him understand the potential weaknesses of his case, may be able to achieve the same result.

That result may cost you, the owner, a few hundred dollars. But it's the same few hundred dollars you would pay your attorney to simply begin defending the lawsuit, not to mention the potential judgment that could be rendered against your facility by a sympathetic judge. In many states, you can compel the tenant to mediate before filing a lawsuit by including a mandatory-mediation provision in your lease.

In any event, if you resolve the dispute through settlement with the tenant or mediation, make certain you obtain from the tenant a release of all claims accruing up and through the date of the settlement, including any issue raised in the complaint. Without a release, the tenant can theoretically go to court and sue you later for the same circumstances. With a release, which should be prepared by your attorney, you can block the tenant from ever bringing up the problems or issues he had with you in any type of action before a court.

The most common mistake I encounter with self-storage operators who settle their own cases is they base their settlement on a handshake rather than a written release. Sometimes an oral agreement works; sometimes it comes back to haunt you. It is simply too large a risk to resolve any dispute without a written release.

Employment-Law Issues

States vary in their laws regarding an employer's ability to discharge employees. If you have even one maintenance person or manager, you should strongly consider having an employee handbook outlining your company's policies regarding everything from absenteeism to vacation and everything in between.

An employee handbook must be drafted by your attorney. There are too many state-specific issues that must be included for this document to be purchased from a stationery store. Almost all employee handbooks, however, have some common threads, such as statements about sexual harassment, payment of wages or salaries, vacation policies, termination policies, expected behavior, including any uniform requirements, and attendance issues. An employee handbook should be given to every new hire, and a signed receipt should be retained by ownership. If you are instituting use of an employee handbook with current employees, ask your attorney about the appropriate consideration to give employees to make policies binding.

The employee handbook buys you, for a small price, excellent legal protection--if you follow your own rules. For example, if you terminate an employee who is habitually late and you do not have an employee handbook, the employee may cite other alleged reasons for the termination. However, if the employee received and signed for an employee handbook that states excessive tardiness or absenteeism is grounds for discharge, you are in a far better position. You can now show a judge or jury the employee knew what was expected of him and failed to act in accordance with requirements for employment.

An interesting development, which has been around for a long time but is really coming home to roost in the self-storage industry, is fair wage and hours claims by managers. The Fair Labor Standards Act is a federal law. As you may know, people who are in management can be salaried and may not be subject to the provisions of this act, which requires payment of overtime for more than 40 hours worked in a week, or eight hours a day in certain circumstances. However, there have recently been cases involving the apartment industry, for example, where people who have the title of manager are not considered management by the act's definitions.

Generally speaking, for a manager to be exempt from the requirements of the act, he must be an executive, professional or administrative employee. He must receive a fixed salary even if he does not work a 40-hour week. An executive generally must manage at least two other employees and exercise a significant amount of discretion and independent judgment in doing his job. The administrative exemption is more like a project manager instead of a manager of employees. Still, this employee must exercise a substantial amount of independent discretion in his position, be included in decisions that directly relate to the company's management policies, and operate with only general supervision.

In either position, the manager's work must significantly relate to the success or failure of the business. If these employees do not have this sort of authority, they are not actually management; and even though you have them on salary, they might be entitled to overtime for working in excess of 40 hours a week. Self-storage facility managers often work more than 40 hours a week, either because of staff shortage, busy weeks when rent is being received, maintenance, etc. The penalties for wage and hour violations are substantial, and the look-back period is two years, or three years in the event of a willful violation. Consult with an attorney to see if changes should be made to your policies.

Class-Action Lawsuits

While these suits are rare, they have certainly garnered a lot of attention in our industry, especially over late fees. Please make sure your late fees are in compliance with your state statute and are not punitive. (For more information, refer to the "Legal Perspectives" column in the April 2001 issue of Inside Self-Storage.) More local self-storage associations are trying to lobby for statutes that provide guidance for the types of late fees you should be allowed to charge. Most recently, Missouri and Arizona have passed such bills, with other states likely to follow.

Until your state has a late-fee bill, make certain your late fees are not unreasonably high or find other creative ways to avoid charging late fees. For example, some operators require all tenants give them a credit card with authorization to charge the card in the event rent is not paid on time. These operators avoid all late rent. The few tenants with issues such as maxed-out credit cards are not being charged late charges; rather, the operators are simply working to remove those people from the facility via lien sale, eviction, etc. This is just one example of what operators are doing to get around the problem.

When You Are Sued

All of this being said, there is still a good chance that, at some point, you could be sued. There are several things you should do as soon as you are served with a summons from a court:

1. Immediately tender the claim to your insurance company in writing by certified mail.

2. Prepare and organize the file pertaining to the claim.

3. Conduct your own investigation and review existing policies.

Notifying the Insurance Company

Most insurance policies have a provision stating that if you do not notify the insurance company you are being threatened with a lawsuit and/or being sued within a certain number of days after receiving notice, its obligation to cover you is waived. Even if you are not certain you want to invoke your insurance coverage, you must immediately let the insurance company know there is a potential claim.

If there is any question as to whether the insurance company will cover the claim, it may issue what is called a reservation of rights letter. This letter says that while the insurance company will assume the obligations of defending you in a lawsuit, it reserves the right to determine whether the claim is actually covered and whether it would actually have to pay any judgment rendered against you.

The insurance company will assign an attorney to handle the lawsuit. This attorney, while employed by the insurance company, works for you. You make decisions about the case with him. The insurance company only authorizes payments of settlements or pays judgments. That being said, it is never a bad idea to keep your own attorney involved in the case to always ensure your best interests are being represented or in case some portion of the claim is not covered by insurance. Often, the attorney hired by the insurance company will not have the working knowledge of your business and industry that your own attorney has. You would be responsible for your own attorney's fees, but that minimal investment may pay great dividends later in the case.

Preparing and Organizing the File

As the owner of the facility, you want to make certain you have a complete and accurate file regarding the situation. Documents have a habit of disappearing--especially if your employee has done something wrong. Before anyone else in the company knows about the lawsuit, compile a full and complete copy of the tenant's file, including computer printouts and all written documentation. If the lawsuit is a claim against the facility for something such as a personal injury or theft, make certain you have obtained copies of all police, fire, and/or ambulance reports and witness statements. You should also take photographs of the scene of injury, accident or theft.

It is also important to gather the names, addresses and phone numbers of anyone who may have seen or learned any information about the case who may be able to act as a witness. As time passes between the filing of the lawsuit and the trial (this can be several years), you may forget or lose track of the people who could be witnesses in the case. Gathering this information early will make it easier for you and/or your attorneys to find these pertinent people later.

Conduct an Investigation and Review Policies

If this is a claim by a tenant for some type of wrongful action, make certain you have not actually done something wrong before preparing a large and expensive defense. If you have done the alleged act, find out if it was somehow justified. If not, it might be in your best interest (and less expensive) to get out of the lawsuit early through settlement. This would also be an appropriate time to review your policies and procedures and ensure you have properly instructed employees to avoid a reoccurrence of the same problem.

Be aware there is a time limit by which you must file an answer and certain other pleadings with the court. If you miss these deadlines, you may not only lose by default, but you may waive the right to assert counterclaims or join other parties in the lawsuit. This is not the time to be frugal with your money and avoid hiring a lawyer. If you have not reported this claim to your insurance company and/or it has not appointed an attorney, obtain one on your own.

Assuming complaints and answers are all properly filed, there will be a period of time for what is known as "discovery." During discovery, each party is entitled to obtain information from the other party, including asking questions about the nature of the case, determining valuations, and reviewing medical records, incident reports and all other documents that may be used at trial.

Some of the forms of discovery may be familiar to you, such as interrogatories, requests for production of documents and depositions. Others, such as requests for admissions and requests for physical examinations may not be as familiar to you, but the idea is there should be no surprises at trial. A properly prepared case should allow you and your attorney to know exactly what the other side intends to claim and the basis for those claims, as well as the evidence, reports and all other documents they intend to produce at trial.

If you find through discovery that the plaintiff has a good claim against you, there are opportunities, informally and through court intervention, to reach a settlement or negotiated resolution of the matter. Sometimes, cases may even be sent to binding or nonbinding arbitration, where one or several independent parties listen to the case and render an evaluation/judgment on the claim. Other cases are sent to mediation for the same type of back-and-forth negotiation described earlier in this article.

If all else fails, the case eventually will have its day in court. A larger, complex class-action case has its weeks in court, while a simple property-loss claim may have its 15 minutes in court. In the end, both sides will have had the opportunity to have a judge or jury determine who is responsible for the alleged loss, and how much the alleged loss is worth to the injured party. If the plaintiff wins, there will be a judgment for the plaintiff, and an amount will be awarded that will have to be paid by you or your insurance company, depending on the nature of the claim and your coverage limitations.

For a self-storage owner/operator, there is absolutely nothing fun about litigation. It is not only distracting, costly and time-consuming, but emotionally difficult. It is never easy to be told that you are wrong or may have done something wrong. That is why good documents, preparedness and a willingness to listen and resolve the situation early is more important than ever.

Jeffrey Greenberger practices with the law firm of Katz Greenberger & Norton LLP in Cincinnati, which primarily represents owners and operators of commercial real estate, including self-storage. Mr. Greenberger is licensed to practice in the states of Ohio and Kentucky, and is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. He is a regular contributor to Inside Self-Storage magazine and the tradeshows it sponsors. For more information, Mr. Greenberger can be contacted at Katz Greenberger & Norton LLP, 105 E. Fourth St., Suite 400, Cincinnati, OH 45202, or by calling 513.721.5151.

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