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Warding Off a Wrongful Sale

March 1, 2008

6 Min Read
Warding Off a Wrongful Sale

Its 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 tenants 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 wasnt a typical rental. Somewhere in the tenants 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, its 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 CSIs rental agreement contained any legal defenses that would have protected the facility from the claims and damages asserted in Barshaks 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 Barshaks 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.

The Lesson: If you have a good rental agreement that contains protective language in favor of the facility, do not forego your right to have your case heard in court. That is not to say cases should not be settled if they can be, either through mediation or non-binding arbitration. But a facility operator should never forego the protection of the rights afforded him under the terms of a well-written lease agreement by resorting to arbitration.

The other lesson is to make certain youve recently reviewed your rental agreement, ensuring that it contains the proper exculpatory provisions to protect your facility in the case of a wrongful sale. Provisions such as value limitations can go a long way in capping the liability risk you may face if you hold an improper sale.

Judgment Day

As the story goes, the arbitrator found in favor of Barshak; CSI was negligent, had converted her property, and the tenant was harmed by the companys acts. The arbitrator awarded Barshak special damages of $1,141,936, property damages of $152,320 and general damages of $2,500,000, for a total judgment of $3,794,256! This is believed to be a record judgment against a self-storage operator for this type of case.

Since CSI had assigned its insurance rights to Barshak as part of the arbitration agreement, Barshak then pursued her claim against CSIs insurance company, American Equity Insurance Co. Since the facility had its commercial generalliability policy with American Equity only between July 15, 1998, and July 15, 1999, the company denied coverage for the loss occurring before the policy had started (May 1998).

Additionally, since this was not a sale-and-disposal policy, American Equity claimed this was not a covered loss under the policy. When Barshak sued the insurance company, the court granted summary judgment in favor of American Equity.

The Third Flag: The facility did not have the proper insurance to protect it against the risk of wrongful sale. Even if the policy had been in effect at the time of the sale, the policy did not cover the type of loss that arose from the foreclosure and sale of the stored property. Although more insurance companies now offer their self-storage customers sale-and-disposal coverage, this specialized product is not part of a typical comprehensive general-liability policy.

The Lesson: If youre in the self-storage business, you must have some type of sale-and-disposal coverage. Dont assume this coverage is part of a standard insurance package.

A special effort should be made to include sale-and-disposal as well as customer-goods legal liability protection as part of your insurance package. The amount of coverage is up to you; but without it, youre left to defend yourself in the case and are subject to the collection of any judgment against the business own assets, including the facility itself. Even though large claims are not common, they occasionally happen, and the decision to be uninsured is risky.

Again, this type of judgment is unusual and apparently arose as the result of a number of missteps along the way. The moral of the story has resonating value: Facility operators should take a step back and ask themselves, What would I have done? or maybe How are my managers trained to deal with this situation?

Certainly, the question should be asked, What does my lease say about storing sentimental or emotional items? or Does my insurance cover wrongful sales? By asking these questions, storage operators can better prepare themselves for the risks they face each time they lease a unit. Although this was an expensive lesson for this particular storage operator, what you can learn from this case will save you money in the future. 

Scott Zucker is a partner in the law firm of Weissmann & Zucker, P.C., in Atlanta. He specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. Mr. Zucker is a frequent lecturer at national conventions and is the author of Legal Topics in Self Storage: A Sourcebook for Owners and Managers. He is also a partner in the Self Storage Legal Network, subscription-based legal services for self-storage owners and managers. He can be reached at 404.364.4626 or [email protected]

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