It’s no secret that the economy is in poor shape, particularly the finance market. As a result, self-storage operators find themselves faced with more commercial tenants who go out of business or default on their units, leaving behind sensitive records that contain personal information about members of the public.
For example, a defunct mortgage broker might leave behind hundreds of mortgage applications, tax returns, pay stubs, etc., in a self-storage unit. Even some medical professionals are ceasing operation and leaving records that contain health information, Social Security numbers and other documents for the self-storage operator to handle.
I have long been a proponent of excluding from a lien sale any personal items or those that have no resale value to the buyer, such as diplomas, photographs and documents. When people ask me how to enforce this, my general answer is “the honor system.” The sale rules signed by the bidder should exclude these items, and buyers should be required to return these items when found to the facility owner or manager for safekeeping or proper disposal. But what if an entire unit is full of what appears to be business records?
Facing the Issue in Maine
This issue has recently been brought to light in Maine. A mortgage company had records in self-storage and was going out of business. The self-storage operator notified the Maine Bureau of Consumer Credit Protection that it had a storage unit full of files containing clients’ personal information. The mortgage broker had defaulted, and the unit was scheduled for sale.
The bureau’s superintendent tried to obtain the records to prevent them from being lost or falling into the wrong hands. But the facility owner refused to release them, contending he had a lien against the unit’s contents and the right to sell them for a price. The bureau then served the self-storage owner with a subpoena and took the records out box by box.
This scenario contemporaneously played out in the court of public opinion, outraging Maine legislators who then introduced Bill LD 366 in attempt to “over correct” the issue. I won’t describe the bill in detail here because it’s sure to change. (Already the bill has been tabled for at least a year, thanks to the efforts of the state and national self-storage associations.) However, the intent of the bill is to impose legal liability on the self-storage owner for any piece of personal data or record released into the hands of anyone, aside from its rightful owner.
When I first learned about what happened in Maine, I knew it would only be a matter of time before someone proposed a bill that would go way over the top and make storage operators legally responsible for the items sold. It appears our nightmare scenario is potentially coming true.
The problems with the Maine bill are several. First, it imposes a different kind of liability on self-storage owners than it does on any other real estate owner who might evict a tenant. For example, under the bill as written, if a mortgage company is evicted from its office, the building owner would not have the same responsibility as a self-storage owner to control and dispose of the records. The same holds true for an apartment owner.
Thus, the Maine bill is potentially unconstitutional because of its prejudicial treatment of the self-storage industry. The facility owner, who is simply trying to reclaim his space, is punished under this bill, which makes storage the best go-to dumping ground for business records. In essence, if business owners cannot shred their records, they can put them in self-storage, where the operator retains all the liability.
As a self-storage operator, you generally do not have any control or knowledge of what is stored in a unit. Even if you wanted to prohibit records from being stored and created a lease provision to do so, there’s no real way for you to enforce it.
What Should You Do?
Self-storage operators in all states should learn a lesson from Maine. If you find a unit that appears to be full of records, do not sell them. If you find a unit containing records and other items, sell the other items and exclude the records. You may be able to work with a state agency that will be willing to take the records into custody.
In Ohio, we have an agreement with the local Academy of Medicine stating it will take any medical records stored in a unit that is in default rather than allow the records to be sold, lost or otherwise destroyed because patients may need them. It appears in Maine that the Consumer Credit Protection Agency would have been willing to take the records if the owner would have released them.
What do you do with records if no one else will take them? First, determine if your state statute discusses the right to “dispose” of property. In many states, in the small print, the statute says you may sell or dispose of property. While I do not know what your individual state means by “dispose,” I imagine the language was written for situations in which a sale is not possible, not simply a shortcut to clear out a unit.
If you have the right to dispose, there should be no problem with giving a notice of intent to dispose rather than sell, and then dispose of the contents properly by shredding or destruction. If you do not have the right to dispose, you may have to take the extra step of evicting the unit to get the right to dispose of the contents. In either case, the court of public opinion will never tolerate a large release of records containing a bunch of personal information into a dumpster.
Some of you have argued that the expense of shredding or other destruction is prohibitive and would ruin your business. Records disposal is not something you want to take on, especially if you believe there is no precedent to justify it. You do not control what goes into the unit, but suddenly you will have a duty to patrol what goes out.
I say there is precedent because there are other types of goods you would never sell. For example, if you opened a unit and found illegal property, drug-making paraphernalia, weapons, liquor or other items you know you cannot sell, you wouldn’t attempt it. You would arrange for proper disposal. In this day and age, records containing personal information are the “new” illegals, and you must make provisions to deal with them properly. If this means raising your rent on commercial units, so be it.
I’ve found that if you arrange for a regular shredding service, the price is pretty much the same whether you shred a little or a lot, and can be manageable. It’s time to factor a shredding service into your operating budget.
You can argue all you want that it should not be your responsibility to dispose of these records—and I will agree with you. But once the records are on your property and the unit goes into default, if you have no agency to take them, you cannot simply put them in the dumpster. First, you risk damage to your reputation in the community and the court of public opinion. Second, you risk causing your state legislature to escalate your current level of responsibility to an affirmative duty to find and properly dispose of records left in units.
The Maine bill comes with some extra neat “benefits” that will hopefully go away. For example, it requires storage operators to register with a bureau to regulate the industry, along with a potential registration fee. It also includes a records-disposal policy that must be approved by the bureau before you can continue your sales. Believe me ... it’s cheaper to shred or properly destroy these documents than it is to bring this kind of bad law into your state.
This article is for the purpose of providing general legal insight into the self-storage field and should not be substituted for the advice of your own attorney.
Jeffrey J. Greenberger is a partner with the law firm of Katz Greenberger & Norton LLP in Cincinnati and is licensed to practice in Kentucky and Ohio. Mr. Greenberger primarily represents the owners and operators of commercial real estate, including self-storage owners and operators. To reach him, call 513.721.5151; visit www.selfstoragelegal.com.