Kennet M. Piken and Associates.

Inside Self Storage

March 2004

By Kenneth M. Piken

Now that the embryonic nature of our business has passed and we're "all grown up," self storage operators deal with issues that were not necessarily worth contemplation at the time of facility construction. Once a site is fully operational, legal issues crop up involving third parties, some as a result of a breakdown in diligence when it comes to paperwork. This does not necessarily mean a missing rental agreement; it could also mean a missing notice from a court or law firm, or documentation supporting proof of deceased status or a pending estate, etc.

This article provides a brief overview of the various rules, regulations and laws that affect situations in which your customer is no longer your customer and third parties get involved.

Bankruptcy

There are four types of bankruptcy. The first is commonly referred to as Chapter 7, which is broken down into two categories: corporate and personal. The other types are Chapter 11, also known as debtor-in possession, and Chapter 13, which is a personal reorganization. The concept of the different types is vastly different, except the two Chapter 7s operate primarily the same.

The most important thing to note is once you have any sort of proof even if it's just reasonable suspicion of a bankruptcy filing on behalf of your tenant, you must take no action with respect to this customer. What has happened is a federal judge has ruled that any action against this entity/person's life or business is automatically stayed. This notice includes the telephone call from the attorney 10 minutes before your auction is scheduled to commence. As it is often said in criminal law, "certain things cannot be undone," and it is better to inconvenience the facility operator than have a bankrupt party's goods be lost forever.

This is what is commonly referred to as a "362 Stay," referring to the Bankruptcy Code of the United States. It is extremely important to note this is federal. While bankruptcy judges are not necessarily at the same hierarchy as other federal judges, they are appointed by the President. What this means is when the Bankruptcy Court has spoken, there is no judge or individual who can alter the process. This is frustrating for a variety of reasons, not the least of which may be the personal relationship you have with the customer. Unfortunately, in the case of bankruptcy, the property is frozen and no longer that of your customer.

Briefly stated, in the case of a Chapter 7, the trustee takes over the affairs; in the cases of Chapters 11 and 13, the United States trustee oversees the affairs of the debtor. While it may seem the trustee would wish to take possession immediately so the property can be liquidated to pay off creditors, the opposite is often the case. In a Chapter 7, the trustee is paid a flat fee and then a percentage on property recovered for liquidation and, ultimately, payment to creditors. However, if the trustee does not feel the property of the debtor is even worth examining, the process becomes extremely difficult and frustrating.

Most bankruptcy law firms operate on a large volume basis. Accordingly, it is difficult at best to get the attention of the trustee, who is usually an attorney. The proper measures to take are to immediately notify the Bankruptcy Court that you are holding property of the debtor (contents and value unknown) in a room the size of which can hold a certain amount of goods. You must also notify the trustee, whose name, address and phone number will appear on any bankruptcy filing. These contacts can be any number of well documented, well timed, methodical phone calls. Then, in a week or two, contact the court and the trustee in writing. You should document every attempt you have made to contact the trustee prior to judicial intervention.

If the tenant contacts you, entry to his unit is not permitted, nor is any alternate contact access. Remember, the property no longer belongs to the debtor. There will be many passionate pleas these must be ignored. Of course, the unit should be over locked immediately.

From the moment you are notified a bankruptcy filing exists, there is debt owed to you by the tenant. But going forward, you are seeking a different type of payment, known in the Bankruptcy Court as an administrative expense. An administrative expense is usually paid 100 cents on the dollar, whereas any "pre petition debt' is customarily paid on pennies per dollar.

There is one caveat. Any payments made to you within 90 days of the filing of the bankruptcy petition can be considered by the trustee as a "preference," i.e., preferential treatment was given to you over another creditor. This could be extremely onerous, as payments made to you up to 89 days prior to the filing, even if they were for back payments, can be completely overturned and recaptured by the trustee.

To recap the Chapter 7 worst case scenario, let's say a customer pays you for three or more months of arrears 85 days before filing bankruptcy. He is now almost three months past-due again. You havealready paid your auctioneer and inventoried the property. The bankruptcy notice comes in virtually minutes before the auction. You fail to contact the trustee for some period of time, and accordingly, you are somehow denied administrative expense as a result.

Aside from following the few simple guidelines above, you can become more aggressive in a bankruptcy. The bankruptcy rules permit going to the court to request relief from the automatic stay. The motion is a fairly easy one. It spells out the facts. You make allegations that you were preserving the assets of the estate and indicate to the judge that the monthly charges go up ad infinitem unless you are allowed:

1) Payment for the months in arrears from the date of bankruptcy
filing as well as going forward.
2) Continual payments until removal or abandonment of the property. Although aggressive, this approach is usually effective, as the last thing a trustee wishes is for the judge to be told by an independent third party that he is not acting expeditiously and costing the bankruptcy estate money.

A Chapter 13 filing is usually done by a pro se litigant (meaning, on one's own behalf). Common to these filings is a request to reorganize debts and "give me some breathing room." Conversely, as the Chapter 7 is an outright and immediate liquidation-subject to some rare exceptions-the individual ceases to exist in the eyes of the business world.

The Chapter 11, being the most complicated, is reserved for corporations. In its wish to stave off creditors, the entity does not cease to exist, but changes its form and operates as a "debtor-in-possession." All of the previous debts are frozen, but the company continues to operate on its own, under the auspices of the United States trustee, paying, ongoing debts on a C.O.D. basis. You cannot take any action to enforce the previous debt; however, the company must file a plan of reorganization and operating statements in a limited period of time.

Again, the most recognized way to protect yourself is to file a "362 motion" relief from the stay as quick ly as possible. There must be, however, good faith efforts on your part to get paid for administrative expenses and have the goods examined by the trustee prior to filing the motion.

Most jurisdictions do not permit corporations to appear in court without an attorney; however, rules of appearance are somewhat lax in certain jurisdictions. Same clients pay for the preparation of an omnibus motion for relief from the stay, customizing it so facts can be inserted and it can be used again. More often than not, pro se corporations have been able to file their own motions and appear before the Bankruptcy Court to plead their own cases, with some success.

Death

Many of the "generic" rules above are applicable in the case of a tenant death. There can be only one authorized person recognized by the probate/surrogate's court that can handle the affairs of a decedent. That person is appointed by the surrogate's court in what is known as Letters of Administration or Letters Testamentary. This is a letter issued by the court, with its raised seal, designating a certain individual to be the only person who may enter the deceased person's unit. In many instances, there are limitations on this, such as a limit to only take inventory and not remove contents.

The right of an authorized party to gain access to a deceased person's unit is usually not a recognized procedure; however, co-contracting parties whether they be husband and wife, etc.) are usually granted access. The issue of power of attorney is often raised, though it should be noted a power of attorney ceases to be valid when the person giving the power dies. Furthermore, there are no alternates or substitutes. Some of the more aggressive pleas have come from people who have no right to receive the property. Although no one wishes to maintain a unit in default, when the customer is so insistent, there must be something of value in the unit.

There are instances where no letters from the court are issued and a 'Hold Harmless Agreement" may suffice. This agreement should specifically identify the relationship between the parties; explain why the person wishes to take the property, i.e., for a keepsake or a need to transfer personal effects to another party; and state that the person accessing the unit is the only next of kin. There should also be a provision that if you get sued, the person who accessed the unit agrees to be sued by you, and further agrees to indemnify you as well as pay your attorney's fees. The agreement is substantially safer if handled through attorneys at both ends. If the appealing party is willing to go to such lengths, and you are able to contact the surrogate's court or Department of Health for a death certificate to verify no other letters have been issued, the agreement may suffice.

Other Claimants

There are numerous other instances in which the general rules for third parties apply. These might include a situation in which a corporation is no longer in business, and yet the proper signatories are on the account to access its unit, or one in which an employee who has left a company never have power to any other party to access the company's unit.

Another common circumstance is a divorce, in which a spouse may not have been on the contract but requests access. Or the s spouse may be on the contract, and the alternate party wants to now deny access. Remember, verbal modifications to an agreement are completely ineffectual-for example, a husband calling and saying, 'Do not let my wife in the unit even though she is on the agreement." These sorts of statements should not be recognized. In all business transactions, but particularly ones involving third parties, caution must be used to avoid potential liability. Before acting, always ask yourself what could be the potential harm to your business if you act too quickly, take time to consider options, or work with a lawyer. As a general rule of business, reasonable prudence should dictate.

Kenneth M. Piken is a practicing attorney who has been in law for more than 25 years and is the senior partner in the New York-based firm Kenneth Piken & Associates. The firm encompasses all aspects of law, with a concentration on real estate and logistics matters. It has participated in or handled virtually every Appellate New York case affecting self-storage operators, all with favorable results. Mr. Piken was general counsel for the New York Self Storage Association for more than 15 years and participated in drafting and lobbying a New York lien law. He has lectured throughout the country and written articles involving self-storage in every major trade publication. For more information, visit www.pikenlaw.com.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

Copyright © 2002 by Kenneth M. Piken and Associates.. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.