Jul 152008

This one has been bothering me ever since the Question and Answer Session at the ISS Expo at the Venetian in Las Vegas in February of this year. I just had to write about it this month.

A question was asked at the Session about using the facility for garage sales. I think the question was misunderstood. I think the question was “Do you allow your facility to be used to host flea markets and garage sales or other charitable events?” However an operator answered that he has had a lot of success with garage sales instead of going through the lien sale process. For some reason that concept spent the entire week in Las Vegas trickling down to people wondering: (A) why I was banging my head against an airwall during the Session; and (B) why I have never recommended garage sales instead of lien sales.

In my opinion it is not legal to conduct a garage sale in lieu of a lien sale, as provided by your self-storage statute or, in states without a self-storage statute, the Uniform Commercial Code.
Let us examine why. In summary, all self-storage statutes, in some fashion, discuss that after a period of default and after other prerequisites such as certified mail, notices in opposition to a lien sale, advertising in a newspaper of general circulation or posting notices around the town, that you are entitled to exercise your lien against the stored property by selling the stored property.

A garage sale to me indicates that you have put the items out with a pre-determined price, that you have put a price tag on each item and that you are willing to sell the item for a certain price. Whether or not haggling is allowed, at some point if someone meets “your price” the item is then sold. Unfortunately garage sales are not designed to begin and end within a short period of time like an auction or public sale where all bidders are gathered around to look at an item, then everyone gets an opportunity to bid against the other to see who will pay the highest price for the item(s), and then a winner is declared. As you can see, the problem with the idea of a garage sale is you will never know whether you could have sold the item for more money had you waited for another buyer to come along. That is the advantage or importance of having an auction or public sale. You know of all the buyers coming to the sale that day that you will fetch the highest price any buyer will pay for that specified unit or item.

The state self-storage statutes, in general, say that a sale must be conducted in a commercially reasonable manner, such as the California statute. Statutes such as Georgia specifically say that the items must be sold to the highest bidder, indicating the requirement of an auction or a public sale. In any case, you could go through all state statutes and you would find the requirements are essentially the same. You are required to sell the items for as much money as you can reasonably fetch. I have previously written in ISS Magazine what makes a sale commercially reasonable (July 2006). Without going through that entire list from the article again, the UCC in most states sets out a 12 part test on what makes a sale commercially reasonable. Of course, the test has nothing to do with self-storage in particular, in most states; it just looks at what makes a sale generally commercially reasonable. That list is:

1. The nature of the collateral including its fair market value;

2. The re-sale price of the collateral;

3. The nature and amount of advertising to get buyers to a sale;

4. The use of genuine reasonable efforts to reach the appropriate market best able to use the collateral;

5. Whether the secured parties’ efforts are reasonably calculated to achieve a reasonable number of bidders or potential purchasers in an appropriate market;

6. The methods used to solicit bidders or potential purchasers;

7. The number of potential bidders contacted prior to the sale;

8. The nature of the sale (was it public or private?);

9. Was the sale conducted in a reasonable manner under normal business conditions (using standard business practices?) Were the services performed by an experienced, professional auctioneer;

10. The number of bids actually received;

11. The presence of collusion or self-dealing;

12. The good faith of the secured party.

Could you imagine if a car was repossessed by a bank and the bank simply stuck a “For Sale for $1,000.00” tag on the car and put it out in front of the bank. If that was your car and it could have been sold for $10,000.00 you would cry “fowl”, that your repossessed vehicle was not sold in a commercially reasonable manner, the highest amount of money was not raised for the vehicle, and thus the deficiency balance is unfair and, for lack of a better term, “fixed” at the banks discretion. I am sure you can see the same is true of a self-storage sale.

Look at factor No. 8 – the nature of the sale. If the testimony in a later lawsuit was that you put every item up for sale for $0.50 and that somebody would have purchased each item for $1.00 but they weren’t forced to because you pre-priced the item, you would be facing a claim that you did not conduct the sale in a commercially reasonable manner which could put you in violation of your lien sale statute or perhaps simply a claim that the tenant is entitled to money because you did not sell the goods for as much as the goods could have sold.

Look at No. 10 – the number of bids actually received. There is no bidding process at a garage sale, you put out a price tag and people decide whether or not to pay what you want.
Finally, look at No. 11 – the presence of collusion or self dealing. I think this is the biggest problem. If you set the price and no one buys the item, someone is going to come along and claim that had the actual market forces of an auction been allowed to take place that item would have sold for some amount of money, by your pricing it you prevented the sale of that item from happening, thus preventing money from being raised to help satisfy the lien or even create a surplus of proceeds.

I know that in most circumstances if you are conducting a lien sale, it is not that you are selling expensive jewelry, furs, gold bouillon, etc.; you are selling often what looks to be like abandoned property. I have said on many occasions “one man’s trash is another’s treasures.” For you to price it in a garage or yard sale type setting, based on your evaluation of the property is in clear violation of the factors described in the UCC of what makes a sale commercially reasonable and thus in violation of your state self-storage statute, if you have one, or a direct violation of the UCC standards if you operate under the need to have a UCC sale (because you have no state self-storage statute).

Thus, while I am sorry to the attendees who left the Expo thinking that a garage sale might be a great idea, the type of garage sale you should allow at your property, if any at all, is the type where you allow your facility to be used to host a garage sale of property that is not stored at your facility, or maybe to allow people to sell property out of their own units that are not in lien status (although this seems to be self defeating to our business model).

Unfortunately, a yard sale is just not the way to dispose of property when it goes into default at a self-storage facility.
Jeffrey J. Greenberger is a Partner with the law firm of Katz Greenberger & Norton LLP in Cincinnati, Ohio and is licensed to practice in the states of Ohio and Kentucky. Mr. Greenberger’s practice focuses primarily on representing the owners and operators of commercial real estate, including self-storage owners and operators.
This column 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’s new website, www.selfstoragelegal.com, contains Jeffrey’s legal opinions and insights into the self-storage industry, as well as an article archive.
Jeffrey is the legal counsel for several State Self-Storage Associations, as well as a regular presenter at Inside Self-Storage Trade Shows. You can send your questions, comments, or suggestions for future topics to Jeffrey J. Greenberger at jjg@kgnlaw.com, or mail them to Jeffrey J. Greenberger, c/o Katz Greenberger & Norton LLP, 105 E. Fourth Street, Suite 400, Cincinnati, Ohio 45202, or you can reach Mr. Greenberger at (513) 721-5151.



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