Storage Wars and the Credit Practices Rule

A few times I have caught Storage Wars, a television show on A&E. When storage units customers do not pay their fees, the contents are auctioned off by the storage unit company. The show follows professional treasure hunters who bid at these auctions. The catch is that the treasure hunters are purchasing the unit without full knowledge of the unit's contents. With all the drama of finding out what was behind door number three on Let's Make a Deal, viewers get to watch these treasure hunters paw through the storage unit's contents and try to profit by finding items of real value. Every now and then, an item of tremendous value might be uncovered. A few days ago, I started wondering how this was legal.

The law of every state apparently gives the storage unit operator a lien against any property stored in the unit and allows the storage unit operator to auction off this property to recover unpaid bills. These laws are a great deal for the storage unit operator but not such a great deal for the customer. The auctions often must include items of little value to the storage unit operator but of great sentimental value or replacement value to the customer.

There is already a regulation that is supposed to police these sorts of situations, and as a federal regulation, it would control over any contrary state law. Specifically, the Federal Trade Commission (FTC) created a rule that bans the taking of a nonpossessory, non-purchase money security interest in household goods. A purchase money security interest (or "PMSI" as lawyers call it) is one where the loan enabled the borrower to purchase the collateral used for the loan. Common examples would be a car loan or a home mortgage loan. A non-PMSI is everything else. The FTC adopted the regulation in 1984 to put an end to predatory lending practices where consumer lenders would routinely repossess household items of little value just to put pressure on the consumer to repay. The regulation now falls under the jurisdiction of the new Consumer Financial Protection Bureau (CFPB).

Still, the application of the existing rule to storage unit liens is far from a slam dunk. First, it would only apply to the extent the items in the storage unit are "household goods." Many items in storage units, of course, would meet that definition but many others would not. The most difficult legal issue is whether the rule applies at all to storage unit operators. By its own terms, the rule applies to "lenders" and "retail installment sellers." Storage unit operators might be selling services on a "deferred payment basis," which is the way the regulation defines a "retail installment seller." Even if the storage unit fee is nominally payable in advance, the customer can still access the unit if payment is made later and thus could be seen to be paying on a "deferred" basis. But, it all depends on what the rule means by "deferred."

One might also question whether the storage unit operator's security interest is possessory and thus outside the federal rule. After all, the goods are physically located on the storage unit operator's premises, but location of the goods would not be dispositive. When a friend parks his new Porsche in my driveway during a visit, it cannot be said I am in possession of the Porsche simply because it is parked on my driveway. (If I am wrong about that, let me know as I would like to take it for a spin.) Possession requires something more than location. Importantly, many of the same statutes that create the liens for the storage unit operator also specify that any items in the storage unit remain in the custody and control of the customer. And, I would bet that many--or maybe all--of the form contracts used in the industry contain similar language to try to protect the storage unit operator for liability for damage to stored items. If the items are in the custody and control of the customer, it is hard to see them as being in the possession of the storage unit operator.

A friend said that he did not think the federal rule would apply to a statutory lien like the storage unit liens, but why not? A state could not simply adopt a law that circumvented the federal rule by saying the activity prohibited by the feds is now deemed to be a statutory lien. Why should the storage unit liens be any different? Moreover, the rule is broad and applies to any direct or indirect taking of a security interest. Of course, the rule does not necessarily invalidate the lien -- it just makes the taking of a lien an unfair trade practice.

All things considered, the storage unit industry probably does not have a lot to fear from the federal rule. It would take an unusual case to raise the issue. In most of these situations, the dollar values are too low to make it worthwhile to make a federal case out of it (literally), and even then it is not clear what the standing would be of a single customer. The industry certainly does not seem to expect its activities fall under the ambit of the federal rule, and I am not a big fan of using the courts to suddenly upset settled commercial expectations. Still, the auctioning of items in the storage unit may be the same raise the same sort of problems the FTC meant to address in its original rulemaking. As the CFPB contemplates the future of the credit practices rule, perhaps its application to storage unit liens should be considered, and the CFPB can create a more level playing field for storage unit customers.

A different question is what the bankruptcy laws have to say about these storage unit liens. If I have the time in the next couple of days, I may follow up on those points.

Comments

[ted janger]

What I have wondered is whether the storage unit operator is accountable to the "tenant" for any surplus over the unpaid rent.

[Knute Rife]

These are true leases, not finance leases. I don't think you're going to find many courts that will characterize landlords as "lenders" or "retail installment sellers."

[David Fuller]

Some of my clients keep what they refer to as their "toys" in the storage units, especially once they've stopped making the payments on them. Toys are things like ATV's, snowmobiles, dirt bikes, jet skis boats, and the other expensive detritus of poor financial decisions. If a storage unit tried to auction them off, there is an issue of lien priority. It's not inventory and some toys require title registration in my state.

Also - I'm pretty sure that there's a direct correlation between purchasing a "toy hauler" and filing bankruptcy.

[c. hokanson]

Agree with Knute that this is property law. Would add that these liens are much more like innkeepers, or even warehouseman, liens. The analogy to retail and consumer financing regulations doesn't work, at least not to me.

I am pretty familiar with the California statutory scheme that applies to auctions in the original storage wars show (there is now another one in Texas). That scheme addresses the issues raised by the other commentators -- it specifies that excess proceeds go to the tenant/renter and that liens under the vehicle code have priority and have to be auctioned off in accordance with the vehicle code (which requires notice to all lien holders etc.)

I would also say that this isn't such "a great deal for the storage unit operator." They are in the business of selling space, not auctioning off property, and they haven't been paid by someone that occupied their space. Complying with the lien/auction law requirements is also an administrative pain. And the most they are going to get is the money that they should have been paid to begin with. They do not get to keep the excess funds.

[Thomas WIcklund]

Where I live in Colorado a local auction company sells storage unit contents. This is not sight unseen (I had never heard of Storage Wars), rather all of the items are out for inspection. Most of the stuff is junk, some I'm sure with sentimental value, but from what I've seen I'd guess a fair percentage of abandoned storage units are stuff people no longer want, so they just quit paying on the storage unit.

[Bryan Gates]

I went to few storage auctions in North Carolina a few years ago. The format was similar to "Storage Wars," open the door, allow a quick look and sell the contents as a unit.
The sales prices were not high as a rule, unless there was something visible (like mechanic tools) that had some obvious value.

[Steevo]

So the rule likely applies but it's being ignored. And it would cost too much to litigate.

But if the rule is applicable perhaps the state attorney general should look into those practices and make sure the law is being completely complied with. I'd be for that.

It's often troubled me that a storage auction might sell all the items for $1500 to satisfy a $600 unpaid storage bill, then those items might be resold for much more.

Not really right, is it?

[Tonka]

This whole area of the law get's even more murky when dealing with container's stored on-site, usually at the lessee's residence or place of business (e.g. "Pods"). I know most of the contracts to lease these containers purport to grant a lien/security interest on the contents, and provide that the Lessor has the right to remove the container and sell the contents upon default by the lessees? This seems to leave open questions of perfection, and priority under the UCC, and the lease of personal property usually falls outside the scope of state self-storage laws. Does the lessor of a container have to file a financing statements. Is a lessor truly protected in using a contract that purports to take a security interest in contents?

[Steevo]

As to the issue Tonka brought up about the on site storage containers, I can't imagine the container provider would have any interest at all in the contents. It's not theirs and it's not stored at their place. They just rented a box to put them in at someone else's place. No part of it is in their possession.

Why would the container owner be able to repossess the container and someone else's property contained therein?

I would think their sole remedy would be to sue for the unpaid rent or the value of the empty container. Anything else is just ridiculous.

Now, it would be different if they took the container somewhere and were being paid to store it.

If anyone has anything to say about this I'd love to hear it.

[H]

Have to wonder at the format of the auctions. Wouldn't lots more be gotten for the contents if they were on display for bidders?

Doesn't the storage place have a duty to try and get at least reasonable bids by allowing inspection?

The whole storage wars show is based on the idea that the folks who store stuff are getting ripped off.

[ruserious?]

This is no different than a landlord's lien. A storage space is being leased, and if you don't pay for the space, the owner has a possessory lien on what's inside. There is no question that the federal law is not applicable here.

[Steevo]

ruserius, that depends greatly on state. In some states a landlord has significant rights from unpaid rent.

In some states, like California, I think a landlord has very few.

[Whatever]

Is there a certain amount of time that must go by before the contents can be auctioned?Guess they cant just hang on to this stuff in hopes of getting paid but it is a bit of a bummer watching the silly cast of folks rifling through someone else's stuff.Its pretty scummy if you ask me but that seems to be the American way at present.

[Eric Rasmusen]

In the case of Tonka's pods, what is the alternative policy to allowing them to take the goods and sell them for the back rent?
I should think the company would at least be able to empty out all the contents onto the lawn and then take away their box. That would be wasteful, though, if they're not being paid because the customer skipped town and abandoned everything, since the goods would get rained on and wrecked (or stolen).

[Parker]

Storage Wars has always surprised me with the fact that at least one state allows for storage unit auctions of contents sight-unseen. This obviously has certain disadvantages for the storage unit operator and the delinquent tenant (who presumably would be entitled to any surplus). In Alabama, where I practice, storage unit operators are required to advertise at least a rudimentary description of the contents in their pre-auction notice. Many just repeat "boxes of misc. household items", but large items like furniture or appliances typically are itemized. This should help drive up bids on truly worthwhile units and avoid windfalls to the bidders (and avoid depressing bids on mediocre units due to the risk discount involved with sight-unseen auctions). Perhaps the states who've adopted the blind auction method are pursuing a different policy good, namely the assurance that the contents haven't been tampered with. Storage unit operators may be willing to accept lower bids as the price of avoiding controversy as to whether they have removed any items pre-auction unlawfully.