Protected Property
By Richard Marmor, Esq.
AZSA Legal & Legislative Chair
“Protected property” is a term we all have to come to understand now. Before you groan and ask, “Now what?” understand that you have been living with this problem since the day you entered the self-storage business. We just gave the problem a name and–best of all–a solution.
Here’s the problem. Our lien statute gives us one method only for dealing with the contents of a defaulted unit: sell them. Deal with that property any other way and you would be violating the lien law. But there are other laws on the books that say certain kinds of property may not be sold. Obey our lien law and you would violate those other laws. As I said in an earlier article, you’re damned if you do and damned if you don’t. The new law that went into effect on July 28 at long last gives us some safe alternatives.
In this article, we’ll examine what it is we’re dealing with. There are four classes of protected property:
Alcoholic Beverages. This is the easiest class to understand. It means any alcoholic beverage, including stored wines. The law is very simple: in order to sell alcoholic beverages, you must have a state liquor license, no exceptions.
Pharmaceuticals. Like liquor, the basic rule is simple: in order to sell pharmaceuticals, you must be a licensed pharmacist, no exceptions. Sales people representing drug manufacturers frequently rent storage space for their materials. Boxes of drug samples simply cannot be sold in the event of a default.
But what about individual prescription bottles of pills stored by tenants along with their other effects? It’s one thing to have a commercial tenant with boxes of samples that you can identify, and quite another to have to look for some tiny prescription bottle buried under a sea of junk. For that reason, the definition of protected property specifically excludes “pharmaceuticals...dispensed by a licensed pharmacy for the occupant's personal use.” In other words, we don’t have to worry about those little medicine bottles.
The ban on sales of pharmaceuticals is limited to drugs for which a prescription is required. Over-the-counter drugs like aspirin and cold remedies that you typically buy off the shelf may be sold.
Firearms. Hold on, you ask. I thought we were allowed to sell stored firearms! That’s true, provided two things: 1) that the firearm is one that is permitted to be sold, i.e., not prohibited, modified or stolen; and 2) that the person you’re selling to is someone to whom you are legally permitted to sell a firearm. You ordinarily can’t be assured of either of those things. The new law gets you off the hook. If it’s a firearm, simply don’t sell it: no laws broken, no exposure to liability.
Documents and Records. This is the most common situation we encounter, but the most complicated.
Whose records are we talking about? Stored documents could be a tenant’s own records, of course, but if the tenant is a business, the documents could be records of the tenant’s customers or clients. A tenant cannot simply abandon boxes that contain his/her own social security number or financial information and then claim the storage operator acted wrongfully by exercising its lien rights. Therefore, the protected property definition excludes the tenant’s own records and limits the law’s applicability to records “relating to clients, customers, patients or others in connection with the occupant's business.” If tenant is a business, it’s the customer records; if a doctor, the patient records; if an attorney or accountant, the client records.
Records of what? Records that include “personal information,” which means:
A person's first name (or first initial) and last name, plus any of these:
(i) Social security number;
(ii) Driver’s license number (or state-issued ID card number);
(iii) Financial account, debit or credit card number along with any required security code that would permit access to the person’s account;
(iv) Passport information; and/or
(v) Medical or legal records.
Excluded from the definition is any such sensitive information that may be present, but which has been encrypted or blanked out in such a way as to make it unusable. Of course, any information that can be found in the public records is also exempted.
What kinds of records? Paper records and files are included certainly, but so are electronic records: data disks and tapes. How would you know if stored electronic media contains such records? If you find computer data strewn among a tenant’s personal effects, I wouldn’t worry about it, but if your tenant is a business and you find such disks, use caution. If you can, try to view a sample of the records on your computer. If you cannot, then err on the side of caution. Assume the records should be excluded from sale.
If you don’t know it’s there. The prohibition against you selling protected contents applies to protected property that you have actual acknowledge of in the unit. There are two ways you could know that it’s there: you see it or the tenant discloses that it’s there. If your pre-sale photos show protected property in the unit, don’t sell it. Remember, too, that our newly revised leases now require tenants to disclose whether protected property is or will be stored in their units, so be aware of what the tenant did or did not indicate on the lease.
Inevitably, some prohibited property will be hidden in units and will end up being included in a sale. Not only does the law prohibit you from selling protected property at your auctions, it also prohibits auction attendees from buying it. Be sure to let your bidders know that protected property discovered in a purchased unit is by law not subject to sale. As a result, if it is discovered after the sale, they did not buy it and they must surrender it to you. A notice to that effect that you can post at your auctions is available for download from the AZSA website.
Rule: If there is an appropriate state or federal governmental agency which deals with materials of that kind, give the material to them, if they accept it.
What makes a governmental agency “appropriate”? Generally, consider what kind of license is required for dealing in the realm of such materials, for example, the State Medical Board licenses doctors and thus is concerned with medical records. Importantly, although there may be an appropriate agency in your situation, that agency must be willing to take custody of the contents. You can’t simply drop the stuff at their front door and assume that you have done your duty. It is more usual for state agencies to refuse to take them. Speak with the agency before taking any action.
Much depends on the circumstances of the tenant’s situation. Some licensing authorities have been known to refuse contents but then have put pressure on the tenant (their licensee), forcing him/her to pay the rent in order to protect the contents. If and when contents are accepted by an agency, you may have to bring the material to them. It’s a good idea to get a receipt.
Here are some typical agencies:
RECORDS: These are paper or electronic files. The agency involved would depend on the tenant and the kind of records:
Tenant: Doctor or medical practice
Records: Patient medical records
Agency: Arizona State Medical Board
Tenant: Dentist or dental practice
Records: Patient dental records
Agency: Arizona State Board of Dental Examiners
Tenant: Attorney or law firm
Records: Client legal files
Agency: Arizona State Bar Association
Tenant: Account or accountancy firm
Records: Client tax or financial records
Agency: Arizona Board of Accountancy
Tenant: Chiropractor or chiropractic practice
Records: Patient medical files
Agency: Arizona Board of Chiropractic Examiners
Tenant: A business
Records: Customer files with social security numbers, credit card or financial account numbers
Agency: NONE
Tenant: Any person(s)
Records: Passport(s)
Agency: NONE
PHARMACEUTICALS: Containers of drugs (not tenant’s bottles of prescriptions)
Tenant: Drug company or manufacturer’s sales representative
Drug: Controlled substances (narcotics, marijuana, etc.)
Agency: Federal Drug Enforcement Agency (DEA)
Drug: Any other pharmaceuticals
Agency: NONE
ALCOHOLIC BEVERAGES
Tenant: Anyone, individual or business
Beverage: All alcoholic beverages, including wines, beer, liquor, etc.
Agency: NONE
(The Arizona State Liquor Control Board has made it known that they will not accept contents.)
FIREARMS
Tenant: Anyone, individual or business
Weapon: Any firearm
Agency: Local police
Note: If you call the local non-emergency number for the police and report finding the weapon, the police will usually send a patrol car to collect it.
Rule: If there is no governmental authority available and willing to take contents, it must be destroyed. “Destroyed” is not a relative term. Something is either destroyed or it’s not. It has to be rendered unusable. We thus get this rule’s corollary:
Rule: Never simply throw protected property into the trash. It can be found and taken back out again. That’s not “destroyed.”
Instead:
RECORDS: Shred them. You may have your own shredder, but when possible, have a bonded records destruction company come and do it and issue you a certificate verifying the records’ destruction.
PHARMACEUTICALS: Destroy them, but do not flush them down a toilet; that pollutes our water supply. The best course is to crush the material and mix it with other materials and trash, then discard it. TIP: Try contacting the drug’s manufacturer (if that’s not your tenant), and see if they will take the samples back. They might even pay the back rent to get them. The local fire department may accept them for destruction, too.
ALCOHOLIC BEVERAGES: You cannot sell them to anyone, not even to a liquor wholesaler. You must destroy them, and yes, that does include drinking the stuff. That said, be careful. Obviously, that implies helping yourself to a tenant’s contents and consuming them over some period of time. While that does amount to destroying, it might also be seen as stealing them. You could find yourself at the wrong end of a lawsuit. Note: You may also donate alcoholic beverages to a 501(c)(3) charity for use in a fund raiser if that charity has a liquor license for the purpose.
FIREARMS: Fortunately, the police will usually take these, so destruction or other disposition is their problem.
Notices: Even if a unit contains only protect property, so there is nothing to actually sell, always send all of the usual pre-auction notices. Add something like this to your notices as well:
In lieu of sale, any contents in your unit protected by law from sale will be disposed of at the specified time as provided by law.
Note that AZSA offers an automated pre-sale notice you can reproduce on your own computer free of charge. Form A004 can be downloaded from the Forms area of the members’ section at the AZSA website. The form contains appropriate language concerning protected contents.
When to act: Remember that your tenant has the right to redeem, pay what’s due to you and rescue their property from sale, right up to the moment that the gavel falls at the auction. Therefore, do not dispose of protected contents until the time of auction has passed. Instead:
Remove any protected property from the unit prior to sale. (Remember that if the tenant redeems, you will have to give it back.)
Sell any unprotected contents at the appointed sale time. As soon as practical following the sale, dispose of the protected property as outlined above.
Record keeping: It’s a good idea to keep a record of what the protected contents are and what you do with them. To that end, AZSA provides a form available for download from the members’ section of the AZSA website for tracking all that. It even has a receipt form for a governmental agency to sign.
What if you missed some protected property and left it in the unit? Under the new law, buyers at storage auctions do not acquire title to protected property discovered in a unit. They must surrender it to you. To that end, AZSA has prepared a notice to buyers warning them about protected contents. The notice can be downloaded from the members’ section of the AZSA website and posted at you auctions.
For this and other discussions of the new 2010 law be sure attend one of AZSA’s workshops held from time to time around the state. Check the AZSA website for dates and locations.
[This article deals with a law related subject at a general level and is not intended for you to rely on. You should consult a lawyer before making a final decision in a situation involving any legal issues.]
Richard Marmor, Esq. is a self-storage consultant, facility owner and former facility operator in the Phoenix area. He is also the founding President and current member of the Board of Directors of the Arizona Self-Storage Association, serving as Chair of the Legal and Legislative Committee.
Source: Behind Closed Doors, AZSA Newsletter Archives