A Growing Concern

Posted by msmessenger on Jun 1, 2016 12:00:00 AM

Class Action Litigation In The Self-Storage Industry

In the last few years we have seen a strong increase in class action filings against self-storage operators. In fact, the top self-storage REITs have all faced class action lawsuits in recent years. So what is a class action lawsuit? According to the Webster’s dictionary a class action is “a legal action undertaken by one or more plaintiffs on behalf of themselves and all other persons having an identical interest in the alleged wrong.”

Class actions are different than other lawsuits since they do not involve single plaintiffs bringing individual actions against one corporate defendant. In class action lawsuits, the “class” is assembled from similarly situated parties who all allegedly have “common” claims against the defendant business. Two factors are always present for every class action:

1) The issues in dispute are common to all members of the class

2) The persons affected are so numerous as to make it impracticable to bring them all before the court

Rule 23

Rule 23 of the Federal Rules of Civil Procedure govern class actions in federal courts. Rule 23 requires that a party seeking class certification satisfy four requirements found in Section 23(a) of the Rule. The four requirements of Rule 23(a) are the following:

  1. Numerosity. Where the potential plaintiffs in the alleged case are so numerous that the joinder of all of them into one lawsuit would be impracticable.
  2. Commonality. Where there are common questions of law and fact for all parties and their claims in the proposed class.
  3. Typicality. Where the claims and defenses of the representative plaintiffs are “typical of the full class”.
  4. Adequate Representation. Where the representative plaintiffs and their counsel would adequately represent the whole class.

If the requirements of Rule 23(a) are met, the action must then fit into one of three categories under Rule 23(b). (See sidebar.) In order to meet the requirements of Rule 23(b) the court must find that questions of law or fact common to the class members predominate over any questions affecting only individual members and that a class action would be superior to other available methods for fairly and efficiently adjudicating the controversy. The matters pertinent to these findings include:

  • The class members’ interests in individually controlling the prosecution or defense of separate actions
  • The extent and nature of any litigation concerning the controversy already begun by or against class members
  • The desirability or undesirability of concentrating the litigation of the claims in the particular forum
  • The likely difficulties in managing a class action

Class actions are supported by public policy. The belief is that class actions permit individuals to take on companies where otherwise the expense of litigation by one small consumer against a larger business entity would be prohibitive. Essentially, it allows individuals to band together into one large lawsuit instead of there being thousands of separate small lawsuits. The class action law is seen as a way of controlling wrongdoers who may have no incentive to stop bad behavior except where multiple small plaintiffs can band together to level the playing field. Those who support class action litigation contend that it helps control companies that may otherwise believe they are immune from liability if they were only subject to independent small claims brought by singular consumers or injured parties. Others, who challenge the integrity of the class action process, suggest that only the plaintiff’s counsel who represents the class (and receives a large percentage of the recovery) as well as the defendant corporation’s attorney (who gets paid to defend the claim) are the only ones who truly benefit from a class action. Although these arguments have existed for many, many years, the number of filings have not been affected.

Self-Storage Class Action Lawsuits

It is not surprising that class action lawsuits are starting to surface against self-storage operators since self-storage operations are a perfect breeding ground for this type of litigation. Each storage facility has a large number of tenants, each using the same lease, each paying the same fees and charges, and each processing their tenants under the same state lien procedure. If a claim can be developed against a self-storage operator, the class can easily be determined based on the tenants who occupied the facility during the period under which the alleged wrong occurred.

We have seen a significant number of class action cases being filed in New Jersey, essentially due to the interpretation of their consumer protection law otherwise known as the New Jersey Truth in Consumer Contract, Warranty and Notice Act (“TCCWNA”). The recent class actions have focused on the issue of fairness to the customer such as whether the contract provisions are clear and unambiguous, whether the fees charged are reasonable, whether the proper notices are being sent, and whether the denial of access is timely. There are a number of class action cases pending in New Jersey at the current time. Plaintiff’s Martinez, Castro, and Gomes have each filed class actions against national storage operators, and each lawsuit, for the most part, claim violations of the companies’ lease agreements based on the provisions of TCCWNA. In each case there have been many separate allegations of statutory violations. Some of the claims have, over time, been dismissed. Others continue to be litigated.

Class actions against self-storage operators have also been filed recently in California. A recent class action filed in the Superior Court in Sacramento, Calif., was brought by a tenant (DeLeon) claiming a list of operational violations that had allegedly occurred with respect to his tenancy. Examples included: improper denial of access for late payment; invalid lien notices that did not contain required language or the required “Declaration in Opposition” form; excessive fees for lien notices, lock cuts, and unit inventories; and the unauthorized and non-licensed sale of tenant insurance. The Plaintiff’s complaint, brought for himself and “on behalf of all others similarly situated and on behalf of the general public,” alleges that the facilities being sued failed to comply with the California Self-Service Storage Facility Act and the California Insurance code. That case, filed in late 2015, is still going through the class certification process.

Another recent case, also filed in California in the Superior Court in Los Angeles, involved a storage tenant (Downey) who made a number of claims against a large storage facility. The claims include: false advertising relating to a “$1.00 “First Month” move-in promotion, an unauthorized first late fee, and an unauthorized second late fee.

Insurance And Protection Plans
Class actions have also been brought regarding tenant insurance plans. For example, a tenant in Florida (Bowe) sued a national operator claiming, among other things, that the operator failed to disclose that it was receiving a portion of the revenue generated from the sale of the tenant insurance at the facility. Although a majority of the allegations in the case were dismissed and notwithstanding defenses that were still available, the Defendant facility settled the case for $5 million. That settlement sum is the maximum exposure to the company based on the number of claims that could be asserted by prior tenants who opt into the settlement class.

Class actions have also been brought about protection plans. A recent decision from the California Court of Appeals confirmed a trial court’s decision finding that a protection plan offered by a storage operator in California was “not insurance” and was not subject to the California Insurance Code. This Plaintiff (Heckart) had asserted that the protection plan program was an unlicensed and illegal insurance policy and sued on behalf of himself and all of the tenants who had purchased the plan. The Plaintiff’s claims were denied at both the trial court level and in the appellate level.

One of the reactions to the class action litigation in the self-storage industry has been the consideration of revising rental agreements to provide for arbitration (with class action waivers) in lieu of court jurisdiction for disputes. This contractual change would automatically restrict the opportunity of tenants to file class action claims, forcing instead that they pursue their claims through contractually agreed arbitration.

Such a contractual arbitration provision may read as follows:

ARBITRATION. In the event of any dispute between the parties, the parties agree that all claims shall be resolved by final and binding arbitration in front of a single mutually agreeable arbitrator as administered before any arbitration organization approved by Owner and Occupant located within 15 miles of the Facility. The Parties understand and agree that Arbitration of any dispute pursuant to this section shall take place on an individual basis without resort to any form of class action and understand and agree that this class action waiver is an essential term of this arbitration clause. Each party shall bear its own costs and fees, including travel expenses, out-of-pocket expenses (including, but not limited to, copying and telephone), witness fees, and attorneys’ fees and expenses. The fees and expenses of the arbitrator, and all other costs and expenses incurred in connection with the arbitration, shall be shared and borne equally by the Occupant and Owner.

Certainly, problems exist with how arbitrations are conducted. Arbitrations are typically privately run services (although there are some courts that have arbitration programs within the court system). As such, arbitrators are not strictly guided by the law like judges are. And since there is a growing body of successful cases throughout the country on self-storage disputes, any operator that shifts their disputes to arbitration rather than the courts may be giving up on the strength of those prior cases (since arbitrators are not necessarily obligated to follow legal precedents).

So, for example, where an operator that has a $5,000 limitation of value provision in its lease and might be able to use that provision to cap its overall liability in the courts, arbitrators are not necessarily restricted by the parameters of the law. Therefore, an arbitrator may choose not to enforce the limitation and instead find an equitable resolution that may not limit the facility’s liability. Another concern with arbitrations involves the cost. Since most arbitration programs are private, they are allowed to charge for their time and services performed. Since many tenants in self-storage disputes are individual consumers, storage operators may be required to pay the cost of the arbitrations (even for the tenant), whereas the court system (other than certain fees) is free to both parties.

Recent tracking has confirmed that the monetary value of class actions reached an all-time high in 2015. With these unprecedented levels of recovery for class action lawyers, 2016 is apt to see more cases being filed rather than less. Additionally, recent Supreme Court rulings have begun to further shape future class action litigation. Some recent decisions have been interpreted to strengthen the class action rules and their applicability to large consumer claims. As long as class action claims are permitted under state and federal law these types of large consumer cases, like the ones brought against self-storage companies in recent years, are only likely to continue as the years go on.

Scott Zucker is a partner in the law firm of Weissmann Zucker Euster Morochnik, P.C. in Atlanta, Georgia. He specializes in business litigation with an emphasis on real estate, landlord-tenant, and construction law. Scott is a frequent lecturer at national conventions and the author of “Legal Topics in Self Storage: A Sourcebook for Owners and Managers”. He is also a partner in the Self Storage Legal Network, a subscription based legal service for self-storage owners and managers.