Bankruptcy continues to be one of the most elusive and difficult topics for self-storage operators to understand. This is for good reason. The laws are written to be so debtor-friendly that, as a creditor, it’s easy to feel abused by the system. Bankruptcy is extremely technical and laden with rules that give creditors no leeway in time to make certain actions or filings.
The best advice I can give is, once you’re aware that a tenant has filed bankruptcy, you should work closely with a knowledgeable bankruptcy attorney who also understands self-storage, if possible. This article aims to provide the “get you through the night” information you need to avoid making mistakes before you speak to a lawyer, plus some terms you’ll hear during the conversation.
Are You in the Know?
The first thing you need to understand is what it means for you to “know” a bankruptcy has been filed. Like everything in bankruptcy, the definition is extremely debtor-friendly. Depending on your jurisdiction, “knowing” your tenant filed bankruptcy can mean coming into contact with almost any form of notice, innuendo or hearsay. That should be enough to make you stop and determine the legitimacy of the information.
Many storage operators think they must receive some sort of written notice from a bankruptcy court or attorney informing them the tenant has filed. That’s inaccurate in almost every jurisdiction. Consider these examples of discovery: a statement by the debtor or someone familiar with the debtor, or even a statement prospectively indicating the intent to file bankruptcy before a sale. Even hearing, “Before you auction my unit, I’ll file bankruptcy, so don’t do it,” is good enough to put you on notice that you must check for the bankruptcy before proceeding.
Automatic Stay
The second thing you need to understand about bankruptcy is “automatic stay.” As indicated by its name, this is automatically issued anytime a bankruptcy is filed. No judge is looking at the filing to determine its merit. Any bankruptcy will result in the issuance of the automatic stay, and that means there are certain things you, as a creditor, can’t do.
Once a bankruptcy has begun, all creditors are automatically halted from taking or continuing any action against the debtor or his property. This includes lawsuits, foreclosures, garnishments, repossessions, lien sales and all collection activity. Thus, you may take no action to collect your debt, such as sending default notices or imposing additional fees or charges on sums that accrued through the date of the filing.
Even if you’re getting ready to enforce your lien and you discover a bankruptcy has been filed by a tenant who’s filed three previous bankruptcies in the last year—all of which have been dismissed—it doesn’t matter. If another bankruptcy has been filed, the automatic stay is in effect, and you may not proceed to sale.
If you didn’t overlock the space before the bankruptcy was filed, doing so after the notice of a filing is arguably a violation of the automatic stay because you’ve done something to enforce your lien against the debtor. While there are exceptions to the automatic stay, none really govern the actions you may take at a self-storage facility.
Snapshot Law
Bankruptcy is a “snapshot in time” kind of law. The moment the bankruptcy is filed, everything prior to the filing is under the bankruptcy “tent” and protected for a period of time by the automatic stay.
However, most forms of bankruptcy require the debtor to become or remain current in his payments post-petition (from the date of filing forward). So don’t be surprised if a tenant who’s three or four months delinquent starts paying rent after his filing. Debts that accrue after the filing date aren’t protected. Everything prior to the date of filing is covered, but the debtor is expected with this fresh start to remain generally current on his financial obligations.
Why is this snapshot-in-time concept important to you? Because it also represents your remedy in the event the tenant fails to pay his post-petition rent and any related charges. Depending on the chapter of bankruptcy, the debtor will have a certain amount of time to do something, such as accept or reject the self-storage lease. He may give notice of intent to reject, at which point he would have to move out within a certain time frame. If this happens, you probably wouldn’t expect to see any rent for the period of time between the filing and the rejection date.
However, if the debtor doesn’t actively reject the lease, or he accepts it, you have a claim if he fails to pay the post-petition rent. This is important because many of you, not knowing what to do in the event of a bankruptcy, sit on your hands and wait for something to happen. In this case, however, you can ask the court to lift the automatic stay and allow you to enforce your right of possession of the storage space.
The request to lift the automatic stay is a technical document and should be filed by an attorney on your behalf. If you’re not getting paid, these are easy allegations to make and win. Rarely can a debtor oppose such a motion. Don’t wait for the debtor to do the right thing. If he’s not living up to his post-petition obligations, bring this to the attention of the bankruptcy court.
The Right Remedy
Finally, know that bankruptcy courts have very little sense of humor when it comes to a violation of its orders, whether direct or automatic. In a bankruptcy situation, you can’t conveniently ignore the filing or decide to do whatever you want with your property. Violations of the automatic stay, even unintentional, can lead to civil fines, debtor damages and, in certain cases, contempt of court.
That’s why there’s absolutely no sense in being penny-wise and pound-foolish. When a tenant files bankruptcy, get in touch with an attorney right away and ensure he understands the situation as it pertains to your business. If it’s the appropriate remedy, you can work together to file a motion for relief from the automatic stay.
Much like the automatic stay, an entry granting relief from the stay is given without much review or thought from the bankruptcy court, but the old expression applies: “Be careful what you wish for, you might get it.” Make sure you’re asking for the right remedy, as the court won’t fashion it for you.
Work with your counsel to help him understand the special nature of self-storage. Whether you’ll be allowed to sell the tenant’s property or clear out the unit varies by the type of bankruptcy filed and your jurisdiction. However, if the tenant doesn’t pay his post-petition rent, you have the right to reclaim your space. You should enforce that legal right—with proper legal assistance. Don’t allow a bad situation to get worse by not knowing how to react.
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 J. Greenberger is a partner with the law firm Katz, Greenberger, & Norton LLP in Cincinnati 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. His website, www.selfstoragelegal.com, contains legal opinions and insights as well as an article archive. You can send your questions, comments or suggestions for future topics to [email protected].
