Off The Hook?
The New Bankruptcy Law And Your Lien Sales
By Michael E. Hickey

Owners and managers of storage facilities are probably aware that the bankruptcy code was substantially amended last year, changing the prior law. Thankfully, many of the changes did not affect the law as normally handled by the storage industry. An important aspect of the law is the automatic “stay,” which is a fundamental debtor protection that gives a debtor (the person filing the bankruptcy) a breathing spell from creditors. The stay legally stops all collection efforts including harassment, lawsuits, and foreclosures. Most of the changes to these rules do not affect the way self-storage facilities should proceed.

Regardless of which the Chapter the tenant files under, the filing of any bankruptcy creates a stay that automatically prohibits any person or company from collecting debts owed to them by the debtor, and further prohibits a creditor from proceeding against the debtor’s property. Although the code does not define “stay,” courts have ruled that its protection is broad and clearly includes stopping a lien sale or any acts to perfect a lien, including the mailing of pre-lien letters or notices of lien sales.

The one aspect of the stay is that it exists regardless of facility’s knowledge of the filing of the bankruptcy. An intentional violation is a Contempt of Court and may be a basis for sanctions, including monetary damages, against your storage facility and its owner, manager, and attorneys. Violation of stay is a huge mistake! If bankruptcy is mentioned by anyone, the facility employee should request the debtor’s name, case number, the court where the case is filed, the chapter number, and filing date.

After a bankruptcy is filed, a tenant’s rent coming due again should be monitored to assure that the debtor does not default after filing. Bankruptcy courts generally will not allow a tenant to hide behind the stay and occupy a unit without paying rent. If a tenant does not pay rent after filing, the owner should contact an attorney to file a motion in the bankruptcy court for permission to go forward with a lien sale in accordance with state laws. But remember: until the stay is formally modified by the bankruptcy court, a creditor may not proceed against the debtor in any manner.

A bankruptcy dismissal or discharge ends the protections of the stay. A discharge ends the tenant’s obligation to pay rent. However, a discharge does not, by itself, affect a storage lien that was validly perfected prior to the bankruptcy filing. Hence, the existence of a valid pre-petition lien is crucial to collecting delinquent rent.

One way of limiting loss of rent due to bankruptcy is to promptly and properly obtain execute a self-storage lien when tenants are past due. Then, if a bankruptcy is later filed and the tenant or a trustee continues to default in rent payments, the owner should file a motion in the bankruptcy court for permission to proceed with a lien sale before the amount of unpaid rent continues to increase.

This column contains legal information that is generalized to illustrate legal principles and laws, but should not be substituted for the advice of your own attorney.

Michael E. Hickey is a California Attorney and Partner in the law firm of Corrons-Hickey & Hickey in Southern California. He represents clients in the self-storage industry, evictions, and debtor/creditor rights in bankruptcy cases.