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.