Documentos de Académico
Documentos de Profesional
Documentos de Cultura
11-0396
_______________________________________________________________________
IN THE SUPREME COURT OF TEXAS
_______________________________________________________________________
ECF NORTH RIDGE ASSOCIATES, L.P. and TCI 9033 WILSHIRE
BOULEVARD, INC.,
Petitioners,
v.
ORIX CAPITAL MARKETS, L.L.C., U.S. BANK, N.A. a/k/a U.S. BANCORP,
N.A., as Trustee FOR THE MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1996-C3, and WELLS FARGO BANK, N.A. a/k/a WELLS FARGO
BANK, MINNESOTA, N.A., as Trustee FOR THE MORTGAGE PASS-
THROUGH CERTIFICATES, SERIES 99-C1,
Respondents.
______________________________________________________________________
Appealed from the Fifth Court of Appeals District, Dallas County, Texas,
No. 05-09-00066-CV
______________________________________________________________________
TCI 9033 WILSHIRE BOULEVARD, INC.'S
PETITION FOR REVIEW
______________________________________________________________________
Jonathan Cunningham
State Bar No. 00793574
C. Gregory Shamoun
State Bar. No. 18089650
SHAMOUN & NORMAN, LLP
1755 Wittington Place, Suite 200, LB 25
Dallas, Texas 75234
214-987-1745 phone
214-521-9033 fax
Attorneys for Petitioner
FILED
IN THE SUPREME COURT
OF TEXAS
11 July 15 A11:23
BLAKE. A. HAWTHORNE
CLERK
TCI 9033 Wilshire Boulevard, Inc.
i
IDENTITY OF PARTIES AND COUNSEL
Petitioner TCI 9033 Wilshire Boulevard, Inc. certifies that the following is a
complete list of the parties, attorneys, and any other person who has any interest in the
outcome of this lawsuit:
1. Petitioner TCI 9033 Wilshire Boulevard, Inc. was a Plaintiff/Counter-Defendant in
the trial court, and an Appellant in the Court of Appeals. TCI 9033 Wilshire Boulevard,
Inc. is represented by Jonathan J. Cunningham and C. Gregory Shamoun, SHAMOUN &
NORMAN, LLP, 1700 Wittington Place, Suite 200, LB 25, Dallas, Texas, 75234. For ease
of reference, within this Petitioners Brief, TCI 9033 Wilshire Boulevard, Inc. will be
referred to as "Plaintiff" or TCI 9033 Wilshire.
2. Petitioner ECF North Ridge Associates, L.P. was a Plaintiff/Counter-Defendant in
the trial court, and an Appellant in the Court of Appeals. ECF North Ridge Associates,
L.P. is represented by Ryan K. Lurich and Lawrence J. Friedman, FRIEDMAN & FEIGER,
L.L.P., 5301 Spring Valley, Suite 200, Dallas, Texas 75254. For ease of reference, within
this Petitioners Brief, ECF North Ridge Associates, L.L.P. will be referred to as
Plaintiff or ECF North Ridge.
3. Respondent Orix Capital Markets, L.L.C. was a Defendant/Counter-Plaintiff in the
trial court, and an Appellee in the Court of Appeals. Orix Capital Markets, L.L.C. is
represented by P. Michael Jung, STRASBURGER & PRICE, LLP, 901 Main Street, Suite
4400, Dallas, Texas, 75202, Talmage Boston, WINSTEAD PC, 1201 Elm Streeet, Suite
5400, Dallas, Texas 75270 and Nicola Hobeiche, ORIX USA Corporation, 1717 Main
ii
Street, Suite 900, Dallas, Texas, 75201. For ease of reference, within this Petitioners
Brief, Orix Capital Markets, L.L.C. will be referred to as Defendant or ORIX.
4. Respondent U.S. Bank N.A. a/k/a U.S. Bancorp, N.A., as Trustee For The
Mortgage Pass-Through Certificates, Series 1996-C3 was a Defendant/Counter-Plaintiff
in the trial court, and an Appellee in the Court of Appeals. U.S. Bank N.A. a/k/a U.S.
Bancorp, N.A., as Trustee For The Mortgage Pass-Through Certificates, Series 1996-C3
is represented by P. Michael Jung, STRASBURGER & PRICE, LLP, 901 Main Street, Suite
4400, Dallas, Texas, 75202, Talmage Boston, WINSTEAD PC, 1201 Elm Streeet, Suite
5400, Dallas, Texas 75270 and Nicola Hobeiche, ORIX USA Corporation, 1717 Main
Street, Suite 900, Dallas, Texas, 75201. For ease of reference, within this Petitioners
Brief, U.S. Bank N.A. a/k/a U.S. Bancorp, N.A., as Trustee For The Mortgage Pass-
Through Certificates, Series 1996-C3 will be referred to as Defendant or U.S. Bank.
5. Respondent Wells Fargo Bank, N.A. a/k/a Wells Fargo Bank, Minnesota, N.A., as
Trustee For The Mortgage Pass-Through Certificates, Series 99-C1. was a
Defendant/Counter-Plaintiff in the trial court, and an Appellee in the Court of Appeals.
Wells Fargo Bank, N.A. a/k/a Wells Fargo Bank, Minnesota, N.A., as Trustee For The
Mortgage Pass-Through Certificates, Series 99-C1 is represented by P. Michael Jung,
STRASBURGER & PRICE, LLP, 901 Main Street, Suite 4400, Dallas, Texas, 75202,
Talmage Boston, WINSTEAD PC, 1201 Elm Streeet, Suite 5400, Dallas, Texas 75270 and
Nicola Hobeiche, ORIX USA Corporation, 1717 Main Street, Suite 900, Dallas, Texas,
75201. For ease of reference, within this Petitioners Brief, Wells Fargo Bank, N.A. a/k/a
iii
Wells Fargo Bank, Minnesota, N.A., as Trustee For The Mortgage Pass-Through
Certificates, Series 99-C1 will be referred to as Defendant or Wells Fargo Bank.
iv
TABLE OF CONTENTS
IDENTIFICATION OF PARTIES AND COUNSEL ...................................................... i
INDEX OF AUTHORITIES .............................................................................................. iii
STATEMENT OF THE CASE .......................................................................................... vi
STATEMENT OF JURISDICTION ................................................................................. vii
ISSUES PRESENTED FOR REVIEW ............................................................................. 1
STATEMENT OF FACTS ................................................................................................. 1
SUMMARY OF ARGUMENT .......................................................................................... 1
ARGUMENT ....................................................................................................................... 2
I. THE COURT OF APPEALS ERRONEOUS STANDING HOLDING .................................... 2
(A) The Standing Issue is Paramount Jurisdictional Issue ................................... 2
(B) ORIX Lacks Privity and Therefore Lacks Standing ..................................... 6
(C) The CWCapital Asset Mgmt. Case Is Erroneous In Several Ways ................ 8
II. ISSUES ARISING REGARDING HOLDER STATUS OF WELLS FARGO BANK ................. 10
(A) Questions Are Raised Due to Industry Irregularities ..................................... 10
(B) Wells Fargo Did Not Provide Clear Evidence of Ownership To
Establish Standing As Holder of TCI 9033 Wilshires Promissory
Note and Deed of Trust .................................................................................. 11
III. TCI 9033 WILSHIRE DEMONSTRATED THAT WELLS FARGO PLEADED
NO DAMAGES ............................................................................................................. 10
IV. THE COURT OF APPEALS ERRED IN ITS HOLDING REGARDING THE OTHER
INSURANCE PROVISION ............................................................................................. 10
CONCLUSION AND PRAYER ......................................................................................... 15
v
INDEX OF AUTHORITIES
CASES
Alexander v. Houston Oil Field Material Co., 386 S.W.2d 540
(Tex.Civ.App.Tyler 1965, writ refd n.r.e) ) ................................................................. 11
Asshauer v. Wells Fargo Foothill, 263 S.W.3d 468
(Tex.App.Dallas 2008, pet.denied) ...................................................................... 3
Austin Nursing Center, Inc. v. Lavato, 171 S.W.3d 845 (Tex. 2005) ................................ 6
AVCO Corporation v. Interstate Southwest, Ltd., 251 S.W.3d 632
(Tex.App.Houston [14
th
Dist.] 2007, pet. denied) ............................................. 5,6
Basic Capital Mgmt., Inc. v. American Realty Trust, Inc., __ S.W.3d __,
2011 WL 1206376, 2011 Tex.LEXIS 247 (Tex. April 1, 2011) .............................. 4
BFP 245 Park Co. v. GMAC, 12 A.D. 3d 330, 786 N.Y.S. 2d 425 (2004) ....................... 15
Boy Scouts of America v. Responsive Terminal Sys., Inc., 790 S.W.2d 738
(Tex.App.Dallas 1990, writ denied) ................................................................ 3,12
Cadle Co. v. Lobinger, 50 S.W.3d 662
(Tex. App.Fort Worth 2001, pet. denied) ............................................................. 9
Coastal Liquids Transp., L.P. v. Harris County Appraisal Dist., 46 S.W.3d 880
(Tex. 2001) ............................................................................................................... 6
CWCapital Asset Mgmt., LLC v. Chicago Props. LLC, 610 F.3d 497 (7
th
Cir. 2010) ..... 5-8
Derbigny v. Bank One, 809 S.W.2d 292
(Tex.App.Houston [14
th
Dist.] 1991, no writ) .................................................... 11
Deutsche Bank Natl Trust Co. v. Triplett, 2011 Ohio 478,
2011 Ohio App. LEXIS 401 (Ohio Ct. App. 2011) .............................................. 11
Eaves v. Unifund CCR Partners, 301 S.W.3d 402 (Tex.App.El Paso 2009, no pet.) ..... 9
Elizondo v. Texas Nat. Resource Conservation Commn, 974 S.W.2d 928
(Tex.App.Austin 1998, no pet.) ............................................................................ 4
vi
Grinnell v. Munson, 137 S.W.3d 706 (Tex.App.San Antonio 2004, no pet.) ............... 10
Jacobsen v. SCI Texas Funeral Serv., Inc., No. 05-00-00686-CV,
2001 Tex.App. LEXIS 1517 (Tex.App.Dallas, Mar. 8, 2001, no pet.)
(mem. op.) ................................................................................................................ 2
Nauslar v. Coors Brewing Co., 170 S.W.3d 242 (Tex.App.Dallas 2005, no pet.) ......... 6
OAIC Comml Assets, L.L.C. v. Stonegate Village, L.P., 234 S.W.3d 726
(Tex.App.Dallas 2007, pet. denied). ............................................................... 3,10
ORIX Capital Markets, LLC v. La Vallita Motor Inns, J.V., 329 S.W.3d 30
(Tex.App..San Antonio 2010, pet. granted) ......................................................... 1
R & R White Family Limited Partnership v. Jones, 182 S.W.3d 454
(Tex.App.Texarkana 2006, no pet.) ..................................................................... 4
Rodarte v. Investco Group, L.L.C., 299 S.W.3d 400
(Tex.App.Houston [14
th
Dist.] 2009, no pet.) ...................................................... 5
Shipley v. Unifund CCR Partners, 331 S.W.3d 27
(Tex.App.Waco 2010, no pet. hist.) ..................................................................... 9
South Texas Water Auth. v. Lomas, 223 S.W.3d 304 (Tex. 2007) ................................... 2,4
Texas Assn of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440
(Tex. 1993) ............................................................................................................. 11
Tinsley v. Dowell, 26 S.W. 946, 948 (Tex. 1894) ............................................................... 6
United States Bank Natl Assn v. Ibanez, 941 N.E.2d 40 (Mass. 2011) ......................... 11
US Bank Natl Assn v. Madero, 913 N.Y.S.2d 612 (N.Y. Ct. App. 2011) ...................... 11
Wells v. Dotson, 261 S.W.3d 275 (Tex.App.Tyler 2008, no pet.) .................................. 3
Wells Fargo Bank, N.A. v. Ford, 15 A.3d 327, 329 (N.J. Ct. App. 2011) ....................... 11
Wells Fargo Bank, N.A. v. Konover, 2009 WL 2710229 (D. Conn. 2009) ......................... 6
vii
TREATISES & OTHER AUTHORITIES
Congressional Oversight Panel, Examining the Consequences of Mortgage
Irregularities for Financial Stability and Foreclosure Mitigation ............................. 10
viii
STATEMENT OF THE CASE
Plaintiffs TCI 9033 Wilshire Boulevard, Inc. (TCI 9033 Wilshire) and ECF
North Ridge Associates, L.P. (ECF North Ridge) originally filed this lawsuit against
Orix Capital Markets, L.L.C. (ORIX) on August 13, 2004, asserting causes of action
for breach of contract and seeking a declaratory judgment. [CR 1:17] On September 10,
2004, Defendant ORIX filed a general denial [CR 1:36], and on January 26, 2005, ORIX
filed an Original Counterclaim asserting causes of action for breach of contract. [CR
1:38] On July 11, 2005, ORIX filed its First Amended Counterclaim and its Second
Amended Counterclaim on April 25, 2006, each alleging a cause of action for breach of
contract and seeking declaratory judgment. [CR 1:53, 62] On November 14, 2005, the
parties waived a jury trial. [CR 1:60] The parties filed Stipulated Facts with the trial
court on August 4, 2006. [CR 1:73] On August 14, 2006, ORIX filed its Third Amended
Counterclaim, continuing to assert its counterclaims for breach of contract and seeking
declaratory judgment. [CR 1:76] On December 26, 2007, Plaintiffs TCI 9033 Wilshire
and ECF North Ridge filed their Second Amended Petition, adding the lenders U.S. Bank
and Wells Fargo Bank as parties. [CR 1:81] U.S Bank filed a general denial on February
8, 2008, and Wells Fargo Bank filed its general denial on February 29, 2008. [CR 1:111,
113, see also CR 1:115] On May 16, 2008, both Wells Fargo Bank and U.S. Bank each
filed their First Amended Answer and Counterclaim, asserting the same breach of
contract and declaratory judgment actions as ORIX. [CR 1:128, 147]
The case was tried to the Trial Court beginning November 5, 2008 and
ending December 5, 2008. The Trial Court issued a Final Judgment on December 18,
ix
2008, finding against Plaintiffs on their causes of action and in favor of ORIX on its
counterclaims, and U.S. Bank, and Wells Fargo, purportedly, on their counterclaims.
[CR 2:412] Findings of Fact and Conclusions of Law were signed by the Trial Court on
February 10, 2009. [CR 2:450] Plaintiffs filed a Joint Motion for New Trial on January
20, 2009 [CR 2:422], which was overruled by the Trial Court in a general order on
February 26, 2009. [C. Supp. R. 3:743].
TCI 9033 Wilshire appealed the judgment to the Fifth District Court of Appeals,
Dallas, Texas, No. 05-09-00066-CV. The case was submitted before a panel of
consisting of Justices Michael O Neill, Douglas Lang, and Mary Murphy. On December
20, 2010, the court of appeals issued an opinion, authored by Justice Murphy; however,
on January 19, 2011, the panel withdrew the opinion and vacated the previous judgment
and issued a new Opinion. After motions for rehearing, on March 14, 2011, the Court of
Appeals again withdrew its opinion and vacated its judgment and issued an Opinion on
Rehearing. In its Opinion on Rehearing and Judgment, the court affirmed and modified
the judgment of the trial court. Basically, as to that portion of the case concerning TCI
9033 Wilshire, the Court of Appeals affirmed the trial court's judgment.
STATEMENT OF JURISDICTION
The Texas Supreme Court has jurisdiction over this appeal under Texas
Government Code section 22.001(a)(6) because the Court of Appeals has committed an
error of law of such importance to the state's jurisprudence that it should be corrected.
The Texas Supreme Court has jurisdiction over this appeal under Government
Code section 22.001(a)(2) because the Court of Appeals' decision conflicts with this
x
Court's decision in South Texas Water Auth. v. Lomas, 223 S.W.3d 304, 307 (Tex. 2007)
and the Waco Court of Appeals decision in Shipley v. Unifund CCR Partners, 331
S.W.3d 27 (Tex.App.Waco 2010, no pet. hist.).
ISSUES PRESENTED FOR REVIEW
Standing
1. The Court of Appeals erred in its holding that ORIX had standing to assert
a claim for breach of contract and declaratory relief because it is contrary to well-
established law and there was no evidence (or, in the alternative, insufficient evidence) to
support such a holding.
2. Issues are present regarding the failure of Wells Fargo Bank to produce and
offer evidence of the original promissory note and deed of trust to establish its standing
and holder status.
Contract Issues
3. The Court of Appeals erred in failing to address the issue that Wells Fargo
Bank failed to plead an essential element (i.e., damages) and cannot assert damages
should be recovered by another party.
4. The Court of Appeals erred in affirming the Trial Courts legal conclusion
and finding that TCI 9033 Wilshire breached the Deed of Trust, Security Agreement,
Assignment of Leases and Rents and Fixture Filing because there was no evidence (or, in
the alternative, insufficient evidence) to support such a holding.
1
STATEMENT OF FACTS
With certain additions, in the "Background" section of its Opinion, the Court of
Appeals correctly stated the nature of the case.
1
Additionally, however, it is important that it is uncontroverted that ORIX was not
a party, and never has been a party, and has never been an assignee to any of the loan
documents offered and admitted into evidence at trial. [RR 4: pp. 21-25, 94, RR 9: p. 13]
Also, it is uncontroverted that, Wells Fargo asserted no claim for damages, instead
solely alleging only that ORIX is entitled to damages, if any. [CR 1, pp. 131-132]
SUMMARY OF ARGUMENT
Ultimately, as this Court is even now considering other cases with similar themes
2
,
this case is about maintaining the consistency of well-established black-letter law and
reigning in a trend whereby loan servicers, here a particularly notorious one, attempt to
create and manipulate non-monetary defaults in order to profit by charging default
interest which they have contractually negotiated with lenders to allow the servicer to
receive, and take it upon themselves, without standing, to prosecute lawsuits regardless of
the fact that the servicer was, and is, not a party to the underlying contracts.
In this case, ORIX attempted to require TCI 9033 Wilshire to obtain terrorism
insurance coverage when the specific loan documents did not require it. More
importantly, it was error for the Court of Appeals to disregard well-established law and
1
Additionally, however, Petitioner neither indorses nor adopts the Court of Appeals discussion and
characterization of CMBS loans in Footnote 1 of the Court of Appeals Opinon. See ECF North Ridge
Assoc., L.P. v. Orix Capital Markets, L.L.C., 336 S.W.3d 400, 403 (Tex.App.Dallas 2011, pet. filed).
2
ORIX Capital Markets, LLC v. La Vallita Motor Inns, J.V., 329 S.W.3d 30(Tex.App..San Antonio
2010, pet. granted).
2
hold that ORIX has standing to assert a breach of contract action and seek damages and
attorneys fees in ORIXs own name, when it is undisputed in the record that ORIX lacks
both privity and third-party beneficiary status. Finally, in addition to the undisputed fact
that Wells Fargo, the Trustee regarding CMBS loans related to TCI 9033 Wilshires
mortgage, made no claim or pleading for damages, it also failed to prove its standing and
status as the actual holder of TCI 9033 Wilshires original promissory note and deed of
trust.
ARGUMENT
I. THE COURT OF APPEALS ERRONEOUS STANDING HOLDING.
A. The Standing Issue is a Paramount Jurisdictional Issue.
In the present case, Defendant/Counter-Claimant ORIX brought affirmative claims
against TCI 9033 Wilshire for breach of contract and for declaratory judgment,
wrongfully attempting to bring suit, in its own name and for its own benefit, on a contract
to which it admittedly lacks privity and which ORIX is clearly not an intended third-party
beneficiary with any legal rights under the contract. [RR 4: pp. 21-25] Standing is a
component of subject matter jurisdiction and a constitutional prerequisite to maintaining
a suit under Texas law. South Texas Water Auth. v. Lomas, 223 S.W.3d 304, 307 (Tex.
2007). Standing may be raised at any time and may not be waived by the parties. Id.
Further, standing is not an affirmative defense. Jacobsen v. SCI Texas Funeral Serv.,
Inc., No. 05-00-00686-CV, 2001 Tex.App. LEXIS 1517 at *5 (Tex.App.Dallas, Mar.
8, 2001, no pet.) (mem. op.).
3
B. ORIX Lacks Privity and Therefore Lacks Standing.
In the context of a breach of contract action, the courts have long recognized that
the general rule is that only the parties to a contract have the right to complain of a
breach thereof. Wells v. Dotson, 261 S.W.3d 275, 284 (Tex.App.Tyler 2008, no pet.).
Further, the courts have long been consistent in applying the general rule that in contract
actions, privity of contract is an essential element of recovery. Boy Scouts of America v.
Responsive Terminal Sys., Inc., 790 S.W.2d 738, 747 (Tex.App.Dallas 1990, writ
denied. For purposes of standing, privity is established by proving that the defendant
was a party to an enforceable contract with either the plaintiff or a party who assigned its
cause of action to the plaintiff. OAIC Comml Assets, L.L.C. v. Stonegate Village, L.P.,
234 S.W.3d 726, 738 (Tex.App.Dallas 2007, pet. denied). In July 2008, the Dallas
Court of Appeals itself reaffirmed the principle that without a breach of a legal right
belonging to that particular plaintiff, that plaintiff has no standing to litigate. Asshauer
v. Wells Fargo Foothill, 263 S.W.3d 468, 471 (Tex.App.Dallas 2008, pet.denied).
In the present suit, it was uncontroverted that ORIX lacks contractual privity with
TCI 9033 Wilshire. And, ORIX did not allege, prove, or proffer any evidence of any
assignment of any rights or causes of action to it regarding the TCI 9033 Wilshire loan
documents. The uncontroverted evidence, in fact, establishes the opposite as a matter of
law. The very contract upon which ORIXs counterclaim relies expressly excludes ORIX
4
as having standing to assert any legal or equitable right under it.
3
Such is the definition
of lack of standing.
Lacking direct privity, ORIX also did not allege any third-party beneficiary status;
and, as the contracts themselves demonstrate, it was the clear express intention of the
parties to exclude any potential third-party beneficiaries as having standing to claim any
legal or equitable rights. There is a presumption against conferring third party
beneficiary status on noncontracting parties. South Texas Water Auth., 223 S.W.3d at
304.
4
The express provisions contained in the PSA, which is the sole document upon
which ORIX claims to rely to derive its standing to have brought suit in ORIXs own
name and seeking damages to be paid to ORIX, actually demonstrate that ORIX is not an
assignee,
5
agent, attorney-in-fact,
6
or otherwise possesses authority or rights to bring suit
3
Section 15.1(6) of the TCI 9033 Wilshire Deed of Trust (Joint Trial Exhibit 4) particularly
states --
4
Very recently, the Texas Supreme Court reiterated that the law governing third-party beneficiaries is
relatively settled and that a court will not create a third party beneficiary contract by implication.
Basic Capital Mgmt., Inc. v. American Realty Trust, Inc., __ S.W.3d __, 2011 WL 1206376 at *3, 2011
Tex.LEXIS 247 at *11-12 (Tex. April 1, 2011).
5
R & R White Family Limited Partnership v. Jones, 182 S.W.3d 454, 459 (Tex.App.Texarkana 2006,
no pet.) (To recover under the theory that a cause of action was assigned to another party, the party
claiming the assigned rights must prove that the cause of action was in fact assigned.).
6
Texas courts have expressly recognized that An attorney-in-fact is not a real party in interest. The
attorney is merely an agent of the real party in interest and does not possess interests sufficient to qualify
for real party in interest status. Thus, the attorney-in fact cannot bring suit in its own name. Elizondo
v. Texas Nat. Resource Conservation Commn, 974 S.W.2d 928 (Tex.App.Austin 1998, no pet.).
5
to enforce the rights or remedies under the applicable loan documents in its own name
and for its own benefit.
D. The CWCapital Asset Mgmt. Case Is Erroneous In Several Ways.
The Court of Appeals relied upon one singular case to reach its holding regarding
the issue of ORIX having standing to assert a breach of contract action in its own name
and for its own benefit. Unfortunately, the holding in CWCapital Asset Mgmt., LLC v.
Chicago Properties, LLC, 610 F.3d 497 (7
th
Cir. 2010), was not only unnecessary dicta
7
in the case, but also demonstrably erroneous and contrary to well-established black-
letter Texas law.
In CWCapital Asset Mgmt., Justice Posner recognized that the servicer was not an
assignee who obtained legal rights in the underlying mortgage contracts. Id. at 501.
8
7
The CWCapital Asset Mgmt. case was not truly one of the servicer attempting to bring a breach of
contract cause of action in its own name and for its own benefit, but instead was a case involving
capacity under FED. R. CIV. P. 17. See id at 500-502. The courts erroneous reasoning that the servicer
somehow obtained equitable ownership of the claim was clearly rendered dicta since the court resolved
the Rule 17 issue on the basis that the trustee had submitted an affidavit ratifying the authority of the
servicer to sue on its behalf. CWCapital Asset Mgmt., 610 F.3d at 502. In the present suit, instead, the
issue has always been one of standing since ORIX asserted a breach of contract action in its own name,
claiming its own legal interest and its own damages. ORIX never pleaded or asserted a representative
capacity, which is accentuated by the fact that the Trustee, Wells Fargo was itself also a party to the suit,
rendering any representative capacity of ORIX unnecessary.
8
The courts statement that although the plaintiff may not be an assignee, it has a personal stake in the
outcome of the lawsuit because it receives a percentage of the proceeds of a defaulted loan that it
services, does not operate to grant standing as a third-party beneficiary to the underlying contracts.
CWCapital Asset Mgmt, 610 F.3d at 501. Certainly, as here, although the Trustee and the servicer may
contract to give a percentage of proceeds to the servicer, such executory contract in no way establishes
any legal interest or right of the servicer, either as a party in privity or a third-party beneficiary, in the
underlying mortgage contracts between the debtor/mortgagor and the lender/trustee, the owner of the
debt. Indeed, the test is not whether someone may just simply have some interest in the outcome of the
suit, but whether that plaintiff has a legally cognizable and enforceable interest in the outcome of the
case, meaning, regarding a suit on contract, whether the plaintiff owns a legal right in the contract.
Rodarte v. Investco Group, L.L.C., 299 S.W.3d 400, 407 (Tex.App.Houston [14
th
Dist.] 2009, no pet.)
(standing concerns the question of whether a party has an enforceable right or interest); AVCO
Corporation v. Interstate Southwest, Ltd., 251 S.W.3d 632, 649 (Tex.App.Houston [14
th
Dist.] 2007,
6
Also, Justice Posner expressly recognized that if the Pooling and Servicing Agreement
made the servicer a mere attorney, the servicer would not have standing to bring legal
actions in its own name and for its own benefit.
9
Id. In the present case, ORIX never
presented any evidence of having received any power of attorney on behalf of the
Trustee, even to make ORIX an asserted attorney-in-fact to bring suit in a
representative capacity.
10
Instead, as in CWCapital Asset Mgmt., the Dallas Court of Appeals relied solely
upon selective language within the Pooling and Servicing Agreement to wrongfully
conclude that ORIX was granted a right and authority
11
to bring a breach of contract suit
in its own name and for its own benefit. In particular, both Justice Posner and the Court
of Appeals erroneously interpreted the following clause in the PSA to permit ORIX to
institute lawsuits in its own name and not a representative capacity
Notwithstanding anything contained herein to the contrary, neither the
Master Servicer nor the Special Servicer shall without the Trustees written
consent: (i) except as relating to a Mortgage Loan which the Master
Servicer or the Special Servicer, as applicable, is servicing pursuant to their
respective duties herein (in which case servicer shall give notice to the
Trustee thereof), initiate any action, suit or proceeding solely under the
Trustees name without indicating the Master Servicers or Special
Servicers, as applicable, representative capacity, or (ii) take any action
pet. denied) (a plaintiff with no legally cognizable interest in the outcome of the case lacks standing to sue
on its own behalf).
9
Texas law is also well-established and clear on this point. Tinsley v. Dowell, 26 S.W. 946, 948 (Tex.
1894); AVCO Corporation v. Interstate Southwest, Ltd., 251 S.W.3d 632, 652-53 (Tex.App.Houston
[14
th
Dist.] 2007, pet. denied).
10
Compare to Wells Fargo Bank, N.A. v. Konover, 2009 WL 2710229 at *1 (D. Conn. 2009) (slip copy).
11
It is also well-settled law that a plaintiff must have both standing and capacity to bring a lawsuit.
Austin Nursing Center, Inc. v. Lavato, 171 S.W.3d 845, 848 (Tex. 2005); Coastal Liquids Transp., L.P. v.
Harris County Appraisal Dist., 46 S.W.3d 880, 884 (Tex. 2001); Nauslar v. Coors Brewing Co., 170
S.W.3d 242, 255 (Tex.App.Dallas 2005, no pet.).
7
with the intent to, or which actually does cause, the Trustee to be registered
to do business in any state.
[RR 21, Exh. 136, p. 54] The Court of Appeals wrongfully conclude[d] under the same
reasoning as in CWCapital that this language indicates that the servicer can sue in its
own name if the suit relates to a loan that it is servicing, or in the trustees name without
indicating that it is doing so in a representative capacityimplying that it is not doing so
in a representative capacity if it is suing in regard to a servicing-related loan.
CWCapital Asset Mgmt., 610 F.3d at 501 [emphasis in original].
Simply, this conclusion, resting upon perceived indication and implication, is
extremely erroneous, and even contrary to a straightforward reading of the provision.
The clause does not authorize the servicer to initiate any action in its own name, but
instead clearly requires the servicer to always indicate its representative capacity of the
Trustee, and only in cases relating to a mortgage being serviced does the servicer need
not previously obtain the Trustees written consent to initiate, but must still provide the
Trustee notice.
12
There simply is no indication or implication of what the servicer can do
in its own name and for its own benefit. Accordingly, the Court of Appeals reliance and
adoption of Justice Posners erroneous conclusion was, likewise, erroneous under the
clear unambiguous language of the Pooling and Servicing Agreement.
12
The seminal requirement addressed by the clause is the necessity of obtaining the Trustees prior
written consent, not whether the servicer can initiate actions in its own name and for its own benefit. This
is borne out by part (ii) of the provision. So, the clause is merely stipulating when the servicer needs to
obtain prior written consent, and has nothing to do with indicating, implying, granting, or even
assigning the servicer any authority whatsoever, much less standing, to bring a legal breach of contract
action in the servicers own name and for its own benefit.
8
More importantly, despite recognizing that the ORIX, as the servicer, is not an
assignee and that the trust still owns and holds any legal rights, title and interest in the
mortgage contracts, the Court of Appeals adopted the CWCapital Asset Mgmt. courts
wrongful conclusion that the PSA somehow effectively delegates what is effectively
equitable ownership of the claim and the trust holds merely the bare legal title; thus,
effectively creating some sort of new category of third-party beneficiary, entirely
unintended and even expressly denied by the mortgage contract parties, who can assert a
legal action for breach of contract.
13
The Court of Appeals completely disregarded the
well-established law and concluded that such black-letter law does not control the
current circumstances of loan servicers of CMBS loans under pooling and servicing
agreements. As a result, the Court of Appeals wrongfully carved out some new exception
to contract law whereby, without any ownership or title interest in the loan contracts, loan
servicers can claim their pooling and servicing agreements convey a post-contract
equitable right or third-party beneficiary status giving them an equitable claim and
standing to sue for breach of contract in their own names and for their own benefit.
Nothing could be further than the established law in Texas.
Shortly after oral argument in this case, and before the Dallas Court of Appeals
issued its original opinion, the Waco Court of Appeals issued an opinion that, in fact,
13
In fact, in the entire universe of Texas jurisprudence available on either Westlaw or Lexis, the term
equitable ownership of the claim appears in one singular opinion the Court of Appeals opinion in the
present case, quoting CWCapital Asset Mgmt. Nowhere in Texas jurisprudence has Petitioner found a
plaintiff asserting a mere equitable interest in a claim being allowed to bring a legal action for breach of
contract, particularly where there is neither privity nor third-party beneficiary status. The Court of
Appeals holding in this case would result in a complete watershed change in the well-established Texas
law regarding standing in breach of contract actions.
9
directly addresses the exact situation presented. In Shipley v. Unifund CCR Partners, 331
S.W.3d 27 (Tex.App.Waco 2010, no pet. hist.), the assignment, much like the purpose
of the Pooling and Servicing Agreement in the present suit, assigned the rights and duties
to collect the debt; however, again much like a pooling a servicing agreement, retained
title and ownership of the debt in the assignor. Id. at 29. Directly applicable to what the
circumstances of a pooling and servicing agreement regarding a servicer of a CMBS loan,
the Waco Court of Appeals correctly held that
Because standing denotes a partys justiciable interest in a controversy,
it is only the party whose primary legal right has been breached that may
seek redress for that injury. Eaves v. Unifund CCR Partners, 301 S.W.3d
402, 404 (Tex.App.El Paso 2009, no pet.) Without a breach of a legal
right belonging to that party, that party has no standing to litigate. Id.
(citing Cadle Co. v. Lobingier, 50 S.W.3d 662, 669-70 (Tex.App.Fort
Worth 2001, pet. denied)). Unifund CCR Partnerss [sic] right is solely
limited to taking whatever steps are necessary to collect a debt owned
entirey by someone else, while holding no title, interest, or rights in
anything else. We do not find that this is sufficient to establish that
Unifund CCR Partners has standing to pursue this claim in its own name.
Shipley, 331 S.W.3d at 29-30. In the present suit, no evidence of any type of ownership
of the debt and mortgage contracts by ORIX exists, and the PSA did no more than the
assignment in Shipley, assigning ORIX rights and duties of collection, but retaining all
title, interest and ownership rights with the Trustee. Accordingly, as in Shipley, ORIX
did not have standing to bring a legal action for breach of contract in its own name, for its
own benefit, seeking its own damages, and the Court of Appeals erred in not dismissing
ORIXs suit for lack of subject matter jurisdiction.
14
14
The lack of privity which deprives subject-matter jurisdiction regarding ORIXs breach of contract
counterclaim against TCI 9033 Wilshire also requires dismissal of ORIXs claim for declaratory relief
10
II. ISSUES ARISING REGARDING HOLDER STATUS OF WELLS FARGO BANK.
A. Questions Are Raised Due to Industry Irregularities.
In the fall of 2010, after this case was tried, and even argued to the Court of
Appeals, reports of irregularities in the CMBS industry, surfaced as a result of scandals
involving robo-signing. Particularly, on November 16, 2010, the Congressional
Oversight Panel issued a report Examining the Consequences of Mortgage Irregularities
for Financial Stability and Foreclosure Mitigation.
15
[Appendix, Tab 11] Noting that
questions of irregularities had arisen in the securitized market, the Report stated that
documentation standards in the foreclosure process have helped shine a light on
potential questions regarding the ownership of loans sold into securitization without the
proper assignment of title to the trust that sponsors the mortgage securities. Id. at p. 64.
B. Wells Fargo Did Not Provide Evidence of Clear Ownership to Establish
Standing as Holder Regarding TCI 9033 Wilshires Promissory Note and Deed
of Trust.
Wells Fargo, as Trustee and alleged holder and owner of the TCI 9033 Wilshire
note and mortgage, did not provide evidence of possessing the original loan documents
as part of the same putative counterclaim. Recently, in OAIC Comml Assets, L.L.C., where similar to the
present case the plaintiff asserted breach of contract and declaratory judgment claims, the Dallas Court of
Appeals expressly held that because the plaintiff lacked privity there were no rights, status, or other legal
relations affected by the agreement in relation to the parties required by the Uniform Declaratory
Judgment Act for the court to determine. Id., 234 S.W.3d at 745. Therefore, [a]ccordingly, OAIC has
no standing to assert its claims for declaratory relief respecting the agreement. Id. (citing Grinnell v.
Munson, 137 S.W.3d 706, 712-14 (Tex.App.San Antonio 2004, no pet.) (plaintiff not in privity to
written contract lacked standing to seek declaratory relief respecting contract). Also, importantly, the
Dallas Court of Appeals added, Because we concluded above that OAIC lacks standing to bring its
claims for breach of contract and declaratory relief, OAIC is not entitled to attorneys fees under either
chapter 38 or the Uniform Declaratory Judgments Act. We vacate the trial courts award of attorneys
fees to OAIC and dismiss OAICs claim for attorneys fees for lack of jurisdiction. OAIC Comml
Assets, L.L.C , 234 S.W.3d at 746.
15
Available at http://cybercemetery.unt.edu/archive/cop/20110401223205/http:/www.cop.senate.gov/
11
and chain of assignments to establish its standing as owner and holder.
16
Such evidence
was clearly Wells Fargos burden. It has long been settled law in Texas that although a
general denial does not put the plaintiff to proof of the execution of the instrument in suit,
it requires him to produce the negotiable instrument and introduce it into evidence or
show an excuse for not doing so. Alexander v. Houston Oil Field Material Co., 386
S.W.2d 540, 543 (Tex.Civ.App.Tyler 1965, writ refd n.r.e). The claimant has the
burden of producing and introducing the original note into evidence. Derbigny v. Bank
One, 809 S.W.2d 292, 294 (Tex.App.Houston [14
th
Dist.] 1991, no writ).
17
Accordingly, in the present case, even though the Trustee, Wells Fargo Bank, was
a party to the suit, no evidence was presented of the Trustees possession of the original
loan documents or the chain of assignments to establish that Wells Fargo was the actual
and legal holder of the TCI 9033 Wilshire promissory note and mortgage documents.
16
Although these issues arose and came to light after the trial in this case, it must be remembered that the
question of standing is jurisdictional, cannot be waived, and can be raised at any time, even on appeal.
Texas Assn of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 445-46 (Tex. 1993).
17
With the advent of the issues of irregularities, in recent months, several other states supreme courts
and appellate courts have issued decisions emphasizing the requirement that a party seeking to enforce a
mortgage note must prove its connection to the note. See United States Bank Natl Assn v. Ibanez, 941
N.E.2d 40, 53 (Mass. 2011) (affirming denial of action to quiet title by securitization trusts that could not
prove the assignments of the mortgages); Wells Fargo Bank, N.A. v. Ford, 15 A.3d 327, 329 (N.J. Ct.
App. 2011) (foreclosure judgment reversed because plaintiff securitization trustee, Wells Fargo Bank,
failed to present any evidence that the note had been assigned to it); Deutsche Bank Natl Trust Co. v.
Triplett, 2011 Ohio 478, 2011 Ohio App. LEXIS 401 (Ohio Ct. App. 2011) (foreclosure reversed where
bank failed to offer evidence establishing that it owned the note at the time of the filing of the complaint);
US Bank Natl Assn v. Madero, 913 N.Y.S.2d 612, 613-14 (N.Y. Ct. App. 2011) (plaintiff failed to
demonstrate the prima facie requirement to establish that it had standing as the lawful holder or assignee
of the subject note on the date it commenced this action). While the precise legal issues in these cases
varied, all of these cases have arisen in a securitization context, they all require actual proof of standing
by evidence of the original loan documents and proof of actual assignment, and they demonstrate the very
concerns and irregularities mentioned by the Congressional Oversight Panel.
12
III. TCI 9033 WILSHIRE DEMONSTRATED THAT WELLS FARGO PLEADED NO
DAMAGES.
The Court of Appeals recognized that TCI 9033 Wilshire raised the issue of Wells
Fargo failure to plead, and prove, the essential element of damages; however, the court
erred in its opinion by failing to address the issue on the asserted basis that TCI 9033
Wilshire had not briefed the issue. To the contrary, TCI 9033 Wilshire expressly
directed the Court of Appeals to the fact that Importantly, Wells Fargo asserted no claim
for damages, instead solely alleging only that ORIX is entitled to damages, if any, and
included appropriate record references.
18
Although unsure of how much citation and demonstration the Court of Appeals
may consider adequate briefing, TCI 9033 Wilshire certainly did provide the
appropriate legal standard with the direct quotation from the Dallas Court of Appeals
itself that [O]ne may not maintain an action based upon the harm suffered by another
18
TCI 9033 Wilshire further provided briefing demonstrating
That only ORIX is a party asserting a counterclaim is further demonstrated by the live
pleading of Defendant Wells Fargo Bank in its First Amended Answer and
Counterclaim. [CR 1; p. 128] Although titled as such (although the law instructs that a
title is rather meaningless, instead it is the substance of the claims included from which
meaning is derived), under the section entitled Counterclaim, each and every paragraph
is an exact copy, word for word, merely parroting ORIXs Third Amended Counterclaim.
[compare CR 1: pp. 76-80, CR 1:, pp. 130-133] In fact, nowhere in such counterclaim
is Wells Fargo Bank even mentioned. And, the prayer of the pleading actually only
identifies Wells Fargo Bank as defendant (presumably in relation to the First Amended
Answer) and expressly identifies ORIX as the Counter-Plaintiff (necessarily asserting
the counterclaim included in the pleading). [CR 1: p. 132]
Accordingly, particularly when the repeated stipulations placed into the record by
counsel are considered, it becomes clear the live pleadings reveal that only ORIX is
asserting claims against TCI alleging breach of contract and for declaratory relief.
And TCI 9033 Wilshire briefed the Court of Appeals that, Such is further demonstrated by an
examination of the evidence presented, in which absolutely NO evidence was proffered of any damages,
an essential element, incurred by Wells Fargo Bank. In fact, even ORIX presented no evidence of any
damages alleged to support a putative counterclaim. [RR 4: p. 66].
13
from Boy Scouts of America v. Responsive Terminal Sys., Inc., 790 S.W.2d 738, 746
(Tex.App.Dallas 1990, writ denied). Whereas TCI 9033 Wilshire not only
demonstrated the lack of pleading and evidence, as well as the law that a party cannot
assert damages alleged as being suffered by someone else, the Court of Appeals clearly
erred in holding that issue was waived as not having been briefed and failing to address
the issue.
IV. THE COURT OF APPEALS ERRED IN ITS HOLDING REGARDING THE OTHER
INSURANCE PROVISION.
In its Opinion on Rehearing, the Court of Appeals only addressed the terrorism
insurance issue under the other insurance provision of section 2.1(h) of the Deed of
Trust, necessarily presuming that the Court of Appeals agreed with TCI 9033 Wilshires
briefing that, as a matter of law, terrorism insurance could not have been required under
section 2.1(a), the all risk provision, as TCI 9033 Wilshire maintained both at trial and
on appeal.
By the express language of Section 2.1(h), before ORIX, acting on behalf of the
lender/holder Wells Fargo, could require terrorism insurance coverage for the Wilshire
Medical Building, ORIX was obligated to determine that terrorism was a hazard or
casualty which at that time [May 2004] was commonly insured against by similar
properties, similarly situated. Notwithstanding this express obligation, ORIXs that,
instead of complying with TCI 9033 Wilshires Deed of Trust, ORIX merely issued a
blanket order to require ALL of the borrowers of ALL the loans it serviced to procure
terrorism insurance. [RR 13: pp. 44-48, 51-52, 75-77] ORIXs blanket order even
14
contradicted its own Policies and Practices Insurance Administration that directed its
insurance department to cause collateral properties to be adequately insured against loss
in accordance with generally accepted servicing practices and the constraints of
applicable loan documents. [RR 13: pp. 69-71; RR 22; Exh. 154]
At trial, ORIX attempted to support its blanket decision by relying (solely) upon a
survey that indicated it was common for servicers of commercial mortgage backed
securities (CMBS loans) to require terrorism insurance. However, the survey ORIX
relied upon at trial to justify its decision was not published, and therefore unknown by
ORIX, at the time ORIX made the blanket decision to require all of the borrowers of the
loans it serviced to procure terrorism insurance. [RR 19: Exh. 120] And, the survey did
not survey loans securing buildings clearly similar to the Wilshire Medical Building,
much less similarly situated. [RR 7: p. 92] ORIX relied upon the survey as the sole
evidence to justify, years after the fact, the blanket decision to require all the CMBS
loans it serviced to obtain terrorism insurance.
Nonetheless, the Court of Appeals erroneously held that TCIs Deed of Trust did
not require what the Court described as an individualized commonality analysis.
Incredibly, rather than holding what the document seems to clearly require, the Court of
Appeals concluded that the contract only requires that the required insurance be
commonly required and insured against, regardless whether ORIX actually knew at the
time it required the insurance. However, the Court of Appeals reasoning ignores, and in
fact removes from the contract (and ORIXs own obligations) the requirements that the
constraints of the appropriate loan documents be analyzed and considered before
15
requiring such additional insurance coverages. Such conclusion defies the logic that the
obligations and requirements in the contract clearly contemplate that the party have a
necessary mens rea, so to speak, and know that at the time it is requiring the additional
insurance, it is doing so because it meets the constraints of the contract, i.e., it is
customarily required and at the time commonly insured against for similarly situated,
similar properties.
The Court of Appeals erred in reaching its conclusion, particularly when the
evidence foreclosed the possibility that the MBA study relied upon by ORIX to justify
its blanket decision (and which the Court of Appeals spent much space describing) was
not published, could not have been known, and was not known by ORIX at the time it
required the additional terrorism insurance.
19
CONCLUSION AND PRAYER.
WHEREFORE PREMISES CONSIDERED, for the reasons discussed above, TCI
9033 Wilshire respectfully request that this Court grant a petition for review, reverse the
trial courts and Dallas Court of Appeals judgments, and render judgment in favor of
TCI 9033 Wilshire, or in the alternative remand the case for a new trial.
19
Further, the Court of Appeals citation to BFP 245 Park Co. v. GMAC Commercial Mortg. Corp., 12
A.D.3d 33, 332, 786 N.Y.S.2d 425 (N.Y. App. Div. 2004) on this point is somewhat disingenuous
because the requisite conditional language to which the BFP 245 court was referring was language
which would have stipulated that any all risk coverage would have to be maintained for all insured risks
that, at the time of the contract, were included in an all risk policy. As the Dallas Court of Appeals
conclusion in this case would appear to require, every contract would have to expressly include a
conditional statement for nearly every sentence of obligation to make clear that the parties must have
actual knowledge of the basis for requiring the obligation be performed, in order to prevent a party from
merely hoping that its actions can be justified a later time during litigation.
16
Respectfully submitted,
/s/ Jonathan J. Cunningham
Jonathan J. Cunningham
State Bar No. 00793574
C. Gregory Shamoun
State Bar No. 18089650
SHAMOUN & NORMAN, LLP
1755 Wittington, Suite 200
Dallas, Texas 75234
214-987-1745 phone
214-521-9033 fax
Attorneys for Petitioner
TCI 9033 Wilshire Blvd., Inc.
17
CERTIFICATE OF SERVICE
This is to certify that a true and correct copy of the above and foregoing has been
forwarded to all counsel of record in accordance with the Texas Rules of Appellate
Procedure on this 15
th
day of July, 2011, as follows:
P. Michael Jung, Esq.
Strasburger & Price, L.L.P.
901 Main Street, Suite 4400
Dallas, Texas 75202
(214) 651-4300 (Telephone)
(214) 651-4330 (Telecopier)
Talmage Boston, Esq.
Winstead P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
(214) 745-5709 (Telephone)
(214) 745-5390 (Telecopier)
Ryan K. Lurich, Esq.
Friedman & Feiger, L.L.P.
5301 Spring Valley, Suite 200
Dallas, Texas 75254
(972) 788-1400 (Telephone)
(972) 788-2667 (Telecopier)
/S/ Jonathan J. Cunningham
Jonathan J. Cunningham
No. 11-0396
_______________________________________________________________________
IN THE SUPREME COURT OF TEXAS
_______________________________________________________________________
ECF NORTH RIDGE ASSOCIATES, L.P. and TCI 9033 WILSHIRE
BOULEVARD, INC.,
Petitioners,
v.
ORIX CAPITAL MARKETS, L.L.C., U.S. BANK, N.A. a/k/a U.S. BANCORP,
N.A., as Trustee FOR THE MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1996-C3, and WELLS FARGO BANK, N.A. a/k/a WELLS FARGO
BANK, MINNESOTA, N.A., as Trustee FOR THE MORTGAGE PASS-
THROUGH CERTIFICATES, SERIES 99-C1,
Respondents.
______________________________________________________________________
Appealed from the Fifth Court of Appeals District, Dallas County, Texas,
No. 05-09-00066-CV
______________________________________________________________________
APPENDIX TO TCI 9033 WILSHIRE BOULEVARD, INC.'S
PETITION FOR REVIEW
______________________________________________________________________
Jonathan Cunningham
State Bar No. 00793574
C. Gregory Shamoun
State Bar. No. 18089650
SHAMOUN & NORMAN, LLP
1755 Wittington Place, Suite 200, LB 25
Dallas, Texas 75234
214-987-1745 phone
214-521-9033 fax
Attorneys for Petitioner
TCI 9033 Wilshire Boulevard, Inc.
CERTIFICATE OF SERVICE
This is to certify that a true and correct copy of the above and foregoing Appendix
has been forwarded to all counsel of record in accordance with the Texas Rules of
Appellate Procedure on this 15
th
day of July, 2011, as follows:
P. Michael Jung, Esq.
Strasburger & Price, L.L.P.
901 Main Street, Suite 4400
Dallas, Texas 75202
(214) 651-4300 (Telephone)
(214) 651-4330 (Telecopier)
Talmage Boston, Esq.
Winstead P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
(214) 745-5709 (Telephone)
(214) 745-5390 (Telecopier)
Ryan K. Lurich, Esq.
Friedman & Feiger, L.L.P.
5301 Spring Valley, Suite 200
Dallas, Texas 75254
(972) 788-1400 (Telephone)
(972) 788-2667 (Telecopier)
/S/ Jonathan J. Cunningham
Jonathan J. Cunningham
APPENDIX
TAB "1" -- Trial Court Final Judgment dated December 19, 2008 (CR 2; pp. 412-415).
TAB "2" -- Trial Court Findings of Fact and Conclusions of Law, dated February 10,
2009 (CR 2: 450-462).
TAB "3" -- Dallas Court of Appeals Opinion dated December 20, 2010.
TAB "4" -- Dallas Court of Appeals Opinion dated January 19, 2011.
TAB "5" -- Dallas Court of Appeals Opinion on Rehearing dated March 14, 2011.
TAB "6" -- Joint Trial Exhibit No. 3, Promissory Note [RR 17, Exh. 3]
TAB "7" -- Joint Trial Exhibit No. 4, Deed of Trust [RR 17, Exh. 4]
TAB "8" -- Excerpts from Trial Exhibit 136, Pooling and Servicing Agreement
[RR 21, Exh. 136]
TAB "9" -- CWCapital Asset Mgmt., LLC v. Chicago Props., LLC, 610 F.3d 497
(7
th
Cir. 2010)
TAB "10" -- Shipley v. Unifund CCR Partners, 331, S.W.3d 27
(Tex.App.Waco 2010, no pet. hist.)
TAB "11 -- Congressional Oversight Panel issued a report Examining the
Consequences of Mortgage Irregularities for Financial Stability and
Foreclosure Mitigation, dated November 16, 2010.
No. 11-0396
IN THE SUPREME COURT OF TEXAS
ECF NORTH RIDGE ASSOCIATES, L.P. and TCI 9033 WILSHIRE
BOULEVARD, INC.,
Petitioners,
v.
ORIX CAPITAL MARKETS, L.L.C., U.S. BANK, N.A. a/k/a U.S. BANCORP,
N.A., as Trustee FOR THE MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1996-C3, and WELLS FARGO BANK, N.A. a/k/a WELLS FARGO
BANK, MINNESOTA, N.A., as Trustee FOR THE MORTGAGE PASS-
THROUGH CERTIFICATES, SERIES 99-Cl,
Ref.,pondents.
Appealed from the Fifth Court of Appeals District, Dallas County, Texas,
No.05-09-00066-CV
APPENDIX TO TCI 9033 WILSHIRE BOULEVARD, INC.'S
PETITION FOR REVIEW
Jonathan Cunningham
State Bar No. 00793574
C. Gregory Shamoun
State Bar. No. 18089650
SHAMOlJN & NORMAN, LLP
1755 Wittington Place, Suite 200, LB 25
Dallas, Texas 75234
214-987-1745 phone
214-521-9033 fax
Attorneys for Petitioner
Tel 9033 Wilshire Boulevard, Inc.
CERTIFICATE OF SERVICE
This is to certify that a true and correct copy of the above and foregoing Appendix
has been forwarded to all counsel of record in accordance with the Texas Rules of
Appellate Procedure on this 15
th
day of July, 2011, as follows:
P. Michael Jung, Esq.
Strasburger & Price, L.L.P.
901 Main Street, Suite 4400
Dallas, Texas 75202
(214) 651-4300 (Telephone)
(214) 651-4330 (Telecopier)
Talmage Boston, Esq.
Winstead P.e.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
(214) 745-5709 (Telephone)
(214) 745-5390 (Telecopier)
Ryan K. Lurich, Esq.
Friedman & Feiger, L.L.P.
5301 Spring Valley, Suite 200
Dallas, Texas 75254
(972) 788-1400 (Telephone)
(972) 788-2667 (Telecopier)
lSI Jonathan J. Cunningham
Jonathan J. Cunningham
APPENDIX
TAB "1" -- Trial Court Final Judgment dated December 19,2008 (CR 2; pp. 412-415).
TAB "2" -- Trial Court Findings of Fact and Conclusions of Law, dated February 10,
2009 (CR 2: 450-462).
TAB "3" -- Dallas Court of Appeals Opinion dated December 20,2010.
TAB "4" -- Dallas Court of Appeals Opinion dated January 19,2011.
TAB "5" -- Dallas Court of Appeals Opinion on Rehearing dated March 14,2011.
TAB "6" -- Joint Trial Exhibit No.3, Promissory Note [RR 17, Exh. 3]
TAB "7" -- Joint Trial Exhibit No.4, Deed of Trust [RR 17, Exh. 4]
TAB "8" -- Excerpts from Trial Exhibit 136, Pooling and Servicing Agreement
[RR 21, Exh. 136]
TAB "9" -- CWCapital Asset Mgmt.. LLC v. Chicago Props., LLC, 610 F.3d 497
(i
h
Cir. 2010)
TAB" 10" -- Shipley v. Unifimd CCR Partners, 331, S.W.3d 27
(Tex.App.---Waco 2010, no pet. hist.)
TAB" 11" -- Congressional Oversight Panel issued a report Examining the
Consequences 0/ Mortgage Irregularities for Financial Stability and
Foreclosure Mitigation, dated November 16, 2010.
APPENDIX
TAB
"I"
CAUSE NO. 04-07956-G
ECF NORTH RIDGE ASSOCIATES, L.P.
AND TCI 9033 WILSHIRE BOULEVARD,
INC.
IN THE DISTRICT COURT OF
DALLAS COUNTY, TEXAS
134th JUDICIAL DISTRICT
Plaintiffs and Counter-Defendants,
Defendants and Counter-Plaintiffs.
v.
FINAL JUDGMENT
Beginning November 5
th
and ending December 5, 2008, this cause was called to trial and carne
on to be heard. ECF North Ridge Associates, L.P. ("ECF"), and TCI 9033 Wilshire Boulevard, Inc.
("TCI"), Plaintiffs and Counter-Defendants, appeared through their designated representative and
attorneys of record, and ORIX Capital Markets, LLC ("ORIX"), U.S. Bank, N.A., a/k/a U.S. Bancorp,
N.A., as Trustee for the Mortgage Pass-Through Certificates, Series 1996-C3, and Wells Fargo Bank,
N.A., a/k/a Wells Fargo Bank, Minnesota N.A., as Trustee for the Mortgage Pass-Through Certificates
Series 99-1, Defendants and Counter-Plaintiffs, appeared through their designated representatives and
attorneys of record, and all announced ready for trial. The subject contracts between the parties
contained a provision that waived the right to trial by jury, all questions of fact were submitted to the
Comi, and the case proceeded to trial.
The Court, after hearing the evidence and arguments of counsel, is of the opmlOn that
Defendant and Counter-Plaintiff ORIX, acting in its capacity as (i) owner and holder (as of July 25,
FINAL JUDGMENT - Page 1
2006) of the loans formerly held by U.S. Bank, Trustee, on the subject ECF loan, and (ii) Special
Servicer for Wells Fargo Bank, Trustee, on the subject TCI loan, has prevailed on its pleaded causes of
action in its counterclaim against ECF and TCI for its breach of contract and declaratory relief causes
of action, and therefore, is entitled to recover the $217,027.38 in default interest previously paid under
protest by ECF in 2005, which ORIX has been holding in an escrow account since it was paid; and
ORIX is also entitled to recover the $302,335.53 in default interest previously paid by TCI in 2005,
which ORIX has been holding in an escrow account since it was paid. This relief being awarded to
ORIX in such capacities is consistent with the relief sought by U.S. Bank, Trustee, and Wells Fargo
Bank, Trustee, in their pleaded counterclaims.
It is further determined that Plaintiffs ECF and TCI shall take nothing by their claims asserted
against the Defendants in this case.
It is therefore ORDERED, ADJUDGED and DECREED by the Court that ORIX, in such
previously designated capacities, shall have and be permitted to retain for its ultimate recovery the
amounts it has held in escrow since 2005, as designated above, in the amounts of $217,027.38 against
ECF (plus pre-judgment interest at the rate of 5% per annum on the amounts of default interest owing
by ECF from May 13, 2004, until such interest was paid under protest by ECF on April 14, 2005, as set
forth in Joint Exhibit 79) and $302,335.53 against TCI (plus pre-judgment interest at the rate of 5% per
annum on the amounts of default interest owing from March 23, 2004, until such interest was paid
under protest by TCI on May 26,2005, as set forth in Joint Exhibit 85).
It is further ORDERED that ORIX, in such previously designated capacities, shall recover from
Counter-Defendant ECF its attorneys fees in the sum of $190,048.91 (being the total amount of
attorneys fees owed through trial by ECF in the amount of $241,380.39 minus the $51,331.48 in
ORIX's attorneys fees previously paid by ECF) for services rendered through the trial of this case, and
FINAL JUDGMENT Page 2
shall also recover from TCl attorneys fees the sum of $241,380.39 for services rendered through the
trial of this case; and in the event of an appeal by ECF and TCl to the Court of Appeals, if the appeal is
unsuccessful, ORIX, in such previously designated capacities, shall be further entitled to $75,000 as
reasonable attorneys fees (to be allocated $37,500.00 against ECF and $37,500.00 against TCl); and in
the event of an appeal by ECF and TCl to the Supreme Court of Texas, in connection with an
unsuccessful Petition for Review, then ORlX, in such previously designated capacities, shall be
entitled to an additional $15,000 in appellate attorneys fees (to be allocated $7,500.00 against ECF and
$7,500.00 against TCl); and if the Petition for Review is granted, and the appeal is unsuccessful, then
ORIX in such previously designated capacities, shall be entitled to an additional $20,000 in appellate
attorneys fees (to be allocated $10,000.00 against ECF And $10,000.00 against TCl).
It is further ORDERED that the total amount of the Judgment here rendered as to (i) pre-
judgment interest accrued between May 13, 2004 - April 14, 2005 for ECF, and (ii) as to interest
accrued between March 23, 2004 - May 26, 2005 for TCl, and (iii) as to the award of attorneys fees
awarded by this Judgment to ORlX from both ECF and TCl, shall bear interest at the post-judgment
rate of interest of 5% per annum from date ofjudgment until date of payment.
All costs of court spent or incurred in this cause are hereby taxed and adjudged against
Plaintiffs and Counter-Defendants, ECF and TCl, for whjch let execution issue.
All writs and processes for the enforcement and collection of this Judgment or the costs of
Court may issue as necessary.
All relief requested in this case and not expressly granted is hereby denied. This Judgment
finally disposes of all parties and claims and is appealable.
FINAL JUDGMENT Page 3
Signed on this
I it- day of _-=(J:=-- -'{..... __, 2008.
APPROVED AS TO FORM:
Ryan Lurich
Larry Friedman
Friedman & Feiger, L.L.P.
Counsel for ECF North Ridge Associates, L.P.
Gregory Shamoun
Dennis Holmgren
Shamoun & Nonnan, LLP
Counsel for TCI 9033 Wilshire Boulevard, Inc.
\
!\
Nicola Hobeiche
ORIX Capital Markets
Talmage Boston
Winstead PC
Counsel for ORIX Capital Markets, L.L.C.,
U.S. Bank, N.A., a/k/a U.S. Bancorp, N.A. as
Trustee for the Mortgage Pass-Through Certificates,
Series 1996-C3 and Wells Fargo Bank, N.A., a/k/a
Wells Fargo Bank, Minnesota N.A., as Trustee for
the Mortgage Pass-Through Certificates Series 99-1
Dallas ] 5308083v2
FINAL JUDGMENT - Page 4
Judge Presiding
l
.. .. l:' ;, ::' " " :.' 4 ''':;:;''1'
. ::" :.,', . 'f',
.,,1.1.1.1 .....: "j
.. .. :.. : .... ,.._ .._J
6/1012004 28 - $676:38 5.0000%
$4,869,943,18 -$18,938.67
7/12/2004 31 $674.72 5.0000% $4,857,997.83 $20.916.38
8/10/2004 28 $673.05 5.0000% $4,845,974.09 $18,845.45
9/9/2004 29 $671.37 5.0000% $4,833,871.44 $19,469.76
10/8/2004 28 $669.68 5.0000% $4;821 689.37 $18,751.01
11/9/2004 31 $667.98 5.0000% $4 809,427.36 $20,707.26
12/9/2004 29 $666.26 5.0000% $4.797,084.88 $19321.59
1/10/2005 31 $664.54 5.0000% $4,784,661.40 $20,600.63
2/912005 29 $662.80 5.0000% $4,772156.39 $19,221.19
3/9/2005 27 $661.05 5.0000% $4,759,569.32 $17,848.38
4/8/2005 29 $659.29 5.0000% $4,746,899.64 $19,119.46
4/14/2005 5 $657.52 5.0000% $4,734.146.82 $3,287.60
o
gj '""3
l?i
0)0000(
.j::..tT.;
'I-;
\(3'""3
Vl
9'Z
C19
'-l
'-a
$732.88
$732.25
$731.46
$730.82
$730.01
$729.37
$728.71
$727.89
$727.23
$726.40
$725.73
$725.05
$723.88
$723.19
$722.34
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
$6.590.263.25
$6.583,099.88
$6.577,363.61
$6.570,113.52
$6.564,287.03
$6,558,420.06
$6.551,042.61
$6.545,083.63
$6,537,616.52
$6.531,564.27
$6,525,469.98
$6,514,946.33
$6.508.736.59
$6.501.025.12
$21,235.29
$23,406.58
$20,462.91
$21.170.37
$23.339.69
$19.675.26
$24,748.38
$18,908.02
$21,065.65
$23,223.34
$17,401.25
$23.888.14
$28,204.53
$5,778.69
$302,035.52
$0.00
Ifl
00
00
...... t-
...... 0
OJ
t/J
E-i ::l
zl3
......
o
APPENDIX
TAB
"2"
CAUSE NO. 04-07956-G
ECF NORTH RIDGE ASSOCIATES, L.P.,
AND TCI 9033 WILSHIRE BOULEVARD,
INC.
ECF NORTH RIDGE ASSOCIATES, L.P.
AND TCI 9033 WILSHIRE BOULEVARD,
INC.
IN THE DISTRICT COURT OF
DALLAS COUNTY, TEXAS
134th JUDICIAL DISTRICT
Plaintiffs,
Counter-Defendants
v.
S
S
v.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Based on substantial, though conflicting testimony, I adopt the following
Findings of Fact:
FINDINGS OF FACT
1. At the pertinent times for purposes of thi s lawsuit, by reason of the
applicable Pooling and Servicing Agreements ("PSAs"), ORIX was (i) the servicer of the
commercial mortgage loan originated in 1995 by Banc One Commercial Loan Original
Corporation and later assigned to U.S. Bank, N.A. as Trustee Mortgage Pass-Through
Certificates, Series 1996 C-3 's in connection with the purchase an apartment complex ",un""
h ~ r " n n as the
Ridge Apartments located at 41 f-j ::lr\!f'c:t Hill in Dallas, and
Findings of Fact and Conclusions of Law - Page 1
(ii) the servicer of the commercial mortgage loan originated in 1999 by Merrill Lynch Credit
Corporation and later assigned to Wells Fargo Bank Minnesota, N.A., as Trustee for the
l'.1ortgage Pass-Through Certificates Series 99-C1 in connection with the purchase of a building
owned by TCI known as the Wilshire Medical Building located at 9033 Wilshire Boulevard in
Los Angeles, California. ORIX later became the owner and holder of the ECF note on July 25,
2006.
2. In both of the subject loans, the pertinent mortgage instruments required
ECF and TCI, as borrowers and mortgagors, to obtain "all risk" insurance coverage and also to
obtain "other insurance" as deemed reasonably necessary by the lender in order to protect the
real estate collateral on the loans. For ECF, under the Mortgage and Security Agreement dated
November 6, 1995, the specific provisions that required ECF to obtain "all risk" and "other
insurance" were Sections l.4(a) and (f), respectively, and for TCI, under the Deed of Trust
dated June 1, 1999, the specific provisions that required TCI to obtain "all risk" and "other
insurance" were Sections 2.1(a) and (h) respectively:
Sections 1.4 of the ECF Mortgage and Security Agreement reads in pertinent part as
follows: Mortgagor shall, at Mortgagor's expense, maintain in force and effect on the Property
at all times, while this Mortgage continues in effect the following insurance:
(a) "All risk" coverage insurance against loss or damage to the Property from all risk
perils...
(f) Such other insurance on the Property ... as may from time to time be required by
Mortgagee against other insurable hazards or casualties which at the time are
commonly insured against in the case of property similarly situated, due regard
being to height type of buildings, use
occupancy.
Findings of Fact and Conclusions of Law - Page 2
Sections 2.1 of the TCI Deed of Trust reads in pertinent part as follows: Borrower shall,
at its own cost and expense maintain the following insurance coverages with respect to the
Prope11y during the term of this Deed of Trust:
(a) Casualtv. Insurance against loss or damage by fire, ..., and other hazards
covered by an "all risk" policy or a policy covering "special" causes of loss, with
such endorsements as Lender or Trustee may from time to time reasonably
reqUIre.
(h) Miscellaneous. Such other insurance coverages, in such amounts, and such other
forms and endorsements, as may from time to time be required by Lender, and
which are customarily required by institutional lenders for similar properties,
similarly situated, including, without limitation, coverages against other insurance
hazards, which at the time are commonly insured against and generally
available .
3. Oh December 20,2002, April 2, May 13, July 14 and October 18,2004, ORIX, as
servicer, sent letters to ECF and/or its designated agents stating that the insurance requirement
imposed upon the borrower/mortgagor as contained in the Mortgage and Security Agreement
executed in connection with the ECF loan, required ECF to carry terrorism insurance on the
North Ridge Apartments, and ECF failed and refused to provide such coverage until April 14,
2005. Thus, ECF breached its loan agreement and was in default on May 13,2004, thereby
triggering its obligation to pay the default rate of interest as that date. and remained in default
with the default rate of interest continuing to accrue until ECF cured it on April 14,2005.
4. On December 20,2002, March 23, July 20, October 28,2004 and March 29,
2005, ORIX sent letters to TCI and/or its designated agents stating that the insurance
requirement imposed upon the borrower/mortgagor, as contained in the Deed of Trust executed
in connection with the TCI loan, required TCI to carry terrorism insurance on the Wilshire
Medical Building, and TCI failed and refused to provide such coverage until May 2, 2005 when
Findings of Fact and Conclusions of Law - Page 3
it sold the property and had its position as borrower on the loan documents assumed by the
purchaser of the property. Thus, TCI breached its loan agreement and was in default on March
23, 2004, thereby triggering its obligation to pay the default rate of interest as of that date, and
remained in default with the default rate of interest continuing to accrue until TCI cured it on
May 2,2005.
5. Commercial loan documents executed prior to 9/11/01 typically contained no
explicit requirement that terrorism insurance be obtained by the borrower and/or mortgagor in
order to protect the commercial real property collateral that secured the loans.
6. Prior to 9/11/01, typically "all risk" insurance policies that covered commercial
real estate did not exclude terrorism as a covered peril, and thus what ORIX initially asked TCI
and ECF to obtain in the way of terrorism insurance coverage was only a request for such
borrowers to comply with the property insurance coverage requirements which were in place at
the time of the two loans' origination.
7. When ECF and TCI responded to ORIX's request by refusing to obtain terrorism
insurance coverage on the subject real estate collateral properties, such refusal constituted a
breach of the subject loan documents, resulting in both ECF' sand TCI' s defaulting in their
obligation under their respective mortgage instruments to carry "all risk" insurance coverage and
also their obligation to obtain "other insurance" as reasonably requested by the servicer in order
to protect the real estate collateral on the loans.
8. The only collateral that existed for both of the subject loans was the real estate
collateral (i.e., the North Ridge Apartments the Wilshire Medical Building
for the TCI in that the loan obligations
the
both were non-recourse and were no
personal guaranty agreements executed by anyone in
Findings of Fact and Conclusions of Law - Page 4
either loan.
9. The replacement cost of the real estate collateral for the two loans at the time
ORlX asked ECF and TCl to obtain terrorism insurance was in excess of $10,000,000, and the
cost of the annual premium on terrorism insurance if secured by ECF (as the property owner) on
the North Ridge Apartments in 2004 was $1,412.40 and if secured by TCl (as the property
owner) on the Wilshire Medical Building was $345.63.
10. lfORlX, as serviceI' for the two trusts referenced in Findings of Fact #1, had
purchased terrorism insurance on the two real estate collateral properties, the cost of the
premiums for such coverage would have been in excess of $1 00,000.
11. ORIX was under no obligation under the subject loan agreements (to which ECF
and TCl were parties) to force place terrorism insurance on the two real estate collateral
properties. The cost for ORlX to obtain forced placed terrorism insurance on the properties
would have been approximately $50,000 for the ECF property and $70,000 for the TCl property.
12. ORIX's forced place insurance policy from 2003 to 2005 did not provide single
endorsements or coverage for terrorism, and therefore, ORIX could not have obtained forced
placed stand alone terrorism insurance on the two real estate collateral properties.
13. For commercial real estate loans being serviced in the 2004 time period that were
part of Commercial Mortgage-Backed Securities ("CMBS") trusts, noteholders required more
than 80% of the borrowers to obtain terrorism insurance coverage on the real estate collateral
properties for such loans.
14. ORlX's demands after 11/01 on ECF and TCl to obtain terrorism insurance on
commercial real estate collateral included in a securitized loan portfolio, and after TRIA went
into effect in November 2002, were consistent with the practices the substantial majority
commercial lenders in the United States had involvements with securitized loan portfolios.
Findings of Fact and Conclusions of Law - Page ::;
15. Before filing this lawsuit, neither ECF nor TCI ever obtained a quote for terrorism
insurance coverage on the subject real estate collateral for the two loans.
16. From 2002-2005, ORlX was acting as servicer for many other CMBS trusts on
thousands of other commercial mortgages in addition to the trusts that owned the two subject
loans during the relevant time period. ORIX acted consistently for all the loans it serviced in
requiring the borrower for all the loans it serviced to obtain terrorism insurance following
9/1 I/O1 and the enactment of TRlA because all of such loans were securitized.
17. Following the events of9/11/01 and the effective date of TRIA in November
2002, it was commercially reasonable for a commercial mortgage loan servicer to require
borrowers to obtain terrorism insurance on real property collateral since it was beneficial to trust
.,
certificate holders and available at low cost.
18. The location of terrorist targets is, and has always been, unpredictable.
19. The cost ofECF's and TCl's obtaining terrorist insurance in 2004 and 2005 was
very reasonable, given the replacement cost of the subject real estate collateral on those two
loans, and clearly much less expensive than the cost of litigating the issue and prosecuting this
lawsuit.
20. The amount of default interest owed by TCl to ORlX as servicer for the
certificate holders of the trust on the subject loan was in the amount of$302,335.53, which TCl
paid at the time the TCl subject loan was assumed by the purchaser at the closing in May 2005.
21. The amount default interest owed bv to ORIX as c p r ' , ! 1 r , ~ r for the
certificate holders of the trust on the subject loan was the amount of$217,027.38, thr.(',ll(lh
time ECF finally cured the default in April 2005.
Findings of Fact and Conclusions of Law - Page 6
22. Though both ECF and TCl waived notice of default in their respective loan
documents, both ECF and TCl received notice of potential default from ORlX throughout 2004
and the first few months of 2005, yet they refused to cure such default until April and May,
2005, respectively.
23. ECF and TCI had a much better and less expensive opportunity to obtain
terrorism insurance than did ORlX as serviceI' for the two trusts on the two subject loans, given
that ECF and TCI could have obtained such terrorism insurance (i) with little expense and effort,
and (ii) due to the ready accessibility of terrorism insurance to them as the property owners in
2004. Furthermore, ORIX was not in a position, as a third party servicer, to obtain terrorism
insurance coverage on behalf of borrowers ECF and TCl.
24. ORlX was not a named insured on ECF's and TCI's insurance policies, and,
therefore, had no rights or privileges in or to those policies.
25. ORlX was not responsible for any material delays associated with the assumption
of the TCI loan since almost all of the delay was a result of litigation between TCI and its tenant
and ORlX was not involved in any way with such litigation.
26. ORlX's approval of ECF' s funding requests from ECF's reserve account on
October 7, 2004 was not an admission that no default existed under the loan documents as of
such date.
ORIX is entitled to recover all amounts of default interest, pre- and post-judgment
as an
interest, costs, and attorneys fees, as provided in the Final Juclgn1enlt,
the ECF Mortgage and Security Agreement, ORIX quali
under 15.1 (6) the TCI Deed Trust Security
that (i) under 4.6
the Mortgagee; (ii)
LJvcceJvJ and Rents
and Fixture Filing, ORIX qualifies as an Lender and Trustee; and (iii) both of
Findings of Fact and Conclusions of Law - Page 7
subject Pooling and Servicing Agreements between ORlX, the lenders, and the trustees provide
that ORlX is entitled to such recoveries.
28. Regarding 2.3 of the ECF Promissory Note, ORlX as for the lender and
trustee, was not required to apply each monthly payment made by ECF to default interest, before
applying it to payment of accrued interest, and the reduction of principal, because of ORlX's
having the right to grant indulgences to the borrower (under 4.1 of the ECF Promissory Note)
and ORlX's not applying such default interest every month after the default occurred qualified
as an indulgence to the borrower.
To the extent any Conclusion of Law is construed, in whole or in part, to be a Finding of
Fact, it is hereby adopted as such.
I adopt the following Conclusions of Law:
CONCLUSIONS OF LAW
1. ECF breached its loan agreement and was in default on May 13,2004, thereby
triggering its obligation to pay the default rate of interest as of that date, and remained in default
with the default rate of interest continuing to accrue until ECF cured it on April 14,2005.
2. TCl breached its loan agreement and was in default on March 23, 2004, thereby
triggering its obligation to pay the default rate of interest as of that date, and remained in default
with the default rate of interest continuing to accrue until TCl cured it on May 2, 2005.
3. Based on the controlling case law established in courts throughout the United
States who have considered this issue previously, both the "all risk" and the "other insurance"
provisions in the mortgage instruments in the subject loan documents required ECF and TCl to
when ORlX obtain terrorism insurance at such as servicing representative
trusts) made such a request and imposed such a rprll11rprnf'1'1! on the borrowers.
Findings of Fact and Conclusions of Law - Page 8
4. ORlX, as servicer for the two trusts on the subject mortgage loans, had no duty to
mitigate the damages sustained by ECF and TCI in connection with their defaults under their
respective loan agreements, and ORIX was reasonable in not obtaining stand alone or forced
place terrorism coverage for the two real estate collateral properties after ECF and TCI refused
to obtain such coverage.
5. ORIX, as servicer for the trusts on the two subject mOligage loans, had no
obligation under the loan documents to tap the insurance reserves for ECF and TCI in order to
purchase terrorism insurance on the two real estate collateral properties.
6. Because of the substantial replacement costs of the real estate collateral on the
two subject loans compared to the small cost associated with the borrowers obtaining terrorism
insurance and the ready availability of terrorism insurance at the time ORlX requested it, it was
reasonable for ORIX as servicer for the two trusts on the subject loans to require ECF and TCI to
obtain terrorism insurance coverage on both real estate collateral properties.
7. Given that both of the subject loans were part ofCMBS trusts for which ORIX
was acting as servicer, and for which there was no collateral other than the subject two
properties, it was commercially reasonable for ORlX as servicer for the trusts to require ECF
and TCI to obtain terrorism insurance coverage at the low cost specified above (in Finding of
Fact # 9) as a means of protecting the collateral for the certificate holders in the trusts,
particularly once terrorism insurance became easily obtainable and affordable after TRIA went
into effect November 2002.
8. Given that its standard practices were consistent with of most servicers
CMBS trusts on commercial ORIX re3lS0nal)Jy ll1 requmng and TCI to
obtain telTorism insurance coverage on the subject real estate collateral properties.
Findings of Fact and Conclusions of Law - Page 9
9. Though ECF and TCl both ultimately cured their defaults and obtained terrorism
insurance in 2005 after refusing to obtain it in 2004, a late cure after default does not extinguish
their obligation to pay default interest that accrued before the cure.
10. ORIX as servicer for the two trusts on the two subject loans had no duty to obtain
terrorism insurance coverage on the two real estate collateral properties, given that the cost of
ORlX's obtaining such terrorism insurance on behalf of the two trusts was not a trifling expense
and ORlX had no duty to sacrifice its right to collect default interest under the subject loan
documents.
II. ORlX as agent for the lenders and trustees under the subject loan agreements with
ECF and TCl, and as a party to the subject PSA's, had standing to pursue its counterclaims in
this case seeking to obtain default interest, attorneys fees, costs, and pre-judgment and post-
judgment interest from ECF and TCl.
12. ORlX had no duty to forego charging default interest under the subject loan
agreements, once ECF and TCl were in default because of their refusal to obtain terrorism
insurance coverage on their real estate collateral properties.
13. ORIX breached no contracts with either ECF or TCl.
14. USA Bank, N.A., as Trustee, breached no contracts with ECF.
15. Wells Fargo Bank Minnesota, N.A., as Trustee, breached no contracts with TCl.
16. Once ECF and TCl believed ORIX, as servicer for the respective trusts, had
breached the subject requiring the hn,'n,1,1iP1CQ the terrorism lnQIlr'U1{'p
a duty to mitigate their damages coverage for the two real estate collateral properties, they
by obtaining terrorism insurance after being requested to
Findings of Fact and Conclusions of Law - Page 10
it yet they failed to do so.
17. Because of its meritorious counterclaim for declaratory relief against ECF and
TCI, and its meritorious counterclaim for breach of contract against ECF and TCI, ORlX is
entitled to retain the $302,335.53 plus all interest accrued on the default interest collected on the
TCI loan, and also is entitled to retain the $217,027.38, plus all interest accrued on the default
interest collected on the ECF loan.
18. ORlX, on behalf of itself and on behalf of U.S. Bank, N.A., Trustee, and Wells
Fargo Bank Minnesota, N.A., as Trustee under the respective PSAs, is entitled to recover its
attorneys' fees because of its meritorious counterclaim for declaratory relief against ECF and
TCI, and its meritorious counterclaim for breach of contract against ECF and TCI, due to ECF's
and TCI's breach of the subject mortgage instruments by failing to obtain terrorism insurance
coverage on the subject real estate collateral properties, with such fees reasonably incurred and
such legal work necessarily performed, with the amount of such fees through the trial of this
cause being $482,760.78 (with such trial fees to be paid (i) by ECF in the amount of $241 ,380.39
less the $51,331.48 in fees previously paid by ECF, such that $190,048.91 are presently due and
owing by ECF; and (ii) by TCI in the amount of $241 ,380.39); and in the event of any appeal of
this case to the Dallas Court of Appeals in the amount of $75,000 (with such fees to be paid
$37,500.00 by ECF and $37,500.00 by TCI); in the event of an application for Petition for
Review to the Texas Supreme Court in the amount of an additional $15,000 (with such fees to be
paid $7,500 by ECF and $7,500 by TCI); and if such Petition for Review is granted, in the
amount an additional $20,000 (with such fees to paid $1
TCI).
by ECF and $1 by
19. 1 l.lllUL',,- other things. a terrorist act to be certified an
under TRIA, the act must have been committed by foreign terrorists and caused in excess of
Findings of Fact and Conclusions of Law - Page 11
$5,000,000 in damages in aggregate losses for all losses occurring due to anyone act, such that
for TRIA terrorism insurance coverage to apply, the terrorist attack only needed to aggregate
more than $5,000,000 for all claims to all properties effected (i.e., ECF could suffer $1,000,000,
the shopping center across the street $2,000,000 and the office building next door $2,000,000,
and the insurance policy would have been triggered and the coverage would have paid
$1,000,000 for the damage to the ECF property); furthermore, the $5,000,000 aggregate losses
include workers compensation claims, business income, etc. as being included within the
threshold.
20. As to the TCI loan, California law is clear that there can be no viable claim for
unjust enrichment (which is a claim essentially trying to create an implied contract), when the
transaction out of which the claim arose is the subject of an express contract, and the loan
documents between TCI and its lender were and are an express contract.
21. With respect to the TCI loan, TCl's cause of action under California law for
breach of good faith and fair dealing against ORIX has no merit since under California law there
is no duty of good faith and fair dealing between parties who have no contract with each other,
and ORIX has never had contractual privity with TCL
22. All pleaded causes of action asserted by ECF and TCI (i.e., for breach of contract;
for waiver and/or estoppel and/or unjust enrichment; seeking declaratory relief; and for breach of
duty and good faith and fair dealing) against the Defendants are not meritorious, such that ECF
and TCI should take nothing against Defendants in connection
action.
pleaded causes of
The amount of the Judgment in this case as to (i) pre-judgment interest
accrued between May 13, 2004 - April 14, 2005 for
Findings of Fact and Conclusions of Law - Page 12
, (ii) pre-judgment interest accrued
between March 23, 2004 - May 26, 2005 for TCI, (iii) the amount of default interest that accrued
(per Conclusion of Law #15) and (iv) the award of attorneys fees awarded by this Judgment to
ORlX from both ECF and TCI, shall all bear interest at the post-judgment rate of interest of 5%
per annum from date of Judgment until date of payment.
24. All costs of court spent or incurred in this cause are hereby taxed and adjudged
against Plaintiffs and Counter-Defendants, ECF and TCI, (allocated 50-50 between them) for
which let execution issue.
Signed this the _-'----'=__ day of February 2009. n
~ ~ - -
Anne Ashby, Judge Presiding
Findings of Fact and Conclusions of Law - Page 13
APPENDIX
TAB
"3"
IU\ FH\F and in pal"L\FFiRM in part and Opinion Filed Ikcember :W, ::01 (I
in The
([ourt of Appeals
District of Qlrx4U'1 at
No. 05-iN-(HHloo-CV
FCF NORTH RIDGE ASSOCL\TES, L.P. /\ND Tel 9033 WILSIHRE BOULEVARD,
iNC., Appellants
ORIX CAPITAL MARKETS, L.L.c., U.S. HANK, N.A. A/K/A BANCORP, !'l.A., AS
TIUlSTEE FOR THE MORTG.\GE PASS-THROUGH CERTIFICATES, SERIES 1996-
C3, AND \VELLS FARC;O BANK, N.A., A/K/A WELLS FARGO BANK, \UNNESOTA.,
N.\., AS TRUSTEE FOR THE !\10RT(;i\.GE PASS-THROUGH CERTIF!C'ATES,
SERf ES 99-Cl, Appellees
On Appeal from the !J4th .Indicia! Histrict COUl"t
Dallas County, Texas
Trial Com"t Cause No. 04-07956-G
BcCore Justices O'Neill.
Opinion Justice M
Born 'F ()()3."\ i1shire Bou 1nco COI)[eSl
the I and factual the trial court' ing that and
h,-p,){'!'P,j their loan
not procLJri led telTori
securJng the trial comt' calculation of default interest, and
I chal .ng. as servicer, to sue breach ofcontracl.
c a rnl tnal lh de It interest
Badq.:rollud
'I the owners u( COI1lt11lTCLl! !'l'ell csl:ltc
YIn [hi Texas, which is Income
ng huilt in I ! ')()()s :lIJd Iucated within a C 1111 of Dallas len a and
u!'rolilld II1g olfice towers, IC'I was the owner or the Wilshire f'vlcdieal Bui Iding in I.os
('alif()lTli:l, winch IS loc:!led less than a nli1e lIulll Rodeo [)rive in "{i've,'I\; Ilills, andre 'I share
I he S:lI11e pri nc ipal :lI1d, dlJ ri ng the re lcv:1l1 t time, the S;llllC propert y man:t gement comp:ll1y, Pri me
Ineon1<..' Asset Man:tgcment, Inc, Prime cllso functioned as their eontr:lctnal advisor. responsible for
risk loans origin:tted in I ()<)5 for the apartment property and 1')<)9 1(,)[ the
medical huilding,
F3uth loans were pooled ;l1ld securiti/ed after originatlon, becoming Commercial M
Backed rity loans (Uv1F3Ss),I ORIX was the servicer on behalfofthc loan pools' trustees
both :mc! was there!(HT rcsponsi hIe !()r coI ng Iy payments of principal and interest,
the property was ,w,'",,,rly Insurcd, ;md ",tIn'cc,',n" :ll1Y issues of default under
the documents,
The rcquired speci li insurance on the properties, ineluJing "al
Illsurance," 11 insurance covers any perlinot specifically excluded in the ley, Trilli(li
Indlls, , 11](' I'. IllS. ,J Ill" () 16 F,2d 2()() n 11 (5th Cir. 1()()()) At the tlll1C or the loan
originations,llel FC 'F's nor 'leTs alsk policy ex,ciIIClc'(j {""\\'i"r",Ui" causc(J acts
( "
IV;1111;1, inSl!IdnCe COlllp;mles, Including thosc I'or [< F ;ll1d ! 'I
tcrrorist ;lttacks.
In ;1 SlT1CS or letters nnlllg in 2002, III F' and I ('crt I te1TOri Sill
IllsULlilce \V;IS ITCjLllred under Ihe relevant luan documents. "Certllied terrorism IIJsurance" IS
coverage Il)r certain tcrrnrist acts that heen certiried the United States
0(' rl'1 ., n! 0
In concurrellce with the I !nitcd States orStateand /\ General under the TerrOrism
Risk Insurance Act or 2002, 15 usc. C/OI Note (the TRL\). The correspondence continued,
with ORIX sending "final notice" to both ECF and TC'I in 2004. andrCI shared the same
prinCipal and risk management and there received the same inll}rmation on the cost of certified
terrorism insurance prcmiums purportedly ran as high as al1nua I The loan halances in
2004 were approximately :5 million for FCF and S6,() million fl)r TeL and both were umvilling
to ohtain such insurance. Evidence at trial showed that ohtained ac
insur;lr1ce. the annual prelnilll11S would have been SI,412.40 I.
When and 1'('1 reCused to obtJin certified terrorism inslILlllce, OR! X declared defaults
under the loan docurl1ents, F and Tef responded by filing suit against ORIX for or
contract and dec X answered and cClllntercl al ng breaches or
cOl1lract and ,',.,n",('j,'ng;I dec"n"n,nn
and Tel had breached the insurance provislOns in the
evant loan dOCUlTlents t interest date of the al it
received the counterclaim, elected to olTits loan. In connec!.lon fT, Ii rst
obtai certi fied terrorism insurance in '12005 an annual premium J,
the interest under Ahout the same time, to have
another assume its loan, To {'nn,l',if>lf> the aSSlln--,r"u"n de It interest under
II
ORIX h;ld aCljlllred [CT' loan fonncriv held
S.I{;l ;md ,IS hoth the U\YlllT and scnlcer olthe loan. Yet Wells still held Ts
;lnd Tel ;Hldcd ;t defense Ihal ORI\ did Ilut have standing to assert any claims against Tel. lhe
trustees on,.,,,,",-,, ()RIX's al ions and asserting ()RIX had the to
recuver def:lltlt Interest and s attendant 10 enfiJrcing s andre'I's loan documents.
Arkr thirteen days olhench trial in late 200g, the trial court renderedjudgment II)r appellees
and avv;mlcd OR1X deLwlt interest anu a s and appeal.
Slandard of R('vie\'\'
F and Tel, as the att;tcking the sulTiciency ofan adverse Ii on an Issue
\vhich the.y did not have tile hurden of' proof, must demonstrate on I there is no
to support the adverse linding. Croucher I'. (rnllf'/Ii'r, CJ()() S .2d 55, 5g (Tex. J ( 8 3 ) ~ [Jc!c
Filfers., fne. 1'. ( of , 18g S. W.3d 385, 387 ex. App. Dallas no
pet.) U ;1 no-evidence pcnnt, we consider the cvidence in most favorable to the verdict,
inclu ng every !em ( 'ifl' !h8
. 20(5). A Insu ciency challenge 'Is if there is rnore than a intilla of to
the ict. Forl!losa U,)'A \'. I'rcsl!lw 'rs (f ('(llifrilcfors,
S .2d -+ i ,-+8 T
I ()()8) (
op.). Ie the evidence 0 to prove a vilal act
weak as to IiO more than creale a surmise or suspicion 01 Its eXistence, the evi no more
than a \111ilia cmd is ly no evidence. v. C fnc. S.W.2d (d.
lcnc no L'\'llknce lli findl
!I/I \foon'. 112 S S50 (Tex. ApI'. rex ).
Discussion
F ,llld Tel cbllcnge the findings ,md conclusions requiring to 11l;lintain terrorism
Illsurance, Fe'F the trial court judgment ing ORI interest
the date of ORIX's lirst "Iin,d notice" letter. Tel further
()RIX's sLtnding ;IS the account scrV1CLT to sue for breach or contract. We begin \viih T(Ts
challenge to ()RIX's standing.
,)'/unding
TC 1 ;Irglles that ORI as the ,nflrl.,"",, serviceI' and not the s has no
standi ng to sue TCI. ORIX responds that the pool ing and servici ng agreement (PSA) hetween it ,md
the trustee oflCT CM convevs to sue for defiwlt or the documents.
Standing is a 1'1),,",1)1,.',,1 matlerjuri on. Tex.Iss '1/ V. Tex. . 1ir C'ol/fro!
Hel. 852 S. VY .2d 440. 445 1
1
)1)3). Whether a trial court has subject matter junsdiction is a
matter oj'law, which yve review de novo. ,S'ee at 446; sec Tc'x Dep 'f &
133 S.W3d 217, nCl (Tex. 2U04 a plainti rf possesses ,,,,I,rlO to assert a
lar clairn onthe pil;;J(Jled and the c;wse of action 'lcC',>,"Iicd
LLC. 178 S.W.3d 853 (Tex. pp. Worth 2()()5. no ) D.
ullcer ( 'il'. . :::00 I Vvc construc thc tion i r
the p lC\V the entire to determine if any
. 1ir ::: s. ng on
has a lTicient lp Ith the as to a 'able interest in its
fllilcomc," 11i',fllI ( '/ r I' ! () Ii I I (), liS
IWill. \ Jilt I{ R \1\111 ,\ Idv1 1< 1< K I, 1{lldl'l, 1111.&1<./\ 1,1'lilIY I
I' C[111: I)I'I{()CII)! 1<1:1'1 II I,". 141 (
\io It'X:lS else llJrl:ctly ;Iddre'.;ses ihe.;landing qllestJol1 before this Con ORlX
uks OR!\' ( "lllllill iI/urAd\', IJC v. j,u Illlrl'l !llnlor .lV, .2010 WL
III ;ll 7 l) (Tex, nloni,) ug 25,20 I0, . l'i the court
concluded thcr record cuntamed snri'icicn! eVidence ORiX C;tpital IvLirkcts proven its ritlht to
enforce a nole as the current "special and pursuant to :l servicing agreement cOlltaining
Similar 10 the PSA in Ihis case. Reeentl ,a appeals court addressed the very issue
of whether a mortgage serviceI' had standing 10 pursue claims agaHlst a borrower an al
under a mortgage loan to which Ihe servicei' was not a ,','ce ('IY( ,Issei
I', /III'""n l'roj7s., jJ(', (ll () l,',:-;d 4()7 (7th '1'. 20 10),
In ( Ihe court ressed hether a Illorlgllge serviceI', C W;iS enll
to 'ng SUit and its 1",""("- tenant for moneys the
lcn;ll1t paid the landlord in settlement of a separate dl at Examining the
,("'\!Ii'/'" S role in administering 3 seCllr1 . the court explained how a "serViCeI'
must ha all the Interests 0 the dliTcrenl tranches as cletemlllled
.. Iii. at 4')(j SOO. The court turned to the of ith its
trustee, stating the serviceI' is the trust's lectioll heea It I. have I power and
,Iuthon actl alone. to do or cause to and all In such
and ,Idlll nistrati "vhieh it ran
or n to It! ,It ons l!l na I),
/\eeording 10 the court: "There is no about Arllclc IJI mg l!1 thi case f a serviceI'
lit IK'CIII it
['he cnurt nc t lurncd the Issue or hl:illlT C in Inkrcst.
U/'/tu!, ()II) F. dill SIi] .1!11ining C the COllrt eited vanous provIsions
lind rcsponsibili to hrlng SUit nst the burrm.\/cr, incIlid In.':.;
to do or Cllu",e to he done Ilnd ;tII things It1
connection with such servicing imd administratIon It may deem necessary or " !t!.
trustee Iliso \vas ohli , al Ihe s \\TIUen to execute any limited po\vers or
iI!torney 11I1d other documents furnished the serVIceI' and necessary or ;lppropriale to enable the
servicer 10 Clirry out ils lUll! IIdrnini ve dut les under the The court concluded the
trustee WIIS rcqll!red to conlCr necessary authori on the serviceI' to hri ng su i t, "[ fJ or it is
serviceI'. not the trustee. who is "llln''''/i'IPrJ 10 decide \vhether to slle." !d. ing the n
the serVIceI' to sue in Its o\vnnllme. Ihe court "!T)nl,,,,, ;:cd the !()ilowlI1g
the requ' consent when suing pursuant to serVicing """","
!vV!lth()Lr( the Trustee's written consent, "exccpt relates to a Loan that the ...
Icer.. I ser\ICII1!:' to i representative es herel11 (1I1 which case
such serviceI'll gi Trustee of the ll1itiatlon I, shall not]
in!tlale llI1y action, sllit or
indlCllill1!: the" .. Servicer's ..
tInder
capacliY
Trustee I1dlTle WI
cun iI1 I o\\n !lame if the suit relates to
a loan th:li It trustee
representati ng t!JIltn IS not 'In')f'''''! ifit is
regard to a
ltisthus
(/iu!the Ii
, undcr the aLJ:reC:HlrCll,l, who
lind trustee d hen the serv
dUll ill) 1'j()vl,k fhe Ilriti;:llion trust Iiolds mere! the h:tre
lit Iloollnh' :lIId ScTviclng i\ del what IS ellective\ equit:thlc
uWllershl1l ul till: bll1l alhelt lur eVl:nlu:tl dlslrlhlll Jon ul'l to the mvncrs
uf (lie Ir:lIlchcs ul' Ihe mort kl'd Sl'Curlty III :iccurd:lIlCe \\llh their
to the senieer. 1'01' that in dCClding hat :lction to take Ith re to a
scnlecr to consllJcr 1 ing interests oCtile O\\/I1crs Crf
dllTerenl Ir:lllC!1es 01' the seeun1
II!. at 50! il2 (inlcrnal l'il:ttlons en1\111a:;IS IJ1 original).
the I:tngllage ufORDCs PSA is :lImost Jdcntic:tl to inCIVCUpt IU/. ;\ gives
ORIX "I'ull power and authority, acting a tu do or cause to he done any and all things III
connection with such servicing and IJdrl1inistralioll \vhich it may deem necessary or desirable,"
Similarly, the trustee IS reqllllu! to support ()RIX's to service the pooled loans: "Trustee
shall execute any powers or altorney and other documents dehvered to it rORIXj and necessary
dppropriale to RI as the case may to carry out its servicing anu administrative
duties hercunder . " Further. the permits ORIX to institute la\vsllits 1I1 its own n:lIlle:
"without Ihe Trustee's 'vvritten cons,cnt X shal I not 1ex as relating to a Loan
\vhich as appl IS servlclI1g """'''T''''! to fits] 've duties ate any
action, suit or proceeding solely under tlleTrllstee's name Wl indicating X']
representatJve capaci .. ," \Vc therefore conclude under same reasontng as Il1
ORIX had ."'.lIlU'''' to hring this lawsuit agalllst name as servicer.
Terrorism II/SUFallCe
Having concluded turn to the questioll
and were cOIJlraclual oblIgated procure terrorism insurance. In response to and
Ihe 1rI III c() urt s J I J( I
I X l'lllHcllds 111:11 i
loall duc lImcnl s "nt Ill:r ills uri Il1 Cc" Imd "J II, IT,; I-; In su rl illCC.
I umlcrs!;lnd Inns, we Ililil ant 10iln
documents Our prilllilry concern in cnl\II'ilCl int IS to ascertain the determine
what
ions lire I,n,n",.", onlill' ( ukcr l'. CukeI', (l50 S WI 391,
\Vc e'.ilnl1ne ilnd con.sider the entire \\TIlIng as a whole to hlinnollizc and givc c to all the
prnVISIOIiS so lhatllone will be rendered rneani Iii. Terms arc given their plain, ordinilrv, and
generally ilcccpted mc;ming 1!l1lcss the instrument the parties terms in a technical or
different sense. I fer/(oge !?cs . file. v. (F)9 S.W.2d J18, 121 (Tex. ] ()<)6).
We the "01 her i c of the loan documcnts first
1m: c!Ispositivc. Subsection 1 C) of s and Securi
\lorlgl!gor shalL ctt S expense, maintain in force on
lit all times v,hile this !v1 continues in eCfCct following insurallce:
(f) Such othcr insurance 011 the or 011 any replacements or substitUlions
thereof or additions thereto as may I'rom tiine to time he required
agalllst other insurable hazards or casualties "vhleh at
m the case SltllJ due gIven to
usc and occupancy.
l'sDeedoC of LA. <C',L :J and and Fixture Filing
contains a similar prOVision:
shall. at
vv'lth n"cn,pr'i
cost ;tnd expense, the
to the dUring the term ofthi
(h) I lalJcous. Such IIlSUrimCe coverages, In amounts, and such
and ;]3 may from time to tllne be required and which
are customari Iy required I lenders for sllnilar ''''.''''''>'''''C
situ;:t includi Ithout Ii coverages against insurable
111Cllldii I" oj' 11Ipk onl ,,:llnilqllllkl' :;lllkho!L: ,I Ilillll:
,It \ Illi' ,.nc' cOI])ll]\lili I ,1C',dlnsl IlIId"c:nL:rllilv 11\llil;J!Jic,
it hOI II0t L Ihe contritets i ckar: ORI.\: tiS rVlceT
Il'quile U T' llIlell('l to uhLlIfJ C'lT1illl1 IfJSUrill1Ce as cert I lied terrorism insur:mcc
,(
Ii
'.;uch 111SUrllllCC I cOlflmonly Insured against I"or slllliLtr n1',""",-j ill I
c'
,>l 'F Ilnd I
do not chid \vhether ceTtl rll,'il terrorism insurlll1ce WIIS "generdlly aVili argue
terrorism WliS nul "coml11only ITlsured against" !()r properties 'Imbr to the apllrtment properly or
medical fhelr hurden is to demonstrate there IS 110 cVidence to
cerl i tied terrorism insur;mee WIlS cornmonly i against Slllli situdted.
During the course or the thirteen-day tnal, Ol"-(lX primari relied on a survey
published ill June 2004 the Bankers Association, rhc BA was conducted in
response to a the I nitcd Slates to in f(mniltion ng the
n:CIA !n ils survey. over I' ) commercial and
, rarmly !pans across 111 ajor in vestelr cIasses ( B Ii fc companies. Fannie f'vlae,
FI-LA and ot with 1mninlal banks and savings and
avcrage loan sue being 1mII ion, Of the () billion commercial ilnd mu
the tn'>t'" ,'t terrorism insurance \vas r::quired of sl ud i
Il1vestor Of ser\iJcer the terrorism insurimce was in ror
terrOrism insurance ,vas required ror I o balance scrv
affiliat rhe press re SUtr1ITl;lr1/ed the results
across l ,S:' and stating ical that
coverage IS not 'ust n,",',nl'!'lICS hut across the
re
commcrciaLmul ti 'Jy real estale
thl 1\/1 HA IllrtlllT CXplOrL:d ORIX' conclusioli tli;l!
l'crli1icd krrorlSIil IIiSUr;l1lCC \\:IS comllHlniy 1!ISurn! to the
Ilpartment and mL'dic;il huildinil' In Iiddl to the conclusion terrorlsrn Insurallce liS
or the ! X' S ex perl 1csli lj the survey was statistically
reli:lh!e over 12 coml11ercial and l11llltirlunily loans \vcrc SlI nationally Without
restrIction to spccilic gC0i:'raphie:l! local ions, lX's expert rurlher lestIfied that hecause or the
n;ltional (()CllS orthe survcy, It necessarily included properties 'mibr to the mcdicil building and
the dpartrnent property,
Other eVHJence admitted at trial included a January paper published the
C'ongression;l! Budget Ofljcc entitled "Federal Terrorism An Update" and a report or
the Lrnited Stales Department oCtheTreasury entitied, ";\sseSSlTlent: The Terrorism Risk Insurance
Act or2()()2," These reports corrohorated the rindings reported in the MBA survey that B
almost ullJi(mnly required terrorism insurance, The survey was Cl in the paper for
the cone Ius ion "n,''-'"'''' al I 0 Cthe OlillirJC('S sen Iced CM segment or the
commercial/llluiti Cam' rnortgage rnarketwere required to tenorism insurance in place,
Further, the CBO paper included re l'l">nC'F' to "one recent deaL i ng a S13 billion
('nrnl,ncO!'1i 01' IO() loans and 120 (includmg :I number 01' retail ShOpplllg malls across the
country), [Ill which) ()97 ng the eM terrorism insurance in
" In the c veness or the TRI
orpo ;md insurers
almost I, I miliion orgallllations markets
thai \\ere "nC("'T1",,'n) and had at !c;lst ten
i11 21i( l!Jelime
Ies, results were refined 10
proPlTtlCS with ;lCcrnenl V;I!IICS undcr ) million (the v;l!llCS rur the dpartlllent
ieal
:;;llIle plTiod, take-up r;lle::; for polic as
risk cit ICC; the Dcpartment oj' Homeland ,-","11"11 such as Los
Angeles, Results were segregated i'urther hy Illtiustria\ sector: husiness, which includ'_'d industries
In real eslale ;Illd rental dnd leasing: pro """'''''''''1, sClenti lie, and technical scrvices: and 1l1anagement
of comp;lnics and "lll"rn,-'scs had;1
Althou :.;ome orthe evidcnee did noi re 1UO'j;, terrorism coverage. more th;tn a scmti l1a
of evidence supported the trial court's findings that certified terrorism insurance was commonly
situated il11 to the and medical kfing:
and 1l1llitifamilv n'-",ni"'11es that were collateral securitized simi jar
repl:lcell1cnt values, \vere in dic ind sectors, and were located in Dallas and Los
S'ec. eg. !1FP Park Co
]' (
C _12 A.D.:\d :\32 (N.Y.
App. Div. motions, the lender did demonstrate that the risk \vas 'common
insured agamst: It was not necessary that the he uni II y lI1sured a.L::llrlst, so 'nUfT
demonstratIOn that some huildings in anhaHan
on thi issue.").
not have terronsm coverage was not dispositive
F and no e\ Idcnce stati cs. instead contc:Jl(jJn the
cCHmnonal anal in context was mappropnale loan
1'l,lt.:"
trill/cd the l1111l' U!' \ illnn. II
her lLH1C,(" C nlllcd llh ClfCHinst
1'l9)lJrl')')').thctli1leO the I he c()ntr:lct and i 11 the
II1c:;ur:I1KC" :IS may 110111 tnne iO lime" he rcqui which "at the I in :Irc cornmon inc:;ured
y c:;itualcd ,\ the c!:llIses arc not IdenticaL In malenal n'c:n,"'\
reI likewise W:IS required 10 IYlainLlin such "oth:! 111SUr;11}C .IS Ina y me to tIme" he
required. whIch "lit the time" :liT ,'n"""nn insnred aplinstand lyavailable. Located at the
end oCtile sectlOilS diseussll1g Insur:mce requirernents, ,md f;Jlkl\ving thc prior subsectIons detailIng
speci lie requirernel1ls, the "other insurance" proviSIOns or hoth and TCTs loan documents
effect i Cunction liS "e:lteh-all" c!:luses that prOVIde the knde! ihili
unforeseen Clrcunlstances or insurance encountered during the dural ion oCthe loalls. I
:Ippellants cO!lceded slich ;J chllraelerI/.atio!l: at re to the "ulhe! 1l1suranec"
as "calch-all" :mel iants' j nsurancc ex Neither the contract no!
the testimony F's lInd T(Ts contentions the must be
to the circumstances at the or' origination.
Nor do F r conlention IX \vas requIred under he terms of the
loan documents to engage in Illdi iduaii/.ed ('n,ntYtnn ana fied
no in the a rcquirC'111cnt and the
Silll;',ltCtI
eli a. condltl()n to dc;tcrrninlng
commonly requI the
requisite cOllchtional it not ilion lender rJ
,_' ;!lj(lIlOIlUlkd
lude F(F ;lIJd l( I f;llbl thclr hllrdcll 01
IX cou urHllT the lthcl' IllSIJLmcl:" pn)vI lOllS f the
loan documellts, require cenilled terrorisml!1sUl'ance, 'vV also CUllcl evidence is I and
!;lCtually su Icicnl to support the trial court's lindillt' that hreached their loan
llut procuring the insurance on these conclusions, we nol rClch the
ITlnalnll1g Issues Ing the "all-nsk Insurance" pruvisions, '>'cc' TEX. R. ;\Pi>, P. 47, I.
('II Ie1I111! ion In!eres!
FeF ;tlso conlcsts the trial court's fmding default interest accrued from fvLJy j 3. the
date oCORIX's first "final notice" F asserts both this Idter and a July 14, 2004 letter from
ORIX gave additional cure periods and any deLllIlt inlcre';t must calculated the ex
of the last cure J ulv 1<),2004. ORIX r("'n"111 that del' Interest is due i 11111\-(" cll.\-d upon
and ;ll1V cure iTered in Its letters do not alter the 1'1l''''''''<1I' Ul1lents.
()ur ;I!la or the loan documents ns with section 3, of the note, which proVides:
It is y that" should any other de occur under any or the
l,oan J)UClllnents which is not cured \Vln appl
a del;lull shall exist hereunder, and in evenl1he i
including ;i\1 sums adv,Incec! or un<L:r under any other Loan
Document. and ,!II d interest accrued shall at the
wl!huul nut Ice to Borru\ver. ;It once and may
ith,
on 10
as ailV all eXI interest
be IIl1lned i
c IS 111 F's
nOlC. F3ccause the nol contains nitlon Cur a to that ,'-"111-11\
":\ rld:lldl he:rcundcr which hilS nol he'ell llli"l'd
I)oCUl11CIl1s"'-\uhsection:2 1(hi pnwldes "'The occmrcncc or:l1lY oj'the jid events shall
It Calls 10 Ide insurance :is requlfTd Section .4 r.
and such Lui ure con1 iIlues ror Ii ve ('i) alkr wrinen notice thereor Irorn IORIXl 10 I
! ,,-+
j.
I (\ determine :lccrualcbte le)r del;wltlnlcrest. we must ,-"""1,,,, v/hcther a "dcf;H1H" eXists
;IS orthe d,lIe of'OR1X's "'(lnal notice" tklt FCF must obtain certdied (crrorism Insur:mce, or oilly
upon the eXpiration oLmy cure pcnoe!. The plain language of'the note states defaults exist after
expiration of the cure period "should [al dcCaull occur undcr any orthe Loan Documents which
is not eured within any applicahle grace or cure period, llLell a default shall exist." (Eillphasi
added.) Su ion 2.1 (b) of the security :lgree11lenl plainly sets a CIIIT period--live
Considering both agreements together, as we must, IlO def;llIlt occulTed under the note until
expiration ollhe Ii cure period. S'cc ,ldolllS v. Firs! ;VU!. Bailk 154S.W.Jd
8hi) ex. App. IJallas 2005, no
together)
) (op. n. )(construi ng prornissory note and deed 0 ('trust
ORfX asserts the language orthe loan documents making any interest "immediately
due and '''''''ll'''' no cure he interest accrues. The loan documents nn,\i,tlp
se. ly, section 3.3 the note fining the rate default interest ,,(\nli'nonl,t
existence 01' deCiwlt ailer which c!ef:wit interest accrues and all immediately and
" 13ecause a f:iult exists on upon Ihe ion of the Ii cure no de It
mterest hi'('(\n11'0 "Immedi due" untli the cure expires. c)rtglnal to
II
!kd io 11LlII1Llill 111S1JrllilCe, Illev would !111\( do!w so.
ulHkr the loall that
Ignollllg I!1C';c IfJdulgcnce:; calculatilli' Ihe dlnOlJllt of' ;udt
!Iller-cst. the trllt! COllrt \'c( seclion+ I ClfFC F' u\vn note states speeil-Ically any indulgences
granted by (JRIX shall not he construed dS a w;lIver of its rI ORL\ had the right to
indulgences and l'.':lensions under the loan docurnellis in an eff(lrt to pnlvlde lime Illr F to cure
its dd;lUlt reeF rclused any Iltlempt to ellre until April 01' 2005 vvhen it SOllght to payoff its
outstanding 101111 h;JI:lI1ce. Jlad F' cured its dd:nJlt Within the time periods III by ORIX, no
deLlUlt would have OCCUlTed. Because it did not cure, OR DCs indulgences did not prevent ORIX 's
n to collect dcf:lllit interest pursuant to the first "final notice" letteL We conclude the trial court
CITed when it dwarded dcf'ault interest li'OIl] the dale of ORIX's corrc:sponelel May IJ,
w1thoul :lI'I"\I,nl 1he Ii cure ulllkr
0[171'1' Issues
loan documents.
also identified sub-issues in its hriefas 10 appel breach miti
of damages. Tel similarly raised issues regarding mitigation and the
essential clement and I ,hd nol brief any of Issues. the
Issues ~ l r c W ~ i 1 will nut them. TE\:. R. ApI'. P. 38.1; see also
\'. SwrC,
1,(;\,\J
1 _ ,.). ~ 71 (Tex. App. Dallas :2010, peL dism el)
it waives the issue on .").
lih
Conclusion
r l ~ \ ' tnal c O \ l r l ~
uli to ll1clude the Ii
I ;1 Irrncd III :111 (jlher respl'ets.
()()( IOh()F.ll( I)
]"7
JUDGMENT
LCF N( )1(111 RIDe;E .\SSOCIXfTS, L,f'
;uld T( 'I 'HfU WI LS!! IRE LH H lEV/\RD,
INC, ,\ppellants
C)RIX C\PITAI, i'vlARKETS, f .. Le., U.S.
HANK., N.A a/k/a U.S. HANCORP, N.A.,
:IS Trustee F()R III E ;\;l()RTC/\(;E PASS-
I][ROI1(;][ CERTIFICATES, SERIES
I and WF:Ll.S 1'/\1\ BANK,
N A. \VL:I.I.S F.ARCiC) HANK,
MINNES()TA, N.!\., as Trustee FOR Till:
;Vl0R"!'(j/\ (; L ~ I'ASS-'rll ROl.Je; H
(TRrrr;lCAITS, SERI ()()-CI,
:\ppelices
Appeal frorn the l34th J u d i c i ~ d DIstrict
Court ofT)all;ls Cnullty, Tex;is. (fret No
04-07956-C; ).
Opinion delivered hy Justice :'vlurphy,
Justices C)'Neill ;ll1d I ,ang participating.
Hascd 011 the Court's opinion ofthi we REVERSE and REMA;'\JD the trial court's
JUdglllllnt regllnling lllllnUlll ()fdcl;JlIlt Illlerest llwarded to appellee ORIX Capital Markets,
LL,C. llgall1st llppellant EC'F North Ridge /\ssociates, L.P. to include the five-day grace period
followlIlg i\;lay I.\, 20()4.
We AFFIRM the court's .J 1 in all other rcspe(:ts.
It i:: ORHERED that each its own costs of appeaL
rhe ohl of llppc!LlIlt I' North Ridge Associates, LP., as principal, and Fidel
and DepOSit Company ofrv1aryland 01']910 Keswick Road, Baltimore, MD 2J2.03, as on
appellant LeI" North Ri Associates, L.P.' hond arc RELEA.SED.
lUIO
APPENDIX
TAB
"4"
IH \ FRSV :lIld HF\I \,,1) ill p:lrf. \IHH\I in part and Opinion Fikd .1:lIIl1an Ill.
In The
([011rt of Appl'abl
lfiftl! Di';.;trirt of ITl'xa';.; at Dalla';.;
"n. 05-09-00066-( ..v
VCF "ORTII RIDGE\SSOC!\n:s. L.P. AND TCl90]] WILSIIIRE BOLLEVARD,
INC., Appellants
v.
ORIX ('.\PIT.\L \L\Rh:.ETS, L.L.c., L.S. B\"h:., !\i.\.\/h:./A BANCORP, N.A., AS
TRl STEE FOR Til E \lORTG.\GE P\SS-IIIROlJGII CERTI FIC\n:S, SERI ES 1996-
C], .\ND WELLS F\RGO B\Nh:., N.\., \/1'./\ WELLS FARGO BANK, \IINNESOT\,
!\i.A., .\S IRLSTFE FOR TilE \IORr<;\GE P\SS-TIIROlJGII CERTIFIC\n:S,
SERIFS 99-CI ,\ppelkes
On Appeal from the IJHh .Judicial District Court
Dallas County. Texas
Trial Court ('ause No. 04-07956-G
OPINION
Hl'!lJ!"e JUStiCeS (),'\eill. \Ill
()pllllon By .Just ICC \1
Ihls ('ollfl S 01'1111011 <d' Ikc<.:mh<.:!" 2(), 2()!il IS Ithdra\vll 011 uu!" (1\\11 l!lotlon. ,lI1d \\e
,Inti l( 'I ()I,
I ,Inti I u:l! su ICICIlC to
SII nolprOCllrJ
cerlltietllernm II1SI1 on I he SeClIfll1'-'. til<':l!" dehh. . I(T:lppcals thl' tna!
I(! ,:hal 01< L\ ( \1;1
I <I,Iil' 1"1 ,kl:n!it 111ll'lc";1
Back:.,:rollnd
pI"! )per! les It' I ,1\\ Iwd t he '\it 11th 1\ I .\p:lrIIlh:lllc; plnplTty III I)ltllas, I"cxas, \\ 11Ich IS In'" Illcome
SlliTntllldllH: 'll!ice ttl\\l'rS It'l W:IS tile tl\\nl'r nl' the \VilsllIll.' \kdic:tl Blilldlllg In Ius Angeks,
t ':i1I/(lrlllll. \\lIlch I.S lucalnl!css Ihall amlk l'nllll I\nden Drive inlkverlv 1IIIIs H'F ,lI1d It 'I shale
the S:If1lC prlnClp:tl ,11)(1. dUrlIlg the re!c\11l11 IIIlIC, thcsaIllc propl'rly lllaIlage11ll'llt C0l11Pl1l1Y, Primc
Incnmc Assd \bIl:lgcml.'nL 1Ill'. Prunc ItiSO l'uIlcllolled liS Ihclr cOlltractual advlsnr, respollslhle for
Ihe ,lpaltl1lCIll property ,lI1d I ()iN !lX rhc
medlcil hUlldmg.
Hnlh IUllt1s \\ ere pno!cd 1111d sCl'IJrltl/l'd II/ler ongll1:IIIOI1, hccnllling ('OIlll11Crct:li \lortgllge-
H:llkul Sl'C 1011ih It \ 1HSs} t lRI:\. \\:IS the sen ICl'r nil hch:t1 f ,) f 1he luall pnols' t ruskes for
hoth IOlll1S :lI1d WIIS IIlcrc!(lrc rl",pnnslhlc !(Ir colkcling mOllthly paymcnts ofpnIlciplti :lI1d illtelest
IlloIlltorll1g \\ 11l'lhn the property W:IS properly Illsured, :lI1d IlddressiIlg llI1y issues nf def:lltll under
thc IO:tll doeulI1ents
Ihe 101m docul1lellls leqlllrl'd speci fil'd InSULlI1Ce (m the Includlflg ":i1I-rlsk"
IllSULll1Ce "\II-rlsk" I ,rlmCl' cmcrs IInV I not Spl.'cl!iC:llly excluded inlhe policv)'cc
i li I 'lUI li
I) ( "llld 11II:i1 1\'nllwh,1I1I,[, InSllr;U1Ce UHnp:lllleS, thosc IlH' I( T :l11d It'l.
IlhUrill1Cl' \\:IS 1,'quIIClI undcr !he le!cv:lnt lu:m documents. "t 'crll11ed terrorISm InsuI:mcc" IS
l'U\crll!.-'C fi lr ('l'lLII n terrorist :Icls that haVC hecn ccrt Iii ed hy thc l Jmted Stat cs Sccret :lry Ut' I'rc:lsury
III conCUITl'llCc \\ Ith thc ['nikd States Sccretarv orStak and Attorncy (i,'neralunder the TerrOrIsm
Risk Insur:lIlec\ct 01'2002, Puh. L. 107-2<J7. 101IOX, lit) Stat. 2.'\22. 2J22 J(j (2002) (the
IRIA) Ihe correspondcnce clH1tlnued, With ORIX sending "Iillalnotlcc" tu holh ECF :lI1d Tel in
2004 I( F ,ll1d Ie I sharcd the samc prIncipal :Ind risk 11111l1agcmcnt and thereforc ITcclved the samc
mf(mllatlon on Ihe l'OSt l)r certlflcd lerrOrISlll II1Surlll1CC prellliums purportcdly rim as high :IS
IOU :lnl1lI:l!lv. I hc loan h:l!:l11ces in 2004 \vcrc :lpproxlI1ukly S4S millIon Illr H T :md
nlllIion I(lr It'!. :md hoth wcre unwilling to ohLlln such Insurance hildcncc at tnal shO\ved that
Iud they ohtained Ilctuallwis Il)r the Insurancc, the :lf1nual prcmiums would havc heen SI A12.40
\Vhen H T and le'l refuscd to ohUln ccrl111ed terrorism Insurance, ORI\( declared
under the loan documl'nts rCF and Tel rcspondcd tiling SUit ORI\( Illr hrcach ur
contract :ll1d dec ,,"d, . n' lel!er ORI\( :lIls\vercd 11I1d eountelclain lIcs 0 f
contract and Il ng I! lk'clar:ltlonlhat F:CF: :lIld 1('\ h:ld hlc:lched thc lI1sur:Il1CC Plo\)s)ons in
documcnts and h Once It
recelvcd the counterCI;JIIil. I( F clected to pity olTils IO;In. in cunnection \\ It It till payuli'.
,
.'
F first
!I (kl,lliltllll 1IIItkr pr'llc,t \!lollllhc,lllll,' [lll1l', i (i \11 It ,ij\llIll\,t1 110m (n<l\ 10 1I,I\l'
N :\, ,L k ,I \\;\,lls FIlrgo Ibnk, \llnnesoLI, N ,\, liS lrllstl'c l(lI' Ihc i\1 PIlSS- lhroll!:dl
(','1tllll'liles, Serll'S ')')-( 'I PrC\lollslv, III 2()()(), ()RI\ hlld Ilcqulrl'd I( 'F's 101111 Ilml1erlv held hv
is ,I Ill! \\ liS hot h the o\\n,-'I' Ilfld scn Icer 0 I the loan 'y' ct W1'Ils Fargo sf I II held T( 'I' s !olm,
1111d ICI lidded II delense thlll ORI\ did 110t hIlVL' to assert Ilny claims TCI lhc
trllskes l'sSClllllllly PllfTollllg ORIX's .llkglltlons lind IISSCrtlllg ORIX had thc rt to
rccener deLlIIllllllL'rl'st IlI1d lltlornl'y's ICl'S Illtcndllnt to enl(lI'Clll" E< T's Ilmll('I's loan documents.
.\ llL-r Ilmleen dllys ofhcnch Inlllll1 IIlle 2()()S, the tnal cOllrtlcndercdjlldgmcnt Illr llppellees
IlI1d 1mIIII led ( )RI \: de Lillil Illkrcst llI1d IltlorneV' s Ices H T Imd T< 'I appelll
Standard of Review
For thclr Iliclellcv chal rcF 11m! rCI mllst demonstrate on Ilppclli there I no
(Tex I ')S,): l'I'/t' j)Olllilll!,liC Filicrs, Ilic. \' ('!JUII!\ j),i//us, ISS S Wid S5," 7 ( lcx.
Did I;IS 2! ii 1(1, IlO ) i nder lillo-evidence POint. wc C(IIlSlder the eVldellce In the Ii t most
I'avorllhlc to Ihc \crdlct. indlll Ill! every rCIlsollllhlc Illkrl'nce III
illsulll Il'ncv (lit! If thlTe I more thlln 11
sClI1ull1l 01' C\ Ilk-nce to I hl' I t. !'UUlililll I)/Ilsl/(s (}rp ,">.1 \' I'rcsu!w r.1l1!, rs cl':
('olllrilCllin. /Ill , I)(\() S \V 2d -1-1, '+S (IL', 1')')S) (suh op) the L'\ I dellec () I'Icred to
Id,'IKe I'; IIlI III, IILl11 ,1
'-; \V ~ d (, I. (\ '\ ( II \ I' I
\pp, I );lIl;ls ~ 1 ) i ) ( I . pct. dL'1l1Cd) 111 rL'\leWIII:.!, a (;lcllllt! slIliiCICIlCY lullell ,wc consider IIIHI
\LTdICt only II' the e\ Ilknce supporting thc verdict IS so slight. l)j' thc eVldellce agaillst It so slrong.
111111 the IllhlillC', IS 111;illlll'sll llIlJlIst and qUIlL' cleltrly wron:.!., ,)'('(' (;,ICill lilli/I'. 'I')'; SW,2d S21.
:-;2.\ (Tc\ j ')(\"\1 (iilldlllg (I1CIuldlv Illsul'iiclClll I("the eVldellce supporttlH! the VL'Illtcl IS so \\L'llk l)j'
Ihe L'\llknce to Ihc cUIIlrarv IS su oVl'lwhelllll that Illldlllgshl\llld he sL't aSide ;Illd ncw tTlld
sliliICIL'11C\ rL'\llIW, verdict .sL't ;tslde onl If "clearlv \\Tong and IIn!lIst"l: I !:tIL Slillldlln!s rtf
Discussion
!c!TOl1SIl1 111SlIrallce, !'( T
Illterest 11111 \1
se1'\1 'I to hreach o(cul1l n 11 h
j( 111'1 IILI! ()I<I\. ,I, II 11Itl1l".,1
I (
c:d matter jurlSdlctlul1 IS ;1
I'ur/,s & II iii/I,!,' \'
\/mIlU/'/, I" S 21 . 22(l ( rex. 21){14). \Vhelher;1 plall1tlll to ,ISSlT! a
particular Lilin depcnds lin the Llcts plc;ldcd and the CIlIS(' ()f;lction asserted, ('\cr,,//)' IX /l///O,
/.J(', 17S S W\d S-+-+, S'i1 (Te\ App I'ort Worth 2()()5, 110 pCL): scc Ifisil "If) .lfll!('}SOIi
('lfflcer ('/r \' !luli, 52 S W 'd 7()4, 71 70S (Tcx 20()J) We conslruc the petItlOI1 111 1:\\ or of
the pk;ldcr ,1I1d, If Ill'Cl'ss;lry, 1'C\iew the el1tire record to ddermll1e If an\, elldenCl' supports
),'f !,'f I,r ('ofl'rol Hd, S52 S W 2d;!t -+4(). rhe sLlI1tlIng dOC!l'llle "focuses on whether
;1 partv h;ls ;1 reL!tllllhlliP \\Ith the laWSUit Sf) ,IS to hale a 'lustlcl;lhlc Interest' III Its
lIutc011le." 1/11'1111 ('/r \. /'Im//o, J71 S W1d S45, :\-+X ( le\ 20(5) (quoting CJ;\ ('I L\I<I IS
;\ 1\ \; W RI( d tl, ,\ lilt R R. \111 I I R, \ \; I) \1\!{ Y K;\ Y K\ '\ I, WRit d tT, \1111 I R, 8: K.\ '\ 1 1'1 1)1 R\!
ISS'), -+41 (2d cd, I ()l)O))
"\0 le\;I:; ;Ise dlrectlv the :;(;lI1dlllg questllll1 heillre IhlS ('ourL althou ORL\\
CIk'S (JIU\ \/UiJC/S. !J(' \' (If I Illili! ,\/n/or/fllIs, J I. '\0. 11-+-II').OOS/3-('V, 2t Jo WL
., I 12. ,It 'i I lex. ,\pp S;rn ,\IlIOIIItJ\Ug 25, 20 I O. I here, the
record cOlll;ulled sulficlcnt eVldencl: (>Rl\-: ( I \1arkds had proven Its n
10 ellliJI-Ce IlO\c as the currl'llt Icer" ;Ind pursuant to;1 COIlLIll1lnc>.
Sllllll:!r to tile PS/\ 111 thIS R eml y ;1 icderIll ;tppcil ('0 II rt 'd I hc \ lTV I sSlie
ll.( 'I' ('hli I' ) / '1"11(11' !I( ,(,jill '+')
Illust h:lI:l1ICl' IlllpIUtI:t1lv the Interl'slS 01 tl1\.' til lrerent tranches as deterTllIIlcd hv thclr cOlltr:lCtlial
cntitlemeIlts," IJ .It '+()') Ihe court turned to the langullgl: of' CW( 'apltld's PS:\ With its
trustee, Stlltll1:.' thc senlCer IS the trust's clllkctioll Ilgel1t because It "shall, ,have lull power alld
IIUthorltv, .tCtlllt', .dlll1e, tll dll or cause tll he done :Il1V and :III things III connection With such
:lIld IldlIlIlllstratJ()n WhICh It may dcem nl'ccssary or ,ksIr:thle," thus Illak Ing the delcgatilln
01 the truSkl" 1'1 s to the senlcer "comprehensive" Id at sou (alterations III onglnal),
:\ccllrdin\! tll the cunrl: IhLTe is no douht :lhlHlt :\rtlclc III sundIn\! Ul tIllS case 101 a senlcer
lmnging though the pl:tintlfTrn:lj' not he:il1 assignee, it has II persllnlll st:lke Il1the outcmne llf
the bwsult heClIlise It receives a percel1tage orthe' proceeds llf II deLllIltcd loan that It services," Id
lit 501 ,
lhc Cllurt ncxt turne'd to the ISSUC llr 'shether C\VC:lpltaI W:lS :I rcd III intcrest.
(II( (lill F FX:llrJll1Ing (' t;!I' PS;\ tlw court Cited vllriol!s proVlS\()l1S
Illlhcatlllt' the Iccr hlld the n lind 1'<.,";POllSlhdl V 10 hring SUII :lgaInst thc horrowcr, includi
Ihe "lull cr lilid 11lIillOntv, :ICli :llolle, to do or C:lllse he done :lnv and all thmgs in
COIlIleCIlol1 Ilh such serVIClll!.! Imd adl1llIlISlrlillOI1 hlch It mllV deern I1CCCSSllrv or Iii
Ihe trusk'e Iso '.\ liS ohll lcd, the Icer '.\Tltten request. to execute :Inv limIted powers of
,'I \ ie\.T Iii (,iIT\ illII Ih '1\ I III ,lI1d ,ldlll111hlr:lll\ l' dlill lllHkr tile 1'\ \ IIi\.' UHlrt \.'Ililcludni th,:
tile SlT\Il'lT to Sill.' Illlh ()\\lll1:llllC, the court L'l1lpil:ISI/L'd thc 1()llo\\ It1g I'S/\ 1:lllgll:lgL' C\c\.']1tlng (lut
IIIC rl'qulr\.'d Iltlstce UlI1SCllt when sUing pursuallt tn sen ICing dU(ll'S:
IWlillwllt thc l'nlstL:e's \\Tilkl1 consent. "c\'n'jlI:1S rdaks (0 a 10:111 that the
SCiVICL'!' , IS scrvlclng pllrslI.lllt to ItS rcprcsL'nLltlve dutil'S hUl'ln (In which l'ase
'-;lIch ,-;er\IClT sh:dl glvc l1otlCl' to thc Irustce olthc Il1lti:I!iOn), Ithc SenlclT ,-;hallnot I
InltI:lte .111Y .Ictlon, '-;UII or pr<JCl'nling ,-;okly 1I11lkr the Irllske's IU111e Without
IlldlC:JllJ1g the, SLTViclT'S I'l'prescntatlvc capacity,"
Iii tstatll1g ItaliCi/ed "'c\cept" indicates "'the serviccr Cilil suc in Its own na111C ilthe SUit rel:ltcs to
:1 Inan th:lt II's serVIcing, or In the trustcc's n:l111C \vlthout Jl1diC:ltlng that It'S dOing so In .1
Il'prl'scntallvc c:qJ:IClly Implying that it IS lin! dOing so In:1 rcpresent:ltivc clpaclty 11'11 is suing In
rcg:mllo a scrvlclng,rclated lo:m") (ci1lphaSIS and alteratluns In urJgJl1al), Ihe court ('uncluded,
It IS thus thc scrVlccr, lIndcr the agreclllcnt, who hilS the whip hand: hc IS thc lawyer
iflld thc cllL'nl. :lI1d lilc truske's dlltv. \\hl'll thc scn'ICl:r is carrylJ1g Ullt hiS delegated
duties. IS to proVide support. Jhe securitlntiun trust holds merely the hare legal
tltk: thc Pooling and Scr'vlclng Agrecillent dek-gates \vhat IS cllectlvcly equltahle
ownership ollhe cLutn (alheit I()r eventual distribution ulthc proceeds to the ()wncrs
uf the tranches u!' the l11ortgagc-h:lcked security 111 accordance with their priorities)
10 the Sl'j'\lcer. For rel11emher that ill decHhng \\ hat action to take with r e ~ a r d to a
deLlu!tcd the servlcer h:ls to COIlSH!cr the Ing Interests olthe oWllers 01'
dllTcrellt lr:lIlches uf the SeeUrItv
Iii at SOl 1)1 {lnterllalcl!;llIOIlS ollllttcd: emphaSIS in OrI gl11a I I
! !ere. tile nC,ll:Jce ore H{!X' PS.\ IS all110stldelltlcal to thatrn ('11'(' Ihe PS.\ ves
(J/<IX "lull pm\lT ;md :llIthori . ;JCtlllg to do or ClliSe to he done :mv :lIld II til IlC.s III
COlll1l'CllOll Ith such SCI'\'1Clllg ;lI1d :Idmlillstr:ltioll hlch It llIay deem 11,>, """"IT\! or dCSlr:lhlc,"
') 11111 , the trllslce IS reqUired to ORrX eIforls to service the cd loalls: "'Trustee
!\
lurtlitT, t 1'\\ p"'11111tS (lRI\ to iihlilute Lmsulls 111 its ll\\n i1:ll11t'
'\\ 11110111 the Illlstce's \\Tlltcl1 ~ ! C l,();,lli
\\ Inch I()I{ I \ I, ,IS ,Ippllc;ihk', IS StTVleI11!' pur-;tJ;JIH to i lis I respectIve dutll:s hLTl'ln ,
" \Ve then:f()re cOl1clude Ill1der the same n::ISOl1lllc; lIS In ('W( 'Ujilluj,
(H{I\ ILld SLIIldl11Sto hrlng tins bwsull ag:llllSt I( 'I either In ItS U\\11IUIllC ur :IS it SpCC1:tI serviceI'.
f(('(/III/"('1I1CIlI {C/,/,Ur/I/II jlll'IIUIII('('
Ila\ll1g conciIHkd ORL\ Iud standing to Imng SUIt. wc now turn to the question or whether
I( 'I" lll1d 1('1 wcre contractually ohli:,;tted to procure terrorism insurance, In response to F( 'F's and
I( 'I'sclullcu!:c to the legal :lIld factual surliciencyofcvldcnce to support the trial court' JudgIl1L'nt.
()RI\ contends lhat terrorism Il1SUlilnCe tS reqUIred under lwo separ:lte pn1\ISIOnS of the relevant
10ill1 docuilleuis "olher InSUlillll'l''' :1I1l! ",til-risk InSULlIKl',"
10 ullllerslitl1d H 'F's 11Iltl T( 'I 's cOl1tLlclual ohligatlons, \\C ill1alv/e the relevant 101111
docul1lents. ()ur prlillary concern 111 cOl1tract Intcrpretationls to ascertain the l1leaJ1lng and determine
what ohilgatlllils dre I
We e\lll11ll1e IIIHI cOl1sldcr the L'nttre \\Tttmg as 1.1 whole to harl1lol1l/e llI1d glvc erl\:et to itll thc
prC)VISIOI1S so that none Will he renderulllleiif1111 less. Id Terms arc Ulven theIr 11, ordl!larv, Ilild
"ellcLtll l1le;llllng link Instrumellt shu\\s the partlL:s lIsed tenns III a techl1l\,;;iI
()
,lllkll'li! II,nf,i" /{,\
1
j II 121 ([c'\ I'j'l(l)
\1<llll';I:;or ,ILI!L ,It \1t11tc
'
111'ur's 111:1In(;\111 III jtllTl' 11I1(! l'lTect nil thc
1)1< \ ,It ,ill lllllc'S Wlilk IhlS \IOllccll Ct1l1tll1ll\.:S Illl'lkc! IIlSllrllf1Cc:
(I) Such othel 111Slll:lf1eC pn the !Jlt1pclty ilr ill] ,1111' Ic'plllCCl11ellts Ill' sllhslItlltit1ns
IhuCi1lor ,Iddltlons theretn liS milY lrom tlillC to 11111e hc leqlllrcd hy M'lr!,Ia:;l'c
,Icc:lllhi pillcr II\SUlilhk hll/lm!:;preIISiJ:I!tll':S \\11I(:h ilt the tll11C Ille eOl11l11oniy il1surL,d
111'II1I\St III the CISC t1j'property slmI!arl\ sltllalL'lL dilC Il'g;lrd givcn tn the
,llld t\PC 'llhtlJldillgS, their CPllstltlctlnl1, Inclllt1Il, liSe illid nCCllpililCY,
[e Ts [ked pi' [IUS\' Security Agreel11cl1t. ,\ssignl1ll.'nt nf [eilsl's alld Rcnts and F1.\tllrc FIllI1g
COII(;IIIIS i) Slllll!:lr prnVIS1l111,
Horrc)\\ er shlllL :It ds own Cllst and cxpcnsc. 111111nt:\111 thc !tdlllwlI1g illsur;lllce
Ct1\el:II;C With lespect to thc Property during the term of thiS Dccd of [rust:
(h) \:IISCc![ll!lcous Sueh t1lher Illsurallce III such amOUllls. ilnd such other
1'(lrl11s ,1m/ L'lldol';clllL'nis. ,IS milY 110m tll11L' 10 lime he rClJulr'..'d l'c'IHh:r ,lI1d Wll1Ch
:Ire ustoll1anly r'..'qlllr'..'d hy II1StllutlOllil! lenders fiJI' sllllllar properties. slllllbrly
SlllllllL'd, ll1eludlflg, Without Il11utatloll, COycr:lcces against othlT insurahle Iw/ards
includIng. hy \\;11' ofexlll11ple only, L'arthquake. smkhole and mine suhsldence. whieh
;It the Ill11e arc cOl11monly insured :ulll :IV:lILlhlc
\ I not Idcntlc:tI. the f these contrac IS clear: ORIX ;IS senlcer may
require 1,( 'I" :lI1d I( '[ 10 j1htam ClTLun il1sur;lI1ce coverage SIKh as CLTII lied terrnrJsl11 insurance If
les.slrnliarlv situated. f( T lInd lei
dn not hl:ll \\ hether ccrti lied IcrrunSl1llnSilrlil1Ce \\;lS
.SIInI Lir to the ment
(lr l11UIICd hUlldlllg. !helr hurden ullder Ihelr Isu I'..'ncv chal IS to dCl1lonstr:llL'
there I no e\ Idel1ce III "''''''','U'! the :i(l\erse lindlng cLTlllied terronst II([S \\'..'IT conml\l!1!v Insured
J I ! ILti II I le'l \ liLt! II ,I( I ,II I it II II .I1d\\ Ih \ 1<.
\1111, 1IIIdili '1\ ) II t, II) 1(IHlel till' Illllllll" L !L'11i1 \\ II\! ,llhllllllll,,1 ,')'", (/(1111, ;l)-) ') \V ,'d
I ,
_.-
puhllshed Illlulle '1It),.j
IL'SP( )fISC I(l II hv I Ill' I lllkd SLlks IIL'IISIIIY I kplllll11CIlI 10
"eill'cll\l'lleSS" 01' Iile I RIA, 111 Its SIIIVL'V, Iile \lIL\ lII1II1Y/('(1 over 1.2.2,t)Ol) COllllllL'rCI;}1 ill1d
IIII II tiLun II v 101 IIlS ,lcrOSS IlUI 01 III VL'st or CI:tsscs (( '\11 iI IC COl11pltlll es, 1'1 til 11 Ie \1:1 e, I: rcdd i e VLie,
1,1 L\ ,1I1d olhers, \\ Ilh 1111111111111 rL'plL'selll:illoll comnlLTClld hlUlks Illld ,';;}VIIH"S IlI1d IOIlIlS), With the
q miliioll, ()r the Sh)() hillion ur cOlmnercial alld mullirlll1llly
sll1diedi.2"" of the 101111 mllrkct terrorism IIlSllrllllCe \VIlS reqUilul hy Ihe
Investor orse['\lcer 1\)1' (nlJ"" urthe 1011l1s, lind terrorism Insurllnce WIlS in place 1\)1' S3,)"0, In the
olher alfdlillL'S, Ihe press rckllse this ,survey SUl1ll1lllrJ/ed the results liS sllowlng the
"impllct Oil ,III propl'l'ty IVpl'S IICroSS ( S," IlI1d slating "II Ihls Indicates thilt terrorIsm Il1SULlnCC
CDVCLI:':C IS \vlde Ill1d deep, nut lust I()r trophy properties hut IlcrOSS the entllT
comIII elT1IIIIl1ul t II':UllIl v rei d eSIll te
Ihc ksll1l10nv III t nlll In:.: thIS \lIL\slIrvcv I'Ill 1her c \ p lurcd ( lR 1.\' Scone IusIon that
cerlillcd iL'rrorist IICtS \\ l're common I Insured lic:alllst I()r ICS tua1ed sJnlllarl to IhL'
pre and I1lL'dil'lt! huIidll1,:, III ,Iddillon to the cOllcluslon IL:rronslll Illsurance
l<.:cjlll rul
I, )1 ( 1\
It
i the 10:lI1s sur\ ( )!( IX's I (iL'd the \\ [s[teldlv
lellllhk (l\er 1
2.2, I;(}()
cOInInCrcIIl! :UH! Iliultll;lIl11lv 11):1I1S \\'crc 11I1l10111d Iv It
rcstrlct lOll to speC! tic I I(ll'
II
(urthcr leslillcd thllt \1CClHI of the
It Iv II Ilil "d ilI11p("11
( )thu Illl'
\ct 1\1 II1L'sc rcplll[s cllrlllhorrlkd tile repl)rtcd 111 the \lIL\ sunev that ('\II5Ss
,lImost 1I1111mmi r,'tjlllfed krlllrism Ille \IIL\ SIII\L'V was Clkd in the ("150 Juper lor
the conclusloll "lll':lIlv rrll 01 the hal:lI1ces sLTvlced Illr ("\1I5Ss the segment "rthe
':urther, the ( I{() prq1l'r Il1cluded refl-rl'nce to "one recellt deal, a $1.\ hIllion ('\1BS
composed 01111(, lorms rll1d pr(\perlles (1I1cludil1g:l numher orretar!.;hoppil1g mails :teross the
countrv), 1111 \\ IlId11 ()() 7 percent or the hal:ll1ce ul1derlvlng the ( \1 BS had terrorism II1S11r:lllCC In
pI:1CC" In the r"rercnced I rl'asury Ikpaltml'nt ;ISSeSS111eI11. the efTectlVL'ness or the IRIA \vas
rl11alv/ed thrull,dl a \ l' set ulnallol1wlde smyevs olpollCyholders and insurers between
sllfyeycd rl'l,resented :rlm"st I" I 1111111011 mgal1l/atlul1s aeross markets
that were n(\t p:lrt orthe i(:(krrrl :mll had :11 least tel1 l'mp rq)resel1tlng vanous
market slures rlild huslllesses, lhe aSSeSSl1ll'nt also showed a ';-1."" rate' 111 20()-1., the tll11e
ol"(ml\:'s (kmallds 011 FIT rliId 1('1 to prucllfe Cl5t.llil'd iernmSl11l11sur:lIlCc 1"0 :ICCOlll1t (IX
\anallOl1s rll11(\11,1 les, Its were lil1ed :iccordi to
IL'S \\ rtll \:ilues IllHkr I11JiIIOIl (the rq)I:lcl'illelll v:tlues fi)r the
v :rnd mullcrt! hUlldl I, the r:lle 1!1 21)1 i-1. ;IS" ,,,''''' .... nhjCt!
Jidcrs \\ere ill 111 ItlL'S leh
Il,i1!
\1
Iloth I( I ,Iild 1< 'I COlllpl:liI1 110 :ltlclltlOll was paid tospecllic l'I'llcna or the
pi'l)pcrtll'S \\ hl'll ()I-( 1:\ ,!L:tLTlllllled cutllil'd k'rrorhm lilsur:lllce \\:IS required uIHkr the In:111
dOCUlllL'llh: LllhlT, ihe\ .Is,sert, 1:\ sImply m:lde:1 hl:mkct dech1nll 10 rl'quire u:rtllicd lL'rrurISIl1
iI1Sur:lllce jill ,ill IO:ll1s ItsU'\ll'UI. Hut. URI:\'s expert testJiied the statistically rellahle MBA
survey which cOllelllded O\lT 'no;, or eOll1l11cl'clal :tnd ll1ullll;lIllily mortgages required tcrrorISIll
Il1Sur:lllcc lin,' lI1e ludcd properties slmil:tr 10 the medical huilding and the apartment
pruplTtv :\ccordlnglv, sOll1e oCthe did nol rellcel IIH)";, terrOrIsm CO\l'!':lge, we
conclude the e\ Idence supported tnal court's lindll1gs thaI cenilled terrurIst :lcls were conHl1only
Insured :lg:llI1St li)r properties SIIIl:Ik'd sll1111:1IIy 10 tile :Iparlmelll pruperly :tnd Il1cdlcal
COlllllllTcul :tnd mulllraI11lly prnpertles Ihal were co!laler:t1 li)r secllnli/.ed loans, had sllm!:lr
rl'placCl1lL'nt \:t1lles, \vere In specIllc Industry seclors, :llld were located In l):t1las :iI1d Lns Angeles.
332 (\.i.Y App.
Dlv 2()(I-q ("Un these motIons, the lender did de!llnl1str:lte that Ihe rISk w:ts 'commonly' Insured
,H.'<lIl1St: II \\:h not necessary that the risk he till! Insured sn P!:U111111"' Ion
soniC hlllldings In .\LlnhalLHl dld not have lcrrorlsfn \\
Issue. )
not dlSPOSltl\'C on thi
j( I ,lIld ICI Ifl:rul lIn cVldencc contradIcting these ICS, Illste:ld contemling thc
CUll1l1\Ona!ltv allll!vsl 111 the context (C:VI USs as II1:tppropn:lte hCl':IUSC thc I'C .Int
doc umcnlS Wl're 11\ l( rI I/.cd at the limc of excentlOIl. lhe rcIcV:U1l lo:m documents.
III I 1, III
1'1'1', \\1' I 'J'!'), Iilc rI111l' II/ th,' 11.111 1l."" ltllIIICi'i, Ilhll',ld, Illl' ,'IHlIl:ICI 1,ll1c'ILIC'l' ,111d 1'1,ICCI11l'lli 111 lile
I ( I,
IlhIILII1Cl' liS 11LlV 'Irni11 tlmc 10 1111\(':" hc Il'qUI!uL 1\ Incll ",II rhe tll11e" ,Irl: l'O1l1l1l011l Ill'll
,1'!llIns! lilt' 11r<ll1cl'tll':' 111"111Iv:,lludk'd, ,\llhou
I( 'I II"l'WI:'l' \\IIS !l'qUlITd to 1ll;lllltlllllsuch "olhlT II1S11!IIIICe" ItS 111:IY "Ii't)m IIl11C 10 time" he
specllIC lequlrements, the "nther InSULII1Ce" proVISIOIlS ofhOlh HT's ,1l1d l( i's loan documents
clfectlvelv 1'IIIlctltlll as "c:ltch-;I1I" cLlUses that pn)\llde Ihe lender tle\lhility (or changing or
lInl'oresn'n ClrCIIl11sl:mces tll' Illsurance needs dllrJIlg the dur;ltlon oflhe loans, Illdl'elL
;IPIKILll1ts cOIlCl'ded such II charac!LrJ/al1on: at tn;I1. i'( 'F relCrred io the "othlT II1SllrlII1Ce"
pnnlSIUI1S liS "cI!lch-all" llI1d Ilppellants' II1S11LlllCe e\pen Ilgrcl'tl. Neither the cOlltraetllll1g11age nor
the testlillony SlipportS f:( 'I"s IlIld ICl's COl1tentlOI1S thc commol1lI1lty an;i/vsls must he dl'lerJlllncd
;Iccordlng to lhe ClrCII111Sl:JI1Cl'S lit the tlinc ()r()rJgll1lttloll,
N()r do FCF Ilild I( 'I support thcir cOlltcntlon ()RI X WIIS rcqulred under thl' krms or the
rdeYlt!1t 101m documcnts 10 cngage ill IndlYlduallll'd C()l11mOJlalll llI1;t!yScs. Ihcy have IdcntJ Ilcd
Il() lallguIlgc 111 the IOlln d()Cllmel1tS lllal1tLiting :,uch d requlremcnt, dllt! lhe pLlln LJI1guage. requli'CS
the rcqllesled il1sur;lllCe "he" cOl1lmonly IIEured dgllln:,t ror Silllilariv :,Illilited SLlled
dltll'rl'ntly, 110 IIl\iI\ldllal!/l'd nlquir\ IS d C()lldillOn to dellTJ11i ill:! hethl'! the ()thlT II1sur;llKl' i
C() III III 0 n .:: ("\hselll l
rc..'qui k' cOndlll()1l1l1 It IVIlS Ilot d COlldltl()1l tot to request (
II1SUrance li)r It 10 th;lt c()\'cragc
i -+
Ii n:,k cUJ11lllunl Insurcd :1':;1Insl. " ; (Iillem;i/
I il.lii"l! , 1111ke! i
I) ..+ 7 I.
( ([(ClIIII/lfili I )t'/,III(/ Ill/crt's/
I( T ,tlso cOlllests the trIal court's Ii IIIIIIl[! del;llilt Illtnest accrued li'om Mav 13. 2()()..+. the
da!coIClRI:\'s lirsl "fin:rllltltIce" letter HT :Isserts hoth tillS klter:lI1d :I.lulv 1"+.200"+ letter lrom
(lRI\ ~ ~ : I \ e ,Iddillonal cure perIods and :II1Y delaullll1!crest must he cllcliialed lrolllihe expIration
orthe Lisl cure period July I (). 200"+. OR I.\: rl'sponds Ihal de!;llillintcrcstis due lllHnediately upon
der:lult :II,d anv Cllrc petlods o/ferl'd In Its letlers do Ilot ,titer the l<tlE!.UIlgc of Ihe loan documents.
(lUI ,1Il:i1vSIS 01 the 101m doculnents ns With Sl'ctlonl I 01 the Ilote. whieh proVides:
It IS hnehv l'xprcssly that .. shOllld any ()ther default occur under any ()fthe
I.Olln I )OCUl11ellt \vhlch IS not curcd \\ilhm :II1Y :ipplIcIhlc grace or cure then
:1 del;llIlt shall exiSt herelillder, and In such eVL'Ill the Indchtedness eVIdcnced
IllCludlll ,III Silins :ldv,ll1cl,d (lr :Icullcd huculllkr or undcr :111 other Loan
I )ocllml'I1L ,1I1d allul1p:ud Interest <tcullcd I sh:rll, at the upllon olTcndu ;l11d
Itlwut Ilollce to Borrow'cr. :It OIKl' hecUllle duc :ll1d C;lI1d 11l1lV he c()lkch:d
f<lltl1\\lth
Sect lUll .3 :tlso prm Idcs. s!o ,is ailV del:lUlt eXISts I1LTeUlH!cr such dc It Ill1crcsl slull
hc I Il1l1lld I
\ lor[
,lIlll payllhk "
~ r l . I (Jill' ulthc "!,'al1 DOCllnlCllls"
nute. 13ccillsc thc l10te cOIlL!lI1S n() delinitiull Itn';I "'dcl'lllilt." wc loul< tu thaI
i Iii 1\ ,
itlkr\\rltk'l1llollce Ihe'reollrOIllI(lRI\: 10 II (1'] '"
,IS o! Ihe (Llk' ,dl )I{ 1\( 's "ll!liI! l101ICC'' Ihat I( 'I, I1111St oht;1111 ccrtillcd lcrrorISIll IIISlIrancc, or only
Iq)O!llhl' l'\ptrillton olany cllrc pcTtod, Ihc oClhl' !loiC :;Llte:; dl'lalllt:; t.:\ISt only idkr
C\PILlllon oClhe cure period ":;11Ould la]tklallit occur lInder imy olthe Loan l)oClll1lents which
IS not clIred wllllill Imy ilpphclhlc or cure pcriod, it del:lllit :;hall C\ISt." (Fmpllilsl:;
added) Sllh:;ectlon 2.1 (h) or the :,ecunty ,Igrel'ment pLuI11y :;cis a cure perIOd Il\e days,
('onsHknng hoth al;rl'Cl1lents together. as we IllUSt, 110 derilllit occurred under Ihe nute until
e\pILIIIOll ,lithe' live-lby cure period. SeC' /dillll.\ I' Firs! Nill Nililk I!f/1c1lsSiI\()\', 15.+ SW,d
SSt), S()I; ( le'\, .\pr I )allas 20U5. no pet) (op, l1.pt.) (col1strull1g pronllssory l10te ill1d deed ortrust
together)
I )f{1 \: asserts the olthe loan docul1lents lllal\lng any default Illlerest ""iml11ediately
due and It)!' 110 cure period hel()re il1tcTCSt accrues, lhe loan documcnts pnwlde
otherwlSc, lIically. :;ectlOIl 3 .1 olthe nole delll1ll1'..', the' rale oldcCault Ii1lcre:;t lales the
l:;tellCe ill iltk'l:lltll lir:;!. ilfter which de!:lUlt mlL're:;t accrues imd "shall he til1ll1edLllclv due and
Ie" Ikel dc It e\lSh oilly UpOIl I e\ptratHlIl olthe Ii
ilHeresl hl ll11C:; "iil1ll1edi due'" 111111/ t ICS to Ihese
: \,
1,llkd I" 111,11111.i111 IlhIII.I11Cl', II
I '11011 tile'se IIldll
()I{ I \ ILld tile to c:r:lill H T
l!1dli IIIH!l'\klhl<l!1S IIl1der Ihe loan doelllllcl1ts III ItI1 l'llort to p\()\lde tll11C Illf IC '1'" to Clirc
Its (kl'lllll! I( 'I, Il'lused lillY ,Itkillpt In CIiIT 1111111 .\pIII 01' 2()(l5 whel1 It sUlight 10 pav ulf lis
,lIl(sLlndlll\l 101111 hllLtllCC 1Lid H T cllrullts ,kl:lllit \\ltllll1 thl' tlml' PlTIUds IIlkmcd hy (H<I \, no
dcl:lUlt \\Olild ha\c occlirfcd, IkelllSC II did not curc, (JR 1.\ 's did nol prCVl'l1t ()RI \ 's
II 10 cullect ikrllidt Inkiest ""'TI""'" to the rilst "rlllilinolice" ktter We conclude Ihe tnal CUtilt
erred \\hel1 It 1l\\lmkd dclault Intelest rrom the (bte ur()RI\'s cOITespundence, \by Il, 2()O-i,
\\ilhout IICCOlll1llllg Ill!' the Ii ClifT perrod under the 101111 dUCltI11\.'lIIS,
(>thCl'ISSIICS
!( F Idso I(IeIlII licd SUh-ISSIiCS 111 Its hrlerllS to Ilppellel's' hrellch orcontracts 11l1d mltl Ion
Ot'dIUl1l1c:es IC 'I sl11n!;lllv Ilnscd issues regardil1g Illitl lUll liI1d Wells ringo's I'aJiure to plead the
elemel1t or dlll11:1C'es IC T lind TC 'I did n'lt hner :111\ or these Issues, \ecnldl
WI1I\\.'(1. llllil \\C wJilllot .Iddress Ihel11.)'('( li\ R .\1'1' PiS I' SCC i//IO
v. the Issues arc
'I'IIlS ('() \' Sfi/fC,
\pp Dldilis 2IJIO, pd (!Jsm\l) ("When:1 LtJ! to hnelll
C0l11pldlilt uldel V. I I III the Issue Oil
\\ II h Il.'\cT\l: ,llld le'11LIIH! IhL' Ili,11 )1I11'\
IS
([ 0 II r t 0 f AJ.T Pl' a1
of at
JUDGMENT
1(1, '\it lR III 1.( 11)( d \SS()(I \ 11'->, I 1'.
,I11d 1(1 ')()\\ \\.11 IIV\RD,
I '\i(', \ppl'II;111h
.\PI)(:;11 j'rnl11 the I\+th .Il1dlclal District
('Olll! oj D;J1Lis Cnllllty, Il'\;IS (lr( 't'\in.
1!4,.IO()':;(,(i),
()pIIlIUIl delivered Justice Murphy,
[llsllces (),'\ieJlI Ilild 1.;lllg p:lrtlclp:ltlI1g.
(WI\: ('\I'II\L \1\RI--:IIS. 1.1 C, l S
'\i \ .1 ka IS B;\'\I( '( )RI', '\1.\ ,
,IS I ruskl' I()R 1111:\101<. I( 1,\( d: I':\\S-
IlfROII('!l (IRIII,I('\ liS, SLRlLS
I()%( 'j, ,lIld \\.1 I IS 1',\R(iO B,\'\il--:,
'\1;\ akll \VIILS F\R( iO IL\'\iK,
MI'\i'\iISO 1\. '\i ;\, ,IS Inlske I()I{ II II
\IORI(i\( il PASS IIIROl!(;I!
('l-RTlFl( '.\ 11\, SIRIIS (J')'( 'I.
\ppelkl's
We \ \(' \TE nur jildg111 ell t nllk'Ccll1her 20, 20 I 0 Ihls IS I1nw the Judgmenl 01' the
nl1 the Court' nplnlnll oj,thls dll!c, we REVERSE aIIII REM;\ND thc trial court's
ludgllll'llt rl'g;lIdillg the ;11l10UIII nllkl;llIlt Interest ,Iwankd to ;Ippelkc ORIX C;lpltal Markets,
L 1(' ;1C'11I11St, lant [.( T '\I(mh R ASSOCiates. I.Y. 10 Iileilldc the II gr;lce period
1()llowlng \\;1\ ) j, 200'+.
We\ FFI Ri\1 the Irldl court' In ;111 other
It IS ORDElU:D thllt CCich
\SSOCldtCS, 1 I) ,:IS pnl1l'1pal. and I ideh
Ick Road, Bldti \1 D 21 lIS , 011
hond arl' RELL\SED.
!llnt HI '\iorth RI
!:tnd ol,() i Ii I--:
\SSOCIIIlCs. !. P .
Ihc ohll Ions 01
,ilHI I t ('(nnp;111 01 \1
Lint HI '\i()llh R
\1\RY \l( RPHY
II let.
APPENDIX
TAB
"5"
AFFIRM as modified and Opinion Filed March 14,2011
In The
Qrourt uf Appeals
lJ1iftl1 11iitri!t of wexai at 11 allai
No. 05-09-00066-CV
ECF NORTH RIDGE ASSOCIATES, L.P. AND TCI 9033 WILSHIRE BOULEVARD,
INC., Appellants
v.
ORIX CAPITAL MARKETS, L.L.C., U.S. BANK, N.A. AlKJA BANCORP, N.A., AS
TRUSTEE FOR THE MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-
C3, AND WELLS FARGO BANK, N.A., AlKJA WELLS FARGO BANK, MINNESOTA,
N.A., AS TRUSTEE FOR THE MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 99-Cl, Appellees
On Appeal from the 134th Judicial District Court
Dallas County, Texas
Trial Court Cause No. 04-07956-G
OPINION ON REHEARING
Before Justices O'Neill, Lang, and Murphy
Opinion By Justice Murphy
Appellee ORIX Capital Markets, L.L.C. filed a motion for rehearing, and appellant ECF
North Ridge Associates, L.P. filed a response. The motion for rehearing is granted, and we withdraw
our substituted opinion issued January 19,2011 and vacate ourjudgment ofthat date. The following
is now the opinion of the Court.
Borrowers ECF and TCI 9033 Wilshire Boulevard, Inc. contest the legal and factual
sufficiency of the evidence to support the trial court's finding that ECF and TCI breached their loan
agreements by not procuring certified terrorism insurance on the properties securing their debts.
Separately, ECF appeals the trial court's calculation ofdefault interest, and TCI challenges ORIX's
standing, as servicer, to sue for breach ofcontract. We modify the trial court's judgment to account
for the proper accrual date for default interest against ECF and affirm the judgment as modified.
Background
At the time of the dispute, ECF and TCI were the owners of commercial real estate
properties. ECF owned the North Ridge Apartments property in Dallas, Texas, which is low-income
housing built in the late 1960s and located within a couple miles of the Dallas Galleria and
surrounding office towers. TCI was the owner of the Wilshire Medical Building in Los Angeles,
Calitornia, which is located less than a mile from Rodeo Drive in Beverly Hills. ECF and TCI share
the same principal and, during the relevant time, the same property management company, Prime
Income Asset Management, Inc. Prime also functioned as their contractual advisor, responsible for
risk management. Mortgage loans originated in 1995 for the apartment property and 1999 for the
medical building.
Both loans were pooled and securitized after origination, becoming Commercial Mortgage-
Backed Security loans (CMBSs).1 ORIX was the servicer on behalf of the loan pools' trustees for
both loans and was therefore responsible for collecting monthly payments ofprincipal and interest,
monitoring whether the property was properly insured, and addressing any issues of default under
IA CMBS is a type of bond secured by a large number of commercial mortgages pooled together, often on the basis of the similarity of the
mortgage loan documents and geographical location and type of collateral. The creator of the CMBS then issues a series of "slices" of the bond
(usually called tranches) that vary in yield, duration, and payment priority. The income ofthe mortgage is the income ofthe bond, with the investors
in the highest-rated tranches being paid first; ifthere is a shortfall in the income from the mortgages, the investors with the lowest-rated tranches may
not receive any income at all. The mortgages that securethe CMBS are placed in a securitization trust, and the trustee is responsible for servicing
those mortgages. Sometimes, however, trustees of CMBSs delegate their rights, authority, and monitoring responsibilities to master or special
servicers pursuant to pooling and servicing agreements. The servicer is obligated to balance competing interests of the various tranches with the
borrowers' various contractual obligations, but is ultimately contractuallyobligated to service the loan in accordance with the interests ofthe trustees
as well as the holders of the various tranches. See CWCapi/al Asset Mgml. LLC v. Chicago Props., LLC, 610 F.3d 497,499-501 (7th Cir. 2010),
also discussed below.
-2-
the loan documents.
The loan documents required specified insurance on the properties, including "all-risk"
insurance. "All-risk" insurance covers any peril not specifically excluded in the policy. See Trinity
Indus., Inc. v.Ins. Co. o/N. Am., 916 F.2d 267, 269 n.ll (5th Cir. 1990). At the time of the loan
originations, neither ECF's nor TCl's all-risk policy excluded coverage for damage caused by acts
of terrorism. Yet after the September 11,2001 terrorist attacks in New York City, Washington,
D.C., and rural Pennsylvania, insurance companies, including those for ECF and Tel, began
excluding from their all-risk policies any coverage for damage caused by terrorist acts.
In a series of letters beginning in 2002, ORIX informed ECF and TCI certified terrorism
insurance was required under the relevant loan documents. "Certified terrorism insurance" is
coverage for certain terrorist acts that have been certified by the United States Secretary ofTreasury
in concurrence with the United States Secretary of State and Attorney General under the Terrorism
Risk Insurance Act of 2002, Pub. L. 107-297, 101-108, 116 Stat. 2322, 2322-36 (2002) (the
TRIA). The correspondence continued, with ORIX sending "final notice" to both ECF and TCI in
2004. ECF and TCI shared the same principal and risk management and therefore received the same
information on the cost of certified terrorism insurance-premiums purportedly ran as high as
$20,000 annually. The loan balances in 2004 were approximately $4.8 million for ECF and $6.6
million for TCI, and both were unwilling to obtain such insurance. Evidence at trial showed that had
they obtained actual bids for the insurance, the annual premiums would have been $1 ,412.40 for ECF
and $345.63 for TCI.
When ECF and TCI refused to obtain certified terrorism insurance, ORIX declared defaults
under the loan documents. ECF and TCI responded by filing suit against ORIX for breach of
contract and declaratory relief. ORIX answered and counterclaimed, also alleging breaches of
contract and requesting a declaration that ECF and TCI had breached the insurance provisions in the
relevant loan documents and seeking default interest from the date of the alleged breach. Once it
received the counterclaim, ECF elected to payoff its loan. In connection with this payoff, ECF first
obtained certified terrorism insurance in April 2005 for an annual premium of$I,787.00 and paid
the default interest under protest. About the same time, TCI sought approval from ORIX to have
another party assume its loan. To complete the assumption, TCI also paid default interest under
protest. The lawsuit continued.
In late 2007, ECF and TCljoined as co-defendants U.S. Bank, N.A. a/k/a Bancorp., N.A.,
as Trustee for the Mortgage Pass-Through Certificates, Series 1996-C3, and Wells Fargo Bank, N.A.,
a/k/a Wells Fargo Bank, Minnesota, N.A., as Trustee for the Mortgage Pass-Through Certiticates,
Series 99-C1. Previously, in 2006, ORIXhad acquired ECF's loan formerly held by U.S. Bank and
was both the owner and servicer of the loan. Yet Wells Fargo still held TCI's loan, and TCI added
a defense that ORIX did not have standing to assert any claims against TCI. The trustees answered,
essentially parroting ORIX' s allegations and asserting ORIXhad the right to recover default interest
and attorney's fees attendant to enforcing ECF's and TCI's loan documents.
After thirteen days of bench trial in late 2008, the trial court renderedjudgment for appellees
and awarded ORIX default interest and attorney's fees. ECF and TCI appeal.
Standard of Review
For their legal-sufficiency challenge, ECF and TCI must demonstrate on appeal there is no
evidence to support the trial court's adverse findings. Croucher v. Croucher, 660 S.W.2d 55, 58
(Tex. 1983); Pete Dominguez Enters., Inc. v. County of Dallas, 188 S.W.3d 385, 387 (Tex.
App.-Dallas 2006, no pet.). Under a no-evidence point, we consider the evidence in the light most
favorable to the verdict, indulging every reasonable inference in support. City ofKeller v. Wilson,
-4-
168 S. W.3d 802, 822 (Tex. 2005). A legal insufficiency challenge fails if there is more than a
scintilla of evidence to support the verdict. Formosa Plastics Corp. USA v. Presidio Eng'rs &
Contractors, Inc., 960 S.W.2d 41, 48 (Tex. 1998) (sub. op.). If, however, the evidence offered to
prove a vital fact is so weak as to do no more than create a surmise or suspicion of its existence, the
evidence is no more than a scintilla and is legally no evidence. Kindred v. Con/Chern, Inc., 650
S.W.2d 61, 63 (Tex. 1983).
For their factual sufficiency challenge, ECF and TCI must demonstrate there is insufficient
evidence to support the adverse finding. Pulley v. Milberger, 198 S.W.3d 418, 426 (Tex.
App.-Dallas 2006, pet. denied). In reviewing a factual sufficiency challenge, we consider and
weigh all ofthe evidence in support ofand contrary to the trial court's finding and will set aSIde the
verdict only if the evidence supporting the verdict is so slight, or the evidence against it so strong,
that the finding is manifestly unjust and quite clearly wrong. See Garza v. Alviar, 395 S. W.2d 821,
823 (Tex. 1965) (finding factually insufficient if "the evidence supporting the verdict is so weak or
the evidence to the contrary is so overwhelming" that finding should be set aside and new trial
ordered); see also Cain v. Bain, 709 S. W.2d 175, 176 (Tex. 1986) (per curiam) (for factual
sufficiency review, verdict set aside only if"clearly wrong and unjust"); Hall, StandardY ofAppellate
Review in Civil Appeals, 34 ST. MARY'S L.J. 1, 172 (2002). The amount of evidence necessary to
affirm a judgment is far less than that necessary to reverse a judgment. Pulley, 198 S. W.3d at 427.
Discussion
ECF and TCI challenge the findings and conclusions requiring them to maintain certified
terrorism insurance. ECF separately challenges the trial court's judgment awarding ORIX default
interest beginning May 13, 2004, the date of ORIX's first "final notice" letter. TCI further
challenges ORIX's standing as the account servicer to sue for breach of contract. We begin with
TCI's challenge to ORIX's standing.
Standing
TCI argues that ORIX, as the mortgage servicer and not the holder of TCl's note, has no
standing to sue TCI. ORIX responds that the pooling and servicing agreement (PSA) between it and
the trustee of TCl's CMBS conveys standing to sue for default of the loan documents.
Standing is a component ofsubject matterjurisdiction. Tex. Ass 'n ofBus. v. Tex. Air Control
Rd, 852 S.W.2d 440, 445 (Tex. 1993). Whether a trial court has subject matter jurisdiction is a
matter of law, which we review de novo. See id. at 446; see also Tex. Dep 't ofParks & Wildlife v.
Miranda, 133 S.W.3d 217, 226 (Tex. 2004). Whether a plaintiff possesses standing to assert a
particular claim depends on the facts pleaded and the cause of action asserted. Everett v. TK-Taito,
L.L.c., 178 S.W.3d 844, 853 (Tex. App.-Fort Worth 2005, no pet.); see also MD. Anderson
Cancer Ctr. v. Novak, 52 S.W.3d 704, 707-708 (Tex. 2001). We construe the petition in favor of
the pleader and, ifnecessary, reviewthe entire record to determine ifany evidence supports standing.
See Tex. Air Control Bd., 852 S.W.2d at 446. The standing doctrine "focuses on whether a party has
a sufficient relationship with the lawsuit so as to have a 'justiciable interest' in its outcome." Austin
Nursing Cfr. v. Lovato, 171 S.W.3d 845, 848 (Tex. 2005) (quoting 6A CHARLES ALAN WRIGHT,
ARTHUR R. MILLER, AND MARY KAYKANE, WRIGHT, MILLER, & KANE, FEDERAL PRACTICE AND
PROCEDURE: CIVIL 1559,441 (2d ed. 1990.
No Texas case directly addresses the standing question before this Court, although ORIX
cites ORIX Capital Markets, LLC v. La Villita Motor Inns, J V, No. 04-09-00573-CV, 2010 WL
3331702, at *7-9 (Tex. App.-San Antonio Aug. 25, 2010, pet. abated) for guidance. There, the
court concluded the record contained sufficient evidence ORIXCapital Markets had proven its right
to enforce a note as the current "special servicer" and pursuant to a servicing agreement containing
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language similar to the PSA in this case. Recently, a federal appeals court addressed the very issue
of whether a mortgage servicer had standing to pursue claims against a borrower for an alleged
default under a mortgage loan to which the servicer was not a party. See CWCapital Asset Mgmt.,
LLC v. Chicago Props., LLC, 610 F.3d 497 (7th Cir. 2010).
In CWCapital, the court addressed whether a mortgage servicer, CWCapital, was entitled to
bring suit against the commercial landlord (the borrower) and its former tenant for moneys the
former tenant paid the landlord in settlement of a separate dispute. ld. at 499. Examining the
servicer's role in administering a mortgage-backed security, the court explained howa"servicer must
balance impartially the interests of the different tranches as determined by their contractual
entitlements." ld. at 499-500. The court turned to the language of CWCapital's PSA with its
trustee, stating the servicer is the trust's collection agent because it "shall ... have full power and
authority, acting alone, to do or cause to be done any and all things in connection with such servicing
and administration which it may deem necessary or desirable," thus making the delegation of the
trustee's rights to the servicer "comprehensive." ld. at 500 (alterations in original). According to
the court: "There is no doubt about Article III standing in this case [of a servicer bringing suit];
though the plaintiff may not be an assignee, it has a personal stake in the outcome of the lawsuit
because it receives a percentage of the proceeds ofa defaulted loan that it services." Jd. at 501.
The court next turned to the issue of whether CWCapital was a real party in interest.
CWCapital, 610 F.3d at 501. Examining CWCapital's PSA, the court cited various provisions
indicating the servicer had the right and responsibility to bring suit against the borrower, including
the "full power and authority, acting alone, to do or cause to be done any and all things in connection
with such servicing and administration which it may deem necessary or desirable." ld. The trustee
also was obligated, at the servicer's written request, to execute any limited powers of attorney and
other documents furnished by the servicer and necessary or appropriate to enable the servicer to carry
out its servicing and administrative duties under the PSA. The court concluded the trustee was
required to confer necessary authority on the servicer to bring suit, "[f]or it is the servicer, not the
trustee, who is empowered to decide whether to sue." ld. Regarding the right ofthe servicer to sue
in its own name, the court emphasized the following PSA language excepting out the required trustee
consent when suing pursuant to servicing duties:
[W]ithout the Trustee's written consent, "except as relates to a Loan that the ...
Servicer ... is servicing pursuant to its representative duties herein (in which case
such servicer shall give notice to the Trustee ofthe initiation), [the Servicer shall not]
initiate any action, suit or proceeding solely under the Trustee's name without
indicating the ... Servicer's ... representative capacity."
ld. (stating italicized "except" indicates "the servicer can sue in its own name if the suit relates to
a loan that it's servicing, or in the trustee's name without indicating that it's doing so in a
representative capacity-implying that it is not doing so in a representative capacity if it is suing in
regard to a servicing-related loan") (emphasis and alterations in original). The court concluded:
It is thus the servicer, under the agreement, who has the whip hand; he is the lawyer
and the client, and the trustee's duty, when the servicer is carrying out his delegated
duties, is to provide support. The securitization trust holds merely the bare legal title;
the Pooling and Servicing Agreement delegates what is effectively equitable
ownership ofthe claim (albeit for eventual distribution of the proceeds to the owners
of the tranches of the mortgage-backed security in accordance with their priorities)
to the servicer. For remember that in deciding what action to take with regard to a
defaulted loan, the servicer has to consider the competing interests of the owners of
different tranches of the security.
ld. at 501-02 (internal citations omitted; emphasis in original).
Here, the language of ORIX's PSA is almost identical to that in CWCapital. The PSA gives
ORIX "full power and authority, acting alone, to do or cause to be done any and all things in
connection with such servicing and administration which it may deem necessary or desirable."
Similarly, the trustee is required to support ORIX's efforts to service the pooled loans: "Trustee
-8-
shall execute any powers of attorney and other documents delivered to it by [ORIX] and necessary
and appropriate to enable [ORIX], as the case may be, to carry out its servicing and administrative
duties hereunder ...." Further, the PSA permits ORIX to institute lawsuits in its own name:
"without the Trustee's written consent[, ORIX shall not,] except as relating to a Mortgage Loan
which [ORIX], as applicable, is servicing pursuant to [its] respective duties herein. , . initiate any
action, suit or proceeding solely under the Trustee's name without indicating [ORIX's]
representative capacity ...." We therefore conclude under the same reasoning as in CWCapital,
ORIX had standing to bring this lawsuit against TCI either in its own name or as a special servicer.
2
Requirement a/Terrorism Insurance
Having concluded ORIX had standing to bring suit, we now turn to the question of whether
ECF and TCI were contractually obligated to procure terrorism insurance. In response to ECF' sand
TCI's challenge to the legal and factual sufficiency ofevidence to support the trial court's judgment,
ORIX contends that terrorism insurance is required under two separate provisions of the relevant
loan documents-"other insurance" and "all-risk insurance."
To understand ECF's and TCI's contractual obligations, we analyze the relevant loan
documents. Our primary concern in contract interpretation is to ascertain the meaning and determine
what obligations are imposed on the parties. See Coker v. Coker, 650 S. W.2d 391,393 (Tex. 1983).
We examine and consider the entire writing as a whole to harmonize and give effect to all the
provisions so that none will be rendered meaningless. Id. Terms are given their plain, ordinary, and
generally accepted meaning unless the instrument shows the parties used terms in a technical or
J
"Tel cited several ofour cases for the proposition, "[i]n order to establish standing to maintain a breach ofcontract action, a plaintiff must show
either third-party beneficiary status or privity." See, e.g., OAJC Commercial Assets. L.L.C v. Stonegate Village, L.P., 234 S.W.3d 726, 738 (Tex.
App.-Dallas 2007, pet. denied). Reviewing these cases, we conclude they do not control the current circumstances in which a pooling and servicing
agreement specifically gives the servicer the right and responsibility to institute suit against a borrower either in its own name or on behalf of the
trustee.
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different sense. Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996).
We address the "other insurance" clauses of the loan documents first because those
provisions are dispositive. Subsection 1A(t) ofECF's Mortgage and Security Agreement provides
in relevant part:
Mortgagor shall, at Mortgagor's expense, maintain in force and effect on the Property
at all times while this Mortgage continues in effect the following insurance:
(t) Such other insurance on the Property or on any replacements or substitutions
thereof or additions thereto as may from time to time be required by Mortgagee
against other insurable hazards or casualties which at the time are commonly insured
against in the case ofproperty similarly situated, due regard being given to the height
and type of buildings, their construction, location, use and occupancy.
TCl's Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing
contains a similar provision:
Borrower shall, at its own cost and expense, maintain the following insurance
coverage with respect to the Property during the term of this Deed of Trust:
(h) Miscellaneous. Such other insurance coverages, in such amounts, and such other
forms and endorsements, as may from time to time be required by Lender and which
are customarily required by institutional lenders for similar properties, similarly
situated, including, without limitation, coverages against other insurable hazards
including, by way ofexample only, earthquake, sinkhole and mine subsidence, which
at the time are commonly insured against and generally available.
Although not identical, the language of these contracts is clear: ORIX as servicer may
require ECF and TCI to obtain certain insurance coverage-such as certified terrorisminsurance-if
such perils are commonly insured against for similar properties, similarly situated. ECF and TCI do
not challenge whether certified terrorism insurance was "generally available"; instead, they argue
certified terrorist acts were not "commonly insured against" for properties similar to the apartment
property or medical building. Their burden under their legal sufficiency challenge is to demonstrate
there is no evidence to support the adverse finding certified terrorist acts were commonly insured
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against for similar properties, similarly situated. See Croucher, 660 S.W.2d at 58. Alternatively,
under their factual sufficiency challenge, ECF and TCI must showthe evidence supporting the trial
court's finding is so slight as to render the finding clearly wrong and unjust. See Garza, 395 S.W.2d
at 823; Hall, supra, at 172.
During the course of the thirteen-day bench trial, ORIX primarily relied on a survey
published in June 2004 by the Mortgage Bankers Association. The MBA study was conducted in
response to a request by the United States Treasury Department to gather information regarding the
"effectiveness" of the TRIA. In its survey, the MBA analyzed over 122,000 commercial and
multifamily loans across major investor classes (CMBSs, life companies, Fannie Mae, Freddie Mac,
FHA and others, with minimal representation by commercial banks and savings and loans), with the
average loan size being $5.34 million. Ofthe $656 billion ofcommercial and multifamily mortgages
studied-32% of the total market-terrorism insurance was required by the mortgage investor or
servicer for 93.9% of the loans, and terrorism insurance was in place for 83.5%. In the portfolios
studied, terrorism insurance was required for 100% of the balance serviced for CMBS and other
affiliates. The press release regarding this survey summarized the results as showing the "impact
on all property types across U.S." and stating "[tJhis indicates that terrorism insurance coverage is
wide and deep, not just for trophy properties but across the entire commercial/multifamily real estate
spectrum."
The testimony at trial regarding this MBA survey further explored ORIX's conclusion that
certified terrorist acts were commonly insured against for properties situated similarly to the
apartment property and medical building. In addition to the conclusion terrorism insurance was
required for over 93% of the loans surveyed, ORIX's expert testified the survey was statistically
reliable--over 122,000 commercial and multifamily loans were surveyed nationally without
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restriction to specific geographical locations. ORlX's expert further testified that because of the
breadth of the survey, it necessarily included properties similar to the medical building and the
apartment property.
Other evidence admitted at trial included a January 2005 paper published by the
Congressional Budget Office entitled "Federal Terrorism Reinsurance: An Update" and a report of
the United States Department of the Treasury entitled, "Assessment: The Terrorism Risk Insurance
Act of 2002." These reports corroborated the findings reported in the MBA survey that CMBSs
almost uniformly required terrorism insurance. The MBA survey was cited in the CBO paper for
the conclusion "nearly all of the balances being serviced for CMBSs-the largest segment of the
commerciaJ/multifami ly mortgage market-were required to have terrorism Insurance in place ...."
Further, the CBO paper included reference to "one recent deal, involving a $1.3 billion CMBS
composed of 106 loans and 120 properties (including a number of retail shopping malls across the
country), [in which] 99.7 percent of the balance underlying the CMBS had terrorism insurance in
place." In the referenced Treasury Department assessment, the effectiveness of the TRIA was
analyzed thrOUgll a comprehensive set of nationwide surveys ofpolicyholders and insurers between
2002 and 2005. Policyholders surveyed represented almost 1.1 million organizations across markets
that were not part of the federal government and had at least ten employees, representing various
market shares and businesses. The assessment also showed a 54% take-up rate
3
in 2004, the time
of ORlX's demands on ECF and TCI to procure certified terrorism insurance. To account for
variations among properties, results were refined according to property replacement values: for
properties with replacement values under $50 million (the replacement values for the apartment
3The take-up rate is the share of policyholders who purchased any amount of terrorism risk insurance.
-12-
property and medical building), the take-up rate in 2004 was 53%. To account for geographical
differences for the same period, take-up rates for policyholders were 61 % in large cities such as
Dallas, and 67% in high-risk cities designated by the Department of Homeland Security such as Los
Angeles. Results were segregated further by industrial sector: business-which included industries
in real estate and rental and leasing; professional, scientific, and technical services; and management
of companies and enterprises-had a 65% take-up rate in 2004.
Both ECF and TCI complain no attention was paid to specific criteria of the relevant
properties when ORIX determined certified terrorism insurance was required under the loan
documents; rather, they assert, ORIX simply made a blanket decision to require certified terrorism
insurance for all loans it serviced. But, ORlX's expert testified the statistically reliable MBA
survey-which concluded over 93% of commercial and multifamily mortgages required terrorism
insurance-necessarily included properties similar to the medical building and the apartment
property. Accordingly, although some of the evidence did not reflect 100% terrorism coverage, we
conclude the evidence supported the trial court's findings that certified terrorist acts were commonly
insured against for properties situated similarly to the apartment property and medical building:
commercial and multifamily properties that were collateral for securitized loans, had similar
replacement values, were in specific industry sectors, and were located in Dallas and Los Angeles.
See, e.g., BFP 245 Park Co. v. GMAC Commercial Mortg. Corp., 12 A.D.3d 330,332 (N.Y. App.
Div. 2004) ("On these motions, the lender did demonstrate that the risk was 'commonly' insured
against; it was not necessary that the risk be universally insured against, so plaintiff s demonstration
that some buildings in Manhattan did not have terrorism coverage was not dispositive on this
issue.").
ECF and TCI offered no evidence contradicting these statistics, instead contending the
-13-
commonality analysis in the context of CMBSs was inappropriate because the relevant loan
documents were not securitized at the time of execution. The relevant loan documents, however,
do not require ORIX's request for "other insurance" be examined with circumstances frozen as of
1995 or 1999, the time of the parties' contracts. Instead, the contract language and placement in the
loan documents indicate the intent of flexibility. ECF was required to maintain such "other
insurance" as may "from time to time" be required, which "at the time" are commonly insured
against for properties similarly situated. Although the clauses are not identical, in material respects
TCI likewise was required to maintain such "other insurance" as may "from time to time" be
required, which "at the time" are commonly insured against and generally available. Located at the
end of the sections discussing insurance requirements, and following the prior subsections detailing
specific requirements, the "other insurance" provisions of both ECF's and TCl's loan documents
effectively function as "catch-all" clauses that provide the lender flexibility for changing or
unforeseen circumstances or insurance needs encountered during the duration of the loans. Indeed,
appellants conceded such a characterization: at trial, ECF referred to the "other insurance" provisions
as "catch-aU" and appellants' insurance expert agreed. Neither the contract language nor the
testimony supports ECF's and TCI's contentions the commonality analysis must be determined
according to the circumstances at the time of origination.
Nor do ECF and TCI support their contention ORIX was required under the terms of the
relevant loan documents to engage in individualized commonality analyses. They have identified
no language in the loan documents mandating such a requirement, and the plain language requires
the requested insurance "be" commonly insured against for similarly situated properties. Stated
differently, no individualized inquiry is a condition to determining whether the other insurance is
commonly required for similar properties. See, e.g., BFP 245, 12 A.D. 3d at 332 ("Absent the
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requisite conditional language, it was not a condition precedent to the lender's right to request other
insurance for it to show that such coverage was for a risk 'commonly insured against."') (internal
citation omitted).
We conclude ECF and TCI have failed to meet their burdens of showing there is either no
evidence or insufficient evidence to support the trial court's findings that ORIX could, under the
"other insurance" provisions of the loan documents, require certified terrorism insurance. We also
conclude the evidence is legally and factually sufficient to support the trial court's finding that ECF
and TCT breached their loan agreements by not procuring the insurance. Based on these conclusions,
we do not reach the remaining issues regarding the "all-risk insurance" provisions. See TEX. R. ApP.
P.47.1.
Calculation ojDeJault Interest
ECF also contests the trial court's finding default interest accrued from May 13, 2004, the
date of ORIX' s first "final notice" letter. ECF asserts both this letter and a July 14, 2004 letter from
ORTX gave additional cure periods and any default interest must be calculated from the expiration
ofthe last cure period: July 19,2004. ORlX responds that default interest is due immediately upon
default and any cure periods offered in its letters do not alter the language of the loan documents.
Our analysis of the loan documents begins with section 3.1 of the note, which provides:
It is hereby expressly agreed that ... should any other default occur under any of the
Loan Documents which is not cured within any applicable grace or cure period, then
a default shaH exist hereunder, and in such event the indebtedness evidenced hereby,
including all sums advanced or accrued hereunder or under any other Loan
Document, and all unpaid interest accrued thereon, shall, at the option of Lender and
without notice to Borrower, at once become due and payable and may be collected
forthwith.
Section 3.3 also provides, "[s]o long as any default exists hereunder ... such default interest shaH
be immediately due and payable."
-15-
The Mortgage and Security Agreement is one of the "Loan Documents" as defined in ECF' s
note. Because the note contains no definition for a "default," we look to that security agreement.
Section 4.16 ofthe security agreement also provides, "Adefault hereunder which has not been cured
within any applicable grace or cure period shall be a default under each of the other Loan
Documents." Subsection 2.1 (b) also provides: "The occurrence ofany ofthe following events shall
be a default hereunder: ... [ECF] fails to provide insurance as required by Section 1.4 hereof ... and
such failure continues for five (5) days after written notice thereoffrom [ORlX] to [ECF].''''
To determine the accrual date for default interest, we must resolve whether a "default" exists
as of the date of ORIX' s "final notice" that ECF must obtain certified terrorism insurance, or only
upon the expiration ofany cure period. The plain language ofthe note states defaults exist only after
expiration of the cure period- "should [a] default occur under any of the Loan Documents which
is not cured within any applicable grace or cure period, then a default shall exist." (Emphasis
added.) Subsection 2.1 (b) of the security agreement plainly sets a cure period-five days.
Considering both agreements together, as we must, no default occurred under the note until
expiration of the five-day cure period. See Adams v. First Nat. Bank ofBells/Savoy, 154 S. W.3d
859,868 (Tex. App.-Dallas 2005, no pet.)(op. n.p.t.) (construing promissory note and deed oftrust
together).
ORlX asserts the language ofthe loan documents making any default interest "immediately
due and payable" provides for no cure period before interest accrues. The loan documents provide
otherwise. Specifically, section 3.3 ofthe note defining the rate of default interest contemplates the
existence of a default first, after which default interest accrues and "shall be immediately due and
4Although argued to the trial court, ECF does not challenge now whether notice by ORIX was required or, if so, was sufficient.
-16-
payable." Because a default exists only upon the expiration of the five-day cure period, no default
interest becomes "immediately due" until the cure period expires. The original parties to these
transactions were sophisticated; had they chosen to define the default date as the date the borrower
failed to maintain insurance, they would have done so.
ECF maintains ORIX's correspondence was an "indulgence" under the loan documents that
extended ECF's cure period; by ignoring these indulgences when calculating the amount of default
interest, the trial court erred. Yet section 4.1 of ECF' s own note states specifically any indulgences
granted by ORIX shall not be constmed as a waiver of its rights. ORIX had the right to grant ECF
indulgences and extensions under the loan documents in an effort to provide time for ECF to cure
its default. ECF refused any attempt to cure until April of 2005 when it sought to payoff its
outstanding loan balance. Had ECF cured its default within the time periods allowed by ORIX, no
default would have occurred. Because it did not cure, ORIX's indulgences did not prevent ORIX's
right to collect default interest pursuant to the first "final notice" letter. We conclude the trial court
erred when it awarded default interest from the date of ORIX's correspondence, May 13, 2004,
without accounting for the five-day cure period under the loan documents.
Other Issues
ECF also identified sub-issues in its brief as to appellees' breach ofcontracts and mitigation
of damages. TCI similarly raised issues regarding mitigation and Wells Fargo's failure to plead the
element of damages. ECF and TCI did not brief any of these issues. Accordingly, the issues are
waived, and we will not address them. See TEX. R. ApP. P. 38.1; see also Ranger Ins. Co. v. State,
312 S.W.3d 266, 270-71 (Tex. App.-Dallas 2010, pet. dism'd) ("When a party fails to brief a
complaint adequately, it waives the issue on appeal.").
-17-
Conclusion
With respect to the calculation of default interest, we modify the trial court's judgment to
reflect the five-day grace period following May 13,2004. Specifically, we modify the trial court's
judgment to provide the amount of default interest paid by ECF that ORlX may retain (modifying
$217,027.38 to $213,645.47) and the commencement date for prejudgment interest against ECF
(modifying May 13,2004 to May I g, 2004). See TEX. R. Arr. P. 43.2(b). The trial court'sjudgment
is affirmed in all other respects.
~ ~ M
mSTICE
090066F.P05
-18-
(!tour! of Appeals
lJrtfth llistrirt of IDexas at 1Jlallas
.
JUDGMENT
ECF NORTH RIDGE ASSOCIATES, L.P.
and TCI 9033 WILSHIRE BOULEVARD,
INC., Appellants
No.05-09-00066-CV V.
ORIX CAPITAL MARKETS, L.L.c., U.S.
BANK, N.A. a/k/a U.S. BANCORP, N.A.,
as Trustee FOR THE MORTGAGE PASS-
THROUGH CERTIFICATES, SERIES
I996-C3, and WELLS FARGO BANK,
N.A. a/k/a WELLS FARGO BANK,
MINNESOTA, N.A., as Trustee FOR THE
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 99-Cl, Appellees
Appeal from the I34th Judicial District
Court of Dallas County, Texas. (Tr.Ct.No.
04-07956-G).
Opinion delivered by Justice Murphy,
Justices O'Neill and Lang participating.
In accordance with this Court's opinion of this date, we WITHDRAW our opinion of
January 19,2011 and VACATE our judgment of January 19,2.011. This is now the judgment of
the Court.
The judgment of the trial court is MODIFIED as follows:
In the fourth and fifth lines on the second page, the trial court's judgment is
modified to read, "... is entitled to recover $213,645.47 of the $217,027.38 in
default interest previously paid under protest by ECF in 2005, which ORIX has
been holding in an escrow account since it was paid ...."
In the second full paragraph on the second page, the trial court's judgment is
modified to read, "It is therefore ORDERED, ADJUDGED and DECREED by the
Court that ORIX, in such previously designated capacities, shall have and be
permitted to retain for its ultimate recovery the amounts it has held in escrow
since 2005, as designated above, in the amounts of$213,645.47 against ECF (plus
pre-judgment interest at the rate of 5% per annum on the amounts of default
interest owing by ECF from May 18, 2004, until such interest was paid under
protest by ECF on April 14,2005, as set forth in Joint Exhibit 79) ...."
In the first full paragraph on the third page, the trial court's judgment is modified
to read, "It is further ORDERED that the total amount of the Judgment here
rendered as to (i) pre-judgment interest accrued between May 18,2004 - April 14,
2005 for ECF ...."
As modified, the judgment of the trial court is AFFIRMED.
It is ORDERED that appellee ORlX Capital Markets, L.L.C. recover the full amount of
the judgment as modified herein from appellant ECF North Ridge Associates, L.P., as principal,
and Fidelity and Deposit Company of Maryland of3910 Keswick Road, Baltimore, MD 21203,
as surety, from appellant ECF North Ridge Associates, L.P.'s supersedeas bond.
It is ORDERED that each party bear its own costs of appeal.
Judgment entered March 14,2011.
M I ! : : t ~ ~
JUSTICE
Page I
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
Insurance 217
Court of Appeals of Texas,
Dallas.
ECF NORTH RIDGE ASSOCIATES, L.P. and TCI
9033 Wilshire Boulevard, Inc., Appellants,
v.
Insurance
Coverage-Property Insurance
In General
Risks or Losses Covered and
Exclusions
Courts 106
k. In general.
Action 13
Action
Grounds and Conditions Precedent
k. Persons entitled to sue.
Courts
Nature, Extent, and Exercise of Jurisdiction
in General
Standing is a component of subject matter jur-
isdiction.
"All-risk Insurance" covers any peril not spe-
cifically excluded in the policy.
In General
k. Determination of questions of
jurisdiction in general.
Whether a trial court has subject matter juris-
diction is a matter of law.
ORIX CAPITAL MARKETS, L.L.c., U.S. Bank,
N.A. a/k/a Bancorp, N.A., as Trustee For The Mort-
gage Through Certificates, Series 1996C3,
and Wells Fargo Bank, N.A., a/k/a Wells Fargo
Bank, Minnesota, N.A., as Trustee for the Mortgage
Pass-Through Certificates, Series 99-C I, Ap-
pellees.
No.
March 14,201 I.
Rehearing Overruled April 19, 20 I I.
Background: Mortgagors, who had obtained com-
mercial mortgage-backed security loans (CMBSs),
filed suit against loan servicer for the CMBSs, al-
leging breach of contract and seeking declaratory
relief, arising from mortgagors' refusal to obtain
certified terrorism insurance as requested by ser-
vicer. Servicer filed counterclaim for breach of con-
tract and declaratory relief, and sought default in-
terest from date of alleged breach. The 134th Judi-
cial District Court, Dallas County, , J.,
entered judgment in favor of servicer. Mortgagors
appealed.
Holdings: On rehearing, the Court of Appeals,
J., held that:
) as matter of first impression, servicer had stand-
ing to sue mortgagor for breach of contract;
"other insurance" provisions of loan documents
required mortgagors to obtain certified terrorism in-
surance at servicer's request; and
default interest accrued at conclusion of five-
day cure period.
Action 13
Action
Grounds and Conditions Precedent
k. Persons entitled to sue.
Whether a plaintiff possesses standing to assert
a particular claim depends on the facts pleaded and
the cause of action asserted.
Affirmed as modified.
Action 13
West Headnotes
Action
201 I Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 2
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
Grounds and Conditions Precedent
k. Persons entitled to sue.
Court, in determining whether a party has
standing to sue, construes the petition in favor of
the pleader and, if necessary, reviews the entire re-
cord to detennine if any evidence supports stand-
ing.
Action 13
Action
Grounds and Conditions Precedent
k. Persons entitled to sue.
The standing doetrine foeuses on whether a
party has a sufficient relationship with the lawsuit
so as to have ajusticiable interest in its outcome.
Mortgages 266
k. In general.
Contracts 95
Contracts
Construction and Operation
) General Rules of Construction
Application to Contracts in Gen-
Contracts 95
Contracts 95
Contracts
Construction and Operation
General Rules of Construction
k. Construction as a whole.
Court's primary concern in contract interpreta-
tion is to ascertain the meaning and determine what
obligations are imposed on the parties.
eral
Court examines and considers the entire writ-
ing as a whole to harmonize and give dfect to all
the provisions of a contract so that none will be
rendered meaningless.
Mortgages 266
Mortgages
Rights and Liabilities of Parties
Actions for Damages
k. Between parties to mortgage
Mortgages
Rights and Liabilities of Parties
or their privies.
Servicer of mortgagor's commercial mortgage-
backed security loan (CMBS) had standing to sue
mortgagor for breach of contract, based on mort-
gagor's failure to obtain certified terrorism insur-
ance as allegedly required by loan documents,
though servicer was not the holder of mortgagor's
note, as pooling and servicing agreement (PSA)
between servicer and trustee of mortgagor's CMBS
loan gave servicer "full power and authority, acting
alone, to do or cause to be done any and all things
in connection with such servicing and administra-
tion which it may deem necessary or desirable,"
PSA required trustee to support servicer's efforts to
service pooled loans, and PSA permitted servicer to
institute lawsuits in its own name.
201 I Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 3
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
and
Windstead, Secrest & Minick, P.c.,
Dallas, TX, for appellees.
Before Justices
Contracts
Construction and Operation
General Rules of Construction
Language of Instrument
k. In general.
Terms used in a contract are given their plain,
ordinary, and generally accepted meaning unless
the instrument shows the parties used terms in a
technical or different sense.
121 Interest 219 =>43
Interest
Time and Computation
Stipulations as to Time
k. Particular provisions.
Default interest accrued with respect to mort-
gagor's default in failing to procure certified terror-
ism insurance as requested by loan servicer per
"other insurance" provision of loan documents on
date five days after date of loan servicer's first
"final notice" letter informing mortgagor that ter-
rorism insurance was required under loan docu-
ments, rather than as of date of "final notice" letter,
as mortgage and security agreement provided for a
five-day cure period, and note stated that a default
existed only after expiration of the cure period.
OPINION ON REHEARING
Opinion By Justice
Appellee ORIX Capital Markets, L.L.c. filed a
motion for rehearing, and appellant ECF North
Ridge Associates, L.P.filed a response. The motion
for rehearing is granted, and we withdraw our sub-
stituted opinion issued January 19,201 I and vacate
our judgment of that date. The following is now the
opinion of the Court.
Borrowers ECF and TCI 9033 Wilshire
Boulevard, Inc. contest the legal and factual suffi-
ciency of the evidence to support the trial court's
finding that ECF and TCI breached their loan
agreements by not procuring certified terrorism in-
surance on the properties securing their debts. Sep-
arately, ECF appeals the trial court's calculation of
default interest, and TCI challenges ORIX's stand-
ing, as servicer, to sue for breach of contract. We
modify the trial court's judgment to account for the
proper accrual date for default interest against ECF
and affirm the judgment as modified.
Background
At the time of the dispute, ECF and TCI were
the owners of commercial real estate properties.
ECF owned the North Ridge Apartments property
in Dallas, Texas, which is low-income housing built
in the late 1960s and located within a couple miles
of the Dallas Galleria and surrounding office
towers. TCI was the owner of the Wilshire Medical
Building in Los Angeles, California, which is loc-
ated less than a mile from Rodeo Drive in Beverly
Hills. ECF and TCI share the same principal and,
during the relevant time, the same property man-
agement company, Prime Income Asset Manage-
ment, Inc. Prime also functioned as their contractu-
al advisor, responsible for risk management. Mort-
gage loans originated in 1995 for the apartment Strasburger & Price, LLP,
Appeal and Error
Review
Error Waived in Appellate Court
k. Insufficient discussion of ob-
Appeal and Error 30 =>l 079
*402 Friedman & Feiger, L.L.P.,
Shamoun & Norman,
LLP, Dallas, TX, for appellants.
jections.
Appellants waived on appeal those sub-issues
identified in their briefs that they failed to brief.
2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 4
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
[ ] The loan documents required specified in-
surance on the properties, including "all-risk" in-
surance. "All-risk" insurance covers any peril not
specifically excluded in the policy. See
At the time of the loan origina-
tions, neither ECF's nor TCl's all-risk policy ex-
cluded coverage for damage caused by acts of ter-
rorism. Yet after the September II, 200 I terrorist
attacks in New York City, Washington, D.C., and
rural Pennsylvania, insurance companies, including
those for ECF and TCI, began excluding from their
all-risk policies any coverage for damage caused by
terrorist acts.
When ECF and TCI refused to obtain certified
terrorism insurance, ORIX declared defaults under
the loan documents. ECF and TCI responded by fil-
ing suit against ORIX for breach of contract and de-
claratory relief. ORIX answered and counter-
claimed, also alleging breaches of *404 contract
and requesting a declaration that ECF and TCI had
In a series of letters beginning in 2002, ORIX
informed ECF and TCI certified terrorism insurance
was required under the relevant loan documents.
"Certified terrorism insurance" is coverage for cer-
tain terrorist acts that have been certified by the
United States Secretary of Treasury in concurrence
with the United States Secretary of State and Attor-
ney General under the Terrorism Risk Insurance
Act of 2002,
2322-36 (2002) (the TRIA). The corres-
pondence continued, with ORIX sending "final no-
tice" to both ECF and TCI in 2004. ECF and TCI
shared the same principal and risk management and
therefore received the same information on the cost
of certified terrorism insurance-premiums pur-
portedly ran as high as $20,000 annually. The loan
balances in 2004 were approximately $4.8 million
for ECF and $6.6 million for TCI, and both were
unwilling to obtain such insurance. Evidence at trial
showed that had they obtained actual bids for the
insurance, the annual premiums would have been
SI,412.40 for ECF and $345.63 for TCI.
cussed below.
A CMBS is a type of bond secured
by a large number of commercial mort-
gages pooled together, often on the basis
of the similarity of the mortgage loan doc-
uments and geographical location and type
of collateral. The creator of the CMBS
then issues a series of "slices" of the bond
(usually called tranches) that vary in yield,
duration, and payment priority. The in-
come of the mortgage is the income of the
bond, with the investors in the highest-
rated tranches being paid first; if there is a
shortfall in the income from the mortgages,
the investors with the lowest-rated tranches
may not receive any income at all. The
mortgages that secure the CMBS are
placed in a securitization trust, and the
trustee is responsible for servicing those
mortgages. Sometimes, however, trustees
of CMBSs delegate their rights, authority,
and monitoring responsibilities to master
or special servicers pursuant to pooling
and servicing agreements. The servicer is
obligated to balance competing interests of
the various tranches with the borrowers'
various contractual obligations, but is ulti-
mately contractually obligated to service
the loan in accordance with the interests of
the trustees as well as the holders of the
various tranches. See
*403 property and 1999 for the medical building.
Both loans were pooled and securitized after
Origination becoming Commercia... l.. Mort-
, .. . . fN
gage-Backed Security loans (CMBSs). ORIX
was the servicer on behalf of the loan pools' trust-
ees for both loans and was therefore responsible for
collecting monthly payments of principal and in-
terest, monitoring whether the property was prop-
erly insured, and addressing any issues of default
under the loan documents.
2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 5
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
(sub. op.). If, however, the evid-
ence offered to prove a vital fact is so weak as to do
no more than create a surmise or suspicion of its
existence, the evidence is no more than a scintilla
and is legally no evidence.
A legal insufficiency challenge
fails if there is more than a scintilla of evidence to
support the verdict. FO,<"/IUH'O FI,,'"''''''
For their factual sufficiency challenge, ECF
and TCI must demonstrate there is insufficient
evidence to support the adverse finding,
I
In reviewing a factual suffi-
ciency challenge, we consider and weigh all of the
evidence in support of and contrary to the trial
court's finding and will set aside the verdict only if
the evidence supporting the verdict is so slight, or
the evidence against it so strong, that the finding is
manifestly unjust and quite clearly wrong. See
I
(finding factually insufficient if "the evidence sup-
porting the verdict is so weak or the evidence to the
contrary is so overwhelming" that finding should be
set aside and new trial ordered); see also
I I (per curiam)
(for factual sufficiency review, verdict set aside
only if "clearly wrong and unjust"); Hall, ,)U.'l1aanlS
). The amount of evid-
ence necessary to afTirm a *405 judgment is far less
than that necessary to reverse a judgment.
breached the insurance provisions in the relevant
loan documents and seeking default interest from
the date of the alleged breach. Once it received the
counterclaim, ECF elected to payoff its loan. In
connection with this payoff, ECF first obtained cer-
tified terrorism insurance in April 2005 for an an-
nual premium of $1,787.00 and paid the default in-
terest under protest. About the same time, TCI
sought approval from ORIX to have another party
assume its loan. To complete the assumption, TCI
also paid default interest under protest. The lawsuit
continued.
In late 2007, ECF and TCI joined as co-
defendants U.S. Bank, N.A. a/k/a Bancorp., N.A.,
as Trustee for the Mortgage Through Certific-
ates, Series and Wells Fargo Bank, N.A.,
a/k/a Wells Fargo Bank, Minnesota, N.A., as Trust-
ee for the Mortgage Certificates,
Series 99CI. Previously, in 2006, ORIX had ac-
quired ECF's loan formerly held by U.S. Bank and
was both the owner and servicer of the loan. Yet
Wells Fargo still held TCI's loan, and TCI added a
defense that ORIX did not have standing to assert
any claims against TCI. The trustees answered, es-
sentially parroting ORIX's allegations and asserting
ORIX had the right to recover default interest and
attorney's fees attendant to enforcing ECF's and
TCI's loan documents.
After thirteen days of bench trial in late 2008,
the trial court rendered judgment for appellees and
awarded ORIX default interest and attorney's fees.
ECF and TCI appeal.
Standard of Review
For their legal-sufficiency challenge, ECF and
TCI must demonstrate on appeal there is no evid-
ence to support the trial court's adverse findings.
Under a no-evidence point, we con-
sider the evidence in the light most favorable to the
verdict, indulging every reasonable inference in
support.
Discussion
ECF and TCI challenge the findings and con-
clusions requiring them to maintain certified terror-
ism insurance. ECF separately challenges the trial
court's judgment awarding ORIX default interest
beginning May 13, 2004, the date of ORIX's first
"final notice" letter. TCI further challenges ORIX's
standing as the account servicer to sue for breach of
contract. We begin with TCI's challenge to ORIX's
2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 6
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
Recently, a federal appeals court addressed the very
issue of whether a mortgage servicer had standing
to pursue claims against a borrower for an alleged
default under a mortgage loan to which the servicer
was not a party. See
In the court addressed whether a
mortgage servicer, CWCapital, was entitled to
bring suit against the commercial landlord (the bor-
rower) and its former tenant for moneys the former
tenant paid the landlord in settlement of a separate
dispute. Examining the servicer's role in
administering a mortgage-backed security, the court
explained how a "servicer must balance impartially
the interests of the different tranches as determined
by their contractual entitlements."
The court turned to the language of CWCapital's
PSA with its trustee, stating the servicer is the
trust's collection agent because it "shall ... have full
power and authority, acting *406 alone, to do or
cause to be done any and all things in connection
with such servicing and administration which it
may deem necessary or desirable," thus making the
delegation of the trustee's rights to the servicer
"comprehensive." (alterations in origin-
al). According to the court: "There is no doubt
about Article III standing in this case [of a servicer
bringing suit]; though the plaintiff may not be an
assignee, it has a personal stake in the outcome of
the lawsuit because it receives a percentage of the
proceeds of a defaulted loan that it services."
Standing is a component of sub-
matter jurisdiction.
er a plaintiff possesses standing to assert a particu-
lar claim depends on the facts pleaded and the
cause of action asserted.
Whether a trial court has subject matter jurisdiction
is a matter of law, which we review de novo. See
standing.
Standing
TCI argues that ORIX, as the mortgage ser-
vicer and not the holder of TCI's note, has no stand-
ing to sue TCI. ORIX responds that the pooling and
servicing agreement (PSA) between it and the trust-
ee of TCl's CMBS conveys standing to sue for de-
fault of the loan documents.
r We
construe the petition in favor of the pleader and, if
necessary, review the entire record to determine if
any evidence supports standing. See
The standing doctrine
"focuses on whether a party has a sufficient rela-
tionship with the lawsuit so as to have a 'justiciable
interest' in its outcome."
(quoting
6A CHARLES ALAN WRIGHT, ARTHUR R.
MILLER, AND MARY KAY KANE,
No Texas case directly addresses the stand-
ing question before this Court, although ORIX cites
for guidance. There, the
court concluded the record contained sufficient
evidence ORIX Capital Markets had proven its
right to enforce a note as the current "special ser-
vicer" and pursuant to a servicing agreement con-
taining language similar to the PSA in this case.
The court next turned to the issue of whether
CWCapital was a real party in interest.
Examining CWCapital's PSA, the
court cited various provisions indicating the ser-
vicer had the right and responsibility to bring suit
against the borrower, including the "full power and
authority, acting alone, to do or cause to be done
any and all things in connection with such servicing
and administration which it may deem necessary or
desirable." The trustee also was obligated, at the
2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 7
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
(internal citations omitted; em-
phasis in original).
ferent tranches of the security.
Requirement oj'Terrorism Insurance
TCI cited several of our cases for the
proposition, "[i]n order to establish stand-
ing to maintain a breach of contract action,
a plaintiff must show either third-party be-
neficiary status or privity." See, e.g..
Re-
viewing these cases, we conclude they do
not control the current circumstances in
which a pooling and servicing agreement
specifically gives the servicer the right and
responsibility to institute suit against a bor-
rower either in its own name or on behalf
of the trustee.
Here, the language of ORlX's PSA is almost
identical to that in The PSA gives
ORIX "full power and authority, acting alone, to do
or cause to be done any and all things in connection
with such servicing and administration which it
may deem necessary or desirable." Similarly, the
trustee is required to support *407 ORIX's efforts to
service the pooled loans: "Trustee shall execute any
powers of attorney and other documents delivered
to it by [ORIX] and necessary and appropriate to
enable [ORIXL as the case may be, to carry out its
servicing and administrative duties hereunder. ... "
Further, the PSA permits ORIX to institute lawsuits
in its own name: "without the Trustee's written con-
sent[, ORIX shall not,] except as relating to a Mort-
gage Loan which [ORIX], as applicable, is servi-
cing pursuant to [its] respective duties herein ... ini-
tiate any action, suit or proceeding solely under the
Trustee's name without indicating [ORIX's] repres-
entative capacity.... " We therefore conclude under
the same reasoning as in ORlX had
standing to bring this lawsuit against TCI either in
. . . FN2
ItS own name or as a speCIal servlcer.
servicer's written request, to execute any limited
powers of attorney and other documents furnished
by the servicer and necessary or appropriate to en-
able the servicer to carry out its servicing and ad-
ministrative duties under the PSA. The court con-
cluded the trustee was required to confer necessary
authority on the servicer to bring suit, "[f]or it is
the servicer, not the trustee, who is empowered to
decide whether to sue." Regarding the right of
the servicer to sue in its own name, the court em-
phasized the following PSA language excepting out
the required trustee consent when suing pursuant to
servicing duties:
[W]ithout the Trustee's written consent, "except
as relates to a Loan that the ... Servicer ... is ser-
vicing pursuant to its representative duties herein
(in which case such servicer shall give notice to
the Trustee of the initiation), [the Servicer shall
not] initiate any action, suit or proceeding solely
under the Trustee's name without indicating the
... Servicer's ... representative capacity."
(stating italicized "except" indicates "the
servicer can sue in its own name if the suit relates
to a loan that it's servicing, or in the trustee's name
without indicating that it's doing so in a representat-
ive capacity-implying that it is not doing so in a
representative capacity if it is suing in regard to a
servicing-related loan") (emphasis and alterations
in original). The court concluded:
It is thus the servicer, under the agreement, who
has the whip hand; he is the lawyer and the cli-
ent, and the trustee's duty, when the servicer is
carrying out his delegated duties, is to provide
support. The securitization trust holds merely the
bare legal title; thc Pooling and Servicing Agree-
ment delegates what is effectively equitable own-
ership of the claim (albeit for eventual distribu-
tion of the proceeds to the owners of the tranches
of the mortgage-backed security in accordance
with their priorities) to the scrvicer. For remem-
ber that in deciding what action to take with re-
gard to a defaulted loan, the servicer has to con-
sider the competing interests of the owners of dif-
2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 8
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
Ilaving concluded ORIX had standing to
bring suit, we now turn to the question of whether
ECF and TCI were contractually obligated to pro-
cure terrorism insurance. In response to ECF's and
TCI's challenge to the legal and factual sufficiency
of evidence to support the trial court's judgment,
ORIX contends that terrorism insurance is required
under two separate provisions of the relevant loan
documents-"other insurance" and "all-risk insur-
ance."
We address the "other insurance" clauses of the
loan documents first because those provisions are
dispositive. Subsection 1.4(f) of ECF's Mortgage
and Security Agreement provides in relevant part:
Mortgagor shall, at Mortgagor's expense, main-
tain in force and effect on the Property at all
times while this Mortgage continues in effect the
following insurance:
(f) Such other insurance on the Property or on
any replacements or substitutions thereof or addi-
tions thereto as may from time to time be re-
quired by Mortgagee against other insurable haz-
ards or casualties which at the time are com-
monly insured against in the case of property
similarly situated, due regard being given to the
height and type of buildings, their construction,
location, use and occupancy.
TCl's Deed of Trust, Security Agreement, As-
signment of Leases and Rents and Fixture Filing
contains a similar provision:
Borrower shall, at its own cost and expense,
maintain the following insurance *408 coverage
with respect to the Property during the term of
this Deed of Trust:
(h) Miscellaneous. Such other insurance cover-
ages, in such amounts, and such other forms and
endorsements, as may from time to time be re-
quired by Lender and which are customarily re-
quired by institutional lenders for similar proper-
ties, similarly situated, including, without limita-
tion, coverages against other insurable hazards
including, by way of example only, earthquake,
sinkhole and mine subsidence, which at the time
are commonly insured against and generally
available.
Although not identical, the language of these
contracts is clear: ORIX as servicer may require
ECF and TCI to obtain certain insurance cover-
a g e ~ s u c h as certified terrorism insurance-if such
perils are commonly insured against for similar
properties, similarly situated. ECF and TCI do not
challenge whether certified terrorism insurance was
"generally available"; instead, they argue certified
terrorist acts were not "commonly insured against"
for properties similar to the apartment property or
medical building. Their burden under their legal
sufficiency challenge is to demonstrate there is no
evidence to support the adverse finding certified
terrorist acts were commonly insured against for
similar properties, similarly situated. See
Alternatively, under their factual
sufficiency challenge, ECF and TCI must show the
evidence supporting the trial court's finding is so
slight as to render the finding clearly wrong and un-
just. See Hall, supra, at
172.
2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 9
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
During the course of the thirteen-day bench tri-
al, ORIX primarily relied on a survey published in
June 2004 by the Mortgage Bankers Association.
The MBA study was conducted in response to a re-
quest by the United States Treasury Department to
gather information regarding the "effectiveness" of
the TRIA. In its survey, the MBA analyzed over
122,000 commercial and multifamily loans across
major investor classes (CMBSs, life companies,
Fannie Mae, Freddie Mac, FHA and others, with
minimal representation by commercial banks and
savings and loans), with the average loan size being
$5.34 million. Of the $656 billion of commercial
and multifamily mortgages studied-32% of the
total insurance was required by
the mortgage investor or servicer for 93.9'% of the
loans, and terrorism insurance was in place for
83.5%. In the portfolios studied, terrorism insur-
ance was required for 100% of the balance serviced
for CMBS and other affiliates. The press release re-
garding this survey summarized the results as
showing the "impact on all property types across
U.S." and stating "[t]his indicates that terrorism in-
surance coverage is wide and deep, not just for
trophy properties but across the entire commercial!
multifamily real estate spectrum."
The testimony at trial regarding this MBA sur-
vey further explored ORIX's conclusion that certi-
fied terrorist acts were commonly insured against
for properties situated similarly to the apartment
property and medical building. In addition to the
conclusion terrorism insurance was required for
over 93'% of the loans surveyed, ORIX's expert test-
ified the survey was statistically reliable-over
122,000 commercial and multifamily loans were
surveyed nationally without restriction to specific
geographical locations. ORIX's expert further testi-
fled that because of the breadth of the survey, it ne-
cessarily included properties similar to the medical
building and the apartment property.
Other evidence admitted at trial included a
January 2005 paper published by the *409 Congres-
sional Budget Off1ce entitled "Federal Terrorism
Reinsurance: An Update" and a report of the United
States Department of the Treasury entitled,
"Assessment: The Terrorism Risk Insurance Act of
2002." These reports corroborated the findings re-
ported in the MBA survey that CMBSs almost uni-
formly required terrorism insurance. The MBA sur-
vey was cited in the CBO paper for the conclusion
"nearly all of the balances being serviced for
CMBSs-the largest segment of the commercial!
multifamily mortgage market-were required to
have terrorism insurance in place.... " Further, the
CBO paper included reference to "one recent deal,
involving a $1.3 billion CMBS composed of 106
loans and 120 properties (including a number of re-
tail shopping malls across the country), [in which]
99.7 percent of the balance underlying the CMBS
had terrorism insurance in place." In the referenced
Treasury Department assessment, the effectiveness
of the TRIA was analyzed through a comprehensive
set of nationwide surveys of policyholders and in-
surers between 2002 and 2005. Policyholders sur-
veyed represented almost 1.1 million organizations
across markets that were not part of the federal
government and had at least ten employees, repres-
enting various market shares and businesses. The
FNl
assessment also showed a 54'% take-up rate . in
2004, the time of ORIX's demands on ECF and TCI
to procure certified terrorism insurance. To account
for variations among properties, results were re-
fined according to property replacement values: for
properties with replacement values under 850 mil-
lion (the replacement values for the apartment prop-
erty and medical building), the take-up rate in 2004
was 53%,. To account for geographical differences
for the same period, take-up rates for policyholders
were 61 % in large cities such as Dallas, and 67
%
in
high-risk cities designated by the Department of
Homeland Security such as Los Angeles. Results
were segregated further by industrial sector: busi-
ness-which included industries in real estate and
rental and leasing; professional, scientific, and
technical services; and management of companies
and a 65% take-up rate in 2004.
The take-up rate is the share of poli-
2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 10
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
cyholders who purchased any amount of
terrorism risk insurance.
Both ECF and TCI complain no attcntion was
paid to specific criteria of the relevant properties
when ORIX determined certified terrorism insur-
ance was required under the loan documents;
rather, they assert, ORIX simply made a blanket de-
cision to require certified terrorism insurance for all
loans it serviced. But, ORIX's expert testified the
statistically reliable MBA survey-which con-
cluded over 93'% of commercial and multifamily
mortgages required terrorism necessar-
ily included properties similar to the medical build-
ing and the apartment property. Accordingly, al-
though some of the evidence did not reflect 100%
terrorism coverage, we conclude the evidence sup-
ported the trial court's findings that certified terror-
ist acts were commonly insured against for proper-
ties situated similarly to the apartment property and
medical building: commercial and multifamily
properties that were collateral for securitized loans,
had similar replacement values, were in specific in-
dustry sectors, and were located in Dallas and Los
Angeles. See. e.g..
("On these
motions, the lender did demonstrate that the risk
was 'commonly' insured *410 against; it was not
necessary that the risk be universally insured
against, so plaintiffs demonstration that some
buildings in Manhattan did not have terrorism cov-
erage was not dispositive on this issue.").
ECF and TCI offered no evidence contradicting
these statistics, instead contending the commonality
analysis in the context of CMBSs was inappropriate
because the relevant loan documents were not se-
curitized at the time of execution. The relevant loan
documents, however, do not require ORIX's request
for "other insurance" be examined with circum-
stances frozen as of 1995 or 1999, the time of the
parties' contracts. Instead, the contract language
and placement in the loan documents indicate the
intent of flexibility. ECF was required to maintain
such "other insurance" as may "from time to time"
be required, which "at the time" are commonly in-
sured against for properties similarly situated. Al-
though the clauses are not identical, in material re-
spects TCI likewise was required to maintain such
"other insurance" as may "from time to time" be re-
quired, which "at the time" are commonly insured
against and generally available. Located at the end
of the sections discussing insurance requirements,
and following the prior subsections detailing specif-
ic requirements, the "other insurance" provisions of
both ECF's and TCI's loan documents effectively
function as "catch-all" clauses that provide the
lender flexibility for changing or unforeseen cir-
cumstances or insurance needs encountered during
the duration of the loans. Indeed, appellants con-
ceded such a characterization: at trial, ECF referred
to the "other insurance" provisions as "catch-all"
and appellants' insurance expert agreed. Neither the
contract language nor the testimony supports ECF's
and TCl's contentions the commonality analysis
must be determined according to the circumstances
at the time of origination.
Nor do ECF and TCI support their contention
ORIX was required under the terms of the relevant
loan documents to engage in individualized com-
monality analyses. They have identified no lan-
guage in the loan documents mandating such a re-
quirement, and the plain language requires the re-
quested insurance "be" commonly insured against
for similarly situated properties. Stated differently,
no individualized inquiry is a condition to determ-
ining whether the other insurance is commonly re-
quired for similar properties. See, e.g.,
("Absent the re-
quisite conditional language, it was not a condition
precedent to the lender's right to request other in-
surance for it to show that such coverage was for a
risk 'commonly insured against.' ") (internal cita-
tion omitted).
We conclude ECF and TCI have failed to meet
their burdens of showing there is either no evidence
or insufficient evidence to support the trial court's
2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page II
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
findings that ORIX could, under the "other insur-
ance" provisions of the loan documents, require
certified terrorism insurance. We also conclude the
evidence is legally and factually sufficient to sup-
port the trial court's finding that ECF and TCI
breached their loan agreements by not procuring the
insurance. Based on these conclusions, we do not
reach the remaining issues regarding the "all-risk
insurance" provisions. See . 47..
Calculation ofDefclUlt Interest
ECF also contests the trial court's finding
default interest accrued from May 13, 2004, the
date of ORIX's first "final notice" letter. ECF as-
serts both this letter and a July 14, 2004 letter from
ORIX gave additional cure periods and any default
interest must be calculated from the expiration of
the last cure period: July 19, *411 2004. ORIX re-
sponds that default interest is due immediately upon
default and any cure periods offered in its letters do
not alter the language of the loan documents.
Our analysis of the loan documents begins with
section 3.1 of the note, which provides:
It is hereby expressly agreed that ... should any
other default occur under any of the Loan Docu-
ments which is not cured within any applicable
grace or cure period, then a default shall exist
hereunder, and in such event the indebtedness
evidenced hereby, including all sums advanced or
accrued hereunder or under any other Loan Docu-
ment, and all unpaid interest accrued thereon,
shall, at the option of Lender and without notice
to Borrower, at once become due and payable and
may be collected forthwith.
Section 3.3 also provides, "[s]o long as any de-
fault exists hereunder ... such default interest shall
be immediately due and payable."
The Mortgage and Security Agreement is one
of the "Loan Documents" as defined in ECF's note.
Because the note contains no definition for a
"default," we look to that security agreement. Sec-
tion 4.16 of the security agreement also provides,
"A default hereunder which has not been cured
within any applicable grace or cure period shall be
a default under each of the other Loan Documents."
Subsection 2.1 (b) also provides: "The occurrence of
any of the following events shall be a default here-
under: ... [ECF] fails to provide insurance as re-
quired by Section 1.4 hereof ... and such failure
continues for five (5) days after written notice
FN4
thereof from [ORIX] to [ECF]." .
Although argued to the trial court,
ECF does not challenge now whether no-
tice by ORIX was required or, if so, was
sufficient.
To determine the accrual date for default in-
terest, we must resolve whether a "default" exists
as of the date of ORIX's "final notice" that ECF
must obtain certified terrorism insurance, or only
upon the expiration of any cure period. The plain
language of the note states defaults exist only after
expiration of the cure period-"should [a] default
occur under any of the Loan Documents which is
not cured within any applicable grace or cure peri-
od, then a default shall exist." (Emphasis added.)
Subsection 2.1 (b) of the security agreement plainly
sets a cure period-five days. Considering both
agreements together, as we must, no default oc-
curred under the note until expiration of the five-
day cure period. See
(op. n.p.t.)
(construing promissory note and deed of trust to-
gether).
ORIX asserts the language of the loan docu-
ments making any default interest "immediately
due and payable" provides for no cure period be-
fore interest accrues. The loan documents provide
otherwise. Specifically, section 3.3 of the note de-
fining the rate of default interest contemplates the
existence of a default first, after which default in-
terest accrues and "shall be immediately due and
payable." Because a default exists only upon the
expiration of the five-day cure period, no default
interest becomes "immediately due" until the cure
2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 12
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
period expires. The original parties to these transac-
tions were sophisticated; had they chosen to define
the default date as the date the borrower failed to
maintain insurance, they would have done so.
ECF maintains ORlX's correspondence was an
"indulgence" under the loan documents that exten-
ded ECF's cure period; *412 by ignoring these in-
dulgences when calculating the amount of default
interest, the trial court erred. Yet section 4.1 of
ECF's own note states specifically any indulgences
granted by ORIX shall not be construed as a waiver
of its rights. ORIX had the right to grant ECF in-
dulgences and extensions under the loan documents
in an effort to provide time for ECF to cure its de-
fault. ECF refused any attempt to cure until April of
2005 when it sought to payoff its outstanding loan
balance. Had ECF cured its default within the time
periods allowed by ORIX, no default would have
occurred. Because it did not cure, ORIX's indul-
gences did not prevent ORlX's right to collect de-
fault interest pursuant to the first "final notice" let-
ter. We conclude the trial court erred when it awar-
ded default interest from the date of ORIX's corres-
pondence, May 13, 2004, without accounting for
the five-day cure period under the loan documents.
Other Issues
ECF also identified sub-issues in its brief
as to appellees' breach of contracts and mitigation
of damages. TCI similarly raised issues regarding
mitigation and Wells Fargo's failure to plead the
element of damages. ECF and TCI did not brief any
of these issues. Accordingly, the issues are waived,
and we will not address them. See
("When a party fails to brief a complaint ad-
equately, it waives the issue on appeal.").
Conclusion
With respect to the calculation of default in-
terest, we modify the trial court's judgment to re-
Hect the five-day grace period following May 13,
2004. Specifically, we modify the trial court's judg-
ment to provide the amount of default interest paid
by ECF that ORIX may retain (modifying
$217,027.38 to $213,645.47) and the commence-
ment date for prejudgment interest against ECF
(modifying May 13, 2004 to May 18, 2004). See
The trial court's judgment
is affirmed in all other respects.
Tex.App.-Dallas,20 II.
ECF North Ridge Associates, L.P. v. ORIX Capital
Markets, L.L.c.
336 S.W.3d 400
END OF DOCUMENT
2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
APPENDIX
TAB
"6"
LOAN NO. 998505003
PRQMISSORY NOTE
Dated; July q, 1999
FOR VALUE RECEIVED, the"undersigned, AMERlCAN MEDICAL
HNANCIAL GROUP, L.P, a California lif"i1ited partnership, having an address c/o 9033 Wilshire
Boulevard, Beverly Hills, California 90211 (the "Maker"), does hereby covenant and promise to
pay to the order ofMERRlLL LYNCH CREDIT CORPORATION, a Delaware corporation, having
an address at Deer Lake Drive East, Jacksonville, Florida 32246 (the "Holder"), or at such
other place as Holder may from time to time designate in writing. the principal sum of SIX
MIL-tION EIGHT HUNDRED NINETY-TWO THOUSAND AND NOIlOD DOLLARS
($6,892,000) in lawful money of the United States of America, and all other amounts due or
becoming-due hereunder. with interest on the principal sum outstanding from time to time (the
"Principal Amount") from the date hereof on the terms herein provided through the date that the
loan evidenced hereby (the "Loan") is repaid in full, in lawful money of the United States of
America, at an interest rate of Eight and Six Hundred Seventy-Five Ten Thousandths Percent
(8.0675%) per annum (the "Interest Rate"). All capitalized terms not deftned herein shall have the
same meanings set forth in the Mortgage (as hereinafter deftned).
SECTIONT. PAYMENTTERMS
A. Payments under this Note shall be due and payable as follows:
(I) interest from the date ht.rt.:ofthrough the last day of the current month
shall be paid on the date hereof; thereafter
\
'.
(2) interest and principal shall be due and payable in equal consecutive
monthly installments of Fifty-One Four Hundred Sixty-Nine and 161100
Dollars ($51,469.1 6) on the first day of each and every calendar month (each. a
"Payment Date") commencing on September I, 1999; and
(3) the entire Principal Amount, together with all accrued and unpaid
interest and any other charges due hereon shall be due and payable on the Payment
Date on August 1,2009 (the "Maturity Date").
B. Interest shall be computed using the actual number of days elapsed for the relevant
payment period, based oD. a 360..day year. In computing the number of days during which interest
accrues on any amount outstanding hereunder, the ftrst date from which interest is stated to accrue
hereunder shall be included and the date of payment of such amount to Holder shall be excluded.
YNCH CREDiT CORPORAnONfWil,hire Medical Building
Promissory Note
File No.:20067180008
LOSOI:71211.J
JOINT EXHIBIT NO.3
Cause No. 04-7956-0
-2-
MAKER HEREBY ACKNOWLEDGES THAT INTEREST ON THIS NOTE IS TO BE
C.&,.LCULATED BYHOLDERONTHE BASIS OF ATHREE HUNDRED SIXTY (360) DAY
YEAR AND IS FULLY AWARE THAT SUCH CALCULATIONS MAY RESULT IN AN
ACCRUAL ANDIOR PAYMENT OF INTEREST IN AMOUNTS GREATER THAN
CORRESPONDING INTEREST CALCULATIONS BASED ON A THREE HUNDRED
SIXTY-FIVE (365) DAY YEAR.
-:: :-
C. All payments made pilrsuant to this Note shall be made by check to
collection) or by .......u-e transfer to Holder's office. Such payments must be received by Holder hefore
1:00 p.m., Eastern Time, inorder to be credited as a payment received that date.
D. . 'AlI amounts due under this Note shall be payable \\.;thout setoff, counterclaim or any
other deduction whatsoever.
E. Provided no Event ofDefault ("Event of Default") exists under that certain Deed of
Trust, SeC'Urity Agreement, Assignment of Leases and Rents,and Fixture Filing dated as of the date
hereof, given by Maker to Holder, which encumbers certain property described therein (the
"Property") and secures the Loan evidenced by this Note (the all payments received
by Holder on this Note shall be applied first, to the repayment ofsums advanced by Holder to protect
or preserve the Property pursuant to the Mortgage and other loan documents relating to the Loan (the
"Loan Documents'), second, to late charges and other premiums and charges, third, to interest and
finally, to principal. Notwithstanding the foregoing, from and after an Event of Default, all
payments received by Holder on this Note shall be applied by Holder to principal, interest and/or
other charges due hereunder or under the other Loan Documents in such order as Holder shall
determine in its sole discretion.
F. To the extent that Maker makes any payment or Holder receives any payment or
proceeds for Maker's benefit, which are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver, custodian
or aAY other party under any bankruptcy law, common law or equitable cause, then, to such extent,
the obligations ofMaker hereunder intended to be satisfied shall be reinstated and continue as jfsuch
payment or proceeds had not been received by Holder.
SECTION II. NO PREPAYMENTS; DEFEASANCE
A. For purposes of this provision, the definitions shall apply:
(1) ".GQ.!k" shall mean the Internal Revenue Code of1986 as amended from time
to time or any successor statute.
(2) "Defeasance Collateral" shall mean U.S. Obligations (as hereinafter defined)
which are identified by Maker (but if not identified by Maker, then selected by Holder) and that
provide for payments prior, but as close as possible, to the Payment Dates for all Scheduled
MERJlJLL LYNCH CREDIT CORPORATIONIWiislire Medical Building
Promissory Note
File 1'10.:20067/&000&
LOS0l:7127U
-3-
Defeasance Payments (as hereinafter defined), v.rith each payment on such U.S. Obligations (together
with any UI}expended portion of any prior payment) being equal to or greater than the corresponding
Scheduled Defeasance Payment
(3) "Defeasance Deposit" shall mean an amount in immediately available funds
equal to the sum of the cost of the Collateral and all costs and expenses incurred or to
be incurred in connection therewith, without limitation any revenue, documentary .stamp
or intangible taxes or any other tax orcharge due in connection v.rith the defeasance of the Loan.
(4) "Rating Agencies" shall mean each of Standard & Poor's Ratinos Group
'" ,
Duff & Phelps Credit Raiing Co., Moody's fnvestors Service, fnc., Fitch IBCA, fnc. or any
successors thereto.
(5) "REMfC" shall mean a "real estate mortgage investment conduit" as such
term is defined in Section 860D(a) of the Code.
(6) "Scheduled Defeasance Payments" shall mean all successiye scheduled
payments due hereunder on each Payment Date after the Defeasance Date (as hereinafter defined),
including the amounts due on the Maturity Date.
(7) "Startup Dav" shall mean the "startup day", as such term is defined in
Section 860G(a)(9) of the Code, of any REMIC that holds this Note.
(8) "U.S. Obligation:!" shall mean direct non-callable obligations of the United
of America, reasonably acceptable to Holder.
B. Maker shall not be entitled to prepay Note in whole or in part at any time.
Notwithstanding the foregoing, (i) this Note may be prepaid in whole during the three (3) month
period prior to tile Maturity Date, v.rithout any Prepayment Charge (as defined in Section VI hereof)
or Similar premium,.provided that no Event of Default exists and (ii) no Prepayment' Charge or
similar premium shall be payable with respect to a prepayment resulting from Holder's election to
apply any proceeds paid in COr1l1ection .....ith a casualty to or condemnation of the Property
the indebtedness evidenced hereby.
C. Notwithstanding anything contained herein to the contrary, at any time after the date
which is the earlier to occur of (i) two (2) years after the Startup Day or (ii) five (5) years after the
date hereof if the aforesaid Startup Day shall not have occurred during such five (5) years and, in
either case, provided no default exists hereunder and no Event Maker may cause the
Property to be released from the lien of the Mortgage and the Defeasance Collateral to be substituted
therefor as security for the Loan, subject to the satisfaction of the following conditions precedent (a
"Defeasance Event"):
MERRILL LYNCH CREDIT CORPORAT10NlWil,hire Medical Building
Promissory Note
File NO.:200671&OOO&
lOSOI,7127U
i '
( ,
-4-
(I) not less than thirty (30) days' prior written notice shall be given by Maker to
Holder specifying a Payment Date (the "Defeasance Date") on which the Defeasance Event is to
occur;
(2) all accrued and unpaid interest and all other sums due under this Note and
under the other Loan Documents up to and including the Defeasance Date and all costs and expenses
incurred by Holder or its agents in cOrlnection with the' Defeasance Event (including, without
limitation, the review ofthe proposed DefeaSance Collateral and the preparation of the DefeaSance
Security Agreement (as hereinafter defined), legal opinions, mathematical verifications by a certified
public accountant and related documentation), shall be paid in full on or prior to the Defeasance
Date;
.-
(3) Maker shall remit the Defeasance Deposit to Holder;
(4) Maker shall execute and deliver, or cause to be executed and delivered, to
Holder on-or prior to the Defeasance Date:
(a) a pledge and security agreement, in form and substance reasonably
satisfactory to Holder, creating a first priority security interest in favor of Holder in the Defeasance
Collateral (the "Defeasance Security Agreement"), which shall provide, among other things, that
any excess received by Holder from the Defeasance Collateral over the amoWlts payable by Maker
hereunder, to the extent not required to make subsequent payments due hereWlder, shall be refunded
to Maker promptly after each monthly Payment Date;
(b) a certificate of Maker certifying that all of the requirements set forth
in this Section 11.C have been satisfied and that the defeasance of the Loan is being undertaken to
facilitate the disposition of the Property or other customary commercial transaction;
(c) an opinion of counsel in form and substance reasonably satisfactory
to f\olde:r (i) from counsel to Holder stating, amongother things, that Holder has a perfected first
priority security interest in the Defeasance Collateral and, if this Note is owned by a REMIC at the
time of the Assumption (as hereinafter defined), if applicable, the Assumption will not adversely
affect the federal income tax treatment of such REMIC under the applicable provisions of the Code
or cause such REMIC to incur any liability for federal income taxes and (ii) from cOWlsel for Maker
stating, among other things, that the Defeasance' Security Agreement is enforceable against Maker
in accordance with its terms;
(d) if required by Holder in its reasonable discretion, evidence in writing
from the applicable Rating Agencies to the effect that the defeasance of the Loan will not result in
a downgrading, withdrawal or qualification of the respective ratings of any securities backed by this
Note (including, without limitation, any securities issued by a RE1vfIC which holds this Note) which
ratings are in effect immediately prior to such Defeasance Event;
MERRlLL LYNCH CREDIT CORPORATIONfWilshirc Medica! Building
PromLSsory Note
File 1'0,:20067180008
lOSOl:7127U
-5-
(e) Maker and any guarantor or indemnitor of Maker's obligations under
the Loan Documents for which Maker has personal liability execute and deliver to Holder such
documents and agreements as Holder shall reasonably require to evidence and effectuate the
ratification of such personal liability and guaranty or indemnity, respectively;
(f) a ratification of all representations and obligations under the Loan
Documents and such other certificates, documents or instruments as Holder may reasonably require;
and -;;: --
(g) ifrequired by the Rating Agencies, a certificate from a certified public
accountant that the Defeasance Collateral is sufficient to cover the remaining interest and principal
payments undel"'the Loan.
(5) Maker, as directed by Holder, shall have duly endorsed or shall cause the
holder thereof to have duly endorsed the Defeasance Collateral or shall have accompanied the
Defeasance Collateral by a written instrument of transfer in form and substance reasonabl)'
satisfactory to Holder (including, without limitdtion, such instruments as may be required by the
depository institution holding such securities or the issuer thereof, as the case may be, to effectuate
book-entry transfers and pledges through the book-entry facilities of such institution or issuer) in
order to perfect upon the delivery of the Defeasance Security Agreement a first priority security
interest in the Defeasance Collateral in favor of Holder in conformity v,.;th all applicable state and
federal laws governing the granting of such security interests;
D. Maker hereby appoints Holder as its agent and attorney-in-fact for the purpose of
using the Defeasance Deposit to purchase for the account of Maker the Defeasance Collateral at
then-prevail.ing market prices, using the means and sources customarily employed and available to
Holder to effectuate such purchases. The Defeasance Collateral shall be arranged such that payments
received from such Defeasance Collateral shall be paid directly to Holder to be applied on account
of the indebtedness evidenced by this Note. Any portion of the Defeasance Deposit in excess of the
to purchase the Defeasance Collateral and to satisfy Maker's obligations under
Section II.C hereof shall be remitted to Maker follomng such purchase.
E. Upon compliance with the requirements of Section II.C hereof, the Property shall be
released from the lien of the Mortgage and the other Loan Documents, and the Defeasance Collateral
shall constitute collateral which shall secure this Note. Holder shall, at Maker's expense, execute and
deliver any documents reasonably requested by Maker to release the Property from the lien of the
Mortgage.
F. Upon the release of the Property from the lien of the Mortgage in accordance with
Section II.E hereof, Maker may, at its option, assign the Defeasance Collateral and all its rights and
obligations under this Note, the other Loan Documents and under the Defeasance Security
Agreement to a successor obligor which shall be a single purpose, bankruptcy-remote entity and
othc-rwlse reasonably satisfactory to Holder (the "Successor Maker") provided that the Successor
MERRlLL LYNCH CREDIT CORPORATIONlWilshire Modio.1 Building
Promissory NOlO
File No.:20067/8000S
LOSOt:71!71J
-6-
( :
Maker executes an assumption agreement in form and substance reasonably satisfactory to Holder
(the "Assumption pursuant to which Successor Maker assumes Maker's obligations
Wlder this Note, the other Loan Documents and the Defeasance Security Agreement other than those
which are described in Sections [LC(4)(e) and (0 (the "Assumption"). Maker shall, at such time,
(x) deliver to Holder an opinion, in form and substance and by counsel reasonably satisfactory to
Holder, stating, among other things, that the Asswnption Agreement is enforceable against Maker
and such Successor Maker in accordance with its terms and that, upon the Assumption, this Note and
the Defeasance Security Agreement the Successor Maker in accord3I}c;e with
their respective terms, and (y) pay costs and expenses incurred by Holder or its agents in
connection with the Assumption (including, .....ithout limitation, the reviewof the proposed Successor
Maker and the preparation ofthe Assumption Agreement, legal opinions and related documentation).
Upon such Maker shall be relieved of its obligations hereunder, under the other Loan
Documents and under the Defeasance Security Agreement, except for those which are set forth in
SectiolTS ILC(4)(e) and (f) hereof.
. .
G. Upon the release of the Property from the lien of the Mortgage in accordance with
Section If:E hereof, neither Maker nor any Successor Maker shall have any right to prepay this Note
pursuant to the other provisions of this Section or othernise.
H. MAKER HEREBY EXPRESSLY WAIVES ANY RIGHTS IT MAY HAVE
UNDER CALIFORNIA CIVIL CODE SECTION 2954.10 TO PREPAY THIS NOTE, IN
WHOLE OR IN PART, WITHOUT PAYMENT OF A PREPAYMENT CHARGE, UPON
ACCELERATION OF THE !'vIATURlTY DATE OF THIS NOTE, AND AGREES THAT IF,
FOR ANY REASON, A PREPAYMENT OF ANY OR ALL OF THIS NOTE IS l\L-\DE
UPON OR FOLLOWING ANY ACCELERATION OF THE MATURITY DATE OF THIS
NOTE BY HOLDER ON ACCOUNT OF M'Y DEFAULT BY lYlAKER, INCLUDING, BUT
NOT LIMITED TO, ANY TRANSFER, OR FURTHER ENCUMBR-\NCE
AS PROHIBITED OR RESTRICTED BYTHE DEED OF TRUST, THEN MAKER SlLli.L
BE OBLIGATED TO PAY, CONCURRENTLY THEREWITH, AS A PREPAY;\lENT
CHARGE, THE APPLICABLE SUM SPECIFIEDIN THIS SECTION. BY INITIALING
nITS PROVISION IN THE SPACE PROVIDED BELOW, MAKER HEREBY DECL<\RES
THAT HOLDER'S AGREEMENTTO MAKE THE LOAN EVIDENCED BY THISNOTE
AT THE INTEREST RATE AND FOR THE TERM SET FORTH IN THIS NOTE
CONSTITUTES ADEQUATE CONSIDERATION, GIVEN INDIVIDUAL WEIGHT BY
MAKER, FOR THIS WAIVER AND AGREEMENT.
INITIALS: Maker
. MER.RlLL LYNCH CREDn CORPORATIONrwihhirc Medical Building
Promissory Note
file t'o.:20067/80008
LOS0I.1I!71 J
SECnONIIl. DEFAULTRATE
A. Upon the occurrence ofand for 50 fong as an Event ofDefauft exists, in Holder's sole
discretion, Borrower shall pay interest on the Principal Amount and all such other amounts due
under the Loan Documents at an annual rate equal to the lesser of (a) the Interest Rate plus four
percent (4%) and (b) the maximum rate permined by applicable law (the "Default Rate"). and shall
be computed from the date performance was due through the date, if any. upon which full
performance is rendered. -: - -
B. To the extent permitted by law. interest shall continue to accrue at the Default Rate.
notwithstanding the issuance of a judgment of foreclosure and sale, the conveyance of the
through the ex.ercise ofa power of sale or otherwise; it being expressly understood and agreed that
Maker's obligations hereunder shall not merge into any such judgment or conveyance and shall
.survive until the actual receipt by Holder of the full amount of the Principal Amount and any other
amounts due and payable hereunder which were not paid when due. The foregoing provisions shall
not be construed as a waiver by rtolder of its right to pursue any other remedies available to it under
the Mongage or any other Loan Document, nor shall it be construed to limit in any way the
application ufthe Default Rate.
SECTION IV. LATE CHARGE
In addition to any interest which may be charged hereunder. Maker shall pay to Holder a
charge ("Late for the collection of late payments in an amount equal to five percent
(5.0%) of any payment required hereunder (except as specifically set forth in this Section) which is
paid within five (5) days after the Payment Date, as liquidated damages and not as a penalty.
Maker agrees that tr...: Late Charge shall be due and payable upon all or any ponion of the Principal
Amount not rep.lld on or before the Maturity Date. In no event shall Holder apply the Late Charge
to the Principal Amount upon the acceleration of the Loan prior to the Maturity Date. Maker
recognizes that its default in making any payment as provided herein or in any other Loan Document as
agryd to paid when due. or the occurrence of any Event of Default, will require Holder to incur
additional expense in servicing and administering the Loan in loss to Holder of the use of the money due
and in frustration to Holder in meeting its other financial and loan commitments and that the damages
caused thereby would be extremely difficult and impractical to ascertain. Nothing in this Note shall be
construed as an obligation on the part of Holder to accept, at any time, less than the full amount then due
hereunder or as a waiver or limitation of Holder's right to compel prompt performance.
SECTION V. NON-RECOURSE
A. Holder agrees that it will look solely to the Property and sUch other collateral, if any, as
may now or hereafter be given to secure the repayment of the indebtedness evidenced hereby. No other
property or assets of Maker. or any partner. member or principal of Maker, shall be subject to levy.
execution or other enforcement procedure for the satisfaction of the remedies of Holder. or for any
MER.RJlllYNCH CREDIT CORPORATIONfWilshirc Medical Building
Promissory Note
File No.:20067/80008
-8-
, I
payment required to be made under this Note or any of the other Loan Documents or for the performance
of any afme covenants or warranties contained in the Loan Documents.
B. The foregoing provisions of this Section shall not (i) constitute a v.-aiver of the obligations
secured by or arising tmder the Mortgage or the other Loan Documents, (ii) limit the right of Holder to
name Maker or the partners, members or principals of Maker as parties in any action or suit for judicial
foreclosure and sale tmder the Mortgage 'or the other Loan Documents or with respect to any other
remedies available to Holder theretmder;so long as no monetary judgment shall be enforcecf,igainst
Maker or any partner, member or principal of Maker, except to the extent of the Property or such
collateral, (iii) release, reduce or impair this Note, the indebtedness evidenced her::by, or the lien of the
Mortgage, (iv) prevent or in any way hinder Holder from exercising any remedy available to Holder
tmder this Note'tlr any of the Loan Documents including, without limitation. the appointment of a
receiver or naming Maker or, ifnecessary in order to ensure the availability of Holder's remedies as set
forth in the Loan Documents, any person. entity, association or joint venture ("Person") owning an
interest in Maker in any action. suit or proceeding in connection with the exercise of any such remedy,
as long as no monetaryjudgment, including a deficiencyjudgment, shall be enforced against any assets
of Maker or any Person owning an interest in Maker, other than the Property or such other collateral, or
(v) release or limit the liability of Maker, any guarantor hereof or any indemnitor under the indemnity
agreement dated as of the date hereof, by PABLO AND ELEANOR ARLENE NANKIN, TRUSTEES
OF THE PABLE AND ELEANOR NANKIN FAMlLY TRUST in favor of Holder (the "I ndemnit):")
or the environmental indemnity dated as of the date hereof, by Maker and PABLO AND ELEANOR
ARLENE NANKIN, TRUSTEES OF THE PABLE AND ELEANOR NANKIN FAMILY TRUST in
favor of Holder (the "Environmental Indemnitv") or affect in any 'Y.'aY the validity or enforceability of
the Indemnity Agreement, the Environmental Indemnity or any guaranty given in connection with this
Note or any of the other Loan Documents.
C. Notwithstanding any provision hereof or in any Loar. Document to the contrary, Maker
shall be personally liable heretmder for any and all liabilities, obligations, losses, damages, costs.
expenses (including reasonable attorneys' fees, costs and disbursements), causes of action. suits, claims,
de"ancti and judgments paid, imposed upon Holder or to which the Holder may be subject, or any
reduction in amotmts recovered by Holder directly or indirectly (including, without limitation. any
diminution in value of the Property or Holder's security interest therein) as a result of Maker,-or any
Affiliate, indemnitor, guarantor, agent or employee of Maker.
(1) misapplying or misappropriating any proceeds of insurance policies or
condemnation awards in connection with the Property;
(2) misapplying (under any lease, the Mortgage or any other agreement) or
misappropriating any Rents, security deposits or other refundable deposits paid
to or held by or on behalf of Holder;
(3) receiving any Rent or other payments under Leases more than one month in
advance;
MERRllll YNCH CREDIT CORPORATIONrwil,hirc ~ l c d i c a 1 Building
Promissory Note:
File No.;20067/&OOO&
lOSOI:7117U
-9-
(4) committing waste, arson or damage to the Property as a result of intentional
misconduct or gross negligence;
(5) removing any Equipment or other Property in violation of the Mortgage or other
Loan Documents;
(6) failing to fully corii'Ply \>..ith Article xrn of the Mortgage and any other pro\ision
of the Loan Documer.ts relating to hazardous or toxic substances or compliance
with environmental laws and regulations;
. t7) committing fraud or making any material misreprese.ntation in connection \\ith
the Loan or the ownership, use, operation or management of the Property;
(8) transferring or encumbering the Property in violation of Article VITI of the
Mortgage; or
(9) failing to maintain the existence of Maker as a Special-Purpose Entity or
otherwise failing to comply with Article XII of the Mortgage.
D. Nothing contained herein shall be deemed to be a waiver of any right of Holder under
Sections 506(a), 506(b), llll(b) or any other provision of the Bankruptcy Refonn Act of 1978, as
amended, or any successor thereto, or similar provisions under applicable state law to file a claim for the
full amount of the indebtedness owing to Holder in accordance with this Note and the other Loan
Documents.
SECTION VI. Rr:::N1EDIES
A. So long as an Event of Default exists, at th option ofHolder, the following amounts shall
becttme immediately due and payable: (1) the entire Principal Amount, all accrued interest thereon and
all other fees, charges and sums due and payable hereunder, (2) all costs and expenses in connection with
the enforcement ofHolder's rights hereunder, and (3) a prepayment charge (the "Prepayment Cltare')
equal to the greater of (a) 1% of the Principal Amount and (b) the positive difference, if any, between
(x) the present value on the date of such acceleration of all future installments which Maker would
otherwise be required to pay under this Note during the original tenn hereof absent such acceleration.
including the unpaid Principal Amount which might otherwise be due upon the scheduled Maturity Date
absent such acceleration, with such present value being determined by the use of a discount rate equal
to the yield to maturity (adjusted to a "Mortgage Equivalent Basis" pl.lmlant to the standards and practices
of the Securities Industry Association), on the date of such acceleration, of the United States Treasury
Security having the tenn to maturity closest to what otherwise would have been the remaining term
hereof absent such acceleration, and (y) the Principal Amount on the date of such acceleration. Failure
of Holcler to require any of these payments shall not constitute a waiver of the right to require the same
MERRILL LYNCH CREDIT CORPORATIONIWilshirc Merical Building
Promissory Note
File No.:20067/&OOO!
LOSOI:71nU
-10-
in the event of any subsequent default or to exercise any other remedy available to Holder hereunder.
under any Qther Loan Document or at law or in equity.
B. No remedy herein conferred upon or reserved to Holder is intended to be exclusive of any
other remedy or remedies available to Holder under this Note, any other Loan Document or at law or in
equity, and each and every such remedy be cumulative and exercisable in any order and as many
times as Holder deems expedient.
.C. Maker agrees to pay all costs and expenses ofcollection incurred by Holder hereunder
including, without limitation., reasonable attorneys' fees and disbursements, and all costs and expenses
incurred in connection withthe pursuit by Holder of any of its rights or remedies hereunder, under the
Mortgage or any.of the other Loan Documents, whether involving the preservation of Property, protection
ofthe lien of the Mortgage, suit on this Note, participation in any foreclosure proceeding, any
workout or settlement or any bankruptcy, reorganization., receivership, or other proceedings affecting
creditors' rights and involving a claim under this Note or any other Loan Document. All such costs and
expenses-shall be payable on demand with interest thereon to be calculated at the Default Rate and
shall be secured by the Mortgage and other Loan Documents.
SECTION VII. SAVlNGS CLAUSE
This Note is subject to the express condition that at no time shall Maker be obligated or
required to pay interest on the Principal Amount at a rate which could subject Holder. to either civil
or criminal liability as a result of being in excess of the maximum interest rate which Maker is
permitted by applicable law to contract or agree to pay. If, by the terms ofthis Note, Maker is at any
time required or obligated to pay interest on the Principal Amount at a rate in excess of such
maximum rate, the rate of interest shall be deemed to be immediately reduced to such maximum rate
and the interest payable shall be computed at such maximum rate and all previous payments in
excess of such maximum rate shall be deemed to have been payments in reduction of the principal
and not on account of the interest due hereunder. All sums paid or agreed to be paid to Holder for
tho,use,'Jorbearance, or detention ofthe Principal Amount shall, to the extent permitted by applicable
law, be amortized, prorated, allocated and spread throughout the full stated term of this Note until
payment in full so that the rate or amount of interest on account of the Principal Amount dOes not
exceed the applicable maximum lawful rate of interest from time to time in effect. This provision
shall supersede any inconsistent provision of this Note or any other Loan Document.
SECTION VIII. MISCELLANEOUS
A. Note Secured. TIlls Note is secured by the Mortgage and the other Loan Documents.
B. Severability. Whenever possible, each provision of this Note shall be interpreted in
such a manner as to be effective and valid under applicable law, but if any provision hereof shall be
prohibited by or invalid or unenforceable under the applicable law of any jurisdiction with respect
to any Person or circumstance, such provision shall be ineffective to the extent of such prohibition,
MERRJLL LYNCH C.REDIT CORPORAnONl\l{il<hi", Medical Building
f'romissory Note
File No.:1OO67/80008
LOSOI:7127U
-11-
invalidity or unenforceability, without invalidating the remaining provisions hereof or affecting the
validity or enforceability ofsuch provisions in any other jurisdiction or with respect to other Persons
or circumstances. To the extent permitted by applicable law. the parties hereto hereby waive any
provision of law that renders any provision hereof prohibited, invalid or unenforceable in any
respect.
C. Waivers. Maker hereby waives valuation and appraisement, presentment, protest and
demand, notice of protest, demand anci dishonor and nonpayment, notice on intent to acce lmte the
maturity hereof and notice of acceleration of this Note. To the extent permitted by law, Maker
hereby expressly waives the right to receive any notice from Holder with respect to any matter for
which the Loan Documenl$ do not expressly provide for the giving of notice by Holder to Maker.
D. '-Agent for Service. Maker does hereby designate and appoint Arthur M. Katz, having
an address of 10960 Wilshire Boulevard, Tenth Floor. Los Angeles, California 90024. as its
authorized agent to accept and acknowledge on its behalf service of any and all process which may
be served)n any suit, action or proceeding in any federal or.state court in California, and agrees that
service of process upon said agent at said address and written notice,of said service of Maker mailed
or delivered to Maker in the manner provided in the Mortgage shall be deemed in every respect
effective service of process upon Maker in any such suit, action or proceeding in the State of
California. Maker shall give prompt notice to, Holder of any changed address of its authorized agent
hereunder. may at any timt? and from time to time designate a substitute authorized agent with an
office in California (which office shall be designated as the address for service of process). and shall
promptly designate such a substitute if its authorized agent ceases to have an office in' California or
is dissolved without leaving a successor. No notice of change ofdesjgnated agent by Maker or of
such agent's address shall be or be deemed effective until thirty (30) days following Holder's receipt
thereof.
E. . Participation. Holder shall have the right, without notice to or consent of (i)
to sell, assign or otherwise transfer this Note and all of the other Loan Documents in connection with
the Loan, or any of its interest therein and (ii) to transfer, assign or sell participations and
in this Note; provided, however. thai no transfer or participation shall increase the
obligations of Maker or otherwise adversely affect the rights and obligations of Maker and.Holder
hereunder or under any other Loan Documents.
F. Use of Proceeds. Maker certifies that all of the Loan proceeds \\ill be used
exclusively for business or commercial purposes and not for any personal, family. household,
agricultural or consumer pUrpose.
G. Liability. If Maker consists of more than one Person, the obligations and liabilities
of each such Person hereunder shall be joint and several.
H. No Oral Modifications. This Note cannot be modified orally, but only by an
agreement in writing signed by the party against whom enforcement of any modification is sought.
. MERRllllYNCH CREDIT CORPOR.... nONlWilshin: Modioal Building
Promissory Note
File 1'0.:2006718000&
LOSOI:71:!11.J
-12-
L.. WAIVER OF JURy TRIAL. MAKER AND HOLDER, TO THE FULL EXTENT
PER.MITTED BY LAW, EACH HEREBY KNOWT1'iGLY, fNTENTIONALLY AND
VOLUNTARlLY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, WAIVES,
RELfNQUISHES AND FOREVER FORGOES HEREBY THE RIGHT TO A TRIAL BY JURY
IN ANY ACTION OR PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY TORT
ACTION, BROUGHT BY EITHER OF THEM AGAINST THE OTHER BASED UPON,
ARISING OUT OF, OR IN ANY V[AY RELATING TO OR fN CONNECTION WITH THIS
NOTE, THE LOAN OR ANY COURSE OF CONDUCT, ACT, OMISSION. COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRlTTEN) OR ACTIONS OF ANY
PERSON (INCLUDING, WITHOUT LIMITATION. SUCH PERSON'S DIRECTORS,
OFFICERS. PARTNERS. MEMBERS. EMPLOYEES. AGENTS OR ATTORNEYS. OR ANY
OTHER PERSONS AFFILIATED WITH SUCH PERSON), fN CONNECTION WITH THE
LOANDRTHIS NOTE, INCLUDING. WITHOUT LIMITATION. fN ANY COUNTERCLAIM
WHICH MAKER MAy'BE PERMITTED TO ASSERT HEREUNDER OR WHICH MAY BE
ASSERTED BY HOLDER OR ITS AGENTS AGAIi'\fST MAKER, WHETHER SOUNDfNG IN
CONTRACT, TORT OR OTHERWISE. THIS WAIVER BY MAKER OF ITS RIGHT TO A
YTRIAL IS A MATERIAL INDUCEMENT FOR HOLDER TO MAKE THE LOAN. #1../
J. No Waiversbv Holder. The failure of Holder to insist upon strict performance ofany
term hereof shall not be deemed a waiver of any of the obligations of Maker or any of the rights or
remedies of Holder hereunder. Holder may waive any Event of DefauIt or performance of Maker
without waiving any other Event of Default or performance of Maker. Holder may remedy any
Event of Default without waiving the Event of Default remedied. No delay in performance of any
right or remedy of Holder shall be construed as a waiver of such right or remedy. Acceptance of any
payment after the occurrence ofan Event of Default shall not be deemed to waive or cure such Event
of Default. Acceptance by Holder of any partial payment or partial performance by Maker shall not
be deemed a waiver of full payment or full performance. No extension of time for the payment of
any amounts due under this Note made by agreement with any Person now or hereafter liable for the
of this Note shall to release. modify, change or affec,t tJ:e
!labIlity of Maker hereunder, either In whole or In part, unless Holder agrees otherwIse In wntmg.
K. Qffsets. Counterclaims and Defenses. Maker hereby knowingly waives the right to
assert a counterclaim, other than a compulsory counterclaim, in any action or proceeding brought
against it by Holder. Any assignee of this Note or any successor of Holder shall take this Note free
and clear of all offsets, counterclaims or defenses which are unrelated to this Note which Maker may
otherwise have against any assignor of this Note. No such unrelated counterclaim or defense shall
be interposed or asserted by Maker in any action or proceeding brought by any such assignee upon
t.his Note. Any such right to interpose or assert any such unrelated offset, cOWlterclaim or defense
in any such action or proceeding is hereby expressly waived by Maker.
L. Time of the Essence. Time shall be of the essence in the performance of all
obligations of Maker hereunder.
MERRILL LYNCH CREDIT CORPORATl0NIWilshire Medical Building
Promissory Note
File No.:20067/&OOO8
LOSOl:7127U
-13-
M. Successors. All references herein to Maker and to Holder shall be deemed to include
their respective heirs, executors, legal representatives, successors and assigns. Nothing in this Note.
whether express or implied, shall be constlued to give any Person (other than Holder) any legal or
equitable right, remedy or claim under or in respect of this Note or any covenants or provisions
contained herein. .
-:
N. Governing Law. This Note shall be governed by, and construed in accordance with.
the laws of the State where the Property is located.
O. . Due on Sale or Encumbrance.
(a) Maker understands that in making the Loan, Holder is relying to
a material extent upon the business expertise and/or net worth of Maker and, if Maker
is"also an entity, its partners, members, officers 01'" principals and upon the continuin:;
interest which Maker or its partners, members, officers or principals will have in the
Property and in Maker, respectively, and that a violation of Article VIII of the
Mortgage may significantly and materially alter or reduce Holder's security for this
Note. Accordingly, in the event that a violation of Article VIII of the Mortgage occurs,
then the same shall be deemed to increase the risk of Holder and Holder may then, or
at any time thereafter, declare the entire indebtedness evidenced herebyimmediately
due and payable.
(b) The foregoing option may be exercised at any time after the
occurrence of any such violation of Article VIII of the Mortgage and the acceptance of
one or more payments from any Person therEafter shall not constitute a waiver of
Holder's option. Holder's approval of any Transfer (as defined in the Mortgage) or
(ailure to exercise said option with respect thereto shall not be construed as a waiver
\ of the provisions hereof with regard to any subsequent Transfer. .
[Signature Page Follows)
MERRILL LYNCH CREDIT CORPORATIONlWilshire Medical Building
Promissory NOle
File No.:200611!OOOB
-14-
IN \VITNESS WHEREOF, this Note has been duly executed by Maker, the day and ye:u first
above wrinen.
MAKER:
AMERICANlYfEDfCALINVESTMENTFlNANClAL
GROUP. L.P., a California limited partnershiiL-
By: 9033 WILSHIRE COMPANY, a
California corporation
- .
\
'MERRJLL LYNCH CREDIT CORPORAnONf\liilshire Medical Building
Promissory Note
file 1'10.:20067/&000&
LOSOI:7127U
APPENDIX
TAB
"7"
(
RECORDING REQUESTED BY;
/. 1.( 4- 'J I ; f .!., {
v. I ...
WHEN RECORDED MArL TO:
Andrews & Kl1Ith L.t.P.
60 I S. Figueroa Street, Suite 4200
Los Angeles, California 90017
Attention: Gregg J. Loubier
Loan No. 998505003
Property Name: Wilshire Medical Building
Assessors Parcel No. .....:- ._,'o.!!....'_"(-'.i'-'.., _
(
99
55.
12171558
July t, :999
L()SO(:)lJ 13.1
On Z , before me, ;!rj/,(-f6-iZOJ the undersigned, a
notary public for th,: state, perso h /) da Ii "- - . I peR'Qllally KnO'M\
to::::lilc (or proved to me on the basis of satisfactory evidence) 10 be the whose
subscribed 10 L1C:: within inslrnment and acknowledged to me that@'s.be/they executed the same in
@y1ier/thcir authorized capacity(ie.s), and that signature(t) on the instrument the
or the enlity upon behaJf of which the acted, executed the instrument.
(SEAL)
/,
I
"'------------------------_.---_._--------
I
I,
';
(
(-
99
1261558
THE LAND SITUATED IN TIIE COUNTY OF LOS ANGELES. STATE OF CALIFORNIA. AND
DESCRIBED AS FOLLOWS:
LOTS 345 AND 3 ~ 6 OF TRACT NO 7005, INTIffi CITY OF BEVERLY HiLLS, COUNTY OF LOS
ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 72 PAGE 28 OF MAPS,
IN THE OrF1CE OF THE COUNTY RECORDER OF SAID COUNTY.
July t, 1999
LOS01:7fJIl.l
1 -_"_"-_._.'_:' __ . _-_'_..- 1-_"" _
(
99 1261558
RECOROEOIFILEO IN OfFICIAL
RECORDER'S OFFICE
LOS ANGELES COUNTt
CALIFORNIA
4:21 PM JUL 09 J.999
..!.J
SPACE ABOVE THIS LINE RESERVED FOR RECORDER S USE
TITlE(S)
FEE: NfA NlA 0
CODE
REC. 1'10. NO r<::OR
FEE PAGES TIT!..ES
Assessor s Identification NumbGr (AIN)
To Be Completed By Examiner Or Tille Company In Black Ink
D.A. SURVEY NOl1F. INVOL NON
FEE MaN. LIEN CONF.
EXAMINER S INT.
Number of Parcels Shown
II
---------..--...lI.tQ-.-.e:........ ..IaII.
I
,
APPENDIX
TAB
"8"
-e
I
E136-001
Merrill Lynch Mortgage Investors 1999-C1
Execution Copy
MERRILL LYNCH MORTGAGE INVESTORS, INC.
Depositor
and
ORIXREAL ESTATE CAPITAL MARKETS, LLC
Master Servicer
and
ORIX REAL ESTATE CAPITAL MARKETS, LLC
. - Special Servicer -
and
NORWEST BANK MINNESOTA, NATIONAL ASSOCLATION
Trustee
POOLING AND SERVICING AGREEMENT
Dated as of November I, 1999
Mortgage Pass-Through Certificates
Series 1999-Cl
Tel WILSHIRE
Exhibit 136
-
ORIXECF/TCI0153
1111111111111111111111111111111111
Sections 3.20(d) and 11.01 hereof and any consent, approval or waiver required or pennitted to
be made by the Majority Subordinate Certificateholder), any Certificate registered in the name of
the Depositor, the Mortgage Loan Seller, the Master Servicer, the Special Servicer, or the
Trustee, as the case may be, or any Certificate registered in the name of any of its Affiliates, shall
be deemed not to be outstanding, and the Voting Rights to which it is entitled shaH not be taken
into account in determining whether the requisite percentage of Voting Rights necessary to effect
any such consent, approval or waiver that relates to it has been obtained; provided, however, that,
except with respect to increasing the Special Servicer's compensation or reducing the scope of its
responsibilities hereunder, such restrictions will not apply to the exercise by the Special Servicer
of any rights it may have as a member of the Controlling Class or to the exercise by the
Controlling Class Representative of its rights even if such Certificateholder is an Affiliate of the
Master Servicer or Special Servicer. Notwithstanding anything herein to the contrary, so long as
there is no Event of Default with respect to the Master Servicer or the Special Servicer, the
Master Servicer, Special Servicer and any Affiliates thereof shall be entitled to exercise such
Voting Rights with respect to any issue which could reasonably be believed to adversely affect
such party's compensation or increase its obligations or liabilities hereunder. The Certificate
Registrdf shall be entitled to request and rely upon a certificate of the Depositor, the Master
Servicer or the Special Servicer in determining whether a Certificate is registered in the name of
an Affiliate of such Person. All references herein to "Holders" or "Certificateholders" shall
reflect the rights of Certificate Owners as they may indirec!ly exercise such rights through the
Depository and the Depository Participants, except as otherwise specified herein; provided,
however, that the parties hereto shall be required to recognize as a "Holder" or
"Certificateholder" only the Person in whose name a Certificate is registered in the Certificate
Register.
"Class": Collectively, all of the Certificates bearing the same alphabetical and, if
applicable, numerical class designation.
"Class A-l Certificate": Anyone of the Certificates with a "Cla.<;s A-l"
designation on the face thereof, substantially in the fonn of Exhibit A-l attached hereto, and
evidencing a portion of a "regular interest" in REMIC III for purposes of the REMIC Provisions.
"Class A-2 Certificate": Anyone of the Certificates with a "Class A-2"
designation on the face thereof, substantially in the fonn of Exhibit A-2 attached hereto, and
evidt,'ncing a portion of a "regular interest" in REMIC III for purposes of the REMIC Provisions.
"Class B Certificate": Anyone of the Certificates with a "Class B" designation on
the face thereof, substantially in the fonn of Exhibit A-4 attached hereto, and evidencing a
portion of a "regular interest" in REMIC III for purposes ofthe REMIC Provisions.
"Class C Certificate": Anyone of the Certificates with a "Class C" designation
on the face thereof, substantially in the fonn of Exhibit A-5 attached hereto, and evidencing a
portion of a "regular interest" in REMIC III for purposes of the REMIC Provisions.
I
Merrill Lynch Mongage Investors 1999-eI -9-
L..--- _
ORIX-ECF/TCI0176
E136-001
1111111111111111111111111111111111
REO Acquisition had occurred, and to render such incidental services with respect to such
Specially Serviccd Mortgage Loans and REO Properties as are specifically provided for herein;
p!Q.vided, firrther. however, that the Master Servicer shall not be liable for failure to comply with
~ ; u c h duties insofar as such failure results from a failure of the Special Servicer to provide
sufficient information to the Master Servicer to comply with such duties. Each Mortgage Loan
that becomes a Specially Serviced Mortgage Loan shall continue as such until satisfaction of the
conditions specified in Section 3.21(a). Without limiting the foregoing, subject to Section 3.21,
the Master Servicer shall be obligated to service and administer all Mortgage Loans which are
not Specially Serviced Mortgage Loans. The Special Servicer shall make the inspections, use its
reasonable best efforts consistent with the Servicing Standard to conect the statements and shall
prepare the reports in respect of the related Mortgaged Properties with respect to Specially
Serviced Mortgage Loans in accordance with Sections 3.12 and 3.21(c).
(b) Subject only to the Servicing Standard and the tenns of this Agreement
and of the respective Mortgage Loans the Master Servicer and the Special Servicer each shall
have full power and authority, acting alone, to do or cause to be done any and all things in
connection with such servicing and administration which it may deem necessary or desirable.
Without limiting the generality of the foregoing. with respect to each Mortgage Loan it is
obligated to service under this Agreement, each of the Master Servicer and the Special Servicef,
in its own name on behalf of and as attorney-in-fact of the Trustee on behalf of the
Certificateholders, is hereby authorized and empl)wered by the Trustee and obligated to execute
and deliver. on behalf of the Certificateholders and the Trustee or any of them, any and all
financing statements, continuation statements and other documents or instruments necessary to
maintain the lien created by the related Mortgage or other security document in the related
Mortgage File on the related Mortgaged Property and related collateral; subject to Section 3.20,
any and all modifications, waivers, amendments or consents to or with respect to any documents
contained in the related Mortgage File; and any and all instruments of satisfaction or
cancellation, or of partial or full release or discharge, and all other comparable instruments.
Subject to Section 3.10, the Trustee shall execute any powers of attorney and other documents
delivered to it by the Master Servicer or Special Servicer and necessary or appropriate to enable
the Master Servicer or the Special Servicer, as the case may be, to earry out its servicing and
administrative duties hereunder; provided, however, that the Trustee shaH not be held Hable for
and shall be indemnified on a current basis by the Master Servicer or the Special Servicer as
applicable for any negligence with respect to, or misuse of, any such power of attorney by the
Master Serviccr or the Special Servicer. Notwithstanding anything contained herein to the
contrary, neither the Ma<;ter Servicer nor the Special Servicer shaH without the Trustee's
written consent: (i) except as relating to a Mortgage Loan which the Master Servicer or the
Special Servicer, as applicable. is servicing pursuant to their respective duties herein (in which
case such servicer shall give notice to the Trustee thereof), initiate any action, suit or
proceeding solely under the Trustee's name without indicating the Master Servicer's or Special
Servicer's, as applicable. representative capacity, or (ii) take any action with the intent to, or
which actually does cause, the Trustee to be registered to do business in any state.
(c) The relationship of the Master ServiceI' to the Trustee under this
Agreement is intended by the parties to be that of an independent contractor and not that of a
joint venturer, partner or agent.
I
Merrill Lyoch Mongage loveSlors 1999-Cl -54-
ORIX-ECF/TCI0221
SECTION 3.10. Trustee to Cooperate; Release of Mortgage Files.
:1
(a) Upon pa)'lllCllt in full of any Mortgage Loan, or $e by .
MasterSemcer or the Special Servicer, as the case may be, of a notification that payment in full
shall be escrowed in a manner customary for such purposes, the Master Servict.'T or Special
Servicer, as the case may be, will immediately notify the Trustee and request delivCty of the
related Mortgage File. Any such notice and request shall be in the fann of a Request for Release
signed by a Servicing Officer and shall include a statement to the effect that all amounts received
or to be received in connection with such payment which are required to be deposited in the
Certificate Account pursuant to Section 3.04(a) or remitted to the Master Servicer to enable such
deposit, have been or will be so deposited. Within seven Business Days (or within such shortcr
period as release can reasonably be accomplished if the Master Servicer notifies the Trustee of an
exigency) of receipt of such notice and request, the Trustee shall release, ar cause any related
Custodian to release, the related Mortgage File to the Master Servicer or Special Servicer, as the
case may be. No ex.penses incurred in connection with any instrument of satisfaction or deed of
reconveyance shall be chargeable to the Certificate Account but shall be payable by the related
borrower.
(b) From time to time as is appropriate for servicing or foreclosure of any
Mortgage Loan, the Master Servicer or the Special Servicer shall deliver to the Trustee a Request
for Release signed by a Servicing Officer. Upon receipt of the foregoing, the Trustee shall
deliver or cause the related Cu..c;todian to deliver, the Mortgage File or any document therein to
the Master Servicer or the Special Servicer (or a designee), as the case may be.
(c) Within five Business Days (or within such shorter period as delivery can
reasonably be accomplished if the Special Servicer notifies the Trustee of an exigency) of receipt
thereof, the Trustee shall ex.ecute and deliver to the Special Servicer any court pleadings, requests
for trustee's sale or other documents delivered to it by the Special Servicer and necessary to the
foreclosure or trustee's sale in respect of a Mortgaged Property or to any legal action brought to
obtain judgment against any Mortgagor on the Mortgage Note or Mortgage or to obtain a
deficiency judgment, or to enforce any other remedies or rights provided by the Mortgage Note
or Mortgage or otherwise available at law or in equity. The Special Servicer shall be responsible
for the preparation of all such documents and pleadings. When submitted to the Trustee for
signature, such documents or pleadings shall be accompanied by a certificate of a Servicing
Officer requesting that such pleadings or documents be executed by the Trustcc and certifying as
to the reason such documents or pleadings are required and that the execution and delivery
thereofby the Trustee will not invalidate or otherwise affect the lien of the Mortgage, except for
the termination of such a lien upon completion of the foreclosure or trustee's sale.
SECTION 3.11. Servicing Compensation.
(a) As compensation for its activities hereunder, the Master SL'TVicer shaII be
entitled to receive the Master Servicing Fee and, for so long as ORIX is the Master Servicer, the
Retained Fee, with respect to each Mortgage Loan and REO Loan (other than the Mortgage
Loans designated ML-] 24, ML-125 and ML-126. As to each Mortgage Loan and REO Loan, the
Master Servicing Fee and Retained Fcc shall accrue from time to time at the Master Servicing
_ Merrill Lynch Mortgage Investors 1999Cl -76-
1 _
ORIX-ECF/TCI0243
APPENDIX
TAB
"9"
CWCAPITAL ASSET MANAGEMENT v. CHICAGO PROPERTIES 497
CHe as 610 F.3d 497 (7th Cir. lO!O)
CWCAPITAL ASSET MANAGEMENT,
LLC, Plaintiff-Appellant,
v.
CHICAGO PROPERTIES, LLC, et
aI., Defendants-Appellees.
No. 09-3506.
United States Court of Appeals,
Seventh Circuit.
Argued May 24, 2010.
Decided June 29, 2010.
Background: Mortgage serviceI' sued
mortgagor and landlord, its owners who
guaranteed loan for commercial mortgage
placed in securitization trust, and former
tenant, claiming that serviceI' was contrac-
tually entitled to full $471,000 in rent owed
for time remaining on lease after tenant
abandoned premises, including $Hil,OOO
that tenant paid mortgagor in settlement
of underlying suit for unpaid rent. Follow-
ing bench trial, the United States District
Court for the Northern District of Illinois,
James B. Zagel, J., 2009 WL 2972478,
dismissed and awarded tenant attorney
fees and costs. ServiceI' appealed.
Holdings: The Court of Appeals, Posner,
Circuit Judge, held that:
(1) serviceI' had standing to bring suit;
(2) serviceI' was real party in interest enti-
tled to bring suit in own name;
(:3) even if serviceI' was not real party in
interest, trustee ratified suit;
(4) servicer could not recover under subor-
dination, non-disturbance and attorn-
ment agreement (SNDA);
(5) serviceI' could not recover under guar-
anty;
(6) serviceI' could not recover under mort-
gage note; and
(7) tenant was prevailing party entitled to
attorney fees and costs.
Reversed with directions.
1. Guaranty <:2;:::>76
Mortgages <:2;:::>199(2)
Mortgage serviceI' seeking money
judgment for rent owed for time remaining
on lea.'le after tenant abandoned premises
had standing, under Article III, to sue
mortgagor and landlord, its owners who
guaranteed loan for commercial mortgage
placed in securitization trust, and former
tenant, since servicer had personal stake in
outcome of suit based on receipt of per-
centage of proceeds of defaulted loan that
it serviced. U.S.C.A. Const. Art. 3, 2, cl.
1.
2. Federal Civil Procedure <:2;:::>144
Although legal title to commercial
mortgage was held in securitization trust,
mortgage serviceI' was real party in inter-
est authorized, under pooling and servicing
agreement, to file suit in own name against
mortgagor and landlord, its owners who
guaranteed mortgage loan, and former
tenant to obtain money judgment for rent
owed for time remaining on lease after
tenant abandoned premises; agreement ef-
fectively delegated equitable ownership of
claim to serviceI' by providing that serviceI'
had "full power and authority, acting
alone, to do or cause to be done any and all
things in conneetion \vith such servicing,"
requiring trustee to confer on serviceI'
any authority needed to perform servicing
duties, including filing suit, and by autho-
rizing serviceI' to sue in own name if suit
related to loan it was servicing. Fed.Rules
Civ.Proc.Rule 17(a)(ij), 28 lLS.C.A.
:3. Federal Civil Procedure <:2;:::>V14
Even if mortgage serviceI' was not
real party in interest authorized, under
pooling and servicing agreement, to file
498
610 FIWlmAL REPORTER, :M SERIES
suit in own name against mortgagor and
landlord, its owners who guaranteed loan
for commercial mortgage placed in securi-
tization trust, and former tenant to obtain
money judgment for rent owed for time
remaining on lease after tenant abandoned
premises, trustee as real party in interest
timely ratified servicer's suit on trustee's
behalf, even though trustee submitted rati-
fication affidavit only three days before
trial, since affidavit was filed in response
to defendants' motion for judgment on
pleadings arguing that serviceI' lacked
standing to bring suit. Fed.Rules Civ.
Proc.Rule 17(a)(3), 28 IJ.S.C.A.
4. Guaranty <>36(8)
Mortgages <>199(2)
Under Illinois law, mortgage serviceI'
suing mortgagor and landlord, its owners
who guaranteed loan for commercial mort-
gage placed in securitization trust, and
former tenant of premises could not recov-
er rent owed for time remaining on lease
after tenant abandoned premises, under
subordination, non-disturbance and attorn-
ment agreement (SNDA), subordinating
lease to mortgage, requiring tenant to con-
tinue tenancy if there was new landlord as
result of default and foreclosure, assuring
tenant that lease would continue in event
of foreclosure, and requiring tenant to
comply \vith lender's instructions to deliver
rent payments to lender, since landlord
continued to make monthly mortgage pay-
ments in full, and instructions by serviceI',
as lender's delegate, to deliver rent pay-
ments were sent after lease was terminat-
ed.
5. Guaranty <>:16(8)
Under Illinois mortgage serviceI'
seeking money judgment from mortgagor
and landlord, its owners who guaranteed
loan for commercial mortgage placed in
securitization trust, and former tenant for
$471,000 rent owed for time remaining on
lease after tenant abandoned premises, in-
cluding $161,000 that tenant paid landlord
in settlement of underlying suit for unpaid
rent, could not recover under guaranty
making owners liable to lender for any
losses arising from gross negligence or
willful misconduct relating to mortgage
loan and/or property and for losses arising
from misapplication or conversion of rent
paid more than one month in advance,
since money paid in settlement was not
payment of rent, but rather, was payment
in settlement of lawsuit seeking rent for
future period.
6. Guaranty <>36(6)
Mortgages <>199(2)
Under Illinois law, mortgage serviceI'
seeking money judgment from mortgagor
and landlord, its owners who guaranteed
nonrecourse loan for commercial mortgage
placed in securitization trust, and former
tenant for $471,000 rent owed for time
remaining on lease after tenant abandoned
premises, including $161,000 that tenant
paid landlord in settlement of underlying
suit for unpaid rent, could not recover
under mortgage note, prohibiting mortga-
gor from canceling lease without mortgag-
ee's written consent, \vith exception of
cancellations made when mortgagor was
acting in ordinary course of business and
in commercially reasonable manner, since
landlord's settlement with tenant was com-
mercially reasonable due to tenant's finan-
cial difficulties.
7. Costs <>194.3:1
Under Illinois law, former tenant of
commercial premises was "prevailing par-
ty" in mortgage servicer's suit seeking
money judgment from mortgagor and
landlord, its owners who guaranteed mort-
gage loan, and tenant for rent payments
owed for time remaining on lease after
tenant abandoned premises, as required
for award of attorney fees to tenant under
CWCAPITAL ASSET MANAGEMENT v. CHICAGO PROPERTIES 499
Cite as 610 F.3d 497 (7th Cir. 2010)
attorney fees provision of subordination,
non-disturbance and attornment agree-
ment (SNDA), even though tenant lost on
counterclaim charging serviceI' with violat-
ing SNDA provision prohibiting tenant
from being joined in any action by landlord
in performing terms, covenants, conditions
and agreements set forth in mOltgage,
since tenant's success on counterclaim
could only have resulted in payment of
attorney fees and costs that was unimpor-
tant part of case.
See publication Words and Phras-
es for other judicial constructions
and definitions.
Gregory A. Cross (argued), Venable
LLP, Baltimore, MD, for Plaintiff-Appel-
lant.
Timothy P. Donohue, Barrington, IL,
Howard L. Teplinsky (argued), Beerman
Swerdlove LLP, Chicago, IL, for Defen-
dant.s-Appellees.
Joe R. McCray, Portland, OR, pro se.
Before EASTERBROOK, Judge,
and POSNER and EVANS, Cireuit
Judges.
POSNER, Circuit .Judge.
This appeal in a dispute over a commer-
cial mortgage requires us to deeide wheth-
er the plaintiff is entitled to bring this suit
in its own name, and also presents issues
of eontract interpretation under Illinois
law. The plaintiff (and appellant), CWCa-
pital, is a mortgage serviceI'; the defen-
dants (and appellees) are Chicago Proper-
ties, which is a commercial landlord and
the mortgagor (that is, the borrower); its
owners, who are guarantors of the mort-
gage loan; and its former tenant, the
Blockbuster video-rental company. The
suit claims that the serviceI' (standing in
the lender's shoes) is contractually entitled
to the money that Blockbuster paid Chica-
go Properties in settlement of a suit by the
latter for unpaid rent. The district judge
conducted a bench trial and coneluded that
the claim was groundless-but then, seem-
ingly as an afterthought, ruled that the
serviceI' was not a real party in interest;
as only a real party in interest can sue in
its own name, the judge dismissed the suit.
Fed.R.Civ.P. 17(a).
We need to explain the servicer's role in
administering a mortgage-backed seeuri-
ty-a kind of giant bond (made famous, or
rather infamous, by the financial collapse
of September 2008) that is seemed by a
large number of mOltgages, one of which
is the mortgage on Chicago Properties'
building. The income from the mortgages
is the income of the bond. But rather
than selling the bond (which might be val-
ued at $1 billion or more-in the present
case, the bond when issued was valued at
billion), its creator sells "tranches"
(sliees) of the bond having different rights
and eaITying different interest rates. In
effect he breaks up the giant debt security
into a number of separate, smaller bonds.
For example (to simplify) he might create
a senior tranche and entitle the buyer of it
to the first 80 percent of any of the income
generated by the mortgages. The buyer
of this tranche would be safe as long as the
mortgages actually yielded at least 80 per-
eent of the principal and interest owed by
the borrowers, and therefore this buyer
would be promised only a modest interest
rate by the issuer of the mortgage-backed
seeurity. The buyer of the junior tranche
would bear much more risk and so would
be compensated by being promised a high-
er interest rate. The plunge in housing
prices in 2007 and 2008 was so great that
even buyers of the senior tranches of
mortgage-backed seeurities lost money be-
cause there were so many de-
faults. But that sad story is not germane
to this ease.
500
6tO FIWERAL REPORTER, ad SERIES
The mortgages that secure the mort-
gage-backed security are placed in a secu-
ritization trust, and the trustee, or in this
case the trustee's delegate (the plaintiff), is
responsible for servicing them. Every
mortgage needs someone to collect the
borrower's monthly payments of principal
and interest; make sure the property is
properly insured; attend to any default,
either by suing the borrower and if neces-
sary foreclosing the mortgage or by modi-
fying the mortgage to make its terms less
onerous to the borrower; and discharge
the mortgage when it is paid off (and if it
is prepaid, collect the prepayment penalty
if the mortgage provides for one). Ordi-
narily the original lender would be the
serviceI', or would hire one. But when
hundreds of mortgages are packaged into
a debt security it is infeasible for each
security holder to be or to hire its own
serviceI'. The reason is the structure of
the security and specifically the conflicts of
interest latent in the tranching of them.
Hemember that the buyer of the se.nior
tranche in our example (for simplicity we
assume only two tranches, though usually
there are more) is entitled to receive in-
come from all the mortgages ahead of the
buyer of the junior tranche. Faced 'With a
choice between modifying one of the mort-
gages and foreclosing, the serviceI' might
make a different decision as a representa-
tive of the senior tranche holder from the
decision he'd make as a representative of
the junior one. Suppose a borrower gets
into financial trouble and asks the serviceI'
to modify the mortgage by reducing the
monthly payment of principal and interest
by 20 percent. The serviceI' may prefer
doing this to foreclosing the mortgage, be-
cause foreclosure is and the market
value of the property may be depressed.
The holder of the senior tranche wouldn't
object to the the diminished
income from the mortgage would still fully
cover his 80 percent interest in the reve-
nue from mortgages in the mortgage-
backed security. But the holder of the
junior tranche might object because he
might be better off if the serviceI' gam-
bled on obtaining more money by foreclos-
ing or by holding out for a less generous
modification. The serviceI' must balance
impartially the interests of the different
tranches as determined by their contrac-
tual entitlements.
CWCapital, the serviceI' III this case,
confused matters stating in its com-
plaint that the trust which holds title to
the mortgage on Chicago Properties' build-
ing is the real party in interest, and by
arguing that by disclosing that fact it has
dispelled any objection to pursuing the suit
in its own name. What is true is that by
disclosing who the lender is, CWCapital
has enabled the district judge and us to
determine that if the lender were substi-
tuted for CWCapital, or added as an addi-
tional party, there would still be complete
diversity of citizenship. But whether
there is complete diversity is separate
from whether a suit is being maintained by
the real party in interest, or by an inter-
loper. A lawyer for the real party in
interest could not bring suit in his own
name merely because he disclosed the
identity of his client and acknowledged
that the client, and not he, was indeed the
real party in interest.
The trust holds the legal title to the
mortgages. The serviceI' is the trust's col-
lection agent. The delegation to it is com-
prehensive: the serviceI' "shall have
full power and authority, acting alone, to
do or cause to be done any and all things
in connection with such servicing and ad-
ministration which it may deem necessary
or desirable." The serviceI' is much like
an assignee for collection, who must ren-
der to the the money collected
the assignee's suit on his behalf (minus the
assignee's but can sue in his own name
CWCAPITAL ASSET MANAGEMENT v. CHICAGO PROPERTIES 501
Cite as 610 F.3d 497 (7th Cir. 2010)
without violating Rule 17(a). See
Commiunicutious CO. D. APCC
Inc., 554 U.S. 2ml. 128 S.Ct. 2581, 2541,
171 L.Ed.2d 424 (2008) (dictum); Stoi/gers
o. Otto Gerduu Co., 859 F.2d 292, 294 (2d
Cir.l!lGG); Kilbourn v. Western Surety Co.,
187 F'.2d 5G7, 571-72 (lOth Cir.l!l51).
[1] The Supreme Court's holding in
the case was merely that an assign-
ee for collection has standing to sue, within
the meaning of Article III of the Constitu-
tion. 128 S.Ct. at 2542; see also w.I?
HutI' Asset Monoi/elnent CO. D. Deloitte &
Touche LLP, 549 F.:3d 100, 107-10 (2d
Cir.2008). There is no douht about Article
III standing in this case; though the plain-
tiff may not be an assignee, it has a per-
sonal stake in the outcome of the lawsuit
because it receives a percentage of the
proceeds of a defaulted loan that it ser-
vices. But in an aside on real party in
interest, the Supreme Court intimated
agreement \,ith GA Charles A. Wright,
Arthur R. Miller & Mary Kay Kane, Fed-
eral Practice & Procedure 1545 (2d
ed. 1!l!l0), that a real party in interest dif-
fers from a lawyer, or someone else with a
mere power of attorm,y, in having a claim
to the proceeds of the suit even if its claim
derives from legal rather than equitable
title-legal title being the sort held a
trustee. 128 S.Ct. at 2541.
[2] Unfortunately, it is less clear than
it should be whether the Pooling and Ser-
vicing Agreement between the trustee of
the mortgages backing the mortgage-
backed security and the serviceI' made the
latter an assignee or a mere attorney. It
says that the serviceI' "shall have full
power and authority, acting alone, to do or
cause to be done any and all things in
connection with such servicing and admin-
istration which it may deem necessary or
desirable." The trustee shall at the servi-
cer's "written request promptly exe-
cute any limited powers of attorney and
other documents furnished by the [Servi-
cer] that are necessary or appropriate
to enable [the Servicer] to carry out [its]
servicing and administrative duties here-
under." The trustee is thus to
confer on the serviceI' whatever authority
the latter needs to perform his servicing
duties. which include suing. For it is the
serviceI', not the trustee, who is empow-
ered to decide whether to sue. The agree-
ment further states that without the Trus-
tee's written consent, as relates to
a Loan that the ServiceI' is servic-
ing pursuant to its respective duties herein
(in which case such serviceI' shall give
notice to the Trustee of the initiation), [the
ServiceI' shall not] initiate any action, suit
or proceeding solely under the Trustee's
name without indicating the ... Servicer's
. .. representative capacity." The word
we've italicized indicates that the serviceI'
can sue in its own name if the suit relates
to a loan that it's servicing, or in the
trustee's name without indicating that it's
doing so in a representative capacity-
implying that it is not doing so in a repre-
sentative capacity if it is suing in regard to
a servicing-related loan.
It is thus the serviceI', under the agree-
ment, who has the whip hand; he is the
lawyer and the client, and the trustee's
duty, when the serviceI' is carrying out his
delegated duties, is to provide support.
The securitization trust holds merely the
bare legal title; the Pooling and Servicing
Agreement delegates what is effectively
equitable ownership of the claim (albeit for
eventual distribution of proceeds to the
owners of the tranches of the mortgage-
backed security in accordance with their
priorities) to the serviceI'. See Grcer!).
O'Dell, :305 F.:3d 12!l7, 1:302-0:3 (11th Cir.
2002), and cases cited there. For remem-
ber that in what action to take
with regard to a defaulted loan. the servi-
ceI' has to consider the competing interests
502
(>10 FEDERAL REPORTER, ad SERIES
of the owners of different tranches of the
security.
[3] But if, contrary to what we think,
the serviceI' is not the real party in inter-
est in this case, there still is no need to
dismiss the suit. Rule 17(a)(3) provides
that a case should not be dismissed be-
cause it has not been brought in the name
of the real party of interest "until, after an
objection, a reasonable time has been al-
lowed for the real party in interest to
ratify, join, or be substituted into the ac-
tion"; and "after ratification, joinder, or
substitution, the action proceeds as if it
had been originally commenced by the real
party in interest." The trustee: (Bank of
America) submitted an affidavit to the dis-
trict court, which was not contradicted,
ratifying the servicer's suit on the bank's
behalf. The district court rejected the
affidavit as untimely, because earlier the
plaintiff had failed to respond to an inter-
rogatory concerning its authority to sue.
The judge's action was precipitate. The
affidavit was filed in response to the defen-
dants' motion for judgment on the plead-
ings, in which they argued that the plain-
tiff lacked standing to bring suit. So while
the affidavit was submitted only three days
before the trial began, it was nonetheless a
timely response to the defendants' motion.
So we come to the merits.
Blockbuster is the well-known but fast-
fading chain of movie rental stores. Its
business model has been devastated by
direct mail rental services like Netf1ix, by
DVD vending machines, and increasingly
by the direct transmission of movies to
home computers and television sets.
"Blockbuster Shares Fall on Chapter 11
Warning," NY. Mar. 17, 2010,
www.nytimes.com/2010103/18/business/me-
dial18blockbuster.html (visited May 31,
2010); Brooks Barnes, "Studios and Cable
Unite in Support of Video on Demand,"
NY. Times, Mar. 17, 2010, \vww.nytimes.
com/2010103/18/business/mediai 18de-
mand.html (visited May 30, 2010); "Block-
buster's Loss Exceeds Forecast," NY.
Ti,nes, Aug. 13, 2009, p. B4, \vww.nytimes.
com/2009!08/14/business/medial 14block-
buster.html?-r=l (visited May 30, 2010);
Sarah McBride, "Blockbuster to Shutter
More Stores," Wall St. .1., Sept. 16, 2009,
p. B1, http://online.wsj.com/article/
SB125303731573912777.html (visited May
30, 2010). Unable to make a profit at the
premises that it had leased from Chicago
Properties, Blockbuster abandoned the
lease. Chicago Properties sued. The suit
was settled by Blockbuster's agreeing to
pay Chicago Properties $161,000, though it
owed rent of some $471,000 for the time
remaining on the lease. (The plaintiff is
seeking a judgment for the full $471,000,
plus attorneys' fees and costs.) Chicago
Properties tried to find a substitute tenant,
but failed. Nevertheless it continued to
make full, timely payment of the principal
and interest due each month on the mort-
gage.
14] The basis of the plaintiffs claim
against Blockbuster is a "Subordination,
Non-Disturbance and Attornment Agree-
ment" (SNDA) to which Chicago Proper-
ties, Blockbuster, and the trust are parties.
This is a standard agreement that defines
the rights of lender and tenant in the
event that the landlord defaults on his
mortgage and the lender forecloses. See
Scott W. Dibbs, "Looking Down the
Road," Probate & Property. Sept.-Oct.
2008, at 49, 52-54; Arnold B. West &
Sidney A. Keyles, "Does the A in SNDA
Work?" id.. at 54; Robert
D. Feinstein & Sidney A. Keyles, "Foreclo-
sure: Subordination, Non-Disturbance
and Attornment Agreements," i.d., ,July-
Aug.1989, at 38. The subordination provi-
sion subordinates the lease to the mort-
gage; the attornment provision requires
that the temant agree to continue the ten-
CWCAPITAL ASSET MANAGEMENT v. CHICAGO PROPERTIES 503
Cite as 610 F.3d 497 (7th Cir. 2(10)
ancy if as a result of the default and
foreclosure there is a new landlord; and
the nondisturbance provision assures the
tenant that his lease 'Nill continue in the
event of foreclosure. But nowadays, de-
spite the name, an SNDA often and in this
case contains additional provisions for the
protection of the lender or the tenant.
A critical provision in this case is that
the lender isn't bound by any rent that the
tenant may have paid in advance, nor by
any modification of the lease made \vithout
the lender's consent that reduces the term
of the lease or the tenant's monetary obli-
gations under it. The concern is that a
landlord who is or foresees soon being in
default may, perhaps in collusion with the
tenant, collect rent far in advance, or oth-
erwise modify the terms of the lease in a
way that reduces its value to a future
landlord, depriving that landlord (the fore-
closing mortgagee or the purchaser of the
property at the foreclosure sale) of rent
for occupancy of the property by the ten-
ant after the original landlord is no longer
the owner. Joshua Stein, "Needless Dis-
turbances? Do Non-Disturbance Agree-
ments .Justify all the Time and Trouble?"
87 Real Propel1y Probate & Trust J. 701,
7mJ-12 (200:3); see, e.g., Dime Sa/riugs
Bauk q( New York, FSB v. Montague
Street Realty Associates, 90 N.Y.2d 5:39,
664 N.Y.S.2d 246, 686 N.E.2d 1:340, 1841-
42 (1997); Prudence Co. IJ. 1(J() West Sev-
enty-Third St. C7orp., 260 N.Y. 205, 188
N.K :365, :367 (19:32); Kirkeby C'OI]}. v.
Cross Bridge Towers, 91 N..J.Super.
12(5, 219 A.2d :34:3, :344-4G WH5G). What is
strange about the plaintiffs invocation of
this provision is that the landlord, Chicago
Properties, has continued to make its
monthly mortgage payments in full and so
there has been no event that could trigger
Blockbuster's liability under the SNDA.
Another provision requires the tenant on
the lender's instmctions to deliver his rent
payments to the lender. The plaintiff
complains that Blockbuster disregarded its
instmctions to do that. But the instmc-
tions were sent after the lease had been
terminated, so there were no more rent
payments to be made. Nor was the plain-
tiff injured by not receiving rent payments
from Blockbuster, for had it received them
it would have applied them to reduce the
debt that Chicago Properties owes it, and
it has not presented evidence that Block-
buster's failure to direct rent to it has
impaired the value of its collateral. Re-
member that Chicago Properties has con-
tinued to make its monthly mortgage pay-
ments in full.
[5,6] The claimed liability of the land-
lord and its owners is based on other
documents-the mortgage note and the
owners' guaranty of the note. The guar-
anty makes the owners liable for any loss-
es to the lender arising from "gross negli-
gence or willful misconduct ., relating to
the [mortgage] Loan and/or the Property,"
and (under a provision similar to a provi-
sion in the SNDA that we've already dis-
cussed) for losses arising from the misap-
plication or conversion of rent paid more
than a month in advance. Nothing in the
settlement with Blockbuster violates these
provisions. The money paid in the settle-
ment was not a payment of rent. It was a
payment in settlement of a lawsuit that
sought rent for a future period, namely the
remaining term of the lease after Block-
buster abandoned the premises. And al-
though the mortgage agreement prohibits
the borrower from cancelling a lease with-
out the lender's written consent, it makes
an exception for cancellations made when
the borrower "is acting in the ordinary
course of business and in a commercially
reasonable manner." It would be odd if
the defendants could be to liability
for doing something contemplated by the
mortgage abrreement. In light of Block-
504
610 FEDERAL REPORTER, ad simms
buster's financial difficulties, there is no
basis for thinking that Chicago Properties
was being commercially unreasonable in
settling 'With Blockbuster on the terms it
did. And CWCapital argues neither that
Chicago Properties violated a covenant of
the loan agreements by failing to reduce
the rent it charges, in order to secure a
replacement tenant; or that it should have
made greater efforts to find such a tenant;
or (what is critical) that leaving the build-
ing unoccupied has impaired its value as
security for the mortgage loan-a related
point is that there is no evidence of what
the building was worth either before or
after Blockbuster's abandonment of the
lease.
The loan was nonrecourse ('With some
conditions-as we're about to see). A
mortgage loan is nonrecourse when the
mortgage lender can't obtain damages
against the borrower if the loan is default-
ed and the lender can't be made whole by
foreclosing on the lender's This
may have given Chicago Properties an in-
centive to hold out for a high-paying ten-
ant even if that reduced the value of the
collateral (its building). But that isn't ar-
gued either.
The mortgage agreement (which is sepa-
rate from the mortgage note) requires the
borrower to place in escrow "all funds
received by Mortgagor from tenants in
connection 'With the cancellation of any
Leases, including, but not limited to, any
cancellation fees [or] penalties." This lan-
guage covers the proceeds of the $161,000
settlement of Chicago Properties' suit
against Blockbuster for unauthorized
abandonment of the lease; and breach of
this provision is a default under the mort-
gage agreement, requiring immediate pay-
ment of the unpaid balance of the mort-
gage note. But the plaintiff is not seeking
enforcement of the mortgage agreement.
(Perhaps Chicago Properties has complied
",'ith the escrow provision; it seems not to
have, but the record is unclear.) The only
relief it seeks against Chicago Properties
is a money judgment for the entire amount
of rent owed by Blockbuster, plus attor-
neys' fees and costs.
[7J A final issue involves the district
court's award of attorneys' fees to Block-
buster on the basis of a provision in the
SNDA that "should any action or proceed-
ing be commenced to enforce any provi-
sions of this Agreement or in connection
'With its meaning, the prevailing party in
such action shall be awarded, in addition to
any other relief it may obtain, it." reason-
able costs and expenses, not limited to
taxable costs and reasonable attorney's
fees." The plaintiff argues that Blockbus-
ter is not a prevailing party because it lost
on a counterclaim charging a violation of a
provision of the SNDA which said that
"Tenant [BiockbusterJ shall not be joined
as a party/defendant in any action or pro-
ceeding which may be instituted or taken
by reason or under any default by Land-
lord in the performance of the terms, cove-
nants, conditions and agreements set forth
in the Mortgage." The district court
found this provision inapplicable because
the claims against Blockbuster arose under
the SNDA independently of any claims
against Chicago Properties under the
mortgage. But all that Blockbuster could
have obtained from its counterclaim were
attorneys' fees and cost.". That was an
unimportant part of the case, so, on bal-
ance, Blockbuster was indeed a prevailing
party.
The judgment is reversed ",ith di-
rections to enter judgment for the defen-
dants.
REVERSED WITH DI!{ECTlONS
APPENDIX
TAB
"10"
v. UNIFUND CCR PARTNERS
Cile as 331 S.W.3d 27 (Tex.App.-Waco 20W)
Tex. 27
44.2(c)(l) to conclude that the State met its
burden of proving venue in Randall Coun-
ty.
Conclusion
Having overruled appellant's sole issue
on appeal, we affirm the trial court's judg-
ment.
Robert D. SHIPLEY, Appellant,
V.
UNIFUND CCR PARTNERS, Appellee.
No. 10-09-00:n4-CV.
Court of Appeals of Texas,
Waco.
Oct. 1:5, 2010.
Rehearing Overruled Dec. 21, 2010.
Background: Assignee of right to collect
on credit card account brought action
against card holder. The 87th District
Court, Freestone County, Patrick H. Sim-
mons, .J., entered judgment against card
holder. Card holder appealed.
Holding: The Court of Appeals, Tom
Gray, C..J., held that assignee did not have
standing to bring action against card hold-
er.
Reversed.
1. Assignments <3=:>31
An assignment is simply a transfer of
some right or interest.
2. Assignments <3=:>90
\\'hen an holds a contractual-
ly valid assignment, that assignee steps
into the shoes of the assignor and is con-
sidered under the law to have suffered the
same injury as the assignors and have the
same ability to pursue the claims.
3. Action <3=:>
A court may presume the truth of
allegations made in a party's pleadings
when determining standing.
.1. PIeadi ng <3=:> 111.36
A court is not required to look solely
to the pleadings but may consider evidence
and must do so when necessary to resolve
the jurisdictional issues raised.
5. Consumer Credit <3=:> 18
Assignee of right to collect on credit
card account did not have ownership or
title in the account, and therefore, did not
have standing to bring action against card
holder; assignee only had been assigned
right to collect, and assignor explicitly re-
tained title and ownership.
6. Action <3=:>13
Because standing denotes a party's
justiciable interest in a controversy, it is
only the party whose primary legal right
has been breached that may seek redress
for that injury; ""ithout a breach of a legal
right belonging to that party, that party
has no standing to litigate.
Richard C..Jenkins, Dallas, for Appel-
lant.
Abel Reyna, .11'., McCleskey HarTiger &
Brazill & Graf LLP, Lubbock, for Appel-
lee.
Before Chief Justice GRAY, Justice
REYNA, and .Justice DAVIS.
28 Tex. ; ~ ; n SOUTH WgSTERN REPORTgR, ;{d SERIES
OPINION ON REHEARING
TOM GRAY, Chief Justice.
Robert Shipley appeals from the entry
of a judgment against him for a debt on a
credit card account. Shipley complains
that the trial court erred by not dismissing
the suit against him because Unifund CCR
Partners lacked standing to bring the suit
because the court lacked subject matter
jurisdiction in that Unifund CCR Partners
did not own the debt and therefore did not
have standing to bring the action. Shipley
also complains that the evidence was legal-
ly insufficient for the trial court to have
granted a judgment against him and in
favor of Unifund CCR Partners because
there was no evidence that Shipley's debt
had been assigned to Unifund CCR Part-
ners.
On original submission, this Court af-
firmed the judgment. See Shipley u. Uni-
CCR No. 1O-09-00i314-CV,
2010 Tex.App. LEXIS 4544 (Tex.App.-
Waco June 16, 2010). Upon Shipley's
timely motion for rehearing, we requested
a response from Unifund CCR Partners,
although Unifund has not done so. As
authorized by Rule of Appellate Procedure
49.:3, we issue this modified opinion after
requesting the response. TEX.R.App P.
4(j.3. On reconsideration of the issues pre-
sented, we will reverse the .iudl"rment, dis-
miss this cause for lack of jurisdiction, and
'Nithdraw our prior opinion and judgment.
ld.
Standing
Shipley contends that Unifund CCR
Partners did not own any interest in the
account in question, and therefore, they
lacked standing to bring the suit against
him. Citibank South Dakota, N.A. sold
the account to Unifund Portfolio A., LLC.
lJnifund Portfolio A, LLC then assigned
its rights to collect the account to Unifund
CCR Partners, but retained the title and
ownership of the account. In his brief to
this Court, Shipley does not complain
about the sale of the account from Citi-
bank to Unifund Portfolio A, but of the
assignment from Unifund Portfolio A to
Unifund CCR Partners.
Standing, a necessary component of sub-
ject-matter jurisdiction, is a constitutional
prerequisite to maintaining a suit under
Texas law. Te:r. Ass'n of' Bus. u. Te:r. Ail'
Control Bd., 852 S.W.2d 440, 444-45 (Tex.
1(93). Whether a party has standing to
pursue a claim is a question of law that we
review de novo. Mayhew v. Town ()f'Sun-
nyvale, 964 S.W.2d ()22, 928 (Tex.1998).
Standing refers to a party's justiciable
interest in a controversy. See Nootsie,
Ltd. IJ. Williamson Cou.nty Appraisal
Dist., 925 S.W.2d 659, 661-62 (Tex.1996);
T010n or Pairuiew v. LawleT, 252 S.W.3d
853, 855 (Tex.App.-Dallas 2008, no pet.).
Only the party whose primary legal right
has been breached may seek redress for
an injury. NauslaT IJ. COOTS BreLoing Co.,
170 S.W.3d 242, 249 (Tex.App.-Dallas 2005,
no pet.). Witbout a breach of a legal right
belonging to that party, that party has no
standing to litigate. Cadle Co. v. Lobi.ugi-
eT, 50 S.W.:kJ 6G2, GG9-70 (Tex.App.-Fort
Worth 2001, pet. denied). In revie'Ning
standing on appeal, we construe the peti-
tion in favor of the plaintiff, and if neces-
sary, review the entire record to determine
if any evidence supports standing. See
Tex. Air 852 S.W.2d at 446.
[1,2J An "assignment" is simply a
transfer of some right or interest. See
Pagosa Oil & Gas, LL.C. v. Marrs &
Smith P'ship, 323 S.W.:3d 203, 211 (Tex.
App.-EI Paso 2010, no pet. h.) (citing Uni-
Te:w.s /11cd. BTaru:h at Galveston
u. Allan, 777 S.W.2d 450, 452 (Tex.App.-
Houston [14th Dist.] 1989, no writ)).
When an assignee holds a contractually
valid assignment, that assignee steps into
the shoes of the assignor and is considered
SHIPLEY v. UNIFUND CCR PARTNERS
Cite as 331 S.W.3d 27 (Tex.App.-Waco 2010)
Tex. 29
under the law to have suffered the same
injury as the assignors and have the same
ability to pursue the claims. So/dhwestern
Bell Tel. Co. v. Mkt{}. on Hold fnc.. 808
S.W.8d 909 (Tex.2010) (citing Holy Cross
Chnrch of' God in Christ v. Wolf: 44
S.W.:3d 5G2, 572 (Tex.2001)).
Pleadin{}s and Bvidence in the Record
[3,4] "It has long been the rule that a
plaintiffs good faith allegations are used to
determine the trial court's jurisdiction."
Baues v. Unif'und CCR Partners, :301
S.W.3d 402, 404 (Tex.App.-EI Paso 2009,
no pet.) (citing Brannon u. Pac. Brnploy-
ers fns. Co., 148 Tex. 289, 224 S.W.2d 4GG,
4G9 (Tex.1949)). A court may presume the
truth of allegations made in a party's
pleadings when determining standing. fd.
(citin{} Te:r. Ass'n of' Bus., 852 S.W.2d at
44G; Browu v. Todd, 58 S.W.3d 297,305 n.
3 (Tex.2001) ("Because standing is a com-
ponent of subject matter jurisdiction, we
consider [it] as we would a plea to the
jurisdiction, construing the pleadings in fa-
vor of the plaintiff.")). "A court is not
required to look solely to the pleadings but
may consider evidence and must do so
when necessary to resolve the jurisdiction-
al issues raised." State Dep't of' C'rirn.
Justice v. Miller, 51 S.W.3d 583, 587 (Tex.
2001). However, the petition's sole refer-
ence to Unifund CCR Partners's owner-
ship or standing to litigate is the statement
that "Plaintiff is authorized to file this
petition." We do not find that this consti-
tutes any evidence of standing.
[5 J The case was solely decided based
on business records filed by Unifund CCR
Partners. The evidence presented in the
business records affidavit is likevrise un-
clear as to what interest beyond the right
of collection that Unifund CCR Partners
owns. Additionally, the trial court sus-
tained Shipley's hearsay objections to the
affidavit and struck the content of the
affidavit outside of the questions required
to authenticate the business record as
such. In fact, the assignment from IJni-
fund Portfolio A, LLC to Unifund CCR
Partners indicates that Unifund CCR
Partners owns nothing. The pertinent
language of the assignment states:
Assignor, for value received and in con-
nection with the Agreement, transfers
and assigns to Assignee all of Assignor's
rights in the Receivables, for collection
purposes only, including conducting liti-
gation in Assignee's name, for those Re-
ceivables which Assignor owns or may
acquire from time to time. Assiguor
shall retain title and OIDnership (!f' such
Receivables. The assignment is without
recourse to Assignor and without war-
ranty of any kind (including, without
limitation, warranties pertaining to title,
validity, collectibility (sic), accuracy or
sufficiency of information, and applica-
bility of any statute of limitations), ex-
cept as stated in the Agreement or here-
in. (emphasis added)
[(j] Because standing denotes a party's
justiciable interest in a controversy, it is
only the party whose primary legal right
has been breached that may seek redress
for that injury. Baves, 301 S.W.3d at 404.
Without a breach of a legal right belonging
to that party, that party has no standing to
litigate. [d. (cdin{} Cadle Co. Lobingier,
50 SW.3d GG2, GG9-70 (Tex.App.-Fort
Worth 2001, pet. denied)). Unifund CCR
Partners's right is solely limited to taking
whatever steps are necessary to collect a
debt owned entirely by someone else,
while holding no title, interest, or rights in
anything else. We do not find that this is
sufficient to establish that ITnifund CCR
Partners has standing to pursue this claim
in its own name.
Cases that have found standing to exist
all indicate that a finding of ownership of
some type was made. Even the cases
80 Tex. :m SOUTH WESTERN REPORTER, ad SERIES
cited to by Unifund CCR Partners demon-
strate that some ownership interest was
transferred by the assignor to the assign-
ee. See Sprint. Communications Co., L.P.
APCC Inc., 554 U.S. 269, 128
S.Ct. 2,5:31, 2541-4:3, 171 L.Ed.2d 424
(2008) (assignee with legal title to debt of a
legal claim for money owed has standing to
pursue the claim even if proceeds are to be
entirely remitted to a..-;signor); see also
Eaues, 301 SW.3d at 40:3-04 (pleadings
and live testimony sufficiently demonstrat-
ed that Unifund owned the account in
question to establish standing); Cart-
wright/). MBank Christi, N.A.,
865 S.W.2d 546, 549-50 (Tex.App.-Corpus
Christi 199:3, writ denied) (note transferred
to MBank making MBank the holder of
the note); Schultz D. Aet.na Business Cred-
it., Inc., 540 S.W.2d 530, 531 (Tex.Civ.App.-
San Antonio 1976, no \\Trit) (assignor trans-
ferred "all of its rights, title and interests"
in the relevant instrument, any accompa-
nying promissory note or notes, and all
rights and remedies under said instrument
or notes); Kelley/). Blutr Creek Oil Co.,
218 SW.2d 263, 267 (Tex.Civ.App.-Fort
Worth 1956) (assignment transferred all
"right, title and interest" in a claim, "with
full power and authority to collect and
receipt therefore"), qtt'd in part., and reu'd
in parl on ot.her grounds, 158 Tex. 180,
:509 S.W.2d 208 (1958).
We find that without of any
ownership interest or title in the account
that Unifund CCR Partners does not have
standing to bring this suit ami that the
trial court did not have subject matter
jurisdiction over the action. We sustain
issue one.
Conclusion
We conclude that Unifund CCR Part-
ners did not have standing to file suit
Shipley. Therefore, because the
trial court lacked subject matter jmisdic-
tion, we reverse the judgment of the trial
court and render judgment dismissing the
case.
Thomas Ed COLE and Roy Franklin
Cole, Appellants and Cross-
Appellees,
v.
ANADARKO PETROLEUM CORPO
RATION and Permian Basin Joint
Venture, LLC, Appellees and Cross-
Appellants.
No. 1l-09-00056-CV.
Court of Appeals of Texas,
Eastland.
Oct. 14.2010.
Rehearing Overruled Nov. 12, 2010.
Background: Ranch owners brought ac-
tion for breach of contract and excessive
and unauthorized surface use against pe-
troleum company that was both an oil and
gas and a surface lessee as well as
company's assignee, arising out of opera-
tion of waterflood partially situated on
ranch. The 161st District Court, Ector
County, John W. Smith, J., "''Tanted multi-
ple motions for partial summary judgment
and celtified an interlocutory appeal.
Holdings: On grant of rehearing in palt,
the Court of Appeals, Rick Strange, J.,
held that:
(l) owners did not acquire surface use
claims as heirs and successors of their
father;
(2) owners had standing to assert surface
use claims accruing after O\vners ac-
quired ranch;
APPENDIX
TAB
"II"
November 16,
2010
Congressional Oversight Panel
NOVEMBER
*
OVERSIGHT REPORT
Examining the Consequences of Mortgage
Irregularities for Financial Stability and Foreclosure
Mitigation
*Subrnitted under Section 1) ofTitie 1 of the
Stabilization Act of 2008, Pub, L, No. 110-343
mprupn.r\1 EcollOlnic
Table of Contents
Executivc SUlnn1ary 4
Scction Onc:
A. Overvicw 7
B. Background 9
C. Tinlclinc 10
D. Legal Conscquences of Document Irregularities 14
1. Potential Flaws in thc Recording and Transfer of Mortgages and
Violations of Pooling and Servicing Agreements 16
2. Possible Legal Consequences of thc Document Irregularities to
Various Parties 24
3. Additional Considerations 33
Court Cases and Litigation 34
I. Fraud Clailns 35
2. Existing and Pending Claims under Various Fraud 'Ihcories .40
3. Other Potential Claims .42
4. Othcr State Legal Steps .44
5. Other Possible Implications: Potential "Front-end" Fraud and
Documentation Irregularities .46
F. AsseSSIng the Potential Impact on Bank Balance Sheets 51
I. Illtroduction 51
Irregularities: the Cost to Banks 59
3. Issues alldlYlc)ltgagc I)ut-backs 63
2
G. Effect or Irregularities and Foreclosure Freezes on Housing MarkeL 73
I. Foreclosure Freezes and their Elfect on I-lousing 73
2. Foreclosure Irregularities and the Crisis of Confidence 78
H. Impact on HAf\1P 79
I. Conclusion 82
Section Two: Correspondence with Treasury 85
Section Three: TARP Updates Since Last Report 86
Section Four: Oversight Activities 122
Section Five: About the Congressional Oversight PaneI I24
Appendices:
APPENDIX 1: LETTER FROM CIIAIRMAN TED KAUFMAN TO
SPECIAL MASTER PATRICIA GEOGHEGAN, RE: FOLLOW UP TO
EXECUTIVE COMPENSATION HEARING, DATED NOVEMBER 1,2010...... 125
3
Executive
In the fall of 20 I0, reports began to surface alleging that companies servicing $6.4 trillion
in Ameriean mortgages may have bypassed legally required steps to f()reelose 011 a home.
Employees or contractors of Bank of America, GMAC Mortgage, and other major loan servicers
testified that they signed, and in some cases backdated, thousands of documents claiming
personal knowledge of facts about mortgages that they did not actually know to be true.
Allegations of"robo-signing" are deeply disturbing amI have given rise to ongoing
federal and state investigations. At this point the ultimate implications remain unclear. It is
possible, however, that "robo-signing" may have concealed much deeper problems in the
mortgage market that could potentially threaten financial stability and undermine the
government's efllJrts to mitigate the ll)reclosure crisis. Although it is not yet possible to
determine whether such threats will materialize, the Panel urges Treasury and bank regulators to
take immediate steps to understand and prepare for the potential risks.
In the best-case scenario, concerns about mOligage documentation irregularities may
prove overblown. In this view, which has been embraced by the financial industry, a handful of
employees failed to f(lllow procedures in signing foreclosure-related affidavits, but the facts
underlying the anidavits are demonstrably accurate. Foreclosures could proceed as soon as the
invalid affidavits are replaced with properly executed paperwork.
The worst-case scenario is considerably grimmer. In this view, which has been
articulated by academics and homeowner advocates, the "robo-signing" of affidavits served to
cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful
f()rec!osure. In essence, banks may be unable to prove that they own the mortgage loans they
claim to own.
The risk stems from the possibility that the rapid growth of mortgage securitization
outpaced the ability of the legal and financial system to track mortgage loan ownership. In
earlier years, under the traditional mortgage model, a homeowner borrowed money from a single
bank and then paid back the same bank. In the rare instances when a bank transferred its rights,
the sale was recorded by hand in the borrower's county properly ollicc. Thus, the ownership of
any individual mortgage could be easily dcmonstrated.
N a singlc mortgage loan may be sold dozens of times between various banks
across the country. In the view of some market participants, the sheer speed of the rnodern
market rendered obsolete the traditional ink-and-paper recordation process, so the
financial industry developed an electronic transfer process that bypasses county property offices.
1he Pallel adoptee! thiS lepolt \\Ith a:; 0 vute 011 November 15, 2010.
This electronic process has, however, legal challenges that could, in an extreme scenario,
call into question the validity of 33 million mortgage loans.
Further, the financial industry now commonly bundles the rights to thousands of
individual loans into a mortgage-backed security (MBS). The securitization process is
complicated and requires several properly executed transfers. If at any point the required legal
steps are not followed to the letter, then the ownership of the mortgage loan could into
question. I lomeowner advocates have alleged that frequent "robo-signing" of ownership
affidavits may have concealed extensive industry failures to document mortgage loan transfers
properly.
If documentation problems prove to be pervasive and, more importantly, throw into doubt
the ownership of not only foreclosed properties but also pooled mortgages, the consequences
could be severe. Clear and uncontested property rights are the foundation of the housing market.
If these rights into question, that foundation could collapse. Borrowers may be unable to
determine whether they are sending their monthly payments to the right people. Judges Inay
block any effort to even in cases where borrowers have Jailed to make regular
payments. Multiple banks may attempt to JiJreclose upon the same property. Borrowers who
have already su ffered foreclosure may seek to regain title to their homes and any new
owners to rnove out. Would-be buyers and sellers could find themselves in limbo, unable to
know with any certainty whether they can safely buy or sell a home. If such problems were to
arise on a large scale, the housing market could experience even greater disruptions than have
already occurred, resulting in signi ficant harm to major financial institutions. For example, if a
Wall Street bank were to discover that, due 10 shoddily executed paperwork, it still owns
millions of mortgages that it thought it sold off years ago, it could billions of
dollars in unexpected losses.
I)ocumentation irregularities could also have major effects on Treasury's main
prevention effort, the Home Modification Program (HAMP). Some
servicers dealing wilh Treasury may have no legal right to initiate which may call
inlo question their ability to grant modiCications or to dcrnand payrnents from homeowners. "'he
servicers' use of"robo-signi may also have affected determinations about individual loans;
scrviccrs may havc becn lllore willing to foreclosc if they werc not bearing the full C()sts of a
properly executed !()reclosure. Treasury has so far not provided reports of any investigation as to
whether documentation problems could undermine I lAMP. It should engage in active effe)rts to
rnonitor the i foreclosure irregularities. and it should relJort its findinos to and
," "b
the public.
In addition to documentation concerns, another problem has arisen with securitized
loans that could threaten financial stabilitv. Investors in mortuaoe-backed
Job
securities typically demanded certain assurances about the quality of the loans they purchased:
instance, that the borrO\vers had certain minimum credit ratings and income or that their
'-' - ..
5
homes had appraised for at least a minimum value. Allegations have surfaced that banks may
have misrepresented the quality of many loans sold for securitization. Banks found to have
provided misrepresentations could be required to repurchase any affected mortgages. Because
millions of these mortgages are in default or f(Jreclosure, the result could be extensive capital
losses if such repurchase risk is not adequately reserved.
'1'0 put in perspective the potential problem, one investor action alone eould seek to force
Bank of America to repurchase and absorb partial losses on up to $47 billion in troubled loans
due to alleged misrepresentations of loan quality. Bank of America currently has $230 billion in
shareholders' equity, so ifseveral similar-sized actions - whether motivated by concerns about
underwriting or loan ownership were to succeed, the company could suffer disabling damage
to its regulatory capital. It is possible that widespread challenges along these lines could pose
risks to the very financial stability that the Troubled Asset Relief Program was designed to
protect. Treasury has claimed that based on evidence to date, mortgage-related problems
currently pose no danger to the financial system, but in light of the extensive uncertainties in the
market today, Treasury's assertions appear premature. Treasury should explain why it sees no
danger. Bank regulators should also conduct new stress tests on Wall Street banks to measure
their ability to deal with a potential crisis.
'rIle Panel emphasizes that mortgage lenders and securitization servicers should not
undertake to foreclose on any homeowner unless they are able to do so in full eompliance with
applicable laws and their contractual agreements with the homeowner.
The American financial system is in a precarious place. Treasury's authority to support
the financial system through the Troubled Asset Relief Program has expired, and the resolution
authority created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
remains untested. The 2009 stress tests that evaluated the health of the financial system looked
only to the end of 20 I0, providing little assurance that banks could withstand sharp losses in the
years to conIc. The housing market and the broader economy rel1lain troubled and thus
vulnerable to future shocks. In short. even as the government's response to the linancial crisis is
drawing to a close, severe threats remain that have the potential to damage financial stability.
Section One:
A. Overview
In the fall of 20 10, with the Troubled Asset Relief Program's (TARP) authority expiring,
reports began to surface of problems with foreelosure doeumentation, particularly in states where
foreelosures happen through the courts. GMAC Mortgage, a subsidiary of current TARP
recipient Ally Financial, announeed on September 24,2010 that it had identified irregularities in
its foreclosure document procedures that raised questions about the validity of foreclosures on
mortgages that it serviced. Similar revelations soon followed from Bank of America, a former
TAIZP recipient, and others. Employees of these companies or their eontractors have testi fied
that they signed, and in some cases backdated, thousands of documents attesting to personal
knowledge of facts about the mortgage and the property that they did not actually know to be
true. Mortgage scrviccrs also appeared to be cutting corners in other ways. According to these
banks, their employees were having trouble keeping up with the crush of f()J'eclosures, but
additional trai ning and employees would generally suffice to get the process in order again.
At present, the reach of these irregularities is unknown. The irregularities may be limited
to paperwork errors among certain servicers in certain states; alternatively, they may call into
question aspects orthe securitization process that pooled and sold intercsts in innumerable
rnortgages during the housing boom. Depending on their extent, the irregularities may afreet
both Treasury's ongoing roreclosure programs and the financial stability that Treasury, under the
l:mergency Economic Stabilization Act of 2008 (EESA), was tasked with restoring. Further, the
mortgage market races ongoing risks related to the right of mortgage-backcd sccurities to force
banks to repurchase any loans. Losses stemming from these repurchases would compound any
risks associated with documentation irregularities.
Under the C'ongressional Oversight Panel is charged with reviewing the current
state or the linancial markets and the regulatory system. The Panel's oversight interest in
roreclosure documentation irregularities stems Il'ol11 several distinct conccrns:
If S e v ( ~ r e Disruptiolls ill the HOIISillg Market Materialize, Finallcial Stahility alld Taxpayer
Funds Could Be Imperiled. lrdocument irrcgularities prove to be pervasive and, more
importcllltly, throw into question owncrship of not only foreclosed propertics but also pooled
the result could be significant harm to financial stability - the very stability that the
TARP was to protect. In the worst ease scenario. a clear chain or title an esscntial
clement or a functioning housing market may be difficult to establish fiJr propertIes subject to
loans that wcre pooled and securitized. Rating agencies are already cautious in their
outlook (il[' the banking sector, and rurther blows could have a significant elTecL 'fhe
implications could also dire for taxpaycrs' recovcry oftheirTARP investments. Treasury still
7
bas $66.8 billion invested in the banking sector generally, and as the Panel discussed in its July
report, "Sma II Bemks in the Capi ta I Purchase Program," the prospects for repayment from
smaller banks are still uncertain and dependent, in great part, on a sector healthy enough to
.. I
attract prIvate mvestrnent.
HAl\IP May Rely on Uncertain Legal Authority and Inaccurate Foreclosure Cost
Estimates, Potentially Posing a Risk to Foreclosure Mitigation Efforts. If irregularities in the
foreclosure process reflect deeper to document properly changes of ownership as
rnortgage loans were securitized, then it is possible that T'reasury is dealing with the wrong
parties in the course of tire Home J\ffordable IVlodifieation Program (HAMP). This could mean
tlrat borrowers either received or were denied modi fications improperly. Some servicers dealing
with Treasury may have no legal right to initiate foreclosures, which may call into question their
ability to grant modifications or to demand payments fron1 homeowners, whether they are part of
a foreclosure mitigation program or otherwise. The servicers' tendency to cut corners may also
have affected the detennination to modify or foreclose upon individual loans. Because the net
present value (NPV) model compares the net present value of the modification to a foreclosure,
improper procedures that cut corners might have aHected the G:;reclosure cost calculation and
thus might have affected the outcome of the NPV test.
TARP-Recipicnt Banks May Have Failed to Meet Legal Obligations. Many oftlre entities
illlplicated in the recent document irregularities, including Ally Financial, Bank of America, and
JPMorgan Chase, are current or femner TARP recipients. Ally Financial, notably, rernains in
TARP and is in possession of $17.2 billion in taxpayer funds. Bank of America received funds
not only from TARP's Capital Purchase Program (CPP) but also what Treasury deemed
"exceptional assistance" fh1l11 TARY's Targeted Investment Program (TIP). Some of the banks
involved were also subject to the Supervisory Capital Assessment Prograrn (SCAP), also known
as the stress tests: Treasury's and the Board of Governors of the F'ederal Reserve's (Federal
Reserve) eff(xts to determine the health of the largest banks under a variety of stressed scenarios.
The Congressional Oversight Panel \vill continue to monitor Treasury's engagement with
these ongoing evenls. not only to protect the taxpayers' existing TARP investments and to
oversee its foreclosurc mitigation programs, but also to meet the Panel's statutory mandate to
"review thc current slate of the linancial markets and the regulatory system."
-._------
" .... '1:1\/('1' may alsll be al risk fllr losses relaled tll Treasury's inveslment in AI(;. The Maiden Lane II
and Maiden Lanc III vchicles. wlm:h the Federal Reserve Bank orNew York (FRBNY) created to hold assets
purchased Crom Ale;, hold substantial amounts orresidentialmortgagc-backed securities (I';MBSs), most of which
arc either sub-prime or ;\11-;\ mortgages originated during the housing boom. Trcasurv's ahility to recover the Cunds
it has put int.o Ale; in' p,;rt on FRBN';;'s abi on these inVeS[l1Ie;lts, and uneertainlv
associated with the investments could hinder that process.
B. Background
In the Call of 20 I0, a series of revelations about foreclosure documentation irregularities
hit the housing markets. The transfer of a property's title ii'om the mortgagor (the homeowner)
to the mortgagee (typically a bank or a trust) necessary for a successful foreclosure requires a
series of steps established by state law? As further described below, depositions taken in a
variety of cases in which homeowners were fighting foreclosure actions indicated that mortgage
servicer employees - who were required to have personal knowledge of the matters to which
they were attesting in their affidavits - were signing hundreds of these documents a day. Other
docmnents appcared to have been backdated improperly and ineffectively or incorrectly
notarized. While these documentation irregularities may sound minor, they have the potential to
throw the /()reclosure system and possibly the mOltgage loan system and housing market itself
- into turmoil. At a minirnum, in certain cases, signers of affidavits appear to have signed
documents attesting to information that they did not verify and without a notary present. If this
is the extent of the irregularities, then the issue may be limited to these signers and the
foreclosure proceedings they were involved in, and in many cases, the irregularities may
potentially be remedied by reviewing the documents more thoroughly and then resubmitting
them. If, however, the problem is related not simply to a limited number of foreclosure
documents but also to irregularities in the mortgage origination and pooling process, then the
impact of the irregularities could be far broader, affecting a vast number of investors in the
mortgage-backed securities (MBS) market, already completed foreclosures, and current
I)()meowners. 'This latter scenario could result in extensive litigation, an extended freeze in the
foreclosure market, and significant stress on bank balance sheets arising from the substantial
repurchase liability that can arise from mistakes or misrepresentations in mortgage documents.:>
) These steps depend on whether a slate is a judicial slale or a non-judicial slale, as
flllther described below, in f()()tnole 17.
.1 If Il10rtgage documentation has errors or misrepresenlations, buyers of the mortgage paper can "put-back"
the mortgage to its originator and require them to repurchase the morlgage. For a more complete discussion of this
possibility, see Sections D.I.b and D.2.
Several and experls have spcculated on the fm WIII,,,,,, ...,,11
Afwicci iVe Hal'c a PIOh!cm 12, 20 I0); Amherst V/],,,,,,,,,,,-
'///(jjJ1'1I hosco !I/l'estors iI/ {'rimlc Lahc! Securities (let. 12, 20 I FBR Capital Markets,
'1lI/f"/',,oW'" ('o!!' FrJlcc!oslIIe MOllio, Dea! or Not? (let. 15.2(10) (hcreinaHer "FBR Foreclosure i'dania
ConlCrence Cal In a conferenee eall with investors. Jamie Dimon. CEe) Chase. speculated thaI lhe
I';sue could ellher a"bl or a more extended with "a lot of consequences, mos! of which will be
adverse on ," Cardiff (iarcia, .!PM 01/ {,}/'ec!osllres, MERS, Financial Times Alphaville 13.
201U) (online <1! rtalph<1vil ]0/]0/1 (hereinaHer"JPiVloll
Fmccluslllcs, i'v1l'RS") ("Iryou talk about three or weeks i! will be a blip in Ihe housing market. Ifit \vellt 011
f()r a long period ortillle, it will have a Iut of COil sequences, 1l10st of which will be adverse Oil everybody.").
C. Timeline
After the housing market started to collapse in 2006, the effects rippled through the
financial sector and led to disruptions in the credit markets in 2008 and 2009. In an economy
that had been hit hard by the financial crisis and soon settled into a deep recession, the housing
market declined, dragging down housing prices and increasing the likelihood of default. This put
pressure on a variety of parties involved in the mortgage market. During the boom, there were
many players involved in the process of lending, securitizing, and servicing mortgages, and
many of these players took on multiple roIcs.
4
The initial role of servieers was largely administrative.
5
They were hired by the MBS
investors to handle all back-office functions for existing loans, and generally acted as
lI1tennediaries between borrowers and MBS investors.
6
flowever, when the housing bubble
burst, and the number of delinquencies began to rise, the role of servieers evolved
correspondingl y. 7 Servicer flJCus shi fted from performing purely administrative tasks to
engaging in active loss mitigation efforts.
8
Servicers found themselves responsible for
processing all defaults, modifications, short sales, and foreclosures.
9
The servieers themselves
have admitted that they were simply not prepared f<)r the volume of work that the crisis
generated.
1o
Thus, many servicers began subcontracting out much of their duties to so-called
"foreclosure mills," contractors that had significant incentives to move foreclosures along
quickly.
4 For example. it was not uncommon fix a commercial bank to perf(mll both lending and servicing
functions, and to bave established separate lending and servicing arms of its organization. As discussed later in this
report, the securitization process begins with a lemler/originator, onen but not always a commercial bank. Next, the
mortgage is securitizcd by an investment bank. Finally, the mortgage is serviced, onen also by a commercial bank
or its subsidiary. L:vcn where the same banks are listed as doing both lending and servicing, they did not necessarily
service only the mortgages they origi nated. Source: Inside Mortgage Finance.
()ffice of thc General fill" the Troubled Asset Relief Program. QuorterlvReport to
(}I,,'n'c'(' at 157 (Oct. 26. 2(10) (online at
I0!Cktober20 10 Quarterly Report to_C'ongress,pd f) (hereina fter "Clctober
2010 SICiTARP RepOin
(, ServiceI' duties includcd fielding borrower inquiries. collecting mortgage payments II-om the borrowers.
and remitting mortgage paYlllents to the trust. See!d at 157. 164. See also Congressional Clvcrsight Panel, /\,lorch
/,';,nl,OTlI Rq)ort: Foreclosure Crill.\" ]1J1l'i1ul a Solutio!l. at 40-42 (Mar. 6,2(09) (online at
(hereinafter "March 2009 Oversight Report")
f\larch
Marcil 2009
.1"1"11 notc at 1
1111'/(/ note 6. at 4U-42. also Oetoher 10 SICiTJ\RP
()cto!Jcr2UIU SIGTARI' \Uflli/ note S, at 157-IS8. In tile or2()09. wilen
anl10ullced its Makillg IJollic Aflonlahlc program, thc or which was HAMP. servieers took on the
additional of all HAMI' modifications.
10
fvUlrch SlljJ/(/ note 6. at 39.
10
Thus, as the boom in the housing market mutated into a boom in foreclosures, II banks
rushed to move delinquent borrowers out of their hOlnes as quickly as possible, leading,
apparently, to procedures of which the best that can be said is that they were sloppy and cursory.
Concerns with f()rcclosure irregularities first arose when depositions of so-called "robo-signers"
camc to lighL
I2
In a June 7, 20 I0, dcposition, .lenITy Stephan, who worked for GMAC
Mortgage
ll
as a "limited signing officer," testified that he signed 400 documents each day. In at
least some cases, he signed affidavits without reading them and without a notary present. 14 He
II Me,rtgag(;s that are more than 90 days past due are concentrated in certain regions and states of the
country, including California. Nevada, Arizona, Florida, and Georgia. See Federal Reserve Bank of New York, Q3
Credit Conditions 8,20 I 0) (online at www.newyorkfed.org/creditconditions/). Similarly, foreclosures are
concentrated in certain states. including the so-called "sand states": Arizona, California, Nevada, and Florida. U.S.
Department of Housing and Urban Development, Report to C'ongress on the Root Causes of the Foreclosure Crisis,
at vi (.Jan. 2(10) (online at www.huduser.org/Publications/PDF/Foreclosure_09.pdf). The Panel's field hearings in
Clark County, Nevada, Prince George's County, Maryland, and Philadelphia, Pennsylvania, also touched on the
subject of high concentrations of foreclosures in those regions. See Congressional Oversight Panel, Clark County,
NV: Ground Zero of the Housing and Financial Crises (Dee. 16,20(8) (online at
cop.senatc.gov/hearings/library/hearing-12I 608-firsthcaring.cCl11); Congressional Oversight Panel, COP Hearing:
Coping with the Foreclosure Crisis in Prince George ',I' County, Afmyland (Feb. 27, 20(9) (online at
cop.senate.gov/hearings/library/hearing-022709-housing.efm); Congressional Oversight Panel, Philadelphia Field
I1earing on Mortgage Foreclosures (Sept. 24, 20(9) (online at cop.senate.gov/hearings/library/hearing-092409-
phi ladelphia.cfnl).
12 The dctails of"robo-signers" actions on the Internet in September 20 I0, including video and
transcriptions of depositions liled by robo-signers, See, e.g., The Florida Foreclosure Fraud Weblog, Jetfi'ev
S'tepl101l 'IJ'itlidrml'll' Florida Defolilt LOll' C;roll/7 (Sept. 15,2(10) (online at
florida forec losure Iraud.coml20 IO/09/jeffrey-stephan-affida vi ts- wi thdrawn-by- florida-defau It-Iaw-group/). SOlne of
this inl(mnation was made public in court documents. For instance, in an order issued a state court in Maine on
Scptember 24, 20 10, the judge noted that it was undisputed that Jeffi'ey Stephan had an affidavit without
reading it and that he had not been in the presence ofa notary when he signed it. Order on Four Pending Motions at
J, Fedeml Notiollal Mortgage Assoc. v. Nicolle Bradhurv, No. BRJ-RE:-09-65 (Me. Bridgton D. Ct. Sept. 24, 20 I 0)
(onl inc at www.molleulla\v.com/t hemed/mo lieu ria w/Ilies/up loads/9_24. JO'!';,20Four';';,20Motions%200rder.pd f)
(hereinafter "Federal National Mortgage Assoc. v. Nicolle Bradbury").
1.\ CiMAC Mortgage is a subsidiary of Ally Financial. The Panel examined Ally Financial, then named
GMAC, in detail in its March 2010 report. Sec Panel./v/areh Report: lhe
heatment Under l:4RP Uvlar. II, 20 I 0) (onl inc at cop.senate.gov/documents/cop-031 J 10-
rcport.pdf).
14 E:ederal National Mortgagc Assoc. v. Nicollc Bradbury, slipra note 12. There are two primary concerns
with affidavits. First: arc tlte affidavits accurate'? For example, evcn if the homeowner is indebted, the amount of
the indebtedness is a part olthe attestation, The amount oCthc indebtedness must be accUiate because there might
bc a subsequent judgment against the hOlllcowncr, which would require the homeowner to cover the
amounl to the lender. And even iftllCie was no judgment, an inflated claim would
increasc the of the mortgage scrvicer flOm the IClicclosure sale to the detriment of other parties in
the process. Second. if the in!zmniltion in the affidavit is correct, it must beswOrll out someone with
Iv>"-cn,,,JI in"Hul,>,I", of Ihe indebtedness; otherwise it is and not admissible as eVidence. See,
Transcript of Court GAIA C LLC'l'. Dchhie Viscm(J. ct a/., No, 070 I ]02\4CI (Fla. Cir. Ct.
2() I()) 11K at Ilorida f(lree 1()Sllrefraud.eo Ill/'wll-eontellt!Llploa,ds/20 I0104/0407 I f) whet her
alketed allidavits were admissible). See Congressional tJversight Panel, Written Testimony of Katherine
Porter, ollaw, of Iowa of Law, C'OP !lear/ng on 7>IRP Forcclosure /\1I'tipatl'oll
. 2() I0) ine al mony-I0271 .pdl') (hereinafler "Wri tten
Cestimony of Katherine Porter").
II
also testilied that in doing so, he acted consistently with GMAC Mortgage's policies.
15
Similarly, LlCed with revelations that robo-signers had signed tens of thousands of foreclosure
documents vvithout actually verifying the inf(mnation in them, Bank of America announced on
October 8, 20 10, that it would freeze j(xeclosure sales in all 50 states until it could investigate
and address the irregularities. III GMAC Mortgage took similar action, announcing that while it
would not suspend j()reclosures, it had "temporarily suspended evictions and post-f()reclosure
closings" in 23 states.
17
In a stalernent, it referred to the issue as a "procedural error .. , in certain
affidavits" and staled that "we are confident that the processing errors did nClt result in any
inappropriate foreclosures." GMAC also announced that the company had taken three remedial
steps to address the problem: additional education and traimng for employees, the release of a
"more robusl policy" to govern the process, and the hiring of additional staff to assist with
j
' I . I g
orec osme processmg.
15 Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12. In addition, a Florida court
admonished GMAC for similar problems in 2006. Plaintiffs Notice of Compliance with this Court's Order Dated
May 1,2006, TCIF RE02 1'. Leibowitz, No. I62004CA004835XXXXMA (June 14,2006) (detailing GMACs
policies on affIdavits filed in foreclosure cases). These actions, if true, would be inconsistent with the usual
documentation requirements necessary fe)r proper processing of a foreclosure, giving rise to concerns that the
f()reelosure was not legally sufficient. See genera//v Written Testimony of Katherine Porter, supra note 14.
16 Bank of America Corporation, StatemenrjiwlI Bank o!"America Home Loans (Oct. 8,2010) (onlinc at
med iaroom.banko .com/phoenix.zhtml?c234503&p=irol-newsArticle&lD
c
1480657&highl ight=)
(hereinafter "Staternenl liOin Bank of America Home Loans"). At the same time, Bank of America agreed to
indemnify Fidelity National Financial, a title insurer, for losses directly incurred by "failure to comply with state law
or local practice on both transactions in which foreclosure has already occurred or becn initiated and those to bc
initiated in the future." See Fidelity National Financial, lvotiona/ Final/cio/, II/C., EPS oj'$().36
(C)et. 20, 20 I0) (online at files.shareholder.com/downloads/FNT/I 051799117xOx41 I089/209d61 a9-8a05-454c-
90dl-4a78eOa7c4ae/F'NF 20 J0 10 Earnings.pd f). As further described below in Section D.2, title
insurance is a critical piece ofthc mortgage market. Generally, title insurance insures against the possibility that
title is encumbered or unclear, and thereby provides crucial certainty in transactions involving real estate. The
insurancc is retrospective covering the history of thc properly until, but not after the sale, and is issued after a
review of the land title records. For a buyer, title insurance therefore insures against the possibility that a defect in
the title that is not apparent from the public records will affect their ownership. Industry sources conversations with
Panel staff(Nov. 9. 2010). /\ title insurer's refusal to issue insurance can signillcantly hamper the orderly transler
of real estate and interests collateralized by real estate, Bank of/\merica's indcmnity agreement with Fidelity
National Financial shirts the risk of eovcrcd losses arising from the foreclosure irregularities fi'orn Fidelity National
to Bank of America.
17 Twcnty-two states require judicial oversight of f()reclosure proceedings. In these judicial foreclosure
states the mortgagee must establish its claim show that a borrower is in (!cLlLdt bcfc)rc a judge. in non-judicial
states a 1()J'eclosure call proceed upon adequate and timely notice to thc borrower, as defined statute. In non-
states, a power of sale clause included in a deed of tl'llst allows a trustee to conduct a non-judicial
f()I-eciosure. foreclosures can more Sl11ee do not
Bankers Association, Jw!icia/ I'enus NOIl-Judlcia/ Foreclosure 26, 2U I0) (online at
'Iypically,
states that foreclosure slales, while states that on deeds of trust are non-judicial
IClreclosure states. Standard & Poor's, Structured Fillallce Reseorch Ileek.' !Jow IVi// the Foreclosure Crisis
!Jollie Price\? 21, 201U) (hereinafter "S&P on Foreclosure Crisis").
Finalleial, IIIC., C;;\fAC Pml'ides
at med ia.allyeom/index.php'lsA3&item' 417).
24,2(10)
12
]'hese voluntary, privately determined suspensions were brief. I'! On October 12, 20 I 0,
GMAC Mortgage released a statement indicating that in eases in which it had initiated a review
process Cor its foreclosure procedures, it would resume f(xeclosure proceedings once any
problems had been identified and, where necessary, addressed. It also noted that it "found no
evidence to date of any inappropriate Coreclosures.,2o On October 18, Bank of America
announced that it had completed its review of irregularities in the 23 states that require judicial
review of foreclosure proceedings and that it would begin processing foreclosure affidavits for
102,000 foreclosure proceedings in those states. It stated that it would review proceedings in the
remaining 27 states on a case-by-case basis and that foreclosure sales in those states would be
delayed until those reviews are complete. It further stated that in all states, it appeared that the
"basis of our foreclosure decisions is accurate.,,21 Various commentators, however, have
questioned Bank of America's ability to make such determinations in such a short timeframe.
22
]'hen, on October 27, another large bank entered the fray when Wells Fargo announced that it
had uncovered irregularities in its foreclosure processes and stated that it would submit
supplemental afTidavits in 55,000 foreclosure actions.
23
Meanwhile, as the revelations of irregularities quickly multiplied, some argued that over
and above the banks' and servicers' voluntary actions, the federal government should impose a
naticH1wide moratorium on foreclosures.
24
lIousing and Urban Development Secretary Shaun
l)onovan rejected the idea. arguing that "a national, blanket moratorium on all foreclosure sales
would do l ~ l r more harm than good.,,25 At the same time, on October 13, attorneys general frorn
19 To date. GMAC Mortgage and Bank of America have only resumed foreclosures in judicial foreclosurc
states and are still their plOeedures in non-judicial foreclosure states.
)0 Ally Financial. Inc . (;'111AC Statemcnt on Indcpendcnt Review and Foreclosure Sales (Oct. 12.
2010) (online at media.ally.eom/index .php?s=43&.item'421) (hereinafter "GivIAC Mortgage Statement on
Independent Review and Foreclosure Sales").
)1 Bank of America Corporation. Statcmcnt/i'Oln Bank o(Amcriea J/ome Loans (Oct. 18,2010) (online at
mediaroom. ba nko fillneri ca. com/plloenix. zhtml 'J c ~ 2 3 4 5038qviro1- newsArtic le&[D' 1483909&hi ghli ght_
c
)
(hereinafter "Statement f1'om Bank of America Ilome Loans").
SCI' Written Testimony of Katherine Porter. supra note 14. at 10 ("In the wake of these parties'
longstanding allegations and findings of inappropriate and illegal practices, I alllllnabic to weight to recent
statements by banks sllch as Bank of America that only 10 to 25 of the first several hundred loans that it has
reviewed have pmblel11s.").
'''''''''''1 (/Ilil II/(II)<I(/"e
(hereinafter "\Vells
JJ'c!!s
UCfiee ofSenatnr I ReilL Reid WeiI'll/III'S Bank America Dc'cisioll. On (!tliClS Ii)
10) (online at reid,senate fOl008 b,ulkoEnncriea.c (bereinaJlcr "Reid
Amcriea I)ceision"j: Dean Baker. Foreclosllre ;1IoratoriIll1l' DOll'll on Liar Liens,
"'U"'." "" a11d Researc h 18, 20 I0) at www.eepr.net/i mlex nlllJ!CllHc'(J'I-&. -cIll Ulnlils/on-
-11101'11011 ulll-crae klnL'.' -1I1/)\vll-<.)n-1 iar-I icns) (herei na Iter I. FOiecloslire rvlmatoriulll:
01/ Foreclosllre
Secllrili:::iltion.1 2(10) (online at www.wellslal'l(0.1,:ol'n!ple,;sUOIO/20101027
on !\ Cfidavits and 1Vl0TILl.aLl.e Sel'uriti7ations
('lacking Down on I.iar I.iens").
Sbaun DonovalL secretary, I i.S.
Famifies 18, 20 I OJ at
0-10-1
all 50 states
26
announced a bipartisan effort to look into the possibility that documents or
affidavits were irnproperly submitted in their jurisdictions.
Although the public focus today lies generally on foreclosures, the possibility of
document irregularities in mortgage transactions has expanded beyond their significance to
foreclosure proceedings. Recently, investors have begun to claim that similar irregularities in
origination and pooling of loans should trigger actions against entities in the mortgage
origination, securitization, and servicing industries.
27
D. Legal Consequences of Document Irregularities
The possible legal consequences of the documentation irregularities described above
range from minor, curable title defects for certain foreclosed homes in certain states to more
serious consequences such as the unenforceability of f()l"eclosure claims and other ownership
rights that rely on the ability to establish clear title to real property, f()rced put-backs of defective
mOltgages to originators, and market upheaval. The severity and likelihood of these various
possible consequences depend on whether the irregularities are pervasive and when in the
process they occurred.
Effective transfers of real estate depend on parties' being able to answer seemingly
straighU()lward questions: who owns the propelty? how did they come to own it? can anyone
make a competing claim to it? The irregularities have the potential to make these seemingly
simple questions complex. As a threshold matter, a party seeking to enforce the rights associated
with the mc)rtgage must have standing in court, meaning that a party must have an interest in the
property sufficient that a court will hear their claim and can provide them with relief.28 For a
mortgage, "[a] Illortgage may be en!()rced only by, or in behalf of, a person who is entitled to
National Association of Attorneys General, 50 States Sign Mortgage Forec!osure Joint Stalement (Oct.
13, 20 I 0) (onl ine al www.naag.org/joinl-statement-of.. the-mortgage-foreclosure-ITlultistate-group.php) (hereinafter
"SO States Sign Mortgage Foreclosme Joint Statement").
Cascs involved suits nst Bank of America (as the parent of loan originator Countrywide) claiming
violations of representations and warranties and sought to en{()rce put-back provisions. Cr'rcell1vich Finaneill!
Services Distressed FUlld 3 LLC. Finaneio! et a/., I:O:-l-ev-I I343-IUII (S.D.N. Y. Oct. 15,
201 Limited Trust and OHP Trusl)S. Balik otAmeriea, CV00367 (S.D.N.Y. Oct J,
10)
Sec Stephen R. Buehenrot h and Gretchen U. .IcnJics, Recent Foreclosure Cases.' Lenders BClvare (June
ahanel IVe!!s )'.
JOU!OIl. 914 N. F ~ . 2 d 204 (Ohio ("I I' plaintiff has ol'lercd no evidence that it owned the note and mortga!.',e
when the Iilet!' it would not be entitled tojudgment as a matter of law."): .. ~
Peterson, Foreclosure, ([lid t!le E!eell'ollic !?('(I}s/I'(J/iflll
ufC'incinnati Law Review. Vol. 7:-1, No.4, at 136:-1-1J 1 (Sullllller 201U) (online at
id 14(9749) (hereinafler "C'ineinnati I,aw Review on
)1'('('1",,111""")' MER5'COIU). fill. 1'. :-161 N.L. 2d ill .20(6). Accordingly, a second set of problems
relates to the chain of title on mortgages and the ability of the party to prove that it has standing to
foreclose. Wilile these arc not limited to the securitization market. are acute for securitized
loans because there arc 1110re chain of title issues involved.
14
enforce the obligation the mortgage secures.',Z9 Thus, the only party that may enforce the rights
associated with the mortgage, with standing to take action on a mortgage in a court, must be
legally able to act on the mortgage.
30
Accordingly, standing is critical for a successful
foreclosure, because if the party bringing the f(Jreclosure does not have standing to enforce the
rights attached to the mortgage and the note, that party may not be able to take the property with
clear title that can be passed on to another buyer. 31 Thus, if prior transfers of the mortgage were
unsuccessful or improper, subsequent transfers of the property, such as a foreclosure or even an
ordinary sale, could be affected. Further, failure to foreclose properly - whether because the
foreclosing party did not actually hold the mortgage and the note, or because robo-signing
affected the homeowner's due process rights - rneans that the prior homeowner may be able to
assert claims against a subsequent owner of the property.32 In this way, documentation
irregularities can affect title to a property at a number of stages, as further described below.
29 Restatement (Third) of Prop. (Mortgages) 5.4(c) (1997). Only the proven mortgagee may maintain a
f()reclosure action. The requirement that a foreclosure action be brought only by the actual mortgagce is at the heart
of the issues with foreclosure irregularities. If the homcowner or the court challenges the claim of the party bringing
a f()reclosure action that it is the mortgagee (and was when the f()reclosure was filed), then evidentiary issues arise
as to whether the party bringing the f()ITclosure can in fact prove that it is the mortgagee. The issues involved are
highly complex areas of law. but despite the complexity of these issues, they should not be dismissed as mere
technicalities. Rather. they arc legal requirements that must be observed both as part of due process and as part of
the contractual bargain made between borrowers and lenders.
VI That party must either own the mortgage and the note or be legally empowered to act on the owner's
behal f. Servieers acting on behal I' of a trust or an originator do not own the mortgage, but by contract are granted
the ability to act on behal l' of the trust or the originator. See Federal Trade Commission. Foctsfc)!' COl/sumers
(online at www.ftc.gov/bcp/eduJpubs/eonsumer/homeslrea1 O.shtm) (accessed Nov. 12.20 I0) ("In today's market.
loans and the rights to service them often are bought and sold. In many cases, the company that you send your
pLlyment to is not the company that owns your loan.'"). See also October 20 I 0 SIGTARP Report. supra note S, at
160 (describing clients of
.JI I .aws governing the remedies available to a lender lCrreclosing on a property vary considerably. States
also differ markedly in how long it takes the lender to fiJleclose dcpending on the available procedures. In general,
claimants can seck to recover loan amounts by I(Jreclosing on thc property securing the debt. If the loan is "non-
recoul'se," the lender only may f(rreclose upon the property. but if the loan is "recourse,'" the lender may f(H'eelose
upon the propcrty and other borrowcr assets. Ivlost states are recourse statcs. A loan in a recourse state allows a
mortgagee to f(lIcelose upon property securing a note and, ir that property is insufficient to the
debt. move thc hOllower's other assets. In non-recourse states. rccovery of tile loan amount is limited to the
loan Put her the Icnder cal1not go a ncr the borrower's other assets ina non-recourse state i I' the
property is insuClicient to the debt. It is worth that evcn in recourse states, the current
economic cl imate. the recourse to the bOITO\\Tr's personal assets may be somewhat illusory since they
lIIay' he minimal relative to the and in pursuing and colon a Judgments. See Andra C.
(;hent and Iv! arianna Recourse alld Residcll!iai alld E\'idellcc US S!a!cs.
Fedeml Reservc Bank of Richmond at
.1 ilt a.lIO'Vlevel'li i1csll 5051 Iwcbsi te ghent. pd f).
1... ,ci,,,,I,,, Lewis Peterson, associate deal) fill acadcmic artilirs and pnliessiJrof
of Law, Uni of Utah. conversations with Panel stafT (Nov. 8, 20 I0),
S..J. Quinncy
IS
I. Potential Flaws in the Recording and Transfer of Mortgages and Violations of
Pooling and Servicing Agreements
a. Mol"tgage Recordation, Perfecting Title, and l'ransferrillg Title
I. Title
The U.S. real property market depends on a seller's ability to convey "clear title": an
assurance that the purchaser owns the property free of encumbrances or competing claims ..J.J
Laws governing the transCer of real property in the United States were designed to create a
public, transparent recordation system that supplies reliable information on ownership interests
in property. Each of tbe 50 states bas laws governing title to land witbin its legal boundaries.
Every county in the country maintains records of who owns land there, of transfers of ownership,
and of related mortgages or deeds of trust. Whi Ie each state's laws have uniq ue features, the ir
basic requirements are the same, consistent with the notion that the purpose of the recording
system is to establish certainty regarding property ownership. In order to protect ownership
interests, fully executed, original (coml11only referred to as "wet ink") documents must be
recorded in a grantor!grantee index at a county recording ofIice.
34
In the case of a purchaser or
transferee, a properly recorded deed describing both the property and the parties to the transfer
establ ishes property ownership.
II. Transfer
In a purchase of a home using a mortgage loan, required documents include (a) a
promissory note establishing the mortgagor's personal liability, (b) a mortgage evidencing the
security interest in the underlying collateral, and (c) iI' the mortgage is translCrred, proper
assignments of the mortgage and the note..J5 'fhere are a number of ways for a mortgage
Black's L,aw Diclionary, at 1522 (2004).
J4 See Cincinnati Law Review Paper on hJI'eclosure supra note 28.
There are two documents that need to be transferred as part of the securitization proccss - a promiss01Y
note and thc security instrumcnt (the mortgagc or deed of trust). The promissory note embodies the debt obligation,
while the security instrument provides that if the debt is not repaid, the creditor may sell the designated collateral
(the Both the note and the mortgage need to be properly transferred. Without the note, a mortgage is
unent()rceable, while without the mortgage, a note is simply an unsecured debt obligation, no different fi'om credit
card debt. Sec FBR Foreclosure Mania Conference Call, supra note 3. The rules for these transfers arc generally
governed the Unil(lI'In Commercial Code (UCC), although onc author statcs that thc application of the UCC' to
the tr:mslCr of the note is not ccnain. Dale A. Whitman. !lOH' lias Foulcd Ihe )'C('iIl7,-!aIT
1",'I,,,ro, Marker. alld WIIilI {O Do .[bow !t, L,aw Review. Vol. at 758-759
Statcs articlcs 01' and revisions tel the liCe IIldividually, :lIld so there can be variation among states in
the application of the liCe. This report does not attempt to identi(y all of the possible iterations. )l,atheL it
describcs :lIId c<)ml1lon applications of the UCC' to such transactIOns,
There are methods whieh a note may be transkrred. First, it may be transferred by
ion." the over of individual notes through indorscment, in the same way that a check
can be tJallslCrred via indorsement. Sec UCC ~ ~ 3-20 L 3-203. The pooling and servicing agrecments (PSAs) for
sceuritized loans contemplate transFer through negotiation. Typical language in PSAs rcquires the
originator to proceed upon entering into a loan secured by real property. They may keep the loan
on their own books; these arc so-called "whole loans." Flowever, if the loan is sold in a
secondary market either as a 'vvhole loan or in a securitization process - the loan must be
properly transferred to the purchaser. To be transferred properly, both the loan and
accompanying documentation must be transferreclto the purchaser, and the transfer must be
recorded.
delivery to the securitization trust of the notes and the mortgages, indorsed in blank. Alternatively, a promissory
note may be transferred by a sale contract, also governed by whether a state has adopted particular revisions to the
Uec. In rnany states. in order for a transfer to take place under the relevant portion of the uee, there are only three
requirernents: the buyer of the promissory note must give value, there must be an authenticated document of sale
that describes the promissory note, and the seller must have rights in the promissOlY note being sold. uee ~ 9-
203(a)-(b).
The first two requirements should be easily met in most seeuritizations; the transfer of the mortgage loans
at each stage of the securitization involves the buyer giving the seller value and a document of sale (a mortgage
purchase and sale agreement or a PSA) that should include a schedule identifying the promissory notes involved.
The third requirement, however. that the seller must have rights in the promissory note being sold, is more
complicated. as it requircs an unbrokcn chain of title back to the loan's originator. While the loan sale documents
plus their schedules are evidence of such a chain of title, they cannot establ ish that the loan was not previously sold
to another party.
Furthcr. this discussion addresses the validity of transfers betwccn sellers and buyers of mortgage
loans. It docs not address the enforceability of those loans against homeowners. whieh requires physical possession
of the original note. Thus, for both securitized and non-securitized loans, it is necessary for a party to show that it is
entitled to enforce the promissory note (and therefore generally that it is a holder oftbe physical original note) in
order to complete a foreclosure successfully.
Perhaps more critically. parties are /J'ee to contract around the Uec. uee ~ 1-302. This raises the
qucstion ofwhcther PSAs fe)r MBS provide for a variancc Ii'om the !Jee by agreement of the parties. The PSA is
thc document that provides felf' the transfer of the mortgage and notes from the securitization sponsor to the
depositor and thence to the trust. The PSA is also the document that creates the trust. The transler fl'OIn the
originator to the sponsor IS Iy a separate document. although sections of it may be incorporated
reference in the PSA.
IT a I'SA is considered a variation agrccmcnt hom the \ ICC, then there is a question of what the PSA
itself to transler the mortgage loans and whether thosc requirements have been met. In some cases. PSAs
appear to require a complete chain of indorsemcnts on the notcs from originator up to the dcpositor with a final
ilHlorscmcllt ill blank to tbc trust. A chain of illdorsemellts. rather than a sillglc indorsemcllt in blank with
tbe notes transferred thereafter as bearer paper. is importallt for establishing the "bankruptcy remoleness" oUhe trust
assets. ;\ critical p,lrt ofseclll'itization is to establish that the trust's assets arc bankruptcy remote. meaning that
could not be clanned the eslatc of an upstream transferor of the assets. Without a complete chain of
imhllsements. it is difTieult, if not impossible. to estabhsh that the loans were in fact transferred hom originator to
sponsor to to trust. rather than Ii'om originator or sponsor to the trust. If the transl'er were directly
110111 the nator 01' sponsor to the trust. the loans could be claimed as part of tile (s or
eslate. The about what the transfers required. therefell'e. involve both the question as
tlansl'crs as well as whether, if werc legally
17
iii. Mortgage Securitization Process
Figure I: Transfer of Relevant Paperwork in Securitization Process
36
Mongage
OrigirHltor
Sewritization
Sponsor
Securitization
Trust
Depositor
sells MBS to
Underwriter
for pubnc safe
1rust issues H
MBSto
Depositor
Securitizations of mortgages require multiple transfers, and, accordingly, multiple
assignments. Mortgages that were securitized were originated through banks and mortgage
brokers- mortgage originators. Next they were securitized by investment banks ~ the sponsors ~
through the use of special purpose vehicles, trusts that qualify for Real Estate Mortgage
Investment Conduit (REM Ie) status. These trusts arc bankruptcy-remote, tax-exempt vehicles
that pooled the mortgages transl'erred to them and sold interests in the income jJ'om those
mortgages to investors in the !()rm of shares. The pools were collateralized by the underlying
real property, because a mortgage represents a first-lien security interest on an asset in the pool
a house.
n
A governing document for securitizations called a pooling and servicing agreement
(PSA) includes various representations and warranties for the underlying mortgages. It also
describes the responsibilities of the trustee, who is responsible f()f' holding the recorded mUligage
\(, FBI< Foreclusure Mania Cunf'erenee Call, slipm note J.
Fur all overview 01' RIM
at
,ICC Federal National "",r"""'., Assuciation, Bosin
). Scc 0/,10 Internal Revenue
!1.1",-I,,,,,,,, /nvcsll7lcnl COlldllilS, 26 CFR I 1 1(95) at
wvvw.Ir.<;"llvilJu!Jilll'SI'CPs/I,:lSilI4,txt}. Only the MBS investors arc taxed on their incume from the trusts' paymenls
on the MIlS. RIMIC\ arc u"",,,,,,,j to be passive entities. \Vith few a RFJvl!C may nut
receive new ;lssets aner 90 have passed sim-c its creation. ur there will be adverse tax consequences. Thus. if a
IransfCr of a loan not done in the lirsl proper transfer nuw euuld endanger the RI:I'vllC slat us.
For an overview of residenlial seeUlities in .ICC American Sccuritizatiun Furuill. ASP
ScclIl'ili::olio/i /l/sliIIiIC. Residcl/liol ScclII!rics al
18
docurnents, and of the serviceI', who plays an administrative role, collecting and disbursing
mortgage and related payments on behalf of the investors in the MBS.
As described above, in order to convey good title into the trust and provide the trust with
both good ti tie to the collateral and the income from the mortgages, each transfer in this process
required particular steps.38 Most PSAs are governed by New York law and create trusts
governed by New York law.
39
New York trust law requires strict eOlnpliance with the trust
documents; any transaetion by the trust that is in contravention of the trust documents is void,
Ineaning that the transfer cannot actually take place as a matter of law.
40
Therefore, if the
transfer for the notes and mortgages did not comply with the PSA, the transfer would be void,
and the assets would not have been transferred to the tmst. Moreover, in many cases the assets
could not now be transferred to the trust.
4
! PSAs generally require that the loans transferred to
the trust not be in default, which would prevent the transfer of any non-performing loans to the
trust now.
42
Furthermore, PSAs f1'equently have timeliness requirements regarding the transfer
in ()rder to ensure that the trusts qualify for favored tax treatment.
43
Various commentators have begun to ask whether the poor recordkeeping and error-filled
work exhibited in f()reclosure proceedings, described above, is likely to have marked earlier
stages of the process as well. If so, the effect could be tbat rights were not properly transferred
during the securitization process such that title to the mortgage and the note might rest with
another party in tbe process other than the trust. 44
IV. MEJZS
In addition to the concerns with the securitization process described above, a method
adopted by tbe mortgage securitization industry to track transfers of mortgage servicing rights
bas come under question. A mortgage does not need to be reeorded to be enf()ITeable as between
the mortgagor and the mortgagee or subsequent transferee, but unless a mortgage is recorded, it
does not provide the mortgagee or its subsequent transferee with priority over subsequent
l S " , " " ~ ' - " ) or lien holders.
45
,8 See Section [).l.a.ii, Sli/ira.
FUR Forcclosure Mania Conference Call. supm note J.
,HI N.Y. Est. Powers & Trusts Law I:i 72.'1; FBR Foreclosure Mania Conference Call, SlI/JI'U note J.
,11 FBR Foreclosure Mania Confcrencc Call. .IU!ml notc 3.
JuslirUl/ee
Insurance
onlDI<lInt at Exhibit 5. page 13.
No. 09CV- I (,56 (I) DC'
Jelli'''{'lle Bunk Na/iona! hus/ \' Federal/J'IJIJ""
8.20 I0) (hereinatler "Ilcutsehc Bank . Federal F)cposit
FBi<. hllcc!osure Mania Confercnce Call. supra note 3.
e.g.. FIlR FOleclosure l'vlania Conferencc Call. SlifJI'CI no(e 3.
Resta(eilicul (Third) of Prop. I:i 5.4 cmt. 13 (I
19
During the housing boom, multiple rapid transfers of mortgages to facilitate securitization
I I
I' ., d' I' I 46
ma( e recor( atlon 0 mortgages a more tlme-COnSUll1lng, an expensIve process t lan 111 t le past.
'ro alleviate the burden of recording every rnortgage assignment, the mortgage securitization
industry created the Mortgage Electronic H.egistration Systems, Inc. (MERS), a company that
serves as the rnortgagee of record in the county land records and runs a database that tracks
ownership and servicing rights of mortgage loans.
47
MERS created a proxy or online registry
that would serve as the mortgagee of record, eliminating the need to prepare and record
subsequent transfers of servicing interests when they were transferred from one MERS member
to another.
48
In essence, it attempted to create a paperless mortgage recording process overlying
the traditional, paper-intense mOligage tracking system, in which MERS would have standing to
initiate foreclosures.
49
MERS experienced rapid growth during the housing boom. Since its inception in 1995,
66 million mortgages have been registered in the MERS system and 33 million MERS-registered
loans remain outstanding. 50 During the summer of 20 10, one expert estimated that MERS was
involved in 60 percent of mortgage loans originated in the United States. 5 I
Widespread questions about the efficacy of the MERS model did not arise during the
boorn, when home prices wcre escalating and the incidence of foreclosures was minimal.
52
But
as foreclosures began to increase, and documcntation irrcgularitics surfaced in some cases and
raised questions about a wide range of legal issues, including thc legality of foreclosurc
proceedings in general, some litigants raised questions about the validity of MERS. 54 There is
46 Christopher Lewis Peterson, associate dean fix academic affairs and professor of law, S..J. Quinney
College of Law, University of Utah, conversations with Panel staff (Nov. 8, 2(10).
MERS conversations with Panel staff (Nov. 2(10). See Christopher Lewis Peterson, Two Faces:
f)emysti(l;ing the Electronic Registration Svstem's Land Title TheolY, Real Property, Probate, and Trust
Law Journal (forthcoming) (onl inc at 1(84729).
1S TvlE:RS convcrsatiolls with Panel stall (Nov. 10, 20 I 0); John R. llodge and Laurie Williams, /Yiort,gagc
Electu)/lic Inc.. II ,)url'e)' Dlscllssing AIERS" AlIflwritv tu AeI, Norton Bankruptcy
Law AdvisCL at 2 2010) (hereinalier "A Survey ofCascs Discussing MERS' Authority to Act').
'\<) i'v1cmbers pay an annual ree and $6,95 for every loan registered, versus approximately $30
in rees lilr Illing a mortgage assignment at a local county land office. MEJZSCOIZP,lnc., Kif (OeL
(onl inc at www.mersillc,org/rnembership/WinZip/M ]:RSeRegistryMembersllipKiLpdf); Cincinnati La \AI
Review Paper on Forec slllim nole 28, at 1368-1371. 5'ec alsu j\iERSCORP. flit'. 1'. ROllwille, 861 N.I'" 2d 81
(N.V
Iv!U-(S cOilversatlUns wilh Panel slall 10.201
I ('incillll,lli 1 al\! IZnil'\\ Oil Forcclosurc, slIpra i10le 28, at 1362.
See A ofCases Diseussillg MERS AUlhority to Act, SIlf!1O note 48, al J.
For instance. ill a session during a recent call with investors. Jamie Dimon.
(TO and chairl11an 01'.1 ('hase. said that the 111'111 had stopped MERS "a while back," JP!'v1organ
Chase & Co.. Ii ('oil (OeLI3,2010)(onlineat ,com/earn-O/earnings--
I 1 .shUnl) (hereinaller "Q3 20 I0 Earnings Call Transcript"). See also
20
limited case law to provide direction, but some state courts have rendered vcrdicts on the issue.
In Florida, for example, appellate courts bave determined that MERS bad standing to bring a
foreclosure proceeding. 55 On the other hand, in Vermont, a court determined tbat MERS did not
I d
56
lave stan mg.
In the absence of more guidance from state cOUlis, it is difficult to ascertain the impact of
the use of MERS on the foreclosure process. The uncertainty is compounded by the fact that the
issue is rooted in state law and lies in the bands of SO states' judges and legislatures. If states
adopt the Florida model, tben the issue is likely to bave a limited efTecL However, if more states
adopt the Vermont model, then the issue may complicate the ability of various players in the
securitization process to enforee foreclosure liens.
57
If suffieiently widespread, these
complications could bave a substantial eflect on the mOligage market, inasmuch as it would
destabilize or delegitimize a system that bas been embedded in tbe mortgage market and used by
multiple participants, both government and private. Although it is impossible to say at present
what the ultimate result of litigation on MERS will be, holdings adverse to MERS could have
significant consequences to the market.
If courts do adopt the Vermont view, it is possible that the impact may be mitigated if
ITJarket participants devise a viable workaround. For example, according to a report released by
Standard & Poor's, "most" market participants believe that it may be possible to solve any
MElZS-related problems by taking the mortgage out of MERS and putting it in the mortgage
.lPM on MERS. supra note 3. This. however. related only to the use of MFRS to foreclose. MERS
conversations with Panel stafl 10,2(10).
54 See Cincinnati Law Review Paper on Foreclosure. supra note 28. Cases addressed questions as
to standing and as to whether, by separating the mortgage and the note, the mortgage had been rendered invalid (OIUS
invalidating the security interest in the property). Sec A Survey of Cases Discussing MERS' Authority to Act. supra
note 48, at 20-2 I ("These intcrpretivc problems and inconsistcncies have provoked some courts to determine the
worst possible fate for secured loan that their mortgages were not effectively transferred or even that the
mOl tgages have been separated liom the note and are no longer enforceable.... '-'/hether the [vIERS construct holds
water is bei ng robustl y tested ina variety of eontex ts. Given the pervasi veness 0 f !vi FRS, if the construct is not
viable. illvlLJZS cannot file j()reelosures, and. perhaps most importantly. cannot even record or execute an
as,;lgllll1ent of a mortgage. what then?").
;)ec \'. ;I::i::e. 9ilS So. 2d 151 (Fla. Dist. Ct.
of Cases Discussing MEIZS' Authority to Act. supra note at 9.
Sec also A
\' . .!o/ill.\iOll, No. Rdcv (Rutland Vl.. (Jet. 2X,
delcnninlng Ihal ivlLRS did flol have standing 10 initiale the f()leclosurc because Ihe nole and mortgage had heen
IvlLRS used the most active in (he securitization market including the banks
Bank of /\lI\ellca. Chase. Wells Citigroup. and Fannie Mae and Freddie Mac), and
ll!<lCC'ssc'd ilO percent of'all MBS. MFRSC()RP. 11\(: .. SliT/hUll Beco!7les Ihird ['I'm'ide!' ill
f(eccT/I !\Iolli/is 10 MERS (Mar. IX. 2DID) (onlinc at
.lnCISU delai i(235). (0 MIRS. il has acled as the party roreclosiug
ror one in five of' the delinqnent 1I\00tgages on its syslem. Iv! FRS conversations with Panel slalT (Nov. I D. 20 10).
21
owner's name prior to initiating a f<Jreclosure proceeding.
58
According to one expert, the odds
that the status of fv1ERS will be settled quickly are IOW.
59
b. Violations of Representations and \Varranties in the PSA
60
Residential mortgage-backed securities' PSAs typically contain or incorporate a variety
of representations and warranties. These representations and warranties cover such topics as the
organization of thc sponsor and depositor, the quality and status of the mortgage loans, and the
validity of their transfers.
More particularly, PSAs, whose terms are unique to each fv1 BS, include representations
and warranties by the originator or seller relating to the conveyance of good title,61
I
. f' I I 62 I . . I d 63 I' . I I' hi I 64 I
(OCIIITlcntatlon or t le oan, une erwntmg stane ar s, . comp lance WIt 1 app lea. e aw, ane
58 See S&P on Foreclosure Crisis, supra note 17.
Christopher Lewis Peterson, associate dean fiJr academic afhirs and professor of law at the S..!. Quinney
College of Law at the University of Utah, conversations with Panel staff (Nov. 8,20 I0).
60 This section attempts to provide a general description of put-backs. Put-backs have been an issue
throughout the linancial crisis, typically in the context of questions about underwriting standards. See. e.g., Federal
National Mortgage Association, Form 1O-Kfiilthe Fiscal Year E'ndcd Decemher 3 I, 2009, at 9 (Feb. 26, 20 I 0)
(online at www..scc.gov/Archives/edgar/data/310522/000095012310018235/w77413el0vk.htm) ("As delinquencics
have increascd, wc havc accordingly increased our rcviews of dclinquent loans to uncovcr loans that do not meet our
underwriting and eligibility rcquircments. As a result. we have increased the number of demands wc make for
lenders to repurehasc these loans or compensate us fClr losses sustained on the loans. as well as requests fc)!'
repurchase or compensation for loans f(lr which the mortgage insurer rescinds coverage."). Documentation
irregularities may provide an additional basis f()r put-backs. although the viability of these put-back claims will
depend on a variety of deal-specific issues. such as the particular representations and warranties that were
ineorporatcd into the I'SA, whieh in turn often are related to whether the MBSs are agency or private-label
securities. Although private-label MBS PSAs typically includcd weaker representations regarding the quality of the
loans and underwriting, they still contain representations regarding proper transfer of the documents to the trust.
1,1 Failure to transfer the loans properly would create two sources of liability: one would be in rendering the
owner of the mortgage and the note uncertain, and the other would be a breach of contract claim under the PSA. For
an example of typical in representations and warranties contained in PSAs or incorporated by reference
['10m mOl tgage loan purchase agreements executed by the mortgage originator. sec Deutsche Bank v. r"ederal
IJcposit Jnsulance Corporation, sUj!ra note 42 (" ... and that immediately prior to the transf'er and assignlllent of the
Mortgage Loans to the Trustee, the Depositor was the sole owner and had good title to each Mortgage Loan, and had
full right to transf'er and sell each Loan to the Trustee fi"ee and clear. ").
Sec Ikutsche Bank . Federal Insurance SUj!1"<i note 42 ("[ach Mortgage Note. each
each and any other document rcquircd to be delivcred or on behalCofthe Seller under this
I1n'CllleI11 or the and t.o the Purchaser or any transkree or of the
Purchaser i()i each I.oan has been or will be . " delivercd to thc Purchaser 01 any such transf'erce
01 'vVith respect to each Loan. the Seller is in ofa rile in
eOlllpllallcc with the and The Note and the related are gelllline.
and each is the valid and binding obligation of the enf()lccable against the by the
mortgagee or its In accordance with its terms, except as such enlc)lcement may be limited
hankrnptcy, ..")" These replesentations and warranties state that the documcnts submitted it)!"
loan underwriting IVere not liJisified and contain no untrue statement of material f;ICt or olllit to state a material f;ICt
Icquiled to be stated thcrein and ale not misleading and that no errOl, omission, misrepresentation, or
fi'aud occurred in the loan's oligination or insurance.
22
I I
j' -I (,,, 1 I . ('1, I d l' . 1 1'1 .
(e Ivery 0 mortgage lIes, . among ot leI' t 11l1gS. n a (ltIon, t le mortgage 1 es must contain
specific loan and mortgage docurnents and notification of material breaches of any
representations and warranties.
If any of the representations or warranties are breached, and the breach materially and
adversely aJTects the value of a loan, which can be as simple as reducing its market value, the
offending loan is to be "put-back" to the sponsor, meaning that the sponsor is required to
repurchase the loan for the outstanding principal balance plus any accrued interest.
67
If successfully exercised, these put-back clauses have enormous value fl.)!' investors,
because they permit the holder of a security with (at present) little value to attempt to recoup
some of the lost value from the originator (or, if the originator is out of business, the sponsor or a
successor). Put-backs shirt credit risk from MBS investors to MBS sponsors (typically, as noted
above, investment banks): the sponsor now has the defective loan on its balance sheet, and the
trust has cash fe)r the full unpaid principal balance of the loan plus acerued interest on its balance
sheet. 68 This means that the sponsor may have to increase its risk-based eapital and will bear the
(,] Sec Deutsche Bank v. Federal Deposit Insuranec COIvoration, supra note 42 ("Each Mortgage Loan was
underwritten in accordance with the Seller's underwriting guidelines as described in the Prospectus Supplemcnt as
applicable to its credit grade in all material respects."). Many concerns over underwriting standards have surfilCed in
the wake of the housing boom, such as lack of adequate documentation, lack of income veri tieation,
misrepresentation of income and job status, and haphazard appraisals. l:ven be1(we the more recent emergence of
the issue of document irregularities. institutions were pursuing put-back actions to address conccrns ovcr
underwriting quality. See Federal National Mortgage Association, Furm ! O-Qji)r the Quarter/v Periud Ended .l1I11e
30, 20!O. at 95 (Aug. 5, 2(10) (online at
www.see.gov/Arehives/edgar/data/3 10522/00009501231 0073427/w79360e I Ovq.htlll) ("()ur mortgage
seller/servicers are obligated to repurchase loans or f(lreelosed properties, or rcimburse us for losses if the foreclosed
property has becn sold, if it is determined that thc mortgage loan did not meet our underwriting or eligibility
requirements or if mortgage insurers rescind coverage.
(,4 See Deutsche Bank v. Federal Deposit Insurance CorporatioJl, supm note 42 ("Each Mortgage Loan at
origination complied in all malerial respects wilh applicable local, stale and federal laws, including, without
limitation, predatory and abusive lending, usury, equal credit opportunity. real estate settlement procedures, truth-in-
lending and disclosure laws, and consummalion of the transaclions cOIltemplated hereby, including without
limitation the receipt orinlerest docs not involve the violation of any such laws.").
(" ,Sec Deutsche Bank v. Federal Insurance CorporatiolJ, .Ii/pm note 42.
or representations and warranties,
"/))'1/,11'" 16, )OU5, at [':x. lJ9,2
New Century Ilome Equity Loan Trust. F(}Im S,K
I I, 20(5) (online al
the Fiscu/ Year Ended f)cccmher 3J, 2UIW al 131 (Feb
(\ n: 11I'ves/cclgaricLata/iU 100 1/00012067741 0000406/citi 10k, htm) (herei na Itcr
10- K"). I lowe vel', since every deal is di tTeren!. there arc a number of di flerent Inethods f()I'
tlngUlslllng a claim lhal may nol the actual repurchasing of the loan. InduslI'Y
experts conversations with Panel slall 9.20J
'iIi",.,,,,,, Form I
supra note 67, at J31.
risk of future losses on the loan, while the trust receives 100 cents on the dollar for the loan.
69
Not surprisingly, put-back actions are very fact-specific and can be hotly contested.
7o
Servicers do not often pursue representation and warranties violations. A 20 I0 study by
Amherst Mortgage Securities showed that while private mortgage insurers were rescinding
coverage on a substantial percentage of the loans they insured because of violations of very
similar representation and warranties, there was very little put-back activity by scrvicers, even
though one would expect relatively similar rates.
71
One explanation for the apparent lack of
servicer put-back activity may be the possibility of servicer conflicts of interest. Servieers are
often affiliated \vith securitization sponsors and therefore have disincentives to pursue
representation and warranty violations. Trustees have disincentives to remove servicers because
they act as backup servicers and bear the costs of servicing if the servicer is terminated from the
deal. Finally, investors are poorly situated to monitor servicers. Whereas a securitization trustee
could gain access to individual loan files but typically do not
n
investors cannot review loan
files without substantial collective costs.
73
On the other hand, investor lawsuits have the
potential to be lucrative for lawyers, so it is possible that some investor groups may take action
despite their limited access to information.
74
2. Possible Legal of the Document Irregularities to Various Parties
In addition to fraud claims, discussed further below, and claims arising liOln whether the
loans in the pool met the underwriting standards required (which is primarily relevant to
(ii Wells Fargo & Company, Together /;Ve '/I (;'0 F'ar: Wells Fargo & Company Annual Rcport2008, at 127
(online at www,wellsrargo,eol1l/downloads/pdlJinvest reiations/wf2008annualreporLpdf) ("In certain loan
sales or seeuritizations, we provide recourse to the buyer whereby we are required to repurchase loans at par value
plus accrued intcrest on the oecurrcnce of ccrtain credit-related events within a certain period of time,").
10 Compass Point Research & Trading, LLC, Repurchascs Part lJ: Private Labe! RMBS !nvestors
lil/,c Aim- Quanti/villg thc Risks (Aug. 17,2010) (online at
api,ning,colniflles/fiCVZyzNTkoAzUdzhSWYNullv33*UrSZYBh3S08zo*phyT79SFiOIC)pPG7kIHe3h8RXKKyp
hNZqqytZrXQKbMxv4R3F61N5d1l36431 I 13MortgageFinanceRepurchasesPrivateLabel08 I 720 10,pdf),
Amhersl Morlgage Insight, PM! ill Sccuritialtiolls, at 4 (July 16,20 I0) ("PMI companies
have beeollle Illore assertive in rescinding insurance", In since early 2009. option ARM recoveries have
averaged 4(J':/,. Alt-A recoveries averaged ,15':0, prime recoveries averaged 58'!';,. and suhprinle recoveries
Securitizalion trustees do not examine and monitor loan flies ror representation and warranty violations
and l'ellcr,I1lv exercise very little of scrvicers, Securitization trustees arc not general fiduciaries; so long as
Illere l1as not been an event of del;mlt [1Jr tile securitization trust. tile trustee has narlOwly (1cllned contractual duties,
alld 110 oll1ers, Seeurililatiolltrustees arc also paid lill' too little to fund active Irustees generally receive
1 basis or less on Ihe principal balance in tile trust. III addiilon. securilization trustees often
receive subSialitial amounts of husiuess from particular sponsors. whicl1l1lay a disincentive [111' them to
pursue and walTallty violations those Nixon LLP. in
tli" . S""illlti.:llliulI li'ilsl""s lind I/i(' CTisis (Jan, 20 I0) (online at
detail3 J 131) the role of the truSiec in
;)ectloll D2.
Sec Seclion D,2.
24
investors' rights nfput-back and bank liability), the other primary concern arising out of
document irregularities is the potential failure to convey clear title to the property and ownership
oI' the mortgage and the note.
There are two separate but interrelated forms of conveyance that may be implicated by
documentation irregularities: conveyance of the mortgage and the note, and conveyance of the
property securing the mortgage. The foreclosure documentation irregularities afTect conveyance
of the propeliy: if the foreclosure was not done correctly, the bank or a subsequent buyer may
not have clear title to the property. But these f()reclosure irregularities may also be further
compromised by a f'Lliiure to convey the mortgage and the note propcriy earlier in the process. I f ~
during the securitization process, required documentation was ineomplete or improper, then
ownership of the mortgage may not have been conveyed to the trust. This could have
implications for the PSA - inasmuch as it would violate any requirement that the trust own the
nlortgages and the notes - as well as call into question the holdings of the trust and the collateral
underlying the pools under common law, the UCC, and trust law.
75
The trust in this situation
may be unable to enf(xce the lien through f()reclosure because only the owner of the mortgage
and the note has the right to foreclose. If the owner of the Inortgage is in dispute, no one may be
able to f()reclose until ownership is clearly established.
If it is unclear who owns the mortgage, clear title to the property itsel I' cannot be
conveyed. I ! ~ for example, the trust were to enf()ITe the lien and foreclose on the property, a
buyer could not be sure that the purchase of the f()recIosed house was proper if the trust did not
have the right to f(lreclose on the house in the first place. Similarly, if the house is sold, but it is
unclear who owns the mortgage and the note and, thus, the debt is not properly discharged and
the lien released, a subsequent buyer may find that there arc other claimants to the property. In
this way, the consequences of f()reclosure docunJentation irregularities converge with the
consequences of securitization documentation irregularities: in either situation, a subsequent
buyer or lender may have unclear rights in the property.
These irregularities may have significant bearing on many of the participants in the
mortgage securitization process:
.. Parties to \Vholll a Mol"tgage and Note Is Transferred Ira lien was not
"perf - filed according to appropriate procedures participants in the transfer
process Illay no longer have a first-lien interest in the property and may be unable to
en that against third-parties (and, where the property has little value, particularly
in non-recourse jurisdictions, may not be able to recover any Illoney). Similarly, if
[\ll00,t I'SAs are on\/('nl('l!
New York trust law and contain proVisions that override uce Article 9
J11('IV""l1fl, Oil secured transactions. Ihis report does not attempt to describe dclc.'ct that may
arise out of the IITc'j!ullantIes partIcularly the nature of the but addresses
aq2.11lllellts COllllllOli to thc CUITent discllssions. In addition, the Panel takes 110 un whet Iter any of these
arguments are val id or to sllcceed.
25
the notes and mortgages were not properly transferred, then the party that can enforce
the rights attached to the note and the mortgage right to receive payment and right
to foreclose, among others may not be readily identifiable. If a trust does not have
proper ownership to the notes and the mortgage, it is unclear what assets are actually
. I 'j' 76
ll1 t le trust, I any.
Sponsors, Servicers, and Trustees - Failure to follow representations and warranties
found in PSAs can lead to the removal 0 f servicers or trustees and trigger
indemnification rights between the parties.
77
Failure to record mortgages can result in
the trust losing its first-lien priority on the property. Failure to transfer mortgages and
notes properly to the trust can affect the holdings of the trust. If transfers were not
done correctly in the first place and cannot be corrected, there is a profound
implication for mortgage securitizations: it would mean that the improperly
transferred loans are not trust assets and MBS are in not backed by some or all of
the mortgages that are supposed to be backing them. This would mean that the trusts
would have litigation c1airns against the securitization sponsors f()J' refunds of the
value given by the trusts to the sponsors (or depositors) as part of the securitization
transaction.
7R
If successful, in the most extrerne scenario this would mean that MBS
trusts (and thus MBS investors) could receive complete recoveries on all improperly
transferred mortgages, thereby shilling the losses to the securitization sponsors.
79
The competing claims about MERS can also factor into these issues. IfMERS is held not to be a valid
recording system, then mortgages recorded in the name ofl'vlERS may not have first priority. Similarly, iflVIERS
does not have standing to foreclose. it could cast into question !()reclosures done by !VIERS.
77 It should be noted that while no claims have been made yet based on an alleged breach of representations
and warranties related to lhe translt,r ofti(le, claims have beellmade based on allegations of poor underwriting and
loan pool qnality. See Buckingham Research Group. Conj(,/"(>!7ce 7ilkeawavs on Mougage Repurchase Risk. at 2
(Nov. 4. 20 I0) (hereinaller "Buckingham Research Group C'onfercnce Takeaways"). However. there is a possibility
that there will be put-back demands f()r breaches of representations and warranties relating to mortgage transfers.
Because the REI'v1JC status and avoidance of double taxation (trust level ami investor level) is so critical
to the economics of securitization deals. the PSAs that govel"l1 the securitization trusts are replete with instructions to
servicers and trustees to protect the REMIC status. including provisions requiring that the transfers of the mortgage
loans oeeur within a limited time aller the trust's creation. See, e.g.. Deutsche All-A Securities.
Inc., , 'Veils Fargo Bank. National Associalion, Alaster ServiceI' and Securilies Administralor, and ffSBC
Bank USA. NatlO/wl Associalion. 'huslee, Pooling and (Sept. I. (onl inc at
\vww.seci nl<Jcom/d I 312 ] ,v] B7.d .htm# I
)<) If a signi licant number of loan transfers jililed to comply with governing PSAs. it would mean that
slleable losses 011 Inol'tgages would rest on a handful of banks. rather than being spread among NIBS investors.
Sometimes the sceuritization sponsor indemmficd the j()r any losses the sponsor incurs as a result of
the breach of and warranties. Id at scction I (UJ3, This indemni fication is valuable.
howevcr. to the ex tent that thc has su ffieient assets to cover tile indemnification. arc
and others have ceased or liled for bankruptcy, in many cases. any put,baek
liabi IS to rest on the securitization sponsors. these sometimes entitle the trust
to the value of the loan any payments received. plus interest. the value the trust would reccive is
still greater current value of llJany of these loans. As a number of and sponsors were acquired
other tinanClal institutions 2008-2009. liability has become even more !,,lCused on a
relatively small number of important financial institutions. Financial Crisis Inquiry Commission.
26
Successful put-backs to these entities would require them to hold those loans on their
books. Even iI' the mortgage loans are sti II valid, enf(Jrceable obligations, tbe
sponsors would (if regulated for capital adequacy) be required to hold capital against
tbc mortgage loans, and might have to raise capital. If these banks were unable to
raise capitaL it might, again, subject tbern to risks of insol vency and threaten the
system.
BOITo,"vel's/holllcowners - Borrowers may have several available causes of action.
'They may seek to reclaim foreclosed properties that have been resold. They may also
refuse to pay the tlUstee or serviceI' on the grounds that these parties do not own or
legitimately act on behalf of the owner of the mortgage or the note. so In addition,
they may defend themselves against f()reelosure proceedings on the claim that wbo-
signing irregularities deprived them of due process.
Later Purchasers Potential home-buyers may be concerned that they are unable to
determine definitively whether the home they wish to purchase was actually
eonveyed with clear title, and may be unwilling to rely on title insuranee to proteet
them.
s,
Financial institutions that may have been interested in buying m011gages or
mOligage securities may worry that the current holder of the mortgage did not
actually receive the loan through a proper transfer.
.. Invcstors Originators of mortgages destined for mortgage securities execute
mortgage loan purchase agreements, incorporated into PSAs, that, as mentioned
earlier, rnake representations and warranties the breach of vvhich can result in put-
back rights requiring that the mortgage originator repurchase defective mortgages.
MBS investors may assert claims regarding issues that arose during the origination
and securitization process. For instance, they may assert that violations of
underwriting standards or faulty appraisals were misrepresentations and material
omissions that violate representations and warranties and may, in some cases where
the necessary elements are established, raise fraud elaims.
s2
They may also raise
issues about the validity of the RHvlIe, the bankruptcy-remote, tax-exempt conduit
that is central to the mortgage securitization process. A potential investor claim is
iUnrlo,'!op C'lisis, at 13 (Apr. 7. 20 I0) (online at
ICI(:.lcuw/:reDorls/D,dls/2010-0407Preliminary Staff Report Securitization and thc
of' the top 25 sponsors ill 2007 have sillce been (lverall. recovery is
uea [.. nv-uear basis.
Crisis.pd!)
to be
noted above. the servicer does not oIVn the mortgagc alld the note. but has a contractual to
enforce the associated IVlth the mortgage and the Ilote.
xr The cOllcept of"bona-lidc lin value." which existx in both COl1111101l alld slatntory law. Inay
protect the latcr If the laler records an intcrest in the property and had no notice of the competing
clallll, that Interest ill the pmperly will be sourccs convcrsations with Pancl.slaff(Nov. 9. 2(10).
See Section r:. I,
27
that mortgage origination violations and title defects prevented a "true sale" of the
mortgages, consistent with Internal Revenue Service (IRS) regulations and as
required by the New York State trust law, invalidating the REMIC. Some
comrnentators believe that inquiries by investors could uncover untimely attempts to
cure the problem by substituting complying property more than 90 days after
formation of the REIvlIC, a prohibited transaction that could cause loss ofREMIC
status, resulting in the loss of pass-through taxation status and taxation of income to
the trust and to the investor. 83 Loss of REMIC status would provide substantial
grounds for widespread put-backs. Moreover, this type of litigation could be
extremely lucrative for the lawyers representing the investors. It may be expected
tbat, for this type of action, the investors' counsel would have strong incentives to
litigate forcefully.
Title Insurance Companies - In tbe United States, purchasers of real property (i.e.,
land and/or buildings) typically purchase title insurance, which provides a payment to
the purchaser if a defect in the title or undisclosed lien is discovered after the sale of
the property is complete. Given the potential legal issues discussed in this section,
title insurance companies could face an increase in claims in the near future. The
threat of such issues nwy also lead insurers to require additional documentation
bc1()re issuing a policy, increasing the costs associated with buying property. 84
Junior Lien Holdets -Second and third liens are not as comrnonly securitized as first
liens; therefore, their holders may not face the same direct risk as first lien holders.
Junior lien holders may, however, face an indirect risk if the rights of the first lien
holder cannot be properly established. If the property securing the lien is sold, all
senior liens must be paid first. IJthe senior liens cannot be paid off because it is
The majority ofl'SAs were created under the laws of New York state. Under New York law, there are
f(Hlr requirements f()r creating a trust: (f) a designated beneficiary; (2) a designated trustee; property sufficiently
identificd; and (4) and the delivery of the property to the trustee. Joshua Rc)sner of GrahalJl Fisher, an investment
research firm. has noted that there lJlay not have always been proper delivery of the property to the trustee. "In New
York it is not enough to have an intention 1.0 deliver the property to the trust, the property lJlust actually be delivered.
what defines acceptable The answer appears to lie with the 'governing instrument,' the Pooling and
""ppmenl (PSA). Thus, in order to have proper the parties to the PSA must do that which thc
PSA demands 10 achieve ." Joshna Rosner. noll' to Panel staff (Nov 8. 20 10). To the extent that a PSA
I('{IIII i('S that property be to thc trust wilhin a certain timelj'ame, such convcvance would be void. N.Y.
L:states, Powers. and lrusts Law 7-2.4 (iVIcKillney' 2(06).
'""Ul'1'II title insurers appear to be !()r potential risk, one observer has noted that title insurance
Inhh\/ilC'k and Iradc groups have instead down the effects of Ihese Issues. I
Peterson, or law. S.. I. School or law, l Jniversily or I Jtah. conversations with Panel staff II,
2(10). Title insurers state that do not presently helieve that these issues wili have much Industry
sources cUllvcTsations with I'allel sta 10,20 I 1'10 Peterson that the insurers mav earn
sullicient relnullcratiun rnlill various ft'es to orfset any potential risk. ()n the other hallcl, title insurers could stand to
sulkr licantlosses ifsolne of the matters discussed in the such as invalidation or
PvlFRS. come 10 It is 100 to if such evcnts arc but title insurers would be one orthe primary
parties damaged such all action.
28
impossible to determine who holds those liens, the junior lien holder may not be able
to claim any of the proceeds of the sale until the identity of the senior lien holder is
settled. On the other hand, document irregularities may offer a windfall for some
junior liens. If the first mortgage has not been perfected, the first lien holder loses its
priority over any other, perfected liens. Therefore, if a second lien was properly
recorded, it eould take priority over a first lien that was not properly recorded. The
majority of second liens, however, were completed using the same system as first
Iiens and therefore face the same potential issues. Moreover, many mortgages that
were created during the housing boom were created with an 80 percent/20 pereent
"piggy-back" structure in which a lirst and second lien were created simultaneously
and using the same system. If neither lien was perfected, there may be a question as
to which would take priority over the other. 85
Local Actions Despite the state attorneys' general national approach to
investigating document irregularities, there may be separate state initiatives. Under
traditional mortgage recording practices, each time a mortgage is transferred from a
seller to a buyer, the transfer must be recorded and a fee paid to the local government.
Although each fee is not large typically around $30 the fees for the rapid transfers
inherent in the mortgage securitization process could easily add up to hundreds of
dollars per securitization. T'he MERS system was intended in part to bypass these
lees.
S
(, Local jurisdictions. deprived of mortgagc recording tax revenue. may lile
Iawsu its against origll1ators. servicers, and MERS.
lhe primary private litigation in this arca is likely to cOllie li'om investors in NIBS. These
investors arc orten institutional investors, a group that has the resources and expertise to pursue
such claims.
s7
A major obstacle to investor lawsuits seeking put-backs has been a provision in
PSAs that limits private investor action in the case of breaches of representations and warranties
to certificate holders with some minimuill percentage orvoting rights, orten 25 percent.
8S
Investors also surfer from a collective-action problem in trying to achieve these thresholds, not
least because they do not know who the other investors are in a particular deal, and many
II,-"I(\nl,,'r t .ewis l'eterS(\Jl. nn,1es",, (\1' law. S..I. Sch(\ol (\1' I,aw. or
conversations with 1',1I1el staff Irlhe l1Jortgages were ercalcd at dirkrenttil1Jes. the l1J(\rtgage created
Ii rst w(\u Id ta ke nrecc,lcl1l:e
SI, Cillcil111ati
(\n Foreclosure, supra lIole al1386-1371.
lnstituti(\nal holders or RTvlBS include rUlids. hcdge runds and other asset l1Janaeers, Illutual
Ii re insurance and investors. IJata provided Inside Finance' 12. 20 10).
1'111'''"101,,,\11 Research l 'emf('rence supra note 77, at 2.
29
investors are reluctant to share infonnation about their holdings. Furthermore, the interests of
junior and senior tranche holders may not be aligned.
8Y
When investors do achieve the collective-action threshold, it is only the first step in a
complieated process. For example, if the trustee declines to declare the serviceI' in default, then
investors can either bring suit against the trustee to force it to remove the servicer, attempt to
remove the trustee (which often requires a 51 percent voting threshold), or remove the servicer
directly (with 8 two-thirds voting threshold). It bears emphasis that the collective-action
thresholds required vary J!'cHl1 deal to deal. Two recent investor lawsuits started with a view to
enforce put-back provisicllls resulted in dismissals based on the plaintiffs' failure to adhere to 25-
percent threshold requirements. YO The practieal effect of such decisions is that the hurdle of
meeting this relatively high threshold of certificate holders can limit investors' ability to examine
the documents that would support their clairns.
Recently, however, investors are beginning to take colleetive action, suggesting that the
25 percent threshold may not be an enorrl1OUS burden for organized investors. A registry created
by RMBS Clearing IIouse is providing a confidential data bank whose purpose is to identify and
organize certificate holders into groups that can meet threshold requirements.
Y1
Using the
registry data, a lawsuit has been initiated against JPMorgan Chase and the Federal Deposit
Insurance Corpor8tion (FDIC),92 both of which have assumed liabilities of failed bank
Washington Mutual, seeking to enforce put-backs and document disclosure. Recently, an
investor group composed of eight institutional investors, including the Federal Reserve Bank of
New York (FRBNY), representing more than 25 percent of the voting rights in certain
C:ountrywide MBSS,93 made a request of securitization trustee Bank of New York to initiate an
investigation of the offerings originated by Countrywide prior to its acquisition by Bank of
89 Also, to the extent that these MBSs have been turned into collateralized debt obligations (eDOs), the
collateralmanagcr overseeing the CD()s may need to weigh actions that pose conflicts among thc tranche holders
because of obligations to act in the best interests ofall the securities classes. Panel staffconversatiol1s with industry
sources 8. 20 I
'JG (;u;elllvieh Fin. Sel'\. \'. ('nIlI1J'J'1"I'i"I,FIn. C'OlP, No. 650474/08 (N.Y. Supp. Oct. 7. 2(10); Foo!brldge
Lid. hilS! IIlId OHP Lid. hils! v. Home Loalls, fllc. No. 09 CIV 4050 (S.D.N.Y. Sep. 28.
2(10).
PI
' Based on conversations between Panel sta If and ibe company. lZJ'v! BS ('Icaring Iiousc cia iillS (0 rCjJrcsent
11\0re than perccl1t oC the certificate holders of 2.300 mortgage-backed securities, more tban 50 percent of holders
oC900 seeullties, and more than I,ll percent of the holders of450 securities
in tbe aggregate, a Lice amount of:;;500 billion, or one-third of the label
1I1L',1l2e-llael(eli seelilities mmket. (lile likened them to a site f()1 investors. l<.fY1I3S
House convelsations with Panel staff
Deutsche B,nl!, v. Federal 'nnH,,:dw,n SlIplll note 42.
institutional investors who collectively hold more than 25 percent of the
",":>n",JU!'",' l11orll.',w<>I)ilel,ec! securities issued in 115 in 2001l
<)) Gibbs & Bruns represents
in 1110re than $47 billion in
and 2007, On (let 20. 20 10. FRBNY became a c1Ul1,!innr t.o the leiter.
30
America. After Bank of New York refused to act,94 the group petitioned Bank of America
directly in an ef!c)rt to review the loan files in the pool.95 Some believe that the difficulty faced
by investors in gaining access to the loan files that support their claims of contractual breaches
and the cost of auditing them wiU make widespread litigation economically unrealistic. 96 Even
as put-back demands from investors are appearing, unless the investors can review loan
documents, they lack the inlc)rmation to know what level of put-backs should be occurring.
Moreover, at least one bank CEO has stated that his bank will challenge any determination that
underwriting standards were not met on a loan-by-loan basis, creating further hurdles.
97
At
present, it is unclear what litigation risk these proceedings are likely to pose for the banks.
98
There is good reason to assume, however, that the litigation will attract sophisticated parties
interested in the deep pockets of the sponsors.
Given the complexity of the legal issues, the numerous parties involved, and the
relationships between rnany of them, it is likely that any litigation will be robust, costly, and
lengthy. Nonetheless, it is possible that banks may see a financial advantage to delaying put-
backs through litigation and other procedural hurdles, if only to slow the pace at which they must
be completed and to keep the loans oIl of their books a little longer. In addition, as discussed
above, conflicts of interest in the industry may further complicate an assessment of litigation
risk: servicers, trustees, sponsors, and originators are oflen affiliated with each other, meaning
that each has a disincentive to proceed with an action against anothcr lest it harm its own bottom
'14 Under the PSA, the trustee is entitled to a satishlctory indemnity prior to allowing such a process to
continue. The trustee f(lr the securities. Bank of New York, did not find the indemnity offered acceptable and
refused to allow the parties to proceed. The various trustees for these securities may therefore fOlTn an additional
barrier between investors and review of the loan files. For example, Fannie Mae explains in a prospectus fell'
mortgage-backcd securities (IZEMIC certificates) that "We arc not required, in our capacity as trustee, to risk our
funds or incur any liability if we do not believe those funds are recoverable or if we do not believe adequate
indemnity exists against a particular risk." See Federal National MOIigage Association. Single-FamilF REMIC
Prospectus. at 44 (May 1.2(10) (online at
www FM_May 1 201 O.pdf).
')5 Letter from Gibbs 8: Bruns LLP on behalfofBlackRoek Financial Management. Inc. ct al. to
'""nlt\/",id, 110me Loans LP, The Bank of New York, and eounsel, Ne. Holders' ;Yotice to '/i-lIstcc and
Muster Ser\'icer 18, 20 I0) (hereinafter "Letter li'om Ciibbs & Bruns LLl' to Countrywide"). The group
including r:RBNY that the loans in the pools did not meet the quality required the PSA and
have not been prudently serviced.
Jamie Dimon, CFO orJl'Morgan Chase, commented during a recent quarterly earnings call that litigation
costs in I(lreelosure cases will be so large as to become a cost of doing business and that, in anticipation of such suits
J ('hase has raised I(S reserves $1.3 billion, Transcript provided SNL FinanCial (Nov. 2(10), Sec
iI!SO .lPM ou Foreclosures, Ivl FRS, supra note .3-
Chuck Noski, chid linaucial officer ror Hank or America, Slated during au earnings call for the third
quarter of 2010: 'This really g.ets dowu (0 a loan-by-Ioan determination amI we have, wc believe, (he resources to
deploy that kiud ora revicw" 13ank or Amcrica Corporation, Q3 20!O Cu!! (Oct. 19,
2(10) (ouliuc a( 183 n176-bank-or-america-corporation-qJ20 IO.aspx?piudcx -I)
(hcreinalkr "Bank or America Q3 20 I() Call Transcript").
For a discussion ol'lill:"atlon risk, see Sectiou 1'.2,
31
lO}
line.'!'! Moreover, there is the possibility that those who foresee favorable results from such
litigation, and who have the resources and stamina for complex litigation (such as hedge funds),
will purchase affected assets with the intent to participate as plaintiffs, intensifying the legal
battle further. TARP recipients, of course, were and are at the center of many of these
transactions, and predicting all of the possible litigation to which they might be subject as a
result of the irregularities (known and suspected) is vitiually impossible. It is not unlikely that,
on the heels of highly publicized actions initiated by major finaneial institutions and the
increasing likelihood that investors can meet the 25 percent threshold requirements for filing
lawsuits, sophisticated institutional investors may become more interested in pursuing litigation
., .. \ AS' c, . I .. I ' 'I f' I . 100 S .
or even 111 mvestll1g 111 in ;:, 111 on er to POSttion t lemse vcs or awsUlts. 0l11C seeurIty
holders, such as large endowments and pension plans, have fiduciary duties to their own
investors that may lead them to try and enforce repurchase rights. In addition, if investors such
as hedge funds that have the resources to support protraeted litigation initiate lawsuits, that could
intensify the legal battles that banks will faee.
tol
If litigation based on significant document
irregularities is successful, it may throw the large banks back into turmoil.
Similarly, Fannie Mae and Freddie Mac may become embroiled in the controversies.
Fannie and Freddie have already been actively engaged in efforts to put-back nonconforming
loans to the originators/sponsors of the loans they guarantee. But they may also find themselves
on the other side, as targets of litigation. In addition to being embedded in the entire
securitization process, they are part owners of MERS, 102 which is becoming a litigation target.
'1'1 Sec Section D.I.b. slipra.
100 Sec discussion of collective action thresholds in this section. slipra.
101 In its latest with the Securities and Exchange Commission (SEC), Citigroup acknowledged that
hedge fund Cambridge Place Investmcnt Management. The Charles Schwab Corporation. the Federal Home Loan
Bank of and the Federaillome Loan Bank of Indianapolis have Illed actions related to underwriting
irregularities in RMBS. .)'ee Citigroup. Inc. Form JOQJi)llhe Qllarlerlv Period Ended SelJlelllher 30, 20JO. at 204
5, 20 IOJ (online at /\ rchives/edgar/data/83 100 I/000 I047469 I0009274/a2200nSzl Oq.htm)
(hercinafler "C'itigroup IOQ !()I Q2 20 I0"). In addition, the hedge fund eon1l11unity has begun eoaleseing around
their investments in Rl\1BS. f(lIming a lobbying group called the Mortgage Investors Coalition. Sec Senate
Committee on Banking. Housing. and Urban Wrillen Testimony ofC'urtis GlovicL managing director,
Fortress Investment Ciroup, Needed lu Pre'Fcnl Fureclosllres (.luIy 16.
(online at banking. senate id 181'542121 b61-4486-98dO
e02fe74ea2eS).
lvl ERSC'OR p. Inc .. i11 ERS Shure/wldcrs (online al www.mersine.org/aboutlslwreholders.aspx)
"('(',-"",,11 No\ I 10) a critical role in the development offvlERS Through their capital
supporL MI.RS ahle to fund related to and initial starlup."). also letter fnllli R.K.
\mold. and ehiefexecullve officer. MFRSCORP Inc.. to Elizaheth M. secretary. Securities and
/lI/i(J,I('(J Rille Assel-Blided ,'JecII/llles. at Appendix B
30.2010) al IO/s7081 ngasall letters from
both Fannie Mae and FI'eddie Mac. which include the Fannie ,'vIae statemenl that "As you arc aware. Fannie l\lae has
heell ,Ill advocate alld strong supporter of the eff()rts of MERS since its !(H'lnation in 1996. The mission of tv1 F]ZS to
streamlille Ihe Ili00tgage illitiatives and data stalldards is in tlie best illterests of the
mortgage . :llld Fanllie Ivlae supports this missioll.").
32
Both Fannie and Freddie have recently ccased allowing MEIZS to bring foreclosure actions. 103
Further, Fannie and Freddie used at least one of the law firms implicated in the irregularities to
handle foreclosures. 104 Given that these two government-supported finns are perceived as the
ultinlate "deep pocket," it is likely that interested litigants will attempt to find a way to attach
liability to them, which, if successful, could further affect the taxpayers. 105
3. Additional Considerations
The participants described above are by no means the only parties affected by these
Issues. Lenders may be reluctant to make new loans on homes that could have title issues.
Investors may likewise be reluctant to invest in mortgages and MBS that may be affected.
t]ncertainty about the actions that federal and state governments may take to address the
docLlllJentation issues, how these actions will affect investment returns, and concerns that these
problems may be widespread in the mortgage industry nlay also discourage investors. Until
there is more clarity on the legal issues surrounding title to affected properties, as well as on the
extent of any title transfer issues, it may also becolne more diflicult or expensive to get title
insurance, an essential part of any real estate transaction. In addition, put-backs of mortgages,
10.1 See Federal National Mortgage Assoeiation, Miscellaneous Servicing Polin
'
Changes, at 3 (Mar. 30,
20 I0) (Announeement SVC-20 10-05) (online at www.efanniemae.com/sf/guides/ssg/annltrs/pdmOl O/svc 1005.pdf)
("EfTective with foreclosures referred on or ailer rvlay 1.20 I0, MERS must not be named as a plaintiff in any
forcclosure action, whetherjudicial or non-judicial. on a mortgage loan owned or securitized by Fannie Mac.").
104 ()n November 2, 20 I0, Fannie Mae and Freddie Mac terminated their relationships with a Florida
foreclosure attorncy David .I. Stcrn, who had processcd thousands of evictions on thcir behalf and allegations
the Florida Attorney General's ol'fice of improper foreclosllre practices including lillse and misleading
documents. See OfhI' I' of Florida Attorney Gcneral Bill McCollum, Florida Law Firms Subpoenaed Over
FOIec1osure Filing I'laclices (Aug. 10,2(10) (onlinc at
www.rnylloridalegal.eom/newsrel.nsfJnewsreleascs/2BAC1AF2A61 BBA398525777B0051 BB30); ()ITiee of Florida
Attorney General Bill tvlcColium. Active Puhlic Consumer-Re1aled !171'estigation, No. LI 0-3-1145 (online at
www.mylloridalegal.com/ . 85256309005085AB.nsfJO/ADOFO IOA43782D96852577770067B68D?Open&Jlighligh
tc'O,david,stern) (accessed Nov. 10.201 Nick Timiraos, Fannie. Freddie Cut li'es to Law Firm. Wall Street
Journal .3,2010) (online at online.wsj.co1ll/article/SBI0001424052748704462704575590342587988742.htlnl)
("A spokeswoman felr Fleddie Mac. Sharon Mcllale. said it took the rare step on Monday of beginning to remove
loan files after an internal review raised 'concerns about some of the practices at the Stern firm.' She added that
Freddie Mac took of its Ii Ies 'to protect our interest in those loans as well as those of borrowers.
lOS The F'ederal Finance placed Fannie Mae and Freddie Mac into conservatorship
Oil Septemher 7. 200X. in ol'der to preserve each company's assets and to restore them to sound and solvent
condition. has guaranteed their debts, ami FII L\ has all the powers of the management, board, and
shareholders of the CiSls. Iiouse !'inaneial Subcommittee on C'apital Markets. Insurance, and
Written of [.dwald.l. director. Federal
FllWIICC A o/ll!ie(;SEs,at2( 15.2010)(onlincat
fUU'l.','uvl[Vledlaililc/h,'arlln"s/IIIIDeMarco09151 0. One of the that has ariscn is
to he difTelences in the quality of securitization f(,r go',ernlllent.-SI)OI'ISOII-e<!
DriVaIClaIlCI MIlS. SOllie sources believe that the process GS!:
securitizations is to have becn llIore but it is to determine if this is correct.
this report docs not atteillpt to between CiSE and cleals. Howevcr. ifGSE
securitizations prove to have heen donc it result in additional Ie)!' the CiSEs either as
or as the GSEs try to pursue indel1lnification
damages from lawsuits, and claims against title cOlnpanies, mortgage servicers, and MBS
pooling and securitization firms have the potential to drive these firms out of business. Should
these and other companies that provide serVIces to the mortgage rnarket either decide to exit the
rnarket or go bankrupt, and no other companies opt to take their place in the current environment,
the housing market \vOltldlikcly suffer. Even the mere possibility of such losses in the future
could have a chilling effect on the risk tolerance of these firms, and could dim the housing
market expectations of prospective home buyers and mortgage investors, fUIiher reducing
I
. I I I ,. I f' 106
lousmg (emam am rarsmg t le cost 0 mortgages.
More generally, howevcr, and as noted below, the efficient functioning ufthe housing
market is highly dependent on the existence of clear property rights and a level of trust that
. I ' , I . I I I' I' . f' I I 107 If' I
vanous marzet partICIpants lave m eac lot leI' am m tIe mtegrIty O. t le marzet system. . t le
current foreclosure irregularities prove to be widespread, they have the potential to undermine
trust in the legitimacy of many foreclosures and hence in the legality of title on many foreclosed
, 108 I I ,. 'bl I I 'll'd I' ..
propertles. < n tlat case, It IS pOSSI e t lat )uyers WI avol purclasmg propertIes m
foreclosure proceedings because they cannot be sure that they are purchasing a clean title.
Protections in the law, such as those feJr a bona-fide purchaser for value, may not ease their
anxiety if they are concerned that they will become embroiled in litigation when prior owners
appeal foreclosure rulings. These concerns would be likely to continue until the situation is
resolved, or at least until the legal issues surrounding title to foreclosed properties have been
clarified. Those buyers who remain will likely f ~ I c e less competition and will offer very low
bids. Even fCJreclosed homes that have already been sold are at risk, since honles sold before
these documentation issues canle to light cannot be assumed to have a legally provable chain of
title. 'rhcse homes will therefore likely be drflicult to resell, except at low pnees that attract risk-
tolerant buyers.
E. Court Cases and Litigation
The foreclosure doemnentation irregularities unquestionably show a system riddled with
errors. But the question arises: were they merely sloppy Inistakes, or were they fraudulent?
Differing answers to tins question may not affect certain remedies available to aggrieved parties
put-backs, fCll' example, arc available fc)r both mistakes and fe)r fraud but would aflect
10(. Sec Standard & Poor's Global C'rcdit Portal, l{arings IJirccl, flilor!",I'u' Jioub/cs ('Ofll/flIlC j() On
US Ballks (Nov 4,2010) (online at 11410Artiele5.pdf)
Itcr "Standard Poor' on the IIII pact of of best and wurst
lIernando de Soto, Jilc Sll'nelT
Use, at 5-CJ, 17,1 ("I' 01111 a I property titles allowed
of validation into that of an markct.
a/n'llI/lsm Trill",,,I,, /n Ihe 11'1',11 alld Fails F""f'1.'",h,"IP
to movc the fhrits uftheir labor from a small range
lOP, "1"1 {' I' I I I I I' I I ".
re eIV uree osee rOllles IV lere a ball \ llllglllatcc lIe mortgage, serViced It, held It as a whole
alld the {(lITelosme doeullIenls themselves arc very unlikely 10 be affected. The elket of the
on other types or loans ami homes are, as discussed In this reporL presently very diflieult to predict.
34
, I I 'I ,109 I "I I ' 'I I II
potentw (amages 111 a awsUlt. t IS Important to note t lat t 1e vanous parties w 10 may )e a) e
to bring lawsuits may choose different causes of action for very similar sets of facts depending
on standing and a host of other For example, on the same facts, an investor may try to
pursue a civil suit alleging violations of representations and warranties relating to underwriting
standards in a PSA instcad of pursuing a seeurities fraud case where the burden of proof would
be higher. Put another way, plaintiffs will pursue as many or as few causes of action as they
believe serves their purpose, and one case does not necessarily preclude another.
1. Fraud Claims
a. COllllllon Law Fraud
Property law is principally a state issue, and the foreclosure irregularities first in
depositions filed in state courts. Accordingly, one option for plaintiffs may be to pursue a
common law fiaud claim. The bar for proving common law f1'aud, however, is fairly high. In
order to prove common law fraud, the plaintiff must establish five clements: (I) that the
respondent made a material statement; (2) that the statement was false; (3) that the respondent
made the statement with the intent to deceive the (4) that the plaintiff relied on the
statement; and (5) that the plaintiff suffered injury as a result of that reliance, I 10
Traditionally, in order to prove common Jaw fraud under state Jaws, each element
detailed above has to be satisfied to the highest degree of rigor. F:ach state'sjurisprudence has
somewhat different relevant interpretive provisions, and common law fraud is generally
10') SCI', DClilsehc All-A Seelirilie,l, fllC, , Wells Fargn Balik Naliolla!
Associalioll, Masler SCI Ticer alld Securilies ,I dmillislralol", alld I1SBC Balik liS,!. iValiolial Assncial/oll, hIiSICC,
/'o"//11<1olld (Sept I, (online at www.seeinlil.colll/dI312I.vI1l7.d.htlll) ("Scction 2.03,
IZcpurchase or Substitution or I.Oims, (a) Upon or rcccipt or notice ", or a breach by the Seller or any
representation, warranly or covenanl under the loal1 Purchase ... the Truslee shall enf('ree the
0111",all(\ns or Ihe ler under the I,oan Purchase to such I,oan"):hllst .1 "r",'m,,'1I1
(I'S "1/1'1111'.1 nlf! ' alld Dewsche Ball!' Na1iOl/il1 hllsl C'iIIl/hllll'. fruslec, II./"r/",I("{'
Fass- Sales }l!l!ri-FM! I 200Cl) (online at
wWIV.scciI1l(l,C0!l1/dRSU111. Ii ll'y.e.hlmlll ) discovery or notice or auy breach the Assignor 0 I' any
covenant under this '" the may enl(lree the ;\s,sl,S:nc,(
DUleh:asc such Loan fI'oll1 the ").
Illc. 141 F.3d IOS9, 1069 (led, Cir.
I IS Fraud J ( I
perceived as a fairly difficult claim to make. II I In particular, the requirement of intent has been
very difficult to show, since it requires more than simple negligence. J 12
h. Securities Fraud
l. Foreclosure Irregularities
In the wake of the revelations about foreclosure irregularities, a number of government
agencies have gotten involved. The Securities and Exchange Commission (SEC) is reviewing
the mortgage securitization process and market participants for possible securities law violations.
It has also provided specific disclosure guidance to public companies for their quarterly
reports.
l13
Since many of the mortgages potentially affected by faulty documentation practices
were put into securitization pools, there is an increased potential for lawsuits by investors,
including securities law claims.
In order for MBS investors to state a securities fraud claim against investment or
cOlnmcrcia[ bank sponsors under the Securities Act or J934's Rule 1Ob-5, 114 the most
common private litigant cause or action, the investors must prove: (l) a material
Inisrepresentalion or omission; (2) wrongful intent; (3) connection to the purchase or sale of the
security; (4) reliance by the purchaser on the inflxlTlation; (5) economic loss to the and
(
. II)
( l) causatIon..
III Scc, C.g.. Lynn Y. IVlcKernan, Strict Liahilit\' Against f1olllehuildersJor Material Latent De/eets' It's
Tillie, An,cOIw. Arizona Law Review. Vol. 38. at 373. 382 (Spring 1(96) ("Although its recovery options arc
aliractive, common law fi'aud is gcnerally difficult to prove"): Teal E, Luthy, C'omlllon Low Cloilllslil/'
Fraud. University orChicago Law Review. Vol. (is. at 100 I. 1002 (Summer 1(98) CFraud is a difficult claim to
prove"); Jonathan l'vl. Sobel. A Rose Mav Not AI1ravs Be a Rose: SOllie Genel'lll Partnership Interests Should Be
Deemed Securities Under the Federal Securities Acts, Cardozo Law Review, Vol. IS, at 1313. 1318 (Jan. 19(4)
CCOl11nlOn law f1'aud is inadequate as a reilledy because it is ollen extremely difficult to prove").
112 See Seth Lipner &. Lisa A. Catalano. The IiiI'I oIGi\-ing Inveslll1elll Advice. IJniversity of
Memphis Law Vol. at 697 11. 181 (2009); Jack E, Karns & Jerry G. Ilunt. C'all Porl/IJ!io Damages Be
Fstahlishul in a Chumin,!!, Case Whai' the Plaintlfrs Account Gamel's a Pro/it Rather Thall a Loss, Oklahoma City
Ulli Law Review. Vol. at 214 (I
11\ SL'C conversations with Panel stall 15.201 In addition. the SEC's [)ivisiun ufCorporation
Finance has disclusure for the upcoming quarterly reports affected companies. U.S, Securities
and Commission. Sample LeiliT SCI/I 10 Puhlic 01/ Accollnlin,!!, and Disclosure Issues /?elaled
10 Polenlial lIisks ond Costs Associilled lI'ith ilnd Foreclosure-Relilled AcliFilies or Jet. 2010)
(online at www.see visiuns/curplin/guidance/el()foreelusureIOIO.htm) (hereinaner "Sample SEC Letter on
I>iselosure Guide I If the disclosure pruves misleading, it cuuld provide the basis liJr another cause ofaetiol1.
17 (TI{ 240.1011-5. I.i to note that uther causes of action arc available under the Securities Act
under Section II, a claim 11I<1y be made 1'01' a 1;11se or misleading statement in the
re!"lstrafHH! slatement. and the issuer or the the purpose vehicle. underwriters. and auditors wi II all
he tu potential Section II liabi (with the laller two groups having due With respect
to other eonlllJunications made the process. rise to Section
liahil See IS USc. 77k.77m.
II
claims under a
Dum P/rOI'lIlS.. Inc. BlUudo, 544 U,S, 336. 341-42 lhe SF-,C can enforcement
of but litigants typically litigate under Rule IOb-5, Sec Scott .I, Davis,
36
To be sure, private investor lawsuits have been ongoing since the end of 2006 without
much success. I III Senne argue that securities fraud was not at the heart of the financial crisis, and
securities fraud claims arc bound to fail because of the typically extensive disclosure on risks
. I . I I . 117 A I {"I .
assoclate( WI t 1 t lese transacllons. num )er 0 Juc ges seem to agree: sonIc mlportant cases
"suggest judicial skepticism to claims arising from the mortgage and financial crises.,,118 The
main hurdle in these securities claims beyond establishing that the misrepresentations were so
material that without them the investment would not have been made is to establish "loss
causation," i.e., that the misrepresentations caused the investor's losses directly. Any losses
caused by unforeseeable external factors such as "changed economic circumstances" or "new
industry-specific conditions" will not be recoverable. 119 Defendants in subprime litigation cases
arc likely to argue that the crash of the housing market, for example, was just such an unexpected
new industry-specific condition. 120 Losses occurring as a result of the market's crash would be
non-recoverable even if there was a material misrepresentation. It remains to be seen how
securities fraud cases would play out in the context of the current documentation irregularities.
Of course, the SEC has other tools at its disposal should it choose to pursue action against
any of the financial institutions involved in potential documentation irregularities. For example,
if a formal SEC investigation finds evidence of wrongdoing, the SEC may order an
administrative hearing to determine responsibility for the violation and impose sanctions.
Administrative proceedings can only be brought against a person or firm registered with the
S'vl7lposium: lhe Phenol7lenon: IVould in the Rules!()r Director Selection and Liahi/itv Help
Puh/ic ( (Join Some Equity's lJniversity of I,aw Review. Vol. 76. at 104
(Winter 2(09); PalmerI'. Heenan. et 'II., Securities Fraud. American Criminal Law Review, Vol. 47. at 1018
(Spring 2010).
III, For an extensive analysis of subprirne mortgage-related litigation up to 2008 and potential legal issues
surrounding such litigation, scc Jcnnifer E. Bethel. Allen Ferrel. and Gang Hu. Law and E'eonomies Issucs in
Suhprime Litigation, Harvard Law School John M. Olin Center For Law, Fconomics. and Business Discussion
Paper (Mar. 21, (online at Isr.ncl1co.org/harvard 01 in/(12) (hereinafter "I larvaI'd Law School Discussion
Paper on Subpril1le Litigation"), A list of class action lawsuits filed up to February 28. 2008 is included in Table I
of the article. at 67-69.
117 Sec. e.g., Peter II. Hamner IIII' Credit Crisis and Suhprime Lil igation: How Fmud Without
Motive '/ItaliCS Latle Economic Sense '. UPR Business Law Journal. Vol. I (0) (ouline at
www IO/08/I-U PRBLJ- i 03-Hamncr-Pllpdl).
118 A recent update 011 subprilllc and ccedit crisis-rela/cd litigation sUillmari/cs a numbcr of eases and
;m:liV7('S many of'them lililed (for example. lack of'staudiug and lack ofwrougf'ul iuteut). Gibson, Dunn &
('rut.cher LEI', lOIO Alul-rearSulirities (9. 2UIO) (ouline at
~ ' I lJSOIIUIJIlILl lln/I)ul:1 ifcatlon:,/Pag,:;s/SC<,:url tl(?S! ItI:gallol12U IUM id- toc2e,;) 7742(4). The
NF,RA Ecollomic ou a decrease in securities law Iii sillt:e 2009. S'ce
Natioual r:couolllic Research Associalcs. Inc, hends 20I 0 ;IIid- Year Dcclinc as the IVIl1'c
Crisis Cascs Suhsidcs. Median Settlemcnt at IIceard (July 2(10) (ouline at www.ucra.com/67
119
Dllra P!Iallns., Ine 1'. BlOudo. 544 U.S, 336,342-43
For a morc discussioll of this
Lfll,Y'llUII,SllIJT'U note 116. at 42-44,
IlarvaI'd I.aw School Discussion on Subprime
37
SEC, or with respect to a security registered with the SEC. Many times these actions end with a
settlement, but the SEC often seeks to publish the settlement terms.
II. Due Diligence Firms
There is also the possibility of distinct claims against the institutions that acted as
securitization sponsors f()r their use of third-party due diligence firms. Specifically, before
purchasing a pool of loans to securitize, the securitization sponsors, usually banks or investment
firms, hired a third-party due diligence firm to check if the loans in the pool adhered to the
seller's underwriting guidelines and complied with federal, state, and local regulatory laws. t2t
The sponsor would select a sample of the total loan pool, typically around 10 percent,I22 for the
due diligence firm to review. The due diligence firm reviewed the sample on a loan-by-loan
basis and categorized each as not meeting the guidelines, not meeting the guidelines but having
compensating factors, or meeting the guidelines. Those specific loans that did not meet the
guidelines, called exceptions, were returned to the sellers unless the securitization sponsors
waived their objections. 123 One due diligence firm found that, from the first quarter 2006 to
121 Financial Crisis Inquiry Commission, WriIten Tcstimony of Vicki Be'll. scnior vicc president, Clayton
Holdings, Financial Crisis - Sacramento, at 2 (Sept. 23, 20 I 0) (on line at
www IO-0923-Beal.pdf) (hcreinafter "Written 'festimony of Vicki Beal before the FCle"').
Iii. at 2. A sample size of only around 10 percent of the total loans in the pool was low historical
standards. In the past, sample sizes were between 50 percent and 100 percent. Financial Crisis Inquiry
COlllluission, Testimony of Keith Johnson, fCJrITJer president, Claytonlloldings, hanscnj!/: Impact o{the Financial
Crisis - Sacramento, at 183 (Sept. 23, 20 I0) (online at fCic.gov/hearings/pdfs/20 I 0-0923-transcript.pdf) (hereinafter
"'festimony of Keith Johnson bef()re the FeIC"'). In his leIter to the FCIC after Mr. Johnson's testirnony. the cnrrent
president of Clayton Holdings. Paul T. Bossidy, contested some of Mr. Johnson's testimony Calling the testi mony
"inaecuratc.' he corrected I'dI'. Johnson on three points. First, Mr. Johnson testified during the hearing about
meetings he had had with the rating agencies in which he showed them Clayton's Exception Tracking reports. Mr.
Bossidy stated that Clayton had never disclosed client data during these meetings and that Clayton had never
concerns about the securitization proccss or the ratings being issued. Second. Mr. Bossidy cautioned that
the tracking data provided to the FCIC was f1'om "beta" reports. These reports contain valid client-level
data, but arc not standardized across clients. Different clients have different standards and guidelines. leading to
difTerent rates. Thus. the results do not 1()l"Jn a meaningful basis f()I" comparison between
clients and the data cannot he used to draw conclusions. Finally. !VIr. Johnson had stated that Clayton examined a
number ofprospeetuses to determine if the inj()l"Jnation (i'om Clayton's due diligence reporls had been included. Mr.
clarified that was not prospectuses but had begun in 2007 in response to
fic from I etter from Paul T. president and chief execuli officer, Clayton
Iloldings. LI('. to Phil ides, chamnan, FinanCial Crisis Inquiry Commission, Rc 23.20ll!
Sacramento JO, 2(10) (online al 1,,/2010-101 FCIC.pdf)
(hereinafter "Letter hom l'aull3ossidy to Phil Angelides"').
Ihis deslli is just a sunllnary. For ,I more description of one due dil firm's
Financial ('risis In(jniry COlllmission, of Vicki BeaL senior vice ('layton
Finuncio! (',I:;is- SOC/1m/CillO. at 156-158 23,20 I0) (online at
(hereinalter of Vicki Heal bel(lI"e the
38
second quarter 2007, only 54 percent of the loans they sampled met all underwriting
. I I' 104
gUIC e meso -
R.ejected loans from the sample were returned to the seller. 1'he sample, though, was
onlyapproxinlately 10 percent of the loans in the pool, and the low rate of compliance indicated
that there \'Jere likely other non-compliant loans in the pool. The securitization sponsors did not
then require due diligence on a larger sample to identify non-compliant loans.
125
Instead, some
assert that the sponsors used the rate of non-compl iant loans to negotiate a lower price fix the
pool of loans.
126
These loan pools were subsequently sold to investors but, reports claim, the
results of the due diligence were not disclosed in the prospectuses except for standard language
I I
. I b I . . . 127
t lat t 1ere I111g 1t e unc erwntmg exceptIOns.
This behavior raises at least two potential securities i'aud claims. The first is a Rule 10b-
5 violation.
128
Rule IOb-5 prohibits "omit[tingJ to state any material fact necessary to make the
statements made, in the light of the circumstances under which they were made, not
misleading.'d29 If the sponsors used the due diligence reports to negotiate a lower price, the
information may have been material. In addition, the reports were not publicly available. 130 On
the other hand, the courts may find the standard disclosures, that there might be underwriting
exceptions, to be sufficient disclosure. As yet, the IOb-5 claim is untested in the coulis, and the
f ~ l c t s are sti II unproven.
Another potential claim is based on Section 17 of the Securities Act of 1933, which
makcs it unlawful in the "otTer or sale of any securities ... to obtain money or property by means
of any untrue staten/cn! of a material fact or any omission to state a material t ~ l C t necessary in
order to make the statements rnade, in light of the circumstances under which they were made,
124 Financial Crisis Inquiry COlllmission, All Clayton Trending Reports: I st Quarter 2006 ~ 2nd Quarter
impilct olthe FI/lo/lciol ("'isis Sacramento (Sept. 23, 20 I 0) (online at www.fCic.gov/hearings/pdfs/20 10-
0923-Clayton-AII-Trcnding-Rcport.pdl) Eightecn perccnt or sampled loans did not meet guidelines but had
compensating factors. L:Jevcn percent of loans were non-compliant loans, but objections were waived. Seventeen
percent orthe loans in the sample were rejected. In his letter to the FCIC noted above, Mr. Bossidy cautioned the
FCIC from relying on information. The cxceptiontraeking data provided to the F'CIC was
(i'om "heta" reports which contain valid client-Ievcl data, but are not standardized ,ICross clients. Different clients
use di Cfi:.,rent standards and guidclines, leading to difkrcnt exception rates. Letter fiom Paul Bossidy to Phil
!\n.gellctes. supro note I
('"liIlHl11V of Kei tb Jobnson before tbe FCIC, sUflro note 122, at 177-711,: Testimony of Vicki Bea I
be((lIc the FCIC, .1111)1(/ no(c 123. at 177.
or Keith Johnson bcfi:.)re the FCIC, .Ill/in! note 1 at I 10-211
Writlcnl CS(IIlHlI1V
CF!\ 240.IOb5.
erR
I Vicki Beal bef(lIC the FCIC, III/JIll note 121, at
1\0 Writieni Vicki [kal hef(Jre the FCI(', supra note 121, at 1 (The work produced
IS orrePOIts that include loan-level data reports and loan reports. Such reports are
'works f(lr hire,' tbe propertv or oUl' clients and to our eliellts.").
39
not misleading."IJI This claim also depends on unproved facts, but if the securitization sponsors
used the due diligence reports to negotiate a lower price for the loan pools, the information is
arguably material. As such, the sponsors may have violated Section 17 when they omitted the
results of the due diligence reports from the prospectuses, though the proposition has not yet
been ruled on by a court. Section 17, however, can only be enforced by the SEC, and not by
private litigants.
There are suggestions in the press that authorities are examining the issue, with several
f
' . l' . '1' . 137
news reports reerencmg ( IScusslons WIt 1 Investigators or prosecutors.. ~
2. Existing and Pending Claims under Various ({raud Theories
Currently, these issues are being explored at the state level and, as discussed above, the
private investor level. The recent disclosures about robo-signing may provide additional causes
of action and additional arguments for private lawsuits asking for put-backs of deficient loans.
In response to a question at the Panel's most recent hearing on housing issues. however, one of
the witnesses indicated tbat be was not aware of any successful put-backs for foreclosure
procedure problenls alone. m According to some consumer lawyers who are significantly
involved in these proceedings, while it is very unlikely that a national class action lawsuit based
on wrongful foreclosure claims could be successfully filed, it may be possible on a state-by-state
basis.
l34
The outcome in these cases is uncertain, and consumer lawyers said that at this point it
would be difficult to quantify potential losses arising out of these actions or any similar
challenges in individual foreclosure procedures. J
Various slates arc proceeding under a variety of theories. As noted above. on October 13,
20 I0, all 50 slate attorneys general, as well as state bank and mortgage regulators, announced
111 15 U.S.C'.
m Gretchen 1V!orgenson. Raters (gllored Proofof Loans, Pane! is 7(I!d, The New York Times
(Sept. 26,20 I 0) (onIine at 10109/27/business/27ratings. html'lpagewanted=all); (;retehen
\'.I. The New Yorkfimes (.July 24. 2010) (onlinc at
10/07/25/busi ness/25grel. ht ml?ref'I;1ir
I\J ('ollgressional Oversight Panel, Testimony of Guy Cecala, chief executive ortleer and publisher, Inside
IVI,)!'I,,,,,,,, Finance PulJlieations, Inc.. . COl' Heoring Oil 7:4RP Foreclosltre Miligalion Programs (Oel.
2(10) (publ ieat ion at eop.senale. gov/hearings/I ibrary/heari ng-l 0271 0- [()ICC losure.e fm)
(hereilla ncr "Test imolly
Consumer eOllversations with Panel slaff (I'iov. 'I, 20 I Several state class aelions have been
filed !clIeelosllles and l'raud on lhe court. e.g.. IJefendant William Timothy
A!lirmative Defc:llsCS and Individual and Class Aetiun Cuunterelaims, IVc!ls Furgo lIullll us 7Il/stee
NUlionu! Loon 7Il/SI ]U()5-1, Series ]UU5-/ I'S. IVillwlll Tilllolhl'
ct ul.. Nu. 08-('1-120 (('oll1l11omvcalth uCKenlueky 13uurbun Circuit Cuul'l L)jvisiun 1 OeL 4. 2010) Sec u!so
Class Aeliun Ill/her. /!calll:: /) 'AJIIICOSOII::O, und AIichuel und Tino [!nsIHJlih.
und oil persons sifllulcd \". C;;\LIC LLC, Financial. fnc., Nu. 8: I0-ev-0245i\-SCL1-EAJ (United
Slales District Courl Middle District of Florida Tampa I)ivisiun Nov. 4, 20
CUIlsull1cr cunversatiuns wi lh Panel stafr 9,20 I0).
40
that they would pursue a "bi-partisan multistate group" to investigate foreclosure irregularities.
1J6
They are working together to investigate allegations of questionable and potentially fraudulent
f(lreclosure docurnentation practices, and rnay design rules to improve foreclosure practices.
They also may begin individual actions against some of the implicated institutions. On
October 6,20 I0, ()hio Attorney General Richard Cordray filed a suit against CjMAC Mortgage
and its parent Ally Financial, alleging that the cornpanies committed common law fraud and
violated the Ohio Consumer Sales Practices Act. m In response, GMAC referred to the
irregularities as "procedural mistakes" and maintained that it would defend itself"vigorously.,,138
'rile ()hio state attorney general allcges that "GMAC and its cmployecs committed fraud on Ohio
consumcrs and Ohio courts by signing and liling hundreds of false affidavits in foreclosure
cases." He argucs that the defendants' actions were both against the Ohio Consumer Sales
Practices Act and constituted common law fraud. 139 The attorney general has asked the court to
halt affected foreclosures until defendants remedy their faulty practices and to require them to
subrnit written procedures to the attorney general and the court to ensure that no employee signs
documentation without pcrsonal knowledge.
Although Ohio is the lirst state to take action, it would not be surprising if others
follow.
140
Depositions have been taken in various foreclosure cases around the country that
point to questionable practices by employees at a number of banks. 141 Most of the large financial
institutions that service mortgages maintain that documentation issues can be fixed relatively
easily by re-submiUing ailidavits whcre appropriate and that based on their internal reviews there
is no indication that the mortgage rnarket is severely nawed. Many of the banks that temporarily
suspended f(xeclosures have no'vv resumed them, IIowever, in their most recent earnings
1\(, 50 States
rvlortgage Foreclosure Joint Statement. supra note 26.
In Complaint. State of Ohio ex ref. Richard C'ordrav 1'. GMAC Mortgage. C:I020 1006984 t Lucas Cnty
Ohio Ct. Common Pleas Oct. 6. 20!0) (online at www.ohioattorneygeneral.gov/GMACLawsuit). The complaint
also named .leniTy Stephan as a defendant. It was Jeffrey Stephan's testimony in a Maine ff)reelosure ease that he
signed thousands of anIdavits without verifying their contcnt that ignitcd the ffJreclosure documentation scandal.
1)8 Ally Financial. Inc., GMAC Sratclllellt Oil Ohio Lawsuit (Oct. 6. 20(0) (online at
Inedia,all y.coln/illdex. php'lsAJ&i tem420).
1)<) The Ohio attorney argues that the statements in the ff)reclosure aflldavits were material and
and the elnployees making them were aware that they were and were making them anyway to induce
(lhio courts and to upon them. which. in turn, justiJiably did so. He further argues that Ally
and GMAC Ii bClleiitted from thesc fraudulell1 foreclosures that should not have
been allowed to and the ofjustiec in Ohio and Ohio borrowers have suffered and are suflcring
.. The Ohio attorncy also argues that Ally and GMAC in a pattell1 and ,..-,wllee
I\'C and unconscionable acts" in violation of the (lhio ('cll1sumcr Sales Practices Act when their
lidsc aflidavits and when to mortgage notcs on behalf of rvIFRS.
rei Richard C1020 I 006984 Ohio Ct
10) at
140
Sl'l,ti()n L.3.
141
Uq')oO':Itl()n of Moua, IVelis
o12434XXXXMB AW (Fla, 15th Cir. Ct. Mar. 9. 20 I0).
!Jallk I'. ./ohll P No. SU 2UU9 ('A
41
statements, many of these institutions have indicated that they set aside additional funds for
repurehase reserves and potential litigation costs resulting from the foreclosure documentation
irregularities.
[n addition to these potential lawsuits, the Administration's Financial Fraud Enforcement
Task Force (FFETF) is in the early stages of an investigation into whether banks and other
companies that submitted flawed paperwork in state foreclosure proceedings may also have
violated federal laws. Treasury's representative inf(mlled the Panel that through Treasury's
Financial Crimes Enf()\"cement Network (FinCEN) they arc actively participating in the work of
the FFETF led by the Departnlent of Justice.
142
Treasury has otherwise indicated that they arc
not presently engaged in any independent investigative eff()lts. 143 To date, little has been
disclosed about the investigation.
3. Other Potential Claims
Beyond the various fraud claims, there are also several other potential claims. For
example, those who signed false affidavits may be guilty of peljury. Peljury is the crime of
intentionally stating any fact the \vitness knows to be false while under oath, either in oral
testirnony or in a written declaration. 144 Though the exact definition varies from state to state,
peljury is universally prohibited. Affidavits such as the ones involved in the foreclosure
irregularities are statements made under oath and thus clearly fall within the scope of the pCljury
145
M
I j' I '1" . I . . I 1 1
statutes.' oreover, t lere arc reports 0 ro lo-slgners ae nllttlllg III ( eposltlons t lat t ley <new
142 Congressional Oversight Panel, Written Testimony of Phyllis Caldwell, chiefofthc Homeownership
Preservation Office, U.S. Department of the Treasury, COP Hearing on IARP Foreclosure iI/litigation Programs, at
13 ((let. 27, 2010) (online at cop.senate.gov/doeuments/testimony-I 0271 O-caldwell.pdf) (hereinaller "Written
Testimony of Phyllis Caldwell"). In addition to their participation in F'FETF Treasury is coordinating efforts with
other federal and regulators, including the Department of Housing and Urban Development (HUD), the
Federal Housing Administration the Federal Housing Finance (FHFA), Ihe Federal Reserve System,
the OITice of Thrilt Supervision (OTS), the Ol'fice of the COl1Jptroller of the Currency the Fr)IC. the Federal
Irade COl1Jmission and the SF.C.
14.\ C'c'ngrcssic>nal Oversight Panel, Testimony of Phyll is C'aldwell, chief of the tlomeownership
Preservation Office, U.S. Department of the Treasury, hanscript. COP Hearing on TARP Foreclosure Mitigation
27,2010) (publication [(lrthcoming) (onlinc at cop,senate.gov/hearings/library/hearing-I027 I 0-
(hcreinatler of Phyllis Caldwel
Ij,! EOI lhe federal statute slates "\Vhoever - (I) Ilaving taken an oath bel'ore a competenl
lnbunal. officer, or pCTSOIl, in any ease in whieh a law 01' the I lnited Stales aUlhorizes an oalh to be administcrclL
that he will declare, or certify or that anv wriUen dcclaratiolL or
Ilcale him suhsClibell.. is tlue, willl'ully and conlrary to such oath slates or suhsClibes any malerialnla((cr
which he docs nol believe 10 he true; or (2) in any declaratiolL cerlilicale, verilication, or statemenl under penalty 01'
Illy lied undel 174601' litle I Jnited States will subscribes true material
maller which he docs nol believe 10 he lrue: is Ity 01' perjury and shall, except as othcrwise provided
l;1\v, he I'ined under this lille 01 imprisoned not more than live years, or both." 18 I JSC ~ 1(,21.
Black I,;\w
'''''''''''''''', al (,2 (8th cd.
42
they were lying when they signed the affidavits. i4() As a result, it is possible that these
individuals at least are guilty of peljury. Even without such an explicit admission, it is possible
that a COllli could flnd that a robo-signer was intentionally and knowingly lying by signing
hundreds of affidavits a day that attested to personal knowledge of loan documents. 147 It is
important to note, however, that peljury prosecutions are rare. For example, of the 91,835
federal cases commenced in fiscal year 2008, at most, only 342 charged PCljury as the most
serious offense. 148 It is thus possible that robo-signers, though potentially guilty, will not be
charged.
By contrast, tbe state attorneys general are already investigating whether foreclosure
irregularities such as the use of robo-signers violated state unfair or deceptive acts or practices
(UDAP) laws. Each state has some form ofUDAP law, and most generally, they prohibit
. . . I d I b i' . d . 149 I d"d I
practIces III consumer transactlons t 1at are eemec to ,e un atr or eceptlve. n IVI ua state
laws, however, can be as broad as generally prohibiting deceptive or unfair conduct or as narrow
as prohibiting only a discrete Jist of practices or exempting all acts by banks.
150
As a result,
whether there has been a UDAP violation will depend heavily on the particularities of each
state's law. The state attorneys general, though, are already examining the matter. In
announcing their bipartisan multi state group, the attorneys general explicitly stated that they
"believe such a process [robo-signing] may constitute a deceptive act and/or an unfair
. ,,151
practice.
14(, A Florida Law ['inn, The Tieldin Law (;roup. P.A. has taken hundreds of depositions in which
cmnlclw'(.'S or contractors of various banks admitled 10 not kn'JWIIHI what werc sq!lllng or regarding their
,,,,,"'<m,lI 1(lilOvvle,Jpe ol'illl'onnation in affidavits. Sec, of Ismeta Dumanjic. La Sa!!e Bank NA as
f,llllee Mlllllu/ Assel-Bocked IVA1ABS Senes 2UU7-HE2 hllsll'. Jeanelle Allclus, el a/.
No. CACE 080G037S (Fla. 17th (ir. Ct. Dec, 8.
147 For tcstimony atlcsting to signing hundrcds of artldavits a day. see IJeposilion of Xee Moua. at
/I'd/s FII/:t;o BUld, ". John P. No. SO 2000 C'A 012434XXXXMB AW (Fla. 15th Cif. (I. Mar. 9. 2(10);
Deposition of Rei ICC I Icrtzler. al In re: PUlricia L SlilIl'. No. 09-41903-J13R (D. Mass Fcb. 19,2(10),
14:' BUI eau ul' Justice Statistics. Fer/era! Jllsliee SIIIII.llies, 2UU8 Sialislica! J,I1)!CI, at Table 4.1
at I ,pdt).
ShaUll !( aud .IcnuilCT M. Miller. Siule /1/1"1/"111'1'1: Genem!
Uusiness Torts Joumal I. at I (Fall (online at
I(l! ln/si te/members/l 1/6/L:/DIOI7/0/4/.);( 'I Ille/2' ',c"LUIZarlle'v'/!{;lInev-
L. Carler, COJ/SIIIIIC/, PmlcclioJ/ ill Ihc UJ/iled Sllllcs:
IIlId ['mcliccs Sioluies (Feb. (online at
REPRINl.pdf).
IIlId
SO_states.pdl).
1 I SO States 1,"'ln',I'''' Foreclosure .Ioilll Statement, supra lIole 26.
43
4. Other State Legal Steps
In addition to the Ohio lawsuit described above and the ongoing joint investigation, some
other state officials have taken concretc steps to address the foreclosure irregularities, including
but not limited to: 152
In New York, the court system now requires that those initiating residential
foreclosure actions must file a new affirmation to certify that an appropriate employee
has personally reviewed their documents and papers filed in the ease and confinned
both the aceuracy of these court filings and the accuracy of the notarizations
contained therein.
153
In California, a non-judicial foreclosure state, the attorney general sent a letter to
.lPMorgan Chase demanding that the firm stop all foreclosures unless it could
demonstrate that all foreclosures had been conducted in accordance with California
law.
IS4
'I"he attorney general also called on all other lenders to halt f(xeclosures
un less they can demonstrate compliance with California law.
155
In Arizona, which is also a non-judicial foreclosure state, the attorney general sent
letters on October 7,2010 to several servicers implicated in the mbo-signing scandals
to demand a description of their practices and any remedial actions taken to address
potential paperwork irregularities. 'rhe attorney general wrote that if any employees
or agents used any of the questionable praetices in connection with eonducting a
trustec's sale or a foreclosure in Arizona, slich lise would likely constitute a violation
of thc Arizona Consumer Fraud Act, and thc attorney general would have to take
. . 156
appropnatc actIon. "
In Ohio, in addition to his lawsuit against GMAC, the attorney general filed an
amicus curiae brief in an individual foreclosure case asking the court to consider
This list is not a list of state actions. States are becoming involved at a rapid pace, in a
of ways. and fronl a of levels.
153 New York State Unified Court System, Allir/llalioll-Required ill Residelllial Foreclosure
/Ie/iolls (Oct. 20 10) (online at www.courts.state.ny.lls!attorneys!foreelosures!aITirmation.shtml); New \"ork State
Unified Court J)oclIlllelll (online at
www.eourts.stalc.ny.us!attolllcys!foreclosllres!ArIlrmation-Foreelosure.pdl) (accessed Nov. 12.20 I0).
Letier fmm Ldlllllnd G Browll., Jr., atiomey Statc of ('aliti.)rnia. to Steve Stein. SVP channel
director. Preservation and ('hase 2(10) (online at
ag.ea.l(Ov!ellls ;!lI;;,,' 1'"nl'''1',/nrp,,,/ndk/n 1996 morga n chase letier .pd f).
Office ofCalifi.llllia
Foreclosures III
General F:tlll111l1d G. Brown, Jr.. BnnvlI Calls Oil Ballks 10 Huh
at ag.ca .goIj! 11<,:v;"alc:lts!relcil"e. [lhp'! idl
15(, l,eller from Terry Goddard, attorney
Ol"cc!OSl/U' DOel/lllenlS ill Al"i;:olla
releases!oet/20 Il/f\A ()l-j",!Ue'''/;,
Slate of Arizona, to mortgage ",,\/il""-'
7.20 I 0) (online at
oall';i;,:WS,cl"\lice:r'/;,201 ,etllel .pd f).
Re "Roho-
44
evidence that (jMAC committed fraud that tainted the entire judicial process and to
consider sanctioning GMAC. 157 The attorney general also sent a letter to 133 Ohio
judges asking them [or inforlnation on any cases involving the robo-signer Xee
Moua.
158
In addition, he asked Wells Fargo Bank to vacate any foreclosure
judgments in Ohio based on documents that were signed by mbo-signers and to stop
I I I
I . 1'19
t le sa es o. repossessec propertIes..
In The Distdct of Columbia, Attorney General Peter Nickles announced on October
27,2010 that Coreclosures cannot proceed in the District of Columbia unless a
mortgage deed and all assignments of the deed are recorded in public land records,
and that loreclosures relying on MERS would not satisfy the requiremenL
I60
MERS
responded the next day by issuing a statement that their procedures conlorm to the
laws of the District of Columbia and encouraged their members to contact them if
they experience problems with their foreclosures. 161
In Connecticut, the attorney general started investigating GMAC/Ally and demanded
that the company halt all foreclosures. He also asked the company to provide specific
inf(mnation relating to its loreclosure practices. 162 In addition, the attorney general
ask cd the state Judicial Department on October 1, 20 I0 to freeze al I home
157 Briel' I'or Richard C'ordray, Ohio aHorncy general. as Amici Curiae. US Bunk, Nu!/onu/ Assoc/at/oll )',
Jumcs W f(cn/io. No, CY-10-716322 (Cuyahoga Oy Ohio Ct. Common Pleas Oct. 27.2010); Office of Ohio
Attorney General Richard Cordray. Cordray Outlines Fraud /n Cleveland Foreclosurc Casc (Oct. 27. 2(10) (online
al www.ohioaltorneygeneral.govlBrieflng- Room/News- Releases/October-20 1O/Cordray-Clutl ines- Fraud-in-
Cleveland- Force losure-Ca).
158 Letter from Richard Cordray. attorney general. Slale ol'Ohio. to Judges. State of Ohio (Oct. 29. 2(10).
159 Leller from Richard
LUI.IIl.-,LI. WeIls 29.201
allorney Stale 01' Ohio. to David Moskowitz. deputy general
_I<I(> veaF' 2U IO&ti IC'" ",,"C'IJA f20
of District 01' Columbia General Peter.J. Nickles, S!atcmcn!
)I'I'(ntll'l'Force/osurc Su/c Not/u's (Oct. 27, 2(10) (online al
Fnto/'if'lllc,llt!lIIcnt
at
(,'cllcm/1ll1'cst/!!I,rlill!! /)" f, -, ti,,'p ()f!icc olTonl1ectieul General Richard Blumenthal.
Furec!osulc Ducs, Delllilli(!s !lult 'J(I Its C1' Forcclosures
1(>1 MIRSC()RP. Inc .. MERS (!cncm/'s Oct. 28, 20!O Statc/IIcnt
(Oct. 10) (oillille at The s[alenlenl [hat "Iwle wiIl
lake sleps 10 proteel Ihe lawful 10 I'oreclose thaI the borrower contractually [0 if the borrower defaults on
their ll10ltgage loall.' The law firm K&L Gates has also a critical of the attornev
actions. K&I, Gales LI.P. DC AU Seck, tu l10me Loan Forcc!osures Bused Oil IIi(OIl.IIJI,c'f('
COIlSUlllcr Fillullc/a/ Products Alcrt 1.20 I 0) (online al
7)
4S
foreclosures fc)!' (lO days to allow time to institute measures to assure the integrity of
J f
-I' 163 , J' 'ID f' J J' 1M
e oeument 1 mgs,' 1e, ue leIa epartment re usee t 11S request.
5. Other Possible Implications: Potential "Front-End" Fraud and Doclllnentation
Irregularities
Until the full scope of the problem is determined, it will be difficult to assess whether
banks, servicers, or borrowers knew of the irregularities in the market. However, there are
several signs that the problem was at least partially foreseeable, For example, numerous systems
had been developed to circumvent the slow, paper-based property system in the United States.
MERS, diseussed in more detail above, represented an attempt to add speed and simplification to
the property registration process, which in turn would allow property to be trans felTed more
quickly and easily. MERS arose in reaction to a clash: during the boom, originations and
sccuritizations moved extremely quickly. But the property law system that governed the
underlying collateral moves slowly, and is heavily dependent on a variety of steps memorialized
on paper and thus inefficient at processing enormous lending volume. While systems like MERS
appeared to allow the housing market to accelerate, the legal standards underpinning the market
did not change substantially. 165 In some respects, the irregularities and the mounting legal
problems in the mortgage system seem to be the consequence of the banks asking the property
law system to do something that it may be largely unequipped to do: process millions of
Coreclosures within a relatively short period of time. 166 The Panel emphasizes that m0l1gage
lenders and securitization servicers should not undel1ake to foreclose on any homeowner unless
they are able to clo so illlitil compliance \vith applicable la'v!'s and their contractual agreements
with the homeowner. IC legal uncertainty remains, foreclosure should cease with respect to that
homeowner until all matters are objectively resolved and vetteclthrough competent counsel in
each applicable jurisdiction, SatisCaction of applicable legal standards and legal certainty is in
the best interests oC homeowners as well as creditors and will enable all concerned parties to
exercise properly their legal and contractual rights and remedies.
This combination of - a demand Cor speed, the use of systems designeclto
streamline a legal regime that was viewed as out-of-clate, and a slow, localized legal system
may havc substantially increased the likelihood that documentation would be insufCicient. As
1(,1 Oflicc ofConnccticut i\ttollley Cicncrall{ichanl Bluillenthal,
[[OIliC F(!ICC[OII/ICS ()() 8c('(/l/sc f)ms (Oct. I, 20 I0)
(;ClIc'lO[ Asks CTC'OWIS 10
lclter Irol1l
I{ichard Blumcntlwl. altorncy
Barbara iVl, Ouinn, chief court administrator. State of Connecticut Judicial Brancll, to
State o!Connccticut 14,201
, I,'ederal National Assoc.. Nicolle Bradbury. II/pra note I that the
the book and page number of the Illortgage, as well as the street address and
street address is sufficicut to summary in a foreclosure
Scetioll III/no, discm;sing strains ollserviecrs,
46
discLlssed above, somc authorities are taking dircct aim at MERS and the validity of its
C I d
'1 I '1I f- 167 I 168
processes. /oup e WIt] JUSll1ess pressure exertec onaw Irms anc contractors to process
rapidly f()reclosure documents, the system had clear risks of encouraging corner-cutting and
creating substantial legal difficulties. Furthermore, even if these problems were not foreseeable
frorn the vantage point of the housing boom, the downturn in the housing market and the
foreclosure crisis made them much more likely. In 2008 and 2009, a vast amount of attention
was given to the difficulty of determining liability in the securitization market because of
problems with documentation and transparency. 169 At this time, servicers could have had notice
of the types of documentation problems that could affect the transfer of mortgage ownership. In
sonIc cases, even when servicers were explicitly made aware of the shoddy documentation, they
did little to correct the problem. One judge determined that "[r]ather than being an isolated or
inadvertent instance of misconduct ... GMAC has persisted in its unlawful document signing
'" f" d d . . 170
practices even a tel' It was or ere to correct Its practices.
Smne observers argue that current irregularities were not only foreseeable, but that they
mask a range of potential irregularities at the stage in which the mortgages were originated and
pooled. According to that view, current practices sinlply added to and magnified problems with
the prior practices. The legal consequences of foreclosure irregularities will be magnified if the
problems also plagued originations: aner all, foreclosures are still a relatively limited portion of
the market. If all securitizations or performing whole loans were to be affected, the
consequences could be significantly greater. At this point, answers as to what exactly is the
source of the problems at the front end and how severe the consequences Illay be going flxward
depend to a large degree on who is evaluating the problem. The Panel describes below the
perspectives of varioLls stakeholders in the residential mortgage market.
167 Deposition of Tammie Lou Kapusta, JII re: Jllvesl(galioll olLmv Offices olDavid.l. Siern. P.iI. (Sept.
22,2010)
!6R Federal Nalional Association, Foreclosure nl71e Frames (/ild Feesfbr Breach
01 ' at 3 (Aug. 3 I, 20 10) (Announcement SVC-20 I0-12) (online at
www.efanniel1lae.com/s f/gu ides/ssg/annl trs/pd U20 I O/svc I 0 I 2.pd [) (stal ing tha t Fannie !VI ae might pursue
compensatory fces based on "Ihe lenglh orlhe delay. and any additional cosls thai arc directly allributable 10 the
delay.").
, Ifern:mdo de Soto, 1ruie Assels Were /liddell Assels, Wall Street Journal UVIal'. 25,
atcoll1/artie!c/SBI23793S1139SI ("The real villain is the lack of trust in the paper on
and all other assets arc printed. If wc don't restore trust in paper, the next dehwlt -
student loans will another col in paper and the world economy to its knees."),
Federal National Nicolle iiiI'm note I ("The ('ourt is particularly
troubled the facl thai in tbis case is not Ihe lirst lime Ihat G(\cl I\("s nH"tl-'volull1le
careless to aflldavit has been T'he oflhis case reveals Ibat. the
Florida Court's Older. Gfvll\C's It is well past time for such practices to
end. a/su Secllon C .I'll/nil. It is worth thatthc rights ora bona-lide It)r value arc affectcd
whether the had notice ofa competing claim at the tinlc of'purehasc. ()ne source of conflict
will be wlwt, under thesc circumstances, constitules adequate notice. Panel slafTeonversalions with industry sources
9,2UIU).
47
a. Academics and Advocates for Homeowners
Many lawyers and stakeholders who have worked with borrowers and servicers on a
regular basis ovcr the past few years, primarily in bankruptcy and foreclosure cases, maintain
that documentation problems, including potentially fraudulent practices, have been pervasive and
apparent. 171 'rhese actors, including academics who study the topic, argue tbat bankruptcy and
f()reclosure procedures have been revealing major deficiencies in mortgage servicing and
documentation for quite some time, Professor Katherine M. Porter, a professor of law wbo
testifled at the Panel's most recent hearing, wrote: "I'he robo-signing scandal should not have
been a surprise to anyone; thcse problems were being raised in litigation for years now.
Similarly, I released a study in 2007 - tbree years ago - that showed that mortgage companies
who filed claims to be paid in bankruptcy cases of homeowners did not attach a copy of the note
to 40% of their claims." 172 According to this view, the servicing process was severely flawed,
and "servicers falsify court documents not just to save time and money, but because they simply
have not kept the accurate records of ownership, payments, and escrow accounts that would
enable them to proceed !egally.,,173 In 2008-2009 over 1,700 lost note affidavits were filed in
Broward County, Florida alone.
174
These affidavits claim that the original note has been lost or
destroyed and cannot be produced in court. It is important to recognize, however, that a lost
note affidavit may not actually mean that the note has been lost. In her written testimony to the
Panel, Professor Katherine Porter points out that her study of lost notes in bankruptcies "does not
prove ... whethcr the mortgage companies have a copy of the note and refused to produce it to
stymie the consumers' rights or to cut costs, whether the mortgage companies or their
predecessors in a securitization lost tbe note, or whether someone other than the mortgage
cOlnpany is the holder/bearer of the note.,,1
171 For example, in her (estimony submitted to the Congressional Oversight Panel, Julia Gordon of the
Center Ic)r Responsible J,ending writes: "The recent media revelations about "robo-signing" highlight just Olle of the
many Ivays in which servicers or their eontraetors elevate profits over eustomer service or duties to their clients, the
investors. Other abuses include misapplying payments. fc)rce-placing insuranee improperly. disregarding
requirements to evaluate homeowners fi)r nonfc)reelosure options, and documents related to the
murtgage's ownership or accuunt status." See Cungressiona I Oversight Panel, Written Testimony of.J ulia Gordon,
senIOr counsel, Center for Responsible J.emling, COl' Hearing on TA Rl' Foreclosure Mifigallol1 Programs,
at (Oct. 27, 20 I 0) (onl inc at 10271 Ogurdon.pdf) (hereinafter "Written
Testimony of Julia
Wrillen of Katherine Porter. slipro 1I0k 14. at 9 her paper: Katherine M. Porter,
Misl)(,{wvior olld Misloke ill {iolll<l"I/I)I,.,.' ClollII.\, Texas Law Review. Vol. (online
at The paper an oj' how lIIortgage servieers
Written II"f1l1nIH'" of Julia C;ordon, slipm note I I. at II.
Flurida
"'''lInl"''I'lnc.. Oil Losl Nole '"/""l"\ III Hroword Florida
researe h Ii rill (hat uses and publ ic fi)rec Iosure court records.
201 se IS a
Wllttcn ,."",,,,,,,' oj'Katherine Portcr, supra note 14, at 9,
If the lawyers' and advocates' assertions of widespread irregularities are correct, it could
mean that potentially millions of shoddily documented mortgages have becn pooled improperly
into securitization trusts. Lawyers are using a lack of standing by the servicers due to ineffective
conveyance of ownership of the mortgage as a defense in foreclosure cases. Some of these
lawyers argue that the disconnect between what was happening on the "street level," i.e., with
the origination and documentation of mortgages, and the transfer requirements in the PSAs, is so
huge that no credence can be given to the banks' argument that the issues are merely technical. 176
However, commentators who believe that the problem is widespread also believe that investors
in these securitization pools, rather than homeowners, may be the best placed to pursue the cases
on a larger scale sueccssfully.177
b. Servicers and Banks
Since the foreclosure irregularities have surfaced, the banks involved have maintained
that the problems are largely procedural and technical in nature. Banks have temporarily
suspended foreclosures in judicial foreclosure states in particular and looked into their practices,
but they state that they do not view these problems as fundamental either in the foreclosure area
or in the origination and pooling of mortgages. The CEO of Bank of America, Brian Moynihan,
noted in the company's most recent earnings call that Bank of America has resumed
foreclosures, but "it's going to take us three or five weeks to get through and actually get all the
judicial states taken care of. Thc teams reviewing data have not found information which was
inaccurate, would affect the fiame factors of the f(Jreclosure; i.e., the customer's delinquency,
etcetera.,,178 He focused on the Caulty afCidavits and argued that "[they] fixed the affidavit
signing problem or will be fixed in very short order." 179 Many of the other largc banks have
issued statements in the same vein.
lso
Most of these banks have either not commented on the
issues around the transCer of ownership of the mortgage or maintain that alleged ownership
!
' I I .I' lisI
trans er pro) ems arc WIt lout ment or exaggeratec .
Iii> Consumer
conversations with Panel s(a 1'1' (Oct. 28, 20] 0).
conversations with Panel stalT (Nov. 9, 20] 0).
liS Bank 01" Amcrica Q3 20 I 0 [:arnings Call TransClipl, SlIfJl'I1 note 97. al (l.
Bank of America 20 I0 Earnings Call TrausClipt, SII/)/'II note a( 6.
ISO Jl'ivlori!an Chase 8.: Co., Finane/II/ RcslIlrs II, at 15 (Oct. 13,20]0) (online ai
lilessharelloldercomidownloadsiONlj 105104nn9.x0.x4091 Miennd82-cf74-42ge-81T1-
'''".U'UL] 10 natier" Q320IOFin,lIlcial ou
believe f()reclosurc decisions ilied the I"ads and
circumslanccs ou i\ffidavils and Ili/ilil 110lc 23 ("The issues the
cOlllpauy has idcnti lied do uot relate ill allY way to the quality of the customer and loan data: nor does the company
helieve that any oflhcse instances led (0 !(Jreclosures which should not have otherwisc occurred").
IXI For the American Sccuritization Forum issucd a statemcnt Ihe of
concerns rai,;ed ahout sccuritization "In the last Jew days, concerns have heen raised as to whether the
standard methods of trans l'erri ng owncrship of residential mortgage loans to securitization trusts arc
sufTicieut and appropriate, Thesc conccrns arc withoul merit and our membership is confident thatthcse methods of
49
c. Invcsto,'s
As discussed above, securitization investors have been involved in lawsuits regarding
underwriting representations and warranties for sellne time. Investors in MBS or collateralized
elebt obligation (COO) transactions have a variety of options to pursue a claim. Claims alleging
violations of representations and warranties have typically focused on violations of underwriting
standards regarding the underlying loans pooled into the securities. Another option may be to
pursue similar claims relating to violations of representations and warranties with respect to the
transfer of rnortgage ownership. In the wake of the current documentation controversies, it
appears that private investors may become rnore emboldened to pursue put-back requests and
potentially file lawsuits. For example, and as discussed above, a group of investors - including
FIU3NY in its capacity as owner ofRMBS it obtained from American International Group, Inc.
(AIO) sent a letter to Bank of America as an initial step to be able to demand access to certain
loan files.
ls2
Direct contact with the bank was initiated because the securitization trustee (Bank
of New York) had refused to comply with the initial request in accordance with the PSA.
FRBNY, as an investor, is on equal footing with all the other investors, and according to
FRBNY's representatives, they view this action and any potential participation in a future
lawsuit as one way to attempt to recover funds for the taxpayers.
IS3
While there Inay be a growing appetite for pursuing such lawsuits, these lawsuits still
have to overcome a fair number of obstacles built in to the PSAs, IS4 as well as problems inherent
. I I . I ... . 1 18') A I I
III any ega actIon t Jat requIres .JOInt actIOn )y many actors. . 's a genera matter, wJat
appears to be a significant problem is that the operating documents for these transactions
transfer are sound and based on a well-established body of law governing a multi-trillion dollar secondary mortgage
market.' See American Securitization Forum, ASF Savs Mortgage Securitization Le.gal Stl'llcllIres & Loan
1,.,""-1';''''- Are Sound (Oct. 15. lO I0) (online at www.americanseeuritizalion.eom!story.aspx'iid=4457) (hereinafier
"ASF Statement on Mortgage Securilization Legal Structures and Loan Transfers"). ASF will issue a white paper in
the coming weeks to elaborate fiJrther on this statement.
Sec Letler from Gibbs & Bruns LLP to Countrywide, supra note 95. As noted the letter
predominantly problems with loan quality and violation of prudent servicing obligations. .s'ee also Gibbs &
Bruns LLI'.Inslitlllionallloitlers HMBS Issue Notiee Non'PCljimllance Idenli/t,ing
Failures Master Sen'icer to Perfimn COl'enanlS and in More Th(1/7 $47 Billion
ou,'urVIV,llle-}s.\Uc)(1 RAlliS 18.20 I0) (online at
\vww.gibbsbllll1s.eoll1/files/l Jploads/Documents/Press Release 10 18 10.pdf); Ciibbs
& Bruns LLI'. RMliS Inifiative (Oct. 20, 20 I0) (onlinc at www.gibbsbruns.collJ/eounlrywide-nllbs-
initiative-I 0-20-20 I
FRBNY staff conversations with Panel stafl 26,2010)
Scction D.l. In auellllUII. see d'''''j'''''''''''' of PSAs III
For further diSCUSSion 01' thesc obstacles,
Scction 1).1. SIl/JlII.
For the investors action have 10 consider costs associated With thcir litigation such as
imlclllnificalions 10 be to trustecs when those are directed to initiate a lawsuit on the bondholders' behalf
Another consideration is that ng II1vestors Illay also bcnefit from actions without
,',11,11'11",111;0 to thc costs.
50
generally give significant discretion to trustees in exercising their powers, I and these third
parties may not be truly independent and willing to look out for the investors. J 87
F. Assessing the Potential Impact on Bank Balance Sheets
I. Introduction
A bank's exposure to the current turmoil in the residential real estate market stems from
its role as the originator of the initial mortgage, its role as the issuer of the packaged securities,
its role as the underwriter of the subsequent mortgage trusts to investors, and/or its role as the
servicer 0 f the trou bled loan.
188
Through these various roles in the mortgage market, the banking
sector's vulnerability to the current turmoil in the market generally encompasses improper
foreclosures, related concerns regarding title documentation, and mortgage repurchase risk
owing to breaches in representations and warranties provided to investors.
181, For example, in some PSAs, trustees are not required to investigate any report or, in many agreements,
request put-backs, unless it is requested by 25 percent of investors. See Pooling and Servicing Agrccment by and
among JP. Morgan COIporation J. Depositor, et aI., at 122 (Apr. I, 2006) (online at
www.scribd.eom/doc/3I45330 I/Pooling-Servicing-Agreement-JPMAC2006-NC1-PSA). Abscnt that threshold
bcing Inet, thc trustec has discretion to act. For further discussion, see Section D.2.
187 Amherst Securities Group 1.1', Conference Call: "Rohosigners, "viERS, And I'lIC Issues IVilh Reps and
IVorranls" (Oct. 28, 2(10). Ifthc investors wished to act against trustces they believe arc not independent, there arc
some legal avenues they could pursue. For example, the investors could remove the trustee using provisions that
are typically in PSAs that allow fi.Jr such a removal. Such provisions, howcver, onen require 51 percent of investors
to act. 1n addition, to the extent that the trustees arc found to be Ijdueiaries, if the trustee takes a specifje action that
the investors believe not to be in their best interest, they may be able to sue the trustee. If successful, investors could
be awarded a number of possible remedies, including damages or removal of the trustee. Greenljeld, Stein, &
Sellior, Fiduciarv Re!11oval Proceedings (online at www.gss-law.com/PracticeAreas/Fidueiary-Removal-
Proceedings.asp) (accessed Nov 12,201 Gary B. Freidlnan, ReliefAgainst a Fiduciarv: SCPA 21 02
NYSBA Trusts and Estates L,aw Section Newsletter, at 1-2,4 (Oct. 13,2003) (online at www.gss-
law.eom/CM/Articles/SCI' 02%,20Proceedings':I,,20-I,,20Reviscd.pdl) ("The hli lure of the fiduciary to
comply with a court order dirccting that the infi.Jrll1ation be supplicd can be a basis j()r contcmpt undcr SCI' A
607-1 and/or suspcnsion or rcmoval of the fiduciary under SC'PA I I.
ISS There arc also risks fi.n holders of second lien loans, but these loans are not as directly impacted by
foreclosure as fjrst-lien mortgages, since most second liens werc not securitized, and are held on the
balance shects of banks and other market participants. As discussed above, if second liens were perfected and fjrst
liens wcrc not, may actually takc priority. See Section D.2 fi.Jr further discussion of clTects on sccond lien
11ulclers.
/\n report rrom January 2010, values securitized second hens only at $32.5 billion or the $1.053
tnllion orthe total second liens outstanding. Amherst Securities Group Lt'. Amhcrst 2nd Liens
llow at I (Jan. 20 I
At the end or the second quarter of 20 I0, the Ii.lur l J.S. cOllllllercial banks -- Bank or America,
C'itigroup, J (hase. and Wells .- rcported $433.7 billion in second lien mortgages while having total
tv 01'$548.8 billion, Amherst Securitics Group LP data provided to Panel stafT(Sept. 2, 2(10); Federal
Insurance Stallslics flislillltiulis (online at www2. Nov.
20 I This is based on not their and therel()le !!lay not
include all sceond liellS held affiliates.
51
Many investment analysts believe that potential costs associated Vv'ith bank foreclosure
irregularities are manageable, with potential liabilities representing a limited threat to earnings,
rather than bank capital. IR9 Market estimates stemming from foreclosure irregularities to a
potential prolonged f()reclosure moratorium range fI'om $1.5 to $10.0 billion for the entire
. I 190 I I 1'1 I .. . 11'd I' . I I'
me ustry. ... owever, w 11 e t 1e situation remams U1, t 1e emergmg consensus m t le mar <et IS
that the risk fl'OJn mortgage put-backs is a potentially bigger source of instability for the banks. I'll
Using calculations based on current market estimates of investment analysts, the Panel calculates
a consensus exposure for the industry of $52 billion. Aside from the potential for costs to far
exceed these market estimates (or be matcrially lower), the wild card here is the impact of
broader title documentation concerns across the broader mOligage market. In any case, the
fallout from the foreclosure crisis and ongoing put-backs to the banks from mortgage investors
are likely to continue to weigh on bank earnings, but are, according to industry analysts, unlikely
. 197
to pose a grave threat to bank capltallcvels. -
IIowever, there are scenarios whereby wholesale title and legal documentation problems
for the bulk of outstanding mortgages could create significant instability in the marketplace,
leading to potentially significantly larger effects on the balance sheets of banks. Under
significantly more severe scenarios that would engulf the broader mortgage market--
encompassing widespread legal uncertainty regarding mortgage loan documentation as well as
the prospect of extensive put-backs impacting agency and private label mortgages bank capital
levels could conceivably conle under renewed stress, particularly for the most exposed
institutions. 191 It is unclear whether severe mortgage scenarios wcre modeled in the Federal
IR9 FBR Foreclosure Mania Conference Call, supra note 3.
190 See Section 1".2 li)r further discussion on costs stemming from a foreclosure moratorium.
I'll I lowevcr, to thc cxtent Ihat banks hold MBSs originated/issued by non-affiliates, they may themselves
benefit Ii'om put backs.
192 Credit US Banks. PUIhaek Losses Appear Manageable/ilr Ihe Banks, at 4 (Oct.
2il. 20 I 0) (hereinal1er "Credit Suisse on i'v10rtgage Put-back Losscs"); I)eutsche Bank. RCl'isiling PUlbacks and
Securili:-ariolls. at 7 (Nov. 1.20 I 0) (hereinal1er "Deutsche 13ank Revisits Plitbacks and Securitizations"); FB R
Capital Markets. Lo,ses $44B/in' Industrv - SCl1Saliollu!islJl Nol IVarrantcd (Sept.
20 I 0) (hcrcinal1er "'FBR on Repurchase-Related Standard & Poor's on the Impact of Mortgage Troubles
on U.S. Banks. SIIlml note 1Oil.
19\ There are other mortgage risks that arc difficult to quantify. such as the potential elfect mortgage put-
h;teks may have on holders of interests in CDOs and the banks that serve as counterparties for synthetic C])()s. A
C'!)() is a financial instrument that is made up of credit dehlUlt swaps on a
relerenced offixed-ineome assets. in these cases olten including the mezzanine tranches of RMBSs.
hanks served as intermedi;uies ((II' clients 10 shirt risk and theref<Jre structure a synthetic CDC) These banks
p[lc:ka;,'ed and underwrute CDOs and may have retained a certain amount of liquidity risk. It is nearly
however to measlile the effect of this issue due to the f ~ l c t that there is no reliable data that
estimates the size of the ("DO market, and the f<let that eOllnterparty risk in synthetic CDC)s is to under a
contract and therefore no data is availahle. Panel staff conversations with sources 4.
52
Reserve's 2009 stress tests, which, in any event, did not examine potential adverse scenarios
194
beyond 2010.
While the situation is still uncertain, the worst-case scenarios would have to presuppose
at a minimum a systemic breakdown in documentation standards, the consequences of which
woulcllikely grind the mortgage market to a halt. However, it is important to note that, so f ~ l r ,
many of the experts who have spoken to the question (and the banks themselves) believe that
securities documentation concerns are unlikely to trigger meaningful broacl-basecllosses. These
experts state that although put-backs owing to breaches ofrepresentations and warranties will
continue to exert a toll on the banks, it will largely be rnanageable, with costs covered from
ongoing reserves and earnings. Furthermore, as noted in Section D, there are a considerable
number of legal considerations that will likely lead to losses being spread out over time. 195
Residential U.S. mortgage debt outstanding was $10.6 trillion as of.J une 2010.
196
Of this
amount, $5.7 trillion is government-sponsored enterprise (GSE) or agency-backed paper, $1.4
trillion is private label (or non-GSE issued) securities, and $3.5 trillion is non-securitized debt
held on financial institution balance sheets. 197
For gencral in{(lIIllation on thc countcrparty risk involved in synthetic CDOs, .ICC Michael (iillson,
ll]a'Cr,I'Iil/lilil/.". IIIC /(is!! eDOs (July (on!ine at www.euraeao-!mve... ni.U.. -
(l/l'edera 1- reserve-edo-allaIys is- 2004, pd n.
,''''''''". Thc SIII)("""","'" e
Iederal re:scrve, :co\'!n('w,;cvcnls!nrcss/h,!'lcp!hclcP71 JOC)! )4)4,11 ,pd l'),
ASS('SSIlIClll P""m'"m
Sce Section j) Il)r a discussion on considerations of {l)reclosure documcnt irregularities,
1% 130ard or Governors of the Federal Rcserve .)V:,Il"", Slalislics (I[ lIisloricu! Dalu,
20 I 0) at
53
Figure 2: Residential (1-4 Family) Mortgage Debt Outstanding, 1985-2009 (millions u(
1 9 ~
dul lars)
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
o
[ III GSE and Agency MBS &l Private Label MBS Non-Securitized Mortgage Debt
Industry-wide, 4.6 percent of mortgages are classifiecI as in the foreclosure process. In
addition, 9.4 percent of mortgages are at least 30 days past due, approxilnately half of which are
199
more than 90 days past due.
Board of (iovell1ors of Ihe Federal Reserve Fcdcm! RC\iTl'C Siallsllca! Rclcil\c: Fluw
Unlled Sioies Dora Duwll!uad /',.,,,,,.0111 (Instrument: Home Annuall
federal I) (accessed Nov, 12. 201
1')'1 IVI,)1'I,,.,,,1' Bankers Association, Naliuna! UCllllall,'llCT'
"ivlFIA National 20 I0"), See a!su V:l"d,,"""
Fureclusure Slaris !)e('1'('ase in LOiesl MBA Naliulla!
I'oreclosure Slarls").
54
Figure 3: Delinquency and Foreclosure Rates (200(,-21110Y!OO
16%
14%
12%
10%
8%
6%
4%
2%
0%
l1)
/g
l1) l1)
'" '" '" '"
8 8
&
8
/!} /!} /!}
&
0 0
0 0
8 8 8 8
0
c:; c:;
0 a a a 0 0 0 0
ry ry ry ry ry ry ry ry ry ry ry ry ry ry ry ry ry ry
CJ CJ CJ
"t
.....,
CJ CJ
"t
.....,
CJ CJ
"t
.....,
ry
CJ
"t
.....,
CJ CY CY CY CY CY CY CY CY CY
II Delinquency Rate
a. Leading Market Pal,tidpants
Foreclosure Inventory at End of Quarter
Troubled mortgagcs were largely originated in 2005-2007, when underwriting standards
'vvcre most suspect, particularly for subprime, Alt-A and other loans to low-crcdit or poorly
documcntcd borrowcrs. Figure 4 below outlines the largest mortgage originators during this
period, ranked by volurne and markct share.
JlIl 1I11 1I11 I\. V rates IJlelude loans rhar arc 30 GO and 90 or 11I0re past due. Foreclosure
rares IJlelude loaus III the f(lreclosurc process at the eud ol"eaclJ quarter. See Id.
Figure 4: Largest U.S. Mortgage Originators, 2005-2007 (bilfiolls
Market
('
'y
Volume Share
Bank of America 1,880 22.1%.
Countrywide Financial 1,362 16.0'Y,)
Bank of America Mortgage & Affiliates 518 6.1 '/'o
Wells Fargo 1,324 15.5%
Wells Fargo Home Mortgage 1,062 12.4%
Wacbovia Corporation 262 3.1
.lPMorgan Chase 1,151 13.5%
Chase Home Finance 566 6.6%,
Washington Mutual 584 6.9%
Citigroup 506 5.9'Y..
Four '-i'. ... '"
4,861 57.0%
Total Originations (2005-2007) 8,530
The four largest banks accounted for approximately 60 percent of all loan originations
between 2005 and 2007. Totals for Bank of America, Wells Fargo, .lPMorgan Chase, and
Citigroup include volumes originated by companies that these firms subsequently acquired. As
Figure 4 indicates, a significant portion of Bank of America's mortgage loan portfolio is
comprised of loans assumed upon its acquisition of Countrywide Financial. Similarly, JPMorgan
Chase more than doubled its mortgage loan portfolio with its acquisition of Washington Mutual.
Figure 5, below, details the largest originators of both Alt-A and subprime loans between
2005 and 2007. The five leading originators of Alt-A and subprime loans rcpresented
approximately 56 perccnt and 34 percent, respcctivcly, of aggregate issuance volume for these
loan types. Alt-A and subprime loans represented approximately 30 percent of all mortgages
originated fi'om 2005 to 2007.
Jllside Ivl"d"'lOe Finance.
56
Figure 5: L,eading Originators of Subprime and AIt-A Loans, 2005-2007 (billions oj
)0)
c!o//arsr
-------------.--------------------- ------------,
ALT-A ORIGINATIONS
------------------------------ --,---------,---------1
(",
I]' Volume
Market
Share
Countrywide Financial (Bank of America)
IndyMac
JPAforgan Chase
Washington Mutual
EMC Mortgage
Chase flame Financial
GMAC
GMAC-RFC
GMACResidentiallIolding
Lehman Brothers
LOl
Top Five i,A1 ;:,0",0",' ... 1'0;:,<>':1,,' ... 1'
Total Alt-A Origina!!.<.)Ils
172
145
]02
40
38
25
98
77
21
79
596
1,065
16.2'j-()
13.6%
9.M6
3.8'j-()
3.5%
2.3%
9.2%
7.3%
1.9%
7A';;')
56.01.,
SUBPRIME ORIGINATIONS
----------
Market
__
Ameriquest Mortgage 112 7.70;;)
New Century J09 7
Countrywide Financial (E3ank of America) 102 7.0%
JPMorvan Chase 99 6.8%
r .. '_:J
I