In some (but not all) states, home owners (whose loans have been securitized) are successfully overturning or stopping judicial foreclosures (of their defaulted loan) by questioning the authority of the loan servicer (such as MERS) to foreclosure. An example of this is the Ibanez case. While the facts of these cases center around lost notes or missing documents, the legal concept centers around "standing" – which means "who" has the ability to assert certain rights or claims.
The issue of "who" has standing to assert claims on behalf of a lender will be the focus of many courts over the next few months (or even years).
In a recent Texas appellate case handled by several lawyers at Winstead (including Talmage Boston and David Johnson, as co-counsel with in-house counsel and another Dallas law firm), this issue was addressed in the context of a securitized commercial real estate loan and the borrower’s failure to obtain terrorism insurance. In the case, the loan servicer called a default and then sued the borrower due to this failure. The borrower then argued that the loan servicer didn’t have the authority (or "standing") to bring the law suit.
After reviewing the pooling and servicing agreement (the "PSA"), the court held that the loan servicer had the authority to sue either in its own name or as loan servicer. (More details on the case are below.)
Clearly, unless and until we get a federal solution to these questions involving securitized loans, this will be a 50 state slugfest on the basic question of "who" can assert the lender’s rights in a securitized loan. And as this case illustrates, the answer could vary – depending upon the facts of each case.
If you see if differently, or have your own story, please post a comment below.
And "thanks" to Brian Vanderwoude for bringing this important Texas case to my attention, and in furnishing the summary below -
The issue of who has standing to assert claims under a mortgage or other agreement is not always clear. In ECF North Ridge Assocs., L.P. v. ORIX Capital Markets, L.L.C., No. 05-09-00066-CV, 2010 WL 5141806 (Tex. App.—Dallas Dec. 20, 2010, no pet. h.), the Dallas Court of Appeals held that ORIX Capital Markets, L.L.C. ("ORIX"), as servicer on behalf of a loan pool’s trustee, had standing to bring suit in its own name under the language of a pooling and servicing agreement (the "PSA") between it and the trustee of a CMBS. The borrower, TCI 9033 Wilshire Boulevard, Inc. ("TCI"), challenged ORIX’s standing to assert claims arising out of TCI’s refusal to obtain certified terrorism risk insurance. TCI argued that ORIX, as the mortgage servicer and not the holder of TCI’s note, lacked standing to sue TCI. ORIX responded by arguing that the applicable PSA conveyed standing to sue for default of the loan documents.
Observing that no Texas court had directly addressed the issue, the Dallas Court of Appeals looked to the Seventh Circuit’s recent opinion in CWCapital Asset Mgmt., L.L.C. v. Chicago Props., L.L.C., 610 F.3d 497 (7th Cir. 2010) for guidance. In CWCapital, the court focused on the servicer’s role in administering a mortgage-backed security and the language of the PSA between CWCapital and its trustee in concluding that:
It is . . . 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 [PSA] 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 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.
The Dallas Court of Appeals found that the language of the PSA in front of it was almost identical to that in CWCapital. Specifically, the PSA gave 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." The trustee was also obligated, at ORIX’s written request, to "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 . . . ." Regarding the right of ORIX to sue in its own name, the PSA provided that "without the trustee’s written consent[, ORIX shall not,] except as related to a Mortgage Loan which [ORIX] . . . 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 . . . ." Id. In CWCapital, the court held that language similar to that following the italicized "except" indicated that the servicer could sue in its own name if the suit relates to a loan that it is servicing. Under the same reasoning as the court in CWCapital, the court concluded that ORIX had standing to bring suit against TCI either in its own name or as a special servicer.