Mortgage Servicer Sues to Collect Rent Paid to Landlord

party, there would still be complete diversity of citizen- work?" id., sept.-oct. 1993, at 54; robert d. feinstein & other relief it may obtain, its reasonable costs and ex- sidney a. keyles, "foreclosure: subordination, non- real party in interest to ratify, join, or be substituted defendants' motion for judgment on the pleadings, in sue, within the meaning of article iii of the constitu- evans, circuit judges. own name, the judge dismissed the suit. fed. r. civ. by landlord in the performance of the terms, covenants, money because there were so many mortgage defaults. of any of the income generated by the mortgages. the for unauthorized abandonment of the lease; and breach the whip hand; he is the lawyer and the client, and the snda independently of any claims against chicago full power and authority, acting alone, to do or cause duties herein (in which case such servicer shall give trustee, or in this case the trustee's delegate (the plain- the [servicer] . . . that are necessary or appropriate to cwcapital, the servicer in this case, confused matters gages actually yielded at least 80 percent of the principal by the issuer of the mortgage-backed security. the buyer and servicing agreement delegates what is effectively unfortunately, it is less clear than it should be whether united states court of appeals sions for the protection of the lender or the tenant. lawsuit because it receives a percentage of the proceeds of this provision is a default under the mortgage agree- loss exceeds forecast," n.y. times, aug. 13, 2009, the diminished income from the mortgage would still 6-29-10 though it owed rent of some $471,000 for the time re- one). ordinarily the original lender would be the the basis of the plaintiff's claim against blockbuster is appeal from the united states district court or in connection with its meaning, the prevailing party the claimed liability of the landlord and its owners posner, circuit judge. this appeal in a dispute over tenancy if as a result of the default and foreclosure there ministrative duties hereunder." the trustee is thus each month on the mortgage. servicer . . . is servicing pursuant to its respective from "gross negligence or willful misconduct . . . relating the supreme court's holding in the sprint case was he'd make as a representative of the junior one. suppose st. j., sept. 16, 2009, p. b1, http://online.wsj.com/article/ the plaintiff had failed to respond to an interrogatory failure to direct rent to it has impaired the value of its only relief it seeks against chicago properties is a money argued may 24, 2010--decided june 29, 2010 suing the borrower and if necessary foreclosing the mort- 567, 571-72 (10th cir. 1951). p. b4, www.nytimes.com/2009/08/14/business/media/ odd if the defendants could be exposed to liability for the servicer may prefer doing this to foreclosing the ment co. v. deloitte & touche llp, 549 f.3d 100, 107- tion under illinois law. the plaintiff (and appellant), was groundless--but then, seemingly as an after- chancery 1966). what is strange about the plaintiff's without violating rule 17(a). see sprint communications for remember that in deciding what action to take with more money by foreclosing or by holding out for a merely that an assignee for collection has standing to buster on the terms it did. and cwcapital argues less generous modification. the servicer must balance power and authority, acting alone, to do or cause to be to be done any and all things in connection with such escrow "all funds received by mortgagor from tenants in sion; it seems not to have, but the record is unclear.) the a timely response to the defendants' motion. without the lender's consent that reduces the term of is not doing so in a representative capacity if it is suing by stating in its complaint that the trust which holds pany. the suit claims that the servicer (standing in the mcbride, "blockbuster to shutter more stores," wall disturbance and attornment agreements," id., july- to it is comprehensive: the servicer "shall . . . have full for the seventh circuit sion requires that the tenant agree to continue the objection, a reasonable time has been allowed for the (n.y. 1997); prudence co. v. 160 west seventy-third st. higher interest rate. the plunge in housing prices in required to confer on the servicer whatever authority mortgage, because foreclosure is costly and the market payments in full and so there has been no event that a "subordination, non-disturbance and attornment servicer to modify the mortgage by reducing the (dictum); staggers v. otto gerdau co., 359 f.2d 292, properties under the mortgage. but all that blockbuster lender's shoes) is contractually entitled to the money or in the trustee's name without indicating that it's neither that chicago properties violated a covenant of cwcapital, is a mortgage servicer; the defendants (and the loan agreements by failing to reduce the rent it the pooling and servicing agreement between the and interest owed by the borrowers, and therefore this after the lease had been terminated, so there were no netflix, by dvd vending machines, and increasingly by has impaired its value as security for the mortgage loan-- buyer would be promised only a modest interest rate cancelling a lease without the lender's written consent, it penses, not limited to taxable costs and reasonable at- concerning its authority to sue. the judge's action was 6 no. 09-3506 should not be dismissed because it has not been brought servicing and administration which it may deem neces- an snda often and in this case contains additional provi- charging a violation of a provision of the snda which is properly insured; attend to any default, either by to the [mortgage] loan and/or the property," and (under the mortgage agreement (which is separate from the of the junior tranche would bear much more risk and shall not] initiate any action, suit or proceeding solely no. 09-3506 7 dinates the lease to the mortgage; the attornment provi- injured by not receiving rent payments from block- unite in support of video on demand," n.y. times, mar. ment of chicago properties' suit against blockbuster so we come to the merits. case, so, on balance, blockbuster was indeed a prevailing in such action shall be awarded, in addition to any ment further states that without the trustee's written servicing and administration which it may deem neces- we're about to see). a mortgage loan is nonrecourse 12 no. 09-3506 in the settlement was not a payment of rent. it was a being in default may, perhaps in collusion with the aug. 1989, at 38. the subordination provision subor- district judge and us to determine that if the lender were ments of principal and interest; make sure the property which they argued that the plaintiff lacked standing to for collection, who must render to the assignor the the trust holds the legal title to the mortgages. the though usually there are more) is entitled to receive remember that the buyer of the senior tranche in our monthly payment of principal and interest by 20 percent. seeking enforcement of the mortgage agreement. (perhaps enable [the servicer] to carry out [its] servicing and ad- landlord and the mortgagor (that is, the borrower); its sb125303731573912777.html (visited may 30, 2010). unable court, which was not contradicted, ratifying the of a defaulted loan that it services. but in an aside on his delegated duties, is to provide support. the securiti- of the mortgage-backed security in accordance with more--in the present case, the bond when issued was isn't argued either. own name if the suit relates to a loan that it's servicing, it should have made greater efforts to find such a tenant; p. 17(a). assignee, it has a personal stake in the outcome of the thought, ruled that the servicer was not a real party buster, for had it received them it would have applied the concern is that a landlord who is or foresees soon party/defendant in any action or proceeding which may ship. but whether there is complete diversity is separate misapplication or conversion of rent paid more than assures the tenant that his lease will continue in the and in a commercially reasonable manner." it would be 10 no. 09-3506 that blockbuster paid chicago properties in settlement stitution, the action proceeds as if it had been originally 17, 2010, www.nytimes.com/2010/03/18/business/media/ but not limited to, any cancellation fees [or] penalties." them to reduce the debt that chicago properties owes it, gages are packaged into a debt security it is infeasible the terms of the lease in a way that reduces its value to modifying one of the mortgages and foreclosing, the chicago properties, llc, et al., no. 09-3506 5 appellees) are chicago properties, which is a commercial regard to a defaulted loan, the servicer has to consider mary kay kane, federal practice & procedure � 1545 (2d indeed the real party in interest. buster's agreeing to pay chicago properties $161,000, blockbuster is the well-known but fast-fading chain real party in interest could not bring suit in his own or (what is critical) that leaving the building unoccupied event that the landlord defaults on his mortgage and the tiff), is responsible for servicing them. every mortgage 294 (2d cir. 1966); kilbourn v. western surety co., 187 f.2d the senior tranche wouldn't object to the modification; in interest; as only a real party in interest can sue in its and trouble?" 37 real property probate & trust j. 701, 709-12 ued to make its monthly mortgage payments in full. 10 (2d cir. 2008). there is no doubt about article iii 4 no. 09-3506 of the bond having different rights and carrying dif- for the northern district of illinois, eastern division. distribution of proceeds to the owners of the tranches security and the servicer made the latter an assignee or before easterbrook, chief judge, and posner and 2007 and 2008 was so great that even buyers of the chicago properties has complied with the escrow provi- and its former tenant, the blockbuster video-rental com- co. v. apcc services, inc., 128 s. ct. 2531, 2541 (2008) conditions and agreements set forth in the mortgage." is based on other documents--the mortgage note and the equitable ownership of the claim (albeit for eventual a critical provision in this case is that the lender isn't commenced by the real party in interest." the trustee servicer, or would hire one. but when hundreds of mort- 8 no. 09-3506 borrower "is acting in the ordinary course of business v. could trigger blockbuster's liability under the snda. but that sad story is not germane to this case. security are placed in a securitization trust, and the torney's fees." the plaintiff argues that blockbuster is owners' guaranty of the note. the guaranty makes the on chicago properties' building. the income from the (visited may 31, 2010); brooks barnes, "studios and cable mortgages is the income of the bond. but rather than ment that defines the rights of lender and tenant in the selling the bond (which might be valued at $1 billion or 2 no. 09-3506 title being the sort held by a trustee. 128 s. ct. at 2541. being commercially unreasonable in settling with block- specifically the conflicts of interest latent in the tranching of movie rental stores. its business model has to hold out for a high-paying tenant even if that reduced their priorities) to the servicer. see greer v. o'dell, 305 the competing interests of the owners of different sary or desirable." the servicer is much like an assignee the real party in interest, and by arguing that by dis- balance of the mortgage note. but the plaintiff is not needs someone to collect the borrower's monthly pay- mortgage note) requires the borrower to place in impartially the interests of the different tranches as deter- the lease or the tenant's monetary obligations under it. under the trustee's name without indicating doing so in a representative capacity--implying that it closing mortgagee or the purchaser of the property at building was worth either before or after blockbuster's standing in this case; though the plaintiff may not be an maining on the lease. (the plaintiff is seeking a judg- in the name of the real party of interest "until, after an owners liable for any losses to the lender arising of a suit by the latter for unpaid rent. the district judge the latter needs to perform his servicing duties, which lender forecloses. see scott w. dibbs, "looking down the trustee's duty, when the servicer is carrying out commenced to enforce any provisions of this agreement judgment for the defendants. real party in interest, the supreme court intimated agree- invocation of this provision is that the landlord, chicago include suing. for it is the servicer, not the trustee, who the . . . servicer's . . . representative capacity." the word to make a profit at the premises that it had leased from title to the mortgage on chicago properties' building is no. 07 c 5029--james b. zagel, judge. f.3d 1297, 1302-03 (11th cir. 2002), and cases cited there. might be better off if the servicer gambled on obtaining tenant, collect rent far in advance, or otherwise modify mortgage when it is paid off (and if it is prepaid, collect no. 09-3506 11 value of the property may be depressed. the holder of gage or by modifying the mortgage to make its terms mortgages in the mortgage-backed security. but the a mere attorney. it says that the servicer "shall . . . have powers of attorney and other documents furnished by debt security into a number of separate, smaller bonds. sary or desirable." the trustee shall at the servicer's be made whole by foreclosing on the lender's collateral. mined by their contractual entitlements. payment in settlement of a lawsuit that sought rent for valued at $1.3 billion), its creator sells "tranches" (slices) (2003); see, e.g., dime savings bank of new york, fsb v. montague street realty associates, 686 n.e.2d 1340, 1341-42 servicer's suit on the bank's behalf. the district court doing something contemplated by the mortgage agree- tranche and entitle the buyer of it to the first 80 percent the mortgage agreement prohibits the borrower from the foreclosure sale) of rent for occupancy of the connection with the cancellation of any leases, including, corp., 183 n.e. 365, 367 (n.y. 1932); kirkeby corp. v. cross the prepayment penalty if the mortgage provides for zation trust holds merely the bare legal title; the pooling money collected by the assignee's suit on his behalf defendants-appellees. when the mortgage lender can't obtain damages against tion. 128 s. ct. at 2542; see also w.r. huff asset manage- a related point is that there is no evidence of what the the borrower if the loan is defaulted and the lender can't no. 09-3506 collateral. remember that chicago properties has contin- instructions to do that. but the instructions were sent buster, plus attorneys' fees and costs. senior tranches of mortgage-backed securities lost done any and all things in connection with such cwcapital asset management, llc, blockbuster violates these provisions. the money paid after blockbuster abandoned the premises. and although name, and also presents issues of contract interpreta- neys' fees and costs. that was an unimportant part of the the plaintiff is entitled to bring this suit in its own of them. a provision similar to a provision in the snda that "written request . . . promptly execute any limited we need to explain the servicer's role in administering disclosing who the lender is, cwcapital has enabled the from whether a suit is being maintained by the real a borrower gets into financial trouble and asks the servicer. the reason is the structure of the security and conducted a bench trial and concluded that the claim this language covers the proceeds of the $161,000 settle- tranches of the security. another provision requires the tenant on the lender's this may have given chicago properties an incentive do non-disturbance agreements justify all the time is a new landlord; and the nondisturbance provision the junior tranche. faced with a choice between lawyer, or someone else with a mere power of attorney, less onerous to the borrower; and discharge the a future landlord, depriving that landlord (the fore- party in interest, or by an interloper. a lawyer for the dismiss the suit. rule 17(a)(3) provides that a case servicer might make a different decision as a representa- in regard to a servicing-related loan. and television sets. "blockbuster shares fall on chapter the district court found this provision inapplicable bridge towers, inc., 219 a.2d 343, 344-46 (n.j. super. ct. property by the tenant after the original landlord is no three days before the trial began, it was nonetheless chicago properties, blockbuster abandoned the lease. the mortgages that secure the mortgage-backed in the snda that "should any action or proceeding be we've already discussed) for losses arising from the instructions to deliver his rent payments to the lender. no. 09-3506 3 buster, and the trust are parties. this is a standard agree- could have obtained from its counterclaim were attor- fully cover his 80 percent interest in the revenue from buyer of this tranche would be safe as long as the mort- party. bound by any rent that the tenant may have paid in (minus the assignee's fee) but can sue in his own name com/2010/03/18/business/media/18blockbuster.html attorneys' fees to blockbuster on the basis of a provision ment with 6a charles alan wright, arthur r. miller & ed. 1990), that a real party in interest differs from a precipitate. the affidavit was filed in response to the substituted for cwcapital, or added as an additional lapse of september 2008) that is secured by a large the loan was nonrecourse (with some conditions--as rejected the affidavit as untimely, because earlier road," probate & property, sept.-oct. 2008, at 49, 52-54; and it has not presented evidence that blockbuster's real party in interest in this case, there still is no need to 14 no. 09-3506 advance, nor by any modification of the lease made a future period, namely the remaining term of the lease so would be compensated by being promised a chicago properties sued. the suit was settled by block- for each security holder to be or to hire its own (bank of america) submitted an affidavit to the district income from all the mortgages ahead of the buyer of closing that fact it has dispelled any objection to client and acknowledged that the client, and not he, was longer the owner. joshua stein, "needless disturbances? properties, has continued to make its monthly mortgage been devastated by direct mail rental services like it is thus the servicer, under the agreement, who has said that "tenant [blockbuster] shall not be joined as a a final issue involves the district court's award of more rent payments to be made. nor was the plaintiff we've italicized indicates that the servicer can sue in its ment. in light of blockbuster's financial difficulties, there tive of the senior tranche holder from the decision 14blockbuster.html?_r=1 (visited may 30, 2010); sarah number of mortgages, one of which is the mortgage servicer is the trust's collection agent. the delegation a mortgage-backed security--a kind of giant bond tenant, but failed. nevertheless it continued to make name merely because he disclosed the identity of his 11 warning," n.y. times, mar. 17, 2010, www.nytimes. a commercial mortgage requires us to decide whether ferent interest rates. in effect he breaks up the giant ment, requiring immediate payment of the unpaid no. 09-3506 9 be instituted or taken by reason or under any default (made famous, or rather infamous, by the financial col- event of foreclosure. but nowadays, despite the name, but if, contrary to what we think, the servicer is not the consent, "except as relates to a loan that the . . . is no basis for thinking that chicago properties was holder of the junior tranche might object because he claim derives from legal rather than equitable title--legal is empowered to decide whether to sue. the agree- arnold b. west & sidney a. keyles, "does the a in snda the judgment is reversed with directions to enter in having a claim to the proceeds of the suit even if its charges, in order to secure a replacement tenant; or that full, timely payment of the principal and interest due no. 09-3506 13 the plaintiff complains that blockbuster disregarded its 18demand.html (visited may 30, 2010); "blockbuster's not a prevailing party because it lost on a counterclaim a month in advance. nothing in the settlement with abandonment of the lease. bring suit. so while the affidavit was submitted only because the claims against blockbuster arose under the plaintiff-appellant, reversed with directions. agreement" (snda) to which chicago properties, block- example (for simplicity we assume only two tranches, into the action"; and "after ratification, joinder, or sub- trustee of the mortgages backing the mortgage-backed costs.) chicago properties tried to find a substitute in the the value of the collateral (its building). but that judgment for the entire amount of rent owed by block- ment for the full $471,000, plus attorneys' fees and makes an exception for cancellations made when the pursuing the suit in its own name. what is true is that by owners, who are guarantors of the mortgage loan; notice to the trustee of the initiation), [the servicer the direct transmission of movies to home computers for example (to simplify) he might create a senior