The Line welcomes back guest blogger Linda Stahl. Linda is a partner in our litigation practice. Using her experience in litigating issues affecting CMBS trusts and loan servicers, she will periodically share her insightful perspectives to The Line.
On more than one occasion, clients have described the creation of mortgage-backed securities not as a delegation of authority by one party to another, but rather as a "coming to the table" by the issuer, master servicer, special servicer and trustee to assume discrete roles. As a result, CMBS players look to the Pooling and Servicing Agreement (PSA) to define their responsibilities, and give little thought to whether there are common-law duties inherent in the servicer/trustee relationship.
To a litigator attempting to understand the architecture of a CMBS transaction, the servicer's enforcing of loan documents looks an awful lot like an agent acting on behalf of its principal, i.e., the servicer acts on behalf of the trust that holds title to the loans in the pool. I have seen this in my own practice, where opposing counsel questions the right of a servicer to enforce loan covenants either in its own name or in the name of the trustee on behalf of the certificateholders.
In answering this question, we've found that servicers are resistant to being labeled an "agent" of the trustee, because of the fiduciary and other duties inherent in that role. But if a servicer is not an agent for the trust (as it generally would be when acting pursuant to a power of attorney), what basis does a servicer have for bringing suit in connection with its servicing activities?
Recently, in the case of CWCapital Asset Management, LLC v. Chicago Properties, LLC, 610 F.3d 497 (7th Cir. 2010), Judge Posner answered this question, and his analysis should have servicers feeling confident in their seat at the table.
In CWCapital, the servicer filed suit in its own name to collect a portion of settlement proceeds that the borrower, a commercial landlord, obtained from its tenant in a suit for unpaid rent. The servicer argued that the settlement payment was "rent" that should have been paid to it under a Subordination, Non-Disturbance and Attornment Agreement. The trial court concluded the claim was groundless on the merits, but rather than rule on that basis, it dismissed the case under Federal Rule of Evidence 17(a). That Rule requires that an action be prosecuted in the name of the real party in interest, and the trial court held that the servicer did not qualify. On appeal, Judge Posner examined the relationships between the CMBS players, and concluded that a servicer suing in connection with its servicing activities is a real party in interest.
How he got there is very interesting. He did not conclude that the servicer is an agent acting on behalf of the trust or the certificateholders. Rather, he pointed out that the PSA empowers the servicer, acting alone, to do all things necessary in connection with servicing of the loans. In fact, it is the servicer (not the trustee) who decides whether and when to file suit. He also observed that the PSA requires that when a servicer sues in the name of the trustee, it must indicate the servicer's representative capacity, "except as relates to a Loan that the...Servicer...is servicing pursuant to its respective duties [under the PSA]." From this, Judge Posner concluded that a servicer suing in regard to a servicing-related loan is not doing so in a representative capacity. Instead, he reasoned, the servicer sues as the owner of equitable title to the claim. The trust holds bare legal title, but it is the servicer with the right to enforce claims arising out of the loan documents.
Why is this noteworthy? Well, from the servicer's perspective, it establishes the right to pursue claims in connection with servicing activities without seeking a power of attorney from the trustee, and in its own name. And it can do so without conceding any principal/agent relationship.
Judge Posner's reasoning may be of even more interest to trustees, who often are named in litigation arising out of servicing activities. Now, in addition to pointing to liability limitations in the PSA, a trustee sued for conduct of a servicer (such as foreclosure), can defend on the ground that, lacking equitable title to the claim, the trustee has no right either to pursue the claim or to direct the servicer to refrain from pursuing it.
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