AMICUS BRIEF IN SUPPORT OF APPELLANT’S PETITION FOR REVIEW

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    600New Jersey Avenue, NW, Washington DC 20001-2075

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    GEORGETOWNUNIVERSITYLAWCENTER

    Adam J. LevitinAssociate Professor of Law

    AMICUS BRIEF IN SUPPORT OF APPELLANTS PETITION FOR REVIEW

    La Villita Motor Inns, J.V., Executive Motels of San Antonio, Inc., and S.A. SunvestHotels, Inc.

    Appellant,

    v.

    Orix Capital Markets, LLC, Bank of America, N.A. LNR Partners, Inc., Capmark

    Finance, Inc., Nicholas M. Pyka as Trustee, Michael N. Blue as Trustee, and Greta E.Goldsby as Trustee,

    Appellees.

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    STATEMENT OF INTEREST OF AMICUS CURIAE

    The Amicus Curiae sponsoring this brief is the Texas Hotel and Lodging

    Association (TH&LA). TH&LA is a nonprofit trade association representing every

    aspect of the Texas lodging and tourism industry. TH&LA over 1,800 members

    include hotels, motels, resorts, bed & breakfasts, guest ranches, convention centers,

    chambers of commerce, and tourism-related businesses all of sorts. TH&LA

    advocates for legislation, regulations, resources, and a business climate that will

    promote a strong, vibrant, and growing lodging and tourism industry within Texas.

    The fee for preparation of this brief has been paid by the Amicus; no fee has

    been paid by any party to this litigation. See TEX R.APP.P. 11(c).

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    INTRODUCTION

    This case involves a controversy about mortgage servicing. Mortgage

    servicing is the administration of mortgage loansthe collection of payments and

    management of defaultson behalf of third parties. Mortgage servicing is an

    essential component of mortgage securitization, which is the predominant method for

    financing commercial mortgages in major metropolitan markets and for financing

    residential mortgages nationwide.

    Mortgage servicing has received significant media attention in recent months.

    See, e.g., David Streitfeld & Nelson D. Schwartz, Officials Disagree on Penalties for

    Mortgage Mess, N.Y.TIMES, Mar. 3, 2011 at B1;Nick Timiraos, Victoria McGrane& Ruth Simon, Big Banks Face Fines on Role of Servicers, WALL ST. J., Feb. 17,

    2011; Robbie Whelan, Big Banks Told Not to 'Fix' a Fraud, WALL ST. J., Oct. 30,

    2010; Robo-Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage

    Servicing, Hearing Before the House Financial Services Committee, Subcommittee

    on Housing and Community Opportunity, November 18, 2010; Problems in

    Mortgage Servicing from Modification to Foreclosure, Hearing Before the Senate

    Committee on Banking, Housing, and Urban Affairs, November 16, 2010. The cause

    for this attention has been the robosigning scandal and other malfeasance by the

    servicers of residential mortgages.

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    Several of the largest residential mortgage servicers imposed voluntary

    foreclosure moratoria in the wake of the discovery that they were routinely submitting

    mass-produced (robosigned) affidavits in judicial foreclosures signed by employees

    without any personal knowledge of the facts attested to therein. See, e.g., David

    Streitfeld & Nelson D. Schwartz, Largest U.S. Bank Halts Foreclosures in All States,

    N.Y.TIMES, Oct. 8, 2010, at A1; David Streitfeld, GMAC Halts Foreclosures in 23

    States for Review, N.Y.TIMES, Sept. 20 2010 at B4. These robosigned affidavits

    varied in function, but they were generally affidavits attesting to the fact and amount

    of the borrowers indebtedness. Relatedly, the countrys largest mortgage servicer

    reached a $108 million settlement with the FTC over inflated calculation of loan

    balances. Press Release, Fed. Trade Commn, Countrywide Will Pay $108 Million for

    Overcharging Struggling Homeowners; Loan Servicer Inflated Fees, Mishandled

    Loans of Borrowers in Bankruptcy (June 7, 2010), available at

    http://ftc.gov/opa/2010/06/countrywide.shtm. As a result of these scandals, all 50

    state attorneys general as well as federal bank regulators and the Department of

    Justice are currently engaged in an investigation of residential mortgage servicing

    practices, and fines totaling as high as $20 billion have been bruited. See, e.g., David

    Streitfeld & Nelson D. Schwartz, Officials Disagree on Penalties for Mortgage Mess,

    N.Y. TIMES, Mar. 3, 2011 at B1; Ariana Eunjung Cha & Dina Elboghady, 50 state

    attorneys general announce foreclosure probe, WASH.POST, Oct. 13, 2010; Thomas

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    Frank & Julie Schmit, Federal agencies investigate mortgage foreclosures, USA

    TODAY, Oct. 19, 2010.

    This case presents mortgage servicing issues in the commercial mortgage

    context. Two distinct mortgage servicing problems exist in this case. First, there is

    the question of who has standing to enforce a mortgage note. Because mortgage

    securitization divides the economic ownership of notes from their management, there

    is an issue of what must be shown regarding the status of a party that claims to be the

    manager of the note. Second, there is the problem of mortgage borrowers being

    unable to get an accurate accounting of the balance due on a loan. Both issues present

    rather straightforward questions of what a party must show to prosecute a mortgage

    note, namely what sort of evidentiary showing is required for a party to show that it

    has standing to prosecute a note and what sort of evidentiary showing is necessary to

    prove the balance owed on a note.

    Contested fact issuethe fact finders decision on that should not be disturbed.What is Texas appellate court standard for findings of fact? Trial courts ruling mustbe against the great weight and preponderance of the evidence.--borrowers and THLA members deserve a chance to present evidence and be heard,just like the servicer, and their evidence should not be disregarded.There were no evidentiary challenges to the borrowers testimony

    In this case, the Appellee, Orix Capital Markets, LLC (Orix), presented only

    thin and contested evidence to the trial court that it was in fact the servicer of the

    Appellants mortgage loan and regarding the balance owed on the loan. This

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    evidence was thin, consisting of Orixs in-house counsels declaration, an unsigned

    and undated letter from Bank of America appointing Orix as special servicer, and a

    letter from the previous special servicer that Orix was assuming its role.

    The Appellant offered contravening evidence, including a Bloomberg report

    listing another party as special servicer; as Appellants expert witness testified, such

    Bloomberg reports are relied on by market participants and presumed to be accurate.

    Orix did not challenge the admissibility of Appellants evidence.

    After weighing the evidence, the trial court concluded that Orix had not

    satisfied its burden of proof that it was the servicer. The trial court also ruled, in the

    alternative, as to the loan balance, in favor of the Appellant. The Court of Appeals,

    however, disregarded both findings of fact and held that Orix was the servicer and

    that the loan balance was that claimed by Orix, not the Appellant. In so doing, the

    Court of Appeals essentially declared that Appellants evidence simply did not count.

    Instead, it held that a partys own bald allegation that it is entitled to enforce a note,

    coupled with thin and contradictory evidence, were sufficient to create standing and

    establish the balance owed and ultimately deprive a debtor of its property. Put

    differently, the rule adopted by the Court of Appeals was debtors evidence doesnt

    count.

    The Texas Hotel and Lodging Association (the TH&LA), the trade

    association for the Texas lodging and tourism industry, urges the Court to grant the

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    petition to hear the appeal in this case so as to address these important issues and

    provide clarity in the law in Texas. To this end, it is important that the Court provide

    a clear statement as to (1) what a party must show to establish that it is entitled to

    enforce a mortgage note and (2) what standard should be applied for determining the

    actual balance on a mortgage.

    In light of the national foreclosure crisis, courts in other states have begun to

    address these issues and clarify the evidentiary requirements for standing in

    foreclosure cases. It is important that the Court hear this appeal in order to bring

    Texas law into line with that of other jurisdictions that have established clear

    standards of proof for the enforcement of mortgage notes that properly protect

    business and consumer borrowers procedural rights and ensure that the courts are

    used as instrumentalities of justice, rather than mere collection agencies.

    I. Mortgage SecuritizationNationwide, roughly a fifth of commercial mortgages by dollar volume are

    securitized.1 Federal Reserve Statistical Release Z.1 (Flow of Funds), Tables L. 217-

    218. This means that loans made (or in mortgage parlance originated) by various

    lenders (originators) are pooled by an investment bank (the securitization sponsor

    or securitizer) and sold to a specially-created entity (special purpose entity or SPE)

    1 Most securitized mortgages, however, are on properties in roughly 60 major urban markets,4 of which are in Texas, so the securitization rate in those markets is substantially higher.

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    mortgage investment conduit (REMIC) under the Internal Revenue Code. See 26

    U.S.C. 860A-860G.

    While the SPE is a passive entity, mortgage loans require active management.

    Billing statements must be mailed out and remittances collected. Adam J. Levitin &

    Tara Twomey, Mortgage Servicing, 28 YALE J. ON REG. 1, 15 (2011). Loan

    covenants must be enforced, and defaulted loans must be managed either by

    restructuring the loan or foreclosing on the mortgage. These tasks are handled by

    mortgage servicers, who are agents of the SPE.

    In a typical CMBS deal, there are at least two separate mortgage servicers, a

    master servicer and a special servicer. Id. at 86. The master servicer handles billing

    and receives payments on performing mortgages, while the special servicer

    administers defaulted mortgages. Id. In a typical CMBS deal, loans are automatically

    transferred from the master to the special servicer once they are 60 days delinquent.

    Id. at 87.

    A CMBS issuance is divided into separate series known as tranches, with a

    senior-subordinate structure for credit risk among the tranches. This means that the

    seniormost tranches are paid before the mezzanine or middle priority tranches, which

    are paid before the junior tranches, which are known as the B-piece. The special

    servicer is appointed by the majority investor in the juniormost tranche of the CMBS

    deal (the B-piece investor or in the parlance of the CMBS deal documents, the

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    majority controlling class certificateholder). Id. at 88. Often the special servicer is

    in fact an affiliate of the B-piece investor. Id. at 88 n.311. The special servicer is

    typically compensated with a 1% share of the proceeds of all specially serviced loans,

    irrespective of whether a foreclosure or restructuring results. Id. at 87.

    The servicing contract is typically part of a document known as a pooling and

    servicing agreement (PSA). Id. at 31. PSAs are lengthy and complex documents

    that combine several distinct contracts into one document. Id. PSAs are the contract

    under which the mortgage loans are sold to the SPE. Id. at 15, Fig. 2. They are also

    the contract for servicing the loans that authorizes the servicer to act on behalf of the

    SPE. Id. at 31. If the SPE is a trust, as if often the case, the PSA is the trust

    instrument, setting forth the powers of the trust and the duties and rights of the trustee.

    Id. And the PSA is the indenture under which the CMBS are issued. Id.

    II. Standing of ServicersMortgage securitization divides the ownership of mortgage notes from their

    administration. This can complicate attempts to enforce the mortgage note. The

    enforceability of mortgage notes is in Texas is governed by Article 3 of the Texas

    Business and Commerce Code (TBCC), which is the Texas codification of Article 3

    of the Uniform Commercial Code. Section 3-301 of the TBCC provides that an

    instrument, such as a note, may be enforced by a holder, a nonholder in possession

    of the instrument who has the rights of a holder, or a person not in possession of the

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    instrument who is entitled to enforce the instrument pursuant to [the lost note

    provision of the TBCC].

    Mortgage servicers are rarely holders of notes, as under the TBCC 1-

    201(b)(21)(A), a holder is defined as the person in possession of a negotiable

    instrument that is payable either to bearer or to an identified person that is the person

    in possession. The note is property of the SPE, not the servicer. Therefore, if a

    servicer is to enforce a note, it must often do so as a nonholder in possession of the

    instrument who has the rights of a holder. TBCC 3-301. This necessitates proving

    that the servicer is (1) in possession of the instrument and (2) that the servicer is

    entitled to the rights of a holder, such as through an agency agreement or by way of

    subrogation.

    What is necessary to make such showings is one of the central issues in this

    case. In the instant case, the Appellee produced no evidence that it in fact has any

    connection with Appellants mortgage note. It did not introduce evidence of that it

    had any sort of agency agreement with the securitization trust that owns the

    Appellants note or whether that agency agreement authorized it to prosecute the note.

    The trial court understood this problem, but the Court of Appeals took a position that

    can be summarized as creditors win, debtors lose.

    The law in Texas cannot simply be debtors lose. Debtors are entitled to their

    day in court facing the real party in interest. The judicial system as a whole has a

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    strong interest in ensuring that the real parties in interest are those involved in the

    litigation. In the context of a mortgage foreclosure case, this means ensuring that it is

    the mortgagee or its agent who is prosecuting the foreclosure, and requiring proof that

    a party is the mortgagee or its authorized agent if the defendant questions standing. In

    the context of mortgage foreclosures in particular, this issue is particularly important

    because different parties in the securitization chain have different incentives and

    abilities to engage in a restructuring of the loan rather than a foreclosure.

    Accordingly, a mortgagor wants to be sure that it dealing with the proper party.

    If the Court of Appeals decision is left to stand, then contestedallegations,

    that a party is in fact the servicer and entitled to enforce a note would provide

    sufficient grounds for a party to foreclose. The effect of such a ruling is to condone

    vigilante foreclosures. It cannot simply be assumed that only the proper party would

    attempt to enforce a note.

    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, e.g., United States Bank

    Nat'l Ass'n v. Ibanez, 458 Mass. 637 (Mass. 2011) (affirming denial of quiet title to

    securitization trusts that could not prove that they were the assignees of mortgages);

    Wells Fargo Bank, N.A. v. Ford, 2011 N.J. Super. LEXIS 13 (N.J. Super. Ct.

    Appellate Div. 2011) (foreclosure judgment reversed because plaintiff securitization

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    the mortgagees at the time they brought the foreclosure actions. Despite voluminous

    paperwork from the securitization deal, the securitization trusts were incapable of

    proving that the mortgages had in fact been transferred to them. This is an analogous

    problem to a party claiming to be a commercial mortgage securitization special

    servicer being incapable of proving its status. These issues ultimately go to the issue

    of what are the requirements to have standing to sue to enforce a mortgage note?

    Given the increase in foreclosures and foreclosure-related litigation in the wake

    of the real estate bubble, it is of particular importance that the Court provide clear

    guidance on what is required to prove standing to enforce a mortgage note. A clear

    statement of the requirements necessary to enforce a mortgage is of great interest to

    both Texas borrowers and Texas lenders, and will help avoid a great deal of future

    litigation. This case presents a favorable opportunity for clarify the law, as unlike in

    the residential mortgage context, both parties in this case are ably represented by

    counsel.

    Clarity of the evidentiary standards for proving standing to enforce mortgage

    notes is of particular interest to the Texas lodging and tourism industry. The

    mortgages of many Texas Hotel and Lodging Association members have been

    securitized. The national economic downturn has hit the lodging and tourism industry

    particularly hard, and nationally, as of December 2010, 60+ day delinquency rates for

    hospitality-related properties were 13.46%, as compared to 6.55% for other properties

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    types. See Bloomberg CMBCMBS Market Overview. Texas is not immune from

    these national economic conditions, and some TH&LA members are finding it

    necessary to seek restructuring of their mortgage debt.

    The TH&LA is concerned that its members receive a fair and reasonable

    chance to restructure their mortgages when they are affected by a national economic

    downturn. Mortgage restructuring is a negotiation that occurs in the shadow of the

    law, and so the state of the law regarding the enforcement of mortgage notes affects

    the dynamics of mortgage restructurings. Greater certainty about who can enforce a

    mortgage note will facilitate note restructuring negotiations, which will assist the

    Texas lodging and tourism industry in weathering economic downturns.

    The TH&LA is also concerned that if its members do find themselves in

    litigation over their mortgage borrowing, that they will have the same opportunity to

    litigate and be heard and have their evidence respected as all other litigants.

    Borrowers evidence must be weighed against lenders evidence; the rule in Texas

    cannot simply be debtors lose, creditors win.

    III. Servicer Fee AbuseThe second issue in this case involves the evidence that must be presented to

    establish a particular amount of indebtedness. This too is an issue that is a particular

    problem with mortgage securitization because mortgage servicers are incentivized to

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    charge illegal and unauthorized fees, thereby inflating their claims about borrowers

    level of indebtedness.

    Mortgage servicers receive a regular servicing fee from the SPE. In addition,

    servicers are entitled to keep any fees they levy on the borrower, known as ancillary

    fees. Adam J. Levitin & Tara Twomey, Mortgage Servicing, 28 YALE J. ON REG. 1

    (2011). For example, the pooling and servicing agreement for the securitization trust

    that owns Appellants mortgage note, provides that the Special Servicer is entitled to

    keep all Assumption Fees, loan modification or forbearance fees or extension fees

    andlate payment chargesall loan service transaction fees, demand fees GS

    Mortgage Securities Corp. II Commercial Mortgage Pass-Through Certificates Series

    1999-C1, 3.12(b).

    A major problem in mortgage servicing is that servicers frequently charge

    borrowers fees for which the borrowers are not legally obligated. See Katherine M.

    Porter, Mistake and Misbehavior in Bankruptcy Mortgage Claims, 98 TEX. L.

    REV. 121 (2008). It is well-established that servicers sometimes file improper

    foreclosures or attempted foreclosures; imposition of improper fees, especially late

    fees; forced-placed insurance that is not required or called for; and misuse of escrow

    funds. Kurt Eggert, Comment on Michael A. Stegman et al.s Preventive Servicing

    Is Good for Business and Affordable Homeownership Policy: What Prevents Loan

    Modifications?,18 HOUSING POLY DEBATE 279 (2007). Thus, one empirical study

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    has documented that when mortgage creditors file claims in bankruptcy, they

    generally list amounts owed that are much higher than those scheduled by debtors.

    Porter, Mortgage Misbehavior, supra at 162. This suggests a pattern of servicer

    overcharges.

    Concerns over mortgage servicer overcharges have lead to the United States

    Trustees Office, the section of the Department of Justice charged with ensuring the

    integrity of the bankruptcy system, undertaking several investigations of servicers

    inflated claims in bankruptcy and brought suit against the largest mortgage servicer.

    See Ashby Jones, U.S. Trustee Program Playing Tough With Countrywide, Others,

    WALL ST. J. LAW BLOG (Dec. 3, 2007, 10:01 AM), at

    http://blogs.wsj.com/law/2007/12/03/us-trustee-program-playing-tough-with-

    countrywide-others; Complaint, Walton v. Countrywide Home Loans, Inc. (In re

    Atchely), No. 05-79232 (Bankr. N.D. Ga. filed Feb. 28, 2008).

    Texas too has taken action against illegal mortgage servicing practices. The

    Texas Attorney General has recently sued a major mortgage servicer for illegal debt

    collection practices. See Complaint, State v. Am. Home Mtg. Servicing, Inc., No.

    2010-3307 (Tex. Dist. Ct. 448th Jud. Dist. filed Aug. 30, 2010).

    As a general matter, servicer overcharges end up being paid by either the

    borrower or the CMBS investors. If the borrower has equity in the mortgaged

    property, illegal servicer fees come out of the borrowers pocket. If, on the other

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    hand, the borrower has no equity in the property (the property is underwater or

    upside down), then the illegal fees come out of the CMBS investors pockets,

    because the servicers fees are paid off the top of foreclosure sale proceeds before any

    payments are made to the CMBS investors.

    Small business borrowers, such as the Appellant present a twist on this

    situation. Many small business owners personally guarantee their businesss

    mortgages. See Congressman Hinojosa Files for Bankruptcy, ASSOCIATED PRESS,

    Feb. 3, 2011 (noting that U.S. Rep. Hinojosa (Texas 15th District) filed for bankruptcy

    due to a personal guarantee of a failed family business). This means that illegal

    servicing fees are a particular concern to small businesses, because if there is no

    equity left in the property, the deficiency is paid out of the small business owners

    pocket. An illegal servicer overcharge can result in a deficiency judgment on the

    foreclosure for which the small business owner is personally liable.3

    The effect of such overcharges is to chill entrepreneurship. A legal system that

    is appropriately protective of debtors rights ensures that entrepreneurs will take risks

    because they know that if they fall down, they can dust themselves off and try again.

    Ensuring that servicers provide a clear and accurate accounting of their claims is

    critical for ensuring that entrepreneurs are willing to stake their personal risk capital

    in businesses. Accordingly, it is critical that courts give fair consideration to evidence

    3 In this case, the owner of the Appellant is actually being sued by Orix on hispersonal guarantee.

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    presented by debtors on loan balances owed, rather than automatically assuming that

    creditors claim are correct.

    CONCLUSION

    It would seem axiomatic that a party seeking to enforce a contested debt must

    first prove that it has the right to enforce the debt and second that it must prove the

    amount of the debt. But the Court of Appeals opted to adopt perhaps a more

    fundamental axiom of creditor wins, debtor loses. Permitting such a ruling to stand

    encourages fraud and creditor overreach and places Texas law in sharp contrast to that

    of Massachusetts, New York, and Ohio, where the courts have recently made clear

    that even in mortgage foreclosure cases where there is no dispute about a default on

    the debt, the party seeking to enforce the note still bears the burden of proving

    through evidence, rather than mere assertion, that it is the creditor and of the amount

    of the indebtedness.

    As the robosigning scandal has made clear, servicers frequently make claims as

    to amounts owed without undertaking proper diligence and without presenting

    evidence as to how they reached their conclusions. Mandating that parties seeking to

    use the courts to enforce private obligations adhere to traditional requirements of

    presenting evidence of their standing and of the obligation in question is necessary to

    ensure that the courts do not become mere instrumentalities of debt collection, but

    remain forums of justice.

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    For the above reasons, the Texas Hotel and Lodging Association urges the

    Court to issue the writ and to hear the appeal in this case that is of significant

    importance to the Texas tourism and hospitality industry and to commercial and

    residential mortgage borrowers throughout Texas.

    Respectfully Submitted on Behalf ofthe Texas Hotel and LodgingAssociation, Mar. 9, 2011

    Adam J. Levitin, Esq.Associate Professor of LawGeorgetown University Law Center600 New Jersey Ave., NW

    Washington DC 20001202-662-9234