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8/7/2019 AMICUS BRIEF IN SUPPORT OF APPELLANTS PETITION FOR REVIEW
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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