Cwcapital Asset Mgmt. LLC v. Chicago Properties LLC

• Decision Date: 29 June 2010
• Docket Number: No. 09-3506.,09-3506.
• Citation: 610 F.3d 497
• Parties: CWCAPITAL ASSET MANAGEMENT, LLC, Plaintiff-Appellant,v.CHICAGO PROPERTIES, LLC, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

610 F.3d 497

CWCAPITAL ASSET MANAGEMENT, LLC, Plaintiff-Appellant,v.CHICAGO PROPERTIES, LLC, et al., Defendants-Appellees.

No. 09-3506.

United States Court of Appeals Seventh Circuit.

Argued May 24, 2010.

Decided June 29, 2010.

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Gregory A. Cross (argued), Venable LLP, Baltimore, MD, for Plaintiff-Appellant.

Timothy P. Donohue, Barrington, IL, Howard L. Teplinsky (argued), Beerman Swerdlove LLP, Chicago, IL, for Defendants-Appellees.

Joe R. McCray, Portland, OR, pro se.

Before EASTERBROOK, Chief Judge, and POSNER and EVANS, Circuit Judges.

POSNER, Circuit Judge.

This appeal in a dispute over a commercial mortgage requires us to decide whether the plaintiff is entitled to bring this suit in its own name, and also presents issues of contract interpretation under Illinois law. The plaintiff (and appellant), CWCapital, is a mortgage servicer; the defendants (and appellees) are Chicago Properties, which is a commercial landlord and the mortgagor (that is, the borrower); its owners, who are guarantors of the mortgage loan; and its former tenant, the Blockbuster video-rental company. The suit claims that the servicer (standing in the lender's shoes) is contractually entitled to the money that Blockbuster paid Chicago Properties in settlement of a suit by the latter for unpaid rent. The district judge conducted a bench trial and concluded that the claim was groundless-but then, seemingly as an afterthought, ruled that the servicer was not a real party in interest; as only a real party in interest can sue in its own name, the judge dismissed the suit. Fed.R.Civ.P. 17(a).

We need to explain the servicer's role in administering a mortgage-backed security-a kind of giant bond (made famous, or rather infamous, by the financial collapse of September 2008) that is secured by a large number of mortgages, one of which is the mortgage on Chicago Properties' building. The income from the mortgages is the income of the bond. But rather than selling the bond (which might be valued at $1 billion or more-in the present case, the bond when issued was valued at $1.3 billion), its creator sells “tranches” (slices) of the bond having different rights and carrying different interest rates. In effect he breaks up the giant debt security into a number of separate, smaller bonds. For example (to simplify) he might create a senior tranche and entitle the buyer of it to the first 80 percent of any of the income generated by the mortgages. The buyer of this tranche would be safe as long as the mortgages actually yielded at least 80 percent of the principal and interest owed by the borrowers, and therefore this buyer would be promised only a modest interest rate by the issuer of the mortgage-backed security. The buyer of the junior tranche would bear much more risk and so would be compensated by being promised a higher interest rate. The plunge in housing prices in 2007 and 2008 was so great that even buyers of the senior tranches of mortgage-backed securities lost money because there were so many mortgage defaults. But that sad story is not germane to this case.

The mortgages that secure the mortgage-backed security are placed in a securitization trust, and the trustee, or in this case the trustee's delegate (the plaintiff), is responsible for servicing them. Every mortgage needs someone to collect the borrower's monthly payments of principal and interest; make sure the property is properly insured; attend to any default, either by suing the borrower and if necessary foreclosing the mortgage or by modifying the mortgage to make its terms less onerous to the borrower; and discharge the mortgage when it is paid off (and if it is prepaid, collect the prepayment penalty if the mortgage provides for one). Ordinarily the original lender would be the servicer, or would hire one. But when hundreds of mortgages are packaged into a debt security it is infeasible for each security holder to be or to hire its own servicer. The reason is the structure of the security and specifically the conflicts of interest latent in the tranching of them.

Remember that the buyer of the senior tranche in our example (for simplicity we assume only two tranches, though usually there are more) is entitled to receive income from all the mortgages ahead of the buyer of the junior tranche. Faced with a choice between modifying one of the mortgages and foreclosing, the servicer might make a different decision as a representative of the senior tranche holder from the decision he'd make as a representative of the junior one. Suppose a borrower gets into financial trouble and asks the servicer to modify the mortgage by reducing the monthly payment of principal and interest by 20 percent. The servicer may prefer doing this to foreclosing the mortgage, because foreclosure is costly and the market value of the property may be depressed. The holder of the senior tranche wouldn't object to the modification; the diminished income from the mortgage would still fully cover his 80 percent interest in the revenue from mortgages in the mortgage-backed security. But the holder of the junior tranche might object because he might be better off if the servicer gambled on obtaining more money by foreclosing or by holding out for a less generous modification. The servicer must balance impartially the interests of the different tranches as determined by their contractual entitlements.

CWCapital, the servicer in this case, confused matters by stating in its complaint that the trust which holds title to the mortgage on Chicago Properties' building is the real party in interest, and by arguing that by disclosing that fact it has dispelled any objection to pursuing the suit in its own name. What is true is that by disclosing who the lender is, CWCapital has enabled the district judge and us to determine that if the lender were substituted for CWCapital, or added as an additional party, there would still be complete diversity of citizenship. But whether there is complete diversity is separate from whether a suit is being maintained by the real party in interest, or by an interloper. A lawyer for the real party in interest could not bring suit in his own name merely because he disclosed the identity of his client and acknowledged that the client, and not he, was indeed the real party in interest.

The trust holds the legal title to the mortgages. The servicer is the trust's collection agent. The delegation to it is comprehensive: the servicer “shall ... have 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 servicer is much like an assignee for collection, who must render to the assignor the money collected by the assignee's suit on his behalf (minus the assignee's fee) but can sue in his own name without violating Rule 17(a). See Sprint Communications Co. v. APCC Services, Inc., 554 U.S. 269, 128 S.Ct. 2531, 2541, 171 L.Ed.2d 424 (2008) (dictum); Staggers v. Otto Gerdau Co., 359 F.2d 292, 294 (2d Cir.1966); Kilbourn v. Western Surety Co., 187 F.2d 567, 571-72 (10th Cir.1951).

The Supreme Court's holding in the Sprint case was merely that an assignee for collection has standing to sue, within the meaning of Article III of the Constitution. 128 S.Ct. at 2542; see also W.R. Huff Asset Management Co. v. Deloitte & Touche LLP, 549 F.3d 100, 107-10 (2d Cir.2008). There is no doubt about Article III standing in this case; though the plaintiff may not be an assignee, it has a personal stake in the outcome of the lawsuit because it receives a percentage of the proceeds of a defaulted loan that it services. But in an aside on real party in interest, the Supreme Court intimated agreement with 6A Charles A. Wright, Arthur R. Miller & Mary Kay Kane Federal Practice & Procedure § 1545 (2d ed.1990), that a real party in interest differs from a lawyer, or someone else with a mere power of attorney, in having a claim to the proceeds of the suit even if its claim derives from legal rather than equitable title-legal title being the sort held by a trustee. 128 S.Ct. at 2541.

Unfortunately, it is less clear than it should be whether the Pooling and Servicing Agreement between the trustee of the mortgages backing the mortgage-backed security and the servicer made the latter an assignee or a mere attorney. It says that the servicer “shall ... have 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 shall at the servicer's “written request ... promptly execute any limited powers of attorney and other documents furnished by the [Servicer] ... that are necessary or appropriate to enable [the Servicer] to carry out [its] servicing and administrative duties hereunder.” The trustee is thus required to confer on the servicer whatever authority the latter needs to perform his servicing duties, which include suing. For it is the servicer, not the trustee, who is empowered to decide whether to sue. The agreement further states that without the Trustee's written consent, “ except as relates to a Loan that the ... Servicer ... is servicing pursuant to its respective duties herein (in which case such servicer shall give notice to the Trustee of the initiation), [the Servicer shall not] initiate any action, suit or proceeding solely under the Trustee's name without indicating the ... Servicer's ... representative capacity.” The word we've italicized indicates that the servicer can sue in its own name if the suit relates to a loan that it's servicing, or in the trustee's name without indicating that it's doing so in a representative...