The United States Court of Appeals for the Seventh Circuit recently reversed a district court decision that had dismissed claims by a mortgage servicer seeking to recover settlement payments made in satisfaction of unpaid rent by a commercial property tenant to the mortgagor. CWCapital Asset Management, LLC v. Chicago Properties, LLC, No. 09-3506, 2010 U.S. App. Lexis 13229 (7th Cir. June 29, 2010). The Court found that, pursuant to the terms of the parties’ Pooling and Servicing Agreement, the mortgage servicer could sue in its own name as a real party in interest. While finding that the mortgage servicer had standing, the Court went on to dismiss the servicer’s claims on the merits pursuant to the terms of the parties’ Subordination, Non-Disturbance and Attornment Agreement and the mortgage note.
Plaintiff CWCapital Asset Management, LLC (“CWCapital” or the “Servicer”), was a mortgage servicer for the LaSalle Bank National Association, the Trustee for a trust (the “Trust” or “Mortgagee”) holding a $618,000 mortgage note (the “Mortgage Note”) executed by Insite Chicago (Addison/ Milwaukee), LLC (“Insite”). The Mortgage Note granted the Trust a first priority security interest in certain commercial property located in Chicago (the “Property”). CWCapital’s specific responsibilities relating to the Mortgage Note were dictated by a Pooling and Servicing Agreement (“PSA”) with the Trustee.
Beginning in 1999, Insite leased the Property to Blockbuster, Inc. (“Blockbuster”), a national chain of movie rental stores. As part of the lease to Blockbuster (the “Lease”), Blockbuster executed a Subordination, Non-Disturbance and Attornment Agreement (“SNDA”) between itself, as the tenant; Insite, as the mortgagor; and the Trust, as the Mortgagee. The SNDA required Blockbuster to pay rent directly to the mortgagee upon written demand, prohibited payment of rent more than one month in advance, and required prior written consent from the Mortgagee for any amendments or modifications to the lease that reduces its term or the tenant’s monetary obligations. In 2002, Chicago Properties, a commercial landlord, became the mortgagor when it assumed all of Insite’s obligations under the Mortgage Note, and Chicago Properties’ owners became guarantors of the Mortgage Note (the “Guarantors”).
Unable to make a profit at the location due in part to increasing competition from direct mail movie rental companies, movie rental vending machines, and Internet and cablebased movie streaming, Blockbuster abandoned the Lease and vacated the Property by July 2006. Chicago Properties subsequently filed suit against Blockbuster, which allegedly owed approximately $470,500 in rental payments for the time remaining on the Lease, and they soon after agreed to a settlement. Blockbuster would pay the Guarantors approximately $161,000 (the “Settlement Payment”) in exchange for an agreement to terminate the Lease and release all claims against it (the “Settlement Agreement”). When Blockbuster and Chicago Properties notified CWCapital of the proposed terms, CWCapital and the Trustee objected to them on the grounds that it would decrease the collateral value of the loan.
Despite CWCapital and the Trustee’s protests, Blockbuster wired the Settlement Payment to the Guarantors, and Chicago Properties released Blockbuster from its Lease obligations. CWCapital subsequently sent letters to Blockbuster and Chicago Properties demanding that Blockbuster continue to make payments directly to the Trust, and that Chicago Properties give CWCapital any additional payments Blockbuster had made in excess of the monthly rent. During this time, Chicago Properties continued to make full and timely payments on the Mortgage Note, despite being unable to find a substitute tenant after Blockbuster’s departure.
When Blockbuster and Chicago Properties failed to follow CWCapital’s demands, the Trust declared an event of default. Suing in its own name in the United States District Court for the Northern District of Illinois, CWCapital filed a complaint against Chicago Properties, the Guarantors, and Blockbuster (collectively, the “Defendants”). CWCapital alleged that it was contractually entitled to the Settlement Payment, plus attorneys’ fees, because the Defendants had breached the Mortgage Note, the guaranty, and the SNDA when they modified the Lease without consent and agreed to exchange more than one month of rent in advance. The Defendants filed counterclaims against CWCapital, and Blockbuster filed crossclaims against Chicago Properties and the Guarantors.
After a two-day bench trial, the district court held that CWCapital’s contract claims were meritless, but dismissed the suit on the grounds that CWCapital lacked standing to sue because it failed to establish that it was a real party in interest as a servicer. An appeal to the Seventh Circuit followed.
The Seventh Circuit’s Standing Decision
On appeal, Circuit Judge Richard Posner, writing for the majority, reversed the lower court’s holding. The Court first found that pursuant to the terms of the PSA, CWCapital had standing as a servicer to sue in its own name as a real party in interest. Generally, servicers are tasked with collecting the borrower’s monthly principal and interest payments; ensuring that the property is properly insured; discharging the mortgage when it is paid off; and acting as the mortgagee’s collection agent in addressing defaults by suing the borrower, foreclosing, or modifying the terms of the mortgage. The Court analogized that a servicer’s standing may be similar to that of an assignee for collection, which has standing to sue in its own name to recover money for the assignor, depending on the specific contractual arrangement between the servicer and the mortgagee. The Court reasoned that servicers and assignees have a personal stake in the outcome of a collection lawsuit because they receive a percentage of the proceeds from the defaulted loans that they service. If the contractual arrangement between the servicer and the mortgagee was merely a power of attorney, and the servicer’s role was akin to an attorney who does not have authority to sue as real party in interest, the servicer would have no standing.
Accordingly, the Court examined the PSA to determine whether CWCapital’s role was that of an assignee for collection or merely an attorney. Although the PSA failed to explicitly state whether CWCapital had the same standing as an assignee for collection, the Court found that three provisions in the PSA delegated “what is effectively equitable ownership of the claim . . . to the servicer,” and that CWCapital could sue in its own name.
First, the PSA stated 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 Court interpreted this provision to include the authority to sue. Second, 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 Court held that the mandatory language of the provision required the Trustee to grant CWCapital whatever authority it needed to service the Mortgage Note. Finally, the PSA provided that “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” without the Trustee’s written consent. The Court found that this language indicated that CWCapital may sue in its own name.
The Court further held, in the alternative, that even if CWCapital was not the real party in interest, it could still sue because the Trustee submitted an affidavit that ratified CWCapital’s suit on the Trustee’s behalf. Rejected as untimely by the lower court because CWCapital failed to respond to an interrogatory regarding its authority to sue, the Seventh Circuit found that the affidavit was timely submitted in response to the Defendants’ motion for judgment on the pleadings regarding the standing issue.
Decision on the Merits
After finding that the Servicer had standing, the Seventh Circuit, however, ultimately directed the lower court to enter judgment for the Defendants on the merits. The Court found that there was no event to trigger Blockbuster’s requirement to pay CWCapital pursuant to the SNDA because Chicago Properties continued to pay monthly mortgage payments in full, CWCapital was not injured by not receiving payments directly from Blockbuster, and there was no evidence that Blockbuster’s failure to pay CWCapital directly reduced the value of the Property.
The Court further held that the Settlement Agreement did not breach any provisions concerning payment of rent in advance in the SNDA, Mortgage Note, or guaranty. The money that Blockbuster paid the Guarantors was not a rent payment. Instead, it was a payment to settle a lawsuit for rent payments for the term remaining on Blockbuster’s lease. Additionally, Chicago Properties did not breach the Mortgage Note’s prohibition against cancelling the Lease without the Mortgagee’s written consent because the Mortgage Note included an exception for cancellations made when the borrower “is acting in the ordinary course of business and in a commercially reasonable manner.” The Court found that Chicago Properties was commercially reasonable to reach the Settlement Agreement with Blockbuster in consideration of Blockbuster’s financial situation.
Implication for Mortgage Servicers
The CWCapital Asset Management case illustrates the importance of unambiguous contractual language. Although the Seventh Circuit found that the Servicer’s arrangement here allowed the Servicer to sue in its own name as a real party in interest, the substitution of more ambiguous contractual language could have led to a different outcome entirely—potentially leaving the Servicer without legal recourse.