GEORGETOWN UNIVERSITY LAW CENTER

Adam J. Levitin
Associate Professor of Law

AMICUS BRIEF IN SUPPORT OF APPELLANT’S PETITION FOR REVIEW

La Villita Motor Inns, J.V., Executive Motels of San Antonio, Inc., and S.A. Sunvest
Hotels, 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 loans—the collection of payments and

management of defaults—on 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 borrower’s indebtedness. Relatedly, the country’s largest mortgage servicer

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

balances. Press Release, Fed. Trade Comm’n, 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 issue—the fact finder’s decision on that should not be disturbed.
What is Texas appellate court standard for findings of fact? Trial court’s ruling must
be 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 borrower’s 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

Appellant’s mortgage loan and regarding the balance owed on the loan. This

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evidence was thin, consisting of Orix’s in-house counsel’s 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 Appellant’s expert witness testified, such

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

Orix did not challenge the admissibility of Appellant’s 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 Appellant’s evidence simply did not count.

Instead, it held that a party’s 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 doesn’t

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 Securitization

Nationwide, 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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that pays for the loans by issuing securities.2 Because the debt service on these

securities is paid solely from the cashflow on the mortgage loans, these securities are

known as commercial mortgage-backed securities (CMBS).

The reason for this transaction structure is to create legal isolation of the

cashflows from the loans from the liabilities of the loans’ originator(s) and the

securitizer. By isolating the cashflows, investors are able to invest solely based on the

risks inherent in the loans without regard to the enterprise risks of the originator(s) or

securitizer.

The SPE that issues the CMBS is not an operating company, but a passive

shell. This passivity is necessary to ensure the “bankruptcy remoteness” of the

securitized assets, meaning that they will not be subject to claims other than those of

the CMBS holders, including claims of creditors of the loans’ originators. Anna

Gelpern & Adam J. Levitin, Rewriting Frankenstein Contracts: Workout

Prohibitions in Residential Mortgage-Backed Securities, 82 S. CAL. L. REV. 1075,

1093-98 (2009). The SPE’s passivity is also critical for ensuring that the CMBS

receive pass-thru tax status, meaning that the SPE is not taxed on its income on the

mortgage loans, so the only level of taxation is on the CMBS holders for their

investment income. Id. at 1093-98. Typically this pass-thru tax status is as real estate

2
Often there is an intermediate transfer or transfers. See Adam J. Levitin & Tara Twomey,
Mortgage Servicing, 28 YALE J. ON REG. 1, 13-15 (2011) (describing typical securitization
deal structure).

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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 Servicers

Mortgage 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 Appellant’s mortgage note. It did not introduce evidence of that it

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

Appellant’s 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 Appeal’s decision is left to stand, then contested allegations,

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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trust failed to present any evidence that note had been assigned to it); Deutsche Bank

Nat'l Trust Co. v. Triplett, 2011 Ohio 478 (Ohio Ct. of Appeals, 8th App. Div. 2011)

(foreclosure denied where bank offered no evidence that it owned the note at time

complaint was filed); US Bank Nat’l Ass’n v Madero, 2011 NY Slip Op 505 (N.Y.

App. Div. 2d Dept. 2011) (affirming denial of summary judgment for foreclosure

plaintiff because “Where, as here, a [foreclosure] plaintiff's standing is put into issue

by the defendants, the plaintiff must prove its standing to be entitled to relief”); U.S.

Bank, N.A. v. Collymore, 68 A.D.3d 752 (N.Y. App. Div. 2d Dept. 2009) (affirming

denial of summary judgment on foreclosure for plaintiff securitization trust because

“In view of the bank's incomplete and conflicting evidentiary submissions, an issue of

fact remained as to whether it had standing to commence the action.”). While the

precise legal issues in these cases have varied, all of these cases have arisen in a

securitization context, and they all require actual proof of standing to foreclose, not

mere unsubstantiated allegations of such standing once standing is in dispute.

Of particular note is the Massachusetts Supreme Judicial Court’s recent

unanimous ruling in United States Bank Nat'l Ass'n v. Ibanez, 458 Mass. 637 (Mass.

2011). Ibanez makes clear that extra scrutiny of foreclosures is warranted when the

action is brought by a securitization trust or its servicer. In Ibanez, Massachusetts’

highest court ruled that a pair of nonjudicial foreclosures were ineffective because the

securitization trusts bringing the foreclosures could not prove that they were in fact

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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 CMB—CMBS 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 Abuse

The 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 borrower’s

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 Appellant’s mortgage note, provides that the Special Servicer is entitled to

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

and…late payment charges…all 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 POL’Y 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

Trustee’s 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 borrower’s 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 servicer’s 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 business’s

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 owner’s

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 his
personal 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 of

the Texas Hotel and Lodging
Association, Mar. 9, 2011

Adam J. Levitin, Esq.

Associate Professor of Law
Georgetown University Law Center
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