(ORIX) TCI Petition For Review and Appendix - File Stamped

No.
11-0396
_______________________________________________________________________
IN THE SUPREME COURT OF TEXAS
_______________________________________________________________________

ECF NORTH RIDGE ASSOCIATES, L.P. and TCI 9033 WILSHIRE
BOULEVARD, INC.,

Petitioners,

v.

ORIX CAPITAL MARKETS, L.L.C., U.S. BANK, N.A. a/k/a U.S. BANCORP,
N.A., as Trustee FOR THE MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1996-C3, and WELLS FARGO BANK, N.A. a/k/a WELLS FARGO
BANK, MINNESOTA, N.A., as Trustee FOR THE MORTGAGE PASS-
THROUGH CERTIFICATES, SERIES 99-C1,

Respondents.

______________________________________________________________________

Appealed from the Fifth Court of Appeals District, Dallas County, Texas,
No. 05-09-00066-CV
______________________________________________________________________

TCI 9033 WILSHIRE BOULEVARD, INC.'S
PETITION FOR REVIEW
______________________________________________________________________

Jonathan Cunningham
State Bar No. 00793574
C. Gregory Shamoun
State Bar. No. 18089650
SHAMOUN & NORMAN, LLP
1755 Wittington Place, Suite 200, LB 25
Dallas, Texas 75234
214-987-1745 phone
214-521-9033 fax
Attorneys for Petitioner

FILED
IN THE SUPREME COURT
OF TEXAS
11 July 15 A11:23
BLAKE. A. HAWTHORNE
CLERK

TCI 9033 Wilshire Boulevard, Inc.
i
IDENTITY OF PARTIES AND COUNSEL

Petitioner TCI 9033 Wilshire Boulevard, Inc. certifies that the following is a
complete list of the parties, attorneys, and any other person who has any interest in the
outcome of this lawsuit:
1. Petitioner TCI 9033 Wilshire Boulevard, Inc. was a Plaintiff/Counter-Defendant in
the trial court, and an Appellant in the Court of Appeals. TCI 9033 Wilshire Boulevard,
Inc. is represented by Jonathan J. Cunningham and C. Gregory Shamoun, SHAMOUN &
NORMAN, LLP, 1700 Wittington Place, Suite 200, LB 25, Dallas, Texas, 75234. For ease
of reference, within this Petitioners Brief, TCI 9033 Wilshire Boulevard, Inc. will be
referred to as "Plaintiff" or TCI 9033 Wilshire.
2. Petitioner ECF North Ridge Associates, L.P. was a Plaintiff/Counter-Defendant in
the trial court, and an Appellant in the Court of Appeals. ECF North Ridge Associates,
L.P. is represented by Ryan K. Lurich and Lawrence J. Friedman, FRIEDMAN & FEIGER,
L.L.P., 5301 Spring Valley, Suite 200, Dallas, Texas 75254. For ease of reference, within
this Petitioners Brief, ECF North Ridge Associates, L.L.P. will be referred to as
Plaintiff or ECF North Ridge.
3. Respondent Orix Capital Markets, L.L.C. was a Defendant/Counter-Plaintiff in the
trial court, and an Appellee in the Court of Appeals. Orix Capital Markets, L.L.C. is
represented by P. Michael Jung, STRASBURGER & PRICE, LLP, 901 Main Street, Suite
4400, Dallas, Texas, 75202, Talmage Boston, WINSTEAD PC, 1201 Elm Streeet, Suite
5400, Dallas, Texas 75270 and Nicola Hobeiche, ORIX USA Corporation, 1717 Main
ii
Street, Suite 900, Dallas, Texas, 75201. For ease of reference, within this Petitioners
Brief, Orix Capital Markets, L.L.C. will be referred to as Defendant or ORIX.
4. Respondent U.S. Bank N.A. a/k/a U.S. Bancorp, N.A., as Trustee For The
Mortgage Pass-Through Certificates, Series 1996-C3 was a Defendant/Counter-Plaintiff
in the trial court, and an Appellee in the Court of Appeals. U.S. Bank N.A. a/k/a U.S.
Bancorp, N.A., as Trustee For The Mortgage Pass-Through Certificates, Series 1996-C3
is represented by P. Michael Jung, STRASBURGER & PRICE, LLP, 901 Main Street, Suite
4400, Dallas, Texas, 75202, Talmage Boston, WINSTEAD PC, 1201 Elm Streeet, Suite
5400, Dallas, Texas 75270 and Nicola Hobeiche, ORIX USA Corporation, 1717 Main
Street, Suite 900, Dallas, Texas, 75201. For ease of reference, within this Petitioners
Brief, U.S. Bank N.A. a/k/a U.S. Bancorp, N.A., as Trustee For The Mortgage Pass-
Through Certificates, Series 1996-C3 will be referred to as Defendant or U.S. Bank.
5. Respondent Wells Fargo Bank, N.A. a/k/a Wells Fargo Bank, Minnesota, N.A., as
Trustee For The Mortgage Pass-Through Certificates, Series 99-C1. was a
Defendant/Counter-Plaintiff in the trial court, and an Appellee in the Court of Appeals.
Wells Fargo Bank, N.A. a/k/a Wells Fargo Bank, Minnesota, N.A., as Trustee For The
Mortgage Pass-Through Certificates, Series 99-C1 is represented by P. Michael Jung,
STRASBURGER & PRICE, LLP, 901 Main Street, Suite 4400, Dallas, Texas, 75202,
Talmage Boston, WINSTEAD PC, 1201 Elm Streeet, Suite 5400, Dallas, Texas 75270 and
Nicola Hobeiche, ORIX USA Corporation, 1717 Main Street, Suite 900, Dallas, Texas,
75201. For ease of reference, within this Petitioners Brief, Wells Fargo Bank, N.A. a/k/a
iii
Wells Fargo Bank, Minnesota, N.A., as Trustee For The Mortgage Pass-Through
Certificates, Series 99-C1 will be referred to as Defendant or Wells Fargo Bank.

iv
TABLE OF CONTENTS
IDENTIFICATION OF PARTIES AND COUNSEL ...................................................... i

INDEX OF AUTHORITIES .............................................................................................. iii

STATEMENT OF THE CASE .......................................................................................... vi

STATEMENT OF JURISDICTION ................................................................................. vii

ISSUES PRESENTED FOR REVIEW ............................................................................. 1

STATEMENT OF FACTS ................................................................................................. 1

SUMMARY OF ARGUMENT .......................................................................................... 1

ARGUMENT ....................................................................................................................... 2

I. THE COURT OF APPEALS ERRONEOUS STANDING HOLDING .................................... 2
(A) The Standing Issue is Paramount Jurisdictional Issue ................................... 2
(B) ORIX Lacks Privity and Therefore Lacks Standing ..................................... 6
(C) The CWCapital Asset Mgmt. Case Is Erroneous In Several Ways ................ 8

II. ISSUES ARISING REGARDING HOLDER STATUS OF WELLS FARGO BANK ................. 10
(A) Questions Are Raised Due to Industry Irregularities ..................................... 10
(B) Wells Fargo Did Not Provide Clear Evidence of Ownership To
Establish Standing As Holder of TCI 9033 Wilshires Promissory
Note and Deed of Trust .................................................................................. 11

III. TCI 9033 WILSHIRE DEMONSTRATED THAT WELLS FARGO PLEADED
NO DAMAGES ............................................................................................................. 10

IV. THE COURT OF APPEALS ERRED IN ITS HOLDING REGARDING THE OTHER
INSURANCE PROVISION ............................................................................................. 10
CONCLUSION AND PRAYER ......................................................................................... 15
v
INDEX OF AUTHORITIES

CASES

Alexander v. Houston Oil Field Material Co., 386 S.W.2d 540
(Tex.Civ.App.Tyler 1965, writ refd n.r.e) ) ................................................................. 11

Asshauer v. Wells Fargo Foothill, 263 S.W.3d 468
(Tex.App.Dallas 2008, pet.denied) ...................................................................... 3

Austin Nursing Center, Inc. v. Lavato, 171 S.W.3d 845 (Tex. 2005) ................................ 6

AVCO Corporation v. Interstate Southwest, Ltd., 251 S.W.3d 632
(Tex.App.Houston [14
th
Dist.] 2007, pet. denied) ............................................. 5,6

Basic Capital Mgmt., Inc. v. American Realty Trust, Inc., __ S.W.3d __,
2011 WL 1206376, 2011 Tex.LEXIS 247 (Tex. April 1, 2011) .............................. 4

BFP 245 Park Co. v. GMAC, 12 A.D. 3d 330, 786 N.Y.S. 2d 425 (2004) ....................... 15

Boy Scouts of America v. Responsive Terminal Sys., Inc., 790 S.W.2d 738
(Tex.App.Dallas 1990, writ denied) ................................................................ 3,12

Cadle Co. v. Lobinger, 50 S.W.3d 662
(Tex. App.Fort Worth 2001, pet. denied) ............................................................. 9

Coastal Liquids Transp., L.P. v. Harris County Appraisal Dist., 46 S.W.3d 880
(Tex. 2001) ............................................................................................................... 6

CWCapital Asset Mgmt., LLC v. Chicago Props. LLC, 610 F.3d 497 (7
th
Cir. 2010) ..... 5-8

Derbigny v. Bank One, 809 S.W.2d 292
th
Dist.] 1991, no writ) .................................................... 11

Deutsche Bank Natl Trust Co. v. Triplett, 2011 Ohio 478,
2011 Ohio App. LEXIS 401 (Ohio Ct. App. 2011) .............................................. 11

Eaves v. Unifund CCR Partners, 301 S.W.3d 402 (Tex.App.El Paso 2009, no pet.) ..... 9

Elizondo v. Texas Nat. Resource Conservation Commn, 974 S.W.2d 928
(Tex.App.Austin 1998, no pet.) ............................................................................ 4

vi
Grinnell v. Munson, 137 S.W.3d 706 (Tex.App.San Antonio 2004, no pet.) ............... 10

Jacobsen v. SCI Texas Funeral Serv., Inc., No. 05-00-00686-CV,
2001 Tex.App. LEXIS 1517 (Tex.App.Dallas, Mar. 8, 2001, no pet.)
(mem. op.) ................................................................................................................ 2

Nauslar v. Coors Brewing Co., 170 S.W.3d 242 (Tex.App.Dallas 2005, no pet.) ......... 6

OAIC Comml Assets, L.L.C. v. Stonegate Village, L.P., 234 S.W.3d 726
(Tex.App.Dallas 2007, pet. denied). ............................................................... 3,10

ORIX Capital Markets, LLC v. La Vallita Motor Inns, J.V., 329 S.W.3d 30
(Tex.App..San Antonio 2010, pet. granted) ......................................................... 1

R & R White Family Limited Partnership v. Jones, 182 S.W.3d 454
(Tex.App.Texarkana 2006, no pet.) ..................................................................... 4

Rodarte v. Investco Group, L.L.C., 299 S.W.3d 400
th
Dist.] 2009, no pet.) ...................................................... 5

Shipley v. Unifund CCR Partners, 331 S.W.3d 27
(Tex.App.Waco 2010, no pet. hist.) ..................................................................... 9

South Texas Water Auth. v. Lomas, 223 S.W.3d 304 (Tex. 2007) ................................... 2,4

Texas Assn of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440
(Tex. 1993) ............................................................................................................. 11

Tinsley v. Dowell, 26 S.W. 946, 948 (Tex. 1894) ............................................................... 6

United States Bank Natl Assn v. Ibanez, 941 N.E.2d 40 (Mass. 2011) ......................... 11

US Bank Natl Assn v. Madero, 913 N.Y.S.2d 612 (N.Y. Ct. App. 2011) ...................... 11

Wells v. Dotson, 261 S.W.3d 275 (Tex.App.Tyler 2008, no pet.) .................................. 3

Wells Fargo Bank, N.A. v. Ford, 15 A.3d 327, 329 (N.J. Ct. App. 2011) ....................... 11

Wells Fargo Bank, N.A. v. Konover, 2009 WL 2710229 (D. Conn. 2009) ......................... 6

vii
TREATISES & OTHER AUTHORITIES

Congressional Oversight Panel, Examining the Consequences of Mortgage
Irregularities for Financial Stability and Foreclosure Mitigation ............................. 10

viii
STATEMENT OF THE CASE

Plaintiffs TCI 9033 Wilshire Boulevard, Inc. (TCI 9033 Wilshire) and ECF
North Ridge Associates, L.P. (ECF North Ridge) originally filed this lawsuit against
Orix Capital Markets, L.L.C. (ORIX) on August 13, 2004, asserting causes of action
for breach of contract and seeking a declaratory judgment. [CR 1:17] On September 10,
2004, Defendant ORIX filed a general denial [CR 1:36], and on January 26, 2005, ORIX
filed an Original Counterclaim asserting causes of action for breach of contract. [CR
1:38] On July 11, 2005, ORIX filed its First Amended Counterclaim and its Second
Amended Counterclaim on April 25, 2006, each alleging a cause of action for breach of
contract and seeking declaratory judgment. [CR 1:53, 62] On November 14, 2005, the
parties waived a jury trial. [CR 1:60] The parties filed Stipulated Facts with the trial
court on August 4, 2006. [CR 1:73] On August 14, 2006, ORIX filed its Third Amended
Counterclaim, continuing to assert its counterclaims for breach of contract and seeking
declaratory judgment. [CR 1:76] On December 26, 2007, Plaintiffs TCI 9033 Wilshire
and ECF North Ridge filed their Second Amended Petition, adding the lenders U.S. Bank
and Wells Fargo Bank as parties. [CR 1:81] U.S Bank filed a general denial on February
8, 2008, and Wells Fargo Bank filed its general denial on February 29, 2008. [CR 1:111,
113, see also CR 1:115] On May 16, 2008, both Wells Fargo Bank and U.S. Bank each
filed their First Amended Answer and Counterclaim, asserting the same breach of
contract and declaratory judgment actions as ORIX. [CR 1:128, 147]
The case was tried to the Trial Court beginning November 5, 2008 and
ending December 5, 2008. The Trial Court issued a Final Judgment on December 18,
ix
2008, finding against Plaintiffs on their causes of action and in favor of ORIX on its
counterclaims, and U.S. Bank, and Wells Fargo, purportedly, on their counterclaims.
[CR 2:412] Findings of Fact and Conclusions of Law were signed by the Trial Court on
February 10, 2009. [CR 2:450] Plaintiffs filed a Joint Motion for New Trial on January
20, 2009 [CR 2:422], which was overruled by the Trial Court in a general order on
February 26, 2009. [C. Supp. R. 3:743].
TCI 9033 Wilshire appealed the judgment to the Fifth District Court of Appeals,
Dallas, Texas, No. 05-09-00066-CV. The case was submitted before a panel of
consisting of Justices Michael O Neill, Douglas Lang, and Mary Murphy. On December
20, 2010, the court of appeals issued an opinion, authored by Justice Murphy; however,
on January 19, 2011, the panel withdrew the opinion and vacated the previous judgment
and issued a new Opinion. After motions for rehearing, on March 14, 2011, the Court of
Appeals again withdrew its opinion and vacated its judgment and issued an Opinion on
Rehearing. In its Opinion on Rehearing and Judgment, the court affirmed and modified
the judgment of the trial court. Basically, as to that portion of the case concerning TCI
9033 Wilshire, the Court of Appeals affirmed the trial court's judgment.
STATEMENT OF JURISDICTION
The Texas Supreme Court has jurisdiction over this appeal under Texas
Government Code section 22.001(a)(6) because the Court of Appeals has committed an
error of law of such importance to the state's jurisprudence that it should be corrected.
The Texas Supreme Court has jurisdiction over this appeal under Government
Code section 22.001(a)(2) because the Court of Appeals' decision conflicts with this
x
Court's decision in South Texas Water Auth. v. Lomas, 223 S.W.3d 304, 307 (Tex. 2007)
and the Waco Court of Appeals decision in Shipley v. Unifund CCR Partners, 331
S.W.3d 27 (Tex.App.Waco 2010, no pet. hist.).
ISSUES PRESENTED FOR REVIEW
Standing
1. The Court of Appeals erred in its holding that ORIX had standing to assert
a claim for breach of contract and declaratory relief because it is contrary to well-
established law and there was no evidence (or, in the alternative, insufficient evidence) to
support such a holding.
2. Issues are present regarding the failure of Wells Fargo Bank to produce and
offer evidence of the original promissory note and deed of trust to establish its standing
and holder status.
Contract Issues
3. The Court of Appeals erred in failing to address the issue that Wells Fargo
Bank failed to plead an essential element (i.e., damages) and cannot assert damages
should be recovered by another party.
4. The Court of Appeals erred in affirming the Trial Courts legal conclusion
and finding that TCI 9033 Wilshire breached the Deed of Trust, Security Agreement,
Assignment of Leases and Rents and Fixture Filing because there was no evidence (or, in
the alternative, insufficient evidence) to support such a holding.
1
STATEMENT OF FACTS
With certain additions, in the "Background" section of its Opinion, the Court of
Appeals correctly stated the nature of the case.
1

Additionally, however, it is important that it is uncontroverted that ORIX was not
a party, and never has been a party, and has never been an assignee to any of the loan
documents offered and admitted into evidence at trial. [RR 4: pp. 21-25, 94, RR 9: p. 13]
Also, it is uncontroverted that, Wells Fargo asserted no claim for damages, instead
solely alleging only that ORIX is entitled to damages, if any. [CR 1, pp. 131-132]
SUMMARY OF ARGUMENT
Ultimately, as this Court is even now considering other cases with similar themes
2
,
this case is about maintaining the consistency of well-established black-letter law and
reigning in a trend whereby loan servicers, here a particularly notorious one, attempt to
create and manipulate non-monetary defaults in order to profit by charging default
interest which they have contractually negotiated with lenders to allow the servicer to
receive, and take it upon themselves, without standing, to prosecute lawsuits regardless of
the fact that the servicer was, and is, not a party to the underlying contracts.
In this case, ORIX attempted to require TCI 9033 Wilshire to obtain terrorism
insurance coverage when the specific loan documents did not require it. More
importantly, it was error for the Court of Appeals to disregard well-established law and

1
Additionally, however, Petitioner neither indorses nor adopts the Court of Appeals discussion and
characterization of CMBS loans in Footnote 1 of the Court of Appeals Opinon. See ECF North Ridge
Assoc., L.P. v. Orix Capital Markets, L.L.C., 336 S.W.3d 400, 403 (Tex.App.Dallas 2011, pet. filed).
2
ORIX Capital Markets, LLC v. La Vallita Motor Inns, J.V., 329 S.W.3d 30(Tex.App..San Antonio
2010, pet. granted).
2
hold that ORIX has standing to assert a breach of contract action and seek damages and
attorneys fees in ORIXs own name, when it is undisputed in the record that ORIX lacks
both privity and third-party beneficiary status. Finally, in addition to the undisputed fact
that Wells Fargo, the Trustee regarding CMBS loans related to TCI 9033 Wilshires
mortgage, made no claim or pleading for damages, it also failed to prove its standing and
status as the actual holder of TCI 9033 Wilshires original promissory note and deed of
trust.
ARGUMENT
I. THE COURT OF APPEALS ERRONEOUS STANDING HOLDING.

A. The Standing Issue is a Paramount Jurisdictional Issue.

In the present case, Defendant/Counter-Claimant ORIX brought affirmative claims
against TCI 9033 Wilshire for breach of contract and for declaratory judgment,
wrongfully attempting to bring suit, in its own name and for its own benefit, on a contract
to which it admittedly lacks privity and which ORIX is clearly not an intended third-party
beneficiary with any legal rights under the contract. [RR 4: pp. 21-25] Standing is a
component of subject matter jurisdiction and a constitutional prerequisite to maintaining
a suit under Texas law. South Texas Water Auth. v. Lomas, 223 S.W.3d 304, 307 (Tex.
2007). Standing may be raised at any time and may not be waived by the parties. Id.
Further, standing is not an affirmative defense. Jacobsen v. SCI Texas Funeral Serv.,
Inc., No. 05-00-00686-CV, 2001 Tex.App. LEXIS 1517 at *5 (Tex.App.Dallas, Mar.
8, 2001, no pet.) (mem. op.).

3
B. ORIX Lacks Privity and Therefore Lacks Standing.
In the context of a breach of contract action, the courts have long recognized that
the general rule is that only the parties to a contract have the right to complain of a
breach thereof. Wells v. Dotson, 261 S.W.3d 275, 284 (Tex.App.Tyler 2008, no pet.).
Further, the courts have long been consistent in applying the general rule that in contract
actions, privity of contract is an essential element of recovery. Boy Scouts of America v.
Responsive Terminal Sys., Inc., 790 S.W.2d 738, 747 (Tex.App.Dallas 1990, writ
denied. For purposes of standing, privity is established by proving that the defendant
was a party to an enforceable contract with either the plaintiff or a party who assigned its
cause of action to the plaintiff. OAIC Comml Assets, L.L.C. v. Stonegate Village, L.P.,
234 S.W.3d 726, 738 (Tex.App.Dallas 2007, pet. denied). In July 2008, the Dallas
Court of Appeals itself reaffirmed the principle that without a breach of a legal right
belonging to that particular plaintiff, that plaintiff has no standing to litigate. Asshauer
v. Wells Fargo Foothill, 263 S.W.3d 468, 471 (Tex.App.Dallas 2008, pet.denied).
In the present suit, it was uncontroverted that ORIX lacks contractual privity with
TCI 9033 Wilshire. And, ORIX did not allege, prove, or proffer any evidence of any
assignment of any rights or causes of action to it regarding the TCI 9033 Wilshire loan
documents. The uncontroverted evidence, in fact, establishes the opposite as a matter of
law. The very contract upon which ORIXs counterclaim relies expressly excludes ORIX
4
as having standing to assert any legal or equitable right under it.
3
Such is the definition
of lack of standing.
Lacking direct privity, ORIX also did not allege any third-party beneficiary status;
and, as the contracts themselves demonstrate, it was the clear express intention of the
parties to exclude any potential third-party beneficiaries as having standing to claim any
legal or equitable rights. There is a presumption against conferring third party
beneficiary status on noncontracting parties. South Texas Water Auth., 223 S.W.3d at
304.
4
The express provisions contained in the PSA, which is the sole document upon
which ORIX claims to rely to derive its standing to have brought suit in ORIXs own
name and seeking damages to be paid to ORIX, actually demonstrate that ORIX is not an
assignee,
5
agent, attorney-in-fact,
6
or otherwise possesses authority or rights to bring suit

3
Section 15.1(6) of the TCI 9033 Wilshire Deed of Trust (Joint Trial Exhibit 4) particularly
states --

4
Very recently, the Texas Supreme Court reiterated that the law governing third-party beneficiaries is
relatively settled and that a court will not create a third party beneficiary contract by implication.
Basic Capital Mgmt., Inc. v. American Realty Trust, Inc., __ S.W.3d __, 2011 WL 1206376 at *3, 2011
Tex.LEXIS 247 at *11-12 (Tex. April 1, 2011).
5
R & R White Family Limited Partnership v. Jones, 182 S.W.3d 454, 459 (Tex.App.Texarkana 2006,
no pet.) (To recover under the theory that a cause of action was assigned to another party, the party
claiming the assigned rights must prove that the cause of action was in fact assigned.).
6
Texas courts have expressly recognized that An attorney-in-fact is not a real party in interest. The
attorney is merely an agent of the real party in interest and does not possess interests sufficient to qualify
for real party in interest status. Thus, the attorney-in fact cannot bring suit in its own name. Elizondo
v. Texas Nat. Resource Conservation Commn, 974 S.W.2d 928 (Tex.App.Austin 1998, no pet.).
5
to enforce the rights or remedies under the applicable loan documents in its own name
and for its own benefit.
D. The CWCapital Asset Mgmt. Case Is Erroneous In Several Ways.
The Court of Appeals relied upon one singular case to reach its holding regarding
the issue of ORIX having standing to assert a breach of contract action in its own name
and for its own benefit. Unfortunately, the holding in CWCapital Asset Mgmt., LLC v.
Chicago Properties, LLC, 610 F.3d 497 (7
th
Cir. 2010), was not only unnecessary dicta
7

in the case, but also demonstrably erroneous and contrary to well-established black-
letter Texas law.
In CWCapital Asset Mgmt., Justice Posner recognized that the servicer was not an
assignee who obtained legal rights in the underlying mortgage contracts. Id. at 501.
8

7
The CWCapital Asset Mgmt. case was not truly one of the servicer attempting to bring a breach of
contract cause of action in its own name and for its own benefit, but instead was a case involving
capacity under FED. R. CIV. P. 17. See id at 500-502. The courts erroneous reasoning that the servicer
somehow obtained equitable ownership of the claim was clearly rendered dicta since the court resolved
the Rule 17 issue on the basis that the trustee had submitted an affidavit ratifying the authority of the
servicer to sue on its behalf. CWCapital Asset Mgmt., 610 F.3d at 502. In the present suit, instead, the
issue has always been one of standing since ORIX asserted a breach of contract action in its own name,
claiming its own legal interest and its own damages. ORIX never pleaded or asserted a representative
capacity, which is accentuated by the fact that the Trustee, Wells Fargo was itself also a party to the suit,
rendering any representative capacity of ORIX unnecessary.
8
The courts statement that although 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, does not operate to grant standing as a third-party beneficiary to the underlying contracts.
CWCapital Asset Mgmt, 610 F.3d at 501. Certainly, as here, although the Trustee and the servicer may
contract to give a percentage of proceeds to the servicer, such executory contract in no way establishes
any legal interest or right of the servicer, either as a party in privity or a third-party beneficiary, in the
underlying mortgage contracts between the debtor/mortgagor and the lender/trustee, the owner of the
debt. Indeed, the test is not whether someone may just simply have some interest in the outcome of the
suit, but whether that plaintiff has a legally cognizable and enforceable interest in the outcome of the
case, meaning, regarding a suit on contract, whether the plaintiff owns a legal right in the contract.
Rodarte v. Investco Group, L.L.C., 299 S.W.3d 400, 407 (Tex.App.Houston [14
th
Dist.] 2009, no pet.)
(standing concerns the question of whether a party has an enforceable right or interest); AVCO
Corporation v. Interstate Southwest, Ltd., 251 S.W.3d 632, 649 (Tex.App.Houston [14
th
Dist.] 2007,
6
Also, Justice Posner expressly recognized that if the Pooling and Servicing Agreement
made the servicer a mere attorney, the servicer would not have standing to bring legal
actions in its own name and for its own benefit.
9
Id. In the present case, ORIX never
presented any evidence of having received any power of attorney on behalf of the
Trustee, even to make ORIX an asserted attorney-in-fact to bring suit in a
representative capacity.
10

Instead, as in CWCapital Asset Mgmt., the Dallas Court of Appeals relied solely
upon selective language within the Pooling and Servicing Agreement to wrongfully
conclude that ORIX was granted a right and authority
11
to bring a breach of contract suit
in its own name and for its own benefit. In particular, both Justice Posner and the Court
of Appeals erroneously interpreted the following clause in the PSA to permit ORIX to
institute lawsuits in its own name and not a representative capacity
Notwithstanding anything contained herein to the contrary, neither the
Master Servicer nor the Special Servicer shall without the Trustees written
consent: (i) except as relating to a Mortgage Loan which the Master
Servicer or the Special Servicer, as applicable, is servicing pursuant to their
respective duties herein (in which case servicer shall give notice to the
Trustee thereof), initiate any action, suit or proceeding solely under the
Trustees name without indicating the Master Servicers or Special
Servicers, as applicable, representative capacity, or (ii) take any action

pet. denied) (a plaintiff with no legally cognizable interest in the outcome of the case lacks standing to sue
on its own behalf).
9
Texas law is also well-established and clear on this point. Tinsley v. Dowell, 26 S.W. 946, 948 (Tex.
1894); AVCO Corporation v. Interstate Southwest, Ltd., 251 S.W.3d 632, 652-53 (Tex.App.Houston
[14
th
Dist.] 2007, pet. denied).
10
Compare to Wells Fargo Bank, N.A. v. Konover, 2009 WL 2710229 at *1 (D. Conn. 2009) (slip copy).
11
It is also well-settled law that a plaintiff must have both standing and capacity to bring a lawsuit.
Austin Nursing Center, Inc. v. Lavato, 171 S.W.3d 845, 848 (Tex. 2005); Coastal Liquids Transp., L.P. v.
Harris County Appraisal Dist., 46 S.W.3d 880, 884 (Tex. 2001); Nauslar v. Coors Brewing Co., 170
S.W.3d 242, 255 (Tex.App.Dallas 2005, no pet.).
7
with the intent to, or which actually does cause, the Trustee to be registered
to do business in any state.

[RR 21, Exh. 136, p. 54] The Court of Appeals wrongfully conclude[d] under the same
reasoning as in CWCapital that this language indicates that the servicer can sue in its
own name if the suit relates to a loan that it is servicing, or in the trustees name without
indicating that it is doing so in a representative capacityimplying that it is not doing so
in a representative capacity if it is suing in regard to a servicing-related loan.
CWCapital Asset Mgmt., 610 F.3d at 501 [emphasis in original].
Simply, this conclusion, resting upon perceived indication and implication, is
extremely erroneous, and even contrary to a straightforward reading of the provision.
The clause does not authorize the servicer to initiate any action in its own name, but
instead clearly requires the servicer to always indicate its representative capacity of the
Trustee, and only in cases relating to a mortgage being serviced does the servicer need
not previously obtain the Trustees written consent to initiate, but must still provide the
Trustee notice.
12
There simply is no indication or implication of what the servicer can do
in its own name and for its own benefit. Accordingly, the Court of Appeals reliance and
adoption of Justice Posners erroneous conclusion was, likewise, erroneous under the
clear unambiguous language of the Pooling and Servicing Agreement.

12
The seminal requirement addressed by the clause is the necessity of obtaining the Trustees prior
written consent, not whether the servicer can initiate actions in its own name and for its own benefit. This
is borne out by part (ii) of the provision. So, the clause is merely stipulating when the servicer needs to
obtain prior written consent, and has nothing to do with indicating, implying, granting, or even
assigning the servicer any authority whatsoever, much less standing, to bring a legal breach of contract
action in the servicers own name and for its own benefit.
8
More importantly, despite recognizing that the ORIX, as the servicer, is not an
assignee and that the trust still owns and holds any legal rights, title and interest in the
mortgage contracts, the Court of Appeals adopted the CWCapital Asset Mgmt. courts
wrongful conclusion that the PSA somehow effectively delegates what is effectively
equitable ownership of the claim and the trust holds merely the bare legal title; thus,
effectively creating some sort of new category of third-party beneficiary, entirely
unintended and even expressly denied by the mortgage contract parties, who can assert a
legal action for breach of contract.
13
The Court of Appeals completely disregarded the
well-established law and concluded that such black-letter law does not control the
current circumstances of loan servicers of CMBS loans under pooling and servicing
agreements. As a result, the Court of Appeals wrongfully carved out some new exception
to contract law whereby, without any ownership or title interest in the loan contracts, loan
servicers can claim their pooling and servicing agreements convey a post-contract
equitable right or third-party beneficiary status giving them an equitable claim and
standing to sue for breach of contract in their own names and for their own benefit.
Nothing could be further than the established law in Texas.
Shortly after oral argument in this case, and before the Dallas Court of Appeals
issued its original opinion, the Waco Court of Appeals issued an opinion that, in fact,

13
In fact, in the entire universe of Texas jurisprudence available on either Westlaw or Lexis, the term
equitable ownership of the claim appears in one singular opinion the Court of Appeals opinion in the
present case, quoting CWCapital Asset Mgmt. Nowhere in Texas jurisprudence has Petitioner found a
plaintiff asserting a mere equitable interest in a claim being allowed to bring a legal action for breach of
contract, particularly where there is neither privity nor third-party beneficiary status. The Court of
Appeals holding in this case would result in a complete watershed change in the well-established Texas
law regarding standing in breach of contract actions.
9
directly addresses the exact situation presented. In Shipley v. Unifund CCR Partners, 331
S.W.3d 27 (Tex.App.Waco 2010, no pet. hist.), the assignment, much like the purpose
of the Pooling and Servicing Agreement in the present suit, assigned the rights and duties
to collect the debt; however, again much like a pooling a servicing agreement, retained
title and ownership of the debt in the assignor. Id. at 29. Directly applicable to what the
circumstances of a pooling and servicing agreement regarding a servicer of a CMBS loan,
the Waco Court of Appeals correctly held that
Because standing denotes a partys justiciable interest in a controversy,
it is only the party whose primary legal right has been breached that may
seek redress for that injury. Eaves v. Unifund CCR Partners, 301 S.W.3d
402, 404 (Tex.App.El Paso 2009, no pet.) Without a breach of a legal
right belonging to that party, that party has no standing to litigate. Id.
(citing Cadle Co. v. Lobingier, 50 S.W.3d 662, 669-70 (Tex.App.Fort
Worth 2001, pet. denied)). Unifund CCR Partnerss [sic] right is solely
limited to taking whatever steps are necessary to collect a debt owned
entirey by someone else, while holding no title, interest, or rights in
anything else. We do not find that this is sufficient to establish that
Unifund CCR Partners has standing to pursue this claim in its own name.

Shipley, 331 S.W.3d at 29-30. In the present suit, no evidence of any type of ownership
of the debt and mortgage contracts by ORIX exists, and the PSA did no more than the
assignment in Shipley, assigning ORIX rights and duties of collection, but retaining all
title, interest and ownership rights with the Trustee. Accordingly, as in Shipley, ORIX
did not have standing to bring a legal action for breach of contract in its own name, for its
own benefit, seeking its own damages, and the Court of Appeals erred in not dismissing
ORIXs suit for lack of subject matter jurisdiction.
14

14
The lack of privity which deprives subject-matter jurisdiction regarding ORIXs breach of contract
counterclaim against TCI 9033 Wilshire also requires dismissal of ORIXs claim for declaratory relief
10
II. ISSUES ARISING REGARDING HOLDER STATUS OF WELLS FARGO BANK.

A. Questions Are Raised Due to Industry Irregularities.

In the fall of 2010, after this case was tried, and even argued to the Court of
Appeals, reports of irregularities in the CMBS industry, surfaced as a result of scandals
involving robo-signing. Particularly, on November 16, 2010, the Congressional
Oversight Panel issued a report Examining the Consequences of Mortgage Irregularities
for Financial Stability and Foreclosure Mitigation.
15
[Appendix, Tab 11] Noting that
questions of irregularities had arisen in the securitized market, the Report stated that
documentation standards in the foreclosure process have helped shine a light on
potential questions regarding the ownership of loans sold into securitization without the
proper assignment of title to the trust that sponsors the mortgage securities. Id. at p. 64.
B. Wells Fargo Did Not Provide Evidence of Clear Ownership to Establish
Standing as Holder Regarding TCI 9033 Wilshires Promissory Note and Deed
of Trust.

Wells Fargo, as Trustee and alleged holder and owner of the TCI 9033 Wilshire
note and mortgage, did not provide evidence of possessing the original loan documents

as part of the same putative counterclaim. Recently, in OAIC Comml Assets, L.L.C., where similar to the
present case the plaintiff asserted breach of contract and declaratory judgment claims, the Dallas Court of
Appeals expressly held that because the plaintiff lacked privity there were no rights, status, or other legal
relations affected by the agreement in relation to the parties required by the Uniform Declaratory
Judgment Act for the court to determine. Id., 234 S.W.3d at 745. Therefore, [a]ccordingly, OAIC has
no standing to assert its claims for declaratory relief respecting the agreement. Id. (citing Grinnell v.
Munson, 137 S.W.3d 706, 712-14 (Tex.App.San Antonio 2004, no pet.) (plaintiff not in privity to
written contract lacked standing to seek declaratory relief respecting contract). Also, importantly, the
Dallas Court of Appeals added, Because we concluded above that OAIC lacks standing to bring its
claims for breach of contract and declaratory relief, OAIC is not entitled to attorneys fees under either
chapter 38 or the Uniform Declaratory Judgments Act. We vacate the trial courts award of attorneys
fees to OAIC and dismiss OAICs claim for attorneys fees for lack of jurisdiction. OAIC Comml
Assets, L.L.C , 234 S.W.3d at 746.
15
Available at http://cybercemetery.unt.edu/archive/cop/20110401223205/http:/www.cop.senate.gov/
11
and chain of assignments to establish its standing as owner and holder.
16
Such evidence
was clearly Wells Fargos burden. It has long been settled law in Texas that although a
general denial does not put the plaintiff to proof of the execution of the instrument in suit,
it requires him to produce the negotiable instrument and introduce it into evidence or
show an excuse for not doing so. Alexander v. Houston Oil Field Material Co., 386
S.W.2d 540, 543 (Tex.Civ.App.Tyler 1965, writ refd n.r.e). The claimant has the
burden of producing and introducing the original note into evidence. Derbigny v. Bank
One, 809 S.W.2d 292, 294 (Tex.App.Houston [14
th
Dist.] 1991, no writ).
17

Accordingly, in the present case, even though the Trustee, Wells Fargo Bank, was
a party to the suit, no evidence was presented of the Trustees possession of the original
loan documents or the chain of assignments to establish that Wells Fargo was the actual
and legal holder of the TCI 9033 Wilshire promissory note and mortgage documents.

16
Although these issues arose and came to light after the trial in this case, it must be remembered that the
question of standing is jurisdictional, cannot be waived, and can be raised at any time, even on appeal.
Texas Assn of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 445-46 (Tex. 1993).
17
With the advent of the issues of irregularities, 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 United States Bank Natl Assn v. Ibanez, 941
N.E.2d 40, 53 (Mass. 2011) (affirming denial of action to quiet title by securitization trusts that could not
prove the assignments of the mortgages); Wells Fargo Bank, N.A. v. Ford, 15 A.3d 327, 329 (N.J. Ct.
App. 2011) (foreclosure judgment reversed because plaintiff securitization trustee, Wells Fargo Bank,
failed to present any evidence that the note had been assigned to it); Deutsche Bank Natl Trust Co. v.
Triplett, 2011 Ohio 478, 2011 Ohio App. LEXIS 401 (Ohio Ct. App. 2011) (foreclosure reversed where
bank failed to offer evidence establishing that it owned the note at the time of the filing of the complaint);
US Bank Natl Assn v. Madero, 913 N.Y.S.2d 612, 613-14 (N.Y. Ct. App. 2011) (plaintiff failed to
demonstrate the prima facie requirement to establish that it had standing as the lawful holder or assignee
of the subject note on the date it commenced this action). While the precise legal issues in these cases
varied, all of these cases have arisen in a securitization context, they all require actual proof of standing
by evidence of the original loan documents and proof of actual assignment, and they demonstrate the very
concerns and irregularities mentioned by the Congressional Oversight Panel.
12
III. TCI 9033 WILSHIRE DEMONSTRATED THAT WELLS FARGO PLEADED NO
DAMAGES.

The Court of Appeals recognized that TCI 9033 Wilshire raised the issue of Wells
Fargo failure to plead, and prove, the essential element of damages; however, the court
erred in its opinion by failing to address the issue on the asserted basis that TCI 9033
Wilshire had not briefed the issue. To the contrary, TCI 9033 Wilshire expressly
directed the Court of Appeals to the fact that Importantly, Wells Fargo asserted no claim
for damages, instead solely alleging only that ORIX is entitled to damages, if any, and
included appropriate record references.
18

Although unsure of how much citation and demonstration the Court of Appeals
may consider adequate briefing, TCI 9033 Wilshire certainly did provide the
appropriate legal standard with the direct quotation from the Dallas Court of Appeals
itself that [O]ne may not maintain an action based upon the harm suffered by another

18
TCI 9033 Wilshire further provided briefing demonstrating
That only ORIX is a party asserting a counterclaim is further demonstrated by the live
pleading of Defendant Wells Fargo Bank in its First Amended Answer and
Counterclaim. [CR 1; p. 128] Although titled as such (although the law instructs that a
title is rather meaningless, instead it is the substance of the claims included from which
meaning is derived), under the section entitled Counterclaim, each and every paragraph
is an exact copy, word for word, merely parroting ORIXs Third Amended Counterclaim.
[compare CR 1: pp. 76-80, CR 1:, pp. 130-133] In fact, nowhere in such counterclaim
is Wells Fargo Bank even mentioned. And, the prayer of the pleading actually only
identifies Wells Fargo Bank as defendant (presumably in relation to the First Amended
Answer) and expressly identifies ORIX as the Counter-Plaintiff (necessarily asserting
the counterclaim included in the pleading). [CR 1: p. 132]
Accordingly, particularly when the repeated stipulations placed into the record by
counsel are considered, it becomes clear the live pleadings reveal that only ORIX is
asserting claims against TCI alleging breach of contract and for declaratory relief.

And TCI 9033 Wilshire briefed the Court of Appeals that, Such is further demonstrated by an
examination of the evidence presented, in which absolutely NO evidence was proffered of any damages,
an essential element, incurred by Wells Fargo Bank. In fact, even ORIX presented no evidence of any
damages alleged to support a putative counterclaim. [RR 4: p. 66].
13
from Boy Scouts of America v. Responsive Terminal Sys., Inc., 790 S.W.2d 738, 746
(Tex.App.Dallas 1990, writ denied). Whereas TCI 9033 Wilshire not only
demonstrated the lack of pleading and evidence, as well as the law that a party cannot
assert damages alleged as being suffered by someone else, the Court of Appeals clearly
erred in holding that issue was waived as not having been briefed and failing to address
the issue.
IV. THE COURT OF APPEALS ERRED IN ITS HOLDING REGARDING THE OTHER
INSURANCE PROVISION.

In its Opinion on Rehearing, the Court of Appeals only addressed the terrorism
insurance issue under the other insurance provision of section 2.1(h) of the Deed of
Trust, necessarily presuming that the Court of Appeals agreed with TCI 9033 Wilshires
briefing that, as a matter of law, terrorism insurance could not have been required under
section 2.1(a), the all risk provision, as TCI 9033 Wilshire maintained both at trial and
on appeal.
By the express language of Section 2.1(h), before ORIX, acting on behalf of the
lender/holder Wells Fargo, could require terrorism insurance coverage for the Wilshire
Medical Building, ORIX was obligated to determine that terrorism was a hazard or
casualty which at that time [May 2004] was commonly insured against by similar
properties, similarly situated. Notwithstanding this express obligation, ORIXs that,
instead of complying with TCI 9033 Wilshires Deed of Trust, ORIX merely issued a
blanket order to require ALL of the borrowers of ALL the loans it serviced to procure
terrorism insurance. [RR 13: pp. 44-48, 51-52, 75-77] ORIXs blanket order even
14
contradicted its own Policies and Practices Insurance Administration that directed its
insurance department to cause collateral properties to be adequately insured against loss
in accordance with generally accepted servicing practices and the constraints of
applicable loan documents. [RR 13: pp. 69-71; RR 22; Exh. 154]
At trial, ORIX attempted to support its blanket decision by relying (solely) upon a
survey that indicated it was common for servicers of commercial mortgage backed
securities (CMBS loans) to require terrorism insurance. However, the survey ORIX
relied upon at trial to justify its decision was not published, and therefore unknown by
ORIX, at the time ORIX made the blanket decision to require all of the borrowers of the
loans it serviced to procure terrorism insurance. [RR 19: Exh. 120] And, the survey did
not survey loans securing buildings clearly similar to the Wilshire Medical Building,
much less similarly situated. [RR 7: p. 92] ORIX relied upon the survey as the sole
evidence to justify, years after the fact, the blanket decision to require all the CMBS
loans it serviced to obtain terrorism insurance.
Nonetheless, the Court of Appeals erroneously held that TCIs Deed of Trust did
not require what the Court described as an individualized commonality analysis.
Incredibly, rather than holding what the document seems to clearly require, the Court of
Appeals concluded that the contract only requires that the required insurance be
commonly required and insured against, regardless whether ORIX actually knew at the
time it required the insurance. However, the Court of Appeals reasoning ignores, and in
fact removes from the contract (and ORIXs own obligations) the requirements that the
constraints of the appropriate loan documents be analyzed and considered before
15
requiring such additional insurance coverages. Such conclusion defies the logic that the
obligations and requirements in the contract clearly contemplate that the party have a
necessary mens rea, so to speak, and know that at the time it is requiring the additional
insurance, it is doing so because it meets the constraints of the contract, i.e., it is
customarily required and at the time commonly insured against for similarly situated,
similar properties.
The Court of Appeals erred in reaching its conclusion, particularly when the
evidence foreclosed the possibility that the MBA study relied upon by ORIX to justify
its blanket decision (and which the Court of Appeals spent much space describing) was
not published, could not have been known, and was not known by ORIX at the time it
required the additional terrorism insurance.
19

CONCLUSION AND PRAYER.
WHEREFORE PREMISES CONSIDERED, for the reasons discussed above, TCI
9033 Wilshire respectfully request that this Court grant a petition for review, reverse the
trial courts and Dallas Court of Appeals judgments, and render judgment in favor of
TCI 9033 Wilshire, or in the alternative remand the case for a new trial.

19
Further, the Court of Appeals citation to BFP 245 Park Co. v. GMAC Commercial Mortg. Corp., 12
A.D.3d 33, 332, 786 N.Y.S.2d 425 (N.Y. App. Div. 2004) on this point is somewhat disingenuous
because the requisite conditional language to which the BFP 245 court was referring was language
which would have stipulated that any all risk coverage would have to be maintained for all insured risks
that, at the time of the contract, were included in an all risk policy. As the Dallas Court of Appeals
conclusion in this case would appear to require, every contract would have to expressly include a
conditional statement for nearly every sentence of obligation to make clear that the parties must have
actual knowledge of the basis for requiring the obligation be performed, in order to prevent a party from
merely hoping that its actions can be justified a later time during litigation.
16
Respectfully submitted,
/s/ Jonathan J. Cunningham
Jonathan J. Cunningham
C. Gregory Shamoun

1755 Wittington, Suite 200
Dallas, Texas 75234
214-987-1745 phone
214-521-9033 fax

TCI 9033 Wilshire Blvd., Inc.
17
CERTIFICATE OF SERVICE
This is to certify that a true and correct copy of the above and foregoing has been
forwarded to all counsel of record in accordance with the Texas Rules of Appellate
Procedure on this 15
th
day of July, 2011, as follows:

P. Michael Jung, Esq.
Strasburger & Price, L.L.P.
901 Main Street, Suite 4400
Dallas, Texas 75202
(214) 651-4300 (Telephone)
(214) 651-4330 (Telecopier)

Talmage Boston, Esq.
Winstead P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
(214) 745-5709 (Telephone)
(214) 745-5390 (Telecopier)

Ryan K. Lurich, Esq.
Friedman & Feiger, L.L.P.
5301 Spring Valley, Suite 200
Dallas, Texas 75254
(972) 788-1400 (Telephone)
(972) 788-2667 (Telecopier)

/S/ Jonathan J. Cunningham

No. 11-0396
_______________________________________________________________________
_______________________________________________________________________

BOULEVARD, INC.,

Petitioners,

v.

THROUGH CERTIFICATES, SERIES 99-C1,

Respondents.

______________________________________________________________________

No. 05-09-00066-CV
______________________________________________________________________

APPENDIX TO TCI 9033 WILSHIRE BOULEVARD, INC.'S
PETITION FOR REVIEW
______________________________________________________________________

Jonathan Cunningham
C. Gregory Shamoun
Dallas, Texas 75234
214-987-1745 phone
214-521-9033 fax

TCI 9033 Wilshire Boulevard, Inc.


This is to certify that a true and correct copy of the above and foregoing Appendix
has been forwarded to all counsel of record in accordance with the Texas Rules of
Appellate Procedure on this 15
th

Dallas, Texas 75202
(214) 651-4300 (Telephone)
(214) 651-4330 (Telecopier)

Winstead P.C.
1201 Elm Street
Dallas, Texas 75270
(214) 745-5709 (Telephone)
(214) 745-5390 (Telecopier)

Dallas, Texas 75254
(972) 788-1400 (Telephone)
(972) 788-2667 (Telecopier)

/S/ Jonathan J. Cunningham

APPENDIX

TAB "1" -- Trial Court Final Judgment dated December 19, 2008 (CR 2; pp. 412-415).

TAB "2" -- Trial Court Findings of Fact and Conclusions of Law, dated February 10,
2009 (CR 2: 450-462).

TAB "3" -- Dallas Court of Appeals Opinion dated December 20, 2010.

TAB "4" -- Dallas Court of Appeals Opinion dated January 19, 2011.

TAB "5" -- Dallas Court of Appeals Opinion on Rehearing dated March 14, 2011.

TAB "6" -- Joint Trial Exhibit No. 3, Promissory Note [RR 17, Exh. 3]

TAB "7" -- Joint Trial Exhibit No. 4, Deed of Trust [RR 17, Exh. 4]

TAB "8" -- Excerpts from Trial Exhibit 136, Pooling and Servicing Agreement
[RR 21, Exh. 136]

TAB "9" -- CWCapital Asset Mgmt., LLC v. Chicago Props., LLC, 610 F.3d 497
(7
th
Cir. 2010)

TAB "10" -- Shipley v. Unifund CCR Partners, 331, S.W.3d 27
(Tex.App.Waco 2010, no pet. hist.)

TAB "11 -- Congressional Oversight Panel issued a report Examining the
Consequences of Mortgage Irregularities for Financial Stability and
Foreclosure Mitigation, dated November 16, 2010.

No. 11-0396
BOULEVARD, INC.,
Petitioners,
v.
THROUGH CERTIFICATES, SERIES 99-Cl,
Ref.,pondents.
No.05-09-00066-CV
APPENDIX TO TCI 9033 WILSHIRE BOULEVARD, INC.'S
PETITION FOR REVIEW
Jonathan Cunningham
C. Gregory Shamoun
SHAMOlJN & NORMAN, LLP
Dallas, Texas 75234
214-987-1745 phone
214-521-9033 fax
Tel 9033 Wilshire Boulevard, Inc.
This is to certify that a true and correct copy of the above and foregoing Appendix
has been forwarded to all counsel of record in accordance with the Texas Rules of
Appellate Procedure on this 15
th
Dallas, Texas 75202
(214) 651-4300 (Telephone)
(214) 651-4330 (Telecopier)
Winstead P.e.
1201 Elm Street
Dallas, Texas 75270
(214) 745-5709 (Telephone)
(214) 745-5390 (Telecopier)
Dallas, Texas 75254
(972) 788-1400 (Telephone)
(972) 788-2667 (Telecopier)
lSI Jonathan J. Cunningham
APPENDIX
TAB "1" -- Trial Court Final Judgment dated December 19,2008 (CR 2; pp. 412-415).
TAB "2" -- Trial Court Findings of Fact and Conclusions of Law, dated February 10,
2009 (CR 2: 450-462).
TAB "3" -- Dallas Court of Appeals Opinion dated December 20,2010.
TAB "4" -- Dallas Court of Appeals Opinion dated January 19,2011.
TAB "5" -- Dallas Court of Appeals Opinion on Rehearing dated March 14,2011.
TAB "6" -- Joint Trial Exhibit No.3, Promissory Note [RR 17, Exh. 3]
TAB "7" -- Joint Trial Exhibit No.4, Deed of Trust [RR 17, Exh. 4]
TAB "8" -- Excerpts from Trial Exhibit 136, Pooling and Servicing Agreement
[RR 21, Exh. 136]
TAB "9" -- CWCapital Asset Mgmt.. LLC v. Chicago Props., LLC, 610 F.3d 497
(i
h
Cir. 2010)
TAB" 10" -- Shipley v. Unifimd CCR Partners, 331, S.W.3d 27
(Tex.App.---Waco 2010, no pet. hist.)
TAB" 11" -- Congressional Oversight Panel issued a report Examining the
Consequences 0/ Mortgage Irregularities for Financial Stability and
Foreclosure Mitigation, dated November 16, 2010.
APPENDIX
TAB
"I"
CAUSE NO. 04-07956-G
ECF NORTH RIDGE ASSOCIATES, L.P.
AND TCI 9033 WILSHIRE BOULEVARD,
INC.
IN THE DISTRICT COURT OF
DALLAS COUNTY, TEXAS
134th JUDICIAL DISTRICT
Plaintiffs and Counter-Defendants,
Defendants and Counter-Plaintiffs.
v.
ORIX CAPITAL MARKETS, L.L.C.,

U.S. BANK, N.A., a/k/a U.S. BANCORP,
N.A., AS TRUSTEE FOR THE MORTGAGE
PASS-THROUGH CERTIFICATES, SERIES
1996-C3 and WELLS FARGO BANK, N.A.,
a/k/a WELLS FARGO BANK, MINNESOTA
PASS-THROUGH CERTIFICATES SERIES
99-1
FINAL JUDGMENT
Beginning November 5
th
and ending December 5, 2008, this cause was called to trial and carne
on to be heard. ECF North Ridge Associates, L.P. ("ECF"), and TCI 9033 Wilshire Boulevard, Inc.
("TCI"), Plaintiffs and Counter-Defendants, appeared through their designated representative and
attorneys of record, and ORIX Capital Markets, LLC ("ORIX"), U.S. Bank, N.A., a/k/a U.S. Bancorp,
N.A., as Trustee for the Mortgage Pass-Through Certificates, Series 1996-C3, and Wells Fargo Bank,
N.A., a/k/a Wells Fargo Bank, Minnesota N.A., as Trustee for the Mortgage Pass-Through Certificates
Series 99-1, Defendants and Counter-Plaintiffs, appeared through their designated representatives and
attorneys of record, and all announced ready for trial. The subject contracts between the parties
contained a provision that waived the right to trial by jury, all questions of fact were submitted to the
Comi, and the case proceeded to trial.
The Court, after hearing the evidence and arguments of counsel, is of the opmlOn that
Defendant and Counter-Plaintiff ORIX, acting in its capacity as (i) owner and holder (as of July 25,
FINAL JUDGMENT - Page 1
2006) of the loans formerly held by U.S. Bank, Trustee, on the subject ECF loan, and (ii) Special
Servicer for Wells Fargo Bank, Trustee, on the subject TCI loan, has prevailed on its pleaded causes of
action in its counterclaim against ECF and TCI for its breach of contract and declaratory relief causes
of action, and therefore, is entitled to recover the $217,027.38 in default interest previously paid under
protest by ECF in 2005, which ORIX has been holding in an escrow account since it was paid; and
ORIX is also entitled to recover the $302,335.53 in default interest previously paid by TCI in 2005,
which ORIX has been holding in an escrow account since it was paid. This relief being awarded to
ORIX in such capacities is consistent with the relief sought by U.S. Bank, Trustee, and Wells Fargo
Bank, Trustee, in their pleaded counterclaims.
It is further determined that Plaintiffs ECF and TCI shall take nothing by their claims asserted
against the Defendants in this case.
It is therefore ORDERED, ADJUDGED and DECREED by the Court that ORIX, in such
previously designated capacities, shall have and be permitted to retain for its ultimate recovery the
amounts it has held in escrow since 2005, as designated above, in the amounts of $217,027.38 against
ECF (plus pre-judgment interest at the rate of 5% per annum on the amounts of default interest owing
by ECF from May 13, 2004, until such interest was paid under protest by ECF on April 14, 2005, as set
forth in Joint Exhibit 79) and $302,335.53 against TCI (plus pre-judgment interest at the rate of 5% per
annum on the amounts of default interest owing from March 23, 2004, until such interest was paid
under protest by TCI on May 26,2005, as set forth in Joint Exhibit 85).
It is further ORDERED that ORIX, in such previously designated capacities, shall recover from
Counter-Defendant ECF its attorneys fees in the sum of $190,048.91 (being the total amount of
attorneys fees owed through trial by ECF in the amount of $241,380.39 minus the $51,331.48 in
ORIX's attorneys fees previously paid by ECF) for services rendered through the trial of this case, and
FINAL JUDGMENT Page 2
shall also recover from TCl attorneys fees the sum of $241,380.39 for services rendered through the
trial of this case; and in the event of an appeal by ECF and TCl to the Court of Appeals, if the appeal is
unsuccessful, ORIX, in such previously designated capacities, shall be further entitled to $75,000 as
reasonable attorneys fees (to be allocated $37,500.00 against ECF and $37,500.00 against TCl); and in
the event of an appeal by ECF and TCl to the Supreme Court of Texas, in connection with an
unsuccessful Petition for Review, then ORlX, in such previously designated capacities, shall be
entitled to an additional $15,000 in appellate attorneys fees (to be allocated $7,500.00 against ECF and
$7,500.00 against TCl); and if the Petition for Review is granted, and the appeal is unsuccessful, then
ORIX in such previously designated capacities, shall be entitled to an additional $20,000 in appellate
attorneys fees (to be allocated $10,000.00 against ECF And $10,000.00 against TCl).
It is further ORDERED that the total amount of the Judgment here rendered as to (i) pre-
judgment interest accrued between May 13, 2004 - April 14, 2005 for ECF, and (ii) as to interest
accrued between March 23, 2004 - May 26, 2005 for TCl, and (iii) as to the award of attorneys fees
awarded by this Judgment to ORlX from both ECF and TCl, shall bear interest at the post-judgment
rate of interest of 5% per annum from date ofjudgment until date of payment.
All costs of court spent or incurred in this cause are hereby taxed and adjudged against
Plaintiffs and Counter-Defendants, ECF and TCl, for whjch let execution issue.
All writs and processes for the enforcement and collection of this Judgment or the costs of
Court may issue as necessary.
All relief requested in this case and not expressly granted is hereby denied. This Judgment
finally disposes of all parties and claims and is appealable.
FINAL JUDGMENT Page 3
Signed on this
I it- day of _-=(J:=-- -'{..... __, 2008.
APPROVED AS TO FORM:
Ryan Lurich
Larry Friedman
Counsel for ECF North Ridge Associates, L.P.
Gregory Shamoun
Dennis Holmgren
Shamoun & Nonnan, LLP
Counsel for TCI 9033 Wilshire Boulevard, Inc.
\
!\

Nicola Hobeiche
ORIX Capital Markets
Talmage Boston
Winstead PC
Counsel for ORIX Capital Markets, L.L.C.,
U.S. Bank, N.A., a/k/a U.S. Bancorp, N.A. as
Trustee for the Mortgage Pass-Through Certificates,
Series 1996-C3 and Wells Fargo Bank, N.A., a/k/a
Wells Fargo Bank, Minnesota N.A., as Trustee for
the Mortgage Pass-Through Certificates Series 99-1
Dallas ] 5308083v2
FINAL JUDGMENT - Page 4
Judge Presiding
l
.. .. l:' ;, ::' " " :.' 4 ''':;:;''1'
. ::" :.,', . 'f',
.,,1.1.1.1 .....: "j
.. .. :.. : .... ,.._ .._J
6/1012004 28 - $676:38 5.0000%
$4,869,943,18 -$18,938.67
7/12/2004 31 $674.72 5.0000% $4,857,997.83 $20.916.38
8/10/2004 28 $673.05 5.0000% $4,845,974.09 $18,845.45
9/9/2004 29 $671.37 5.0000% $4,833,871.44 $19,469.76
10/8/2004 28 $669.68 5.0000% $4;821 689.37 $18,751.01
11/9/2004 31 $667.98 5.0000% $4 809,427.36 $20,707.26
12/9/2004 29 $666.26 5.0000% $4.797,084.88 $19321.59
1/10/2005 31 $664.54 5.0000% $4,784,661.40 $20,600.63
2/912005 29 $662.80 5.0000% $4,772156.39 $19,221.19
3/9/2005 27 $661.05 5.0000% $4,759,569.32 $17,848.38
4/8/2005 29 $659.29 5.0000% $4,746,899.64 $19,119.46
4/14/2005 5 $657.52 5.0000% $4,734.146.82 $3,287.60
o

gj '""3
l?i

0)0000(
.j::..tT.;
'I-;
\(3'""3
Vl
9'Z
C19
'-l
'-a
,:'.1:: toO :'';.fii !

:',); I :; I I, j

5/6/2004
6/8/2004
71712004
8/6/2004
9/8/2004
10/6/2004
11/10/2004
1217/2004
1/6/2005
2/8/2005
3/5/2005
4/8/2005
5/18/2005
5/5/2004
61712004
7/6/2004
8/5/2004
91712004
1015/2004
11/9/2004
1216/2004
11512005
21712005
3/4/2005
41712005
5/17/2005
5/26/2005
$732.88
$732.25
$731.46
$730.82
$730.01
$729.37
$728.71
$727.89
$727.23
$726.40
$725.73
$725.05
$723.88
$723.19
$722.34
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
4.0000%
$6.590.263.25
$6.583,099.88
$6.577,363.61
$6.570,113.52
$6.564,287.03
$6,558,420.06
$6.551,042.61
$6.545,083.63
$6,537,616.52
$6.531,564.27
$6,525,469.98
$6,514,946.33
$6.508.736.59
$6.501.025.12
$21,235.29
$23,406.58
$20,462.91
$21.170.37
$23.339.69
$19.675.26
$24,748.38
$18,908.02
$21,065.65
$23,223.34
$17,401.25
$23.888.14
$28,204.53
$5,778.69
$302,035.52
$0.00
Ifl
00
00

...... t-

...... 0

OJ
t/J
E-i ::l
zl3
......
o
APPENDIX
TAB
"2"
CAUSE NO. 04-07956-G
ECF NORTH RIDGE ASSOCIATES, L.P.,
INC.
INC.
IN THE DISTRICT COURT OF
DALLAS COUNTY, TEXAS
134th JUDICIAL DISTRICT
Plaintiffs,
Counter-Defendants
v.
ORIX CAPITAL MARI<..ETS, L.L.C.,

U.S. BANK, N.A., AIKJAI U.S. BANCORP,
PASS-THROUGH CERTIFICATES, SERIES
1996-C-3'S, WELLS FARGO BANK
MINNESOTA, N.A., AS TRUSTEE FOR
THE MORTGAGE PASS-THROUGH
CERTIFICATES SERIES 99-C1
Defendants.
S
S
v.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Based on substantial, though conflicting testimony, I adopt the following
Findings of Fact:
FINDINGS OF FACT
1. At the pertinent times for purposes of thi s lawsuit, by reason of the
applicable Pooling and Servicing Agreements ("PSAs"), ORIX was (i) the servicer of the
commercial mortgage loan originated in 1995 by Banc One Commercial Loan Original
Corporation and later assigned to U.S. Bank, N.A. as Trustee Mortgage Pass-Through
Certificates, Series 1996 C-3 's in connection with the purchase an apartment complex ",un""
h ~ r " n n as the
Ridge Apartments located at 41 f-j ::lr\!f'c:t Hill in Dallas, and
Findings of Fact and Conclusions of Law - Page 1
(ii) the servicer of the commercial mortgage loan originated in 1999 by Merrill Lynch Credit
Corporation and later assigned to Wells Fargo Bank Minnesota, N.A., as Trustee for the
l'.1ortgage Pass-Through Certificates Series 99-C1 in connection with the purchase of a building
owned by TCI known as the Wilshire Medical Building located at 9033 Wilshire Boulevard in
Los Angeles, California. ORIX later became the owner and holder of the ECF note on July 25,
2006.
2. In both of the subject loans, the pertinent mortgage instruments required
ECF and TCI, as borrowers and mortgagors, to obtain "all risk" insurance coverage and also to
obtain "other insurance" as deemed reasonably necessary by the lender in order to protect the
real estate collateral on the loans. For ECF, under the Mortgage and Security Agreement dated
November 6, 1995, the specific provisions that required ECF to obtain "all risk" and "other
insurance" were Sections l.4(a) and (f), respectively, and for TCI, under the Deed of Trust
dated June 1, 1999, the specific provisions that required TCI to obtain "all risk" and "other
insurance" were Sections 2.1(a) and (h) respectively:
Sections 1.4 of the ECF Mortgage and Security Agreement reads in pertinent part as
follows: Mortgagor shall, at Mortgagor's expense, maintain in force and effect on the Property
at all times, while this Mortgage continues in effect the following insurance:
(a) "All risk" coverage insurance against loss or damage to the Property from all risk
perils...
(f) Such other insurance on the Property ... as may from time to time be required by
Mortgagee against other insurable hazards or casualties which at the time are
commonly insured against in the case of property similarly situated, due regard
being to height type of buildings, use
occupancy.
Sections 2.1 of the TCI Deed of Trust reads in pertinent part as follows: Borrower shall,
at its own cost and expense maintain the following insurance coverages with respect to the
Prope11y during the term of this Deed of Trust:
(a) Casualtv. Insurance against loss or damage by fire, ..., and other hazards
covered by an "all risk" policy or a policy covering "special" causes of loss, with
such endorsements as Lender or Trustee may from time to time reasonably
reqUIre.
(h) Miscellaneous. Such other insurance coverages, in such amounts, and such other
forms and endorsements, as may from time to time be required by Lender, and
which are customarily required by institutional lenders for similar properties,
similarly situated, including, without limitation, coverages against other insurance
hazards, which at the time are commonly insured against and generally
available .
3. Oh December 20,2002, April 2, May 13, July 14 and October 18,2004, ORIX, as
servicer, sent letters to ECF and/or its designated agents stating that the insurance requirement
imposed upon the borrower/mortgagor as contained in the Mortgage and Security Agreement
executed in connection with the ECF loan, required ECF to carry terrorism insurance on the
North Ridge Apartments, and ECF failed and refused to provide such coverage until April 14,
2005. Thus, ECF breached its loan agreement and was in default on May 13,2004, thereby
triggering its obligation to pay the default rate of interest as that date. and remained in default
with the default rate of interest continuing to accrue until ECF cured it on April 14,2005.
4. On December 20,2002, March 23, July 20, October 28,2004 and March 29,
2005, ORIX sent letters to TCI and/or its designated agents stating that the insurance
requirement imposed upon the borrower/mortgagor, as contained in the Deed of Trust executed
in connection with the TCI loan, required TCI to carry terrorism insurance on the Wilshire
Medical Building, and TCI failed and refused to provide such coverage until May 2, 2005 when
it sold the property and had its position as borrower on the loan documents assumed by the
purchaser of the property. Thus, TCI breached its loan agreement and was in default on March
23, 2004, thereby triggering its obligation to pay the default rate of interest as of that date, and
remained in default with the default rate of interest continuing to accrue until TCI cured it on
May 2,2005.
5. Commercial loan documents executed prior to 9/11/01 typically contained no
explicit requirement that terrorism insurance be obtained by the borrower and/or mortgagor in
order to protect the commercial real property collateral that secured the loans.
6. Prior to 9/11/01, typically "all risk" insurance policies that covered commercial
real estate did not exclude terrorism as a covered peril, and thus what ORIX initially asked TCI
and ECF to obtain in the way of terrorism insurance coverage was only a request for such
borrowers to comply with the property insurance coverage requirements which were in place at
the time of the two loans' origination.
7. When ECF and TCI responded to ORIX's request by refusing to obtain terrorism
insurance coverage on the subject real estate collateral properties, such refusal constituted a
breach of the subject loan documents, resulting in both ECF' sand TCI' s defaulting in their
obligation under their respective mortgage instruments to carry "all risk" insurance coverage and
also their obligation to obtain "other insurance" as reasonably requested by the servicer in order
to protect the real estate collateral on the loans.
8. The only collateral that existed for both of the subject loans was the real estate
collateral (i.e., the North Ridge Apartments the Wilshire Medical Building
for the TCI in that the loan obligations
the
both were non-recourse and were no
personal guaranty agreements executed by anyone in
either loan.
9. The replacement cost of the real estate collateral for the two loans at the time
ORlX asked ECF and TCl to obtain terrorism insurance was in excess of $10,000,000, and the
cost of the annual premium on terrorism insurance if secured by ECF (as the property owner) on
the North Ridge Apartments in 2004 was $1,412.40 and if secured by TCl (as the property
owner) on the Wilshire Medical Building was $345.63.
10. lfORlX, as serviceI' for the two trusts referenced in Findings of Fact #1, had
purchased terrorism insurance on the two real estate collateral properties, the cost of the
premiums for such coverage would have been in excess of $1 00,000.
11. ORIX was under no obligation under the subject loan agreements (to which ECF
and TCl were parties) to force place terrorism insurance on the two real estate collateral
properties. The cost for ORlX to obtain forced placed terrorism insurance on the properties
would have been approximately $50,000 for the ECF property and $70,000 for the TCl property.
12. ORIX's forced place insurance policy from 2003 to 2005 did not provide single
endorsements or coverage for terrorism, and therefore, ORIX could not have obtained forced
placed stand alone terrorism insurance on the two real estate collateral properties.
13. For commercial real estate loans being serviced in the 2004 time period that were
part of Commercial Mortgage-Backed Securities ("CMBS") trusts, noteholders required more
than 80% of the borrowers to obtain terrorism insurance coverage on the real estate collateral
properties for such loans.
14. ORlX's demands after 11/01 on ECF and TCl to obtain terrorism insurance on
commercial real estate collateral included in a securitized loan portfolio, and after TRIA went
into effect in November 2002, were consistent with the practices the substantial majority
commercial lenders in the United States had involvements with securitized loan portfolios.
Findings of Fact and Conclusions of Law - Page ::;
15. Before filing this lawsuit, neither ECF nor TCI ever obtained a quote for terrorism
insurance coverage on the subject real estate collateral for the two loans.
16. From 2002-2005, ORlX was acting as servicer for many other CMBS trusts on
thousands of other commercial mortgages in addition to the trusts that owned the two subject
loans during the relevant time period. ORIX acted consistently for all the loans it serviced in
requiring the borrower for all the loans it serviced to obtain terrorism insurance following
9/1 I/O1 and the enactment of TRlA because all of such loans were securitized.
17. Following the events of9/11/01 and the effective date of TRIA in November
2002, it was commercially reasonable for a commercial mortgage loan servicer to require
borrowers to obtain terrorism insurance on real property collateral since it was beneficial to trust
.,
certificate holders and available at low cost.
18. The location of terrorist targets is, and has always been, unpredictable.
19. The cost ofECF's and TCl's obtaining terrorist insurance in 2004 and 2005 was
very reasonable, given the replacement cost of the subject real estate collateral on those two
loans, and clearly much less expensive than the cost of litigating the issue and prosecuting this
lawsuit.
20. The amount of default interest owed by TCl to ORlX as servicer for the
certificate holders of the trust on the subject loan was in the amount of$302,335.53, which TCl
paid at the time the TCl subject loan was assumed by the purchaser at the closing in May 2005.
21. The amount default interest owed bv to ORIX as c p r ' , ! 1 r , ~ r for the
certificate holders of the trust on the subject loan was the amount of$217,027.38, thr.(',ll(lh
time ECF finally cured the default in April 2005.
22. Though both ECF and TCl waived notice of default in their respective loan
documents, both ECF and TCl received notice of potential default from ORlX throughout 2004
and the first few months of 2005, yet they refused to cure such default until April and May,
2005, respectively.
23. ECF and TCI had a much better and less expensive opportunity to obtain
terrorism insurance than did ORlX as serviceI' for the two trusts on the two subject loans, given
that ECF and TCI could have obtained such terrorism insurance (i) with little expense and effort,
and (ii) due to the ready accessibility of terrorism insurance to them as the property owners in
2004. Furthermore, ORIX was not in a position, as a third party servicer, to obtain terrorism
insurance coverage on behalf of borrowers ECF and TCl.
24. ORlX was not a named insured on ECF's and TCI's insurance policies, and,
therefore, had no rights or privileges in or to those policies.
25. ORlX was not responsible for any material delays associated with the assumption
of the TCI loan since almost all of the delay was a result of litigation between TCI and its tenant
and ORlX was not involved in any way with such litigation.
26. ORlX's approval of ECF' s funding requests from ECF's reserve account on
October 7, 2004 was not an admission that no default existed under the loan documents as of
such date.
ORIX is entitled to recover all amounts of default interest, pre- and post-judgment
as an
interest, costs, and attorneys fees, as provided in the Final Juclgn1enlt,
the ECF Mortgage and Security Agreement, ORIX quali
under 15.1 (6) the TCI Deed Trust Security
that (i) under 4.6
the Mortgagee; (ii)
LJvcceJvJ and Rents
and Fixture Filing, ORIX qualifies as an Lender and Trustee; and (iii) both of
subject Pooling and Servicing Agreements between ORlX, the lenders, and the trustees provide
that ORlX is entitled to such recoveries.
28. Regarding 2.3 of the ECF Promissory Note, ORlX as for the lender and
trustee, was not required to apply each monthly payment made by ECF to default interest, before
applying it to payment of accrued interest, and the reduction of principal, because of ORlX's
having the right to grant indulgences to the borrower (under 4.1 of the ECF Promissory Note)
and ORlX's not applying such default interest every month after the default occurred qualified
as an indulgence to the borrower.
To the extent any Conclusion of Law is construed, in whole or in part, to be a Finding of
Fact, it is hereby adopted as such.
I adopt the following Conclusions of Law:
CONCLUSIONS OF LAW
1. ECF breached its loan agreement and was in default on May 13,2004, thereby
triggering its obligation to pay the default rate of interest as of that date, and remained in default
with the default rate of interest continuing to accrue until ECF cured it on April 14,2005.
2. TCl breached its loan agreement and was in default on March 23, 2004, thereby
triggering its obligation to pay the default rate of interest as of that date, and remained in default
with the default rate of interest continuing to accrue until TCl cured it on May 2, 2005.
3. Based on the controlling case law established in courts throughout the United
States who have considered this issue previously, both the "all risk" and the "other insurance"
provisions in the mortgage instruments in the subject loan documents required ECF and TCl to
when ORlX obtain terrorism insurance at such as servicing representative
trusts) made such a request and imposed such a rprll11rprnf'1'1! on the borrowers.
4. ORlX, as servicer for the two trusts on the subject mortgage loans, had no duty to
mitigate the damages sustained by ECF and TCI in connection with their defaults under their
respective loan agreements, and ORIX was reasonable in not obtaining stand alone or forced
place terrorism coverage for the two real estate collateral properties after ECF and TCI refused
to obtain such coverage.
5. ORIX, as servicer for the trusts on the two subject mOligage loans, had no
obligation under the loan documents to tap the insurance reserves for ECF and TCI in order to
purchase terrorism insurance on the two real estate collateral properties.
6. Because of the substantial replacement costs of the real estate collateral on the
two subject loans compared to the small cost associated with the borrowers obtaining terrorism
insurance and the ready availability of terrorism insurance at the time ORlX requested it, it was
reasonable for ORIX as servicer for the two trusts on the subject loans to require ECF and TCI to
obtain terrorism insurance coverage on both real estate collateral properties.
7. Given that both of the subject loans were part ofCMBS trusts for which ORIX
was acting as servicer, and for which there was no collateral other than the subject two
properties, it was commercially reasonable for ORlX as servicer for the trusts to require ECF
and TCI to obtain terrorism insurance coverage at the low cost specified above (in Finding of
Fact # 9) as a means of protecting the collateral for the certificate holders in the trusts,
particularly once terrorism insurance became easily obtainable and affordable after TRIA went
into effect November 2002.
8. Given that its standard practices were consistent with of most servicers
CMBS trusts on commercial ORIX re3lS0nal)Jy ll1 requmng and TCI to
obtain telTorism insurance coverage on the subject real estate collateral properties.
9. Though ECF and TCl both ultimately cured their defaults and obtained terrorism
insurance in 2005 after refusing to obtain it in 2004, a late cure after default does not extinguish
their obligation to pay default interest that accrued before the cure.
10. ORIX as servicer for the two trusts on the two subject loans had no duty to obtain
terrorism insurance coverage on the two real estate collateral properties, given that the cost of
ORlX's obtaining such terrorism insurance on behalf of the two trusts was not a trifling expense
and ORlX had no duty to sacrifice its right to collect default interest under the subject loan
documents.
II. ORlX as agent for the lenders and trustees under the subject loan agreements with
ECF and TCl, and as a party to the subject PSA's, had standing to pursue its counterclaims in
this case seeking to obtain default interest, attorneys fees, costs, and pre-judgment and post-
judgment interest from ECF and TCl.
12. ORlX had no duty to forego charging default interest under the subject loan
agreements, once ECF and TCl were in default because of their refusal to obtain terrorism
insurance coverage on their real estate collateral properties.
13. ORIX breached no contracts with either ECF or TCl.
14. USA Bank, N.A., as Trustee, breached no contracts with ECF.
15. Wells Fargo Bank Minnesota, N.A., as Trustee, breached no contracts with TCl.
16. Once ECF and TCl believed ORIX, as servicer for the respective trusts, had
breached the subject requiring the hn,'n,1,1iP1CQ the terrorism lnQIlr'U1{'p
a duty to mitigate their damages coverage for the two real estate collateral properties, they
by obtaining terrorism insurance after being requested to
it yet they failed to do so.
17. Because of its meritorious counterclaim for declaratory relief against ECF and
TCI, and its meritorious counterclaim for breach of contract against ECF and TCI, ORlX is
entitled to retain the $302,335.53 plus all interest accrued on the default interest collected on the
TCI loan, and also is entitled to retain the $217,027.38, plus all interest accrued on the default
interest collected on the ECF loan.
18. ORlX, on behalf of itself and on behalf of U.S. Bank, N.A., Trustee, and Wells
Fargo Bank Minnesota, N.A., as Trustee under the respective PSAs, is entitled to recover its
attorneys' fees because of its meritorious counterclaim for declaratory relief against ECF and
TCI, and its meritorious counterclaim for breach of contract against ECF and TCI, due to ECF's
and TCI's breach of the subject mortgage instruments by failing to obtain terrorism insurance
coverage on the subject real estate collateral properties, with such fees reasonably incurred and
such legal work necessarily performed, with the amount of such fees through the trial of this
cause being $482,760.78 (with such trial fees to be paid (i) by ECF in the amount of $241 ,380.39
less the $51,331.48 in fees previously paid by ECF, such that $190,048.91 are presently due and
owing by ECF; and (ii) by TCI in the amount of $241 ,380.39); and in the event of any appeal of
this case to the Dallas Court of Appeals in the amount of $75,000 (with such fees to be paid
$37,500.00 by ECF and $37,500.00 by TCI); in the event of an application for Petition for
Review to the Texas Supreme Court in the amount of an additional $15,000 (with such fees to be
paid $7,500 by ECF and $7,500 by TCI); and if such Petition for Review is granted, in the
amount an additional $20,000 (with such fees to paid $1
TCI).
by ECF and $1 by
19. 1 l.lllUL',,- other things. a terrorist act to be certified an
under TRIA, the act must have been committed by foreign terrorists and caused in excess of
$5,000,000 in damages in aggregate losses for all losses occurring due to anyone act, such that
for TRIA terrorism insurance coverage to apply, the terrorist attack only needed to aggregate
more than $5,000,000 for all claims to all properties effected (i.e., ECF could suffer $1,000,000,
the shopping center across the street $2,000,000 and the office building next door $2,000,000,
and the insurance policy would have been triggered and the coverage would have paid
$1,000,000 for the damage to the ECF property); furthermore, the $5,000,000 aggregate losses
include workers compensation claims, business income, etc. as being included within the
threshold.
20. As to the TCI loan, California law is clear that there can be no viable claim for
unjust enrichment (which is a claim essentially trying to create an implied contract), when the
transaction out of which the claim arose is the subject of an express contract, and the loan
documents between TCI and its lender were and are an express contract.
21. With respect to the TCI loan, TCl's cause of action under California law for
breach of good faith and fair dealing against ORIX has no merit since under California law there
is no duty of good faith and fair dealing between parties who have no contract with each other,
and ORIX has never had contractual privity with TCL
22. All pleaded causes of action asserted by ECF and TCI (i.e., for breach of contract;
for waiver and/or estoppel and/or unjust enrichment; seeking declaratory relief; and for breach of
duty and good faith and fair dealing) against the Defendants are not meritorious, such that ECF
and TCI should take nothing against Defendants in connection
action.
pleaded causes of
The amount of the Judgment in this case as to (i) pre-judgment interest
accrued between May 13, 2004 - April 14, 2005 for
, (ii) pre-judgment interest accrued
between March 23, 2004 - May 26, 2005 for TCI, (iii) the amount of default interest that accrued
(per Conclusion of Law #15) and (iv) the award of attorneys fees awarded by this Judgment to
ORlX from both ECF and TCI, shall all bear interest at the post-judgment rate of interest of 5%
per annum from date of Judgment until date of payment.
24. All costs of court spent or incurred in this cause are hereby taxed and adjudged
against Plaintiffs and Counter-Defendants, ECF and TCI, (allocated 50-50 between them) for
which let execution issue.
Signed this the _-'----'=__ day of February 2009. n
~ ~ - -
Anne Ashby, Judge Presiding
APPENDIX
TAB
"3"
IU\ FH\F and in pal"L\FFiRM in part and Opinion Filed Ikcember :W, ::01 (I
in The
([ourt of Appeals
District of Qlrx4U'1 at
No. 05-iN-(HHloo-CV
FCF NORTH RIDGE ASSOCL\TES, L.P. /\ND Tel 9033 WILSIHRE BOULEVARD,
iNC., Appellants
ORIX CAPITAL MARKETS, L.L.c., U.S. HANK, N.A. A/K/A BANCORP, !'l.A., AS
TIUlSTEE FOR THE MORTG.\GE PASS-THROUGH CERTIFICATES, SERIES 1996-
C3, AND \VELLS FARC;O BANK, N.A., A/K/A WELLS FARGO BANK, \UNNESOTA.,
N.\., AS TRUSTEE FOR THE !\10RT(;i\.GE PASS-THROUGH CERTIF!C'ATES,
SERf ES 99-Cl, Appellees
On Appeal from the !J4th .Indicia! Histrict COUl"t
Dallas County, Texas
Trial Com"t Cause No. 04-07956-G
BcCore Justices O'Neill.
Opinion Justice M
Born 'F ()()3."\ i1shire Bou 1nco COI)[eSl
the I and factual the trial court' ing that and
h,-p,){'!'P,j their loan
not procLJri led telTori
securJng the trial comt' calculation of default interest, and
I chal .ng. as servicer, to sue breach ofcontracl.
c a rnl tnal lh de It interest
Badq.:rollud
'I the owners u( COI1lt11lTCLl! !'l'ell csl:ltc
YIn [hi Texas, which is Income
ng huilt in I ! ')()()s :lIJd Iucated within a C 1111 of Dallas len a and
u!'rolilld II1g olfice towers, IC'I was the owner or the Wilshire f'vlcdieal Bui Iding in I.os
('alif()lTli:l, winch IS loc:!led less than a nli1e lIulll Rodeo [)rive in "{i've,'I\; Ilills, andre 'I share
I he S:lI11e pri nc ipal :lI1d, dlJ ri ng the re lcv:1l1 t time, the S;llllC propert y man:t gement comp:ll1y, Pri me
Ineon1<..' Asset Man:tgcment, Inc, Prime cllso functioned as their eontr:lctnal advisor. responsible for
risk loans origin:tted in I ()<)5 for the apartment property and 1')<)9 1(,)[ the
medical huilding,
F3uth loans were pooled ;l1ld securiti/ed after originatlon, becoming Commercial M
Backed rity loans (Uv1F3Ss),I ORIX was the servicer on behalfofthc loan pools' trustees
both :mc! was there!(HT rcsponsi hIe !()r coI ng Iy payments of principal and interest,
the property was ,w,'",,,rly Insurcd, ;md ",tIn'cc,',n" :ll1Y issues of default under
the documents,
The rcquired speci li insurance on the properties, ineluJing "al
Illsurance," 11 insurance covers any perlinot specifically excluded in the ley, Trilli(li
Indlls, , 11](' I'. IllS. ,J Ill" () 16 F,2d 2()() n 11 (5th Cir. 1()()()) At the tlll1C or the loan
originations,llel FC 'F's nor 'leTs alsk policy ex,ciIIClc'(j {""\\'i"r",Ui" causc(J acts
( "
IV;1111;1, inSl!IdnCe COlllp;mles, Including thosc I'or [< F ;ll1d ! 'I
tcrrorist ;lttacks.
In ;1 SlT1CS or letters nnlllg in 2002, III F' and I ('crt I te1TOri Sill
IllsULlilce \V;IS ITCjLllred under Ihe relevant luan documents. "Certllied terrorism IIJsurance" IS
coverage Il)r certain tcrrnrist acts that heen certiried the United States
0(' rl'1 ., n! 0
In concurrellce with the I !nitcd States orStateand /\ General under the TerrOrism
Risk Insurance Act or 2002, 15 usc. C/OI Note (the TRL\). The correspondence continued,
with ORIX sending "final notice" to both ECF and TC'I in 2004. andrCI shared the same
prinCipal and risk management and there received the same inll}rmation on the cost of certified
terrorism insurance prcmiums purportedly ran as high as al1nua I The loan halances in
2004 were approximately :5 million for FCF and S6,() million fl)r TeL and both were umvilling
to ohtain such insurance. Evidence at trial showed that ohtained ac
insur;lr1ce. the annual prelnilll11S would have been SI,412.40 I.
When and 1'('1 reCused to obtJin certified terrorism inslILlllce, OR! X declared defaults
under the loan docurl1ents, F and Tef responded by filing suit against ORIX for or
contract and dec X answered and cClllntercl al ng breaches or
cOl1lract and ,',.,n",('j,'ng;I dec"n"n,nn
and Tel had breached the insurance provislOns in the
evant loan dOCUlTlents t interest date of the al it
received the counterclaim, elected to olTits loan. In connec!.lon fT, Ii rst
obtai certi fied terrorism insurance in '12005 an annual premium J,
the interest under Ahout the same time, to have
another assume its loan, To {'nn,l',if>lf> the aSSlln--,r"u"n de It interest under
II
ORIX h;ld aCljlllred [CT' loan fonncriv held
S.I{;l ;md ,IS hoth the U\YlllT and scnlcer olthe loan. Yet Wells still held Ts
;lnd Tel ;Hldcd ;t defense Ihal ORI\ did Ilut have standing to assert any claims against Tel. lhe
trustees on,.,,,,",-,, ()RIX's al ions and asserting ()RIX had the to
recuver def:lltlt Interest and s attendant 10 enfiJrcing s andre'I's loan documents.
Arkr thirteen days olhench trial in late 200g, the trial court renderedjudgment II)r appellees
and avv;mlcd OR1X deLwlt interest anu a s and appeal.
Slandard of R('vie\'\'
F and Tel, as the att;tcking the sulTiciency ofan adverse Ii on an Issue
\vhich the.y did not have tile hurden of' proof, must demonstrate on I there is no
to support the adverse linding. Croucher I'. (rnllf'/Ii'r, CJ()() S .2d 55, 5g (Tex. J ( 8 3 ) ~ [Jc!c
Filfers., fne. 1'. ( of , 18g S. W.3d 385, 387 ex. App. Dallas no
pet.) U ;1 no-evidence pcnnt, we consider the cvidence in most favorable to the verdict,
inclu ng every !em ( 'ifl' !h8
. 20(5). A Insu ciency challenge 'Is if there is rnore than a intilla of to
the ict. Forl!losa U,)'A \'. I'rcsl!lw 'rs (f ('(llifrilcfors,
S .2d -+ i ,-+8 T
I ()()8) (
op.). Ie the evidence 0 to prove a vilal act
weak as to IiO more than creale a surmise or suspicion 01 Its eXistence, the evi no more
than a \111ilia cmd is ly no evidence. v. C fnc. S.W.2d (d.
lcnc no L'\'llknce lli findl
!I/I \foon'. 112 S S50 (Tex. ApI'. rex ).
Discussion
F ,llld Tel cbllcnge the findings ,md conclusions requiring to 11l;lintain terrorism
Illsurance, Fe'F the trial court judgment ing ORI interest
the date of ORIX's lirst "Iin,d notice" letter. Tel further
()RIX's sLtnding ;IS the account scrV1CLT to sue for breach or contract. We begin \viih T(Ts
challenge to ()RIX's standing.
,)'/unding
TC 1 ;Irglles that ORI as the ,nflrl.,"",, serviceI' and not the s has no
standi ng to sue TCI. ORIX responds that the pool ing and servici ng agreement (PSA) hetween it ,md
the trustee oflCT CM convevs to sue for defiwlt or the documents.
Standing is a 1'1),,",1)1,.',,1 matlerjuri on. Tex.Iss '1/ V. Tex. . 1ir C'ol/fro!
Hel. 852 S. VY .2d 440. 445 1
1
)1)3). Whether a trial court has subject matter junsdiction is a
matter oj'law, which yve review de novo. ,S'ee at 446; sec Tc'x Dep 'f &
133 S.W3d 217, nCl (Tex. 2U04 a plainti rf possesses ,,,,I,rlO to assert a
lar clairn onthe pil;;J(Jled and the c;wse of action 'lcC',>,"Iicd
LLC. 178 S.W.3d 853 (Tex. pp. Worth 2()()5. no ) D.
ullcer ( 'il'. . :::00 I Vvc construc thc tion i r
the p lC\V the entire to determine if any
. 1ir ::: s. ng on
has a lTicient lp Ith the as to a 'able interest in its
fllilcomc," 11i',fllI ( '/ r I' ! () Ii I I (), liS
IWill. \ Jilt I{ R \1\111 ,\ Idv1 1< 1< K I, 1{lldl'l, 1111.&1<./\ 1,1'lilIY I
I' C[111: I)I'I{()CII)! 1<1:1'1 II I,". 141 (
\io It'X:lS else llJrl:ctly ;Iddre'.;ses ihe.;landing qllestJol1 before this Con ORlX
uks OR!\' ( "lllllill iI/urAd\', IJC v. j,u Illlrl'l !llnlor .lV, .2010 WL
III ;ll 7 l) (Tex, nloni,) ug 25,20 I0, . l'i the court
concluded thcr record cuntamed snri'icicn! eVidence ORiX C;tpital IvLirkcts proven its ritlht to
enforce a nole as the current "special and pursuant to :l servicing agreement cOlltaining
Similar 10 the PSA in Ihis case. Reeentl ,a appeals court addressed the very issue
of whether a mortgage serviceI' had standing 10 pursue claims agaHlst a borrower an al
under a mortgage loan to which Ihe servicei' was not a ,','ce ('IY( ,Issei
I', /III'""n l'roj7s., jJ(', (ll () l,',:-;d 4()7 (7th '1'. 20 10),
In ( Ihe court ressed hether a Illorlgllge serviceI', C W;iS enll
to 'ng SUit and its 1",""("- tenant for moneys the
lcn;ll1t paid the landlord in settlement of a separate dl at Examining the
,("'\!Ii'/'" S role in administering 3 seCllr1 . the court explained how a "serViCeI'
must ha all the Interests 0 the dliTcrenl tranches as cletemlllled
.. Iii. at 4')(j SOO. The court turned to the of ith its
trustee, stating the serviceI' is the trust's lectioll heea It I. have I power and
,Iuthon actl alone. to do or cause to and all In such
and ,Idlll nistrati "vhieh it ran
or n to It! ,It ons l!l na I),
/\eeording 10 the court: "There is no about Arllclc IJI mg l!1 thi case f a serviceI'
lit IK'CIII it
['he cnurt nc t lurncd the Issue or hl:illlT C in Inkrcst.
U/'/tu!, ()II) F. dill SIi] .1!11ining C the COllrt eited vanous provIsions
lind rcsponsibili to hrlng SUit nst the burrm.\/cr, incIlid In.':.;
to do or Cllu",e to he done Ilnd ;tII things It1
connection with such servicing imd administratIon It may deem necessary or " !t!.
trustee Iliso \vas ohli , al Ihe s \\TIUen to execute any limited po\vers or
iI!torney 11I1d other documents furnished the serVIceI' and necessary or ;lppropriale to enable the
servicer 10 Clirry out ils lUll! IIdrnini ve dut les under the The court concluded the
trustee WIIS rcqll!red to conlCr necessary authori on the serviceI' to hri ng su i t, "[ fJ or it is
serviceI'. not the trustee. who is "llln''''/i'IPrJ 10 decide \vhether to slle." !d. ing the n
the serVIceI' to sue in Its o\vnnllme. Ihe court "!T)nl,,,,, ;:cd the !()ilowlI1g
the requ' consent when suing pursuant to serVicing """","
!vV!lth()Lr( the Trustee's written consent, "exccpt relates to a Loan that the ...
Icer.. I ser\ICII1!:' to i representative es herel11 (1I1 which case
such serviceI'll gi Trustee of the ll1itiatlon I, shall not]
in!tlale llI1y action, sllit or
indlCllill1!: the" .. Servicer's ..
tInder
capacliY
Trustee I1dlTle WI
cun iI1 I o\\n !lame if the suit relates to
a loan th:li It trustee
representati ng t!JIltn IS not 'In')f'''''! ifit is
regard to a
ltisthus
(/iu!the Ii
, undcr the aLJ:reC:HlrCll,l, who
lind trustee d hen the serv
dUll ill) 1'j()vl,k fhe Ilriti;:llion trust Iiolds mere! the h:tre
lit Iloollnh' :lIId ScTviclng i\ del what IS ellective\ equit:thlc
uWllershl1l ul till: bll1l alhelt lur eVl:nlu:tl dlslrlhlll Jon ul'l to the mvncrs
uf (lie Ir:lIlchcs ul' Ihe mort kl'd Sl'Curlty III :iccurd:lIlCe \\llh their
to the senieer. 1'01' that in dCClding hat :lction to take Ith re to a
scnlecr to consllJcr 1 ing interests oCtile O\\/I1crs Crf
dllTerenl Ir:lllC!1es 01' the seeun1
II!. at 50! il2 (inlcrnal l'il:ttlons en1\111a:;IS IJ1 original).
the I:tngllage ufORDCs PSA is :lImost Jdcntic:tl to inCIVCUpt IU/. ;\ gives
ORIX "I'ull power and authority, acting a tu do or cause to he done any and all things III
connection with such servicing and IJdrl1inistralioll \vhich it may deem necessary or desirable,"
Similarly, the trustee IS reqllllu! to support ()RIX's to service the pooled loans: "Trustee
shall execute any powers or altorney and other documents dehvered to it rORIXj and necessary
dppropriale to RI as the case may to carry out its servicing anu administrative
duties hercunder . " Further. the permits ORIX to institute la\vsllits 1I1 its own n:lIlle:
"without Ihe Trustee's 'vvritten cons,cnt X shal I not 1ex as relating to a Loan
\vhich as appl IS servlclI1g """'''T''''! to fits] 've duties ate any
action, suit or proceeding solely under tlleTrllstee's name Wl indicating X']
representatJve capaci .. ," \Vc therefore conclude under same reasontng as Il1
ORIX had ."'.lIlU'''' to hring this lawsuit agalllst name as servicer.
Terrorism II/SUFallCe
Having concluded turn to the questioll
and were cOIJlraclual oblIgated procure terrorism insurance. In response to and
Ihe 1rI III c() urt s J I J( I
I X l'lllHcllds 111:11 i
loall duc lImcnl s "nt Ill:r ills uri Il1 Cc" Imd "J II, IT,; I-; In su rl illCC.
I umlcrs!;lnd Inns, we Ililil ant 10iln
documents Our prilllilry concern in cnl\II'ilCl int IS to ascertain the determine
what
ions lire I,n,n",.", onlill' ( ukcr l'. CukeI', (l50 S WI 391,
\Vc e'.ilnl1ne ilnd con.sider the entire \\TIlIng as a whole to hlinnollizc and givc c to all the
prnVISIOIiS so lhatllone will be rendered rneani Iii. Terms arc given their plain, ordinilrv, and
generally ilcccpted mc;ming 1!l1lcss the instrument the parties terms in a technical or
different sense. I fer/(oge !?cs . file. v. (F)9 S.W.2d J18, 121 (Tex. ] ()<)6).
We the "01 her i c of the loan documcnts first
1m: c!Ispositivc. Subsection 1 C) of s and Securi
\lorlgl!gor shalL ctt S expense, maintain in force on
lit all times v,hile this !v1 continues in eCfCct following insurallce:
(f) Such othcr insurance 011 the or 011 any replacements or substitUlions
thereof or additions thereto as may I'rom tiine to time he required
agalllst other insurable hazards or casualties "vhleh at
m the case SltllJ due gIven to
usc and occupancy.
l'sDeedoC of LA. <C',L :J and and Fixture Filing
contains a similar prOVision:
shall. at
vv'lth n"cn,pr'i
cost ;tnd expense, the
to the dUring the term ofthi
(h) I lalJcous. Such IIlSUrimCe coverages, In amounts, and such
and ;]3 may from time to tllne be required and which
are customari Iy required I lenders for sllnilar ''''.''''''>'''''C
situ;:t includi Ithout Ii coverages against insurable
111Cllldii I" oj' 11Ipk onl ,,:llnilqllllkl' :;lllkho!L: ,I Ilillll:
,It \ Illi' ,.nc' cOI])ll]\lili I ,1C',dlnsl IlIId"c:nL:rllilv 11\llil;J!Jic,
it hOI II0t L Ihe contritets i ckar: ORI.\: tiS rVlceT
Il'quile U T' llIlell('l to uhLlIfJ C'lT1illl1 IfJSUrill1Ce as cert I lied terrorism insur:mcc
,(
Ii
'.;uch 111SUrllllCC I cOlflmonly Insured against I"or slllliLtr n1',""",-j ill I
c'
,>l 'F Ilnd I
do not chid \vhether ceTtl rll,'il terrorism insurlll1ce WIIS "generdlly aVili argue
terrorism WliS nul "coml11only ITlsured against" !()r properties 'Imbr to the apllrtment properly or
medical fhelr hurden is to demonstrate there IS 110 cVidence to
cerl i tied terrorism insur;mee WIlS cornmonly i against Slllli situdted.
During the course or the thirteen-day tnal, Ol"-(lX primari relied on a survey
published ill June 2004 the Bankers Association, rhc BA was conducted in
response to a the I nitcd Slates to in f(mniltion ng the
n:CIA !n ils survey. over I' ) commercial and
, rarmly !pans across 111 ajor in vestelr cIasses ( B Ii fc companies. Fannie f'vlae,
FI-LA and ot with 1mninlal banks and savings and
avcrage loan sue being 1mII ion, Of the () billion commercial ilnd mu
the tn'>t'" ,'t terrorism insurance \vas r::quired of sl ud i
Il1vestor Of ser\iJcer the terrorism insurimce was in ror
terrOrism insurance ,vas required ror I o balance scrv
affiliat rhe press re SUtr1ITl;lr1/ed the results
across l ,S:' and stating ical that
coverage IS not 'ust n,",',nl'!'lICS hut across the
re
commcrciaLmul ti 'Jy real estale
thl 1\/1 HA IllrtlllT CXplOrL:d ORIX' conclusioli tli;l!
l'crli1icd krrorlSIil IIiSUr;l1lCC \\:IS comllHlniy 1!ISurn! to the
Ilpartment and mL'dic;il huildinil' In Iiddl to the conclusion terrorlsrn Insurallce liS
or the ! X' S ex perl 1csli lj the survey was statistically
reli:lh!e over 12 coml11ercial and l11llltirlunily loans \vcrc SlI nationally Without
restrIction to spccilic gC0i:'raphie:l! local ions, lX's expert rurlher lestIfied that hecause or the
n;ltional (()CllS orthe survcy, It necessarily included properties 'mibr to the mcdicil building and
the dpartrnent property,
Other eVHJence admitted at trial included a January paper published the
C'ongression;l! Budget Ofljcc entitled "Federal Terrorism An Update" and a report or
the Lrnited Stales Department oCtheTreasury entitied, ";\sseSSlTlent: The Terrorism Risk Insurance
Act or2()()2," These reports corrohorated the rindings reported in the MBA survey that B
almost ullJi(mnly required terrorism insurance, The survey was Cl in the paper for
the cone Ius ion "n,''-'"'''' al I 0 Cthe OlillirJC('S sen Iced CM segment or the
commercial/llluiti Cam' rnortgage rnarketwere required to tenorism insurance in place,
Further, the CBO paper included re l'l">nC'F' to "one recent deaL i ng a S13 billion
('nrnl,ncO!'1i 01' IO() loans and 120 (includmg :I number 01' retail ShOpplllg malls across the
country), [Ill which) ()97 ng the eM terrorism insurance in
" In the c veness or the TRI
orpo ;md insurers
almost I, I miliion orgallllations markets
thai \\ere "nC("'T1",,'n) and had at !c;lst ten
i11 21i( l!Jelime
Ies, results were refined 10
proPlTtlCS with ;lCcrnenl V;I!IICS undcr ) million (the v;l!llCS rur the dpartlllent
ieal
:;;llIle plTiod, take-up r;lle::; for polic as
risk cit ICC; the Dcpartment oj' Homeland ,-","11"11 such as Los
Angeles, Results were segregated i'urther hy Illtiustria\ sector: husiness, which includ'_'d industries
In real eslale ;Illd rental dnd leasing: pro """'''''''''1, sClenti lie, and technical scrvices: and 1l1anagement
of comp;lnics and "lll"rn,-'scs had;1
Althou :.;ome orthe evidcnee did noi re 1UO'j;, terrorism coverage. more th;tn a scmti l1a
of evidence supported the trial court's findings that certified terrorism insurance was commonly
situated il11 to the and medical kfing:
and 1l1llitifamilv n'-",ni"'11es that were collateral securitized simi jar
repl:lcell1cnt values, \vere in dic ind sectors, and were located in Dallas and Los
S'ec. eg. !1FP Park Co
]' (
C _12 A.D.:\d :\32 (N.Y.
App. Div. motions, the lender did demonstrate that the risk \vas 'common
insured agamst: It was not necessary that the he uni II y lI1sured a.L::llrlst, so 'nUfT
demonstratIOn that some huildings in anhaHan
on thi issue.").
not have terronsm coverage was not dispositive
F and no e\ Idcnce stati cs. instead contc:Jl(jJn the
cCHmnonal anal in context was mappropnale loan
1'l,lt.:"
trill/cd the l1111l' U!' \ illnn. II
her lLH1C,(" C nlllcd llh ClfCHinst
1'l9)lJrl')')').thctli1leO the I he c()ntr:lct and i 11 the
II1c:;ur:I1KC" :IS may 110111 tnne iO lime" he rcqui which "at the I in :Irc cornmon inc:;ured
y c:;itualcd ,\ the c!:llIses arc not IdenticaL In malenal n'c:n,"'\
reI likewise W:IS required 10 IYlainLlin such "oth:! 111SUr;11}C .IS Ina y me to tIme" he
required. whIch "lit the time" :liT ,'n"""nn insnred aplinstand lyavailable. Located at the
end oCtile sectlOilS diseussll1g Insur:mce requirernents, ,md f;Jlkl\ving thc prior subsectIons detailIng
speci lie requirernel1ls, the "other insurance" proviSIOns or hoth and TCTs loan documents
effect i Cunction liS "e:lteh-all" c!:luses that prOVIde the knde! ihili
unforeseen Clrcunlstances or insurance encountered during the dural ion oCthe loalls. I
:Ippellants cO!lceded slich ;J chllraelerI/.atio!l: at re to the "ulhe! 1l1suranec"
as "calch-all" :mel iants' j nsurancc ex Neither the contract no!
the testimony F's lInd T(Ts contentions the must be
to the circumstances at the or' origination.
Nor do F r conlention IX \vas requIred under he terms of the
loan documents to engage in Illdi iduaii/.ed ('n,ntYtnn ana fied
no in the a rcquirC'111cnt and the
Silll;',ltCtI
eli a. condltl()n to dc;tcrrninlng
commonly requI the
requisite cOllchtional it not ilion lender rJ
,_' ;!lj(lIlOIlUlkd
lude F(F ;lIJd l( I f;llbl thclr hllrdcll 01
IX cou urHllT the lthcl' IllSIJLmcl:" pn)vI lOllS f the
loan documellts, require cenilled terrorisml!1sUl'ance, 'vV also CUllcl evidence is I and
!;lCtually su Icicnl to support the trial court's lindillt' that hreached their loan
llut procuring the insurance on these conclusions, we nol rClch the
ITlnalnll1g Issues Ing the "all-nsk Insurance" pruvisions, '>'cc' TEX. R. ;\Pi>, P. 47, I.
('II Ie1I111! ion In!eres!
FeF ;tlso conlcsts the trial court's fmding default interest accrued from fvLJy j 3. the
date oCORIX's first "final notice" F asserts both this Idter and a July 14, 2004 letter from
ORIX gave additional cure periods and any deLllIlt inlcre';t must calculated the ex
of the last cure J ulv 1<),2004. ORIX r("'n"111 that del' Interest is due i 11111\-(" cll.\-d upon
and ;ll1V cure iTered in Its letters do not alter the 1'1l''''''''<1I' Ul1lents.
()ur ;I!la or the loan documents ns with section 3, of the note, which proVides:
It is y that" should any other de occur under any or the
l,oan J)UClllnents which is not cured \Vln appl
a del;lull shall exist hereunder, and in evenl1he i
including ;i\1 sums adv,Incec! or un<L:r under any other Loan
Document. and ,!II d interest accrued shall at the
wl!huul nut Ice to Borru\ver. ;It once and may
ith,
on 10
as ailV all eXI interest
be IIl1lned i
c IS 111 F's
nOlC. F3ccause the nol contains nitlon Cur a to that ,'-"111-11\
":\ rld:lldl he:rcundcr which hilS nol he'ell llli"l'd

I)oCUl11CIl1s"'-\uhsection:2 1(hi pnwldes "'The occmrcncc or:l1lY oj'the jid events shall
It Calls 10 Ide insurance :is requlfTd Section .4 r.
and such Lui ure con1 iIlues ror Ii ve ('i) alkr wrinen notice thereor Irorn IORIXl 10 I
! ,,-+
j.
I (\ determine :lccrualcbte le)r del;wltlnlcrest. we must ,-"""1,,,, v/hcther a "dcf;H1H" eXists
;IS orthe d,lIe of'OR1X's "'(lnal notice" tklt FCF must obtain certdied (crrorism Insur:mce, or oilly
upon the eXpiration oLmy cure pcnoe!. The plain language of'the note states defaults exist after
expiration of the cure period "should [al dcCaull occur undcr any orthe Loan Documents which
is not eured within any applicahle grace or cure period, llLell a default shall exist." (Eillphasi
added.) Su ion 2.1 (b) of the security :lgree11lenl plainly sets a CIIIT period--live
Considering both agreements together, as we must, IlO def;llIlt occulTed under the note until
expiration ollhe Ii cure period. S'cc ,ldolllS v. Firs! ;VU!. Bailk 154S.W.Jd
8hi) ex. App. IJallas 2005, no
together)
) (op. n. )(construi ng prornissory note and deed 0 ('trust
ORfX asserts the language orthe loan documents making any interest "immediately
due and '''''''ll'''' no cure he interest accrues. The loan documents nn,\i,tlp
se. ly, section 3.3 the note fining the rate default interest ,,(\nli'nonl,t
existence 01' deCiwlt ailer which c!ef:wit interest accrues and all immediately and
" 13ecause a f:iult exists on upon Ihe ion of the Ii cure no de It
mterest hi'('(\n11'0 "Immedi due" untli the cure expires. c)rtglnal to
II
!kd io 11LlII1Llill 111S1JrllilCe, Illev would !111\( do!w so.
ulHkr the loall that
Ignollllg I!1C';c IfJdulgcnce:; calculatilli' Ihe dlnOlJllt of' ;udt
!Iller-cst. the trllt! COllrt \'c( seclion+ I ClfFC F' u\vn note states speeil-Ically any indulgences
granted by (JRIX shall not he construed dS a w;lIver of its rI ORL\ had the right to
indulgences and l'.':lensions under the loan docurnellis in an eff(lrt to pnlvlde lime Illr F to cure
its dd;lUlt reeF rclused any Iltlempt to ellre until April 01' 2005 vvhen it SOllght to payoff its
outstanding 101111 h;JI:lI1ce. Jlad F' cured its dd:nJlt Within the time periods III by ORIX, no
deLlUlt would have OCCUlTed. Because it did not cure, OR DCs indulgences did not prevent ORIX 's
n to collect dcf:lllit interest pursuant to the first "final notice" letteL We conclude the trial court
CITed when it dwarded dcf'ault interest li'OIl] the dale of ORIX's corrc:sponelel May IJ,
w1thoul :lI'I"\I,nl 1he Ii cure ulllkr
0[171'1' Issues
loan documents.
also identified sub-issues in its hriefas 10 appel breach miti
of damages. Tel similarly raised issues regarding mitigation and the
essential clement and I ,hd nol brief any of Issues. the
Issues ~ l r c W ~ i 1 will nut them. TE\:. R. ApI'. P. 38.1; see also
\'. SwrC,
1,(;\,\J
1 _ ,.). ~ 71 (Tex. App. Dallas :2010, peL dism el)
it waives the issue on .").
lih
Conclusion
r l ~ \ ' tnal c O \ l r l ~
uli to ll1clude the Ii
I ;1 Irrncd III :111 (jlher respl'ets.
()()( IOh()F.ll( I)
]"7
JUDGMENT
LCF N( )1(111 RIDe;E .\SSOCIXfTS, L,f'
;uld T( 'I 'HfU WI LS!! IRE LH H lEV/\RD,
INC, ,\ppellants
C)RIX C\PITAI, i'vlARKETS, f .. Le., U.S.
HANK., N.A a/k/a U.S. HANCORP, N.A.,
:IS Trustee F()R III E ;\;l()RTC/\(;E PASS-
I][ROI1(;][ CERTIFICATES, SERIES
I and WF:Ll.S 1'/\1\ BANK,
N A. \VL:I.I.S F.ARCiC) HANK,
MINNES()TA, N.!\., as Trustee FOR Till:
;Vl0R"!'(j/\ (; L ~ I'ASS-'rll ROl.Je; H
(TRrrr;lCAITS, SERI ()()-CI,
:\ppelices
Appeal frorn the l34th J u d i c i ~ d DIstrict
Court ofT)all;ls Cnullty, Tex;is. (fret No
04-07956-C; ).
Opinion delivered hy Justice :'vlurphy,
Justices C)'Neill ;ll1d I ,ang participating.
Hascd 011 the Court's opinion ofthi we REVERSE and REMA;'\JD the trial court's
JUdglllllnt regllnling lllllnUlll ()fdcl;JlIlt Illlerest llwarded to appellee ORIX Capital Markets,
LL,C. llgall1st llppellant EC'F North Ridge /\ssociates, L.P. to include the five-day grace period
followlIlg i\;lay I.\, 20()4.
We AFFIRM the court's .J 1 in all other rcspe(:ts.
It i:: ORHERED that each its own costs of appeaL
rhe ohl of llppc!LlIlt I' North Ridge Associates, LP., as principal, and Fidel
and DepOSit Company ofrv1aryland 01']910 Keswick Road, Baltimore, MD 2J2.03, as on
appellant LeI" North Ri Associates, L.P.' hond arc RELEA.SED.
lUIO
APPENDIX
TAB
"4"
IH \ FRSV :lIld HF\I \,,1) ill p:lrf. \IHH\I in part and Opinion Fikd .1:lIIl1an Ill.
In The
([011rt of Appl'abl
lfiftl! Di';.;trirt of ITl'xa';.; at Dalla';.;
"n. 05-09-00066-( ..v
VCF "ORTII RIDGE\SSOC!\n:s. L.P. AND TCl90]] WILSIIIRE BOLLEVARD,
INC., Appellants
v.
ORIX ('.\PIT.\L \L\Rh:.ETS, L.L.c., L.S. B\"h:., !\i.\.\/h:./A BANCORP, N.A., AS
TRl STEE FOR Til E \lORTG.\GE P\SS-IIIROlJGII CERTI FIC\n:S, SERI ES 1996-
C], .\ND WELLS F\RGO B\Nh:., N.\., \/1'./\ WELLS FARGO BANK, \IINNESOT\,
!\i.A., .\S IRLSTFE FOR TilE \IORr<;\GE P\SS-TIIROlJGII CERTIFIC\n:S,
SERIFS 99-CI ,\ppelkes
On Appeal from the IJHh .Judicial District Court
Dallas County. Texas
Trial Court ('ause No. 04-07956-G
OPINION
Hl'!lJ!"e JUStiCeS (),'\eill. \Ill
()pllllon By .Just ICC \1
Ihls ('ollfl S 01'1111011 <d' Ikc<.:mh<.:!" 2(), 2()!il IS Ithdra\vll 011 uu!" (1\\11 l!lotlon. ,lI1d \\e
,Inti l( 'I ()I,
I ,Inti I u:l! su ICICIlC to
SII nolprOCllrJ
cerlltietllernm II1SI1 on I he SeClIfll1'-'. til<':l!" dehh. . I(T:lppcals thl' tna!
I(! ,:hal 01< L\ ( \1;1
I <I,Iil' 1"1 ,kl:n!it 111ll'lc";1
Back:.,:rollnd
pI"! )per! les It' I ,1\\ Iwd t he '\it 11th 1\ I .\p:lrIIlh:lllc; plnplTty III I)ltllas, I"cxas, \\ 11Ich IS In'" Illcome
SlliTntllldllH: 'll!ice ttl\\l'rS It'l W:IS tile tl\\nl'r nl' the \VilsllIll.' \kdic:tl Blilldlllg In Ius Angeks,
t ':i1I/(lrlllll. \\lIlch I.S lucalnl!css Ihall amlk l'nllll I\nden Drive inlkverlv 1IIIIs H'F ,lI1d It 'I shale
the S:If1lC prlnClp:tl ,11)(1. dUrlIlg the re!c\11l11 IIIlIC, thcsaIllc propl'rly lllaIlage11ll'llt C0l11Pl1l1Y, Primc
Incnmc Assd \bIl:lgcml.'nL 1Ill'. Prunc ItiSO l'uIlcllolled liS Ihclr cOlltractual advlsnr, respollslhle for
Ihe ,lpaltl1lCIll property ,lI1d I ()iN !lX rhc
medlcil hUlldmg.
Hnlh IUllt1s \\ ere pno!cd 1111d sCl'IJrltl/l'd II/ler ongll1:IIIOI1, hccnllling ('OIlll11Crct:li \lortgllge-
H:llkul Sl'C 1011ih It \ 1HSs} t lRI:\. \\:IS the sen ICl'r nil hch:t1 f ,) f 1he luall pnols' t ruskes for
hoth IOlll1S :lI1d WIIS IIlcrc!(lrc rl",pnnslhlc !(Ir colkcling mOllthly paymcnts ofpnIlciplti :lI1d illtelest
IlloIlltorll1g \\ 11l'lhn the property W:IS properly Illsured, :lI1d IlddressiIlg llI1y issues nf def:lltll under
thc IO:tll doeulI1ents
Ihe 101m docul1lellls leqlllrl'd speci fil'd InSULlI1Ce (m the Includlflg ":i1I-rlsk"
IllSULll1Ce "\II-rlsk" I ,rlmCl' cmcrs IInV I not Spl.'cl!iC:llly excluded inlhe policv)'cc
i li I 'lUI li
I) ( "llld 11II:i1 1\'nllwh,1I1I,[, InSllr;U1Ce UHnp:lllleS, thosc IlH' I( T :l11d It'l.
IlhUrill1Cl' \\:IS 1,'quIIClI undcr !he le!cv:lnt lu:m documents. "t 'crll11ed terrorISm InsuI:mcc" IS
l'U\crll!.-'C fi lr ('l'lLII n terrorist :Icls that haVC hecn ccrt Iii ed hy thc l Jmted Stat cs Sccret :lry Ut' I'rc:lsury
III conCUITl'llCc \\ Ith thc ['nikd States Sccretarv orStak and Attorncy (i,'neralunder the TerrOrIsm
Risk Insur:lIlec\ct 01'2002, Puh. L. 107-2<J7. 101IOX, lit) Stat. 2.'\22. 2J22 J(j (2002) (the
IRIA) Ihe correspondcnce clH1tlnued, With ORIX sending "Iillalnotlcc" tu holh ECF :lI1d Tel in
2004 I( F ,ll1d Ie I sharcd the samc prIncipal :Ind risk 11111l1agcmcnt and thereforc ITcclved the samc
mf(mllatlon on Ihe l'OSt l)r certlflcd lerrOrISlll II1Surlll1CC prellliums purportcdly rim as high :IS
IOU :lnl1lI:l!lv. I hc loan h:l!:l11ces in 2004 \vcrc :lpproxlI1ukly S4S millIon Illr H T :md
nlllIion I(lr It'!. :md hoth wcre unwilling to ohLlln such Insurance hildcncc at tnal shO\ved that
Iud they ohtained Ilctuallwis Il)r the Insurancc, the :lf1nual prcmiums would havc heen SI A12.40
\Vhen H T and le'l refuscd to ohUln ccrl111ed terrorism Insurance, ORI$ declared
under the loan documl'nts rCF and Tel rcspondcd tiling SUit ORI\( Illr hrcach ur
contract :ll1d dec ,,"d, . n' lel!er ORI\( :lIls\vercd 11I1d eountelclain lIcs 0 f
contract and Il ng I! lk'clar:ltlonlhat F:CF: :lIld 1('\ h:ld hlc:lched thc lI1sur:Il1CC Plo$s)ons in
documcnts and h Once It
recelvcd the counterCI;JIIil. I( F clected to pity olTils IO;In. in cunnection \\ It It till payuli'.
,
.'
F first
!I (kl,lliltllll 1IIItkr pr'llc,t \!lollllhc,lllll,' [lll1l', i (i \11 It ,ij\llIll\,t1 110m (n<l\ 10 1I,I\l'
N :\, ,L k ,I \\;\,lls FIlrgo Ibnk, \llnnesoLI, N ,\, liS lrllstl'c l(lI' Ihc i\1 PIlSS- lhroll!:dl
(','1tllll'liles, Serll'S ')')-( 'I PrC\lollslv, III 2()()(), ()RI\ hlld Ilcqulrl'd I( 'F's 101111 Ilml1erlv held hv
is ,I Ill! \\ liS hot h the o\\n,-'I' Ilfld scn Icer 0 I the loan 'y' ct W1'Ils Fargo sf I II held T( 'I' s !olm,
1111d ICI lidded II delense thlll ORI\ did 110t hIlVL' to assert Ilny claims TCI lhc
trllskes l'sSClllllllly PllfTollllg ORIX's .llkglltlons lind IISSCrtlllg ORIX had thc rt to
rccener deLlIIllllllL'rl'st IlI1d lltlornl'y's ICl'S Illtcndllnt to enl(lI'Clll" E< T's Ilmll('I's loan documents.
.\ llL-r Ilmleen dllys ofhcnch Inlllll1 IIlle 2()()S, the tnal cOllrtlcndercdjlldgmcnt Illr llppellees
IlI1d 1mIIII led ( )RI \: de Lillil Illkrcst llI1d IltlorneV' s Ices H T Imd T< 'I appelll
Standard of Review
For thclr Iliclellcv chal rcF 11m! rCI mllst demonstrate on Ilppclli there I no
(Tex I ')S,): l'I'/t' j)Olllilll!,liC Filicrs, Ilic. \' ('!JUII!\ j),i//us, ISS S Wid S5," 7 ( lcx.
Did I;IS 2! ii 1(1, IlO ) i nder lillo-evidence POint. wc C(IIlSlder the eVldellce In the Ii t most
I'avorllhlc to Ihc \crdlct. indlll Ill! every rCIlsollllhlc Illkrl'nce III
illsulll Il'ncv (lit! If thlTe I more thlln 11
sClI1ull1l 01' C\ Ilk-nce to I hl' I t. !'UUlililll I)/Ilsl/(s (}rp ,">.1 \' I'rcsu!w r.1l1!, rs cl':
('olllrilCllin. /Ill , I)(\() S \V 2d -1-1, '+S (IL', 1')')S) (suh op) the L'\ I dellec () I'Icred to
Id,'IKe I'; IIlI III, IILl11 ,1
'-; \V ~ d (, I. (\ '\ ( II \ I' I
\pp, I );lIl;ls ~ 1 ) i ) ( I . pct. dL'1l1Cd) 111 rL'\leWIII:.!, a (;lcllllt! slIliiCICIlCY lullell ,wc consider IIIHI
\LTdICt only II' the e\ Ilknce supporting thc verdict IS so slight. l)j' thc eVldellce agaillst It so slrong.
111111 the IllhlillC', IS 111;illlll'sll llIlJlIst and qUIlL' cleltrly wron:.!., ,)'('(' (;,ICill lilli/I'. 'I')'; SW,2d S21.
:-;2.\ (Tc\ j ')(\"\1 (iilldlllg (I1CIuldlv Illsul'iiclClll I("the eVldellce supporttlH! the VL'Illtcl IS so \\L'llk l)j'
Ihe L'\llknce to Ihc cUIIlrarv IS su oVl'lwhelllll that Illldlllgshl\llld he sL't aSide ;Illd ncw tTlld
sliliICIL'11C\ rL'\llIW, verdict .sL't ;tslde onl If "clearlv \\Tong and IIn!lIst"l: I !:tIL Slillldlln!s rtf
Discussion
!c!TOl1SIl1 111SlIrallce, !'( T
Illterest 11111 \1
se1'\1 'I to hreach o(cul1l n 11 h
j( 111'1 IILI! ()I<I\. ,I, II 11Itl1l".,1
I (
c:d matter jurlSdlctlul1 IS ;1
I'ur/,s & II iii/I,!,' \'
\/mIlU/'/, I" S 21 . 22(l ( rex. 21){14). \Vhelher;1 plall1tlll to ,ISSlT! a
particular Lilin depcnds lin the Llcts plc;ldcd and the CIlIS(' ()f;lction asserted, ('\cr,,//)' IX /l///O,
/.J(', 17S S W\d S-+-+, S'i1 (Te\ App I'ort Worth 2()()5, 110 pCL): scc Ifisil "If) .lfll!('}SOIi
('lfflcer ('/r \' !luli, 52 S W 'd 7()4, 71 70S (Tcx 20()J) We conslruc the petItlOI1 111 1:\\ or of
the pk;ldcr ,1I1d, If Ill'Cl'ss;lry, 1'C\iew the el1tire record to ddermll1e If an\, elldenCl' supports
),'f !,'f I,r ('ofl'rol Hd, S52 S W 2d;!t -+4(). rhe sLlI1tlIng dOC!l'llle "focuses on whether
;1 partv h;ls ;1 reL!tllllhlliP \\Ith the laWSUit Sf) ,IS to hale a 'lustlcl;lhlc Interest' III Its
lIutc011le." 1/11'1111 ('/r \. /'Im//o, J71 S W1d S45, :\-+X ( le\ 20(5) (quoting CJ;\ ('I L\I<I IS
;\ 1\ \; W RI( d tl, ,\ lilt R R. \111 I I R, \ \; I) \1\!{ Y K;\ Y K\ '\ I, WRit d tT, \1111 I R, 8: K.\ '\ 1 1'1 1)1 R\!
ISS'), -+41 (2d cd, I ()l)O))
"\0 le\;I:; ;Ise dlrectlv the :;(;lI1dlllg questllll1 heillre IhlS ('ourL althou ORL\\
CIk'S (JIU\ \/UiJC/S. !J(' \' (If I Illili! ,\/n/or/fllIs, J I. '\0. 11-+-II').OOS/3-('V, 2t Jo WL
., I 12. ,It 'i I lex. ,\pp S;rn ,\IlIOIIItJ\Ug 25, 20 I O. I here, the
record cOlll;ulled sulficlcnt eVldencl: (>Rl\-: ( I \1arkds had proven Its n
10 ellliJI-Ce IlO\c as the currl'llt Icer" ;Ind pursuant to;1 COIlLIll1lnc>.
Sllllll:!r to tile PS/\ 111 thIS R eml y ;1 icderIll ;tppcil ('0 II rt 'd I hc \ lTV I sSlie
ll.( 'I' ('hli I' ) / '1"11(11' !I( ,(,jill '+')
Illust h:lI:l1ICl' IlllpIUtI:t1lv the Interl'slS 01 tl1\.' til lrerent tranches as deterTllIIlcd hv thclr cOlltr:lCtlial
cntitlemeIlts," IJ .It '+()') Ihe court turned to the langullgl: of' CW( 'apltld's PS:\ With its
trustee, Stlltll1:.' thc senlCer IS the trust's clllkctioll Ilgel1t because It "shall, ,have lull power alld
IIUthorltv, .tCtlllt', .dlll1e, tll dll or cause tll he done :Il1V and :III things III connection With such
:lIld IldlIlIlllstratJ()n WhICh It may dcem nl'ccssary or ,ksIr:thle," thus Illak Ing the delcgatilln
01 the truSkl" 1'1 s to the senlcer "comprehensive" Id at sou (alterations III onglnal),
:\ccllrdin\! tll the cunrl: IhLTe is no douht :lhlHlt :\rtlclc III sundIn\! Ul tIllS case 101 a senlcer
lmnging though the pl:tintlfTrn:lj' not he:il1 assignee, it has II persllnlll st:lke Il1the outcmne llf
the bwsult heClIlise It receives a percel1tage orthe' proceeds llf II deLllIltcd loan that It services," Id
lit 501 ,
lhc Cllurt ncxt turne'd to the ISSUC llr 'shether C\VC:lpltaI W:lS :I rcd III intcrest.
(II( (lill F FX:llrJll1Ing (' t;!I' PS;\ tlw court Cited vllriol!s proVlS\()l1S
Illlhcatlllt' the Iccr hlld the n lind 1'<.,";POllSlhdl V 10 hring SUII :lgaInst thc horrowcr, includi
Ihe "lull cr lilid 11lIillOntv, :ICli :llolle, to do or C:lllse he done :lnv and all thmgs in
COIlIleCIlol1 Ilh such serVIClll!.! Imd adl1llIlISlrlillOI1 hlch It mllV deern I1CCCSSllrv or Iii
Ihe trusk'e Iso '.\ liS ohll lcd, the Icer '.\Tltten request. to execute :Inv limIted powers of
,'I \ ie\.T Iii (,iIT\ illII Ih '1\ I III ,lI1d ,ldlll111hlr:lll\ l' dlill lllHkr tile 1'\ \ IIi\.' UHlrt \.'Ililcludni th,:
tile SlT\Il'lT to Sill.' Illlh ()\\lll1:llllC, the court L'l1lpil:ISI/L'd thc 1()llo\\ It1g I'S/\ 1:lllgll:lgL' C\c\.']1tlng (lut
IIIC rl'qulr\.'d Iltlstce UlI1SCllt when sUing pursuallt tn sen ICing dU(ll'S:
IWlillwllt thc l'nlstL:e's \\Tilkl1 consent. "c\'n'jlI:1S rdaks (0 a 10:111 that the
SCiVICL'!' , IS scrvlclng pllrslI.lllt to ItS rcprcsL'nLltlve dutil'S hUl'ln (In which l'ase
'-;lIch ,-;er\IClT sh:dl glvc l1otlCl' to thc Irustce olthc Il1lti:I!iOn), Ithc SenlclT ,-;hallnot I
InltI:lte .111Y .Ictlon, '-;UII or pr<JCl'nling ,-;okly 1I11lkr the Irllske's IU111e Without
IlldlC:JllJ1g the, SLTViclT'S I'l'prescntatlvc capacity,"
Iii tstatll1g ItaliCi/ed "'c\cept" indicates "'the serviccr Cilil suc in Its own na111C ilthe SUit rel:ltcs to
:1 Inan th:lt II's serVIcing, or In the trustcc's n:l111C \vlthout Jl1diC:ltlng that It'S dOing so In .1
Il'prl'scntallvc c:qJ:IClly Implying that it IS lin! dOing so In:1 rcpresent:ltivc clpaclty 11'11 is suing In
rcg:mllo a scrvlclng,rclated lo:m") (ci1lphaSIS and alteratluns In urJgJl1al), Ihe court ('uncluded,
It IS thus thc scrVlccr, lIndcr the agreclllcnt, who hilS the whip hand: hc IS thc lawyer
iflld thc cllL'nl. :lI1d lilc truske's dlltv. \\hl'll thc scn'ICl:r is carrylJ1g Ullt hiS delegated
duties. IS to proVide support. Jhe securitlntiun trust holds merely the hare legal
tltk: thc Pooling and Scr'vlclng Agrecillent dek-gates \vhat IS cllectlvcly equltahle
ownership ollhe cLutn (alheit I()r eventual distribution ulthc proceeds to the ()wncrs
uf the tranches u!' the l11ortgagc-h:lcked security 111 accordance with their priorities)
10 the Sl'j'\lcer. For rel11emher that ill decHhng \\ hat action to take with r e ~ a r d to a
deLlu!tcd the servlcer h:ls to COIlSH!cr the Ing Interests olthe oWllers 01'
dllTcrellt lr:lIlches uf the SeeUrItv
Iii at SOl 1)1 {lnterllalcl!;llIOIlS ollllttcd: emphaSIS in OrI gl11a I I
! !ere. tile nC,ll:Jce ore H{!X' PS.\ IS all110stldelltlcal to thatrn ('11'(' Ihe PS.\ ves
(J/<IX "lull pm\lT ;md :llIthori . ;JCtlllg to do or ClliSe to he done :mv :lIld II til IlC.s III
COlll1l'CllOll Ith such SCI'\'1Clllg ;lI1d :Idmlillstr:ltioll hlch It llIay deem 11,>, """"IT\! or dCSlr:lhlc,"
') 11111 , the trllslce IS reqUired to ORrX eIforls to service the cd loalls: "'Trustee
!\
lurtlitT, t 1'\\ p"'11111tS (lRI\ to iihlilute Lmsulls 111 its ll\\n i1:ll11t'
'\\ 11110111 the Illlstce's \\Tlltcl1 ~ ! C l,();,lli
\\ Inch I()I{ I \ I, ,IS ,Ippllc;ihk', IS StTVleI11!' pur-;tJ;JIH to i lis I respectIve dutll:s hLTl'ln ,
" \Ve then:f()re cOl1clude Ill1der the same n::ISOl1lllc; lIS In ('W( 'Ujilluj,
(H{I\ ILld SLIIldl11Sto hrlng tins bwsull ag:llllSt I( 'I either In ItS U\\11IUIllC ur :IS it SpCC1:tI serviceI'.
f(('(/III/"('1I1CIlI {C/,/,Ur/I/II jlll'IIUIII('('
Ila\ll1g conciIHkd ORL\ Iud standing to Imng SUIt. wc now turn to the question or whether
I( 'I" lll1d 1('1 wcre contractually ohli:,;tted to procure terrorism insurance, In response to F( 'F's and
I( 'I'sclullcu!:c to the legal :lIld factual surliciencyofcvldcnce to support the trial court' JudgIl1L'nt.
()RI\ contends lhat terrorism Il1SUlilnCe tS reqUIred under lwo separ:lte pn1\ISIOnS of the relevant
10ill1 docuilleuis "olher InSUlillll'l''' :1I1l! ",til-risk InSULlIKl',"
10 ullllerslitl1d H 'F's 11Iltl T( 'I 's cOl1tLlclual ohligatlons, \\C ill1alv/e the relevant 101111
docul1lents. ()ur prlillary concern 111 cOl1tract Intcrpretationls to ascertain the l1leaJ1lng and determine
what ohilgatlllils dre I
We e\lll11ll1e IIIHI cOl1sldcr the L'nttre \\Tttmg as 1.1 whole to harl1lol1l/e llI1d glvc erl\:et to itll thc
prC)VISIOI1S so that none Will he renderulllleiif1111 less. Id Terms arc Ulven theIr 11, ordl!larv, Ilild
"ellcLtll l1le;llllng link Instrumellt shu\\s the partlL:s lIsed tenns III a techl1l\,;;iI
()
,lllkll'li! II,nf,i" /{,\
1
j II 121 ([c'\ I'j'l(l)
\1<llll';I:;or ,ILI!L ,It \1t11tc
'
111'ur's 111:1In(;\111 III jtllTl' 11I1(! l'lTect nil thc
1)1< \ ,It ,ill lllllc'S Wlilk IhlS \IOllccll Ct1l1tll1ll\.:S Illl'lkc! IIlSllrllf1Cc:
(I) Such othel 111Slll:lf1eC pn the !Jlt1pclty ilr ill] ,1111' Ic'plllCCl11ellts Ill' sllhslItlltit1ns
IhuCi1lor ,Iddltlons theretn liS milY lrom tlillC to 11111e hc leqlllrcd hy M'lr!,Ia:;l'c
,Icc:lllhi pillcr II\SUlilhk hll/lm!:;preIISiJ:I!tll':S \\11I(:h ilt the tll11C Ille eOl11l11oniy il1surL,d
111'II1I\St III the CISC t1j'property slmI!arl\ sltllalL'lL dilC Il'g;lrd givcn tn the
,llld t\PC 'llhtlJldillgS, their CPllstltlctlnl1, Inclllt1Il, liSe illid nCCllpililCY,
[e Ts [ked pi' [IUS\' Security Agreel11cl1t. ,\ssignl1ll.'nt nf [eilsl's alld Rcnts and F1.\tllrc FIllI1g
COII(;IIIIS i) Slllll!:lr prnVIS1l111,
Horrc)\\ er shlllL :It ds own Cllst and cxpcnsc. 111111nt:\111 thc !tdlllwlI1g illsur;lllce
Ct1\el:II;C With lespect to thc Property during the term of thiS Dccd of [rust:
(h) \:IISCc![ll!lcous Sueh t1lher Illsurallce III such amOUllls. ilnd such other
1'(lrl11s ,1m/ L'lldol';clllL'nis. ,IS milY 110m tll11L' 10 lime he rClJulr'..'d l'c'IHh:r ,lI1d Wll1Ch
:Ire ustoll1anly r'..'qlllr'..'d hy II1StllutlOllil! lenders fiJI' sllllllar properties. slllllbrly
SlllllllL'd, ll1eludlflg, Without Il11utatloll, COycr:lcces against othlT insurahle Iw/ards
includIng. hy \\;11' ofexlll11ple only, L'arthquake. smkhole and mine suhsldence. whieh
;It the Ill11e arc cOl11monly insured :ulll :IV:lILlhlc
\ I not Idcntlc:tI. the f these contrac IS clear: ORIX ;IS senlcer may
require 1,( 'I" :lI1d I( '[ 10 j1htam ClTLun il1sur;lI1ce coverage SIKh as CLTII lied terrnrJsl11 insurance If
les.slrnliarlv situated. f( T lInd lei
dn not hl:ll \\ hether ccrti lied IcrrunSl1llnSilrlil1Ce \\;lS
.SIInI Lir to the ment
(lr l11UIICd hUlldlllg. !helr hurden ullder Ihelr Isu I'..'ncv chal IS to dCl1lonstr:llL'
there I no e\ Idel1ce III "''''''','U'! the :i(l\erse lindlng cLTlllied terronst II([S \\'..'IT conml\l!1!v Insured
J I ! ILti II I le'l \ liLt! II ,I( I ,II I it II II .I1d\\ Ih \ 1<.
\1111, 1IIIdili '1\ ) II t, II) 1(IHlel till' Illllllll" L !L'11i1 \\ II\! ,llhllllllll,,1 ,')'", (/(1111, ;l)-) ') \V ,'d
I ,
_.-
puhllshed Illlulle '1It),.j
IL'SP( )fISC I(l II hv I Ill' I lllkd SLlks IIL'IISIIIY I kplllll11CIlI 10
"eill'cll\l'lleSS" 01' Iile I RIA, 111 Its SIIIVL'V, Iile \lIL\ lII1II1Y/('(1 over 1.2.2,t)Ol) COllllllL'rCI;}1 ill1d
IIII II tiLun II v 101 IIlS ,lcrOSS IlUI 01 III VL'st or CI:tsscs (( '\11 iI IC COl11pltlll es, 1'1 til 11 Ie \1:1 e, I: rcdd i e VLie,
1,1 L\ ,1I1d olhers, \\ Ilh 1111111111111 rL'plL'selll:illoll comnlLTClld hlUlks Illld ,';;}VIIH"S IlI1d IOIlIlS), With the
q miliioll, ()r the Sh)() hillion ur cOlmnercial alld mullirlll1llly
sll1diedi.2"" of the 101111 mllrkct terrorism IIlSllrllllCe \VIlS reqUilul hy Ihe
Investor orse['\lcer 1\)1' (nlJ"" urthe 1011l1s, lind terrorism Insurllnce WIlS in place 1\)1' S3,)"0, In the
olher alfdlillL'S, Ihe press rckllse this ,survey SUl1ll1lllrJ/ed the results liS sllowlng the
"impllct Oil ,III propl'l'ty IVpl'S IICroSS ( S," IlI1d slating "II Ihls Indicates thilt terrorIsm Il1SULlnCC
CDVCLI:':C IS \vlde Ill1d deep, nut lust I()r trophy properties hut IlcrOSS the entllT
comIII elT1IIIIl1ul t II':UllIl v rei d eSIll te
Ihc ksll1l10nv III t nlll In:.: thIS \lIL\slIrvcv I'Ill 1her c \ p lurcd ( lR 1.\' Scone IusIon that
cerlillcd iL'rrorist IICtS \\ l're common I Insured lic:alllst I()r ICS tua1ed sJnlllarl to IhL'
pre and I1lL'dil'lt! huIidll1,:, III ,Iddillon to the cOllcluslon IL:rronslll Illsurance
l<.:cjlll rul
I, )1 ( 1\
It
i the 10:lI1s sur\ ( )!( IX's I (iL'd the \\ [s[teldlv
lellllhk (l\er 1
2.2, I;(}()
cOInInCrcIIl! :UH! Iliultll;lIl11lv 11):1I1S \\'crc 11I1l10111d Iv It
rcstrlct lOll to speC! tic I I(ll'
II
(urthcr leslillcd thllt \1CClHI of the
It Iv II Ilil "d ilI11p("11
( )thu Illl'
\ct 1\1 II1L'sc rcplll[s cllrlllhorrlkd tile repl)rtcd 111 the \lIL\ sunev that ('\II5Ss
,lImost 1I1111mmi r,'tjlllfed krlllrism Ille \IIL\ SIII\L'V was Clkd in the ("150 Juper lor
the conclusloll "lll':lIlv rrll 01 the hal:lI1ces sLTvlced Illr ("\1I5Ss the segment "rthe
':urther, the ( I{() prq1l'r Il1cluded refl-rl'nce to "one recellt deal, a $1.\ hIllion ('\1BS
composed 01111(, lorms rll1d pr(\perlles (1I1cludil1g:l numher orretar!.;hoppil1g mails :teross the
countrv), 1111 \\ IlId11 ()() 7 percent or the hal:ll1ce ul1derlvlng the ( \1 BS had terrorism II1S11r:lllCC In
pI:1CC" In the r"rercnced I rl'asury Ikpaltml'nt ;ISSeSS111eI11. the efTectlVL'ness or the IRIA \vas
rl11alv/ed thrull,dl a \ l' set ulnallol1wlde smyevs olpollCyholders and insurers between
sllfyeycd rl'l,resented :rlm"st I" I 1111111011 mgal1l/atlul1s aeross markets
that were n(\t p:lrt orthe i(:(krrrl :mll had :11 least tel1 l'mp rq)resel1tlng vanous
market slures rlild huslllesses, lhe aSSeSSl1ll'nt also showed a ';-1."" rate' 111 20()-1., the tll11e
ol"(ml\:'s (kmallds 011 FIT rliId 1('1 to prucllfe Cl5t.llil'd iernmSl11l11sur:lIlCc 1"0 :ICCOlll1t (IX
\anallOl1s rll11(\11,1 les, Its were lil1ed :iccordi to
IL'S \\ rtll \:ilues IllHkr I11JiIIOIl (the rq)I:lcl'illelll v:tlues fi)r the
v :rnd mullcrt! hUlldl I, the r:lle 1!1 21)1 i-1. ;IS" ,,,''''' .... nhjCt!
Jidcrs \\ere ill 111 ItlL'S leh

Il,i1!
\1
Iloth I( I ,Iild 1< 'I COlllpl:liI1 110 :ltlclltlOll was paid tospecllic l'I'llcna or the
pi'l)pcrtll'S \\ hl'll ()I-( 1:\ ,!L:tLTlllllled cutllil'd k'rrorhm lilsur:lllce \\:IS required uIHkr the In:111
dOCUlllL'llh: LllhlT, ihe\ .Is,sert, 1:\ sImply m:lde:1 hl:mkct dech1nll 10 rl'quire u:rtllicd lL'rrurISIl1
iI1Sur:lllce jill ,ill IO:ll1s ItsU'\ll'UI. Hut. URI:\'s expert testJiied the statistically rellahle MBA
survey which cOllelllded O\lT 'no;, or eOll1l11cl'clal :tnd ll1ullll;lIllily mortgages required tcrrorISIll
Il1Sur:lllcc lin,' lI1e ludcd properties slmil:tr 10 the medical huilding and the apartment
pruplTtv :\ccordlnglv, sOll1e oCthe did nol rellcel IIH)";, terrOrIsm CO\l'!':lge, we
conclude the e\ Idence supported tnal court's lindll1gs thaI cenilled terrurIst :lcls were conHl1only
Insured :lg:llI1St li)r properties SIIIl:Ik'd sll1111:1IIy 10 tile :Iparlmelll pruperly :tnd Il1cdlcal
COlllllllTcul :tnd mulllraI11lly prnpertles Ihal were co!laler:t1 li)r secllnli/.ed loans, had sllm!:lr
rl'placCl1lL'nt \:t1lles, \vere In specIllc Industry seclors, :llld were located In l):t1las :iI1d Lns Angeles.
332 (\.i.Y App.
Dlv 2()(I-q ("Un these motIons, the lender did de!llnl1str:lte that Ihe rISk w:ts 'commonly' Insured
,H.'<lIl1St: II \\:h not necessary that the risk he till! Insured sn P!:U111111"' Ion
soniC hlllldings In .\LlnhalLHl dld not have lcrrorlsfn \\
Issue. )
not dlSPOSltl\'C on thi
j( I ,lIld ICI Ifl:rul lIn cVldencc contradIcting these ICS, Illste:ld contemling thc
CUll1l1\Ona!ltv allll!vsl 111 the context (C:VI USs as II1:tppropn:lte hCl':IUSC thc I'C .Int
doc umcnlS Wl're 11\ l( rI I/.cd at the limc of excentlOIl. lhe rcIcV:U1l lo:m documents.
III I 1, III
1'1'1', \\1' I 'J'!'), Iilc rI111l' II/ th,' 11.111 1l."" ltllIIICi'i, Ilhll',ld, Illl' ,'IHlIl:ICI 1,ll1c'ILIC'l' ,111d 1'1,ICCI11l'lli 111 lile
I ( I,
IlhIILII1Cl' liS 11LlV 'Irni11 tlmc 10 1111\(':" hc Il'qUI!uL 1\ Incll ",II rhe tll11e" ,Irl: l'O1l1l1l011l Ill'll
,1'!llIns! lilt' 11r<ll1cl'tll':' 111"111Iv:,lludk'd, ,\llhou
I( 'I II"l'WI:'l' \\IIS !l'qUlITd to 1ll;lllltlllllsuch "olhlT II1S11!IIIICe" ItS 111:IY "Ii't)m IIl11C 10 time" he
specllIC lequlrements, the "nther InSULII1Ce" proVISIOIlS ofhOlh HT's ,1l1d l( i's loan documents
clfectlvelv 1'IIIlctltlll as "c:ltch-;I1I" cLlUses that pn)\llde Ihe lender tle\lhility (or changing or
lInl'oresn'n ClrCIIl11sl:mces tll' Illsurance needs dllrJIlg the dur;ltlon oflhe loans, Illdl'elL
;IPIKILll1ts cOIlCl'ded such II charac!LrJ/al1on: at tn;I1. i'( 'F relCrred io the "othlT II1SllrlII1Ce"
pnnlSIUI1S liS "cI!lch-all" llI1d Ilppellants' II1S11LlllCe e\pen Ilgrcl'tl. Neither the cOlltraetllll1g11age nor
the testlillony SlipportS f:( 'I"s IlIld ICl's COl1tentlOI1S thc commol1lI1lty an;i/vsls must he dl'lerJlllncd
;Iccordlng to lhe ClrCII111Sl:JI1Cl'S lit the tlinc ()r()rJgll1lttloll,
N()r do FCF Ilild I( 'I support thcir cOlltcntlon ()RI X WIIS rcqulred under thl' krms or the
rdeYlt!1t 101m documcnts 10 cngage ill IndlYlduallll'd C()l11mOJlalll llI1;t!yScs. Ihcy have IdcntJ Ilcd
Il() lallguIlgc 111 the IOlln d()Cllmel1tS lllal1tLiting :,uch d requlremcnt, dllt! lhe pLlln LJI1guage. requli'CS
the rcqllesled il1sur;lllCe "he" cOl1lmonly IIEured dgllln:,t ror Silllilariv :,Illilited SLlled
dltll'rl'ntly, 110 IIl\iI\ldllal!/l'd nlquir\ IS d C()lldillOn to dellTJ11i ill:! hethl'! the ()thlT II1sur;llKl' i
C() III III 0 n .:: ("\hselll l
rc..'qui k' cOndlll()1l1l1 It IVIlS Ilot d COlldltl()1l tot to request (
II1SUrance li)r It 10 th;lt c()\'cragc
i -+
Ii n:,k cUJ11lllunl Insurcd :1':;1Insl. " ; (Iillem;i/
I il.lii"l! , 1111ke! i
I) ..+ 7 I.
( ([(ClIIII/lfili I )t'/,III(/ Ill/crt's/
I( T ,tlso cOlllests the trIal court's Ii IIIIIIl[! del;llilt Illtnest accrued li'om Mav 13. 2()()..+. the
da!coIClRI:\'s lirsl "fin:rllltltIce" letter HT :Isserts hoth tillS klter:lI1d :I.lulv 1"+.200"+ letter lrom
(lRI\ ~ ~ : I \ e ,Iddillonal cure perIods and :II1Y delaullll1!crest must he cllcliialed lrolllihe expIration
orthe Lisl cure period July I (). 200"+. OR I.\: rl'sponds Ihal de!;llillintcrcstis due lllHnediately upon
der:lult :II,d anv Cllrc petlods o/ferl'd In Its letlers do Ilot ,titer the l<tlE!.UIlgc of Ihe loan documents.
(lUI ,1Il:i1vSIS 01 the 101m doculnents ns With Sl'ctlonl I 01 the Ilote. whieh proVides:
It IS hnehv l'xprcssly that .. shOllld any ()ther default occur under any ()fthe
I.Olln I )OCUl11ellt \vhlch IS not curcd \\ilhm :II1Y :ipplIcIhlc grace or cure then
:1 del;llIlt shall exiSt herelillder, and In such eVL'Ill the Indchtedness eVIdcnced
IllCludlll ,III Silins :ldv,ll1cl,d (lr :Icullcd huculllkr or undcr :111 other Loan
I )ocllml'I1L ,1I1d allul1p:ud Interest <tcullcd I sh:rll, at the upllon olTcndu ;l11d
Itlwut Ilollce to Borrow'cr. :It OIKl' hecUllle duc :ll1d C;lI1d 11l1lV he c()lkch:d
f<lltl1\\lth
Sect lUll .3 :tlso prm Idcs. s!o ,is ailV del:lUlt eXISts I1LTeUlH!cr such dc It Ill1crcsl slull
hc I Il1l1lld I
\ lor[
,lIlll payllhk "
~ r l . I (Jill' ulthc "!,'al1 DOCllnlCllls"
nute. 13ccillsc thc l10te cOIlL!lI1S n() delinitiull Itn';I "'dcl'lllilt." wc loul< tu thaI
i Iii 1\ ,
itlkr\\rltk'l1llollce Ihe'reollrOIllI(lRI\: 10 II (1'] '"
,IS o! Ihe (Llk' ,dl )I{ 1\( 's "ll!liI! l101ICC'' Ihat I( 'I, I1111St oht;1111 ccrtillcd lcrrorISIll IIISlIrancc, or only
Iq)O!llhl' l'\ptrillton olany cllrc pcTtod, Ihc oClhl' !loiC :;Llte:; dl'lalllt:; t.:\ISt only idkr
C\PILlllon oClhe cure period ":;11Ould la]tklallit occur lInder imy olthe Loan l)oClll1lents which
IS not clIred wllllill Imy ilpphclhlc or cure pcriod, it del:lllit :;hall C\ISt." (Fmpllilsl:;
added) Sllh:;ectlon 2.1 (h) or the :,ecunty ,Igrel'ment pLuI11y :;cis a cure perIOd Il\e days,
('onsHknng hoth al;rl'Cl1lents together. as we IllUSt, 110 derilllit occurred under Ihe nute until
e\pILIIIOll ,lithe' live-lby cure period. SeC' /dillll.\ I' Firs! Nill Nililk I!f/1c1lsSiI\()\', 15.+ SW,d
SSt), S()I; ( le'\, .\pr I )allas 20U5. no pet) (op, l1.pt.) (col1strull1g pronllssory l10te ill1d deed ortrust
together)
I )f{1 \: asserts the olthe loan docul1lents lllal\lng any default Illlerest ""iml11ediately
due and It)!' 110 cure period hel()re il1tcTCSt accrues, lhe loan documcnts pnwlde
otherwlSc, lIically. :;ectlOIl 3 .1 olthe nole delll1ll1'..', the' rale oldcCault Ii1lcre:;t lales the
l:;tellCe ill iltk'l:lltll lir:;!. ilfter which de!:lUlt mlL're:;t accrues imd "shall he til1ll1edLllclv due and
Ie" Ikel dc It e\lSh oilly UpOIl I e\ptratHlIl olthe Ii
ilHeresl hl ll11C:; "iil1ll1edi due'" 111111/ t ICS to Ihese
: \,
1,llkd I" 111,11111.i111 IlhIII.I11Cl', II
I '11011 tile'se IIldll
()I{ I \ ILld tile to c:r:lill H T
l!1dli IIIH!l'\klhl<l!1S IIl1der Ihe loan doelllllcl1ts III ItI1 l'llort to p\()\lde tll11C Illf IC '1'" to Clirc
Its (kl'lllll! I( 'I, Il'lused lillY ,Itkillpt In CIiIT 1111111 .\pIII 01' 2()(l5 whel1 It sUlight 10 pav ulf lis
,lIl(sLlndlll\l 101111 hllLtllCC 1Lid H T cllrullts ,kl:lllit \\ltllll1 thl' tlml' PlTIUds IIlkmcd hy (H<I \, no
dcl:lUlt \\Olild ha\c occlirfcd, IkelllSC II did not curc, (JR 1.\ 's did nol prCVl'l1t ()RI \ 's
II 10 cullect ikrllidt Inkiest ""'TI""'" to the rilst "rlllilinolice" ktter We conclude Ihe tnal CUtilt
erred \\hel1 It 1l\\lmkd dclault Intelest rrom the (bte ur()RI\'s cOITespundence, \by Il, 2()O-i,
\\ilhout IICCOlll1llllg Ill!' the Ii ClifT perrod under the 101111 dUCltI11\.'lIIS,
(>thCl'ISSIICS
!( F Idso I(IeIlII licd SUh-ISSIiCS 111 Its hrlerllS to Ilppellel's' hrellch orcontracts 11l1d mltl Ion
Ot'dIUl1l1c:es IC 'I sl11n!;lllv Ilnscd issues regardil1g Illitl lUll liI1d Wells ringo's I'aJiure to plead the
elemel1t or dlll11:1C'es IC T lind TC 'I did n'lt hner :111\ or these Issues, \ecnldl
WI1I\\.'(1. llllil \\C wJilllot .Iddress Ihel11.)'('( li\ R .\1'1' PiS I' SCC i//IO
v. the Issues arc
'I'IIlS ('() \' Sfi/fC,
\pp Dldilis 2IJIO, pd (!Jsm\l) ("When:1 LtJ! to hnelll
C0l11pldlilt uldel V. I I III the Issue Oil
\\ II h Il.'\cT\l: ,llld le'11LIIH! IhL' Ili,11 )1I11'\
IS
([ 0 II r t 0 f AJ.T Pl' a1
of at
JUDGMENT
1(1, '\it lR III 1.( 11)( d \SS()(I \ 11'->, I 1'.
,I11d 1(1 ')()\\ \\.11 IIV\RD,
I '\i(', \ppl'II;111h
.\PI)(:;11 j'rnl11 the I\+th .Il1dlclal District
('Olll! oj D;J1Lis Cnllllty, Il'\;IS (lr( 't'\in.
1!4,.IO()':;(,(i),
()pIIlIUIl delivered Justice Murphy,
[llsllces (),'\ieJlI Ilild 1.;lllg p:lrtlclp:ltlI1g.
(WI\: ('\I'II\L \1\RI--:IIS. 1.1 C, l S
'\i \ .1 ka IS B;\'\I( '( )RI', '\1.\ ,
,IS I ruskl' I()R 1111:\101<. I( 1,\( d: I':\\S-
IlfROII('!l (IRIII,I('\ liS, SLRlLS
I()%( 'j, ,lIld \\.1 I IS 1',\R(iO B,\'\il--:,
'\1;\ akll \VIILS F\R( iO IL\'\iK,
MI'\i'\iISO 1\. '\i ;\, ,IS Inlske I()I{ II II
\IORI(i\( il PASS IIIROl!(;I!
('l-RTlFl( '.\ 11\, SIRIIS (J')'( 'I.
\ppelkl's
We \ \(' \TE nur jildg111 ell t nllk'Ccll1her 20, 20 I 0 Ihls IS I1nw the Judgmenl 01' the
nl1 the Court' nplnlnll oj,thls dll!c, we REVERSE aIIII REM;\ND thc trial court's
ludgllll'llt rl'g;lIdillg the ;11l10UIII nllkl;llIlt Interest ,Iwankd to ;Ippelkc ORIX C;lpltal Markets,
L 1(' ;1C'11I11St, lant [.( T '\I(mh R ASSOCiates. I.Y. 10 Iileilldc the II gr;lce period
1()llowlng \\;1\ ) j, 200'+.
We\ FFI Ri\1 the Irldl court' In ;111 other
It IS ORDElU:D thllt CCich
\SSOCldtCS, 1 I) ,:IS pnl1l'1pal. and I ideh
Ick Road, Bldti \1 D 21 lIS , 011
hond arl' RELL\SED.
!llnt HI '\iorth RI
!:tnd ol,() i Ii I--:
\SSOCIIIlCs. !. P .
Ihc ohll Ions 01
,ilHI I t ('(nnp;111 01 \1
Lint HI '\i()llh R
\1\RY \l( RPHY
II let.
APPENDIX
TAB
"5"
AFFIRM as modified and Opinion Filed March 14,2011
In The
Qrourt uf Appeals
lJ1iftl1 11iitri!t of wexai at 11 allai
No. 05-09-00066-CV
ECF NORTH RIDGE ASSOCIATES, L.P. AND TCI 9033 WILSHIRE BOULEVARD,
INC., Appellants
v.
ORIX CAPITAL MARKETS, L.L.C., U.S. BANK, N.A. AlKJA BANCORP, N.A., AS
TRUSTEE FOR THE MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-
C3, AND WELLS FARGO BANK, N.A., AlKJA WELLS FARGO BANK, MINNESOTA,
N.A., AS TRUSTEE FOR THE MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 99-Cl, Appellees
On Appeal from the 134th Judicial District Court
Dallas County, Texas
Trial Court Cause No. 04-07956-G
OPINION ON REHEARING
Before Justices O'Neill, Lang, and Murphy
Opinion By Justice Murphy
Appellee ORIX Capital Markets, L.L.C. filed a motion for rehearing, and appellant ECF
North Ridge Associates, L.P. filed a response. The motion for rehearing is granted, and we withdraw
our substituted opinion issued January 19,2011 and vacate ourjudgment ofthat date. The following
is now the opinion of the Court.
Borrowers ECF and TCI 9033 Wilshire Boulevard, Inc. contest the legal and factual
sufficiency of the evidence to support the trial court's finding that ECF and TCI breached their loan
agreements by not procuring certified terrorism insurance on the properties securing their debts.
Separately, ECF appeals the trial court's calculation ofdefault interest, and TCI challenges ORIX's
standing, as servicer, to sue for breach ofcontract. We modify the trial court's judgment to account
for the proper accrual date for default interest against ECF and affirm the judgment as modified.
Background
At the time of the dispute, ECF and TCI were the owners of commercial real estate
properties. ECF owned the North Ridge Apartments property in Dallas, Texas, which is low-income
housing built in the late 1960s and located within a couple miles of the Dallas Galleria and
surrounding office towers. TCI was the owner of the Wilshire Medical Building in Los Angeles,
Calitornia, which is located less than a mile from Rodeo Drive in Beverly Hills. ECF and TCI share
the same principal and, during the relevant time, the same property management company, Prime
Income Asset Management, Inc. Prime also functioned as their contractual advisor, responsible for
risk management. Mortgage loans originated in 1995 for the apartment property and 1999 for the
medical building.
Both loans were pooled and securitized after origination, becoming Commercial Mortgage-
Backed Security loans (CMBSs).1 ORIX was the servicer on behalf of the loan pools' trustees for
both loans and was therefore responsible for collecting monthly payments ofprincipal and interest,
monitoring whether the property was properly insured, and addressing any issues of default under
IA CMBS is a type of bond secured by a large number of commercial mortgages pooled together, often on the basis of the similarity of the
mortgage loan documents and geographical location and type of collateral. The creator of the CMBS then issues a series of "slices" of the bond
(usually called tranches) that vary in yield, duration, and payment priority. The income ofthe mortgage is the income ofthe bond, with the investors
in the highest-rated tranches being paid first; ifthere is a shortfall in the income from the mortgages, the investors with the lowest-rated tranches may
not receive any income at all. The mortgages that securethe CMBS are placed in a securitization trust, and the trustee is responsible for servicing
those mortgages. Sometimes, however, trustees of CMBSs delegate their rights, authority, and monitoring responsibilities to master or special
servicers pursuant to pooling and servicing agreements. The servicer is obligated to balance competing interests of the various tranches with the
borrowers' various contractual obligations, but is ultimately contractuallyobligated to service the loan in accordance with the interests ofthe trustees
as well as the holders of the various tranches. See CWCapi/al Asset Mgml. LLC v. Chicago Props., LLC, 610 F.3d 497,499-501 (7th Cir. 2010),
also discussed below.
-2-
the loan documents.
The loan documents required specified insurance on the properties, including "all-risk"
insurance. "All-risk" insurance covers any peril not specifically excluded in the policy. See Trinity
Indus., Inc. v.Ins. Co. o/N. Am., 916 F.2d 267, 269 n.ll (5th Cir. 1990). At the time of the loan
originations, neither ECF's nor TCl's all-risk policy excluded coverage for damage caused by acts
of terrorism. Yet after the September 11,2001 terrorist attacks in New York City, Washington,
D.C., and rural Pennsylvania, insurance companies, including those for ECF and Tel, began
excluding from their all-risk policies any coverage for damage caused by terrorist acts.
In a series of letters beginning in 2002, ORIX informed ECF and TCI certified terrorism
insurance was required under the relevant loan documents. "Certified terrorism insurance" is
coverage for certain terrorist acts that have been certified by the United States Secretary ofTreasury
in concurrence with the United States Secretary of State and Attorney General under the Terrorism
Risk Insurance Act of 2002, Pub. L. 107-297, 101-108, 116 Stat. 2322, 2322-36 (2002) (the
TRIA). The correspondence continued, with ORIX sending "final notice" to both ECF and TCI in
2004. ECF and TCI shared the same principal and risk management and therefore received the same
information on the cost of certified terrorism insurance-premiums purportedly ran as high as
$20,000 annually. The loan balances in 2004 were approximately $4.8 million for ECF and $6.6
million for TCI, and both were unwilling to obtain such insurance. Evidence at trial showed that had
they obtained actual bids for the insurance, the annual premiums would have been $1 ,412.40 for ECF
and $345.63 for TCI.
When ECF and TCI refused to obtain certified terrorism insurance, ORIX declared defaults
under the loan documents. ECF and TCI responded by filing suit against ORIX for breach of
contract and declaratory relief. ORIX answered and counterclaimed, also alleging breaches of
contract and requesting a declaration that ECF and TCI had breached the insurance provisions in the
relevant loan documents and seeking default interest from the date of the alleged breach. Once it
received the counterclaim, ECF elected to payoff its loan. In connection with this payoff, ECF first
obtained certified terrorism insurance in April 2005 for an annual premium of$I,787.00 and paid
the default interest under protest. About the same time, TCI sought approval from ORIX to have
another party assume its loan. To complete the assumption, TCI also paid default interest under
protest. The lawsuit continued.
In late 2007, ECF and TCljoined as co-defendants U.S. Bank, N.A. a/k/a Bancorp., N.A.,
as Trustee for the Mortgage Pass-Through Certificates, Series 1996-C3, and Wells Fargo Bank, N.A.,
a/k/a Wells Fargo Bank, Minnesota, N.A., as Trustee for the Mortgage Pass-Through Certiticates,
Series 99-C1. Previously, in 2006, ORIXhad acquired ECF's loan formerly held by U.S. Bank and
was both the owner and servicer of the loan. Yet Wells Fargo still held TCI's loan, and TCI added
a defense that ORIX did not have standing to assert any claims against TCI. The trustees answered,
essentially parroting ORIX' s allegations and asserting ORIXhad the right to recover default interest
and attorney's fees attendant to enforcing ECF's and TCI's loan documents.
After thirteen days of bench trial in late 2008, the trial court renderedjudgment for appellees
and awarded ORIX default interest and attorney's fees. ECF and TCI appeal.
Standard of Review
For their legal-sufficiency challenge, ECF and TCI must demonstrate on appeal there is no
evidence to support the trial court's adverse findings. Croucher v. Croucher, 660 S.W.2d 55, 58
(Tex. 1983); Pete Dominguez Enters., Inc. v. County of Dallas, 188 S.W.3d 385, 387 (Tex.
App.-Dallas 2006, no pet.). Under a no-evidence point, we consider the evidence in the light most
favorable to the verdict, indulging every reasonable inference in support. City ofKeller v. Wilson,
-4-
168 S. W.3d 802, 822 (Tex. 2005). A legal insufficiency challenge fails if there is more than a
scintilla of evidence to support the verdict. Formosa Plastics Corp. USA v. Presidio Eng'rs &
Contractors, Inc., 960 S.W.2d 41, 48 (Tex. 1998) (sub. op.). If, however, the evidence offered to
prove a vital fact is so weak as to do no more than create a surmise or suspicion of its existence, the
evidence is no more than a scintilla and is legally no evidence. Kindred v. Con/Chern, Inc., 650
S.W.2d 61, 63 (Tex. 1983).
For their factual sufficiency challenge, ECF and TCI must demonstrate there is insufficient
evidence to support the adverse finding. Pulley v. Milberger, 198 S.W.3d 418, 426 (Tex.
App.-Dallas 2006, pet. denied). In reviewing a factual sufficiency challenge, we consider and
weigh all ofthe evidence in support ofand contrary to the trial court's finding and will set aSIde the
verdict only if the evidence supporting the verdict is so slight, or the evidence against it so strong,
that the finding is manifestly unjust and quite clearly wrong. See Garza v. Alviar, 395 S. W.2d 821,
823 (Tex. 1965) (finding factually insufficient if "the evidence supporting the verdict is so weak or
the evidence to the contrary is so overwhelming" that finding should be set aside and new trial
ordered); see also Cain v. Bain, 709 S. W.2d 175, 176 (Tex. 1986) (per curiam) (for factual
sufficiency review, verdict set aside only if"clearly wrong and unjust"); Hall, StandardY ofAppellate
Review in Civil Appeals, 34 ST. MARY'S L.J. 1, 172 (2002). The amount of evidence necessary to
affirm a judgment is far less than that necessary to reverse a judgment. Pulley, 198 S. W.3d at 427.
Discussion
ECF and TCI challenge the findings and conclusions requiring them to maintain certified
terrorism insurance. ECF separately challenges the trial court's judgment awarding ORIX default
interest beginning May 13, 2004, the date of ORIX's first "final notice" letter. TCI further
challenges ORIX's standing as the account servicer to sue for breach of contract. We begin with
TCI's challenge to ORIX's standing.
Standing
TCI argues that ORIX, as the mortgage servicer and not the holder of TCl's note, has no
standing to sue TCI. ORIX responds that the pooling and servicing agreement (PSA) between it and
the trustee of TCl's CMBS conveys standing to sue for default of the loan documents.
Standing is a component ofsubject matterjurisdiction. Tex. Ass 'n ofBus. v. Tex. Air Control
Rd, 852 S.W.2d 440, 445 (Tex. 1993). Whether a trial court has subject matter jurisdiction is a
matter of law, which we review de novo. See id. at 446; see also Tex. Dep 't ofParks & Wildlife v.
Miranda, 133 S.W.3d 217, 226 (Tex. 2004). Whether a plaintiff possesses standing to assert a
particular claim depends on the facts pleaded and the cause of action asserted. Everett v. TK-Taito,
L.L.c., 178 S.W.3d 844, 853 (Tex. App.-Fort Worth 2005, no pet.); see also MD. Anderson
Cancer Ctr. v. Novak, 52 S.W.3d 704, 707-708 (Tex. 2001). We construe the petition in favor of
the pleader and, ifnecessary, reviewthe entire record to determine ifany evidence supports standing.
See Tex. Air Control Bd., 852 S.W.2d at 446. The standing doctrine "focuses on whether a party has
a sufficient relationship with the lawsuit so as to have a 'justiciable interest' in its outcome." Austin
Nursing Cfr. v. Lovato, 171 S.W.3d 845, 848 (Tex. 2005) (quoting 6A CHARLES ALAN WRIGHT,
ARTHUR R. MILLER, AND MARY KAYKANE, WRIGHT, MILLER, & KANE, FEDERAL PRACTICE AND
PROCEDURE: CIVIL 1559,441 (2d ed. 1990.
No Texas case directly addresses the standing question before this Court, although ORIX
cites ORIX Capital Markets, LLC v. La Villita Motor Inns, J V, No. 04-09-00573-CV, 2010 WL
3331702, at *7-9 (Tex. App.-San Antonio Aug. 25, 2010, pet. abated) for guidance. There, the
court concluded the record contained sufficient evidence ORIXCapital Markets had proven its right
to enforce a note as the current "special servicer" and pursuant to a servicing agreement containing
-6-
language similar to the PSA in this case. Recently, a federal appeals court addressed the very issue
of whether a mortgage servicer had standing to pursue claims against a borrower for an alleged
default under a mortgage loan to which the servicer was not a party. See CWCapital Asset Mgmt.,
LLC v. Chicago Props., LLC, 610 F.3d 497 (7th Cir. 2010).
In CWCapital, the court addressed whether a mortgage servicer, CWCapital, was entitled to
bring suit against the commercial landlord (the borrower) and its former tenant for moneys the
former tenant paid the landlord in settlement of a separate dispute. ld. at 499. Examining the
servicer's role in administering a mortgage-backed security, the court explained howa"servicer must
balance impartially the interests of the different tranches as determined by their contractual
entitlements." ld. at 499-500. The court turned to the language of CWCapital's PSA with its
trustee, stating the servicer is the trust's collection agent because it "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," thus making the delegation of the
trustee's rights to the servicer "comprehensive." ld. at 500 (alterations in original). According to
the court: "There is no doubt about Article III standing in this case [of a servicer bringing suit];
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 ofa defaulted loan that it services." Jd. at 501.
The court next turned to the issue of whether CWCapital was a real party in interest.
CWCapital, 610 F.3d at 501. Examining CWCapital's PSA, the court cited various provisions
indicating the servicer had the right and responsibility to bring suit against the borrower, including
the "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." ld. The trustee
also was obligated, at the servicer's written request, to execute any limited powers of attorney and
other documents furnished by the servicer and necessary or appropriate to enable the servicer to carry
out its servicing and administrative duties under the PSA. The court concluded the trustee was
required to confer necessary authority on the servicer to bring suit, "[f]or it is the servicer, not the
trustee, who is empowered to decide whether to sue." ld. Regarding the right ofthe servicer to sue
in its own name, the court emphasized the following PSA language excepting out the required trustee
consent when suing pursuant to servicing duties:
[W]ithout the Trustee's written consent, "except as relates to a Loan that the ...
Servicer ... is servicing pursuant to its representative duties herein (in which case
such servicer shall give notice to the Trustee ofthe initiation), [the Servicer shall not]
initiate any action, suit or proceeding solely under the Trustee's name without
indicating the ... Servicer's ... representative capacity."
ld. (stating italicized "except" indicates "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 capacity-implying that it is not doing so in a representative capacity if it is suing in
regard to a servicing-related loan") (emphasis and alterations in original). The court concluded:
It is thus the servicer, under the agreement, who has the whip hand; he is the lawyer
and the client, and the trustee's duty, when the servicer is carrying out his delegated
duties, is to provide support. The securitization trust holds merely the bare legal title;
the Pooling and Servicing Agreement delegates what is effectively equitable
ownership ofthe claim (albeit for eventual distribution of the proceeds to the owners
of the tranches of the mortgage-backed security in accordance with their priorities)
to the servicer. For remember that in deciding what action to take with regard to a
defaulted loan, the servicer has to consider the competing interests of the owners of
different tranches of the security.
ld. at 501-02 (internal citations omitted; emphasis in original).
Here, the language of ORIX's PSA is almost identical to that in CWCapital. The PSA gives
ORIX "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."
Similarly, the trustee is required to support ORIX's efforts to service the pooled loans: "Trustee
-8-
shall execute any powers of attorney and other documents delivered to it by [ORIX] and necessary
and appropriate to enable [ORIX], as the case may be, to carry out its servicing and administrative
duties hereunder ...." Further, the PSA permits ORIX to institute lawsuits in its own name:
"without the Trustee's written consent[, ORIX shall not,] except as relating to a Mortgage Loan
which [ORIX], as applicable, is servicing pursuant to [its] respective duties herein. , . initiate any
action, suit or proceeding solely under the Trustee's name without indicating [ORIX's]
representative capacity ...." We therefore conclude under the same reasoning as in CWCapital,
ORIX had standing to bring this lawsuit against TCI either in its own name or as a special servicer.
2
Requirement a/Terrorism Insurance
Having concluded ORIX had standing to bring suit, we now turn to the question of whether
ECF and TCI were contractually obligated to procure terrorism insurance. In response to ECF' sand
TCI's challenge to the legal and factual sufficiency ofevidence to support the trial court's judgment,
ORIX contends that terrorism insurance is required under two separate provisions of the relevant
loan documents-"other insurance" and "all-risk insurance."
To understand ECF's and TCI's contractual obligations, we analyze the relevant loan
documents. Our primary concern in contract interpretation is to ascertain the meaning and determine
what obligations are imposed on the parties. See Coker v. Coker, 650 S. W.2d 391,393 (Tex. 1983).
We examine and consider the entire writing as a whole to harmonize and give effect to all the
provisions so that none will be rendered meaningless. Id. Terms are given their plain, ordinary, and
generally accepted meaning unless the instrument shows the parties used terms in a technical or
J
"Tel cited several ofour cases for the proposition, "[i]n order to establish standing to maintain a breach ofcontract action, a plaintiff must show
either third-party beneficiary status or privity." See, e.g., OAJC Commercial Assets. L.L.C v. Stonegate Village, L.P., 234 S.W.3d 726, 738 (Tex.
App.-Dallas 2007, pet. denied). Reviewing these cases, we conclude they do not control the current circumstances in which a pooling and servicing
agreement specifically gives the servicer the right and responsibility to institute suit against a borrower either in its own name or on behalf of the
trustee.
-9-
different sense. Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996).
We address the "other insurance" clauses of the loan documents first because those
provisions are dispositive. Subsection 1A(t) ofECF's Mortgage and Security Agreement provides
in relevant part:
Mortgagor shall, at Mortgagor's expense, maintain in force and effect on the Property
at all times while this Mortgage continues in effect the following insurance:
(t) Such other insurance on the Property or on any replacements or substitutions
thereof or additions thereto as may from time to time be required by Mortgagee
against other insurable hazards or casualties which at the time are commonly insured
against in the case ofproperty similarly situated, due regard being given to the height
and type of buildings, their construction, location, use and occupancy.
TCl's Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing
contains a similar provision:
Borrower shall, at its own cost and expense, maintain the following insurance
coverage with respect to the Property during the term of this Deed of Trust:
(h) Miscellaneous. Such other insurance coverages, in such amounts, and such other
forms and endorsements, as may from time to time be required by Lender and which
are customarily required by institutional lenders for similar properties, similarly
situated, including, without limitation, coverages against other insurable hazards
including, by way ofexample only, earthquake, sinkhole and mine subsidence, which
at the time are commonly insured against and generally available.
Although not identical, the language of these contracts is clear: ORIX as servicer may
require ECF and TCI to obtain certain insurance coverage-such as certified terrorisminsurance-if
such perils are commonly insured against for similar properties, similarly situated. ECF and TCI do
not challenge whether certified terrorism insurance was "generally available"; instead, they argue
certified terrorist acts were not "commonly insured against" for properties similar to the apartment
property or medical building. Their burden under their legal sufficiency challenge is to demonstrate
there is no evidence to support the adverse finding certified terrorist acts were commonly insured
-10-
against for similar properties, similarly situated. See Croucher, 660 S.W.2d at 58. Alternatively,
under their factual sufficiency challenge, ECF and TCI must showthe evidence supporting the trial
court's finding is so slight as to render the finding clearly wrong and unjust. See Garza, 395 S.W.2d
at 823; Hall, supra, at 172.
During the course of the thirteen-day bench trial, ORIX primarily relied on a survey
published in June 2004 by the Mortgage Bankers Association. The MBA study was conducted in
response to a request by the United States Treasury Department to gather information regarding the
"effectiveness" of the TRIA. In its survey, the MBA analyzed over 122,000 commercial and
multifamily loans across major investor classes (CMBSs, life companies, Fannie Mae, Freddie Mac,
FHA and others, with minimal representation by commercial banks and savings and loans), with the
average loan size being $5.34 million. Ofthe $656 billion ofcommercial and multifamily mortgages
studied-32% of the total market-terrorism insurance was required by the mortgage investor or
servicer for 93.9% of the loans, and terrorism insurance was in place for 83.5%. In the portfolios
studied, terrorism insurance was required for 100% of the balance serviced for CMBS and other
affiliates. The press release regarding this survey summarized the results as showing the "impact
on all property types across U.S." and stating "[tJhis indicates that terrorism insurance coverage is
wide and deep, not just for trophy properties but across the entire commercial/multifamily real estate
spectrum."
The testimony at trial regarding this MBA survey further explored ORIX's conclusion that
certified terrorist acts were commonly insured against for properties situated similarly to the
apartment property and medical building. In addition to the conclusion terrorism insurance was
required for over 93% of the loans surveyed, ORIX's expert testified the survey was statistically
reliable--over 122,000 commercial and multifamily loans were surveyed nationally without
-11-
restriction to specific geographical locations. ORlX's expert further testified that because of the
breadth of the survey, it necessarily included properties similar to the medical building and the
apartment property.
Other evidence admitted at trial included a January 2005 paper published by the
Congressional Budget Office entitled "Federal Terrorism Reinsurance: An Update" and a report of
the United States Department of the Treasury entitled, "Assessment: The Terrorism Risk Insurance
Act of 2002." These reports corroborated the findings reported in the MBA survey that CMBSs
almost uniformly required terrorism insurance. The MBA survey was cited in the CBO paper for
the conclusion "nearly all of the balances being serviced for CMBSs-the largest segment of the
commerciaJ/multifami ly mortgage market-were required to have terrorism Insurance in place ...."
Further, the CBO paper included reference to "one recent deal, involving a $1.3 billion CMBS
composed of 106 loans and 120 properties (including a number of retail shopping malls across the
country), [in which] 99.7 percent of the balance underlying the CMBS had terrorism insurance in
place." In the referenced Treasury Department assessment, the effectiveness of the TRIA was
analyzed thrOUgll a comprehensive set of nationwide surveys ofpolicyholders and insurers between
2002 and 2005. Policyholders surveyed represented almost 1.1 million organizations across markets
that were not part of the federal government and had at least ten employees, representing various
market shares and businesses. The assessment also showed a 54% take-up rate
3
in 2004, the time
of ORlX's demands on ECF and TCI to procure certified terrorism insurance. To account for
variations among properties, results were refined according to property replacement values: for
properties with replacement values under $50 million (the replacement values for the apartment
3The take-up rate is the share of policyholders who purchased any amount of terrorism risk insurance.
-12-
property and medical building), the take-up rate in 2004 was 53%. To account for geographical
differences for the same period, take-up rates for policyholders were 61 % in large cities such as
Dallas, and 67% in high-risk cities designated by the Department of Homeland Security such as Los
Angeles. Results were segregated further by industrial sector: business-which included industries
in real estate and rental and leasing; professional, scientific, and technical services; and management
of companies and enterprises-had a 65% take-up rate in 2004.
Both ECF and TCI complain no attention was paid to specific criteria of the relevant
properties when ORIX determined certified terrorism insurance was required under the loan
documents; rather, they assert, ORIX simply made a blanket decision to require certified terrorism
insurance for all loans it serviced. But, ORlX's expert testified the statistically reliable MBA
survey-which concluded over 93% of commercial and multifamily mortgages required terrorism
insurance-necessarily included properties similar to the medical building and the apartment
property. Accordingly, although some of the evidence did not reflect 100% terrorism coverage, we
conclude the evidence supported the trial court's findings that certified terrorist acts were commonly
insured against for properties situated similarly to the apartment property and medical building:
commercial and multifamily properties that were collateral for securitized loans, had similar
replacement values, were in specific industry sectors, and were located in Dallas and Los Angeles.
See, e.g., BFP 245 Park Co. v. GMAC Commercial Mortg. Corp., 12 A.D.3d 330,332 (N.Y. App.
Div. 2004) ("On these motions, the lender did demonstrate that the risk was 'commonly' insured
against; it was not necessary that the risk be universally insured against, so plaintiff s demonstration
that some buildings in Manhattan did not have terrorism coverage was not dispositive on this
issue.").
ECF and TCI offered no evidence contradicting these statistics, instead contending the
-13-
commonality analysis in the context of CMBSs was inappropriate because the relevant loan
documents were not securitized at the time of execution. The relevant loan documents, however,
do not require ORIX's request for "other insurance" be examined with circumstances frozen as of
1995 or 1999, the time of the parties' contracts. Instead, the contract language and placement in the
loan documents indicate the intent of flexibility. ECF was required to maintain such "other
insurance" as may "from time to time" be required, which "at the time" are commonly insured
against for properties similarly situated. Although the clauses are not identical, in material respects
TCI likewise was required to maintain such "other insurance" as may "from time to time" be
required, which "at the time" are commonly insured against and generally available. Located at the
end of the sections discussing insurance requirements, and following the prior subsections detailing
specific requirements, the "other insurance" provisions of both ECF's and TCl's loan documents
effectively function as "catch-all" clauses that provide the lender flexibility for changing or
unforeseen circumstances or insurance needs encountered during the duration of the loans. Indeed,
appellants conceded such a characterization: at trial, ECF referred to the "other insurance" provisions
as "catch-aU" and appellants' insurance expert agreed. Neither the contract language nor the
testimony supports ECF's and TCI's contentions the commonality analysis must be determined
according to the circumstances at the time of origination.
Nor do ECF and TCI support their contention ORIX was required under the terms of the
relevant loan documents to engage in individualized commonality analyses. They have identified
no language in the loan documents mandating such a requirement, and the plain language requires
the requested insurance "be" commonly insured against for similarly situated properties. Stated
differently, no individualized inquiry is a condition to determining whether the other insurance is
commonly required for similar properties. See, e.g., BFP 245, 12 A.D. 3d at 332 ("Absent the
-14-
requisite conditional language, it was not a condition precedent to the lender's right to request other
insurance for it to show that such coverage was for a risk 'commonly insured against."') (internal
citation omitted).
We conclude ECF and TCI have failed to meet their burdens of showing there is either no
evidence or insufficient evidence to support the trial court's findings that ORIX could, under the
"other insurance" provisions of the loan documents, require certified terrorism insurance. We also
conclude the evidence is legally and factually sufficient to support the trial court's finding that ECF
and TCT breached their loan agreements by not procuring the insurance. Based on these conclusions,
we do not reach the remaining issues regarding the "all-risk insurance" provisions. See TEX. R. ApP.
P.47.1.
Calculation ojDeJault Interest
ECF also contests the trial court's finding default interest accrued from May 13, 2004, the
date of ORIX' s first "final notice" letter. ECF asserts both this letter and a July 14, 2004 letter from
ORTX gave additional cure periods and any default interest must be calculated from the expiration
ofthe last cure period: July 19,2004. ORlX responds that default interest is due immediately upon
default and any cure periods offered in its letters do not alter the language of the loan documents.
Our analysis of the loan documents begins with section 3.1 of the note, which provides:
It is hereby expressly agreed that ... should any other default occur under any of the
Loan Documents which is not cured within any applicable grace or cure period, then
a default shaH exist hereunder, and in such event the indebtedness evidenced hereby,
including all sums advanced or accrued hereunder or under any other Loan
Document, and all unpaid interest accrued thereon, shall, at the option of Lender and
without notice to Borrower, at once become due and payable and may be collected
forthwith.
Section 3.3 also provides, "[s]o long as any default exists hereunder ... such default interest shaH
be immediately due and payable."
-15-
The Mortgage and Security Agreement is one of the "Loan Documents" as defined in ECF' s
note. Because the note contains no definition for a "default," we look to that security agreement.
Section 4.16 ofthe security agreement also provides, "Adefault hereunder which has not been cured
within any applicable grace or cure period shall be a default under each of the other Loan
Documents." Subsection 2.1 (b) also provides: "The occurrence ofany ofthe following events shall
be a default hereunder: ... [ECF] fails to provide insurance as required by Section 1.4 hereof ... and
such failure continues for five (5) days after written notice thereoffrom [ORlX] to [ECF].''''
To determine the accrual date for default interest, we must resolve whether a "default" exists
as of the date of ORIX' s "final notice" that ECF must obtain certified terrorism insurance, or only
upon the expiration ofany cure period. The plain language ofthe note states defaults exist only after
expiration of the cure period- "should [a] default occur under any of the Loan Documents which
is not cured within any applicable grace or cure period, then a default shall exist." (Emphasis
added.) Subsection 2.1 (b) of the security agreement plainly sets a cure period-five days.
Considering both agreements together, as we must, no default occurred under the note until
expiration of the five-day cure period. See Adams v. First Nat. Bank ofBells/Savoy, 154 S. W.3d
859,868 (Tex. App.-Dallas 2005, no pet.)(op. n.p.t.) (construing promissory note and deed oftrust
together).
ORlX asserts the language ofthe loan documents making any default interest "immediately
due and payable" provides for no cure period before interest accrues. The loan documents provide
otherwise. Specifically, section 3.3 ofthe note defining the rate of default interest contemplates the
existence of a default first, after which default interest accrues and "shall be immediately due and
4Although argued to the trial court, ECF does not challenge now whether notice by ORIX was required or, if so, was sufficient.
-16-
payable." Because a default exists only upon the expiration of the five-day cure period, no default
interest becomes "immediately due" until the cure period expires. The original parties to these
transactions were sophisticated; had they chosen to define the default date as the date the borrower
failed to maintain insurance, they would have done so.
ECF maintains ORIX's correspondence was an "indulgence" under the loan documents that
extended ECF's cure period; by ignoring these indulgences when calculating the amount of default
interest, the trial court erred. Yet section 4.1 of ECF' s own note states specifically any indulgences
granted by ORIX shall not be constmed as a waiver of its rights. ORIX had the right to grant ECF
indulgences and extensions under the loan documents in an effort to provide time for ECF to cure
its default. ECF refused any attempt to cure until April of 2005 when it sought to payoff its
outstanding loan balance. Had ECF cured its default within the time periods allowed by ORIX, no
default would have occurred. Because it did not cure, ORIX's indulgences did not prevent ORIX's
right to collect default interest pursuant to the first "final notice" letter. We conclude the trial court
erred when it awarded default interest from the date of ORIX's correspondence, May 13, 2004,
without accounting for the five-day cure period under the loan documents.
Other Issues
ECF also identified sub-issues in its brief as to appellees' breach ofcontracts and mitigation
of damages. TCI similarly raised issues regarding mitigation and Wells Fargo's failure to plead the
element of damages. ECF and TCI did not brief any of these issues. Accordingly, the issues are
waived, and we will not address them. See TEX. R. ApP. P. 38.1; see also Ranger Ins. Co. v. State,
312 S.W.3d 266, 270-71 (Tex. App.-Dallas 2010, pet. dism'd) ("When a party fails to brief a
complaint adequately, it waives the issue on appeal.").
-17-
Conclusion
With respect to the calculation of default interest, we modify the trial court's judgment to
reflect the five-day grace period following May 13,2004. Specifically, we modify the trial court's
judgment to provide the amount of default interest paid by ECF that ORlX may retain (modifying
$217,027.38 to $213,645.47) and the commencement date for prejudgment interest against ECF
(modifying May 13,2004 to May I g, 2004). See TEX. R. Arr. P. 43.2(b). The trial court'sjudgment
is affirmed in all other respects.
~ ~ M
mSTICE
090066F.P05
-18-
(!tour! of Appeals
lJrtfth llistrirt of IDexas at 1Jlallas
.
JUDGMENT
and TCI 9033 WILSHIRE BOULEVARD,
INC., Appellants
No.05-09-00066-CV V.
ORIX CAPITAL MARKETS, L.L.c., U.S.
BANK, N.A. a/k/a U.S. BANCORP, N.A.,
as Trustee FOR THE MORTGAGE PASS-
THROUGH CERTIFICATES, SERIES
I996-C3, and WELLS FARGO BANK,
N.A. a/k/a WELLS FARGO BANK,
MINNESOTA, N.A., as Trustee FOR THE
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 99-Cl, Appellees
Appeal from the I34th Judicial District
Court of Dallas County, Texas. (Tr.Ct.No.
04-07956-G).
Opinion delivered by Justice Murphy,
Justices O'Neill and Lang participating.
In accordance with this Court's opinion of this date, we WITHDRAW our opinion of
January 19,2011 and VACATE our judgment of January 19,2.011. This is now the judgment of
the Court.
The judgment of the trial court is MODIFIED as follows:
In the fourth and fifth lines on the second page, the trial court's judgment is
modified to read, "... is entitled to recover $213,645.47 of the $217,027.38 in
default interest previously paid under protest by ECF in 2005, which ORIX has
been holding in an escrow account since it was paid ...."
In the second full paragraph on the second page, the trial court's judgment is
modified to read, "It is therefore ORDERED, ADJUDGED and DECREED by the
Court that ORIX, in such previously designated capacities, shall have and be
permitted to retain for its ultimate recovery the amounts it has held in escrow
since 2005, as designated above, in the amounts of$213,645.47 against ECF (plus
pre-judgment interest at the rate of 5% per annum on the amounts of default
interest owing by ECF from May 18, 2004, until such interest was paid under
protest by ECF on April 14,2005, as set forth in Joint Exhibit 79) ...."
In the first full paragraph on the third page, the trial court's judgment is modified
to read, "It is further ORDERED that the total amount of the Judgment here
rendered as to (i) pre-judgment interest accrued between May 18,2004 - April 14,
2005 for ECF ...."
As modified, the judgment of the trial court is AFFIRMED.
It is ORDERED that appellee ORlX Capital Markets, L.L.C. recover the full amount of
the judgment as modified herein from appellant ECF North Ridge Associates, L.P., as principal,
and Fidelity and Deposit Company of Maryland of3910 Keswick Road, Baltimore, MD 21203,
as surety, from appellant ECF North Ridge Associates, L.P.'s supersedeas bond.
It is ORDERED that each party bear its own costs of appeal.
Judgment entered March 14,2011.
M I ! : : t ~ ~
JUSTICE
Page I
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
Insurance 217
Court of Appeals of Texas,
Dallas.
ECF NORTH RIDGE ASSOCIATES, L.P. and TCI
9033 Wilshire Boulevard, Inc., Appellants,
v.
Insurance
Coverage-Property Insurance
In General
Risks or Losses Covered and
Exclusions
Courts 106
k. In general.
Action 13
Action
Grounds and Conditions Precedent
k. Persons entitled to sue.
Courts
Nature, Extent, and Exercise of Jurisdiction
in General
Standing is a component of subject matter jur-
isdiction.
"All-risk Insurance" covers any peril not spe-
cifically excluded in the policy.
In General
k. Determination of questions of
jurisdiction in general.
Whether a trial court has subject matter juris-
diction is a matter of law.
ORIX CAPITAL MARKETS, L.L.c., U.S. Bank,
N.A. a/k/a Bancorp, N.A., as Trustee For The Mort-
gage Through Certificates, Series 1996C3,
and Wells Fargo Bank, N.A., a/k/a Wells Fargo
Bank, Minnesota, N.A., as Trustee for the Mortgage
Pass-Through Certificates, Series 99-C I, Ap-
pellees.
No.
March 14,201 I.
Rehearing Overruled April 19, 20 I I.
Background: Mortgagors, who had obtained com-
mercial mortgage-backed security loans (CMBSs),
filed suit against loan servicer for the CMBSs, al-
leging breach of contract and seeking declaratory
relief, arising from mortgagors' refusal to obtain
certified terrorism insurance as requested by ser-
vicer. Servicer filed counterclaim for breach of con-
tract and declaratory relief, and sought default in-
terest from date of alleged breach. The 134th Judi-
cial District Court, Dallas County, , J.,
entered judgment in favor of servicer. Mortgagors
appealed.
Holdings: On rehearing, the Court of Appeals,
J., held that:
) as matter of first impression, servicer had stand-
ing to sue mortgagor for breach of contract;
"other insurance" provisions of loan documents
required mortgagors to obtain certified terrorism in-
surance at servicer's request; and
default interest accrued at conclusion of five-
day cure period.
Action 13
Action
Whether a plaintiff possesses standing to assert
a particular claim depends on the facts pleaded and
the cause of action asserted.
Affirmed as modified.
Action 13
West Headnotes
Action
201 I Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 2
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
Court, in determining whether a party has
standing to sue, construes the petition in favor of
the pleader and, if necessary, reviews the entire re-
cord to detennine if any evidence supports stand-
ing.
Action 13
Action
The standing doetrine foeuses on whether a
party has a sufficient relationship with the lawsuit
so as to have ajusticiable interest in its outcome.
Mortgages 266
k. In general.
Contracts 95
Contracts
Construction and Operation
) General Rules of Construction
Application to Contracts in Gen-
Contracts 95
Contracts 95
Contracts
General Rules of Construction
k. Construction as a whole.
Court's primary concern in contract interpreta-
tion is to ascertain the meaning and determine what
obligations are imposed on the parties.
eral
Court examines and considers the entire writ-
ing as a whole to harmonize and give dfect to all
the provisions of a contract so that none will be
rendered meaningless.
Mortgages 266
Mortgages
Rights and Liabilities of Parties
Actions for Damages
k. Between parties to mortgage
Mortgages
Rights and Liabilities of Parties
or their privies.
Servicer of mortgagor's commercial mortgage-
backed security loan (CMBS) had standing to sue
mortgagor for breach of contract, based on mort-
gagor's failure to obtain certified terrorism insur-
ance as allegedly required by loan documents,
though servicer was not the holder of mortgagor's
note, as pooling and servicing agreement (PSA)
between servicer and trustee of mortgagor's CMBS
loan gave servicer "full power and authority, acting
alone, to do or cause to be done any and all things
in connection with such servicing and administra-
tion which it may deem necessary or desirable,"
PSA required trustee to support servicer's efforts to
service pooled loans, and PSA permitted servicer to
institute lawsuits in its own name.
201 I Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 3
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
and
Windstead, Secrest & Minick, P.c.,
Dallas, TX, for appellees.
Before Justices
Contracts
General Rules of Construction
Language of Instrument
k. In general.
Terms used in a contract are given their plain,
ordinary, and generally accepted meaning unless
the instrument shows the parties used terms in a
technical or different sense.
121 Interest 219 =>43
Interest
Time and Computation
Stipulations as to Time
k. Particular provisions.
Default interest accrued with respect to mort-
gagor's default in failing to procure certified terror-
ism insurance as requested by loan servicer per
"other insurance" provision of loan documents on
date five days after date of loan servicer's first
"final notice" letter informing mortgagor that ter-
rorism insurance was required under loan docu-
ments, rather than as of date of "final notice" letter,
as mortgage and security agreement provided for a
five-day cure period, and note stated that a default
existed only after expiration of the cure period.
Opinion By Justice
Appellee ORIX Capital Markets, L.L.c. filed a
motion for rehearing, and appellant ECF North
Ridge Associates, L.P.filed a response. The motion
for rehearing is granted, and we withdraw our sub-
stituted opinion issued January 19,201 I and vacate
our judgment of that date. The following is now the
opinion of the Court.
Borrowers ECF and TCI 9033 Wilshire
Boulevard, Inc. contest the legal and factual suffi-
ciency of the evidence to support the trial court's
finding that ECF and TCI breached their loan
agreements by not procuring certified terrorism in-
surance on the properties securing their debts. Sep-
arately, ECF appeals the trial court's calculation of
default interest, and TCI challenges ORIX's stand-
ing, as servicer, to sue for breach of contract. We
modify the trial court's judgment to account for the
proper accrual date for default interest against ECF
and affirm the judgment as modified.
Background
At the time of the dispute, ECF and TCI were
the owners of commercial real estate properties.
ECF owned the North Ridge Apartments property
in Dallas, Texas, which is low-income housing built
in the late 1960s and located within a couple miles
of the Dallas Galleria and surrounding office
towers. TCI was the owner of the Wilshire Medical
Building in Los Angeles, California, which is loc-
ated less than a mile from Rodeo Drive in Beverly
Hills. ECF and TCI share the same principal and,
during the relevant time, the same property man-
agement company, Prime Income Asset Manage-
ment, Inc. Prime also functioned as their contractu-
al advisor, responsible for risk management. Mort-
gage loans originated in 1995 for the apartment Strasburger & Price, LLP,
Appeal and Error
Review
Error Waived in Appellate Court
k. Insufficient discussion of ob-
Appeal and Error 30 =>l 079
*402 Friedman & Feiger, L.L.P.,
Shamoun & Norman,
LLP, Dallas, TX, for appellants.
jections.
Appellants waived on appeal those sub-issues
identified in their briefs that they failed to brief.
2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
Page 4
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
[ ] The loan documents required specified in-
surance on the properties, including "all-risk" in-
surance. "All-risk" insurance covers any peril not
specifically excluded in the policy. See
At the time of the loan origina-
tions, neither ECF's nor TCl's all-risk policy ex-
cluded coverage for damage caused by acts of ter-
rorism. Yet after the September II, 200 I terrorist
attacks in New York City, Washington, D.C., and
rural Pennsylvania, insurance companies, including
those for ECF and TCI, began excluding from their
all-risk policies any coverage for damage caused by
terrorist acts.
When ECF and TCI refused to obtain certified
terrorism insurance, ORIX declared defaults under
the loan documents. ECF and TCI responded by fil-
ing suit against ORIX for breach of contract and de-
claratory relief. ORIX answered and counter-
claimed, also alleging breaches of *404 contract
and requesting a declaration that ECF and TCI had
In a series of letters beginning in 2002, ORIX
informed ECF and TCI certified terrorism insurance
was required under the relevant loan documents.
"Certified terrorism insurance" is coverage for cer-
tain terrorist acts that have been certified by the
United States Secretary of Treasury in concurrence
with the United States Secretary of State and Attor-
ney General under the Terrorism Risk Insurance
Act of 2002,
2322-36 (2002) (the TRIA). The corres-
pondence continued, with ORIX sending "final no-
tice" to both ECF and TCI in 2004. ECF and TCI
shared the same principal and risk management and
therefore received the same information on the cost
of certified terrorism insurance-premiums pur-
portedly ran as high as $20,000 annually. The loan
balances in 2004 were approximately $4.8 million
for ECF and $6.6 million for TCI, and both were
unwilling to obtain such insurance. Evidence at trial
showed that had they obtained actual bids for the
insurance, the annual premiums would have been
SI,412.40 for ECF and $345.63 for TCI.
cussed below.
A CMBS is a type of bond secured
by a large number of commercial mort-
gages pooled together, often on the basis
of the similarity of the mortgage loan doc-
uments and geographical location and type
of collateral. The creator of the CMBS
then issues a series of "slices" of the bond
(usually called tranches) that vary in yield,
duration, and payment priority. The in-
come of the mortgage is the income of the
bond, with the investors in the highest-
rated tranches being paid first; if there is a
shortfall in the income from the mortgages,
the investors with the lowest-rated tranches
may not receive any income at all. The
mortgages that secure the CMBS are
placed in a securitization trust, and the
trustee is responsible for servicing those
mortgages. Sometimes, however, trustees
of CMBSs delegate their rights, authority,
and monitoring responsibilities to master
or special servicers pursuant to pooling
and servicing agreements. The servicer is
obligated to balance competing interests of
the various tranches with the borrowers'
various contractual obligations, but is ulti-
mately contractually obligated to service
the loan in accordance with the interests of
the trustees as well as the holders of the
various tranches. See
*403 property and 1999 for the medical building.
Both loans were pooled and securitized after
Origination becoming Commercia... l.. Mort-
, .. . . fN
gage-Backed Security loans (CMBSs). ORIX
was the servicer on behalf of the loan pools' trust-
ees for both loans and was therefore responsible for
collecting monthly payments of principal and in-
terest, monitoring whether the property was prop-
erly insured, and addressing any issues of default
under the loan documents.
Page 5
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
(sub. op.). If, however, the evid-
ence offered to prove a vital fact is so weak as to do
no more than create a surmise or suspicion of its
existence, the evidence is no more than a scintilla
and is legally no evidence.
A legal insufficiency challenge
fails if there is more than a scintilla of evidence to
support the verdict. FO,<"/IUH'O FI,,'"''''''
For their factual sufficiency challenge, ECF
and TCI must demonstrate there is insufficient
evidence to support the adverse finding,
I
In reviewing a factual suffi-
ciency challenge, we consider and weigh all of the
evidence in support of and contrary to the trial
court's finding and will set aside the verdict only if
the evidence supporting the verdict is so slight, or
the evidence against it so strong, that the finding is
manifestly unjust and quite clearly wrong. See
I
(finding factually insufficient if "the evidence sup-
porting the verdict is so weak or the evidence to the
contrary is so overwhelming" that finding should be
set aside and new trial ordered); see also
I I (per curiam)
(for factual sufficiency review, verdict set aside
only if "clearly wrong and unjust"); Hall, ,)U.'l1aanlS
). The amount of evid-
ence necessary to afTirm a *405 judgment is far less
than that necessary to reverse a judgment.
breached the insurance provisions in the relevant
loan documents and seeking default interest from
the date of the alleged breach. Once it received the
counterclaim, ECF elected to payoff its loan. In
connection with this payoff, ECF first obtained cer-
tified terrorism insurance in April 2005 for an an-
nual premium of $1,787.00 and paid the default in-
terest under protest. About the same time, TCI
sought approval from ORIX to have another party
assume its loan. To complete the assumption, TCI
also paid default interest under protest. The lawsuit
continued.
In late 2007, ECF and TCI joined as co-
defendants U.S. Bank, N.A. a/k/a Bancorp., N.A.,
as Trustee for the Mortgage Through Certific-
ates, Series and Wells Fargo Bank, N.A.,
a/k/a Wells Fargo Bank, Minnesota, N.A., as Trust-
ee for the Mortgage Certificates,
Series 99CI. Previously, in 2006, ORIX had ac-
quired ECF's loan formerly held by U.S. Bank and
was both the owner and servicer of the loan. Yet
Wells Fargo still held TCI's loan, and TCI added a
defense that ORIX did not have standing to assert
any claims against TCI. The trustees answered, es-
sentially parroting ORIX's allegations and asserting
ORIX had the right to recover default interest and
attorney's fees attendant to enforcing ECF's and
TCI's loan documents.
After thirteen days of bench trial in late 2008,
the trial court rendered judgment for appellees and
awarded ORIX default interest and attorney's fees.
ECF and TCI appeal.
Standard of Review
For their legal-sufficiency challenge, ECF and
TCI must demonstrate on appeal there is no evid-
ence to support the trial court's adverse findings.
Under a no-evidence point, we con-
sider the evidence in the light most favorable to the
verdict, indulging every reasonable inference in
support.
Discussion
ECF and TCI challenge the findings and con-
clusions requiring them to maintain certified terror-
ism insurance. ECF separately challenges the trial
court's judgment awarding ORIX default interest
beginning May 13, 2004, the date of ORIX's first
"final notice" letter. TCI further challenges ORIX's
standing as the account servicer to sue for breach of
contract. We begin with TCI's challenge to ORIX's
Page 6
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
Recently, a federal appeals court addressed the very
issue of whether a mortgage servicer had standing
to pursue claims against a borrower for an alleged
default under a mortgage loan to which the servicer
was not a party. See
In the court addressed whether a
mortgage servicer, CWCapital, was entitled to
bring suit against the commercial landlord (the bor-
rower) and its former tenant for moneys the former
tenant paid the landlord in settlement of a separate
dispute. Examining the servicer's role in
administering a mortgage-backed security, the court
explained how a "servicer must balance impartially
the interests of the different tranches as determined
by their contractual entitlements."
The court turned to the language of CWCapital's
PSA with its trustee, stating the servicer is the
trust's collection agent because it "shall ... have full
power and authority, acting *406 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," thus making the
delegation of the trustee's rights to the servicer
"comprehensive." (alterations in origin-
al). According to the court: "There is no doubt
about Article III standing in this case [of a servicer
bringing suit]; 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."
Standing is a component of sub-
matter jurisdiction.
er a plaintiff possesses standing to assert a particu-
lar claim depends on the facts pleaded and the
cause of action asserted.
Whether a trial court has subject matter jurisdiction
is a matter of law, which we review de novo. See
standing.
Standing
TCI argues that ORIX, as the mortgage ser-
vicer and not the holder of TCI's note, has no stand-
ing to sue TCI. ORIX responds that the pooling and
servicing agreement (PSA) between it and the trust-
ee of TCl's CMBS conveys standing to sue for de-
fault of the loan documents.
r We
construe the petition in favor of the pleader and, if
necessary, review the entire record to determine if
any evidence supports standing. See
The standing doctrine
"focuses on whether a party has a sufficient rela-
tionship with the lawsuit so as to have a 'justiciable
interest' in its outcome."
(quoting
6A CHARLES ALAN WRIGHT, ARTHUR R.
MILLER, AND MARY KAY KANE,
No Texas case directly addresses the stand-
ing question before this Court, although ORIX cites
for guidance. There, the
court concluded the record contained sufficient
evidence ORIX Capital Markets had proven its
right to enforce a note as the current "special ser-
vicer" and pursuant to a servicing agreement con-
taining language similar to the PSA in this case.
The court next turned to the issue of whether
CWCapital was a real party in interest.
Examining CWCapital's PSA, the
court cited various provisions indicating the ser-
vicer had the right and responsibility to bring suit
against the borrower, including the "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 also was obligated, at the
Page 7
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
(internal citations omitted; em-
phasis in original).
ferent tranches of the security.
Requirement oj'Terrorism Insurance
TCI cited several of our cases for the
proposition, "[i]n order to establish stand-
ing to maintain a breach of contract action,
a plaintiff must show either third-party be-
neficiary status or privity." See, e.g..
Re-
viewing these cases, we conclude they do
not control the current circumstances in
which a pooling and servicing agreement
specifically gives the servicer the right and
responsibility to institute suit against a bor-
rower either in its own name or on behalf
of the trustee.
Here, the language of ORlX's PSA is almost
identical to that in The PSA gives
ORIX "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." Similarly, the
trustee is required to support *407 ORIX's efforts to
service the pooled loans: "Trustee shall execute any
powers of attorney and other documents delivered
to it by [ORIX] and necessary and appropriate to
enable [ORIXL as the case may be, to carry out its
servicing and administrative duties hereunder. ... "
Further, the PSA permits ORIX to institute lawsuits
in its own name: "without the Trustee's written con-
sent[, ORIX shall not,] except as relating to a Mort-
gage Loan which [ORIX], as applicable, is servi-
cing pursuant to [its] respective duties herein ... ini-
tiate any action, suit or proceeding solely under the
Trustee's name without indicating [ORIX's] repres-
entative capacity.... " We therefore conclude under
the same reasoning as in ORlX had
standing to bring this lawsuit against TCI either in
. . . FN2
ItS own name or as a speCIal servlcer.
servicer's written request, to execute any limited
powers of attorney and other documents furnished
by the servicer and necessary or appropriate to en-
able the servicer to carry out its servicing and ad-
ministrative duties under the PSA. The court con-
cluded the trustee was required to confer necessary
authority on the servicer to bring suit, "[f]or it is
the servicer, not the trustee, who is empowered to
decide whether to sue." Regarding the right of
the servicer to sue in its own name, the court em-
phasized the following PSA language excepting out
the required trustee consent when suing pursuant to
servicing duties:
[W]ithout the Trustee's written consent, "except
as relates to a Loan that the ... Servicer ... is ser-
vicing pursuant to its representative 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."
(stating italicized "except" indicates "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 representat-
ive capacity-implying that it is not doing so in a
representative capacity if it is suing in regard to a
servicing-related loan") (emphasis and alterations
in original). The court concluded:
It is thus the servicer, under the agreement, who
has the whip hand; he is the lawyer and the cli-
ent, and the trustee's duty, when the servicer is
carrying out his delegated duties, is to provide
support. The securitization trust holds merely the
bare legal title; thc Pooling and Servicing Agree-
ment delegates what is effectively equitable own-
ership of the claim (albeit for eventual distribu-
tion of the proceeds to the owners of the tranches
of the mortgage-backed security in accordance
with their priorities) to the scrvicer. For remem-
ber that in deciding what action to take with re-
gard to a defaulted loan, the servicer has to con-
sider the competing interests of the owners of dif-
Page 8
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
Ilaving concluded ORIX had standing to
bring suit, we now turn to the question of whether
ECF and TCI were contractually obligated to pro-
cure terrorism insurance. In response to ECF's and
TCI's challenge to the legal and factual sufficiency
of evidence to support the trial court's judgment,
ORIX contends that terrorism insurance is required
under two separate provisions of the relevant loan
documents-"other insurance" and "all-risk insur-
ance."
We address the "other insurance" clauses of the
loan documents first because those provisions are
dispositive. Subsection 1.4(f) of ECF's Mortgage
and Security Agreement provides in relevant part:
Mortgagor shall, at Mortgagor's expense, main-
tain in force and effect on the Property at all
times while this Mortgage continues in effect the
following insurance:
(f) Such other insurance on the Property or on
any replacements or substitutions thereof or addi-
tions thereto as may from time to time be re-
quired by Mortgagee against other insurable haz-
ards or casualties which at the time are com-
monly insured against in the case of property
similarly situated, due regard being given to the
height and type of buildings, their construction,
location, use and occupancy.
TCl's Deed of Trust, Security Agreement, As-
signment of Leases and Rents and Fixture Filing
contains a similar provision:
Borrower shall, at its own cost and expense,
maintain the following insurance *408 coverage
with respect to the Property during the term of
this Deed of Trust:
(h) Miscellaneous. Such other insurance cover-
ages, in such amounts, and such other forms and
endorsements, as may from time to time be re-
quired by Lender and which are customarily re-
quired by institutional lenders for similar proper-
ties, similarly situated, including, without limita-
tion, coverages against other insurable hazards
including, by way of example only, earthquake,
sinkhole and mine subsidence, which at the time
are commonly insured against and generally
available.
Although not identical, the language of these
contracts is clear: ORIX as servicer may require
ECF and TCI to obtain certain insurance cover-
a g e ~ s u c h as certified terrorism insurance-if such
perils are commonly insured against for similar
properties, similarly situated. ECF and TCI do not
challenge whether certified terrorism insurance was
"generally available"; instead, they argue certified
terrorist acts were not "commonly insured against"
for properties similar to the apartment property or
medical building. Their burden under their legal
sufficiency challenge is to demonstrate there is no
evidence to support the adverse finding certified
terrorist acts were commonly insured against for
similar properties, similarly situated. See
Alternatively, under their factual
sufficiency challenge, ECF and TCI must show the
evidence supporting the trial court's finding is so
slight as to render the finding clearly wrong and un-
just. See Hall, supra, at
172.
Page 9
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
During the course of the thirteen-day bench tri-
al, ORIX primarily relied on a survey published in
June 2004 by the Mortgage Bankers Association.
The MBA study was conducted in response to a re-
quest by the United States Treasury Department to
gather information regarding the "effectiveness" of
the TRIA. In its survey, the MBA analyzed over
122,000 commercial and multifamily loans across
major investor classes (CMBSs, life companies,
Fannie Mae, Freddie Mac, FHA and others, with
minimal representation by commercial banks and
savings and loans), with the average loan size being
$5.34 million. Of the $656 billion of commercial
and multifamily mortgages studied-32% of the
total insurance was required by
the mortgage investor or servicer for 93.9'% of the
loans, and terrorism insurance was in place for
83.5%. In the portfolios studied, terrorism insur-
ance was required for 100% of the balance serviced
for CMBS and other affiliates. The press release re-
garding this survey summarized the results as
showing the "impact on all property types across
U.S." and stating "[t]his indicates that terrorism in-
surance coverage is wide and deep, not just for
trophy properties but across the entire commercial!
multifamily real estate spectrum."
The testimony at trial regarding this MBA sur-
vey further explored ORIX's conclusion that certi-
fied terrorist acts were commonly insured against
for properties situated similarly to the apartment
property and medical building. In addition to the
conclusion terrorism insurance was required for
over 93'% of the loans surveyed, ORIX's expert test-
ified the survey was statistically reliable-over
122,000 commercial and multifamily loans were
surveyed nationally without restriction to specific
geographical locations. ORIX's expert further testi-
fled that because of the breadth of the survey, it ne-
cessarily included properties similar to the medical
building and the apartment property.
Other evidence admitted at trial included a
January 2005 paper published by the *409 Congres-
sional Budget Off1ce entitled "Federal Terrorism
Reinsurance: An Update" and a report of the United
States Department of the Treasury entitled,
"Assessment: The Terrorism Risk Insurance Act of
2002." These reports corroborated the findings re-
ported in the MBA survey that CMBSs almost uni-
formly required terrorism insurance. The MBA sur-
vey was cited in the CBO paper for the conclusion
"nearly all of the balances being serviced for
CMBSs-the largest segment of the commercial!
multifamily mortgage market-were required to
have terrorism insurance in place.... " Further, the
CBO paper included reference to "one recent deal,
involving a $1.3 billion CMBS composed of 106
loans and 120 properties (including a number of re-
tail shopping malls across the country), [in which]
99.7 percent of the balance underlying the CMBS
had terrorism insurance in place." In the referenced
Treasury Department assessment, the effectiveness
of the TRIA was analyzed through a comprehensive
set of nationwide surveys of policyholders and in-
surers between 2002 and 2005. Policyholders sur-
veyed represented almost 1.1 million organizations
across markets that were not part of the federal
government and had at least ten employees, repres-
enting various market shares and businesses. The
FNl
assessment also showed a 54'% take-up rate . in
2004, the time of ORIX's demands on ECF and TCI
to procure certified terrorism insurance. To account
for variations among properties, results were re-
fined according to property replacement values: for
properties with replacement values under 850 mil-
lion (the replacement values for the apartment prop-
erty and medical building), the take-up rate in 2004
was 53%,. To account for geographical differences
for the same period, take-up rates for policyholders
were 61 % in large cities such as Dallas, and 67
%
in
high-risk cities designated by the Department of
Homeland Security such as Los Angeles. Results
were segregated further by industrial sector: busi-
ness-which included industries in real estate and
rental and leasing; professional, scientific, and
technical services; and management of companies
and a 65% take-up rate in 2004.
The take-up rate is the share of poli-
Page 10
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
cyholders who purchased any amount of
terrorism risk insurance.
Both ECF and TCI complain no attcntion was
paid to specific criteria of the relevant properties
when ORIX determined certified terrorism insur-
ance was required under the loan documents;
rather, they assert, ORIX simply made a blanket de-
cision to require certified terrorism insurance for all
loans it serviced. But, ORIX's expert testified the
statistically reliable MBA survey-which con-
cluded over 93'% of commercial and multifamily
mortgages required terrorism necessar-
ily included properties similar to the medical build-
ing and the apartment property. Accordingly, al-
though some of the evidence did not reflect 100%
terrorism coverage, we conclude the evidence sup-
ported the trial court's findings that certified terror-
ist acts were commonly insured against for proper-
ties situated similarly to the apartment property and
medical building: commercial and multifamily
properties that were collateral for securitized loans,
had similar replacement values, were in specific in-
dustry sectors, and were located in Dallas and Los
Angeles. See. e.g..
("On these
motions, the lender did demonstrate that the risk
was 'commonly' insured *410 against; it was not
necessary that the risk be universally insured
against, so plaintiffs demonstration that some
buildings in Manhattan did not have terrorism cov-
erage was not dispositive on this issue.").
ECF and TCI offered no evidence contradicting
these statistics, instead contending the commonality
analysis in the context of CMBSs was inappropriate
because the relevant loan documents were not se-
curitized at the time of execution. The relevant loan
documents, however, do not require ORIX's request
for "other insurance" be examined with circum-
stances frozen as of 1995 or 1999, the time of the
parties' contracts. Instead, the contract language
and placement in the loan documents indicate the
intent of flexibility. ECF was required to maintain
such "other insurance" as may "from time to time"
be required, which "at the time" are commonly in-
sured against for properties similarly situated. Al-
though the clauses are not identical, in material re-
spects TCI likewise was required to maintain such
"other insurance" as may "from time to time" be re-
quired, which "at the time" are commonly insured
against and generally available. Located at the end
of the sections discussing insurance requirements,
and following the prior subsections detailing specif-
ic requirements, the "other insurance" provisions of
both ECF's and TCI's loan documents effectively
function as "catch-all" clauses that provide the
lender flexibility for changing or unforeseen cir-
cumstances or insurance needs encountered during
the duration of the loans. Indeed, appellants con-
ceded such a characterization: at trial, ECF referred
to the "other insurance" provisions as "catch-all"
and appellants' insurance expert agreed. Neither the
contract language nor the testimony supports ECF's
and TCl's contentions the commonality analysis
must be determined according to the circumstances
at the time of origination.
Nor do ECF and TCI support their contention
ORIX was required under the terms of the relevant
loan documents to engage in individualized com-
monality analyses. They have identified no lan-
guage in the loan documents mandating such a re-
quirement, and the plain language requires the re-
quested insurance "be" commonly insured against
for similarly situated properties. Stated differently,
no individualized inquiry is a condition to determ-
ining whether the other insurance is commonly re-
quired for similar properties. See, e.g.,
("Absent the re-
quisite conditional language, it was not a condition
precedent to the lender's right to request other in-
surance for it to show that such coverage was for a
risk 'commonly insured against.' ") (internal cita-
tion omitted).
We conclude ECF and TCI have failed to meet
their burdens of showing there is either no evidence
or insufficient evidence to support the trial court's
Page II
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
findings that ORIX could, under the "other insur-
ance" provisions of the loan documents, require
certified terrorism insurance. We also conclude the
evidence is legally and factually sufficient to sup-
port the trial court's finding that ECF and TCI
breached their loan agreements by not procuring the
insurance. Based on these conclusions, we do not
reach the remaining issues regarding the "all-risk
insurance" provisions. See . 47..
Calculation ofDefclUlt Interest
ECF also contests the trial court's finding
default interest accrued from May 13, 2004, the
date of ORIX's first "final notice" letter. ECF as-
serts both this letter and a July 14, 2004 letter from
ORIX gave additional cure periods and any default
interest must be calculated from the expiration of
the last cure period: July 19, *411 2004. ORIX re-
sponds that default interest is due immediately upon
default and any cure periods offered in its letters do
not alter the language of the loan documents.
Our analysis of the loan documents begins with
section 3.1 of the note, which provides:
It is hereby expressly agreed that ... should any
other default occur under any of the Loan Docu-
ments which is not cured within any applicable
grace or cure period, then a default shall exist
hereunder, and in such event the indebtedness
evidenced hereby, including all sums advanced or
accrued hereunder or under any other Loan Docu-
ment, and all unpaid interest accrued thereon,
shall, at the option of Lender and without notice
to Borrower, at once become due and payable and
may be collected forthwith.
Section 3.3 also provides, "[s]o long as any de-
fault exists hereunder ... such default interest shall
be immediately due and payable."
The Mortgage and Security Agreement is one
of the "Loan Documents" as defined in ECF's note.
Because the note contains no definition for a
"default," we look to that security agreement. Sec-
tion 4.16 of the security agreement also provides,
"A default hereunder which has not been cured
within any applicable grace or cure period shall be
a default under each of the other Loan Documents."
Subsection 2.1 (b) also provides: "The occurrence of
any of the following events shall be a default here-
under: ... [ECF] fails to provide insurance as re-
quired by Section 1.4 hereof ... and such failure
continues for five (5) days after written notice
FN4
thereof from [ORIX] to [ECF]." .
Although argued to the trial court,
ECF does not challenge now whether no-
tice by ORIX was required or, if so, was
sufficient.
To determine the accrual date for default in-
terest, we must resolve whether a "default" exists
as of the date of ORIX's "final notice" that ECF
must obtain certified terrorism insurance, or only
upon the expiration of any cure period. The plain
language of the note states defaults exist only after
expiration of the cure period-"should [a] default
occur under any of the Loan Documents which is
not cured within any applicable grace or cure peri-
od, then a default shall exist." (Emphasis added.)
Subsection 2.1 (b) of the security agreement plainly
sets a cure period-five days. Considering both
agreements together, as we must, no default oc-
curred under the note until expiration of the five-
day cure period. See
(op. n.p.t.)
(construing promissory note and deed of trust to-
gether).
ORIX asserts the language of the loan docu-
ments making any default interest "immediately
due and payable" provides for no cure period be-
fore interest accrues. The loan documents provide
otherwise. Specifically, section 3.3 of the note de-
fining the rate of default interest contemplates the
existence of a default first, after which default in-
terest accrues and "shall be immediately due and
payable." Because a default exists only upon the
expiration of the five-day cure period, no default
interest becomes "immediately due" until the cure
Page 12
336 S.W.3d 400
(Cite as: 336 S.W.3d 400)
period expires. The original parties to these transac-
tions were sophisticated; had they chosen to define
the default date as the date the borrower failed to
maintain insurance, they would have done so.
ECF maintains ORlX's correspondence was an
"indulgence" under the loan documents that exten-
ded ECF's cure period; *412 by ignoring these in-
dulgences when calculating the amount of default
interest, the trial court erred. Yet section 4.1 of
ECF's own note states specifically any indulgences
granted by ORIX shall not be construed as a waiver
of its rights. ORIX had the right to grant ECF in-
dulgences and extensions under the loan documents
in an effort to provide time for ECF to cure its de-
fault. ECF refused any attempt to cure until April of
2005 when it sought to payoff its outstanding loan
balance. Had ECF cured its default within the time
periods allowed by ORIX, no default would have
occurred. Because it did not cure, ORIX's indul-
gences did not prevent ORlX's right to collect de-
fault interest pursuant to the first "final notice" let-
ter. We conclude the trial court erred when it awar-
ded default interest from the date of ORIX's corres-
pondence, May 13, 2004, without accounting for
the five-day cure period under the loan documents.
Other Issues
ECF also identified sub-issues in its brief
as to appellees' breach of contracts and mitigation
of damages. TCI similarly raised issues regarding
mitigation and Wells Fargo's failure to plead the
element of damages. ECF and TCI did not brief any
of these issues. Accordingly, the issues are waived,
and we will not address them. See
("When a party fails to brief a complaint ad-
equately, it waives the issue on appeal.").
Conclusion
With respect to the calculation of default in-
terest, we modify the trial court's judgment to re-
Hect the five-day grace period following May 13,
2004. Specifically, we modify the trial court's judg-
ment to provide the amount of default interest paid
by ECF that ORIX may retain (modifying
$217,027.38 to $213,645.47) and the commence-
ment date for prejudgment interest against ECF
(modifying May 13, 2004 to May 18, 2004). See
The trial court's judgment
is affirmed in all other respects.
Tex.App.-Dallas,20 II.
ECF North Ridge Associates, L.P. v. ORIX Capital
Markets, L.L.c.
336 S.W.3d 400
END OF DOCUMENT
APPENDIX
TAB
"6"
LOAN NO. 998505003
PRQMISSORY NOTE
Dated; July q, 1999
FOR VALUE RECEIVED, the"undersigned, AMERlCAN MEDICAL
HNANCIAL GROUP, L.P, a California lif"i1ited partnership, having an address c/o 9033 Wilshire
Boulevard, Beverly Hills, California 90211 (the "Maker"), does hereby covenant and promise to
pay to the order ofMERRlLL LYNCH CREDIT CORPORATION, a Delaware corporation, having
an address at Deer Lake Drive East, Jacksonville, Florida 32246 (the "Holder"), or at such
other place as Holder may from time to time designate in writing. the principal sum of SIX
MIL-tION EIGHT HUNDRED NINETY-TWO THOUSAND AND NOIlOD DOLLARS
($6,892,000) in lawful money of the United States of America, and all other amounts due or
becoming-due hereunder. with interest on the principal sum outstanding from time to time (the
"Principal Amount") from the date hereof on the terms herein provided through the date that the
loan evidenced hereby (the "Loan") is repaid in full, in lawful money of the United States of
America, at an interest rate of Eight and Six Hundred Seventy-Five Ten Thousandths Percent
(8.0675%) per annum (the "Interest Rate"). All capitalized terms not deftned herein shall have the
same meanings set forth in the Mortgage (as hereinafter deftned).
SECTIONT. PAYMENTTERMS
A. Payments under this Note shall be due and payable as follows:
(I) interest from the date ht.rt.:ofthrough the last day of the current month
shall be paid on the date hereof; thereafter
\
'.
(2) interest and principal shall be due and payable in equal consecutive
monthly installments of Fifty-One Four Hundred Sixty-Nine and 161100
Dollars ($51,469.1 6) on the first day of each and every calendar month (each. a
"Payment Date") commencing on September I, 1999; and
(3) the entire Principal Amount, together with all accrued and unpaid
interest and any other charges due hereon shall be due and payable on the Payment
Date on August 1,2009 (the "Maturity Date").
B. Interest shall be computed using the actual number of days elapsed for the relevant
payment period, based oD. a 360..day year. In computing the number of days during which interest
accrues on any amount outstanding hereunder, the ftrst date from which interest is stated to accrue
hereunder shall be included and the date of payment of such amount to Holder shall be excluded.
YNCH CREDiT CORPORAnONfWil,hire Medical Building
Promissory Note
File No.:20067180008
LOSOI:71211.J
JOINT EXHIBIT NO.3
Cause No. 04-7956-0
-2-
MAKER HEREBY ACKNOWLEDGES THAT INTEREST ON THIS NOTE IS TO BE
C.&,.LCULATED BYHOLDERONTHE BASIS OF ATHREE HUNDRED SIXTY (360) DAY
YEAR AND IS FULLY AWARE THAT SUCH CALCULATIONS MAY RESULT IN AN
ACCRUAL ANDIOR PAYMENT OF INTEREST IN AMOUNTS GREATER THAN
CORRESPONDING INTEREST CALCULATIONS BASED ON A THREE HUNDRED
SIXTY-FIVE (365) DAY YEAR.
-:: :-
C. All payments made pilrsuant to this Note shall be made by check to
collection) or by .......u-e transfer to Holder's office. Such payments must be received by Holder hefore
1:00 p.m., Eastern Time, inorder to be credited as a payment received that date.
D. . 'AlI amounts due under this Note shall be payable \\.;thout setoff, counterclaim or any
other deduction whatsoever.
E. Provided no Event ofDefault ("Event of Default") exists under that certain Deed of
Trust, SeC'Urity Agreement, Assignment of Leases and Rents,and Fixture Filing dated as of the date
hereof, given by Maker to Holder, which encumbers certain property described therein (the
"Property") and secures the Loan evidenced by this Note (the all payments received
by Holder on this Note shall be applied first, to the repayment ofsums advanced by Holder to protect
or preserve the Property pursuant to the Mortgage and other loan documents relating to the Loan (the
"Loan Documents'), second, to late charges and other premiums and charges, third, to interest and
finally, to principal. Notwithstanding the foregoing, from and after an Event of Default, all
payments received by Holder on this Note shall be applied by Holder to principal, interest and/or
other charges due hereunder or under the other Loan Documents in such order as Holder shall
determine in its sole discretion.
F. To the extent that Maker makes any payment or Holder receives any payment or
proceeds for Maker's benefit, which are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver, custodian
or aAY other party under any bankruptcy law, common law or equitable cause, then, to such extent,
the obligations ofMaker hereunder intended to be satisfied shall be reinstated and continue as jfsuch
payment or proceeds had not been received by Holder.
SECTION II. NO PREPAYMENTS; DEFEASANCE
A. For purposes of this provision, the definitions shall apply:
(1) ".GQ.!k" shall mean the Internal Revenue Code of1986 as amended from time
to time or any successor statute.
(2) "Defeasance Collateral" shall mean U.S. Obligations (as hereinafter defined)
which are identified by Maker (but if not identified by Maker, then selected by Holder) and that
provide for payments prior, but as close as possible, to the Payment Dates for all Scheduled
MERJlJLL LYNCH CREDIT CORPORATIONIWiislire Medical Building
Promissory Note
File 1'10.:20067/&000&
LOS0l:7127U
-3-
Defeasance Payments (as hereinafter defined), v.rith each payment on such U.S. Obligations (together
with any UI}expended portion of any prior payment) being equal to or greater than the corresponding
Scheduled Defeasance Payment
(3) "Defeasance Deposit" shall mean an amount in immediately available funds
equal to the sum of the cost of the Collateral and all costs and expenses incurred or to
be incurred in connection therewith, without limitation any revenue, documentary .stamp
or intangible taxes or any other tax orcharge due in connection v.rith the defeasance of the Loan.
(4) "Rating Agencies" shall mean each of Standard & Poor's Ratinos Group
'" ,
Duff & Phelps Credit Raiing Co., Moody's fnvestors Service, fnc., Fitch IBCA, fnc. or any
successors thereto.
(5) "REMfC" shall mean a "real estate mortgage investment conduit" as such
term is defined in Section 860D(a) of the Code.
(6) "Scheduled Defeasance Payments" shall mean all successiye scheduled
payments due hereunder on each Payment Date after the Defeasance Date (as hereinafter defined),
including the amounts due on the Maturity Date.
(7) "Startup Dav" shall mean the "startup day", as such term is defined in
Section 860G(a)(9) of the Code, of any REMIC that holds this Note.
(8) "U.S. Obligation:!" shall mean direct non-callable obligations of the United
of America, reasonably acceptable to Holder.
B. Maker shall not be entitled to prepay Note in whole or in part at any time.
Notwithstanding the foregoing, (i) this Note may be prepaid in whole during the three (3) month
period prior to tile Maturity Date, v.rithout any Prepayment Charge (as defined in Section VI hereof)
or Similar premium,.provided that no Event of Default exists and (ii) no Prepayment' Charge or
similar premium shall be payable with respect to a prepayment resulting from Holder's election to
apply any proceeds paid in COr1l1ection .....ith a casualty to or condemnation of the Property
the indebtedness evidenced hereby.
C. Notwithstanding anything contained herein to the contrary, at any time after the date
which is the earlier to occur of (i) two (2) years after the Startup Day or (ii) five (5) years after the
date hereof if the aforesaid Startup Day shall not have occurred during such five (5) years and, in
either case, provided no default exists hereunder and no Event Maker may cause the
Property to be released from the lien of the Mortgage and the Defeasance Collateral to be substituted
therefor as security for the Loan, subject to the satisfaction of the following conditions precedent (a
"Defeasance Event"):
MERRILL LYNCH CREDIT CORPORAT10NlWil,hire Medical Building
Promissory Note
File NO.:200671&OOO&
lOSOI,7127U
i '
( ,
-4-
(I) not less than thirty (30) days' prior written notice shall be given by Maker to
Holder specifying a Payment Date (the "Defeasance Date") on which the Defeasance Event is to
occur;
(2) all accrued and unpaid interest and all other sums due under this Note and
under the other Loan Documents up to and including the Defeasance Date and all costs and expenses
incurred by Holder or its agents in cOrlnection with the' Defeasance Event (including, without
limitation, the review ofthe proposed DefeaSance Collateral and the preparation of the DefeaSance
Security Agreement (as hereinafter defined), legal opinions, mathematical verifications by a certified
public accountant and related documentation), shall be paid in full on or prior to the Defeasance
Date;
.-
(3) Maker shall remit the Defeasance Deposit to Holder;
(4) Maker shall execute and deliver, or cause to be executed and delivered, to
Holder on-or prior to the Defeasance Date:
(a) a pledge and security agreement, in form and substance reasonably
satisfactory to Holder, creating a first priority security interest in favor of Holder in the Defeasance
Collateral (the "Defeasance Security Agreement"), which shall provide, among other things, that
any excess received by Holder from the Defeasance Collateral over the amoWlts payable by Maker
hereunder, to the extent not required to make subsequent payments due hereWlder, shall be refunded
to Maker promptly after each monthly Payment Date;
(b) a certificate of Maker certifying that all of the requirements set forth
in this Section 11.C have been satisfied and that the defeasance of the Loan is being undertaken to
facilitate the disposition of the Property or other customary commercial transaction;
(c) an opinion of counsel in form and substance reasonably satisfactory
to f\olde:r (i) from counsel to Holder stating, amongother things, that Holder has a perfected first
priority security interest in the Defeasance Collateral and, if this Note is owned by a REMIC at the
time of the Assumption (as hereinafter defined), if applicable, the Assumption will not adversely
affect the federal income tax treatment of such REMIC under the applicable provisions of the Code
or cause such REMIC to incur any liability for federal income taxes and (ii) from cOWlsel for Maker
stating, among other things, that the Defeasance' Security Agreement is enforceable against Maker
in accordance with its terms;
(d) if required by Holder in its reasonable discretion, evidence in writing
from the applicable Rating Agencies to the effect that the defeasance of the Loan will not result in
a downgrading, withdrawal or qualification of the respective ratings of any securities backed by this
Note (including, without limitation, any securities issued by a RE1vfIC which holds this Note) which
ratings are in effect immediately prior to such Defeasance Event;
MERRlLL LYNCH CREDIT CORPORATIONfWilshirc Medica! Building
PromLSsory Note
File 1'0,:20067180008
lOSOl:7127U
-5-
(e) Maker and any guarantor or indemnitor of Maker's obligations under
the Loan Documents for which Maker has personal liability execute and deliver to Holder such
documents and agreements as Holder shall reasonably require to evidence and effectuate the
ratification of such personal liability and guaranty or indemnity, respectively;
(f) a ratification of all representations and obligations under the Loan
Documents and such other certificates, documents or instruments as Holder may reasonably require;
and -;;: --
(g) ifrequired by the Rating Agencies, a certificate from a certified public
accountant that the Defeasance Collateral is sufficient to cover the remaining interest and principal
payments undel"'the Loan.
(5) Maker, as directed by Holder, shall have duly endorsed or shall cause the
holder thereof to have duly endorsed the Defeasance Collateral or shall have accompanied the
Defeasance Collateral by a written instrument of transfer in form and substance reasonabl)'
satisfactory to Holder (including, without limitdtion, such instruments as may be required by the
depository institution holding such securities or the issuer thereof, as the case may be, to effectuate
book-entry transfers and pledges through the book-entry facilities of such institution or issuer) in
order to perfect upon the delivery of the Defeasance Security Agreement a first priority security
interest in the Defeasance Collateral in favor of Holder in conformity v,.;th all applicable state and
federal laws governing the granting of such security interests;
D. Maker hereby appoints Holder as its agent and attorney-in-fact for the purpose of
using the Defeasance Deposit to purchase for the account of Maker the Defeasance Collateral at
then-prevail.ing market prices, using the means and sources customarily employed and available to
Holder to effectuate such purchases. The Defeasance Collateral shall be arranged such that payments
received from such Defeasance Collateral shall be paid directly to Holder to be applied on account
of the indebtedness evidenced by this Note. Any portion of the Defeasance Deposit in excess of the
to purchase the Defeasance Collateral and to satisfy Maker's obligations under
Section II.C hereof shall be remitted to Maker follomng such purchase.
E. Upon compliance with the requirements of Section II.C hereof, the Property shall be
released from the lien of the Mortgage and the other Loan Documents, and the Defeasance Collateral
shall constitute collateral which shall secure this Note. Holder shall, at Maker's expense, execute and
deliver any documents reasonably requested by Maker to release the Property from the lien of the
Mortgage.
F. Upon the release of the Property from the lien of the Mortgage in accordance with
Section II.E hereof, Maker may, at its option, assign the Defeasance Collateral and all its rights and
obligations under this Note, the other Loan Documents and under the Defeasance Security
Agreement to a successor obligor which shall be a single purpose, bankruptcy-remote entity and
othc-rwlse reasonably satisfactory to Holder (the "Successor Maker") provided that the Successor
MERRlLL LYNCH CREDIT CORPORATIONlWilshire Modio.1 Building
Promissory NOlO
File No.:20067/8000S
LOSOt:71!71J
-6-
( :
Maker executes an assumption agreement in form and substance reasonably satisfactory to Holder
(the "Assumption pursuant to which Successor Maker assumes Maker's obligations
Wlder this Note, the other Loan Documents and the Defeasance Security Agreement other than those
which are described in Sections [LC(4)(e) and (0 (the "Assumption"). Maker shall, at such time,
(x) deliver to Holder an opinion, in form and substance and by counsel reasonably satisfactory to
Holder, stating, among other things, that the Asswnption Agreement is enforceable against Maker
and such Successor Maker in accordance with its terms and that, upon the Assumption, this Note and
the Defeasance Security Agreement the Successor Maker in accord3I}c;e with
their respective terms, and (y) pay costs and expenses incurred by Holder or its agents in
connection with the Assumption (including, .....ithout limitation, the reviewof the proposed Successor
Maker and the preparation ofthe Assumption Agreement, legal opinions and related documentation).
Upon such Maker shall be relieved of its obligations hereunder, under the other Loan
Documents and under the Defeasance Security Agreement, except for those which are set forth in
SectiolTS ILC(4)(e) and (f) hereof.
. .
G. Upon the release of the Property from the lien of the Mortgage in accordance with
Section If:E hereof, neither Maker nor any Successor Maker shall have any right to prepay this Note
pursuant to the other provisions of this Section or othernise.
H. MAKER HEREBY EXPRESSLY WAIVES ANY RIGHTS IT MAY HAVE
UNDER CALIFORNIA CIVIL CODE SECTION 2954.10 TO PREPAY THIS NOTE, IN
WHOLE OR IN PART, WITHOUT PAYMENT OF A PREPAYMENT CHARGE, UPON
ACCELERATION OF THE !'vIATURlTY DATE OF THIS NOTE, AND AGREES THAT IF,
FOR ANY REASON, A PREPAYMENT OF ANY OR ALL OF THIS NOTE IS l\L-\DE
UPON OR FOLLOWING ANY ACCELERATION OF THE MATURITY DATE OF THIS
NOTE BY HOLDER ON ACCOUNT OF M'Y DEFAULT BY lYlAKER, INCLUDING, BUT
NOT LIMITED TO, ANY TRANSFER, OR FURTHER ENCUMBR-\NCE
AS PROHIBITED OR RESTRICTED BYTHE DEED OF TRUST, THEN MAKER SlLli.L
BE OBLIGATED TO PAY, CONCURRENTLY THEREWITH, AS A PREPAY;\lENT
CHARGE, THE APPLICABLE SUM SPECIFIEDIN THIS SECTION. BY INITIALING
nITS PROVISION IN THE SPACE PROVIDED BELOW, MAKER HEREBY DECL<\RES
THAT HOLDER'S AGREEMENTTO MAKE THE LOAN EVIDENCED BY THISNOTE
AT THE INTEREST RATE AND FOR THE TERM SET FORTH IN THIS NOTE
CONSTITUTES ADEQUATE CONSIDERATION, GIVEN INDIVIDUAL WEIGHT BY
MAKER, FOR THIS WAIVER AND AGREEMENT.
INITIALS: Maker
. MER.RlLL LYNCH CREDn CORPORATIONrwihhirc Medical Building
Promissory Note
file t'o.:20067/80008
LOS0I.1I!71 J

SECnONIIl. DEFAULTRATE
A. Upon the occurrence ofand for 50 fong as an Event ofDefauft exists, in Holder's sole
discretion, Borrower shall pay interest on the Principal Amount and all such other amounts due
under the Loan Documents at an annual rate equal to the lesser of (a) the Interest Rate plus four
percent (4%) and (b) the maximum rate permined by applicable law (the "Default Rate"). and shall
be computed from the date performance was due through the date, if any. upon which full
performance is rendered. -: - -
B. To the extent permitted by law. interest shall continue to accrue at the Default Rate.
notwithstanding the issuance of a judgment of foreclosure and sale, the conveyance of the
through the ex.ercise ofa power of sale or otherwise; it being expressly understood and agreed that
Maker's obligations hereunder shall not merge into any such judgment or conveyance and shall
.survive until the actual receipt by Holder of the full amount of the Principal Amount and any other
amounts due and payable hereunder which were not paid when due. The foregoing provisions shall
not be construed as a waiver by rtolder of its right to pursue any other remedies available to it under
the Mongage or any other Loan Document, nor shall it be construed to limit in any way the
application ufthe Default Rate.
SECTION IV. LATE CHARGE
In addition to any interest which may be charged hereunder. Maker shall pay to Holder a
charge ("Late for the collection of late payments in an amount equal to five percent
(5.0%) of any payment required hereunder (except as specifically set forth in this Section) which is
paid within five (5) days after the Payment Date, as liquidated damages and not as a penalty.
Maker agrees that tr...: Late Charge shall be due and payable upon all or any ponion of the Principal
Amount not rep.lld on or before the Maturity Date. In no event shall Holder apply the Late Charge
to the Principal Amount upon the acceleration of the Loan prior to the Maturity Date. Maker
recognizes that its default in making any payment as provided herein or in any other Loan Document as
agryd to paid when due. or the occurrence of any Event of Default, will require Holder to incur
additional expense in servicing and administering the Loan in loss to Holder of the use of the money due
and in frustration to Holder in meeting its other financial and loan commitments and that the damages
caused thereby would be extremely difficult and impractical to ascertain. Nothing in this Note shall be
construed as an obligation on the part of Holder to accept, at any time, less than the full amount then due
hereunder or as a waiver or limitation of Holder's right to compel prompt performance.
SECTION V. NON-RECOURSE
A. Holder agrees that it will look solely to the Property and sUch other collateral, if any, as
may now or hereafter be given to secure the repayment of the indebtedness evidenced hereby. No other
property or assets of Maker. or any partner. member or principal of Maker, shall be subject to levy.
execution or other enforcement procedure for the satisfaction of the remedies of Holder. or for any
MER.RJlllYNCH CREDIT CORPORATIONfWilshirc Medical Building
Promissory Note
File No.:20067/80008

-8-
, I
payment required to be made under this Note or any of the other Loan Documents or for the performance
of any afme covenants or warranties contained in the Loan Documents.
B. The foregoing provisions of this Section shall not (i) constitute a v.-aiver of the obligations
secured by or arising tmder the Mortgage or the other Loan Documents, (ii) limit the right of Holder to
name Maker or the partners, members or principals of Maker as parties in any action or suit for judicial
foreclosure and sale tmder the Mortgage 'or the other Loan Documents or with respect to any other
remedies available to Holder theretmder;so long as no monetary judgment shall be enforcecf,igainst
Maker or any partner, member or principal of Maker, except to the extent of the Property or such
collateral, (iii) release, reduce or impair this Note, the indebtedness evidenced her::by, or the lien of the
Mortgage, (iv) prevent or in any way hinder Holder from exercising any remedy available to Holder
tmder this Note'tlr any of the Loan Documents including, without limitation. the appointment of a
receiver or naming Maker or, ifnecessary in order to ensure the availability of Holder's remedies as set
forth in the Loan Documents, any person. entity, association or joint venture ("Person") owning an
interest in Maker in any action. suit or proceeding in connection with the exercise of any such remedy,
as long as no monetaryjudgment, including a deficiencyjudgment, shall be enforced against any assets
of Maker or any Person owning an interest in Maker, other than the Property or such other collateral, or
(v) release or limit the liability of Maker, any guarantor hereof or any indemnitor under the indemnity
agreement dated as of the date hereof, by PABLO AND ELEANOR ARLENE NANKIN, TRUSTEES
OF THE PABLE AND ELEANOR NANKIN FAMlLY TRUST in favor of Holder (the "I ndemnit):")
or the environmental indemnity dated as of the date hereof, by Maker and PABLO AND ELEANOR
ARLENE NANKIN, TRUSTEES OF THE PABLE AND ELEANOR NANKIN FAMILY TRUST in
favor of Holder (the "Environmental Indemnitv") or affect in any 'Y.'aY the validity or enforceability of
the Indemnity Agreement, the Environmental Indemnity or any guaranty given in connection with this
Note or any of the other Loan Documents.
C. Notwithstanding any provision hereof or in any Loar. Document to the contrary, Maker
shall be personally liable heretmder for any and all liabilities, obligations, losses, damages, costs.
expenses (including reasonable attorneys' fees, costs and disbursements), causes of action. suits, claims,
de"ancti and judgments paid, imposed upon Holder or to which the Holder may be subject, or any
reduction in amotmts recovered by Holder directly or indirectly (including, without limitation. any
diminution in value of the Property or Holder's security interest therein) as a result of Maker,-or any
Affiliate, indemnitor, guarantor, agent or employee of Maker.
(1) misapplying or misappropriating any proceeds of insurance policies or
condemnation awards in connection with the Property;
(2) misapplying (under any lease, the Mortgage or any other agreement) or
misappropriating any Rents, security deposits or other refundable deposits paid
to or held by or on behalf of Holder;
(3) receiving any Rent or other payments under Leases more than one month in
advance;
MERRllll YNCH CREDIT CORPORATIONrwil,hirc ~ l c d i c a 1 Building
Promissory Note:
File No.;20067/&OOO&
lOSOI:7117U
-9-
(4) committing waste, arson or damage to the Property as a result of intentional
misconduct or gross negligence;
(5) removing any Equipment or other Property in violation of the Mortgage or other
Loan Documents;
(6) failing to fully corii'Ply \>..ith Article xrn of the Mortgage and any other pro\ision
of the Loan Documer.ts relating to hazardous or toxic substances or compliance
with environmental laws and regulations;
. t7) committing fraud or making any material misreprese.ntation in connection \\ith
the Loan or the ownership, use, operation or management of the Property;
(8) transferring or encumbering the Property in violation of Article VITI of the
Mortgage; or
(9) failing to maintain the existence of Maker as a Special-Purpose Entity or
otherwise failing to comply with Article XII of the Mortgage.
D. Nothing contained herein shall be deemed to be a waiver of any right of Holder under
Sections 506(a), 506(b), llll(b) or any other provision of the Bankruptcy Refonn Act of 1978, as
amended, or any successor thereto, or similar provisions under applicable state law to file a claim for the
full amount of the indebtedness owing to Holder in accordance with this Note and the other Loan
Documents.
SECTION VI. Rr:::N1EDIES
A. So long as an Event of Default exists, at th option ofHolder, the following amounts shall
becttme immediately due and payable: (1) the entire Principal Amount, all accrued interest thereon and
all other fees, charges and sums due and payable hereunder, (2) all costs and expenses in connection with
the enforcement ofHolder's rights hereunder, and (3) a prepayment charge (the "Prepayment Cltare')
equal to the greater of (a) 1% of the Principal Amount and (b) the positive difference, if any, between
(x) the present value on the date of such acceleration of all future installments which Maker would
otherwise be required to pay under this Note during the original tenn hereof absent such acceleration.
including the unpaid Principal Amount which might otherwise be due upon the scheduled Maturity Date
absent such acceleration, with such present value being determined by the use of a discount rate equal
to the yield to maturity (adjusted to a "Mortgage Equivalent Basis" pl.lmlant to the standards and practices
of the Securities Industry Association), on the date of such acceleration, of the United States Treasury
Security having the tenn to maturity closest to what otherwise would have been the remaining term
hereof absent such acceleration, and (y) the Principal Amount on the date of such acceleration. Failure
of Holcler to require any of these payments shall not constitute a waiver of the right to require the same
MERRILL LYNCH CREDIT CORPORATIONIWilshirc Merical Building
Promissory Note
File No.:20067/&OOO!
LOSOI:71nU
-10-
in the event of any subsequent default or to exercise any other remedy available to Holder hereunder.
under any Qther Loan Document or at law or in equity.
B. No remedy herein conferred upon or reserved to Holder is intended to be exclusive of any
other remedy or remedies available to Holder under this Note, any other Loan Document or at law or in
equity, and each and every such remedy be cumulative and exercisable in any order and as many
times as Holder deems expedient.
.C. Maker agrees to pay all costs and expenses ofcollection incurred by Holder hereunder
including, without limitation., reasonable attorneys' fees and disbursements, and all costs and expenses
incurred in connection withthe pursuit by Holder of any of its rights or remedies hereunder, under the
Mortgage or any.of the other Loan Documents, whether involving the preservation of Property, protection
ofthe lien of the Mortgage, suit on this Note, participation in any foreclosure proceeding, any
workout or settlement or any bankruptcy, reorganization., receivership, or other proceedings affecting
creditors' rights and involving a claim under this Note or any other Loan Document. All such costs and
expenses-shall be payable on demand with interest thereon to be calculated at the Default Rate and
shall be secured by the Mortgage and other Loan Documents.
SECTION VII. SAVlNGS CLAUSE
This Note is subject to the express condition that at no time shall Maker be obligated or
required to pay interest on the Principal Amount at a rate which could subject Holder. to either civil
or criminal liability as a result of being in excess of the maximum interest rate which Maker is
permitted by applicable law to contract or agree to pay. If, by the terms ofthis Note, Maker is at any
time required or obligated to pay interest on the Principal Amount at a rate in excess of such
maximum rate, the rate of interest shall be deemed to be immediately reduced to such maximum rate
and the interest payable shall be computed at such maximum rate and all previous payments in
excess of such maximum rate shall be deemed to have been payments in reduction of the principal
and not on account of the interest due hereunder. All sums paid or agreed to be paid to Holder for
tho,use,'Jorbearance, or detention ofthe Principal Amount shall, to the extent permitted by applicable
law, be amortized, prorated, allocated and spread throughout the full stated term of this Note until
payment in full so that the rate or amount of interest on account of the Principal Amount dOes not
exceed the applicable maximum lawful rate of interest from time to time in effect. This provision
shall supersede any inconsistent provision of this Note or any other Loan Document.
SECTION VIII. MISCELLANEOUS
A. Note Secured. TIlls Note is secured by the Mortgage and the other Loan Documents.
B. Severability. Whenever possible, each provision of this Note shall be interpreted in
such a manner as to be effective and valid under applicable law, but if any provision hereof shall be
prohibited by or invalid or unenforceable under the applicable law of any jurisdiction with respect
to any Person or circumstance, such provision shall be ineffective to the extent of such prohibition,
MERRJLL LYNCH C.REDIT CORPORAnONl\l{il<hi", Medical Building
f'romissory Note
File No.:1OO67/80008
LOSOI:7127U
-11-
invalidity or unenforceability, without invalidating the remaining provisions hereof or affecting the
validity or enforceability ofsuch provisions in any other jurisdiction or with respect to other Persons
or circumstances. To the extent permitted by applicable law. the parties hereto hereby waive any
provision of law that renders any provision hereof prohibited, invalid or unenforceable in any
respect.
C. Waivers. Maker hereby waives valuation and appraisement, presentment, protest and
demand, notice of protest, demand anci dishonor and nonpayment, notice on intent to acce lmte the
maturity hereof and notice of acceleration of this Note. To the extent permitted by law, Maker
hereby expressly waives the right to receive any notice from Holder with respect to any matter for
which the Loan Documenl$ do not expressly provide for the giving of notice by Holder to Maker.
D. '-Agent for Service. Maker does hereby designate and appoint Arthur M. Katz, having
an address of 10960 Wilshire Boulevard, Tenth Floor. Los Angeles, California 90024. as its
authorized agent to accept and acknowledge on its behalf service of any and all process which may
be served)n any suit, action or proceeding in any federal or.state court in California, and agrees that
service of process upon said agent at said address and written notice,of said service of Maker mailed
or delivered to Maker in the manner provided in the Mortgage shall be deemed in every respect
effective service of process upon Maker in any such suit, action or proceeding in the State of
California. Maker shall give prompt notice to, Holder of any changed address of its authorized agent
hereunder. may at any timt? and from time to time designate a substitute authorized agent with an
office in California (which office shall be designated as the address for service of process). and shall
promptly designate such a substitute if its authorized agent ceases to have an office in' California or
is dissolved without leaving a successor. No notice of change ofdesjgnated agent by Maker or of
such agent's address shall be or be deemed effective until thirty (30) days following Holder's receipt
thereof.
E. . Participation. Holder shall have the right, without notice to or consent of (i)
to sell, assign or otherwise transfer this Note and all of the other Loan Documents in connection with
the Loan, or any of its interest therein and (ii) to transfer, assign or sell participations and
in this Note; provided, however. thai no transfer or participation shall increase the
obligations of Maker or otherwise adversely affect the rights and obligations of Maker and.Holder
hereunder or under any other Loan Documents.
F. Use of Proceeds. Maker certifies that all of the Loan proceeds \\ill be used
exclusively for business or commercial purposes and not for any personal, family. household,
agricultural or consumer pUrpose.
G. Liability. If Maker consists of more than one Person, the obligations and liabilities
of each such Person hereunder shall be joint and several.
H. No Oral Modifications. This Note cannot be modified orally, but only by an
agreement in writing signed by the party against whom enforcement of any modification is sought.
. MERRllllYNCH CREDIT CORPOR.... nONlWilshin: Modioal Building
Promissory Note
File 1'0.:2006718000&
LOSOI:71:!11.J
-12-
L.. WAIVER OF JURy TRIAL. MAKER AND HOLDER, TO THE FULL EXTENT
PER.MITTED BY LAW, EACH HEREBY KNOWT1'iGLY, fNTENTIONALLY AND
VOLUNTARlLY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, WAIVES,
RELfNQUISHES AND FOREVER FORGOES HEREBY THE RIGHT TO A TRIAL BY JURY
IN ANY ACTION OR PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY TORT
ACTION, BROUGHT BY EITHER OF THEM AGAINST THE OTHER BASED UPON,
ARISING OUT OF, OR IN ANY V[AY RELATING TO OR fN CONNECTION WITH THIS
NOTE, THE LOAN OR ANY COURSE OF CONDUCT, ACT, OMISSION. COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRlTTEN) OR ACTIONS OF ANY
PERSON (INCLUDING, WITHOUT LIMITATION. SUCH PERSON'S DIRECTORS,
OFFICERS. PARTNERS. MEMBERS. EMPLOYEES. AGENTS OR ATTORNEYS. OR ANY
OTHER PERSONS AFFILIATED WITH SUCH PERSON), fN CONNECTION WITH THE
LOANDRTHIS NOTE, INCLUDING. WITHOUT LIMITATION. fN ANY COUNTERCLAIM
WHICH MAKER MAy'BE PERMITTED TO ASSERT HEREUNDER OR WHICH MAY BE
ASSERTED BY HOLDER OR ITS AGENTS AGAIi'\fST MAKER, WHETHER SOUNDfNG IN
CONTRACT, TORT OR OTHERWISE. THIS WAIVER BY MAKER OF ITS RIGHT TO A
YTRIAL IS A MATERIAL INDUCEMENT FOR HOLDER TO MAKE THE LOAN. #1../
J. No Waiversbv Holder. The failure of Holder to insist upon strict performance ofany
term hereof shall not be deemed a waiver of any of the obligations of Maker or any of the rights or
remedies of Holder hereunder. Holder may waive any Event of DefauIt or performance of Maker
without waiving any other Event of Default or performance of Maker. Holder may remedy any
Event of Default without waiving the Event of Default remedied. No delay in performance of any
right or remedy of Holder shall be construed as a waiver of such right or remedy. Acceptance of any
payment after the occurrence ofan Event of Default shall not be deemed to waive or cure such Event
of Default. Acceptance by Holder of any partial payment or partial performance by Maker shall not
be deemed a waiver of full payment or full performance. No extension of time for the payment of
any amounts due under this Note made by agreement with any Person now or hereafter liable for the
of this Note shall to release. modify, change or affec,t tJ:e
!labIlity of Maker hereunder, either In whole or In part, unless Holder agrees otherwIse In wntmg.
K. Qffsets. Counterclaims and Defenses. Maker hereby knowingly waives the right to
assert a counterclaim, other than a compulsory counterclaim, in any action or proceeding brought
against it by Holder. Any assignee of this Note or any successor of Holder shall take this Note free
and clear of all offsets, counterclaims or defenses which are unrelated to this Note which Maker may
otherwise have against any assignor of this Note. No such unrelated counterclaim or defense shall
be interposed or asserted by Maker in any action or proceeding brought by any such assignee upon
t.his Note. Any such right to interpose or assert any such unrelated offset, cOWlterclaim or defense
in any such action or proceeding is hereby expressly waived by Maker.
L. Time of the Essence. Time shall be of the essence in the performance of all
obligations of Maker hereunder.
MERRILL LYNCH CREDIT CORPORATl0NIWilshire Medical Building
Promissory Note
File No.:20067/&OOO8
LOSOl:7127U
-13-
M. Successors. All references herein to Maker and to Holder shall be deemed to include
their respective heirs, executors, legal representatives, successors and assigns. Nothing in this Note.
whether express or implied, shall be constlued to give any Person (other than Holder) any legal or
equitable right, remedy or claim under or in respect of this Note or any covenants or provisions
contained herein. .
-:
N. Governing Law. This Note shall be governed by, and construed in accordance with.
the laws of the State where the Property is located.
O. . Due on Sale or Encumbrance.
(a) Maker understands that in making the Loan, Holder is relying to
a material extent upon the business expertise and/or net worth of Maker and, if Maker
is"also an entity, its partners, members, officers 01'" principals and upon the continuin:;
interest which Maker or its partners, members, officers or principals will have in the
Property and in Maker, respectively, and that a violation of Article VIII of the
Mortgage may significantly and materially alter or reduce Holder's security for this
Note. Accordingly, in the event that a violation of Article VIII of the Mortgage occurs,
then the same shall be deemed to increase the risk of Holder and Holder may then, or
at any time thereafter, declare the entire indebtedness evidenced herebyimmediately
due and payable.
(b) The foregoing option may be exercised at any time after the
occurrence of any such violation of Article VIII of the Mortgage and the acceptance of
one or more payments from any Person therEafter shall not constitute a waiver of
Holder's option. Holder's approval of any Transfer (as defined in the Mortgage) or
(ailure to exercise said option with respect thereto shall not be construed as a waiver
\ of the provisions hereof with regard to any subsequent Transfer. .
[Signature Page Follows)
MERRILL LYNCH CREDIT CORPORATIONlWilshire Medical Building
Promissory NOle
File No.:200611!OOOB

-14-
IN \VITNESS WHEREOF, this Note has been duly executed by Maker, the day and ye:u first
above wrinen.
MAKER:
AMERICANlYfEDfCALINVESTMENTFlNANClAL
GROUP. L.P., a California limited partnershiiL-
By: 9033 WILSHIRE COMPANY, a
California corporation
- .
\
'MERRJLL LYNCH CREDIT CORPORAnONf\liilshire Medical Building
Promissory Note
file 1'10.:20067/&000&
LOSOI:7127U
APPENDIX
TAB
"7"
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RECORDING REQUESTED BY;
/. 1.( 4- 'J I ; f .!., {
v. I ...
WHEN RECORDED MArL TO:
Andrews & Kl1Ith L.t.P.
60 I S. Figueroa Street, Suite 4200
Los Angeles, California 90017
Attention: Gregg J. Loubier
Loan No. 998505003
Property Name: Wilshire Medical Building
Assessors Parcel No. .....:- ._,'o.!!....'_"(-'.i'-'.., _
(
99
D.A. FEE Code 20 $(l_

DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF
LEASES AND RENTS"AND FIXTURE FILING
I
\
luly 1,1999
lOSOI71)fJ.)
JOINT EXHIBIT NO.4
Cause No. 04-7956-G
EXHIBIT
i c1-
ifRh3/00 Pi
I
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TABLE QF CONTENTS.
f
99 1261558
.'
TABLE OF CONTENTS ................... j
DErlNITlONS iv
ARTICLE I REPRESENTATIONS, WARRANTIES
AND COVENANTS OF BORROWER ................................... 3
Section 1.1. Representations, Warranties end Covenants of Borrower. . 3
Section 1.2. J.iens ........................... :........................ 7
Section 1.3. Further Acts, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 104. Recording ofDeed of Trust, etc 7
Section 1.5. Changes in Taxation Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7
Section 1.6. Indemnification ............................................ 8
Section 1.7. Cost ofDefending and Upholding the Deed ofTrust Lien. '" 8
ARTICLE II INSURANCE........................................................... 9
Section 2.1. Insurance Coverage . . . . . . . . . . . . . . ... . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.2. Policy Terms ......................................... 10
Section 2.3. Assignment of Proceeds ,.................. 12
Section 2.4. Comply with Insurance Requirements ....................... [2
ARTICLE JlI CASUALTY AND CONDEMNATION 12
Section 3.1. Casualty and Condeffillation 12
Section 3.2. Condemnatjon ....................................... 13
Section 3J. Ca'iUalty and Restoration , 13
Section 3.4. Disbursement ofNet Proceeds 14
Section 3.5. Builders'Risk 15
Section 3.6. Application ofNet Proceeds , 15
ARTlCLF..IV TAXES;RESERVES 16
S ( ~ c t i o n 4.1. Payment of Taxes 16
Section 42. Right to Contest ....................................... ~ . 16
Section 4.3. Reserve Account " ..... , ................ , .. 16
MANAGEMENT ..........................................' ..... 18
Section 5.1. Management ...................................... 18
LEASES AND RENTS .......... , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.1. Assignment 18
Section 62. Leases ........................................... 19
MAINTENANCE AND REPAIR , ......................... 21
Section 7.1. Maintenance and Repair of the Property; Alterations;
Replacement of Equipment .............................. , 21
ARTICLE VIlI TRANSFER OR ENCUMBRANCE OF THE PROPERTY .. . . . . . . . . . . . . . . .. 22
Seccion 8.1. !'Io Transfer/Encumbrance , . . 22
Jetly I, 1999
1.050r:71113,)
I
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99 1261558
Section &.2. Permitted Transfers , 22
Seelion &.3. Conditions to Consent .. , 22
ARTICLE IX BOOKS AND RECORDS; REPORTING REQUIREMENTS 23
Section 9.1. Estoppel Certificates 23
Section 9.2. Financial Statements and Books and Records " , " 23
ARTICLE X SECURITY AGREEMENT; FIXTURE FILING 24
Section J0.1. Security Agreement; Fixture Filing 24
ARTICLE XI DEFAULTS ........................................................ 24
Section 11.1. Events of Default '.. _ " 24
Section 11.2. Remedies ............................................. 26
Section I J.3. Interest After Default , . " ................... " '" " 30
Section 11.4. Borrower's Actions After Default 30
Section 11.5. Control by Lender After Default ............................. 30
Section 1J.6. Right to Cure Defaults .................................... 30
Section 11.7. R.ecovery of Sums Required to Be Paid J 1
Section 11.8. Marshaling and Other Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 3 I
Section 11.9. No Impairment; No Releases '" .. , , 31
ARTICLE Xl! NEGATIVE COVENANTS REGARDING
INDEBTEDNESS AND CHANGES IN BORROWER. . . . . . . . . . . . . . . . . . . . . . . . . . . .. J I
Section J2.1. Negative Covenants Regarding Indebtedness
and Changes in Borrower ................................. 31
ARTICLE xrrr ENVJRONMENTAL COMPLIANCE ............................... 33
Section 13.1. Indemnity .. , , , " .. ", , ,..... 33
Section 13.2, Representations Regarding Hazardons Materials .. , , 33
Section 13.3. Covenants, Representations and Warranties .. '" ............ 34
Section 13.4, Indemnification Procedures ........... , , ... , . , , . , . . . . .. 36
. Section D.5. General Provisions , . '" 37
ARTICLE XIV MISCELLANEOUS , ; .................. : 37
Section 14.1. Right of Entry , 37
Section 14.2. No Merger ...... ' . " , ., ... , . ,. , ..... " 38
Section 14.3. Tax Reduction Proceedings " " , ', 38
Seerion 14.4. Attorney-in Fact , 38
Section 14.5. Substitution or f.tesignation ofTrustee , ........... 38
Section t4.6. Conveyance by TrusteelDefeasance , ......... , ...... 38
i\RT1CLE XV RULES Or- CONSTRUCTION " , .. , ....... , " , , , 39
Section JS.I. Rules of Construction , .............. 39
ARTICLE XVI STATE SPECIFIC PROVISIONS " 45'
Section! 6.l. Inconsistencies ..... , , , ........... " .... , 45
Exhibit A
July I, 1999
LUSII!:itJlj.J:
Legal Description
II
1
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"
I.
99 1261558
DEFINITIONS
For All Purposes of this Deed of Trust, the Following Capitalized Terms Shall Have the Meaning
Sct Forth below or in the Provis;on Referenced Below:
"Affiliate" shall me<ln, with respect to any party, (i) each Person that controls, is controlled by or
is under common control with such party, (ii) each Person that, directly or indirectly, owns or controls,
whether bencficially or as a trustee, guardian or other fiduciary, any of tho stock of such party, and (iii) each
of such party's officers, directors. members, joint venturers and partners. For the purpose of this definition,
"control" of a Person shall mean the possesnion. directly or indirectly, of the power to direct or cause the
direction ofits management or policies, whether through the ownership of voting securities, by contract or
otherwise.
"Appraisal" shall mean an appraisal of the Property, reasonably satisfactory to Lender in form and
CDntent, performed by an Appraiser.
"Appraiser" shall mean a licensed real estate appraiser who is a member of the American Institute
of Real Estate Appraisers, having sufficient expertise and experience to perform an Appraisal, and otherwise
reasonably satisfactory to Lender.
"Architect" shall mean a reputable architect, engineer licensed in the State, or general contractor
selected by Borrow;;:r and reasonably satisfactory to Lender.
"Assignment" shal! mean the Assignment ofLeases and Rents ofeven date herewith from Borrower
to Lcnder pertain ing to the Property, as the same may be amended, supplemented or modified from time to
time.
" B o r r o w ~ ( " shall have the meaning set forth in the first paragraph on page I hereof.
"Business Day" shall mean a weekday, Monday through Friday, except a legaJ holiday or a day on
whidl banking institutions in NewYork, New York are authorized by law to be closed.
"CERCLA" shall mean the Comprehensive EnvironmentaJ Response, Compensation and Liability
Act of J980 (42 u,s.e. 9601 et seq.), as amended or supplemented from time to time.
Cfilim" shall have the meaning set forth in Section 13.4 hereof.
"Collatera'" shall mean all ofthe Property which is governed bythe DeC.
"Contract'l" l:hall have the meaning set forth in the NINlli granting clause hereof.
".\.&lli." shall mean, colkctively, aJlliens, damages, losses, fines,liabilities, obligations, settlements,
penalties. assessmenls, citations, directives, claims,litigations, demands, response ccsts (including, without
limitation, investigation, removal, remediation, mitigation, containment, posl-closure and monitoring costs),
defenses, judgments, suits, proceedings, costs, laboratory fees, disbursements and expenses of any kind or
nature whatsoever (including. without limitation, reasonable attorneys', consultants' and experts' fees and
disbursements). "Costs" shall also include any future reduction in sales price of, or unmarketability and
consequent inability of Lender or Trustee to sell the Property pursuant to the power of sale provided herein,
Jul,. 1,1999
1.05QI.:11)1).)
I
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iii
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99 1261558
and the lost opportllnitycosts resulting from the inability of Lender or Trusf.eo to sell or dispose orits interest
in the Property, all as a consequence of any event described in Section D.l.
"Debt" shall have the meaning set forth in the recitals on page I hereof.
"Deed of Trllst"'shan h'3ve the meaning set forth in the fi",t paragraph on page I hereof.
".QllilliUtlN" shan have the meaning set forth in the Note.
"Environmental Laws" shan mean, collectively, any present or future federal, state or local law,
statute, rule, regulation, common law duty or ordinance, and any judicial or administrative order, jodgment,
permit or authorization issued pursuant theretf.>, pertaining to the environment, natural resources, pollution,
health, safcty or clean-up, including, without limitation, each ofthe laws, statutes and ordinances identified
in the definition of Hazardous Materials hereinafter set forth, as enacted as of the date hereof and as hereafter
amended or supplemented, and all regulations promulgated pursoant thereto.
"Environment!}1 ~ m " shall mean any environmental audit, testing or study of the Property, and
of the operation of Borrower delivered by BOlTower to Lender.
"Equipment" shall have the meaning set forth in1he FOURTH granting clause hereof.
"Event of Default" shall have the meaning set forth in Section II.I hereof.
"Govcmmental Authority" shall mean any federal, state, regional, local or other government or
political subdivision or agency thereof and any body or authority exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.
"Hazardous M ~ " shall mean and include (i) those elements, wastes, materials, substaJlces or
compounds identified or regulated as hazardous or toxic pursuant to the CERCLA, the Resource
Conservation and Recovery Act ofJ976 (42 U.S.C. 6901 et seq.), the Federal Water Pollution Control Act
(33 U.S.C. 1251 et seq.), the H.e:zardous Mate,;als Transportation Act (49 U.S.c. 5101 et seq.), the Clean
Air Act (42 U.S.C. 7401 et seq.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. 136
et seq.), the Emergency Planning and Community Right-to-Know Act (42 U.S.C. 11001 et seq.), the
Occupational Safety and Health Act (29 U.S.C. 651 et seq.), the Residential Lead-Based Paint Hazard
Reduction Act (42 U.s,C. 4851 ~ m . ) , any analogous state or local laws, any amendments thereto, and
the regulations promulgated pursusnt to said laws, all as amended from time to time, relating to or affecting
the Property, (ij) any hazardous, toxic or harmful substances, wastes, materials, pollutants or contaminants
(including, without limitation, asbestos, polychlorinated biphenyls, petroleum or petroleum by-products or
wastes, flammable explosives, radioactive materials, infectious substances, materials containing lead-based
paint or raw materials which include hazardous constituents) or any other substances or materials which are
identified by or regulated by Environmental Laws, on, in, under or affecting all or any portion oftho Propelty
or finy surrounding areas, and (iii) any substances now or hereafter defined as or included in the definitions
of "hazardous substan.ces", "ha2:ardous Was.te-3", "hazardous materials", "pollutants", "contaminants" or
"toxic substt<nces" under any applicable Legal Requirements.
"Improvements" shall have the meaning set forth in the SECOND granting clause hereof:
"lnsuldnQLRequirements:' shall mean all tenns of any insurance policy required by this Deed of
Trust, Ill! reqltiremcllts of the issuer of any such policy, and all regulations and then current standards
July I, 1999
LOSOI:1I)fJ.J iv
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applicable to or affcc,ting the Property or any use or condition thereof, which may, at any time, be
recommended by the Board of Fire Underwriters, if any, having jurisdiction over the Property, or such other
nuthority exercising similar functions.
"Leases" shall have the meaning set forth in the FIFTH granting clause hereof.
"Legal Requirements" shall mean all federal, state, county, municipal and other governmental
s!aMes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions (including, without
limitation any of the foregoing relating to Hazardou3 Materials) affecting either the Property or the
ownership, occupancy, construction, use, alteration or operation thereof, whether now or hereafter enacted
and in force, including, without limitation, (i) any which may require repairs, modifications or alterations
ill or to the Property, (ii) any which may in any way limit the use and enjoyment thereof, and all permits,
licenses and authorizations and regulations re[ating thereto, (iii) all covenants, agreements, restrictions and
encumbrances contained in any instruments, either of record or known to Borrower, any time in force
affecting or relating to tne Propeny, or (iv) any which may pertain to requirements for equal opportunity,
anti-discrimination, disability accommodation, safety, environmental protection, zoning or land use.
"Lender" shall have the meaning set forth in the first paragraph on page I hereof.
"Licenses" shall have the meaning set forth in the EIGHTH granting clause hereof.
"Lieo" shall mean, with respect to any property or asset, any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any
easement not materially impairing usefulness or marketability), encumbrance, preference, right of reverter,
option to pur.::hase, reversionary interest, priority or other security agreement or preferential arrangement
of any kind or m,ture whatsoever on or with respect to such property or asset (including, without limitation,
any conditional sale or other title retention agreement having substantially the same economic affect as any
oftne foregoing).
"Loan" shall have themeaning set forth in the recitals on page 1 hereof.
"Loan Doyuments" Shflll mean, collectively, all documents, instruments, certifications and
agreements now or hereafter given in connection with, evidencing, securing or relating to the Loan or the
indebtedness evidenced by the Note, including, without limitation, all indenmities, guaranties, the Note, this
Deed ofTrust, related vee financing statements, the Assignment and the Reserve Agreement.
"Maturity shall have the meaning set form in the Note.
"Net Proceedi' shall mean, in connertionwith any casualty, the insurance proceeds actually received
by Lender and in connection with any Taking, any condemnation awards, proceeds or other payments, in
either case, including any interest accrued or which accrues thereon and Jess any adjusters' fees and expenses
and all costs and expenses, including, without limitation, all reasonable architects', attorneys', engineers'
and other consultants' and professionals' fees lind disbursements incurred by Lender in connection with the
casualty or Taking in question.
"Officer's Certjficate" shall mean a certificate of Borrower signed by the President, any Vice
President, the Treasurer or any other officer authorized so to sign by the board of directors or by-laws of
Borrower, and delivered to Lender or, if Borrower is a partnership with one or more corporate general
partners, a certificate so execLJted by such partner(s) and/or any other partners having the power and
July I, 1999
tU.':;.UI:7f:H:U v
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12G15t"8
authcrity 10 sign on behalf of Borrower or, if Borrower is a limited liability company with on' Or more
corporftte members, a certificate so executed by such member(s) and/or any other members having the power
and authority to sign on behalf of Borrower.
Charges" shall have the meaning zet forth in Section 4.1 hereof.
"Payment Dete" shall have the meaning set forth ill the Note.
Encumbrances" shall have the meaning set fotth in Section 1.1 Cd) hereof.
"Person" mean any individual, corporation, partnership, joint venture, estate, trust, limited
liability company, unincorporated association, any federal, stale, COMty or municipal government or any
bureau, department or agency thereof and any fiduciary acting in such capacity on behalf of any of the
foregoing, and any of the heirs, executors, legal representatives, successors and assigns of any of the
foregoing, as applicahle.
"Premises" shull have the meaning set forth in the FIRST granting clause hereof.
"Prepayment shall have the meaning set forth in the Note.
shall have the meaning set forth in the recitals on page I hereof.
"Rating Agencies" shall me4n Standard & PC'Or's Ratings Group, Duff & Phelps Credit Rating Co.,
Moody's Investors Service, Inc., Fitch mCA, Inc. or any succeSSOr:l thereto.
"Rents" shall have the meaning set forth in the FIFfH granting clause hereof.
"Reserve Account" shall have tile meaning set forth in Section 4.3 hereof.
"Reserve Agreement" shall me4n that agreement dated the date hereof, made by Borrower in favor
of Lender, in cOilfJoction with additional Reserves, if any, required by Lender, other than for Taxes and
insurance premiums expressly provided for ia Article IV hereof. .
"Reserves" shall have the meaning set forth in Section 4.3 hereof.
"Resto!]tion Work" shall have the meaning set forth in Section 3.3 hereof.
"Retention AJJlQ.ll.!J1" shall have the meaning set forth in Section 3.4 (e) hereof.
"Spedal.Purpose Entity" shall mean an entity which owns no interest or property other than the
Property or interests in Borrower and otherwise is required to comply with the Special.Purpose Entity
Provisions.
"SpeciaiPJmlose Entity Provisions" shall mean the provisions required by Lender to be included
in an entity's organizational docu"11ents for such entity to satisfY Lender's bankruptcy-remote requirements.
Such provisions deal with certain prohibited activities ofthe entity, subordination of certain indemnification
obligations, separateness covenants and, if applicable, anti-dissolution, voting and independent director
requirements.
July I, 1999
LOSOt:, IHJ.J
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DaX" shall have the meaning set forth in the Note.
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1261558
"State" shall mean the state or commonwealth in which the Premises is locate<:!.
"Jaking" shall mean a taking or voluntary conveyance during the term hereof ofany of the Property,
or any interest therein or right accruing thereto or the use thereof or relocation of any roadway providing
access thereto, including, without limitation, any change of grade of any street, road, avenue or the widening
of streets, roads or avenues adjoining or abutting the Premises, or any other injury to, or decrease in value
of the Property, os the result of. or in settlement of any condemnation or oilier eminent domain proceeding
affecting the Property whether or not the same shall have actually been commenced.
"Taxes" shall have the meaning set forth in Section 4.1 hereof.
"Tr<\nsfe(' shall mean any direct or indirect sale, conveyance, mortgaging, grant, bargain, alienation,
encumbrance, pledge, assignment or other transfer oftbe Property or any part thereof, or interest therein, or
agreement to do any of the foregoing. whether voluntary or involuntary, including, without limitation, all
of the items enumerated in Section 8.1 hereof.
"Trustee" shall mean the Person identified as such in this Deed of Trust and its successors and

shall mean the Uniform Commercial Code as in effect in the State.
July I. 1999
I.US01:71111.1 vii
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THIS DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS
AND FIXTURE FILING (as the same may be supplem<:nted, amended, modified or extended from time to
time, "Deed of Trust") is made as of July 1999, by AMERICAN MEDICAL INVESTMENTS
FINANCI AL GROUP, LTD., a California limited partnership, as trustor, having an address at 9033 Wilshire
Boulcvard, Beverly Hills, California 90211 ("Uorrower"), to LAWYERS TITLE COMPANY, as trustee
("Trustee"), for the benefit of MERRILL LYNCH CREDIT CORPORATION, a Delaware corporation, as
beneficiary, having all address at 4802 Deer Lake Drive East, Jacksonville, Florida 32246 ("Lender"), with
respect to the following facts:
/\. Borrower has requested that Lender make a loan to Borrower in the aggregate principal sum
of SIX MILLION EIGHT HUNDRED NINETY-TWO TIIOUSAND AND NO/I 00 DOLLARS
($6,892,000) ("Loan") to be used for the purposes set forth herein.
n. Lender has agreed to make the wan to Borrower upon, and subject to, the terms and
conditions set forth herein and in the other Loan Documents.
NOW THEREFORE, in consideration of Lender making the wan, and other good and valuable
consideration, the receipt and legal sufficiency ofwhich are hereby acknowledged, and TO SECURE (i) the
payment of wi inte.rest and other sums due under that certain promissory note dated the date hereof,
made by Borrower in favor ofLender in the original principal amount ofSIXMILLION EIGHT HUNDRED
NINETY-TWO THOUSAND AND NOIIOO DOLLARS ($6,892,000) and (ii) the payment and
performance of all other covenants, obligations, liabilities or sums due or to become due under this Deed of
Trust, the Note or any other Loan Document, including, without limitation, interest on said obligations,
liabilities or sums now due or to become due under this Deed of Trust, the Note or any other Loan
Document; and (iii) any further Dr subsequent advances made by Lender or Trustee pursuant to this Deed
of Trust, the Note or any other Loan Document to protect or preserve the Property or the lien or security
created hereby, including all advances and costs incurred by Lender or Trustee to perform any obligation of
Borrower under the Loan Documents and (iv) all costs of collection in connection with this Deed ofTrust
and the other Loan Documents (items (i) tltrough (1v), collectively, "Debe'), Borrower does hereby
irrevocably grant, convey, assign and transfer to TlUstee IN TRUST, WITH POWER OF SALE, with right
of entry and possession, all right, title and interest of Borrower in, to and under all of the following property,
rights, interests and estates, whelller now owned or hereafter acqu1red (collectively, and any part or portion
thereof, "Property"):
fIRST, all plots, pieces or parcels of real property described in Exhibit A hereto ("Premises");
SECOND, all buildings, structures and improvements of every kind or nature now or hereafter
located on the Premises (collectively, "Imurovements");
THIRD, aU =ements, rights-of-way, strips and gores ofland, streets, ways, alleys, passages, sewer
rights, water, wens, water courses, wells, water lights, ditches, reservoirs, air rights and development rights,
late,al supports, foundations and drainage, and 1111 rights, interests, reversions, remainders, tenements,
hereditaments Slid appllrtenances of Bny nature whatsoever located on, under, above or pertaining to the
Premisos and Improvements;
July I, 1999
f,QS01:1I1tLt
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FOURTH, ail machinery, equipment, fittings, furniture, furnishings, fixtures (including, but not
limitcu to, all heating, air conditioning, ventilating, waste disposal, sprinkler and fire and theft protection
equipment, plumbing, fighting, communications and elevator fixtures), building equipment, materials and
supplies, and all wammties and guaranties relating therdo, and all other property of every kind,and nature
whatsoevrcr, now or hereafter located upon, in or used in connection with the Premises or the Improvements
01' appurtenant thereto (collectively, "EqJlipmerlt");
FIFTH, all leases, tenancies, licenses, 5Ubleases, assignments and other agreements affecting the use,
enjoyment or occupancy of all or any portion of the Premises or the Improvements now existing or hereafter
entered into, and all amendments, renewals and extensions thereto (collectively, "!&!1m"), together with
all income, rents, issues, profits, revenues and royalties therefrom (collectively, "Rents''), and all security
deposits, guarantees or other security held by Borrower in connection therewith, and all other credits, rights,
options, claims and causes ofaction of Borrower in connection with any of the foregoing;
SIXTH, all proceeds, awards and payments, including interest thereon, which may hereafter be made
with respect to all or any pOltion of the Propeliy in connection with any Taking, and aU proceeds of. and any
unearned premiums under, any insurance policies covering all or any portion ofthe Property, and all refunds
or rebates of Taxes, impositions and Other Charges or in connection with other Property, and any interest
thereon;
SEVEN'rn, aff accountS, funds, deposits and reserves, including without limitation, those Reserves
referred to in or governed by Article IV hereof and any Reserves covered by the Reserve Agreement, and
aJ Jaccounts receivable, contract rights. rights, claims, actions, general intangibles, trademarks, trade names,
franchises, service marks, buikling names and logos;
EIGHTH, all licenses, permits, building permits, certificates, certificates of occupancy, consents,
authorizations, approvals, varian= and land use entitlements for the construction, use, occupancy and
operation of the Improvements and the Premises (collectively,
NINTH, all contracts, documents, agreements and arrangements to which Borrower is a party or
bound or which relate to the use, operation, ownership or enjoyment of the Property, including without
limitation all service contracts, management agreements, zoning agreements, development agreements,
utility agreements, parking arrangements, operating contracts, supply and maintenance contracts, equipment
or other personal property leases, and all amendments thereto; and all income, revenue, rights of
reimbursement ana benefits therefrom, and aU deposits, security, credits and advance payments in eonnection
with any of the foregoing; and all books and records relating to the Property (collectively. "Contrags");
TENTH, all claims with respect to the Property, including without limitation, for loss or damage
arising from an)' defect in or with respect to the design or construction of the Improvements or, the
Equipment; and the right to appear in and defend any action or proceeding, in the name and on behalf of
Borro\,{er, brought withrespecUo any ofthe Property; and the right to commence any action or proceeding
to protect the interest of Lender in such Property;
drawings, designs, architectural renderings, models, surveys, reports, studies. tests,
plans and specifications for the design, development. construction, repair, improvement, ownership or
operation of the Property;
Jul)" I, 1999
r.nsot:71HJ.J 2
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1261.558
TWELFTH, all oil, gas, min-crals, timber and crops ill, on, under or pertaining 10 the Premises and
all royalties, revenues
J
leasehold and other rights and interests of Borrower pertaining thereto, including,
without limitation, any surface or subsurface entry rights to the Premises or any other property; and
THIRTEENTH, all renewals, substitutions, improvements, accessions, attnchments, additions,
replacements and aU proceeds to or of each ofthe foregoing, and all conversions ofthe security constituted
thereby so that, immediately upon such acquisition, construdion, assemblage, placement or conversion, as
the case may be, and in each such case, the foregoing shall be deemed a part of the Property and shall
automatically become subject to the lien of this Deed of Trust as fully and completely and with the same
priority and effect as thOll gh now owned by Borrower and specifically described herein, without any further
mortgage or assignment or conveyance by Borrower.
PROVIDED, HOWEVER, ifBorrowel shall pay to Lender the Debt and comply with each and every
covenant and condition set forth herein, in the Note and in the other Loan Documents in a timely manner,
then, upon written request of Lender stnting that aJI indebtedness secured hereby has been paid, and upon
surrender ofthis Deed ofTrust and tile Note to Trustee for cancellation and retention and upon payment by
Borrower of Trustee's fees, Trustee shall reconvey to Borrower, or the person or persons legally
entitled thereto, without warranty, any portion ofthe Property then held hereunder (the recitals in
such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof and
the grantee in any reconveyance may be described as "the person or persons legally entitled
thereto").
AND, Borrower covenants with and represents and warrants to Lender and Trustee as follows:
ARTICLE r REPRESENTATIONS, WARRANTlES
AND COVENANTS OF BORROWER
Section 1.1. Wgrrgnties eno Covenant;. of Borrower. Borrower represents and
warrants to, and covenants with Lender and Trustee follows:
(a) Payment of Debt. Borrower shall pay the Debt at the time and in the manner provided in
the Note and other Loan Documents and shall perform all of its obligations in accordance with the
provisions set forth herein and in the other Loan Documents.
(b) Authorization. Borrower has duly authorized the execution, delivery and performance of
the Loan Documents to which it is a party, and has te.ken all requisite action and obtained all required
approvals and consents for the Loan Documents to be binding upon" and enforceable againSt Borrower.
Borrower warmnts that the execution, delivery and perforJn21nce ofsuch Loan Documents will not (i) violate
any provision of any organizational document ofBorrower or any instrument, contract, covenant, mortgage,
indenture or other agreement to which Borrovver is a party or bound and (ii) to its knowledge, violate or
contravene any law, judgment, order, rule or regulation applicable to Borrower.
(c) Enforceability. The Note, this Deed of Trust and the other Loan Documents aro (i) legal,
valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respeclive
terms and (ii) not subject to any right of rescis:;ion, set-off, counterclaim or defense, and no claim of any
such right has been asserted with respect thereto.
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(d) Title. Borrower has good, markctilbfe and insurable fee simple title to the Premisos and
Improvements, free and clear of all liens, claims, encumbrances and charges whatsoever except for those
expressly set forth as exceptions to title or mOatlers in the title insurance policy insuring the lien
of this Deed of Trust which Lendcr has agrced to accept (''PerD'lit!ed Encumbrances"). Borrower has the
right, power and l\uthority to mOltgnge aod convey its interest in the Property lIS contemplated herein.
Borrower shz.!! forever warrant and defend such title, and the validity and priority ofllie lien of this Deed
ofTrust, to Lemler, fiom and against the claims of all Persons. The foregoing warranty oftitle shall survive
the foreclosure of this Deed of Trust or any deed given in lieu thereof.
(e) Borrower shall cause the Property to be used for its current use in
compliance with all Licenses and Legal Requirements. Borrower shall not allow any change io the manner
of use of the Property to occur. Borrower shall not pennit the Property to be used by the public or any
Person not a tCllant under a Lease in such manner as might impair Borrower's title to the Property or give
rise to a claim of ndverse usage or possession or of implied dedication. Borrower shall not file or subject
tile Premises or Improvements to any subdivision, declaration ofcondominium, cooperative or other multiple
ownership regime:
(f) Legal Requirements. Borrower is in compliance in all material respects with all Legal
Requirements. There is no evidence ofany illegal activities at the Property. Borrower shall comply with
all present and future Legal Requirements in all materia! respects.
(g) LiCCllses. Borrower possesses all Licenses, franchises, patents, copyrights, trademarks and
trade names necessary (i) for the use, occupancy, maintenance and operation of tlle Property and (ii) to
conduct its business substantially as now conducted. All such items are currently in full force and effect,
and Borrower shall do all things necessary to comply with and keep such items in full force and effect.
(h) Leases and Contracts. Borrower has delivered to Lender true, correct and complete copies
of all Contracts and Leases, and as ofthe date of this Deed ofTrust, is in compliance with all ofthe material
tenns thereof. Borrower is not a party to any Contract or Lease or subject to any restriction which may have
a material adverse affect on Borrower or the Property. No default exists, or with notice or the passage of
time or boolh vrol1ld exist, by any party under any Contract or Lease, which would, in the aggregate, have a
material adverse effect on Borrower or the Property. Borrower shall comply in a timely fashion with all of
its material covenants and obligations and satisfaction of aU conditions under all Leases and Contracts to
which it is a party or hound.
(1) No Bankruptcy Any bc'rrowings made by Borrower under the Loan do not and will
not render Borrower insolvenl No bankruptcy, reorganization or insolvency pro.cecdings are pending against
Borrower or, if Borrower is a partnership or limited liability company, against any general partner or member
of Borrower, or against any guarantor or indemnitor of any obligations under the Loan. Borrower is not
contemplating either filing R petition under any state or federal bankruptcy or insolvency laws or liquidating
a major portion ofit:; assets. Borrower has no knowledge of any party contemplating the filing of any such
petition against it or against allY general partner 01' member, if applicable, or any guarantor or indemnitor.
(j) Disclosure. No statement cf fact made by or on behalf of Borrower to Lender or Trustee
in connection with the Loan or in any certificate, rent roll, document, affidavit, data, financial or operating
statement or schedule furnished to Lender or Trustee in connection with the Loan, (i) contains any untrue
statement of a material fact or (ii) omits to state nny material fact necessary to make statements contained
therein or herein true or r.ot misleading as ofthu date given, and there has been no material adverse change
July I.
Lose 1:1lJ lJ.J
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in the information set forth therein. There i$ no fact presently known to Borrower which has not been
disclosed to Lender which has or could have a material adverse effect on either Borrower or the Property.
(k) Financig! fnfonnation. All financial data that has been delivered by or on behalfof Borrower
to Lender or Trustee (i) is true, correct and complete in all material respects, (ii) accurately represents tho
financial cDndition of the Person covered thereby as of the date stated therein, and (iii) has been prepared
in accordonce with generally accepted accounting principles consistently applied throughout the periods
covered. As of the date of this Deed ofTmst, neither Borrower nor, if Borrower is a partnership or limited
liability company, any general partner or member ofBorrower, has any material contingent liability, liability
for taxes or other unusual or forward commitment not reflected in the financial statements delivered to
Lender. Since the date of the last financial statements delivered by Borrower to Lender, there has been no
material adverse change in the financial CDndition of the Property, Borrower nor, if Borrower is a partnership
or limited liability company, any general partner or member ofBorrower.
(I) No Adyance Payments. Borrower has not received any rent, payment, deposit or oilier
amount of any nature for any existing or prospective occupant or tenant at the Premises more than one (1)
month in advance of its due date.
(01) OtherSecuritv [nlerests. There are no security agreements or frnancing statements affecting
the Property other than (i) as approved in writing by Lender prior to the date hereof and (ii) those created
in favor of Lender.
(n) Federal Reserve Regulations. No part of the proceeds of tho Loao wiil be used for the
purpGsc of purchasing or acquiring any "margin stock" within the meaning of Regulations G, T, U or X of
the Board ofGovernors ofthe Fe.Je.-a! ReserveSystem or for any other purpose which would be inconsistent
with such RegUlations G, T. U or X or any other Regulations of such Board of Governors, or for any
purposes prohibited by Legal Requirements or by the terms and conditions of the Loan Documents.
(0) The Property has all necessary and sufficient utility services for the full use,
occupancy, disposition and enjoyment ofthe Property, including water, storm sewer, sanitary sewer, electric;
gas, telepholte and cable facilities, located in the public rights-of way or within perpetual easements
acceptable to Lender.
(p) The"Properly has access to completed, dedicated all-weather
streets, roads, highways, driveways, curb cuts and bridges necessary for the full utilization of the Property
for its current purpose, without further CDndition or cost to Borrower.
(q) Separate Lots. The Premises is made up of one or more parcels, each of which constitutes
a separate tax lot and none ofwhich constitutes a portion of any other tax lot Borrower shall Dot consent
to or initiate the joint assessment of the Premises and the Improvements (i) with any other real property
constituting a separate tax lot or (ii) with any of the Property which may be deemed to constitute personal
property.
(r) [.jtigation. There is no judicial or administrative action, suit or proceeding pending or
threatened against or affecting Borrower, or, if Borrower is a partnership or limited liability company,
against any general partner or member of Borrower, or against the Property which, if adversely determined,
would have a rnaterhl adverse etrect on either the Property or the ability of Borrower to perform its
covenants and obligations under "the Loan Documents.
July I. 19\<9
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89 1261558
(s) CllSl1alty Dal]la(.!<. As of the date of this Deed ofTrust, the Property is free from unrepaired
damage caused by fire, flood or other casualty.
(t) Taking. As of the date of this Deed of Trust, no proceeding for a Taking has been
commenced or, to the best of Borrower's knowledge, threatened or contemplated.
(n)
Charges.
No Delinquent Taxes. The Property and Borrower are free from delinquent Taxes and Other
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(v) TllX FilingF. Borrower and, ifBorrower is a partnership or limited liability company, each
of the general partners or members of Borrower, have filed all federal, state and local tax returns required
to be filed and have paid or made adequate provision for the payment of all federal, state and local taxes,
charges and assessments, including sales and payroH taxes. The income tax returns filed by Borrower and,
jf Borrower is a partnership or limited liability company, each of the general partners and members of
Borrower, accurately Md correctly reflect the income and taxes of Borrower and such general partners or
members for the periodS covered thereby, subject only to reasonable adjustments required by the Internal
Revenue Service or other applicable ta.'( authority upon audit, which will have JlO material adverse effect on
the financial condition ofBOIIDwer, such partners or members, or Borrower's ability to perform the
cC'venants and obligations required to be performed under the Loan Documents.
(w) Property Conditj91l. The Improvements are stJllCturnllysound, in good repair, free ofdefects
in materials and workmanship and have been constructed and installed in substantial compliance with all
Legal Requirements. All major building systems located within the Improvements including, without
limitation, heating, ventilationanj air conditioning systems and electrical and plumbing systems, are in good
working order and condition.
(x) Equipment There are no ftXtures, machinery, apparatus, tools, equipment or articles of
personal property attached or appurtenant to, or located on, or used in connection with the management,
operation or maintenance ofthe Property, except for the Equipment and equipment leased by Borrower for
the management, operation or maintenance ofthe Property in accordance with the Loan DDcuments. All of"
the Equipment is tree and clear of all Lien:;, except for the lien of this Deed of Trust and the Permitted
Encumbrances.
(y) PersQrt.. Borrower is not a "foreign person" within the meaning of 1445(f)(3)
of the Internal Revenue COOe of 1986 as amended and the related Treasury Department regulations,
including temporary regr.lations.
With respect to thl'; representations set forth in items 0), (1<) and (I), the term "Borrower" shall also include
any predecessor-in-interest to Borrower who applied for the Loan secured hereby, if applicable.
Section J.2. Borrower shall. at its expense, maintain this Deed ofTmst as a ftrst priority lien
all the l)roperty Bnd shalt keep the Property fh:e and clear of all Liens ofany kind and nature other than the
Penniued Encumbrances. IfBoITower fails to comply with the requirements of this provision, Lender or
Trustee may. but shall not be obligated to, pay any such Lien, and Borrower shall reimburse Lender or
Trustee, as the Ca3C may be, Oil demand for all sums so expended, together with interest thereon at the
Default Rate from the date advanced to the date repaid, all of which shall be deemed part of the Debt.
Borrow!'r shall, within thirty (JO) days following the filinS ofany materialman's, mechanic's or similar lien,
such liell of record, br payment, bonding or otherwise Md, promptly upon request by Lender,
deliver to Lender evidence reasonably satisf.'1ctory to Lellderofthe discharge thereof. Nothing contained
July I, 1959
lOSQl:' I} 11_' 6
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89 12f15f?8
herein shall be deemed a conseat or request of Lender, express or implied, by inference or otherwise, to the
performance of any alteration, repair or other work by any contrdctor, subcontractor or laborer or the
furnishing of any materials by any materialmen in connection therewith.
Section 1.3. f'yrther Acts. etc. At its sole cost and expense, Borrower shall execute, acknowledge
and deliver all such further acts, deeds, conveyances, mortgages, assignments, financing statements, trn.nsfers
and assurances as Lender or Trustee shall, from time to time, require to confirm and fully protect the lien
and priority of ill is Deed of Trust, or to file, register or record this Deed of Trust. On demaod, Borrower
shall execute and deliver and hereby authorizes Lender and Trustee to execute in the name of Borrower or
without Ihe signature ofBorrower, to the extent Lender or Trustee may lawfully do so, one or more financing
statements, chattel mortgages or comparablo security instruments, to evidence more effectively the Iieo
hereof upon the Property. Borrower grants to Lender and Trustee an irrevocable power of attorney coupled
with llU interest for the purpose of (i) protecting, perfecting, preserving and realizing upon the interests
granted pursuant to this Deed ofTrust and to effect the intent hereof, lind (ii) correcting any mistakes, filling
in blanks aud otherwise completing and perfecting the Loan Documents (provided such changes do not
impose any additional liability or obligation upon Borrower). Borrower bereby ratifies all that Lender shall
lawfully do or cause Lo be done by virtue hereof.
Section 1.4. Recording of Deed of Trust etc. UpO::l. execution and delivery ofthis Deed of Trust
and thereafter, from time to time, Borrower shall cause this Deed of Trust and any other Loan Document
specified by Lender or Trustee, and any documeat of further assurance, to be filed, registered or recorded
in such manner and in such places as may be required by any Legal Requirement in order to publish notice
of and fully protect Trustee's and Lender's interest in and lien or security interest upon the Property.
Borrower shall pay all filing, registration or recording fees, and all expenses incidental to the preparation,
execution and acknowledgment lind subsequent release or reconveyance ofthis Deed of Trust, any deed of
trust supplemental hereto, any instrument of further assurance, aod any other Loan Document with respect
to the Property and all federal, state, county and municipal, taxes, duties, imposts, documentary stamps,
assessments, intangibles taxes lind other charges arising Qut of or in connection with the execution, delivery,
filing or recordation ofthis Deed of Trust, the Note or any other Loan Document.
Section 1.5. Changes in Taxation 'n the event of the passage after the date ofthis Deed of
Trust of any Le.<ssl Requirement deducting from the value of the Property for the purpose of taxation,
amounts in respect of any Lien thereon or changing in any way the Legal Requirements now in force for the
taxation of this Deed of Trust andlor the Debt for federal, state or local purposes, or the manner of the
collection of any such taxes so as to adversely affect the interest ofLender, or impose any tax or other charge
on any Loan then Borrower will pay silch tax,. with interest and penalties thereon, if any, within
the statutory period. In tbe event Lender l'ecer.;s an opinion ofcounsel chosen by it (the cost ofwhich shall
be paid by Borrower upon demand) to the effect that the payment ofstich tax, interest andlor penalties by
Borrower would be (i) (li) taxable to Lender, (iii) unenforceable, (iv) provide tile basis for a
defense of usury. 01' (v) entitle Borro'iYer to any credit against the Debt, then in any such event, Lender shall
have the option, hy giving Borrower at least thirty (30) days' prior written ootice, to declare the Debt
immediately due and payable, without any Prepayment Charge.
Se:ction l.6. Indemnification.
(a) ln addition and without limitation to any provision of this Deccl of Trust, Borrower
shall protect, indemniiy and save harmless Lender and Trustee, and their agents, employees, officers and
directors, fi-om and against all Costs, claims, a,:tions, suits, proceedings or demands imposed upon or
incurred by cr asserte:d against L or Truslee, or any of L.1.eir agents, employees, officers or directors,
July I, i9n
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by rea,on of (i) ownership of this Deed the or any interest therein, or l"CC<lipt of any Rents;
(ii) any accident, injury to or death of any person or loss of o!: damage to property occurring io, on or about
the Properly or all the adjoining sidewalks, curbs, parking areas, streets or ways; (iii) any use, nonuse or
condition in, on or about, or possession of, the Property or on the adjoining sidewalks, curbs, parking areas,
streets or ways; (iv) performance of any labor or services or the furnishing of any materials or other property
in respect of the Property; (v) any claim by brokers, finders or similar parties claiming to be entitled to a
commission in cOllllection with any Lease or other transaction involving the Property; (vi) any Lien or claim
arising on or against the Property under any Legal Requirement or any liability asserted against Lender or
Trustee with respect thereto; or (vii) the claims ofany tenant, or its invitees or other party acting through or
under any tenant or otherwise arising under or as a consequence of any Lease. Any amounts payable to
Lender pursuant to this Section 1.6 shall constitute a part ofthe Debt secured by this Deed of Trust and other
Loan Documents, shall become immediately due and payable and shall bear interest at the Default Rate from
the date loss or damage is sustained by Lender until paid.
(b) Notwithstanding the forngoing, shall have no obligation to indemnify Lender or
Trustee, as the case may be, pursuant to this Section for liabilities, obligations, claims, damages, penalties,
causes of action, costs ar.d expenses relative to the foregoing which result directly from the willful
mlsconduct or gross negligence of such Pers':m.
(c) Notwithstaoding the foregoing pcovisiofls of this Section to the contrary, Trustee shall not
be answerable or accountable hereunder except for its own wiUful misconduct or gross negligence, and
Borrower agr= to indemnify, defend and hold Trustee harmless from and against any cost, loss, damage,
liability or expense (including, without limitation reasonable attorney's fees and disbursements) which
Tcustee may inc.lr or sllS,ain in the exercise or pcrforrnfUlce of its powers and duties hereunder.
Section 1.7. Cost ofDefending and Upholding the Deed ofTmst Lien. Ifany Claim is commenced
to which Lender or Trustee is made a party relating to the Loan Documents, the Property or Lender's or
Trustee's interest therein or in which it becomes necessary to defend or uphold the lien of this Deed of Trust
or any other Loan Documei.l, Borrower shall, on demand, reimburse Lender or Trustee, as the case may be,
for all Costs incurred by Lender in connection lherewith. Such Costs, together with interest thereon at the
Default Rate from the date of demand through the date of repayment, shall constitute part of the Debt
Sectioll 2.1. lnsurance CQ.... erage. Borrower shall, at its own ccst and expense, maintain the
following insurance coverages with respect to th.; Property during the term of this Deed ofTrust:
(a) Casualty. Jnsurance against loss or damage by fire, lightning, bail, windstorm and other
hazards covered by an "all riBk" policy or a policy covering "special" causes of loss, with such endorsements
as Lender or Trustee may from time to time reasonably require. 1he amount of such insurance shall be equal
to the lesser of (i) 100% ofllle full insurable replacement value of the Property (exclusive of footings and
foundations bdow the lowest basement leor) and contain a replacement cost endorsement and agreed
amount endorsement or (ii) the original principai Loan amount evidenced by the Note provided a wavier of
any co insurance provisions can be and is obtained, and in either case, lhe policy shall be without deduction
for depreciation. The determination of the replace.ment cost (lmount shall be adjusted annually to comply
with the requirements of the insurer issuing t}le coverage or, at Lender's election, by reference to such
indexes, appraisiils or ir.formation as Lender determines in its reasonable discretion, and, unless the insurance
require{] by this paragraph shall be effected by blanket and/or umbretla policies in accordance with the
requirements of this Deed of Trust, the policy i:hall include inflation guard coverage.
July I, :999
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(b) .Liability. Commercial general liability insurance under a policy containing "Comprehensive
General Liability Form" ofcoverage (or a comparably worded form ofcoverage) and the "Broad Fonn CGL"
endorsement (or a policy which otherwise incorporates the language of such endorsement), providing
coverage on an OCI;urrenee (not "claims made") basis, which policy shall include, whhout limitation,
coverage against claims for personal injury, bodily injury, death and property damage liability with respect
to the Property and the operations related thereto, whether on or off the Premises, and the following
coverages: Employee as Additioual Insured, Product Liability/Completed Operations; Broad Form
Contractual Liability, Independent Contractor, Personal InjUl)' and Advertising InjUlY Protection, Medical
Payment (with a minimum limit of $5,000 per person), Broad Fonn Cross Suits Liability Endorsement,
where applicable, hired and non-owned automobile coverage (including rented and ieased vehicles), and,
if any alcoholic beverages shall be sold, manufactured or distributed on the Property, liquor liability
coverage, all of which shall be in such amounts as Lender may from time to time reasonably require, but not
less than One Million Dollars ($1,000,000) per occurrence with a Two Million Dollar ($2,000,000) general
aggregate limit. Ifsuch policy shall rover more than one PfO}X'rty, such limits shall apply on a "per location"
basis. rn the event a swimming pool is located at the Property, Borrower shall obtain an excess liability or
umbrella policy to increase the foregoing limit'\ to Four Million Dollars ($4,000,000) per occurrence with
a Five Million Dollar ($5,000,000) general aggregate limit.
(c) .fulliwss Interruption. Business interruption and/or business income insllTance, (i) with loss
payable to Lendcr; (ii) covering all risks required to be covered by the insurance provided for in Section
2.I(a); (iii) in an amount equal to the aHnual net income from the Property (net profit before payment of
income taxes) l2.!ill; normal operating expenses of the Property, including payroll end (iv) including either
an agreed amount endorsement or a wavier of any co-insurance provisions, so as to prevent Borrower,
Lender and any other insured thereunder from being a co-insurer. The amount of business interruption
and/or business income insurance shall be determined upon the execution of this Deed of Trust and once
each calendar year thereafter.
Cd) Roj/&!_ If the Property contains steam boilers, or other high pressure vessels, insurance
covering the major components of the central he;ling, air conditioning and ventilating systems, boilers, other
pressure vessels, high pressttre piping and machinery, elevators and escalators, if any. and other similar
equipment installed in the Improvements, in an anlount equnl to one hundred percent (l00%) of the full
replacement cost of the Property, which policies shall insure against physical damage to and loss of
occapancy and use of the Improvements arising out of an accident or breakdown 'covered thereunder.
(e) Flood. Flood insurance with a deductible not to exeeed TIlree Thousand Dollars ($3,000),
or such greater amount as may be satisfactory to Lender in its sole discretion, and in an amount equal to tlle
full insurable value of the Property or the maximum amount available, whichever is less, if the Property is
located in an area designated by the Federal EmergencyManagement Agency as a special flood hazard area
(Zone A or Zone V) as having special flood hazards, and if flood insurance is available under the National
Flood Insurance Act. .
(f) ;A'orkcr's..cQmpensation. Worke.r's compensation insurance or other similar insurance
which may be required by any Legal Requirement in an amount at least equal to the minimum required by
law.
(g) Building ordinance and law coverage acceptable to Lender,
including, without HIT/itation, Coverage for Loss to the Undamaged Portion of the Building, Demolition Cost
Coverage alllI Increased Cost of COl\StlUCtiOll Coverll.ge.
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(It) MiscellRneous. Such otner insurance coverages, in such amounts, and such other forms and
cndorsements, as may from time to time be required by Lender and which are customarily required by
institutionallcnders for similar properties, similarly situated, induding, without limitation, coverages against
otner insurable hazards including, byway of example only, earthquake, sinkhole and mine subsidence, which
at the timc arc commonly insured against and generally available. Borrower may carry insurance not
required under thi$ Deed ofTrust, provided any such insuranc<; affecting the Property shall be for the mutual
benefit of Borrower and Lender, as their respective interests may appear, and shall be subject to all other
provisions of this Article r1.
Section 2.2. Policy Terms.
(a) All insurance required by this Article II shall hzve a term of not less than one year and shall
be in the form ar:d anlOunt and with deductiblcs as, from time to time, shall be reasonably acceptable to
Lender, under valid and enfofceable policies issued by financially responsible insurers either licensed to
transact business in the State where the Property is located, or obtained through a duly authorized surplus
line instlfance agent or otherwise in conformity with the laws ofsuch State, with a rating ofnot less than the
third (3rd) highest rating category by anyone of the Rating Agencies or with an A.M. Best Company, Inc.
rating ofA or higher and a fmanciar size category ofnot less than X or a rating of at least BBB in the
Solvency Review published by Standard & Poor's. Originals or certified copies of all insuram:e policies
shall be delivered to and held by Lender. All such policies shall name Lender as an additional insured, shall
provide for loss payable to L-::nder and snail contain: (i) standard "non-contributory. mortgagee"
endorsement or its equivalent re",atlng, inter J!.li.:!, to recovery by Lender notwithstanding (a) the negligent
or willful acts or omissions of Borrower, (b) occupancy or use of the Property for purposes more hazardous
than those permitted by the terms ofsuch polky, (c) any foreclosure or other action taken by Lender pursuant
to this Deed ofTrust upon the occurrence ofan Event of Defuult, or (d) any change in title or ownership of
the Property; and (ii) a provision that such policies shall not De canceled or amended, including, without
limitation, allY amendment reducing the scope or limits of coverage, or failed to be renewed, without at least
thitl:y (30) days prior written to Lend.er in each instance. With respect to policies which
require payment of premiums annually, not less than thirty (30) days prior to the expiration dates oCthe
insurance policies oblllined pursuant to this De<;.d ofTrus!, Borrower shall pay such amount, to the
extent provision is actually made theorefor pursuant to Section 4J(b).Not less than thirty (30) days prior to
the expiration dates of the insurance policies obtained pursuant to this Deed ofTrus!, originals or certified
copies of renewals of such policies (or certificates evidencing such renewals), together with evidence
satisfactory to Lender of the payment of all premiums by Borrower and not through or by any financing
arrr.ngement, shaH be delivered by Borrower to Lender. Borrower shall not carry separate insurance,
concurrent in kind or form or contributing in the event ofloss, with any iOSUfilnce required under this Article
II. If the limits of any policy required hereunder are reduced or eliminated due to a covered loss, Borrower
shall pay the additionnl premium.. if any, in order to have the original limits of insurance reinstated, or
BOITower shall purcllase new insurance in th<; S;1mc type and amount that existed immediately prior to the
loss.
(b) lfBormwer fails to maintain and deliver to Lender t!)e policies and certificates of insurance
required by this Deed ofTrust, or Trustee may, at their option, procure such insurance and Borrower
shall payor, as the case may be, reimburse Lender or Trustee, as the case may be, for, all premiums thereon
promptly, IlpOn demand by Lender or Trustee, as the case may be, with interest thereon at the Default Rate
from the dRtc paid hy Lenrler or TrnstBe to the date of repayment and such SUIll shall constitute a part of tile
Debt.
July I. 1999
I.QSOI;,Ul:;J. 10
89
(c) The insurance required by this Deed of Trust may, at tho option of Borrower, be effected
by blanket and/or umbrella policies issned tD Borrower covering the Property and the other properties .of
Borrower provided that, in each case, the policies otherwise comply with the provisions of this Deed ofTrust
and allQcate to the Property, from time to time, the coverage spedfied by this Deed of Trust, without
possibility of reduction or coinsurance by reason of, or damage tD, any other property (real or personal)
named therein. If the insurdllce required by this Deed'of Trust shall be effected by any such blanket or
umbrcHa policies, BOlrower shall furnish to Lender original policies or certified copies thereof, with
schedules attached thereto showing the amount of insurance applicable to the Property provided under such
policies.
(d) Neither Lender, Trustee nor their agents or employees shall be liable for any loss or damage
insurcd by the insurance policies required to be maintained under this Deed ofTrust; it being understood that
(i) Borrower shall look solely to its insurance company for the recovery of such loss or damage, (ii) such
insurance company shall have no rights of subrogation against Lender, Trustee, their agents or employees,
and (iii) BOlTower shall use its best efforts to procure from such iostlnmce company a waiver of subrogation
rights against Lendcr and Trustee. If, however, such insurance policies do not provide for a waiver of
subrogation rights against Lender and Trustee (whether be;;ause such a waiver is unavailable or otherwise),
then Borrower hereby agrees, to the extent permitted by law and to the extent not prohibited by such
insurance policies, to waive its rights of recoverj, if any, against Lender and Trustee, their agents and
employees, whether resulting from any damage to the Property, any liability claim in connection with the
Property or otherwise. If any such insurance policy shall prohibit Borrower from waiving such claims, then
Borrower must obtain from such insurance company a waiver of subrogation rights against Lender and
Trustee.
Section 2.3. AssignmcntofProceeds.
(a) Borrower hereby assigns to Lender all of its rights to instmlJ1ce proceeds and condemnation
awards in connection with the Property, all ofwhich proceeds shall be payable to Lender as collateral and
further security for the payment of the Debt and the perfonnance ofBorrower' s obligations under the Loan
Docunl';nts. Borrowe.r hereby authorizes and dire,cts the issuer of any such insurance or award to make
payment directly to Lender. Nothing herein contained shall be deemed to excuse Borrower from repairing
or maintaining the Property as provided in this Deed ofTrust or restoring all damage or destruction to the
Property, provided that Lender shall have elected tD appiy the Net Proceeds to pay fer the cost of the
Restoratiorl Work, regardless ofthe sufficiency of the Net Proceeds. No appIication or release of proceeds
by Lender shall be deemed a waiver or elITe or any default or Event ofDefault.
(b) [n the event ofsale by Trustee pursuant tD the power of sale provided herein or any other
conveyance of title or assignmeot of the Property in extinguishment, in whole or in part, of the Debt, all
right, titli?; and ofBoHower, to the extent permissible, in and to all policies of insurance required by
this Deed ofTf1Jst inure to the benefit of the successor in interest to Borrower or the purchaser of the
Property. The. piOvi$ions of this Section 2.3(0) Sh1111 sUlvive the termination of this Deed of Trust by sale
by Trtlstee to the powa- of sale pro'fidel! herein or otherwise.
(c) Borrower hereby authorizes Lenderto payout ofany proceeds or awards, all adjusters' fees
and expenses, and all ofLender's costs and expenses, including, without limitation, all reasonable architects',
attomeys', <lnd otherccnsultnnts' and professionals' fees and disbursements, incurred by Lender
in connection with the (i) casualty or Taking, (ii) luovery of the proceeds or award or (iii) repair or
restoration or the Property pursuant to Article. m.
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Section 2.4. Insurance R"Quirernent<. Borrower promptly shall comply with, and
shall cause the Property to comply with, all Insurance Requirements and shall not by any action or omission
invalidate any insu;ance policy required to be carried hereunder or materially increase the premiums on any
sllch policy 2bove the normal premium charged by the carrier of such policy.
ARTICLE III CASUALTY AND CONDEMNATION
Section 3. J. Casualty and Condemnation. In the event of any damage or destruction to, or
commencement or threat of a Taking of, the Property, Borrower shall give prompt written notice thereof to
Lender. Borrower hereby assigns to Lender all insurance proceeds, condemnation awards, compensation
and other recoveries related to damage or destruction to, or a Taking of, the Property. In connection
therewith, Lender is hereby irrevocably appointed as Borrower's attorney-in-fact, coupled with an interest,
with exc.lusive power (I) to collect., receive and retain all such proceeds and recoveries, (ii) to make any
compromise or settlement ill connection therewith, (iil) to give, execute and deliver on behalf of Borrower
proper receipts and acquittances therefor and (iv) to endorse any checks, drafts or other instruments
representing any insurance proceeds, condemnation awards or other recoveries. !fno Event ofDefBultexists,
Borrower may participate in any such c1aim$, suits or proceedings and shall be authorized and entitled to
compromise or settle any such claims, suits or proceedings in an amount less than One Hundred Thousand
Dollars ($\ 00,000). Borrower shall execute and deliver to Lender any and all instruments, proofs of loss,
receipts, vouchers and releases re<1sonably required in connection with any such claims, suits, proceedings
or settlements promptly after request therefor by Lender and shall cooperate with Lender in connection
therewith.
Section 3.2. C(JlldCDln(.!ion. In event of a Taking, Lender shall have the option, in its sole
discretion, to apply any NctProc.::eds toward the payment oftne Debt, to cure any default or Event ofDefauft
hereunder or to allovl such pmceeds to be appiied to the restoration ofthe Property to 8 usable whole. Any
Net Proceeds to be applied to restocdtion shall be disbursed subject to the satisfaction ofthe conditions in
Section 33 and in the manaer set forth in Section 3.4.
Section 3.3. .casualty and RestOf:ltion.
(a) In thc eVent of any casualty to the Property, Borrower shall promptly commence and
diligently prosecute to completion the repair, replacement, restoration and rebuilding of the Property(the
"Re:stQra1;On Work") so damaged, destroyed or talcen in full compliance with all Legal Requirements and
the provisions of this Article Ill, and free and cleM from any and all Liens, claims and encumbrances.
(b) Following the occur.ence of 8 Takilig in which Lender approves, in its sole discretion,
Borrower's request to rebuik!, or an insured casualty, Lender shall apply the Net Proceeds to pay the cost
of the Restoration Work in accordance with Section 3.4 hercofprovided:
co 110 Event of Default exists;
(ii) Borrower has provided its written (A) agreement to proceed promptly and diligently
with the Restoration Work in compliance with all Legal Requirements and plans and specifications approved
by an Architect, the applicable Governmental Authority and, ifl(Xjuested, Lender and (13) certification setting
fmill z. rcasonabl;: estimate ofthe cost of completing the Restoration Work and time schedule therefor;
(iii) t:,e Work can ue completed prior to the earlier of (A) one year prior to
the Malt:.rily 1)at(": Hr;(i (B) tho dt<tc OC;;ltrring six (6) after the tlateoftho casualty or Taking;
J"iy I. 1191'
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(iv) in Lender's solejudgment, there are sufficient proceeds ofbusiness interruption, rent
insurance or cash available to pay the Debt through the completion of the Restoration Work and any
reasonable period thereafter for leasing the Property;
(v) in the event of a c&sualty, Borrower provides substantiation requested by and
satisfactory to 0wder Witll respect to:
(A) the feasibility and reasonability oftne schedule and costs;
(B) the restoration of the Property resulting in an economically viable project
at least equivalent to the quality and character oflhe Property immediately prior to the casualty;
(e) th projected income and cash flow of the Property after the restoration
being at least equivalent to the levels prior to the casualty;
(D)
all phases of such work; and
(E)
the Net Proceeds to complete the Restoration Work during
this Deed of Trust remaining a first priority lien on the Property.
(c) [f the cost of the Restoration Work exceeds the Net Proceeds, Borrower shall deliver to
under either: (i) cash collateral; (ii) an unconditional, irrevocable, transferable letter of credit in form,
substance, amount and issued by a bank acceptable to Lender or (iii) a completion bond in form, substance,
amount and issued by 11 surety company acceptable to Lender.
(d) Notwithstanding the foregoing, if a casualty involves destruction of seventy-five percent
(75%) or more of the Premises, any right to rebuild or restore the Property shaH be in Lender's sole
discretion.
(e) 80rrower agrees with Lender that all fees, costs and expenses (including without limitation.
aU reasonable attorneys' fees, engineers' fees, architects' fees, fees, title endorsements
and all disbursements) incurred by Lender in connection with the restoration of the Property, reviewing and
monitoring the restomtion and verifying compliance with this Article III shdl constitute a part of the cost
of Restoration 'Vork and shall be paid by Borrower.
Section ].4'. .Disbursl?tnl"JJt orNet Proceeds.
(a) Any Net Proceeds t\1 be used to pay the cost ofRestoration Work pursuant to Sections 3.2
or 3.3 hereof shall be held by Lender and shall be paid out from time to time to Borrower as the work
progresses (less any cost to Lender or Trustee of recovering and paying out such proceeas, including
reasonable attorneys' fees and costs allocable to inspr.cting the work and the plans and specifications
therefor), subject to each of the following conditions:
(b) Each request for payment shall be made on not less than ten (10) Business Days prior notice
to Lender and shall be accompanied bya certificate Orall Architect stating (i) that all oftlle Restoration
Work completed has b.een perfonned in compliance with the approved plans and specifications, (ii) that the
sum is justly due, or is required to reimburse Borrower for payments justly made, to the contractor,
subcontractors, materialmen, laborers, engineers, architects or other Persons reDdering services or materials
Jury /. /999
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for ,he Restoration Work (giving a brief description of such services and materials), and (iii) that tho
undishursed Net Proceeds are sufficient to complete the Restoration Work; provided, however, that Lender
shall not he obligaled to dishurse such fimds if Lender reasonably detennines that Borrower shall not be in
compliance with conditions set forth in Section 3.3 (b) hereof. Additionally, each request for payment shall
contain a stiltement signed by Borrower approving both tho Restoration Work performed to date and the
RestorJtion Work covered by the request for payment in question. As to any personal property covered by
the request for payment., Lender shall be furnished with satisfactory evidence of payment therefor and such
further evidence satisfJ.ctory to assure Lender of its valid first lien on the personal property.
(c) Each request fo" payment shull be accompanied by lien waivers covering that part of the
Restoration Work for which payment or reimbursement is being requested and, if required by Lender, a
search preparcd by a title company, or by other evidence satisfactory to Lender indicating that no mechanics'
or other liens: or title retention instruments have been fIled in connection with such Restoration Work.
Cd) Proceeds shaH not be disbursed more frequently than once every thirty (30) days.
(e) Until such time as the Restoration Work has been completed and Lender shall have received
copies of arid all final certificaies of occupancy or other Licenses required to comply with all Legal
Req uirements. Lender shall be entitled to retain up to teo percent (10%) ofthe cost of the Restoration Work
(the "Retention A...ill.Q.!!1!f'). Borrower hereby covcnants diligently to seek to obtain all Licenses. Provided
no Event ofDefault shaH exist, promptly after the completion of the Restoration Work and delivery of such
Licenses to Lender, 'Lender shall pay the Retention Amount to Borrower_ Any excess Net Proceeds
remaining after the completion of the Restoration Work shall, so long as 110 Event of Default exists, be
remitted to Borrower.
Cf) The application or release by Lender of any proceeds shall not cure or waive any default or
Event of Default.
Cg) If Borrower (i) shall fail promptly to submit to Lender for approval plans and specifications
for the Restorati')ll Work llpproved by the ArclJitect and by all Governmental Authorities whose approval
is required, (ii) fail to promptly such Restoration Work after obtaining all approvals,(iii)
shall fail to diligently ,msecute such Restoration Work to completion, or (iv) shall fuil in any other respect
to comply with ill: Restoratioa Work obligations under Section 33 and this Sectiou3.4, then Lender, Trustee
or any receiver cf tile Property, upon five (5) days prior notice to B-orrower (except in the event ofemergency
in which case no notice shall be rt:oquir.ed), shalt have !he right but not the obligation to perfonn or cause to
be performed such Restoration Work, and may take such o!her steps as it deems advisable. Borrower hereby
waives any claim, other than for gross negligence or wiUful misconduct, against Lender, Trustee and any
receiver arising Ollt of any act or of Lender, Trustoo or such receiver pursuant hereto.
Section 3.5. .fu!ili!ers' Risk. During the period of any new construction on the Premises, Borrower
shall maintain a so-called "Builder's All-Risk Completed Value" or "Course of Construction" insurance
policy in non-reporting form for any improvements under construction, induding, without limitation, for
demolition and increased cost of construction or renovation, in an amount equal to 100% of the estimated
replacement cost value 011 the date of completion, including "soft cost" coverage. Borrower shall also
maint&ir. Worker's Compensation Insurance, covering all Persons engaged in such construction, in an
amount at ICllst eq.tal to the minimum required by Log?l RequIrements. In addition, each contractor and
subcontractor shall be to pte-vide Lender with a certificate of insurance for (i) Worker's
Compensation [nSUT:U1CC covC!:'ing all Persons engaged by the controctor or subcontractor in the construction
in an amount at equal to the minimum required by Legal Requirements, and (ii) general liability
I
July 1. 1999
14
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1261558
showing minimum limits of at least $5,000,000, including coverage for products Bnd completed
operations. Borrower shan cause each contraCfor and subcontractor to cover Borrower and Lender as an
additional insured under such liability policy and to indemnify and hold Borrower and Lender harmless from
and against any and all claims, damages, losses, liabilities, costs and expenses arising O'.1t of, relating to or
otherwise in r.:onl\ection with its perfomlancc of such construction.
Section 3.6. AQl1lication oCNet Pro@l1!l. Except iftbe Net Procwls are applied to the repair and
restoration of the Property in accordance with this Article III, under shall have the option, in its discretion,
and without regard to the adequacy of its security, to apply all or any part of the proceeds it may receive
pursuant to Article II, ill such order and amounts as Lender slull elect, to anyone or more of the following:
(i) the payment of the Debt in accordance with the provisions of the Note, (ii) the cure of any default or
Event of Default or (iii) the reimbursement of the costs and expenses ofLender or Trustee in connection with
the rcc(}very of the proceeds. All amounts deposited with Lender pursuant to Article II hereof or this Article
nI, until expended or applied as provided herein, may be commingled with the general funds ofLender and
shall constitute additional for the payment of the. Debt and performance of all of Borrower's
obi igations under tiln Loan Documents. Lendllr makes no representation or warranty as to the rate or amount
of interest, if any, which may accrue on any proceeds deposited by Lender in any bank or other rmancial
institution and shall have no liability in connection therewith.. Lender shall not be deemed a trustee or other
fiduciary with respect to its any amounts received or held by it pursuant to Article II or this Article TIL
ARTICLE IV TAXES; RESERVES
Section 4.1. fl!:L!nent ofTaxes. Borrower shall payor cause to be paid in a timely fashion all taxes,
assessments, water rates and sewer rents, now or hereafter levied, assessed or imposed against the Property
(collectively and all ground rents, utility charges, maintenance charges, governmental impositions,
excises, levies, fees, licenses and charges which may be or become a lien or charge against the Property
(including, without limitation, charges for:my easements, vault charges and license fees for the use cfvaults,
chutes lind sirnilzr areas adjoining the Property), now or hereafter levied, imposed or assessed against the
ProPClty (the "OHler CltatgSlS"), Borrower nhall furnish to Lender or its agent or designee receipts for the
payment ofthe Taxes and Other Charges prier to the date the same shall become delinquent and at any time
upon Lender's request
Section 4.2. llighUillm. After prior wrhter, n'Jtice to Lender, Borrower shull have'the right;
at its sole expem;e, to contest by appropriate legal proceedings, promptly initialed and diligently conducted
in good faith, the validity, amount or application, in whole or in part, ofany ofthe Taxes or Other Charges,
provided that:
(a) no Event of Default exists;
(b) such proceeding shall suspend the collection ofth.e Taxes or Other Charges from Borrower
and from the and.no portion of the Property or interest therein shall be mdanger of being sold,
forfeited, tenn ill Ilted, Ill\noeled or lost;
(c) such proceeding shall be permitted under lmd conducted in accordance with the provisions
of any other in:;trumefit or agreement to which Borrower is bound or to which the Property or Borrower is
subject and shall not conStitute a default thereunder,
(d) Borrower shall have furnished sucll security ll.'! may be n,quired in the proceeding or by
Lender to insure the payment of any such or Other Charges, together with all interest and penalties
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thereon or, jf not n'quired, 130rTOWor shall have t,et aside ade'1uate reserves far tho p"yment afthe Taxes ar
Odler Charges, together with all interest and penalties thereon.
Upon completion of HOY contest, slu: nimmediately pay any amount due, and deliver to Lender
proof of the completion of the contest and payment of the amount due, whereupon Lender shall return any
security deposited with Lender. Borrower shall deliver copies of ell notices relating to any Taxes and Other
Charges covered by this Article IV to Lender.
Section 4.3. Account.
(a) On each Payment Date, Borrower shall d.:posit willi Lender (or its servicer) a sum equal to
(i) one-twelfth of the aggregate annual amount which would be sufficient to pay the Taxes and (ii) one-
twelfth of the aggregate oftlte current annual insurance premiums for all insurance required by the terms of
DeeJi of Trust. The monthly deposits described in (i) and (ii) above, together with any reserves
established pursuant to the Reserve Agreement, are hereinafter referred to, collectively. as the "Reserves"
and all amounts held by, or to be held by Lender under this Article IV are hereinafter collectively referred
to as the Acoounl". Itl addition. on the date hereof, Borrower shall pay to Lender for deposit into
the Reserve Account an amount which, when added to the Reserves subsequently required to be deposited
with Lender hereunder, win result in there being sufficient amounts in the Reserve Account to pay the next
due installments ofTaxes and insurance premiums. The determination of the amount of the Reserves and
the tractional part thereafto be deposited with Lender shall be made by Lender in its sole discretiOIL
(b) !lj;weativn ofReserves: So long as no Event ofDefauIt erists, to the extent ofamounts on
deposit in the Reserve Accoar.t, Lender shall apply the Reserve Account to payments ofTaxes and insurance
premiums required to be made by Borrower herein. Borrower shall be responsible for ensuring the receipt
by Lender (or any servicer or other party Leilder designates). at least thirty (30) days prior to the respective
due date fOl paymant thereo!; ofall bills, invoices and statements for all Taxes and insurance premiums. In
making any payment from the Reserve Account. Lender shalll>e entitled to rely on any bill, statement or
estimate obtained fi-om the appropriate public office or insurance oompany or agentwithout any inquiry into
the accuracy of S'Jch bill, 5latement or estimate nor ilie validity. enforceability or contestability of any tax,
assessment, valuation, sale, forfeiture, tax lien, title or claim thereof.
Co) Security Interest:. Borrower hereby grarlts to Lender alien on and security interest in all
Reserves now or hereafter in the, Reserve Account, and such Reserve Account shall constitute additional
security fo, the Deht 'untii expended or applied lIS ;,.bove provided. Upon the occurrence' of an Event of
Default, Lender may Rpply any SUfilS then pn'Sent in the Reserve Account to the payment ofthe following
items in any order f,nd amount, in its sole discretion: (i) Taxes and Other Charges; (ii) insurance premiums;
(iii) 3r.y other advance or payment made by Lender or Trustee to preserve and protect the Property or the lien
of this Deed onrust, (iv) Debt and (v) any olller sum payuble to Lender by Borrower under any Loan
Documcnt.
(d) !t.;serve Account lftlle amount ofthe Reserve Aceount shall exceed the amounts
due for Ta.xes and insurance premiums pursuent to this Article N, Lender shall, in its discretion. return any
excess to Borrower or crooit such excess against future payments to be made to the Reserve Account In
allocating stich excess, Lcnder may deal with (he Persoll shown on the records ofLender to be the owner of
the Property. If the Resen!e Account is notsnfficient to pay the items set forth in SectiOI14.J, Borrower shall
promptly pay to Lender,. upon demand., an ammml which Lender shall estimate as sufficient to make up such
defiei-ency.
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(e) llirJ:!c to If Borrower shall fail to pay any Taxes or insurance premiums
in accordance with this Article and is not contestiog such charges in accordance with the terms hereof, then
Lender or Trustee shall have the right. but not the obligation, to advance such Taxes or insurance premium.
Borrower shall repay Lender or Trustee, as tho case may be, on demand, any amount so advanced by Lender
or Tl1lstee, as the case may be, with interest thereon at the Default Rate from the date of the advance to the
date of repayment.
(I) Limitation ofLiability. Lender's acceptance ofReserves shall not impose any responsibility
on Lender beyond the p:?ymentofTaxes and insurance premiums for which the Reserves were paid into the
Reserve Account following Lender's receipt ofbills, invoices or statements therefor in acc.ordance with the
tcrms of this Deed of Tmst. Upon assignment of this Deed ofTrust by Lender, any funds in the Reserve
Account shall be paid over to the assignee and Lender shall thereupon bc completely released from all
liability with respectthereto.
(g) Additional Reserves. If there is a default or Event ofDefault hereunder, or if Lender deems
it prudent to require additional Reserves during the tenn of the Loan, Lender shall have the right to require
Borrower (0 deposit additional Reserves with Lender on each Payment Date. Borrower shall commence
paying such additional Reserves on the next Payment Date. All such Reserves, and the rights and obligations
of Lender and Borrower in connection therewith, shall be governed by this Article IV and the Reserve
Agreement.
(h) Miscellaneous. Unless express!y required by applic3ble law, no Reserves sh211 be deemed.
to be escrow or trust fi.mds and the Reserves may, .at Lender's discretion, be held in It separate acc.ount or be
commingled with the geller-a! fl1;1ds of Lende). No eamings or interest on the Reserve Account shall be
payable to Borrower.
ARTICLE V MAHAGEM1lliI
Section 5.1. Ifthe Property is not managed by Borrower, it shall be managed either
by an Affiliate ofBorrower or professional property mlltlllgement company reasonably acceptable to tender.
The Property be managed in accordance ",,-jth generally accepted management practices for properties
of similar type and class in the vicinity of the Property. Management by an Affiliate or a professional
properly manacement company shall be pursuant to a written agreement approved by and collaterally
assigned to Lender. 1n no sbal1eny manager be relIlovr.d or replaced or the terms or.lny management
agreement modifieo or amended without the prior written consent of Lender. In the event of default by
Borrower hereunder or 'Inder any manllgement wntract then in effect, which default is not cured within any
appiicabb grace or cure period, Lender sball have the right (0 terminate, or to direct Borrower to terminate,
such managemerit contract upon thirty (30) days' notice and to retain, or to direct Borrower to retain., a new
management agent approved by Lender.
ARTICLE VI LEASES AND REt-ITS
(8) Harrower docs hereby bargain, transfer, pledge, convey, assign and set over unto
Lender, all aod -.en15. This assignment d:L.:ases /lIld Rents is an abwlute, unconditional and present
assignment from $orrower (0 Lellder and 110t ,m assign,nen.t for security. The exercise by Lender of any of
its rights or remedies pursuant ttl this Section 6.1 shall not be deemed to make Leader a mortgagee-in-
pO$sessioil.
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(b) So long as no Event of Ddault shall exist hereunder, Borrower shall have a revocable license
to take all actions with respect to all Leases, present and future, subject to the {enns of this Deed of Trust
and the Assignment The (;xistence or exer\'.ise of Borrower's revocable license to collect Rent shall not
operate to subordinate: this assignment to any subsequent assiglUnent This assignment shall be fully
operative without any further action on the part of any Person. Upon the occurrence of an Event ofDefault
hereunder, I.ender shall be entitled to all Rents, whether or not Lender takes possession ofthe Property.
(c) Borrower agrees to deliver to Lender within ten (10) days after Lender's request a complete
list of the Leases, certified pursuant to an Officer's CertHicate stating the demised premises, the names of
the Lessees, the Rent payable under the Lease:>, the date 10 which such Rents havo bu:/! paid, the terms of
the Leases, the dates of occupancy, the dates of expiration, 8Jly Rent concessions, work obligations or other
inducements granted to the Lessees, and any renewal options. Borrower shall also deliver on demand a copy
of any Lease not p,'eviously delivered to Lender.
(d) Up0n the oc.c;urrence of an Event ofDefaul1, the licehse granted hereinabove automatically
shall tel111inate without notice to Borrower, and Lender, Trustee or a receiver may thereupon or at auy time
thereafter (i) cnte'r upon the Property, and collect, and apply the Rents toward payment ofthe Debt in
such priority and proportions as Lender in its discretion shall deem proper, (ii) dispossess by "the usual
summary proceedings any lessee defaulting in making any payment due under any Lease or sublease or
defaulting in the perfonnance of any of its other obligations under its Lease or sublease, (iii) let the Premises.
the Improvements or ilny portion thereof and (iv) perfoml such other acts as Lender or Trustee is entitled to
perform hereunder or that Borro\\ -ar is entitled to perform as landlord under ;my Lease. This assignment and
grant shall continue in effect Ullt1l the enttre amount ofilie Debt shall be paid in full and all of the obligations
shall be fully perfonned in ao:ordance with this Deed of Trust and the other Loan Documents. The
execution of this Deed ofT,ust constitutes and evidences the irrevocable consent ofBorrower to.the entry
upon and taking possession of the Premiss, the Improvements and the Equipment by Lender, Trostee or
such receiver.
(c) In addition to flle rights which Lender may have herein, upon the occurrence of any Event
of Default, Lender, at its option, may require Borrower to (i) pay monthly in advance to Lender, or any
receiver appointed to collect the Rents, the fair aud reasonable rr-ntal value forthe use l:nd occupation ofsucb
part of thePrope:ty as may be in the possession ofBorrower and (ii) vacate and surrender possession ohlle
Property to Leuder, Trust(;e CIT such receiver; 'and in default thereof, Borrower may be summary
proceedings or olherwise.
Section 6.2. Leases.
(a) All new leases and lease renewals shall, regardless ofwhether Lender's approval is required:
(i) he arms' -length tram;Bctians on commercially reasonable tenns;
(ii) be for aaual occupancy by the tenant thereU11dc:r;
(i ii) eorltain preYailing market rental rates, terms and conditions;
(iv) be filHy "ubordinated to this Deed of Trust and provide for attornment to Lender,
if it becomes a SUCct:ssor landlord;
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(v) in the case of new Leases, be written on the form of Lease "pproved by Lender;
without material revision (unless required by law); and
(vi) not permit the tenant to "go dark" or otherwise stop operating, not contain
termination rights other tb:ln for landlord default, or major casualty or Taking, and
not permit the lease to be contitlgent upon the operation or existence of another
tenant at the Property.
Lender's written shall be required for f',ach new Lease prior to its exec;ution ifthe Lease is for space
in excess of 5,000 square feet or is for a term exceeding five-years (including all extensions and renewal
options); provided, however, that consent shall be required in all instances ifan Event of Default shall exist.
If Lender's consent is required hereunder, Borrower shall submit to Lender a description of the economic
terms TO be incorporllted in the Lease including, without limitation, the minimum rental per square foot,
additional rental items, any expense stop, rental escalators, rent credits, abatements and concessions, tenant
fin ish allowances, security deposit amounts, term, renewal rights and options for additional space. Lender's
consent to the economic terms and to any changes in the approved standard lease shall not be unreasonably
withheld or delayed. Promptly upon the execution of eac.h Lease or renewal, Borrower shall deliver a copy
thereof, together with Gli related"documcnta!ion, to Lender.
(b) DOlTcwer shall observe and perform all L'te obligations imposed upon till': lessor under the
Leases Md purslJant to applicable Legal Requirements. Borrower shall not, without the prior written consent
of Lender: (i) a(;cept Rents(exelusive of security deposits) for more than one month in advance,(ii) do or
permit anything to impair the value ofthe Leases as security for the Debt; (iii) amend or modify any Lease,
except as permitted under this Section 6.2; (iv) entel" into any Lease not in conformity with Section 6.2 (a);
(v) t:ke or omit to take any action or exercise any right or option which would permit the tenant under any
Lease to cancel or terminate said Lease or accept the surrender or assignment of any Lease; (vi) permit any
Lease to become subordinl!.te to any Lien other than the lien of this Deed of Trust; (vii) further pledge,
transfer, mortgage or otherwise encumber or assign the Leases or future payments of Rents except if
expressly_permitted by this Deed ofTrust (viii) cancel or terminate any-Lease (other than for lloD-payment
ofrcntor any other material defalllt thereunder); or (ix) discount, release, waive, C<lrnpromise or otherwise
discharge any Rcnts payable or other obligations under 1he Leases. However, Borrow!'x may take any of the
actions described in subsections (viii) and (bt) so long as such actions ate taken by Borrower in the ordinary
course ofbusine-$$ Rnd arc consistent with sound cu:>'tomary leasing and management practices for similar
properties and prompt thereof L" given to Lencler.
(c) Upon the occurrence ofan Eve.'1t ofDefault, before or after the whole principal sum
secured hereby is declared 1;0 be immediately due or whether before or after the institution of any sale by
Trustee of the Property or any portion thereof by Trustee pursuant to the power of snte provided herein or
otherwise, Lender shall lUl.ve, and Borrower hereby gives and grants to Lender, the right, power and
authority to make and enter into Leases with respect to the Property for such rents and for such periods of
occupancy and upon such other terms and conditions as Lender determines in its sole discretion with like
effect as ifsuch Leases had been made by Borrower as the owner in fee simple ofthe Property free and clear
of any conditions cr Iimitattolls establisned by this Deed ofTt1Jsl Borrower expressly acknowledges and
agrees that the or GUO:l :Le.'lSe may extend beyond ihe Maturity Date of the Loan or any sale by Trustee
of tile Property. In furtherallce ofthe rights granted U:flderundcr Section 6.1 (d) hereof and this Section 62
(c), inevoc(I.bly appoints Lender, Trustee mId any receiver ofthe Property as the attorneys-
in-fact of Borrower coupled with an interest. lrl C<lnnection with any action taken by Leoder, Trustee or any
receiver of lhe Property purnam: to this Article, unde'", or llny receiver of the Property shall not be
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for any 10$5 sust"ined by Borrower resulting from any failure to let tbe Properly, or from any other act
or omission of Lender, Trustee or any receiver afthe Property in managing the Property, nor shall Lender,
Trustee or any recel'/er of the Property be obligstecl to perfonn or discharge any obligation, duty or liability
under finy Lease.
(d) All security deposits of lesse-.es, whether held in cash or any other form, shall be treated by
Borrower as trust funds, shall tlot be commingled with any other funds of Borrower and, if cash, shall be
deposited by Borrower at a bank or other financial institution reasonably satisfactory to Lender. Any bond
or other instrument which Borrower is permitted to hold in lieu of cash security deposits under applicable
Legal Rcquiremel1lts shall be maintained in full force and effect unless replaced by cash deposits as
hereinabove described and shall be issued by a financial institution reasonably satisfactory to Lender. The
bond or oth<:'r instrtlment shall, , jf permitted pur51Jant to Legal ReqUirements, at Lender's option, narne
Lender as paye(' or ben;;ficiary thereunder or be fully assignable to Lender and shall otherwise be reasonably
satisfactoiY to Lender.
ARTICLE VU MATNTENANCE AND REPAIR
Section 7.1. Maintenance and Repair Ql'1he Prope:lty; Alterations: of Equiprncnt.
Borrower hereby COVCil3nts and agrees that:
(a) Borrower shall (i) mainl:ain the Property and the sidewalks and curbs adjoining the Property
in good repair and shall keep the same in good, safe and insurable condition and in compliance with all
existing and future applicabie Legal Requirements, (ii) promptly make all :repairs and replacements to the
Property, interior IOld cX:1enor, structural and nonstructural, ordinary and extraordinary, nnforeseen and
foreseen, and maintain the Property in a manner appropriate for 1:imilar buildings ror their present uses, (iii)
not commit or suffu to be committed any waste of the Property or do or suffer to be done linythingwhich
will increase the risk of fire or other hazard to the Property or otherwise impair the value thereof arid (Iv)
not abandon the Property. Borrower shall keep the sidewalks, vaults, gutters and curbs comprising, in front
ofor adjacent to, the Propcrty. clean andfiee from dirt, snow, ice, rubbish and obstructions. All repairs and
replacements made by BQJTQwer shall (i) be with first-class materials, in a good and workmanlike
manner, (ii) be e:t!uai or better in quality and class to the original work, (iii) comply with all applicable Legal
Requirements and inSUflUlce Requirements and (iv) be a Borrower's sole expense.
(b) Borrower shall not demolish, re-move, wnsn-uct, and, except as expressly provided in Article
III hereof, restore or aHerthe Property or any portion thereof, nor consent to or permit any of the foregoing,
wilhout Lender's prior written consent in each instance, which consent may be given or witbheld in Lender's
discretion_ Notwithstanding the foregoing, Lender's consent shall not be required with respect to
nonstructural, int::.rior alterations involving less than One Hundrt:d Thousand DolJars($lOO,OOO) to complete,
as by an Officer's Certificate delivtred to Lender prior to the commencement ofsuch alteration.
(0) Nolwithstanding the provisions ofthi3 Deed of Trust to the contrary, Borrower shall have
the right, at any 'time alla f:-om time to time, t,) mmove and dispose of Equipment which may have become
obsolete or unfit for us.;: or which is no longer useful in tlte management, operation or maintenance of the
Property. BarlOwe< shall promptly replace any such Equipment so disposed of or removed with other
Equipment of at least equal quality, value, servi!:eab1lity and use. free of superior title, liens and claims.
However, ifby reason oftedmolc.gical or other devc1oprnen,s in the operation and maintenance ofbuildings
of the general of.,ny Improvement, replacement of the Equipment so removed or dispoSed of is
not n';ce:;saly or d::-.... irdbie for the prope:t management, operation or rnaintenance of the Property, Borrower
shall "/lot be n:qllirerl to rf;pldc.e the same.
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ARTICLE V[l! TRANS}'ER QJLElli;UMBRANCE QF THE PROPERT'(
Section 8.1. No TransferlEncumbrance. Without the prior written consent of Lender, Borrower
that it shall not Transfer, or agree to Trilnsfer, all or any portion of the Property or any interest therein.
foor purposes of the preceding the following shall be prohibited:
(i) an installment sale agreement wherein Borrower agrees to sell the Property or any part
thercof for a price to be paid in installments;
(ii) an agn:ement by Borrower leasing all or a substantial portion of the Property for other than
actual occupancy by a SPSCil tenant thereunder;
(iii) a sale, assignment or other transfer of, or the grant ofa security interest in, Borrower's right,
title and interest in and to any Leases or any Rents;
(iv) 3ubjecting the Property to a condominium regime or transferring the Property to a
cooperative corporation or similar association;
(v) any merg<'1 or consolidation involving Borrower;
(vi) ,my YolunOlry or involuntary sale, conveyance, transfer, pledge or encumbrance of a
lUajolily of the beneficial interest.; in Borrower or any general partner or maIlaging member
(or if no managillg member, any member) ofBorrower, whether occurring inone or a series
oftr<lnsadions; <md
(vii) any Trsl'.$fer by Pablo Nankin of any of its interest in Borrower or tile general partner or
member of Borrower, ifapplicable.
.Section &.2. Pennii"ied Transfers. NOlwithstandiog the foregoing, the following shall not be deemed
to be Transfers hereundt.r: (i) transfer by devise or descent or by operation of law upon the death of a
member, general part:i1er or stockholder of Borrower or any member or general partner thereof; and (ii) a
sale, transfer or nypothxation of a membership, partnership or shareholder interest in Borrower, whichever
the case may be, by a :;un'(;llt member, general partner (tr shareholder, as -applk:able, to an tnmediate family
member (i.e., parents, spO'Jses, !iiblings, children or grandchildren) of men member, general partner or
shareholder or to an entity cuntrolled by such un imrl"!ediate family member, or to a trust for the benefit of
an immediate family member ofsuch member, general partner or shareholder.
SectionS.). Conditions to Consent. Lender reserves the right to condition its consent to any sale,
conveyance, mortgage, grant, bargain, encumbrance, pledge, or other transfer under this Article
Vlllupol\ (a) its re.::eiptofall information regarding the proposed transferee which Lender deems necessary
to unoerwrite the credit-worthiness and expertise ofthe proposed trnnsferee at least sixty (60)
days prior 10 the proposed Transfer, (b) Lend{:('s receipt of a: one percent (1%) assumption fee, (c) payment
of alI costs, fees "TId expenses ofunder and its coonsel in connection with the Transfer, (d) execution and
delivery of Lenders' form of assumption agreement, indemllities, guaranties, ratifications, financing
statements, note !1lr;difi>:.ahOl1$, opinions and all other agreements required byLender, (e) ddivery of all title,
casualty, liability lind other rnsumnce policies, endorsements and certificates required by Lender, and(f)
satisfaction ofsuch other r.onditiolls as lender shall oetennille in its sole discretion. No request fot' consent
will be enteltained by Lender ifthe loan is in default or ifthe Transfer is to occur within sixty (60) days of
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any contemplated salo of Loan hy Lender, whether ill connection with a securitization or otherwise. Any
approval or denial ofconsent to a Transter prohibited under this Article vrrr shall be in the sole and absolute
discretion of
ARTlCLE IX BOOKS AND RECORDS: REPQRTING REQUIREMENTS
Section ;>.1. fstoppel Certificates. Borrower shall at its own expense, within fifteen (15) days after
request by Lender, fumish Lender with a statement, duly acknowledged and certifie.d, setting forth (a) the
amount oflhe original principal amount of the Note, and the unpaid principal amount of the Note, (b) the
rate of interest ofthe Note, (c) the date payments of interest and/or principal were last paid, (d) any offsets
or defenses to the payment ofthe Debt, and if any are alleged, the nature thereot: (e) that the Note, this Deed
of Trust and the other Loan Docwnents hav,: not been modified or if modified, giving particulars of such
modifiC<ltion and (I) that no default or Event of Default exists pursuant to the Note or this Deed ofTrust or
any event or circumstal1Ce whJch, willi the giving of notice or the passage oftime, or both, would constitute
a default or Event of Default hereunder. or if such default, Event of Default, event or circumstance exists,
the nature thereof, lhe period of time it has existed, and the action being taken to remedy such default, Event
of Default, event IJr circumstance.
2ection 9.2. fimncial StJltements una Books and Recol-ds. Borrower shall keep accurate books
and records of account oHhe Property and its OWll fmancul! affairs sufficient to permit the preparation of
financial stJltem6llts thcrefi'om in accordance with gener-aliy accepted accounting principles. Lender and its
duiy authorized representJltives, agents, and employees shall have the right to examine, copy and audit
Borrower's recx:rcis and books of account at all reasonable times and, except during an emergency or
following the occurrenct': and during the continuance of an Event of Default, upou reasonable advance
written notice. BOHO'Ner sh"ll provide to the following financial stat::ments and information, all of
which must be cerii'fieJ to Lt':llder as being true and correctby Bon'ower or the entity to which they pertain
and, if financitJl statements, be compiled in accof'dance with generally accepted accounting prinCiples' ,
consistently applied, and be in form and substance acceptable to Lender:
(a) until the Startup Day, promptly upon request, operating statements for the Property for the
immediately preeeding: twelve month period and a rent roll for the preceding monlli;
(b) copies of all tax returns filed by Borrower, within thirty (30) days after the date of filing;
(c) amlU"lIy, within thirty (30) days after the end of each calendar year, operating stJltements
for the Property for the: immediately preceding twelve (:t2) month period and a rent roll for the Property
containing the name of each tenant, the space occupied by such tenant, the lease commencem1:nt date and
expinttion date, security deposit, rent, additional rent. arrearages, and such ollier inforoation as may
customarily be reflected t:ilereon or reasonably requested by Lender;
(d) annual financial statements for Borrower within ninety (90) days after the end of each fiscal
year and, upon Lender's request, financial statements from each indemnitor and guarantor under the Loan;
and
(e) other information with respect to the Property, Borrower, the principals, members or
general partners of Borrower, as applicable, and each indemnitor and guarantor under any indemnity or
gunrnntyexecuted in (;onllection with the Note.: secured hereby which may he requested from timeto time
by Lender, within a reasonable thne al'<er the applicahle request.
July" !91''9
I.OSOt;7lJL'U
22
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(
In toe event Borrower fails to supply any of the financial information as and when required in items (a)
through (e) above or, upon the occurrence of an Event of Default, Lender, io addition to any other rights and
remedies contained herein, shall have the right (but no obligati;:m) to make or cause to be made such
inspections of the Property and such audits cfBorrower and/or the Property as Lender shall determine, in
its sole discretion, by Person(s) as Lender deems appropriate. Borrower agrees to payor to reimburse
Lender fer any expense incurred therefor and further agrees to provide and/or make available all necesS2ry
information and personnel and to otherwise c(YJperate in connection with any such inspection or audit If
8orrower fails to pay Qr reimburse Lender within tcn (10) days of a request by Lender therefor, the amounts
so owed shall be adde,d t.o the DC'bt Bod shall accrue interest at the Default Rate.
ARTICLE X SECURITY AGREEMENT: FlXTURE FILING
Section 10.1. Agreement; fixture Fjfing.
(a) This Dee..i of Trust 1s both c. real property deed oftcust and a "security agreement" within
the meaning afthe UCC. The Property includes both real and personal property and all other rights and
interests, whether tangible or intangible in nature, of Borrower in the Property. This Deed of Trust further
constitutes a financing smtemer,t filed as a "fixture filing" and covers goods which are or are to become
fixtores on the Pt"vperty. Borrower hereby gran!s to LCllder as security for the Debt a security interest in the
Prop:;orty to the lull extent that the Property may be to the vec of the State. If an Event ofDefault
shan oc.cur, Lender, addition to any other rights and remedies which it may have, shall have and may
exercise immediately and any and all rights and remedies granted to a secured party upon
default under the VCC. Any disposWon pUmilaJlt tc fhe DCC of so much of the Property as may constitute
personal property shdl be. considered commercially reasonable if made pursuant to a public sale which is
adveortised at least twice ill a new:;paper in which sheriff's sales are advertised in the co'mty where tho
Premises is located. Any notiee ofsale, dispositioll or other intended action by Lender with respect to the
Collateral given to Borrower in accordance with the provisions hereof at least ten (10) days prior to such
action, shall constitute reasonable notice to Borrower. 'The proceeds of any disposition of the Collateral. or
any P<1rt thereof, may be applied by Lender to the paymellt t}fthe Debt in such priority and proportions as
Lende-r in its discretion shall deem proper.
(b) Borrower hereby irrevocably appoints Lender as its attorney-in-fact, with an
interest, to file with !J\e appropriate public office on its behalfany financing, continuation or other statements
signed only by Ler.cler, as secured party, in connection with the Collateral covered by this Deed of Trust at
Borrower's cost and expense..
(c) Tbe g1'lmt of a security interest to Lender in the granting ciause ofthis Deed ofTrust shall
not be construed to derogate from or impair the Hen or provisions ofoT the rights of Lcndcr under this Deed
of Trust with respect to any property described therein which is real property or which !.be parties have
agreed to treat as red property. The hereby slatr,<f intention of Borrower and Lender is that everything used
in connection wHit Ihe production of income from such real property or adapted for use thereon is, and at all
times and for aIr purpo.es find in all proceedings, both legal and equitable, shall be regarded as real property,
irrespe"tive of whether or not the same is physically attached to the Premises and/or Improvements.
i
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LOSOf:7t.j !:;J 23
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ARTteLl; XI DEFAULTS
Seclion [1.1. 'The Debt shall become immediately due at the option of Lender
upon anyone or more of the following events (each, on "Event of
(z,) if any monthly payment of:"aleres( or principal is not paid as required pursuant to the Note
w ithin (5) days after the date that the is dlle or if all or any pDrtion of the principal amount of the
Note shall not r:.e paid on the Maturity Date;
(h) if any other amonnt payable pursuant to the Note, this Deed of Trust, or any other Loan
Document except as set fotth in (a) above is not paid within five (5) days after the date when due and payable
ill accordance with the provisions thereof;
(0) if a default occurs under any of the other Loan Documents and such default is not cured
within ,my applicable grace 0, cure period provided therein or, ifan Event ofDefault occurs under the terms
of any of the Loan Documents;
(d) if BC:tTower fails to mcintai insurance in accordance with Article nhereof;
(e) if BOHowcr fails to comply with. Article VIE or Article XlI hereof;
(f) if any represenl-atioD, warranty or coven&nt ofBorrower made herein or in any other Loan
Document or in a,"y cetiificate, report, financial statenlent or olher instrument or agreement furnished to
Lender 2.hall proye, false or misleading in any material respect;
(g) if a rceeiver, liquidator or trustee; appointed for Borrower, any general par'l1er or member
of Borrower or any indemnitor of any of Bon'ower's ooligations under the Loan; or if Borrower or any
general partner Oi member ofBorrower or any indemnitor becomes insolvent, makes an assignment for the
benefit of creditors or in writing its im,bil.ity to pay its debts generally as they become due; or if any
petition for bankruptcy, reorganization, iiqt:jdation or arrangement pursuant to federal bankruptcy law, or
Eny similar fed6ral or law, shall be filed by or against, consented to, or acquiesced in by, Borrower or
any general palin",r or member of Borrower or any indemnitor of any of Borrower' s obligations under the
Loan; provided. however, if such appointment, adjudication, petition or proceeding was involuntary and not
consented to by BorrOWer or such general pattr:er or member ofBotl"Qwer or indemnitor, tJten upon the same
not being disch<:rg,ed, or dismissed within thirty (30) days thereof;
(h) jf Borrower shall be in default beyond any notice or grace period, if any, under 8uy other
deed of trust or seC;llrity agreement covering any part of the Property without regard to its priority relative
to this Deed of Trust; provided, however, tIii,) provision shall not be deemed a waiver of the provisions
hereof prohibiting furthtr encumbrances 1Jle Property or any other provision ofthis Deed of Trust;
(i} if the Property becomes slllJject (i) to any Lief> other thall a Lien for real estate taxes and
assessmen',;: not yet due aJ)d payable, or (ii) tv a'1Y mechanic's, materialmau's or other Lien, and such Lien
shall not be discharged (by payment, bonding, or otherwise) within thirty (30) days unless contested in
accordance with the tronn;: hereof;
(j) if Borrower diseontinue:l the operation of the Property for reasons other than repair or
restoration arising ITom a casualty or Taking, 01" if Borrower is enjoined by any court or other Governmental
Jnly '.
.. .....
(
99 1261558
Authority from continllinglhe operation of its business, including, without limitation, entering into lAases
or performing its obligations thereunder, which injunction is not released or stayed, for fc.rty-five (45) days;
(k) if Borrower or any general partner or member of Borrower shall institute or cause to be
instituted any for the termination or dissolution of Borrower or any such general partner or
member;
(I) if the Property, is subjected to waste or to removal, demolition or material alteration so that
the value of the Property is materially dimin;shed thereby; and Lender determines that it is not adequately
frem any 10%, damage or risk associated therewith;
(m) if any judgment, writ, warrant of attachment or cKecution or similar process is issued or
le'"ied against the Property and is not released, V1lC,1ted or fuJly bonded 'Nithin thirty (30) days aB:er its issue
or levy; or
(n) if Borrower shall fail to perform auy of the other terms, covenants or conditions of the Note,
tbis ofTmst or any other Loan Document, other than as set forth in (a) through (m) above, for thirty
(J 0) days aner notice from Lender, provided that ifsuch default is susceptible of cure but cannot reasonably
be cured within such tbirty (30) day period and Borrower shaH have cornmencr-d to cure such default within
such thirty (30) day perivd and thereafter diligently llIId C"fCpeditiously proceeds to cure the sume, such thirty
(30) day period shall be extended for so long aR it shall require Borrower in the exercise of due diligence to
cure :iud\ default up to lJut Hot e-.<ceeding a oUlximum period of ninety (90) days.
Section I 1.2.
(a) Remedies Available. During the existence of any Event of Default, Lender and, upon
request of Lender, Trustee may, in addition to any other rights or remedies available to it hereunder; at law
or in equ ity, take such action, without notice or demand, as it deems advisable to protect and enforce anyone
or more or its rights against Borrower and in ana to the Property, including, without limitation, the following
actions:
(i) declare all or any portion of the unpaid Debt to be immediately due and payable;
providcd, however, tlut upon the occurrence of allY ofthe events specified in Se::tion 11.1(h) the entire Debt
will be immediately due z.:nd pay,J:lle wiiliout l10tice or demand or any other declaration of the amounts due
and payable;
(ii) cnter into or upon the Property, either personally or by its agents, nominees or
attorneys, and dispossess BOfi"OV,'Cf and its agents and servants therefrom, with or without Ii sale by Trustee
of tbe Property pursuant to -the power of sal<: provided berei.n and without applying for a receiver for the
Rents and without allY payment ofrent or other compensation to Harrower, but SUbject to the rights oftbe
tenants under the Le<\ses. Thereupon Lender or Trustee may (A) use, operate, manage, control, insure,
maintain, repair, restore and otherwise deal with any or all of the Property and conduct the business thereat,
(B) make alterations, additi<lrls, renewals, replacements and inlprovements to or on any oftbe Property, (C)
exercisc all rights and power:> ofBorrower with respect 10 ali or any portion c:fthe Property, whether in the
name ofBOfrower or otheMise, including, witltou-t limitation, me right to make, c--ancel, enforce or modifY
[eases and COtltr'Jcts, obtain and evict tenants, and demand, sue for, collect and receive all earnings, revenues,
rellts, iSSlIIOS, profits and other income of the Property, and (0) apply the receipts from the Property to the
payment of the Debt, after de-ducting therefrom all expenses (including, without limitation, reasonable
attorneys' fees and -disblll'$OlTlenls) reasonably incUl1"ed in connection with the afoIT-said operations and all
)ldy I, 1999
L(J$v::7DP.:
25
99 12615;:;8
amounts necessary to pay the taxes, fiSSeS"ments. insuraoce and other charges in connection with the
Property, ?s well as just ,lnd compensation for the services of Lender's and Trustee's third-party
agents;
(iii) have en Appraisal or other valuation ofthe Property performed by an Appraiser (EI11d
Borrower CQvr:l1ants and agrees it shall cooperate in eausing any such valuation or Appraisal to be
performed) and any cost or expense incurred cy Lender or Trustee, as the case may be, in connection
therewith shall constit"ae a portion of the Debt and be secured '?y this Deed ofTrust and shall be immediately
due and payable to Lender or Trustee, as (he c:ase may be, with interest, at the Default Rate, until the date
of payment to Lender or Trustee, as the case may be;
(iv) sell all or any portion of the and any or all estate, claim, demand, right, title
lind interest of 8orrov!er therein and rights of redemption thereof, pursuant to power of sale or otherwise,
at one or more saks, in whole or in parcels, in any order or manner, at such time and place, upon such terms
and after such notice thereof as may be required or permitted by law, at the discretion ofLender or Trustee,
and in the event of a sale ofless than all of Property, this Deed of Trust shall continue as a lien on the
remainiog portion cf the Property;
(V) institute an action, suit or proceeding in equity for the specific performance of any
covenant, rXrnditi(,n ag;eement contl!.ined in any of the Loan Documents,
(vi) recover judgment on the Note or any guaranty either before, during or after (or in
lieu of) any proceedings for the -:nforcemenl ofthis Deed of Trust;
(vii) apply, for the appointment of a custodian, trustee, receiver, liquidator or
conservator oftne .?ropertyor any part thereof, irrespective ofthe adequacy of the security for the Debt and
without regard to the solvency of Borrower or of any Person liable for the payment of the Debt, and such
receiver or otlier official shaH have all righw and powers permitted by 2lpplicable law and such other rights
and pO'Ncrs as the CUlirt fl!aking such appointment may roofer, but the appointmel1t of such receiver or other
offici?.! shall not impsir or ioany mannel' prejudice the rights. ofLender or Trustee to receive the Rent with.
respect to any of the Properly pursuant to this Deed of Trust or the Assignment;
(viii) reql!ire Borrower or any receiver appointed to collect the Rents to pay Lender
monthly in advance the fair <tnd reasonable rental value for any portioo of the Property used or occupied by
Borrower. Upon del11:3nd oy u.:nder, Trustee or such n:ceiver, Borrower shall inunediately vacate and
surrender possession to Lender, Trustee or such receiver. In default thereof, Borrower may be evicted by
Lender, Trustee or such rec,ervcr by summary proceedings or or
(ix) pursue any or an such other rights or remedies as Lender or Trustee may haveunder
applicable law or in equity; provicied, however, that the provisions of tt'tis Section 1J2(a) shall not be
construed to or modify any ofL1e notic,e requirements or grace periods provided for hereunder or
under ar,y of lhc other Loan Documenw.
Each of the fOr('going remedies may be purStled individually, concurrently or otherwise, at such time and
in such order as Lend::r or Trustee may deterr1lbe, in its sole discretion, without impairing or otherwise
affecting nny other rights remedies or Trustee hereunder, at law or in equity.
(b) [fLender elects to Clrc!se the Yrvperty or arty portion thereof to be sold, Trustee shall sell the
Prop,:rty ill acCOrdilll('e wilh the fol[cwing:
July t, 1999
\1__
26
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1261558
(i) Tlustee !nay calise any such s<ll-e or other disposition to be conduetea immediately upon the
occurrence of any Ev,ent of Default (or immediately upon the expiration of any redemption
or reinstatement period re.quired by law and not capable of being waived by Borrower), or
Trustee may delay any such sale or other disposition for such period of time as Lender
deems (0 be in its best interest. Should Lender desire that more than one such sale or other
disposition be conducted, Lender may, at its option, cause Trustee to conduct such sales
si;nllltaneous[y, or successively, on the same day, or at such different days or times and in
such order as Lender may deem to be in its best interest.
(ii) ll-.ereafi:er, upon the giving of such notice of the time, terms and place of sale as may then
be required by IB.W, and without the necessity of any demand on Borrower, Trustee shall sell
the Property or the portion the-.reof so specified by Lender at public auction. Lender, from
t,me tv time, also mey rescind any notice of default or Event of Default theretofore given
and such notice of its election to sell the Property. The ex.ercise by Lender of such right of
posiponement or rescission shall not constitute a waiver of any default or Event of Default
thell ei:isting or subsequendy occurring nor impair the right of the Lender to give notice of
default or Event ofDefault znd notice ofits ejection to seJl the Property or otherwise affect
any provision of this Deea of Trust or any oflhe other Loan Documents.
(iii) [n tll.e cvcni of a sale or other disposition of the Property or any portion thereof and the
ex.ecution ofa deea or other conveyance pursuant thereto, the recitals therein of facts, such
as defauit or of Default hereunder, the giving 0-[ notice of such defa.olt or Event of
Dehtllt lUld r,otice of sale, demood that such sale should be made, postponement of such
sale, the terms of sale, the s&le, the purchase, payment ofpurchase money and other facts
at'.'ecting the regularity or validity of such sale or disposition shaH be conciusjye proof of
ti1e truth. of such facts, and my such deed or conveyance shall be conclusive agamst all
rersons <$ to all matters alld faGts recited therein.
(iv) may, and upon the request of Lender. shall, adjourn from time to time any sale by
it '10 b maJe under or by virtue of this Deed ofTrust by Bl1nouncement at the time and place
appointed for such sale or for such adjourned sale or sales and, except as otherwise provided
by any appiicabte provision of Legal Requiremellts, without further notice or
pUblication, may make such sale at the time and place to wllieh ilie same shall be .0

(c) A.1?l!!k!'Jk!1 The proceeds or avails ofany sale made Iluder or by virtue ofthis
Section 11.2, tcgether with llny other sums which then may be held by Lender or Trustee under this Deed
ofTrust, whether under the provision" oftbis 112 or otherwise, shall be applied as follows:
First: To the payment dlhe third-party CQ;its and expenses reasonably incurred in
connection with ClOy such sale and to advances, fees and expenses, including, without limitation,
reasonable fees and expenses of Trustee and of Trustee':; and Lender's legal counsel, and of any
judicial procet:dings wherein the same may be made, and of all expenses, linbilities and advances
reasonably made or incurred by Lender and Tmstec tmdr.r this Deed ofTrust, to.gether with interest
as htgin on all such expenses, liabiiities and advances made by Lender or Trustee, as the
case may h:;
Jllly 1,1999
LOSOl:1fJ1).' 27
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I
Second: To the payment ofth" whole amount then due, owing and unpaid upon the
Note for rrincipal with in/crest on the unpaid principal at the Default Rato from the date
of the occurrence of the earliest Event of Default that formed a basis for such sale until the same is
p"id in full;
Third: To the payment of any other Debt required to be paid by Borrower pursuant
to :my provi;;ion vf this Decd of Trust, the Note, or any of the other Loan Documents; and
Fourth: The SUrplllS, if any, to Borrower unless otherwise required by Legal
Requirement,;.
Lender, Trustee zuy receiver or custodian of the Property shaH be liable to account for only those rents,
issues, proceeds a'ad profits actually ro;:ccived by it.
(i) Lender may adjourn from time to time any sale to be made under or by virtue! ofthis
Deed ofTrllst by announcement at the time and place appointed for such salem adjourned sale. Except as
otherwise provided by any applicable Legal Requirements, Lender, without fw1her notice or publication,
may make such sale at (be time and place to which the same shall be so adjourned.
(i1) Upon the completion of My sale made by Truslee under or by virtue oflhis Section,
Trustee, or any officer of any court empowered to do so, shall execute and deliver to any accepted purchaser
good and sufficient instruments granting, conveying, assigning and transferring ail estate, right, title and
interest in aod to the Property sold without any covc,nant or warranty whatsoever express or implied. Trustee
is hereby irrevocably appointed the true and lawful atiorney-in-fact of Borrower (coupled with an interest),
in its name and stead, to ;nake all necessary conveyances, assignments, !ransfers and deliveries of the
Property SO sold. For that purpose Truslee may execute all necessary instruments of conveyance,
assignment., transfer and cidivery, Mel substitute one or more Persons with like power. Borrower bereby
ratifies and conlirrns "ll that such attorncy-in.fact cr substitutes shclllawfu[Jy do by virtue hereof. Borrower,
if so requested by Lender or Trustee, shall rfJti(v :md confirm any such sale by executing and delivering to
Lender or ;my purchaser all such instruments as Lendel' deems necessary or d<:sirable. Any sale made
pursuant to this Section, whether by power of sale or otherwise, shall operate to divest ail the estate, right,
title, interest, claim and demand whatsoever, whei:ber at law or in equity ofBorrower in and to the Property
so sold, and shall, to the vlllest extent pennitteo by Legal Requirements, be a perpetual bar both at law and
in equity against Borrower and against any and all Persons claiming or who may claim the same, or any part
therwf, from, through or unclet' Borrower.
(iii) III the event of any sale made pursuant to this Section 11.2, the entire Debt
immediately thereupon sh",U become due; and "payable, anything in the Loan Documents to "the contrary
notwithstanding.
(tv) Upiln any sale made pursuant to t.!lis Section 11.2, Lender may bid for and aC<juire
all or any portion of til<: Pf('perty. b lieu of paying cash therefor, Lender or Trustee may make settlement
for the purchase price by crediting against the Debt the net sales price after deducting therefrom the expenses
of the sale and the CO:;t5 ofClo action.
July 1, 1999
LOSCI:?t') n.) 23
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1261558
(e) No recovery ofony judgment by Lender or Tmstee and no levy ofan execution
under any judgment llrOn tbe Property or upon any other property of Borrower shall or impair the
lien of this Deed of TrJst upon the Property, or any liens, rights, powers or remedies of Lender or Trustee
hereunder until the Debt is paid in full.
(f) Sufferance. Unless Lender, Trustee or the purchaser of the Property purslLlUlt
to any sale therwfresulting from the exercise of Lender's or Trustee's rights hereunder would have the right
automatiea Ily to cauS": Borrower or any Person in possession of the Property to be evicted therefrom
immediately upon SllC.h sale, any sale of the Property pursuant to this Deed ofTruS!, without further notice,
shall create the relation of landlord and tenant at sufferance between the purchaser and Borrower or any
Person in possession of the Property through Borrower, and upon failure of Borrower or :ruch Pe.rsoll to
surrender possession thereofimmediately, Borrower or such Person may be removed by a writ of possession
of the purchaser in ilny court haviug jurisdiction.
(i) In accordance with Califomia Code ofCivil Procedure Section 736, as such Section
lllay be amended from time to time; Lender may bring an action for breach ofcontract against Borrower for
breach of My "e:nvirofilOcnta] provision" (as such term is defUled in sucb Sec/ion) made by Borrower herein
or in any alh,,"r Loan Docume,nt for the recovery of damages and/or for tile enforcement of the environmental
provision.
(ii) In lIc<::oldar:ce with California Code of Civil Procedure Section 7265. as such
Section may be amended from time to time. Lender may waive the security ofthis Deed ofTrust as to any
parcel of the Premises that is "en,ironmentelly or is an "affected parcel" (as such terms are
defined in such Section), and as to any personal property which is Property attached to such parcef, and
thereafter exercise aga1nst Borrower, to the extent permitted by such Section 726.5, the rights and remedies
ofan unsecured creditor, including reduction cfLender's claim against Borrowertojudgment, and any other
rights and remedies pemiitted by law. In the event Lender elects, in accordance with California Code of
Civil Procedu;e S.ection 720.5, to waivll all or part of the security of this Deed of Trust and proceed against
Borrower on an uns->..cured basis, the valuatioo. of the real property. the <ietermination ofthe envirorunentally
impaired status of such security and any of lictionfor a money judgment, shall, at the request of
LeJ,dcr, be referred to a referee in accordance with California Code of Civil Procedure Section 63&
Such referee shall be an M.A.I, appraiser selected by Lender and approved by Borrower, which approval
shall not be unreasonably withb:IJ or Thl:> decision of such referee shall be binding upon both
Borrower and Lender. uno judgment lJpOn the award rendered by such referee shall be entered in the cowt
in which such.proceeding was commen<=! in =rdanc with California Code ofCivil Procedure Sections
64'4 and 645. Borrower snail pr..y ell reasonable costs aua expenses incurred by Lender in connection with
any proceeding under California C<Jde of Civil Procedure Section 726.5, as such Section may be amended
from time to time.
SecticnJ 1.3. Jnt1?I'est After Defillill. If any portion ofthe Debt is not paid when due (whether by
acceleration or vtherwise), and after any applicable grace period, then Borrower shall pay interest at the
Default Rate 011 the entire o'1tstanding principal balance of/he Debt from tho date on which such emount first
becomes due until tlte of the cure of all Events of Default or the payment oft1le entire amouiJt duo
to LendE,r, whether or not any :.ctb:t shall have [.1kerl. or proceeding commenced to recover tho samo
or to sell the Property. Ali unpaic s.nd '.":Clued. shall be secured by this Deed ofTrust part ofthe
Debt. Nothi'lg ill 11.4 c:r in other pmviskm of tilis Deed of TnlS! sball constitute an
e:,knsi"n of the tin',:: IG! p",\'Jll<;n(.:.:fthe Dehe
II
July I. 1999
29
i I
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99
Section 11.4. Borrower's After happening of any Event ofDefault and
immediately upon the commencement of any action, suit or other loga! proceedings by Lender in connection
therewith, Borrower shall (a) after recdpt of notice of the institution of any such action, waive the issuance
ilnd scrvice of process 'md enter its voluntary appearance in such action, suit or proceeding, (b) if required
by Lender I'll' Trustee, consent to the appointment of a recei'/er or receivers of the Property and of aU the
earnings, revenue:;, rent:;, issues, profits and income thereof, and (c) waive any defense Borrower might have
for the failure ot' Lender or Trustee to make ar..y tenants party defendants to a foreelosure proceeding or to
foreclose their rights ill any sllch proceeding.
Section 11.5. ConlrQl by Lender Aft!<tl2Iilll1!.!l. Notwithstanding the appointment of any custodian,
receiver, liquidator or trustee of Borrower, any of its property, or the Property, to the extent permitted by
Legal Requiremer.ts, Lender or Trustee zhaJl be entitled to obtain possession and control of aJI of the
Property in accordance wii!! the terms hereof.
Section i 1.6. Right Upon the occurrence of any Event of Default hereunder,
Lender, Trustee or their agents, without notice to or demand on Borrower and without releasing Borrower
from obligation hereunder, may, but without obligntion to do so, perform, payor otherwise cure any
obligation ot'Borrower in such manner andto such extent as Lender may deemnecessary to protect
the or the lien aftms Deed cfTrnst. Ihnder, Tl1lstee and tlleir agents are authorized to enter upon
the Propeny, or 3?pe<1r ill, defend, or bring any action or proceeding, to protect Lender's interest in the
Property, calise the sale of the Property or collect the Debr. Trustee's or Lender's costs, as the case may be,
and expense:; in connecticll with this Section 11.5 (including reasonable attorneys' fees to the e>:tent
permitted by law), shall (i) constitute n portioa ofthe De:bt, (ii) be due and payable to Lender or Trustee, as
the case may be, upon and (iii) accrue inlerest at the Default Rate from the date so demanded to the
date Lender or T(ustee, as ,lie may be, i:; paid in full.
Section 11.7. &.oyeryofSWfJkauirnUiL.&..1Jillt. Lender shall have the right fmm time to time
to lake aeti.ol\ 10 :ecover ali)' .1;wnS which CDllstitute a pmofthe Debt as the same become due and payable
hereunder (after the eJ{pirl1don of any period or Ule g;.'Ving of any notice herein provided, if any),
without regard to WllctJicr the balance of the Debt shaH be due, md witho'tlt prejudice to the right ofLender
thcreau!:r te. bring a.i action of foreclosure, or arty other for any default by Borrower existing at the
time stich action .,"..s commenced.
Section 11.8. M.claling and Other Marilli. Borrower hereby waives, to the fullest ex.tent
penn ittcd by law, the benefit of all appraisement, valuation, stay, extension, reinstatement, redemption (both
equ itable and statutory) ,,-rid homestead laws now or hereafter in force and all rights of marshaling in the
cvent of any sale hereunde.r of ihe Property or any interest therein; BOlTOwer hereby expressly waives all
rights of rr.demption from whether equitable or statutory, under any order or decree of foreclosure of
this Deed ofTrust. Such v;clver shall1r;nd Borrower, aHd every Person acquiring any interest in or title to
the Property sub!equent to the date hereof and all othel ?ersons, to the fullest ex.tent pennitted by
law.
Section I I.,. No 1ll.lP..airment: The interests and rights of-Lender under the Lonn
shalln;,t be impaired by any indulgence, including (1) any renewal, extension or modification
which Lender may grant with respect to llny of the Debt; OJ) My surrender, compromise, release, renewal,
eXlenl;ion, exchang<: or subs:ltuticTi which lenGer ill"}' giant with respect to the Property; or (iii) any release
or indulgence gmnted to :.my maker, endorser, guarantor or surety of any of me Debt.

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1261558
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I
M(flCLE XII HEGATlVE REGARDrNG
[NDEfrffiIlliESS ANp CHANGES fN BOR.RQY[!ill.
Seclion 12.1. Indebtedness and CnangesJr!.J.lQIT,)wer. Borrower
hereby warrant:; and COvenants thEt it shill! not
(a) clis!;olve, to.rminate or amend the lenns of its certificate of incorporation, articles
of orpmi7:aticn, operating ?.greement {)r partnership agreement, a$ appliC<lble;
(b) <enter into any transaction to merge, consolidate, liquidate or dissolve (or suffer any
liquidation or dissolution), or acquue by purchase or otherwise all or substantially all the business or assets
of; or any stock or other evidence of beneficial ownership of, any Person;
(c) guarantee, indemnify or otherwise becom>;: liable 00 or in connection with any obligation
of any other Person;
(d) at any time own any erocllInber.eod other than (i) tbe Property, and (ii) incidental personal
property necessary for the operation of the Property;
(e} at any ti!1le be dir.ectly or indirectly, in any business other than the ownership,
management and operation of the Property;
(I) elller into any contract or agreement with any general partner, principal, member or Affiliate
of Borrower or any Affiliate oftile general partuer or member of Botmwer except upon terms and conditions
that are intrinsically fair and substantially similar to those that would be available on an arm's-length basis
with third parties other than an Afliliate;
(g) create or assume my indebtedness, secured or unsecured, direct or contingent
(including any ooiiga!ion), other than (i) Ule Loan, and (ii) indebtedness which represents trade
payahles or accrued .;xpenses il1curred in the ordinary course of business of owning and operatingthe
Property. No ulhel debt may be secured (se.nior, subordinate or pari passu) by the Property;
(h) any loans ur advances to any third party (including any Affiliate);
(i) become insolvent cor fail'io pay irs debt fl."om its assets as the same shall become due;
(j) fail to <10 "II thin;;;s ,*":cssary to preserw ii:s as a Special-Purpose Entity, nor shaU
Borrower, any partner, limited or !!1:mber or shareholder thereof, amend, modify or otherwise
change its partnership partnership agreement, articles of organization, operating agreement,
articles Qfincorporation or hy-laws in mann-:;t" which adversely affects Borrower's existence as a Specinl-
Purpose Entity;
(k) i'i,il to and opemm it; business as prE:se.ntly conducted and operated;
(I) fail to maintain books and rewrds and bank accounts separate from those of its Affiliates,
including its me.mbers or general partners, an applicable;
July I, :999
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(m) fail to al all times l.o!d itself out to the public as a legal entity separate and distinct from Rny
other enf.ity any A.ffiliate thereof, including the genernJ partner or any member ofl3offower or any
Affiliate of the general partner or any member of BOffower, as applicable);
(0) fnil to file its own tax returns;
(0) fail to maintain adequate (;apital for the normal obligations reasonably foreseeable in a
business of its and character and in light of its contemplated business operations;
(p) seek the dissolution or winding up, in whole or in par!, ofBorrower;
(q) commingle the :fllnds and assets of Borrower with those of any genernJ partner, any
member, flny Afl:iliate or ,my other Person;
(r) fail to maintain its assets ill such a manner that it is not costly or difficult to segregate,
ascertain or identify its individual assets from those of any Affiliate or any other Person; and
(5) hold itself (Jut to be responsible for the debts or obligations of any other Person.
ARTICLEXIll
(a) Borrower hereby 3Esumes liahilif:'j fur, and agrees to pay, prorect, defend, and
save Lender harmless from ana agdnst an)' and all Costs which may be imposed upon, incurred by or
asserted (wawarded against Lender and Trustee or the Property, and arising directly or indirectly from: (i)
the violation or alleged violatiou of any EnviL-onmental Laws relating to or affecting the Property, whether
or not caused by Of within the control of Borrower; (ii) the actual or alleged presence, release or threat of
release of, or exposure to any Hazardous Materials on, in, undE;r or affecting all or any portion of the
Property or any sOiYUurJdii'ig areas, regalu!ess of whether or not ('.aused by or within the control ofBoffOWer;
(iii) any actual or alleged personal iruury or property damage arising out ofor related to Hazardous Materials
and the Property; (iv) any acts or omissions t'lat exacerbate an existing condition at the Property or that give
rise to liabiHty under any Environmental Law; (v) the failure by Borrower to comply fully with the terms
and conditions of XlII of this Deed of Trust; (vi) the breach of any representn.tion or warranty
contain"d in Articl<: xm oftbis Deed of Trust; (vii) the enforcement ofArticlo Xlli of this Deed ofTrust;
(viii) complying 'with Environmental L:lws in connection with the Property or slUTonnding 8l"eSS or (ix:)
assessment, investigation, containment, monitoring, remcdia!ton and/or removal of any and all Hazardous
Materials from the Property or any surrounding areas.
(b) Notwitltstanding any provision hereof to the conu-ary, Borrower shall have no liability under
this Deed of Trust with respect to Costs to Hazardous Materials which are initially placed on, in or
under the i'ropeliy after earlier of (i) Lender or Trustee taking actual possession and control of the
Property following an Event of Default, and (ii) Lender or Trustee exercising tile power of sale contained
hereillor otl1erwise taking title to the Property. Borrower shall have no liability under this Deed ofTrust to
Lender or Trust!;e, as tile CE..se may be, with to Costs which result directly and solely :from Trustee's
or Lemler' $, as tho ma.y be, willful or gros:; negligence.
Ic \ BorJUtve," s obligltiO.j to ufefJ;i Leu,)er '1Jlreunder shaU im:ltlde defcns;:; at both file> trial and
appeliale kvds and shall be with llticnleys, consuta;jts and expelis acceplabk to Lender.
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Section 13.2. Borrower hereby represents and
warrants (0 and C(lvenanL, and agrees with Lender,3s follows:
(a) The Property and all businesses or operations conducted thereon are in compliance with all
Environmental L"ws;
(b) No Hazardous Materials have been disposed ofon or released (as used herein, shall
have the meaning prc)vidcd in 42 V.S.c. 9601(22)) at, onto or under the Property by Borrower or, to the
Borrower's best knowiedge, after due inquiry anri investigation, by any other Person;
(c) No Hazardous Materials are located in, on or under, or have been handled, generated, stored,
processed or discharged from the Property by Borrower or, to the Borrower's best knowledge, after due
inquiry and investigation, by any Person, I'-xcept for those substmces used by Borrower or tenants of
the Property in the ordinary.wurse of their business in compliance with all Environmental Laws and not
reasonably to give rise to liability under Envirorunental Lawz;
(d) The: Propelty is not subject to a..'ly private or gove!l1mentallien or judicial or administrative
notice or acti0n relating 10 or arising under Environmental Laws;
(e) Tl1cre arc no underground storage receptacles or surface impoundments, landfills or dumps
for Hazardous Materhls 011 the Property;
(1) Borrowu has received no notice of, and to the best of Bon'ower's knowledge and belief,
th"'re exists no investigation, acti<In, proceeding or claim by any Govemrneontal Authority or by Person which
couItl result in any liability, penalty, sanction or judg!lli:"lt under any Environmental Laws with respect to
any condition, \ISC or operation of the Property, nor does Borrower know of any basis for any of the
foregoing;
(g) Except as previously disclosed to Lender in \\Titing, there is no asbestos-containing material
or read-based paint <.t Property, nor are tllei"; allY PCBs, ewi.angered species habitats or wetlands at the
Property; .
(h) Borrow0t has receive<! no that, and to the best of Borrower's knowledge and
there has been no claim by' any Pers0l} that any use, operation or condition of the Property has causedauy
nuisance or any other liability or adverse condition Oli, ill or under any other property, nor does Borrower
know of any ba.is for a claim;
(i) Except as previously disclosed in writing to Lender, Borrower has not knowingly waived
Of any Person from liability with regard to HllZllrdous Materials in, aD, under or around the Property.
nor retained or assumed, contractually or otherwise, any other Person's liability relative to Hazardous
Materials or any claim, &ction or proceediog reiating thereto; and
(j) Neither the Property nor ally,)tner property owned by Borrower (i) is included or, to
Borrower's knowledge, a.iter due inquiry, proposed for inclusion on the National Priorities List issued
pursuant to CERCLA by the United States Environmental Protection Agency (the "EfA'') or on any of the
inventories of poT<mtiai "hobIMl" sites issued by the EPA or other applicable Governmental Anthority
nor (ii) otherwi:ie by the EPA as a pot<:otial CERCLA or included or, to Borrower's
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knowlc.cige, after due inquiry. proposed for inclusion all any such list or inventory issued pursuant to any
othel' Environmental Law or issued by any other Governmental Authority.
Section 13.3. Covenants. and Warranties.
(a) Borrower shall, ;Jnd shall cause all property managers, agents, employees, tenants and other
permitted o,.cupants Property to: (i) lXlmplywith all applicable Environmental Laws, (ii) keep or cause
the Property to be kept free from Hazardous Materials (except those substances used by Borrower or tenants
of the Property in the ordinary courso of their business, in compliance with, and not likely to give rise to
liabirity onder, Environmental Laws, (iii) not install or use. or permit the installation or use of, any
underground receptacles containing Hazardous Materials on the Property, (iv) expressly prohibit the use,
generation. handling, stornge, production, r;:lease, processing and disposal of Hazardous Materials by all
future tenants oftbe (except tho3e substances used by such tenants in the ordinary course of their
business, in compliance with, and not likely to give rise to liability urider, Environmental Laws) and use aU
reasonable efforts to prevent existing tenants from taking any such actions, (v) in any event not install on
the Property or permit to be installd on tile Property polychlorinated bipbenyls, urea formaldehyde
insulation, asbestos or any substance contain.ing asbestos or any material containing lead-based paint, and
(vi) prohibit the disposal and/or release of tny Hazardous Materials on, at, beneath. or near the Property.
(b) . immediately shallllvtify Lender in writing should Borrower become aware of(i)
any rel;;,'lSe of Hazardous Materials or vther aclllai or potential environmental problem or lialbility with
respect to or affecting (he- Property, (ii) amy lien, action or notice ofviolation or potential liability affecting
the Property or Borrower arising under any Environmental Law, (iii) the institution of any investigation,
inquiry or proceedillg concerning 8<J1rower or the Property pursuant-to cmy Environmental Law or otherwise
relating to Hazardous Matermls, or (iv) the discovery of any occurrence, condition or slale of facts which
would render any represenMion or warranty contained in this Deed ofTrust incorrect in any respect if made
at the time ofsuch discovery. Borrower sha11promptIy transmit to Lender copies ofany and all citations.,
orders. notice,s or, upon written request of Li:nder, other communications relating to any of the' foregoing.
(c} vfthe source of<:antamination, Borrower shall, at its sole e:<.pense, promptly take
or cause to be taken a!l actions necessary or advisable for tim clean-up of the Property and other property
affected by contamination in, on, under or at the Property, including;witll.ou1' Iimita.lion, all investigative.
monitoring, removal, comarilrnent and remedial actions, in accordance witb. th;e all applicable Environmental
Laws (and in all eVC;1l:S 11 a rna!loer salisfaclol)' to the applicable Governmental Authority and Lender)_
Borrower silali further payor cause (\) he paid, at no expense to Lender or Trustee, all clean-up,
administrative a.Cld enforcement lXlsts of the applicable Authority which may be asserted
against the Property. In the event Borrower fails to do so, or follOWing an Event of Default, Lender or
Trustee, at its sole election, may cause the Property or other affected property 1'a be freed from any
Materials or otherwise brought into compliance with Environmentlll Laws. Any cost incurred
in connection therewith shall be included in Costs. Borrower hereby grants to Lender nnd Trustee llCCesS
to the Property and an ilTevocable license to remove any items deemed by Lender to be Hazardous Materials
and to do all things Lendf.f shall deem or prudent to bring the Property into compliance with all
Environmental Laws. However, Lender and Trnstee shall n.we no obirgation to inspect or clean up any
Hazardous Mat.erials. L\'Ilder and. Trustee shall 110t be deem<:d a generator of any Hazardous Materials
removed from t1Je Prop<;({y.
(d) UPOIl the nqucH (.YLcllder or Tr.;stce, at any time (i) after an Event of DeJault or (ii)
LCI1c!,:r 0r Twstee has reasonable: grot::.llds to that (x) Hazardous are or have been released,
stored 0, dispo5ed of on, ill, under or around the Property or (y) \he Property may be in violation of
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Environmental Laws, BOJrower shall cause an investigation or audit ofthc Property to be undertaken by a
hydrcgeoiog.ist, environmental engineer or o<her appropriate consultant approved by Lender, to detennine
whether allY lhzardous 1vl<Jteri:lis are iocated on, at, beneath, or near Property and/or whether the
Property is ill with Environm<:nt;>.l Lawr.. The of any investigation or audit shall be
approved by Lendtr. [fBon'ower fails to fE'ovid,: reports of such investigation or audit within thirty (30)
days after such request, Lender may, OJt shaH have no obligation to, order the same. Borrower hereby grants
to Lender, Trustee and contractors 10 the Property and en irrevoc3ble license to undertake such
investigation or audit. All costs of allY such investigation or audit shall be included in Costs and shall be
paid by Borrower in 8c:cordance with the terms of Section lJ.4 (c) hereof.
(e) [n the event that a Lion is filed against the Properly pursuant to any Environmental Law,
Borrower shall, within thirty (30) days from ihe date that Borrower receives notice of such Lien (but in any
event len (10) days prior to the dat." of any sale contemplated pUIStlant to such Lien, either (1) pay the claim
and remove the \j)n ITom tnt; Property, or (H) (A) a bond l3tisfactory to Lender in the amount oflhe
claim out ol'which th" Lillll arises, (B) Ii: cash deposit in the amountoHhe claim out efwhich the Lien arises,
(C) other security reascrowly satisfaciory t) knJer in an sufficient to discharge the claim out of
which the Lien or (D) security in. a bnn gnd amount to the applicable Governmental
Authority purst'ilr,t te a vidid consent CI' ether o'Ger, and BarlOWei' sball promptly remove or arrange for the
remonl of the tkn. Notwithstanding the iorcgomg, Borrower use its best efforts to take all actions
and make all paymentS necessary 01' prudent tL' prevmt a sale pursuant to any Lien.
(f) The. amount ofBorrower's liability hereunder is unrelated to the amount ofthe Loan and any
failure of tile Loan to be n:paid :n fulL The ;:ni:on::ement ofthis Deed of Trust by Lender 0[' Trustee shall
not be C0nstlUed by BOTr.:lWer as an indirect al1ernjit to rc\:over any Loan deficiency or losf, relating to the
failure ofthe Loan to be repaid in fuEl. Borrower <lc!-;nuwledljes that it may have liability hereunder even if
the Loan is ,'epaid in fat! by reasoll of a fui! '.:;redit hid at any s2.le under this Deed ofTrus!, and that the
amount of BomJwer's liability hereunder ccule; excet:d the entire "mount paid by Borrower for the Property..
Sectioll 13A. Indemnification ProOl-:I.lrGi.
(a) [f anyection, proceeding, litigation or claim shall be brought or IlSse\ie{j against Lender or
Trustee for any matter which Lender or Trustee Is indemnified hereunder (each, a "1JJ!im''), Lender or
Trustee, as the case may be, shall notify Borrower in writing thereof and Borrower shan promptly assume
the. defense thereot: including, without Iimitation,ihe employment of counse[ accept.nble to Lender or
Trustee, as the may be, and tle negotiation ofany settlemenlAny failure ofLender or Trustee to notifY
Borrower of such metter shdl not impair or the obligatians of Borrower hereunder. Lender and
Trustee shail have the right, ,it the expense ofHOlTOwer (which e.xpense be included in Costs), ifLender
or TlUstee has rca9)n to believe that its illteJ'C1,1;] are not being represented or div('rge from other
interests being lepresenlell by such counsel, to separate eo=el in any such action and to partiC'.ipate
in the defense thereof In !h.e event BorwI'l-cr saaU faU to discharge or undertake to defend Lender or
Trustee, as the CfL>e may be, zgainst nny Claim, web failure shall tNnstit1.!te an Event of Default and Lender
or Trm:tee, 210 the case may be, may, at ;ts sole defend or settle such Claim. The liability of
BorT()wer to Lender aTJd TrJ.Stee hereunder for ,my seltlement by Leoder or Trustee., as (he case may be, shall
. be conclusively established hy any settlement enterd iuto by o. Trustee, liS the case may be, in good
faith, alld such good faith shall be conclusive.ly established if the settlement is made on the advice of
independent legal coullsel fill' Lender or as the C<lse may be. The amount ofBorrower's liability
hereunder shall include the setile'men( consideration and all other Ccsts, which llhall be paid by Borrower
as provided in Section 13,4 (;;) Cos(;: illcut!,..ci in connection with a Claim st",a!L be by
Borrower without the m::ui!,)ITiellt of wailing for the outcome of S'\2cn Claim.

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99 12615'58
(b) Wil!l0ut the prior 'liritten cor",ent ofl.-ender or Trustee, as the case may be, Borrower shall
ftN settle or :;ompromise any Claim ill manner or consent to tbe entry of Blly judgment (i) in which the
claimant or pfaintifldoes nct unconditionally rdea';e Lender or Trustee, as the case may be, from all liability
and obligations ill respect ofsuch Claim and obtain a dismissal of such Claim with prejudice; or (ii) that may
adversoly a/leet Lender or Trustee, ar. the caue may be, (as detelmincd in the sole discretion of Lender or
Trustee, as t!:e m:iY be) or obligate Lell.def ot Trustee, as the case may be, to pay any sum or perform
any obligation.
(c) Borrower shaH Jay to Lender or Trustee, as the case may be, allY and all Costs within ten
(10) days after written notice from Lender or Trustee, as the case may be. All Costs shall be immediately
reimbursable to Le.nder or Trus!e-e, as the case may be, or, upon request ofLender or Trustee, as the case may
be, paid directly to the party sending a bill or other statement to Lender or Trustee, as the case may be. Any
Costs not paid within the ten (l tl) day period shall bear interest at the Default Rate from the
date such notice is given until the date paid ia full.
Secti.)n 13.5. General Provisions.
(a) if at ar:y th.ue all or any part of any payment r.;ceived by or TTUstee, as Lhe case may
be, pursul:int to this Deed of Trost sflal! be rescinded or returned for any reason whatsoever, including,
without limitation, 6: insolvmcy, bankruptcy or reorganization of Borrower, then the obligations of
Borrower here/lncier shall, to the ex.tent of such rescinded or ret-Limed payment, be reinstated and shall
continue as though such previous pcyment receive:j by Lender or Trustee, as the case mllY be, had never
occurred.
(b) Nothing <XJntained in this Deed ofTrust shall prevent or in any way diminish or interfere
wirh allY rights or n:medies, including, witham: limitation, the right to cost recovery or contribution, which
BOlTower may have any other Person 'mder CERCLA or any other applicable federal, state or local
laws, all sllch rights beinfl hereby e::;pressly reser/ed.
(c) At Le.ncler' selection, fi'om time. to time, Borrower shall agree to ,ecOl1veyance of this Deed
of Trusi: with respect to any portion of the Property with respect to which Lender believes in good faith
H&Vlrdou:> fvlatt:rill1s !lave been discovered on, ae, in, uncler, or above and have or are or reasonably likely
to nave a malerial adv<;rs.e: effect Oil t:le Property, :BO\TUWer, Lender, Trustee or the lie.'1 or priori!:'.! oflhis
Deed orTrust, or with respect to wilic:l Lel1de-.it believes ill good faith an Environmental Law has or may
have been violated wllicil has or is reasonably likely to have a materiaJ ndverse effect on the Properly,
Borrower, Lender, TrtlS1Ce or the lien or priority of Ihis Deed o-fTmst. Borrower shall, 'at Borrower's
expense, cause :my consents, agreemf.nts lind instruments to be entered into that may be reasonably required
by Lender in connection with such reconveyance, including, williout limitation, subdivision consents,
appropriate sun'oys, appnlisals of tile subdivisions, consents of tenants, access agreements, easement
agreements, consents of pUTties to existing agreements and C<lnsents ofsubordinate lieoors. Borrower shall
pay fc,r !t!iy nct\' title insumnee policy or endorsement required by Lender in connection with any such
release.
(d) Tilis in(lfmmificatiun and the :ft:presemiauons contained in Section 13.2 shall survive the
terrniEatil)I1 oi'this of Tru:.t "Mlethr fly rcpl)'rllcnt of the Debt, cJ;:C'tcise of tho power ofsale hereunder,
oc oth<:mvise. Nothing ill this Article XIII shall be to deprive Lender or Trustee of any rights or
remedies otherwise available to Loender 01' Trustee, including, without limitation, those rights and remedies
provided dsewltero in UfXO ofTn1St or the other L/Jan Documents.
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ARTICLE XIV Ivlli.CBLLANEOUS
Section 14.1. Rig.t!t of Entry. Lender. Tmstce and their agents and employees shall have the right,
subject to tht rights of ten,nts under existing and valid Leases, to enter and inspect, and/or take any action
permitted hereunder with respect to the at all times and, except in the event of an
e.mergcncy. UP0'l notice.
Section \4.2. If Borrower's and Lender's estates become the same, whether by sale
by Trustee oftt,e Property, cr othenvise, this of Trus!: and the lien created hereby shaH not be de,,!royed
or terminated by the application of the doctrine of merger and Lender shall continue to have and enjoy all
of the rights and privileges of Lender as to the separate estates. Upon the a sale by Trustee of the Property,
any Leases or sublease" then existing and created by Borrower smll not be destroyed or terminated by
application of the law of merger or as a result of such sale unless Le.nder or any purchaser at any such sale
shall so elect. No act by or on beh&.1f of Lende.r or any such purchaser shall constitute a termination of any
Lease Of sublease unless Lender or such p'Jrehaser shall give written notice thereof to such Lessee or

Section 14.3. T;,x ReOuction Procef.dings. During the existence of an Event of Default, Borrower
shaH be deemed to have appointed Lender and Trustee as its attorneys-in-fact to se>.::k a reduction or
reductions in vc:.luauon oftne Property for re<:tl property l'aX purposes or for any other purpose
and to prosecute any action or proceedillg in connection therewiih. This power, being coupled with an
interest, shait be irrevocable for so long as <lny part of the Debt remains unpaid and any Event of Default
shall be continuing.
Section 14.4. Attorney-it' Fact. At any time during the tenn of this Deed ofTrust and upon the
failure ofBorfowe'"- to act or perform in accordance with the requirements ofthis Deed ofTrust, whether or
not l!ll Evcnt of Default bten declared, lkud;'li' or sb.llll be appointed as attorney-in-fact for
Borrower to t)kc IIny e.ction or make any performance on b<:halfof Borrower at the sole cost and expense
of Borrower. Bcrrowershall reimburse Lender or Tmstee, as the case may be, on demand for all costs and
expenses inl;llrred by Ler,der or Trustee, as toll: case may be, and such amounts not promptly paid by
Borruwer shall llecome part .)f the Debt. Suc.h power sh3'.n irrevocabie for so long as any part of the Debt
remains unpaid am] shall be: coHpied with an interest.
Section 14.5. ofTrqst,ee.
(a) Lender may, without notice or C3m;e, and in Lender's sole discretion, substitute a suctessor
or successors to the Trust:;c naroclfhc,ein or acting hereunder or fill a vacancy in the position of Trustee
hereundE'.r. UpOll ot:ich appointment, and without conveya.occ toO the successor Trustee, the latter shall be
vested with the titie, powers .and duties C'onfe!'1\".<f. u!,an any Trustee herein named or acting hereunder. Each
such appointr.1wt ancl. subsl:itutioll shalt be made- by written instrument executed and acknowledged by
Lender, containing to this Decd of Trust and its place of recordation. The recordation of such
instrument in the office in which this Deed of Tmst is I'ecotdcd shall be cooclusive proof of the proper
appointment of ",och Trustee.
(b) Trustee may resir,n by written instrument executed by Trustee, ccntaining reference to this
Deed of Trust and its pfacc of rCC<,1rdation. The m::orda::on in the office in which this Deed of Trust is
recorded and delivery to Le;lder in accordance with paragraph (2) ofArticle 'XV hereof of such instrument
July I.
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?9 1261.5fi8
shall b'l ,:onclu.ivc pWvf orthe cf sucr. Trustee. Upon su",h resig",ation, Lender may appoint Ii
successor in licc.ordallce with Section 14.5(u) hereof.
Section [4.6. Conveyance by Upon receipt by Trustee ofwritten notice from
that the Debt h;,s be<:n fully paid and the obligations fully performed pursuant to the tf:rms hereof and
the other Loan Documents, Trustee shaU reGOnvey the Property, without warranty, to Borrower or such
Person or Persons lawfully entitled thereto.
ARTICLE XV Rl1LES.QF CQNSIRUCTIOti
Section 15.1. of ConstructiO\1. 111C following provisions shall apply to this Deed of Trust
and also to any other Loan Document which expressly stntes that it incorporates by reference these Rules
of Con:.tructloil, and lhtl application of these provisions to such other Loan Documents shall apply with the
same i1r.POI1 3!ithough s]lci! fJTovisjons wer", folly llet fortb therein:
(i) General Rules QfUsae;;. This Article shall apply to each Loan Document as from time to
time amended, modified, replaced, reslatexl, extended or including by waiver or consent, and
to aU artaGhtlJents thereto end all other documents or instruments incorporated therein. When used in any
Loan Document governed by this Article: (i) "hereof," "herein," "hereunder" and comparable terms refer-
to the entire Loan Docnment in which such remts are used and not to any particular article, section or other
subdivision thereof or attachment thereto; (ii) rclferences to z:ny gender include, Unless the contex.t otherwise
requires, references to all genders, (iii) to the singular include, unless the context otherwise
requires, references to lhe plural, hod vice versa; (iv) "sh311" and "win" have equal force and effect;
(v) in a Loan Document to Article," ";Section," "Paragra.pb." or another subdivision or to an
attachment are, unless the context otherwise requires, tu an article, section, paragraph or subdivision of or
an a'itachment SUell LORn Document, (vi) 'be,lude," "includes" and "including" shall deemed to be
followed by "without limitation" or 1I0t they in fact foHowed by such words or words of like
import aod (vii) til to the f'r.)pert)' shall include all ofthe Property or any ym1 or portioo of the
Property_
(2) Notices. AU noticl':S, consents, approvals, statements, requests, reports, demands,
instruments or other communications to be giv=n purs'Uant to any Loan Document a "notice")'shall .
be in writing and shall oe deemed gil'(m ifaddressed 10 the party intended to rereive the same at the address
set forth below (i) Upt'o w:dptw1ten personalty delivered at wch addrl:'ss, (ii) four (4) Business Days hfter
the same is deposited in the UI ifed States rnailllli filst class registered or certified mail, retllm receipt
requesti>:J. posiage prepaid, or (iii) one Business Day after Ute date of-delivery ofsucU notice to a nationwide,
repulable courier sel'viC':;; .
Lender: 'MERRrLL LYNCHCREDIT CORPORA.TION
Atiention: Steve GcisScler
41102 Deer Lake Drive Ee.1t
Jacksonville, Florida 32246
with a copy by the same means sent situultaJleously to:
A.nclrews & Kurth L.L.P.
60: S. Figueroa Stm:t, Suite 4200
Lo,; CalifclrGm 9Cnt 7
Att<:l1tion:....01m!'&L..Lol1t?-fur
July I. 1999
l..QS01:':"tJtJ.:! 38
Borrower:
Indemnitor:
American Medical Investment Financial Group, L.P.
Attcnrion: Pablo Nankin
9033 Wilshire Boule','ard
Beverly Hills, California 90211
Pablo and Eleanor Arlene Nankin Family Trust
9033 Boulevard
Beverly Hills, Calif.ornia 90211
Attention: Pablo Nankil1
tl9 1261558
with a copy orany notice to Bor.rower or Indemoito:
by the same means sent simultaneous:'y to;
Saltwurg. Ray & Bergman
Attention: Arthur Katz
i{)960 Wilshire Boulevard, 1otit Floor
L05 Angeles, California 90024
Any P3rty may chai1ge the address to whbh any notice is to be delivered to any other llddress within
the United Slates of Amerka by notice of such change at least fifteen (15) days prior to
the effective date of change to the other plllii<:s in the lna.llner set forth above. Rejection or refusal to
accept, or inability to deliver because of changt;d "ddress c.r because no notice ofchanged address was given.
sh.all be deemed to be of 3.I1Y such notlen. Any notice to an entity shall be deemed to be given on the
date "pecified in this Section (2), as applicable, without reg:lId to when such notice is delivered by the entity
to the individual to whose attention it is directed and without regard to the fact that proper delivery may be
refused by someOne other than the individnal to whose attention it is directed. Ifa notice is received by an
entity, the fact that the individual to attention it is directed is no longer at such address or associated
with such entity shall not affect the effectiveness of such notice. Notices may be given on behalf of any
party by such party's attomeys.
(3) Seyernbilitv. Whenever possible, (each provision ofthe Loan Documents shall be interpreted
in such a m"nr<er as (0 to;, etTectiveand ya!i(! ilnder 3pplicable law, but if allY provision of any Loan
Document shall be by or invalici or uncufor(;f--3bte under the applicable lawofan:1jurisdiction with
respect to itny Person or <;ircumstanc)C, such provi:lion shaH be ineffective to the elCtent ofsuch prohibition,
invalidity or unenforce.abHity, without invalidating, the remaining provisions of the Lom Document or
affecting the validity or enfi:m;eabiIiiy of such provisions in any other jurisdiction or with respect to other
Persons or To tlle extent permitied by applicable law, the parties to the Loan Documeut
thereby waivr; any provision of law that. renders any provision thereof prohibited. invalid or unenforceable
in any rcspecl
(4) Remedies Not Exclusive. No remdy conferred upon orreserved to Lender or Trustee under
ally Loan Document is 10 be exclusive of any othel' remedy available to Lender or Trustee under
the Lom Document or any other Loan Documcnr, at law, in equity or by statute, and each and every such
remedy shall ve and in addflion Ie elY othel'lt,medy given thereunder or under any other Loan
Document or n,;ow or flf:retdk.r exbting I1llaw 0: h, .:quity. Remcdi(;S m<'rj be exercised in order Lender
or "trustee j:;ct$.
)IIly t.
LO$Gj:7tJll.} 39

(5) Li;iliiliJ;x, IfBorrnwer 0" consists of more than one Person, the obligations and
liabil ities of each such Person uncler such Lo.an Document shall be joint Bnd several.
(6) ';;J!.@gssors and Assi8!l.S., &:teh Loan Document shall be binding upon Borrower or
Indemnitor, asapplicabk\ and their resJ>el'tive. successors, Ilssigns, heirs, executors and personal
and shall inure to the bencOt of Lender, Trustee and all subsequent holders of the Loan
Document and their respective officees, directors, employees, shareholders, agents, successors and assigns.
Nothing in any LOBn Document, whether express or implied, shall be construed to give any Person (other
than the parties thereto and their permitted successors and Il5signs as expressly provided therein) any legal
or equitable right, remedy or claim ul1der or in respect of such Loan Document or any covenants, cond!tions
or provisions contained therein. Ifany Loan Documt>.nt is to be recorded, all ofthe grants, covenants, !erms,
provisions and conditions of such L)aIl Doc:ument $ha!lrun with the land.
(1) lio O@! Each Loan Document, and any of the provisions thereof, cannot be
altered, modified, amended, waived, extended, changed, discharged or terminated orally or by any act on the
part of Borrower, bdemnitor Lender or Tru3tee. but only by an agreement in writing signed by the party
again st whom en fOt..::e:lllent ofany allemtion, modification, amendment, waiver, extension, change, discharge
or termin;!tlon is sought.
(3) Entire Agreement. Each Loan Docwnent, together with the other applicable Loan
Documents, the ei1Dre agreement of the "thereto with respect to the S't1bject matter thereof
and supersedes all prior written and oral agreements and understandings with respect to such subject matter.
(9) Borrower and IJI(lemnitor hereby waive anyacoeptance ofany Loan
Document by Lender and Trustee in writing, and the Loan Document shall immediately be binding upon
Borrower or Inde.mnil0i", ar; the may b:::.
(10) jurisdiction. Court EACH OF BORROWERAND INDEMNITOR, TO TIlE
l'ULLEST EXTENT PE.RMlTI'ED BY LA.'N, HEREBY KNOWINGLY, INTENTIONALLY AND
VOLUNTAPJLY, WITH AND UPON nlEADVICE OF COMPETENT COUNSEL, (I) SUBMITS TO
PERSONAL, NONEXCLUSIVE JURISDICTION IN TIIE STATE OF CALlFORNIAWIlli RF--SPECT
TO ANY SUIT, ACTION OR PROCEEDING BY A:NY PERSON ARlSINGFROM, REI-ATING TOOR
TN CONNECTiON WITH THE LOAN DOCUMENT ORTHE LOAN, (II) AGREES THATANY
SUIT, ACTION ORPROCEEDING MAY BE BROUGHT IN ANY STATE ORFEDERAL COURT OF
COMPETENTJURlSDIC1lON SfITING IN LOS ANGELES COUNTY, CALIFORNIA, (III) SUBMITS
TO THE JURlSDll.'110N OF S-JCil COl}I<:TS, OV) AGREES THAT IT WILL NOT BRING ANY
ACTION, SUIT OR PROCEEiJTI-KI iN ANY FORUM OTHER THAN LOS ANGELES CmJNTY,
CALlFORNIA(BUTNOnl1NG HERElN SHALLAFFECTTIiERIGlITOF LENDERORTRUSTEETO
BRING ANY ACTION, SUIT OR PROCEEDING IN ANY OTIIER FORUM), M IRREVOCABLY
AGREE'S NOT '\'0 ASSERT ANY OfUFlC110N WHICH IT:MAYEVERHAVE TO THE LAYING OF
VENUE OF A!'I"Y SUCH SUIT, ACTIO'NORPROCEEDING IN ANY FEDERAL OR STATECOURT
LOCATED 11'1 CALIFORNiA AND AJ"{'(' CLAIM11IAT ANY SUCHAcTION, SUITORPROCEEDING
BROUGHT TN ..".Ny SUCH COURTHAS BEENBROUGfIT IN AN INCONVENIENT FORUM, AND
(VI) CONSENTS AND AGI<EES TO SERVICEOF ANY SUMMONS, COMPLAINTOROTIIERLEGAL
PROCESS tNANY SUCHSUIT, ACl10N ORPROCEEJ)1NG BYREGISTERED OR CERTIFIED U.S,
MAIL, POSTAGE PREPAm, TO BORROWER OR lNDEivlNlTOR, AS THE CASE MAY BE, AT THE
ADDRF.<;g FOR NOTICES DESCRlBED HEREINABOVE AND CONSENTS AND AGREES THAT
SUCH SERVICE SHALL CONSTITUTE IN EVEil.Y RESPECT VALID AND EFFEC1TVE SERVICE
JUli' I, 1999
lOsn!:'ilJIJ,1 40
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(BUT NOTHING HEREIN SHALL AFFECT THE VALIDITY OR EFFECTIVENESS OF PROCESS
SERVED!N ANY OTHER MANNER PERMITTED BY LA\).
(ll) :y!aiv.,;r of Jury Trial. BORROWER, lNDEMNlTOR AND LENDER, TO TIffi FULL
EXTENT PEHlv!ffTED BY LAW" EACH HEREBY KNOWJNGLY, INTENTIONALLY AND
VOLUN1'ARILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, WAIVES,
RELlNQUJSHES AND E'OREVER FORGOES THE RlGHT TO A TRIAL BY JURY IN ANY ACTION
OR PROCEEDING, INCLUDING, WITHOv'T LIMITATION, ANY TORT ACTION, BROUGHT BY
ANY or THEM AGAiNST THE OTHER BASED UPON, ARISING OUT OF, OR IN ANY \VAY
RELATlNGTOORINCONNECTIONWITIITHELOANDOCUMEN1',THELOANORANYCOURBE
OF CONDUCT, ACT, OMISSION, COURSE OF DEALING, STATEMENTS (WHETIlER VERBAL OR
WRiTIEN) OR ACTIONS OF ANY PERSON (INCLUDING, WITHOUT LIMITATION, SUCH
PERSON'S DIRECTORS, OFFICERS, PAR1NERS, MEMBERS, EMPLOYEES, AGENTS OR
ATTORNEYS, ORANY OTHERPERSONS AFFILIATED WITH SUCHPERSON), IN CONNECTION
WITH THE LOAN OR THE LO.t\N DOCUMENT. INCLUDING, WITIIOUT LIMITAnON, IN ANY
COUNTERCLAIM WHLCH BORROWER OR JNDElvlNlTOR MAY BE PERMITTED TO ASSERT
THEREUNDE:;{ on WBICH MAYBE ASSERTED llY LENDER, TRUSTEE OR THEIR AGENTS
AGAINST BORROWER OR INDEMNITOR, WHE'rn:.ER SOUN"DlNG IN CONTRACT, TORT OR
OTnERWi SE. ';.1{A.i\"ER BY BORRO\VER.AND Ir.'DE1vJNITOROF TI!ElR IUOHT TO A JURY
TRIAL IS A i.1i\ TExiAL L'JDTJCEMENTFOR LEI,<'DER TO MAKE1HE LOAN.
(12) ]\jo WaL'illiJll::J ,endecr Of Trm-tru. No delay or omission of Lender or Trustee in exercising
any rjght or power accruing upon any default under any LOill1 Document shall impair any sucll right or power
or shall he construed to be a waiver of any default under such Loan Document or any acquiescence therein,
nor shall any single or pattial exercise of any such right or power or lilly abandonment or discontinuance of"
steps tLl enforce such right or power. preclude <loy other or further exercise thereof or the exercise of any
other right or power. A':ClOptcUlce of any pa)7llont after the cccnrrence ofa default nnller any Loan Document
0(; de>emed to waive or cure $uch dehu:t under such Loa., DOcWllent; and every power and remedy
given by the L.elIll Document to Lender or Tmstee illay be exereised from time to tL'lle a3 often as may be
deemed expe.dicilt oy ue..iSer or Tmstee. Wi1.nCiut limiting the generalily ofllie foregoin':, any payment made
by L;;nder (Ii' lrtl&1<:e T'lr premiums ()r Tl1Xl:S or all'! other amounts in connection with affecting
the ProjJ1lrty shali flO< t;Ow;titute a w2.ivt;r of Borrower's lir default in rna-Icing such payments
and shall not obiigate I..enclcr or Trustee to mnke any further payments. BOlTOwer and Ind<;mnitor hereby
waive any right to re.qvJre Ler.d.:r or Trust'Ce any time 10 pursue any remedy in'Lender's or Trustee's
power
(13) WJi"ei Bxcept as specilk-ally and (,.'Xpressly provided for in any Loan Document
or pursuant to appEcoole Legal neither Borrower nor Indemnitor shall be entitled to any
notices of any n'l.!I:re wha!soever tiom Lcnder or Tru:rtee, Each of Borrower and Indemnitor hereby
waives till: rigi1t '.0 receive any l10tice i m:n Lender or Tnmlee with IT-Spect to any matter for wbich
the LOil:l [i0cufIm:,t does \:0': specifically and ex:;;ressly provide for the giving ofnotice by Lender or Trustee
to Borrower or. blden,l!itof, ,1$ the may btl,
\1 4) and Borrower ana Indemnitor each hereby knowingly
waives the right :0 "SSt,:t !lny collf.ll:rc.laim, other tn,U1 a t;ol11pulsory counterclaim, in any adion or
proceeding brought llgz.i[l::t 6lther ofthemoy Lender' or Trustee. Any assignee ofthe Loan Document or any
successor of Lender shall take the same free and clear of all offsets, counterclaims or defenses which are
unrelated to the Loa.!l Docu!!lent which Borrower or Tndemnitor may otherwise have against My assignor
of r.he: Loan DOGumen" ;)lid ,,0 weh urrreJat.ed counterclaim or defense shaH be interposeci or asserted by
luly I. 1}99
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Borrower or lridenJnitof in any action or rroceeding brought by any such assignee under such Loan
DocumecL Any right to interpose or any such unrelated offset, counterclaim or defense in any
such acti()11 or proG.;cding is hereby exprl,\o;sly waived by Borrower and Indemnitor, Notwithstanding
anything herein stlted in [hi,; Agreement, nothing ghall prevent tbe Borrower, lndemnitor or assignee of their
interests rrO!l1 j',1itirtting any claim against Lc:nder, Trustee or their successors or assigns in an independent
action,
(15) In case (of Trustee shall have proceeded to enforce any right
under any Loan Document by power of sale, entry or otherwise, and such proceedings shaJl have been
discontinued or abandoned fat uny reason or shall have been determined adversely to Lender or Trustee,
then, in every such case, 'Borrower, Indemnitor, Lender and Trustee shall be restored to their former positions
and rights thereunder.
(\6) lili\ OF. THE ESSEl:K:B TThill SI..IALL BE OF THE ESSENCE IN THE
PERFORMANCE OF ALL OBLIGATiONS 0;< BORROWERAND INDEMNITORUNDERTHE LOAN
DOCUMENT,
(l I) yoveming Law. Each Loan Document shall be governed by, and construed in accordance
with, the !aVIS of the State wbere the Property is located, exce,pt to the extent that the applicability of any of
such, laws nuy !lOWor be p=mptedhy FWeilll1&w, in which such FcdelQllaw shall so govern
and 'be controlling.
(18) .s.1,yill>?S Ezdl Loan Documer:l is subject to the express CQndition that at no time
shall Barrow"r ce obligated or require-.d. to pay interest on the Debt Jlt a rate which could subject Lender to
either civil or criminal liability as II result of being in excess oftile maximum interest rate which Maker is
permitted by appli;;r.hb Is.... to contract ar ag;-ee to pay. If, by the tenllS of any Loan Document; Borrower
is 3t any time ro;quired or obligated to pay inlere;t on the Debt at a rate in excess ofs-uch maximum rate, the
rate 01 iniere;.t be deemed to be immediately reduced to such maximum rate and the interest payable
shall be computed at such maximum rate and all previous payments in excess of such maximum rate shall
be deemed to hr.'!c u",en payments hl'reduction ofth!;) priucipaJand not on account of the illterestdue
hereunder. All SUIllS pairj or agreed to be pain to Le..der iur the use, forbearance, or det<:ntioll ofthe Debt
shull, to tJH\ eKtl'nt pelmir,ed by a1Jpiicabj<j be amomr.cd., prorated, alJO<:ated and spread throughout the
full state;3 term of the Nole rmtil }Jayment in full so that thoe rate or anlOtlntofinterest on accoHntofthe Debt
does not the applicabte maximum' lawful rate of interest [TOm 6me to time in effect. This provision
shaH supers;dt: u:y incami"te:J:: pl"Ovision ofthis or liny other Loan Document
(19) .;Lq,k: Dis\<>1:tion t;lTnerever pursuallt to any Loan Document, Lender has the right
to consent to ,or ;;j.'ft,:ove ::L'iY matter, or when any arrangement or 'I.er.n is to be satisfactory tv Lender or is
in Lender's discretion, the decision ofl-ender to consent or approve or deny consent or disapprove such
matter or to dcdcle that amillgements or terms are satisfactory or acceptable or not satisfactory or acceptable
shall be in the sole discretion of Under and shall be final ar,d conclusive, except as may be otherwise
specifically '"het':il:L In addition, Lender shalt have tile right to refuse to grant consent. approval
or accept8nce or te. i!s sat isfaction suc.h const-n!, approval, acceptance OJ' satisfdction shall
be required undzr the L{l:m DOCllmenL
('20) Any Do-:;,.nuellt may be executed 1n nUl)] ber ofseparate Cl.lunrerparts,
each ofwliich, l'ihe-II !.O exC/:rtted and delivered, shall be deemed an original, but all of which, collectively
and separatelY, sllB,i! c0f!stitute one arvJ the same Loan Document. All signatures need not be on the same
covnterpa.-t.
July J, 199!}
1.0.'\\>1 \3.)
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99 1261558
(21) t:.KlJ.i.Pits !ILcorporstec1; Headirgi. Any cxhibil-l &ttaehed to the Loan Documents and any
of other LOlln incorporated by reference to herein, shall be deemed to be incorporated
therein witll the same (:ffeet as if fully set forth in the body thereof. 111e headings and captions of the various
par3graphs of the Loan D')cwnent are fer convenience of reference only and shall not
be con:;(rued as defining or limiting, in any way, the s,::ope or intent ofthe provisions thereof.
(22) t&..IfdlzlLYentrmLQI...E:lli.oJlcmm, Borrower, Indemnitor and Lender intend that the
cre3tcd the Loan Docwnent be solely thnt ofmortgagor and mortgagee, borrower and
lender, or indemnitor and lender, as the case may be. Nothing therein is iotended to create ajoint venture,
partnership, tenancy-io-common, agency or joint tenaocy relationship between Borrower and Lender or
Indemnitor and Lender, as the case may be, nor to grant to Lender any interest in the Property other than that
of mortgagee or lender; it being the intent of the parties hereto that Lender shall not share in any loss
whatsoever gem;l ::.t,:d by Proper,y amI that l-ender shall have no C<>lltrol over the management
and o!Jeraiion ofrhl;: P,OP<:lLy.
(23} Reml,d;"' ofBorrower aod IfBm'rower or Indemnitor, as 'the case may be, shall
seek the approval or C:VIScHt ofLender under the Loaii DlXf>.lmellt, which Loao Document expressly provides
that Le;,der's appro""l shaLl not be unreasonably witbheld, and Lender shall fail or refuse to give such
or <lppro\';:!, ,hl! cf prol}f 113 to whether or oot Lemler acted unreasonably shall be upon
Borrower 01' as tlie c"se may be. til addition thereto, in event that a claim or adjudication
is made that Lefllbr hns :Jetel! unreasonably or uOl'("<!sonably delayed IlCting in any case where by law or
under the Loan Document it has an' obligation to act reasonably or plOmptly, Lender shall not be liable for
any monetary damage.>, and Borrower's and Indenmitor's remedies shall b(".limited to injunctive relief or
declaratory judgmwt.
(24) AU amounts required to be paid by any party to the Loan Document
to any other party shall be paid in such freely transferable legal tender oflhe United States ofAmerica at the
time of payment tJy wire transfer or to ,;ollection).
:25) In cax of a conroet between My pmvision of Lean Document
and any provisior. or 1hz otb",r Loan Document;, the .l)ro"{ision selecte<! by!-enaeT in its sole subjective
discretion shall prc;yail and be cvllt.t'olling. The provisions of the Loan Document shall be Iibeirally construed
in favor of Lender-.
(26) )"we Copy. By executing the Loon Document, Borrower or Indemnitor, as the case may be,
acknowkdge:; it h.?s "?ceived a true copy of the Loan Document.
(:;) g.::rm}wer shall reimbl;n;:e Lend.er )r ail re.asonable expenses, costs, charges
and legal costs jI1.GI4<]">.i t'r Lender (inc1ud1ng, withont Jimitation, the fees and expeu,es of experts
and Goasu[t.'l,nl,:}, or not suit to collect My of the Debt or to enforce
oft};,,, cbligatir;u!l, Gllvenant>: rind agreements oftht:
(b) In any legal action betweenLender and Borrower seeking enforcement ofany
of the terms and providons oftllls Dee-Ai ofTro3t or any ofthe other Ula:.:l. Docmnents, or the subject
m3tter hereaf onh;crc-G( Cir. ill f.;0tl11ecti on ',v1!h t'1e Property, lf1G prevailing patty shall be awarded,
july 1,199\'
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in addition to costs, damages, iqjunctive or other relief, its actual costs and expenses incurred in that
action including, but limited to, its reason.a.bte attorneys' f e e ~ . The teml "prevailing party" means
the party obtainillg substantially the relief sought, whether by compromise, settlement or judgment.
(2:t) QthiOr J''iflg'cillLaneousJ:rovi2kn!i. With respect to the Loan Document: (i) any act which
Lender or Trustee, as the case may be, is permirted to perform thereunder may be performed at any time and
from time to time by Lender or Trustee, as the case may be, or by any Person designated by Lender or
Tmstee, as thc case may be, and (ii) each appointment of Lender as attorney-in-fact for Bor.rower or
Indemnitor under suer. LOan Docwnenl shall be irrevocable and coupled with an interest.
Sectton 16.1. l!l<::onsisteocies. In the event ofany inconsistencies between the terms and conditions
of this Article X\1 and ill(; other provisions ofthis Deed ofTrust, the terms and conditions oftrus Article
XVI shall co,lti-ci.
IN WfnJESS \}.'EEREOF, Borrowe: has duly executed this Deed ofTrust the day and year first
above written.
AMElUCAN MEDICAL INVESThffiNT FINANCIAL
GROUP, L.P., a California limited partnership
By: 9033 WILSBIRECOMPANY, aCaJifornia corporation
July I, 1999
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COUNTY
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July t, :999
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On Z , before me, ;!rj/,(-f6-iZOJ the undersigned, a
notary public for th,: state, perso h /) da Ii "- - . I peR'Qllally KnO'M\
to::::lilc (or proved to me on the basis of satisfactory evidence) 10 be the whose
subscribed 10 L1C:: within inslrnment and acknowledged to me that@'s.be/they executed the same in
@y1ier/thcir authorized capacity(ie.s), and that signature(t) on the instrument the
or the enlity upon behaJf of which the acted, executed the instrument.
(SEAL)
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THE LAND SITUATED IN TIIE COUNTY OF LOS ANGELES. STATE OF CALIFORNIA. AND
DESCRIBED AS FOLLOWS:
LOTS 345 AND 3 ~ 6 OF TRACT NO 7005, INTIffi CITY OF BEVERLY HiLLS, COUNTY OF LOS
ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 72 PAGE 28 OF MAPS,
IN THE OrF1CE OF THE COUNTY RECORDER OF SAID COUNTY.
July t, 1999
LOS01:7fJIl.l
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RECOROEOIFILEO IN OfFICIAL
RECORDER'S OFFICE
LOS ANGELES COUNTt
CALIFORNIA
4:21 PM JUL 09 J.999
..!.J
SPACE ABOVE THIS LINE RESERVED FOR RECORDER S USE
TITlE(S)
FEE: NfA NlA 0
CODE
REC. 1'10. NO r<::OR
FEE PAGES TIT!..ES
Assessor s Identification NumbGr (AIN)
To Be Completed By Examiner Or Tille Company In Black Ink
D.A. SURVEY NOl1F. INVOL NON
FEE MaN. LIEN CONF.
EXAMINER S INT.
Number of Parcels Shown
II
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APPENDIX
TAB
"8"
-e
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E136-001
Merrill Lynch Mortgage Investors 1999-C1
Execution Copy
MERRILL LYNCH MORTGAGE INVESTORS, INC.
Depositor
and
ORIXREAL ESTATE CAPITAL MARKETS, LLC
Master Servicer
and
ORIX REAL ESTATE CAPITAL MARKETS, LLC
. - Special Servicer -
and
NORWEST BANK MINNESOTA, NATIONAL ASSOCLATION
Trustee
POOLING AND SERVICING AGREEMENT
Dated as of November I, 1999
Mortgage Pass-Through Certificates
Series 1999-Cl
Tel WILSHIRE
Exhibit 136
-
ORIXECF/TCI0153
1111111111111111111111111111111111
Sections 3.20(d) and 11.01 hereof and any consent, approval or waiver required or pennitted to
be made by the Majority Subordinate Certificateholder), any Certificate registered in the name of
the Depositor, the Mortgage Loan Seller, the Master Servicer, the Special Servicer, or the
Trustee, as the case may be, or any Certificate registered in the name of any of its Affiliates, shall
be deemed not to be outstanding, and the Voting Rights to which it is entitled shaH not be taken
into account in determining whether the requisite percentage of Voting Rights necessary to effect
any such consent, approval or waiver that relates to it has been obtained; provided, however, that,
except with respect to increasing the Special Servicer's compensation or reducing the scope of its
responsibilities hereunder, such restrictions will not apply to the exercise by the Special Servicer
of any rights it may have as a member of the Controlling Class or to the exercise by the
Controlling Class Representative of its rights even if such Certificateholder is an Affiliate of the
Master Servicer or Special Servicer. Notwithstanding anything herein to the contrary, so long as
there is no Event of Default with respect to the Master Servicer or the Special Servicer, the
Master Servicer, Special Servicer and any Affiliates thereof shall be entitled to exercise such
Voting Rights with respect to any issue which could reasonably be believed to adversely affect
such party's compensation or increase its obligations or liabilities hereunder. The Certificate
Registrdf shall be entitled to request and rely upon a certificate of the Depositor, the Master
Servicer or the Special Servicer in determining whether a Certificate is registered in the name of
an Affiliate of such Person. All references herein to "Holders" or "Certificateholders" shall
reflect the rights of Certificate Owners as they may indirec!ly exercise such rights through the
Depository and the Depository Participants, except as otherwise specified herein; provided,
however, that the parties hereto shall be required to recognize as a "Holder" or
"Certificateholder" only the Person in whose name a Certificate is registered in the Certificate
Register.
"Class": Collectively, all of the Certificates bearing the same alphabetical and, if
applicable, numerical class designation.
"Class A-l Certificate": Anyone of the Certificates with a "Cla.<;s A-l"
designation on the face thereof, substantially in the fonn of Exhibit A-l attached hereto, and
evidencing a portion of a "regular interest" in REMIC III for purposes of the REMIC Provisions.
"Class A-2 Certificate": Anyone of the Certificates with a "Class A-2"
designation on the face thereof, substantially in the fonn of Exhibit A-2 attached hereto, and
evidt,'ncing a portion of a "regular interest" in REMIC III for purposes of the REMIC Provisions.
"Class B Certificate": Anyone of the Certificates with a "Class B" designation on
the face thereof, substantially in the fonn of Exhibit A-4 attached hereto, and evidencing a
portion of a "regular interest" in REMIC III for purposes ofthe REMIC Provisions.
"Class C Certificate": Anyone of the Certificates with a "Class C" designation
on the face thereof, substantially in the fonn of Exhibit A-5 attached hereto, and evidencing a
portion of a "regular interest" in REMIC III for purposes of the REMIC Provisions.
I
Merrill Lynch Mongage Investors 1999-eI -9-
L..--- _
ORIX-ECF/TCI0176
E136-001
1111111111111111111111111111111111
REO Acquisition had occurred, and to render such incidental services with respect to such
Specially Serviccd Mortgage Loans and REO Properties as are specifically provided for herein;
p!Q.vided, firrther. however, that the Master Servicer shall not be liable for failure to comply with
~ ; u c h duties insofar as such failure results from a failure of the Special Servicer to provide
sufficient information to the Master Servicer to comply with such duties. Each Mortgage Loan
that becomes a Specially Serviced Mortgage Loan shall continue as such until satisfaction of the
conditions specified in Section 3.21(a). Without limiting the foregoing, subject to Section 3.21,
the Master Servicer shall be obligated to service and administer all Mortgage Loans which are
not Specially Serviced Mortgage Loans. The Special Servicer shall make the inspections, use its
reasonable best efforts consistent with the Servicing Standard to conect the statements and shall
prepare the reports in respect of the related Mortgaged Properties with respect to Specially
Serviced Mortgage Loans in accordance with Sections 3.12 and 3.21(c).
(b) Subject only to the Servicing Standard and the tenns of this Agreement
and of the respective Mortgage Loans the Master Servicer and the Special Servicer each 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.
Without limiting the generality of the foregoing. with respect to each Mortgage Loan it is
obligated to service under this Agreement, each of the Master Servicer and the Special Servicef,
in its own name on behalf of and as attorney-in-fact of the Trustee on behalf of the
Certificateholders, is hereby authorized and empl)wered by the Trustee and obligated to execute
and deliver. on behalf of the Certificateholders and the Trustee or any of them, any and all
financing statements, continuation statements and other documents or instruments necessary to
maintain the lien created by the related Mortgage or other security document in the related
Mortgage File on the related Mortgaged Property and related collateral; subject to Section 3.20,
any and all modifications, waivers, amendments or consents to or with respect to any documents
contained in the related Mortgage File; and any and all instruments of satisfaction or
cancellation, or of partial or full release or discharge, and all other comparable instruments.
Subject to Section 3.10, the Trustee shall execute any powers of attorney and other documents
delivered to it by the Master Servicer or Special Servicer and necessary or appropriate to enable
the Master Servicer or the Special Servicer, as the case may be, to earry out its servicing and
administrative duties hereunder; provided, however, that the Trustee shaH not be held Hable for
and shall be indemnified on a current basis by the Master Servicer or the Special Servicer as
applicable for any negligence with respect to, or misuse of, any such power of attorney by the
Master Serviccr or the Special Servicer. Notwithstanding anything contained herein to the
contrary, neither the Ma<;ter Servicer nor the Special Servicer shaH without the Trustee's
written consent: (i) except as relating to a Mortgage Loan which the Master Servicer or the
Special Servicer, as applicable. is servicing pursuant to their respective duties herein (in which
case such servicer shall give notice to the Trustee thereof), initiate any action, suit or
proceeding solely under the Trustee's name without indicating the Master Servicer's or Special
Servicer's, as applicable. representative capacity, or (ii) take any action with the intent to, or
which actually does cause, the Trustee to be registered to do business in any state.
(c) The relationship of the Master ServiceI' to the Trustee under this
Agreement is intended by the parties to be that of an independent contractor and not that of a
joint venturer, partner or agent.
I
Merrill Lyoch Mongage loveSlors 1999-Cl -54-
ORIX-ECF/TCI0221
SECTION 3.10. Trustee to Cooperate; Release of Mortgage Files.
:1
(a) Upon pa)'lllCllt in full of any Mortgage Loan, or $e by .
MasterSemcer or the Special Servicer, as the case may be, of a notification that payment in full
shall be escrowed in a manner customary for such purposes, the Master Servict.'T or Special
Servicer, as the case may be, will immediately notify the Trustee and request delivCty of the
related Mortgage File. Any such notice and request shall be in the fann of a Request for Release
signed by a Servicing Officer and shall include a statement to the effect that all amounts received
or to be received in connection with such payment which are required to be deposited in the
Certificate Account pursuant to Section 3.04(a) or remitted to the Master Servicer to enable such
deposit, have been or will be so deposited. Within seven Business Days (or within such shortcr
period as release can reasonably be accomplished if the Master Servicer notifies the Trustee of an
exigency) of receipt of such notice and request, the Trustee shall release, ar cause any related
Custodian to release, the related Mortgage File to the Master Servicer or Special Servicer, as the
case may be. No ex.penses incurred in connection with any instrument of satisfaction or deed of
reconveyance shall be chargeable to the Certificate Account but shall be payable by the related
borrower.
(b) From time to time as is appropriate for servicing or foreclosure of any
Mortgage Loan, the Master Servicer or the Special Servicer shall deliver to the Trustee a Request
for Release signed by a Servicing Officer. Upon receipt of the foregoing, the Trustee shall
deliver or cause the related Cu..c;todian to deliver, the Mortgage File or any document therein to
the Master Servicer or the Special Servicer (or a designee), as the case may be.
(c) Within five Business Days (or within such shorter period as delivery can
reasonably be accomplished if the Special Servicer notifies the Trustee of an exigency) of receipt
thereof, the Trustee shall ex.ecute and deliver to the Special Servicer any court pleadings, requests
for trustee's sale or other documents delivered to it by the Special Servicer and necessary to the
foreclosure or trustee's sale in respect of a Mortgaged Property or to any legal action brought to
obtain judgment against any Mortgagor on the Mortgage Note or Mortgage or to obtain a
deficiency judgment, or to enforce any other remedies or rights provided by the Mortgage Note
or Mortgage or otherwise available at law or in equity. The Special Servicer shall be responsible
for the preparation of all such documents and pleadings. When submitted to the Trustee for
signature, such documents or pleadings shall be accompanied by a certificate of a Servicing
Officer requesting that such pleadings or documents be executed by the Trustcc and certifying as
to the reason such documents or pleadings are required and that the execution and delivery
thereofby the Trustee will not invalidate or otherwise affect the lien of the Mortgage, except for
the termination of such a lien upon completion of the foreclosure or trustee's sale.
SECTION 3.11. Servicing Compensation.
(a) As compensation for its activities hereunder, the Master SL'TVicer shaII be
entitled to receive the Master Servicing Fee and, for so long as ORIX is the Master Servicer, the
Retained Fee, with respect to each Mortgage Loan and REO Loan (other than the Mortgage
Loans designated ML-] 24, ML-125 and ML-126. As to each Mortgage Loan and REO Loan, the
Master Servicing Fee and Retained Fcc shall accrue from time to time at the Master Servicing
_ Merrill Lynch Mortgage Investors 1999Cl -76-
1 _
ORIX-ECF/TCI0243
APPENDIX
TAB
"9"
CWCAPITAL ASSET MANAGEMENT v. CHICAGO PROPERTIES 497
CHe as 610 F.3d 497 (7th Cir. lO!O)
CWCAPITAL ASSET MANAGEMENT,
LLC, Plaintiff-Appellant,
v.
CHICAGO PROPERTIES, LLC, et
aI., Defendants-Appellees.
No. 09-3506.
United States Court of Appeals,
Seventh Circuit.
Argued May 24, 2010.
Decided June 29, 2010.
Background: Mortgage serviceI' sued
mortgagor and landlord, its owners who
guaranteed loan for commercial mortgage
placed in securitization trust, and former
tenant, claiming that serviceI' was contrac-
tually entitled to full $471,000 in rent owed
for time remaining on lease after tenant
abandoned premises, including $Hil,OOO
that tenant paid mortgagor in settlement
of underlying suit for unpaid rent. Follow-
ing bench trial, the United States District
Court for the Northern District of Illinois,
James B. Zagel, J., 2009 WL 2972478,
dismissed and awarded tenant attorney
fees and costs. ServiceI' appealed.
Holdings: The Court of Appeals, Posner,
Circuit Judge, held that:
(1) serviceI' had standing to bring suit;
(2) serviceI' was real party in interest enti-
tled to bring suit in own name;
(:3) even if serviceI' was not real party in
interest, trustee ratified suit;
(4) servicer could not recover under subor-
dination, non-disturbance and attorn-
ment agreement (SNDA);
(5) serviceI' could not recover under guar-
anty;
(6) serviceI' could not recover under mort-
gage note; and
(7) tenant was prevailing party entitled to
attorney fees and costs.
Reversed with directions.
1. Guaranty <:2;:::>76
Mortgages <:2;:::>199(2)
Mortgage serviceI' seeking money
judgment for rent owed for time remaining
on lea.'le after tenant abandoned premises
had standing, under Article III, to sue
guaranteed loan for commercial mortgage
tenant, since servicer had personal stake in
outcome of suit based on receipt of per-
centage of proceeds of defaulted loan that
it serviced. U.S.C.A. Const. Art. 3, 2, cl.
1.
2. Federal Civil Procedure <:2;:::>144
Although legal title to commercial
mortgage was held in securitization trust,
mortgage serviceI' was real party in inter-
est authorized, under pooling and servicing
agreement, to file suit in own name against
guaranteed mortgage loan, and former
tenant to obtain money judgment for rent
owed for time remaining on lease after
tenant abandoned premises; agreement ef-
fectively delegated equitable ownership of
claim to serviceI' by providing that serviceI'
had "full power and authority, acting
alone, to do or cause to be done any and all
things in conneetion \vith such servicing,"
requiring trustee to confer on serviceI'
any authority needed to perform servicing
duties, including filing suit, and by autho-
rizing serviceI' to sue in own name if suit
related to loan it was servicing. Fed.Rules
Civ.Proc.Rule 17(a)(ij), 28 lLS.C.A.
:3. Federal Civil Procedure <:2;:::>V14
Even if mortgage serviceI' was not
real party in interest authorized, under
pooling and servicing agreement, to file
498
610 FIWlmAL REPORTER, :M SERIES
suit in own name against mortgagor and
landlord, its owners who guaranteed loan
for commercial mortgage placed in securi-
tization trust, and former tenant to obtain
money judgment for rent owed for time
remaining on lease after tenant abandoned
premises, trustee as real party in interest
timely ratified servicer's suit on trustee's
behalf, even though trustee submitted rati-
fication affidavit only three days before
trial, since affidavit was filed in response
to defendants' motion for judgment on
pleadings arguing that serviceI' lacked
standing to bring suit. Fed.Rules Civ.
Proc.Rule 17(a)(3), 28 IJ.S.C.A.
4. Guaranty <>36(8)
Mortgages <>199(2)
Under Illinois law, mortgage serviceI'
suing mortgagor and landlord, its owners
who guaranteed loan for commercial mort-
gage placed in securitization trust, and
former tenant of premises could not recov-
er rent owed for time remaining on lease
after tenant abandoned premises, under
subordination, non-disturbance and attorn-
ment agreement (SNDA), subordinating
lease to mortgage, requiring tenant to con-
tinue tenancy if there was new landlord as
result of default and foreclosure, assuring
tenant that lease would continue in event
of foreclosure, and requiring tenant to
comply \vith lender's instructions to deliver
rent payments to lender, since landlord
continued to make monthly mortgage pay-
ments in full, and instructions by serviceI',
as lender's delegate, to deliver rent pay-
ments were sent after lease was terminat-
ed.
5. Guaranty <>:16(8)
Under Illinois mortgage serviceI'
seeking money judgment from mortgagor
and landlord, its owners who guaranteed
loan for commercial mortgage placed in
securitization trust, and former tenant for
$471,000 rent owed for time remaining on
lease after tenant abandoned premises, in-
cluding $161,000 that tenant paid landlord
in settlement of underlying suit for unpaid
rent, could not recover under guaranty
making owners liable to lender for any
losses arising from gross negligence or
willful misconduct relating to mortgage
loan and/or property and for losses arising
from misapplication or conversion of rent
paid more than one month in advance,
since money paid in settlement was not
payment of rent, but rather, was payment
in settlement of lawsuit seeking rent for
future period.
6. Guaranty <>36(6)
Mortgages <>199(2)
Under Illinois law, mortgage serviceI'
seeking money judgment from mortgagor
and landlord, its owners who guaranteed
nonrecourse loan for commercial mortgage
tenant for $471,000 rent owed for time
remaining on lease after tenant abandoned
premises, including $161,000 that tenant
paid landlord in settlement of underlying
suit for unpaid rent, could not recover
under mortgage note, prohibiting mortga-
gor from canceling lease without mortgag-
ee's written consent, \vith exception of
cancellations made when mortgagor was
acting in ordinary course of business and
in commercially reasonable manner, since
landlord's settlement with tenant was com-
mercially reasonable due to tenant's finan-
cial difficulties.
7. Costs <>194.3:1
Under Illinois law, former tenant of
commercial premises was "prevailing par-
ty" in mortgage servicer's suit seeking
money judgment from mortgagor and
landlord, its owners who guaranteed mort-
gage loan, and tenant for rent payments
owed for time remaining on lease after
tenant abandoned premises, as required
for award of attorney fees to tenant under
Cite as 610 F.3d 497 (7th Cir. 2010)
attorney fees provision of subordination,
non-disturbance and attornment agree-
ment (SNDA), even though tenant lost on
counterclaim charging serviceI' with violat-
ing SNDA provision prohibiting tenant
from being joined in any action by landlord
in performing terms, covenants, conditions
and agreements set forth in mOltgage,
since tenant's success on counterclaim
could only have resulted in payment of
attorney fees and costs that was unimpor-
tant part of case.
See publication Words and Phras-
es for other judicial constructions
and definitions.
Gregory A. Cross (argued), Venable
LLP, Baltimore, MD, for Plaintiff-Appel-
lant.
Timothy P. Donohue, Barrington, IL,
Howard L. Teplinsky (argued), Beerman
Swerdlove LLP, Chicago, IL, for Defen-
dant.s-Appellees.
Joe R. McCray, Portland, OR, pro se.
Before EASTERBROOK, Judge,
and POSNER and EVANS, Cireuit
Judges.
POSNER, Circuit .Judge.
This appeal in a dispute over a commer-
cial mortgage requires us to deeide wheth-
er the plaintiff is entitled to bring this suit
in its own name, and also presents issues
of eontract interpretation under Illinois
law. The plaintiff (and appellant), CWCa-
pital, is a mortgage serviceI'; the defen-
dants (and appellees) are Chicago Proper-
ties, which is a commercial landlord and
the mortgagor (that is, the borrower); its
owners, who are guarantors of the mort-
gage loan; and its former tenant, the
Blockbuster video-rental company. The
suit claims that the serviceI' (standing in
the lender's shoes) is contractually entitled
to the money that Blockbuster paid Chica-
go Properties in settlement of a suit by the
latter for unpaid rent. The district judge
conducted a bench trial and coneluded that
the claim was groundless-but then, seem-
ingly as an afterthought, ruled that the
serviceI' 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 seeuri-
ty-a kind of giant bond (made famous, or
rather infamous, by the financial collapse
of September 2008) that is seemed by a
large number of mOltgages, 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 val-
ued at $1 billion or more-in the present
case, the bond when issued was valued at
billion), its creator sells "tranches"
(sliees) of the bond having different rights
and eaITying 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 per-
eent 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
seeurity. The buyer of the junior tranche
would bear much more risk and so would
be compensated by being promised a high-
er interest rate. The plunge in housing
prices in 2007 and 2008 was so great that
even buyers of the senior tranches of
mortgage-backed seeurities lost money be-
cause there were so many de-
faults. But that sad story is not germane
to this ease.
500
6tO FIWERAL REPORTER, ad SERIES
The mortgages that secure the mort-
gage-backed security are placed in a secu-
ritization 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 neces-
sary foreclosing the mortgage or by modi-
fying 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). Ordi-
narily the original lender would be the
serviceI', 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
serviceI'. The reason is the structure of
the security and specifically the conflicts of
interest latent in the tranching of them.
Hemember that the buyer of the se.nior
tranche in our example (for simplicity we
assume only two tranches, though usually
there are more) is entitled to receive in-
come from all the mortgages ahead of the
buyer of the junior tranche. Faced 'With a
choice between modifying one of the mort-
gages and foreclosing, the serviceI' might
make a different decision as a representa-
tive 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 serviceI'
to modify the mortgage by reducing the
monthly payment of principal and interest
by 20 percent. The serviceI' may prefer
doing this to foreclosing the mortgage, be-
cause foreclosure is and the market
value of the property may be depressed.
The holder of the senior tranche wouldn't
object to the the diminished
income from the mortgage would still fully
cover his 80 percent interest in the reve-
nue from mortgages in the mortgage-
backed security. But the holder of the
junior tranche might object because he
might be better off if the serviceI' gam-
bled on obtaining more money by foreclos-
ing or by holding out for a less generous
modification. The serviceI' must balance
impartially the interests of the different
tranches as determined by their contrac-
tual entitlements.
CWCapital, the serviceI' III this case,
confused matters stating in its com-
plaint that the trust which holds title to
the mortgage on Chicago Properties' build-
ing 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 substi-
tuted for CWCapital, or added as an addi-
tional 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 inter-
loper. 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 serviceI' is the trust's col-
lection agent. The delegation to it is com-
prehensive: the serviceI' "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 ad-
ministration which it may deem necessary
or desirable." The serviceI' is much like
an assignee for collection, who must ren-
der to the the money collected
the assignee's suit on his behalf (minus the
assignee's but can sue in his own name
Cite as 610 F.3d 497 (7th Cir. 2010)
without violating Rule 17(a). See
Commiunicutious CO. D. APCC
Inc., 554 U.S. 2ml. 128 S.Ct. 2581, 2541,
171 L.Ed.2d 424 (2008) (dictum); Stoi/gers
o. Otto Gerduu Co., 859 F.2d 292, 294 (2d
Cir.l!lGG); Kilbourn v. Western Surety Co.,
187 F'.2d 5G7, 571-72 (lOth Cir.l!l51).
[1] The Supreme Court's holding in
the case was merely that an assign-
ee for collection has standing to sue, within
the meaning of Article III of the Constitu-
tion. 128 S.Ct. at 2542; see also w.I?
HutI' Asset Monoi/elnent CO. D. Deloitte &
Touche LLP, 549 F.:3d 100, 107-10 (2d
Cir.2008). There is no douht about Article
III standing in this case; though the plain-
tiff may not be an assignee, it has a per-
sonal stake in the outcome of the lawsuit
because it receives a percentage of the
proceeds of a defaulted loan that it ser-
vices. But in an aside on real party in
interest, the Supreme Court intimated
agreement \,ith GA Charles A. Wright,
Arthur R. Miller & Mary Kay Kane, Fed-
eral Practice & Procedure 1545 (2d
ed. 1!l!l0), that a real party in interest dif-
fers from a lawyer, or someone else with a
mere power of attorm,y, 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 a
trustee. 128 S.Ct. at 2541.
[2] Unfortunately, it is less clear than
it should be whether the Pooling and Ser-
vicing Agreement between the trustee of
the mortgages backing the mortgage-
backed security and the serviceI' made the
latter an assignee or a mere attorney. It
says that the serviceI' "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 admin-
istration which it may deem necessary or
desirable." The trustee shall at the servi-
cer's "written request promptly exe-
cute any limited powers of attorney and
other documents furnished by the [Servi-
cer] that are necessary or appropriate
to enable [the Servicer] to carry out [its]
servicing and administrative duties here-
under." The trustee is thus to
confer on the serviceI' whatever authority
the latter needs to perform his servicing
duties. which include suing. For it is the
serviceI', not the trustee, who is empow-
ered to decide whether to sue. The agree-
ment further states that without the Trus-
tee's written consent, as relates to
a Loan that the ServiceI' is servic-
ing pursuant to its respective duties herein
(in which case such serviceI' shall give
notice to the Trustee of the initiation), [the
ServiceI' 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 serviceI'
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 capacity-
implying that it is not doing so in a repre-
sentative capacity if it is suing in regard to
a servicing-related loan.
It is thus the serviceI', under the agree-
ment, who has the whip hand; he is the
lawyer and the client, and the trustee's
duty, when the serviceI' is carrying out his
delegated duties, is to provide support.
The securitization trust holds merely the
bare legal title; the Pooling and Servicing
Agreement delegates what is effectively
equitable ownership of the claim (albeit for
eventual distribution of proceeds to the
owners of the tranches of the mortgage-
backed security in accordance with their
priorities) to the serviceI'. See Grcer!).
O'Dell, :305 F.:3d 12!l7, 1:302-0:3 (11th Cir.
2002), and cases cited there. For remem-
ber that in what action to take
with regard to a defaulted loan. the servi-
ceI' has to consider the competing interests
502
(>10 FEDERAL REPORTER, ad SERIES
of the owners of different tranches of the
security.
[3] But if, contrary to what we think,
the serviceI' is not the real party in inter-
est in this case, there still is no need to
dismiss the suit. Rule 17(a)(3) provides
that a case should not be dismissed be-
cause it has not been brought in the name
of the real party of interest "until, after an
objection, a reasonable time has been al-
lowed for the real party in interest to
ratify, join, or be substituted into the ac-
tion"; and "after ratification, joinder, or
substitution, the action proceeds as if it
had been originally commenced by the real
party in interest." The trustee: (Bank of
America) submitted an affidavit to the dis-
trict court, which was not contradicted,
ratifying the servicer's suit on the bank's
behalf. The district court rejected the
affidavit as untimely, because earlier the
plaintiff had failed to respond to an inter-
rogatory concerning its authority to sue.
The judge's action was precipitate. The
affidavit was filed in response to the defen-
dants' motion for judgment on the plead-
ings, in which they argued that the plain-
tiff lacked standing to bring suit. So while
the affidavit was submitted only three days
before the trial began, it was nonetheless a
timely response to the defendants' motion.
So we come to the merits.
Blockbuster is the well-known but fast-
fading chain of movie rental stores. Its
business model has been devastated by
direct mail rental services like Netf1ix, by
DVD vending machines, and increasingly
by the direct transmission of movies to
home computers and television sets.
"Blockbuster Shares Fall on Chapter 11
Warning," NY. Mar. 17, 2010,
www.nytimes.com/2010103/18/business/me-
dial18blockbuster.html (visited May 31,
2010); Brooks Barnes, "Studios and Cable
Unite in Support of Video on Demand,"
NY. Times, Mar. 17, 2010, \vww.nytimes.
com/2010103/18/business/mediai 18de-
mand.html (visited May 30, 2010); "Block-
buster's Loss Exceeds Forecast," NY.
Ti,nes, Aug. 13, 2009, p. B4, \vww.nytimes.
com/2009!08/14/business/medial 14block-
buster.html?-r=l (visited May 30, 2010);
Sarah McBride, "Blockbuster to Shutter
More Stores," Wall St. .1., Sept. 16, 2009,
p. B1, http://online.wsj.com/article/
SB125303731573912777.html (visited May
30, 2010). Unable to make a profit at the
premises that it had leased from Chicago
Properties, Blockbuster abandoned the
lease. Chicago Properties sued. The suit
was settled by Blockbuster's agreeing to
pay Chicago Properties $161,000, though it
owed rent of some $471,000 for the time
remaining on the lease. (The plaintiff is
seeking a judgment for the full $471,000,
plus attorneys' fees and costs.) Chicago
Properties tried to find a substitute tenant,
but failed. Nevertheless it continued to
make full, timely payment of the principal
and interest due each month on the mort-
gage.
14] The basis of the plaintiffs claim
against Blockbuster is a "Subordination,
Non-Disturbance and Attornment Agree-
ment" (SNDA) to which Chicago Proper-
ties, Blockbuster, and the trust are parties.
This is a standard agreement that defines
the rights of lender and tenant in the
event that the landlord defaults on his
mortgage and the lender forecloses. See
Scott W. Dibbs, "Looking Down the
Road," Probate & Property. Sept.-Oct.
2008, at 49, 52-54; Arnold B. West &
Sidney A. Keyles, "Does the A in SNDA
Work?" id.. at 54; Robert
D. Feinstein & Sidney A. Keyles, "Foreclo-
sure: Subordination, Non-Disturbance
and Attornment Agreements," i.d., ,July-
Aug.1989, at 38. The subordination provi-
sion subordinates the lease to the mort-
gage; the attornment provision requires
that the temant agree to continue the ten-
Cite as 610 F.3d 497 (7th Cir. 2(10)
ancy if as a result of the default and
foreclosure there is a new landlord; and
the nondisturbance provision assures the
tenant that his lease 'Nill continue in the
event of foreclosure. But nowadays, de-
spite the name, an SNDA often and in this
case contains additional provisions for the
protection of the lender or the tenant.
A critical provision in this case is that
the lender isn't bound by any rent that the
tenant may have paid in advance, nor by
any modification of the lease made \vithout
the lender's consent that reduces the term
of the lease or the tenant's monetary obli-
gations under it. The concern is that a
landlord who is or foresees soon being in
default may, perhaps in collusion with the
tenant, collect rent far in advance, or oth-
erwise modify the terms of the lease in a
way that reduces its value to a future
landlord, depriving that landlord (the fore-
closing mortgagee or the purchaser of the
property at the foreclosure sale) of rent
for occupancy of the property by the ten-
ant after the original landlord is no longer
the owner. Joshua Stein, "Needless Dis-
turbances? Do Non-Disturbance Agree-
ments .Justify all the Time and Trouble?"
87 Real Propel1y Probate & Trust J. 701,
7mJ-12 (200:3); see, e.g., Dime Sa/riugs
Bauk q( New York, FSB v. Montague
Street Realty Associates, 90 N.Y.2d 5:39,
664 N.Y.S.2d 246, 686 N.E.2d 1:340, 1841-
42 (1997); Prudence Co. IJ. 1(J() West Sev-
enty-Third St. C7orp., 260 N.Y. 205, 188
N.K :365, :367 (19:32); Kirkeby C'OI]}. v.
Cross Bridge Towers, 91 N..J.Super.
12(5, 219 A.2d :34:3, :344-4G WH5G). What is
strange about the plaintiffs invocation of
this provision is that the landlord, Chicago
Properties, has continued to make its
monthly mortgage payments in full and so
there has been no event that could trigger
Blockbuster's liability under the SNDA.
Another provision requires the tenant on
the lender's instmctions to deliver his rent
payments to the lender. The plaintiff
complains that Blockbuster disregarded its
instmctions to do that. But the instmc-
tions were sent after the lease had been
terminated, so there were no more rent
payments to be made. Nor was the plain-
tiff injured by not receiving rent payments
from Blockbuster, for had it received them
it would have applied them to reduce the
debt that Chicago Properties owes it, and
it has not presented evidence that Block-
buster's failure to direct rent to it has
impaired the value of its collateral. Re-
member that Chicago Properties has con-
tinued to make its monthly mortgage pay-
ments in full.
[5,6] The claimed liability of the land-
lord and its owners is based on other
documents-the mortgage note and the
owners' guaranty of the note. The guar-
anty makes the owners liable for any loss-
es to the lender arising from "gross negli-
gence or willful misconduct ., relating to
the [mortgage] Loan and/or the Property,"
and (under a provision similar to a provi-
sion in the SNDA that we've already dis-
cussed) for losses arising from the misap-
plication or conversion of rent paid more
than a month in advance. Nothing in the
settlement with Blockbuster violates these
provisions. The money paid in the settle-
ment was not a payment of rent. It was a
payment in settlement of a lawsuit that
sought rent for a future period, namely the
remaining term of the lease after Block-
buster abandoned the premises. And al-
though the mortgage agreement prohibits
the borrower from cancelling a lease with-
out the lender's written consent, it makes
an exception for cancellations made when
the borrower "is acting in the ordinary
course of business and in a commercially
reasonable manner." It would be odd if
the defendants could be to liability
for doing something contemplated by the
mortgage abrreement. In light of Block-
504
610 FEDERAL REPORTER, ad simms
buster's financial difficulties, there is no
basis for thinking that Chicago Properties
was being commercially unreasonable in
settling 'With Blockbuster on the terms it
did. And CWCapital argues neither that
Chicago Properties violated a covenant of
the loan agreements by failing to reduce
the rent it charges, in order to secure a
replacement tenant; or that it should have
made greater efforts to find such a tenant;
or (what is critical) that leaving the build-
ing unoccupied has impaired its value as
security for the mortgage loan-a related
point is that there is no evidence of what
the building was worth either before or
after Blockbuster's abandonment of the
lease.
The loan was nonrecourse ('With some
conditions-as we're about to see). A
mortgage loan is nonrecourse when the
mortgage lender can't obtain damages
against the borrower if the loan is default-
ed and the lender can't be made whole by
foreclosing on the lender's This
may have given Chicago Properties an in-
centive to hold out for a high-paying ten-
ant even if that reduced the value of the
collateral (its building). But that isn't ar-
gued either.
The mortgage agreement (which is sepa-
rate from the mortgage note) requires the
borrower to place in escrow "all funds
received by Mortgagor from tenants in
connection 'With the cancellation of any
Leases, including, but not limited to, any
cancellation fees [or] penalties." This lan-
guage covers the proceeds of the $161,000
settlement of Chicago Properties' suit
against Blockbuster for unauthorized
abandonment of the lease; and breach of
this provision is a default under the mort-
gage agreement, requiring immediate pay-
ment of the unpaid balance of the mort-
gage note. But the plaintiff is not seeking
enforcement of the mortgage agreement.
(Perhaps Chicago Properties has complied
",'ith the escrow provision; it seems not to
have, but the record is unclear.) The only
relief it seeks against Chicago Properties
is a money judgment for the entire amount
of rent owed by Blockbuster, plus attor-
neys' fees and costs.
[7J A final issue involves the district
court's award of attorneys' fees to Block-
buster on the basis of a provision in the
SNDA that "should any action or proceed-
ing be commenced to enforce any provi-
sions of this Agreement or in connection
'With its meaning, the prevailing party in
such action shall be awarded, in addition to
any other relief it may obtain, it." reason-
able costs and expenses, not limited to
taxable costs and reasonable attorney's
fees." The plaintiff argues that Blockbus-
ter is not a prevailing party because it lost
on a counterclaim charging a violation of a
provision of the SNDA which said that
"Tenant [BiockbusterJ shall not be joined
as a party/defendant in any action or pro-
ceeding which may be instituted or taken
by reason or under any default by Land-
lord in the performance of the terms, cove-
nants, conditions and agreements set forth
in the Mortgage." The district court
found this provision inapplicable because
the claims against Blockbuster arose under
the SNDA independently of any claims
against Chicago Properties under the
mortgage. But all that Blockbuster could
have obtained from its counterclaim were
attorneys' fees and cost.". That was an
unimportant part of the case, so, on bal-
ance, Blockbuster was indeed a prevailing
party.
The judgment is reversed ",ith di-
rections to enter judgment for the defen-
dants.
REVERSED WITH DI!{ECTlONS
APPENDIX
TAB
"10"
v. UNIFUND CCR PARTNERS
Cile as 331 S.W.3d 27 (Tex.App.-Waco 20W)
Tex. 27
44.2(c)(l) to conclude that the State met its
burden of proving venue in Randall Coun-
ty.
Conclusion
Having overruled appellant's sole issue
on appeal, we affirm the trial court's judg-
ment.
Robert D. SHIPLEY, Appellant,
V.
UNIFUND CCR PARTNERS, Appellee.
No. 10-09-00:n4-CV.
Waco.
Oct. 1:5, 2010.
Rehearing Overruled Dec. 21, 2010.
Background: Assignee of right to collect
on credit card account brought action
against card holder. The 87th District
Court, Freestone County, Patrick H. Sim-
mons, .J., entered judgment against card
holder. Card holder appealed.
Holding: The Court of Appeals, Tom
Gray, C..J., held that assignee did not have
standing to bring action against card hold-
er.
Reversed.
1. Assignments <3=:>31
An assignment is simply a transfer of
some right or interest.
2. Assignments <3=:>90
\\'hen an holds a contractual-
ly valid assignment, that assignee steps
into the shoes of the assignor and is con-
sidered under the law to have suffered the
same injury as the assignors and have the
same ability to pursue the claims.
3. Action <3=:>
A court may presume the truth of
allegations made in a party's pleadings
when determining standing.
.1. PIeadi ng <3=:> 111.36
A court is not required to look solely
to the pleadings but may consider evidence
and must do so when necessary to resolve
the jurisdictional issues raised.
5. Consumer Credit <3=:> 18
Assignee of right to collect on credit
card account did not have ownership or
title in the account, and therefore, did not
have standing to bring action against card
holder; assignee only had been assigned
right to collect, and assignor explicitly re-
tained title and ownership.
6. Action <3=:>13
Because standing denotes a party's
justiciable interest in a controversy, it is
only the party whose primary legal right
has been breached that may seek redress
for that injury; ""ithout a breach of a legal
right belonging to that party, that party
has no standing to litigate.
Richard C..Jenkins, Dallas, for Appel-
lant.
Abel Reyna, .11'., McCleskey HarTiger &
Brazill & Graf LLP, Lubbock, for Appel-
lee.
Before Chief Justice GRAY, Justice
REYNA, and .Justice DAVIS.
28 Tex. ; ~ ; n SOUTH WgSTERN REPORTgR, ;{d SERIES
TOM GRAY, Chief Justice.
Robert Shipley appeals from the entry
of a judgment against him for a debt on a
credit card account. Shipley complains
that the trial court erred by not dismissing
the suit against him because Unifund CCR
Partners lacked standing to bring the suit
because the court lacked subject matter
jurisdiction in that Unifund CCR Partners
did not own the debt and therefore did not
have standing to bring the action. Shipley
also complains that the evidence was legal-
ly insufficient for the trial court to have
granted a judgment against him and in
favor of Unifund CCR Partners because
there was no evidence that Shipley's debt
had been assigned to Unifund CCR Part-
ners.
On original submission, this Court af-
firmed the judgment. See Shipley u. Uni-
CCR No. 1O-09-00i314-CV,
2010 Tex.App. LEXIS 4544 (Tex.App.-
Waco June 16, 2010). Upon Shipley's
timely motion for rehearing, we requested
a response from Unifund CCR Partners,
although Unifund has not done so. As
authorized by Rule of Appellate Procedure
49.:3, we issue this modified opinion after
requesting the response. TEX.R.App P.
4(j.3. On reconsideration of the issues pre-
sented, we will reverse the .iudl"rment, dis-
miss this cause for lack of jurisdiction, and
'Nithdraw our prior opinion and judgment.
ld.
Standing
Shipley contends that Unifund CCR
Partners did not own any interest in the
account in question, and therefore, they
lacked standing to bring the suit against
him. Citibank South Dakota, N.A. sold
the account to Unifund Portfolio A., LLC.
lJnifund Portfolio A, LLC then assigned
its rights to collect the account to Unifund
CCR Partners, but retained the title and
ownership of the account. In his brief to
this Court, Shipley does not complain
about the sale of the account from Citi-
bank to Unifund Portfolio A, but of the
assignment from Unifund Portfolio A to
Unifund CCR Partners.
Standing, a necessary component of sub-
ject-matter jurisdiction, is a constitutional
prerequisite to maintaining a suit under
Texas law. Te:r. Ass'n of' Bus. u. Te:r. Ail'
Control Bd., 852 S.W.2d 440, 444-45 (Tex.
1(93). Whether a party has standing to
pursue a claim is a question of law that we
review de novo. Mayhew v. Town ()f'Sun-
nyvale, 964 S.W.2d ()22, 928 (Tex.1998).
Standing refers to a party's justiciable
interest in a controversy. See Nootsie,
Ltd. IJ. Williamson Cou.nty Appraisal
Dist., 925 S.W.2d 659, 661-62 (Tex.1996);
T010n or Pairuiew v. LawleT, 252 S.W.3d
853, 855 (Tex.App.-Dallas 2008, no pet.).
Only the party whose primary legal right
has been breached may seek redress for
an injury. NauslaT IJ. COOTS BreLoing Co.,
170 S.W.3d 242, 249 (Tex.App.-Dallas 2005,
no pet.). Witbout a breach of a legal right
belonging to that party, that party has no
standing to litigate. Cadle Co. v. Lobi.ugi-
eT, 50 S.W.:kJ 6G2, GG9-70 (Tex.App.-Fort
Worth 2001, pet. denied). In revie'Ning
standing on appeal, we construe the peti-
tion in favor of the plaintiff, and if neces-
sary, review the entire record to determine
if any evidence supports standing. See
Tex. Air 852 S.W.2d at 446.
[1,2J An "assignment" is simply a
transfer of some right or interest. See
Pagosa Oil & Gas, LL.C. v. Marrs &
Smith P'ship, 323 S.W.:3d 203, 211 (Tex.
App.-EI Paso 2010, no pet. h.) (citing Uni-
Te:w.s /11cd. BTaru:h at Galveston
u. Allan, 777 S.W.2d 450, 452 (Tex.App.-
Houston [14th Dist.] 1989, no writ)).
When an assignee holds a contractually
valid assignment, that assignee steps into
the shoes of the assignor and is considered
SHIPLEY v. UNIFUND CCR PARTNERS
Cite as 331 S.W.3d 27 (Tex.App.-Waco 2010)
Tex. 29
under the law to have suffered the same
injury as the assignors and have the same
ability to pursue the claims. So/dhwestern
Bell Tel. Co. v. Mkt{}. on Hold fnc.. 808
S.W.8d 909 (Tex.2010) (citing Holy Cross
Chnrch of' God in Christ v. Wolf: 44
S.W.:3d 5G2, 572 (Tex.2001)).
Pleadin{}s and Bvidence in the Record
[3,4] "It has long been the rule that a
plaintiffs good faith allegations are used to
determine the trial court's jurisdiction."
Baues v. Unif'und CCR Partners, :301
S.W.3d 402, 404 (Tex.App.-EI Paso 2009,
no pet.) (citing Brannon u. Pac. Brnploy-
ers fns. Co., 148 Tex. 289, 224 S.W.2d 4GG,
4G9 (Tex.1949)). A court may presume the
truth of allegations made in a party's
pleadings when determining standing. fd.
(citin{} Te:r. Ass'n of' Bus., 852 S.W.2d at
44G; Browu v. Todd, 58 S.W.3d 297,305 n.
3 (Tex.2001) ("Because standing is a com-
ponent of subject matter jurisdiction, we
consider [it] as we would a plea to the
jurisdiction, construing the pleadings in fa-
vor of the plaintiff.")). "A court is not
required to look solely to the pleadings but
may consider evidence and must do so
when necessary to resolve the jurisdiction-
al issues raised." State Dep't of' C'rirn.
Justice v. Miller, 51 S.W.3d 583, 587 (Tex.
2001). However, the petition's sole refer-
ence to Unifund CCR Partners's owner-
ship or standing to litigate is the statement
that "Plaintiff is authorized to file this
petition." We do not find that this consti-
tutes any evidence of standing.
[5 J The case was solely decided based
on business records filed by Unifund CCR
Partners. The evidence presented in the
business records affidavit is likevrise un-
clear as to what interest beyond the right
of collection that Unifund CCR Partners
owns. Additionally, the trial court sus-
tained Shipley's hearsay objections to the
affidavit and struck the content of the
affidavit outside of the questions required
to authenticate the business record as
such. In fact, the assignment from IJni-
fund Portfolio A, LLC to Unifund CCR
Partners indicates that Unifund CCR
Partners owns nothing. The pertinent
language of the assignment states:
Assignor, for value received and in con-
nection with the Agreement, transfers
and assigns to Assignee all of Assignor's
rights in the Receivables, for collection
purposes only, including conducting liti-
gation in Assignee's name, for those Re-
ceivables which Assignor owns or may
acquire from time to time. Assiguor
shall retain title and OIDnership (!f' such
Receivables. The assignment is without
recourse to Assignor and without war-
ranty of any kind (including, without
limitation, warranties pertaining to title,
validity, collectibility (sic), accuracy or
sufficiency of information, and applica-
bility of any statute of limitations), ex-
cept as stated in the Agreement or here-
in. (emphasis added)
[(j] Because standing denotes a party's
justiciable interest in a controversy, it is
only the party whose primary legal right
has been breached that may seek redress
for that injury. Baves, 301 S.W.3d at 404.
Without a breach of a legal right belonging
to that party, that party has no standing to
litigate. [d. (cdin{} Cadle Co. Lobingier,
50 SW.3d GG2, GG9-70 (Tex.App.-Fort
Worth 2001, pet. denied)). Unifund CCR
Partners's right is solely limited to taking
whatever steps are necessary to collect a
debt owned entirely by someone else,
while holding no title, interest, or rights in
anything else. We do not find that this is
sufficient to establish that ITnifund CCR
Partners has standing to pursue this claim
in its own name.
Cases that have found standing to exist
all indicate that a finding of ownership of
some type was made. Even the cases
80 Tex. :m SOUTH WESTERN REPORTER, ad SERIES
cited to by Unifund CCR Partners demon-
strate that some ownership interest was
transferred by the assignor to the assign-
ee. See Sprint. Communications Co., L.P.
APCC Inc., 554 U.S. 269, 128
S.Ct. 2,5:31, 2541-4:3, 171 L.Ed.2d 424
(2008) (assignee with legal title to debt of a
legal claim for money owed has standing to
pursue the claim even if proceeds are to be
entirely remitted to a..-;signor); see also
Eaues, 301 SW.3d at 40:3-04 (pleadings
and live testimony sufficiently demonstrat-
ed that Unifund owned the account in
question to establish standing); Cart-
wright/). MBank Christi, N.A.,
865 S.W.2d 546, 549-50 (Tex.App.-Corpus
Christi 199:3, writ denied) (note transferred
to MBank making MBank the holder of
the note); Schultz D. Aet.na Business Cred-
it., Inc., 540 S.W.2d 530, 531 (Tex.Civ.App.-
San Antonio 1976, no \\Trit) (assignor trans-
ferred "all of its rights, title and interests"
in the relevant instrument, any accompa-
nying promissory note or notes, and all
rights and remedies under said instrument
or notes); Kelley/). Blutr Creek Oil Co.,
218 SW.2d 263, 267 (Tex.Civ.App.-Fort
Worth 1956) (assignment transferred all
"right, title and interest" in a claim, "with
full power and authority to collect and
receipt therefore"), qtt'd in part., and reu'd
in parl on ot.her grounds, 158 Tex. 180,
:509 S.W.2d 208 (1958).
We find that without of any
ownership interest or title in the account
that Unifund CCR Partners does not have
standing to bring this suit ami that the
trial court did not have subject matter
jurisdiction over the action. We sustain
issue one.
Conclusion
We conclude that Unifund CCR Part-
ners did not have standing to file suit
Shipley. Therefore, because the
trial court lacked subject matter jmisdic-
tion, we reverse the judgment of the trial
court and render judgment dismissing the
case.
Thomas Ed COLE and Roy Franklin
Cole, Appellants and Cross-
Appellees,
v.
ANADARKO PETROLEUM CORPO
RATION and Permian Basin Joint
Venture, LLC, Appellees and Cross-
Appellants.
No. 1l-09-00056-CV.
Eastland.
Oct. 14.2010.
Rehearing Overruled Nov. 12, 2010.
Background: Ranch owners brought ac-
tion for breach of contract and excessive
and unauthorized surface use against pe-
troleum company that was both an oil and
gas and a surface lessee as well as
company's assignee, arising out of opera-
tion of waterflood partially situated on
ranch. The 161st District Court, Ector
County, John W. Smith, J., "''Tanted multi-
ple motions for partial summary judgment
and celtified an interlocutory appeal.
Holdings: On grant of rehearing in palt,
the Court of Appeals, Rick Strange, J.,
held that:
(l) owners did not acquire surface use
claims as heirs and successors of their
father;
(2) owners had standing to assert surface
use claims accruing after O\vners ac-
quired ranch;
APPENDIX
TAB
"II"
November 16,
2010
Congressional Oversight Panel
NOVEMBER
*
OVERSIGHT REPORT
Examining the Consequences of Mortgage
Irregularities for Financial Stability and Foreclosure
Mitigation
*Subrnitted under Section 1) ofTitie 1 of the
Stabilization Act of 2008, Pub, L, No. 110-343
mprupn.r\1 EcollOlnic
Table of Contents
Executivc SUlnn1ary 4
Scction Onc:
A. Overvicw 7
B. Background 9
C. Tinlclinc 10
D. Legal Conscquences of Document Irregularities 14
1. Potential Flaws in thc Recording and Transfer of Mortgages and
Violations of Pooling and Servicing Agreements 16
2. Possible Legal Consequences of thc Document Irregularities to
Various Parties 24
3. Additional Considerations 33
Court Cases and Litigation 34
I. Fraud Clailns 35
2. Existing and Pending Claims under Various Fraud 'Ihcories .40
3. Other Potential Claims .42
4. Othcr State Legal Steps .44
5. Other Possible Implications: Potential "Front-end" Fraud and
Documentation Irregularities .46
F. AsseSSIng the Potential Impact on Bank Balance Sheets 51
I. Illtroduction 51
Irregularities: the Cost to Banks 59
3. Issues alldlYlc)ltgagc I)ut-backs 63
2
G. Effect or Irregularities and Foreclosure Freezes on Housing MarkeL 73
I. Foreclosure Freezes and their Elfect on I-lousing 73
2. Foreclosure Irregularities and the Crisis of Confidence 78
H. Impact on HAf\1P 79
I. Conclusion 82
Section Two: Correspondence with Treasury 85
Section Three: TARP Updates Since Last Report 86
Section Four: Oversight Activities 122
Section Five: About the Congressional Oversight PaneI I24
Appendices:
APPENDIX 1: LETTER FROM CIIAIRMAN TED KAUFMAN TO
SPECIAL MASTER PATRICIA GEOGHEGAN, RE: FOLLOW UP TO
EXECUTIVE COMPENSATION HEARING, DATED NOVEMBER 1,2010...... 125
3
Executive
In the fall of 20 I0, reports began to surface alleging that companies servicing $6.4 trillion
in Ameriean mortgages may have bypassed legally required steps to f()reelose 011 a home.
Employees or contractors of Bank of America, GMAC Mortgage, and other major loan servicers
testified that they signed, and in some cases backdated, thousands of documents claiming
personal knowledge of facts about mortgages that they did not actually know to be true.
Allegations of"robo-signing" are deeply disturbing amI have given rise to ongoing
federal and state investigations. At this point the ultimate implications remain unclear. It is
possible, however, that "robo-signing" may have concealed much deeper problems in the
mortgage market that could potentially threaten financial stability and undermine the
government's efllJrts to mitigate the ll)reclosure crisis. Although it is not yet possible to
determine whether such threats will materialize, the Panel urges Treasury and bank regulators to
take immediate steps to understand and prepare for the potential risks.
In the best-case scenario, concerns about mOligage documentation irregularities may
prove overblown. In this view, which has been embraced by the financial industry, a handful of
employees failed to f(lllow procedures in signing foreclosure-related affidavits, but the facts
underlying the anidavits are demonstrably accurate. Foreclosures could proceed as soon as the
invalid affidavits are replaced with properly executed paperwork.
The worst-case scenario is considerably grimmer. In this view, which has been
articulated by academics and homeowner advocates, the "robo-signing" of affidavits served to
cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful
f()rec!osure. In essence, banks may be unable to prove that they own the mortgage loans they
claim to own.
The risk stems from the possibility that the rapid growth of mortgage securitization
outpaced the ability of the legal and financial system to track mortgage loan ownership. In
earlier years, under the traditional mortgage model, a homeowner borrowed money from a single
bank and then paid back the same bank. In the rare instances when a bank transferred its rights,
the sale was recorded by hand in the borrower's county properly ollicc. Thus, the ownership of
any individual mortgage could be easily dcmonstrated.
N a singlc mortgage loan may be sold dozens of times between various banks
across the country. In the view of some market participants, the sheer speed of the rnodern
market rendered obsolete the traditional ink-and-paper recordation process, so the
financial industry developed an electronic transfer process that bypasses county property offices.
1he Pallel adoptee! thiS lepolt \\Ith a:; 0 vute 011 November 15, 2010.
This electronic process has, however, legal challenges that could, in an extreme scenario,
call into question the validity of 33 million mortgage loans.
Further, the financial industry now commonly bundles the rights to thousands of
individual loans into a mortgage-backed security (MBS). The securitization process is
complicated and requires several properly executed transfers. If at any point the required legal
steps are not followed to the letter, then the ownership of the mortgage loan could into
question. I lomeowner advocates have alleged that frequent "robo-signing" of ownership
affidavits may have concealed extensive industry failures to document mortgage loan transfers
properly.
If documentation problems prove to be pervasive and, more importantly, throw into doubt
the ownership of not only foreclosed properties but also pooled mortgages, the consequences
could be severe. Clear and uncontested property rights are the foundation of the housing market.
If these rights into question, that foundation could collapse. Borrowers may be unable to
determine whether they are sending their monthly payments to the right people. Judges Inay
block any effort to even in cases where borrowers have Jailed to make regular
payments. Multiple banks may attempt to JiJreclose upon the same property. Borrowers who
have already su ffered foreclosure may seek to regain title to their homes and any new
owners to rnove out. Would-be buyers and sellers could find themselves in limbo, unable to
know with any certainty whether they can safely buy or sell a home. If such problems were to
arise on a large scale, the housing market could experience even greater disruptions than have
already occurred, resulting in signi ficant harm to major financial institutions. For example, if a
Wall Street bank were to discover that, due 10 shoddily executed paperwork, it still owns
millions of mortgages that it thought it sold off years ago, it could billions of
dollars in unexpected losses.
I)ocumentation irregularities could also have major effects on Treasury's main
prevention effort, the Home Modification Program (HAMP). Some
servicers dealing wilh Treasury may have no legal right to initiate which may call
inlo question their ability to grant modiCications or to dcrnand payrnents from homeowners. "'he
servicers' use of"robo-signi may also have affected determinations about individual loans;
scrviccrs may havc becn lllore willing to foreclosc if they werc not bearing the full C()sts of a
properly executed !()reclosure. Treasury has so far not provided reports of any investigation as to
whether documentation problems could undermine I lAMP. It should engage in active effe)rts to
rnonitor the i foreclosure irregularities. and it should relJort its findinos to and
," "b
the public.
In addition to documentation concerns, another problem has arisen with securitized
loans that could threaten financial stabilitv. Investors in mortuaoe-backed
Job
securities typically demanded certain assurances about the quality of the loans they purchased:
instance, that the borrO\vers had certain minimum credit ratings and income or that their
'-' - ..
5
homes had appraised for at least a minimum value. Allegations have surfaced that banks may
have misrepresented the quality of many loans sold for securitization. Banks found to have
provided misrepresentations could be required to repurchase any affected mortgages. Because
millions of these mortgages are in default or f(Jreclosure, the result could be extensive capital
losses if such repurchase risk is not adequately reserved.
'1'0 put in perspective the potential problem, one investor action alone eould seek to force
Bank of America to repurchase and absorb partial losses on up to $47 billion in troubled loans
due to alleged misrepresentations of loan quality. Bank of America currently has $230 billion in
shareholders' equity, so ifseveral similar-sized actions - whether motivated by concerns about
underwriting or loan ownership were to succeed, the company could suffer disabling damage
to its regulatory capital. It is possible that widespread challenges along these lines could pose
risks to the very financial stability that the Troubled Asset Relief Program was designed to
protect. Treasury has claimed that based on evidence to date, mortgage-related problems
currently pose no danger to the financial system, but in light of the extensive uncertainties in the
market today, Treasury's assertions appear premature. Treasury should explain why it sees no
danger. Bank regulators should also conduct new stress tests on Wall Street banks to measure
their ability to deal with a potential crisis.
'rIle Panel emphasizes that mortgage lenders and securitization servicers should not
undertake to foreclose on any homeowner unless they are able to do so in full eompliance with
applicable laws and their contractual agreements with the homeowner.
The American financial system is in a precarious place. Treasury's authority to support
the financial system through the Troubled Asset Relief Program has expired, and the resolution
authority created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
remains untested. The 2009 stress tests that evaluated the health of the financial system looked
only to the end of 20 I0, providing little assurance that banks could withstand sharp losses in the
years to conIc. The housing market and the broader economy rel1lain troubled and thus
vulnerable to future shocks. In short. even as the government's response to the linancial crisis is
drawing to a close, severe threats remain that have the potential to damage financial stability.
Section One:
A. Overview
In the fall of 20 10, with the Troubled Asset Relief Program's (TARP) authority expiring,
reports began to surface of problems with foreelosure doeumentation, particularly in states where
foreelosures happen through the courts. GMAC Mortgage, a subsidiary of current TARP
recipient Ally Financial, announeed on September 24,2010 that it had identified irregularities in
its foreclosure document procedures that raised questions about the validity of foreclosures on
mortgages that it serviced. Similar revelations soon followed from Bank of America, a former
TAIZP recipient, and others. Employees of these companies or their eontractors have testi fied
that they signed, and in some cases backdated, thousands of documents attesting to personal
knowledge of facts about the mortgage and the property that they did not actually know to be
true. Mortgage scrviccrs also appeared to be cutting corners in other ways. According to these
banks, their employees were having trouble keeping up with the crush of f()J'eclosures, but
additional trai ning and employees would generally suffice to get the process in order again.
At present, the reach of these irregularities is unknown. The irregularities may be limited
to paperwork errors among certain servicers in certain states; alternatively, they may call into
question aspects orthe securitization process that pooled and sold intercsts in innumerable
rnortgages during the housing boom. Depending on their extent, the irregularities may afreet
both Treasury's ongoing roreclosure programs and the financial stability that Treasury, under the
l:mergency Economic Stabilization Act of 2008 (EESA), was tasked with restoring. Further, the
mortgage market races ongoing risks related to the right of mortgage-backcd sccurities to force
banks to repurchase any loans. Losses stemming from these repurchases would compound any
risks associated with documentation irregularities.
Under the C'ongressional Oversight Panel is charged with reviewing the current
state or the linancial markets and the regulatory system. The Panel's oversight interest in
roreclosure documentation irregularities stems Il'ol11 several distinct conccrns:
If S e v ( ~ r e Disruptiolls ill the HOIISillg Market Materialize, Finallcial Stahility alld Taxpayer
Funds Could Be Imperiled. lrdocument irrcgularities prove to be pervasive and, more
importcllltly, throw into question owncrship of not only foreclosed propertics but also pooled
the result could be significant harm to financial stability - the very stability that the
TARP was to protect. In the worst ease scenario. a clear chain or title an esscntial
clement or a functioning housing market may be difficult to establish fiJr propertIes subject to
loans that wcre pooled and securitized. Rating agencies are already cautious in their
outlook (il[' the banking sector, and rurther blows could have a significant elTecL 'fhe
implications could also dire for taxpaycrs' recovcry oftheirTARP investments. Treasury still
7
bas $66.8 billion invested in the banking sector generally, and as the Panel discussed in its July
report, "Sma II Bemks in the Capi ta I Purchase Program," the prospects for repayment from
smaller banks are still uncertain and dependent, in great part, on a sector healthy enough to
.. I
attract prIvate mvestrnent.
HAl\IP May Rely on Uncertain Legal Authority and Inaccurate Foreclosure Cost
Estimates, Potentially Posing a Risk to Foreclosure Mitigation Efforts. If irregularities in the
foreclosure process reflect deeper to document properly changes of ownership as
rnortgage loans were securitized, then it is possible that T'reasury is dealing with the wrong
parties in the course of tire Home J\ffordable IVlodifieation Program (HAMP). This could mean
tlrat borrowers either received or were denied modi fications improperly. Some servicers dealing
with Treasury may have no legal right to initiate foreclosures, which may call into question their
ability to grant modifications or to demand payments fron1 homeowners, whether they are part of
a foreclosure mitigation program or otherwise. The servicers' tendency to cut corners may also
have affected the detennination to modify or foreclose upon individual loans. Because the net
present value (NPV) model compares the net present value of the modification to a foreclosure,
improper procedures that cut corners might have aHected the G:;reclosure cost calculation and
thus might have affected the outcome of the NPV test.
TARP-Recipicnt Banks May Have Failed to Meet Legal Obligations. Many oftlre entities
illlplicated in the recent document irregularities, including Ally Financial, Bank of America, and
JPMorgan Chase, are current or femner TARP recipients. Ally Financial, notably, rernains in
TARP and is in possession of $17.2 billion in taxpayer funds. Bank of America received funds
not only from TARP's Capital Purchase Program (CPP) but also what Treasury deemed
"exceptional assistance" fh1l11 TARY's Targeted Investment Program (TIP). Some of the banks
involved were also subject to the Supervisory Capital Assessment Prograrn (SCAP), also known
as the stress tests: Treasury's and the Board of Governors of the F'ederal Reserve's (Federal
Reserve) eff(xts to determine the health of the largest banks under a variety of stressed scenarios.
The Congressional Oversight Panel \vill continue to monitor Treasury's engagement with
these ongoing evenls. not only to protect the taxpayers' existing TARP investments and to
oversee its foreclosurc mitigation programs, but also to meet the Panel's statutory mandate to
"review thc current slate of the linancial markets and the regulatory system."
-._------
" .... '1:1\/('1' may alsll be al risk fllr losses relaled tll Treasury's inveslment in AI(;. The Maiden Lane II
and Maiden Lanc III vchicles. wlm:h the Federal Reserve Bank orNew York (FRBNY) created to hold assets
purchased Crom Ale;, hold substantial amounts orresidentialmortgagc-backed securities (I';MBSs), most of which
arc either sub-prime or ;\11-;\ mortgages originated during the housing boom. Trcasurv's ahility to recover the Cunds
it has put int.o Ale; in' p,;rt on FRBN';;'s abi on these inVeS[l1Ie;lts, and uneertainlv
associated with the investments could hinder that process.
B. Background
In the Call of 20 I0, a series of revelations about foreclosure documentation irregularities
hit the housing markets. The transfer of a property's title ii'om the mortgagor (the homeowner)
to the mortgagee (typically a bank or a trust) necessary for a successful foreclosure requires a
series of steps established by state law? As further described below, depositions taken in a
variety of cases in which homeowners were fighting foreclosure actions indicated that mortgage
servicer employees - who were required to have personal knowledge of the matters to which
they were attesting in their affidavits - were signing hundreds of these documents a day. Other
docmnents appcared to have been backdated improperly and ineffectively or incorrectly
notarized. While these documentation irregularities may sound minor, they have the potential to
throw the /()reclosure system and possibly the mOltgage loan system and housing market itself
- into turmoil. At a minirnum, in certain cases, signers of affidavits appear to have signed
documents attesting to information that they did not verify and without a notary present. If this
is the extent of the irregularities, then the issue may be limited to these signers and the
foreclosure proceedings they were involved in, and in many cases, the irregularities may
potentially be remedied by reviewing the documents more thoroughly and then resubmitting
them. If, however, the problem is related not simply to a limited number of foreclosure
documents but also to irregularities in the mortgage origination and pooling process, then the
impact of the irregularities could be far broader, affecting a vast number of investors in the
mortgage-backed securities (MBS) market, already completed foreclosures, and current
I)()meowners. 'This latter scenario could result in extensive litigation, an extended freeze in the
foreclosure market, and significant stress on bank balance sheets arising from the substantial
repurchase liability that can arise from mistakes or misrepresentations in mortgage documents.:>
) These steps depend on whether a slate is a judicial slale or a non-judicial slale, as
flllther described below, in f()()tnole 17.
.1 If Il10rtgage documentation has errors or misrepresenlations, buyers of the mortgage paper can "put-back"
the mortgage to its originator and require them to repurchase the morlgage. For a more complete discussion of this
possibility, see Sections D.I.b and D.2.
Several and experls have spcculated on the fm WIII,,,,,, ...,,11
Afwicci iVe Hal'c a PIOh!cm 12, 20 I0); Amherst V/],,,,,,,,,,,-
'///(jjJ1'1I hosco !I/l'estors iI/ {'rimlc Lahc! Securities (let. 12, 20 I FBR Capital Markets,
'1lI/f"/',,oW'" ('o!!' FrJlcc!oslIIe MOllio, Dea! or Not? (let. 15.2(10) (hcreinaHer "FBR Foreclosure i'dania
ConlCrence Cal In a conferenee eall with investors. Jamie Dimon. CEe) Chase. speculated thaI lhe
I';sue could ellher a"bl or a more extended with "a lot of consequences, mos! of which will be
adverse on ," Cardiff (iarcia, .!PM 01/ {,}/'ec!osllres, MERS, Financial Times Alphaville 13.
201U) (online <1! rtalph<1vil ]0/]0/1 (hereinaHer"JPiVloll
Fmccluslllcs, i'v1l'RS") ("Iryou talk about three or weeks i! will be a blip in Ihe housing market. Ifit \vellt 011
f()r a long period ortillle, it will have a Iut of COil sequences, 1l10st of which will be adverse Oil everybody.").
C. Timeline
After the housing market started to collapse in 2006, the effects rippled through the
financial sector and led to disruptions in the credit markets in 2008 and 2009. In an economy
that had been hit hard by the financial crisis and soon settled into a deep recession, the housing
market declined, dragging down housing prices and increasing the likelihood of default. This put
pressure on a variety of parties involved in the mortgage market. During the boom, there were
many players involved in the process of lending, securitizing, and servicing mortgages, and
many of these players took on multiple roIcs.
4
The initial role of servieers was largely administrative.
5
They were hired by the MBS
investors to handle all back-office functions for existing loans, and generally acted as
lI1tennediaries between borrowers and MBS investors.
6
flowever, when the housing bubble
burst, and the number of delinquencies began to rise, the role of servieers evolved
correspondingl y. 7 Servicer flJCus shi fted from performing purely administrative tasks to
engaging in active loss mitigation efforts.
8
Servicers found themselves responsible for
processing all defaults, modifications, short sales, and foreclosures.
9
The servieers themselves
have admitted that they were simply not prepared f<)r the volume of work that the crisis
generated.
1o
Thus, many servicers began subcontracting out much of their duties to so-called
"foreclosure mills," contractors that had significant incentives to move foreclosures along
quickly.
4 For example. it was not uncommon fix a commercial bank to perf(mll both lending and servicing
functions, and to bave established separate lending and servicing arms of its organization. As discussed later in this
report, the securitization process begins with a lemler/originator, onen but not always a commercial bank. Next, the
mortgage is securitizcd by an investment bank. Finally, the mortgage is serviced, onen also by a commercial bank
or its subsidiary. L:vcn where the same banks are listed as doing both lending and servicing, they did not necessarily
service only the mortgages they origi nated. Source: Inside Mortgage Finance.
()ffice of thc General fill" the Troubled Asset Relief Program. QuorterlvReport to
(}I,,'n'c'(' at 157 (Oct. 26. 2(10) (online at
I0!Cktober20 10 Quarterly Report to_C'ongress,pd f) (hereina fter "Clctober
2010 SICiTARP RepOin
(, ServiceI' duties includcd fielding borrower inquiries. collecting mortgage payments II-om the borrowers.
and remitting mortgage paYlllents to the trust. See!d at 157. 164. See also Congressional Clvcrsight Panel, /\,lorch
/,';,nl,OTlI Rq)ort: Foreclosure Crill.\" ]1J1l'i1ul a Solutio!l. at 40-42 (Mar. 6,2(09) (online at
(hereinafter "March 2009 Oversight Report")
f\larch
Marcil 2009
.1"1"11 notc at 1
1111'/(/ note 6. at 4U-42. also Oetoher 10 SICiTJ\RP
()cto!Jcr2UIU SIGTARI' \Uflli/ note S, at 157-IS8. In tile or2()09. wilen
anl10ullced its Makillg IJollic Aflonlahlc program, thc or which was HAMP. servieers took on the
additional of all HAMI' modifications.
10
fvUlrch SlljJ/(/ note 6. at 39.
10
Thus, as the boom in the housing market mutated into a boom in foreclosures, II banks
rushed to move delinquent borrowers out of their hOlnes as quickly as possible, leading,
apparently, to procedures of which the best that can be said is that they were sloppy and cursory.
Concerns with f()rcclosure irregularities first arose when depositions of so-called "robo-signers"
camc to lighL
I2
In a June 7, 20 I0, dcposition, .lenITy Stephan, who worked for GMAC
Mortgage
ll
as a "limited signing officer," testified that he signed 400 documents each day. In at
least some cases, he signed affidavits without reading them and without a notary present. 14 He
II Me,rtgag(;s that are more than 90 days past due are concentrated in certain regions and states of the
country, including California. Nevada, Arizona, Florida, and Georgia. See Federal Reserve Bank of New York, Q3
Credit Conditions 8,20 I 0) (online at www.newyorkfed.org/creditconditions/). Similarly, foreclosures are
concentrated in certain states. including the so-called "sand states": Arizona, California, Nevada, and Florida. U.S.
Department of Housing and Urban Development, Report to C'ongress on the Root Causes of the Foreclosure Crisis,
at vi (.Jan. 2(10) (online at www.huduser.org/Publications/PDF/Foreclosure_09.pdf). The Panel's field hearings in
Clark County, Nevada, Prince George's County, Maryland, and Philadelphia, Pennsylvania, also touched on the
subject of high concentrations of foreclosures in those regions. See Congressional Oversight Panel, Clark County,
NV: Ground Zero of the Housing and Financial Crises (Dee. 16,20(8) (online at
cop.senatc.gov/hearings/library/hearing-12I 608-firsthcaring.cCl11); Congressional Oversight Panel, COP Hearing:
Coping with the Foreclosure Crisis in Prince George ',I' County, Afmyland (Feb. 27, 20(9) (online at
cop.senate.gov/hearings/library/hearing-022709-housing.efm); Congressional Oversight Panel, Philadelphia Field
I1earing on Mortgage Foreclosures (Sept. 24, 20(9) (online at cop.senate.gov/hearings/library/hearing-092409-
phi ladelphia.cfnl).
12 The dctails of"robo-signers" actions on the Internet in September 20 I0, including video and
transcriptions of depositions liled by robo-signers, See, e.g., The Florida Foreclosure Fraud Weblog, Jetfi'ev
S'tepl101l 'IJ'itlidrml'll' Florida Defolilt LOll' C;roll/7 (Sept. 15,2(10) (online at
florida forec losure Iraud.coml20 IO/09/jeffrey-stephan-affida vi ts- wi thdrawn-by- florida-defau It-Iaw-group/). SOlne of
this inl(mnation was made public in court documents. For instance, in an order issued a state court in Maine on
Scptember 24, 20 10, the judge noted that it was undisputed that Jeffi'ey Stephan had an affidavit without
reading it and that he had not been in the presence ofa notary when he signed it. Order on Four Pending Motions at
J, Fedeml Notiollal Mortgage Assoc. v. Nicolle Bradhurv, No. BRJ-RE:-09-65 (Me. Bridgton D. Ct. Sept. 24, 20 I 0)
(onl inc at www.molleulla\v.com/t hemed/mo lieu ria w/Ilies/up loads/9_24. JO'!';,20Four';';,20Motions%200rder.pd f)
(hereinafter "Federal National Mortgage Assoc. v. Nicolle Bradbury").
1.\ CiMAC Mortgage is a subsidiary of Ally Financial. The Panel examined Ally Financial, then named
GMAC, in detail in its March 2010 report. Sec Panel./v/areh Report: lhe
heatment Under l:4RP Uvlar. II, 20 I 0) (onl inc at cop.senate.gov/documents/cop-031 J 10-
rcport.pdf).
14 E:ederal National Mortgagc Assoc. v. Nicollc Bradbury, slipra note 12. There are two primary concerns
with affidavits. First: arc tlte affidavits accurate'? For example, evcn if the homeowner is indebted, the amount of
the indebtedness is a part olthe attestation, The amount oCthc indebtedness must be accUiate because there might
bc a subsequent judgment against the hOlllcowncr, which would require the homeowner to cover the
amounl to the lender. And even iftllCie was no judgment, an inflated claim would
increasc the of the mortgage scrvicer flOm the IClicclosure sale to the detriment of other parties in
the process. Second. if the in!zmniltion in the affidavit is correct, it must beswOrll out someone with
Iv>"-cn,,,JI in"Hul,>,I", of Ihe indebtedness; otherwise it is and not admissible as eVidence. See,
Transcript of Court GAIA C LLC'l'. Dchhie Viscm(J. ct a/., No, 070 I ]02\4CI (Fla. Cir. Ct.
2() I()) 11K at Ilorida f(lree 1()Sllrefraud.eo Ill/'wll-eontellt!Llploa,ds/20 I0104/0407 I f) whet her
alketed allidavits were admissible). See Congressional tJversight Panel, Written Testimony of Katherine
Porter, ollaw, of Iowa of Law, C'OP !lear/ng on 7>IRP Forcclosure /\1I'tipatl'oll
. 2() I0) ine al mony-I0271 .pdl') (hereinafler "Wri tten
Cestimony of Katherine Porter").
II
also testilied that in doing so, he acted consistently with GMAC Mortgage's policies.
15
Similarly, LlCed with revelations that robo-signers had signed tens of thousands of foreclosure
documents vvithout actually verifying the inf(mnation in them, Bank of America announced on
October 8, 20 10, that it would freeze j(xeclosure sales in all 50 states until it could investigate
and address the irregularities. III GMAC Mortgage took similar action, announcing that while it
would not suspend j()reclosures, it had "temporarily suspended evictions and post-f()reclosure
closings" in 23 states.
17
In a stalernent, it referred to the issue as a "procedural error .. , in certain
affidavits" and staled that "we are confident that the processing errors did nClt result in any
inappropriate foreclosures." GMAC also announced that the company had taken three remedial
steps to address the problem: additional education and traimng for employees, the release of a
"more robusl policy" to govern the process, and the hiring of additional staff to assist with
j
' I . I g
orec osme processmg.
15 Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12. In addition, a Florida court
admonished GMAC for similar problems in 2006. Plaintiffs Notice of Compliance with this Court's Order Dated
May 1,2006, TCIF RE02 1'. Leibowitz, No. I62004CA004835XXXXMA (June 14,2006) (detailing GMACs
policies on affIdavits filed in foreclosure cases). These actions, if true, would be inconsistent with the usual
documentation requirements necessary fe)r proper processing of a foreclosure, giving rise to concerns that the
f()reelosure was not legally sufficient. See genera//v Written Testimony of Katherine Porter, supra note 14.
16 Bank of America Corporation, StatemenrjiwlI Bank o!"America Home Loans (Oct. 8,2010) (onlinc at
med iaroom.banko .com/phoenix.zhtml?c234503&p=irol-newsArticle&lD
c
1480657&highl ight=)
(hereinafter "Staternenl liOin Bank of America Home Loans"). At the same time, Bank of America agreed to
indemnify Fidelity National Financial, a title insurer, for losses directly incurred by "failure to comply with state law
or local practice on both transactions in which foreclosure has already occurred or becn initiated and those to bc
initiated in the future." See Fidelity National Financial, lvotiona/ Final/cio/, II/C., EPS oj'$().36
(C)et. 20, 20 I0) (online at files.shareholder.com/downloads/FNT/I 051799117xOx41 I089/209d61 a9-8a05-454c-
90dl-4a78eOa7c4ae/F'NF 20 J0 10 Earnings.pd f). As further described below in Section D.2, title
insurance is a critical piece ofthc mortgage market. Generally, title insurance insures against the possibility that
title is encumbered or unclear, and thereby provides crucial certainty in transactions involving real estate. The
insurancc is retrospective covering the history of thc properly until, but not after the sale, and is issued after a
review of the land title records. For a buyer, title insurance therefore insures against the possibility that a defect in
the title that is not apparent from the public records will affect their ownership. Industry sources conversations with
Panel staff(Nov. 9. 2010). /\ title insurer's refusal to issue insurance can signillcantly hamper the orderly transler
of real estate and interests collateralized by real estate, Bank of/\merica's indcmnity agreement with Fidelity
National Financial shirts the risk of eovcrcd losses arising from the foreclosure irregularities fi'orn Fidelity National
to Bank of America.
17 Twcnty-two states require judicial oversight of f()reclosure proceedings. In these judicial foreclosure
states the mortgagee must establish its claim show that a borrower is in (!cLlLdt bcfc)rc a judge. in non-judicial
states a 1()J'eclosure call proceed upon adequate and timely notice to thc borrower, as defined statute. In non-
states, a power of sale clause included in a deed of tl'llst allows a trustee to conduct a non-judicial
f()I-eciosure. foreclosures can more Sl11ee do not
Bankers Association, Jw!icia/ I'enus NOIl-Judlcia/ Foreclosure 26, 2U I0) (online at
'Iypically,
states that foreclosure slales, while states that on deeds of trust are non-judicial
IClreclosure states. Standard & Poor's, Structured Fillallce Reseorch Ileek.' !Jow IVi// the Foreclosure Crisis
!Jollie Price\? 21, 201U) (hereinafter "S&P on Foreclosure Crisis").
Finalleial, IIIC., C;;\fAC Pml'ides
at med ia.allyeom/index.php'lsA3&item' 417).
24,2(10)
12
]'hese voluntary, privately determined suspensions were brief. I'! On October 12, 20 I 0,
GMAC Mortgage released a statement indicating that in eases in which it had initiated a review
process Cor its foreclosure procedures, it would resume f(xeclosure proceedings once any
problems had been identified and, where necessary, addressed. It also noted that it "found no
evidence to date of any inappropriate Coreclosures.,2o On October 18, Bank of America
announced that it had completed its review of irregularities in the 23 states that require judicial
review of foreclosure proceedings and that it would begin processing foreclosure affidavits for
102,000 foreclosure proceedings in those states. It stated that it would review proceedings in the
remaining 27 states on a case-by-case basis and that foreclosure sales in those states would be
delayed until those reviews are complete. It further stated that in all states, it appeared that the
"basis of our foreclosure decisions is accurate.,,21 Various commentators, however, have
questioned Bank of America's ability to make such determinations in such a short timeframe.
22
]'hen, on October 27, another large bank entered the fray when Wells Fargo announced that it
had uncovered irregularities in its foreclosure processes and stated that it would submit
supplemental afTidavits in 55,000 foreclosure actions.
23
Meanwhile, as the revelations of irregularities quickly multiplied, some argued that over
and above the banks' and servicers' voluntary actions, the federal government should impose a
naticH1wide moratorium on foreclosures.
24
lIousing and Urban Development Secretary Shaun
l)onovan rejected the idea. arguing that "a national, blanket moratorium on all foreclosure sales
would do l ~ l r more harm than good.,,25 At the same time, on October 13, attorneys general frorn
19 To date. GMAC Mortgage and Bank of America have only resumed foreclosures in judicial foreclosurc
states and are still their plOeedures in non-judicial foreclosure states.
)0 Ally Financial. Inc . (;'111AC Statemcnt on Indcpendcnt Review and Foreclosure Sales (Oct. 12.
2010) (online at media.ally.eom/index .php?s=43&.item'421) (hereinafter "GivIAC Mortgage Statement on
Independent Review and Foreclosure Sales").
)1 Bank of America Corporation. Statcmcnt/i'Oln Bank o(Amcriea J/ome Loans (Oct. 18,2010) (online at
mediaroom. ba nko fillneri ca. com/plloenix. zhtml 'J c ~ 2 3 4 5038qviro1- newsArtic le&[D' 1483909&hi ghli ght_
c
)
(hereinafter "Statement f1'om Bank of America Ilome Loans").
SCI' Written Testimony of Katherine Porter. supra note 14. at 10 ("In the wake of these parties'
longstanding allegations and findings of inappropriate and illegal practices, I alllllnabic to weight to recent
statements by banks sllch as Bank of America that only 10 to 25 of the first several hundred loans that it has
reviewed have pmblel11s.").
'''''''''''1 (/Ilil II/(II)<I(/"e
(hereinafter "\Vells
JJ'c!!s
UCfiee ofSenatnr I ReilL Reid WeiI'll/III'S Bank America Dc'cisioll. On (!tliClS Ii)
10) (online at reid,senate fOl008 b,ulkoEnncriea.c (bereinaJlcr "Reid
Amcriea I)ceision"j: Dean Baker. Foreclosllre ;1IoratoriIll1l' DOll'll on Liar Liens,
"'U"'." "" a11d Researc h 18, 20 I0) at www.eepr.net/i mlex nlllJ!CllHc'(J'I-&. -cIll Ulnlils/on-
-11101'11011 ulll-crae klnL'.' -1I1/)\vll-<.)n-1 iar-I icns) (herei na Iter I. FOiecloslire rvlmatoriulll:
01/ Foreclosllre
Secllrili:::iltion.1 2(10) (online at www.wellslal'l(0.1,:ol'n!ple,;sUOIO/20101027
on !\ Cfidavits and 1Vl0TILl.aLl.e Sel'uriti7ations
('lacking Down on I.iar I.iens").
Sbaun DonovalL secretary, I i.S.
Famifies 18, 20 I OJ at
0-10-1
all 50 states
26
announced a bipartisan effort to look into the possibility that documents or
affidavits were irnproperly submitted in their jurisdictions.
Although the public focus today lies generally on foreclosures, the possibility of
document irregularities in mortgage transactions has expanded beyond their significance to
foreclosure proceedings. Recently, investors have begun to claim that similar irregularities in
origination and pooling of loans should trigger actions against entities in the mortgage
origination, securitization, and servicing industries.
27
D. Legal Consequences of Document Irregularities
The possible legal consequences of the documentation irregularities described above
range from minor, curable title defects for certain foreclosed homes in certain states to more
serious consequences such as the unenforceability of f()l"eclosure claims and other ownership
rights that rely on the ability to establish clear title to real property, f()rced put-backs of defective
mOltgages to originators, and market upheaval. The severity and likelihood of these various
possible consequences depend on whether the irregularities are pervasive and when in the
process they occurred.
Effective transfers of real estate depend on parties' being able to answer seemingly
straighU()lward questions: who owns the propelty? how did they come to own it? can anyone
make a competing claim to it? The irregularities have the potential to make these seemingly
simple questions complex. As a threshold matter, a party seeking to enforce the rights associated
with the mc)rtgage must have standing in court, meaning that a party must have an interest in the
property sufficient that a court will hear their claim and can provide them with relief.28 For a
mortgage, "[a] Illortgage may be en!()rced only by, or in behalf of, a person who is entitled to
National Association of Attorneys General, 50 States Sign Mortgage Forec!osure Joint Stalement (Oct.
13, 20 I 0) (onl ine al www.naag.org/joinl-statement-of.. the-mortgage-foreclosure-ITlultistate-group.php) (hereinafter
"SO States Sign Mortgage Foreclosme Joint Statement").
Cascs involved suits nst Bank of America (as the parent of loan originator Countrywide) claiming
violations of representations and warranties and sought to en{()rce put-back provisions. Cr'rcell1vich Finaneill!
Services Distressed FUlld 3 LLC. Finaneio! et a/., I:O:-l-ev-I I343-IUII (S.D.N. Y. Oct. 15,
201 Limited Trust and OHP Trusl)S. Balik otAmeriea, CV00367 (S.D.N.Y. Oct J,
10)
Sec Stephen R. Buehenrot h and Gretchen U. .IcnJics, Recent Foreclosure Cases.' Lenders BClvare (June
ahanel IVe!!s )'.
JOU!OIl. 914 N. F ~ . 2 d 204 (Ohio ("I I' plaintiff has ol'lercd no evidence that it owned the note and mortga!.',e
when the Iilet!' it would not be entitled tojudgment as a matter of law."): .. ~
Peterson, Foreclosure, ([lid t!le E!eell'ollic !?('(I}s/I'(J/iflll
ufC'incinnati Law Review. Vol. 7:-1, No.4, at 136:-1-1J 1 (Sullllller 201U) (online at
id 14(9749) (hereinafler "C'ineinnati I,aw Review on
)1'('('1",,111""")' MER5'COIU). fill. 1'. :-161 N.L. 2d ill .20(6). Accordingly, a second set of problems
relates to the chain of title on mortgages and the ability of the party to prove that it has standing to
foreclose. Wilile these arc not limited to the securitization market. are acute for securitized
loans because there arc 1110re chain of title issues involved.
14
enforce the obligation the mortgage secures.',Z9 Thus, the only party that may enforce the rights
associated with the mortgage, with standing to take action on a mortgage in a court, must be
legally able to act on the mortgage.
30
Accordingly, standing is critical for a successful
foreclosure, because if the party bringing the f(Jreclosure does not have standing to enforce the
rights attached to the mortgage and the note, that party may not be able to take the property with
clear title that can be passed on to another buyer. 31 Thus, if prior transfers of the mortgage were
unsuccessful or improper, subsequent transfers of the property, such as a foreclosure or even an
ordinary sale, could be affected. Further, failure to foreclose properly - whether because the
foreclosing party did not actually hold the mortgage and the note, or because robo-signing
affected the homeowner's due process rights - rneans that the prior homeowner may be able to
assert claims against a subsequent owner of the property.32 In this way, documentation
irregularities can affect title to a property at a number of stages, as further described below.
29 Restatement (Third) of Prop. (Mortgages) 5.4(c) (1997). Only the proven mortgagee may maintain a
f()reclosure action. The requirement that a foreclosure action be brought only by the actual mortgagce is at the heart
of the issues with foreclosure irregularities. If the homcowner or the court challenges the claim of the party bringing
a f()reclosure action that it is the mortgagee (and was when the f()reclosure was filed), then evidentiary issues arise
as to whether the party bringing the f()ITclosure can in fact prove that it is the mortgagee. The issues involved are
highly complex areas of law. but despite the complexity of these issues, they should not be dismissed as mere
technicalities. Rather. they arc legal requirements that must be observed both as part of due process and as part of
the contractual bargain made between borrowers and lenders.
VI That party must either own the mortgage and the note or be legally empowered to act on the owner's
behal f. Servieers acting on behal I' of a trust or an originator do not own the mortgage, but by contract are granted
the ability to act on behal l' of the trust or the originator. See Federal Trade Commission. Foctsfc)!' COl/sumers
(online at www.ftc.gov/bcp/eduJpubs/eonsumer/homeslrea1 O.shtm) (accessed Nov. 12.20 I0) ("In today's market.
loans and the rights to service them often are bought and sold. In many cases, the company that you send your
pLlyment to is not the company that owns your loan.'"). See also October 20 I 0 SIGTARP Report. supra note S, at
160 (describing clients of
.JI I .aws governing the remedies available to a lender lCrreclosing on a property vary considerably. States
also differ markedly in how long it takes the lender to fiJleclose dcpending on the available procedures. In general,
claimants can seck to recover loan amounts by I(Jreclosing on thc property securing the debt. If the loan is "non-
recoul'se," the lender only may f(rreclose upon the property. but if the loan is "recourse,'" the lender may f(H'eelose
upon the propcrty and other borrowcr assets. Ivlost states are recourse statcs. A loan in a recourse state allows a
mortgagee to f(lIcelose upon property securing a note and, ir that property is insufficient to the
debt. move thc hOllower's other assets. In non-recourse states. rccovery of tile loan amount is limited to the
loan Put her the Icnder cal1not go a ncr the borrower's other assets ina non-recourse state i I' the
property is insuClicient to the debt. It is worth that evcn in recourse states, the current
economic cl imate. the recourse to the bOITO\\Tr's personal assets may be somewhat illusory since they
lIIay' he minimal relative to the and in pursuing and colon a Judgments. See Andra C.
(;hent and Iv! arianna Recourse alld Residcll!iai alld E\'idellcc US S!a!cs.
Fedeml Reservc Bank of Richmond at
.1 ilt a.lIO'Vlevel'li i1csll 5051 Iwcbsi te ghent. pd f).
1... ,ci,,,,I,,, Lewis Peterson, associate deal) fill acadcmic artilirs and pnliessiJrof
of Law, Uni of Utah. conversations with Panel stafT (Nov. 8, 20 I0),
S..J. Quinncy
IS
I. Potential Flaws in the Recording and Transfer of Mortgages and Violations of
Pooling and Servicing Agreements
a. Mol"tgage Recordation, Perfecting Title, and l'ransferrillg Title
I. Title
The U.S. real property market depends on a seller's ability to convey "clear title": an
assurance that the purchaser owns the property free of encumbrances or competing claims ..J.J
Laws governing the transCer of real property in the United States were designed to create a
public, transparent recordation system that supplies reliable information on ownership interests
in property. Each of tbe 50 states bas laws governing title to land witbin its legal boundaries.
Every county in the country maintains records of who owns land there, of transfers of ownership,
and of related mortgages or deeds of trust. Whi Ie each state's laws have uniq ue features, the ir
basic requirements are the same, consistent with the notion that the purpose of the recording
system is to establish certainty regarding property ownership. In order to protect ownership
interests, fully executed, original (coml11only referred to as "wet ink") documents must be
recorded in a grantor!grantee index at a county recording ofIice.
34
In the case of a purchaser or
transferee, a properly recorded deed describing both the property and the parties to the transfer
establ ishes property ownership.
II. Transfer
In a purchase of a home using a mortgage loan, required documents include (a) a
promissory note establishing the mortgagor's personal liability, (b) a mortgage evidencing the
security interest in the underlying collateral, and (c) iI' the mortgage is translCrred, proper
assignments of the mortgage and the note..J5 'fhere are a number of ways for a mortgage
Black's L,aw Diclionary, at 1522 (2004).
J4 See Cincinnati Law Review Paper on hJI'eclosure supra note 28.
There are two documents that need to be transferred as part of the securitization proccss - a promiss01Y
note and thc security instrumcnt (the mortgagc or deed of trust). The promissory note embodies the debt obligation,
while the security instrument provides that if the debt is not repaid, the creditor may sell the designated collateral
(the Both the note and the mortgage need to be properly transferred. Without the note, a mortgage is
unent()rceable, while without the mortgage, a note is simply an unsecured debt obligation, no different fi'om credit
card debt. Sec FBR Foreclosure Mania Conference Call, supra note 3. The rules for these transfers arc generally
governed the Unil(lI'In Commercial Code (UCC), although onc author statcs that thc application of the UCC' to
the tr:mslCr of the note is not ccnain. Dale A. Whitman. !lOH' lias Foulcd Ihe )'C('iIl7,-!aIT
1",'I,,,ro, Marker. alld WIIilI {O Do .[bow !t, L,aw Review. Vol. at 758-759
Statcs articlcs 01' and revisions tel the liCe IIldividually, :lIld so there can be variation among states in
the application of the liCe. This report does not attempt to identi(y all of the possible iterations. )l,atheL it
describcs :lIId c<)ml1lon applications of the UCC' to such transactIOns,
There are methods whieh a note may be transkrred. First, it may be transferred by
ion." the over of individual notes through indorscment, in the same way that a check
can be tJallslCrred via indorsement. Sec UCC ~ ~ 3-20 L 3-203. The pooling and servicing agrecments (PSAs) for
sceuritized loans contemplate transFer through negotiation. Typical language in PSAs rcquires the
originator to proceed upon entering into a loan secured by real property. They may keep the loan
on their own books; these arc so-called "whole loans." Flowever, if the loan is sold in a
secondary market either as a 'vvhole loan or in a securitization process - the loan must be
properly transferred to the purchaser. To be transferred properly, both the loan and
accompanying documentation must be transferreclto the purchaser, and the transfer must be
recorded.
delivery to the securitization trust of the notes and the mortgages, indorsed in blank. Alternatively, a promissory
note may be transferred by a sale contract, also governed by whether a state has adopted particular revisions to the
Uec. In rnany states. in order for a transfer to take place under the relevant portion of the uee, there are only three
requirernents: the buyer of the promissory note must give value, there must be an authenticated document of sale
that describes the promissory note, and the seller must have rights in the promissOlY note being sold. uee ~ 9-
203(a)-(b).
The first two requirements should be easily met in most seeuritizations; the transfer of the mortgage loans
at each stage of the securitization involves the buyer giving the seller value and a document of sale (a mortgage
purchase and sale agreement or a PSA) that should include a schedule identifying the promissory notes involved.
The third requirement, however. that the seller must have rights in the promissory note being sold, is more
complicated. as it requircs an unbrokcn chain of title back to the loan's originator. While the loan sale documents
plus their schedules are evidence of such a chain of title, they cannot establ ish that the loan was not previously sold
to another party.
Furthcr. this discussion addresses the validity of transfers betwccn sellers and buyers of mortgage
loans. It docs not address the enforceability of those loans against homeowners. whieh requires physical possession
of the original note. Thus, for both securitized and non-securitized loans, it is necessary for a party to show that it is
entitled to enforce the promissory note (and therefore generally that it is a holder oftbe physical original note) in
order to complete a foreclosure successfully.
Perhaps more critically. parties are /J'ee to contract around the Uec. uee ~ 1-302. This raises the
qucstion ofwhcther PSAs fe)r MBS provide for a variancc Ii'om the !Jee by agreement of the parties. The PSA is
thc document that provides felf' the transfer of the mortgage and notes from the securitization sponsor to the
depositor and thence to the trust. The PSA is also the document that creates the trust. The transler fl'OIn the
originator to the sponsor IS Iy a separate document. although sections of it may be incorporated
reference in the PSA.
IT a I'SA is considered a variation agrccmcnt hom the \ ICC, then there is a question of what the PSA
itself to transler the mortgage loans and whether thosc requirements have been met. In some cases. PSAs
appear to require a complete chain of indorsemcnts on the notcs from originator up to the dcpositor with a final
ilHlorscmcllt ill blank to tbc trust. A chain of illdorsemellts. rather than a sillglc indorsemcllt in blank with
tbe notes transferred thereafter as bearer paper. is importallt for establishing the "bankruptcy remoleness" oUhe trust
assets. ;\ critical p,lrt ofseclll'itization is to establish that the trust's assets arc bankruptcy remote. meaning that
could not be clanned the eslatc of an upstream transferor of the assets. Without a complete chain of
imhllsements. it is difTieult, if not impossible. to estabhsh that the loans were in fact transferred hom originator to
sponsor to to trust. rather than Ii'om originator or sponsor to the trust. If the transl'er were directly
110111 the nator 01' sponsor to the trust. the loans could be claimed as part of tile (s or
eslate. The about what the transfers required. therefell'e. involve both the question as
tlansl'crs as well as whether, if werc legally
17
iii. Mortgage Securitization Process
Figure I: Transfer of Relevant Paperwork in Securitization Process
36
Mongage
OrigirHltor
Sewritization
Sponsor
Securitization
Trust
Depositor
sells MBS to
Underwriter
for pubnc safe
1rust issues H
MBSto
Depositor
Securitizations of mortgages require multiple transfers, and, accordingly, multiple
assignments. Mortgages that were securitized were originated through banks and mortgage
brokers- mortgage originators. Next they were securitized by investment banks ~ the sponsors ~
through the use of special purpose vehicles, trusts that qualify for Real Estate Mortgage
Investment Conduit (REM Ie) status. These trusts arc bankruptcy-remote, tax-exempt vehicles
that pooled the mortgages transl'erred to them and sold interests in the income jJ'om those
mortgages to investors in the !()rm of shares. The pools were collateralized by the underlying
real property, because a mortgage represents a first-lien security interest on an asset in the pool
a house.
n
A governing document for securitizations called a pooling and servicing agreement
(PSA) includes various representations and warranties for the underlying mortgages. It also
describes the responsibilities of the trustee, who is responsible f()f' holding the recorded mUligage
\(, FBI< Foreclusure Mania Cunf'erenee Call, slipm note J.
Fur all overview 01' RIM
at
,ICC Federal National "",r"""'., Assuciation, Bosin
). Scc 0/,10 Internal Revenue
!1.1",-I,,,,,,,, /nvcsll7lcnl COlldllilS, 26 CFR I 1 1(95) at
wvvw.Ir.<;"llvilJu!Jilll'SI'CPs/I,:lSilI4,txt}. Only the MBS investors arc taxed on their incume from the trusts' paymenls
on the MIlS. RIMIC\ arc u"",,,,,,,j to be passive entities. \Vith few a RFJvl!C may nut
receive new ;lssets aner 90 have passed sim-c its creation. ur there will be adverse tax consequences. Thus. if a
IransfCr of a loan not done in the lirsl proper transfer nuw euuld endanger the RI:I'vllC slat us.
For an overview of residenlial seeUlities in .ICC American Sccuritizatiun Furuill. ASP
ScclIl'ili::olio/i /l/sliIIiIC. Residcl/liol ScclII!rics al
18
docurnents, and of the serviceI', who plays an administrative role, collecting and disbursing
mortgage and related payments on behalf of the investors in the MBS.
As described above, in order to convey good title into the trust and provide the trust with
both good ti tie to the collateral and the income from the mortgages, each transfer in this process
required particular steps.38 Most PSAs are governed by New York law and create trusts
governed by New York law.
39
New York trust law requires strict eOlnpliance with the trust
documents; any transaetion by the trust that is in contravention of the trust documents is void,
Ineaning that the transfer cannot actually take place as a matter of law.
40
Therefore, if the
transfer for the notes and mortgages did not comply with the PSA, the transfer would be void,
and the assets would not have been transferred to the tmst. Moreover, in many cases the assets
could not now be transferred to the trust.
4
! PSAs generally require that the loans transferred to
the trust not be in default, which would prevent the transfer of any non-performing loans to the
trust now.
42
Furthermore, PSAs f1'equently have timeliness requirements regarding the transfer
in ()rder to ensure that the trusts qualify for favored tax treatment.
43
Various commentators have begun to ask whether the poor recordkeeping and error-filled
work exhibited in f()reclosure proceedings, described above, is likely to have marked earlier
stages of the process as well. If so, the effect could be tbat rights were not properly transferred
during the securitization process such that title to the mortgage and the note might rest with
another party in tbe process other than the trust. 44
IV. MEJZS
In addition to the concerns with the securitization process described above, a method
adopted by tbe mortgage securitization industry to track transfers of mortgage servicing rights
bas come under question. A mortgage does not need to be reeorded to be enf()ITeable as between
the mortgagor and the mortgagee or subsequent transferee, but unless a mortgage is recorded, it
does not provide the mortgagee or its subsequent transferee with priority over subsequent
l S " , " " ~ ' - " ) or lien holders.
45
,8 See Section [).l.a.ii, Sli/ira.
FUR Forcclosure Mania Conference Call. supm note J.
,HI N.Y. Est. Powers & Trusts Law I:i 72.'1; FBR Foreclosure Mania Conference Call, SlI/JI'U note J.
,11 FBR Foreclosure Mania Confcrencc Call. .IU!ml notc 3.
JuslirUl/ee
Insurance
onlDI<lInt at Exhibit 5. page 13.
No. 09CV- I (,56 (I) DC'
Jelli'''{'lle Bunk Na/iona! hus/ \' Federal/J'IJIJ""
8.20 I0) (hereinatler "Ilcutsehc Bank . Federal F)cposit
FBi<. hllcc!osure Mania Confercnce Call. supra note 3.
e.g.. FIlR FOleclosure l'vlania Conferencc Call. SlifJI'CI no(e 3.
Resta(eilicul (Third) of Prop. I:i 5.4 cmt. 13 (I
19
During the housing boom, multiple rapid transfers of mortgages to facilitate securitization
I I
I' ., d' I' I 46
ma( e recor( atlon 0 mortgages a more tlme-COnSUll1lng, an expensIve process t lan 111 t le past.
'ro alleviate the burden of recording every rnortgage assignment, the mortgage securitization
industry created the Mortgage Electronic H.egistration Systems, Inc. (MERS), a company that
serves as the rnortgagee of record in the county land records and runs a database that tracks
ownership and servicing rights of mortgage loans.
47
MERS created a proxy or online registry
that would serve as the mortgagee of record, eliminating the need to prepare and record
subsequent transfers of servicing interests when they were transferred from one MERS member
to another.
48
In essence, it attempted to create a paperless mortgage recording process overlying
the traditional, paper-intense mOligage tracking system, in which MERS would have standing to
initiate foreclosures.
49
MERS experienced rapid growth during the housing boom. Since its inception in 1995,
66 million mortgages have been registered in the MERS system and 33 million MERS-registered
loans remain outstanding. 50 During the summer of 20 10, one expert estimated that MERS was
involved in 60 percent of mortgage loans originated in the United States. 5 I
Widespread questions about the efficacy of the MERS model did not arise during the
boorn, when home prices wcre escalating and the incidence of foreclosures was minimal.
52
But
as foreclosures began to increase, and documcntation irrcgularitics surfaced in some cases and
raised questions about a wide range of legal issues, including thc legality of foreclosurc
proceedings in general, some litigants raised questions about the validity of MERS. 54 There is
46 Christopher Lewis Peterson, associate dean fix academic affairs and professor of law, S..J. Quinney
College of Law, University of Utah, conversations with Panel staff (Nov. 8, 2(10).
MERS conversations with Panel staff (Nov. 2(10). See Christopher Lewis Peterson, Two Faces:
f)emysti(l;ing the Electronic Registration Svstem's Land Title TheolY, Real Property, Probate, and Trust
Law Journal (forthcoming) (onl inc at 1(84729).
1S TvlE:RS convcrsatiolls with Panel stall (Nov. 10, 20 I 0); John R. llodge and Laurie Williams, /Yiort,gagc
Electu)/lic Inc.. II ,)url'e)' Dlscllssing AIERS" AlIflwritv tu AeI, Norton Bankruptcy
Law AdvisCL at 2 2010) (hereinalier "A Survey ofCascs Discussing MERS' Authority to Act').
'\<) i'v1cmbers pay an annual ree and $6,95 for every loan registered, versus approximately $30
in rees lilr Illing a mortgage assignment at a local county land office. MEJZSCOIZP,lnc., Kif (OeL
(onl inc at www.mersillc,org/rnembership/WinZip/M ]:RSeRegistryMembersllipKiLpdf); Cincinnati La \AI
Review Paper on Forec slllim nole 28, at 1368-1371. 5'ec alsu j\iERSCORP. flit'. 1'. ROllwille, 861 N.I'" 2d 81
(N.V
Iv!U-(S cOilversatlUns wilh Panel slall 10.201
I ('incillll,lli 1 al\! IZnil'\\ Oil Forcclosurc, slIpra i10le 28, at 1362.
See A ofCases Diseussillg MERS AUlhority to Act, SIlf!1O note 48, al J.
For instance. ill a session during a recent call with investors. Jamie Dimon.
(TO and chairl11an 01'.1 ('hase. said that the 111'111 had stopped MERS "a while back," JP!'v1organ
Chase & Co.. Ii ('oil (OeLI3,2010)(onlineat ,com/earn-O/earnings--
I 1 .shUnl) (hereinaller "Q3 20 I0 Earnings Call Transcript"). See also
20
limited case law to provide direction, but some state courts have rendered vcrdicts on the issue.
In Florida, for example, appellate courts bave determined that MERS bad standing to bring a
foreclosure proceeding. 55 On the other hand, in Vermont, a court determined tbat MERS did not
I d
56
lave stan mg.
In the absence of more guidance from state cOUlis, it is difficult to ascertain the impact of
the use of MERS on the foreclosure process. The uncertainty is compounded by the fact that the
issue is rooted in state law and lies in the bands of SO states' judges and legislatures. If states
adopt the Florida model, tben the issue is likely to bave a limited efTecL However, if more states
adopt the Vermont model, then the issue may complicate the ability of various players in the
securitization process to enforee foreclosure liens.
57
If suffieiently widespread, these
complications could bave a substantial eflect on the mOligage market, inasmuch as it would
destabilize or delegitimize a system that bas been embedded in tbe mortgage market and used by
multiple participants, both government and private. Although it is impossible to say at present
what the ultimate result of litigation on MERS will be, holdings adverse to MERS could have
significant consequences to the market.
If courts do adopt the Vermont view, it is possible that the impact may be mitigated if
ITJarket participants devise a viable workaround. For example, according to a report released by
Standard & Poor's, "most" market participants believe that it may be possible to solve any
MElZS-related problems by taking the mortgage out of MERS and putting it in the mortgage
.lPM on MERS. supra note 3. This. however. related only to the use of MFRS to foreclose. MERS
conversations with Panel stafl 10,2(10).
54 See Cincinnati Law Review Paper on Foreclosure. supra note 28. Cases addressed questions as
to standing and as to whether, by separating the mortgage and the note, the mortgage had been rendered invalid (OIUS
invalidating the security interest in the property). Sec A Survey of Cases Discussing MERS' Authority to Act. supra
note 48, at 20-2 I ("These intcrpretivc problems and inconsistcncies have provoked some courts to determine the
worst possible fate for secured loan that their mortgages were not effectively transferred or even that the
mOl tgages have been separated liom the note and are no longer enforceable.... '-'/hether the [vIERS construct holds
water is bei ng robustl y tested ina variety of eontex ts. Given the pervasi veness 0 f !vi FRS, if the construct is not
viable. illvlLJZS cannot file j()reelosures, and. perhaps most importantly. cannot even record or execute an
as,;lgllll1ent of a mortgage. what then?").
;)ec \'. ;I::i::e. 9ilS So. 2d 151 (Fla. Dist. Ct.
of Cases Discussing MEIZS' Authority to Act. supra note at 9.
Sec also A
\' . .!o/ill.\iOll, No. Rdcv (Rutland Vl.. (Jet. 2X,
delcnninlng Ihal ivlLRS did flol have standing 10 initiale the f()leclosurc because Ihe nole and mortgage had heen
IvlLRS used the most active in (he securitization market including the banks
Bank of /\lI\ellca. Chase. Wells Citigroup. and Fannie Mae and Freddie Mac), and
ll!<lCC'ssc'd ilO percent of'all MBS. MFRSC()RP. 11\(: .. SliT/hUll Beco!7les Ihird ['I'm'ide!' ill
f(eccT/I !\Iolli/is 10 MERS (Mar. IX. 2DID) (onlinc at
.lnCISU delai i(235). (0 MIRS. il has acled as the party roreclosiug
ror one in five of' the delinqnent 1I\00tgages on its syslem. Iv! FRS conversations with Panel slalT (Nov. I D. 20 10).
21
owner's name prior to initiating a f<Jreclosure proceeding.
58
According to one expert, the odds
that the status of fv1ERS will be settled quickly are IOW.
59
b. Violations of Representations and \Varranties in the PSA
60
Residential mortgage-backed securities' PSAs typically contain or incorporate a variety
of representations and warranties. These representations and warranties cover such topics as the
organization of thc sponsor and depositor, the quality and status of the mortgage loans, and the
validity of their transfers.
More particularly, PSAs, whose terms are unique to each fv1 BS, include representations
and warranties by the originator or seller relating to the conveyance of good title,61
I
. f' I I 62 I . . I d 63 I' . I I' hi I 64 I
(OCIIITlcntatlon or t le oan, une erwntmg stane ar s, . comp lance WIt 1 app lea. e aw, ane
58 See S&P on Foreclosure Crisis, supra note 17.
Christopher Lewis Peterson, associate dean fiJr academic afhirs and professor of law at the S..!. Quinney
College of Law at the University of Utah, conversations with Panel staff (Nov. 8,20 I0).
60 This section attempts to provide a general description of put-backs. Put-backs have been an issue
throughout the linancial crisis, typically in the context of questions about underwriting standards. See. e.g., Federal
National Mortgage Association, Form 1O-Kfiilthe Fiscal Year E'ndcd Decemher 3 I, 2009, at 9 (Feb. 26, 20 I 0)
(online at www..scc.gov/Archives/edgar/data/310522/000095012310018235/w77413el0vk.htm) ("As delinquencics
have increascd, wc havc accordingly increased our rcviews of dclinquent loans to uncovcr loans that do not meet our
underwriting and eligibility rcquircments. As a result. we have increased the number of demands wc make for
lenders to repurehasc these loans or compensate us fClr losses sustained on the loans. as well as requests fc)!'
repurchase or compensation for loans f(lr which the mortgage insurer rescinds coverage."). Documentation
irregularities may provide an additional basis f()r put-backs. although the viability of these put-back claims will
depend on a variety of deal-specific issues. such as the particular representations and warranties that were
ineorporatcd into the I'SA, whieh in turn often are related to whether the MBSs are agency or private-label
securities. Although private-label MBS PSAs typically includcd weaker representations regarding the quality of the
loans and underwriting, they still contain representations regarding proper transfer of the documents to the trust.
1,1 Failure to transfer the loans properly would create two sources of liability: one would be in rendering the
owner of the mortgage and the note uncertain, and the other would be a breach of contract claim under the PSA. For
an example of typical in representations and warranties contained in PSAs or incorporated by reference
['10m mOl tgage loan purchase agreements executed by the mortgage originator. sec Deutsche Bank v. r"ederal
IJcposit Jnsulance Corporation, sUj!ra note 42 (" ... and that immediately prior to the transf'er and assignlllent of the
Mortgage Loans to the Trustee, the Depositor was the sole owner and had good title to each Mortgage Loan, and had
full right to transf'er and sell each Loan to the Trustee fi"ee and clear. ").
Sec Ikutsche Bank . Federal Insurance SUj!1"<i note 42 ("[ach Mortgage Note. each
each and any other document rcquircd to be delivcred or on behalCofthe Seller under this
I1n'CllleI11 or the and t.o the Purchaser or any transkree or of the
Purchaser i()i each I.oan has been or will be . " delivercd to thc Purchaser 01 any such transf'erce
01 'vVith respect to each Loan. the Seller is in ofa rile in
eOlllpllallcc with the and The Note and the related are gelllline.
and each is the valid and binding obligation of the enf()lccable against the by the
mortgagee or its In accordance with its terms, except as such enlc)lcement may be limited
hankrnptcy, ..")" These replesentations and warranties state that the documcnts submitted it)!"
loan underwriting IVere not liJisified and contain no untrue statement of material f;ICt or olllit to state a material f;ICt
Icquiled to be stated thcrein and ale not misleading and that no errOl, omission, misrepresentation, or
fi'aud occurred in the loan's oligination or insurance.
22
I I
j' -I (,,, 1 I . ('1, I d l' . 1 1'1 .
(e Ivery 0 mortgage lIes, . among ot leI' t 11l1gS. n a (ltIon, t le mortgage 1 es must contain
specific loan and mortgage docurnents and notification of material breaches of any
representations and warranties.
If any of the representations or warranties are breached, and the breach materially and
adversely aJTects the value of a loan, which can be as simple as reducing its market value, the
offending loan is to be "put-back" to the sponsor, meaning that the sponsor is required to
repurchase the loan for the outstanding principal balance plus any accrued interest.
67
If successfully exercised, these put-back clauses have enormous value fl.)!' investors,
because they permit the holder of a security with (at present) little value to attempt to recoup
some of the lost value from the originator (or, if the originator is out of business, the sponsor or a
successor). Put-backs shirt credit risk from MBS investors to MBS sponsors (typically, as noted
above, investment banks): the sponsor now has the defective loan on its balance sheet, and the
trust has cash fe)r the full unpaid principal balance of the loan plus acerued interest on its balance
sheet. 68 This means that the sponsor may have to increase its risk-based eapital and will bear the
(,] Sec Deutsche Bank v. Federal Deposit Insuranec COIvoration, supra note 42 ("Each Mortgage Loan was
underwritten in accordance with the Seller's underwriting guidelines as described in the Prospectus Supplemcnt as
applicable to its credit grade in all material respects."). Many concerns over underwriting standards have surfilCed in
the wake of the housing boom, such as lack of adequate documentation, lack of income veri tieation,
misrepresentation of income and job status, and haphazard appraisals. l:ven be1(we the more recent emergence of
the issue of document irregularities. institutions were pursuing put-back actions to address conccrns ovcr
underwriting quality. See Federal National Mortgage Association, Furm ! O-Qji)r the Quarter/v Periud Ended .l1I11e
30, 20!O. at 95 (Aug. 5, 2(10) (online at
www.see.gov/Arehives/edgar/data/3 10522/00009501231 0073427/w79360e I Ovq.htlll) ("()ur mortgage
seller/servicers are obligated to repurchase loans or f(lreelosed properties, or rcimburse us for losses if the foreclosed
property has becn sold, if it is determined that thc mortgage loan did not meet our underwriting or eligibility
requirements or if mortgage insurers rescind coverage.
(,4 See Deutsche Bank v. Federal Deposit Insurance CorporatioJl, supm note 42 ("Each Mortgage Loan at
origination complied in all malerial respects wilh applicable local, stale and federal laws, including, without
limitation, predatory and abusive lending, usury, equal credit opportunity. real estate settlement procedures, truth-in-
lending and disclosure laws, and consummalion of the transaclions cOIltemplated hereby, including without
limitation the receipt orinlerest docs not involve the violation of any such laws.").
(" ,Sec Deutsche Bank v. Federal Insurance CorporatiolJ, .Ii/pm note 42.
or representations and warranties,
"/))'1/,11'" 16, )OU5, at [':x. lJ9,2
New Century Ilome Equity Loan Trust. F(}Im S,K
I I, 20(5) (online al
the Fiscu/ Year Ended f)cccmher 3J, 2UIW al 131 (Feb
(\ n: 11I'ves/cclgaricLata/iU 100 1/00012067741 0000406/citi 10k, htm) (herei na Itcr
10- K"). I lowe vel', since every deal is di tTeren!. there arc a number of di flerent Inethods f()I'
tlngUlslllng a claim lhal may nol the actual repurchasing of the loan. InduslI'Y
experts conversations with Panel slall 9.20J
'iIi",.,,,,,, Form I
supra note 67, at J31.
risk of future losses on the loan, while the trust receives 100 cents on the dollar for the loan.
69
Not surprisingly, put-back actions are very fact-specific and can be hotly contested.
7o
Servicers do not often pursue representation and warranties violations. A 20 I0 study by
Amherst Mortgage Securities showed that while private mortgage insurers were rescinding
coverage on a substantial percentage of the loans they insured because of violations of very
similar representation and warranties, there was very little put-back activity by scrvicers, even
though one would expect relatively similar rates.
71
One explanation for the apparent lack of
servicer put-back activity may be the possibility of servicer conflicts of interest. Servieers are
often affiliated \vith securitization sponsors and therefore have disincentives to pursue
representation and warranty violations. Trustees have disincentives to remove servicers because
they act as backup servicers and bear the costs of servicing if the servicer is terminated from the
deal. Finally, investors are poorly situated to monitor servicers. Whereas a securitization trustee
could gain access to individual loan files but typically do not
n
investors cannot review loan
files without substantial collective costs.
73
On the other hand, investor lawsuits have the
potential to be lucrative for lawyers, so it is possible that some investor groups may take action
despite their limited access to information.
74
2. Possible Legal of the Document Irregularities to Various Parties
In addition to fraud claims, discussed further below, and claims arising liOln whether the
loans in the pool met the underwriting standards required (which is primarily relevant to
(ii Wells Fargo & Company, Together /;Ve '/I (;'0 F'ar: Wells Fargo & Company Annual Rcport2008, at 127
(online at www,wellsrargo,eol1l/downloads/pdlJinvest reiations/wf2008annualreporLpdf) ("In certain loan
sales or seeuritizations, we provide recourse to the buyer whereby we are required to repurchase loans at par value
plus accrued intcrest on the oecurrcnce of ccrtain credit-related events within a certain period of time,").
10 Compass Point Research & Trading, LLC, Repurchascs Part lJ: Private Labe! RMBS !nvestors
lil/,c Aim- Quanti/villg thc Risks (Aug. 17,2010) (online at
api,ning,colniflles/fiCVZyzNTkoAzUdzhSWYNullv33*UrSZYBh3S08zo*phyT79SFiOIC)pPG7kIHe3h8RXKKyp
hNZqqytZrXQKbMxv4R3F61N5d1l36431 I 13MortgageFinanceRepurchasesPrivateLabel08 I 720 10,pdf),
Amhersl Morlgage Insight, PM! ill Sccuritialtiolls, at 4 (July 16,20 I0) ("PMI companies
have beeollle Illore assertive in rescinding insurance", In since early 2009. option ARM recoveries have
averaged 4(J':/,. Alt-A recoveries averaged ,15':0, prime recoveries averaged 58'!';,. and suhprinle recoveries
Securitizalion trustees do not examine and monitor loan flies ror representation and warranty violations
and l'ellcr,I1lv exercise very little of scrvicers, Securitization trustees arc not general fiduciaries; so long as
Illere l1as not been an event of del;mlt [1Jr tile securitization trust. tile trustee has narlOwly (1cllned contractual duties,
alld 110 oll1ers, Seeurililatiolltrustees arc also paid lill' too little to fund active Irustees generally receive
1 basis or less on Ihe principal balance in tile trust. III addiilon. securilization trustees often
receive subSialitial amounts of husiuess from particular sponsors. whicl1l1lay a disincentive [111' them to
pursue and walTallty violations those Nixon LLP. in
tli" . S""illlti.:llliulI li'ilsl""s lind I/i(' CTisis (Jan, 20 I0) (online at
detail3 J 131) the role of the truSiec in
;)ectloll D2.
Sec Seclion D,2.
24
investors' rights nfput-back and bank liability), the other primary concern arising out of
document irregularities is the potential failure to convey clear title to the property and ownership
oI' the mortgage and the note.
There are two separate but interrelated forms of conveyance that may be implicated by
documentation irregularities: conveyance of the mortgage and the note, and conveyance of the
property securing the mortgage. The foreclosure documentation irregularities afTect conveyance
of the propeliy: if the foreclosure was not done correctly, the bank or a subsequent buyer may
not have clear title to the property. But these f()reclosure irregularities may also be further
compromised by a f'Lliiure to convey the mortgage and the note propcriy earlier in the process. I f ~
during the securitization process, required documentation was ineomplete or improper, then
ownership of the mortgage may not have been conveyed to the trust. This could have
implications for the PSA - inasmuch as it would violate any requirement that the trust own the
nlortgages and the notes - as well as call into question the holdings of the trust and the collateral
underlying the pools under common law, the UCC, and trust law.
75
The trust in this situation
may be unable to enf(xce the lien through f()reclosure because only the owner of the mortgage
and the note has the right to foreclose. If the owner of the Inortgage is in dispute, no one may be
able to f()reclose until ownership is clearly established.
If it is unclear who owns the mortgage, clear title to the property itsel I' cannot be
conveyed. I ! ~ for example, the trust were to enf()ITe the lien and foreclose on the property, a
buyer could not be sure that the purchase of the f()recIosed house was proper if the trust did not
have the right to f(lreclose on the house in the first place. Similarly, if the house is sold, but it is
unclear who owns the mortgage and the note and, thus, the debt is not properly discharged and
the lien released, a subsequent buyer may find that there arc other claimants to the property. In
this way, the consequences of f()reclosure docunJentation irregularities converge with the
consequences of securitization documentation irregularities: in either situation, a subsequent
buyer or lender may have unclear rights in the property.
These irregularities may have significant bearing on many of the participants in the
mortgage securitization process:
.. Parties to \Vholll a Mol"tgage and Note Is Transferred Ira lien was not
"perf - filed according to appropriate procedures participants in the transfer
process Illay no longer have a first-lien interest in the property and may be unable to
en that against third-parties (and, where the property has little value, particularly
in non-recourse jurisdictions, may not be able to recover any Illoney). Similarly, if
[\ll00,t I'SAs are on\/('nl('l!
New York trust law and contain proVisions that override uce Article 9
J11('IV""l1fl, Oil secured transactions. Ihis report does not attempt to describe dclc.'ct that may
arise out of the IITc'j!ullantIes partIcularly the nature of the but addresses
aq2.11lllellts COllllllOli to thc CUITent discllssions. In addition, the Panel takes 110 un whet Iter any of these
arguments are val id or to sllcceed.
25
the notes and mortgages were not properly transferred, then the party that can enforce
the rights attached to the note and the mortgage right to receive payment and right
to foreclose, among others may not be readily identifiable. If a trust does not have
proper ownership to the notes and the mortgage, it is unclear what assets are actually
. I 'j' 76
ll1 t le trust, I any.
Sponsors, Servicers, and Trustees - Failure to follow representations and warranties
found in PSAs can lead to the removal 0 f servicers or trustees and trigger
indemnification rights between the parties.
77
Failure to record mortgages can result in
the trust losing its first-lien priority on the property. Failure to transfer mortgages and
notes properly to the trust can affect the holdings of the trust. If transfers were not
done correctly in the first place and cannot be corrected, there is a profound
implication for mortgage securitizations: it would mean that the improperly
transferred loans are not trust assets and MBS are in not backed by some or all of
the mortgages that are supposed to be backing them. This would mean that the trusts
would have litigation c1airns against the securitization sponsors f()J' refunds of the
value given by the trusts to the sponsors (or depositors) as part of the securitization
transaction.
7R
If successful, in the most extrerne scenario this would mean that MBS
trusts (and thus MBS investors) could receive complete recoveries on all improperly
transferred mortgages, thereby shilling the losses to the securitization sponsors.
79
The competing claims about MERS can also factor into these issues. IfMERS is held not to be a valid
recording system, then mortgages recorded in the name ofl'vlERS may not have first priority. Similarly, iflVIERS
does not have standing to foreclose. it could cast into question !()reclosures done by !VIERS.
77 It should be noted that while no claims have been made yet based on an alleged breach of representations
and warranties related to lhe translt,r ofti(le, claims have beellmade based on allegations of poor underwriting and
loan pool qnality. See Buckingham Research Group. Conj(,/"(>!7ce 7ilkeawavs on Mougage Repurchase Risk. at 2
(Nov. 4. 20 I0) (hereinaller "Buckingham Research Group C'onfercnce Takeaways"). However. there is a possibility
that there will be put-back demands f()r breaches of representations and warranties relating to mortgage transfers.
Because the REI'v1JC status and avoidance of double taxation (trust level ami investor level) is so critical
to the economics of securitization deals. the PSAs that govel"l1 the securitization trusts are replete with instructions to
servicers and trustees to protect the REMIC status. including provisions requiring that the transfers of the mortgage
loans oeeur within a limited time aller the trust's creation. See, e.g.. Deutsche All-A Securities.
Inc., , 'Veils Fargo Bank. National Associalion, Alaster ServiceI' and Securilies Administralor, and ffSBC
Bank USA. NatlO/wl Associalion. 'huslee, Pooling and (Sept. I. (onl inc at
\vww.seci nl<Jcom/d I 312 ] ,v] B7.d .htm# I
)<) If a signi licant number of loan transfers jililed to comply with governing PSAs. it would mean that
slleable losses 011 Inol'tgages would rest on a handful of banks. rather than being spread among NIBS investors.
Sometimes the sceuritization sponsor indemmficd the j()r any losses the sponsor incurs as a result of
the breach of and warranties. Id at scction I (UJ3, This indemni fication is valuable.
howevcr. to the ex tent that thc has su ffieient assets to cover tile indemnification. arc
and others have ceased or liled for bankruptcy, in many cases. any put,baek
liabi IS to rest on the securitization sponsors. these sometimes entitle the trust
to the value of the loan any payments received. plus interest. the value the trust would reccive is
still greater current value of llJany of these loans. As a number of and sponsors were acquired
other tinanClal institutions 2008-2009. liability has become even more !,,lCused on a
relatively small number of important financial institutions. Financial Crisis Inquiry Commission.
26
Successful put-backs to these entities would require them to hold those loans on their
books. Even iI' the mortgage loans are sti II valid, enf(Jrceable obligations, tbe
sponsors would (if regulated for capital adequacy) be required to hold capital against
tbc mortgage loans, and might have to raise capital. If these banks were unable to
raise capitaL it might, again, subject tbern to risks of insol vency and threaten the
system.
BOITo,"vel's/holllcowners - Borrowers may have several available causes of action.
'They may seek to reclaim foreclosed properties that have been resold. They may also
refuse to pay the tlUstee or serviceI' on the grounds that these parties do not own or
legitimately act on behalf of the owner of the mortgage or the note. so In addition,
they may defend themselves against f()reelosure proceedings on the claim that wbo-
signing irregularities deprived them of due process.
Later Purchasers Potential home-buyers may be concerned that they are unable to
determine definitively whether the home they wish to purchase was actually
eonveyed with clear title, and may be unwilling to rely on title insuranee to proteet
them.
s,
Financial institutions that may have been interested in buying m011gages or
mOligage securities may worry that the current holder of the mortgage did not
actually receive the loan through a proper transfer.
.. Invcstors Originators of mortgages destined for mortgage securities execute
mortgage loan purchase agreements, incorporated into PSAs, that, as mentioned
earlier, rnake representations and warranties the breach of vvhich can result in put-
back rights requiring that the mortgage originator repurchase defective mortgages.
MBS investors may assert claims regarding issues that arose during the origination
and securitization process. For instance, they may assert that violations of
underwriting standards or faulty appraisals were misrepresentations and material
omissions that violate representations and warranties and may, in some cases where
the necessary elements are established, raise fraud elaims.
s2
They may also raise
issues about the validity of the RHvlIe, the bankruptcy-remote, tax-exempt conduit
that is central to the mortgage securitization process. A potential investor claim is
iUnrlo,'!op C'lisis, at 13 (Apr. 7. 20 I0) (online at
ICI(:.lcuw/:reDorls/D,dls/2010-0407Preliminary Staff Report Securitization and thc
of' the top 25 sponsors ill 2007 have sillce been (lverall. recovery is
uea [.. nv-uear basis.
Crisis.pd!)
to be
noted above. the servicer does not oIVn the mortgagc alld the note. but has a contractual to
enforce the associated IVlth the mortgage and the Ilote.
xr The cOllcept of"bona-lidc lin value." which existx in both COl1111101l alld slatntory law. Inay
protect the latcr If the laler records an intcrest in the property and had no notice of the competing
clallll, that Interest ill the pmperly will be sourccs convcrsations with Pancl.slaff(Nov. 9. 2(10).
See Section r:. I,
27
that mortgage origination violations and title defects prevented a "true sale" of the
mortgages, consistent with Internal Revenue Service (IRS) regulations and as
required by the New York State trust law, invalidating the REMIC. Some
comrnentators believe that inquiries by investors could uncover untimely attempts to
cure the problem by substituting complying property more than 90 days after
formation of the REIvlIC, a prohibited transaction that could cause loss ofREMIC
status, resulting in the loss of pass-through taxation status and taxation of income to
the trust and to the investor. 83 Loss of REMIC status would provide substantial
grounds for widespread put-backs. Moreover, this type of litigation could be
extremely lucrative for the lawyers representing the investors. It may be expected
tbat, for this type of action, the investors' counsel would have strong incentives to
litigate forcefully.
Title Insurance Companies - In tbe United States, purchasers of real property (i.e.,
land and/or buildings) typically purchase title insurance, which provides a payment to
the purchaser if a defect in the title or undisclosed lien is discovered after the sale of
the property is complete. Given the potential legal issues discussed in this section,
title insurance companies could face an increase in claims in the near future. The
threat of such issues nwy also lead insurers to require additional documentation
bc1()re issuing a policy, increasing the costs associated with buying property. 84
Junior Lien Holdets -Second and third liens are not as comrnonly securitized as first
liens; therefore, their holders may not face the same direct risk as first lien holders.
Junior lien holders may, however, face an indirect risk if the rights of the first lien
holder cannot be properly established. If the property securing the lien is sold, all
senior liens must be paid first. IJthe senior liens cannot be paid off because it is
The majority ofl'SAs were created under the laws of New York state. Under New York law, there are
f(Hlr requirements f()r creating a trust: (f) a designated beneficiary; (2) a designated trustee; property sufficiently
identificd; and (4) and the delivery of the property to the trustee. Joshua Rc)sner of GrahalJl Fisher, an investment
research firm. has noted that there lJlay not have always been proper delivery of the property to the trustee. "In New
York it is not enough to have an intention 1.0 deliver the property to the trust, the property lJlust actually be delivered.
what defines acceptable The answer appears to lie with the 'governing instrument,' the Pooling and
""ppmenl (PSA). Thus, in order to have proper the parties to the PSA must do that which thc
PSA demands 10 achieve ." Joshna Rosner. noll' to Panel staff (Nov 8. 20 10). To the extent that a PSA
I('{IIII i('S that property be to thc trust wilhin a certain timelj'ame, such convcvance would be void. N.Y.
L:states, Powers. and lrusts Law 7-2.4 (iVIcKillney' 2(06).
'""Ul'1'II title insurers appear to be !()r potential risk, one observer has noted that title insurance
Inhh\/ilC'k and Iradc groups have instead down the effects of Ihese Issues. I
Peterson, or law. S.. I. School or law, l Jniversily or I Jtah. conversations with Panel staff II,
2(10). Title insurers state that do not presently helieve that these issues wili have much Industry
sources cUllvcTsations with I'allel sta 10,20 I 1'10 Peterson that the insurers mav earn
sullicient relnullcratiun rnlill various ft'es to orfset any potential risk. ()n the other hallcl, title insurers could stand to
sulkr licantlosses ifsolne of the matters discussed in the such as invalidation or
PvlFRS. come 10 It is 100 to if such evcnts arc but title insurers would be one orthe primary
parties damaged such all action.
28
impossible to determine who holds those liens, the junior lien holder may not be able
to claim any of the proceeds of the sale until the identity of the senior lien holder is
settled. On the other hand, document irregularities may offer a windfall for some
junior liens. If the first mortgage has not been perfected, the first lien holder loses its
priority over any other, perfected liens. Therefore, if a second lien was properly
recorded, it eould take priority over a first lien that was not properly recorded. The
majority of second liens, however, were completed using the same system as first
Iiens and therefore face the same potential issues. Moreover, many mortgages that
were created during the housing boom were created with an 80 percent/20 pereent
"piggy-back" structure in which a lirst and second lien were created simultaneously
and using the same system. If neither lien was perfected, there may be a question as
to which would take priority over the other. 85
Local Actions Despite the state attorneys' general national approach to
investigating document irregularities, there may be separate state initiatives. Under
traditional mortgage recording practices, each time a mortgage is transferred from a
seller to a buyer, the transfer must be recorded and a fee paid to the local government.
Although each fee is not large typically around $30 the fees for the rapid transfers
inherent in the mortgage securitization process could easily add up to hundreds of
dollars per securitization. T'he MERS system was intended in part to bypass these
lees.
S
(, Local jurisdictions. deprived of mortgagc recording tax revenue. may lile
Iawsu its against origll1ators. servicers, and MERS.
lhe primary private litigation in this arca is likely to cOllie li'om investors in NIBS. These
investors arc orten institutional investors, a group that has the resources and expertise to pursue
such claims.
s7
A major obstacle to investor lawsuits seeking put-backs has been a provision in
PSAs that limits private investor action in the case of breaches of representations and warranties
to certificate holders with some minimuill percentage orvoting rights, orten 25 percent.
8S
Investors also surfer from a collective-action problem in trying to achieve these thresholds, not
least because they do not know who the other investors are in a particular deal, and many
II,-"I(\nl,,'r t .ewis l'eterS(\Jl. nn,1es",, (\1' law. S..I. Sch(\ol (\1' I,aw. or
conversations with 1',1I1el staff Irlhe l1Jortgages were ercalcd at dirkrenttil1Jes. the l1J(\rtgage created
Ii rst w(\u Id ta ke nrecc,lcl1l:e
SI, Cillcil111ati
(\n Foreclosure, supra lIole al1386-1371.
lnstituti(\nal holders or RTvlBS include rUlids. hcdge runds and other asset l1Janaeers, Illutual
Ii re insurance and investors. IJata provided Inside Finance' 12. 20 10).
1'111'''"101,,,\11 Research l 'emf('rence supra note 77, at 2.
29
investors are reluctant to share infonnation about their holdings. Furthermore, the interests of
junior and senior tranche holders may not be aligned.
8Y
When investors do achieve the collective-action threshold, it is only the first step in a
complieated process. For example, if the trustee declines to declare the serviceI' in default, then
investors can either bring suit against the trustee to force it to remove the servicer, attempt to
remove the trustee (which often requires a 51 percent voting threshold), or remove the servicer
directly (with 8 two-thirds voting threshold). It bears emphasis that the collective-action
thresholds required vary J!'cHl1 deal to deal. Two recent investor lawsuits started with a view to
enforce put-back provisicllls resulted in dismissals based on the plaintiffs' failure to adhere to 25-
percent threshold requirements. YO The practieal effect of such decisions is that the hurdle of
meeting this relatively high threshold of certificate holders can limit investors' ability to examine
the documents that would support their clairns.
Recently, however, investors are beginning to take colleetive action, suggesting that the
25 percent threshold may not be an enorrl1OUS burden for organized investors. A registry created
by RMBS Clearing IIouse is providing a confidential data bank whose purpose is to identify and
organize certificate holders into groups that can meet threshold requirements.
Y1
Using the
registry data, a lawsuit has been initiated against JPMorgan Chase and the Federal Deposit
Insurance Corpor8tion (FDIC),92 both of which have assumed liabilities of failed bank
Washington Mutual, seeking to enforce put-backs and document disclosure. Recently, an
investor group composed of eight institutional investors, including the Federal Reserve Bank of
New York (FRBNY), representing more than 25 percent of the voting rights in certain
C:ountrywide MBSS,93 made a request of securitization trustee Bank of New York to initiate an
investigation of the offerings originated by Countrywide prior to its acquisition by Bank of
89 Also, to the extent that these MBSs have been turned into collateralized debt obligations (eDOs), the
collateralmanagcr overseeing the CD()s may need to weigh actions that pose conflicts among thc tranche holders
because of obligations to act in the best interests ofall the securities classes. Panel staffconversatiol1s with industry
sources 8. 20 I
'JG (;u;elllvieh Fin. Sel'\. \'. ('nIlI1J'J'1"I'i"I,FIn. C'OlP, No. 650474/08 (N.Y. Supp. Oct. 7. 2(10); Foo!brldge
Lid. hilS! IIlId OHP Lid. hils! v. Home Loalls, fllc. No. 09 CIV 4050 (S.D.N.Y. Sep. 28.
2(10).
PI
' Based on conversations between Panel sta If and ibe company. lZJ'v! BS ('Icaring Iiousc cia iillS (0 rCjJrcsent
11\0re than perccl1t oC the certificate holders of 2.300 mortgage-backed securities, more tban 50 percent of holders
oC900 seeullties, and more than I,ll percent of the holders of450 securities
in tbe aggregate, a Lice amount of:;;500 billion, or one-third of the label
1I1L',1l2e-llael(eli seelilities mmket. (lile likened them to a site f()1 investors. l<.fY1I3S
House convelsations with Panel staff
Deutsche B,nl!, v. Federal 'nnH,,:dw,n SlIplll note 42.
institutional investors who collectively hold more than 25 percent of the
",":>n",JU!'",' l11orll.',w<>I)ilel,ec! securities issued in 115 in 2001l
<)) Gibbs & Bruns represents
in 1110re than $47 billion in
and 2007, On (let 20. 20 10. FRBNY became a c1Ul1,!innr t.o the leiter.
30
America. After Bank of New York refused to act,94 the group petitioned Bank of America
directly in an ef!c)rt to review the loan files in the pool.95 Some believe that the difficulty faced
by investors in gaining access to the loan files that support their claims of contractual breaches
and the cost of auditing them wiU make widespread litigation economically unrealistic. 96 Even
as put-back demands from investors are appearing, unless the investors can review loan
documents, they lack the inlc)rmation to know what level of put-backs should be occurring.
Moreover, at least one bank CEO has stated that his bank will challenge any determination that
underwriting standards were not met on a loan-by-loan basis, creating further hurdles.
97
At
present, it is unclear what litigation risk these proceedings are likely to pose for the banks.
98
There is good reason to assume, however, that the litigation will attract sophisticated parties
interested in the deep pockets of the sponsors.
Given the complexity of the legal issues, the numerous parties involved, and the
relationships between rnany of them, it is likely that any litigation will be robust, costly, and
lengthy. Nonetheless, it is possible that banks may see a financial advantage to delaying put-
backs through litigation and other procedural hurdles, if only to slow the pace at which they must
be completed and to keep the loans oIl of their books a little longer. In addition, as discussed
above, conflicts of interest in the industry may further complicate an assessment of litigation
risk: servicers, trustees, sponsors, and originators are oflen affiliated with each other, meaning
that each has a disincentive to proceed with an action against anothcr lest it harm its own bottom
'14 Under the PSA, the trustee is entitled to a satishlctory indemnity prior to allowing such a process to
continue. The trustee f(lr the securities. Bank of New York, did not find the indemnity offered acceptable and
refused to allow the parties to proceed. The various trustees for these securities may therefore fOlTn an additional
barrier between investors and review of the loan files. For example, Fannie Mae explains in a prospectus fell'
mortgage-backcd securities (IZEMIC certificates) that "We arc not required, in our capacity as trustee, to risk our
funds or incur any liability if we do not believe those funds are recoverable or if we do not believe adequate
indemnity exists against a particular risk." See Federal National MOIigage Association. Single-FamilF REMIC
Prospectus. at 44 (May 1.2(10) (online at
www FM_May 1 201 O.pdf).
')5 Letter from Gibbs 8: Bruns LLP on behalfofBlackRoek Financial Management. Inc. ct al. to
'""nlt\/",id, 110me Loans LP, The Bank of New York, and eounsel, Ne. Holders' ;Yotice to '/i-lIstcc and
Muster Ser\'icer 18, 20 I0) (hereinafter "Letter li'om Ciibbs & Bruns LLl' to Countrywide"). The group
including r:RBNY that the loans in the pools did not meet the quality required the PSA and
have not been prudently serviced.
Jamie Dimon, CFO orJl'Morgan Chase, commented during a recent quarterly earnings call that litigation
costs in I(lreelosure cases will be so large as to become a cost of doing business and that, in anticipation of such suits
J ('hase has raised I(S reserves $1.3 billion, Transcript provided SNL FinanCial (Nov. 2(10), Sec
iI!SO .lPM ou Foreclosures, Ivl FRS, supra note .3-
Chuck Noski, chid linaucial officer ror Hank or America, Slated during au earnings call for the third
quarter of 2010: 'This really g.ets dowu (0 a loan-by-Ioan determination amI we have, wc believe, (he resources to
deploy that kiud ora revicw" 13ank or Amcrica Corporation, Q3 20!O Cu!! (Oct. 19,
2(10) (ouliuc a( 183 n176-bank-or-america-corporation-qJ20 IO.aspx?piudcx -I)
(hcreinalkr "Bank or America Q3 20 I() Call Transcript").
For a discussion ol'lill:"atlon risk, see Sectiou 1'.2,
31
lO}
line.'!'! Moreover, there is the possibility that those who foresee favorable results from such
litigation, and who have the resources and stamina for complex litigation (such as hedge funds),
will purchase affected assets with the intent to participate as plaintiffs, intensifying the legal
battle further. TARP recipients, of course, were and are at the center of many of these
transactions, and predicting all of the possible litigation to which they might be subject as a
result of the irregularities (known and suspected) is vitiually impossible. It is not unlikely that,
on the heels of highly publicized actions initiated by major finaneial institutions and the
increasing likelihood that investors can meet the 25 percent threshold requirements for filing
lawsuits, sophisticated institutional investors may become more interested in pursuing litigation
., .. \ AS' c, . I .. I ' 'I f' I . 100 S .
or even 111 mvestll1g 111 in ;:, 111 on er to POSttion t lemse vcs or awsUlts. 0l11C seeurIty
holders, such as large endowments and pension plans, have fiduciary duties to their own
investors that may lead them to try and enforce repurchase rights. In addition, if investors such
as hedge funds that have the resources to support protraeted litigation initiate lawsuits, that could
intensify the legal battles that banks will faee.
tol
If litigation based on significant document
irregularities is successful, it may throw the large banks back into turmoil.
Similarly, Fannie Mae and Freddie Mac may become embroiled in the controversies.
Fannie and Freddie have already been actively engaged in efforts to put-back nonconforming
loans to the originators/sponsors of the loans they guarantee. But they may also find themselves
on the other side, as targets of litigation. In addition to being embedded in the entire
securitization process, they are part owners of MERS, 102 which is becoming a litigation target.
'1'1 Sec Section D.I.b. slipra.
100 Sec discussion of collective action thresholds in this section. slipra.
101 In its latest with the Securities and Exchange Commission (SEC), Citigroup acknowledged that
hedge fund Cambridge Place Investmcnt Management. The Charles Schwab Corporation. the Federal Home Loan
Bank of and the Federaillome Loan Bank of Indianapolis have Illed actions related to underwriting
irregularities in RMBS. .)'ee Citigroup. Inc. Form JOQJi)llhe Qllarlerlv Period Ended SelJlelllher 30, 20JO. at 204
5, 20 IOJ (online at /\ rchives/edgar/data/83 100 I/000 I047469 I0009274/a2200nSzl Oq.htm)
(hercinafler "C'itigroup IOQ !()I Q2 20 I0"). In addition, the hedge fund eon1l11unity has begun eoaleseing around
their investments in Rl\1BS. f(lIming a lobbying group called the Mortgage Investors Coalition. Sec Senate
Committee on Banking. Housing. and Urban Wrillen Testimony ofC'urtis GlovicL managing director,
Fortress Investment Ciroup, Needed lu Pre'Fcnl Fureclosllres (.luIy 16.
(online at banking. senate id 181'542121 b61-4486-98dO
e02fe74ea2eS).
lvl ERSC'OR p. Inc .. i11 ERS Shure/wldcrs (online al www.mersine.org/aboutlslwreholders.aspx)
"('(',-"",,11 No\ I 10) a critical role in the development offvlERS Through their capital
supporL MI.RS ahle to fund related to and initial starlup."). also letter fnllli R.K.
\mold. and ehiefexecullve officer. MFRSCORP Inc.. to Elizaheth M. secretary. Securities and
/lI/i(J,I('(J Rille Assel-Blided ,'JecII/llles. at Appendix B
30.2010) al IO/s7081 ngasall letters from
both Fannie Mae and FI'eddie Mac. which include the Fannie ,'vIae statemenl that "As you arc aware. Fannie l\lae has
heell ,Ill advocate alld strong supporter of the eff()rts of MERS since its !(H'lnation in 1996. The mission of tv1 F]ZS to
streamlille Ihe Ili00tgage illitiatives and data stalldards is in tlie best illterests of the
mortgage . :llld Fanllie Ivlae supports this missioll.").
32
Both Fannie and Freddie have recently ccased allowing MEIZS to bring foreclosure actions. 103
Further, Fannie and Freddie used at least one of the law firms implicated in the irregularities to
handle foreclosures. 104 Given that these two government-supported finns are perceived as the
ultinlate "deep pocket," it is likely that interested litigants will attempt to find a way to attach
liability to them, which, if successful, could further affect the taxpayers. 105
3. Additional Considerations
The participants described above are by no means the only parties affected by these
Issues. Lenders may be reluctant to make new loans on homes that could have title issues.
Investors may likewise be reluctant to invest in mortgages and MBS that may be affected.
t]ncertainty about the actions that federal and state governments may take to address the
docLlllJentation issues, how these actions will affect investment returns, and concerns that these
problems may be widespread in the mortgage industry nlay also discourage investors. Until
there is more clarity on the legal issues surrounding title to affected properties, as well as on the
extent of any title transfer issues, it may also becolne more diflicult or expensive to get title
insurance, an essential part of any real estate transaction. In addition, put-backs of mortgages,
10.1 See Federal National Mortgage Assoeiation, Miscellaneous Servicing Polin
'
Changes, at 3 (Mar. 30,
20 I0) (Announeement SVC-20 10-05) (online at www.efanniemae.com/sf/guides/ssg/annltrs/pdmOl O/svc 1005.pdf)
("EfTective with foreclosures referred on or ailer rvlay 1.20 I0, MERS must not be named as a plaintiff in any
forcclosure action, whetherjudicial or non-judicial. on a mortgage loan owned or securitized by Fannie Mac.").
104 ()n November 2, 20 I0, Fannie Mae and Freddie Mac terminated their relationships with a Florida
foreclosure attorncy David .I. Stcrn, who had processcd thousands of evictions on thcir behalf and allegations
the Florida Attorney General's ol'fice of improper foreclosllre practices including lillse and misleading
documents. See OfhI' I' of Florida Attorney Gcneral Bill McCollum, Florida Law Firms Subpoenaed Over
FOIec1osure Filing I'laclices (Aug. 10,2(10) (onlinc at
www.rnylloridalegal.eom/newsrel.nsfJnewsreleascs/2BAC1AF2A61 BBA398525777B0051 BB30); ()ITiee of Florida
Attorney General Bill tvlcColium. Active Puhlic Consumer-Re1aled !171'estigation, No. LI 0-3-1145 (online at
www.mylloridalegal.com/ . 85256309005085AB.nsfJO/ADOFO IOA43782D96852577770067B68D?Open&Jlighligh
tc'O,david,stern) (accessed Nov. 10.201 Nick Timiraos, Fannie. Freddie Cut li'es to Law Firm. Wall Street
Journal .3,2010) (online at online.wsj.co1ll/article/SBI0001424052748704462704575590342587988742.htlnl)
("A spokeswoman felr Fleddie Mac. Sharon Mcllale. said it took the rare step on Monday of beginning to remove
loan files after an internal review raised 'concerns about some of the practices at the Stern firm.' She added that
Freddie Mac took of its Ii Ies 'to protect our interest in those loans as well as those of borrowers.
lOS The F'ederal Finance placed Fannie Mae and Freddie Mac into conservatorship
Oil Septemher 7. 200X. in ol'der to preserve each company's assets and to restore them to sound and solvent
condition. has guaranteed their debts, ami FII L\ has all the powers of the management, board, and
shareholders of the CiSls. Iiouse !'inaneial Subcommittee on C'apital Markets. Insurance, and
Written of [.dwald.l. director. Federal
FllWIICC A o/ll!ie(;SEs,at2( 15.2010)(onlincat
fUU'l.','uvl[Vledlaililc/h,'arlln"s/IIIIDeMarco09151 0. One of the that has ariscn is
to he difTelences in the quality of securitization f(,r go',ernlllent.-SI)OI'ISOII-e<!
DriVaIClaIlCI MIlS. SOllie sources believe that the process GS!:
securitizations is to have becn llIore but it is to determine if this is correct.
this report docs not atteillpt to between CiSE and cleals. Howevcr. ifGSE
securitizations prove to have heen donc it result in additional Ie)!' the CiSEs either as
or as the GSEs try to pursue indel1lnification
damages from lawsuits, and claims against title cOlnpanies, mortgage servicers, and MBS
pooling and securitization firms have the potential to drive these firms out of business. Should
these and other companies that provide serVIces to the mortgage rnarket either decide to exit the
rnarket or go bankrupt, and no other companies opt to take their place in the current environment,
the housing market \vOltldlikcly suffer. Even the mere possibility of such losses in the future
could have a chilling effect on the risk tolerance of these firms, and could dim the housing
market expectations of prospective home buyers and mortgage investors, fUIiher reducing
I
. I I I ,. I f' 106
lousmg (emam am rarsmg t le cost 0 mortgages.
More generally, howevcr, and as noted below, the efficient functioning ufthe housing
market is highly dependent on the existence of clear property rights and a level of trust that
. I ' , I . I I I' I' . f' I I 107 If' I
vanous marzet partICIpants lave m eac lot leI' am m tIe mtegrIty O. t le marzet system. . t le
current foreclosure irregularities prove to be widespread, they have the potential to undermine
trust in the legitimacy of many foreclosures and hence in the legality of title on many foreclosed
, 108 I I ,. 'bl I I 'll'd I' ..
propertles. < n tlat case, It IS pOSSI e t lat )uyers WI avol purclasmg propertIes m
foreclosure proceedings because they cannot be sure that they are purchasing a clean title.
Protections in the law, such as those feJr a bona-fide purchaser for value, may not ease their
anxiety if they are concerned that they will become embroiled in litigation when prior owners
appeal foreclosure rulings. These concerns would be likely to continue until the situation is
resolved, or at least until the legal issues surrounding title to foreclosed properties have been
clarified. Those buyers who remain will likely f ~ I c e less competition and will offer very low
bids. Even fCJreclosed homes that have already been sold are at risk, since honles sold before
these documentation issues canle to light cannot be assumed to have a legally provable chain of
title. 'rhcse homes will therefore likely be drflicult to resell, except at low pnees that attract risk-
tolerant buyers.
E. Court Cases and Litigation
The foreclosure doemnentation irregularities unquestionably show a system riddled with
errors. But the question arises: were they merely sloppy Inistakes, or were they fraudulent?
Differing answers to tins question may not affect certain remedies available to aggrieved parties
put-backs, fCll' example, arc available fc)r both mistakes and fe)r fraud but would aflect
10(. Sec Standard & Poor's Global C'rcdit Portal, l{arings IJirccl, flilor!",I'u' Jioub/cs ('Ofll/flIlC j() On
US Ballks (Nov 4,2010) (online at 11410Artiele5.pdf)
Itcr "Standard Poor' on the IIII pact of of best and wurst
lIernando de Soto, Jilc Sll'nelT
Use, at 5-CJ, 17,1 ("I' 01111 a I property titles allowed
of validation into that of an markct.
a/n'llI/lsm Trill",,,I,, /n Ihe 11'1',11 alld Fails F""f'1.'",h,"IP
to movc the fhrits uftheir labor from a small range
lOP, "1"1 {' I' I I I I I' I I ".
re eIV uree osee rOllles IV lere a ball \ llllglllatcc lIe mortgage, serViced It, held It as a whole
alld the {(lITelosme doeullIenls themselves arc very unlikely 10 be affected. The elket of the
on other types or loans ami homes are, as discussed In this reporL presently very diflieult to predict.
34
, I I 'I ,109 I "I I ' 'I I II
potentw (amages 111 a awsUlt. t IS Important to note t lat t 1e vanous parties w 10 may )e a) e
to bring lawsuits may choose different causes of action for very similar sets of facts depending
on standing and a host of other For example, on the same facts, an investor may try to
pursue a civil suit alleging violations of representations and warranties relating to underwriting
standards in a PSA instcad of pursuing a seeurities fraud case where the burden of proof would
be higher. Put another way, plaintiffs will pursue as many or as few causes of action as they
believe serves their purpose, and one case does not necessarily preclude another.
1. Fraud Claims
a. COllllllon Law Fraud
Property law is principally a state issue, and the foreclosure irregularities first in
depositions filed in state courts. Accordingly, one option for plaintiffs may be to pursue a
common law fiaud claim. The bar for proving common law f1'aud, however, is fairly high. In
order to prove common law fraud, the plaintiff must establish five clements: (I) that the
respondent made a material statement; (2) that the statement was false; (3) that the respondent
made the statement with the intent to deceive the (4) that the plaintiff relied on the
statement; and (5) that the plaintiff suffered injury as a result of that reliance, I 10
Traditionally, in order to prove common Jaw fraud under state Jaws, each element
detailed above has to be satisfied to the highest degree of rigor. F:ach state'sjurisprudence has
somewhat different relevant interpretive provisions, and common law fraud is generally
10') SCI', DClilsehc All-A Seelirilie,l, fllC, , Wells Fargn Balik Naliolla!
Associalioll, Masler SCI Ticer alld Securilies ,I dmillislralol", alld I1SBC Balik liS,!. iValiolial Assncial/oll, hIiSICC,
/'o"//11<1olld (Sept I, (online at www.seeinlil.colll/dI312I.vI1l7.d.htlll) ("Scction 2.03,
IZcpurchase or Substitution or I.Oims, (a) Upon or rcccipt or notice ", or a breach by the Seller or any
representation, warranly or covenanl under the loal1 Purchase ... the Truslee shall enf('ree the
0111",all(\ns or Ihe ler under the I,oan Purchase to such I,oan"):hllst .1 "r",'m,,'1I1
(I'S "1/1'1111'.1 nlf! ' alld Dewsche Ball!' Na1iOl/il1 hllsl C'iIIl/hllll'. fruslec, II./"r/",I("{'
Fass- Sales }l!l!ri-FM! I 200Cl) (online at
wWIV.scciI1l(l,C0!l1/dRSU111. Ii ll'y.e.hlmlll ) discovery or notice or auy breach the Assignor 0 I' any
covenant under this '" the may enl(lree the ;\s,sl,S:nc,(
DUleh:asc such Loan fI'oll1 the ").
Illc. 141 F.3d IOS9, 1069 (led, Cir.
I IS Fraud J ( I
perceived as a fairly difficult claim to make. II I In particular, the requirement of intent has been
very difficult to show, since it requires more than simple negligence. J 12
h. Securities Fraud
l. Foreclosure Irregularities
In the wake of the revelations about foreclosure irregularities, a number of government
agencies have gotten involved. The Securities and Exchange Commission (SEC) is reviewing
the mortgage securitization process and market participants for possible securities law violations.
It has also provided specific disclosure guidance to public companies for their quarterly
reports.
l13
Since many of the mortgages potentially affected by faulty documentation practices
were put into securitization pools, there is an increased potential for lawsuits by investors,
including securities law claims.
In order for MBS investors to state a securities fraud claim against investment or
cOlnmcrcia[ bank sponsors under the Securities Act or J934's Rule 1Ob-5, 114 the most
common private litigant cause or action, the investors must prove: (l) a material
Inisrepresentalion or omission; (2) wrongful intent; (3) connection to the purchase or sale of the
security; (4) reliance by the purchaser on the inflxlTlation; (5) economic loss to the and
(
. II)
( l) causatIon..
III Scc, C.g.. Lynn Y. IVlcKernan, Strict Liahilit\' Against f1olllehuildersJor Material Latent De/eets' It's
Tillie, An,cOIw. Arizona Law Review. Vol. 38. at 373. 382 (Spring 1(96) ("Although its recovery options arc
aliractive, common law fi'aud is gcnerally difficult to prove"): Teal E, Luthy, C'omlllon Low Cloilllslil/'
Fraud. University orChicago Law Review. Vol. (is. at 100 I. 1002 (Summer 1(98) CFraud is a difficult claim to
prove"); Jonathan l'vl. Sobel. A Rose Mav Not AI1ravs Be a Rose: SOllie Genel'lll Partnership Interests Should Be
Deemed Securities Under the Federal Securities Acts, Cardozo Law Review, Vol. IS, at 1313. 1318 (Jan. 19(4)
CCOl11nlOn law f1'aud is inadequate as a reilledy because it is ollen extremely difficult to prove").
112 See Seth Lipner &. Lisa A. Catalano. The IiiI'I oIGi\-ing Inveslll1elll Advice. IJniversity of
Memphis Law Vol. at 697 11. 181 (2009); Jack E, Karns & Jerry G. Ilunt. C'all Porl/IJ!io Damages Be
Fstahlishul in a Chumin,!!, Case Whai' the Plaintlfrs Account Gamel's a Pro/it Rather Thall a Loss, Oklahoma City
Ulli Law Review. Vol. at 214 (I
11\ SL'C conversations with Panel stall 15.201 In addition. the SEC's [)ivisiun ufCorporation
Finance has disclusure for the upcoming quarterly reports affected companies. U.S, Securities
and Commission. Sample LeiliT SCI/I 10 Puhlic 01/ Accollnlin,!!, and Disclosure Issues /?elaled
10 Polenlial lIisks ond Costs Associilled lI'ith ilnd Foreclosure-Relilled AcliFilies or Jet. 2010)
(online at www.see visiuns/curplin/guidance/el()foreelusureIOIO.htm) (hereinaner "Sample SEC Letter on
I>iselosure Guide I If the disclosure pruves misleading, it cuuld provide the basis liJr another cause ofaetiol1.
17 (TI{ 240.1011-5. I.i to note that uther causes of action arc available under the Securities Act
under Section II, a claim 11I<1y be made 1'01' a 1;11se or misleading statement in the
re!"lstrafHH! slatement. and the issuer or the the purpose vehicle. underwriters. and auditors wi II all
he tu potential Section II liabi (with the laller two groups having due With respect
to other eonlllJunications made the process. rise to Section
liahil See IS USc. 77k.77m.
II
claims under a
Dum P/rOI'lIlS.. Inc. BlUudo, 544 U,S, 336. 341-42 lhe SF-,C can enforcement
of but litigants typically litigate under Rule IOb-5, Sec Scott .I, Davis,
36
To be sure, private investor lawsuits have been ongoing since the end of 2006 without
much success. I III Senne argue that securities fraud was not at the heart of the financial crisis, and
securities fraud claims arc bound to fail because of the typically extensive disclosure on risks
. I . I I . 117 A I {"I .
assoclate( WI t 1 t lese transacllons. num )er 0 Juc ges seem to agree: sonIc mlportant cases
"suggest judicial skepticism to claims arising from the mortgage and financial crises.,,118 The
main hurdle in these securities claims beyond establishing that the misrepresentations were so
material that without them the investment would not have been made is to establish "loss
causation," i.e., that the misrepresentations caused the investor's losses directly. Any losses
caused by unforeseeable external factors such as "changed economic circumstances" or "new
industry-specific conditions" will not be recoverable. 119 Defendants in subprime litigation cases
arc likely to argue that the crash of the housing market, for example, was just such an unexpected
new industry-specific condition. 120 Losses occurring as a result of the market's crash would be
non-recoverable even if there was a material misrepresentation. It remains to be seen how
securities fraud cases would play out in the context of the current documentation irregularities.
Of course, the SEC has other tools at its disposal should it choose to pursue action against
any of the financial institutions involved in potential documentation irregularities. For example,
if a formal SEC investigation finds evidence of wrongdoing, the SEC may order an
administrative hearing to determine responsibility for the violation and impose sanctions.
Administrative proceedings can only be brought against a person or firm registered with the
S'vl7lposium: lhe Phenol7lenon: IVould in the Rules!()r Director Selection and Liahi/itv Help
Puh/ic ( (Join Some Equity's lJniversity of I,aw Review. Vol. 76. at 104
(Winter 2(09); PalmerI'. Heenan. et 'II., Securities Fraud. American Criminal Law Review, Vol. 47. at 1018
(Spring 2010).
III, For an extensive analysis of subprirne mortgage-related litigation up to 2008 and potential legal issues
surrounding such litigation, scc Jcnnifer E. Bethel. Allen Ferrel. and Gang Hu. Law and E'eonomies Issucs in
Suhprime Litigation, Harvard Law School John M. Olin Center For Law, Fconomics. and Business Discussion
Paper (Mar. 21, (online at Isr.ncl1co.org/harvard 01 in/(12) (hereinafter "I larvaI'd Law School Discussion
Paper on Subpril1le Litigation"), A list of class action lawsuits filed up to February 28. 2008 is included in Table I
of the article. at 67-69.
117 Sec. e.g., Peter II. Hamner IIII' Credit Crisis and Suhprime Lil igation: How Fmud Without
Motive '/ItaliCS Latle Economic Sense '. UPR Business Law Journal. Vol. I (0) (ouline at
www IO/08/I-U PRBLJ- i 03-Hamncr-Pllpdl).
118 A recent update 011 subprilllc and ccedit crisis-rela/cd litigation sUillmari/cs a numbcr of eases and
;m:liV7('S many of'them lililed (for example. lack of'staudiug and lack ofwrougf'ul iuteut). Gibson, Dunn &
('rut.cher LEI', lOIO Alul-rearSulirities (9. 2UIO) (ouline at
~ ' I lJSOIIUIJIlILl lln/I)ul:1 ifcatlon:,/Pag,:;s/SC<,:url tl(?S! ItI:gallol12U IUM id- toc2e,;) 7742(4). The
NF,RA Ecollomic ou a decrease in securities law Iii sillt:e 2009. S'ce
Natioual r:couolllic Research Associalcs. Inc, hends 20I 0 ;IIid- Year Dcclinc as the IVIl1'c
Crisis Cascs Suhsidcs. Median Settlemcnt at IIceard (July 2(10) (ouline at www.ucra.com/67
119
Dllra P!Iallns., Ine 1'. BlOudo. 544 U.S, 336,342-43
For a morc discussioll of this
Lfll,Y'llUII,SllIJT'U note 116. at 42-44,
IlarvaI'd I.aw School Discussion on Subprime
37
SEC, or with respect to a security registered with the SEC. Many times these actions end with a
settlement, but the SEC often seeks to publish the settlement terms.
II. Due Diligence Firms
There is also the possibility of distinct claims against the institutions that acted as
securitization sponsors f()r their use of third-party due diligence firms. Specifically, before
purchasing a pool of loans to securitize, the securitization sponsors, usually banks or investment
firms, hired a third-party due diligence firm to check if the loans in the pool adhered to the
seller's underwriting guidelines and complied with federal, state, and local regulatory laws. t2t
The sponsor would select a sample of the total loan pool, typically around 10 percent,I22 for the
due diligence firm to review. The due diligence firm reviewed the sample on a loan-by-loan
basis and categorized each as not meeting the guidelines, not meeting the guidelines but having
compensating factors, or meeting the guidelines. Those specific loans that did not meet the
guidelines, called exceptions, were returned to the sellers unless the securitization sponsors
waived their objections. 123 One due diligence firm found that, from the first quarter 2006 to
121 Financial Crisis Inquiry Commission, WriIten Tcstimony of Vicki Be'll. scnior vicc president, Clayton
Holdings, Financial Crisis - Sacramento, at 2 (Sept. 23, 20 I 0) (on line at
www IO-0923-Beal.pdf) (hcreinafter "Written 'festimony of Vicki Beal before the FCle"').
Iii. at 2. A sample size of only around 10 percent of the total loans in the pool was low historical
standards. In the past, sample sizes were between 50 percent and 100 percent. Financial Crisis Inquiry
COlllluission, Testimony of Keith Johnson, fCJrITJer president, Claytonlloldings, hanscnj!/: Impact o{the Financial
Crisis - Sacramento, at 183 (Sept. 23, 20 I0) (online at fCic.gov/hearings/pdfs/20 I 0-0923-transcript.pdf) (hereinafter
"'festimony of Keith Johnson bef()re the FeIC"'). In his leIter to the FCIC after Mr. Johnson's testirnony. the cnrrent
president of Clayton Holdings. Paul T. Bossidy, contested some of Mr. Johnson's testimony Calling the testi mony
"inaecuratc.' he corrected I'dI'. Johnson on three points. First, Mr. Johnson testified during the hearing about
meetings he had had with the rating agencies in which he showed them Clayton's Exception Tracking reports. Mr.
Bossidy stated that Clayton had never disclosed client data during these meetings and that Clayton had never
concerns about the securitization proccss or the ratings being issued. Second. Mr. Bossidy cautioned that
the tracking data provided to the FCIC was f1'om "beta" reports. These reports contain valid client-level
data, but arc not standardized across clients. Different clients have different standards and guidelines. leading to
difTerent rates. Thus. the results do not 1()l"Jn a meaningful basis f()I" comparison between
clients and the data cannot he used to draw conclusions. Finally. !VIr. Johnson had stated that Clayton examined a
number ofprospeetuses to determine if the inj()l"Jnation (i'om Clayton's due diligence reporls had been included. Mr.
clarified that was not prospectuses but had begun in 2007 in response to
fic from I etter from Paul T. president and chief execuli officer, Clayton
Iloldings. LI('. to Phil ides, chamnan, FinanCial Crisis Inquiry Commission, Rc 23.20ll!
Sacramento JO, 2(10) (online al 1,,/2010-101 FCIC.pdf)
(hereinafter "Letter hom l'aull3ossidy to Phil Angelides"').
Ihis deslli is just a sunllnary. For ,I more description of one due dil firm's
Financial ('risis In(jniry COlllmission, of Vicki BeaL senior vice ('layton
Finuncio! (',I:;is- SOC/1m/CillO. at 156-158 23,20 I0) (online at
(hereinalter of Vicki Heal bel(lI"e the
38
second quarter 2007, only 54 percent of the loans they sampled met all underwriting
. I I' 104
gUIC e meso -
R.ejected loans from the sample were returned to the seller. 1'he sample, though, was
onlyapproxinlately 10 percent of the loans in the pool, and the low rate of compliance indicated
that there \'Jere likely other non-compliant loans in the pool. The securitization sponsors did not
then require due diligence on a larger sample to identify non-compliant loans.
125
Instead, some
assert that the sponsors used the rate of non-compl iant loans to negotiate a lower price fix the
pool of loans.
126
These loan pools were subsequently sold to investors but, reports claim, the
results of the due diligence were not disclosed in the prospectuses except for standard language
I I
. I b I . . . 127
t lat t 1ere I111g 1t e unc erwntmg exceptIOns.
This behavior raises at least two potential securities i'aud claims. The first is a Rule 10b-
5 violation.
128
Rule IOb-5 prohibits "omit[tingJ to state any material fact necessary to make the
statements made, in the light of the circumstances under which they were made, not
misleading.'d29 If the sponsors used the due diligence reports to negotiate a lower price, the
information may have been material. In addition, the reports were not publicly available. 130 On
the other hand, the courts may find the standard disclosures, that there might be underwriting
exceptions, to be sufficient disclosure. As yet, the IOb-5 claim is untested in the coulis, and the
f ~ l c t s are sti II unproven.
Another potential claim is based on Section 17 of the Securities Act of 1933, which
makcs it unlawful in the "otTer or sale of any securities ... to obtain money or property by means
of any untrue staten/cn! of a material fact or any omission to state a material t ~ l C t necessary in
order to make the statements rnade, in light of the circumstances under which they were made,
124 Financial Crisis Inquiry COlllmission, All Clayton Trending Reports: I st Quarter 2006 ~ 2nd Quarter
impilct olthe FI/lo/lciol ("'isis Sacramento (Sept. 23, 20 I 0) (online at www.fCic.gov/hearings/pdfs/20 10-
0923-Clayton-AII-Trcnding-Rcport.pdl) Eightecn perccnt or sampled loans did not meet guidelines but had
compensating factors. L:Jevcn percent of loans were non-compliant loans, but objections were waived. Seventeen
percent orthe loans in the sample were rejected. In his letter to the FCIC noted above, Mr. Bossidy cautioned the
FCIC from relying on information. The cxceptiontraeking data provided to the F'CIC was
(i'om "heta" reports which contain valid client-Ievcl data, but are not standardized ,ICross clients. Different clients
use di Cfi:.,rent standards and guidclines, leading to difkrcnt exception rates. Letter fiom Paul Bossidy to Phil
!\n.gellctes. supro note I
('"liIlHl11V of Kei tb Jobnson before tbe FCIC, sUflro note 122, at 177-711,: Testimony of Vicki Bea I
be((lIc the FCIC, .1111)1(/ no(c 123. at 177.
or Keith Johnson bcfi:.)re the FCIC, .Ill/in! note 1 at I 10-211
Writlcnl CS(IIlHlI1V
CF!\ 240.IOb5.
erR
I Vicki Beal bef(lIC the FCIC, III/JIll note 121, at
1\0 Writieni Vicki [kal hef(Jre the FCI(', supra note 121, at 1 (The work produced
IS orrePOIts that include loan-level data reports and loan reports. Such reports are
'works f(lr hire,' tbe propertv or oUl' clients and to our eliellts.").
39
not misleading."IJI This claim also depends on unproved facts, but if the securitization sponsors
used the due diligence reports to negotiate a lower price for the loan pools, the information is
arguably material. As such, the sponsors may have violated Section 17 when they omitted the
results of the due diligence reports from the prospectuses, though the proposition has not yet
been ruled on by a court. Section 17, however, can only be enforced by the SEC, and not by
private litigants.
There are suggestions in the press that authorities are examining the issue, with several
f
' . l' . '1' . 137
news reports reerencmg ( IScusslons WIt 1 Investigators or prosecutors.. ~
2. Existing and Pending Claims under Various ({raud Theories
Currently, these issues are being explored at the state level and, as discussed above, the
private investor level. The recent disclosures about robo-signing may provide additional causes
of action and additional arguments for private lawsuits asking for put-backs of deficient loans.
In response to a question at the Panel's most recent hearing on housing issues. however, one of
the witnesses indicated tbat be was not aware of any successful put-backs for foreclosure
procedure problenls alone. m According to some consumer lawyers who are significantly
involved in these proceedings, while it is very unlikely that a national class action lawsuit based
on wrongful foreclosure claims could be successfully filed, it may be possible on a state-by-state
basis.
l34
The outcome in these cases is uncertain, and consumer lawyers said that at this point it
would be difficult to quantify potential losses arising out of these actions or any similar
challenges in individual foreclosure procedures. J
Various slates arc proceeding under a variety of theories. As noted above. on October 13,
20 I0, all 50 slate attorneys general, as well as state bank and mortgage regulators, announced
111 15 U.S.C'.
m Gretchen 1V!orgenson. Raters (gllored Proofof Loans, Pane! is 7(I!d, The New York Times
(Sept. 26,20 I 0) (onIine at 10109/27/business/27ratings. html'lpagewanted=all); (;retehen
\'.I. The New Yorkfimes (.July 24. 2010) (onlinc at
10/07/25/busi ness/25grel. ht ml?ref'I;1ir
I\J ('ollgressional Oversight Panel, Testimony of Guy Cecala, chief executive ortleer and publisher, Inside
IVI,)!'I,,,,,,,, Finance PulJlieations, Inc.. . COl' Heoring Oil 7:4RP Foreclosltre Miligalion Programs (Oel.
2(10) (publ ieat ion at eop.senale. gov/hearings/I ibrary/heari ng-l 0271 0- [()ICC losure.e fm)
(hereilla ncr "Test imolly
Consumer eOllversations with Panel slaff (I'iov. 'I, 20 I Several state class aelions have been
filed !clIeelosllles and l'raud on lhe court. e.g.. IJefendant William Timothy
A!lirmative Defc:llsCS and Individual and Class Aetiun Cuunterelaims, IVc!ls Furgo lIullll us 7Il/stee
NUlionu! Loon 7Il/SI ]U()5-1, Series ]UU5-/ I'S. IVillwlll Tilllolhl'
ct ul.. Nu. 08-('1-120 (('oll1l11omvcalth uCKenlueky 13uurbun Circuit Cuul'l L)jvisiun 1 OeL 4. 2010) Sec u!so
Class Aeliun Ill/her. /!calll:: /) 'AJIIICOSOII::O, und AIichuel und Tino [!nsIHJlih.
und oil persons sifllulcd \". C;;\LIC LLC, Financial. fnc., Nu. 8: I0-ev-0245i\-SCL1-EAJ (United
Slales District Courl Middle District of Florida Tampa I)ivisiun Nov. 4, 20
CUIlsull1cr cunversatiuns wi lh Panel stafr 9,20 I0).
40
that they would pursue a "bi-partisan multistate group" to investigate foreclosure irregularities.
1J6
They are working together to investigate allegations of questionable and potentially fraudulent
f(lreclosure docurnentation practices, and rnay design rules to improve foreclosure practices.
They also may begin individual actions against some of the implicated institutions. On
October 6,20 I0, ()hio Attorney General Richard Cordray filed a suit against CjMAC Mortgage
and its parent Ally Financial, alleging that the cornpanies committed common law fraud and
violated the Ohio Consumer Sales Practices Act. m In response, GMAC referred to the
irregularities as "procedural mistakes" and maintained that it would defend itself"vigorously.,,138
'rile ()hio state attorney general allcges that "GMAC and its cmployecs committed fraud on Ohio
consumcrs and Ohio courts by signing and liling hundreds of false affidavits in foreclosure
cases." He argucs that the defendants' actions were both against the Ohio Consumer Sales
Practices Act and constituted common law fraud. 139 The attorney general has asked the court to
halt affected foreclosures until defendants remedy their faulty practices and to require them to
subrnit written procedures to the attorney general and the court to ensure that no employee signs
documentation without pcrsonal knowledge.
Although Ohio is the lirst state to take action, it would not be surprising if others
follow.
140
Depositions have been taken in various foreclosure cases around the country that
point to questionable practices by employees at a number of banks. 141 Most of the large financial
institutions that service mortgages maintain that documentation issues can be fixed relatively
easily by re-submiUing ailidavits whcre appropriate and that based on their internal reviews there
is no indication that the mortgage rnarket is severely nawed. Many of the banks that temporarily
suspended f(xeclosures have no'vv resumed them, IIowever, in their most recent earnings
1\(, 50 States
rvlortgage Foreclosure Joint Statement. supra note 26.
In Complaint. State of Ohio ex ref. Richard C'ordrav 1'. GMAC Mortgage. C:I020 1006984 t Lucas Cnty
Ohio Ct. Common Pleas Oct. 6. 20!0) (online at www.ohioattorneygeneral.gov/GMACLawsuit). The complaint
also named .leniTy Stephan as a defendant. It was Jeffrey Stephan's testimony in a Maine ff)reelosure ease that he
signed thousands of anIdavits without verifying their contcnt that ignitcd the ffJreclosure documentation scandal.
1)8 Ally Financial. Inc., GMAC Sratclllellt Oil Ohio Lawsuit (Oct. 6. 20(0) (online at
Inedia,all y.coln/illdex. php'lsAJ&i tem420).
1)<) The Ohio attorney argues that the statements in the ff)reclosure aflldavits were material and
and the elnployees making them were aware that they were and were making them anyway to induce
(lhio courts and to upon them. which. in turn, justiJiably did so. He further argues that Ally
and GMAC Ii bClleiitted from thesc fraudulell1 foreclosures that should not have
been allowed to and the ofjustiec in Ohio and Ohio borrowers have suffered and are suflcring
.. The Ohio attorncy also argues that Ally and GMAC in a pattell1 and ,..-,wllee
I\'C and unconscionable acts" in violation of the (lhio ('cll1sumcr Sales Practices Act when their
lidsc aflidavits and when to mortgage notcs on behalf of rvIFRS.
rei Richard C1020 I 006984 Ohio Ct
10) at
140
Sl'l,ti()n L.3.
141
Uq')oO':Itl()n of Moua, IVelis
o12434XXXXMB AW (Fla, 15th Cir. Ct. Mar. 9. 20 I0).
!Jallk I'. ./ohll P No. SU 2UU9 ('A
41
statements, many of these institutions have indicated that they set aside additional funds for
repurehase reserves and potential litigation costs resulting from the foreclosure documentation
irregularities.
[n addition to these potential lawsuits, the Administration's Financial Fraud Enforcement
Task Force (FFETF) is in the early stages of an investigation into whether banks and other
companies that submitted flawed paperwork in state foreclosure proceedings may also have
violated federal laws. Treasury's representative inf(mlled the Panel that through Treasury's
Financial Crimes Enf()\"cement Network (FinCEN) they arc actively participating in the work of
the FFETF led by the Departnlent of Justice.
142
Treasury has otherwise indicated that they arc
not presently engaged in any independent investigative eff()lts. 143 To date, little has been
disclosed about the investigation.
3. Other Potential Claims
Beyond the various fraud claims, there are also several other potential claims. For
example, those who signed false affidavits may be guilty of peljury. Peljury is the crime of
intentionally stating any fact the \vitness knows to be false while under oath, either in oral
testirnony or in a written declaration. 144 Though the exact definition varies from state to state,
peljury is universally prohibited. Affidavits such as the ones involved in the foreclosure
irregularities are statements made under oath and thus clearly fall within the scope of the pCljury
145
M
I j' I '1" . I . . I 1 1
statutes.' oreover, t lere arc reports 0 ro lo-slgners ae nllttlllg III ( eposltlons t lat t ley <new
142 Congressional Oversight Panel, Written Testimony of Phyllis Caldwell, chiefofthc Homeownership
Preservation Office, U.S. Department of the Treasury, COP Hearing on IARP Foreclosure iI/litigation Programs, at
13 ((let. 27, 2010) (online at cop.senate.gov/doeuments/testimony-I 0271 O-caldwell.pdf) (hereinaller "Written
Testimony of Phyllis Caldwell"). In addition to their participation in F'FETF Treasury is coordinating efforts with
other federal and regulators, including the Department of Housing and Urban Development (HUD), the
Federal Housing Administration the Federal Housing Finance (FHFA), Ihe Federal Reserve System,
the OITice of Thrilt Supervision (OTS), the Ol'fice of the COl1Jptroller of the Currency the Fr)IC. the Federal
Irade COl1Jmission and the SF.C.
14.\ C'c'ngrcssic>nal Oversight Panel, Testimony of Phyll is C'aldwell, chief of the tlomeownership
Preservation Office, U.S. Department of the Treasury, hanscript. COP Hearing on TARP Foreclosure Mitigation
27,2010) (publication [(lrthcoming) (onlinc at cop,senate.gov/hearings/library/hearing-I027 I 0-
(hcreinatler of Phyllis Caldwel
Ij,! EOI lhe federal statute slates "\Vhoever - (I) Ilaving taken an oath bel'ore a competenl
lnbunal. officer, or pCTSOIl, in any ease in whieh a law 01' the I lnited Stales aUlhorizes an oalh to be administcrclL
that he will declare, or certify or that anv wriUen dcclaratiolL or
Ilcale him suhsClibell.. is tlue, willl'ully and conlrary to such oath slates or suhsClibes any malerialnla((cr
which he docs nol believe 10 he true; or (2) in any declaratiolL cerlilicale, verilication, or statemenl under penalty 01'
Illy lied undel 174601' litle I Jnited States will subscribes true material
maller which he docs nol believe 10 he lrue: is Ity 01' perjury and shall, except as othcrwise provided
l;1\v, he I'ined under this lille 01 imprisoned not more than live years, or both." 18 I JSC ~ 1(,21.
Black I,;\w
'''''''''''''''', al (,2 (8th cd.
42
they were lying when they signed the affidavits. i4() As a result, it is possible that these
individuals at least are guilty of peljury. Even without such an explicit admission, it is possible
that a COllli could flnd that a robo-signer was intentionally and knowingly lying by signing
hundreds of affidavits a day that attested to personal knowledge of loan documents. 147 It is
important to note, however, that peljury prosecutions are rare. For example, of the 91,835
federal cases commenced in fiscal year 2008, at most, only 342 charged PCljury as the most
serious offense. 148 It is thus possible that robo-signers, though potentially guilty, will not be
charged.
By contrast, tbe state attorneys general are already investigating whether foreclosure
irregularities such as the use of robo-signers violated state unfair or deceptive acts or practices
(UDAP) laws. Each state has some form ofUDAP law, and most generally, they prohibit
. . . I d I b i' . d . 149 I d"d I
practIces III consumer transactlons t 1at are eemec to ,e un atr or eceptlve. n IVI ua state
laws, however, can be as broad as generally prohibiting deceptive or unfair conduct or as narrow
as prohibiting only a discrete Jist of practices or exempting all acts by banks.
150
As a result,
whether there has been a UDAP violation will depend heavily on the particularities of each
state's law. The state attorneys general, though, are already examining the matter. In
announcing their bipartisan multi state group, the attorneys general explicitly stated that they
"believe such a process [robo-signing] may constitute a deceptive act and/or an unfair
. ,,151
practice.
14(, A Florida Law ['inn, The Tieldin Law (;roup. P.A. has taken hundreds of depositions in which
cmnlclw'(.'S or contractors of various banks admitled 10 not kn'JWIIHI what werc sq!lllng or regarding their
,,,,,"'<m,lI 1(lilOvvle,Jpe ol'illl'onnation in affidavits. Sec, of Ismeta Dumanjic. La Sa!!e Bank NA as
f,llllee Mlllllu/ Assel-Bocked IVA1ABS Senes 2UU7-HE2 hllsll'. Jeanelle Allclus, el a/.
No. CACE 080G037S (Fla. 17th (ir. Ct. Dec, 8.
147 For tcstimony atlcsting to signing hundrcds of artldavits a day. see IJeposilion of Xee Moua. at
/I'd/s FII/:t;o BUld, ". John P. No. SO 2000 C'A 012434XXXXMB AW (Fla. 15th Cif. (I. Mar. 9. 2(10);
Deposition of Rei ICC I Icrtzler. al In re: PUlricia L SlilIl'. No. 09-41903-J13R (D. Mass Fcb. 19,2(10),
14:' BUI eau ul' Justice Statistics. Fer/era! Jllsliee SIIIII.llies, 2UU8 Sialislica! J,I1)!CI, at Table 4.1
at I ,pdt).
ShaUll !( aud .IcnuilCT M. Miller. Siule /1/1"1/"111'1'1: Genem!
Uusiness Torts Joumal I. at I (Fall (online at
I(l! ln/si te/members/l 1/6/L:/DIOI7/0/4/.);( 'I Ille/2' ',c"LUIZarlle'v'/!{;lInev-
L. Carler, COJ/SIIIIIC/, PmlcclioJ/ ill Ihc UJ/iled Sllllcs:
IIlId ['mcliccs Sioluies (Feb. (online at
REPRINl.pdf).
IIlId
SO_states.pdl).
1 I SO States 1,"'ln',I'''' Foreclosure .Ioilll Statement, supra lIole 26.
43
4. Other State Legal Steps
In addition to the Ohio lawsuit described above and the ongoing joint investigation, some
other state officials have taken concretc steps to address the foreclosure irregularities, including
but not limited to: 152
In New York, the court system now requires that those initiating residential
foreclosure actions must file a new affirmation to certify that an appropriate employee
has personally reviewed their documents and papers filed in the ease and confinned
both the aceuracy of these court filings and the accuracy of the notarizations
contained therein.
153
In California, a non-judicial foreclosure state, the attorney general sent a letter to
.lPMorgan Chase demanding that the firm stop all foreclosures unless it could
demonstrate that all foreclosures had been conducted in accordance with California
law.
IS4
'I"he attorney general also called on all other lenders to halt f(xeclosures
un less they can demonstrate compliance with California law.
155
In Arizona, which is also a non-judicial foreclosure state, the attorney general sent
letters on October 7,2010 to several servicers implicated in the mbo-signing scandals
to demand a description of their practices and any remedial actions taken to address
potential paperwork irregularities. 'rhe attorney general wrote that if any employees
or agents used any of the questionable praetices in connection with eonducting a
trustec's sale or a foreclosure in Arizona, slich lise would likely constitute a violation
of thc Arizona Consumer Fraud Act, and thc attorney general would have to take
. . 156
appropnatc actIon. "
In Ohio, in addition to his lawsuit against GMAC, the attorney general filed an
amicus curiae brief in an individual foreclosure case asking the court to consider
This list is not a list of state actions. States are becoming involved at a rapid pace, in a
of ways. and fronl a of levels.
153 New York State Unified Court System, Allir/llalioll-Required ill Residelllial Foreclosure
/Ie/iolls (Oct. 20 10) (online at www.courts.state.ny.lls!attorneys!foreelosures!aITirmation.shtml); New \"ork State
Unified Court J)oclIlllelll (online at
www.eourts.stalc.ny.us!attolllcys!foreclosllres!ArIlrmation-Foreelosure.pdl) (accessed Nov. 12.20 I0).
Letier fmm Ldlllllnd G Browll., Jr., atiomey Statc of ('aliti.)rnia. to Steve Stein. SVP channel
director. Preservation and ('hase 2(10) (online at
ag.ea.l(Ov!ellls ;!lI;;,,' 1'"nl'''1',/nrp,,,/ndk/n 1996 morga n chase letier .pd f).
Office ofCalifi.llllia
Foreclosures III
General F:tlll111l1d G. Brown, Jr.. BnnvlI Calls Oil Ballks 10 Huh
at ag.ca .goIj! 11<,:v;"alc:lts!relcil"e. [lhp'! idl
15(, l,eller from Terry Goddard, attorney
Ol"cc!OSl/U' DOel/lllenlS ill Al"i;:olla
releases!oet/20 Il/f\A ()l-j",!Ue'''/;,
Slate of Arizona, to mortgage ",,\/il""-'
7.20 I 0) (online at
oall';i;,:WS,cl"\lice:r'/;,201 ,etllel .pd f).
Re "Roho-
44
evidence that (jMAC committed fraud that tainted the entire judicial process and to
consider sanctioning GMAC. 157 The attorney general also sent a letter to 133 Ohio
judges asking them [or inforlnation on any cases involving the robo-signer Xee
Moua.
158
In addition, he asked Wells Fargo Bank to vacate any foreclosure
judgments in Ohio based on documents that were signed by mbo-signers and to stop
I I I
I . 1'19
t le sa es o. repossessec propertIes..
In The Distdct of Columbia, Attorney General Peter Nickles announced on October
27,2010 that Coreclosures cannot proceed in the District of Columbia unless a
mortgage deed and all assignments of the deed are recorded in public land records,
and that loreclosures relying on MERS would not satisfy the requiremenL
I60
MERS
responded the next day by issuing a statement that their procedures conlorm to the
laws of the District of Columbia and encouraged their members to contact them if
they experience problems with their foreclosures. 161
In Connecticut, the attorney general started investigating GMAC/Ally and demanded
that the company halt all foreclosures. He also asked the company to provide specific
inf(mnation relating to its loreclosure practices. 162 In addition, the attorney general
ask cd the state Judicial Department on October 1, 20 I0 to freeze al I home
157 Briel' I'or Richard C'ordray, Ohio aHorncy general. as Amici Curiae. US Bunk, Nu!/onu/ Assoc/at/oll )',
Jumcs W f(cn/io. No, CY-10-716322 (Cuyahoga Oy Ohio Ct. Common Pleas Oct. 27.2010); Office of Ohio
Attorney General Richard Cordray. Cordray Outlines Fraud /n Cleveland Foreclosurc Casc (Oct. 27. 2(10) (online
al www.ohioaltorneygeneral.govlBrieflng- Room/News- Releases/October-20 1O/Cordray-Clutl ines- Fraud-in-
Cleveland- Force losure-Ca).
158 Letter from Richard Cordray. attorney general. Slale ol'Ohio. to Judges. State of Ohio (Oct. 29. 2(10).
159 Leller from Richard
LUI.IIl.-,LI. WeIls 29.201
allorney Stale 01' Ohio. to David Moskowitz. deputy general
_I<I(> veaF' 2U IO&ti IC'" ",,"C'IJA f20
of District 01' Columbia General Peter.J. Nickles, S!atcmcn!
)I'I'(ntll'l'Force/osurc Su/c Not/u's (Oct. 27, 2(10) (online al
Fnto/'if'lllc,llt!lIIcnt
at
(,'cllcm/1ll1'cst/!!I,rlill!! /)" f, -, ti,,'p ()f!icc olTonl1ectieul General Richard Blumenthal.
Furec!osulc Ducs, Delllilli(!s !lult 'J(I Its C1' Forcclosures
1(>1 MIRSC()RP. Inc .. MERS (!cncm/'s Oct. 28, 20!O Statc/IIcnt
(Oct. 10) (oillille at The s[alenlenl [hat "Iwle wiIl
lake sleps 10 proteel Ihe lawful 10 I'oreclose thaI the borrower contractually [0 if the borrower defaults on
their ll10ltgage loall.' The law firm K&L Gates has also a critical of the attornev
actions. K&I, Gales LI.P. DC AU Seck, tu l10me Loan Forcc!osures Bused Oil IIi(OIl.IIJI,c'f('
COIlSUlllcr Fillullc/a/ Products Alcrt 1.20 I 0) (online al
7)
4S
foreclosures fc)!' (lO days to allow time to institute measures to assure the integrity of
J f
-I' 163 , J' 'ID f' J J' 1M
e oeument 1 mgs,' 1e, ue leIa epartment re usee t 11S request.
5. Other Possible Implications: Potential "Front-End" Fraud and Doclllnentation
Irregularities
Until the full scope of the problem is determined, it will be difficult to assess whether
banks, servicers, or borrowers knew of the irregularities in the market. However, there are
several signs that the problem was at least partially foreseeable, For example, numerous systems
had been developed to circumvent the slow, paper-based property system in the United States.
MERS, diseussed in more detail above, represented an attempt to add speed and simplification to
the property registration process, which in turn would allow property to be trans felTed more
quickly and easily. MERS arose in reaction to a clash: during the boom, originations and
sccuritizations moved extremely quickly. But the property law system that governed the
underlying collateral moves slowly, and is heavily dependent on a variety of steps memorialized
on paper and thus inefficient at processing enormous lending volume. While systems like MERS
appeared to allow the housing market to accelerate, the legal standards underpinning the market
did not change substantially. 165 In some respects, the irregularities and the mounting legal
problems in the mortgage system seem to be the consequence of the banks asking the property
law system to do something that it may be largely unequipped to do: process millions of
Coreclosures within a relatively short period of time. 166 The Panel emphasizes that m0l1gage
lenders and securitization servicers should not undel1ake to foreclose on any homeowner unless
they are able to clo so illlitil compliance \vith applicable la'v!'s and their contractual agreements
with the homeowner. IC legal uncertainty remains, foreclosure should cease with respect to that
homeowner until all matters are objectively resolved and vetteclthrough competent counsel in
each applicable jurisdiction, SatisCaction of applicable legal standards and legal certainty is in
the best interests oC homeowners as well as creditors and will enable all concerned parties to
exercise properly their legal and contractual rights and remedies.
This combination of - a demand Cor speed, the use of systems designeclto
streamline a legal regime that was viewed as out-of-clate, and a slow, localized legal system
may havc substantially increased the likelihood that documentation would be insufCicient. As
1(,1 Oflicc ofConnccticut i\ttollley Cicncrall{ichanl Bluillenthal,
[[OIliC F(!ICC[OII/ICS ()() 8c('(/l/sc f)ms (Oct. I, 20 I0)
(;ClIc'lO[ Asks CTC'OWIS 10
lclter Irol1l
I{ichard Blumcntlwl. altorncy
Barbara iVl, Ouinn, chief court administrator. State of Connecticut Judicial Brancll, to
State o!Connccticut 14,201
, I,'ederal National Assoc.. Nicolle Bradbury. II/pra note I that the
the book and page number of the Illortgage, as well as the street address and
street address is sufficicut to summary in a foreclosure
Scetioll III/no, discm;sing strains ollserviecrs,
46
discLlssed above, somc authorities are taking dircct aim at MERS and the validity of its
C I d
'1 I '1I f- 167 I 168
processes. /oup e WIt] JUSll1ess pressure exertec onaw Irms anc contractors to process
rapidly f()reclosure documents, the system had clear risks of encouraging corner-cutting and
creating substantial legal difficulties. Furthermore, even if these problems were not foreseeable
frorn the vantage point of the housing boom, the downturn in the housing market and the
foreclosure crisis made them much more likely. In 2008 and 2009, a vast amount of attention
was given to the difficulty of determining liability in the securitization market because of
problems with documentation and transparency. 169 At this time, servicers could have had notice
of the types of documentation problems that could affect the transfer of mortgage ownership. In
sonIc cases, even when servicers were explicitly made aware of the shoddy documentation, they
did little to correct the problem. One judge determined that "[r]ather than being an isolated or
inadvertent instance of misconduct ... GMAC has persisted in its unlawful document signing
'" f" d d . . 170
practices even a tel' It was or ere to correct Its practices.
Smne observers argue that current irregularities were not only foreseeable, but that they
mask a range of potential irregularities at the stage in which the mortgages were originated and
pooled. According to that view, current practices sinlply added to and magnified problems with
the prior practices. The legal consequences of foreclosure irregularities will be magnified if the
problems also plagued originations: aner all, foreclosures are still a relatively limited portion of
the market. If all securitizations or performing whole loans were to be affected, the
consequences could be significantly greater. At this point, answers as to what exactly is the
source of the problems at the front end and how severe the consequences Illay be going flxward
depend to a large degree on who is evaluating the problem. The Panel describes below the
perspectives of varioLls stakeholders in the residential mortgage market.
167 Deposition of Tammie Lou Kapusta, JII re: Jllvesl(galioll olLmv Offices olDavid.l. Siern. P.iI. (Sept.
22,2010)
!6R Federal Nalional Association, Foreclosure nl71e Frames (/ild Feesfbr Breach
01 ' at 3 (Aug. 3 I, 20 10) (Announcement SVC-20 I0-12) (online at
www.efanniel1lae.com/s f/gu ides/ssg/annl trs/pd U20 I O/svc I 0 I 2.pd [) (stal ing tha t Fannie !VI ae might pursue
compensatory fces based on "Ihe lenglh orlhe delay. and any additional cosls thai arc directly allributable 10 the
delay.").
, Ifern:mdo de Soto, 1ruie Assels Were /liddell Assels, Wall Street Journal UVIal'. 25,
atcoll1/artie!c/SBI23793S1139SI ("The real villain is the lack of trust in the paper on
and all other assets arc printed. If wc don't restore trust in paper, the next dehwlt -
student loans will another col in paper and the world economy to its knees."),
Federal National Nicolle iiiI'm note I ("The ('ourt is particularly
troubled the facl thai in tbis case is not Ihe lirst lime Ihat G(\cl I\("s nH"tl-'volull1le
careless to aflldavit has been T'he oflhis case reveals Ibat. the
Florida Court's Older. Gfvll\C's It is well past time for such practices to
end. a/su Secllon C .I'll/nil. It is worth thatthc rights ora bona-lide It)r value arc affectcd
whether the had notice ofa competing claim at the tinlc of'purehasc. ()ne source of conflict
will be wlwt, under thesc circumstances, constitules adequate notice. Panel slafTeonversalions with industry sources
9,2UIU).
47
a. Academics and Advocates for Homeowners
Many lawyers and stakeholders who have worked with borrowers and servicers on a
regular basis ovcr the past few years, primarily in bankruptcy and foreclosure cases, maintain
that documentation problems, including potentially fraudulent practices, have been pervasive and
apparent. 171 'rhese actors, including academics who study the topic, argue tbat bankruptcy and
f()reclosure procedures have been revealing major deficiencies in mortgage servicing and
documentation for quite some time, Professor Katherine M. Porter, a professor of law wbo
testifled at the Panel's most recent hearing, wrote: "I'he robo-signing scandal should not have
been a surprise to anyone; thcse problems were being raised in litigation for years now.
Similarly, I released a study in 2007 - tbree years ago - that showed that mortgage companies
who filed claims to be paid in bankruptcy cases of homeowners did not attach a copy of the note
to 40% of their claims." 172 According to this view, the servicing process was severely flawed,
and "servicers falsify court documents not just to save time and money, but because they simply
have not kept the accurate records of ownership, payments, and escrow accounts that would
enable them to proceed !egally.,,173 In 2008-2009 over 1,700 lost note affidavits were filed in
Broward County, Florida alone.
174
These affidavits claim that the original note has been lost or
destroyed and cannot be produced in court. It is important to recognize, however, that a lost
note affidavit may not actually mean that the note has been lost. In her written testimony to the
Panel, Professor Katherine Porter points out that her study of lost notes in bankruptcies "does not
prove ... whethcr the mortgage companies have a copy of the note and refused to produce it to
stymie the consumers' rights or to cut costs, whether the mortgage companies or their
predecessors in a securitization lost tbe note, or whether someone other than the mortgage
cOlnpany is the holder/bearer of the note.,,1
171 For example, in her (estimony submitted to the Congressional Oversight Panel, Julia Gordon of the
Center Ic)r Responsible J,ending writes: "The recent media revelations about "robo-signing" highlight just Olle of the
many Ivays in which servicers or their eontraetors elevate profits over eustomer service or duties to their clients, the
investors. Other abuses include misapplying payments. fc)rce-placing insuranee improperly. disregarding
requirements to evaluate homeowners fi)r nonfc)reelosure options, and documents related to the
murtgage's ownership or accuunt status." See Cungressiona I Oversight Panel, Written Testimony of.J ulia Gordon,
senIOr counsel, Center for Responsible J.emling, COl' Hearing on TA Rl' Foreclosure Mifigallol1 Programs,
at (Oct. 27, 20 I 0) (onl inc at 10271 Ogurdon.pdf) (hereinafter "Written
Testimony of Julia
Wrillen of Katherine Porter. slipro 1I0k 14. at 9 her paper: Katherine M. Porter,
Misl)(,{wvior olld Misloke ill {iolll<l"I/I)I,.,.' ClollII.\, Texas Law Review. Vol. (online
at The paper an oj' how lIIortgage servieers
Written II"f1l1nIH'" of Julia C;ordon, slipm note I I. at II.
Flurida
"'''lInl"''I'lnc.. Oil Losl Nole '"/""l"\ III Hroword Florida
researe h Ii rill (hat uses and publ ic fi)rec Iosure court records.
201 se IS a
Wllttcn ,."",,,,,,,' oj'Katherine Portcr, supra note 14, at 9,
If the lawyers' and advocates' assertions of widespread irregularities are correct, it could
mean that potentially millions of shoddily documented mortgages have becn pooled improperly
into securitization trusts. Lawyers are using a lack of standing by the servicers due to ineffective
conveyance of ownership of the mortgage as a defense in foreclosure cases. Some of these
lawyers argue that the disconnect between what was happening on the "street level," i.e., with
the origination and documentation of mortgages, and the transfer requirements in the PSAs, is so
huge that no credence can be given to the banks' argument that the issues are merely technical. 176
However, commentators who believe that the problem is widespread also believe that investors
in these securitization pools, rather than homeowners, may be the best placed to pursue the cases
on a larger scale sueccssfully.177
b. Servicers and Banks
Since the foreclosure irregularities have surfaced, the banks involved have maintained
that the problems are largely procedural and technical in nature. Banks have temporarily
suspended foreclosures in judicial foreclosure states in particular and looked into their practices,
but they state that they do not view these problems as fundamental either in the foreclosure area
or in the origination and pooling of mortgages. The CEO of Bank of America, Brian Moynihan,
noted in the company's most recent earnings call that Bank of America has resumed
foreclosures, but "it's going to take us three or five weeks to get through and actually get all the
judicial states taken care of. Thc teams reviewing data have not found information which was
inaccurate, would affect the fiame factors of the f(Jreclosure; i.e., the customer's delinquency,
etcetera.,,178 He focused on the Caulty afCidavits and argued that "[they] fixed the affidavit
signing problem or will be fixed in very short order." 179 Many of the other largc banks have
issued statements in the same vein.
lso
Most of these banks have either not commented on the
issues around the transCer of ownership of the mortgage or maintain that alleged ownership
!
' I I .I' lisI
trans er pro) ems arc WIt lout ment or exaggeratec .
Iii> Consumer
conversations with Panel s(a 1'1' (Oct. 28, 20] 0).
conversations with Panel stalT (Nov. 9, 20] 0).
liS Bank 01" Amcrica Q3 20 I 0 [:arnings Call TransClipl, SlIfJl'I1 note 97. al (l.
Bank of America 20 I0 Earnings Call TrausClipt, SII/)/'II note a( 6.
ISO Jl'ivlori!an Chase 8.: Co., Finane/II/ RcslIlrs II, at 15 (Oct. 13,20]0) (online ai
lilessharelloldercomidownloadsiONlj 105104nn9.x0.x4091 Miennd82-cf74-42ge-81T1-
'''".U'UL] 10 natier" Q320IOFin,lIlcial ou
believe f()reclosurc decisions ilied the I"ads and
circumslanccs ou i\ffidavils and Ili/ilil 110lc 23 ("The issues the
cOlllpauy has idcnti lied do uot relate ill allY way to the quality of the customer and loan data: nor does the company
helieve that any oflhcse instances led (0 !(Jreclosures which should not have otherwisc occurred").
IXI For the American Sccuritization Forum issucd a statemcnt Ihe of
concerns rai,;ed ahout sccuritization "In the last Jew days, concerns have heen raised as to whether the
standard methods of trans l'erri ng owncrship of residential mortgage loans to securitization trusts arc
sufTicieut and appropriate, Thesc conccrns arc withoul merit and our membership is confident thatthcse methods of
49
c. Invcsto,'s
As discussed above, securitization investors have been involved in lawsuits regarding
underwriting representations and warranties for sellne time. Investors in MBS or collateralized
elebt obligation (COO) transactions have a variety of options to pursue a claim. Claims alleging
violations of representations and warranties have typically focused on violations of underwriting
standards regarding the underlying loans pooled into the securities. Another option may be to
pursue similar claims relating to violations of representations and warranties with respect to the
transfer of rnortgage ownership. In the wake of the current documentation controversies, it
appears that private investors may become rnore emboldened to pursue put-back requests and
potentially file lawsuits. For example, and as discussed above, a group of investors - including
FIU3NY in its capacity as owner ofRMBS it obtained from American International Group, Inc.
(AIO) sent a letter to Bank of America as an initial step to be able to demand access to certain
loan files.
ls2
Direct contact with the bank was initiated because the securitization trustee (Bank
of New York) had refused to comply with the initial request in accordance with the PSA.
FRBNY, as an investor, is on equal footing with all the other investors, and according to
FRBNY's representatives, they view this action and any potential participation in a future
lawsuit as one way to attempt to recover funds for the taxpayers.
IS3
While there Inay be a growing appetite for pursuing such lawsuits, these lawsuits still
have to overcome a fair number of obstacles built in to the PSAs, IS4 as well as problems inherent
. I I . I ... . 1 18') A I I
III any ega actIon t Jat requIres .JOInt actIOn )y many actors. . 's a genera matter, wJat
appears to be a significant problem is that the operating documents for these transactions
transfer are sound and based on a well-established body of law governing a multi-trillion dollar secondary mortgage
market.' See American Securitization Forum, ASF Savs Mortgage Securitization Le.gal Stl'llcllIres & Loan
1,.,""-1';''''- Are Sound (Oct. 15. lO I0) (online at www.americanseeuritizalion.eom!story.aspx'iid=4457) (hereinafier
"ASF Statement on Mortgage Securilization Legal Structures and Loan Transfers"). ASF will issue a white paper in
the coming weeks to elaborate fiJrther on this statement.
Sec Letler from Gibbs & Bruns LLP to Countrywide, supra note 95. As noted the letter
predominantly problems with loan quality and violation of prudent servicing obligations. .s'ee also Gibbs &
Bruns LLI'.Inslitlllionallloitlers HMBS Issue Notiee Non'PCljimllance Idenli/t,ing
Failures Master Sen'icer to Perfimn COl'enanlS and in More Th(1/7 $47 Billion
ou,'urVIV,llle-}s.\Uc)(1 RAlliS 18.20 I0) (online at
\vww.gibbsbllll1s.eoll1/files/l Jploads/Documents/Press Release 10 18 10.pdf); Ciibbs
& Bruns LLI'. RMliS Inifiative (Oct. 20, 20 I0) (onlinc at www.gibbsbruns.collJ/eounlrywide-nllbs-
initiative-I 0-20-20 I
FRBNY staff conversations with Panel stafl 26,2010)
Scction D.l. In auellllUII. see d'''''j'''''''''''' of PSAs III
For further diSCUSSion 01' thesc obstacles,
Scction 1).1. SIl/JlII.
For the investors action have 10 consider costs associated With thcir litigation such as
imlclllnificalions 10 be to trustecs when those are directed to initiate a lawsuit on the bondholders' behalf
Another consideration is that ng II1vestors Illay also bcnefit from actions without
,',11,11'11",111;0 to thc costs.
50
generally give significant discretion to trustees in exercising their powers, I and these third
parties may not be truly independent and willing to look out for the investors. J 87
F. Assessing the Potential Impact on Bank Balance Sheets
I. Introduction
A bank's exposure to the current turmoil in the residential real estate market stems from
its role as the originator of the initial mortgage, its role as the issuer of the packaged securities,
its role as the underwriter of the subsequent mortgage trusts to investors, and/or its role as the
servicer 0 f the trou bled loan.
188
Through these various roles in the mortgage market, the banking
sector's vulnerability to the current turmoil in the market generally encompasses improper
foreclosures, related concerns regarding title documentation, and mortgage repurchase risk
owing to breaches in representations and warranties provided to investors.
181, For example, in some PSAs, trustees are not required to investigate any report or, in many agreements,
request put-backs, unless it is requested by 25 percent of investors. See Pooling and Servicing Agrccment by and
among JP. Morgan COIporation J. Depositor, et aI., at 122 (Apr. I, 2006) (online at
www.scribd.eom/doc/3I45330 I/Pooling-Servicing-Agreement-JPMAC2006-NC1-PSA). Abscnt that threshold
bcing Inet, thc trustec has discretion to act. For further discussion, see Section D.2.
187 Amherst Securities Group 1.1', Conference Call: "Rohosigners, "viERS, And I'lIC Issues IVilh Reps and
IVorranls" (Oct. 28, 2(10). Ifthc investors wished to act against trustces they believe arc not independent, there arc
some legal avenues they could pursue. For example, the investors could remove the trustee using provisions that
are typically in PSAs that allow fi.Jr such a removal. Such provisions, howcver, onen require 51 percent of investors
to act. 1n addition, to the extent that the trustees arc found to be Ijdueiaries, if the trustee takes a specifje action that
the investors believe not to be in their best interest, they may be able to sue the trustee. If successful, investors could
be awarded a number of possible remedies, including damages or removal of the trustee. Greenljeld, Stein, &
Sellior, Fiduciarv Re!11oval Proceedings (online at www.gss-law.com/PracticeAreas/Fidueiary-Removal-
Proceedings.asp) (accessed Nov 12,201 Gary B. Freidlnan, ReliefAgainst a Fiduciarv: SCPA 21 02
NYSBA Trusts and Estates L,aw Section Newsletter, at 1-2,4 (Oct. 13,2003) (online at www.gss-
law.eom/CM/Articles/SCI' 02%,20Proceedings':I,,20-I,,20Reviscd.pdl) ("The hli lure of the fiduciary to
comply with a court order dirccting that the infi.Jrll1ation be supplicd can be a basis j()r contcmpt undcr SCI' A
607-1 and/or suspcnsion or rcmoval of the fiduciary under SC'PA I I.
ISS There arc also risks fi.n holders of second lien loans, but these loans are not as directly impacted by
foreclosure as fjrst-lien mortgages, since most second liens werc not securitized, and are held on the
balance shects of banks and other market participants. As discussed above, if second liens were perfected and fjrst
liens wcrc not, may actually takc priority. See Section D.2 fi.Jr further discussion of clTects on sccond lien
11ulclers.
/\n report rrom January 2010, values securitized second hens only at $32.5 billion or the $1.053
tnllion orthe total second liens outstanding. Amherst Securities Group Lt'. Amhcrst 2nd Liens
llow at I (Jan. 20 I
At the end or the second quarter of 20 I0, the Ii.lur l J.S. cOllllllercial banks -- Bank or America,
C'itigroup, J (hase. and Wells .- rcported $433.7 billion in second lien mortgages while having total
tv 01'$548.8 billion, Amherst Securitics Group LP data provided to Panel stafT(Sept. 2, 2(10); Federal
Insurance Stallslics flislillltiulis (online at www2. Nov.
20 I This is based on not their and therel()le !!lay not
include all sceond liellS held affiliates.
51
Many investment analysts believe that potential costs associated Vv'ith bank foreclosure
irregularities are manageable, with potential liabilities representing a limited threat to earnings,
rather than bank capital. IR9 Market estimates stemming from foreclosure irregularities to a
potential prolonged f()reclosure moratorium range fI'om $1.5 to $10.0 billion for the entire
. I 190 I I 1'1 I .. . 11'd I' . I I'
me ustry. ... owever, w 11 e t 1e situation remams U1, t 1e emergmg consensus m t le mar <et IS
that the risk fl'OJn mortgage put-backs is a potentially bigger source of instability for the banks. I'll
Using calculations based on current market estimates of investment analysts, the Panel calculates
a consensus exposure for the industry of $52 billion. Aside from the potential for costs to far
exceed these market estimates (or be matcrially lower), the wild card here is the impact of
broader title documentation concerns across the broader mOligage market. In any case, the
fallout from the foreclosure crisis and ongoing put-backs to the banks from mortgage investors
are likely to continue to weigh on bank earnings, but are, according to industry analysts, unlikely
. 197
to pose a grave threat to bank capltallcvels. -
IIowever, there are scenarios whereby wholesale title and legal documentation problems
for the bulk of outstanding mortgages could create significant instability in the marketplace,
leading to potentially significantly larger effects on the balance sheets of banks. Under
significantly more severe scenarios that would engulf the broader mortgage market--
encompassing widespread legal uncertainty regarding mortgage loan documentation as well as
the prospect of extensive put-backs impacting agency and private label mortgages bank capital
levels could conceivably conle under renewed stress, particularly for the most exposed
institutions. 191 It is unclear whether severe mortgage scenarios wcre modeled in the Federal
IR9 FBR Foreclosure Mania Conference Call, supra note 3.
190 See Section 1".2 li)r further discussion on costs stemming from a foreclosure moratorium.
I'll I lowevcr, to thc cxtent Ihat banks hold MBSs originated/issued by non-affiliates, they may themselves
benefit Ii'om put backs.
192 Credit US Banks. PUIhaek Losses Appear Manageable/ilr Ihe Banks, at 4 (Oct.
2il. 20 I 0) (hereinal1er "Credit Suisse on i'v10rtgage Put-back Losscs"); I)eutsche Bank. RCl'isiling PUlbacks and
Securili:-ariolls. at 7 (Nov. 1.20 I 0) (hereinal1er "Deutsche 13ank Revisits Plitbacks and Securitizations"); FB R
Capital Markets. Lo,ses $44B/in' Industrv - SCl1Saliollu!islJl Nol IVarrantcd (Sept.
20 I 0) (hcrcinal1er "'FBR on Repurchase-Related Standard & Poor's on the Impact of Mortgage Troubles
on U.S. Banks. SIIlml note 1Oil.
19\ There are other mortgage risks that arc difficult to quantify. such as the potential elfect mortgage put-
h;teks may have on holders of interests in CDOs and the banks that serve as counterparties for synthetic C])()s. A
C'!)() is a financial instrument that is made up of credit dehlUlt swaps on a
relerenced offixed-ineome assets. in these cases olten including the mezzanine tranches of RMBSs.
hanks served as intermedi;uies ((II' clients 10 shirt risk and theref<Jre structure a synthetic CDC) These banks
p[lc:ka;,'ed and underwrute CDOs and may have retained a certain amount of liquidity risk. It is nearly
however to measlile the effect of this issue due to the f ~ l c t that there is no reliable data that
estimates the size of the ("DO market, and the f<let that eOllnterparty risk in synthetic CDC)s is to under a
contract and therefore no data is availahle. Panel staff conversations with sources 4.
52
Reserve's 2009 stress tests, which, in any event, did not examine potential adverse scenarios
194
beyond 2010.
While the situation is still uncertain, the worst-case scenarios would have to presuppose
at a minimum a systemic breakdown in documentation standards, the consequences of which
woulcllikely grind the mortgage market to a halt. However, it is important to note that, so f ~ l r ,
many of the experts who have spoken to the question (and the banks themselves) believe that
securities documentation concerns are unlikely to trigger meaningful broacl-basecllosses. These
experts state that although put-backs owing to breaches ofrepresentations and warranties will
continue to exert a toll on the banks, it will largely be rnanageable, with costs covered from
ongoing reserves and earnings. Furthermore, as noted in Section D, there are a considerable
number of legal considerations that will likely lead to losses being spread out over time. 195
Residential U.S. mortgage debt outstanding was $10.6 trillion as of.J une 2010.
196
Of this
amount, $5.7 trillion is government-sponsored enterprise (GSE) or agency-backed paper, $1.4
trillion is private label (or non-GSE issued) securities, and $3.5 trillion is non-securitized debt
held on financial institution balance sheets. 197
For gencral in{(lIIllation on thc countcrparty risk involved in synthetic CDOs, .ICC Michael (iillson,
ll]a'Cr,I'Iil/lilil/.". IIIC /(is!! eDOs (July (on!ine at www.euraeao-!mve... ni.U.. -
(l/l'edera 1- reserve-edo-allaIys is- 2004, pd n.
,''''''''". Thc SIII)("""","'" e
Iederal re:scrve, :co\'!n('w,;cvcnls!nrcss/h,!'lcp!hclcP71 JOC)! )4)4,11 ,pd l'),
ASS('SSIlIClll P""m'"m
Sce Section j) Il)r a discussion on considerations of {l)reclosure documcnt irregularities,
1% 130ard or Governors of the Federal Rcserve .)V:,Il"", Slalislics (I[ lIisloricu! Dalu,
20 I 0) at
53
Figure 2: Residential (1-4 Family) Mortgage Debt Outstanding, 1985-2009 (millions u(
1 9 ~
dul lars)
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
o
[ III GSE and Agency MBS &l Private Label MBS Non-Securitized Mortgage Debt
Industry-wide, 4.6 percent of mortgages are classifiecI as in the foreclosure process. In
addition, 9.4 percent of mortgages are at least 30 days past due, approxilnately half of which are
199
more than 90 days past due.
Board of (iovell1ors of Ihe Federal Reserve Fcdcm! RC\iTl'C Siallsllca! Rclcil\c: Fluw
Unlled Sioies Dora Duwll!uad /',.,,,,,.0111 (Instrument: Home Annuall
federal I) (accessed Nov, 12. 201
1')'1 IVI,)1'I,,.,,,1' Bankers Association, Naliuna! UCllllall,'llCT'
"ivlFIA National 20 I0"), See a!su V:l"d,,"""
Fureclusure Slaris !)e('1'('ase in LOiesl MBA Naliulla!
I'oreclosure Slarls").
54
Figure 3: Delinquency and Foreclosure Rates (200(,-21110Y!OO
16%
14%
12%
10%
8%
6%
4%
2%
0%
l1)
/g
l1) l1)
'" '" '" '"
8 8
&
8
/!} /!} /!}
&
0 0
0 0
8 8 8 8
0
c:; c:;
0 a a a 0 0 0 0
ry ry ry ry ry ry ry ry ry ry ry ry ry ry ry ry ry ry
CJ CJ CJ
"t
.....,
CJ CJ
"t
.....,
CJ CJ
"t
.....,
ry
CJ
"t
.....,
CJ CY CY CY CY CY CY CY CY CY
II Delinquency Rate
a. Leading Market Pal,tidpants
Foreclosure Inventory at End of Quarter
Troubled mortgagcs were largely originated in 2005-2007, when underwriting standards
'vvcre most suspect, particularly for subprime, Alt-A and other loans to low-crcdit or poorly
documcntcd borrowcrs. Figure 4 below outlines the largest mortgage originators during this
period, ranked by volurne and markct share.
JlIl 1I11 1I11 I\. V rates IJlelude loans rhar arc 30 GO and 90 or 11I0re past due. Foreclosure
rares IJlelude loaus III the f(lreclosurc process at the eud ol"eaclJ quarter. See Id.
Figure 4: Largest U.S. Mortgage Originators, 2005-2007 (bilfiolls
Market
('
'y
Volume Share
Bank of America 1,880 22.1%.
Countrywide Financial 1,362 16.0'Y,)
Bank of America Mortgage & Affiliates 518 6.1 '/'o
Wells Fargo 1,324 15.5%
Wells Fargo Home Mortgage 1,062 12.4%
Wacbovia Corporation 262 3.1
.lPMorgan Chase 1,151 13.5%
Chase Home Finance 566 6.6%,
Washington Mutual 584 6.9%
Citigroup 506 5.9'Y..
Four '-i'. ... '"
4,861 57.0%
Total Originations (2005-2007) 8,530
The four largest banks accounted for approximately 60 percent of all loan originations
between 2005 and 2007. Totals for Bank of America, Wells Fargo, .lPMorgan Chase, and
Citigroup include volumes originated by companies that these firms subsequently acquired. As
Figure 4 indicates, a significant portion of Bank of America's mortgage loan portfolio is
comprised of loans assumed upon its acquisition of Countrywide Financial. Similarly, JPMorgan
Chase more than doubled its mortgage loan portfolio with its acquisition of Washington Mutual.
Figure 5, below, details the largest originators of both Alt-A and subprime loans between
2005 and 2007. The five leading originators of Alt-A and subprime loans rcpresented
approximately 56 perccnt and 34 percent, respcctivcly, of aggregate issuance volume for these
loan types. Alt-A and subprime loans represented approximately 30 percent of all mortgages
originated fi'om 2005 to 2007.
Jllside Ivl"d"'lOe Finance.
56
Figure 5: L,eading Originators of Subprime and AIt-A Loans, 2005-2007 (billions oj
)0)
c!o//arsr
-------------.--------------------- ------------,
ALT-A ORIGINATIONS
------------------------------ --,---------,---------1
(",
I]' Volume
Market
Share
Countrywide Financial (Bank of America)
IndyMac
JPAforgan Chase
Washington Mutual
EMC Mortgage
Chase flame Financial
GMAC
GMAC-RFC
GMACResidentiallIolding
Lehman Brothers
LOl
Top Five i,A1 ;:,0",0",' ... 1'0;:,<>':1,,' ... 1'
Total Alt-A Origina!!.<.)Ils
172
145
]02
40
38
25
98
77
21
79
596
1,065
16.2'j-()
13.6%
9.M6
3.8'j-()
3.5%
2.3%
9.2%
7.3%
1.9%
7A';;')
56.01.,
SUBPRIME ORIGINATIONS
----------
Market
__
Ameriquest Mortgage 112 7.70;;)
New Century J09 7
Countrywide Financial (E3ank of America) 102 7.0%
JPMorvan Chase 99 6.8%
r .. '_:J
I
One Mortgage 80 5.5%

To!, Five Ao('reoale 502 34.4'Y.,
1_",_4_5_8_-'-- -'
As shown in Figure 6, below. the five leading underwriters (pro f(mlla fe)r acquisitions) of
non-agency MI3S betwccn 2005 and 2007 accounted f()r 58 percent of the total underwriting
volume f()t the period. It is of note that the three firms with the largest underwriting volumes
during this period, Lehman Brothers, Bear Stearns, and Countrywide Securities, have either
['ailed or been acquired by another company.
Insidc Mnclu",,,' Financc.
Includcs /\It-A originations I'rOI11 Lchman Brothcrs subsidiary, Aurora Loan LLC.
57
Figure 6: Leading Underwriters of Non-Agency Mortgage-Backed Securities, 2005-2007
. 704
(hi/lions of do//arsr
lVIad{et

4.7'Yt,
9.8%,
5.0%
12.2%
3.1%
9.1%
10.6%
9.0%
6.7%
58.0'Y,.
593
143
298
152
371
94
277
322
273
203
IJlC!('I"'VI'it iJlV Volume
.!PMorgon Chase
JPMorgan Chase
Bear Stearns
Washington Mutual
Bank q('Al1lerica
Merrill Lynch
Countrywide Securities
Lehman Brothers
RBS Greenwich Capital
Credit Suisse
Five
As noted above, banks either retain or securitize market conditions permitting -the
mortgage loans they originate. In terms of mortgages retained on bank balance sheets, Figure 7
below lists banks with the largest mOl1gage loan books, as well as the concentration of foreclosed
mortgage loans, ranked by volume and as a percentage of overall residential mOl1gage balance
sheet assets.
Figure 7: Bank Holding Companies with 1-4 Family Loans in Foreclosure Proceedings,
.June 2010 (hi/liolls
Total 1-4
Family
Loans
1-4 Family
Loans in
Foreciosul'e
1'1'1'('('1111 of
Family Loans
in FOl'eciosure
Bank of America
Wells
J PMorgan Chase
Citigroup
IISBC North America
U.S. Bancorp
PNC: Financial Services C3roup
SunTrust Banks
F"inancial (GlvIAC)
jifth Third ({"net'!""
'rotal for All Bank
427.1
370.7
259.9
178.4
72.9
58.1
54.9
47.9
21.5
21.4
52.2
18.8
17.6
19.5
6.0
6.6
2.5
2.7
2.4
2.2
0.7
87.7
4.4(/0
4.7%
7.5'1<,
9.0%
HU'/n
3.2';j,
4.1'Y..
Inside Finance,
SNI, Financial. These data include rcvnlv(!lo or permanent loans secured
!lIortgages(FU FMIIA. or or other liens (first or junior) secured
property.
real estate as evidenced
lA residential
The leading mortgage servicers are ranked below by loan volume servieed and market
share, including the percentage of the overall portfolio in foreclosure. During the second quarter
of 20 I0, the 10 largest servicers in the United States were responsible f(lr servicing 67.2 percent
of all outstanding residential mortgages.
Figure 8: Largest lJ.S. Mortgage Servicers, .June 2010
206
Servicing
Portfolio Percent of Percent of
Amount Total Loans Portfolio in
(',
Iy (billions) Serviced Foreclosure
Bank of America 2,135 20.1 'Yo 3.3%
Wells Fargo 1,812 17.0'% 2.0'X,
I
lPMorgan 1,354 12.7% 3.6%
Citigroup 678 2.3%
Ally Financial (GMAC) 349
I
3.3% n/a
U.S. Bancorp 190 1.8'% n/a
SunTrust Banks 176 1.7% 4.9%
Plnl Mortgage 156 1.5% 1.8%
OneWest Bank, CA (lndyMae) 155 1.5'% n/a
PNC Financial Services Group 150 n/a
10 l-,argest ';';">;'" Servicers A 7,155 67.2%,
Total Residential 'VI f),,"';
..
10,640
- -- '.-
2. FOl'ecfosure Irregularities: Estimating the Cost to Banks
Assessing the potential financial impact of f()reclosure irregularities, including a
prolonged f()reclosure moratorium, on bank stability is complicated by the extremely fluid nature
of current developments. For example, aner unilaterally halting foreclosure proceedings, both
Bank of America
207
and Ally Financial (GMAC) announced their intention to resume f()reclosure
proceedings in the wake of intcrnal reviews that did not uncover systemic irregularities,
As a point of as or June 2010, (13 percent of fl)reclosures occurred on homes where the loan
was either owned or guaranteed government investors such as Fannie Mae and Freddie Mac, while the remaining
J 7 percent 0 I' Illreclosurcs on homes owncd pnvate investors. Data on percentage of portrolio in
{(lreclosure unavailable {llr Financial. U.S. Bancorp, ()neWest Bank, and PNC Financial Services Group,
Inside Finance.
Bank or exposure. in part
because or its or involved in CDOs, and its
assun1ptlon or Iiahi the Panel's (lctober 27, 20 10 Cecala of Inside !\;11)('1 '''' c,,'
Finallce noted that !lank 01' America was one of the f(-w mortgage lenders to steer away 1"0111 the subpril11e
markct. I JpOIl tile hal1k ion or Coulltrywide in 20()}\, however, Bank or America became the holder or the
largest suhprime mortgage port{lliio (in the industry). Sec Testimony orGuy slIpra nOle 133.
59
I);
according to both firms.
20s
Looking ahead, the chief variables are the extent and duration of
potential f(xeclosure disruptions or an outright moratorium, which would impact servicing and
foreclosure costs and housing market prices (and recovery values). Such seenarios would also
likely increase litigation and legal risks, including potential fines from state attorneys general, as
well as raising questions regarding the extent to which title irregularities may permeate the
209
system.
During recent conference calls f()r third quarter 20 I 0 earnings and subsequent investor
presentations, the five largest mortgage servicers addressed questions regarding foreclosure
irregularities and potential liabilities stemming from these issues.
2lO
Bank ojA111 erica
2
1J - Bank of America initially suspended f()reclosure sales on
October 8, 2010 across all 50 states after reviewing its internal foreclosure
procedures. On October 18,2010, the bank began amending and re-filing 102,000
foreclosure affidavits in 23 judicial foreclosure states, a process expected to take three
to five weeks to complete. While asserting that it is addressing issues surrounding
affidavit signatures, the company claims that it has 110t been able to identify any
. f' I I" 212
Improper orec osurc ( eClSlOns.
208 Bank of America Q3 2010 Earnings Call Transcript, supra note 97, at 6 COn the foreclosure area ... we
changed and started to reinitiate the foreclosures.. GMAC Mortgage Statement on Independent Review and
Foreclosure Sales, slipra note 20 Cln addition to the nationwide measures, the review and remediation activities
related to cases involving judicial af'lldavits in thc 23 states continues and has been underway for approximately two
months. As each of those fIles is reviewed. and remediated when needed, the foreclosure proecss resumes. GMAC'
Mortgage has found no evidence to date of any inappropriate j(lreclosures.")
209 See Section 1'.3 for further discussion on potential bank liabilities rrom securitization title irregularities
and mortgage repurchases or put -backs.
2!O In October 20 I0, the SF:C sent a letter to Chief Financial Officers of certain public companies to remind
them of their disclosure obligations relating to the f(.lreclosure documentation irrcgularities. See Sample SF:C Letter
(In Disclosurc Guidelines, slipra note 113. The leiter noted that affected public companies should carefully considcr
a variety of issues relating to foreclosure documentation irregularities, including trends, known demands.
commitments and other similar elements that might "reasonilbly expect to have a material favorable or unnlvorable
impact on your results of operations, liquidity, and capital resources." Although the leiter notes a variety of areas
that would require disclosure. the quality of disclosure will depend on what the companies in question arc able to
detcrmiue about the of the irregularities on their Genuine uncertainty will result in less useful
disclosure. ()nce the inf()i"fnation is in a repent have a duty to it if it hecollics
inaccurate or misleading.
i Bank or America
ph;; .col}l()ratc-I r.net/Lxlemal. h I.,,'J ,lpn, I
Bank or Amcriea I() L,allllllgs
It that Bank of' America I(Hlnd errors In 10 to 25 !()leclosure cases out of the Ilrst
hundred the bank !las \Vritten'l ofKathcrinc Porter, supra note 14, at 10); Jessica Hall
Anand [lastI, Balik /Imcrlc([ SOllie /\flslides III Force/o.lure Files as It 10 Resuhmlt
Documcllts Iii / (J(J() rhe Wall ,S'tree! .Journal Sold, Reuters 25.20 I0) at
.reutcrs.com/articic/idIISIRE690U422UI0 I
60
Citigrou/
11
-- Citigroup has not announced plans to halt its foreclosure proceedings.
The bank has nonetheless initiated an internal review of its foreclosure process due to
increased industry-wide focus on foreclosure processes. It has not identified any
issues regarding its preparation and transfer of foreclosure documents thus far.
IIowever, Citigroup noted in a recent filing that its current foreclosure processes and
financial condition could be affected depending on tbe results of its review or if any
industry-wide adverse regulatory or judicial actions are taken on foreclosures.
2
14
JPMorgan ('//(/se
215
Beginning in late September to mid-October 20 I0, JPMorgan
Chase delayed foreclosure sales across 40 sLaLes, suspending approximately 127,000
loan files currently in the foreclosure process.
216
While the company, similar to Bank
of Amcrica, has identified issues relating to foreclosure affidavits, it does not believe
that any foreclosure decisions were improper. On November 4,20 10, JPMorgan
Chase sLated that it will begin refiling foreclosures within a few weeks.
217
The firm
also stated in a recent filing that it is developing new processes to ensure it satisfies
all procedural requirements related to foreclosures?18
Bank of America expects increased costs related to irregularities in its foreclosure affidavit procedures
during the !c)lIrth quarter of 20 I0 and into 2011. Costs associated with reviewing its foreclosure procedures,
revising affidavit filings, and making other operational changes will likely result in higher noninterest expense,
including higher costs and legal expenses. Furthermore, 13ank of Arnerica anticipatcs highcr scrvicing
costs ovcr the long term if it must make changes to its foreclosure process. Finally, the timc to complete foreclosure
sales may increase temporarily, which may increase nonperforlning loans and servicing advances and may irnpact
the eollectability of such advances. as well as the value of the bank's rnortgage servicing 13ank of America
Corporation, Form / O-QJilr the Quarter/v Period Elided SqJ!ember 30. 2010, at 95 (Nov. 5, 20 I0) (online at
scc.govlArchives/cdgarlchrtai70858/00009501231010 1545/g245 13e IOvq.htm).
m Citigroup, lnc., honseript: Cifi 7hird Quarter 20/0 Earnings Review, at 6-7 (Oct. 18, 2(10) (onl ine at
www.eitigroup.com/ci ti/fi nidata/qer 103 tr. pd f?ieNocachc
cc
I
214 Citigroup 10-Q fc)r Q2 20 J0, supra note 101, at 52.
.I Pfvlorgan
supra note 53.
20 I0 r:inancial Rcsults. SU/JUt notc 180, at 14-15; Q3 20 I0 Earnings Call Transcript,
JPMorgan Chase anticipates additional costs li'onl implementation of these new procedures, as well as
expenses associated with maintaining fClreclosed properties, rc-filing documents and f()reclosure cases, or possible
declining home prices during fc)reclosure suspensions. Thesc costs arc dependent on the length of the !(Jreclosure
suspension. JI'Morgan Chase & Co.. FO/IJI /O-Qfi!f'!he QIIIIJler/]' Period Ended Sefitel7lhe/30. 20/0. at 93 (Nov. 9,
20 I0) (oilli lie at 9617i0000950 12310 I f 42e IOvq.htm) (herei na ner
"JPMorgan Chase FOrln IO--Q")
Slifi/ll nole IS, at
Charlie Scharf. CL(). Retail A.IM/ell/!/on
r 7
Chase 8: Co..
Financial Services. at n 4.2(10) (online al
Ii les.sharelloldereOnlichJ\Vllloads/C)NE/967802442xOx4 I5409/c88 19007 5-4d7e-abj(J-
S4(Jb90dbcge3/BAAB Presentation Dra n II -in-lOl'l NAL PRJ NT.pdf) (hcreinaller ".I 1'1',1 Presentation at
Associatioll or Boston
Chase FOrln f slipm note 215, at 93.
61
IVells Fargo
219
Wells Fargo expressed conlidenee in its foreclosure documentation
practices and reiterated that the linn has no plans to suspend foreclosures. The bank
added that an internal review identified instances where the linal affidavit review and
some aspects of the notarization process were not properly executed. Accordingly,
Wells Fargo is submitting supplemental affidavits for approximately 55,000
I
' I . 2'"" I' . II' I 220
orec osures 111 ,) JU( ICIa orec osure states.
A l ~ v Financial (GMAC')221 - As of November 3,2010, GMAC Mortgage reviewed
9,523 foreclosure affidavits, with review pending on an additional 15,500 files. The
company noted that its review to date has not identified any instances of improper
foreclosures. Where appropriate, GMAC re-executed and refiled affidavits with the
courts. GMAC stated that it has modified its foreclosure process, increased the size
of its staff involved in foreclosures, provided more training, and enlisted a
"specialized quality control team" to review each case. The company expects to
complete all remaining foreclosure file reviews by the end of the year. Furthermore,
GMAC recently implemented supplemental procedures for all new f()reclosure cases
in order to ensure that affidavits are properly prepared.
222
While a market-wide J()reclosure moratorium appears less likely J()llowing comments
from the Administration and internal reviews by the affected banks, state attorneys general have
yet to weigh in on the issue. Market estimates of possible bank losses related to a f()reelosure
moratorium have varied considerably, from $1.5 billion to $10 billiOl1.
223
Industry analysts have
) 19 Wells Fargo 8:. Company, 3Q I0 Quar/erlv Supplemen/, at 26 (Oct. 20, 2(10) (onl ine at
www.wcllsti.lrgo.eom/downloads/pdflpress!3Q I O ~ Quarterly SupplemenLpdf); Wells Fargo 8:. Company, Q3 2010
Earnings Call 'hanseript (Oct. 20, 2010) (online at www.morningstaLcom/earn-023!earnings--earnings-call-
tra nscri pt ,aspx!WFCien- US.shtml).
220 Wells Update on Affidavits and Mortgage Seeuritizations, supra note 23.
The company has stated that it could incur significant Icgal costs if its internal review of its foreclosure
proeedurcs causes the bank to re-execute foreclosure documents, or if t()reelosure actions arc challenged by a
borrower or overturned a courL \Vclls Fargo 8:. Company, Form 10 Qj()r/he Quarter/l' Period Ended )(,li/C'I71/ler
30,2010, at 42-43 (Nov. 5. 2(10) (online at
see.gov!Arehi ves!edgar/data/72971 10000950 1231 () I() 1484!L'i6682e 1Ovq.htlll).
9,
Earnings Review, at 10 (Nov 3,20 I0) (online at phx.corporate-
50S1JQ9MzQ2Nzg3 Nnx/JaCilsZEIEPTQwMjMz()/ !xUeXBIPIl8:.t= 1).
()"-",."",.I,, Period Ended 30,2010, at 75-76
An:hive:i!e<Jg,lr!(!al,1/40729;O()O 11931251 0252419!d IOq.htm).
Ally Financial Inc..
ir. net!Ex telTlal.Fi I,.')",.""
2(10)
i\ Credit Suisse research note estimated that Bank or America, JPMorgan Chase, and Wells could
cach fi.lce l11illion""$600 million in increascd costs and write-downs 011 liJreelosed homcs. assuming a
tillee-monlh I()reclosule and associated costs and write-downs approximating I percent per month, An FISR
Markets research note estimated $6 billion-$l 0 billion in potential losses from a three-month j()I"eclosure
moratorium the enlire This estimate aSSlll1leS that there arc million homes
cUITently in the 1()lcelosure process, and that the costs ora on each f()rc:e!osed property is 1.000 per rnonth.
Credit Suisse. IsslIe's MOllllr at 10 15.20 I0) (hcreinaHcr "Credit Suisse on [v!ounting iVlc)rt;<!l.:;e
Issues"); FBR Foreclosure Mania Conlc:renee Call. SUfJW note 3,
62
noted that a three-month foreclosure delay could increase servicing eosts and losses on
foreclosed properties. In addition, banks could also added litigation costs associated with
resolving flawed foreclosure procedures.
224
However, these estimates can of course become
quickly outdated in the current environment. As noted, firms that previously suspended
foreclosures are now beginning to re-file and re-exeeute foreclosure affidavits, and market
estimates accounting for shorter foreclosure moratoriums are currently unavailable.
Although they have not been implicated in the recent news of foreclosure moratoriums,
thousands of small to mid-level banks also fnce some risk fi'om foreclosure suspensions if they
act as servicers f()l' larger banks.
225
Generally, small community banks, as well as credit unions,
are more likely to keep mortgage loans on their books as opposed to selling them in the
d k 1
'1 . .I ... I I . I I . I I' 226
secon ary mar et. ley pnman y use secuntIzation to lee ge ns (am Il1crease ene Il1g power.
Accordingly, foreclosure moratoriums would prevent small banks and credit unions from
working through nonperfonning loans on their balance sheets, limiting their capacity to originate
new loans.
227
As of.J une 20 10, residential mortgages made up 31 percent of small banks' loan
portfolios and 55 percent of credit union portfo!ioS.
228
3. Securitization Issues and Mortgage Put-backs
Foreclosure documentation issues highlight other potential - and to some degree,
related _. mortgage market risks to the banking sector. Questions regarding document standards
in the roreclosure process are tangential to broader concerns irnpacting bank's representations
and warranties to mortgage investors, as well as concerns rcgarding proper Icgal documentation
ror securi tized loans.
Given the lack or transparency into documentation procedures and questions as to the
capacity of disparate investor groups to centralize claims against the industry, market estimates
of potential bank liabilities stemming from sccuritization documentation issues vary widely.
224 FBIZ Foreelosme Mania Conference Call. supra note 3.
rreasury conversations with Panel stalT(OeL 21. 2(10).
Third stalfeonversations \vith Panel staff(()ct. 29.2(10).
Jason (iold and Anne Kim. The Case a Foreclosure Moratoriulll. Third Domestic Pol
at 3-4 20.20 IOJ (online at contenUhirdway.ol g/publicationsI342/Thinl Mcmo -
a Forcclosme f} (hereinal'tcr "Third IJolliestic Pol Mcmo on the Case
a Foreclosure rvloratorium").
Small banks are those with ullder I billion in total assets. Panel.
Small BOllks III the Purchase Progrolll. at 74 (.July 14.2(10) (online at
COIl.S,,:natc.goI;/docllml::nts!copO 141 SNL Financial. Credit union residential t11or(l!al!e loan
include iirst alld second lien mortgages and home equity loans. Credit t lnion National US.
C,edit Uniun . Aliel-Yea, 211 I 0 Unfun Rcsulrs, at 6 7. 20 10) ne at
63
a. Securitization Title
As discussed above, documentation standards in the foreclosure process have helped
shine a light on potential questions regarding the ownership of loans sold into securitization
without the proper assignment of title to the trust that sponsors the mortgage securities. There
are at least three points at which the mOligage and the note must be transfelTed during the
securitization process in order for the trust to have proper ownership of the mortgage and the
note and thereby the authority to foreclose if necessary. Concerns that the proper paperwork was
not placed in the securitization trust within the 90-day window stipulated by law have created
unccliainty in MBS markets.
Any lack of clarity regarding the securitization trust's clear ownership of the underlying
mortgages creates an atmosphere of unceliainty in the market and a bevy of possible problems.
A securitization trust is not legally capable of taking action on mortgages unless it has clear
ownership of the mortgages and the notes. Therefore, possible remedies for loans that are
seriously delinquent such as foreclosure, deed-in-lieu, or short sale - would not be available to
the trust. 229 I-itigation appears likely from purchasers of MBS who have possible standing
against the trusts that issued the MBS. Claimants will contend that the securitization trusts
created securities that were based on mortgages which they did not own. Since the nation's
largest banks often created these securitization trusts or originated the mortgages in the pool, in a
worst-case scenario it is possible that these institutions would be forced to repurchase the MBS
the trusts issued, often at a significant loss.
On Octobcr IS. 20 I 0, the American Securitization Forum (ASF) asserted that concerns
regarding thc legality of loan transfers for securitization were without mcrit. 'I'he statement
asserted that the /\ SF's membel' law /inns found that the "conventional process for loan transfers
embodied in standard legal doeurnentation for mortgage securitizations is adequate and
appropriate to transfer ownership of mortgage loans to the securitization trusts in accordance
. I I' II I .. 210
Wit 1 app I(1) e aw. '
Some
:WI"""\: 'Ii(""11I,lished.
deed-in-lieu a horrower to transCcr their interest in real property to a lender in order to settle
ali indchtednc,s associated with that property. A short sale occurs when a serVIceI' allows a homeowner to ,ell the
home with the that the rrom the ,ale lIJay be less than i, owed Oil the mortgage. U.S.
lk",,,tml'''' orthe TreaslllY. !lOIIIC Fo!cc!o\lIlC ,111('1'/71/1/1'('\ (online at
(aeee,-;,-;ed
Statement on Mn.,I"cwe Securitization Structures and Loan Tran,Ccr,. supm note I
(llberVel, 'I'"""'" whethel. even i rthe in the PS/\ were ,ound.
Con,umer eonver,ation, with Panel ,ta IT 9. 20 I
64
b. Forced Mortgage Repurchases/Put-backs
In the context of the overall $7.6 trillion mortgage securitization market, approximately
$5.5 trillion in NIBS were issued by the GSEs and $2.1 trillion by non-agency issuers.23I As
discussed above, and distinct from the foreclosure irregularities and securitization documentation
concerns, banks make representations and warranties regarding the mortgage loans pooled and
sold into CiSE and private-label securities. A breach of these representations or warranties
allows the purchaser to require the seller to repurchase the specific loan.
While these representations and warranties vary based on the type of security and
customer, triggers that may force put-backs include undisclosed liabilities, income or
employment misrepresentation, property value falsification, and the mishandling of escrow
funds.
232
Thus I ~ l r , loans originated in 200S-2008 have the highest concentration of repurchase
demands. Repurchase volumes stemming from older vintages have not had a material effect on
the nation's largest banks, and due to tightened underwriting standards implemented at the end of
2008, it appears unlikely that loans originated after 2008 will have a high repurchase rate,
although the enormous uncertainty in the market makes it difficult to predict repurchases with
1 I
'" 231
any ( egree 0 preCISIOIl. --
'I'here are meaningful distinctions between the capacity of GSEs and private-label
investors to put-back loans to the banks. This helps explain why the vast majority of put-back
requests and successful put-backs relate to loans sold to the GSEs. 'fhis also helps estimate the
sizc of the potential risks to thc banks from non-agency put-backs. GSEs benefit 11'0111 direct
access to the banks' loan files and lower hurdles for breaches of representations and warranties
duc to the relatively higher standard of loan underwriting. Private label investors, on the other
hand, do not have access to h,an Ii les, and instead must aggregate claims to request a review of
loan Iiles.
234
Moreover, and perhaps more importantly, private label securities often lack some
ofthe representations and warranties common to agency securities. For example, \Vells Fargo
indicated that approximately half of its private label securities do not contain all of the
representations and warranties typical of agency securities. Also, given that private label
, The non-agency figure includes both residential and eOl11l11creialmortgage-baeked securities. Securities
Industry <wd Financial Markets I\ssociation, US Olilslilllding. (online at
www.silnla.org/uploadedFi lesiReseareh/Statisties/Stat ist iesF iles/S F- US- Mortgage- Related-Outsla ndi ng-S IFMA.x Is)
acc:es;,cc! Nov. 12. 2U 1
Federal Nationallvlorw:'we Association.
2UIU) (online at
at
It is Ilnlll<clv that earlier vintages will pose a rel1'"1' 11",,,
or these securities.
more seasoned nature
For 1'1IItilcr discussion. Section D, .III/nil.
at I 4.2(10) (ol1line
at IO/baab I 104 IO.pdf) ("Repurchase ri sk is
mitigated because approximately halCorthe seeuritizatiol1s do not contain typical reps and warranties regarding
65
securities arc orten composed of loans to borrowers with minimal to non-existent supporting loan
I
'1 . . . f' b f' I "16
( ocumentatlon, many (() not contam warranties to protect ll1vestors rom orrower TaU( .--
Since the beginning of 2009, the four largest banks incurred $11.4 billion in repurchase
expenses, with the group's aggregate repurchase reserve increasing to $9.9 billion as orthe third
quarter 20 I0.
237
Bank of America incurred a total of $4.5 billion in expenses relating to
representations and warranties during this period - nearly 40 percent of the $11.4 billion total
that the top four banks have reported?38
Figure 9: Representation and \Varranties Expense and Repurchase Reserves at
Lal'gest Banks (millions o(do!!ars)239
Representation and Estimated Repurchase
"
._
Reserves
.....-
. '" 1 "Ill

Q12010 Q22010 Q32010 FY 2009 Q12010 Q2 Q.
Bank of A111f'1'ir." $526 $1,248 $872 $3,507 $3,325 $3,939 $4
Citigroup 526 5 351 358 482 450 727
.lP Morgan 940 432 667 1,464 1,705 1,982 2,332 3,332
Wells Fargo 927 402 382 370 1,033 1,263 1,375 1,331
;-
Total $4,293 $1,365 $2,648 $3,064 $6,727 $7,020 $8,373 $9,954
G,S'E Put-backs
As oUune 20 I0,63 percent of foreclosures occurred on homes where the loan was either
owned or guaranteed by government investors such as Fannie Mae and Freddie Mac, while the
remaining 37 percent of foreclosures were on homes owned by private invcstors.
24o
A large
borrower or other third party misrepresentations related to the loan, general compliance with underwriting
guidelines. or property valuations").
JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at 24 (",,70% of
loans underlying dcals werc low doc/no doc loans"); Bank of America Corporation, BallcAlIlarsls Associalion
Bosloll. at [3 .4,2(10) (online at phx.coqJOratc-
ir.net/External.File'iitem=UGFyZW50SUQ9Njg5MDV8Q2hpbGR.I RDOtMXx UeXBIPTM=&t= I ) (llereinaf1er
"Bank or America Presentation at BancAnlaysts Association of Boston Conlerence") ("Contractual representations
and warranties on these deals arc less rigorous than those to GSEs. These deals had generally higher L'TV
ratios, lower FICOs and less loan documentation hy program design and [)iselosure').
.20 I 0)
1.17 (,,"edit Suisse. rllnr!u,''''!' PUIback Losscs
!d at 10
Jd. at 10.
Ihe Banks, at 10 (Oct 26,
Loans eithcr owned or the GSl':s have material
securitized other investors. For example. loans owned or the GS]:s that arc classified as
delinquent havc increased from 3.8 percent in June 2009 to 4.5 percent in June 2010. In comparison, the percentage
or loans owned investors that are classified as dclinqucnt IJas increased li'om 10.5 pcrcent in
Junc 200<J to 13.1 perecnt in June 2010. The same dichotomy is seen in the numher of loans in the process of
6CJ
portion of these loans were originated and sold by the nation's largest banks. As Figure 10
illustrates, the nation's rour largest banks sold a total of $3.1 trillion in loans to Fannie Mae and
Freddie Mac from 2005-2008.
Figure to: Loans Sold to Fannie Mae and Freddie Mac, 2005-2008
241
500
450
400
350
300
250
200
150
100
50
0
2005 2006 2007 2008
GSEs have already forced banks to repurchase $ I 2.4 billion in mortgages.
242
Bank of
America, which has the largest loan pOlifoJio in cornparison to its peers, has received a total of
$ 18.0 billion in representation and warranty claims li'om the GSEs on 2004-2008 vintages, Of
this total, Bank of America has resolved $11.4 bill ion, incurring $2.5 billion in associated
losses.
243
However, the bank believes that it has turned the corner in terms of new repurchase
requests lI'om the GSES.
244
Further, the passage ortime is apparently on the banks' side here, as
JPIvlorgan Chase noted that breaches of representations and warranties generally occur within 24
foreclosure. As of June 20 I0, 2.3 pCleent of loans owned or guaranteed by the CiS Es were in the !tJreclosure
process. whereas 8.0 percent of loans owned by private investors wcre classified as such. Staff calculations derived
from Onice of thc Comptroller of the Currcncy and ()ffice of Thri ft Supcrvision. OCC alld 07S Ale/rics
. Sccolld 21!!1!. al Tables 9.10, I I 20]0) (online at fi!cs/4900] 9.pd f')
(hereinafter "OCC and ens f\.10rtgage Metrics Report"); Foreclosure completion information provided by
()CO(' (lIS intoPanel request.
I Credit Suisse Oil ]ssucs. slI/lla note
Standard 8:: ]'c){l!'S on Ille Impact of Troubles on U.S. Banks. slIjJra note 106. at 2.
Hank 0 f' Amcriea Prescntation at 1\111/1\"':1<.; Association of Boston SlIjJliI note 236. at
Hank America Presentalion 'II Association of 130ston Conference. .1'11/1/11 note 2.36. at I
eslimate we are two thirds through with CiSL claims on 20042008 vlnl''''I'',
67
months of the loan being originated.
245
JPMorgan Chase noted that delinquencies or foreclosures
on loans aged more than two years generally reflect economic hardship of the bOITower. 246
Pri vate-LaheI PlIt-hades
In comparison with the GSEs, private-label investors do not benefit from the same degree
of protection through the representations and warranties common in the agency PSAS.
247
There
were, however, representations and warranties in private-label securities that, if violated, could
provide an outlet for mortgage put-backs. In theory, systemic breaches in these securities could
prove a bigger and potentially more problematic exposure, although market observers have cited
logistical impediments to centralizing claims, in addition to the higher hurdles necessary to put-
back securities successfully to the banks.
248
Since the majority of subprime and Alt-A
originators folded during the erisis, the bulk of the litigation is directed at the underwriters and
any large, surviving originators. Thus far, however, subprime and Alt-A repurchase requests
have been slow to materialize. Relative to subprime and Alt-A loans, jumbo loans to higher-net
borrowers - which were in tum sold to private label investors - have performed substantially
better.
249
Bank of America offers a window into the comparatively slow rate at which private-label
securities have been put-back to banks. Between 2004 and 2008, Bank of America sold
approximately $750 billion of loans to parties other than the GSES.
250
As of October 2010, Bank
of Alnerica received $3.9 billion in repurchase requests from private-label and whole-loan
245 JPM Presentation at BancAnalysts Association of Boston Conference. sllpra note 217. at 22 ("More
reccnt additions to 90 DPD [days past due] have longer histories of payment; we believe loans going delinquent
allcr 24 months of origination are at lower risk of repurchase.").
24(, JPM Presentation at BancAnalysts Association of Boston Conlerence. supra note 217. at 24 of
losses-to-date frol11 loans that paid je)r 25+ months before delinquency"): Bank of America Merrill Lynch. R&IY:
InH'stor hurdles mitig,ate impact: CiSE losses peaking (Nov. 8.20 I0) C[)elinquency aller 2 years oftilllely payment
matcrially reduces the likelihood of repurchase Ii'om (or others. Jelr that matter), sinee the likelihood of
being caused origination problems is much lower; instead. was likely triggered by loss of employment.
declinc in home valne, and the like.
217 Standard & Poor's on the Impact of i\lmtgage Troubles on I J.S. Banks. slilira note 106. at 4.
Standard & Poor's on tbe Impact of Mmtgage Troubles on I) .S. 13anks. supra note 106. at 4. ("I W]e
helieve tbat tbe representation and warranties were not standard aCioss all private-label securitics and may have
1)l'i\\!lIl<'d di levels of to Investors. They do no( appear (0 have the same basis 011 which to ask the
hanks (0 back the loans because the hanks did not. in our view, make similar promises m the representation and
warran(ies. )
of June the OCC/C)JS reports that 11.4 percent of (he AIt-A and 19.4 percent of the subpri me
it services arc classilied as delinquent as compared to an overall rate of 6.2 percent. C)CC and errs
Mc(t ics SIiP/(/ no(e 240. Also. for example, JPMorgan Chase noted that 41 percent and 32 percent
me and AI(-/\ securities. isslied and had 90
mOIl' past due at one as to only 13 percent of its prime mortgages. .IPM Presentation at
Association of Boston Conference. .111/1/(/ note 217, at 24 .
Bank of J\lneriea Presentation at BancAnlaysts ASSOCiation of Boston onilel-ence, slipra note 236.
investors. To date, Bank of America has rescinded $1.9 billion in private-label and whole-loan
put-back claims and approved $1.0 billion for repurchase, with an estimated loss of $600 million.
'rhis level of actual put-back requests highlights the difficulty in maneuvering the steps
necessary to put-back a loan, which begins with a group of investors in the same security or
tranche of a security banding together to request access to the underlying loan documents. For
example, the group of investors petitioning for paperwork relating to $47 billion in Bank of
America loans remain a number of steps away II-om being in a position to request formally a put-
back.
2St
Figure] 1, below, illustrates the dollar amount of non-agency loans originated by the
nation's four largest banks belween 2005 and 2008.
As part of its MBS purchase program, the Federal Reserve currently owns approximately $1.1 trillion of
agency MBS. Due to the nature of the government guarantee attached to agency MBS, loans that are over 120 days
past due are automatically bought back at par by the government such as Fannie Mae and Freddie Mac that
guaranteed them. Therefore the Federal Reserve's $1.1 trillion in I'vlBS holdings do not pose a direct put-back risk
to the banking industry, however, if the loans are bought back by the agency guarantors, these agencies have the
right to take action against the entities that originally sold the loans if there were breaches or violations. The Federal
Reserve Bank of New York also owns private-label RMBS in its Maiden Lane vehicles created under its 13(3)
authority.
FRBNY's holdings of private-label RMBS are concentrated in the Maiden I.ane II vehicle created as part
of the intervention in Amcrican International Group (AIG). As of June 3D, 20 I 0, the hrir value of
private-label RMBS in rVlaiden Lane II was $14.8 billion. The sector distribution ofl\1aiden Lane II was 54.6
percent subprime, 3tUj percent AIt-A adjustable rate mortgage (ARM), 6.8 percent option ARM, and the remainder
was classified as "other." The $47 billion action that FRI3NY joined involves only the private-label RMBS it holds
in the Maiden Lane vehicles. and is primarily localized within Maiden Lane II. FRBNY staff conversations 'Nith
Panel stalf(Ckt. 26, 201 Board ofCiovernors of the Federal Reserve System stalfeonversations with Panel stall
IU, 20 I()); Board of Governors of the Federal Reserve Federal Reserve Rqw1't Oil
C',edil alld and Ihe Balance Sheet, at 19 (Jet. 2(10) (online at
www. 101 (hereinafter "Federal Reserve N.epor(
Itlilltlll\' " " ~ , , n ' ~ ' l n , , ' and the Elalance Sheet"); Floard of Governors oCthe Federal Reserve
Faclors RCSCI\'i' /Jalances /} .12,2010) (online at www. 1/)
(hereinatler "Federal Rcsel'\ie Statistical Release 11.4.1 For more inf(mllation on the Federal Reserve's section
I I \ I.S.C. 343 (providing that the Federal Reserve 130ard "may authorize any Federal
reserve bank ... to discount ... notes. drafts, and bills of for individual. partnership. or corporation"
if three conditions are met). olso Congressional Oversight Panel, .Iunc 01'!'I'sighl . Ihe /Il(; Rescuc. irs
IIII/,uel Oil /\,//111/(1'1.1'. alld Ihe (/o\,<'l11ll1ell/'s E,il at 79-83 (.June 10,20 I 0) (online at
dOI.:ulllel1ts.
I
Cop-tJ610 I O-report.pdf).
69
Figurc 11: Non-Agcncy Originations, 2005-2008
252
$225
$200
$175
V'I
...
$150
..n!
0
Cl
$125
'+-
0
V'I
$100
c
.2
$75
co
$50
$25
$0
2005
II Bank of America
Put-hack Loss Estimates
2006
C'S Wells Fargo
2007
JPMorgan Chase
2008
Losses stemming from mortgage put-backs are viewed as the biggest potential liability of
the banking sector fl'orn the foreclosure crisis. While it is difficult to quantify the impact this
issue rnay have on bank balance sheets, a number of analysts have compiled estimates on
potential risks to the sector.
The first step in estimating the industry's exposure is identifying the appropriate universe
of loans, within the $10.6 trillion mortgage debt market. The 2005-2008 period is the starting
point for this analysis. Of the loans originated during this period, $3.7 trillion were sold by
banks to the GSEs and $1.5 trillion were sold to private label investors.
253
Accordingly, this $5.2
trillion in agency and non-agency loans and securities sold by the banks during the 2005-2008
period is the starting point fc)r a series of assumptions loan delinquencies, put-back requests,
successful put-backs, and loss severity - that ultimately drive estimates of potential bank losses.
T'hc Panel has averaged published loss estimates from bank analysts in order to provide a
top level illustration or the cost rnortgage put-backs could inl1ict on bank balance 'rile
a 'ne sarnple of five analyst estimates Cor the E portion and six
There were no sales in 2009. Credit Suisse 011 Mounting lVICtrlU<lUe Issues. supra note 223.
NOl1Hlra
IIII/dies (Nov.
Sachs. -lI'lFISlll u
Research. Pril'ille Lubc! Put-Buck ConcerllS orc (herdonc. Prinltc !ll1'cs!ors Fuce
II""-,",,,ner "Nomura Equity Research 011 Private Labell'ut-Baek Concerns"): Goldman
/ll"rfu.'IO" Morass 15. 20 I 0) (hereinafter "Goldman Saebs on tbe Mortgage
70
analyst estimates for the private-label approximation. Accordingly, realized losses could be
signi ficantly higher or tneaningfully lower.
As outlined below, there are numerous assumptions involved in estimating potential
I
' I I 7 '14
osses from put- )ac (s.-'
}>rojected Loan Losses - Delinquent or non-performing mortgage loans provide the
initial pipeline for potential rnortgage put-backs. Accordingly, estimates of
cumulative losses on loans issued between 2005 and 2008 govern the aggregate put-
back risk of the banks. The blended estimate for GSE loans is 13 percent, and the
blended private label estimate is 30 percent. 255
Gross Put-backs - The next step is projecting what percentage of these delinquent or
nonperforming loans holders will choose to put-back to the banks. The average
estimate for gross put-backs for the GSEs is 30 percent, and private label loans is 24
percent.
Successful Put-backs - Of these put-back requests, analysts estimate that 50 percent
of GSE loans and 33 percent of private label loans are put-baek successfully to the
banks.
Severity The calculation involves the loss severity on loans that are successfully
put-back to the banks (i.e., how much the banks have to pay to make the aggrieved
investors whole). The blended average severity rate used by analysts fiJr both eiSE
and the private label loans is 50 percent.
estinlates loan delinquencies. put-back requests. successful put-backs. and loss ,/,\/(,,.11\1
arc surveyed li'om tbe 1()llowing research reports: Bernstein Research. Balik S'fock lficekll': Relum 10 Lender?
I?ep alld II/(//ralll1' (Sept. 24, 20 I0) (bereinafter "Bernstein Research Report on Sizing Rep and Warranty
L:xIJosurc;"); Barclays Capital. Focus on Risk (Sept. 2.2(10); .1.1', Morgan. PUlbacks and
FUICc!OSlIfC's Fael Fiction 15.20 10) (hereinafter C'apital Research Report on Putbacks and
C,oldman Saehs on the Morass. supra note 253; Nomura Equity Research on
Private Label Put-Back C'oncerns. Sllfilli note 253; C'itigroup CiloballYlarkets. R& IV Losses Manageable. bUI NUll,
be IVildclild (Sept. 26. 20 I0) (hereinafter "Ciligroup Research on Non-Agency Losses"):
Point Research 8i Trading, I.Ie. GSE Risk Poses FlIf1ile !/cadwlIlds: Quallfi(i;illg
15. 20 I0); Deutsche Bank Revisits I'utbaeks and Securitizalions.lllpia note 192: .IPM J'resenta tion at
Association or Boston Sllj)JO note 217, at 26,
Four analyst estimates wcrc used f()f' the blended private-label loan losses percentage or Goldman
Sachs Ilemstein Research Nomura Research and Credit Suisse 40"/,( Goldman
Sachs on the rVlOldSS. supra note 253; Nomura Equity Research on Private Label Put-Back
COIICCriIS. SIIII/a note . Bcmstein Rcsealch on Rep and Warranty Sl/jJliI Ilutc 254; Credit
Suisse 011 I'utback Losscs, slIjJl'a note 192,
71
Using the assumptions outlined above, the estimated loss to the industry from mortgage
put-backs is $52 billion (see Figure 12 below). This compares to industry-wide estimates of
base-case losses ii'om mortgage put-backs. of $43 billion to $65 billion?56
Figure 12: Put-back Loss Estimates (billions dollars/
57
2005-2008 MRS
Projected Loan Losses
Gross Put-backs (Requests)
Successful Put-backs
Put-back ""uP..,,,
Total Put-back Losses
50%
50%
$36
33%
50%
$16 $52
The estimated $52 billion would be borne predominantly by four finns (Bank of
America, .J PMorgan Chase, Wells Fargo, and Citigroup), accounting for the majority of the
industry's total exposure and projected losses.
259
In the aggregate these j()ur banks have already
reserved $9.9 billion future representations and warranties expenses, which is in addition to
the $11.4 billion in expenses already incurred.
260
Thus, of this potential liability, $21.3 billion
has either been previously expensed or reserved for by the major banks.
261
Given the timing
This range is comprised of a number of base-case or mid-point estimales fiJI' potential losses across the
industry li'om put backs: Standard & Poor's - $43 billion. Dcutsche Bank - $43 billion. FI3R Capital Markets $44
billion in potential Citigroup - $50.1 billion, J.P Morgan- $55 billion. Goldman Sachs - $71 billion. Credit
Suisse - $65 billion. The Dcutsche Bank estimate is {iJr $31 billion in remaining losses, the $12 billion in rcalized
losses thus filr was added to create a cOllsistent metric. FBR 011 Repurchase-Related Losses. supra note 1 . Credit
Suisse 011 Mortgage Put-back Losses, supra Ilote 192; Deutsche Bank Revisits Putbacks and Securitizations. supra
note 192; Standard & Poor's on the Impact of Troubles on U.S. Banks, supra note I at 4; Citigroup
Research Report on I.osses, SUpl'll note 254; Barclays Capital Rcsearch Report 011 Putbacks and
supra Ilote 254; Goldman Sacbs on tbe Mortgage Morass, supra note 253.
JPM Presentation at BaneAnalysts Association of Boston Conference. supra Ilote 217. at 26.
These represent the value of the rvlBS sold either to the GSEs or private-label investors during
this period that are still ,-,,,,,."1,, outstanding. Nomura Research on Private label Put-Back Concerns, supra
note 253: Goldman Sachs on the Mortgage [vlorass. su/i/o note 253.
It is worth noting, . that Bank of America and JPMorgan Chase are the meaningful
contributors, fill' 50 percent of the total losses The mid-
()f each of these estimates used to eompule Ihe range. Deutsche 13ank Revisits Putbaeks and
Securitl7ations, SlIjllii note 192, at ,Credit Suisse on IVlounting slI/Jlilnote 223; FI3R on
I{eplllchase-Related 1J1SSeS, .III/1m note 192.
Ihe 11.4 billion 111 estimated expenses at the top Itllll banks has been since the first quarter of2009.
Credit Suisse on Put-back Losses, Sli/JUI note I al 10
Deutsche Flallk Revisits Putbaeks and Se,.:uriti".at,ions.slijlm note 192.
associated with put-back requests and associated accounting recognition, it is not inconceivable
that the major banks could recognize future losses over a 2-3 year period.
G. Effect of Irreguladties and Foreclosure Freezes on Housing l\1ad<et
I. Foreclosure Freezes and their Effect on Housing
In previous reports, the Panel has noted the many undesirable consequences that
f()reclosures, especially mass foreclosures, have on individuals, families, neighborhoods, local
governments, and the economy as a whole.
2CJ2
Additionally, housing experts testifying at Panel
hearings have emphasized that mass foreclosures cause damage to the economy and social fabric
of the country.2CJ} Certainly, the injection over the past several years of millions of
upon homes into an already weak housing market has had a deleterious effect on home prices.
These effeets are especially relevant in examining what repercussions foreclosure freezes would
have on the housing market, and the advisability of such freezes.
Questions rernain as to how broadly the current foreclosure irregularities will affect the
housing rnarket, and the scale of the losses involved. The immediate effect of the foreclosure
document irregularities has been to cause many servicers to fj'eeze all foreclosure processings,
although some f]'eezes have been temporary.2('4 Some states have encouraged these foreclosure
freezes,2CJs and government-imposed, blanket freezes on all foreclosures have been under
discussion.
266
The housing market may not be seriously affected by the current freezes on
pending which may actually cause home prices of unaffected homes to rise. Any
moratorium that is not accompanied by action to address the underlying issues
associated with rnass foreclosures and the irregularities, however, will add delays but will not
provide solutions, Beyond the effects of the current Jl"eezes, mortgage documentation
irregularities may increase home buyers' and mortgage investors' perceptions of risk and damage
confidence and trust in the housing market, all of which may drive down home prices.
In considering the possible effects may have on the housing market, it
is inJportant to distinguish, as the Panel has ill previous reports, between the eflects these
and fj'eezes may have cm individuals versus effects that are more
March 2009 Oversighl Report. supra note 6. at 9-J J.
Written Testimony of Julia Gordon. SUplll nole J 71. al J -2.
Statelllcnt front Bank of America [lome supra note 21.
SCC. c.g.. Onlee of Maryland CiovellJ()I' Marlin CrMal Cl'o\'cl"!lor Marrin
Courl lnien'clliion in Forcdo.lures
10 I \1\}'11 ,.,.,,,}
at
Reid Welcomes Bank of America UU,'''UII. -,UJiI'll note . Fureelosure Moratorium:
supra notc 24.
73
. I . . fl' . 26
7
'f'l P 11
systemic or macroeconomiC, as t lese mterests may come mto con Ict at tllnes. Ie . ane las
also repeatedly acknowledged that the circumstances surrounding some mortgages make
simply unavoidable.
2
()8 Additionally, the current housing market has, among other
difficult problems, a severe oversupply of housing in relation to current demand, which has
fallen substantially since the peak bubble years due to higher unemployment and other economic
hardships. This fundamental supply/demand imbalance has driven down home prices
nationwide, but especially in areas such as Nevada or Florida, where a great many new homes
were constructed.
269
'1'1 l: I f' 1 . f' I f' I' . 27
0
1ere are numerous arguments lot lor ane agamst urec osure reezes at t lIS tIme.
Freezing foreclosures may allow time for servicers, state governments, and courts to sort out the
irregularity situation and may avoid illegal or erroneous fl)reclosures in some cases. Voluntary,
limited fj'eezes may be sensible for particular servicers. The costs associated with a rnandatory
foreclosure freeze may also pressure servicers to resolve frozen foreclosures through
modifications.
271
Further, foreclosure freezes can temporarily reduce the number of real estate
owned by banks and pre-foreclosure homes coming to market, reducing excess supply, which
can be beneficial for horne prices in the short term. The longer-term consequences of freezes
depend on the ultimate solution to the issues giving rise to the fl'eezes.
In addition, foreclosures have many well-documented negative financial and social
consequences on families and neighborhoods that might be mitigated by a foreclosure freeze.
272
Vacant homes can attract thieves and vandals. If not maintained by the lender, properties
foreclosed upon and repossessed by the lender properties also known as real-estate owned
(REGs), often become eyesores, detracting from the appearance of the neighborhood and
2(,7 March 2009 Ovcrsight Rcport. slipra note 6. at 62-63 (Discussing foreclosure li-eezes: "Again, this
raises the question of whether the economic efficiency of lc)reclosures should be viewed in the context of individual
foreclosures or in the contcxt of the macroeconomic impact of widespread foreclosures. II' the former, then caution
should be exercised about fc)reclosure moratoria and other forms of delay to the extent it prevents efficient
IClreclosures_ But if the latter is tbe proper then it may well be that some individually efficient foreclosures
should nonetheless be prevcnled in order to mitigate the macroeconomic impact of mass foreclosures.
March 2009 Oversight Report, SlIfJriI note 6. at 37 (Discussing loan modilication programs: "As all
initial matter. however. it IllUSt be that sOllle foreclosures arc not avoidable and some workouts may not
he economical. This should temper expectations about the scope of any modilication program.").
The of homes can be clearly seen Ii-om "felr sale" inventory stat istics. which the Panel has
discussed in previous reporls. SCI'. C.g. March 200') Oversight Report. slipra note 6. at 107-108. September 20 I 0
lell-sale housing inveillory sl<lIIds al 4.04 million homes. a 10.7 monlh supply at current sales rates. up from the 3.59
million homes an 8.6 llIonth supply cited in the Panel's April report 011 fe)redosures. National
Association of" Realtors. ,Yules Show Another Cll/ill 20 I0) at
.realtor room/uews releases/20 IOil
The Pauel has discussed some of" the pros and cons of Ic)reclosure li-cezes in prior reports, but not ill the
conte:d 0 I' the March 2009 Report. SII/ml note 6, at 61-63 .
i March 2009 SUf!riI nole 6, at 61 .
c . i\larch 2009 SlIf!lil note 6. at 9-1 I.
74
reducing local home values. The drop in the value of neighboring homes has been corroborated
by a reeent study. Although the authors f(Jund that the impact of foreclosed homes on each
individual neighboring home is relatively small, these losses can amount to a considerable total
loss in value to the neighborhood. Not surprisingly, the researchers found a more dramatic
decline in value for the foreclosed home itself. The study indicated that foreclosure lowers a
home's value by an average of 27 percent, much more than other events, such as personal
bankruptcy, that also lead to forced home sales. The researchers attribute these losses primarily
to the urgency with which lenders dispose of REOs and to damage inflicted on vacant, lender-
owned homes.
273
In addition to lowering the value of the home itself: a foreclosure affects the surrounding
neighborhood, especially if the home is clearly marked with a sale sign that says "foreclosure."
A reduction in price from a foreclosed propel1y can affect the values of surrounding homes if the
low price is used as a comparable sale for valuation purposes. Even if foreclosure sales are
excluded as comparable sales from appraisals, as is often the case, these sale prices are readily
accessible public information. For exallJple, considering the popularity of real estate sites such
as Zillow and 'rrulia that show home sale prices, buyers can easily see these low foreclosure sale
prices and are likely to reduce their offers accordingly.274 Furthermore, as .J ulia Gordon of the
Center for Responsible Lending and several academic studies observe,275 minority communities
are disproportionately afrected by fc)reclosures and their consequences.
276
These negative
externalities fl'om rorcclosures are borne not by any of the parties to the mortgage, but by the
neighbors and the community, who are innocent bystanders.
One or the most common arguments against foreclosure frcezes concerns thc effect that
fl'eezes could have on shadow inventory properties likely to be sold in the near future that are
not currently on thc market, and are therclc)re not counted in supply invcntory statistics. A
John CampbelL Stcfililo Giglio, and Parag Pathak, Forced Sales and 11011.11' Prices, at 10, 18,21,
Unpublished manuscript (.July 2010) (online at eeon-www.mit.edu/files/S(94) Co.. the typical foreclosure during this
period lowered the price of tbe forecloscd house by $44,000 and the prices of neighboring houses by a total or
$477.000, ()I a total loss in housing value of$S20,OOO," and "Our pre!C'ITed estimate of the spillover effect suggests
that each rOleelOSlile that takes place 0.05 miles away lowers the price of a house by about I ';().").
lillow docs not include ()f'eclosure data in its home price estimates; however. a person can click on a
bome, including roreclosed bomes, and see its sales price.
Sec, eg., Vicki Beall, Ingrid Gould r ~ l l e n , et aI., Kids and Forcc!oslIICs Ncw J'orl, (Sept. 20 10)
I/Foreelosliles
DO\\'I7II1111 and Ruc!ulfIJl'oliol/,'I'
Brier 20 10.pdf); Vanesa
3.1'00. (Fall (online at
Tcstilllll11Y or Julia Gonloll, senior policy council, ('cnkr for
11",,1';,10 Oil 1:11<1' Forec!o,llIle (Oct. 27, 2010)
(" i\ (i-ica n
csti mate that
at
American and Latino tiunilics arc much more I than whites to lose their
coml1lunities or color will losc over $360 billion worth ofwcalth.").
75
prolonged freeze on foreclosures without a diminution in the number of homes in foreclosure
would add to the already substantial problem of shadow inventory. Of course, increased shadow
inventory can be addressed either by foreclosing and selling the homes, or by creating
circumstances that allow current homeowners to stay in their homes. Although there are no
reliable measures (or definitions) of shadow inventory, estimates range from 1.7 million to 7
million homes.
277
These homes represent additional supply that the market will eventually have
to accommodate, so long as the heJlnes are not removed from the shadow inventory due to
circumstances such as loan modifications or an improvement in the financial condition of
borrowers.
27s
Beyond shadow inventory, foreclosure sales consist of sales of hon1es immediately prior
to foreclosure and sales of REOs. In the 12 months between September 2009 and August 2010,
4.13 rnillion existing homes were sold in the United States, approximately 30 percent of which
were foreclosure sales.
279
Further, lenders are estimated to own 290,000 properties as REOs.
28o
Currently, approximately 2 million homes, or 4.6 percent of all mortgaged properties, arc
classified as in the foreclosure process. Another 2 million, or 4.5 percent of mOligaged
propeliies, are more than 90 days past due.
2s1
The level of foreclosures is, further, expected to
rise: more than $1 trillion in adjustable-rate rnortgages are expected to experience interest rate
277 First American Corel "Shodo11' 1I0/lsing /nvcntOly '. I'/lt At I. Ali/lion i/7 311 According to First
American (Dec. 17.20(9) (online at
the News/FACL.... Shadow InventcHy... 121 R09,pdf);
Laurie Goodman. Robert Hunter, et al.. Amherst Securities Group LP, Amherst MOl'lgoge Illsight: HOllsing
(}nTllilllg/'J'hodmv!ln'elllo':!) Enormous Pmhlem. at I (Sept. 23. 2009) (online at matrix,millersamuel.eolll/wp-
eontent/3'109/Amherst';;,20 M Insi 32009, pd!).
2lX James J. Saecacio, ehiefcxceutive officer ofthc online foreclosure marketplace RealtyTrae, expects that
"i f the lenders can resolve thc documentation issue quickly. then we would expect the temporary lull in foreclosure
activity to be (c)llowed a parallel spike in activity as many ofthe delayed f()reelosures move f()lward in the
foreclosure process. Howevcr, if the documentation issue cannot be quickly resolved and expands to more lenders
we could sec a chilling effect on the overall housing market as sales of pre-!clIeclosure and foreclosed properties,
which acconnt Illl nearly one-third of all sales. dry up and the shadow inventory of distrcsscd properties grows
causing more uncertainty about hOllle priccs," RcaltyTrac. FOl'eclosuI'e Aelilil\, IncI'eases 4 Percent in Thil'd
Iluarler (Oct. 14. 20 I0) (onl ine at www.realtytrac.com/eontent!press-releases!q3-20 IO-and-september-20 I0-
fl)rcclosure-reports-61 (hereinafter "RealtyTrac Press Release on Foreclosure AClivity").
2/'1 National Association of Realtors. Sales Mo)'e ill
\v\vw.rea 1101' room/news re Ieases!2 0 I0/09/ehs I [OPE Now Alliance,
Indusl!'\' LUI'opu!ariuns (Montbly It)r Dec 200R (0 Nov 200Y) (online at
Press Release on Foreclosure 1\"',,,,,,, supra note 27R.
23, 20 I0) (onl i ne at
M(II't,UW'(' Loss
110lT Now Alliance,
also MBA I'ress Release on 20 10, .I'll/nil notc 199,
slIpra note 199.
I !VIBA National Uellllqu1CIIl:Y
DeIIlHIIH"J('II><'; and Foreclosurc
76
resets between 2en 0 and 2012, an event that is positively correlated with delinquency and
Ic)reclosure.
2
R
2
Foreclosure sales therefore represent a very substantial portion of housing market
activity, with many more ICJreclosures either in the pipeline or likely to enter the pipeline in the
comIng years.
Opponents of mandatory foreclosure freezes have also argued that a widespread fj'eeze
would encourage defaults by eliminating the negative consequences of default; that fc)reclosure
fj'eezes are bad for mortgage investors (including taxpayers, as owners of the GSES)283 because
they reduce investment returns by delaying the payment of fc)reclosure sale proceeds; and that
they would disproportionately harm smaller banks and credit unions, which are heavily invested
in home mortgages.
2R4
Further, when smaller banks and credit unions service loans, payments to
investors on non-perfcmning loans must come from significantly smaller cash cushions than they
do fc)r the largest banks and servicers.
2R5
James Lockhart, fC>rJner regulator of Fannie Mae and
Freddie Mac, has stated that freezes will also extend the time that homes in foreclosure
proceedings will be lell vacant, with attendant negative effects on the surrounding
neighborhc)()d.
2R6
Such cases would presumably involve already vacant, Ic)reclosed-upon homes,
and homes with impending or ongoing foreclosure proceedings where the borrower has chosen
to vacate early, as occasionally happens.
287
282 Zach ['ox. Credit Suisse: $1 Trillion worth o(ARMs stillfclee resets. SNL Financial (Feb. 25. 20 I 0).
The Panel addressed the impaet of interest rate resets in its April 2010 Report Congressional
()versi!!ht Panel. Oversight Report: Evaluating Progress 0(7)IRP Foreclosure Mitigation Programs. at III
115. 123 (Apr. 14. 20 I0) (online at cop.senate.gov/doeuments/cop-0414I O-report.pdl) (hereina fIer "Apri I 2010
()vesright ReporC).
28\ Fannie Mac and F'reddie Mac would be impacted directly by a li'eeze because they would have to
continue advancing coupon paymcnts to bondholders while not receiving any revenue fi'om disposal of foreclosed
properties. upon which they are already not receiving mortgage payments. These costs would almost certainly be
borne by taxpaycrs. and depcnding on the duration of the freczc and how the housing market responds to it, they
could be substantial.
Press reports and Panel staff discussions with industry sources have indicated that. as part of an effort to
restart foreclosures. Fannie Mae and Freddie Mac were until recently negotiating an indemnification agreement with
servieers and title insurers. This would have been along the lines of the recent agreement between Bank of America
and j'idelity National Financial. mentioned above in Section C. in which Bank of America agrecd to indemnify
Fidclity National (a titlc incurred due to serviceI' errors. However. industry sources stated that thc
CiSEs had rcccntly cooled to this eflint. Industry sources conversations with Panel stalf 9.20 I0); Nick
Timiraos. Fannie. Freddie Seek End to Free::e. Wall Street Journal (Oct. 23.2(10) (online at
onlinc.wsj.com/artieIe/SB I 000 1424052702304354104575568621229952944.html); sec also Statement from Bank
of America Ilome loans. silpra note 16.
Third I'vlcmo on the Case nst a Foreclosure iVl"r;llnnllm supra note
See Section F supra.
Ulnnmhenr
Il'it17 IVL Ross ,'C Co Jallles !.Oc>!dli11t 2(10) ine at
Chase estimates that one-third of the homes upon which it forecloses are
the time the f()reclosure process commences. Meister.
,'J!),rnnll1g (Jut RealClearMarkcts 22.2(10) (online at
77
2. Foreclosure Jrregularities and the Crisis of ConHdence
The apparently widespread nature of the foreclosure irregularities that have come to light
has the potential to reduce public trust substantially in the entire real estate industry, especially in
the legitimacy of important legal documents and the good faith of other market participants.
Under these circumstances, either buying or lending on a home will appear to be substantially
more risky than before. U'buyers suspect that hcnnes, especially foreclosed homes, may have
unknown title and legal problems, they may be less likely to buy, or at least they may lower their
offers to account f(x the increased risks. Since foreclosure sales currently account for such a
large portion of market activity, in the absence of solutions that reduce foreclosures, a reduction
in demand for previously foreclosed-upon properties would have negative effects on the overall
housing market. David Stevens, commissioner of the Federal Housing Administration, recently
noted that the mortgage industry now faces an "enormous trust deficit" that risks "scaring" off an
. . I' I f' I I' 288
entIre generatIOn 0 young peop e Tom 10meowners l1p.
Similar dynamics may impact the availability and cost of mortgages as well, as mortgage
investors, who provide the capital that ultimately supports home prices, reassess their pereeptions
of risk. The exposure of foreclosure irregularities has raised a host of potential risks for
investors, such as the possibility that MBS trusts may not actually own the underlying loans they
claim to own, that servieers may not be able to upon delinquent borrowers and thus
recover invested capital, that borrowers who have already been foreclosed upon may sue, or that
other currently unknown liability issues exist. These new risks could cause some mortgage
investors to look for safer alternative investments or to increase their investment return
rcquirements to compensate Ic)r the increased risks. With wary investors making less capital
availab Ie for mortgages, and reevaluating the risk of residential lending, mortgage interest rates
could rise, in turn decreasing the af10rdability of h0111eS and depressing home prices, as the same
monthly payment now supports a smaller mortgage.
Additionally, both the Ic)reclosure f!'eezes and the legal wrangling between homeowners,
servicers, title companies, and investors that appears inevitable at this point, and in the absence
ora solution to the problem of mass f(lreelosures could extend the time it will take for the
inventory or homes IClr sale to be cleared from the systern, and thus could potentially delay the
1
'1 I . . I 789 I' I I' ,
recovery o. t le lousmg 'urt 1er, genera uneertall1ty about the scope 01 these
rcalclearmarketscom!articles(lO I is quickly spinning out of eontrol.html}.
Similarly, there are reports about a type of dcl;llIli. commonly known as "j mail." where the delinquent
hormwer vacates the home and mails tbe servieer thc in the hope that the servieer II aeeepi the 'let as a deed-
III-lieu-of, {()Iceloslllc. or to get the foreclosure process over willI.
David I L Stevens, commissioner. Federal
Assoei,ltion Annual Convention, at .20 26.201
Administration, Remarks at the Bankers
The White Huuse,
ullll'c!2010/i0/1 IOI220lO) alsu have puinted uut, though, that
the idea 01' a natiunal moratoriul1l would impact the recovcry in the housing sector, as anybody thai wished to enter
problems and how they will be addressed by market participants and governnlents could have a
chilling effect on both home sales and mortgage investment, as people adopt a "wait and see"
attitude. On the other hand, some delay could be beneficial in that it would provide the time
necessary to arrive at a more eomprehensive solution to the many eomplex issues involved in, or
I I
I" . 290
UD( er ymg, t lIS SItuatIon.
'The recent and developing nature of the foreclosure irregularities means that predicting
their effects, as well as those of any resulting Jreclosure f)'eezes, on the housing market
necessarily involves a high degree of speculation. Actual housing market movements will
depend on, among other things, the seope and severity of the foreclosure irregularities, the
resolution of various legal issues, government actions, and on the reactions of homeowners,
home buyers, servicers, and mortgage investors. It seems clear, however, that the many
unknowns, uncertain solutions, and potential liability for fraud greatly add to the risk inherent in
. I d' ('f' II 291
ownmg or en mg on aectec lomes.
II. Impact on HAMP
HAMP is a nationwide mortgage modification program established in 2009, using TARP
funds, as an answer to the growing foreclosure problem. HAMP is designed to provide a
mortgage modification to homeowners in those cases in which modification, (h)m the
perspective of the mortgage holder, is an economically preferable outcome to foreclosure. The
program provides financial incentives to servicers to modi fy mortgages for homeowners at risk
of d e l ~ l U l t , and incentives ()r the beneficiaries of these modifications to stay current on their
mortgage payrllents going !()rward?92 Participation in the program by servicers is 011 a voluntary
basis. Once a servicer is in HAMP, though, if a borrower meets certain eligibility criteria,
participating serviccrs must run a test, known as a net present value (NPV) test, to evaluate
whether a foreclosure or a loan ITlodification would yield a higher value. If the value of the
rnodified mortgage is greater than the potelltial foreclosure value, then the servicer IIIIlSt offer the
borrower a modification.
inlo a contract or executc a contract to purchase a home that had previously been foreclosed on, that process stops.
Ihat means houscs and neighborhoods remain empty even if there are buyers ready. wi II ing and able to do so. ").
In reports. the Panel has ac!mo.wle(J('ed that the caused by f()rec!osure freezes create
additional costs I()!' servicers, but also have bencficial effects It)r borrowers, March 2009 Oversight Report,
slifllil note h, at 61()) ,
2'11 IVlnl'j,,:lO" lenders who make loans on {iH'IIl(,d\f [(,recloscd homcs where the ownership of the
property is uncertain due to {()!'('closure risk the possibl that other creditors could come f()rward
with claims to the collaleral.
Servicers olCiSF Illollgages are required to participate in flAMP f()J their CiSE p()J[f(,Jios. Servicers of
non,CiSI' may elcet to
Once an agreement has been
participation contract is tell1Jilwted.
J'al'tlclP:ltl()1l ;\"1'1'1'111/,111 ill order to participate in the program.
n,lll tic:in;1I ii,,, serviceI' must evaluate all mortgages under HAMP unless the
\1;('1''1 "hI Panel. Octubcr An Asscssmcnt
9. at
79
Treasury asserts that the foreclosure irregularities have no direct impact on fIAMP. With
regard to f ~ l 1 s e affidavits, Phyllis Caldwell, chief of crreasury's flomeownership Preservation
Office, noted that HAMP is a foreclosure-prevention program and theref(:Jre is separate fI-om the
actual fc)reclosure sale process. As a result, HAMP "is not directly affected by 'robo-signers' or
false affidavits filed wi th state courts. ,,293
With regard to the issues around the transfer of ownership of the mortgage, Ms. Caldwell
testified that "to modify a mortgage, there is not a need to have clear title.,,294 In addition,
cfreasury stated that it has not reviewed mortgage ownership transfer issues because the
modifications are private contracts between the servicer and the borrower. 295 Perhaps as a result,
Treasury is not doing anything independently to detennine iI' the mortgages the servicers in
IIAMP are modifying have been properly transferred into the trusts the servicers represent. It is
supporting other agencies in their effc)rts, but is taking no action on its own.
296
According to Ms.
Caldwell, there is an "assumption that the servicer is following the laws. [ ... J If we learn
something ailer the Llct that contradicts that, we do have the ability to go in and claw back the
. .,,797 CI' I d I' ... ..I P I f'f' 798
1I1centlve. - reasury ec Joe t us 0p1l110n 111 conversatIons WIt Jane sta.-
The Panel questions Treasury's position that HAMP is unafTected by the foreclosure
irregularities. Although it is difficult to assess the exact consequenccs of the fc)reclosure
documentation crisis on 11AMP at this point, there are several strong potential links which
Treasury should carefully consider. For example, if trusts have not properly received ownership
of the mortgage, they may not be the legal owner of the mortgage. If the trust does not own the
mOttgage, the servicer cannot foreclose on it, and HAMP, a foreclosure prevention program, is
paying incentives to parties with no legal right to foreclose. At present, Treasury has no way to
29.1 Written Testimony of Phyllis Caldwell, supra note J42, at J.
294 Testimony of Phyllis Caldwell, supra note 143.
Treasury conversations with Panel staff (Oct. 21.201
2% T of Phyllis Caldwell, supra note 143 CKAUFtvIAN: So you're not sending anyone out to
actually find out whether they hold the mortgages'!. 1011' any kind of physical (ph) f(lilow-up on the fact that there
are mortgages out there do they actually have the mortgages and they actually have title to the land that they are
trying to liJreclose on'? CAl J)Wr:u.: At this point. we are supporting all of the agencies that are doing
invcstigations of those servicns, including thc GSEs, and are monitoring closely, and will take follow-up action
when there are filets that we p.et li'om those reviews. KAUFfvIAN: So .. i'reasury's not doing anything
independently to dctermine that mortgages modified under J IArvlp have allneeessary loan documentation and a
clear chain of title') You're the word of the of the lillks at the banks and financial institutions
re with that do havc a havc loan docmnentation and a clear chain of title'). CALDW ELL:
. it an issue and that. . at least at this point in time .. wc're at the
li)Jcelosure proecss separate from the actual filleelosure sale process. And to modify a mortgage, there is
not a need (0 have clear tille. . you necd information fi'om the note, but you don't necd a physical note to modify a
mongage. iI!SO conversations with Panel sta ff 21, 2(10).
297 Jc;,lIn'lOlly of Phyllis Caldwell, supra note 143.
conversations with Panel stall 21,2010).
I
..f' I I . I )()'!
(. etermme I sue I payments are Jemg mace.- Treasury may well be paying incentives to
servicers that have no right to receive them.
'Treasury has justified its relative inaction by noting that if ownership of the mortgage has
not been properly transferred, the legal owner will eventually appear, and at that time, Treasury
can claw back any incentive payments made to the wrong party.300 Such a solution, however,
may not be feasible. It optimistically assumes that legal owners will be able to identify clearly
the mortgages they own, despite all of the potential litigation and complex transactions many
mortgages have been part of, and then navigate the bureaucracy to bring the matter before
Treasury. Inevitably, not all legal owners will manage this, in which case Treasury will be
giving money to paliies that are not entitled to it. Moreover, if this is occurring, even in cases
where the legal owners do come forward, Treasury is essentially providing interest-free loans to
the wrong parties in the meantime. In addition, Treasury's inactivity may give rise to a double
standard in which borrowers must provide extensive documentation bef()I'e benefiting from
1IAMP, while servicers are allowed public money without having to prove their right to
f()l'eclose.
In addition, although Treasury maintains that HAMP is unaffected by transfer of
mortgage ownership issues because modifications are private contracts between servicers and
I
3
0
1 d' f' I I" I' d I I I ' ,
Jorrowers, a serVICeI' cannot mo 1 y a oan un ess It IS aut 10rIZe to (,0 so )y t le nlOrtgage s
actualowner.
302
If legal owners then begin to come l()lward, as Treasury is relying on them to
do in order to clarify incentive payments, the legal owners will not be bound by the
moditications.
303
Abruptly, borrowers would no longer benefit from the reduced interest rates of
a HAMP modification. As a result, the length of time that a modification provides a borrower to
recover and become current on payment, which Treasury cites as one of HAMP's principal
successes,304 would be cut short. Indeed, borrO\vers may even sufter penalties for not having
been paying the monthly payments required prior to the modification.
Another concern involves how HAMP servicers have been calculating the costs of
roreclosure under the program's NPV test. Foreclosures carry significant costs leading up to the
acquisition or a property's title. If, by cutting corners in the f()reclosure process, servicers were
able to lower the cost of f()reclosure artificially, thcir own internal cost cornparison analysis
2(J9
orl'hyllis Caldwell. Slijin! note 143.
lOO Treasury conversations with Panel staff (Oct. 21. 2(10).
conversations With Panel stafl 2 L 201
Writtcn I ,",t;"I1IH"! or Katherine Porter. Slij II (I note 14, at8.
It is unclear what would happen irthe true owner were also inIlAMP. Under the HAMP standards. the
individual C{I'U;,-'" should maHer. and loan f()r a modification with should fy
with another The borrower. however. have to !()r a modification and cnter a ncw trial modilication.
It is also that could f ~ l c i l i t a t e the transfer and not a borrower to
(,111111\11\7 of lis ('aldwell, slipra notc 143.
81
might have differed fl'om the official NPV analysis. In such instances, servicers would have an
incentive to lose paperwork or otherwise deny modifications that they would be compelled to
make under the program standards.
Conversely, foreclosure irregularities could have the perverse effect of encouraging
servicers to modify more loans through IIAMP. If foreclosure irregularities lead to additional
litigation and delays in foreclosure proceedings, they will increase the costs of foreclosure.
3
0
5
Treasury may then update the HAMP NPV model to reflect these new realities. With tbe costs
of foreclosure higher, the NPV model will find more modifications to be NPV-positive, resulting
in more IIAMP modifications.
I. Conclusion
Allegations of documentation irregularities remain in nux, and their consequences remain
uncertain. The best-case scenario, a possibility embraced by the financial services industry, is
that current concerns over foreclosure irregularities are overblown, renecting mere clerical elTors
that can and will be resolved quickly. If this view proves correct, then the irregularities might be
fixed with little to no impact on HAMP or financial stability.
The worst-case scenario, a possibility predominantly articulated by homeowners and
plaintiffs' lawyers, is considerably grimmer. [n this view, the irregularities reflect extensive
misbehavior on the part of banks and loan servicers that extends throughout the entire
securitization process. Such problenls could throw into question the enl()J"ceability oflegal rights
related to ownership of many loans that have been pooled and securitized. Given that 4.2 million
homcowners are currently in default and facing potential foreclosure, including 729,000 who
have been rejected from IIAMP, the implications for the foreclosure market alone would be
immense. Much larger, of course, would be the implications of such irregularities {()t. the
broader market III MBS, which totals $7.6 trillion in value. Losses related to documentation
issues could be compounded by losses related to MBS investors exercising put-back rights due to
poor underwriting of securitized loans.
Several investigations of irregularities are now underway, including a review by the 50
states' attorneys general: an investigation by the Federal r:raud Enforcement 'rask F'orce; an
effort to review documentation l(lr certain Countrywide loans led by P[MC(), BlackRock, and
F'RBNY'; and nurnerous other inquiries by private investors. These and similar cfforts may
ultimately uncovcr thc full cxtcnt of irrcgularitics in mortgagc loan originations, transfers, and
but the linal picturc may not emcrgc j(lr some time if actions founder in
protracted liti 1011.
In the
cclilsidcr as Issues "\',n";,'
raises several concerns that carefully
Sec Seetiolls U alld F. supra.
'l'l'easury Should l\lonitor Closely the Impact of Foreclosure Irregularities. Treasury
so far has expressed relatively little concern that foreclosure irregularities could renect deeper
problenls that would pose a threat to financial stability. According to Phyllis Caldwell, Chief of
the Homeownership Preservation Office for Treasury, "We're very closely monitoring any
Ii tigation risk to see if there is any systemic threat, but at this point, there's no indication that
there is [any threat]." This statement appears premature. Potential threats are by definition those
that have not yet fully materialized, but their risks remain real. Despite assurances by banks and
Treasury to the contrary, great unceliainty remains as to whether the stability of banks and the
housing market might be at risk if the legal underpinnings of the real estate market should come
irlto question. 'rreasury should closely monitor these issues as they develop, both for the sake of
its foreclosure mitigation programs and f()f the overall health of the banking system, and
Treasury should report its findings to the public and to Congress. Further, Treasury should
develop contingency plans to prepare for the potential worst-case scenario.
Treasury and the Federal Reserve Should Stress Test Banks to Evaluate Theil'
Ability to Weather a Cdsis Related to Mol'tgage Irreguladties. The potential for fUliher
instability among the largest banks raises the specter of another acute crisis like the one that hit
the markets in the autumn of 2008. If investors come to doubt the entire process underlying
securitizations, they may grow unwilling to lend money to even the largest banks without
implicit or explicit assurances that taxpayers will bear any losses. Further, banks could, in the
worst-case scenario, sufTer severe direct capital losses due to put-backs. Bank of America holds
$230.5 billion in equity, yet the PIMCO and FRBNY action alone could ultimately seek up to
$47 bill ion in put-IJacks. If several similar-sized actions were to succeed, Bank of America
could sufTer a major dent in its regulatory capital. In efrect, a bank f()j'ced to accept put-backs
would be required to buy back troubled mortgage loans that in many cases had already defaulted
or had been poorly underwritten. As the Panel has noted in the past, some major banks have had
extensive exposure to troubled mortgage-related assets. Widespread put-backs could destabilize
financial institutions that remain exposed and could lead to a precarious situation for those that
were emerging from the crisis. Further, banks and loan servicers could be vulnerable to state-
based class-action lawsuits initiated by homeowners who claim to have suffered improper
Coreclosures. Even the prospect of'such losses could damage a bank's stock price or its ability to
raise capital.
The [laue! recommended in the past that, when policymakcrs arc faced with uncertain
economic or llnanc ial cond itions, they should cmploy tests" as part of the regular bank
'clt.H"'\!I<"/H"\! n,'n,'I'c:'" to identi possible outcornes and to measure the robustness of the financial
Treasury and the Fedcral Reserve last conducted comprehensive stress tests in 2009, but
tests predated the current concerns about documentation irregularities and
projected Ilanks' capitalization only through the end of20 I0, they oITer limited reassurance that
major banks could survive furthcr shocks in the months and years to come. r;'ederal banking
regulators should re-run stress tests on the largest banks and on at least a sarnpling ofsrnaller
institutions, using realistic macroeconomic and housing price projections and stringent
assumptions about realistic worst-case scenario bank losses. Any assumptions about the ultimate
costs of documentation irregularities would be necessarily speculative and the contours of the
problem are still murky. Stress tests may therefore need to account for a wide range of
possibilities and acknowledge their own limitations. Such testing, however, would nonetheless
illuminate the robustness of the financial system and help prepare fcn a worst-case scenario.
Polkymakers Should Evaluate System-\Vide Consequences of Documentation
Inegularities. As disturbing as the potential irnplications of documentation irregularities may
be fCl!' "too big to {;lil" banks, the consequences would not be limited to the largest banks in the
market. Among other concerns:
Fannie Mae and Freddie Mac Present Significant Risks. Already Fannie Mae and
Freddie Mac play an enormous role in the market for MBS. If investors develop new
concerns about the safety of the MBS market, then Fannie and Freddie backed by
their government guarantee could be fiJrced to maintain or even expand their
dominant role Jc)r years to come. Because the American people ultimately stand
behind every guarantee made by these companies, the result could be greater and
prolonged financial risk to taxpayers.
Homeowners May Lose Confidence in the Housing Market. Buyers and sellers, in
foreclosure or otherwise, may find themselves unable to know with any certainty
whether they can safely buy or saCely sell a home. Widespread loss of confidence in
clear ownership of mortgage loans would throw further sand in the gears of the
already troubled housing market especially since 3 I percent of the hOlnes currently
on the market are fc)reclosure sales, which may already have undergone an improper
legal process.
Public Faith in Due Process Could Suffer. If the public gains the impression that
the government is providing concessions to large banks in order to ensure the Sll100th
proccssing of fi)l"cclosures, the people's fUlldarnental f ~ l i t h in due process could suffer.
In short, actions by some of the largcst financial institutions may have the potential to
threaten the stilI-Jj'agilc econolny. Thc risk is unccrtain, but the dangcr is significant enough that
Treasury and all utbcr with a role to play in the mortgage market must
!c)Cus on preventing another sueh shock.
84
Section Two: Correspondence with Treasury
The Panel's Chairman, Senator Ted Kaullmll1, sent a leUer on behalfofthe Panel on
November I, 20l 0 to Patricia Geoghegan, the Special Master fc)r TARP Executive
( ' . I ["!'S'A 30!J crl I . f' . IS' I M
ompensatlon une er::', '. 1e eUer presents a series 0 questIOns to t le pecla aster,
requesting additional information and data following the Panel's October 21,20 10 hearing on
TARP and executive compensation.
See I of this report,
85
Section Three: TARP Updates Since Last Report
A. GM to Repurchase AIFP Preferred Stock
On October 27, 20 10, Treasury accepted an offer by General Motors Company (New
CJM) to repurchase 83.9 million shares of New GM's Series A preferred stock at $25.50 per
share provided that the company's proposed initial publie offering (IPO) is completed. These
preferred shares were issued, along with 60.8 percent of the company's common stock, in July
2009 in exehange for extinguishing the debtor-in-possession loan extended to General Motors
Corporation (Old GM). The repurchase price represents 102 percent of the liquidation
preference. After the IPO is completed, New GM will repurchase the Series A preferred shares
on the first dividend payment date of the preferred stock. Following this transaction, Treasury's
total return from New GM through debt repayments, the preferred stock repurchase, and interest
and dividends will total $9.5 billion.
B. AIG: AlA Initial Public OtIering and ALICO Sale
As part of its plan to repay the rederal government's outstanding investments, AlG
completed an IPO for AlA Group Limited (AlA) and sold American Life Insurance Company
(ALlCO) to MetLife, Inc. The AlA IPO raised $20.5 billion in cash proceeds and the ALIeO
sale generated $16.2 billion in total proceeds. ()f this amount, $7.2 billion represents cash
proceeds. The $36.7 billion in aggregate proceeds will be used to pay dO\vn the outstanding
balance on the revolving credit lilcility from FRBNY.
C. Sales of Citigroup Common Stock
On October 19, 20 I0, Treasury began a f()urth period of sales for 1.5 billion shares of
Citigroup common stock. Treasury received 7.7 billion common shares in July 2009 in exchange
for its initial 5 billion investment in the company under the CPP. As of October 29, 20 10.
Treasury has sold 4.1 billion shares (approximately finy percent of its stake) for $16.4 billion in
gross proceeds. ()f this amount, approximately $ J 3.4 billion represents a repayment for
Citigroup's (TP funding, vvhile the remaining billion represents a net profit for taxpayers.
rVlorgan Stanley will acl as Treasury's sales agcnt for the fourth selling period. which will end on
[keember 31.20 I0 or upon the of the full allotment of 1.5 billion shares.
D. Legacy Securities Public-Private Invcstmcnts Program Qmu'terly Rcport
()n ()ctober 20 I0, Trcasury released its fourth quarterly rcport on the Legacy
Securities Public-Private Investments Program (PPIP). This progralll is intended to support
market functioning and filcilitate price discovery in MBS markets through equity and debt capital
commitments in eight public-private investmenl funds (PPIFs). As or September 30,20 I0, the
86
purchasing power of these funds totaled $29.4 billion.
307
Of this amount, $7.4 billion represents
equity commitments f)'om private-sector fund managers and investors and $22.1 billion
represents both debt and equity commitments /j-OIn Treasury. The total market value of
securities held by participating PPIFs was approximately $19.3 billion, with 82 percent of
investments concentrated in non-agency RMBS and 18 percent in commercial mortgage-backed
securities (CMBS).
To date, cumulative gross unrealized equity gains f(x both Treasury and private investors
total $1.5 billion. The net internal rate of return for each PPIF is currently between 19.3 percent
and 52.0 percent.
E. Metrics
F:ach month, the Panel's report highlights a number ofmetrics that the Panel and others.
including Treasury, the Government Accountability O/Tiee (GAO), Special Inspector General for
the Troubled Asset Relief Program (SKITARP), and the Financial Stability Oversight Board,
consider useful in assessing the effectiveness of the Administration's efforts to restore financial
stabil ity and accomplish the goals of EESA. This section discusses changes that have occurred
in several indicators since the release of the Panel's October 2010 report.
l. Macroeconomic Indices
The post-crisis rate of real GOP growth quarter-over-quarter peaked at an annual rate of
5 percent in the fourth quarter 01'2009, but the rate has decreased during 2010. Real GOP
increased at all anl1ualized rate of 2.0 percent in the third quarter of 20 10, increasing from 1.7
percent in the second quarter of 20 I0.
308
'fhe third quarter growth rate was unaffected by the
spike in employrnent resulting /j-om the 2010 U.S. Census.
309
'rhe year-over-year increase from
th ird quarter 2009 to third quarter 20 I0 was 3.1 percent, from 12.9 biIlion to 13.3 billion dollars.
107 The total IHJlchasing power published in the I'PIP quarterly report docs not include the purchasing
power within USTITCW Senior Mortgage Services Fund. 1..1'., which was wound up and liquidated on January 4.
20 IO. See endnote x lvi, iIl/ia. for detai Is on the Iiquidation of this fund. U.S. Department of the Treasury,
Sccurilics PuhlicPri,'alc Inveslmcnl at 3 (Oct. 20, 2(10) (online at
financialstabil IO'ji,20vFinal.pdf).
Bureau of L:conolllic Analysis, 7i/h!c !. !.6.: Rca! Gmss Domesllc Pmdllc!, Cliwncd Do!!ars (online at
he,(in,di", "F\urcau of Ecollomic Table 1.1.6") Nov. 3, 2(10). \ Jntil the year-over-year
decreasc Ii'om 10 200R, nominal GDP had not decreased on an annual basis since 1949. Bureau of Economic
Ii/h!e !.! 5.. Gross DOl/lcsric PlOducl (online at
10)
(accesscd Nov. 3, 20lO).
!1)9 The Economics and Statistics Administration within the U.S. Department of Commerce estimated that
the spc:nding associatcd with the 20 I0 Census would peak in thc second qual'ter of 20 10 and could boost annualized
nomi nal and rea I GJ) I' 0.1 percent in the first quartcr of 20 10 and 0.2 percent in the second quarter 0 f
20 IO. As the boost from the Census is a one-time oeCUITence. continuing increases in private investrnent and
87
FiglJloc 13: Rcal GDp1111
$13,500
VI
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....
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co
$11,500
$11,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 01 02 03
2010 2010 2010
--------------------------------------------------
pelsonal consumption well as in exports will be needed to sustain tbe resumption or that has
occurred in lhe U_S, economy over lhe past year. It was that the drop in 20 I0 Census spending would then
reduce CiUP similar amounts in and 2010, Economics and Statistics i\dmi U,S
IJeparlment ofColllmeree, file lOW ('('nslis Oil .lobs and Eco/lomic Growth, at 8 (online at
18201
110 Bureau or Economic Table I, I,6, supra note 308 (accessed Nov, 3. 2010),
88
Since the Panel" s October report. underemployment has increased fI-om 16.7 percent to
17. I percent, while unemployment has remained constant. Median duration of unemployment
has increased by hal f a week.
Figure 14: lJnemployment, lJnderemployment, and Median Duration of lJnemployment31I
18 27
16 24
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Median Duration of Unemployment (right
--Unemployment (left axis)
- - Underemployment + (left axis)
2. Financial Indices
a. Overview
Since the Panel's October report, the St. Louis Financial Stress Index, a proxy for
financial stress in the U.S. economy, bas continued its downward trend, decreasing by a
quarter,'12 The index has fallen by over half since the post-crisis peak in June 2010. The recent
'II It is important to note that the measures of unemployment and underemployment do not include people
Ivho have looking for work altogether. While the Bureau of Labor Statistics (BIoS) does not have a
distinct metric Illr "underemploymenL"' the U-6 category of Table A-15 "Alternative Measures of Labor
\ lnderutilization"' is used here as a proxy BLS defines this measure as: "Total unemployed. plus all persons
marginally attached to the labor force. pius total employed part time for cconomic reasons, as a perccnt of the
civilian labor l(lITe plus all persons marginally attached to the labor Il)lTe,"' U,S, Department of Labor, inlerna/iollal
Anllua! Labor ,\loIislics inc at 15,htm) ( a e c e s s c ~ d
Federal Reserve Bank of SL Louis. SClics SILl'S), BW1IICIs/Fisea! Olher Econollllc Illdicalors
(Instnunenl: SL Louis Financial Stress Index. (online at
I) (accessed Nov, 3. 10), The index includes 18 data series.
llelJlnlltllP in December 1993 to the present. The series are: effective federal funds rate. rreasury. J
Baa-rated corporate. tv1errd I Lynch II igh '{ield [vlaster II Jndex, Merrill
l3aeked Master BBB-rated. J minus 3-month Baa-rated bond
Merrill Lynch High Yield ('orporate Master II Index minus 1 3-month
89
trend in the index suggests that financial stress continues moving toward its long-run n0I111. The
index has decreased by rnClre than three standard deviations since October 2008, the month \vhen
the TARP was initiated.
Figure 15: St. Louis Federal Reserve Financial Stress Index
6
5
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IIBOIZ-OIS 3-lllonth TLl) 3-month commen:ial paper minus 3-month
"''''''''''0 Markets Bond Index Plus. Floard Market
Bond Market Volati Index (I month). nominal minus IU-year Treasury Inflation
Protected and Vanguard Finaneials Fraded Fund (equities), The index is constructed using
aner the data series are de-Illeaned and divided their standard deviations
I',,,,,n"',,hl,, ullits. TlJe standard deviation of the index is set to I. For more details on tlJe construction
Federal Reserve: Flank of St. Louis. NatlOllal Economic Trcllds The Sf Louis Fed's
ll1ile\ 20 I0) (online at Jan20 1OAppendix. pd f}
YO
Stock market volatility has decreased recently. The Chicago Board Options Exchange
Volatility Index (VIX) has f ~ l l l e n by more than half since the post-crisis peak in May 2010 and
has fallen 7 percent since the Panel's ()clober report. However, volatility is still 40 percent
higher than its post-crisis low on April 12, 2010.
Figure 16: Chicago Board Options Exchange Volatility Index
313
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h. Interest Rates, Spreads, and Issuance
As ofNovcmber 3.2010. the 3-month and I-month London Interbank Oller Rates
(LlBOI{), tbe prices at which banks lend and borrow II-ol11 each other, were 0.29 and 0.25,
respeetivcIy.114 Rates have l ~ l l I e n by nearly halfsinee post-crisis highs in June 2010 and have
remained nearly constant since the Panel's October report. Over the longer term, however,
interest rates remain extremely low relative to pre-crisis levels, indicating both e!1(JliS of central
banks and institutions' perceptions of reduced risk in lending to other banks.
Dala accessed
eXj)eclati,olls of Ilear-term volatll
Oil November 3. 2010. The eBOt VIX is a measure
Board ()ptiolls lhe CBOE Index liIX,
aeeess(:d Nov. 3. 20 I
11.( Dala accessed
15 IClolllbelg data service on November 3. 2010.
91
Figure 17: 3-Month and I-Month lABOR Rates (as of November 3,2(10)
Currcnt Ratcs
Pcn'cnt Changc from Data
Availablc at Timc of Last
(1.6)%
I
0.29
0.25
Indicator
3-Month
I-Month UBOR
3J6
Since the Panel's October report, interest rate spreads have decreased slightly. Thiliy-
year mortgage intcrcst rates havc decreased very slightly and IO-year Treasury bond yields have
increascd very slightly. The conventional mortgage spread, which mcasures the 30-year
mortgage rate over IO-year Treasury bond yields, has decreased slightl y since late September. 317
The TED spread serves as an indicator for perceived risk in the financial markets. While
it has increased by about three basis points since the Panel's October report, the spread is still
currently lower than pre-crisis levels.
318
The LlBOR-OIS spread reflects the health of the
banking system. While it increased over threefold fj-om early April to July, it has been falling
since mid-July and is now averaging pre-crisis levels.
319
LlBOR-OIS remained fairly constant
since the Panel's October report. Decreases in the LlBOR-OIS spread and the TED spread
suggest that hesitation among banks to lend to counterparties has receded.
,111) IJata a c c c s ~ c d HI,,,,,,,h,>,'" data service Oil November 3. 2010.
'I (, Data accessed
IliciollllJerg data service Oil November 3. 20 IO.
il Board Ciovclllors of the Federal Reserve ,)v,lel!!. Federal Reser\'{' Srafi.ll/eal Release fl. 15. Selected
Infaesl Rilles. Ihsforieal Dolo (Instillment: COllventional (online at
ledera,lreselvc.,l(ov/relcasc's/h I Thursday (hereillaller "Federal
(accessed Nov. 3.2(10).
118 l'ederal Reserve Bank of IVlinneapolis. Perceived Risk The JED
ine at papers/pub display.cfin?i(4120).
\19 Data accessed Blclo111IJerg data service on November 3. 20 10.
92
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450
400
350
300
250
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321
400
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The interest rate spread Cor AA asset-IJ(lcked commereial paper, winch is considered mid-
investment has Callen more than a lenth since the Panel's October report. Thc interest
Data acccsscd through Bloombcrg data scrvice on November 3.20' 0,
I Data accessed BInn,,,h,>,'o data service Oil November 3. 20 I O.
rate spread on A2/P2 commercial paper, a lower grade investment than AA asset-backed
cOI11Inercial paper, has by nearly 1 I percent since the Panel's October report. This
indicates healthier ILmdraising conditions for corporations.
Figure 20: Interest Rate Spl'eads
Indicator
Conventional mortgage rate
TED Spread (basis points)
AA asset-backed commercial paper interest rate
spread' 3
Overnight A2/P2 nonfinancial cOlnmercial paper interest
rate
....." .
0.14
(11.2)%
(11.0)%
The spread between Moody's Baa Corporate Bond Yield Index and 30-year constant
maturity U.S. Treasury Bond yields doubled from late April to mid-June 2010. Spreads have
trended down since mid-June highs and have over 6 percent since the Panel's October
report. This spread indicates the difference in perceived risk between corporate and government
bonds, and a declining spread could indicate waning concerns about the riskiness of corporate
bonds.
Federal Reserve Statistical Release 11.15, supra note 317 (accessed Nov. 3, 20 I0): Board of Governors
of the Federal Reserve Fedem! Res<'lTe Statisrieu! Release II 15: Selected Interest Rates: Historica! Data
(Instrument: U.S. Govelllillent Securities/Treasury Constant Maturities/Nominal 10-Year Frequency: Weekly)
(online at www. IS/data/Weekly FridayjHI5 TCMNOM '{IO.txt) (accessed Nov. 3,
201
Board of Govelllors of the Federal Reserve Fcdcm! Reserve Statistiea! Release: Commercia!
Rates ond . Data Dmvnload (Instrument: AA Asset-I3aeked Discount Rate, Frequency:
Daily) (online at www.federalrescrve.gov/DataDownload/Choose.aspx?reICP) (accessed Nov. 3, 2(10); Board of
(iovert1ors of the Federal Reserve Fcdem! Rcs<'lTC Statisrica! Re!ease: Commercia! Rates and
!lllstOlutllU'S' Dara Download (Instrument: A/\ Nonfinancial Discount Rate. Daily) (online at
aec:es:,ed Nov. 3. 20 I0). In order to a more
this metric utilizes the average of the interest rate spread fl)r the last five of the nlonth.
Board of Governors of the Federal Reserve Federa! ReH'ITc Sraristica! Release: C'ommcrcia!
ROlcs ond Doro Down!ood (Instruillent: A2/1'2 Nonfinancial Discount Rate,
h'c'nlli'I1,:'\!' Daily) (online at www.fcderalreserve.gov/DataI)ownload/ClllJose.aspx'ireIC'!') (accessed Nov. 3,
201 In order to a more this [nelrie utilizes the average 0 r the interest rate spread
Illr the last fi ve
94
Figure 21: Moody's Baa C'orponlte Bond Index and 30-Year U.S. TreasU/'Y Yield
325
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Moody's Baa Corporate Bond Index (left axis)
30-Year U.S. Treasury Bond Yield, Constant Maturity (left
- Spread (right axis)
Corporate bond Inarket issuance data corroborate this analysis, with investment grade
issuance increasing over 50 percent between August and September 20 I0.
326
c. Condition of the Banks
Since the Panel's last report, 10 additional banks have failed, with an approximate total
asset value 01'$4.2 billion. With 139 failures fiOln January through October 2010, the year-to-
date rate has nearly reached 140, the level for all of calendar year 2009. In general, banks J ~ l i l i n g
in 2009 and 20 10 have been small- and medium-sized institutions;327 while they are f ~ l i l i n g in
high nurnbers, their aggregate asset size has been relatively small.
Federal Reserve Bank of St. Louis, Series DGS3U: cS'c!ecled [Illeresl Rales (Instrument: 30- Year
Treasury Constant !Vlalurity Rale, Frequeney: Daily) (online at researeh.stlouisfed.org/Cred2/) (hereinalter "Federal
Reserve Bank of'SI Louis Series DCiSW") (aeeessed Nov. 3. 2(10). Corporate Baa rate data aeeessed through
I{ 1."""1,.",, dala on November 3. 10.
In.!"""'" and Financial Markets
.Sl
(accessed Nov. 3. 2(10).
on}<l/oIl,- HOlld [ssl/ollce
Is)
with
smaller banks
billion in assets).
the Panel {(lUr categories based on bank assel sizes: banks
mediulll banks (those with between $10 billion and $100 billion in assets).
1 billion and $10 billion in ami smallest banks with less than 1
95
Figure 22: Bank Failures as a Percentage of Total Banks and Bank Failures by Total Assets
(1990_2010)328
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
$400
$350
$300 VI
....
..!l1
$250 "0
Cl
$200
-
0
VI
$150
c:
.2
$100
co
$50
$0
Failures as a %of Total Institutions (left axis) - Total Assets (right axis)
3. Housing Indices
Foreclosure actions, which consist of del:1ult notices, scheduled auctions. and bank
rcpossessions. increased 2.5 percent in September to 347,420. This metric is over 24 percent
above the /c)reclosure action level at the time of the EESA enactment. 329 While the hardest hit
states still aeeount for 19 out of 20 of the highest metro /c)reclosure rates, foreclosure activity
grew less in the hardest-hit cities than in other states.
330
Sales of new homes increased to
307,000. but remain 10W.
HI
The Case-Shiller Composite 20-City Composite decreased very
12, The disparity between the number of and total assets of failed banks in 2008 is driven primarily by tbe
lililllle ofWasbiligton Mutual Balik. which held $307 billion in assets. The 2010 year-to date perccntage of bank
fililllles includes failures thlOugh August. The totainulllber of FDIC'-insured institutions as of March 31.20 lOis
.932 eommereial banks and institutions. As of November 12,2010. there have been 143 institutions that
!ililcd. Federal Insurance Corporation. Faillires and Assislance Transaclions (online at
acc'essed Nov. 12.2(10). Asset totals have been adjusted for
dcllalion illtO 2005 dollars using the ClUP implicit price dcllator. The quarterly values were Into a
value. Federal Reserve Bank of St. [Ollis Series DCiS30. SlIfii'({ note 325 (accessed Nov. 3, 20 I0).
Press Release 011 Foreclosure sllfira note 278.
276.000. the lowest rate since 1963. It should be noted that this
to April prompted the April expiration of tax credits clet;lgl,lec!
Ilanlec;thit cities arc defined as those ill California. 1;lorida. Nevada. and Arizona. Iiouston.
the increases in fi.Jreelosllle RealtyTrae. fhird Qllarler Forec!oslIn' ",,"n'lIT
US M1'Im Areas Bill Down in lImdesl-IIil Cilies (Oct. 28. 2010) (online at
but-dowll-in- hardest-Ilit-ei ties-61
I Sales of new hOllies in 20 I0
nUlllber relleels a shi of sales from
slightly, while the FIIFA IIousing Priee Index increased very slightly in August 20 10. 'The
Case-Shiller and FHFA indices are 6 percent and 5 percent, respectively, below their levels of
October 2008.
332
Additionally, Case-Shiller futures prices indicate a market expectation that home-price
values for the major Metropolitan Statistical Areas
B3
(MSAs) will hold constant through
20 I 1.
334
These futures are cash-settled to a weighted composite index of U.S. housing prices in
the top ten MSAs, as well as to those specific markets. They are used to hedge by businesses
whose profits and losses are related to any area of the housing industry, and to balance portfolios
by businesses seeking exposure to an uncorrelated asset class. As such, futures prices are a
composite indicator of market information known to date and can be used to indicate market
expectations for home prices.
to boost home sales. U.S. Census Bureau and U.S. Department of Housing and Urban Development. New
Rcsidenl/1l1 Sales in .111n( 20J(! (July 26. 2(10) (online at www.census.gov/const/newressales.pdl); U.S. Census
Bureau. Ncw Residenlial Sales One-Fllmilv !l01lSCS Sold (online at
www.census.govlftp/pub/const/soldcuSLxls) (accessed Nov. 3, 2010).
1)2 The most reeent data available is for ,1uly 20 IO. Sec Standard and Poor's, S&P/Cllse-Shiller Home Price
Indices (Instrument: Case-Shiller 20-City Composite Seasonally Adjusted, Frequency: Monthly) (online at
www.stalldardandpoors.conl/illdices/sp-case-shiller-ll0me-price-indices/en/us/?indexld"spusa-casllpidff--p-us----)
(hereinafier "S&P/Case-Shiller Ilome Price Indices") (accessed Nov. 3, 201 Federal Housing Finance Agency,
U.S and Cens1Is Division Monlh/v Purehasc Onl)' Index (Instrument: USA, Seasonally Adjusted) (online at
www.fhfil.gov/DefilLlILaspx?Pag(87) (hereinafter "U.S. and Census Division Monthly Purchase Only Index")
(accessed Nov. 3, 20 I0). S&P has cautioned that the seasonal adjustment is probably being distorted by irregular
liletors. These lilCtors could include distressed sales and the various government programs. Sec Standard and
Poor's. S&I'/C'llsc-Shillcr !lollle Pricc Indiccs and Sellsol/lll S&P Indices: Indcx Analysis (Apr. 20 I0).
1'01' a discussion of the diflerences between the Case-Shiller Index and the Flll'A Index. scc April 20 I0 Ovesright
Report, .IUplll note 282. at 98.
m;\ Metropolitan Statistieal Area is defined as a corc arca containing a substantial population nucleus,
together wirh adjaccnt conlll1unities having a high or economic and soeial integration with the core. I J .S.
Census Burcau. A/wll! (/lid Sialislical Areas (online at
acc:es;;ed Nov. 3, 201
Darn acccsscd data sCl'vice on November 3,20 IO. The ('asc:--Shiller Futures contract
is tradcd on the (<LvIL: and is scttled to the Case-Shiller Index two months allcr the previous calendar quartel. For
eXilmfJte. the cOlltract will be settled the spot value or the S&P Case-Shiller lIome Price Index
values the rourth calendar quarrel' of the year, which is released in one day after the
scttlenlcllt ofthc contract. Notc rhnt most closc observers believe that the aceuracy ofthesc futures contracts as
fcnecasts diminishcs the finther our olle looks.
97
Figure 23: Ilousing Indicators
Indicator
Monthly foreclosure
S&P/Case-Shiller Composite 20 Indcx
JJ6
FHFA Price Indcx
JJ7
Most Recent
Percent Change
from Data Available
at Time of Last
Percent
Change Since
2008
Figure 24: Case-Shiller Home Pdce Index and Futures Values
338
300
275
250
225
200
l7S
125
100
Futures MABoston
- DC-'Nashin[;lOn
-CO-Denver
. CA-Los Ant!eles
NV-Las Vegas
rt-Miami
CA,-S,m Francisco
ComCloslte 10
Foreclosures inc al
recent data available is for 2010.
(accessed Nov. 3, 20 I 0). The most
S&P/Casc>Shiller llome Price Indices, supra noll.' 332
available is Ill!' 2UIU.
acc'es;,ed Nov. J, 20 I 0). Ihe mosl cecent dala
and Census Division l\il()lllillv Purchase
mosl recent data available is for
sflpra l10te 332 (accessed Nov. 3. 20 I 'The
All dala nOllnalized to 100 at 2000. Futures data accessed
November 3.2010. S&P/Case-Shiller Home Price sflpra note 332 (accessed
l:lli')OlnlJ,crg data service on
F. Financial Update
Each month, the Panel summarizes the resources that the federal government has
committed to the rescue and recovery of the financial system. The following financial update
provides: (1) an updated accounting of the TARP, including a tally of dividend income,
repayments, and warrant dispositions that the program has received as of September 30, 20 I 0;
and (2) an updated accounting of the full federal resource commitment as of October 27, 20 I O.
1. The TARP
a. !)rogram Updatcs
339
Treasury's spending authority under the TARP officially expired on October 3, 20 IO.
Though it can no longer make new funding commitments, Treasury can continue to provide
funding for programs f()r which it has existing contracts and previous commitments. To date,
$395.1 billion has been spent under the TARP's $475 billion ceiling.
34o
Of the total amount
disbursed, $209.5 billion has been repaid. Treasury has also incurred $6.1 billion in losses
associated with its CPP and Automotive Industry Financing Program CAIFP) investments. A
significant portion of the $179.7 billion in TARP funds currently outstanding includes Treasury's
investments in AIG and assistance provided to the automotive industry.
cpp Repayments
As of October 29,2010,112 of the 707 banks that participated in the CPP have fully
redeemed their preferred shares either through capital repayment or exchanges for investments
under the Community Development Capital Initiative (CDCI). During the month of Oetober,
Treasury received a $12 million full repayment from Ist Constitution Bancorp, and a $100
million partial repayment Ii-om Webster Financial Corporation. A total of $152.9 billion has
been repaid under the program, leaving $49.5 billion in funds currently outstanding.
l) .S. Department of the Treasury. CUIIlI//alivc Dilidends, Inlercsl and Dislri/mlions Reporl as oj"
Scplcmbcr 30,2010 (Clet. 1J. 20 I0) (online at financialstability.gov/docs/dividcnds-intcrest-
reports/Septcmbcr';;,2020 10"/;,2(1)i vidends'j;,20&':",20Interest%20Report.pd f) (hereina ncr "rreasury Cumulative
Dividends. Interest and Distributions Report); U.S. Department of the Treasury. hUl/hled Assel
hOl/lIIClllins llic Pcriod OClolicr 29. 20W 2.2(10) (online at
flnancialstabil 10A1 IO.pdt)
(Ilcreinalter
lhe $700 billion I !\RP ceil $1.26 billion as part of the Helping Families
Thcir Ilomes Aet of 1 lI.S.C. ~ Families SOH' 7hnr !lomcs Ael 2009. Pub. L.
No. III i:! 40. On June 30. 20 10. the llouse-Senate Conferenee Committee to reduce the amount
authorizcd undcr the TARP J!om $700 billion to $475 billion as part of the Dodd-Frank Wall Street Reform and
Consumcr I'lOtcction ;\cl tbat into law on July 2 I, 2010. Sce L)odd Fmllk Woll Sireci alld
COllsllmer l'mlectioll Acl. Pub. L. No. 111-203 1 The White lIouse. Remarks Ihe {)residclll 01 c)/Pill/i't'
DoddFulII/' Wol/ Sllcel o/ld C'O/lSlIlIlcll'mlcclio/l Act (July 21.20 I0) (online at
press-onJ eel ren Jarks.. pres id cnt .. si gil ing.. dodd li'aIlk-waII-st reet- reform-a nd-co nsu mer-protee tion-act).
99
b. Income: Dividends, Intel'est, and \Varrant Sales
In conj unction with its preferred stock investments under the CPP and TIP, Treasury
generally received warrants to purchase common equity.341 As of October 29,2010,45
institutions have repurchased their warrants from Treasury at an agreed upon price. Treasury has
also sold warrants for 15 other institutions at auction. To date, income from wan'ant dispositions
have totaled $8. I billion.
In addition to warrant proceeds, Treasury also receives dividend payments on the
preferred shares that it holds under the CPP, 5 percent per annum for the first five years and 9
percent per annum thereafter. 342 For preferred shares issued under the TIP, Treasury received a
dividend of 8 percent per amlUm.
343
In total, Treasury has received approximately $25.7 billion
in net income from warrant repurchases, dividends, interest payments, and other proceeds
deriving fI\)m TARP investments (after deducting losses).344 For further infc)rmation on TARP
profit and loss, see Figure 26.
I For its ('PI' investments in privately held financial institutions. Treasury also received warrants to
purchase additional shares stock. which it exercised immediately. Sirnilarly. Treasury also received
warrants to purchase additional subordinated debt that were also immediately exercised along with its ('PI'
investments in subchapter S corporations. Treasury Transactions Report. supra note 339. at 14
\ i.S. Department of the Treasury. Purchasc Program (Oct. 3. 20 I0) (online at
.Ii ity!eapitalpurc1mseprogram.html).
liS. !',."Ulm>l (Oct 3. 2(10) (online at
.gov! ro<uJ tostabl II ty! targeted I nvestme ntIHugram Illnd).
Cumulative Dividends. interest and Distributions Report. supm note Treasury
Transactions sUlna nole 339. also receivcd an additional $1.2 billion in participation fecs fmm its
Guarantee Program I()J' Market Funds. U.S Departmenl of the Announccs E\pirutio!l oj'
GUUlWI!CC Afar/,ct Funds 18. (online at
.ustreas .gO\!!pre<;s/ re Ic:a htm).
100
c. TARP Accounting
Figure 25: TARP Accounting (as of Octobel' 29, 2(10) (billions of dollars)'
Total
Maximum
Repayments!
Funding
Amount Actual Reduced Total Currently Funding
n
Allotted Funding
x'
Losses_I.
Available
I I ,tilt
" ....
iI Purchase $204.9 $204.9
ii$1 152.9) iii$(2.6) $49.5 $0
Program (CPP)
Targeted
40.0 40.0
(40.0) 0 0 0
Investment Prograrn
I
(TIP) I
Asset Guarantee 5.0
,v5.0 V(5.0) 0 0 0
Program (AGP)
AIG Investment 69.8
v'47.5 0 0 47.5 22.3
I
Program (AIGIP)
Auto Industry
81.3 81.3 (l0.8)
V;i(3.5)
vi;i67.1
0
Financing Program
(AllT)
I Auto Supplier 0.4 0.4
(0.4) 0 0 0
Support Program
(ASSPY
x
Tern! Asset-Backed
x4.3 XlOJ 0 0 0.1 4.2
Securities Loan
Facility (TALF)
Public-Private 22.4 ""14.2
'!V(O.4) 0 13.8
I
8.2
I
Investment Program I
(PPIP)'"
I
SBA 7(a) Securities 0.4 ""0.4 0 0 0.4
XVIO
Purchase
Home 29.9 0.6 0 0 0.6 29.3
Modification
Program (lIAMP)
Hardest Hit Fund
xv117.6 xvIllO.I
0 0 0.1 7.5
(HHF)
FHA Refinance 8.1
0 0 0.1 8.0
Program
COinmunity 0.8
xxO.6 0 0 0.6 0
Deve10pnlent
Capital Initiati ve
(CDCl)
Total $475.0 $395.1 $(209.5) $(6.1) $179.7 $79.5
.......... ..
101
I Figures affected by rounding, Unless otherwise noted, data in this table are Ii'om the following source:
U,S, Departmcnt of the Treasury, li'oubled Asset Relic/Program Transactions Reportji)r the Period Ending
October 29, 201 () (Nov, 2. 20 10) (online at financialstability,gov/does/transaetion-reportslll-2-
I 10-29-10,pdf),
II Total amount repaid under CPP includes $13.4 billion Treasury receivcd as part of its sales of Citigroup
common stock, As of Octobcr 29,2010, TreaslllY had sold 4.1 billion Citigroup common shares fc)r $16.4 billion in
gross proceeds, Treasury has received $3 billion in net profit from the sale ofCitigroup common stock. In .June
2009, Treasury exchanged $25 billion in Citigroup preferred stock fClr 7,7 billion shares of the company's common
stock at $3.25 per share. U,S. Department of the Treasury, Ti"oubled Asset ReliefProgram li'ansactiolls Report/iJl'
the Period Ending Octuber 29.2010, at 13-15 (Nov, 2, 2(10) (online at financialstability.gov/docs/transaction-
reportsll 1-2-1 O';;,20Transactions%20Report(%20as%200f'Yt,20 10-29-1 O,pdf); U,S, Department of the Treasury,
Troubled Asset Relie('Program: Two- Year Retrospective, at 25 (Oct 2010) (online at
www. financialstabil ity.gov/docsiTARp%20Two%20Year%20Retrospecti ve,l 0%2005';1;,20 I 0 transmittal%20Ietter.
pdf).
Total CPI' repayments also include amounts repaid by institutions that exchanged their Cpp investments
for investments undcr the CDCI, as well as proceeds earned from the sale of preferred stock and warrants issued by
South Financial Group, Inc. and 'lIB Financial Corp.
iliOn the TARP Transactions Report, TreaslllY has classified the investments it made in two institutions,
CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as losses. In addition, Treasury sold its
preferred ownership interests, along with warrants, in South Financial Group, Inc. and 'rIB Financial Corp. to non
TARP participating institutions. These shares were sold at prices below the value of the original CPP investment.
Therefore. Treasury's net current cpp investment is $49,5 billion due to the $2.6 billion in losses thus far. U.S.
Department of the Treasury, Ti'Oublcd Asset Relic/Program li'ansactions Report /iJr the Period Ending October 29.
2010, at 13-14 (Nov. 2, 20 10) (online at financial stability.gov/docs/transaction-reports/lI-2-
1 10-29-1 O.pdf).
Thc $S billion AGP guarantee fClr Citigroup was unused since Treasury was not required to make any
guarantce payments during the life of the program, U.S. Departmcnt of the TreaslllY, houbled Asset Relic/
Progrom.' Hvo- YeoI' at 3 I (Oct. 2(10) (onl ine at
www,financialstabili ty,gov/ ve I O%200S%20 I Otransmi
pdf).
v Although this $5 bi Ilion is no longer exposed as part of the AGP, Treasury did not receive a repayment in
the same sense as with other investments. Treasury did receive other income as consideration fill' the guarantee,
which is not a repayment and is accounted for in Figure 26.
VI AIG has completely utilized the $40 billion that was made available on Novembcr 2008, in exchange
filr the company's prefCrrcd stock. It has also drawn down $7,S billion of'the $29.8 billion made available on April
17,2009. This ligure docs not include $1.6 billion in accumulated but unpaid dividends owed by A1G to Treasury
due to thc restructuring of Treasury's investment ii'om cunlldative preferred shares to non-cumulative shares. AIC;
expects to draw down up to $22 billion in outstanding funds Ii-om the TARP as part of its plan to repay the revolving
crcdit heility provided by the Federal Reserve Bank of' New York. American International Group, Inc .. Furm 10-Q
(he Fiscal Veal' Elided 30. 201(). at 119 5.2(10) (online at
10474691 0009269/a2200724z 1O-q,htm); American Intcrnational Group, Inc"
C;UVel'lllllent (Sept. 30, 2(10) (online at
10 September/ A1C; AnnouncesPiantoRepay30Sept20 I O,pd I) {J.S, Departlnent
1"','0'-0'" ha/l.\OCliulls Repurt/i)l' tIJe Periud Oc/o!Jer 29. 2010. at 21
nanelaistallillt' ,go,,/dc)Cs/transaetiorl-reIPort,s/ll-2-
10-29-IO.pdi).
acccptcd a$I.9 billion settlcment paymcnt for its $3,5 billion loan to
rcp'rc,;entecl a $1,6 billion loss from the termination of' tbe debt t J,So
Fillallcia! Parent !. 9 Billiull ill Settlement
linancialstabi 051720 I Also. kli
. which the $1.9 billion (DIP) loan
102
provided to Old Chlysler, TreasUlY retained the right to recover the proceeds from the liquidation of specifIed
collateral. To date, Treasury has collected $40.2 million in proceeds from the sale of collateral, and it does not
expect a signi Ii cant recovery frorn the liquidation proceeds. Treasury includes these proceeds as part of the $10.8
billion repaid under the AIFP. U.S. Department of the Treasury, Troubled Assets Relief Program Monthlv 105(a)
Report _. September 2010 (Oct. 12, 20 I0) (online at tinancialstability.gov/docsll 05CongressionalRepOlis/September
I05(a) report FINAL.pdf); Treasury conversations with Panel staff (Aug. 19, 20 J0); U.S. Department of the
TreasUlY, Troubled Asset ReliejProgram Transactions Report JCJr the Period Ending October 29,2010, at J8 (Nov.
2,2(10) (online at tinancialstability.gov/docs/transaction-repOJis!J J-2-
I J0-29-1 O.pdi).
v"i On the TARP Transactions Report the $1.9 billion Chrysler debtor-in-possession loan, which was
extinguished April 30, 2010, was deducted fi'om Treasury's AIFP investment amount. U.S. Departrnent of the
Treasury, Troubled Asset Reliej Program Tramactions Report/clr the Period B'nding October 29. 2010, at 18 (Nov.
2, 20 J0) (online at finaneialstability.gov/docs/transaetion-reports/J 1-2-
I O'Y<,20'I'ransactions'Y<,20Report!t,20as'Yo200f%20 I 0-29-1 O.pdf). See note vii, supra, for details on losses from
Treasury's investment in Chrysler.
105(a)
IX On April 5, 20 I0, Treasury terminated its commitment to lend to the GM Spy under the ASSP. On April
7, 20 I0, it terminated its commitment to lend to the Chrysler SPV. In total, TreasUlY received $413 million in
repayments fhlIn loans provided by this program ($290 million from the GM SPY and $ I 23 million fi'om the
Chrysler SPY). Further, Treasury received $ J0 J million in proceeds fi'mn additional notes associated with this
program. U.S. Department of the Treasury, Troubled Asset Relief Program 7hmsactio11s Report/or the Period
B'nding October 29. 2010, at 19 (Nov. 2, 20 I 0) (online at flnancialstability.gov/docs/transaction-reports/J 1-2-
I0%20Transactions%20Report'}o20as%200f%20 I 0-29-1 O.pdf).
x For the TALI' program, one dollar of TARP funds was committed for every $10 of funds obligated by the
r'ednal Reserve. The program was intended to be a $200 billion initiative, and the TARP was responsible for the
first $20 billion in loan-losses, ifany were incurred. The loan was incrementally funded. When the program closed
in June 2010, a total of$43 billion in loans was outstanding under the TALF program, and the TARP's
commitments eonstitutcd $4.3 billion. The Federal Reserve Board of Governors agreed that it was appropriate for
Treasury to reduce TALF credit protection from TARP to $4.3 billion. Board 0 f Governors of the Federal Reserve
Federal Reserve Announces with the 7;'easur1' Department Regarding a Reduction oj"Credit
Protection PlOvidedfor the 7i'l",n A.s,set-Boclied Securities Loan Facilitv (fALl;; (July 20,20 I 0) (online at
www.federalreserve.gov/newsevents/press/monelaly/20 J00720a. hUn).
Xl As or()ctober 27, 2010, Treasury had provided $105 million to TALF LLC. This total includes accrued
payable intercst. Federal Reserve Bank of New York, Factors AfFecting ReserF(! Balances (11. 4.1) (let. 20 10)
(onl inc at www.fcderalreserve.gov/relcases/h41/20] 0 I
Xl' As of September 30, 20 J0, the total value of securities held by the PPIP managers was $] 9.3 billion.
RcsidentiallVlortgage-Baeked Securities represented R2 percent or the total; CMBS represented the
balance. U.S. Departmcnt or the Treasury, Securities Public.. Prilate Investmellt Program. Program Update
Elided 30,2010.at4(Oet. 2010)(onlineat
Ii Iwneialstabi Iity.gov/docs/Ex telll<II';;;,20Report';;,20-%2009-1 0%20vFinal.pdf).
U.S. Department or the Treasury, Trouhled Assets
20 I U, ilt 6 I 20 J 0) (online at linancialstahility.po,vi{loc'si 1
report FINAl .pdl}
has million in capital repayments li'om two PPIP fund
the Treasury. l/ouhled Tl'llllsactio!r\ the Period
20! 0) (onlinc at 1-2-
10-29- JOpd f)
Xl' ;\s ofClctohCl 29,20 IO. purchases under the SB/\ 7(a) Securities Purchase I'rogram totaled
million. I.I.S. IJepartment of the TrouMed Asset liwI,si1c'tiolls the
Period Octolwi 29. 20/(}. at (Nov. 2, 20!0) (online at linaneialstability II
I tl':/,20TI ansactiollS" J0291
103
XVI Treasury will not make additional purchases pursuant to the expiration of its purchasing authority under
EESA. U.S. Department of the Treasury, ]i-oubled Asset ReliclProgram: Two-Ycar Rctro.lpectivc, at 43 (Oct.
2010) (online at
www. fi nancialstabi Iity.gov/docs/TARp%20Two'I(,20Year'j(,20Retrospective 10';02005'/0201 transmittal%201etter.
pdf).
As part of its revisions to TARP allocations upon enactrnent of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, 'Treasury allocated an additional $2 billion in TARP funds to mortgage assistance for
unemployed borrowers through the Hardest lIit Fund (HlIF). U.S. Department of the Treasury, Obama
Administration Announccs Additional Support/ill' Targeted F'orcc!osurc-Prcvention Programs 10 Help Homeowners
Struggling with Unelllplovment (Aug. 11, 2010) (online at www.ustreas.gov/press/releases/tg823.htm). Another
$3.5 billion ,vas allocated among the 18 states and the District of Columbia currently participating in HHF. The
amount cach statc rcceivcd during this round of funding is proportional to its population. U.S. Department of the
Treasury, ]i-oubled Asset Relic/Program: Two Ycar Retro.spective, at 72 (Oct. 2010) (online at
www.financialstabil ity.gov/docs/TARP'I(,20Two%20Year';i,20Retrospecti ve_10%2005%2010..transmittal%,20Ietter.
pdf).
XVIII As of November 10, 2010, a total 01'$63.6 million has been disbursed to scven state Housing Finance
Agencies (lIFAs). Data provided by Treasury staff (Nov. 10, 2010).
XIX This figure represents the amount Treasury disbursed to fund the advance purchase account of the letter
of credit issued under the FHA Short Refinance Program. Data provided by Treasury staIT(Nov. 10,2(10).
xx Seventy-three Community Development Financial Institutions (CDFls) entered the CDCl in September.
Among these institutions, 17 banks exchanged their CPP investments for an equivalent investment amount under the
CDCI. U.S. Department of the Treasury, Trouhled Asset ReliclProgram Transactions Report/ill' the Period Ending
Octobcr 29, 20i 0, at 1-13, 16-17 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/lI-2-
IO%20Transactions%,20Report';i,20as';(,2001';/(,20 10-29-1 O.pdf). Treasury closed the program on September 30,
20 I0, alter investing $570 l1li Ilion in 84 CDFls. U.S. Department of the Treasury, ]i-casurv Annollnces Special
Financial Stabili::ation lnitialivc InvcSlll1cnlS 70 kfillion in 84 COll1munitp Developmcnt Financial institutions
in [Jndcrscrvcd ArCiis (Sept. 30, 2010) (online at financialstability.gov/latcstlpr()93020 10b.html).
104
Figure 26: TARP Profit and Loss (mil/iolls ojdol/ors)
\Varrant
Disposition Other
Dividends"" Interest""1 Proceeds
xxlv
Proceeds Losses
xxv
TARP (as of (as of (as of of (as of
Initiative
XXi
kl/to) 9/30/20 I0) kill 0) "'''''',':'nO) 10129/20 I0) Total
Total $16,721 $1,052 $8,160 $5 ($6,034) $25,732
CPP 9,859 49 . 6,904 ,015 (2,576) 17,250
'rIP 3,004 1,256 - - 4,260
AIFP
xxvi13,418
931
XXVHl15
(3,458) 906
ASSP - 15
XXIX] 01
- 116
AGP 440 - xxx2,246 - 2,686
PPIP
-
56 -
xxxi 180
- 236
SBA 7(a) I
- -
I
Bank of America - -
xxxii276
- 276
Guarantee
XXI AIC; is not listed on this table because no profit or loss has been recorded to date fill' AJG. Its missed
dividends were capitalized as part of the issuance of Series E preferred shares and are not considered to be
outstanding. Treasury currently holds non-cumulative preferred shares, meaning AIG is not penalized for non-
payment. There1(Jre, no protlt or loss has been realized on Treasury's AIG investment to date.
XXII U.S. Department of the Treaslll-y, CUlIlulative Dil'idends, Interest and Distributions Report as
,)"e,n!i'IJI}'",1' 30, 20J() (Oct. 12,2010) (online at finaneialstability.gov/does/dividends-interest-
reports/September'jj,202010%20Di vi %20Interest%20Report. pd f).
XXIII U.S. Lkpartment of the Treasury, Cumulative Dividends, interest and Distributions Report as oj
Septemher 30, 20]IJ (Oct. 12, 20!O) (online at flnaneialstability.gov/does/dividends-interest-
reports/Septell1ber'j;,2020] O'};,20Di vi dends%20&/t,20 Interest'j;,20Report. pd f).
XXfV U.S. Depaltment of the Treasury, Thmbfed Asset RcfiejProgram 'lIYlIIsactions Report/hI' the Period
Ending October 29, 2IJ J() (Nov. 2, 20! 0) (online at finaneialstability.gov/does/transaetion-reportslll-2-
I IO-29-10.pdf).
xxv In the TARP Transactions Report. Treasury classified the investments it made in two institutions, CIT
Group billion) and Pacific Coast National Bancorp ($4.1 million), as losses. TreaslllY has also sold its
preferred interests and warrants from South J"inancial Group, Inc. and TIB Financial Corp. This
reprcsents a $241.7 Inillion loss on its ('PI' investments in these two banks. Two TARP recipients, UCBH
Iloidings. Inc. 7 million) and a banking subsidial'y of Midwest Banc Iloidings, Inc. ($89.4 million), are
in bankruptcy U.S. Department of the Treasury, hOI/bled Asset hansactiolls
the Period Octoher 29, 20J(j (Nov 2,2(10) (online at
I 1-2-1 10-29-1
which received million in CPP funding, was
Insurance Corporation. IJCS!{l/l/i'l'ICiI Balik.
Bill/k. SOI/Ollla, 2tl, 10)
details {III
l!ollbfed
This ligure represent, l1et to 'freasury rrom the sale ofCitigroup eOllllllon stock to date. For
sales of Citigroup COllllll{ln slock. sce 110te ii, supm. U.S. Departmcnt or the '1',.,,.,,,,,,.,,
! T/JU!',m! l!ullsoctiolls the Period October 29, 2IJ IO. at 15
105
(onl ine at financialstability.gov/docsltransaction-reportslll-2-1 10-
29-1 O.pdf); U.S. Department of the Treasury, Troubled Asset Relie(Program: Two- Year Retrospective, at 25 (Oct.
2010) (online at
www.financialstability.gov/docsI'lARP%20Two%20Ycar'%20Retrospective_1 0%2005%20 10 transmittal'Yc,20letter.
pdf).
xxv,i This figure includes $815 million in dividends from GMAC preferred stock, trust preferrcd securities,
and mandatory convertible preferred shares. The dividend total also includes a $748.6 million senior unsecured note
fl'om Treasury's investment in (Jeneral Motors. Data provided by Treasury.
xxv", Treasury received proceeds from an additional note connected with the loan made to Chrysler
Financial on January 16, 2009. U.S. Department of the Treasury, Troubled Asset Relic/Program Transactions
Reportj!)r the Period Ending October 29,2010, at 18 (Nov. 2, 2010) (online at
finaneialstability.gov/docs/(ransaction-rcportslll-2- I O'Yo20Transactions%20Report'%20as'Yo200f'Yc,20 I 0-29- I O.pdf).
xx'x This represents the total proceeds n'om additional notes connected with Treasury's investments in GM
Supplier Receivables LLC and Chl)'sler Receivables SPY LLc:. U.S. Department of the Treasury, Troubled Asset
Relie(Program 7hmsaetions Report)!Jr the Period Ending October 29,2010, at 19 (Nov. 2, 2010) (online at
finaneialstability.gov/does/transaetion-reports/l 1-2-1 0%20Transactions'%20Repolt%20as%200f%20 I 0-29-1 O.pdf).
xxx As a fee for taking a second-loss position of up to $5 billion on a $30 I billion pool of ring-fenced
Citigroup assets as part of the AGP, Treasury received $4.03 billion in Citigroup prefelTed stock and warrants.
Treasury exchanged these preferred stocks for trust prcfelTed securities in June 2009. Following the early
termination of the guarantee in December 2009, Treasury cancelled $1.8 billion of the trust preferred securities,
Icaving TreasUl)' with $2.23 billion in Citigroup trust preferred securities. On September 30, 2010, 'freasury sold
these securities for $2.25 billion in total proceeds. At the end ofCitigroup's participation in the FDIC's TLGP, the
FDIC may transfer $800 million of$3Jl2 billion in Citigroup Trust Preferred Securities it received in consideration
for its role in the AGP to Treasury. U.S. Department of the Treasury, Troubled Asset Relic/Program Transactions
Report)!)r the Period Ending Octobcr 29, at 20 (Nov. 2, 2010) (online at
financialstabifity.gov/doesltransaction-reports/II-2-1 I0-29-1 O.pdf);
U.S. lJepartrnent of the Treasul)', Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, and ('itigroup Inc., Termination Agreement, at I (Dec. 23, 2(09) (online at
vvww na ncialstabi lity. gov/does/Ci ti';/,,20AG1'%2OTermi nati on%20Agreement%20-
'j(,20Fully%20Executed%20Version.pdf); U.S. Department of the Treasury, Treasurv AnnOllllces Further Sales 0/
Citigroup Securities and Cumulative Return to Taxpayers 0($41.6 Billion (Sept. 30, 2010) (online at
fi naneialstabil ity.gov/lates(/pr093020 1Oe.html); Federal Deposit Insurance Corporation, 2009 Annual Report, at 87
(.lune 30, 2010) (online at
lrouhled Asset
(unlille at finaneialstabtlity
29-10pdl).
As or 30,2010, Treasury has earned $159.1 million in membership interest distributions
rrom the 1'1'11'. Additionally, has earned $20.6 million in total proceeds f{)llowing the termination of the
TCW rund. See U.S. Department or the Treasury, Cumulative Dividends, In/eresl and Distributions Report as oj"
Sei',lem!lf'r30, 2UJU. at 14 (Oel. 12,2010) (online at finaneialstability.gov/docs/dividends-interest-
I0'; (\20Dividends%120&';;,20Interest%20ReporLpdl} U.S. Department of tile Treasury,
1',.,')01''''" TIIlIISactions fhe Period Oclohcr 29, 20!O, at 23 (Nov. 2. 20
docs/transaetJion- rep,orl.',!1 I-2- I 10-
A the Federal Reserve, and the FDIC negotiated with Bank of America regarding a
similar guarantee. the never reached an agreement. In 2009. Bank of America to pay each
of the guarantors a ree as though the guarantee had been in place during the period. This
agrecment resulted in payments ur$276 lllilliull to '[ reasury, $57 million to the Federal Reserve. and $92 miIlion to
tbe FDIC'. II,S. Department of the Board of Governors of the Federal Reserve System, Federal Lkposit
Insurance and Bank or Ameriea J(Tminillfon at 1-2 ( I (online at
Ii 1l<1llC iaIs tabi I
d. CPP Unpaid Dividend and Interest l'ayments
345
As of September 30, 2010, 120 institutions have at least one dividend payment on
preferred stock issued under CPP outstanding.
346
Among these institutions, 95 are not current on
cumulative dividends, amounting to $114.8 million in missed payments. Another 25 banks have
not paid $8 million in non-cumulative dividends. Of the $49.5 billion currently outstanding in
CPP funding. Treasury's investments in banks with non-current dividend payments total
$3.5 billion. A majority of the banks that remain delinquent on dividend payments have under
$1 billion in total assets on their balance sheets. Also, there are 21 institutions that no longer
have outstanding unpaid dividends, after previously deferring their quarterly payments.
347
Six banks have failed to make six dividend payments, while one bank has missed all
seven quarterly payments. These institutions have received a total of $207.1 million in CPP
funding. Under the terms of the CPP, after a bank fails to pay dividends for six periods,
Treasury has the right to elect two individuals to the company's board of directors. 348 Figure 27
below provides further details on the distribution and the number of institutions that have missed
dividend paynlents.
In addition, eight CPP participants have missed at least one interest payment,
representing $3.6 million in cumulative unpaid interest payments. Treasury's total investlnents
in these non-public institutions represent less than $1 billion in CPP funding.
,HI Treasury CUlllulative Dividends. Intercst and Distributions Report. supm note 339. at 20.
Does not includc banks
l/\IU'. gonc inlo iCi'Cl\!('l"';,IWl
th misscd dividcnd paymcnts that havc cither repaid all delinquent dividends,
or filed lin IYlIlkr1l'Ylni
Includcs institutIOns that have cither (a) fully rcpaidtheir CPI' investment and cxiled the program or
(b) cntered bankruptcy or its subsidiary was placed into receivership. Treasury C'ulllulative Dividends. Interest and
Distributions su/!m note at 20.
I- n!(/lIl'lIIlv /Js/ied Purchase I'I'rlUrill1l
I'mm,,,!, IIl1d DIreclor Nomlllalloll (online at
inaneialstal",i1il.Y.l(ov;d,)es/CI'I'/CP'I"j'; Nov. 12,20 I
107
Figure 27: CPP Missed Dividend Payments (as of September 30, 2(10)349
~ ......
Number of lVlissed 1\. 1 2 3 4 5 6 7 Total
Cumulative ; ~
,
,n'<"Ui>
Number of Banks, by asset size 29 19 17 17 10 3 0 95
Under $113 20 15 ]2 11 5 1 0 64
$113-$1013 8 4 4 6 5 2 0 29
Over $]08 1 0 1 0 0 0 0 2
Non-Cumulative Dividends
Number of Banks, by asset size 2 5 6 3 5 3 25
Under $113 1 5 5 3 5 3 23
$113-$108 1 0 1 0 0 0 2
Over $1013 0 0 0 0 0 0 0
Total Missed Payments 20
e. Ratc of RctunJ
As of November 4,20 I0, the average internal rate of return f(x all public financial
institutions that participated in the CPP and fully repaid the U.S. government (including
preferred shares, dividends, and warrants) remained at 8.4 percent, as no institutions exited the
prograrn in October. 350 T'he internal rate of return is the annualized effective compounded return
rate that can be earned on invested capital.
at 17-20. IJata on
Wi
CUl1lulative Dividends, luterest and Distributions Report, ,wpm note
SNL Finaueial data service, (accessed Nov, 3, 2010),
Calculation 01' the internal rate of retnrtl (IRI\) also includes ('PP investments in public institutions not
repaid in rull (ror reasons such as acquisition by another institution) in the Transaction Rcport, c,g" The South
Fin,llIeial aud TIB Financial Corporation, The Panel's total IRR calculation now includes ('PI' investments
institutions recorded as a loss on the TARP Trausaction due to e,g,. CIT IIlC,
r<Jrward, the Panel will continue to include losses due to bankruptcy when determines any
associated value have without value, \Vhen cxcluding cn II'om the calculation. the
resulting lRR is 10.4 percent. Trcasury Transactions Report, supra note 339,
f. \Varrant Disposition
Figul'e 28: Warrant Repurchases/Auctions for Financial Institutions who have fully Repaid
CPP Funds (as of November 4,2010)
\Varrant \Va.-rant at Price/
Investment Repul'chase Repurchase/ Disposition Estimate
Date Date
Date Ratio IRR
National
Bancorp 12/12/2008 5/8/2009
$1,200,000 $2,150,000 0.558
9.3(;;0
Iberiabank
Corporation 12/5/2008 5/20/2009 1,200,000 2,010,000 0.597
9.4(%
Firstmerit
Corporation 1/9/2009 5/27/2009 5,025,000 4,260,000 1.180 20.3%
Sun 1/9/2009 5/27/2009 2,100,000 5,580,000 0.376 15.3%
Independent
Corp. 1/9/2009 5/27/2009 2,200,000 3,870,000 0.568 15.6%
Alliance
Corporation 12/19/2008 6117/2009 900,000 1,580,000 0.570
13.8(/';,
First Niagara
Financial Group 11/21/2008 6/24/2009 2,700,000 3,050,000 0.885 8.0%
Berkshire Hills
Bancorp, Inc. 12/19/2008 6/24/2009 1,040,000 1,620,000 0.642 I
Somerset Hills
Bancorp 1/16/2009 6/24/2009 275,000 580,000 0.474 16.6%
SCBT Financial
Corporation 1/16/2009 6/24/2009 1,400,000 2,290,000 0.611 11.7%
IIF Financial
Corp. 11/21/2008 6/30/2009 650,000 1,240,000 0.524
10.1(%
State Street 10/28/2008 7/8/2009 60,000,000 54,200,000 1.107 9.9%
U.S. Bancorp 11/14/2008 7115/2009 139,000,000 135,100,000 1.029 8.7%
The Golcl1nan
Sachs Group, Inc. 10/28/2008 7/22/2009 1,100,000,000 1,128,400,000 0.975 22.W/;,
BB&1' Corp. 11/14/2008 7/22/2009 67,010,402 68,200,000 0.983 8.7%
Arnerican
COlnpallY 1/9/2009 7129/2009 340,000,000 391,200,000 0.869 29.5'/;,
Bank of New
York Mellon Corp 10/28/2008 8/5/2009 136,000,000 155,700,000 0.873 12.3%
Morgan 10/28/2008 12/2009
0.914
Northern 'Trust
Corporation I 1/14/2008 8/26/2009 87,000,000 0.969 14.5%
Old Line
Hancshares Inc. 9/2/2009 225,000 0.450 10.4'/;,
Bancorp lZhode
Inc. 12/19/2008 9/30/2009 1.000 12.6%
109
Centerstate Banks
of Florida Inc. 11/21/2008 10/28/2009 212,000 220,000 0.964 5.9'%
Manhattan
Bancorp 12/5/2008 10/14/2009 63,364 140,000 0.453 9.8%
CVB Financial
Corp 12/5/2008 10/28/2009 1,307,000 3,522,198 0.371 6.4%
Bank of the
Ozarks 12112/2008 11/24/2009 2,650,000 3,500,000 0.757 9.0'Yo
CapitalOnc
Financial 11114/2008 12/3/2009 148,731,030 232,000,000 0.641
12,()'Ir)
JPMorgan Chase
&Co.
10/28/2008 12/1012009 950,318,243 1,006,587,697 0.944 10.9%
CIT Group Inc. 12/31/2008 -
- 562,54 I
(97.2)%
TCF Financial
Corp
1/16/2009 12/16/2009 9,599,964 11,825,830 0.812 11.0%
LSB Corporation 12/12/2008 12/16/2009 560,000 535,202 1.046 9.0%
Wainwright Bank
& Trust Company 12/19/2008 12/16/2009 568,700 1,071,494 0.531 7.8%
Wesbanco Bank,
Inc.
12/5/2008 12/23/2009 950,000 2,387,617 0.398 6.7%
Union First Market
Bankshares
Corporation (Union
Banksharcs
COl]Joration) 12/19/2008 12/23/2009 450,000 1,130,418 0.398 5.8%
Trustmark
Corporatioll I 1/21/2008 I2/30/2009 10,000,000 11,573,699 0.864 9.4'i;)
Flushing Financial
Corporation 12/19/2008 12/30/2009 900,000 2,861,919 0.314 6.5%
OceanFirst Finan-
cial Corporation 1/16/2009 2/3/20 I0
430,797 279,359 1.542
6.2'/;)
Monarch Finan-
cial Holdings, Inc. 12/19/2008 2/10/2010 260,000 623,434 0.417 6. Tit)
I0IlR/20\l83
5
I
1,l
Bank or America
i /l)/2009 ,,1
I/J ILUU',I 3/3/20 I0 1,566,210,714 1,006,416,684 1.533 6.5%
Washington Fed-
eraI Inc./Washing-
(em Federal Sa"IlJbs
& Loan Association 11/14/2008 319/20 I0 15,623,222 10,166,404 1.537 18.6%
c
lC [Jank 12/12/2008 3/1 0/20 1O II I II 0.988 324' ~ ~ ,
"C
Texas Capital
n
Inc. 1/16/2009 3/11/20 I0 I I 0.807 30.1 ' i ~ ,
'\..-.'
.....
..,
Invcstment date !()r Bank of America in CPl'.
Invesllnenl date lUI Merrill Lynch in CPl'.
Investment date !()r Bank of America in I'll'.
110
Umpqua Iloidings
Corp. 11/14/2008 3/31/20 I0
4,500,000 5,162,400 0.872 6.6'1'0
City National
Corporation 11/21/2008 4/7/2010
18,500,000 24,376,448 0.759 8.5%
First Litchfield
Financial
Corporation 12/12/2008 4/7/2010
1,488,046 1,863,158 0.799 15.9'Yt)
PNC Financial
Services Group Inc. 12/31/2008 4/29/2010 324,195,686 346,800,388 0.935 8.71<)
Comerica Inc. 11/14/2008 5/4/2010 183,673,472 276,426,071 0.664 10.8'/';)
Valley National
Bancorp 11/14/2008 5/18/2010 5,571,592 5,955,884 0.935 8.3%
Wells Fargo Bank 10/28/2008 5/20/2010
849,014,998 1,064,247,725 0.798 7.8%
First Financial
Bancorp 12/23/2008 612/2010
3,116,284 3,051,431 1.021 8.2%
Sterling
Bancshares, Inc.!
Sterling Bank 12/12/2008 6/9/2010
3,007,891 5,287,665 0.569 10.8%)
SVB Financial
Group 12/12/2008 6/16/2010
6,820,000 7,884,633 0.865 7.7%
Discovcr
Financial Services 3/13/2009 7/7/2010
172,000,000 166,182,652 1.035 17.11<)
Bar Harbor
Bancsharcs 1/16/2009 7/28/2010
250,000 518,511 0.482 6.2%
Citizens &.
Northern
Corporation 1/1612009 8/4/2010 400.000 468,164 0.854 5.9%
Columbia Banking
System, Inc. 11/21/2008 8/11/2010
3,301,647 3,291,329 1.003 7.3%
llartford Financial
Services Group,
Inc. 6/26/2009 9/21/20 I0 713,687,430 472,221,996 1.51 1 30.3'Yt)
Lincoln National
Corporati on 7/10/2009 9/16/2010 216,620,887 181,431,183 1.194 27.1%
Fulton Financial
C'orpora Ii on 12/23/2008 9/8/2010
10,800,000 15.616,013 0.692

'I'he Bancorp, Inc.!
The Bancorp Bank 12/12/2008 9/8/2010 4,753,985 9,947,683 0.478 ]2.8%
South
(,roup, Inc.!
Carolina r'irs! Bank 12/5/2008 9130/2010 400.000 1.1 0.343
TlB Financial
Corp/TIB 12/5/2008 9130/2010 40,000 0.170 (38.0)%
Total
$8,(AQ H') 166 1.019 8.4'y.,
III
Figure 29: Valuation of Cunent Holdings of Wanants (as of November 4, 2(10)
$206.88
123.78
63.27
170.52 I
64.62 '
909.42
812.63
$2.351.12
$1,479.30
356.98
172.60
390.18
1
$71.57
17.34
5.94
96.96
20.90
419.89
379.97
$1,012.57
Financial Institutions with
WalTants
Inc.
Banks, Inc.
Financial Corporation
Fifth 'fhird Bancorp
KeyCorp
AIG
All Other Banks
'rotal
2. Federal Financial Stability Efforts
a. Federal and FDIC Programs
In addition to the direct expenditures Treasury has undeliaken through the TARP, the
fcdcral government has engaged in a much broader program directed at stabilizing the U.S.
financial system. Many of these initiatives explicitly auglnent funds allocated by Treasury under
spccific TARP initiatives, such as FDIC and Federal Reserve asset guarantees for Citigroup, or
operate in tandem \vith Treasury programs, such as the interaction between PPIP and TALF.
Other programs, like the Federal Reserve's extension of credit through its Section 13(3)
and special purpose vehicles (SPVs) and the FDIC's Temporary L.iquidity Guarantee Program
(TLGP), operate independently of the TARP.
b. Total Financial Stability Resources
Beginning in its April 2009 report, the Panel broadly classified the resources that the
Cedcral government has devotcd to stabilizing thc economy through myriad ncw programs and
initiatives as outlays, loans, or guarantces. With the reductions in funding for certain TARP
programs, the Panel calculates thc total valuc of thcsc resources to bc over $2.5 trillion.
Ilowcver. this would translate into thc ultimatc "cost" ofthc stabilization cffort only if: (I) assets
do not apprcciale; no dividends are received. no \varranls are exercised, and no 'TARP funds
are ) all and are written off; and (4) all are and
written ofT.
Includes warrants issued under CPP. ACiP. and TIP.
112
With respect to the 17DIC and Federal Reserve programs, the risk of loss varies
significantly across the programs considered here, as do the meehanisms providing proteetion for
the taxpayer against such risk. As discussed in the Panel's November 2009 repOli, the FDIC
assesses a premium of up to 100 basis points on TLGP debt guarantees.
355
In contrast, the
F'ederal Reserve's liquidity programs are generally available only to borrowers with good credit,
and the loans are over-collateralized and with recourse to other assets of the borrower. If the
assets securing a Federal Reserve loan realize a decline in value greater than the "haircut," the
Federal Reserve is able to demand more collateral from the borrower. Similarly, should a
borrower default on a recourse loan, the Federal Reserve can turn to the borrower's other assets
to make the Federal Reserve whole. In this way, the risk to the taxpayer on recourse loans only
materializes if the borrower enters bankruptcy.
c. Credit Union Assistance
Apart from the assistance credit unions have received through the CDCl, the National
Credit Union Administration (NCUA), the federal agency charged with regulating federal credit
unions (FCUs), has also made efforts to stabilize the corporate credit union (CCU) system.
Corporate credit unions provide correspondent services, as well as liquidity and investment
services to retail (or consumer) credit unions.
356
Since March 2009, the NCUA has placed five
CCUs into conservatorship due to their exposure to underperforming private-label MBS. The
NCUA estimates that these live institutions, which have $72 billion in assets and provide
services for 4,600 retail eredit unions, hold more than 90 percent of the MBS in the corporate
I
}57
cree It umon system.-'
To assist in the NCLIA's stabilization efforts, the Temporary Corporate Credit Union
Stabilization Fund ("Stabilization Fund") was created to help cover costs associated with ecu
conservatorships and liquidations. The Stabilization Fund was established on May 20, 2009, as
part of the I Iclping Families Save Their Flomes Act of2009, and allows the NCUA to borrow up
National Credit! inion Adl1llnistration.
/. n'oll!'"II" Asked (r at I (onl ine at
""-u.,,,,f).
Reso!utio/l' Natiolla! C'ledit Ullum
Fuci Slteet:
National Credit Union Admillistration.
Adlllillis/lutiu/l Viltwl! 11!1V11 /lu!!. at 14 (Sept. ,2(10) (online al
0-0927WebinarSlides.pdl); National Credit t Jnion Administration,
14,2(10) (online at
113
to $6 billion from Treasury on a revolving basis.
358
The NCUA had drawn a total of $1.5 billion
from the Stabilization Fund, and repaid the balance at the end of September.
359
d. Mortgage Purchase Programs
On September 7,2008, Treasury announced the GSE Mortgage Backed Securities
Purchase Program. The I-Iousing and Economic Recovery Act of 2008 provided Treasury with
the authority to purchase MBS guaranteed by GSEs through December 31,2009. Treasury
purchased approximately $225 billion in GSE MBS by the time its authority expired.
36o
As of
October 20 I0, there was approximately $154.6 billion in MBS still outstanding under this
361
program.
In March 2009, the Federal Reserve authorized purchases of$1.25 trillion MBS
guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, and $200 billion of agency debt
securities from Fannie Mae, Freddie Mac, and the Federal IIome Loan Banks.
362
The intended
purchase amount for agency debt securities was subsequently decreased to $175 billion.
363
All
purchasing activity was completed on March 31, 2010. As of November 10, the Federal Reserve
held $1.05 trillion of agency MBS and $150 billion of agency debt. 364
National (\edit \Inion Administration. Board Aelion Memorandum (.lune 15,20 I0) (online at
WWW.llCua .gov!Genln f()!I30ardandAction!DraftBoardActions!20 IOIJ un!1 tenl6aBAMSFAssessmentJ une20 IO( I
ill iOll)FINAL.prlt).
15') National Credit Union Administration, Remarks as Prepared/i)r 1>1' Board Meml>er
al Grand IVashinglon (Sept. 20, 2(10) (online at
www.neua.gov!Genlnf()!i'vlembers!llylamIlSpeeehes! I0-0920IIyl and NAFC\ JCongrCaucus. pd f).
U.S. Department of the FY201 I in at 138 (Feb. 2010) (online at
\V IV\V. 11 II %20Blln;,20(2 ).pd n.
J(>! {l.S. Departmcnt of the Treasury, MBS Purchase Program. Porlj;)!io hI' Monlh (online at
IVww.linancialstabii IO';(,20Port!()lio'/(,20by%20month.pdl) (accesscd Nov. 12, 2(10).
has rcceived hillirlll in principal repayments and $14.3 billion in interest payments flom thcse
securities. of the MBS PurcilOsc and Inlcrl'si Rl'ccil'l'd (online at
I
on Credit and Liquidity Programs and the 13alance Sheet, supra note I. at 5.
on Credit and Liquidity Programs and the Balance Sbeet. supra note 251 , at 5.
Federal Reserve Statistical Release! 1.4.1, SUfi/a note 251.
114
e. Federal Reserve Treasul'Y Securities Purchases
365
On November 3, 20 I 0, the Federal Open Market Committee (FOMC) announced that it
has directed FRBNY to begin purchasing an additional $600 billion in longer-term Treasury
securities. In addition, FRBNY will reinvest $250 billion to $350 billion in principal payments
from agency debt and agency MBS in Treasury securities.
366
The additional purchases and
reinvestments will be conducted through the end of the second quarter 2011, meaning the pace of
purchases will be approximately $ll 0 billion per month. In order to facilitate these purchases,
FRBNY will temporarily lift its System Open Market Account per-issue limit, which prohibits
the Federal Reserve's holdings of an individual security from surpassing 35 percent of the
outstanding amount.
367
As of November 10, 2010, the Federal Reserve held $853 billion in
1
, .. 368
reasury secuntIes.'
130ard of Governors of the r'ederal Reserve Press Rclease- FOMC Sralemelll (Nov. 3. 20 I 0)
(online at 101103a.htm); 17ederal Reserve Bank of New
S'lolelllclIl Purchases 7i'easurv Securilic's (Nov. 3, 20 10) (onl ine at
www.lederalreserve.gov/llewsevents/press/monetary/monetary20 I 0 1I 03a I.pdf).
10. 20 I O. the Federal Reserve principal payments on agency debt and
ageney In securities in order to the amount of their securities holdi ngs in
Mnrket Account portl()lio nt their then-eurrent level. Board ofCiovernors of the FederallZeserve
,J V.',ICIII, rOMC'Slalcmell1 10.20 I 0) (online at
wvvI.ledel'alreseTve PO\;!II,cwscvellls!JlrC:SS/lllonel;Ir\;/7( 10081 Oa.htm).
\<;7 f,'edernl Reserve Bank of
2(10) at
. Purchases
hlq.html).
Securilies 3.
Federal Reserve Statistieal Release H.4.I. supra note 251.
liS
Figure 30; Federal Government Financial Stability Effol"t (as of October 27, 20IO)',xlli
Program
Treasury Federal
(billions
(TARP) Reserve FDIC Total
Total
$475 $1,378.0 $690.9
$2,544.0
OutlaysXXXiv
232.2 1,226.8 188.9 1,648.0
Loans
23.4 151.2 0 174.6
Guarantees'XXv
4.3 0 502 506.3
Repaid and Unavailable TARP Fund')
215.1 0 0 215.1
AIGxxxvi 69.8 83.1 0
152.9
Outlays
xxxvii69.8 xxxviii26.1
0 95.9
Loans
0
XXXlX57.1
0 57.1
Guarantees
0 0 0 0
Citigroup
11.6 0 0 11.6
Outlays
x111.6
0 0 11.6
Loans
0 0 0
Guarantees
0 0 0 0
Capital Purchase Pl"ogram (Other)
37.8 0 0 37.8
Outlays
xli37.8 0 0 37.8
Loans
0 0 0 0
Guarantees
0 0 0 0
Capital Assistance Program
0 0
xhiN/A
TALF
4.3 38.7
() 43.0
Outlays
0 0 0 0
Loans
0
xliv38.7
0 38.7
Guarantees
xliii4.3
0 0 4.3
PPIP (Loans)'lv
0 0 0
()
Outlays
0 0 0 0
Loans
0 0 0 0
Guarantees
0 0 0 0
PPIP (Securities)
xlvi22A
0 0 2204
Outlays
7.5 0 0 7.5
Loans
14.9 0 0 14.9
Guarantees
0 0 0 0
Making Home Affordable Program/
45.6 0 0 45.6
Foreclosure .Mitigation
Outlays
xlvii45.6
0 0 45.6
Loans
0 0 0 0
Guarantees
0 0 0 0
Automotive Industry Financing Program
xlviii67.1
0 0 67.1
Outlays
59.0 0 0 59.0
Loans
8 I
()
0 8.1
Guarantees
()
0 0 0
Automotive Supplier Support Program
004 0 0 004
Outlays
()
0 0
()
Loans
xli,O.4
0 0 0.4
Guarantees
0 0 0 0
116
SEA 7(a) Securities Pm'chase
Outlays
Loans
Guarantees
Community Development Capital Initiative
Outlays
Loans
Guarantees
Temporary Liquidity Guarantee Program
Outlays
Loans
Guarantees
Deposit Insurance leund
Outlays
Loans
Guarantees
Other Federal Reserve Credit Expansion
Outlays
Loans
Guarantees
10.36
0.36
o
o
liO.57
o
0.57
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
1,256.1
Iivl,200.7
IV55.4
o
o
o
o
o
o
o
o
o
502.0
o
o
lii502.0
188.9
liiil88.9
o
o
o
o
o
o
0.36
0.36
o
o
0.57
o
0.57
o
50U)
o
o
502.0
188.9
188.9
o
o
1,256.1
l,200.7
55.4
o
xxxiiI Unless otherwise noted, all data in this figure are as of October 27,20 IO.
XXXIV The terrn "outlays" is used here to describe the use of Treasury fimds under the TARI>, which are
broadly classifiable as purchases of debt or equity sccurities (e.g., debentures, preferred stock, exercised warrants,
etc.). These values were calculated using (I) Treasury's actual reported expenditures, and (2) Treasury's anticipated
funding levels as estimated by a of sources, including Treasury statements and GAO estimates. Anticipated
hmding levels are set at discretion, have changed (i'om initial announcements. and are subject to further
change. Outlays used here represent investment and asset purchases as wcll as commitments to make investmcnts
and asset purchases and are not the same as budget outlays, which under section 123 of EJ:SA arc recorded on a
"credit ref()I"Ill" basis.
Although Inany of the guarantccs may never be exercised or will be exercised only partially, the
guarantee included here rqnese!!t the federal government's greatest possible financial cxposure.
Oil AIG hm'\ll7Iclll Valuolioll I, 20 J()
at IIOI2010.html). AIG values exclude accrued dividends on preferred
intercsts in the AlA and AIIC() SPVs and accrued interest to FRBN'{ on the Maiden Lane LLCs.
Ihis IHnnber includes investments under the AIGIP/SSFJ Program: a $40 billion investment made on
November 25,2008, and a $30 billion investmcnt made on April 17,2009 (less a reduction 01'$165 million
rClJlCSelltnlll bonuses paid to AIG Financial Products As of Novembcr L 2010, Ale; had utilized $47.5
billion of the availflble $69.8 billion under the AIGIP/SSFI. U.S. Department of the Treasury. 1i'casurv Updalc Oil
I/()' III 1'(',1 1171 CII I Valualioll (Nov. l. 2(10) (online at www.llnaneialstabil IIOI2010.html); U.S.
elite , 'liouhled 'hill/Siletiolls Ihe Period OefOber 29.
117
2010, at 13 (Nov. 2, 2010) (online at financialstability.gov/docs!transaction-reports!l 1-2-
IO'/j)20Transactions!rJ20Report%20as'Y.,200('/(l20 I 0-29- IO.pdf).
xxxv,;, As part of the restructuring of the U.S. government's investment in AIG announced on March 2, 2009,
the amount available to AIG through the Revolving Credit Facility was reduced by $25 billion in exchange for
preferred equity interests in two special purpose vehicles, AlA Aurora LLC and ALICO Holdings LLC. These
SpYs were established to hold the common stock of two AIG subsidiaries: American International Assurance
Company Ltd, (AlA) and American Life Insurance Company (ALICO). As of October 27,2010, the book value of
the Federal Reserve Bank of New York's holdings in AlA Aurora LLC and ALICO Holdings LL/: was $26.1 billion
in preferred equity ($16.7 billion in AlA and $9.4 billion in ALI CO). Federal Reserve Bank of New York, Factors
Af{(?cting Rescr\'l! Balances (ll.4.J) (Oct. 28, 2010) (online at www.fecleralreserve.gov/releases/h41/20101028/).
xxxix This number represents the full $29.3. billion made available to AIG through its Revolving Credit
Facility (RCF) with FRBNY ($18.9 billion had been drawn down as of October 27,2010) and the outstanding
principal of thc loans extended to the Maiden Lane II and III SPYs to buy AIG assets (as of October 27,20 I0, $ I 3.5
billion and $14.3 billion, respectively). The amounts outstanding under the Maiden Lane II and III facilities do not
reflect the accrued interest payable to FRBNY. Income from the purchased assets is used to pay down the loans to
the SpYs, reducing the taxpayers' exposure to losses over time. Federal Reserve Bank of New York, Factors
Afrecting Reserve Balances (ll. 4.1) (Oct. 27, 20 10) (online at www.federalreserve.govlreleases/h4 1120 I 0 I (28/).
The maximum amount available through the RCF decreased from $34.4 billion to $29.3 billion between
March and Scptember 20 10, as a result of the sale of two Ale; subsidiaries, as well as the company's sale of CM E
Group, Inc. common stock. The reduced ceiling also reflccts a $3.95 billion repayment to the RCF from proceeds
earned li'om a debt offering by the International Lease Finance Corporation (lLFC), an AIG subsidiary. Board of
Governors of the Federal Reserve System, Federal Reserve 5)istem Monthly Report on Credit and Liquidity
Pmgrall1s and the Balance Sheet, at 18 (Oct. 20 10) (online at
www. federalreserve.gov/monetarypolicy/files/monthlyclbsreport20 I0 1O.pdf).
xl This ligure represents Treasury's $25 billion investment in Citigroup. minus $13.4 billion applied as a
repayment f()I' Cpp funding. The amount repaid comes from the $ I 6.4 billion in gross proceeds Treasury received
from the sale of 4.1 billion Citigroup common shares. Sec note ii, supra for a further details of the sales of
Citigroup comlllon stock to date. U.S. Department of the Treasury, hO/lbled Asset Relie(Program hansaetions
Rcportjiir the Period Ending October 29, 2010. at 13 (Nov. 2, 20 I0) (online at
linancialstability.gov/docs/transaetion-reports/l 1-2-1 O';,j,20'I'ransacticl1ls%20Report'%20as%200t'/j,20 I0-29- I O.pdf).
,I! This figure represents the $204,9 billion Treasury disbursed under the CPI', minus the $25 billion
investment in Citigroup identi fled above, $139.5 billion in repayments (excluding the amount repaid for thc
Citigroup investment) that are in "repaid and unavailable" T/\RP fllllds. and losses under the program. This figure
does not account f<lr fllture repayments of Cpp investments and dividend payments ji'om CPP investments. U.S.
Department of the Tim/bled Asset Relie(Prognllll Transactions Report/iii' the Period Ending October 29,
2UJU, at 13 (Nov, 2, 201U) (online at financialstability.gov/docs/lransaetion-reports/lI-2-
IO%20Trallsactions%20Report%20as';;,200t'/;,20 I 0-29-1 O.pdf).
,I" On November 9,2009, Treasury announced the closing of the CAP and that only one institution.
GM;\C, was in need of further capital from Treasury. GMAC', however. received further funding through the AIFp.
Thencfol'e, the Panel considers CAP LInUSI'd. U.S. Department of the Ani/ow1cement J(,"U/JI't/,'IlO
the Capital A.lsis((/nce PrograllJ (Nov, 9, 20(9) (online at www.financialstability.gov/latestltgI1092009.htl1ll).
This represents the $4.3 billion adj,usted allocation to the TALI' SPY. 1I0wever, as ofC)etober
.2010, TALI' LIC had drawn lOS million olthe available $4.3 billion. Board of Governors ofthc Federal
Reservc Factors Reserve Balances (I J 4.1) (Sept. 30, 2(10) (online at
www.fCderalreserve.gov/releases/h41/201 Department of the Treasury. li'ouhled Asset ReliefProgrl//I1
hal1sactions the Period at 21 2, 2(10) ne at
linaneialstabil 1-2-1 10-29-1 O.pdf).
On.lunc 30, 2010. the Federal Reserve ceased issuing loans collateralized issued CMBS. As of this date,
investors had a total 01'$73.3 billion in TALI' loans ($13.2 billion in CMBS and $60,1 billion in nOI1-
C'MBS) and $71 billion in TALI' loans had been settled ($12 billion in CMBS ami $59 billion in non-CMBS).
118
Earlier, it ended its issues of loans collateralized by other TALF-eligible newly issued and legacy ABS (non-CMBS)
on March 31,2010. Federal Rescrve Bank of New York, Term Asset-Backed S'ecurities Loan Faeilitv: Terms and
Conditions (online at www.newyorkfed.org/markets/tal(terms.html) (accessed Nov. 12,2010); Federal Reserve
Bank of New York, Term Asset-Backed Securities Loan Faeilitv: CMBS (online at
www.newyorkfed.org/markets/cmbsoperations.html) (accessed Nov. 12, 2010); Federal Reserve Bank of New
York, Term Asset-Backed Securities Loan Facility: CMBS (online at
www.newyorkfed.org/l1larkets/CMBSrecent_operations.html) (accessed Nov. 12,2010); Federal Reserve Bank of
New York, Term Asset-Backed Securities Loan Facility: llOn-CMBS (online at
www.newyorkfed.org/markets/talfoperations.html) (accessed Nov. 12,2010); Federal Reserve Bank of New ):'ork,
Terl/1 Asset-Backed Securities Loan Facility: non-C/I,fBS (online at
www.newyorkfed.org/l1larketsITALF_recent..operations.htl1ll) (accessed Nov. 12,2010).
xliv This number is derived from the unofficial I: 10 ratio of the value of Treasury loan guarantees to the
value of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability
Plan, at 4 (Feb. 10, 2(09) (online at www.finaneialstability.gov/docs/fact-sheet.pdf) (describing the initial $20
billion Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a
$100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Since only $43 billion in TALF
loans remained outstanding when the program closed, Treasury is currently responsible for reimbursing the Federal
Reserve Board only up to $4.3 billion in losses from these loans. Thus, the Federal Reserve's maximum potential
exposure under the TALF is $38.7 billion. See Board ofGovemors of the Federal Reserve System, Factors
AfFecting Reserve Balances (HA.I) (Oct. 28, 2010) (online at www.federalreserve.govireleases/h41/201 0 I 028/).
xlv It is unlikely that resources will be expended under the 1'1'11' Legacy Loans Program in its original
design as ajoint TreasUly-FDIC program to purchase troubled assets from solvent banks. In several sales described
in FDIC press rcleases, it appears that there is no Treasury participation, and FDIC activity is accounted for here as a
component of the FIJIC"s Deposit Insurance Fund outlays. See. e.g., Federal Deposit Insurance Corporation, FDIC
Statement on the Status o{the Legacv Loans Program (June 3, 20(9) (online at
www.fdic.gov/news/news/press/2009/pr09084.html) .
xlvi This figure represents Treasury's final adjusted iuvestment amount in the Legacy Securities Public-
Private Investment Program (1'1'11'). As ofOetober 29,2010, TreaslilY reported commitments 01'$14.9 billion in
loans and $7.5 billion in membership interest associated with I'PIP. On January 4, 2010, TrcaslllY and one of the
nine fund managers, USTITCW Senior Mortgage Securities Fund, L.P. (TCW), entered into a "Winding-Up and
Liquidation Agreement." Treasury's final investment amount in TC\V totaled $356 million. Follo\ving the
liquidation ofthc fund, Treasury's initial $3.3 billion obligation to TCW was reallocated among the eight remaining
funds on March 22, 20] O. See U.S. Department of the Treasury, Troubled Asset Reliej'Program hansactiolls Report
ji)r the Period Ending Octoher 29,2010, at 23 (Nov. 2, 2010) (online at finaneialstability.gov/docs/transaetion-
1-2-1 10-29-] O.pdl).
On October 20,20 I0, Treasury relcased its I(Hlrth quarterly report on 1'1'11'. The report indicates that as of
Septembcr 20 I 0, all investment funds havc rcalized an internal rate of return since inception (net of any
management lecs or expenses owed to Treasury) above J9 percent. The highest perf()rming fund, thus far, is AG
GECC l'PIF Master Fund, L.l'., which has a net internal rate of return of 52 percent. U.S. Department of the
Treasury, Securities Pllhlil>Privatc Investment ['rogrlllll, at 7 (Clet. 20, 2(10) (online at
fi IO%20vFilla!.pdf).
As of ()ctobcr 29, 10, thc total cap for !lAMP was $29.9 billion. The total amount of TARl' funds
committed to HAMP is $29.9 billion. Ilowever, as ofOetober 30.20]0, only $597.2 million innon-GSE payments
IO-29-10.pdl);
Vf'l,I!'!,,!>,'!' 2010, at (}
1""'>0'"0'" li'allsactiolls
FINAL.pdf). Data provided
hOlibled Asset
2, 201U) (online at
Ins bccn disburscd under HAfvlP. U.S. [)cpartmcnt ofthc
the Period OC/ohcr 29. 20W, at 43
financialstability' 1-2-1
.S. of the
((let. 1,2(10) (online at
linancialstabil
staff
119
xlv,i, A substantial portion of the total $81.3 billion in loans extended under the AIFP has since been
converted to common equity and preferred shares in restructured companies. $8.1 billion has been retained as first
lien deht (with $1 billion committed to old GM and $7.1 billion to Chrysler). This figure ($67.1 billion) represents
TreaslllY's current obligation under the AIFP after repayments and losses. U.S. Depariment of the Treasury,
]i-oubled Asset Relie{Progral71 Transactions Reportj!)r the Period Ending October 29, 2010, at 18 (Nov. 2, 20 I 0)
(online at financialstability.gov/docs/transaction-reports/II-2-1 I 0-
29- I O.pdf).
xlix This figure represents Treasury's total adjusted investment amount in the ASSP. U.S. Department of the
Treasury, Troubled Asset Relie{Program Transactions Report/hI' the Period Ending October 29, 2010, at 19 (Nov.
2, 2(10) (online at fi nancialstability.gov/docs/transaction-repOlis/lI-2-
I 0%20Transactions%20Report%20as%200n'020 I 0-29-1 O.pdf).
I U.S. Department of the TreasUlY, Troubled Asset ReliefProgram: 7\vo Year Retrospective, at 43 (Oct.
2(10) (online at
www. financialstabil ity.gov/docs/TARP%20Two'Y;,20Year%20Retrospecti ve_10'1"02005';;;,20 I0_transmittal%,20Ietter.
pdf).
Ii U.S. Department of the TreasUlY, Troubled Asset Relief Program ]i-ansactions Reportji)r the Period
Ending October 29,2010, at 17 (Nov. 2, 20lO) (online at financialstability.gov/docs/transaction-reports/lI-2-
I 0'%20Transactions%20RepOlt%20as%20ofYo20 I 0-29- I O.pdf).
Iii This figure represents the current maximum aggregate debt guarantees that could be made under the
program, which is a function of the number and size of individual financial institutions participating. $286.8 billion
of debt subject to the guarantee is currently outstanding, which represents approximately 57. I percent of the current
cap. Federal Deposit Insurance Corporation, Monthl)) Reports on Debt Issuance Under the Temporarv Liquidity
Guarantee Program: Debt Issuance Under Guarantee Program (Sept. 30, 20 I0) (online at
www.fclic.goviregulations/resources/tigp/totaUssuance09-10.html). The FDIC has collected $10.4 billion in fees
and surcharges fj-OJ1l this program since its inception in the f()urth qUalier 01'2008. Federal Deposit Insurance
Corporation, Reports Related to the Temporwy Liquidity Guaralllee Program: Fees Under Tel71porarv
Liquidity C;uaranlee Debl Program (Sept. 30, 20 I 0) (online at www.fdic.goviregulations/resourees/tlgp/fees.html).
liii This figure represcnts the FDIC's pl'Ovision f{)r losses to its deposit insurance fund attributable to bank
failures in the third and f{)Urth quarters of 2008, the. first, second, third, and f{)Urth quarters of 2009, and the first and
second quarters of 20 IO. Federal Deposit Insurance Corporation, Chic/Financial Of/icer's (eFOj Repurt to the
Board: DIF Income Stolemenl - Second Quarter 2010 (online at
www.f(lie.gov/about/strategic/eorporate/cfoJeport2ndqtr10/inconle.html). For earlier reports, see Federal
Deposit Insurance Corporation, ChicI' Financial Officer's (CFO) Reporl to the Board (online at
www.f{jie.gov/about/slrategic/corporate/index.html) (accessed Nov. 12,2(10). This figure includes the
estimates of its future losses under loss-sharing agreements that it has entered into wilh banks acquiring assets of
insolvent banks during these eight quarters. Under a loss-sharing agreement, as a condition of an acquiring bank's
agreement to purchase lhe assets of an insolvent bank, the FDIC typically agrees to cover 80 percent of an acquiring
bank's flrture losses on an initial portion of these assets and 95 percent of losses on another portion of assets. See,
e.g. Federal Deposit Insurance Corporation, Purchase and-lI'holc Bank. All
Among FI)IC'. Receiver oj C;ual'lln/r Banli, Auslin, Texas. Federal Depo.lil Insurance Corpol'illion alld Compass
Blink, at 656() (Aug. 21, 2(09) (ouline at www.fdic.gov/banklindividual/hliled/guaranty-
p and a w addendum.pdf).
arc of the f'ednal Re,erve Related Facilitie,. The Federal Reserve balance
,heet accounts Icn tlre,e Elcilitie, uuder federal ageucy debt ,ecurities and securities held the
Fcderal Re,erve. 130ard of Governors of the Federal Reserve System, 1"11001'.1 ResCI've Balances (IJ.4. /)
(Oet. 27, 20 I0) (online at WWIV. federalreserve.gov/releases/h4l!20 I00930/). Although the Fedcral Reserve doe, not
the and guarantees classification, its accounting clearly separates its mortgage,related
,,,,,,1,.,,,,,,,,, programs from its liquidity programs. Sec. e.g., Board of Governors of the Federal Reserve System,
ResCl'vc Balunces 41), at 2 let. 20 10) (onli ne at
kdcralresnve.go\/!lclease,;/h41/20101 Nov. 3. 201
120
Iv Federal Reserve Liquidity Facilities classified in this table as loans include primary credit, secondary
credit, central bank liquidity swaps, Asset-Backed Cornmercial Paper Money Market Mutual Fund Liquidity
Facility, loans outstanding to Commercial Paper Funding Facility LLC, seasonal credit, term auction credit, the
Term Asset-Backed Securities Loan Facility, and loans outstanding to Bear Stearns (Maiden Lane LLC). Board of
Governors of the Federal Reserve System, Faclors A/Tecling Reserve Balances (H.4.I) (Oct. 28, 20 I 0) (online at
www.federalreserve.govlreleases/h4l!20J 0 I028/) (accessed Nov. 3, 20 I0).
121
Section Four: Oversight Activities
The Congressional Oversight Panel was established as part of the Emergency EconcHnic
Stabilization Act (EESA) and formed on November 26,2008. Since then, the Panel has
produced 24 oversight reports, as well as a special report on regulatory reform, issued on
January 29,2009, and a special report on farm credit, issued on July 21,2009. Since the release
of the Panel's October oversight repOIt, the following developments pertaining to the Panel's
oversight of the 'rARP took place:
The Panel held a hearing in Washington on October 21 , 20 I 0, discussing restrictions
on executive compensation for companies that received TARP funds. The Panel
heard testimony from Kenneth R. Feinberg, the former Special Master for TARP
Executive Compensation, as well as from industry and academic experts.
The Panel held a hearing in Washington on October 27, 20 IO. The Panel heard
testimony frorn Phyllis Caldwell, chiefofTreasury's HOlneownership Preservation
Office, as well as from industry and aeademic experts about Treasury's llAMP
program and the cffects of recent foreclosure documentation irregularities on
Treasury's abi Iity to mai ntain systemic fi nancial stabi Iity and effective foreclosure
mitigation efforts under the TARP.
Upcoming Rcports and Hcarings
The Panel will release its next oversight report in Decembcr. The report will discuss
HAMP, the rnost expansive ofTreasmy's foreclosure mitigation initiatives under the TARP,
assessing its effectiveness in meeting the TARP's legislative mandate to "protect home values"
and "preserve homeownership," This \vill be the Panel's fourth report addressing Treasury's
foreclosure mitigation efforts under the T'ARP,
Acknowlcdgemcnts
The Panel would like to thank the following individuals for sharing their thoughts ami
Roger Ashvvorth. BS Analyst, Amhcrst S e e u r i t i e s ~ (Juy Cecala, ('EO and
Publisher Inside Finance; Chris Ciamaitoni, Vice Presidcnt, Compass Point Research
Trading; Jason CJold, Senior Fellow fen llousing and F'inaneial Services Policy, Third Way;
Laurie Cioodman, Director, Amherst Securities; Anne Kim, Domestic Policy
Program Director, Third Way; Paul Miller, Managing Director and Group lIead of Financial
Research, F'BR Capital Markets; Matthew O'Connor, Research Analyst. [)eutsche Bank
122
Securities; Christopher Peterson, Associate Dean for Academic Affairs and Professor of Law,
University of Utah; Robert Placet, Associate Analyst, Deutsche Bank Securities; Joshua Rosner,
Managing Director, Graham Fisher & Co.; and, Jason Stewart, Managing Director, Compass
Point Research & Trading.
The Panel also wishes to acknowledge and thank the many individuals from the
academic, legal, consumer, analyst, and other communities who provided useful information and
views for this report.
123
Section Five: About the Congressional Oversight Panel
In response to the escalating financial crisis, on October 3, 2008, Congress provided
'rreasury with the authority to spend $700 billion to stabilize the US economy, preserve home
ownership, and promote economic growth. Congress created the Office of Financial Stability
(OFS) within Treasury to implement the TARP. At the same time, Congress created the
Congressional Oversight Panel to "review the current state of financial markets and the
regulatory system." The Panel is empowered to hold hearings, review official data, and vv'rite
reports on actions taken by Treasury and financial institutions and their effect on the economy.
Through regular reports, the Panel must oversee Treasury's actions, assess the impact of
spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure
mitigation efforts, and guarantee that Treasury's actions are in the best interests of the American
people. In addition, Congress instructed the Panel to produce a special repOlt on regulatory
reform that analyzes "the current state of the regulatory system and its effectiveness at
overseeing the participants in the financial system and protecting consumers." The Panel issued
this report in January 2009. Congress subsequently expanded the Panel's mandate by directing it
to produce a special report on the availability of credit in the agricultural sector. The repOlt was
issued on July21, 2009.
On November 14, 2008, Senate Majority Leader Harry Reid and the Speaker of the
Iiouse Nancy Pelosi appointed Richard H. Neiman, Superintendent of Banks for the State of
New York, Damon Silvers, Director of Policy and Special Counsel of the American Federation
of Labor and Congress of Industrial Organizations (AFL-CIO), and Elizabeth Warren, Leo
Gottlieb Professor of Law at Harvard Law School, to the Panel. With the appointment on
November 19, 2008, of Congressman Jeb Hensarling to the Panel by House Minority Leader
.Iohn Boehner, the Panel had a quorum and met for the first time on Novelnber 26,2008, electing
Professor Warren as its chair. On December 16, 2008, Senate Minority Leader Mitch
McConnell namcd Senator John Sununu to the Panel. Effective August to, 2009, Senator
Sununu resigned Crom thc Panel. and on August 20,2009, Senator McConnell announced the
appointment or Paul Atkins, Conner Commissioner oCthe U.S. Securities and Exchange
C'olllmission, to fill thc vacant seal, Elfective December 9, 2009. Congressman .Ieb Hensading
resigned from the Panel and Iiouse Minority Leader .Iohn Bochner anllounced the appointment
01'.1. Mark McWalters to lill the vacant seat. Senate Minority Leader Mitch McConnell
appointed Kenneth Troske. Sturgill Professor of Economics at the University of Kentucky, to fill
the vacancy created by the resignation of Paul Atkins on May 21,2010. E:flective September 17,
10. \Varren resigned rrolll the Panel, and on September IO.
Leader Harry Reid announced the appointment of Senator Ted Kaufman to till the vacant seat.
()n ()ctobcr 4.20 IO. the Panel elected Senator Kaurlllan as its chair.
APPENDIX I:
LETTER FROM CHAIRMAN TED I<AUFMAN TO
SPECIAL MASTER PATRICIA GEOGHEGAN,
RE: FOLLOW UP TO EXECUTIVE COMPENSATION
IfEARING, DATED NOVEMBER 1, 2010
125
November 1,20 I0
The Honorable Patricia Geoghegan
Special Master f()[ TAR:!> Executive Compensation
United States Department of the 'Ireasury
Room 1039
1500 Pennsylvania Avenue, N. W.
Washington, D.C. 20220
Dear Ms. Geoghegan:
On behalf of the Congressional Oversight Panel, thank you very much for your
attendance at the Panel's hearing on the TARP and executive compensation on October 21, 20 IO.
The hearing served as an important opportunity for the Panel to learn more about the work of the
Oflice of the Special Master, a subject the Panel will continue to examine in the months ahead.
In the course of the Panel's review of this issue, it has identified several data issues that
are important to its ability to conduct its oversight responsibilities. During the hearing, I
requested that the former Special Master provide this information to the Panel. He responded
that much of this inlemnation is available in the Final Report. IIowever, some relevant details
are not included in the report. Accordingly, the Panel requests your responses to the following
questions:
It,!!"nover Flow nlany employees lell TARP exceptional assistance firms after the
American Recovery and Reinvestment Act was passed? After the Interim Final
Rulc was passed in June 2009'1 Aller the Special Master issued his 2009
determinations? How does this data compare to expected turnover under
"nonnal" conditions? In total, how many employees have left exceptional
assistance firms as a result of the TARP's exccutive compensation restrictions?
Individual conlpensation comparison: llow did the Special Master's 2009
determinations for individual employees compare to their 2007 and 2008 salaries?
The Special Master's dctcrmination letters provide this inlcmnation in the
aggregate, but not at an individual level. Individual names are not necessary, so
long as sonle baSIS Ie)!" comparison (such as employee identification numbers) is
provided.
. What was the total compensation that covered
employees received between January 1,2009 and Decernber 31,2009'1 How
mueh did employee receive during the period between June 15, and the
I l\/laster' Sdcterrn inat ions in ()ctober 2009'1
20 I 0 total compensation: What is the total compensation that you anticipate
covered employees will receive between January 1,20 I 0 and December 31,
2010'1
General Motors determinations: 'The Special Master's 2009 determination letter
for General Motors does not provide employee 10 numbers, making it difficult to
compare individual employee compensation in 2009 and 20 IO. How did
compensation for individual employees at General Motors change between 2009
and 2010'1
The Panel seeks written responses to these questions by November 15,20 IO. I would be
happy to answer any questions about this letter that you may have. If you would prefer, a
member of your staff may contact the Panel's Executive Director, Naomi Baum, at
...
Sincerel y, "

Ii'
Senator Ted
Chairman
Congressional Oversight Panel
Cc: Dr. Kcnncth Troskc
Mr. J. Mark McWattcrs
Mr. Richard 11. Neiman
Mr. Damon A. Silvers

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