In the
United States Court of Appeals
For the Seventh Circuit
No. 09-3506
CWC APITAL A SSET M ANAGEMENT, LLC,
Plaintiff-Appellant,
v.
C HICAGO P ROPERTIES, LLC, et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 07 C 5029—James B. Zagel, Judge.
A RGUED M AY 24, 2010—D ECIDED JUNE 29, 2010
Before E ASTERBROOK, Chief Judge, and P OSNER and
E VANS, Circuit Judges.
P OSNER, Circuit Judge. This appeal in a dispute over
a commercial mortgage requires us to decide whether
the plaintiff is entitled to bring this suit in its own
name, and also presents issues of contract interpreta-
tion under Illinois law. The plaintiff (and appellant),
CWCapital, is a mortgage servicer; the defendants (and
appellees) are Chicago Properties, which is a commercial
2 No. 09-3506
landlord and the mortgagor (that is, the borrower); its
owners, who are guarantors of the mortgage loan;
and its former tenant, the Blockbuster video-rental com-
pany. The suit claims that the servicer (standing in the
lender’s shoes) is contractually entitled to the money
that Blockbuster paid Chicago Properties in settlement
of a suit by the latter for unpaid rent. The district judge
conducted a bench trial and concluded that the claim
was groundless—but then, seemingly as an after-
thought, ruled that the servicer was not a real party
in interest; as only a real party in interest can sue in its
own name, the judge dismissed the suit. Fed. R. Civ.
P. 17(a).
We need to explain the servicer’s role in administering
a mortgage-backed security—a kind of giant bond
(made famous, or rather infamous, by the financial col-
lapse of September 2008) that is secured by a large
number of mortgages, one of which is the mortgage
on Chicago Properties’ building. The income from the
mortgages is the income of the bond. But rather than
selling the bond (which might be valued at $1 billion or
more—in the present case, the bond when issued was
valued at $1.3 billion), its creator sells “tranches” (slices)
of the bond having different rights and carrying dif-
ferent 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 mort-
gages actually yielded at least 80 percent of the principal
No. 09-3506 3
and interest owed by the borrowers, and therefore this
buyer would be promised only a modest interest rate
by the issuer of the mortgage-backed security. The buyer
of the junior tranche would bear much more risk and
so would be compensated by being promised a
higher interest rate. The plunge in housing prices in
2007 and 2008 was so great that even buyers of the
senior tranches of mortgage-backed securities lost
money because there were so many mortgage defaults.
But that sad story is not germane to this case.
The mortgages that secure the mortgage-backed
security are placed in a securitization trust, and the
trustee, or in this case the trustee’s delegate (the plain-
tiff), is responsible for servicing them. Every mortgage
needs someone to collect the borrower’s monthly pay-
ments of principal and interest; make sure the property
is properly insured; attend to any default, either by
suing the borrower and if necessary foreclosing the mort-
gage or by modifying the mortgage to make its terms
less onerous to the borrower; and discharge the
mortgage when it is paid off (and if it is prepaid, collect
the prepayment penalty if the mortgage provides for
one). Ordinarily the original lender would be the
servicer, or would hire one. But when hundreds of mort-
gages are packaged into a debt security it is infeasible
for each security holder to be or to hire its own
servicer. The reason is the structure of the security and
specifically the conflicts of interest latent in the tranching
of them.
Remember that the buyer of the senior tranche in our
example (for simplicity we assume only two tranches,
4 No. 09-3506
though usually there are more) is entitled to receive
income from all the mortgages ahead of the buyer of
the junior tranche. Faced with a choice between
modifying one of the mortgages and foreclosing, the
servicer might make a different decision as a 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
servicer to modify the mortgage by reducing the
monthly payment of principal and interest by 20 percent.
The servicer may prefer doing this to foreclosing the
mortgage, because foreclosure is costly and the market
value of the property may be depressed. The holder of
the senior tranche wouldn’t object to the modification;
the diminished income from the mortgage would still
fully cover his 80 percent interest in the revenue from
mortgages in the mortgage-backed security. But the
holder of the junior tranche might object because he
might be better off if the servicer gambled on obtaining
more money by foreclosing or by holding out for a
less generous modification. The servicer must balance
impartially the interests of the different tranches as deter-
mined by their contractual entitlements.
CWCapital, the servicer in this case, confused matters
by stating in its complaint that the trust which holds
title to the mortgage on Chicago Properties’ building is
the real party in interest, and by arguing that by dis-
closing 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
No. 09-3506 5
substituted for CWCapital, or added as an additional
party, there would still be complete diversity of citizen-
ship. But whether there is complete diversity is separate
from whether a suit is being maintained by the real
party in interest, or by an interloper. A lawyer for the
real party in interest could not bring suit in his own
name merely because he disclosed the identity of his
client and acknowledged that the client, and not he, was
indeed the real party in interest.
The trust holds the legal title to the mortgages. The
servicer is the trust’s collection agent. The delegation
to it is comprehensive: the servicer “shall . . . have full
power and authority, acting alone, to do or cause to be
done any and all things in connection with such
servicing and administration which it may deem neces-
sary or desirable.” The servicer is much like an assignee
for collection, who must render to the assignor the
money collected by the assignee’s suit on his behalf
(minus the assignee’s fee) but can sue in his own name
without violating Rule 17(a). See Sprint Communications
Co. v. APCC Services, Inc., 128 S. Ct. 2531, 2541 (2008)
(dictum); Staggers v. Otto Gerdau Co., 359 F.2d 292,
294 (2d Cir. 1966); Kilbourn v. Western Surety Co., 187 F.2d
567, 571-72 (10th Cir. 1951).
The Supreme Court’s holding in the Sprint case was
merely that an assignee for collection has standing to
sue, within the meaning of Article III of the Constitu-
tion. 128 S. Ct. at 2542; see also W.R. Huff Asset Manage-
ment Co. v. Deloitte & Touche LLP, 549 F.3d 100, 107-
10 (2d Cir. 2008). There is no doubt about Article III
6 No. 09-3506
standing in this case; though the plaintiff may not be an
assignee, it has a personal stake in the outcome of the
lawsuit because it receives a percentage of the proceeds
of a defaulted loan that it services. But in an aside on
real party in interest, the Supreme Court intimated agree-
ment with 6A Charles Alan Wright, Arthur R. Miller &
Mary Kay Kane, Federal Practice & Procedure § 1545 (2d
ed. 1990), that a real party in interest differs from a
lawyer, or someone else with a mere power of attorney,
in having a claim to the proceeds of the suit even if its
claim derives from legal rather than equitable title—legal
title being the sort held by a trustee. 128 S. Ct. at 2541.
Unfortunately, it is less clear than it should be whether
the Pooling and Servicing Agreement between the
trustee of the mortgages backing the mortgage-backed
security and the servicer made the latter an assignee or
a mere attorney. It says that the servicer “shall . . . have
full power and authority, acting alone, to do or cause
to be done any and all things in connection with such
servicing and administration which it may deem neces-
sary or desirable.” The trustee shall at the servicer’s
“written request . . . promptly execute any limited
powers of attorney and other documents furnished by
the [Servicer] . . . that are necessary or appropriate to
enable [the Servicer] to carry out [its] servicing and ad-
ministrative duties hereunder.” The trustee is thus
required to confer on the servicer whatever authority
the latter needs to perform his servicing duties, which
include suing. For it is the servicer, not the trustee, who
is empowered to decide whether to sue. The agree-
ment further states that without the Trustee’s written
No. 09-3506 7
consent, “except as relates to a Loan that the . . .
Servicer . . . is servicing pursuant to its respective
duties herein (in which case such servicer shall give
notice to the Trustee of the initiation), [the Servicer
shall not] initiate any action, suit or proceeding solely
under the Trustee’s name without indicating
the . . . Servicer’s . . . representative capacity.” The word
we’ve italicized indicates that the servicer can sue in its
own name if the suit relates to a loan that it’s servicing,
or in the trustee’s name without indicating that it’s
doing so in a representative capacity—implying that it
is not doing so in a representative capacity if it is suing
in regard to a servicing-related loan.
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 securiti-
zation 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 servicer. See Greer v. O’Dell, 305
F.3d 1297, 1302-03 (11th Cir. 2002), and cases cited there.
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.
But if, contrary to what we think, the servicer is not the
real party in interest in this case, there still is no need to
8 No. 09-3506
dismiss the suit. Rule 17(a)(3) provides that a case
should not be dismissed because it has not been brought
in the name of the real party of interest “until, after an
objection, a reasonable time has been allowed for the
real party in interest to ratify, join, or be substituted
into the action”; and “after ratification, joinder, or sub-
stitution, 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 district
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 interrogatory
concerning its authority to sue. The judge’s action was
precipitate. The affidavit was filed in response to the
defendants’ motion for judgment on the pleadings, in
which they argued that the plaintiff 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
Netflix, 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,” N.Y. Times, Mar. 17, 2010, www.nytimes.
com /2010/03/1 8 /b u sin es s /m e d ia/18blockbuster.htm l
(visited May 31, 2010); Brooks Barnes, “Studios and Cable
No. 09-3506 9
Unite in Support of Video on Demand,” N.Y. Times, Mar.
17, 2010, www.nytimes.com/2010/03/18/business/media/
18demand.html (visited May 30, 2010); “Blockbuster’s
Loss Exceeds Forecast,” N.Y. Times, Aug. 13, 2009,
p. B4, www.nytimes.com/2009/08/14/business/media/
14blockbuster.html?_r=1 (visited May 30, 2010); Sarah
McBride, “Blockbuster to Shutter More Stores,” Wall
St. J., 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 Block-
buster’s agreeing to pay Chicago Properties $161,000,
though it owed rent of some $471,000 for the time re-
maining on the lease. (The plaintiff is seeking a judg-
ment 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 mortgage.
The basis of the plaintiff’s claim against Blockbuster is
a “Subordination, Non-Disturbance and Attornment
Agreement” (SNDA) to which Chicago Properties, Block-
buster, and the trust are parties. This is a standard agree-
ment 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., Sept.-Oct. 1993, at 54; Robert D. Feinstein &
Sidney A. Keyles, “Foreclosure: Subordination, Non-
10 No. 09-3506
Disturbance and Attornment Agreements,” id., July-
Aug. 1989, at 38. The subordination provision subor-
dinates the lease to the mortgage; the attornment provi-
sion requires that the tenant agree to continue the
tenancy if as a result of the default and foreclosure there
is a new landlord; and the nondisturbance provision
assures the tenant that his lease will continue in the
event of foreclosure. But nowadays, despite the name,
an SNDA often and in this case contains additional provi-
sions 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
without the lender’s consent that reduces the term of
the lease or the tenant’s monetary obligations 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 otherwise 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 tenant after the original landlord is no
longer the owner. Joshua Stein, “Needless Disturbances?
Do Non-Disturbance Agreements Justify all the Time
and Trouble?” 37 Real Property Probate & Trust J. 701, 709-12
(2003); see, e.g., Dime Savings Bank of New York, FSB v.
Montague Street Realty Associates, 686 N.E.2d 1340, 1341-42
(N.Y. 1997); Prudence Co. v. 160 West Seventy-Third St.
Corp., 183 N.E. 365, 367 (N.Y. 1932); Kirkeby Corp. v. Cross
Bridge Towers, Inc., 219 A.2d 343, 344-46 (N.J. Super. Ct.
No. 09-3506 11
Chancery 1966). What is strange about the plaintiff’s
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
instructions to deliver his rent payments to the lender.
The plaintiff complains that Blockbuster disregarded its
instructions to do that. But the instructions were sent
after the lease had been terminated, so there were no
more rent payments to be made. Nor was the plaintiff
injured by not receiving rent payments from Block-
buster, 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 Blockbuster’s
failure to direct rent to it has impaired the value of its
collateral. Remember that Chicago Properties has contin-
ued to make its monthly mortgage payments in full.
The claimed liability of the landlord and its owners
is based on other documents—the mortgage note and the
owners’ guaranty of the note. The guaranty makes the
owners liable for any losses to the lender arising
from “gross negligence or willful misconduct . . . relating
to the [mortgage] Loan and/or the Property,” and (under
a provision similar to a provision in the SNDA that
we’ve already discussed) for losses arising from the
misapplication 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 settlement was not a payment of rent. It was a
12 No. 09-3506
payment in settlement of a lawsuit that sought rent for
a future period, namely the remaining term of the lease
after Blockbuster abandoned the premises. And although
the mortgage agreement prohibits the borrower from
cancelling a lease without 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 exposed to liability for
doing something contemplated by the mortgage agree-
ment. In light of Blockbuster’s financial difficulties, there
is no basis for thinking that Chicago Properties was
being commercially unreasonable in settling with Block-
buster 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 building 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 defaulted and the lender can’t
be made whole by foreclosing on the lender’s collateral.
This may have given Chicago Properties an incentive
to hold out for a high-paying tenant even if that reduced
No. 09-3506 13
the value of the collateral (its building). But that
isn’t argued either.
The mortgage agreement (which is separate 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 language covers the proceeds of the $161,000 settle-
ment of Chicago Properties’ suit against Blockbuster
for unauthorized abandonment of the lease; and breach
of this provision is a default under the mortgage agree-
ment, requiring immediate payment of the unpaid
balance of the mortgage note. But the plaintiff is not
seeking enforcement of the mortgage agreement. (Perhaps
Chicago Properties has complied with the escrow provi-
sion; 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 Block-
buster, plus attorneys’ fees and costs.
A final issue involves the district court’s award of
attorneys’ fees to Blockbuster on the basis of a provision
in the SNDA that “should any action or proceeding be
commenced to enforce any provisions 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, its reasonable costs and ex-
penses, not limited to taxable costs and reasonable at-
torney’s fees.” The plaintiff argues that Blockbuster is
not a prevailing party because it lost on a counterclaim
charging a violation of a provision of the SNDA which
14 No. 09-3506
said that “Tenant [Blockbuster] shall not be joined as a
party/defendant in any action or proceeding which may
be instituted or taken by reason or under any default
by Landlord in the performance of the terms, covenants,
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 attor-
neys’ fees and costs. That was an unimportant part of the
case, so, on balance, Blockbuster was indeed a prevailing
party.
The judgment is reversed with directions to enter
judgment for the defendants.
R EVERSED WITH D IRECTIONS.
6-29-10