Seventh Circuit validates loan servicer plaintiffs, blasts real party in interest defense

CWCapital Asset Management, LLC v. Chicago Properties, LLC, et al.

United States Court of Appeals for the Seventh Circuit

___ F.3d ___, 2010 WL 2574190, Case No. 09-3506,

Decided June 29, 2010



In CWCapital, the Seventh Circuit held that a loan servicer is a real party in interest, and thus able to maintain an action in its name. The plaintiff, as servicer for the subject loan, then brought an action to recover the settlement funds from the mortgagor. The District Court had concluded that the plaintiff's claim was groundless, but also ruled "seemingly as an after-thought" that "the servicer was not a real party in interest" and thus dismissed the suit under Fed. R. Civ. P. 17(a). Judge Posner reversed the District Court, finding that the servicer was a real party in interest.

The opinion first explained how mortgages are placed in a securitization trust and that the "trustee or in this case the trustee's delegate (the plaintiff)" is responsible for servicing those mortgages. Servicers are necessary entities because of the need for neutral parties to "balance impartially the interests of the different tranches as determined by their contractual entitlements."

The opinion then distinguished the power of attorneys versus the power of assignees to collect debts. An attorney cannot bring an action in his or her own name on behalf of a real party in interest simply by disclosing that client's identity. However, the servicer is "much like an assignee for collection." In this case, the servicer had standing to sue because it had a personal stake in the outcome of the lawsuit as "it receives a percentage of the proceeds of a defaulted loan that it services."

Judge Posner concluded that under the terms of the pooling and servicing agreement, the servicer "has the whip hand; he is the lawyer and the client"; while the trustee's duty was merely to provide support when needed. The pooling and servicing agreement delegated equitable ownership of the claim to the servicer, while the trust holds mere bare legal title.

This opinion is significant because it strongly validates the loan servicer as the real party in interest in collections actions by focusing on the terms of the pooling and servicing agreement. Pooling and servicing agreements give almost plenary power to servicers to administer and enforce the terms of the subject mortgage loans. This opinion should be cited by creditors to counter the real party in interest defense in order to resolve the default, whether through loss mitigation or court action.