-‫ משרד עורכי‬- '‫ סבג ושות‬,‫ קלארק‬,‫ ניוסטדטר‬,'‫איצקוביץ‬

‫דין‬
ICKOVICS, NEUSTADTER, CLARK, SABAG & CO. - LAW OFFICES
Laurent Ickovics (2003-1963) (1963-2003) ‫לוראן איצקוביץ ז"ל‬
Jay Neustadter,* Adv. 33 Yaavetz St. 33 ‫רח' יעבץ‬ "‫עו‬ (‫יהושע )ג'יי‬
‫ד‬ *,‫ניוסטדטר‬
Eli. D. Clark, ** Adv. Tel Aviv, Israel 65258 ‫אביב‬-‫תל‬ "‫עו‬ ,‫ קלארק‬.‫ ד‬.‫אלי‬
‫ד‬
Yigal Sabag, Adv. 5100898- :‫פקס‬ :5100499-03 :‫טל‬ "‫עו‬ ,‫יגאל סבג‬
:Fax 03 Tel ‫ד‬
Chaim Schiff, Adv. eli.d.clark@incs-law.com "‫עו‬ ,‫חיים שיף‬
‫ד‬
*also admitted in New York ,‫*חבר גם בלשכת עוה"ד בניו יורק‬
** also admitted in New York, Maryland June 22, 2006 ,‫** חבר גם בלשכת עוה"ד בניו יורק‬
and Washington DC. ‫מרילנד‬
‫ובוושינגטון‬

PRIVILEGED AND CONFIDENTIAL

To: Avraham Cimerring

Comments to Biafore Report

1 Analogy to Bad Debt

1.1 In paragraph 1.1.3 Mr. Biafore writes that: “The Trust’s decision to
allocate the UBS Settlement Payment to one loan or another for
internal accounting purposes had the same effect as the decision of a
bank that writes off a bad loan on its books.” However, the Lee Hall
Loan was not written off, but classified by Wells Fargo as liquidated
with no loss.

2 Nature of the Settlement Payment

2.1 In paragraph 2.4.2, Mr. Biafore writes that: “The Settlement

Agreement was intended to compensate the Trust for the difference
between the actual value of the loans in the UBS Pool and what their
value would have been if their quality had been as represented in the
Purchase Agreement.” This is Mr. Biafore’s opinion, but he does not
quote the Settlement Agreement as evidence. Presumably, he does not
quote the Settlement Agreement, because the Settlement Agreement
does not contain a statement supporting this opinion of Mr. Biafore.
 2.2 In paragraph 5.1.2, Mr. Biafore again writes that “the Settlement
Payment reflected an adjustment to the purchase price that had been
paid for the UBS Pool.” Again he cites no evidence from the
Settlement Agreement to that effect.

2.3 In fact, the best evidence for the purpose and intent of the
Settlement Payment is how the Trust characterized the payment in the
notice to Certificateholders, namely as “Liquidation Proceeds, ” in
Hebrew ‫תקבולים מסילוק‬. In other words, the Lee Hall Loan was
liquidated by the Settlement Payment.

3 Characterization of the Settlement Payment as “Liquidation Proceeds”

3.1 In paragraph 5.1.2, Mr. Biafore tries to give a different explanation

for the characterization of the Settlement Payment as “Liquidation
Proceeds”. He quotes the definition of “Liquidation Proceeds” in the
Pooling and Servicing Agreement, which includes “the repurchase of a
Mortgage Loan,” then writes as follows:

“The decision to characterize the Settlement Payment, for purposes of

the Pooling and Servicing Agreement, as Liquidation Proceeds by
Orix, as Special Servicer for the Trust, was appropriate because the
payment was made by UBS in response to the Trust’s demand that
UBS repurchase the applicable loans (including the Lee Hall Loan) as
a result of the breach by UBS of its representations and warranties in
the Purchase Agreement as to the quality of those loans. While there
was no actual repurchase of the Lee Hall Loan in this instance, the
Settlement Payment reflected an adjustment to the purchase price that
had been paid for the UBS Pool.”

3.2 According to Mr. Biafore, the Settlement Payment was like a

repurchase of mortgage loans by UBS. Of course, Mr. Biafore admits
that UBS did not repurchase the Lee Hall Loan. Mr. Biafore even
writes in paragraph 2.4.2 that: “The Settlement Agreement did not
require UBS to repurchase any of the loans in the UBS Pool, including
the Lee Hall Loan.” But Mr. Biafore wants to convince the court that
the Settlement Payment did not discharge the Lee Hall Loan. So he
asserts that that the Settlement was equivalent to a repurchase of the
Lee Hall Loan, even though no repurchase occurred and the Settlement
Agreement arose out of UBS’s refusal to repurchase any of the loans
in the UBS Pool.

3.3 In paragraph 5.2.2 Mr. Biafore tries to attribute significance to the

fact that the Settlement Payment was not characterized as “payments
from Mortgagors.” But it is agreed by all that the Settlement Payment
was from UBS, which of course was not a Mortgagor. What is more
significant is that Mr. Biafore quotes Section 3.02(b) of the Pooling
 and Servicing Agreement, which requires that “payments from
Mortgagors” and “Liquidation Proceeds” be treated exactly the same,
namely “first, as a recovery of accrued and unpaid interest on such
Mortgage Loan” and “second, as a recovery of principal of such
Mortgage Loan”. In other words, from the perspective of the Trust, as
governed by the Pooling and Servicing Agreement, there is no legal
difference between “payments from Mortgagors” and “Liquidation
Proceeds”.

4 Did Wells Fargo Liquidate the Lee Hall Loan?

4.1 In paragraph 5.2.3 Mr. Biafore writes: “Contrary to Mr.

Cimerring’s assertion, the Lee Hall Loan still “exists,” and it has not
been “removed” from the pool loans held by the Trust.” Yet, Mr.
Biafore disregards the fact that in the January 2005 report (and
subsequent reports) issued by the Trust to the Certificateholders, the
Lee Hall Loan no longer appears in the Mortgage Loan Detail, the
Delinquency Loan Detail, or the Specially Serviced Loan Detail, but
on the Liquidated Loan Detail. In other words, since receipt of the
Settlement Payment from UBS, the Trust has categorized the Lee Hall
Loan as “liquidated.” While Mr. Biafore insists that the Lee Hall Loan
still “exists,” the Trust has declared that it does not.

5 Changing the Subject

5.1 In paragraphs 5.3.1-5.3.4, Mr. Biafore expends much effort to

argue that Mr. Cimerring is not a beneficiary of the PSA. Yet, Mr.
Cimerring does not claim otherwise. He claims only that he should not
have to repay a loan that the Trust has classified as repaid.

5.2 In paragraphs 6.1.1-6.1.4, Mr. Biafore expends much effort to

show that a partial refund of purchase price for the UBS loans should
not affect Mr. Cimerring’s obligations under the Lee Hall Loan. But
as noted in 2.1 and 2.2 above, Mr. Biafore never presents any evidence
that the Settlement Payment represents a refund of the purchase price.
He never quotes the Settlement Agreement itself. As noted above in
2.3, the Trust characterized the Settlement Payment as “Liquidation
Proceeds,” meaning funds received in liquidation of the Lee Hall
Loan.

6 Who is Bound By the Characterization of “Liquidation Proceeds”?

6.1 In paragraphs 6.2.1-6.2.5, Mr. Biafore expends much effort to

show that the characterization of a payment to the Trust as
“Liquidation Proceeds” with respect to a particular loan does not affect
the borrower’s obligation to repay the loan. As proof, Mr. Biafore
points out three kinds of payments that are characterized as
“Liquidation Proceeds,” yet do not affect amount due on the loan.
These are:

6.1.1 Repurchase of a loan by the loan seller;

6.1.2 Purchase of a loan by a party to the Pooling and

Servicing Agreement;

6.1.3 Purchase of a loan by third party.

6.2 Yet, Mr. Baifore’s examples actually support Mr. Cimerring. It is

true that, if a third party purchased a loan from the Trust, the third
party would be legally entitled to enforce payment of the loan. But it
is also true that, once the Trust sells the loan, the Trust is no longer
entitled to enforce payment of the loan. In other words, the purchase
price of a loan received by the Trust is classified as “Liquidation
Proceeds” because from the Trust’s perspective the loan has been
liquidated.

6.3 Indeed, this is true for all of the payments classified as

“Liquidation Proceeds” (including sale of the Mortgaged Property and
a deficiency judgment against a Mortgagor); they all represent a
liquidation by the Trust of the relevant loan, whether partial or
complete.

6.4 We agree with Mr. Biafore that the characterization by the Trust of
a certain payment – such as the purchase price of a loan – as
“Liquidation Proceeds” is not necessarily binding on third parties. But
Mr. Biafore would have us believe that such a characterization is not
even binding on the Trust itself!

6.5 We disagree. If the Trust has classified a loan as liquidated with

no loss, the Trust should not be able to collect on such a loan.

6.6 This point becomes still clearer when we consider the following
scenario: If Mr. Cimerring were to pay the Trust the amount claimed,
how would Mr. Cimerring’s payment be classified under the Pooling
and Servicing Agreement? The answer should be obvious: Mr.
Cimerring is a Mortgagor, which makes his payment a “payment from
Mortgagors.” As discussed above, Section 3.02(b) of the Pooling and
Servicing Agreement requires that “payments from Mortgagors” be
treated “first, as a recovery of accrued and unpaid interest on such
Mortgage Loan” and “second, as a recovery of principal of such
Mortgage Loan.” But in the case of the Lee Hall Loan, all of the
interest and principal has already been recovered. How then should
the Trust characterize Mr. Cimerring’s payment? As recovery of a
different loan? Would this not represent a breach of the Pooling and
Servicing Agreement?
7 Effects of the Characterization as a Payment

7.1 In paragraphs 6.3.1-6.3.6, Mr. Biafore expends much effort to

show that a borrower is not bound by the characterization of a payment
by the Trust. Yet, as we argued in 6.4 above, the issue is not whether
the Trust’s characterization of payments should bind Mr. Cimerring,
but whether it should bind the Trust itself. We believe it should. Mr.
Biafore apparently believes otherwise.

8 The REMIC Rules

8.1 In paragraphs 6.4.1-6.4.5, Mr. Biafore expends much effort to

show that the tax rules that apply to REMICs have no effect on the
obligations of borrowers. Referring to myself, he writes: “What is
missing from Mr. Clark’s recitation of these provisions is the simple
and correct acknowledgement that the tax status of the Trust as a
REMIC has no relevance whatsoever on Lee Hall’s and Mr.
Cimerring’s obligations under the Lee Hall Loan and the Guaranty.”

8.2 We are happy to oblige Mr. Biafore and freely acknowledge that if
the Trust were to lose its status as a REMIC or incur a liability for tax
on prohibited transactions, this would not in any way absolve any
borrower of its obligations to the Trust. Nor have we suggested
otherwise.

8.3 On the other hand, we think it is clear – and we hope that Mr.
Biafore would acknowledge – that the REMIC rules summarized by
Mr. Biafore show that the Trust’s characterization of payments for
purposes of the Pooling and Servicing Agreement are not merely
“internal accounting” matters, but substantive decisions with profound
legal consequences.

9 Can the Settlement Payment Be Recharacterized?

9.1 In paragraph 6.5.2, Mr. Biafore asserts that: “the Trust may, under
the Pooling and Servicing Agreement, reallocate the Settlement
Payment to a loan other than the Lee Hall Loan should the Trust
receive a “payment” on the Lee Hall Loan.”

9.2 Mr. Biafore does not cite a specific provision of the Pooling and
Servicing Agreement in support of his assertion, because none exists.
The Pooling and Servicing Agreement does not explicitly permit such
recharacterization nor does it explicitly prohibit such an action. It
seems likely that the idea of recharacterizing a payment was never
considered by the drafters of the Pooling and Servicing Agreement.
 9.3 Yet, the following language of Section 3.02(b) of the Pooling and
Servicing Agreement suggests that such recharacterization of
payments is prohibited:

“All amounts collected on any Mortgage Loan in the form of payments

from Mortgagors, Insurance and Condemnation Proceeds or
Liquidation Proceeds shall be applied to amounts due and owing under
the related Mortgage Note or Mortgage Notes and Mortgage
(including, without limitation, for principal and accrued and unpaid
interest) in accordance with the express provisions of each related
Mortgage Note and the related Mortgage . . . .”

9.4 According to Section 3.02(b), if the Trust receives a payment on a

specific Mortgage Loan, that payment is required to be applied in
accordance with the terms of the related Mortgage Note and Mortgage.
Yet, according to Mr. Biafore, the Trust can always decide
retroactively to reallocate a payment to a different Mortgage Loan, in
which case the payment would – retroactively – be applied by the
Trust in accordance with the terms of a different Mortgage Note and
Mortgage.

9.5 Thus, according to Mr. Biafore, the Trust can, as often as it wishes,
change the terms applicable to a payment by repeatedly reallocating
the payment to a different Mortgage Loan. If Mr. Biafore is correct,
the requirements of Section 3.02(b) are open to unlimited, retroactive
manipulation by the Trust.

9.6 We disagree. In our view, if a payment was received, reported and

distributed to Certificateholders in 2004 according to the terms of one
Mortgage Note, the Trust is not permitted to decide in 2006 that the
payment should be retroactively subject to the terms of a different
Mortgage Note. Thus, the requirements of Section 3.02(b) are truly
binding on the Trust and cannot be nullified retroactively.

9.7 We also note parenthetically that, in light of the recent

controversies involving public companies accused of making
retroactive changes in financial statements, we harbor serious doubts
over Mr. Biafore’s assertions of the Trust’s right to retroactively
reallocate payments.

10 Federal Tax Rules

10.1 In paragraphs 6.6.1-6.6.4, Mr. Biafore expends much effort

to show that the tax treatment of a transaction by one taxpayer does not
determine how the transaction is characterized for commercial law
purposes. Mr. Biafore’s example relates to the deduction of a bad debt.
 Yet, as we noted in 1.1 above, the issue at hand is not the deduction of
a bad debt, but the classification of a loan as liquidated without a loss.

CONCLUSION

Mr. Biafore’s report discusses at length scenarios involving the partial refund of the
purchase price of an asset and the deduction of bad debts. But these scenarios do not
describe the facts of the case at hand.

Mr. Biafore’s main theme is that Mr. Cimerring’s obligations are not affected by various
agreements and actions of the Trust, including the Settlement Agreement, the Pooling and
Servicing Agreement, the characterization of the Settlement Payment, the Trust’s tax
status, etc. But what Mr. Biafore is really trying to claim is that the Trust itself is not
bound by its own actions or obligations: (1) not by its allocation of the Settlement
Payment to the Lee Hall Loan; (2) not by its classification of the Lee Hall Loan as
“liquidated;” (3) not by its reports to Certificateholders; (4) not by Section 3.02(b) of the
Pooling and Servicing Agreement; (5) not even by basic accounting principles that
prohibit the retroactive reallocation of items of income in preceding tax years.

Yours sincerely,

Eli D. Clark, Adv.