Important new 5th Circuit case: Farkas v. GMAC Mortgage, LLC, 5th Cir, 2013.

Mr. Farkas purchased houses in Humble, Texas and in Houston, Texas in 2006. 

At first, Cornerstone Mortgage was the mortgage lender and servicer on both properties.

Cornerstone later sold the promissory notes to RFC, an affiliate of GMAC Mortgage. Still later, the notes were securitized and pooled in a securitized trust, with Deutsche Bank National Trust Company ("Deutsche Bank") as trustee. Such trusts are governed by documents called Pooling and Servicing Agreements ("PSAs"). The deeds of Trust were registered with MERS and later assigned to Deutsche Bank.

Farkas later brought suit in state court, alleging among other things that the assignments were void because they were in violation of the PSA of the Trust. The plaintiff's argument was that the improper assignments keeps Deutsche Bank from becoming  themortgagee, and having the ability to foreclose on the properties.

The state court case was removed to federal court. The district court granted the defendants' motion for summary judgment, denied Farkas' motion for partial summary judgment, and dismissed defendants' motion for judgment on the pleadings as moot.

The 5th Circuit affirmed the district court, and held that the plaintiff does not have standing to challenge the transfer of the notes in violation of the PSA's. The Court held:

We have addressed a similar challenge to a foreclosure action based on the violation of the terms of a PSA and found that borrowers lacked standing to challenge the transfer of a note in violation of the terms of the PSA.Reinagel v. Deutsche Bank Nat'l Trust Co., 12-50569, 2013 WL 5832812, at *5 (5th Cir. Oct. 29, 2013). We explained that borrowers, as non-parties to the PSA, "have no right to enforce its terms unless they are its intended third-party beneficiaries." Id.Further, the "Texas Supreme Court has established `a presumption . . . that parties contracted for themselves,' which applies `unless it clearly appears that they intended a third party to benefit from the contract.'" Id. (internal citations omitted). As a non-party mortgagor, and without any evidence showing Farkas to be an intended third-party beneficiary, we conclude that Farkas lacks the requisite standing to bring suit to enforce the terms of the PSA that govern the assignment of the mortgagor's note.

The Court went on to differentiate this case from Shelton v. Flagstar Bank, F.S.B., No. 4:11-cv-03805, 2012 WL 1231756, *2 (S.D. Tex. Apr. 12, 2012), stating that in this case (Farkas), there was no doubt about the fact that Deutsche Bank was the mortgagee and GMAC was the servicer.

Do you think this was the correct result? Do you think homeowners should be allowed to challenge a party's failure to comply with the PSA? Please post your comments below.

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
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