Can a homeowner challenge the validity of an assignment of a promissory note in violation of a Pooling and Servicing Agreement?

No, says the 5th Circuit Court of Appeals. Farkas vs. GMAC Mortgage, LLC, 5th Cir. 2013.

In this case, the homeowner brought suit in state court, alleging among other things that the assignments of the promissory notes of two properties that he had purchased, were void because they were in violation of the Pooling and Servicing Agreement ("PSA") of the Trust. The argument is that the improper assignment keeps Deutsche Bank from properly becoming mortgagee, and having the ability to foreclose on the properties.

The 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.

Unless and until the U.S. Supreme Court rules otherwise, this may be the end of these kinds of challenges in the 5th Circuit. I don't necessarily think it is right, because who else is there to complain about the failure to propertly assign the note?

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