5th Circuit Rejects Challenges to Assignments in violation of PSA's

J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
Posted on Dec 09, 2013

In 2006, Mr. Farkas purchased a house in Humble, Texas and one in Houston, Texas.

Cornerstone was the mortgage lender and servicer on both properties. Cornerstone sold the promissory notes to RFC, an affiliate of GMAC Mortgage. Later, they were securitized and pooled in a trust, with Deutsche Bank National Trust Company ("Deutsche Bank") as trustee. 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 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. Farkas v. GMAC Mortgage, LLC, 5th Cir. 2013.

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.


Read More About 5th Circuit Rejects Challenges to Assignments in violation of PSA's...