In a decision issued on March 22nd, the Seventh Circuit held that borrowers lack the necessary standing required to challenge alleged violations of pooling and servicing agreements (“PSAs”) because they are not third-party beneficiaries. Plaintiff/borrower contended the transfer of her note and mortgage to the defendant bank/trustee violated the PSA governing the rights and obligations of the parties to the residential mortgage-backed securities trust containing her loan. The borrower raised these claims after she defaulted on her monthly mortgage loan obligations and the bank-trustee initiated foreclosure proceedings. The Court rejected all of her standing arguments. In Re Jepson v. Bank of New York Mellon.
First, the Seventh Circuit held the borrower was unable to make claims for violations of the PSA because she was not a beneficiary of the agreement. Only intended beneficiaries of a private trust may enforce its terms. The Court wrote that it is well-settled New York law—the state law applicable to the PSA—that mortgagors, whose loans are owned by a trust, are not intended beneficiaries of the trust. Borrowers do not have standing to challenge the trustee’s possession or status as assignee of the note and mortgage. A borrower may not assert the rights and legal interests of true beneficiaries regardless of whatever possible incidental personal benefit or relief from personal injury she might incur.
The borrower then argued she had standing to challenge the assignment of her note and mortgage because the transfer was non-compliant with the terms of the PSA and, therefore, void. As a matter of law, a void assignment cannot be ratified by an agreement’s beneficiaries. The borrower explained that mortgagors have prudential standing to challenge a void assignment because such a challenge would not infringe on any beneficiary’s rights.
The Seventh Circuit rejected this argument, stating that New York state courts have never squarely endorsed her view. Rather, New York courts have consistently held an assignment, which is non-compliant with the terms of a trust agreement, merely is voidable and not void. New York courts have almost uniformly held that a beneficiary retains the authority to ratify a trustee’s ultra vires act. Thus, a borrower lacks standing because the beneficiaries’ ability to ratify an unauthorized mortgage assignment makes the assignment merely voidable.
The borrower countered that provisions unique to this PSA prevented the intended beneficiaries (the certificate holders) from ratifying assignments, which did not comply with the PSA and were, therefore, automatically void. The Court, however, held that the provisions of the PSA provided a way for certificate holders to ratify or challenge unauthorized acts through the amendment process or derivative actions. Thus, a breach of the PSA merely renders the assignment voidable.
In conclusion, the Seventh Circuit remanded only those claims that were not based on alleged violations of the PSA.
Weiner Brodsky Kider regularly represents mortgage loan originators and investors throughout the United States against asserted violations of state and federal laws.