Breaches Of Pooling And Servicing Agreements Are Not A Defense To Foreclosures
April 27, 2016
Lesson. If you are a borrower or a guarantor in Indiana, or are defending such parties in a contested mortgage foreclosure, defeating a motion for summary judgment on the basis of an alleged breach of a pooling and servicing agreement isn’t going to happen.
Case cite. Wilmington v. Bowling, 39 N.E.3d 395 (Ind. Ct. App. 2015).
Legal issue. Whether the plaintiff/lender was the holder of the promissory note and entitled to enforce it. In other words, did the lender have standing to sue the borrower?
Vital facts. The lender, an assignee of a securitized mortgage loan, possessed the original note, which had been endorsed in blank. The lender also had a complete chain of recorded assignments establishing who held the note at various times. Nevertheless, the borrower found on the internet what he believed to be the applicable pooling and servicing agreement (PSA), which “reflects that the assignees of the mortgage and note were required to transfer possession by a special endorsement that must be reflected on an allonge.” There was an absence of evidence of such an allonge and, as such, arguably there had been a breach of the PSA.
Procedural history. The trial court granted summary judgment for the lender on the standing issue, and the borrower appealed.
Key rules. Generally, “only the parties to a contract … have rights under the contract.” The exception is “where it can be demonstrated that the parties clearly intended to protect a third party by imposing an obligation on one of the contracting parties….” The law has developed in the country, which law the Indiana Court of Appeals adopted in Wilmington, is that borrowers lack standing to (a) challenge the validity of mortgage securitization or (b) request a judicial determination that a loan assignment is invalid due to noncompliance with a PSA.
Holding. The evidence did not establish that the borrower was a party to the PSA. The evidence also failed to show that there was an intent to protect the borrower as a third party such that he could enforce any obligation under the PSA. The trial court properly found that the lender was entitled to enforce the note under Ind. Code 26-1-3.1-301.
Policy/rationale. Parties to PSA’s typically are the certificate holders, a trustee, and a servicer. Borrowers have no contractual privity with these parties. Any breach of a PSA, and any damages arising out of such breach, are relevant only as between the parties that signed the PSA. Alleged breaches do not inure to the benefit of borrowers (or guarantors), who only are in privity of contract with the lenders/mortgagees under the notes and mortgages (or guaranties) – not the securitization documents.