Thursday, January 16, 2014

FYI: 5th Cir Confirms Inability of Borrower to Challenge PSA, MERS Assignee's Right to Foreclose Under Texas Law, Holds Borrower Estopped from Notice of Servicer Challenge

In examining a borrower's challenge to the ability of a trustee's and servicer's ability to initiate a non-judicial foreclosure, the U.S. Court of Appeals for the Fifth Circuit recently held that:


(1)      where a party seeking injunctive and/or declaratory relief challenges the amount in controversy for the purposes of removal under diversity jurisdiction, the amount in controversy includes the value of the object that is sued for, and because the value of the outstanding mortgages exceeded the amount in controversy threshold by any reasonable measure, the district court had jurisdiction;


(2)      in applying Texas law, MERS, a book-entry system, constitutes a mortgagee, and therefore, a trustee, as MERS's assignee under two deeds of trust, could initiate non-judicial foreclosure as a mortgagee pursuant to Tex. Prop. Code § 51.0001(4) and Martin v. BAC Home Loan Servicing, L.P., 722 F.3d 249, 255 (5th Cir. 2013);


(3)      where a borrower challenges an assignment that purportedly violates the terms of the governing pooling and servicing agreement, if the borrower is not a party to the pooling and servicing agreement, he lacks standing to challenge the assignment, unless he can demonstrated he is an intended third-party beneficiary to that agreement pursuant to the Fifth Circuit's previous ruling in Reinagel v. Deutsche Bank Nat'l Trust Co., 12-50569, 2013 WL 5832812, at *5 (5th Cir. Oct. 29, 2013); and


(4)      where a borrower challenges a mortgage servicer's status and ability to initiate non-judicial foreclosure because the previous servicer rather than the current mortgagee provided notice of the succeeding servicer as required under Tex. Prop. Code § 51.0001(3), the borrower is estopped from such a challenge pursuant to Steubner Realty 19, Ltd. v. Cravens Rd. 88, Ltd., 817 S.W.2d 160, 164 (Tex. App. 1991) because the borrower received notice of the full chain of assignment of the relevant deeds of trust, and was aware that payments were to be made to the mortgage servicer and made payments to the mortgage servicer, thus constituting acquiescence.


In so ruling, the Fifth Circuit upheld the district court's summary judgment ruling in favor of defendant lender and the mortgage servicer of the two deeds of trust, and denied the borrower's partial summary judgment motion.


A copy of the opinion is available at



The borrower ("Borrower") purchased two residential investment properties in 2006. A mortgage company ("Lender") was the lender and the mortgage servicer at the time of the origination of the loans.  The loans for each property were evidenced by a promissory note and secured by a deed of trust.  Each deed of trust named Mortgage Electronic Registration Systems, Inc. ("MERS"), its successors and assigns, as the Lender's beneficiary with the right to enforce the Lender's legal interests.


The Lender sold both the promissory notes in 2006 to an affiliate of another mortgage company ("Purchaser"). Later in 2006, the promissory notes for both loans were securitized and pooled with others in a trust. The deeds of trust were registered with MERS and were not conveyed with the promissory notes. MERS subsequently assigned the Claretfield Deed of Trust on May 31, 2011 and the Oakview Deed of Trust on June 17, 2010 to a trustee ("Trustee"). Each assignment was recorded.


The mortgage servicing rights were transferred separately from the deeds of trust and the promissory notes. The servicing rights for the Claretfield promissory note was transferred from Lender to a separate entity ("Subsequent Servicer") on July 1, 2006, who transferred it to yet another entity ("Current Servicer") on July 1, 2009. The servicing right for the Oakview promissory note was transferred from Lender to Subsequent Servicer, then to the Current Servicer.


The Borrower made monthly payments on each note until December 2010.  During this time, the Borrower acknowledged receiving notice of the change in mortgage servicer for both the service transfers.  In August 2010, the Borrower contacted the Current Servicer as to each loan in separate letters.


He asked for confirmation under the Truth in Lending Act ("TILA") that the Current Servicer was the "Rightful Holder in Due Course" and additional information establishing that the servicer is entitled to service the instrument.  The Current Servicer's responses did not provide the requested documentation proving the right to service the loans.


It provided the account's payment history and the basic originating documents. As to the Claretfield loan, the Current Servicer stated that the loan was registered with MERS. The response additionally said the loan had been "transferred to [the Current Servicer] for servicing on June 27, 2006," and the current owner of the loan was Trustee.  On the Oakview loan, the Current Servicer said that the "holder in due course" was the Trustee.


The Borrower sent the Current Servicer notice of an "Intent to Litigate" as to both mortgages in September 2010 and ceased making payments on both loans in December 2010.


The Current Servicer sent the Borrower notices of default and intent to accelerate payments for both notes in May 2011. At the time the Borrower suspended payment, the unpaid principal and interest on each note exceeded $80,000.00.  The Borrower brought suit in state court against the Current Servicer and Trustee (collectively "Defendants").


The Defendants removed the case to the United States District Court for the Southern District of Texas. The parties consented to proceed before a magistrate judge ("District Court") pursuant to 28 U.S.C. § 636(c).  The District Court granted the Defendants' motion for summary judgment, denied the Borrowers' motion for partial summary judgment, and dismissed Defendants' motion for judgment on the pleadings as moot.  The Borrower appealed.


As an initial matter, the court addressed the Borrower's argument that his claim did not meet the minimum amount in controversy for removal to federal court. As you may recall, federal courts have original jurisdiction over civil actions where the parties are diverse and the amount in controversy exceeds $75,000. 28 U.S.C. 1332(a).


In his initial claim, the Borrower sought damages "not to exceed $60,000," a temporary restraining order, declaratory judgment, and a permanent injunction to stop the foreclosure actions on both properties. "In actions seeking declaratory or injunctive relief, it is well established that the amount in controversy is measured by the value of the object of the litigation." Hunt v. Wash. State Apple Adver. Comm'n, 432 U.S. 333, 347 (1977).


The Fifth Circuit recognized that the purpose of the injunctive and declaratory relief, to stop the foreclosure sale of the properties by Defendants, establishes the properties as the object of the present litigation. As the Fifth Circuit previously explained, "the amount in controversy, in an action for declaratory or injunctive relief, is the value of the right to be protected or the extent of the injury to be prevented." Leininger v. Leininger, 705 F.2d 727, 729 (5th Cir. 1983).


The Borrower's claimed injury was the potential loss of use and ownership of the properties. In actions enjoining a lender from transferring property and preserving an individual's ownership interest, it is the property itself that is the object of the litigation; the value of that property represents the amount in controversy. Garfinkle v. Wells Fargo Bank, 483 F.2d 1074, 1076 (9th Cir. 1973).


Because under any reasonable basis in valuing the properties, the amount in controversy threshold was exceeded and therefore, the Fifth Circuit concluded federal subject-matter jurisdiction existed.


Next the Fifth Circuit examined the Borrower's challenge to the validity of the foreclosure action initiated by the Defendants.  The Borrower argued that the Trustee was not a proper grantee, beneficiary, owner, or holder of the deeds of trust; that the transfer of the notes to the Trustee was improper under the Pooling & Services Agreement ("PSA"); that the Current Servicer was not a proper servicer; and that no evidence supports the Current Servicer's continued role as servicer after assignment to the Trustee.


In determining whether the Trustee was a mortgagee, the Fifth Circuit applied Texas state law, which provides that a non-judicial foreclosure may be initiated by the current mortgagee including: "the grantee, beneficiary, owner, or holder of a security instrument;" a "book entry system;" or "the last person to whom the security interest has been assigned of record." Tex. Prop. Code § 51.0001(4).


In examining the record, the Fifth Circuit recognized that the deeds of trust named MERS the beneficiary of the Subsequent Servicer and MERS later assigned the deeds of trust to the Trustee.  The Fifth Circuit pointed to a previous ruling that provided, "[b]ecause MERS is a book-entry system, it qualifies as a mortgagee." Martins v. BAC Home Loan Servicing, L.P., 722 F.3d 249, 255 (5th Cir. 2013). The Martins decision permitted MERS and its assigns to bring foreclosure actions under the Texas Property Code. The Trustee became the mortgagee as defined under Section 51.0001(4) after recorded transfer of the deeds of trust and therefore was an appropriate party to initiate non-judicial foreclosure actions.


Accordingly, the Fifth Circuit concluded that the district court was correct in its determination that the Trustee was a mortgagee and could proceed with foreclosure.


The Fifth Circuit next addressed the Borrower's challenge to assignment of the notes to the Trustee. The Borrower argued that the assignments were void because they were in violation of the PSA governing the trust. He argues that the improper assignment precludes the Trustee from properly assuming the status of mortgagee and foreclosing on the properties.  However, the Borrower conceded that he was not a party to the governing PSA, which he sought to enforce.


The Fifth Circuit noted that it previously addressed similar challenges 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, 2013 WL 5832812, at *5.  As the Fifth Circuit previously ruled, 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 established that there is a presumption that parties contract for themselves, unless they clearly intended a third party to benefit from the contract.  Accordingly, the Borrower failed to provide any evidence that he was a party to the PSA or that he was an intended third-party beneficiary of the PSA, therefore he had no standing to challenge the assignment to the Trustee.


Finally, the Fifth Circuit examined the Borrower's challenge to the District Court's ruling that the Current Servicer was a mortgage servicer under Tex. Prop. Code § 51.0025.  The Borrower argued that the Current Servicer could not initiate the foreclosure of the deeds of trust because the Borrower was never notified that the Current Servicer was the mortgage servicer of his loans.  The Fifth Circuit rejected the Borrower's argument, recognizing that the record established in each case of the previous service transfers, the previous servicer, not the current mortgage, notified the Borrower of the identity of the succeeding mortgage servicer.


The Fifth Circuit further agreed with the District Court's ruling that because the Borrower acknowledged that payments were to be made to the Current Servicer, notice of the full chain of assignments was provided to the Borrower and the absence of evidence that the mortgage servicer was anyone other than the Current Servicer, the Borrower's challenge failed.


Moreover, the Fifth Circuit addressed Defendants' argument that estoppel barred the Borrower from challenging the Current Servicer's ability to conduct non-judicial foreclosure.  Although the District Court did not address this argument, the Fifth Circuit found that the Borrower could have raised the issue that only the current mortgagee could provide effective notice of the servicer pursuant to Tex. Prop. Code. § 51.0001(3) at any time after origination in 2006. 


As you may recall, "quasi estoppel" applies to legal bars such as ratification, election, acquiescence, waiver or acceptance of benefits.  Steubner Realty 19, Ltd., 817 S.W.2d  at 164.  Because the Borrower only first raised this issue during the pending litigation, and the Borrower made payments to the Current Servicer for over a year, the Borrower acquiescenced to the validity of the notice of transfer from one mortgage servicer to the next.  Although the Fifth Circuit noted that a defect in providing notice existing in the form of the previous mortgage servicer providing notice of the new servicer, rather than the current mortgagee, such a defect could not be challenged for the first time in this appeal. 


As to the Claretfield loan, the preceding mortgage servicer provided notice of the succeeding servicer each time a service transfer occurred.  The mortgagee of the Claretfield property did not change until after the Borrower defaulted.  As to the Oakfield loan, MERS transferred its interest to the Trustee in 2010 and the Current Servicer remained the servicer.  The Current Servicer provided notice via correspondence that it was the servicer.  While the statutory violation was the Trustee's failure to provide notice of the servicer, the Borrower could not first challenge the violation of the Texas Property Code after the previously discussed acquiescence.


Therefore, quasi-estoppel applied because the Borrower's position was inconsistent with his previous position and would disadvantage the Current Servicer.


Accordingly, the Fifth Circuit affirmed the District Court's ruling granting summary judgment in favor of the defendants, denied the Borrower's partial motion for summary judgment and denying as moot the Borrower's motion for judgment on the pleadings.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
(312) 551-9320
(312) 284-4751
(312) 493-0874


Admitted to practice law in Illinois



          McGinnis Wutscher Beiramee LLP





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