Monday, August 26, 2013

FYI: 5th Cir Rejects "Robo-Signing" and "Faulty Securitization" Challenges to Foreclosure

The U.S. Court of Appeals for the Fifth Circuit recently rejected a group of borrowers' claims that two assignments of a note and deed of trust were void as "robo-signed." 


The Fifth Circuit held, in part, that defects to acknowledgements to the assignments would not affect the mortgagee's rights against the borrowers themselves, but the rather mortgagee's rights against a third-party. 


Additionally, the Fifth Circuit rejected the borrowers' claims that the assignments were void due to alleged violations of the Pooling and Servicing Agreement related to their loan, reasoning that the borrowers were neither parties nor intended beneficiaries of the agreement.


A copy of the opinion is available at:



Plaintiff-appellants ("Borrowers") had refinanced their home, obtaining a $360,000 home-equity loan secured by a deed of trust.  The loan was subsequently sold to defendant-appellee ("Mortgagee"), and was pooled with other mortgage loans in a securitization transaction. 


The Borrowers alleged that the Pooling and Servicing Agreement (PSA) which governed the trust in which the subject loan was held did not allow new loans to be transferred into the trust after October 1, 2006.  The Borrowers also alleged that, notwithstanding the PSA, the sale of the loan was not formally documented until January 23, 2008, when an agent of the original lender ("First Agent") allegedly executed an instrument assigning the deed of trust to Mortgagee (the "First Assignment").  The First Assignment, which was notarized, did not reference the promissory note secured by the deed of trust.


In addition, the Borrowers alleged that on February 13, 2009, another agent of the original lender ("Second Agent") executed an assignment (the "Second Assignment"), which was also notarized.  The Second Assignment expressly transferred to Mortgagee "the certain note(s) described [in the deed of trust] together with all interest secured thereby, all liens, and any rights due or to become due thereon."


After Borrowers defaulted on the note, Mortgagee sought and was granted a judicial order authorizing foreclosure.  However, the Borrowers filed suit in Texas state court claiming that the assignments were "robo-signed" and therefore void.  As you may recall, "robo-signing" is a colloquial term used to describe an array of practices which lenders have allegedly used to perfect their right to foreclose.  The state court granted the Borrowers' request for a temporary injunction and Mortgagee removed the case to federal court.


Elaborating on their allegations of "robo-signing" in their amended complaint, Borrowers claimed that the First Assignment was void because First Agent was not an employee of the original lender.  Similarly, the Second Assignment was supposedly void because Second Agent was an employee of a third-party contractor.  The Borrowers also asserted that the Second Assignment was void as a forgery.  Finally, the Borrowers challenged both assignments as void as they supposedly violated the PSA's provision that no mortgage loan could be transferred into the trust after October 1, 2006.


The district court granted Mortgagee's motion to dismiss the Borrowers' amended complaint, ruling among other things that the Borrowers lacked standing to challenge the validity of the assignments.  Borrowers appealed.


Under the law of the state of Texas, a non-party to a contract cannot enforce the contract unless she is an intended third-party beneficiary.  See Tex. Water Auth. v. Lomas, 223 S.W.3d 304, 306 (Tex. 2007).  This issue is sometimes couched in terms of "standing."  Likewise, it is "settled that the obligors of a claim… may not defend [against an assignee's effort to enforce the obligation] on any ground which renders the assignment voidable only."  Tri-Cities Const., Inc. v. Am. Nat. Ins. Co., 523 S.W.2d 426, 430 (Tex. Ct. App. 1975).  However, Texas courts have followed the majority rule that the obligor may defend "on any ground which renders the assignment void."  Id.


The first issue considered by the Fifth Circuit was whether Borrowers had standing to challenge the validity of the transaction by which the original lender purportedly assigned the deed of trust and the corresponding promissory note to Mortgagee.  Although Mortgagee urged that Borrowers had no standing to challenge the assignment as "stranger[s] to [the] contract," the Fifth Circuit disagreed.  According to the Fifth Circuit, under Texas law, an obligor may defend on any ground which renders the assignment void.  Here, because Borrowers were not attempting to enforce the terms of the assignment, but rather were arguing that the assignment was "void ab initio," the Fifth Circuit held that the Borrowers had standing.


The second issue considered was whether Borrowers' allegations, taken as true, establish that Mortgagee lacks authority to foreclose.


As a preliminary matter, the Fifth Circuit considered whether the first assignment itself was sufficient to convey authority to foreclose or whether both assignments were necessary.  Under the Restatement (Third) of Property: Mortgages, the transfer of a mortgage presumptively includes the note secured by the mortgage, whether or not the instrument of assignment expressly references the note.  RESTATEMENT (THIRD) OF PROPERTY: MORTGAGES, §5.4(b).  However, some states have recognized a common-law rule providing that the assignment of a mortgage alone is a nullity.  See e.g. Best Fertilizers of Ariz., Inc. v. Burns, 571 P.2d 675, 676 (Ariz. Ct. App. 1977).  According to the Fifth Circuit, although Texas courts tend to follow the Restatement, see e.g. Conversion Props., LLC v. Kessler, 994 S.W.2d 810, 813 (Tex. Ct. App. 1999), none have expressly adopted the Restatement's "note-follows-the-mortgage presumption."  Therefore, the Fifth Circuit turned to the Borrowers' objections.


As to the First Assignment, the Fifth Circuit held that the Borrowers' challenge to its validity to fail on its own terms.  Although the Borrowers implied that First Agent lacked authority to execute the assignment, they never directly asserted a lack of authority – let alone plead facts to support such an allegation.


As to the Second Assignment, the Borrowers challenged its validity on the basis that Second Agent was actually an employee of a third-party contractor.  However, according to the Fifth Circuit, a contract executed on behalf of a corporation by a person fraudulently purporting to be a corporate officer is – like any other unauthorized contract – not void, but merely voidable at the election of the defrauded party.  Therefore, the Fifth Circuit concluded that Second Agent's lack of authority, even accepted as true, did not furnish the Borrowers with a basis to challenge the Second Assignment.


The Borrowers also asserted that the Second Assignment was void as a "forgery," claiming that Second Agent had testified that "his signature was scanned onto documents and then notarized as an original."  In rejecting Borrowers' claim, the Fifth Circuit held that "Texas recognizes type or stamped signatures – and presumably also scanned signatures – so long as they are rendered by or at the direction of the signer."  Here, Borrowers failed to allege that Second Agent's signature was signed without his authorization.  Additionally, the Fifth Circuit noted that there is no requirement that the affiant affix his signature in wet ink for a valid acknowledgment to exist.


Moreover, the Fifth Circuit held that, although defects in the acknowledgement might prevent Mortgagee from foreclosing if a third-party had purchased the underlying property from Borrowers without actual knowledge of the mortgage, such defects would not affect Mortgagee's rights against the Borrowers themselves.  According to the Fifth Circuit, although Texas's recording statute requires mortgage assignments to be acknowledged in order to be recorded, it only protects subsequent purchasers for value and without notice.


Finally, the Borrowers claimed that both assignments were void because they violated the PSA.  However, because they conceded that they are not parties to the PSA, the Fifth Circuit rejected this claim, ruling that the Borrowers failed to state any facts which indicated that the parties to the PSA intended to benefit the Borrowers.  The Court further held that, even assuming Borrowers were third-party beneficiaries, the fact that the assignments violated the PSA would not render the assignments void, but would "merely entitle [Borrowers] to sue for breach of the PSA."




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
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Admitted to practice law in Illinois


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