Paul Jackson has been forced to eat a bit of crow. A judge in Alabama in a case called Horace v. LaSalle overturned a foreclosure action based on the failure of the trust to comply with the terms of the pooling & servicing agreement. As you see, the judge ruled that the borrower can assert rights under the Pooling and Servicing agreement as a third party beneficiary and that he was “surprised to the point of astonishment” that the trust had not complied with the terms of its PSA.
The ruling in favor of the borrower endorses an argument we have made since last year on this blog, that the pooling and servicing agreement stipulated a specific set of transfers be undertaken to convey the borrower note (the IOU) to the securitization trust within a specified time frame. New York trust law was chosen to govern the trusts precisely because it is unforgiving; any act not specifically stipulated by the governing documents is deemed to be a “void act” and has no legal force. So if a the parties to a securitization failed to convey a note to the trust within the stipulated timetable, retroactive fixes don’t work. In this case, the note had been endorsed by the originator, Encore, but not by the later parties in the securitization chain as required in the pooling and servicing agreement. See the order below:
You may recall that an Alabama judge in Jefferson County had ruled that borrower arguments based on the requirements of the pooling and servicing agreement were inoperative in an ejectment action. Adam Levitin and we had both argued that the ruling was narrow and would have limited applicability even in Alabama, because it was contesting an ejectment, not a foreclosure (Paul Jackson had argued the converse, that the ruling was fatal to the New York trust theory). This decision validates this view and the general viability of arguments based on the New York trust law, which was chosen by the overwhelming majority of real estate securitization trusts to govern the trust (note not the other aspects of the deal).
For background, the original case filing follows (hat tip April Charney):
Housing Wire notes:
In other words, without proof the mortgage had been assigned to the trust, in this case Bear Stearns Asset Backed Securities, the trustee lacked standing to foreclose.
Specifically, the homeowner alleged LaSalle only “produced a collateral file that included the original, wet-ink, signed note in the case,” according to court records. That note contained a single endorsement, which came from the originator of the mortgage — Encore Credit Corp. While the loan was sent through the securitization process – going through two other parties before reaching as the trustee – the only assignment on record was to Encore.
Now this ruling is not definitive, since the New York trust theory has only been presented to a few judges. But this order certainly has more value as a precedent than the narrow ruling debated earlier in Congress v. US Bank.