The Lawletter Vol 39 No 3
There are numerous cases in which a borrower/mortgagor has attempted to defeat the enforceability of its mortgage (and promissory note), based on an alleged violation of the pooling and servicing agreement ("PSA"), the instrument that created the trust into which the mortgage was deposited. The courts in those cases have been quick to point out that the mortgagor was not a party to the PSA. Most of these courts have also held that the mortgagor is not a third-party beneficiary to the PSA and cannot challenge it on that basis. See, e.g., In re Correia, 452 B.R. 319 (B.A.P. 1st Cir. 2011) (finding that an individual who is not a party to, or a third-party beneficiary of, the PSA lacks standing to object to breaches of the PSA's terms).
Recently, in Dernier v. Mortgage Network, Inc., 2013 VT 96, ___ A.3d ___, the court, applying New York law, considered the standing of the mortgagors to challenge their mortgage and note based on a violation of the PSA. The court adopted the general rule that the mortgagor is not a third-party beneficiary to the PSA. But the court went one step further and indicated that the mortgagors, although not a party to, or third-party beneficiary of, the PSA, could attack their mortgage and note if the violations of the PSA rendered the assignment of the mortgage and note void and not merely voidable. There, the court explained:
While we have never so held, courts in other states have qualified this strong proposition in the case of assignment of debts, explaining that a debtor may challenge the assignment of his or her debt if it is void or entirely ineffective—even if that means allowing a "stranger to a contract" to assert reasons related to the breach of that contract. They have been careful to emphasize, however, that this exception does not allow a debtor to challenge an assignment of the debt that is merely voidable. . . .
The obvious next step, then, is to determine whether the alleged violations of the PSA would serve to render the assignment of plaintiffs' mortgage and note void or merely voidable.
Id. ¶¶ 29-30, ___ A.3d at ___. However, the court nevertheless found that the mortgagors lacked standing to claim that their mortgage and underlying promissory note were unenforceable for a violation of the PSA, since the violations in that case would render the assignments voidable rather than void.