Sunday, May 4, 2014
Plaintiffs Do Not Have Standing to Assert Claims Based on Breaches of PSAs
Scholar Alert: [ "Glaski v. Bank of America" ] Case Law
Applied to the context of alleged non-compliance with the terms of a PSA, courts considering EPTL § 7-2.4 have held that "even if it is true that the Notes were transferred to the trust in violation of the trust's terms [after the closing date of the trust], that transaction could be ratified by the beneficiaries of the trust and is therefore merely voidable." Omrazeti v. Aurora Bank FSB, No. SA:12-CV-00730-DAE, 2013 WL 3242520, at *7 (W.D. Tex. June 25, 2013); see also Calderon, 941 F.Supp.2d at 766 (same); Bassman, 981 N.E.2d at 944 ("Hence, numerous cases, including several that specifically reference 7-2.4...indicate that under various circumstances a trustee's ultra vires acts are not void."). Following this case law, even assuming that the transfer of Plaintiffs' mortgages to their respective trusts violated the terms of their respective PSAs, the after the deadline transactions would merely be voidable at the election of one or more of the parties—not void.
Dist. Court, SD New York, 2014The Plaintiffs' Amended Complaint is predicated upon alleged breaches of the PSAs which, the Plaintiffs allege, made the assignment of their mortgage loans by the original lending institution to the Trustee Defendants invalid.
The Plaintiffs' Amended Complaint is predicated upon alleged breaches of the PSAs which, the Plaintiffs allege, made the assignment of their mortgage loans by the original lending institution to the Trustee Defendants invalid. (Am. Compl. ¶¶ 14, 21.) With full knowledge of the invalidity of this transfer, the Trustee Defendants allegedly "concealed" from the Plaintiffs the fact that they did not validly own the mortgage loans and sought to foreclose on certain of the Plaintiffs' properties, in violation of RICO and as part of a conspiracy to violate RICO. (Id. ¶¶ 35-54.) In their motion, the Trustee Defendants argue that the Plaintiffs are neither parties to nor third-party beneficiaries of the PSAs, and therefore lack standing to assert claims based on breaches of those agreements. (Defs.' Mot. at 5.) This argument has merit. Even construing the Amended Complaint in favor of the Plaintiffs, the Plaintiffs' standing to bring this action is lacking based on a careful review of the entire record. Therefore, the Amended Complaint must be dismissed.
The PSAs here are to be interpreted under the New York Estates, Powers, and Trusts Law ("EPTL"). (Pls.' 11/6/13 Letter, Ex. 3 § 10.03 (New York law governs the interpretation of the PSA); Pls.' Opp'n at 10; Defs.' Reply at 2.) New York courts interpreting the EPTL consistently hold that litigants who are not beneficiaries of a trust lack standing to enforce the trust's terms or to challenge the actions of the trustee. See In re Estate of McManus, 390 N.E.2d 773, 774 (N.Y. 1979) (individuals "not beneficially interested" in a trust lack standing to challenge the trustee's actions); Cashman v. Petrie, 201 N.E.2d 24, 26 (N.Y. 1964) ("A person who might incidentally benefit from the performance of a trust but is not a beneficiary thereof cannot maintain a suit to enforce the trust or to enjoin a breach."); Naversen v. Gaillard, 831 N.Y.S.2d 258, 259 (N.Y. App. Div. 2007) ("The Supreme Court properly determined that since the defendants were not beneficiaries of the G. Everett Gaillard Revocable Trust, they lacked standing to challenge the actions of the plaintiff as its trustee.").
The Amended Complaint does not allege that the Plaintiffs were parties to the PSAs, (see generally Am. Compl. ¶¶ 1-59), and the representative PSA provided by the Plaintiffs for the Court's review does not include any provision indicative of a party status for borrowers or mortgagors. (See generally Pls.' 11/6/13 Letter Ex.3.) Though the Second Circuit has not ruled directly on this issue, district courts in this Circuit and elsewhere have generally held that "a nonparty to a PSA lacks standing to assert noncompliance with the PSA as a claim or defense unless the non-party is an intended (not merely incidental) third-party beneficiary of the PSA." Rajamin v. Deutsche Bank Nat. Trust Co., No. 10 Civ. 7531 (LTS), 2013 WL 1285160, at *3 (S.D.N.Y. Mar. 28, 2013) (citing, inter alia, Livonia Property Holdings, LLC v. 12840-12976 Farmington Road Holdings, LLC, 717 F. Supp. 2d 724, 736-37 (E.D. Mich. 2010) ("For over a century, state and federal courts around the country have [held] that a litigant who is not a party to an assignment lacks standing to challenge that assignment."), aff'd, 399 F. App'x 97 (6th Cir. 2010)); see also Karamath v. U.S. Bank, N.A., No. 11 Civ. 1557 (RML), 2012 WL 4327613, at *7 (E.D.N.Y. Aug. 29, 2012) (mortgagor "is not a party to the PSA or to the Assignment of Mortgage, and is not a third-party beneficiary or either, and therefore has no standing to challenge the validity of that agreement or the assignment") adopted by No. 11 Civ. 1557 (NGG), 2012 WL 4327502 (E.D.N.Y. Sep. 20, 2012). These cases have further held that for a party to be considered a third-party beneficiary to a PSA, the intent to render a non-party a third-party beneficiary must be clear from the face of the PSA. Rajamin, 2013 WL 1285160, at *3 (internal citations omitted).
In an effort to establish their standing in the face of this case law, the Plaintiffs argue that the breaches of the PSAs, specifically, the transfers of ownership after the closing dates specified in the PSAs, rendered the conveyances void under Section 7-2.4 of the EPTL. (Pls.' Opp'n at 9.) That section provides that "if the trust is expressed in the instrument creating the estate of the trustee, every sale, conveyance or other act of the trustee in contravention of the trust, except as authorized by this article and by any other provision of law, is void." EPTL § 7-2.4. The Plaintiffs argue first that the conveyances are void under EPTL § 7-2.4, and, second, that because the conveyances are void under that section, they have standing, even as non-parties, to challenge the assignments. (Pls.' Opp'n at 7.)
First, though some courts have held that non-compliance with the terms of a PSA renders an assignment void under EPTL § 7-2.4, the weight of the case law holds that such an assignment is merely voidable, and therefore outside the scope of that section. A void contract is "invalid or unlawful from its inception," while a voidable contract "is one where one or more of the parties have the power, by the manifestation of an election to do so, to avoid the legal relations created by the contract." 17A C.J.S. Contracts § 169. The Plaintiffs cite two cases that found that acceptance of the note and mortgage by a trustee after the closing date of the PSA renders an assignment void under EPTL § 7-2.4. Wells Fargo Bank, N.A. v. Erobobo, No. 31648/2009, 2013 WL 1831799 (N.Y. Sup. Ct. Apr. 29, 2013); Glaski v. Bank of America, Nat'l Ass'n, 218 Cal. Rptr. 3d 449 (Cal. Ct. App. 2013) (relying on Erobobo).
However, those cases run counter to better-reasoned cases, which apply the rule that a beneficiary can ratify a trustee's ultra vires act. See Mooney v. Madden, 597 N.Y.S.2d 775, 776 (N.Y. App. Div. 1993) ("A trustee may bind the trust to an otherwise invalid act or agreement which is outside the scope of the trustee's power when the beneficiary or beneficiaries consent or ratify the trustee's ultra vires act or agreement."); Washburn v. Ranier, 149 A.D. 800, 803 (N.Y. App. Div. 1912) (same); 106 N.Y. Jur. 2d Trusts § 431 ("the trustee may bind trust to an otherwise invalid act or agreement which is outside the scope of the trustee's power when beneficiary consents to or ratifies the trustee's ultra vires act or agreement"). Where an act can be ratified, it is voidable rather than void. See Hackett v. Hackett, No. 3338/2008, 2012 WL669525, at *20 (N.Y. Sup. Ct. Feb. 21, 2012) ("A void contract cannot be ratified; it binds no one and is a nullity. However, an agreement that is merely voidable by one party leaves both parties at liberty to ratify the transaction and insist upon its performance.") (internal citation omitted). Notably, trust beneficiaries need not actually ratify the act to render an act voidable and therefore outside the scope of EPTL § 7-2.4, rather, the fact that trust beneficiaries could ratify such an act is sufficient to render it voidable. Bank of America Nat'l Ass'n v. Bassman FBT, LLC, 981 N.E.2d 1, 9 (Ill. App. Ct. 2012).
Furthermore, even if the allegedly untimely conveyances were to be considered void under EPTL § 7-2.4, district courts in the Second Circuit have found that that section does not provide standing to mortgagors to challenge the conveyances. In Karamath, the plaintiff-mortgagor alleged that the trustee defendant had no legal or equitable interest in her loan because the assignment of the note was invalid, and the transfer was void under the EPTL. Karamath, 2012 WL 4327613, at *7. The Eastern District nevertheless held that because the plaintiff was not a party to the PSA or to the Assignment of Mortgage, and was not a third-party beneficiary of either, she therefore had no standing to challenge the validity of that agreement or the assignment. Id.; see also Rajamin, 2013 WL 1285160, at *3 ("Plaintiffs have not alleged any facts that would support plausibly a claim that they are intended third-party beneficiaries of the PSAs. Thus, Plaintiffs lack standing to challenge Defendants' alleged ownership of the Notes and [Deeds of Trust] or authority to foreclose based on non-compliance with the PSAs.").
Finally, the Plaintiffs argue that whether or not they are intended third-party beneficiaries of the PSAs is a "fact-laden issue" that cannot be determined within the context of the Defendants' motion to dismiss. (Pls.' Opp'n at 19.) However, Plaintiffs bear the burden to plead facts showing their intended third-party beneficiary status. Premium Mortg. Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d Cir. 2009); Rajamin, 2013 WL 1285160, at *3. The Plaintiffs do not make any such factual allegations in the Amended Complaint. (See generally Am. Compl. ¶¶ 1-59.) Moreover, the Plaintiffs can only attain status as intended third-party beneficiaries if the PSAs themselves "clearly evidence an intent to permit enforcement" by them. Premium Mortg, 583 F.3d at 108 (quoting Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., 485 N.E.2d 208, 212 (N.Y. 1985)). The Plaintiffs point to no such provisions, and the Court's independent search has discovered none. (See generally Pls.' 11/6/13 Letter Ex.3.) While the Plaintiffs' Opposition argues that the PSAs place duties upon mortgage loan servicers to safeguard the Plaintiffs' properties from such perils as physical destruction and tax forfeiture, (Pls.' Opp'n at 19-20), the Plaintiffs fail to explain how such provisions would be intended to benefit them, as opposed to the RMBS certificateholders, for whom the Plaintiffs' properties constitute collateral securing their investment. Accordingly, the Plaintiffs have failed to allege that they are intended third-party beneficiaries of the PSAs, and they therefore lack standing to bring claims based on alleged breaches of those agreements.
For the foregoing reasons, the Plaintiffs have no standing to bring any claim based on alleged breaches of the PSAs, and, because the theory underlying the Plaintiffs' claims is untenable, any amendment of the Amended Complaint would be futile. See Foman v. Davis, 371 U.S. 178, 182 (1962). Therefore, the Amended Complaint is dismissed with prejudice in its entirety. Furthermore, because the standing issue is dispositive, this Court need not reach the other issues raised in the motion to dismiss or the issue of severance.
For the reasons discussed herein, the Defendants' joint motion to dismiss the Amended Complaint is GRANTED. The Clerk of the Court is ordered to close this case.