Foreclosure Law article: UCC v Pooling and servicing agreement
Wednesday 11th April 2012by mbavaro
UCC v. PSA
Why the “but we have the note” argument fails when a securitized trust is attempting to foreclose.
By: Matthew Bavaro, Esquire
Loan Lawyers, LLC
The purpose of this article is to flush out the contradictory provisions of the Uniform Commercial Code (“UCC”) and the documents that create securitized trusts. Most debt has been securitized in this country, including those debts that encumber real property. Securitization is a process where debt obligations are grouped, or pooled, together into a trust. The trust then sells bonds in the trust to investors who anticipate receiving income from the money generated by homeowner payments. The homeowner makes their monthly loan payments to a servicer who in turn sends the funds to the trust. The funds then trickle down to the bondholders. The main document which sets forth the relationships of the parties to a securitized trust, as well as their rights and responsibilities, is called a pooling and servicing agreement (“PSA”). The PSA is a document with a lot of “legaleze” that is often hundreds of pages long. They can very daunting to read, but can be boiled down to simple terms for the purpose of this article.
The UCC is a uniform law adopted by most states with some modifications that governs, amongst other things, negotiable instruments and security interests. Every PSA that this author has read contains provisions that are at odds with the UCC. Most notably, the UCC allows negotiable instruments, such as promissory notes, to be transferred by a blank indorsement. Further, many courts in Florida have held that the mortgage follows the note under Florida law, such that the mortgage does not need to be specifically assigned as long as the note is indorsed. This presents a conflict with the requirements of the PSA.
The PSA governs the securitization of loans and also details under what circumstance the trust can hold a note. The trustee derives its authority to act on behalf of the trust from the PSA. Most PSA’s state that they are to be governed by New York law. Section 7-2.4, N.Y. Est. Powers & Trusts Law, states 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.” In other words, the trustee cannot do what PSA does not allow it to do. “The authority of the trustee is subject to any limitations imposed by the trust instrument, and every act in contravention of the Trust is void.” Dye v. Lewis, 324 N.Y.2d 172 (N.Y. Sup. Ct. 1971).
The typical PSA requires that the originator of the loan transfer the loan to the sponsor, who in turn transfers it to the depositor, who then in turn transfers it to the trust at issue. In order to perfect the transfer from the depositor to the trust, the depositor must comply with the document requirements stated in trust, which is usually found at or near Section 2.01 of the PSA. This section of the typical PSA will almost always specifically states that to perfect the trust’s ownership of any loan, the depositor must physically produce to the trustee:
Originals of any intervening assignments of the Mortgage, with evidence of recording thereon or, if the original intervening assignment has not yet been returned from the recording office, a copy of such assignment certified to be a true copy of the original of the assignment which has been sent for recording in the appropriate jurisdiction in which the Mortgaged Property is located.
The typical PSA will also have a time limit on when these documents must be produced. This can oftentimes be found in Section 2.02 of the PSA. The time limits vary, but all that the author has seen is based upon the closing date of the trust. The date chosen as the closing date can typically be found in the section of the PSA entitled “Definitions”. These time limits require that the documents be produced typically within 60, 90, or 180 days of the closing date of the trust.
In other words, in order for the trustee to accept a loan into the trust, the depositor must physically transfer all intervening assignments of mortgage within the specified number of days of the closing date of the trust. If this is not done, the trustee does not have the authority to accept the loan into the trust, thus the trust does not have standing to foreclose. Without evidence of the assignments of mortgage being delivered to the trustee by the time limit set forth in the trust the trust cannot own the loan.
The trust’s argument is typically since the Florida UCC allows a blank indorsement, they do not need an assignment of mortgage. This argument is contrary to the mandates of the PSA and this is where the conflict between the UCC and the PSA gets tricky. While the trust’s argument may be accurate for an individual or corporation, it is not accurate for a trust. First, a trust is created for a specific purpose. If a trust is established to own elephants, its can not own giraffes, even if someone gives a bill of sale and certificate of title for giraffes to the trust. As Section 7-2.4, N.Y. Est. Powers & Trusts Law, states:
“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.”
Thus, if the trust requires an assignment of mortgage be physically delivered to the trust within 60 days of the closing date of the trust, and it is not done, any attempted transaction is void pursuant to New York law.
Second, Section 1-102(3) of the New York UCC states that:
(3) The effect of provisions of this Act may be varied by agreement, except as otherwise provided in this Act and except that the obligations of good faith, diligence, reasonableness and care prescribed by this Act may not be disclaimed by agreement but the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable.
Thus, even if a blank indorsement may be authorized to transfer an interest in a note pursuant to the UCC, pursuant to the terms of the PSA (which override the UCC as quoted above), a blank indorsement in not sufficient in and of itself. The PSA also requires the loan be transferred from the originator, to the sponsor, to the depositor, and then to the trust and all recorded assignments of mortgage must be delivered to the trustee within a specified number of days of the closing date of the trust. This broad grant of power to private parties to contract away from the UCC by private agreement is only limited by prohibitions contained in other provisions of the UCC not applicable here and the parties are prohibited by the UCC from deviating or contracting away their respective UCC “obligations of good faith, diligence, reasonableness and care”. An agreement to have the stricter standards for perfecting security interests is not contracting away obligations of “obligations of good faith, diligence, reasonableness and care”. Thus the mandates of the PSA override the mandates of UCC. The UCC clearly respects the right of a trust to enter into a private agreement, the PSA, which self-limits the trust and changes the standards by which the trust can access holder status and gain UCC rights to enforcement. The UCC bestowed the trust with the right to set up different standards as long as those divergent standards are not manifestly unreasonable.
The official comments to Article I of both the Florida and New York UCC state that the UCC must be liberally construed and applied to permit the expansion of commercial practices through agreement of the parties. The parties are therefore free to do what trusts do by entering into the PSA, which changes the requirements to perfect a security interest and ownership of the loan from that which would otherwise flow from the application of the UCC. The PSA is now the primary source of rules that are intended by the parties to vary the effect of the UCC with respect to how and when the trust can achieve holder status of a negotiable instrument. This holder status is a statutory and common law precedent to a trust having any legal right to enforce a note under the UCC or to foreclose a mortgage under Florida law or New York law.
By entering into a PSA, a trust effectively gives up its claim to rely on a direct unaltered path to UCC enforcement rights and, by the terms of the own PSA, the trust is devoid of any right to enforce the note in the instant matter under the Florida UCC or the New York UCC. The trustee has no powers greater than the trust it serves. The trustee is therefore powerless to turn the trust into a holder of the note because assignments of mortgage were not delivered to the trustee showing a complete chain of ownership from the originator, to the sponsor, to the depositor, and then to the trust within the specified time from the closing date of the trust as set forth in the PSA.
A trust’s own PSA eliminates any legal ability for the trust to be a transferee unless the terms of the PSA have been satisfied. A trust can only be a holder or nothing at all with respect to any given note it claims to hold. In other words, the PSA bans the trustee from coming before any court claiming the status of a transferee unless the terms of the PSA have been met. It is also clear that under New York law, the trustee of a New York common law trust cannot act or ratify acts not authorized or in accordance with its own trust agreement. In re: CELOTEX, 487 F.3d 1320 (11th Cir 2007).
In In Re: CELOTEX, the Eleventh Circuit was faced with the fundamental issue of defining the relative powers of a New York express trust in the process of resolving whether or not the trustees possessed certain discretionary authority or whether the trustees’ actions were ultra vires under the trust agreement. The Eleventh Circuit determined that in order to determine the power of the trustee, the court had to “independently interpret the terms of the…Trust Agreement…” Id., citing: Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 112 (1989) (“As they do with contractual provisions, courts construe terms in trust agreements without deferring to either party’s interpretation.”). “The extent of [a trustee's] duties and powers is determined by the trust instrument and the rules of law which are applicable, and not by his own interpretation of the instrument or his own belief as to the rules of law.” Restatement (Second) of Trusts § 201 cmt. b (1959).
Thus any argument that the bank does not need an assignment of mortgage fails. Even if that argument could hold water under a case governed strictly by the UCC, when a securitized trust is claiming to hold a note, the PSA overrides the provisions in the UCC because the UCC allows an agreement such as the PSA to override its requirements. It is commonplace in foreclosure cases to see an assignment directly from the originator to the trust, which is prohibited by the typical PSA. The typical PSA requires the loan be transferred from the originator, to the sponsor, to the depositor, and then to the trust. All intervening assignments of mortgage must be delivered to the trustee within a specified time of the closing date of the trust An assignment of mortgage directly to the trust from the originator is void.
The author has also heard the argument made that since the borrower is not a party to the PSA, they cannot enforce its terms. This argument also fails. A security interest is either perfected, or it isn’t. The trust either has standing, or it doesn’t. If an actual party to the PSA could successfully argue that the security interest is not perfected, then so could a borrower. A security interest cannot be perfected as to one party, but not another.
About the author
Matthew David Bavaro is a partner in Loan Lawyers, LLC, a South Florida law firm focusing on representing homeowners for a variety of consumer protection claims and defending mortgage foreclosure actions. Matthew has been practicing law for twelve years and has represented thousands of clients in and out of court. Matthew’s practice has always focused on litigation and he has argued before the Florida Supreme Court and various Florida District Courts of Appeal.
The author extends special thanks to April Charney of Jacksonville Legal Aid. Through her tireless efforts of aggressively representing her clients and somehow finding time to educate scores of lawyers in securitization, she is making a difference in the consumer protection arena. Some of the information in the article has been adapted from a written closing argument that she has shared with me for the purpose of preparing an appeal that is, for the first time in Florida, before an appellate court on the issues contained in this article.
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