Consumer Finance Litigation

The U.S. Court of Appeals for the Fifth Circuit recently held in Reinagel v. Deutsche Bank National Trust Co., No. 12-50569, 2013 WL 3480207 (5th Cir. July 11, 2013), that facially valid assignments can only be challenged for want of authority by the defrauded assignor. In Reinagel, the plaintiffs/borrowers alleged that the "robo-signed" assignments of their note and deed of trust were invalid and prohibited the defendant's foreclosure. First, the Fifth Circuit found the plaintiffs had standing to challenge the validity of the assignments of the note and deed of trust to Deutsche Bank. The court noted that, despite Texas courts' holdings that only intended third-party beneficiaries can enforce a contract as a non-party, Texas law does allow an obligor to defend "on any ground which renders the assignment void", which gave the plaintiffs standing. The court reasoned that any other ruling "would lead to the odd result that Deutsche Bank could foreclose on the Reinagels' property though it is not a valid party to the deed of trust or promissory note…" Next, the Fifth Circuit analyzed whether the defendant lacked the authority to foreclose, even if the plaintiffs' allegations were true. There were two different assignments in question, and the court looked at the sufficiency of both. The plaintiffs challenged the first assignment's validity alleging that it was "robo-signed" and the individual was not an "authorized agent." However, the court found plaintiffs' challenge failed because they did not plead any facts to support their allegation that the individual executing the assignment misrepresented the scope of her authority. The plaintiffs also challenged the validity of the second assignment in several ways based on their allegation that it was "robo-signed". The plaintiffs alleged the instrument failed because it was executed by Mr. Bly, a "Vice President" of Citi, who was actually an employee of a third-party contractor. The Fifth Circuit reiterated that "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 principal." In short, the court found that even if the signer lacked authority that fact did not give plaintiffs a basis to challenge the assignment. The plaintiffs also alleged Mr. Bly's signature was a forgery because it was scanned into the documents and then notarized. The Fifth Circuit quickly disregarded this argument, noting both that "Texas recognizes typed or stamped signatures--and presumably also scanned signatures--so long as they are rendered by or at the direction of the signer" and that "acknowledgements are valid as long as they are made in the presence of the notary and meet other formalities that the Reinagels [did] not challenge here." The court clarified that defects in the acknowledgment might prevent the bank from foreclosing after a subsequent party purchased the real estate without actual knowledge, but would not change the rights of the original borrowers. Finally, the plaintiffs claimed that both assignments violated the Pooling and Servicing Agreement ("PSA") governing the trust where the defendant held the mortgage loan. The Fifth Circuit found that the plaintiffs were not party to the PSA and, therefore, were not entitled to enforce it. Furthermore, the court found that even if the plaintiffs were entitled to enforce the PSA, any violation "would not render the assignments void, but merely entitle the [plaintiffs] to sue for breach of the PSA." In conclusion, the court dismissed the case finding that even if the plaintiffs' allegations were true, it would not prevent the defendant from foreclosing. The Fifth Circuit concluded by clearly stating its holding and giving a cautionary message regarding "robo-signing":

We merely affirm that under Texas law, facially valid assignments cannot be challenged for want of authority except by the defrauded assignor. We do not condone "robo-signing" more broadly and remind that bank employees or contractors who commit forgery or prepare false affidavits subject themselves and their supervisors to civil and criminal liability.

For more information on consumer finance litigation topics, please contact one of the Burr & Forman team members for assistance. We are happy to answer any questions or concerns you may have.