A Michigan state court found that a debtor may oppose foreclosure on the basis that the assignment of the mortgage to the foreclosing party was in violation of the Pooling and Service Agreement and, therefore, ineffective. HSBC Bank, USA v. Young, No. 11-693 (Cir. Ct. Mich. Oct. 16, 2012). HSBC conducted a foreclosure by advertisement and bought the property at the foreclosure sale. When it moved the court for possession of the property the debtor challenged the legitimacy of the foreclosure on the basis that the assignment of the note and mortgage from Wells Fargo to HSBC took place after the note was in default in violation of the terms of the PSA.
The court began by finding that the debtor challenged HSBC’s ownership of both the note and the mortgage and Michigan law does not allow foreclosure by a party who owns neither the note nor the mortgage. Residential Funding Co. v. Saurman, 490 Mich 909, 805 NW2d 183 (2011).
The court then turned to the question of whether the debtor had standing to challenge the assignment of the mortgage and note on the basis that it did not conform to the requirements of the PSA. The court found that she did. Citing Livonia Property Hldgs v. 12840-12976 v. Farmington Rd. Hldgs, 717 F.Supp. 2 724, 746 (E.D. Mich 2010), the court recognized an exception under Michigan law, to the rule that only a party or third party beneficiary to a contract may enforce its terms. Under that case, a debtor may protect herself from the threat of having to pay the same debt twice by raising as a defense the assignee’s lack of title.