816 F.3d 942
7th Cir.2016Background
- Jepson borrowed $336,000 in 2005; note named America’s Wholesale Lender and MERS as nominee; the note was later endorsed in blank and transferred into CWABS RMBS Trust, for which BNYM is trustee.
- Jepson defaulted; BNYM sued to foreclose in Cook County in 2008. Jepson filed Chapter 7 in 2012, triggering an automatic stay; BNYM moved to lift the stay to resume foreclosure.
- Jepson filed an adversary complaint seeking a declaration that BNYM has no interest in the mortgage, alleging (1) missing intervening endorsements under the PSA, (2) late endorsement after the PSA closing date, (3) America’s is a fictitious entity rendering the note void, and (4) BNYM is an unlicensed debt collector under Illinois law.
- Bankruptcy court dismissed the adversary complaint and lifted the stay, finding Jepson lacked standing under New York law to challenge PSA-based violations; the court did not address Jepson’s other non‑PSA claims.
- District court affirmed; Seventh Circuit affirms in part (standing ruling) but remands for the bankruptcy court to address the remaining Illinois‑law claims or consider abstention given the pending state foreclosure.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to challenge PSA noncompliance | Jepson: as mortgagor she can challenge assignments that are void or otherwise invalid under the PSA | BNYM: only intended beneficiaries (certificateholders) can enforce PSA; mortgagors lack prudential standing | Jepson lacks prudential standing under New York law to challenge PSA violations |
| Nature of defective assignments (void vs. voidable) | Jepson: certain PSA provisions make noncompliant assignments void, so mortgagors can challenge | BNYM: New York law treats such trustee/PSA breaches as voidable and subject to beneficiary ratification | Court: New York precedent treats most trust/PSA breaches as voidable; beneficiaries can ratify, so mortgagors cannot challenge on that basis |
| Ability of certificateholders to ratify despite PSA language | Jepson: PSA limits certificateholders’ amendment rights, so ratification unavailable | BNYM: PSA vests Master Servicer authority to act for certificateholders and provides mechanisms (including derivative remedies) for contesting acts | Court: PSA contains provisions allowing Master Servicer action and derivative remedy, so ratification/challenge mechanisms exist; assignment is voidable, not void |
| Remaining non‑PSA claims (fictitious lender, debt‑collector status) | Jepson: these claims render the note non‑negotiable or foreclosing party unlicensed; thus BNYM cannot foreclose | BNYM: these claims are not PSA‑based and are separate matters for adjudication | Court: Bankruptcy and district courts did not address these claims; remands for further proceedings and suggests bankruptcy court consider abstention in favor of state foreclosure proceeding |
Key Cases Cited
- Warth v. Seldin, 422 U.S. 490 (prudential standing limits plaintiffs asserting third‑party rights)
- Rajamin v. Deutsche Bank Nat'l Trust Co., 757 F.3d 79 (2d Cir.) (mortgagors lack standing under New York law to enforce PSA; certificateholders are intended beneficiaries)
- Cocroft v. HSBC Bank USA, N.A., 796 F.3d 680 (7th Cir.) (New York law treats trust‑agreement breaches as voidable where beneficiaries may ratify)
- In re Williams, 144 F.3d 544 (7th Cir.) (bankruptcy court may abstain from deciding state‑law issues in deference to state courts)