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Parties Involved:
Bank of New York Mellon
Appellee
Patricia Jepson
Appellant

Document Text:

In the 

United States Court of Appeals 

For the Seventh Circuit ____________________

No. 14‐2459

IN RE: PATRICIA JEPSON,

Debtor‐Appellant,

v.

BANK OF NEW YORK MELLON F/K/A THE BANK OF NEW YORK,

AS TRUSTEE FOR CWABS, INC., ASSET‐BACKED CERTIFICATES,

SERIES 2006‐1,

Defendant‐Appellee.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 1:14‐cv‐00423 — James F. Holderman, Judge.

____________________

ARGUED OCTOBER 30, 2015 — DECIDED MARCH 22, 2016

____________________

Before POSNER, RIPPLE, and HAMILTON, Circuit Judges.

RIPPLE, Circuit Judge. Patricia Jepson filed a Chapter 7

voluntary petition in the United States Bankruptcy Court for

the Northern District of Illinois. That petition resulted in an

automatic stay against the enforcement of any security inter‐

est. Bank of New York Mellon (“BNYM”) then requested a

modification of the automatic stay so that it could resume in

Case: 14-2459 Document: 31 Filed: 03/22/2016 Pages: 12
2 No. 14‐2459

Illinois state court an ongoing foreclosure action against Ms.

Jepson. In response, Ms. Jepson filed both an opposition to

the motion for modification of the stay and an adversary

complaint. In both documents, she sought a declaration that

BNYM had no interest in her mortgage. The bankruptcy

court granted the motion to modify the automatic stay and

dismissed Ms. Jepson’s adversary complaint. The district

court affirmed the bankruptcy court’s orders. For the reasons

set forth in this opinion, we affirm in part and remand the

case for further proceedings.

I

BACKGROUND

In December 2005, Ms. Jepson executed a note secured by

a mortgage on property located in Palatine, Illinois. In ex‐

change for the note, Ms. Jepson received a $336,000.00 loan

from America’s Wholesale Lender (“America’s”). The mort‐

gage listed America’s as the named lender and Mortgage

Electronics Registration Systems, Inc. (“MERS”) as the nom‐

inee for America’s.

Ms. Jepson’s note subsequently was endorsed in blank by

Countrywide Home Loans, Inc., “doing business as Ameri‐

ca’s Wholesale Lender.”1 Countrywide also transferred

Ms. Jepson’s note to “CWABS Trust,”2 which is a residential

mortgage‐backed securities (“RMBS”) trust.3 In a RMBS

                                                 

1 R.1‐3 at 21.

2 Specifically, CWABS, Inc., Asset‐Backed Certificates, Series 2006‐1.

3 Ms. Jepson contends that the note’s endorsement occurred long after

the closing date of the assignment of her mortgage to the CWABS trust.

(continued...)

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No. 14‐2459 3

trust, residential mortgage loans are pooled and then certifi‐

cates backed by these mortgages are sold to investors

(known here as “Certificateholders”). The CWABS Trust was

formed and governed by a written agreement known as a

Pooling and Service Agreement (“PSA”). The PSA set forth

the rights, duties, and obligations of the parties to the trust.

BNYM, the trustee for the CWABS Trust, now possesses

Ms. Jepson’s note. In addition, MERS assigned the rights as‐

sociated with Ms. Jepson’s mortgage to BNYM. Based on

these facts, BNYM claims to have been assigned interests in

both Ms. Jepson’s note and Ms. Jepson’s mortgage.

At some unspecified time between 2005 and 2008, Ms.

Jepson defaulted on her monthly obligations to pay princi‐

pal, interest, and taxes. BNYM filed a complaint in the Cir‐

cuit Court of Cook County, Illinois, on August 12, 2008, to

foreclose on the mortgage.

On July 25, 2012, while the foreclosure proceedings were

still underway, Ms. Jepson filed a Chapter 7 Voluntary Peti‐

tion in the United States Bankruptcy Court for the Northern

District of Illinois. That petition resulted in an automatic stay

of BNYM’s foreclosure action.4 BNYM then filed a motion in

                                                 

(...continued)

However, we need not resolve this factual dispute to dispose of the mat‐

ters before us.  

4 When a petition in bankruptcy is filed, the automatic stay provisions of

11 U.S.C. § 362 take effect and prevent creditors from taking any action

to collect on their debts. Id. § 362(a); see also In re Vitreous Steel Prods. Co.,

911 F.2d 1223, 1231 (7th Cir. 1990). However, “[t]here may be no reason

to make the creditor wait until the final distribution of the estate.” Vitre‐

ous Steel, 911 F.2d at 1231. As Congress acknowledged when enacting the

(continued...)

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4 No. 14‐2459

the bankruptcy court, requesting that the court modify the

automatic stay.

Ms. Jepson responded to BNYM’s motion on October 20,

2012. On the same day, she filed a two‐count adversary

complaint against BNYM. The first count sought a declara‐

tion that BNYM has no interest in Ms. Jepson’s mortgage.

This count raised three main objections: (1) The note does

not include a complete chain of intervening endorsements

and therefore could not be assigned to BNYM under the

terms of the PSA; (2) The note was endorsed after the closing

date in the PSA, which made the assignment invalid; and (3)

America’s is a fictitious entity, and therefore the note is void

and not negotiable under Illinois law. The second count

raised a fourth objection, contending that BNYM lacked the  

                                                 

(...continued)

Bankruptcy Reform Act of 1978, which codified § 362, there may be “a

desire to permit an action to proceed to completion in another tribunal,”

or certain creditors may have claims that “lack ... any connection with or

interference with the pending bankruptcy case.” H.R. Rep. No. 95‐595, at

343 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6300.

For these reasons, and others, the Bankruptcy Code includes a provi‐

sion for creditors to seek relief from automatic stay. 11 U.S.C. § 362(d)

(“On request of a party in interest and after notice and a hearing, the

court shall grant relief from the stay.”). If the bankruptcy court grants

relief, then a creditor can immediately seek payment before another tri‐

bunal. If the court denies relief, then the creditor “must simply comply

with the automatic stay, and wait with the other creditors for the estate’s

administration.” Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 34 (1st Cir.

1994).

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No. 14‐2459 5

authority to act “as a collection agency” in Illinois by fore‐

closing on the property.5

BNYM moved to dismiss the adversary complaint on the

grounds that Ms. Jepson lacked standing and had failed to

state a claim. At a December 10, 2013 hearing, the bankrupt‐

cy court, ruling orally and summarily from the bench,

agreed that, under the governing New York law, Ms. Jepson

lacked standing to challenge alleged violations of the PSA.6

Accordingly, the bankruptcy court dismissed the adversary

complaint and modified the automatic stay to allow BNYM

to proceed with its foreclosure action in the Illinois state

courts. The bankruptcy court did not address Ms. Jepson’s

other contentions that the foreclosure action was infirm.7

Ms. Jepson then appealed to the United States District

Court for the Northern District of Illinois, raising the same

four arguments that she had presented in the bankruptcy

court. The district court affirmed the bankruptcy court’s

judgment. It agreed that Ms. Jepson did not have standing to

bring claims based on noncompliance with the PSA. Like the

                                                 

5 R.1‐5 at 76–79.

6 R.9 at 10.  

7 The record before us contains no indication as to why the bankruptcy

court did not abstain from deciding the adversary proceeding altogether

and grant the motion to modify the stay, thus permitting all issues per‐

taining to the forfeiture action to be heard in state court. See 28 U.S.C.

§ 1334(c)(1) (allowing a court to abstain “in the interest of justice, or in

the interest of comity with State courts or respect for State law”). The

parties apparently acquiesced in the bankruptcy court’s way of proceed‐

ing and certainly present no argument concerning the propriety of the

bankruptcy court’s actions here.

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bankruptcy court, it did not address her other claims. Ms.

Jepson now timely appeals.

II

DISCUSSION

“Like the district court, we review a bankruptcy court’s

factual findings for clear error and its legal conclusions de

novo.” In re Miss. Valley Livestock, Inc., 745 F.3d 299, 302 (7th

Cir. 2014). On a motion to dismiss, we construe the com‐

plaint in the light most favorable to the plaintiff, by accept‐

ing all of the well‐pleaded facts and drawing all inferences

in the plaintiff’s favor. Smith v. Dart, 803 F.3d 304, 309 (7th

Cir. 2015); Citadel Grp. Ltd. v. Wash. Reg’l Med. Ctr., 692 F.3d

580, 591 (7th Cir. 2012).

A.

Ms. Jepson contends that the transfer of her note and

mortgage violated the PSA. She submits that the assignment

of her mortgage was missing intervening endorsements and

that the note was transferred after the proper closing date. In

her view, because the assignment violated the PSA, BNYM

cannot collect on the note.

The bankruptcy court and the district court correctly held

that Ms. Jepson lacks standing to raise a challenge based on

violations of the PSA because she is not a third‐party benefi‐

ciary under the agreement. The “prudential standing

rule ... normally bars litigants from asserting the rights or

legal interests of others in order to obtain relief from injury

to themselves.” Warth v. Seldin, 422 U.S. 490, 509 (1975). In‐

stead, a “plaintiff generally must assert his own legal rights

and interests, and cannot rest his claim to relief on the legal

rights or interests of third parties.” Id. at 499; see also Edge‐

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No. 14‐2459 7

wood Manor Apartment Homes, LLC v. RSUI Indem. Co., 733

F.3d 761, 771 (7th Cir. 2013).

The text of the PSA states that “[t]his agreement shall be

construed in accordance with and governed by the substan‐

tive laws of the State of New York.”8 Therefore, Ms. Jepson

must establish that, under the law of New York, she has a

cognizable interest that permits her to challenge the validity

of the PSA. We think that, at this point, it is well established

that she does not. As our colleagues in the Second Circuit

have stated, “under New York law, only the intended bene‐

ficiary of a private trust may enforce the terms of the trust.”

Rajamin v. Deutsche Bank Nat’l Trust Co., 757 F.3d 79, 88 (2d

Cir. 2014); see also 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 enjoin a breach.”); Tran v. Bank of New

York, No. 13 Civ. 580, 2014 WL 1225575, at *3 (S.D.N.Y. Mar.

24, 2014) (collecting New York cases).

New York courts have held uniformly that “a mortgagor

whose loan is owned by a trust” is not an intended benefi‐

ciary of a trust, and “does not have standing to challenge the

[trustee]’s possession or status as assignee of the note and

mortgage based on purported noncompliance with certain

provisions of [a] PSA.” Wells Fargo Bank, N.A. v. Erobobo, 9

N.Y.S.3d 312, 314 (N.Y. App. Div. 2015), leave to appeal dis‐

missed, 37 N.E.3d 1158 (N.Y. 2015); see also Bank of New York

                                                 

8 R.8‐2 at 40 (Section 10.03). Neither side disputes that New York law

applies. Appellant’s Br. 24; Appellee’s Br. 10; see also Cocroft v. HSBC Bank

USA, N.A., 796 F.3d 680, 689 (7th Cir. 2015) (applying the law of the fo‐

rum that all parties agreed governed the trust agreement).

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Mellon v. Gales, 982 N.Y.S.2d 911, 912 (N.Y. App. Div. 2014);

Rajamin, 757 F.3d at 87–88. Rather, the certificateholders of a

trust are the intended beneficiaries. Rajamin, 757 F.3d at 90.

Mortgagors “are not even incidental beneficiaries of” a trust,

as “their interests are adverse to those of the certificatehold‐

ers.” Id. Therefore, Ms. Jepson—a mortgagor—is not an in‐

tended beneficiary of the PSA and does not have standing to

challenge an assignment for failing to conform to the PSA.

In an effort to distinguish this authority, Ms. Jepson con‐

tends that, as a mortgagor, she still has standing to challenge

a void assignment. She relies on the theory that:

A debtor may, generally, assert against an as‐

signee all equities or defenses existing against

the assignor prior to notice of the assignment,

any matters rendering the assignment absolutely

invalid or ineffective, and the lack of the plain‐

tiff’s title or right to sue; but, if the assignment

is effective to pass legal title, the debtor cannot

interpose defects or objections which merely

render the assignment voidable at the election

of the assignor or those standing in his or her

shoes.

6A C.J.S. Assignments § 133 (2016) (emphasis added); see also

Woods v. Wells Fargo Bank, N.A., 733 F.3d 349, 354 (1st Cir.

2013) (holding that, under Massachusetts law, a mortgagor

has standing to “challenge[] a mortgage assignment as inva‐

lid, ineffective, or void” (internal quotation marks omitted)).

Put another way, a voidable assignment is one that intended

beneficiaries can ratify. See Rothko v. Reis (In re Estate of Roth‐

ko), 372 N.E.2d 291, 299 (N.Y. 1977). The prudential standing

rule therefore prevents a mortgagor from challenging a

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No. 14‐2459 9

voidable assignment because such a challenge would “inter‐

fere with the beneficiaries’ right of ratification.” Rajamin, 757

F.3d at 89. A void assignment, however, cannot be ratified by

the beneficiaries. A mortgagor therefore has prudential

standing to challenge a void assignment because such a chal‐

lenge would not infringe on any of the beneficiaries’ rights.

In evaluating this argument, we note as an initial matter

that New York state courts never have endorsed squarely

the theory that a mortgagor has standing to challenge a void

assignment. See id. at 88–89 (entertaining this theory but not

concluding whether, under New York law, mortgagors actu‐

ally have standing to challenge void assignments). In any

event, New York courts consistently have held that an as‐

signment that fails to comply with the terms of a trust

agreement merely is voidable and not void. Id. at 88–90 (col‐

lecting cases); see also Erobobo, 9 N.Y.S.3d at 314. To be sure,

the governing New York State statute does state that “[i]f 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 ... law, is

void.” N.Y. Estates, Powers and Trusts Law § 7‐2.4 (McKin‐

ney 2016) (emphasis added). As we have noted earlier, how‐

ever, in interpreting this statute, “New York courts appear to

have almost uniformly concluded that a beneficiary retains

the authority to ratify a trustee’s ultra vires act.” Cocroft v.

HSBC Bank USA, N.A., 796 F.3d 680, 689 (7th Cir. 2015) (cit‐

ing Mooney v. Madden, 597 N.Y.S.2d 775, 776 (N.Y. App. Div.

1993), and Tran, 2014 WL 1225575, at *5). If a beneficiary is

able to ratify an unauthorized mortgage assignment, then

the assignment is merely voidable and cannot be challenged

by a mortgagor. Id.

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Ms. Jepson also contends that provisions unique to this

PSA prevent the intended beneficiaries (the Certificatehold‐

ers) from ratifying assignments that fail to comply with the

PSA. She therefore believes that assignments which fail to

comply with this PSA are automatically void. In making this

argument, Ms. Jepson relies on section 10.01 of the PSA,

which states that “[t]he Trustee, the Depositor, the Master

Servicer and the Sellers with the consent of the NIM Insurer

may ... amend this Agreement, without the consent of the

Certificateholders.”9 Ms. Jepson contends that if the Certifi‐

cateholders cannot amend the agreement, they cannot ratify

ultra vires assignments.

Upon closer inspection of the PSA, however, Ms. Jepson’s

argument falls short. The PSA requires the Master Servicer

to speak and provide consent on behalf of the Certificate‐

holders.10 This provision shows that the Certificateholders

have a voice in the amendment process. Further, the PSA

                                                 

9 R.8‐2 at 38 (Section 10.01).  

10 Specifically, the PSA reads:

For and on behalf of the Certificateholders, the Master

Servicer shall service and administer the Mortgage

Loans ... . [T]he Master Servicer shall have full power

and authority ... (i) to execute and deliver, on behalf of

the Certificateholders and the Trustee, customary con‐

sents or waivers and other instruments and documents,

(ii) to consent to transfers of any Mortgaged Property

and assumptions of the Mortgage Notes and related

Mortgages (but only in the manner provided in this

Agreement).  

R.8‐1 at 78 (Section 3.01).  

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No. 14‐2459 11

contemplates that Certificateholders may contest unauthor‐

ized acts through a derivative action.11 Contrary to Ms. Jep‐

son’s argument, the PSA provides a way for Certificatehold‐

ers to ratify or challenge any unauthorized acts. Therefore,

an alleged breach of the PSA merely renders the assignment

voidable.

We conclude that Ms. Jepson lacks standing to raise any

challenges based on alleged violations of the PSA.

B.

In her adversary complaint, Ms. Jepson brought addi‐

tional claims that were not based on alleged violations of the

PSA. First, Ms. Jepson contended that the note was both void

and not a negotiable instrument because America’s is a ficti‐

tious entity. Second, Ms. Jepson contended that BNYM is an

unlicensed debt collector under the Illinois Collection Agen‐

cy Act, 225 ILCS 425/4, and it therefore lacks the authority to

foreclose on the mortgage. Although Ms. Jepson presented

these claims at every proceeding before the bankruptcy

court, district court, and this court, neither the bankruptcy

court nor the district court ever addressed these claims. Both

courts dismissed Ms. Jepson’s adversary complaint in its en‐

tirety because Ms. Jepson lacked standing to challenge the

PSA, even though these claims did not arise out of alleged

violations of the PSA.

                                                 

11 R.8‐2 at 43 (Section 10.08).  

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12 No. 14‐2459

We therefore conclude that a remand is necessary.12 We

note, however, that these claims involve questions of Illinois

state law and that an Illinois state foreclosure proceeding on

Ms. Jepson’s mortgage is pending. The bankruptcy court

therefore has the authority to abstain from adjudicating the

remainder of the complaint “in the interest of comity with

State courts or respect for State law.” 28 U.S.C. § 1334(c)(1);

see also In re Williams, 144 F.3d 544, 550 (7th Cir. 1998) (ex‐

plaining that deciding similarly narrow issues of state law

through a bankruptcy proceeding “would not be a particu‐

larly efficient use of judicial resources” and may encourage

forum shopping). The bankruptcy court therefore ought to

consider whether it would be appropriate to abstain from

hearing the remainder of the adversary proceeding and to

allow the Illinois courts to consider these claims in the fore‐

closure proceeding.

Conclusion

We therefore affirm in part the judgment of the district

court and remand the case for further proceedings consistent

with this opinion. The parties shall bear their own costs in

this court.

AFFIRMED IN PART AND REMANDED IN PART

                                                 

12 See Thompson v. Gen. Motors Acceptance Corp., LLC, 566 F.3d 699, 708

(7th Cir. 2009) (remanding when the bankruptcy court had not ad‐

dressed an issue); In re Scott, 172 F.3d 959, 970–71 (7th Cir. 1999) (re‐

manding when the district and bankruptcy courts had not tried the issue

under the proper standard because we found “it prudent”).

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