Court of Appeals for the 7th Circuit Docket No. 14-2459
Opinion Date: March 22, 2016
This case is a testament to the subprime crisis and illustrates how complex and devastating mortgage securitization and pooling was to ordinary homeowners; middle-class people faced with sudden and insurmountable mortgage debt. Sadly, this decision also illustrates just how hard it is to stand up to the holders of pooled mortgage loans.
The underlying facts of the case are so common that the Plaintiff could have been anyone; while the tortuous path of the case up to the 7th Circuit – years after the underlying foreclosure and bankruptcy – left this Plaintiff financially devastated.
Patricia Jepson (Jepson) executed a Note and Mortgage issued by “America’s Wholesale Lender” – a d/b/a of notorious subprime mortgagee Countrywide – and Mortgage Electronics Registration Systems (MERS), its nominee. The Note was endorsed by Countrywide d/b/a America’s Wholesale Lender and transferred to CWABS, a residential mortgage trust operating under New York law that pooled loans and sells mortgage-backed securities sold on Wall Street. CWABS is governed by a Pooling and Service Agreement (PSA). Bank of New York Mellon (BNYM) was the Trustee for CWABS. MERS therefore assigned Jepson’s mortgage to BNYM.
When Jepson eventually defaulted on her mortgage – a common scenario in such subprime traps – BNYM filed a Foreclosure complaint in State Court. Jepson inturn filed Chapter 7 Bankruptcy. BNYM predictably moved to lift the Automatic Stay. But instead of lying down and letting the Bank proceed, Jepson filed an Adversary Complaint and Objection seeking a declaration that BNYM had no interest in her mortgage because, inter alia, the note did not proceed through a complete chain of intervening endorsements; was endorsed after the closing date in the PSA; and that America Wholesale Lender was a fictitious entity rendering the Note was void under Illinois law.
The Bankruptcy Court, applying New York law as required by the terms of the PSA, held that Jepson lacked standing to challenge the PSA, dismissed her Adversary Complaint, and modified the Automatic Stay in order to allow BNYM to proceed with its Foreclosure. On appeal, the District Court affirmed the holding of the Bankruptcy Court.
7th Circuit Opinion
The Seventh Circuit agreed that Jepson lacked standing to raise challenges based on the PSA but remanded the matter back to the Bankruptcy Court for consideration of Jepson’s remaining claims under Illinois law. In the process, the 7th Circuit opined that the Bankruptcy Court may not even wish to rehear the matter and instead may opt to abstain as provided by Federal law out of “respect for State law.”