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
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…)
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…)
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).
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.
6 No. 14‐2459
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‐
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).
8 No. 14‐2459
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
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.
10 No. 14‐2459
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).
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).
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”).