Case: 18-20336 Document: 00515499894 Page: 1 Date Filed: 07/22/2020
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
July 22, 2020
No. 18-20336
Lyle W. Cayce
Clerk
Sylvia Zepeda,
Plaintiff — Appellee,
versus
Federal Home Loan Mortgage Corporation,
Defendant — Appellant.
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:16-CV-3121
ON PETITION FOR REHEARING
Before Haynes, Graves, and Ho, Circuit Judges.
James C. Ho, Circuit Judge:
No member of this panel nor judge in active service having requested
that the court be polled on rehearing en banc, the petition for rehearing en
banc is denied. The following is substituted in place of our opinion.
Earlier in this dispute between a borrower, Sylvia Zepeda, and her
lender, the Federal Home Loan Mortgage Corporation (commonly known as
Freddie Mac), we certified to the Supreme Court of Texas the following
question: “Is a lender entitled to equitable subrogation, where it failed to
Case: 18-20336 Document: 00515499894 Page: 2 Date Filed: 07/22/2020
No. 18-20336
correct a curable constitutional defect in the loan documents under § 50 of
the Texas Constitution?” Zepeda v. Fed. Home Loan Mortg. Corp., 935 F.3d
296, 301 (5th Cir. 2019).
The district court had previously answered this question “no”—that
a lender is not entitled to equitable subrogation, when the constitutional
defect in the loan documents is due to the lender’s own negligence. In
reaching that conclusion, the court noted the conflicting views reflected in
Texas case law and acknowledged that “[t]his is a delicate balance of
equities.” Zepeda v. Fed. Home Loan Mortg. Ass’n, 2018 WL 781666, *8 (S.D.
Tex. Feb. 8, 2018).
On the one hand, the district court cited an intermediate Texas court
of appeals decision holding that “one of the factors the court may consider is
‘the negligence of the party claiming subrogation.’” Id. at 7 (quoting Murray
v. Cadle Co., 257 S.W.3d 291, 300 (Tex. App.—Dallas 2008, pet. denied)).
On the other hand, as we noted, “[t]hree years later, that same court found
that, although the bank was responsible for the non-compliant loan, it was
still entitled to equitable subrogation.” Zepeda, 935 F.3d at 301 n.2 (citing
Bank of America v. Babu, 340 S.W.3d 917, 928 (Tex. App.—Dallas 2011, no
pet.)).
After reviewing the case law, the district court “[u]ltimately”
concluded that “Ms. Zepeda’s lender was afforded ample notice and
opportunity to cure the defect in the lien in the straightforward manner
contemplated by the drafters of the Texas Constitution, and yet failed to do
so.” Zepeda, 2018 WL 781666, at *8. There was “no indication that this
error was justified by any factor other than oversight.” Id. So the district
court held that “the law’s protection of the homestead is simply too great for
equity to favor the lender over the borrower under such circumstances.” Id.
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No. 18-20336
On appeal, we conducted our own review of Texas case law—in
addition to considering the analysis conducted by the respected district judge
in this case—and concluded that this was, at best, an open question of Texas
law. See Zepeda, 935 F.3d at 301 n.2 (“We have been unable to discern a
governing rule of Texas law from these decisions.”). So we certified the
question to the Supreme Court of Texas.
Confirming our instincts, the Texas Supreme Court has now declined
to accept the district court’s reading of Texas law and instead answered our
certified question “yes”—that lenders remain entitled to equitable
subrogation, regardless of how the constitutional defect arose. Fed. Home
Loan Mortg. Corp. v. Zepeda, 2020 WL 1975169, *1 (Tex. Apr. 24, 2020). As
the court explained: “None of our subsequent § 50 decisions has considered
any factor other than the lender’s discharge of a prior, valid lien. To the
contrary, in this context, we have said that a lender’s right to subrogation is
‘fixed’ when the prior, valid lien is discharged.” Id. at *6 (quoting Benchmark
Bank v. Crowder, 919 S.W.2d 657, 660 (Tex. 1996)). Accordingly, a “lender
who discharge[d] a prior, valid lien on the borrower’s homestead property is
entitled to subrogation,” and that is so even when that “lender fail[s] to
correct a curable defect in the loan documents under § 50 of the Texas
Constitution.” Id. at *5.
Our previous panel decision affirmed the district court’s finding of no
contractual subrogation. Zepeda, 935 F.3d at 301. We vacate that holding and
remand for reconsideration by the district court in light of the Texas Supreme
Court’s answer to our certified question. See Zepeda, 2020 WL 1975169, at
*1 n.3 (declining “to address the [Fifth Circuit]’s contractual-subrogation
analysis”) (citing Benchmark Bank, 919 S.W.2d at 662).
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***
This is precisely the type of case where certification to a state supreme
court is warranted—where federal judges are uncertain about, and indeed
divided over, the proper interpretation of Texas law, concerning an issue that
is likely to recur in other cases involving similar defects in other home loan
documents. See, e.g., JCB, Inc. v. Horsburgh & Scott Co., 941 F.3d 144, 145
(5th Cir. 2019) (“This case is a perfect example of when we should certify
cases, and why certification is valuable. We are presented with a question of
pure . . . interpretation on a recurring issue of interest to citizens and
businesses across Texas. What’s more, it is a question that divided judges on
this court.”).
So we are gratified that our distinguished colleagues on the Texas
Supreme Court agreed, accepted our certified question, and have now
provided the definitive and authoritative answer—binding on all litigants
regardless of whether suit is filed in state or federal court, thereby ensuring
uniformity of Texas law wherever it may govern. See id. (“So rather than
provide a partial answer—binding only litigants who file in federal court, not
those in state court—we instead certified the question to the Supreme Court
of Texas, which can speak with authority for all litigants, in state and federal
court alike.”).
We reverse and remand for further proceedings consistent with the
decision of the Supreme Court of Texas.
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