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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                                   No. 18-20336


                                      ***
        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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