     Case: 18-20336    Document: 00515429413       Page: 1   Date Filed: 05/27/2020




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                                  United States Court of Appeals
                                                                           Fifth Circuit

                                                                         FILED
                                    No. 18-20336                     May 27, 2020
                                                                    Lyle W. Cayce
SYLVIA ZEPEDA,                                                           Clerk


             Plaintiff - Appellee

v.

FEDERAL HOME LOAN MORTGAGE CORPORATION,

             Defendant - Appellant




                Appeal from the United States District Court
                     for the Southern District of Texas


Before HAYNES, GRAVES, and HO, Circuit Judges.
JAMES C. HO, Circuit Judge:
      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
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
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                                 No. 18-20336
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.
      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,
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                                  No. 18-20336
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.
                                       ***
      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


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                                   No. 18-20336
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 and our previously issued opinion on
contractual subrogation. 1




      1 Freddie Mac has asked us to revisit our prior ruling rejecting its contractual
subrogation claim, but we decline to do so for the reasons stated in that ruling.
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