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Foreclosure barred by loss of note, judge rules – Massachusetts Lawyers Weekly 7/9/17, 5(01 PM

Foreclosure barred by loss of note, judge rules

Mortgage assignee’s a!davit insu!cient

! By: Eric T. Berkman " July 6, 2017

A mortgage holder purporting to hold a borrower’s note via a

predecessor’s assignment of a “lost note affidavit” could not
foreclose on the borrower’s property, a Land Court judge has ruled
in a case of first impression.

The servicer for the defendant mortgage holder’s predecessor-in-

interest had misplaced the original note. When the defendant was
subsequently assigned the mortgage, it was also assigned a lost
note affidavit attached to a copy of the note.

The plaintiff borrower, a Wayland homeowner, pointed out that under the Supreme Judicial Court’s 2012 decision in
Eaton v. Federal Nat’l Mtge. Assn., a mortgage holder cannot foreclose on property in default unless either it holds
the actual promissory note or can prove that it is acting on behalf of the note holder.

According to the plaintiff, a lost note affidavit held by an entity that did not hold the note at the time it was
misplaced could not satisfy the Eaton requirements.

Judge Robert B. Foster agreed, relying on Massachusetts’ version of §3-309 of the Uniform Commercial Code.
Section 3-309 permits someone not in possession of an instrument to enforce that instrument only if that person
possessed it and could enforce it when it was lost.

The defendant, HMC Assets, LLC, had not “shown that it is acting on behalf of the note holder who was in
possession of the Note at the time it was lost,” Foster wrote in denying HMC’s motion for summary judgment.

“HMC has presented no evidence that [its predecessor] ever authorized HMC to act on its behalf in enforcing the
Note,” Foster added. “The Lost Note Affidavit does not, and cannot, establish that HMC is undertaking any action on
behalf of [its predecessor] as the note holder.”

The 25-page decision is Zullo v. HMC Assets, LLC v. DLJ Mortgage Capital, Inc., Lawyers Weekly No. 14-050-17. The
full text of the ruling can be ordered here.

‘Hats off’

Plaintiff’s counsel Glenn F. Russell Jr. of Fall River said the decision can be used as precedent in cases involving the
proffer of lost note affidavits when the original note is unavailable. He also said he was pleased Foster took the time
to address the issue in the thorough manner that he did.

“The problem is that the majority of cases involving this issue are never litigated,” Russell said. “And when they are,
you’re dealing either with a pro se litigant or an attorney who may be unfamiliar with this complex area of law who
might take a case here and there and not press a defense of this issue. It’s esoteric and tedious reading to go into
the UCC and try to discern it all. So hats off to Judge Foster for undertaking an extensive discussion to explain his
ruling and the machinery of how this operates.”

Jeffrey B. Loeb of Boston, who represents lenders in foreclosure disputes, said the decision illustrates the strength Page 1 of 4
Foreclosure barred by loss of note, judge rules – Massachusetts Lawyers Weekly 7/9/17, 5(01 PM

of Eaton.

“The Eaton case makes clear that you have to either be the holder of the note or operating ‘at the behest of’ — and
those are the magic words — the holder of the note,” Loeb said.

The defendant here theoretically could have cured its problem by getting an affidavit from its predecessor
specifically stating that the defendant was acting at the predecessor’s behest, Loeb added.

Meanwhile, he said, the situation is not as widespread as it was eight or 10 years ago.

“My sense is that folks are now a lot more careful about keeping track of the notes than they might have been pre-
Eaton,” he said. “And title insurers are requiring proof that the foreclosing lender either has the note or is foreclosing
at the behest of the note holder.”

Boston real estate litigator Gordon M. Orloff said mortgage buyers can best escape the trap the defendant faced by
working cooperatively with the party that lost the note when they are seeking to foreclose.

“However, under Eaton, the mortgage holder must be acting to enforce the note so the foreclosure likely would
need to be done on behalf of the note holder,” he said. “That fact might make for some complicated contractual

Andover real estate attorney Kathleen M. Heyer said Foster’s decision, along with prior rulings fleshing out the
elements of foreclosure, show just how procedural as opposed to substantive the process of complying with
foreclosure rules is becoming.

That is illustrated here by the need for a proper paper trail to establish the right to foreclose rather than just
establishing the existence of a note, she said.

Heyer said that, in the wake of the ruling, she expects to see more challenges of lost note affidavit assignments as a
new line of attack by homeowners fighting foreclosure.

“And probably another lawsuit by [plaintiff] Zullo, even if HMC obtains authorization [to foreclose],” she said,
referring to the multiple actions the plaintiff has filed to hang onto his property in the decade since he defaulted.

“The problem is that the majority of cases involving this issue are never litigated,” said plaintiff’s counsel

❝ Glenn F. Russell Jr.

Lost note

Plaintiff John Zullo purchased property on Claypit Hill Road in Wayland in 2006. In February 2007, he executed a
promissory note in exchange for a $1.1 million loan from Lime Financial Services. As security, he gave a mortgage
on the property to Mortgage Electronic Registration Systems, Inc. — or MERS — as Lime’s nominee.

The note, mortgage and loan were serviced by Select Portfolio Services.

In May 2008, Zullo defaulted on the loan and Select Portfolio Services sent him a demand letter.

On Aug. 22, 2008, MERS assigned the mortgage and note to DLJ Mortgage Capital. Foreclosure proceedings were
initiated around that time, and Zullo took the first of many steps that he would take over the next decade to block
the proceedings. Page 2 of 4
Foreclosure barred by loss of note, judge rules – Massachusetts Lawyers Weekly 7/9/17, 5(01 PM

The note was lost in February 2011 while Select Portfolio Services was transferring it to a new servicer. The note
was never located.

Meanwhile, DLJ purportedly transferred its interest in the note to HMC in December 2011.

A month later, Select Portfolio Services executed a lost note affidavit, attaching a copy of the note. Shortly
afterward, DLJ assigned the mortgage to HMC along with the lost note affidavit.

HMC took over efforts to foreclose, and on July 25, 2016, after other assorted actions to block foreclosure, Zullo
filed a complaint in Land Court seeking a declaration that HMC lacked authority to foreclose based on its failure to
comply with Eaton.

Lack of authority

Foster noted that under G.L.c. 106, §3-309 (Massachusetts’ version of the UCC sections dealing with assignability of
promissory notes), someone not in possession of a note can enforce it only if they possessed it and could enforce it
at the time the loss occurred.

And while the UCC itself has been amended to eliminate that possession requirement, Massachusetts never adopted
the amendment, which means DLJ could not use a lost note affidavit to transfer enforcement rights to HMC, the
judge said.

Foster additionally noted that federal courts applying Massachusetts law have adhered to the possession
requirement, and he saw no reason to diverge from those rulings.

Meanwhile, Foster rejected HMC’s argument that the possession requirement should not be construed so strictly
since it was highly unlikely that multiple parties would come forward with competing claims of the right to enforce
Zullo’s note.

“By setting an actual possession requirement, parties on both sides have a clear and established standard,” he said.
“The maker of the note is protected from multiple claims of ownership and enforcement of the note is still possible
by the party who lost it.”

At the same time, Foster said, HMC could not show by any other means that it was acting on behalf of DLJ in
seeking to enforce the note.

“Accordingly, without having actual possession of the Note or demonstrating that it is acting on behalf of the note
holder, HMC fails to satisfy the requirements of Eaton and lacks standing to foreclose,” the judge concluded, denying
HMC’s motion for summary judgment.

Zullo v. HMC Assets, LLC v. DLJ Mortgage Capital, Inc.

THE ISSUE: Did a mortgage holder purporting to hold the actual note via assignment of a “lost note affidavit” have
authority to foreclose on the encumbered property?

THE DECISION: No (Land Court)

LAWYERS: Glenn F. Russell Jr. of Fall River (plaintiff)

Christopher A. Cornetta of Cornetta Babine, Danvers, and Brian Linehan of Doonan, Graves & Longoria, Beverly
(defense) Page 3 of 4
Foreclosure barred by loss of note, judge rules – Massachusetts Lawyers Weekly 7/9/17, 5(01 PM



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