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In Massachusetts, Lost Notes Create Headaches for Services

Editor's note: This story was originally featured in the January issue of DS Newsout now.

In Massachusetts, in the seminal decision Eaton v. Federal National Mortgage Association, 462 Mass.569 (2012), the Supreme Judicial Court has held that the statutory power of sale can only be exercised by a party who held the mortgage by assignment and was either the holder of the note or was acting as the agent for the holder at the time of the publication of the notice of sale. The Eaton court prospectively applied this ruling on standing to foreclose in actions where the publication occurred after June 22, 2012, the date of its decision. This holding was subsequently codified in M.G.L. Ch. 244§35C.

Unfortunately, in Massachusetts, issues related to standing persist despite the Eaton decision. When a servicer intending to commence a foreclosure action discovers that the original promissory note, generally considered a negotiable instrument under the Uniform Commercial Code (U.C.C.), has been destroyed or lost by the prior holder, problems arise. Section 3-301 of the U.C.C. provides that a note may be enforced by  “..(i) the holder of the instrument, (ii) a non-holder in possession of the instrument who has the rights of a holder, or (iii) the person not in possession … who is entitled to enforce the instrument pursuant to Section 3-309.”

In many jurisdictions, the issue of a lost note can be resolved and the foreclosure may proceed upon execution of a Lost Note Affidavit (LNA) by the party who lost the note detailing the circumstances of the loss and attaching a copy of the note. U.C.C. Section 3-309 addresses the circumstances under which enforcement of lost, destroyed, or stolen instruments may be made by use of a LNA by parties who are not in possession of the original note. In 2002, amendments to U.C.C. Section 3-309 expanding the parties entitled to enforce a lost or destroyed negotiable instrument were subsequently adopted by a number of states. Under the amended version, parties who “… directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred” may enforce the note.

Unfortunately, Massachusetts has not yet adopted the amendment to Section 3-309 and instead, servicers must rely on the earlier version that limits the enforcement of a note to the party who was in possession of the note and entitled to enforce it at the time possession was lost. If the party commencing the foreclosure was not the party who actually lost the note and executed the LNA, Massachusetts courts have applied a strict interpretation of Section 3-309 prohibiting that party from enforcing the note. Most recently, this narrow reading was upheld in Zullo v. HMC Assets, LLC, as Trustee (Misc. 16-000413) (2017). As a result, absent adoption by the Massachusetts Legislature of the amendment to Section 3-309 of the U.C.C., attempts by a successor holder to enforce the note using a LNA are likely to be challenged, limiting enforcement to the party who lost the note.


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