by Eva Massimino, Esq.

Bendett & McHugh, P.C.*

USFN Member (CT, ME, MA, NH, RI, VT)

More than four years ago, in the matter of Zullo v. HMC Assets, LLC, et.al., the Land Court in Massachusetts held that a foreclosing entity must be in actual possession of the note, or in the case of a lost or destroyed note, be the entity that was in possession of the note and entitled to enforce it at the time of loss or destruction. While the case is no longer shocking news, strategies for dealing with the result are still developing.

The nature of the dispute in Zullo involved a claim brought by the Plaintiff that asserted HMC did not have standing to foreclose on his property. To establish its standing, HMC presented a Lost Note Affidavit signed by its predecessor in interest DLJ. The servicer for DLJ lost the original of the note before HMC was transferred all interest in the note from DLJ.  In a non-binding case, Massachusetts statutes relating to the enforcement of notes had previously been interpreted to mean that a note that was lost or destroyed by one entity could not be enforced by another entity who presented a lost note affidavit executed by the former party. The Land Court in Zullo held very close to the black letter law of the UCC Section 3-309 stating: “In interpreting whether enforcement rights to the Note may be transferred from DLJ to HMC through the Lost Note Affidavit, the specific language of Article 3 dictates the ability of DLJ to use the Lost Note Affidavit to assign the Note. Common law principles of assignability are not taken into consideration. Because possession is a key requirement of enforceability, § 3-309 specifically prohibited DLJ to use the Lost Note Affidavit to effect such a transfer of rights.”

The Zullo decision wreaked havoc in Massachusetts for loans where the note had been lost prior to sale. Initially there was optimism surrounding an appeal and legislative action, however, neither yielded a fruitful result.  It triggered a need for a viable strategy that could allow enforcement of instruments that were potentially unenforceable as a result of the case. One such strategy that has brought measured success is a negotiated agreement to proceed with foreclosure in the name of the entity that lost the note and a declaratory action authorizing the foreclosure. While the process is lengthy and the relationship between the current and former servicer somewhat abnormal, it is a path forward where otherwise none existed. It is important to note that this option is not available where the entity that lost the note is now defunct or where authorization to proceed cannot be obtained.

In light of the limited options for enforcement of lost or destroyed notes, it remains of the utmost importance that appropriate diligence is provided to the purchase of loans in Massachusetts. Given the known risk, parties seeking to purchase loans where the physical note cannot be transferred should seek the advice of counsel before exercising what may be a fruitless endeavor.

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December 2021 USFN Report