Much Obliged: Massachusetts Lenders Shouldn’t Have to Lose It Over Lost Notes
Like it or not, the real estate market relies on mortgage lenders trading mortgage loans like kids used to trade baseball cards.* And large companies, like kids who traded baseball cards in the days of yore, sometimes lose things. Luckily, the drafters of the Uniform Commercial Code (UCC) understood this, and built in provisions that allow lenders to enforce lost instruments. Unluckily, at least for mortgage lenders trying to foreclose in Massachusetts these days, case law interpreting the version of the UCC adopted by Massachusetts unnecessarily complicates the foreclosure process when it involves a lost mortgage note.
In Zullo v. HMC Assets, the Massachusetts Land Court ruled that a lender who purchased a mortgage note after a prior entity lost the note cannot foreclose by showing that the prior entity assigned the lender its entitlement to enforce the lost note. Since the Zullo opinion, the notion that Massachusetts law imposes a potentially insurmountable hurdle on a lender seeking to foreclose after a prior lender lost the note appears to be taking hold as commonly accepted wisdom.
Yet a closer look at Massachusetts Supreme Court precedent and the state’s UCC shows why courts should reject this commonly accepted wisdom. As discussed below, a mortgage secures the borrower’s obligation to repay the debt, not the lender’s ability to enforce the note serving as evidence of the debt. Accordingly, the Massachusetts statutory power of sale should allow lenders who can prove that they own a lost mortgage note to foreclose even if they cannot show that the UCC would allow them to enforce the lost note.
Massachusetts’ Foreclosure Process
Under Massachusetts law, “a mortgage and the underlying note can be split”—meaning that different entities can have an interest the mortgage and the note. For example, if a lender purchases a mortgage loan and the seller delivers a properly indorsed note but neglects to assign the mortgage, then the lender holds the note while the seller continues to hold the mortgage. In this situation, “the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage.”
Lenders typically foreclose in Massachusetts through the statutory power of sale, which allows mortgagees to auction mortgaged property after giving proper notice if the borrower defaults. The Massachusetts Supreme Court construes the term “mortgagee” in the state’s foreclosure statutes to “refer to the person or entity then holding the mortgage and also either holding the mortgage note or acting on behalf of the note holder.” Importantly, the Court specifically clarified that it used the term “note holder” in the decision “to refer to a person or entity owning the mortgage note.”
Massachusetts’ Lost Note Requirements
Under Massachusetts’ version of the UCC, mortgage notes typically qualify as negotiable instruments. Accordingly, the “[p]erson entitled to enforce” a mortgage note means “(i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to section 3-309 or subsection (d) of section 3-418.”
For an entity to show that it is entitled to enforce the note under Massachusetts’ version of section 3-309 addressing lost notes, the entity must demonstrate that:
(i) [it] was in possession of the instrument and entitled to enforce it when loss of possession occurred,
(ii) the loss of possession was not the result of a transfer by the [entity] or a lawful seizure, and
(iii) the [entity] cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.
UCC § 3-309 Amendment
In the late 1990s, a federal court in the District of Columbia interpreted the language of the first requirement for enforcing lost notes to preclude any entity who obtained its interest in the loan after the note was lost from showing it could enforce the note. The D.C. federal court held that the entity necessarily could not show entitlement to enforce the note when the loss of possession occurred, because it obtained its interest in the note after the loss of possession. The UCC drafting committee then convened to amend the UCC to allow an entity to enforce a lost note if it “directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when the loss of possession occurred.” Massachusetts has not yet adopted the amended provision, despite it having been added to the UCC in 2002.
The Zullo Opinion
Analyzing these requirements, the Massachusetts Land Court ruled in Zullo that an entity who acquired its interest in the loan after the note was lost lacks standing to foreclose. In Zullo, the lender argued that it acquired its interest from the entity who possessed the note when it was lost, and it therefore stood in that entity’s shoes by virtue of standard contract assignment law. The Land Court rejected the creditor’s argument.
Notably, the Massachusetts Land Court is a lower court, and it does not appear that the Massachusetts Supreme Court or Appeals Court have yet weighed in on the issue of whether a lender can assign its entitlement to enforce a lost note after the note is lost. Relatedly, the Land Court in Zullo acknowledged the disagreement among other state courts on this issue, and it even acknowledged that the judge who wrote the opinion came to a different conclusion earlier in the case. Nevertheless, absent further guidance from the Massachusetts Supreme Court or Appeals Court on this issue, the Zullo opinion appears to be turning into commonly accepted wisdom on the question of enforcing lost notes in Massachusetts.
Ownership of the Note vs. Entitlement to Enforce the Note
Although the common practice for foreclosing with lost notes in Massachusetts (or not foreclosing, as it were) seems to be solidifying around Zullo, courts should not treat the Zullo opinion’s analysis as the final word on the issue. Indeed, to the extent the analysis focused on a lender’s ability to assign its entitlement to enforce a lost note under principles of contract law rather than its ability to transfer ownership of the note under property law, Zullo may have misapplied Eaton altogether.
As noted above, the Massachusetts Supreme Court in Eaton confirmed that when it used the term “note holder” in the decision, it “refer[red] to a person or entity owning the ‘mortgage note.’” It defined “mortgage note” as “the promissory note or other form of debt or obligation to which the mortgage provides security.” This definition tracks with Eaton’s holding and discussion throughout the Court’s ruling, where the Court focused on the nature of a mortgage as security for a debt rather than focusing on a narrow application of terms removed from their overall statutory context. Indeed, the Eaton Court expressly described its interpretation as “the one that best reflects the essential nature and purpose of a mortgage as security for a debt.”
The Court’s ruling predominantly focused on the longstanding and nearly universal recognition that a mortgage is an incident to the debt. The Court discussed the need for a mortgagee exercising the statutory power of sale to maintain an interest in the underlying debt in terms of holding the note or acting for the note’s holder, but it expressly advised that it used the term “note holder” to encompass more broadly the “entity owning the mortgage note.”
Importantly, the comments to Massachusetts’ UCC specify that “[t]he right to enforce an instrument and ownership of the instrument are two different concepts.” The comment further provides that “ownership rights in instruments may be determined by principles of the law of property, independent of Article 3, which do not depend upon whether the instrument was transferred under Section 3-203.” Entities can “claim [ ] ownership of an instrument” even when they may not qualify as “a person entitled to enforce the instrument.” Likewise, an entity can qualify as “a person entitled to enforce the instrument even though [it] is not the owner of the instrument or is in wrongful possession of the instrument.”
Thus, properly harmonizing Eaton with the Massachusetts UCC should allow a lender who can demonstrate that it owns a lost mortgage note using “principles of the law of property” to exercise the statutory power of sale. If the lender could not demonstrate its entitlement to enforce the lost note under Massachusetts’ UCC, it presumably could not collect any deficiency after the sale or otherwise obtain a judgment on the note, but reading Eaton together with the Massachusetts UCC should allow the lender to foreclose under the statutory power of sale as long as it can demonstrate that it owns the mortgage note.
Distinguishing the Note from the Debt
This analysis also tracks commonly accepted principles of Massachusetts law distinguishing between the ability to enforce a note and the underlying debt’s continued existence. Massachusetts has long recognized that the debt continues to exist even when the lender cannot enforce the note against the borrower, and Massachusetts courts acknowledge that a borrower’s moral obligation to repay a debt survives even when the lender cannot obtain judgment on the note.  The court in Nims v. Bank of New York Mellon recently held that “[a] mortgage continues to be enforceable in a proceeding in rem against the security, separate and apart from an action in personam against the debtor on the note. . . . For this reason, for example, the mortgage remains enforceable in rem even when personal liability on the note has been discharged fully in bankruptcy.” Put differently, the mortgage secures the debt, not the note.
Similarly, consider the express language in Fannie Mae’s model Massachusetts mortgage, which is commonly used throughout the state. The mortgage defines the term “Note” to mean “the promissory note signed by Borrower.” The term “Loan” means “the debt evidenced by the Note, plus interest, any prepayment charges and late fees due under the Note, and all sums due under [the mortgage], plus interest.” The mortgage secures both of the following to Lender: “(i) the repayment of the Loan, and all renewals, extensions and modifications of the Note, and (ii) the performance of Borrower’s covenants and agreements under [the mortgage] and the Note.”
In other words, the mortgage secures the borrower’s obligation to repay the loan, not the lender’s ability to enforce the promissory note the borrower gave as evidence of the debt. Accordingly, the court in Bishay v. US Bank held that “[a]s long as the debt evidenced by the note remains unpaid, the mortgagee can foreclose, even if the note is otherwise unenforceable under the statute of limitations.”
Thus, if the lender can demonstrate that it is entitled to enforce the note under the UCC, then it can show that the borrower owes the lender her obligation to repay the loan. But the borrower’s obligation to repay the loan should survive even if the lender cannot enforce the note under the UCC, and the mortgage secures that obligation by its own express terms. Again, this analysis is consistent with Eaton’s explanation that it used the term “note holder” to refer to the note’s owner and the comments to the Massachusetts UCC specifically distinguishing between owning the note and being entitled to enforce the note.
Pegging the Power of Sale to Entitlement to Enforce Harms Borrowers
Importantly, any analysis of Massachusetts law that pegs the statutory power of sale to entitlement to enforce the note rather than ownership of the note would also harm borrowers. Consider the following scenarios.
Bank loans Homeowner money to purchase a home. Homeowner executes a promissory note to Bank memorializing the loan’s terms, and gives Bank a mortgage securing her obligation to repay the debt. Bank loses Homeowner’s promissory note and later sells the lost note to Creditor. Bank assigns Creditor the mortgage. Homeowner defaults.
If Zullo correctly concluded that the Massachusetts UCC does not allow Bank to contractually assign Creditor its entitlement to enforce the note, then Bank remains the only entity entitled to enforce the note even though Creditor now owns the note. The Massachusetts UCC unquestionably distinguishes between entitlement to enforce the note and ownership of the note, and it confirms that an entity who does not own the note can still qualify as the person entitled to enforce the note.
This means that if Massachusetts courts peg the statutory power of sale to entitlement to enforce the note rather than ownership of the note, then Bank—as the entity entitled to enforce the note—can foreclose under the statutory power of sale even though it no longer owns the note. It further means that despite Creditor remaining the entity who reviews Homeowner for loss mitigation options and otherwise works with Homeowner to try to save her home, Bank—who no longer has any interest in the underlying debt—may legally decide whether and when to sell the home in foreclosure.
Notably, as the entity entitled to enforce the note, Bank could even demand that Creditor, who properly and rightly owns the note, assign the mortgage back to Bank, because despite Creditor owning the note, Creditor would only hold the mortgage in trust for Bank as the entity entitled to enforce the note. Creditor could likely recover the proceeds of the foreclosure sale from Bank under UCC section 3-306, but Creditor would have no power to stop Bank from foreclosing on Homeowner, or to voluntarily delay the foreclosure while Creditor reviewed workout solutions with Homeowner.
In fact, legally savvy and ethically lacking operators could take the situation even further. Let’s change the hypothetical to say that Bank never lost the note and never sold it to Creditor. Instead, Bank indorsed the note in blank as a matter of routine practice and continued to hold it. Homeowner then defaults, and Bank delivers the blank-indorsed note to Attorney to begin the foreclosure process in Bank’s name. Attorney—having read Zullo and the Massachusetts UCC but having failed Professional Responsibility in law school—instead decides to foreclose in his own name as the holder of the note.
Bank would have the same legal recourse against Attorney that Creditor had against Bank in the first scenario, but Homeowner would be stuck in the middle of the two without any grounds to stop Attorney’s foreclosure. Attorney has possession of the note indorsed in blank, which makes him the note’s holder under the UCC. Thus, according to any legal analysis where entitlement to enforce the note overrides ownership of the note for statutory power of sale purposes, Attorney may exercise the power of sale as the note’s holder. Massachusetts courts should not interpret Massachusetts foreclosure law to countenance such absurd results.
Indeed, the Massachusetts Supreme Court expressly rejected a similar scenario when analyzing these exact types of concerns in Eaton. More specifically, the Court discounted the lender’s position that a mortgagee who holds the mortgage but cannot show ownership of the note can foreclose in its own name and “thereafter account to the note holder for the sale proceeds.” Pegging the statutory power of sale to entitlement to enforce the note instead of ownership of the note would result in nearly the exact scenario Eaton rejected. It would allow, or even require, an entity without an interest in the underlying debt to foreclose in its own name and then account for the sale proceeds to the note’s true owner. This is not the correct result under Massachusetts law.
Assigning Contract Rights Versus Selling the Note
Notably, none of this analysis directly conflicts with Zullo’s ruling that parties cannot contractually assign their entitlement to enforce lost notes under the Massachusetts UCC. The Land Court in Zullo focused on the narrow issue of whether a prior lender could assign its entitlement to enforce the lost note, rather than the current lender’s ability to prove ownership of the lost note.
Reasonable minds can disagree about whether Zullo correctly concluded that lenders cannot assign their entitlement to enforce lost notes under contract law. However, even if Zullo reached the right answer to that question, Massachusetts courts properly applying the relevant standards should treat the issue of whether a lender can assign its entitlement to enforce the note differently than they treat the issue of whether a lender can demonstrate it owns the note when determining whether the lender may foreclose under Massachusetts’ statutory power of sale.
The Massachusetts UCC specifically distinguishes between entitlement to enforce the note and ownership of the note, and the standard under Eaton allows the lender to foreclose if it shows that it owns the note. The legal question of whether a lender can assign its entitlement to enforce a lost mortgage note is not relevant to the distinct question of whether the lender owns the lost mortgage note. Nothing in Eaton requires lenders to show they can enforce the note. Rather, the decision allows foreclosure under the statutory power of sale if the lender shows it owns the note.
Notably, courts may require lenders to present similar (or maybe even identical) evidence to show they own the note as courts would require them to submit to prove assignment of a contract right, but the legal questions remain distinct. Even if a lender cannot contractually assign its entitlement to enforce a lost note, ownership of the note—not entitlement to enforce the note—is the standard the Massachusetts Supreme Court set for exercising the statutory power of sale to foreclose.
Losing a promissory note changes the lender’s process for demanding repayment on a loan, but it does not relieve the borrower from having to pay the money back. Nor should it cancel the lender’s security for the loan, even if the lender acquired its interest after the note was lost. To the extent the current practice in Massachusetts may tend to accept otherwise, local practitioners should re-examine the analysis. The borrower remains obliged to repay his debt even if the note is missing. Massachusetts lenders should not have to lose their mortgage over a lost note.
* This article is not intended as and should not be considered legal advice.
 25 LCR 400 (2017).
 See, e.g., Eaton v. Fannie Mae, 462 Mass. 569, 576 (2012).
 Id. at 576-77.
 See ALM GL ch. 183, § 21.
 Eaton, 462 Mass. 569 at 571.
 Id., n.2 (emphasis added) (cleaned up).
 See ALM GL ch. 106, § 3-104.
 Id., § 3-301.
 Id., § 3-309.
 See, e.g., Joslin v. Robinson, 977 F. Supp. 491 (D.D.C. 1997).
 Id. at 495.
 See, e.g., Zullo, 25 LCR at 404.
 See ALM GL ch. 106, § 3-309.
 See Zullo, 25 LCR at 407.
 Id. at 404.
 Id. at 404-06.
 Id. at 404, 406 n.2.
 Id., 462 Mass. at 571 n.2.
 Id. at 584 (emphasis added).
 Id. at 578 n.11 (harmonizing on-point Massachusetts case law through “the general principle . . . that a mortgage ultimately depends on the underlying debt for its enforceability”) (emphasis added).
 Id. at 571 n.2 (emphasis added) (cleaned up).
 ALM GL ch. 106, § 3-203, cmt. 1.
 ALM GL ch. 106, § 3-301.
 Compare Eaton, 462 Mass. at 517 n.2 with ALM GL ch. 106, § 3-203, cmt. 1.
 See, e.g., Wash. Mut. v. DeMello, 14 LCR 374, 376 (Mass. 2006) (“A moral obligation to pay the debt survives the [bankruptcy] discharge.”) (quoting Groden v. Kelley, 382 Mass. 333, 336 (1981)); Wexler v. Davis, 286 Mass. 142, 144 (1934) (acknowledging the “moral[ ] obligation” to repay a debt even when “[t]he remedy upon the debt . . . is at an end.”).
 97 Mass. App. Ct. 12, 128-29 (2020).
 Available at: https://singlefamily.fanniemae.com/media/document/doc/massachusetts-security-instrument-form-3022-word.
 No. 18 SBQ 15269 05-100, 2020 Mass LCR LEXIS 195 *15 (Oct. 27, 2020).
 Cf. Duplessis v. Wells Fargo, 16-P-1040, 2017 Mass. App. Unpub. LEXIS 586 *5-*6 (May 30, 2017) (“A mortgage is not a negotiable instrument, and is not a note . . . Article 3 of the UCC, as adopted in Massachusetts, does not govern mortgages.”).
 See, e.g., Eaton, 462 Mass. at 583-84.
 See Eaton, 462 Mass. at 571 n.2; ALM GL ch. 106, § 3-203, cmt. 1.
 See, e.g., ALM GL ch. 106, §§ 3-203, cmt. 1; 3-301.
 Eaton, 462 Mass. at 577 n.10.
 ALM GL ch. 106, § 3-203, cmt. 1; Eaton, 462 Mass. at 571 n.2.
 See Eaton, 462 Mass. at 571 n.2.