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Eaton v. Fannie Mae Analysis

posted by Adam Levitin

The Massachusetts Supreme Judicial Court finally issued its long-awaited ruling in Eaton v. Fannie Mae. This case involved the question of whether a "naked mortgagee"--a mortgagee that was not also the holder of the promissory note--had standing to foreclose. (Full disclosure:  I submitted a pair of amicus briefs in the case arguing that foreclosure required the mortgage and the note to be united.)

The SJC held that in Massachusetts a foreclosing party must have both the mortgage and the note or be acting on behalf of a party with the note. Critically, however, the SJC restricted the ruling to a prospective application. That means that past foreclosures cannot be reopened because of this case, so the financial services industry just dodged billions in liability for wrongful foreclosures and evictions, and the title insurance industry did as well. (Note that Massachusetts has a public option title insurer--a Torrens system of land registration that covers perhaps a third of the properties in the state. If the whole state were covered, there'd be no problem.)

In the immediate term, I'd score the case as a major victory for the financial services industry, which avoided liability for its failure to comply with state law foreclosure requirements. Going forward, however, things are more complicated.

Post-Eaton it is clear that in Massachusetts if one wants to foreclose one must have both the note and mortgage. That seems to tee up the chain of title issue about the note as the next stop on the SJC litigation train. Lenders were previously able to avoid chain of title questions because they would foreclose without the note. Now they've got to show that they are the note holder or acting on the note holder's behalf. Merely proving agency is insufficient; a servicer must show that it is agent for the note holder, so there will be a question of whether the securitization trust has title. Given what Ibanez said about confirmatory assignments not having any effect absent evidence of the original assignment, this is going to put servicers in an awkward place when the evidence of the note assignment isn't there. 

There are some dangerous dicta in the case, however.  First, footnote 28 notes that the foreclosing party can establish that it is the note holder or acting on its behalf by filing an affidavit to that effect with the registry of deeds. I fear that is an invitation to a repetition of affidavit fraud. We're going to see lots of affidavits filed claiming ownership of notes even when that ownership cannot in fact be proven.   

Second, the SJC was not careful in its terminology. The SJC refers to "note holder," but then defines "note holder" as the "owner" of the mortgage (footnote 2).  "Holder" is a negotiable instrument concept. "Owner" is not. And "person entitled to enforce" another negotiable instrument concept is nowhere to be found.  In footnote 26, the SJC sidestepped the question of whether the note at issue was negotiable, assuming that there's no possible conflict between UCC Article 3 and its ruling. I'm not so sure. Of course, one could read Eaton to mean that to foreclose one must be the mortgagee and also a "person entitled to enforce" or that person's agent. This all assumes, however, that UCC Article 3 applies to the note in question. 

Stepping back, I understand that the SJC was reluctant to potentially cloud title on Massachusetts properties that had passed through foreclosure. Yet, I'm still disappointed to see the SJC give a pass to the financial services industry. Surely there was a way to craft a remedy that would have protected the interests of innocent foreclosure sale purchasers while nonetheless imposing liability for illegal foreclosures. In any case, I suspect that this is not the end of major foreclosure litigation in Massachusetts.  



the fact that the court did not rule on the UCC is key. possession of the note (and the mortgage) may be good enough under massachusetts foreclosure law, but the UCC requires something more with respect to the note: possession AND either being the holder or having the rights of a holder. that brings the indorsement issues into play. (the UCC also permits enforcement of a lost note, but puts the burden on the loser to meet some substantial requirements to show former right to enforce the note, inability to obtain it, and that nobody else would be able to enforce it; massachusetts foreclosure law would appear not to permit a note-loser to foreclose).

more critically for people who have been recently foreclosed upon, footnote 26 means they can still challenge the note. the prospective interpretation of the foreclosure statute does not prevent retrospective application of the UCC.

Prof. Levitan, I too have been following and writing about the Eaton case. I think your analysis is spot on, especially the part about being careless with its language.

The SJC held initially that lenders need to "hold" both the note and the mortgage to foreclose. Then they proceeded to create a bunch of different way to establish this, including recording an affidavit, and that physical possession of the note is not necessary to foreclose.

I would go even farther to suggest that the foreclosure and title insurance industry will be driving a Mack truck through the hole left open by the SJC in this case.

Here is my two cents for now: http://www.massrealestatelawblog.com/2012/06/22/breaking-sjc-rules-for-lenders-and-mers-in-eaton-v-fannie-mae-case/


Under Citizens United, yes they do care about "people".

Regardless of the possession or non possession of the ownership of the note, in Massachusetts, the foreclosing entity still must show (independent of the note as the mortgage does not automatically follow the note in Mass)) a complete unbroken chain of title to the mortgagor's title (as Mass is a title theory jurisdiction), evidenced by executed writings from the named (and unnamed) Grantors to the named (and unnamed) Grantees. Therefore I personally do not see any Mack Truck openings to exploit.

I currently have about twenty-five cases being litigated in Massachusetts on this precise issue, including 5 Appeals, one in which involves the unique Servicemembers' Civil Relief Act complaints filed against homeowners in Massachusetts. The Mass SJC has just scheduled oral arguments in this case (HSBC V. Jodi B. Matt sjc-11101) for September. The Justices are still seeking Amicus briefs on the issue of whether HSBC could obtain future standing based upon the PSA, as Judge Long ruled that it appeared as though HSBC does not have current possession of the Matt note or mortgage, but that it didn't matter in a Servicemembers' proceeding, because HSBC could obtain standing in the future.. based upon the PSA (Which I clearly provided evidence that it is impossible to do so)

Thank you for your continued interest in the affairs going on in Massachusetts Professor Levitin

Glenn F. Russell, Jr.

This amicus filed in re: HSBC v Jodi Matt is very good.


MA and RI are and will be major battlegrounds. The Federal Stay Order in RI is unlike any other as far as I am aware.

Glenn, in the Matt case, what is preventing HSBC (or another servicer) from establishing authorization to foreclose, now that Eaton has held that physical possession of the note is not required?

Richard, I will answer that question. HSBC has no legal enforceable right in the Note or Mortgage and therefore cannot foreclose under the terms of the Mortgage Contract. As a matter of Fact and Law, HSBC will never have such a right. More importantly, under Eaton the test will surely be in the evidence and the only way to determine standing in the note and mortgage is by way of foundational evidence.
I want to see the original wet ink copy of the note and mortgage that was signed by Jodi Matt; I want to see a complete unbroken chain of title in the assignments of the Note and Mortgage.
Try this on; if the Note was assigned from one criminal to the next in the securitization chain, it follows that because Massachusetts does not adhere to the rule the mortgage follows the Note, then every time there was an assignment of the note, there had to have been an assignment of the mortgage also, and the assignment of the mortgage must have been recorded every time in the registry of deeds to take priority over the previous recording in order to perfect title.
This just for starters. I have saved the best for last. The next time I have to file a brief, I am going too methodically destroy the Banksters. The SJC alluded to a resulting Trust. No such Trust can exist under New York Law as it relates to a REMIC Expressed Trust. New York Law prohibits any entity other than the Trustee from holding the mortgage in trust but the Trustee for the Trust. EPTL 7-1.2 “Every disposition of property shall be made directly to the person in whom the right to possession and income is intended to be vested and not to another in trust for such person, and if made to any person in trust for another, no estate, legal or equitable, vests in the trustee”.
Therefore, MERS could not legally hold in trust for the certificate holders, the mortgage and now there is no trust over the assets, note and mortgage, and there never will be, the Trustee has no rights as well as the certificate holders. See EPTL 7-2.4 “If the trust is expressed in the instrument creating the estate of the trustee, every sale, conveyance or other act of the trustee in contravention of the trust, except as authorized by this article and by any other provision of law, is void”.

Glenn, love your passion!

They can't find any copies of the Matt note and mortgage??? They don't need originals, you know, as long as they can verify true and accurate copies under UCC. Correct?

There does not have to be a chain of recorded assignments, until the time of foreclosure, under Ibanez. Watch for title insurers to start using equitable subrogation now. Start researching that now.

If the lenders were smart, they would just file an action to enforce the note (assuming they can find it), then get a real estate attachment, which they would levy on and "foreclose" that way.

Either way, borrower still owes the money. No way around that. Some entity holds rights to the indebtedness and someone's going to have to pay -- your clients who borrowed money and have failed to pay it back. Ain't no free lunch.

Before you can get to the "deadbeat borrower" argument, Mr. Vetstein, I believe that the entity to whom the debt is allegedly owed must first be correctly identified. It's just not good enough to say, "Well, the borrower still owes the money so they may as well pay Entity X." While I agree that there may be no free lunch, until and unless it can be proven who owns the food, I would submit that you're dealing with an open buffet.

Personally, I've also got issues with *COPIES* of documents being allowed as evidence in any case. In this digital age, copies are EASY to manipulate. I've actually demonstrated it myself. One rather well known vice president with a signature stamp and her now bankrupting corporation appears to have endorsed an individual promissory note to an entity other than the entity claimed to be the note holder without recourse. Of course, it's a COPY of an allonge and the submitted evidential COPY is still intact. The point is that anyone - including a mortgage servicer or their counsel - with Adobe Illustrator can manipulate documents to their benefit. Prior to the digital age, this could have been performed with an Xacto knife and a copying machine.

As far as establishing a chain of recorded assignments, while they may not have to be on file with the county registry in MA, they might very well have to be submitted to a trust if the note in question was securitized as is apparently alleged in the Matt case. If MERS is involved, the Milestones *SHOULD* be reflective of the chain of "beneficiary interest" as I believe MERS refers to it. Regardless, if the PSA states that an unbroken chain of note and mortgage endorsements needs to be submitted as part of the MLPA and those docs aren't, there may be a proof problem. And if a window of substitution is missed for the trust then the window is closed and no further substitutions can be made which would preclude HSBC/the trust from taking legal possession of the Matt note.

Fantastic, infomrative post Adam, and great strand, the rest of you! I guess I will never understand why banks are not simply required to prove they had standing at the time of suit, just like the rest of us.

and AMC, you would have enjoyed the bumper sticker we saw recently. It said "I'll believe corporations are people when Texas executes one."

As a Chapter 7 trustee, I've been waiting for Eaton. Now that it's out, there's an unanswered issue. Suppose (as is probably often the case) that at the time a petition is filed, the note and mortgage are separated. Does that mean the mortgage does not secure a claim at that time? Can the mortgage be avoided under sec.544? Or can they be rejoined post-petition?

Steven, Eaton does not apply retroactively so if the foreclosure was already advertised under G.L. c. 244, it's unaffected by Eaton, in my opinion.

Glenn Russell may argue otherwise, but I believe the bankruptcy court will agree with me.

I think the SJC wasn't being sloppy when they used "holder". The SJC is making a claim that common law is still relevant, and under the common law in Mass since at least the 1850s holder meant note owner. Now, I don't know how/why the SJC thinks its claim about common law is true, but a unanimous court in a highly watched case that took its time writing the opinion wasn't using 'holder' carelessly or accidentally. http://abigailcfield.com/?p=1379. What are lower courts to do? Obey their institutional leader or reject the claim on the grounds that statutes trump common law and UCC trumps other statutes to the extent inconsistent? Will the legislature leave the Court's definition of 'holder' as the last word?

Ms. Field wrote a nice analysis on her blog which got me thinking. The UCC issues could be the next battle ground over "holder" vs. "owner" and also on whether lenders validly assigned notes via allonges and retained originals of instruments.

If I were counseling banks, I would advise them to get the original loan file at the time of closing, and ensure they have a full chain of ownership with proper assignments, etc. Problem is that servicers and their stupid foreclosure mills are clueless about this stuff.

Professor: I am confused by your comment regarding the seeming benefits of the Torrens system in the context of this case. If the SJC had not gone with prospective application in Eaton why would the Torrens system have barred challenges for "wrongful" foreclosures or evictions or insulated the mortgage industry from liability?

JFM-in MA, if land is registered in the Torrens type land registration system it means that the state guarantees title to the land. I believe that someone who challenges title can get monetary compensation from the state, but not the property. This means that the title to the land remains clean even if there's a challenge; a purchaser of registered land doesn't have to worry that he's buying the Brooklyn Bridge. The land registration system lets markets keep clearing by channeling all claims to a state guarantee fund.

That's why a retrospective application of Eaton wouldn't have created a clouded title problem if all property were registered.

attorney vetstein: substantially all of the non-fannie, non-freddie securitized trusts are already supposed to have the original note, with full chain of indorsements evident, in their possession or the possession of the trust's custodian. the custodian may also the servicer, but the two are often different parties. if a trustee of such a trust heeds your counsel and obtains the note when it's getting ready for foreclosure, it will be adding a non-qualified asset to what is meant to be a passive trust, which creates the risk of loss of the tax-exempt REMIC status. such an ultra vires act would render the transaction void.

in fact, such ultra vires acts happen all the time with respect to the mortgage. mortgages usually get assigned to the trust at the time the servicemembers' action gets filed, which runs into the REMIC-endangering problem. in massachusetts, at least, the banks have gotten away with it by persuading the courts that debtors lack "standing" to present evidence and argument about who held the mortgage at foreclosure. i do not imagine that the SJC would endorse this expanded doctrine of standing, which would conflict with doctrines of standing as adopted in other areas of the law, not to mention the laws of evidence.

Ok. I misread what you were referencing regarding Torrens. I agree that a BFP with a new certificate has clear title. Good luck with an assurance fund claim! I think there has been only one successful claimant in the 100+ year history of Registered Land.

Why did the SJC have Justice Botsford write the ruling ? Sumffin Smells here.



You state that, "under Ibanez" there does not need to be a chain of "recorded" assignments until foreclosure.

Actually what Ibanez affirms is that asa general concept, there must be an independent examination of the chain of title to the mortgage independent of the possession of the note(indeed both bank trustees cases in Ibanez, possession of the borrowers notes was undisputed, thus the Ibanez opinion was written under the context that the foreclosing bank trustees actually possessed the notes) yet they still could not foreclose

Unlike most jurisdictions, the Mass SJC found that the historical decisional case law of the Commonwealth has not adhered to the concept that the "mortgage automatically follows the note"

Mass is also a title theory jurisdiction in which the borrower actually conveys a fee subject to defeasance to the "lender"

Thus either pre or post Eaton, the foreclosing entity must provide executed writings from the Grantors to the Grantees in the chain of title to the borrowers mortgage (as an interest in land) independent of any examination of the note.

From my perspective Eaton is superfluous to my defense of foreclosure actions in Mass, with the only effect of providing me additional causes of examination regarding the note post Eaton.

Little tid bit,the above crates a huge gaff on the part of the financial institutions, as MERS is predicated upon its registry purportedly "tracking" off record sales of the borrowers promissory note (FROM COMPLETELY UNAUTHENTICATED AND UNVERIFIED DATA ENTERED ON THE MERS SYSTEM BY INTERESTED THIRD PARTY MORTGAGE SERVICERS WITH OUT ANY OVERSIGHT BY MERS,

thus JUST BECAUSE MERS remains the named nominee on the land records for the various successive note holders WONT going carry the day in Mass AS A TITLE THEORY JURISDICTION, you need independent executed writings from the Grantors to the Grantees to the mortgage...as the mortgage does not follow the note

MERS internal documentation theorizes that it remains "lien-holder" for the successive purchasers of the borrowers notes, a mortgage is not a lien in Mass...AND THE MORTGAGE DOESNT AUTOMATICALLY FOLLOW THE NOTE

There's a military term for this Richard..FUBAR


Great post--and looking forward to your ORAL arguments in September, 2012.


This leaves the people with forclosure notices dated before june 22 and not forclosed yet in limbo with no legal recourse. we cannot now fight the foreclosure with the old rules and the new rules do not apply we are therefore left with legal recourse either way this seems discriminate to me as we are left in limbo. how do we fight back they should have included us in the new ruling as we are now left with nothing. This cearly discriminates against the pending foreclosures.

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