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Third Time’s (Not) the Charm

The Appeals Court, in a recent decision, Zullo v. HMC Assets, LLC, No. 14-P-1696 (Dec. 30, 2015) (issued pursuant to its Rule 1:28), upholding a summary judgment decision by the Land Court, both reiterated the fundamentals of foreclosure law, and raised (but did not resolve) an interesting legal issue stemming from the holding in Eaton v. Fannie Mae, 462 Mass. 569 (2012).  The case represents John F. Zullo’s third bite at the apple – the latest in a series of cases brought to prevent foreclosure of a mortgage encumbering his registered land in Wayland.

Zullo gave the mortgage in 2007 to secure a loan of over one million dollars from Lime Financial Services, Ltd.  Zullo executed both a promissory note made out to Lime and a mortgage in the name of MERS, as nominee for Lime. The mortgage was recorded on the certificate of title (as were two subsequent assignments).  Zullo defaulted on the note in June of 2008.

In 2011 DLJ Mortgage Capital, Inc., then the holder of the mortgage, scheduled a foreclosure sale.  Two days prior to the sale Zullo filed an action in Superior Court, Civil Action MICV2011-00022, seeking to prevent the foreclosure and challenging DLJ’s status as holder of the mortgage.  The Superior Court case ended with a dismissal of Zullo’s complaint and judgment in favor of DLJ (among others); the judge noted that Zullo’s “ignorance of who holds his mortgage [is] both wholly without merit and frivolous and advanced in bad faith.”

Zullo did not appeal from the Superior Court decision, but instead sought refuge in bankruptcy, filing two Chapter 13 petitions: the first was dismissed, the second was converted to a Chapter 11 case.  After multiple twists, HMC Assets, LLC, as trustee of the CAM III Trust (by this time the holder of the mortgage), obtained relief from stay and resumed its attempts to recover on the debt.

Zullo then filed suit in the Land Court to prevent foreclosure, styling the action as a petition to expunge the two mortgage assignments from his certificate of title.  On summary judgment, the Land Court dismissed Zullo’s petition, Zullo v. HMC Assets, LLC, 22 LCR 391 (2014), and ruled in favor of HMC.  The judge based the dismissal on res judicata grounds with respect to the earlier Superior Court action, while also concluding that HMC was the holder of the mortgage and note based on a Lost Note Affidavit, executed by DLJ’s servicer, but held by HMC.

Zullo appealed, and the Appeals Court upheld the Land Court judgment, albeit on somewhat different legal grounds than those relied on by the trial court judge.  Zullo argued that the earlier Superior Court action did not have preclusive effect over his Land Court action because the Superior Court lacked jurisdiction over title issues concerning registered land.  The Appeals Court recognized this difficulty, but stated “even if the Superior Court lacked jurisdiction, this does not necessarily mean that Zullo now gets a second chance at deciding issues that were addressed in the earlier litigation.”  The Appeals Court determined that Zullo’s action failed as a matter of law because “[a]lthough Zullo has standing to claim that the two mortgage assignments are void, he has no basis on this record for doing so here.”  Additionally, Zullo’s allegation that the MERS system is inapplicable to registered land had been foreclosed by earlier unrelated litigation, and Zullo lacked standing to bring his other claims.  For these reasons the Appeals Court upheld the Land Court dismissal of his petition.

As to the interesting legal issue: HMC alleged that it may properly foreclose on Zullo’s property by virtue of the mortgage, which it held, and the Lost Note Affidavit, which it alleged demonstrated that it was the note holder (or was at some point before the Note was lost), as required by Eaton.  HMC is not alone in this situation – many mortgagees have taken to filing Lost Note Affidavits when the original note cannot be found (for whatever reason).  The topic of HMC’s status under Eaton was raised, both in the Land Court summary judgment proceedings and a later request by Zullo for a preliminary injunction to prevent foreclosure.  The Land Court decision concluded that HMC has authority to act as a “note holder” or “act[] on behalf of the note holder,” as required by Eaton.  Apparently there is no doubt the Note was lost, although the timing of the loss seems in dispute.  However, the Land Court determined that the timing of the loss did not determine HMC’s status: if HMC lost the Note, then it was a “note holder” and is entitled to foreclose; if DLJ lost the Note, then the assignment to HMC was sufficient to designate HMC as one “acting on behalf of the note holder,” and HMC is entitled to foreclose.  Despite the Land Court’s analysis, the Appeals Court declined to fully address the topic on the grounds that it had not been properly developed at the trial court level.  The Appeals Court noted that it was “deferring consideration of how an entity in HMC’s position can satisfy Eaton will allow such issues to be reviewed on a more fully developed trial court record.”  This issue will undoubtedly arise again, but the Appeals Court made clear that the issue of whether these Affidavits satisfy the requirements of Eaton is a question for another day and another case.