523 B.R. 749
1st Cir. BAP2014Background
- Harborhouse purchased property in 2004 subject to a mortgage given by Murphy to Hansbury; Harborhouse assumed the mortgage but did not undertake personal liability to Hansbury.
- Hansbury lost the original promissory note, then assigned the mortgage (with a lost-note affidavit and copy/allonge) to CPIC in 2006; no record that Harborhouse became personally liable to CPIC.
- In 2007 CPIC assigned the note and mortgage to Green as collateral for a loan; again no evidence Harborhouse incurred personal liability to Green.
- Harborhouse’s case converted to chapter 7; Green filed a secured proof of claim based on the assigned note and mortgage; the chapter 7 trustee sued to disallow Green’s claim under Mass. Gen. Laws ch. 106 § 3-309 (lost note) and other theories.
- The bankruptcy court granted summary judgment that Green could not enforce the lost note under § 3-309 but that Green held an enforceable mortgage interest in the sale proceeds (in trust for the true holder of the note); both parties appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Green may enforce the lost note under Mass. Gen. Laws ch. 106 § 3-309 | Trustee: Green cannot enforce the note because it was not in possession when the note was lost, so § 3-309(a) is not met | Green: As assignee of the mortgage and holder of a lost-note affidavit, Green can enforce the note (or must be allowed to collect) | Court: Green cannot enforce the note; trustee prevailed on the note issue (but for different reasoning: Harborhouse never incurred personal liability on the note) |
| Whether Green can enforce the mortgage or assert an in-rem claim against sale proceeds | Trustee: If Green cannot enforce the note, the mortgage is a nullity or cannot be enforced for Green’s benefit | Green: Mortgage survives and Green may assert an in-rem lien; at minimum Green may hold the sale proceeds subject to the true note holder’s rights | Court: Green’s mortgage interest survived; Green may hold sale proceeds in trust for the true holder of the note (Green wins on the mortgage issue) |
| Effect of Massachusetts’ version of UCC § 3-309 (possession requirement) | Trustee: Massachusetts’ § 3-309 requires possession at time of loss; Green fails that test | Green: Other jurisdictions’ comments/edits eliminate the possession requirement; Green should be able to rely on transferor’s rights | Court: § 3-309 as enacted in Massachusetts was discussed, but the court ruled Green lacked an in-personam claim because Harborhouse never incurred liability on the note; nonetheless the mortgage remains enforceable in rem |
| Who ultimately holds the proceeds / who is entitled to enforce the note | Trustee: Proceeds should belong to estate if Green’s claim is invalid | Green: Proceeds should be held by Green as mortgagee; Green will hold them for the true holder of the note | Court: Proceeds attach to Green’s mortgage lien; Green must hold proceeds in trust for the true holder of the note; determination of the true holder is for a non-bankruptcy forum |
Key Cases Cited
- Dennis Joslin Co. v. Robinson Broad. Corp., 977 F. Supp. 491 (D.D.C. 1997) (possession-at-loss requirement applied to lost instrument enforcement)
- Marks v. Braunstein, 439 B.R. 248 (D. Mass. 2010) (Massachusetts courts’ application of § 3-309 and possession requirement)
- Dudley v. S. Va. Univ., 502 B.R. 259 (Bankr. W.D. Va. 2013) (application of § 3-309 to lost notes and possession issue)
- Culhane v. Aurora Loan Servs. of Neb., 708 F.3d 282 (1st Cir. 2013) (note and mortgage separation; assignment of mortgage and equitable duties)
- Eaton v. Fed. Nat’l Mortg. Ass’n, 969 N.E.2d 1118 (Mass. 2012) (mortgagee without the note cannot foreclose for its own benefit)
- U.S. Bank Nat’l Ass’n v. Ibanez, 941 N.E.2d 40 (Mass. 2011) (mortgage held by one party is subject to equitable rights of note holder)