In a case closely watched by the lending community, the Massachusetts Supreme Judicial Court ("SJC") ruled in Eaton v. Federal National Mortgage Association, et al., SJC-11041, on June 22, 2012, that a foreclosing lender must have both the mortgage and note (or be acting on behalf of the noteholder) before it can begin the foreclosure process.


The case began in Boston Housing Court, where Henrietta Eaton was about to be evicted by Green Tree Servicing. In 2007, Ms. Eaton had executed a note to Bank United FSB for $145,000 to refinance her house. The mortgage was granted by Mortgage Electronic Registration Systems (MERS) as nominee for Bank United. MERS assigned the mortgage to Green Tree Servicing. The assignment did not reference the note. The note went into default, Green Tree began the foreclosure process, and on November 24, 2009, the foreclosure sale took place. Green Tree was the high bidder at the foreclosure sale and assigned its rights as the winning bidder to the Federal National Mortgage Association (Fannie Mae). Fannie Mae began an eviction proceeding in Massachusetts Housing Court. There, Ms. Eaton filed a counterclaim that the foreclosure was invalid because Green Tree had not possessed the note at the time of foreclosure and thus did not have authority to enforce the note through the foreclosure process. The parties agreed that Green Tree had not held the note when it foreclosed. After the hearing, the Housing Court issued a stay to allow Eaton to seek injunctive relief in the Massachusetts Superior Court. There was no indication in the record in either the Superior Court (or the later appeal to the Supreme Judicial Court) as to what entity held the note at the time of the foreclosure. The Superior Court granted the injunction and held that both the note and the mortgage must be held by the foreclosing entity at the time of foreclosure. The Superior Court discussed the common law background of notes and mortgages. It noted that the promissory note (which evidences the debt) and the mortgage (which secures the debt) may be separately assigned. In other words, the note and mortgage do not have to be assigned together (and in Massachusetts there is no requirement that the note be recorded, only the mortgage). The Superior Court cited the case of Wolcott vs. Winchester, 81 Mass. 461, 465 (1860). Wolcott held that possession of the debt was essential to an effective mortgage, and without possession of the debt, one cannot maintain an action to foreclose the mortgage, which the Wolcott court noted is simply security for the note. The Superior Court also stated that without the promissory note, the mortgagee holds nothing more than a mere technical interest in trust for the noteholder. If the debt is not in existence (that is, if the foreclosing entity does not hold the note), the assignee has at most a naked legal title to the property.

Ibanez Case Discussion

The Superior Court noted US National Bank Association v. Ibanez, 458 Mass. 637 (2011), which held that the assignment of a mortgage must be effected before commencing the foreclosure process. The Superior Court stated that the holding of the Ibanez case was not inconsistent with the Superior Court decision. Ibanez did not address the authority of a mortgagee who was not in possession of the note to foreclose.

Eaton SJC Decision

Following the Superior Court decision, the Massachusetts Supreme Judicial Court took the case on direct appellate review. The SJC concluded that a foreclosure sale pursuant to a power of sale in a mortgage must comply with all applicable Massachusetts statutory provisions, including the power of sale and notice provisions.

The SJC stated that while the term "mortgagee" is not free from ambiguity, it refers to the person or entity who then holds the mortgage andalso either holds the actual note or acts on behalf of the noteholder (see the Ibanez case above, where the foreclosing entity must be assigned the mortgage before foreclosure.) The SJC, however, in a relief to foreclosing entities, did not make its decision retroactive; it only applies prospectively. Therefore, foreclosure sales that took place before the publication of the Eaton decision where the foreclosing entity did not hold the note do not have to be redone, which would of course have caused chaos among title insurers, lenders, property owners and those who purchased foreclosed properties.

Because it found that the plaintiff's allegations that Green Tree was not authorized to act on behalf of the lender were not properly supported, the SJC vacated the injunction entered by the Superior Court and remanded the case.

Together with applicable statutory law, the Ibanez and Eaton decisions now provide the roadmap for foreclosures in Massachusetts. Massachusetts law is now clear that in order to exercise the statutory power of sale, the foreclosing entity must have a properly assigned mortgage before commencing the foreclosure process, and it must also hold the note or be acting on behalf of the noteholder.