A recent decision by the Massachusetts Court of Appeals voided a second mortgage on a Dorchester home, highlighting the importance of possessing the note and raising questions about whether faulty record keeping could imperil some banks’ abilities to foreclose.

The case, J.P. Morgan Chase v. Carlo Casarano, involves a Dorchester property on which two mortgages were issued, more than 18 years ago, in an unusually-structured purchase agreement.

The first mortgage of $108,000 was in favor of the lender, First Eastern Mortgage. The second, in the amount of $15,443, was to the seller of the property.

Over the years, the first mortgage was refinanced several times. This requires the first mortgage-holder to get a subordination agreement from the second. The most recent holder of the first mortgage, Chase, opted instead to file a “quiet title” action in 2007 seeking to prove the second mortgage was null and void. And when Ford Realty Trust, the current holder of the second mortgage, couldn’t come up with the original note to the property – or a copy of it – a Land Court judge ruled in favor of Chase.

Ford Realty Trust and Trustee Carlo Casarano appealed, arguing that even though the note itself couldn’t be located, the mortgage to the property – which it did possess, and which described the amount owed and the payment schedule to be followed – should be enough to prove its claim.

The Appeals Court disagreed.

“We decline to adopt this approach, which would abandon long-established statutory and common law relating to mortgages,” the court wrote in its decision.

The court said that the other terms of the note, including the agreement between the parties defining what constitutes default and evidence that the note itself was signed and executed properly, are required in order to prove that the debt is legally owed. Without them, “[t]he terms of the second mortgage, now the only documentary evidence, are insufficient as a matter of law to demonstrate the existence, much less the amount, of a current debt.”

That meant, essentially, the second mortgage was wiped out.

Far-Reaching Consequences

The circumstances in the Casarano case are somewhat unusual, since not only could the original note not be found, neither could a copy. But the Casarano decision might nevertheless be enough to inspire some bankers to take a trip into the vaults and blow the dust off some of the files – if only to make sure they’re there.

“I think it’s going to be an interesting [precedent] because what we hear is that the documentation of a lot of mortgage loans has fallen by the wayside. And what this says is that if the note is really lost, and there’s no copy of the note…. you can’t prove the note from the mortgage [alone],” said Christopher Pitt, a senior associate at Boston-based law firm Robinson & Cole and 2012 president of the Real Estate Bar Association. “The mortgage is unenforceable and the note is deemed discharged.”

Which is to say, wiped away.

In the vast majority of cases, at least a copy of the note can be produced (and an affidavit of lost note filed). And even in the Casarano case, Pitt noted, the Appeals court indicated that other evidence beyond the loan documents themselves could help bolster a lender’s case – for example, the homeowner in the case gave a deposition affirming the monthly payment owed.

But the case points toward a way in which some of the sloppy mortgage record keeping, especially during the boom years of the mid-2000s, could come back to bite banks in the butt.

While most paperwork problems have come to light in the course of foreclosure proceedings, anyone with an interest in the property can file a quiet title action, including the homeowner. And any bank in Ford Realty Trust’s position could face the same fate: A complete wipeout of the debt, with the homeowner walking away free and clear.

The paperwork problems highlighted by the Casarano case echo those in the forthcoming Eaton v. Fannie Mae case, soon expected to be decided by the Massachusetts Supreme Judicial Court.

The Eaton case could have a broader impact because it covers instances where a foreclosing lender did not possess the original note at the time of foreclosure and/or did not possess a copy of the note properly assigned to them.