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TECH FOCUS

In the ever-changing landscape of mortgage foreclosures, one of the latest issues to confront the judicial system is electronically signed promissory notes, otherwise known as “eNotes.” While eNotes aren’t exactly new, they may be new to some servicers or attorneys and are certainly new to several courts. Our industry only

recently began to overcome many of the tedious issues and the incessant “lack of standing” defenses routinely raised by defendants with the courts � nally starting to consistently apply note holder concepts under the Uniform Commercial Code (UCC).

But the UCC does not expressly address eNotes, so what must we do to ensure eNotes as part of the foreclosure landscape do not derail the progress we made? What exactly is an eNote? How does it di� er from a standard, writ-ten promissory note? How will this a� ect your foreclosure, and what must we do di� erently to demonstrate the eNote’s validity and enforce-ability to a court?

What Is an eNote?In an age of exponentially increasing electronic

transactions, eNotes are a natural step in mortgage lending toward increasing e� ciency, reducing costs, and streamlining the loan origination and closing processes. � ere’s no doubt as to the ben-e� ts gained from electronic mortgage transactions versus the traditional mortgage transaction when one considers the amount of time, space, and resources saved. � e arrival of electronic mortgage transactions was inevitable, and they quite possibly may become the eventual standard as electronic commerce continues to evolve.

First and foremost, an eNote is an electronic record that, if created, executed, and maintained correctly, is the equivalent of a traditional, written promissory note. More speci� cally, a proper eNote is considered a “transferable record” as de� ned by both the Uniform Electronic Transactions Act (UETA)1 and the Electronic

Signatures in Global and National Commerce (ESIGN) Act2. Two of the de� ning characteris-tics of an eNote are that it bears an electronic sig-nature and it is created and stored electronically. Naturally, these distinguishing characteristics are at the heart of any legitimately contested foreclo-sure when it comes to proving up your eNote.

It should come as no surprise that Fannie Mae and Freddie Mac standardized a uni-form eNote that closely mirrors the traditional uniform note. For example, the Multistate Fixed Rate Note(form 3200) and the reciprocal eNote (form 3200e) are nearly identical but for Section 11 of the eNote, which addresses its electronic nature and characteristics.3 All the standard terms and conditions are also present in the eNote, so there shouldn’t be confusion when it comes to demonstrating the intent of the parties.

To that end, Section 11 of the eNote operates not only as an additional acknowledgement of the electronic nature of the eNote but also re� ects the borrower’s consent to participation in the electronic transaction and agreement that the eNote is a valid and binding agreement. Sec-tion 11 also makes reference to both the UETA and ESIGN Act and discusses several key issues such as the eNote being a transferable record,

how the eNote may be transferred, and how the eNote may be converted from an electronic record to a paper-based note.

As an aside, it is possible for these types of electronic transactions to also involve an eMort-gage, which secures the eNote. However, when reviewing the loan instruments in preparation for foreclosure, you’ll notice the accompanying security instrument is probably a traditional, paper-based mortgage. Since only a very limited number of jurisdictions accept electronic docu-ments for recording, an eNote is often accom-panied by the traditional, paper-based mortgage rather than an eMortgage.4

Legal Support for eNotes� e need for a uniform system governing elec-

tronic transactions was quickly identi� ed, as one general assembly described it, to “enhance and promote the reliability of electronic commerce” because “electronic commerce is expanding rapidly and is an engine for economic growth.”5 � e UETA and ESIGN Act were promulgated in 1999 and 2000, respectively, in order to ensure the validity and enforceability of electronic contracts and electronic signatures.6 � eir ap-proach is noteworthy in that neither law attempts to insert its concepts of a transferable record or controller into the UCC; instead, they extrapolate relevant concepts from Article 3 in order to create an equivalent framework for eNotes.7

Identifying the need to assist and prepare states for the era of electronic commerce, the UETA was created to provide a uniform set of rules to govern electronic transactions.8 To date,

Electronically signed promissory notes are landing on court dockets. Here’s what pros need to know to avoid legal wranglings and get their judicial foreclosures off the ground.By G. Stephen Caravajal Jr.

1 UETA §16. 2 15 U.S.C. §7021. 3 Guide to Delivering eMortgage Loans to Fannie Mae (V. 2.5), §3.3 and Appendix A. 4 Id, at §2.1. 5 Spring� eld Township v. Mellon PSFS Bank, 586 Pa. 1, 13 (2005).6UETA §6 & 7; 15 U.S.C. §7001(a). 7 Case Closed: eNotes are Legal, An Analysis of eNote Enforceability Nationwide, a white paper jointly issued by Mortgage Industry Standards Maintenance Organization (MISMO), the Electronic Signature and Records Association (ESRA), and the American Land Title Association (ALTA). 8 Uniform Law Commission’s Electronic Transactions Act Summary, www.uniformlaws.org/ActSummary.aspx?title=Electronic Transactions Act.

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47 states and the District of Columbia have enacted state legislation adopting the UETA or some version of it9 (only Washington, Illinois, and New York have not adopted the UETA).10 However, those three remaining states each enacted similar legislation that provides the same authority and support, so eNotes are fully enforceable in every jurisdiction, the same as any other paper-based note.

It’s important to mention here that support for eNotes exists outside of, and even pre-dates, the UETA or ESIGN Act. � ere is nothing within the UCC that actually prohibits the formation of agreements by electronic means,11 nor does it require the contract itself be in writing—only that there be adequate evidence of its existence and its essential terms.12 In fact, neither common law nor the UCC requires a handwritten signature.13 For nearly 100 years, the courts have recognized that “a signature need not be written down in cursive form; signing a document is the act of putting down a person’s name to attest to the validity of an instrument and that signature may be stamped, printed, or made legible by using any other device.”14 Against this backdrop, the UETA and ESIGN Act incorporate pre-existing authority and provide uniform guidance for each

jurisdiction in terms that are more applicable to the 21st century’s electronic commerce.

� e primary goals of the UETA and ESIGN Act are to ensure that: (i) a record or signature will not be denied its legal e� ect or enforceabil-ity just because it may be in an electronic form and (ii) a contract not be denied any legal e� ect or enforceability solely because it relies upon an electronic record or signature.15 � e UETA is not intended to displace the UCC when it comes to promissory notes since it is still the UCC that determines whether a promissory note is formed.16 � e UETA expressly states it is not a general contracting statute and the substantive rules of contracts still remain una� ected by the UETA.17 Rather, it is simply there to ensure a promissory note cannot be denied any legal ef-fect simply because it is an eNote.

So how do the UETA or ESIGN Act create the electronic equivalent of a traditional promis-

sory note? An eNote constitutes a transferable record and can be treated as the equivalent of a negotiable, paper-based promissory note if: (i) the eNote contains only the same terms and conditions that are permitted in a paper nego-tiable note; (ii) the eNote is signed; (iii) the is-suer of the eNote agreed it should be treated as a transferrable record; and (iv) the method used to record, register, or evidence a transfer of interests in the eNote reliably establishes the identity of the person entitled to “control” the eNote.18

A person deemed to have “control” over such an eNote is the equivalent of a note holder under the UCC. In order to adequately establish control, an eNote must be created, stored, and assigned in such a manner that: (i) a single “authoritative copy” of the eNote exists that is unique, identi� -able, and unalterable; (ii) the authoritative copy identi� es the person asserting control as either the person to whom the eNote was issued or most recently transferred; (iii) the authoritative copy is communicated to and maintained by the person asserting control or its designated custodian; (iv) copies or revisions that add or change an identi� ed assignee of the authoritative copy can be made only with the consent of the person as-serting control; (v) each copy of the authoritative

copy and any copy of a copy is readily identi� able as a copy that is not the authoritative copy; and (vi) any revision of the authoritative copy is readily identi� able as an authorized or unauthorized revision.19 � ese concepts of a transferable record and controller are essential to getting foreclosure o� on the right foot.

What’s It Mean for Foreclosures?Satisfying the above criteria may establish

your eNote as a transferable record entitled to enforcement, but not unlike traditional promis-sory notes, there are additional concerns. How can you prove which party is entitled to enforce the eNote? Is the eNote a valid and authentic copy or representation? What must be shown to prove possession? In addition to these typical issues, there are also entirely new concerns that arise due to the electronic nature of the eNote. How do you demonstrate possession of an

electronic record like an eNote? Since an eNote lacks any indorsements or allonge, how can you determine whether a previous lender relin-quished its rights?

Fortunately, the UETA and ESIGN Act can point you in the right direction. A person who has control over an eNote is the equivalent of a traditional note holder, and therefore the controller is entitled to enforce the eNote. � e allegations related to the plainti� ’s right to fore-close should disclose up front that the indebt-edness is in the form of an eNote and should incorporate the plainti� ’s status as the controller of the eNote.

From the perspective of avoiding or prevent-ing litigation, it should be clear from the start of your case that any copy of the eNote used and circulated in the foreclosure is merely a copy of the authoritative copy of the eNote. Otherwise, you potentially jeopardize the plainti� ’s status as the controller. Since the obligor of the eNote has the right to demand proof of control, the plain-ti� ’s business records should be able to dem-onstrate the location of the authoritative copy, that the plainti� is the most recent transferee, and that the plainti� may even be required to provide access to the authoritative copy.20 When dealing with an eNote, the plainti� should also be able to explain its processes and procedures of converting the eNote into a complete and accurate paper-based note upon which the court may rely.

� ere may be additional concerns such as: (i) the type of technology or storage facility used to maintain the authoritative copy of the eNote and its related electronic records; (ii) the access to, and security of, the storage facility; and (iii) the reliability of the technology. Although these topics may be highly technical and beyond the scope of this article, they are worth mentioning here because they may also be additional hurdles to clear in order to properly establish a foundation for the plainti� ’s business records. When it comes down to it, proving up your eNote should not be all that di� erent from proving up the right to enforce a traditional note. Armed with the UETA and ESIGN Act, it is simply a matter of educating the courts on yet another aspect of the continually evolving mortgage lending industry.

G. Stephen Caravajal Jr. is senior counsel at Freedman Anselmo Lindberg, LLC. He practices in the areas of mortgage and mechanics lien foreclosures, real estate law, consumer fraud, consumer � nance litigation, and consumer collections.

In an age of exponentially increasing electronic transactions, eNotes are a natural step in mortgage lending toward increasing effi ciency, reducing costs, and streamlining the loan origination and closing processes.

9 See gen., Nat’l Conference of State Legislatures, www.ncsl.org/issues-research/telecom/uniform-electronic-transactions-acts.aspx. 10 See gen., Washington’ Electronic Authentication Act, Illinois’ Electronic Commerce Security Act, and New York’s Electronic Signature and Records Act. 11 Alliance Laundry Sys., LLC, v. � yssenkrupp Materials, NA, 570 F. Supp. 2d 1061, 1067 at FN3 (E.D. Wis. 2008). 12 Cloud Corp. v. Hasbro, Inc., 3 14 F.3d 289, 295 (7th Cir. 2002). 13 Id, at 296. 14 Nat’l City Bank v. Majerczyk, 2011 IL App (1st) 110640, at ¶3 (citing, A.T. Willett Co v. Indus. Comm’n, 287 Ill. 487, 493 (1919). 15 UETA §7; 15 U.S.C. §7001(a). 16 Alliance Laundry, 750 F. Supp. 2d at 1067. 17 UETA Prefatory Note at ¶3.18 UETA §16; 15 U.S.C. §7021; Security Instruments in Transferable Records Evidencing Residential Mortgage Lending Transactions and the Rights of Warehouse Lenders, MBA Residential Technology Steering Committee (2007). 19 Id.20 15 U.S.C. §7021(f).