September/October 2017

The Emergence of Financial Documents in E-Commerce

Spurred by the rapid growth of e-commerce and online lending, e-signatures and e-documents are becoming an essential part of business. However, both terms remain loosely defined in a legal sense. Paul Shur examines the regulations and case law that govern their use.



Paul H. Shur,Shareholder, Wilentz, Goldman & Spitzer

Paul H. Shur, Shareholder, Wilentz, Goldman & Spitzer

Since 2000, 47 states have adopted the Uniform Electronic Transactions Act (UETA), and New York enacted its own regulation, the Electronic Signatures and Records Act (ESRA).1 Since that time, several developments in both law and technology have furthered the statutes’ goal of removing barriers to electronic-based commerce. This article will address the latest developments in applying e-signatures to documents of title and promissory notes as significant evidence of financial obligations.

UETA and ESRA define several terms, but electronic record and electronic signature are the most relevant for financial institutions. UETA defines an electronic record as “a record created, generated, sent, communicated, received or stored by electronic means.”2 ESRA defines it as “information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.”3

UETA and ESTRA both define an electronic signature as an “electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.”4

Consent Required

Both regulations require that electronic signatures and records be used voluntarily. UETA specifies that it applies to a transaction involving at least two people. ESRA provides that an entity or person is not required to participate. The surrounding circumstances or the nature and particulars of the transaction documents can determine consent.5

Neither ESRA nor UETA applies to all documents or transactions. ESRA does not apply to, among other things, “negotiable instruments” and “instruments [documents] of title.” This includes finance-related documents where possession confers title “unless an electronic version of such record is created, stored or transferred pursuant to this article in a manner that allows for the existence of only one unique, identifiable and unalterable version which cannot be copied except in a form that is readily identifiable as a copy.”6 UETA has a similar exclusion for a transaction 7 to the extent “governed by the Uniform Commercial Code (UCC) other than §1-107 and 1-206, Article 2 and Article 2A.”8

Exceptions to the Rule

There are exceptions to those exclusions where UETA and ESRA do apply. But they do so in a dissimilar manner even though the result is the same. In New York, the legislature recently adopted the uniform amendments to Article 7 of the UCC9 (previously adopted in New Jersey and Florida) contemplating uniform treatment among the states to documents of title, such as warehouse receipts and bills of lading, so that they can be converted to electronic form and the transfer of title in electronic form can be effectuated in an alternative medium once a system is in place.10 Article 3 governing negotiable instruments/commercial paper has not been similarly revised, so it still requires a written signature for a negotiable instrument.11 Under ESRA, negotiable instruments and documents of title are covered by the Electronic Version Exception (EVE). Under UETA, instruments and documents covered by Articles 3 and 7 of the UCC can be evidenced in electronic form if they qualify as transferable records.12

Therefore, despite statutory exclusions, both documents and notes can enter the world of e-commerce.

A transferable record is an instrument or document that would otherwise qualify as an Article 3 negotiable instrument or an Article 7 document, if a system is in place where a holder can establish control of a record of such instrument or document by such a system which is “unique, identifiable and authoritative.” Thus, the law has set in place a mechanism to use and create electronic notes and document equivalents.13

A review of reported case law uncovers few judicial pronouncements on the use and enforceability of electronic signatures. An individual’s name in the “from” field of an email was held to constitute a valid signature for purposes of UETA.14 The court in Prudential Insurance Co. of America v. Dukoff,15 indicated under ESRA, an enforceable electronic signature may consist of a checked box or click of a button. In Savarese v. J.P. Morgan Chase,16 the court held that, under ESRA, an individual’s review of an employment application by clicking through prompts and entering a typewritten name at the end of the process constituted an electronic signature on the application.

Recent Case Law

The recent Florida Appellate Court decision of Rivera v. Wells Fargo Bank, et als.17 appears to be the first reported case holding that an e-note is enforceable as a transferable record under UETA. In a foreclosure action, the bank, as the loan servicer of the Federal National Mortgage Association, sought to enforce the electronic note, registered in a national registry maintained by MERSCORP (MERS) for mortgage secured notes. The bank submitted an affidavit from MERS confirming that the bank had electronic possession of the note as the loan servicer. The court held:

The e-note, on its face, is a “transferable record” because it is an electronic record that would be a note under [Article 3 of UCC] if it were in writing, and its issuer expressly agreed on its face that it was a transferable record. [UETA §16] The bank’s evidence proved that Fannie Mae had control of the e-note by showing that the bank, as Fannie Mae’s servicer, employed a system reliably establishing Fannie Mae as the entity to which the e-note was transferred. [UETA §16]. According to the bank’s evidence, the bank’s system stored the e-note in such a manner that a single authoritative copy of the e-note exists which is unique, identifiable, and unalterable. . . That authoritative copy, introduced into evidence by the bank as Fannie Mae’s designated custodian, identified Fannie Mae as the entity to which the transferable record was most recently transferred.18

The case establishes a system for registering e-notes as “transferable records,” although the elements that enabled the system in this case to satisfy the criteria might warrant further examination and study for consistency and reliability. The case does demonstrate the ongoing progress of technology designed to incorporate promissory notes into electronic commerce.

As modern technology advances toward a paperless system to evidence financial transactions, it appears that eventually many, if not all, documents and instruments presently excluded under ESRA and UETA will satisfy the conditions for inclusion. That will occur when users of systems designed to register documents and implement transferable records and the EVE become satisfied that these systems are reliable. And when courts provide guidance on how these systems must ensure the enforceability of the instruments and documents they maintain.

Footnotes

  1. UETA is found at N.J.S.A. 12A:12-1, et seq. in New Jersey (effective June 26, 2001) and F.S.A. 668.50, et seq. in Florida (effective July 1, 2000); ESRA is found at McKinney’s (L. 1999, Ch 4); State Technology Law, Article 3, §301-309. (effective March 27, 2000; September 14, 2004). These three states are cited as they are the three jurisdictions where the author is licensed to practice law.
  2. UETA §2.
  3. ESRA §302.
  4. UETA §2; ESRA §302
  5. ESRA §309; UETA §5
  6. ESRA §307(2): For purposes hereof, the author will refer to this as the “Electronic Version Exception.”
  7. Observe the difference between ESRA’s exclusion of an instrument or document and UETA’s exclusion of a “transaction” making it important for the lender or practitioner to be mindful of the advantages and disadvantages of having some but not all of the documents in a particular transaction in electronic versus written format. See also Official Comments to UETA §3.
  8. UETA §3. A detailed analysis of each of the excluded documents and transactions is beyond the scope of this article. However, it is important to recognize that each exclusion is apparently the function of an absence of a verifiable electronic record keeping and transfer system for certain documents/transactions. Several of the documents and transactions excluded by UETA and ESRA have become part of e-commerce by direct amendments to the specific UCC articles which govern them. See Footnotes No. 10 and No. 13. The comments to UETA acknowledge that certain documentary transactions such as real estate mortgages are not excluded expressly but cannot be reconciled with electronic records until governmental agencies have implemented such a system and integrated third party reliance thereon. See UETA §3, Legislative Note No. 3.
  9. McKinney’s L. 2014, ch 505 (effective December 17, 2014)
  10. See Official Comment No.5 to §7-106; §7-105.
  11. Official Comment No. 5 to §3 of UETA provides that “Articles 3, 4 and 4A of the UCC impact payment systems and have been specifically removed from the coverage of this Act.” In New York, Article 3 governing “commercial paper” and negotiable instruments was last amended on September 24, 1964 and does not incorporate electronic signatures or records. Uniform §3-401 of the UCC continues to require a writing in New Jersey and Florida.
  12. UETA §16.
  13. UETA Official Comment No.1 to §16. The Official Comments note the existence today of such a system for the storage and transfer of security entitlements in electronic form under Article 8 of the UCC. See Official Comment No. 3, §16.
  14. See Khoury v. Tomlinson, 518 S.W.3d 568, 2016 WL [7671376] (Tex. App. Dec. 22, 2016); Int’l Casings Grp. v. Premium Standard Farms, 358 F. Supp. 2d 863 (W.D. Mo. 2005); Mohammed v. Uber Technologies, Inc., — F. Supp. 3d — (N.D. Ill. 2017); Schwalm v. TCF National Bank, 226 F. Supp. 3d 937 (D.S.D. 2016).
  15. 674 F.Supp.2d 401 (E.D.N.Y. 2009). See also Forcelli v. Gelco, 109 A.D.3d 244 (App. Div. 2d Dept. 2013).
  16. 2016 WL 7167968 (E.D.N.Y. 2016)
  17. 189 So. 3d 323 (4th DCA 2016)
  18. 189 So. 3d, at 329. It is not clear whether in determining that the note was a “transferable record” the “system employed for evidencing the transfer of interests…” under UETA was the MERS system or the Wells Fargo system or both.