In the fallout from the 2008 financial crisis,courts across the United States wereinundated with litigation challenging thelegitimacy of mortgages, notes and therecords purporting the transfer or assignthem. Such claims included asserting thatendorsements of promissory notes werenot enforceable, claiming assignments ofmortgages were executed without

authority, and allegations that the note, mortgage,or associated disclosure documents were neitherpresented to nor signed by the borrowers. Inrecent years, as the economy appears to haveimproved, much of this litigation has died down.However, it does not take much imagination toassume that if and when the next economicdownturn hits, some borrowers may again findthemselves in default on their mortgageobligations, and in turn may seek to challenge theenforceability of those agreements.

As eMortgages and eNotes continue to gaintraction across the U.S. as an acceptable formatfor originating mortgage loans, lingering in thebackground is the issue of how these recordsmight be treated by the courts in the event aborrower eventually attempts to challenge them incourt. Given that challenging the enforceability of

mortgage loan records was a common tacticin the years following 2008, it stands toreason that the increased use of eMortgagesand eNotes will generate a fresh set ofchallenges to be employed by borrowers indefault in order to attempt to avoid their

obligations. As such, lenders, servicers, andinvestors seeking to originate, acquire orservice eMortgages and eNotes should bemindful of how these records could be treatedby the courts, and should implement systems,processes and procedures now to insure theywill have the necessary evidentiary record inplace should such litigation come in thefuture.

UETA, E-Sign, and establishing thevalidity of electronic signaturesThe implementation of eMortgages andeNotes is made possible in part by aseries of laws concerning the use ofelectronic signatures. The two primary

sources of authority are the federalElectronic Signatures in Global and

National Commerce Act, 15 U.S.C.ch. 96 (“E-SIGN”), along with various

state adaptations and permutations ofthe Uniform Electronic Transactions Act (UETA). Invery broad terms, these two statutory schemesprovide, subject to certain exclusions, that recordsand signatures may not be denied legal effect,validity, or enforceability solely because they are inan electronic form or because an electronicsignature or electronic record is used in theirformation. Additionally, E-SIGN and UETA permitthe electronic transfer of certain paymentinstruments, such as promissory notes, withouttraditional requirements such as an original papercopy continuing original signatures andendorsements. All states except for Illinois, NewYork and Washington have adopted UETA, buteach of those three states has its own lawsrecognizing electronic signatures.

Those courts applying E-SIGN and UETAgenerally have interpreted the statutes broadly tohold that these statutes permit electronicsignatures to be satisfactory in any scenario thattraditionally required an original signature. For

What’s Past Is PrologueApplying lessons from the financial crisis to the future of eMortgage and eNote litigationBy Laura Baucus & Robert Hugh Ellis

example, Barwick v. Gov’t Em. Ins.Co., 2011 Ark 128 (Ark. 2011)concerned the electronic rejectionof medical coverage in aninsurance context, which underArkansas law needs to bespecifically rejected in writing. Thecourt, however, held that anelectronic signature satisfied thisrequirement, noting “In our view,the meaning of [the UETA] couldnot be more straightforward whenit states that ‘[i]f a law requires arecord to be in writing, anelectronic record satisfies thelaw.”

The primary issue isdetermining what is required toestablish that the e-signature itselfis genuine. Put another way, onemust consider what safeguardsneed to be in place at the time ofthe e-signing, in order toeffectively defend against a futurechallenge by a borrower whomight seek to avoid theagreements in litigation on thebasis that he or she purportedlywas not the person who e-signedthe operative documents.

The answer, in simple terms, is“process.” The lender must have aprocess and safeguards in placeto establish that the electronicdocument is genuine and has notbeen altered. Some of the bestprocesses ensure that theborrower consents to an electronictransaction, that the eNote signedat closing is digitally tampersealed immediately postexecution, and that a completedigital audit is saved related to theelectronic transaction. A failure toillustrate adequate processescould result in an unenforceableagreement.

This concept is nicely illustratedby two UETA cases out ofCalifornia concerning employeearbitration agreements. In Ruiz v.Moss Bros. Auto Grp., Inc., 181Cal Rptr. 3d 781 (Cal. Ct. App.2014), the court refused to enforcean electronically signed employeearbitration agreement becausethere was insufficient evidencethat this particular person actuallysigned the agreement. There wasevidence of a common practice(such that all employees had to e-sign such an agreement), andthere were records showing thatthe electronic system wasaccessed and the electronicdocument was e-signed, but therewas insufficient evidence toestablish that the plaintiff was theperson who did the e-signing.Missing, for example, was anyevidence of security protocol,such as unique username andpassword combination, orevidence that only a person withthe password could have e-signed

the document. Conversely, inEspejo v. S. Cal. Permanente Med.Grp., 201 Cal. Rptr. 3d 318 (CalCt. App. 2016), the court enforceda similarly e-signed employeearbitration agreement. Unlike Ruiz,here there was ample evidence ofprocess. The employee hadreceived a link that could only beaccessed by username andpassword combination. Once thatwas provided, the plaintiff had tochange the password. This type ofprocess evidence helped establishthat the plaintiff was the individualwho had actually electronicallysigned the arbitration agreement.

Enforcing the eNoteWhether the original e-signatureitself is enforceable is not wherethe analysis ends, however,because the vast majority ofmortgage loans do not remain withthe originating lender. The issuethen becomes how to authenticateand establish that the currentowner of the eNote is entitled toenforce the document when theunderlying records are electronicand there are no original inksignatures or paper endorsementsto rely upon. The answer, onceagain, appears to be “process.”

By way of background, provingthe right to enforce a paper noteturns on physical delivery,possession and endorsement.However, with an eNote, lendersand servicers (includingsubsequent holders) need to provethat they are in control of theauthoritative copy of thetransferable record and relatedbusiness records.

For example, courts in UETAstates have applied theirrespective state versions of UETAto permit subsequent holders toenforce electronically executedand delivered notes without normalUCC requirements such asphysical delivery, possession, orendorsement. In Rivera v. WellsFargo Bank, N.A., 189 So.3d 323(Fla. Dist. Ct. App. 2016) anelectronic signature on apromissory note was held to beenforceable under UETA in a realproperty foreclosure action.

Similarly, in N.Y. Comm’ty Bankv. McClendon, 29 N.Y.S.3d 507(N.Y. App. Div. 2016), the courtapplied E-SIGN and held that anelectronically signed promissorynote was enforceable.

Specifically, in both the Riveraand McClendon cases, theborrowers challenged theelectronic chain of title andcustody of the eNotes. InMcClendon, the court applied E-SIGN and found that “[d]elivery,possession, and endorsement arenot required to obtain or exercise

any of the rights” of a holder of anelectronic note.” Instead, theholder needed only to provide“reasonable proof that the personis in control of the transferablerecord,” which “may includeaccess to the authoritative copy ofthe transferable record and relatedbusiness records sufficient toreview the terms of thetransferable record and toestablish the identity of the personhaving control of the transferablerecord.” The court found that theassociated “eNote transfer history”was such a “transferrable record”and that the current holder hadestablished ownership.

Similarly, in Rivera, the courtheld that Fannie Mae’s systemestablished that there was asingle, authoritative copy of thenote that was unalterable.Specifically, “[a]ccording to thebank’s evidence, the bank’ssystem stored the eNote in such amanner that a single authoritativecopy of the eNote exists which isunique, identifiable, andunalterable. That authoritativecopy, introduced into evidence bythe bank as Fannie Mae’sdesignated custodian, identifiedFannie Mae as the entity to whichthe transferable record was mostrecently transferred.” The courtthus held that delivery, possessionand endorsement of a physicalnote were not required.

Finally, in Wells Fargo Bank, NAv. Benitez, No. 15433, 2017 N.Y.Misc. LEXIS 5192, 2017 NY SlipOp 32747(U), ¶ 5, the court heldthat the plaintiff had sufficientlyestablished standing to enforce aneNote, focusing on plaintiff’scontrol over a single authoritativecopy of the eNote. “Plaintiff hasestablished its standing with thesubmission of the affidavits …establish[ing] plaintiff’s standing asthe controller of the eNote, sinceWells Fargo maintains the singleauthoritative copy of the eNoteand is entitled to enforce same.”

A failure to establish a processdemonstrating the ownershiphistory and the existence of anauthoritative copy can lead toevidentiary issues, and thepotential that the court may deemthe transfers unenforceable. Forexample, in Good v. Wells Fargo

Bank N.A., 18 N.E.3d 618 (Ind. Ct.App. 2014), the court set aside anorder granting summary judgmentbecause it found that the lenderhad provided insufficient evidenceto show it was the true owner ofthe note. The lender had providedan affidavit concerning thepossession of certain records, butnothing illustrating that it hadcontrol of the interest in the noteitself. As explained by the Court,“Wells Fargo did not provide anyevidence documenting thetransfer or assignment of theNote[.] Thus, Wells Fargo did notdemonstrate it controlled the Noteby showing that a systememployed for evidencing thetransfer of interests in the Notereliably established that the Notehad been transferred to WellsFargo.”

The enforcement of eMortgagesis a state-specific issue, andgenerally turns on whether thestate permits remote electronicnotarization and electronicsignatures on recordableinstruments. The use ofeMortgages is further impacted bywhether the specific localjurisdiction permits the electronicrecording of documents.

Measures to avoidenforcement issuesWhile the specter of futurelitigation is never a pleasantconsideration, those businessesseeking to utilize eMortgages andeNotes have to assume thatsomewhere down the line they willbe faced with certain borrowerswho seek to avoid theirobligations by challenging thelegitimacy of the e-signatures orthe veracity and enforceable ofelectronic transfers of theownership interest in the notesand mortgages. In order to avoidspending countless hours andincurring significant legal fees infuture disputes on suchevidentiary issues, companieslooking to get into the eMortgageand eNote business should focusnow on making certain they havethe processes in place to createand retain the evidence they willneed to quickly and efficientlyresolve such issues if and whenthe next wave of litigation begins.

Laura Baucus is Dykema’s Financial Services LitigationPractice Group Leader and the Immediate Past OfficeManaging Member of the firm’s Bloomfield Hills, Mich. 70-plusattorney office. She may be reached by phone at (248) 203-0796 or e-mail LBaucus@Dykema.com. Robert Hugh Ellis is amember in Dykema’s Litigation Group. His practice focuses onbusiness and commercial litigation in the areas of contractdisputes, privately-held businesses, insurance litigation,financial services litigation, residential and commercial realestate. He may be reached by phone at (313) 568-6723 or e-mail REllis@Dykema.com.