Enforceability of Electronic Promissory Notes in the Context of Foreclosure

By Erika Hoover

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November 30, 2017 – As the mortgage industry moves toward electronic methods for mortgage closing transactions, the natural questions are: what documents can be signed electronically and is an electronically signed promissory note enforceable in the context of default or foreclosure in the event there is a breach of the mortgage covenants and the failure to fulfill the obligations under the note. Those questions remain mostly unanswered in Massachusetts as to obligations secured by a principal residence of an individual. The applicable statutes are convoluted and there is little case law further clarifying the application and relationship between Article 3 of the Uniform Commercial Code (“UCC”) and foreclosure statutes and regulations with the Uniform Electronic Transfers Act (“UETA”). However, despite these challenges, there is some support for applicability and enforcement of electronic notes if the various criteria under the terms of the note, the UCC and the UETA can be satisfied.

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The UCC, codified under Ma. Gen. Law c 106 and specifically c. 106 Art. 1, Art. 3 and § 3-302, governs negotiable instruments, including promissory notes secured by mortgages on residential property in Massachusetts. Article 3 incorporates the definitions promulgated in Chapter 106, Article 1, §1-201, which define a “writing” as a “printing, typewriting or any other intentional reduction to tangible form.” This limitation of a tangible form, and thereby a tangible signature, throughout Article 3 of Chapter 106 limits enforceability of promissory notes to original tangible “wet-ink” documents with physical records and indorsements thereof. However, pursuant to Ma. Gen. Law c. 110G, the codified UETA in Massachusetts, Chapter 110G, Section 3(a) authorizes, generally, the enforceability of the use of electronic signatures in transactions to the same extent that original tangible signatures may be enforced, but only if the transaction is not otherwise excluded from application of the statute.

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Chapter 110G, Section 3(b) specifically excludes the application of UETA to transfers governed under the Massachusetts UCC within Article 3 and section 1-201 of Chapter 106 and also specifically excludes application of UETA to any law, statute, or other rule related to “the default, acceleration, repossession, foreclosure, or eviction, or the right to cure, under a credit agreement secured by a primary residence of an individual.” This exclusion indicates that individual consumer transactions with promissory notes secured by a principal residence, even if otherwise enforceable, are unenforceable in the context of enforcement of a breach of the agreement, including but not limited to foreclosure.

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Based on a plain reading of Chapter 110G, Section 3(b), although UETA under Chapter 110G authorizes general acceptance of electronic records and electronic signatures, the specific exclusion to Article 3 of the Massachusetts UCC under chapter 106 and more specifically “the default, acceleration, repossession, foreclosure, or eviction, or the right to cure, under a credit agreement secured by a primary residence of an individual,” indicates e-notes in the context of consumer loan mortgage foreclosures appear unenforceable.

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However, Chapter 110G, section 16, provides for some potential enforceability despite the direct and specific exclusions stated in Section 3 of chapter 110G, but only if the requirements of section 16 can be satisfied. Section 16(d) provides that if a promissory note is considered a “transferrable record”, the holder of the note will be afforded the same rights and defenses as to enforceability as any other note holder pursuant to a non-electronic transfer, even if such transfer would otherwise be excluded under Chapter 110G, section 3(b) for “…default, acceleration, repossession, foreclosure, or eviction, or the right to cure…”

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Further, Chapter 110G, section 16(a), a “transferrable record” is an electronic record “that would be a note under Section 3 of Chapter 106, or a document under section 7, if the electronic record were in writing; and the issuer of the electronic record expressly has agreed is a transferrable record.” As defined by Chapter 106, section 1-201, a writing is a “tangible form.” In essence, despite the explicit exclusion to application of UETA to section 3 of Chapter 106, if the electronic record can satisfy the requirements of a “transferrable record” under section 16, then the electronic note is enforceable. Unfortunately, the exception under section 16 of chapter 110G to the exclusion of section 3 of chapter 106 (set forth in section 3 of chapter 110G), does not further clarify whether that also eliminates the exclusion for enforcement actions related to “…default, acceleration, repossession, foreclosure, or eviction, or the right to cure…” as to the principal residence of an individual.

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When looking at the statutes in totality, the argument can be made that if the electronic note specifically authorizes the document to be converted and reduced to a “writing” in “tangible form” as defined under the Massachusetts UCC in Chapter 106, section 1-201, and the holder of that electronic record can satisfy all the requirements for validating the transfer and storage of the electronic record prior to conversion to a tangible form, pursuant to chapter 110G, section 16, and then authenticate the reduction and conversion of that electronic record to a “tangible form”, such that the “tangible form” becomes the definitive and authoritative version of the electronic record, and that no further transfer of that document can be made by electronic transmission, the document may be enforceable in the context of “…default, acceleration, repossession, foreclosure, or eviction, or the right to cure…” as to the principal residence of an individual.

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Until further clarification on the interaction between the UCC and the UETA is available, the question of enforceability will continue, and until electronic signatures can be submitted and accepted by the various land recording authorities for execution of mortgages, the recommendation to lenders is to continue to obtain original signature documents of tangible form promissory notes, as to individual consumer credit agreements secured against an individual’s primary residence during the origination of consumer mortgages. Should you have any questions regarding the above please feel free to contact Orlans PC Attorney Erika Hoover at ehoover@orlans.com or direct at 781-790- 7806.