Professor Dale Whitman posted a commentary on Good v. Wells Fargo Bank, 18 N.E.3d  618 (Ind. App. 2014) on the Dirt listserv. The case addresses whether a lender foreclosing a mortgage securing an electronic note must provide proof that it had “control” of the note when it filed the foreclosure action. This is an interesting new take on an old issue. Dale’s commentary reads:

By now, everyone is familiar with the requirements of UCC Article 3 with respect to enforcement of negotiable notes. Article 3 requires either proof that the party enforcing the note has possession of the original note, or as an alternative, requires submission of a lost note affidavit. With conventional paper notes, it has become common for courts in judicial foreclosure states to require, as a condition of standing to foreclose, that the note holder or its servicer have had possession of the note on the date the foreclosure complaint or petition was filed. This requirement is problematic if (as is often true) the endorsement on the note is undated. In such cases, the servicer will usually be expected to provide additional proof (commonly in the form of affidavits of employees of the holder and/or servicer) that the note had been delivered to the foreclosing party before the date of filing of the action. See, e.g., Deutsche Bank N.T. v. Beneficial New Mexico, Inc., 335 P.3d 217 (N.M. App. 2014); Boyd v. Wells Fargo Bank, N.A., 143 So.3d 1128 (Fla.App. 2014); U.S. Bank, N.A. v. Faruque, 991 N.Y.S.2d 630 (N.Y.App.Div. 2014).

Suppose, however, that the note was electronic rather than paper. Such notes are enforceable under eSign and UETA, but these statutes modify the concepts of delivery and possession. Because an electronic note can be reproduced as many times as desired, and each copy is indistinguishable from the original, eSign creates the concept of the note as a “transferrable record.” Such records must have the following characteristics:

1.  The record must be held within a system in which “a single authoritative copy of the record (the note) exists, which is unique, identifiable, and unalterable.”

2.  To have the equivalent of possession of such a note, if it has been transferred, a person must have “control” in the sense that the system for tracking such notes must reliably establish that the person enforcing the note is the one to whom the record was transferred.

3.  Finally, if the record has been transferred, the authoritative copy of the record itself must indicate the identity of the person who whom it was most recently transferred.

See 15 U.S.C. sec. 7021.

There are very few cases thus far involving foreclosures of mortgages securing e-notes, and little authority on exactly what the holder must prove in order to properly foreclose. In the Good case Wells Fargo was acting as servicer for Fannie Mae, the holder of an e-note that was registered in the MERS e-registry. (MERS’ role with e-notes is very different than for paper notes. In paper note transactions, MERS does not take possession of the note and has no dealings with it, but in e-note transactions, MERS operates a registry to track who has control of the note.)

Accompanying its foreclosure complaint, Wells filed an affidavit by one of its officers, stating that Wells was the servicer, that it maintained a copy of the note, and that its systems provided controls to assure that each note was maintained accurately and protected against alteration. Finally, it stated that the paper copy it submitted with the foreclosure complaint was a true and correct copy of the original e-note.

Unfortunately for Wells, the court found that this affidavit was woefully inadequate to establish Wells’ standing to foreclose the mortgage. Here is the court’s list of particulars:

1.  The affidavit stated that Wells possessed the note, but the court couldn’t tell whether it meant the electronic note or a paper copy.

2.  The affidavit did not assert that Wells had “control” of the record, either by maintaining the single authoritative copy itself in its own system, or by being identified as having control of the single authoritative copy in the MERS registry system.

3.  In fact, Wells never even mentioned the MERS registry system in its affidavit, even though it is obvious from the facts that the note was being tracked within that system.

Wells tried to repair the damage at trial; an employee of Wells testified that Wells was in control of the note, currently maintained it, and serviced the loan. But the court found that this testimony was “conclusory” (as indeed it was) and was insufficient to establish that Wells had control of the note.

Comment: The court provides an extremely useful road map for counsel representing a servicer in the judicial foreclosure of a e-note. The statute itself provides (in 15 U.S.C. 7021(f)) that the person enforcing the note must provide “reasonable proof” that it was in control of the note, and the court felt this must be detailed information and not merely a bare statement.

While the case involved a judicial foreclosure, one might well ask how the “reasonable proof” requirement would be satisfied in a nonjudicial foreclosure. In about eight states, the courts have held (with paper notes) that their nonjudicial foreclosure statutes do not require any assertion or proof of possession of the note. But it is arguable that, if the note is electronic rather than paper, eSign overrides this conclusion by virtue of its express requirement of “reasonable proof.” And since eSign is a federal statute, it is quite capable of preempting any contrary state legislation.  On the other hand, the “reasonable proof” requirement only applies “if requested by a person against which enforcement is sought.” In a nonjudicial foreclosure proceeding, how would the borrower make such a request? These are interesting, but highly speculative questions.