Today's Trends in Credit Regulation

A Good Reminder: Enforcing Electronic Contracts is a Matter of Control, Not Possession
By Catharine S. Andricos

In today's digital world, creditors, consumers and regulators have an interest in increasing the use of technology in credit transactions. Electronic contracting is already widely used in auto finance, and the Consumer Financial Protection Bureau is currently conducting a study to assess the benefits of electronic mortgage closings. An increased use of technology in credit transactions can save time and money for consumers, creditors and other market participants. However, as processes evolve from paper to electronic, creditors must ensure their understanding of and compliance with the laws governing electronic transactions, such as the federal ESIGN Act, state versions of the Uniform Electronic Transactions Act, and Uniform Commercial Code ยง 9-105.

For creditors, one of the most significant distinctions between paper and electronic transactions is the manner in which a creditor is required to perfect its security interest in the collateral. Pursuant to the UCC, a traditional paper note is a negotiable instrument and may be enforced by "the holder of the instrument." The "holder" is the person in possession of a negotiable instrument that is payable either to bearer or to an identified person if the identified person is in possession of the instrument. Regarding an electronic transferrable record, such as an electronic promissory note, the federal ESIGN Act provides that a person having control of the record is the "holder" for purposes of the UCC.

A creditor's failure to appreciate this distinction and to implement procedures to ensure compliance with the electronic record transfer rules under the federal ESIGN Act could result in a transaction being unenforceable. In a recent case against Wells Fargo Bank, N.A., the Indiana Court of Appeals reversed a judgment for Wells Fargo, based on its finding that Wells Fargo failed to establish that it was entitled to enforce an electronic promissory note. A description of the case follows:

Bryan Good entered into an electronic promissory note in favor of Synergy Mortgage Group, Inc. for the purchase of real estate. The note was secured by a mortgage identifying Synergy as the lender and Mortgage Electronic Registration Systems, Inc. as a nominee for the lender. When Good stopped making loan payments, MERS assigned the mortgage to Wells Fargo Bank, N.A., which initiated foreclosure proceedings. In response, Good alleged that Wells Fargo was not a holder in due course and lacked standing to foreclose. The trial court entered judgment for Wells Fargo. Good appealed. The Indiana Court of Appeals reversed.

In reaching its decision, the appellate court distinguished between the enforceability of paper versus electronic notes. In determining a holder's status with respect to an electronic note, the appellate court found that control, not possession, was the relevant consideration. The appellate court looked to Wells Fargo's affidavit certifying that it possessed a copy of the promissory note and that it had controls in place to assure that the electronic note was accurately received as originally executed and protected against alteration. Wells Fargo's affidavit did not suggest that Wells Fargo maintained the authoritative copy of the note and did not indicate that the note had been transferred, as required under the federal ESIGN Act. Thus, the appellate court concluded that Wells Fargo had not shown that it controlled the note and did not establish its entitlement to enforce the note.

For creditors evolving their business toward taking assignment of electronic notes, the Good case illustrates the importance of understanding the distinctions between paper and electronic transactions. Gaining this understanding and ensuring compliance with the laws governing electronic transactions is a critical step for creditors as they enter the digital world.

Good v. Wells Fargo Bank, N.A., 2014 Ind. App. LEXIS 483 (Ind. App. September 29, 2014).

Catharine Andricos is a partner in the Washington, D.C., office of Hudson Cook, LLP. Catharine can be reached at 202-327-9706 or by email at

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