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Subject: DD 11/28 Has ESign Killed the Statute of Frauds?
Date: Tue, 28 Nov 2000 11:09:30 -0600
From: Patrick Randolph prandolph@cctr.umkc.edu
Reply-To: Real Estate Brokers Discussion Group <BROKERDIRT@LISTSERV.UMKC.EDU>


No one knows much about the real meaning of the ESign legislation on real estate transactions. We're just getting a lot of speculation, and here I add my own. I would appreciate in particular feedback about particular things I say in this little piece, as I plan to look for some other publication venue as well, and in any event would like to refine my ideas.

Pat

Daily Development for Tuesday, November 28, 2000

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

STATUTE OF FRAUDS; ELECTRONIC TRANSACTIONS: Federal ESign legislation revokes Statute of Frauds with regard to electronic transactions.

Electronic Records in Global and National Commerce Act, S. 761 (106th Congress, 2000)

This act, popularly referred to as "ESign," in fact has as one of its primary purposes to repeal state law requirements for written instruments as they apply to electronic agreements. The operative language is quite clear and succinct:

The operative term, obviously, is "transaction." ESign provides a very broad definition:
An initial reaction by many familiar with developments in electronic transactions don't find any of this too surprising. They anticipate a brave new world of encrypted signatures managed through elaborate codes, eyeball or DNA recognition, or other sophisticated recognition devices to insure the certainty of agreement that once might have been provided by personal witnesses, signatures, seals and notaries. In other words, one type of formality is replaced with another type. But, in its infinite wisdom, Congress is far, far, beyond this narrow view of transactions. Congress has provided that almost anything can be an electronic signature rendering a party bound to agreement. Here is the statutory language:
That's it. So, for instance, if you sent me an email that said: "I'll buy your property at 450 W. Meyer in Chicago for $50,000, and I typed at the top of this message "OK" and hit "return," it's quite likely that we'd have a binding real estate contract. All you'd have to show is that the typing of the words "OK" indicated my intent to express agreement. The fact that I didn't even type out my name would not matter, since I "attached" an "electronic symbol" to a contract. The contract would still have to meet standards of clarity and certainty. And perhaps an exchange this informal would not meet those standards in some jurisdictions. But the point is that a relatively simple and perhaps thoughtless act arguably could result in the formation of a relatively serious contract.

Perhaps you're wondering whether a voice transmission over a telephone line is also an "electronic sound, symbol or process," taking telephone agreements out of the Statute of Frauds. Esign arguably exempts (at least in consumer agreements) telephone conversations from the impact of its preemptive approval of electronic agreements, but this is not all that clear. Here is the language, which applies only to consumer agreements:
First, we'd have to conclude that a telephonic communication is an "oral communication." We've got a fighting chance there. But then, note that the exemption language applies to "electronic records" which is a different concept from "electronic signature." What about agreements other than consumer agreements? Another ESign provision, of broader application, states that if an existing local law requires that an agreement be in writing, the enforceability of an electronic record of that agreement may be denied if the record is in a form that cannot be retained and accurately reproduced. Thus, arguably we could not negotiate a real estate agreement over the telephone that would be exempt from the Statute of Frauds unless that conversation was recorded in some way and could be reproduced. But does this provision also require that my telephonic assent to an agreement form sent to me by email or even in writing also be preserved in a reproducible fashion? Possibly.

Note that the Act only applies to transactions in "interstate commerce." But that email message, when it left my computer, conceivably bounced to Irkutsk, then to Geneva, then to Mexico City all on its way to your computer, even if your computer was located in the building next door to mine. Further, it was carried on a variety of communications media commonly association with interstate transactions. The likelihood is quite strong that even the current Supreme Court, with its reputed desire for narrowing the reach of the Interstate Commerce Clause, will have difficulty interpreting around the conclusion that email transactions are in interstate commerce. With respect to local telephone conversations, prior cases have held that telephone conversations are per se within interstate commerce as well, although this conclusion is one that the Supreme Court might change at some point.

It's not hard to argue that this is all exactly what Congress intended. But is it good policy?

The traditional Statute of Frauds has come to mean a requirement for formality in the "typical" real estate transaction (and, of course other important transactions as well). We all know that the requirements of the Statute can often be avoided, through the "part performance doctrine," or through the somewhat related concept of "estoppel." Further, in some cases parties relying upon the statute to avoid obligations have been held liable for fraud, even though they escape the transaction itself. But even though there are many exceptions to which lawyers might result in a pinch, the requirements of the Statute have resulted in standard practices by real estate transactions professionals to comply with the requirements and avoid problems. The result, many would argue, is that parties engaged in the serious business of transacting in real estate get the chance to "think twice" and study the instruments before they are finally bound.

It's that "think twice" aspect that the Esign legislation may take away.

Well advised parties have always been able to protect themselves from thoughtless acts by their agents or employees by setting up restrictions on the way in which they are bound to important contracts. There is nothing in ESign that prevents such practices. A company could, for instance, simply prohibit its employees from assenting to anything through email messages. It could provide notice in advance to its business associates that electronic transmissions cannot result in binding agreements. Such a notice, one hopes, would be binding upon any parties that do business with knowledge of it, since an electronic assent would not then be regarded as expressing an "intent to be bound." (A court, however, could find that the party supplying the warning had waived the restriction by the granting of oral assent notwithstanding the warning.)

But many real estate owners are not "well advised" at the time that they are in the throes of negotiating real estate deals. Lawyers know that all too often there is something on the table before the client shows up for legal advice. Frequently, the presence of the Statute of Frauds has protected such clients basically against themselves. If it's not in writing, it can always be changed to make a more comfortable agreement. Frequently, these situations arise when there has been no part performance or estoppel, and the parties can work out an agreement in a more formal negotiating environment.

Obviously, if ESign makes every telephonic exchange a binding agreement, notwithstanding the Statute of Frauds, this comfy "second chance" that generally is available today will be gone. But even if ESign does not apply to telephonic acceptances, its application to Internet agreements may raise many of the same problems. The fundamental policy question is whether an email exchange ought to be viewed as the equivalent of an exchange of written documents or as the equivalent of a telephone conversation. In the author's view, the Internet exchange falls in between, but in many cases fits closer to the telephone conversation. Remember that Internet exchanges now are carried out through hand held transmitters that "road warriors" bang on while walking through airports.

The best result we can hope for under ESign is that the affixation of a digitized signature or other formal identifier becomes the modern equivalent of the written instrument. As suggested, many who have observed the Internet in operation expect and believe that this will come to pass. The real question is whether ESign permits or even creates a legal context with that level of formality.

What actions or arguments might preserve under ESign the requirement of "electronic formality" that is the equivalent of the Statute of Frauds?

Probably the best legal argument is to claim that an assent expressed on an Internet message that is not a formal digitized signature does not embody an "intent to sign" even if it embodies an expression of agreement. Remember that an electronic signature is something that is attached "with the intent to sign the record." No legal authority on this point yet, and here's hoping that you, and not the author, are the first to make history by raising this argument. But it might work, particularly in contexts in which prior electronic commitments made by the signing party have been done through digitized signatures or other secure devices. Note further that the emphasis in ESign appears to be on the intent of the executing party, not on the apparent agreement as observed by the receiving party.

Another approach is to "repreempt" ESIGN. Section 102 of ESIGN states that a state "statute, regulation or other rule of law" may alter the impact of ESIGN, if such new adoption consists of the adoption of the Uniform Electronic Transactions Act or if it is a subsequent enactment that makes specific reference to ESIGN. So, although any existing formality requirements in state law are preempted to the extent they are inconsistent with ESIGN, new requirements could be established. The adoption of the Uniform Electronic Transactions Act wouldn't help much, since the operative provisions of that statute, such as the definition of "electronic record" and "electronic signature" basically are identical to the ESIGN language. The Uniform Act was in fact the model for ESIGN in this regard.

What about a new state law or regulation implementing the concept of the Statute of Frauds or some other formality requirement for binding real estate agreements? Section 102 does permit that, but requires that any such new law be consistent with the provisions of ESIGN. Consequently, electronic signatures or electronic contracts can't be denied enforceability completely.

Can the state impose a greater requirement of "electronic formality," however, such as a requirement that electronic real estate contracts not be binding in the absence of a digitized secure signature? Answer: Maybe, but only very carefully. The problem is that Section 102 also requires that any "readoption" of state standards must not "require or accord greater legal status or effect to . . . a specific technology or technical specification." The concern here was to prevent local law from inhibiting development of electronic transactions developments by creating monopolies for given technologies or even given proprietary systems. The target was legislation similar to Utah legislation that had adopted standards for electronic transactions that did incorporate ABA recommended guidelines for electronic signatures.

So a statute requiring specific technology is out. But what about the creation of a state administrative agency charged with the approval of systems that meet certain guidelines for formality, regardless of their technology? Will this work? Is it the imposition of a specific "technical specification," or simply the imposition of supervised "performance standards?" Watch for the lawsuit. But first, we'd have to get a state to move in this direction.

The ABA Section of Real Property, Probate & Trust Law has created a committee on electronic commerce that is evaluating this and other issues, and may propose state legislation of this type before too long.

In a recent interview with Pat Frey, who was the Reporter for the Uniform Electronic Transactions Act, and hence is quite familiar with the origins of the language in ESIGN, the author raised some of the questions discussed here. On the question of whether an electronic expression of agreement is different from an electronic signature (a possibility raised above), Pat responded that this was not the intent of the drafters of the definition of "electronic signature." No special formality was envisioned. As to the general notion of the meaning of the Statute of Frauds, Pat pointed out that the Statute of Frauds required a preservable and reproducible record a requirement also retained by ESIGN. (In her view the preservable and reproducible record would have to include the signature as well.) But as to the general requirement of formality imposed by the Statute of Frauds, Pat's view is that it never existed. After all, she points out, the Statute of Frauds would have upheld an agreement scribbled on a cocktail napkin so long as it was initialed. Is this really any different from writing "OK" in a response to an email message? Stay tuned.

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.


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Date: Tue, 28 Nov 2000 12:10:52 -0600
From: "Whitman, Dale" <WhitmanD@missouri.edu>

A comment on UETA and ESign:

Neither of these acts requires any particular formality for a digital signature, nor any particular technology. Although most commentators have focused on the desirability of using Public Key Infrastructure (PKI) for digital signatures, and perhaps biometric identifiers as well to supplement PKI, neither UETA nor ESign has any requirements along these lines.

The apparent reason for UETA and ESign not imposing any technical requirements of this sort is a desire not to put the technology in a straitjacket. In other words, if a particular technology were required, it would become the de facto standard, and would perhaps have the effect of stultifying other, better technologies that might come along a little later. Some of the state statutes do impose specific technological requirements, and the effect of ESign is to preempt these, I gather.

There are two issues with respect to "weak" or insecure signatures, such as those permitted by UETA and ESign. One issue, identified by Pat, is the tendency of people to "initial" or "sign" casually, since it is so easy to do. Of course, we have become accustomed to entering into non-realty transactions in this way. I ordered a couple of books from Amazon.com this morning simply by a few mouse clicks. Pat's question, however, is whether we want to facilitate entering into real estate transactions, in which thousands or millions of dollars are at stake, so easily.

The second issue is ease of forgery. I don't think there are very many people who are interesting in forging an order purporting to be from me to Amazon.com. But there are people who might want to forge my signature in a real estate transaction. In the absence of PKI and accompanying biometric identification, forging an electronic signature is utterly easy. It's actually much easier than forging a pen-and-ink signature, since it only takes a couple of strokes at a keyboard. I think it is very questionable whether large transactions (e.g., those over $1,000, to pick an arbitrary figure) should be "consummatable" with insecure signatures.

Nevertheless, that's where these two acts have left us.

Dale Whitman




Date: Tue, 28 Nov 2000 17:04:15 -0600
From: Steven Thorson <sthorson@bgslaw.com>
Subject: Re: DD 11/28 Has ESign Killed the Statute of Frauds?

We real property lawyers in Minnesota were recently advised at a CLE that we were probably on safe ground to ignore the threat of ESign interfering with our recordable documents because of the exception in the federal law for "paramount state recording acts." (Sorry, no cite.) We were advised to be cautious with respect to non-recordable documents, e.g., purchase agreements. We were advised to routinely disclaim electronic transactions unless we overtly wanted the transaction to proceed electronically. My disclaimer appears at the bottom of this reply.

Steve Thorson

Pat Randolph responds:

I think perhaps what Steve is talking about the question of whether Esign compels local recorders to accept electronic filings. There is no language in the statute specifically about "paramount state recording acts," but there is some argument advanced by lawyers hired by ALTA that the statute contains an exemption for recording rules established by "state regulatory agencies." I have weighed in on that debate in the past on DIRT. But I don't think there is any serious argument that ESign does not apply to real estate agreements in general, leaving aside the issue of recording.



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Subject: disclaimer regarding ESign Matters
Date: Wed, 29 Nov 2000 09:38:25 -0600

In his recent post, Steve Thorson alluded to the disclaimer that he was using to avoid commitments through inadvertence as a consequence of ESign. I inadvertently deleted that disclaimer. When I am including additional text or combining posts, disclaimers sometimes get omitted, and this is my disclaimer that you should expect this to happen sometimes. In any event, Steve's disclaimer was a substantive part of the post, and should have been included. I've asked him to provide another copy, and he has done so.

Date: Wed, 29 Nov 2000 09:17:52 -0600
From: Steven Thorson

Steve Thorson ************************************************************************ Steven G. Thorson
Barna, Guzy & Steffen, Ltd., Suite 400 / Northtown Financial Plaza
200 Coon Rapids Boulevard N.W.
Minneapolis, MN 55433-5894

Direct Dial Office: (763) 783-5124
General Office: (763) 780-8500
Office fax: (763) 780-1777
Cellular/Pager : (612) 805-9840
Office E-Mail: sthorson@bgslaw.com
Home E-Mail: sgthorson@aol.com

This electronic mail transmission may be a privileged and confidential attorney-client communication. It is not intended for transmission to, or receipt by, any unauthorized persons. If you have received this electronic mail transmission in error, please delete it from your system without copying it, and notify the sender by reply e-mail or by calling sender at one of the telephone numbers shown above so that our e-mail address records can be corrected.

Thank you.

Disclaimer Regarding Uniform Electronic Transactions Act (Minn. Stat. sections 325L.01--325L.19 [Minn. Sess. Laws 2000, Ch. 371]) ["UETA"]. If this communication concerns negotiation of a contract or agreement, UETA does not apply to this communication: contract formation in this matter shall occur only with manually-affixed original signatures on original documents.

 

Date: Wed, 29 Nov 2000 10:23:32 -0500
From: Bill Hart
Subject: Re: Dale Whitman on DD 11/28 Has ESign Killed the Statute of Frauds?

Pat
While Dale may be correct in stating the reason for UETA and ESIGN [sec. 104(c)(2)] not imposing any technical requirements was to avoid imposing a technological straitjacket or stifling better technology, I'm not so sure ESIGN will effectively preempt such imposition, particularly since Fannie Mae and Freddie Mac are likely to set the "standards." They have already proposed and released preliminary guideline and data specifications relating to software components and the requirements of security programs, which will assist lenders in preparing their business processes and information systems for originating and servicing electronic mortgage. I suspect these guidelines and specs will become the standards to which all vendors will adhere in the marketplace. In fact, the risk of no standards was pointed out in a DIRT post by Michael Cartwright of July 17, 2000 10:44 AM, which followed a lengthy week discussion on the problem with E-Signatures.

Bill Hart
Title Law Associates

 

Date: Wed, 29 Nov 2000 16:10:34 -0600
From: burkh002
Subject: Re: E-SIGN and state recording

E-SIGN does not require county recorders to accept electronic documents. Section 104(a) provides that a state regulatory agency can require that records be filed with it in accordance with "specified standards or formats." The OMB has interpreted this provision as permitting states to specify that a document is recordable only if it is on paper and has ink signatures. OMB Guidance on Implementing the Electronic Signatures in Global and National Commerce Act sec. III.D.

This interpretation is consistent with E-SIGN's legislative history. For example, Congressman Bliley, who chaired the conference committee on E-SIGN and sponsored the House bill that was the basis for E-SIGN stated:

"Section 104(a) provides that ... a State regulatory agency may specify standards or formats for the filing of records with that agency or organization, including requiring paper filings or records." 146 Cong. Rec. H4354 (daily ed. June 14, 2000).

Similarly, Senator Leahy stated:

"Section 104(a) of the conference report expressly preserves governmental filing requirements. Federal agencies are already working toward full acceptance of electronic filing, pursuant to the schedule established by the Government Paperwork Elimination Act. I am confident that State agencies will follow our lead. Until they are technologically equipped to do so, however, they have an unqualified right under section 104(a) to continue to require records to be filed in a tangible printed or paper form." 146 Cong. Rec. S5222 (daily ed. June 15, 2000).

Ann Burkhart

Pat Randolph responds:

I am pleased that ALTA may have been able to get out of the woods on this one by obtaining a ruling of the OMB. It's not clear to me that the OMB has interpretive authority in this area (remember the EPA regulations on CERCLA lender liability that got thrown out), but my uncertainty here stems from ignorance, not from a study of the issue.

But I must say that Anne's reliance upon the notion that legislative history indicating that Congress intended a "state regulatory agency" have the power to set standards, an argument which also appeared in the opinion letter that ALTA obtained from a Washington law firm on this issue, begs the question. Is a local county recorder a "state regulatory agency?"

Informal polls that I have taken of groups of real estate lawyers in various contexts around the country have been almost 100% in agreement that the ordinary meaning of this term would not include county recorders. The opinion letter makes other arguments concerning legislative history as well, but none of them, to my mind, are of a value that would justify a serious opinion on the subject.

In my view, the best argument that can be made on this point is that the consequences of a rule requiring county recorders to accept electronic documents before they're ready are so awful that Congress couldn't possibly have intended this. Further, few in the real estate industry are seriously interested in raising the point in court, so the issue may get resolved by default. Nevertheless, I have been and continue to be a supporter of clarifying legislation. If the OMB regulations indeed have the authority of law, then this would be very, very helpful.

Pat Randolph

 

Date: Thu, 30 Nov 2000 09:33:52 -0500
From: John Thomas
Subject: RE: Re: E-SIGN and state recording

Here in Connecticut we record real estate transactions in the 169 offices of the town or city clerks of our 169 towns and cities; though we have counties (eight of them), there are no county governments or recording offices. By state statute, the format of documents that town clerks may receive for recording is subject to "the approval of the Public Records Administrator." The approval of the Public Records Administrator is given or denied on a statewide basis.

If Pat Randolph informally polled me, "Would a Connecticut town clerk - the counterpart of the county recorder in other areas of the country - qualify as a 'state regulatory agency' under E-SIGN?", my answer would be "No." I would not say the same of the Public Records Administrator, however, and think that if the PRA said "No electronic filings," E-SIGN would not be violated.

In other parts of the country, don't states have the equivalent of Connecticut's Public Records Administrator, a setter of statewide standards that county recorders must adhere to?

John Thomas
Title Counsel
Connecticut Attorneys Title Insurance Company

Pat Randolph responds:

As I understand things, the situation varies tremendously. But Connecticut has more filing venues per capita, I believe, than any other state, which provides a stronger rationale for statewide controls.

In many states, the county clerks office is a political patronage fiefdom in which local power is jealously guarded. During the drafting of the Uniform Electronic Transactions Act, the Joint Editorial Board on Uniform State Property Laws worked very hard to influence the drafters to establish statewide controls on electronic filings (not filings generally). Our concern was that if each local agency decided independently how to deal with electronic filings, we lose desired consistency and uniform quality. We failed to get that result (although we're not sure how that happened), and the UETA draft has bracketed language authorizing local control on this issue that has been adopted in a number of jurisdictions. In any event, the position taken by the opinion sought by the ALTA is that, in fact, local county recorders are "state regulatory agencies" within the meaning of ESign.

 

Date: Thu, 30 Nov 2000 11:33:55 -0600
From: "Scoville, Adam White" AScoville@faegre.com
Subject: RE: Has ESign Killed the Statute of Frauds?

Hi... Although not in real estate, I was forwarded your piece on E-SIGN and the UETA because of my background with digital signature legislation (I am the author of "Clear Signatures, Obscure Signs," 17 Cardozo Arts & Ent. L.J. 345, a major examination of all the models of signature laws up through mid-99, available at http://www.bc.edu/iptf/articles/1999070101fs.html and found it very interesting.

I think you are right on about focusing on "intent to sign." Personally, I think that's exactly the kind of inquiry that courts should be making, rather than focusing on superficial formal requisites. A couple minor notes... although E-SIGN's operative language is fairly consistent with UETA, I think the more direct 'ancestral' root is the Massachusetts draft act that Dan Greenwood developed. As I understand he consulted heavily with Abraham's staff in the drafting of E-SIGN, and the operative language is nearly verbatim.

 

Date: Thu, 30 Nov 2000 13:17:16 -0500 (EST)
From: Jjw5199@aol.com
Subject: Re: Has ESign Killed the Statute of Frauds: blessings of formal requisites

someone said:

>>Personally, I think that's exactly the kind of inquiry that courts should
>>be making, rather than focusing on superficial formal requisites.

The formal requisites, far from being superficial, eliminate a lot of the confusion and litigation over intent. The goal has to be to eliminate as many as possible potential "intent to sign" cases through the use of agreed-on formal requisites.

We are seeing in Florida right now the mess that results when unclear formal requisites (poor technology that generates large numbers of ambiguous ballots) lead to wars over intent. Unfortunately, by sowing confusion on standards for formal requisites, the E-sign statute will do for real estate what the butterfly ballot has done for the voters of Palm Beach County.

It may be that standards will ultimately come from Fannie Mae, as suggested in a posting yesterday, or through the title companies, which will refuse to insure without a high standard of proof.

Jay Weiser
Zicklin School of Business
Baruch College

 

Date: Thu, 30 Nov 2000 16:12:40 -0500
From: Jack Facey

Au contraire, Vermont has 252 towns and 252 municipal recording offices for its 500,000 inhabitants!! We have no Public Records Administrator. Each town Clerk acts with some discretion subject to some statutory oversight as to what is acceptable for recording and what is not.

Jack Facey Reiber, Kenlan, Schwiebert, Hall & Facey, P.C.

 

Date: Thu, 30 Nov 2000 18:37:03 -0500
From: "Buck, Gurdon"
Subject: RE: E-SIGN and state recording

You see, Vermont was settled by folks from Connecticut, which is why Vermont picked up the Connecticut title practice and so many of its towns have Connecticut town names. Thus Connecticut and Vermont also retain "strict foreclosure" as the method of choice for foreclosing mortgages.

 

Date: Fri, 01 Dec 2000 08:28:45 -0800
From: Bert Rush

Hello Pat/DIRT:
I'm enjoying following this thread, and thought you'd enjoy this cartoon we posted last year on LandSakes-- http://ul.firstam.com/landsakes/joke.pdf

I continue to agree with most of what you've said about the ESign Act. I think electronic commerce in general will ultimately rely largely on standardized forms (which people may be disinclined to read having been told they're "standard in the industry" and "uniform") and on processes that may lack the formality and ceremony of a document signing.

I don't know that I'd go so far as to say this will kill the Statute of Frauds (what's left of it). Seems to me electronic transactions can (and probably will) involve a secure electronic "record" of the actions surrounding the making of a contract, and this "record" will include "writings" in electronic format. With these assumptions, I think the intent of the Statute of Frauds can and probably will be served via electronic transactions.

The above leads me to wonder how the "four corners rule" of contract interpretation will come into play with electronic transactions. Might some courts be sufficiently uncomfortable with ESign that they may be more willing to consider extrinsic evidence to discern the intentions of the parties?

I can also tell you from our (First American's) recent claims experience, we see a significant number of claims in which one of two spouses or an elderly homeowner reacts to a threatened foreclosure by claiming the signature on the mortgage isn't theirs. Of these, some turn out to be forgeries--usually pulled off by a relative. It remains to be seen whether electronic transactions will make this more or less a problem.

Lots to think about these days....



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