Electronic documents and signatures have been accepted for some time in nationwide and international commerce and in the Federal Court system and have been steadily gaining acceptance in the insurance and health care industries. Acceptance in the mortgage industry has been slightly slower, meaning that eNotes were not really hitting the New York foreclosure landscape—until now.
Most “eClosings” involve what is a mixed or hybrid process, meaning only the note is signed, “registered” and stored electronically, while the mortgage on real property securing the note is actually printed out to paper and wet ink signed by the borrower and recorded as a public record with the Clerk of the County where the property is located.
The above process presents a particular challenge in New York in residential foreclosure actions.
The single most significant loan document required to establish the standing of a mortgage lender or servicer to foreclose has evolved via litigation away from the recorded mortgage (and any assignment thereof) to the original, wet ink signature note—a loan document that in the case of an eClosing, does not exist in a tangible, paper, wet-ink signed form.
Further, the predominant electronic registry for such eNotes that serves to track the ownership or control of these notes is the MERS eRegistry.
Thus a foreclosing plaintiff in New York in an eNote case may not only have to go before a Court that is obsessed with the actual original note but also may be forced to rely on the MERS registry as evidence of same—an experience that may be likened to that of wearing a Cowboys jersey to a tailgate party in Philadelphia.
Guidance in this area from the New York courts for foreclosure actions has been limited or non-existent. The fact that New York is one of only three (3) states out of fifty (50) to decline to adopt the Uniform Electronic Transactions Act (UETA) has not helped.
However, the Appellate Division, Second Department recently provided some much welcome and fairly clear guidance as to the proofs required to establish standing when an eNote is involved. In New York Community Bank v. McClendon, 138 A.D.3d 805 (2nd Dept. 2016) the Court turned to federal law, 15 U.S.C.S. sec. 7021 governing “transferable records” along with the New York Uniform Commercial Code 1-201(b)(21)(C) which defines a “holder” of a negotiable electronical document of title.
The Appellate Division reversed the Kings County Trial Court’s dismissal of the action (see the Eagles tailgate party scenario above) and determined that the eNote’s transfer history, together with a copy of the eNote itself, were sufficient to review the terms of the transferable record and to establish the identity of the person (or entity) having control of the transferable record (the eNote), thus establishing the plaintiff’s standing as the holder of the eNote and rendering the lack of proof of a valid assignment irrelevant.
While borrower’s counsel in contested eNote cases will be sure to attack the proofs of the “transferable record”, the above decision does provide clarity and a roadmap to a new and challenging area of foreclosure law.