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Proving A Lender Is Entitled To Enforce An Electronic Promissory Note

Lesson.  Electronic promissory notes are valid and enforceable.  But, proof of standing to enforce such a note, including standing as an assignee, can be tricky. 

Case cite.  Good v. Wells Fargo, 18 N.E.3d 618 (Ind. Ct. Appl. 2014).

Legal issue.  Whether the plaintiff lender, an assignee, was entitled to enforce an electronic promissory note executed by the defendant borrower or, in other words, whether the lender/assignee had standing to obtain a judgment against the borrower.

Vital facts.  Borrower executed an electronic note in favor of Synergy, which note secured a mortgage.  The terms of the note provided that, upon transfer, it would be recorded with a registry maintained by MERS, a party that was the subject of several posts in 2012 related to mortgages (see below).  As with certain mortgages, the note in Good identified MERS as the lender’s (here, Synergy’s) nominee.  After the borrower defaulted, MERS assigned the note to Wells Fargo - the plaintiff in Good. 

Procedural history.  Wells Fargo filed a mortgage foreclosure action and moved for a summary judgment.  Its supporting affidavit, which is detailed in the opinion, attempted to establish that Wells Fargo owned the noted and was entitled to enforce it.  The trial court granted summary judgment, but the borrower, who contended that the Wells Fargo lacked standing, appealed the trial court’s ruling. 

Key rules.  The Indiana Court of Appeals in Good stated that the note was an electronic record authorized by the federal ESIGN Act, 15 U.S.C. 7001 et seq.  That Act should be read in conjunction with Indiana’s UCC, Article 3, including Ind. Code 26-1-3.1-301(1), as previously discussed here (see below).  Section 7021 of the ESIGN Act discusses transferable records, and subsection (b) specifically deals with “control” of the record.  See also, 15 U.S.C. 7021(c) regarding “authoritative” copies and transfers.  Like many federal statutes, the particulars are dense, so lenders and their counsel should review the provisions in detail before filing suit and moving for summary judgment.  Fortunately, the Court summarizes many of the key provisions in its opinion.  Generally, a person having “control” of a transferable record (a note) is the “holder” under the UCC.  Unlike with paper notes, “possession” is irrelevant to electronic notes. 

Holding.  The Court reversed the trial court’s summary judgment for Wells Fargo.  The Court concluded that Wells Fargo had not shown in its supporting affidavit that it controlled the note for purposes of Section 7021(b) and, as such, did not establish “its status as holder for purposes of the UCC.”

Policy/rationale.  Ultimately, the Good case was about a proof problem.  Wells Fargo failed to provide “reasonable proof” that it was in control of the note.  The Court did not reject the idea of electronic notes or the concept of lending on transferable records.  Indeed the opinion operates as a set of instructions for lenders and their counsel to construct summary judgment affidavits, including “proof [that] may include access to the authoritative copy of the transferable records and related business records sufficient to review the terms of the transferable record and to establish the identity of the person having control of the transferable record.”  Again, control, not possession, is the operative fact.   

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