Daily Development for
Tuesday, October 20,1998

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

I’m sorry to say that I posted the second installment of Dale’s contribution as the DD for Monday, and this one, which was intended to be the first, goes out for Tuesday.  My apologies to Dale, whose wonderful contributions have added immeasurably to the quality of the list. This is the first of two installments prepared by Dale Whitman on the impact of computer technology on future real estate practice.  This installment deals with the proposed Uniform Electronic Transactions Act.

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The National Conference of Commissioners on Uniform States Laws (NCCUSL) is currently drafting a Uniform Electronic Transactions Act (ETA).  The most recent draft of the act is dated September 18, 1998.  The chair of the drafting committee, Professor Patricia Frye of the University of North Dakota School of Law, estimates that the ETA may come before NCCUSL for a first reading in 1999.  My purpose here is to provide an overview of the ways ETA may affect real estate practice.  The act is still in a state of flux, and it’s possible that some of features in the present draft will be changed or dropped in the final version.

The core concept of the ETA is that electronic documents should be recognized and enforced to the same extent as paper documents.  While the ETA specifically excludes wills and codicils, and trusts created in connection with wills and codicils (Sec. 104(a)), there are no other broad exclusions.  Thus, the act covers deeds, mortgages, releases, and other ordinary real estate documents.  It doesn’t cover “a provision in a rule of law relating to a specific mode of delivery or display of information.”  (Sec. 104(c)).  While deeds and other real estate conveyances must be delivered to take effect, the law does not provide for any “specific mode of delivery;” hence, this exclusion won’t take real estate conveyances out of the act’s coverage.

The ETA doesn’t require anyone to use an electronic document, but merely authorizes their use.  It also doesn’t require any particular mode of delivery or transmission, so long as the recipient of the document has means reasonably available to retrieve and read it.  (Sec. 402(b)). For example, a grantor could probably deliver a deed to a grantee simply by e-mailing it to the grantee, provided that the grantee had the means for readily receiving and reading e-mails.  The grantee could, however, expressly provide that it declined to receive e-mailed deeds, in which case some other form of delivery would be necessary. (Sec. 201(c))

The statute of frauds is deemed to be satisfied by electronic documents, whether or not they are printed out on paper. (Sec. 201(c)).  Since an electronic document can’t be signed conventionally by pen and ink, a signature is defined by the ETA as “an identifying symbol, sound, process, or encryption of a record in whole or in part, executed or adopted by a person.” (Sec. 102(20)).  The ETA does not require use of any particular security procedures for signatures, so a grantor who merely appends his or her name to an e-mail conveyance will be deemed to have signed it.  Such a signature is as effective as if made by pen and ink.  (Sec. 301(a)).  However, the recipient of a document may optionally require that a reasonable security procedure be used in signing it. (Sec. 301(c)).

The role of notaries is drastically changed by the ETA.  Documents in paper form are required to be notarized in order to be recorded in most states.  However, electronic documents need not be notarized, provided that a security procedure is applied to the signature that “establishes by clear and convincing evidence the identity of the person signing.”  (Sec. 304).  Hence, a digitally encrypted signature that uses “public key infrastructure” would probably require no notarization.  (See the second installment of this posting for more information on “public key infrastructure.)

A fascinating question arises as to how electronic promissory notes should be handled.  Under UCC Article 3, in general only a person who is in possession of an original negotiable note may enforce it.  But with electronic documents, multiple copies can be made effortlessly that are indistinguishable from the original.  Indeed, it’s not clear that the word “original” has any meaning with regard to digital documents.  How can anyone establish that he or she has possession of such an instrument?  According to the ETA, “if the identity of the person entitled to enforce a transferable record can be reliably determined from the record itself or from a method employed for recording, registering, or otherwise evidencing the transfer,” that person has possession. (Sec. 405).  Hence, it is conceivable that in lieu of paper endorsements, negotiable notes might have digital signature endorsements appended to them to create a trail of “virtual possession.”

How can electronic conveyances be recorded?  Obviously, current recording statutes make no provision for electronic documents.  However, the ETA provides that “each governmental agency shall determine if, and the extent to which, it will create and retain electronic records instead of written records.”  (Sec. 501).  Under this language, any county recorder of deeds could adopt a procedure for accepting and recording electronic documents.  In some ways this is problematic.  Is it really desirable for each of 50 different county recorders in a given state to adopt a unique way of recording digital documents?  The competence of many recorders to do this effectively is doubtful, and the result might be chaotic.  It would seem far better to authorize some state official to establish standards for computerized recording systems that all county recorders would be required to follow.  Under ETA Sec. 503, a “designated state officer” “ may adopt regulations setting forth rules, standards, procedures, and policies for the use of electronic records and electronic signatures by governmental agencies.”  However, this language has proven controversial in the drafting process, particularly because the judicial and legislative arms of state government may resist the imposition of standards by a bureaucrat in the executive branch.  This is a topic on which further changes are likely before completion of the drafting process.

On the whole, the ETA portends rather drastic changes in conventional real estate practice.  While these changes will probably increase the ability of lawyers to serve their clients speedily and accurately, they will also require a major reorientation in our thinking.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law.  Subscriptions to the Quarterly Report are available to Section members only.  The cost is nominal.  For the last six years,  these Reports have been collated, updated, indexed  and bound into an Annual Survey of Developments in Real Estate Law, volumes 16, published by the ABA Press.  The Annual Survey volumes are available for sale to the public.  For the Report or the Survey, contact Maria Tabor  at the ABA.  (312) 988 5590 or mtabor@staff.abanet.org

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.