Bankruptcy & The Electronic Signature

While infrequent, cases involving proof of one’s electronic signature are not unheard of. Just last year in Perry v. Ad Astra Recovery Services, Inc., the U.S. District Court for the Eastern District of Missouri confronted the issue, finding that the plaintiff, in clicking through a number of screens and entering her initials nearing the end of a PayDay Loan Agreement, electronically consented to the arbitration clause included therein.

Unsurprisingly, this issue, too, touches the realm of bankruptcy law. Essentially, having someone sign a document electronically is perfectly fine until a court demands proof of the signature. As one might imagine, evidencing your client’s signature in such a case might prove challenging. Normally the proof of assent in contractual matters, here the most fundamental proof, itself requires proof. That said, in the midst of this quandary, what factors may establish signature authenticity?

This issue was illustrated in 2005 by the United States Bankruptcy Appellate Panel of the Ninth Circuit with In re Vinhee. Addressing the problems presented in substantiating an electronic signature with the court, this case laid out the four basic elements necessary to prove an electronic business record. Such records must be: (1) made at or near the time by, or from information transmitted by, a person with knowledge; (2) made pursuant to the regular practice of the business activity; (3) kept in the course of regularly conducted business activity; and (4) the source, method, or circumstances of preparation must not indicate lack of trustworthiness. What is more, the court must be persuaded by the proponents of such records as authentic and accurately representing the original agreement.

Statutorily validating the use of electronic records and signatures are the Electronic Signatures in Global and National Commerce Act (E-Sign), and the Uniform Electronic Transactions Act (UETA). Both acts validate the use of electronic records and signatures and, thus, overlap significantly. Each statute provides that electronic contracts and signatures shall not be denied legal effect or enforceability because they are electronic. Nevertheless, as UETA is a more comprehensive protection than its federal precursor, the two are neither identical in scope or substance.

Returning to Perry, the plaintiff denied having signed the agreement the defendant provided, while defendants, through affidavits, argued that to obtain a loan a customer had to go through a series of steps as part of the online application process, including checking boxes to indicate assent to the various contracts and policies involved. Citing to the UETA, the court held that these processes were sufficient to create an electronic signature and that the plaintiff’s following of these processes established sufficiency in proving her signature. The approval of the aforementioned standards increases the scope and enforceability of transactions, while also changing the law’s landscape. With this holding came the widening of the intersection of law and technology.

Ugh, Should’ve Googled it: the ‘Net & Reasonable Inquiry

Turns out running a search via the primary-colored search engine Google or one of its counterparts could save attorneys from sanctions and a retiring judge’s scorn. Bankruptcy judge James Gregg penned an interesting decision in In re Hale, where he touched on an attorney’s obligation to do an online real estate search before filing a consumer bankruptcy petition. As the case background shows, two years into the bankruptcy, the Chapter 7 trustee charged with overseeing the debtors’ liquidation discovered the debtors’ ownership interest in previously undisclosed real estate. In response, the debtors sought to convert their case to Chapter 13, only to be met by judicial denial for filing their motion to convert in bad faith. What is more, the court denied the debtors’ attempt to exempt their interest in the previously undisclosed property.

But the judicial smackdown didn’t stop there. In a section of the opinion captioned “What Now? How These Circumstances Could Have Been Avoided and Possible Sanctions” Judge Gregg delved into the Debtors’ counsel’s obligations under Fed. R. Bankr. P. 9011(b):

By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney… is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances [list of four different categories]. …. Dietrich submitted the Debtor’s erroneous schedules to the court. He therefore faces “presenting” sanctions unless a reasonable inquiry was made.

Because the Judge was able to go online and discover the debtors’ concealed real estate in “less than five minutes,” Judge Gregg believed that debtors’ counsel had not made a reasonable inquiry in the matter. As per the court’s reasoning, certainly debtors’ or one of their paralegals or aids could have, and were bound to, conduct a similar investigation given the search’s ease.

While Judge Gregg is correct in conveying the ease of performing such searches in many jurisdictions and most situations, it could present a slippery slope of sorts to state that not doing a real estate search prior to filing a bankruptcy case constitutes a failure to make a reasonable inquiry. The search was an easy one in the In re Hale case; however, just how rudimentary a search must be to trigger an attorney’s obligation is quite vague. As searches like the one employed in In re Hale will often yield hundreds of results, is this manner of inquiry too high a burden to expect? While one would hope that the lawyer could trust the word of his client, counselors are yet required to make reasonable discovery into the veracity of their client’s claims and submissions to the court.


Christian Carey is an editor on the Michigan Telecommunications and Technology Law Review, and a member of the University  Michigan Law School class of 2017.

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