On June 30, 2000, the President signed the Electronic Signatures in Global and National Commerce Act (the "E-Sign Act" or "Act"). The E-Sign Act establishes a uniform, national framework for the recognition of the validity of electronic records and signatures. The E-Sign Act preempts State laws that are not consistent with the E-Sign Act. States may supersede the E-Sign Act by adopting the Uniform Electronic Transactions Act as approved and recommended for enactment by the National Conference of Commissioners on Uniform State Laws in 1999 ("UETA"). You have asked us to analyze whether Congress in exercising its preemptive authority under the E-Sign Act would require State or local officials charged with accepting filings of deeds, mortgages, or other records ("recorders") to accept such records presented in electronic form.
The E-Sign Act does not require recorders to accept electronic filings. The Act allows "State regulatory agencies" to specify the standards or formats for the filing of records, including standards prescribing non-electronic filings. Although the E-Sign Act does not explicitly define "State regulatory agency," legislative history and the Act itself indicate that recorders are included in the Act’s definition of "State regulatory agency." There is no indication in the legislative history that Congress intended to mandate that recorders accept electronic filings. Moreover, to interpret the Act to require recorders to accept electronic filings would have the anomalous effect of mandating acceptance of electronic filings only during the interim between passage of the E-Sign Act and State adoption of UETA. The stealth imposition of what could be a billion-dollar mandate on States and localities is clearly beyond the contemplation of Congress when it enacted the E-Sign Act, and would be inconsistent with the spirit of Unfunded Mandates Reform Act of 1995. Although the Act does not require recorders to accept electronic filings, it provides recorders with the flexibility to choose to convert to an electronic recording system.
The purpose of the E-Sign Act is to facilitate the use and acceptance of electronic signatures and records in interstate and foreign commerce. The Act establishes a set of uniform national rules that will preempt State laws that are not consistent with the E-Sign Act. States may supersede the E-Sign Act by adopting UETA. See Electronic Signatures in Global and National Commerce Act § 102(a)(1), 15 U.S.C. § 7002(a)(1). The issue has arisen whether the E-Sign Act requires recorders to accept electronic filings.
General Rule Requiring Recognition of Electronic Signatures and Records
Under the E-Sign Act, a government agency, absent an exemption, would have to accept electronic filings. Section 101(a)(1) provides that a record, such as a deed, cannot be denied legal effect solely because it is in electronic form:
In GENERAL.--Notwithstanding any statute, regulation, or any other rule of law (other than this title and title II), with respect to any transaction in or affecting interstate or foreign commerce . . . a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.
A corollary to this general rule is that, even though private parties do not have to agree to do business electronically, if they do, "governmental agencies" must accept such transactions as legally effective, valid, and enforceable. Section 101(b)(2) states:
This title does not . . . require any person to agree to use or accept electronic records or electronic signatures, other than a governmental agency with respect to a record other than a contract to which it is a party.
Exemption for "State regulatory agencies" with Respect to Filings
While there is a general requirement that all governmental agencies must "accept" electronic records and electronic signatures, section 104(a) of the Act exempts "Federal regulatory agencies," "self-regulatory organizations," and "State regulatory agencies" from having to comply with the Act with respect to records filed with such agencies:
Subject to subsection (c)(2) [relating to the impact of the Government Paperwork Elimination Act on Federal regulatory agencies], nothing in this title limits or supersedes any requirement by a Federal regulatory agency, self-regulatory agency, or State regulatory agency that records be filed with such agency or organization in accordance with specified standards or formats.
Electronic Signatures in Global and National Commerce Act § 104(a), 15 U.S.C. § 7004(a) (emphasis added).
Because section 104(a) allows a "State regulatory agency" to specify the "standard" or "format" for records that are filed with the agency, such an agency may require that records be filed in paper format. This conclusion is explicitly supported by legislative history. In Congressman Bliley's (R-VA) floor statement providing a "guide" to the Act at the time of final passage, he states that "[s]ection 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). In addition, Congressman Dingell (D-MI) and Senators Abraham (R-MI) and Leahy (D-VT) stated that section 104(a) would allow agencies to continue to require paper filings:
• Congressman Dingell stated that "Section 104(a) preserves the authority of federal regulatory agencies, self-regulatory organizations, and state regulatory agencies to set standards and formats for the filing of records with such agencies or organizations. The authority contained in section 104(a) is not subject to the limitations set forth in section 104(b) or other limitations contained in the Act. The preservation of agency authority contained in section 104(a) is subject only to the requirements of the Government Paperwork Elimination Act." 146 Cong. Rec. E1071 (daily ed. June 21, 2000) (statement of Congressman Dingell).
• Senator Abraham published in the Congressional Record, an "Explanatory Statement" which states that while section 104(a) allows a State regulatory agency to "specify standards or formats for the filing of records with that agency or organization, including requiring paper filing," the Act encourages electronic filings. 146 Cong. Rec. S5286 (daily ed. June 16, 2000) (statement of Senator Abraham).
• Senator Leahy stated that "[s]ection 104(a) of the conference report expressly preserves governmental filing requirements. Federal agencies are already working toward full acceptance of electronic filings, 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. S5221 (daily ed. June 15, 2000) (statement of Senator Leahy).
Thus, we conclude that, if a recorder is a "State regulatory agency" for the purposes of the E-Sign Act, it would not be required to accept electronic filings.
The Meaning of "State Regulatory Agency"
Although "State regulatory agency" is not explicitly defined in the Act, its meaning can be derived from (i) an analysis of the parallel definition of "Federal regulatory agency" adopted by the Congress; (ii) an analysis of what constitutes rulemaking; and (iii) an analysis of the source of authority under which a recorder operates.
The Term "Regulatory Agency"
While the Act does not define "State regulatory agency," the Act defines the parallel term "Federal regulatory agency" to mean "an agency, as that term is defined in section 552(f) of title 5, United States Code" (the Administrative Procedures Act). See Electronic Signatures in Global and National Commerce Act § 106(6), 15 U.S.C. § 7006(6). The definition of "agency" in 5 U.S.C. 552(f)(1) is very broad:
"[A]gency" as defined in section 551(1) of this title includes any executive department, military department, Government corporation, Government controlled corporation, or other establishment in the executive branch of the Government (including the Executive Office of the President), or any independent regulatory agency).
5 U.S.C. § 551(1), in turn, defines "agency" to mean "each authority of the Government of the United States, whether or not it is within or subject to review by another agency . . .." (emphasis added).
Although State-level agencies are not subject to the Administrative Procedures Act ("APA"), the fact that Congress adopted the definition of "agency" from the APA, indicates that Congress meant to adopt a broad definition of the term "agency," whether used in a Federal or State context. The APA defines "agency" broadly to include agencies that would promulgate rules according to notice and comment procedures required by section 553, as well as agencies whose rules would not be subject to such formal procedures. The APA definition of "agency" sweeps in all agencies, even those that do not issue any rules at all, because the APA definition must be broad enough to cover such agencies in order to bring them within the ambit of (i) the Freedom of Information Act, codified at 5 U.S.C. § 552, governing access to public information; (ii) the Privacy Act of 1974, codified at 5 U.S.C. § 552a, imposing limits on governmental disclosure to persons other than agencies without the prior written consent of the party concerned; and (iii) the Government in the Sunshine Act, codified at 5 U.S.C. § 552b, governing public access to agency meetings whether or not rulemaking is involved. See Soucie v. David, 448 F.2d 1067, 1073 (D.C. Cir. 1971) ("While the primary purpose of the APA is to regulate the process of rule making and adjudication, administrative entities that perform neither function are nevertheless agencies, and therefore subject to the public information provisions of the APA, i.e., the Freedom of Information Act."). Clearly by adopting such a broad definition of "regulatory agency" for Federal purposes, Congress intended to exempt any executive or independent agency in the Federal government from the duty to accept electronic filings.
While Congress did not explicitly define "State regulatory agency" in the Act, it clearly indicated its intent that the term "regulatory agency" be read broadly to include every executive or independent function performed by agencies or sub-agencies of government at the Federal level, and it gave no indication that it intends the words "regulatory agency" to be read any less broadly in the State context. It seems unlikely that a court would look elsewhere for the meaning of the term "regulatory agency" in a State context when Congressional intent regarding the meaning of this term is easily discovered by reference to its parallel use in a Federal context. The term "Federal regulatory agency" covers almost every executive or administrative function of the Federal government. If the function of recording deeds were a Federal function, a recorder of deeds would clearly be covered as a "Federal regulatory agency."
Regulatory Authority Broadly Defined
Even if the term "regulatory agency" were read to require that such an agency must promulgate "rules" or engage in "rule making" as defined in the APA, an agency does not need to promulgate regulations under notice and comment procedures to be considered a "regulatory agency." The APA defines "rule making" to mean the "agency process for formulating, amending or repealing a rule." 5 U.S.C. § 551(5). The APA defines a "rule" to mean:
The whole or part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency and includes the approval or prescription for the future of rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services or allowances thereof or of valuations, costs, or accounting, or practices bearing on any of the foregoing.
5 U.S.C. § 551(4).
Thus, any agency that has rules would be considered to be engaging in rulemaking under the APA. For example, any agency that prescribes rules governing the format or standard for the filing of documents, would be engaging in "rule making" as defined by the APA because its rules governing filings would be a "statement of general or particular applicability . . . designed to implement . . . [its] practice requirements." While State regulatory agencies are clearly not subject to the APA, it makes sense to look to the APA definition of "agency" to determine the meaning of the term "regulatory agency" in a State context because the term "regulatory agency" is not otherwise defined in the statute.
Recorders as "State Agencies"
Having determined the meaning Congress intended to attach to the term "regulatory agency," it is necessary to determine the impact of the modifier "State" to the term "regulatory agency." While it could be argued that Congress intended to exclude State-created jurisdictions, such as counties, cities or towns, from the definition of "State regulatory agency," this would be a strained and unlikely reading of Congressional intent. If the term "regulatory agency" as used at the federal level sweeps in every agency or subdivision of the Federal government, it would be hard to conclude that agencies or subdivisions of a State should not be treated similarly.
Because all governmental authority in a State must be derived from the Constitution or legislature of a State, the term "State regulatory agency" would appear to include agencies at the county or municipal level. See Reynolds v. Sims, 377 U.S. 533, 574-575 (1964) ("Political subdivisions of States--counties, cities, or whatever--never were and never have been considered as sovereign entities. Rather, they have been traditionally regarded as subordinate governmental instrumentalities created by the State to assist in the carrying out of state governmental functions."); Hunter v. Pittsburgh, 207 U.S. 161, 177 (1907) ("Municipal corporations are political subdivisions of the State, created as convenient agencies for exercising such of the governmental powers of the State as may be entrusted to them."); Redwood Gym v. Salt Lake County Com'n, 624 P.2d 1138, 1143 (Utah 1981) ("Local units of government have no inherent police power, and may exercise such power only to the extent that (1) it is expressly conferred by the state legislature; (2) it may be fairly imputed from powers expressly granted; or (3) it is essential to the fundamental declared objects of local government."); see also, e.g., Fla. Const. art. V, § 16; Fla. Const. art. VIII, § 1.
A recorder's authority is established at the State level. See, e.g., Cal. Gov't Code §§ 27201-27361; Fla. Stat. Ann. § 28.222; 55 Ill. Comp. Stat. 5/3-5001 to -5045; Tex. Loc. Gov't Code Ann. §§ 193.001-.0015. Further, the enforceability of deeds and mortgages that are filed with recorders is also established by legislation at the State level for every state. See Jesse Dukeminier & James E. Krier, Property 713 (3d ed. 1993); see, e.g., Iowa Code § 558.41 ("No instrument affecting real estate is of any validity against subsequent purchasers for a valuable consideration, without notice, unless filed in the office of the recorder of the county in which same lies, as hereinafter provided."); see also Connolly Development, Inc. v. Superior Court, 116 Cal. Rptr. 191, 195 (Ct. App. 5th Dist. 1976) ("[I]n order to 'enforce a lien' it must . . . be recorded with a state agency, in this case the county recorder."), vacated on other grounds by 553 P.2d 637, 645 (Cal. 1976) ("[T]here is no question that the mechanic's lien involves significant state action. Not only is the lien governed by detailed statutory provisions, but it becomes effective only upon recordation with the county recorder, an official of the state; moreover it can be enforced only by resort to state courts.").
In exercising its preemption power in section 102, Congress stated that "[a] State statute, regulation or other rule of law may modify, limit, or supersede the provisions of section 101 with respect to State law only if such statute, regulation, or rule of law . . . [constitutes an enactment of UETA] or "specifies the alternative procedures or requirements for use or acceptance (or both) of electronic records or electronic signatures" in a manner consistent with the Act. It is possible to argue that the term "State," as used in the Act, should be narrowly construed to exclude political subdivisions within a State. However, this would open the question of whether Congress effectively exercised its preemption powers in section 102 of the Act, or rather left city and county governments free to enact rules that would override the provisions of the E-Sign Act. This narrow reading of the word "State" might be interpreted to mean that recorders (as subordinate instrumentalities of the State) are excluded from the preemptive provisions of the E-Sign Act. In that case, recorders would not be subject to the requirement of section 101(a) to accept electronic records and signatures. This is clearly not what Congress had in mind. Rather, Congress intended to preempt the laws and rules of all State instrumentalities (both state-wide and local, including recorders) that are inconsistent with the E-Sign Act. But having included the rules of all state instrumentalities within the E-Sign Act’s preemption provisions, Congress then specifically permitted "State regulatory agencies" (including recorders) to prescribe standards and formats for filing of records with such agencies.
Consistency with UETA
The E-Sign Act was enacted to create a national standard regarding the effect of electronic documents and signatures. As noted above, the E-Sign Act preempts State law unless a State enacts UETA. UETA does not require recorders to accept documents electronically. See Unif. Elec. Trans. Act § 18 (1999). The comments to UETA explicitly clarify that:
Section 18 broadly authorizes state agencies to send and receive electronic records and signatures in dealing with non-governmental persons. Again, this provision is permissive and not obligatory (see subsection (c)). However, it does provide specifically that with respect to electronic records used for evidentiary purposes, Section 12 will apply unless a particular agency expressly opts out.
Unif. Elec. Trans. Act § 18 (1999) (comments to section 18).
When UETA is adopted by a State, its provisions would supersede the E-Sign Act and would not be subject to preemption. State law would then clearly permit recorders to prescribe non-electronic filings. Interpreting the E-Sign Act to require recorders to accept documents electronically would thus have the anomalous effect of providing that only during the interim between passage of the E-Sign Act and State adoption of UETA would recorders be required to accept electronic filings. Given the manifest Congressional intent to defer to UETA once a State enacts UETA, it would be highly improbable that Congress, without explicitly stating its intent, would impose a demonstrably unachievable electronic filing mandate on recorders and other State agencies only during the hiatus between the effective date of the E-Sign Act and a State’s adoption of UETA.
Lack of Concern Over Unfunded Mandates
As further evidence of Congressional intent, it should also be noted that Congress is extremely wary of imposing unfunded mandates on State and local governments. The Senate Commerce Committee report on the E-Sign bill contains an estimate prepared by the Congressional Budget Office ("CBO") regarding the costs of the Act on States pursuant to the Unfunded Mandates Reform Act of 1995, 2 U.S.C. § 658 et seq. See S. Rep. 106-131, at 3-4 (1999). CBO estimated the impact on States not to exceed $50 million (the threshold established in the Unfunded Mandates Reform Act) because, "as defined in the bill, the term ‘transaction’ would specifically exempt any contract to which a governmental entity is a party." See id. at 4. Further, a search of the legislative history of the Act fails to indicate that anyone in Congress was concerned over the financial impact of the Act on governmental agencies because of electronic filing requirements. If Congress intended to force recorders to comply with a requirement to accept electronic filings, potentially a billion-dollar undertaking, it is unlikely that it would have ignored the resulting large, unfunded mandate, especially where there are specific Congressional procedures designed to focus attention on the cost of such unfunded mandates.
Act Allows Recorders to Choose to Convert to an Electronic Recording System
In summary, under the E-Sign Act, absent an exemption, a governmental agency must accept electronic filings. There is a clear exemption, however, for "State regulatory agencies" to specify standards and formats, including paper filing. As is demonstrated above, the term "State regulatory agency" covers recorders. Thus, while recorders may accept electronic filings and rely upon the principles of the E-Sign Act to establish the legal validity of any record presented to be filed, they are not required to do so under the provisions of the E-Sign Act.
This memorandum only addresses the effect of the E-Sign Act on recorders. This memorandum is for the sole benefit of parties addressed, and no other party is entitled to rely hereon.