Is your electronic signature enforceable?

Dear Alex: I would like to know once and for all, are electronic signatures enforceable or not? In the course of my business, I have been required to go into our bank branch to physically sign financial documents, our commercial real estate broker emailed our real estate documents for e-signature, most of our contracts are scanned and emailed, but some vendors require original signatures. It seems inconsistent and is very confusing!

If this issue seems confusing, that is probably because the law itself leads to confusion, which subsequently leads to businesses being confused when they implement their own contracting policies.

California was the first state to adopt the federal Uniform Electronic Transactions Act (UETA), which called for electronic signatures and electronic contracts to carry as much legal weight and enforceability as written, printed documents and hand signatures (with certain exceptions).

The UETA has been adopted by 46 other states, and is enforced in the District of Columbia, Puerto Rico and other federal territories. In California, the UETA is codified Civil Code Sections 1633.1 et seq. and applies to all electronic records or signature created, sent, communicated, received or stored on or after Jan. 1, 2000. The confusion arises because of the many exceptions to this rule, both in its federal form and that California has carved out on its own.

Although most common contracts and business agreements are enforceable by electronic signature, there are certain types of documents, generally of the sort that are subject to higher risk of fraud, which do require original signatures, or in which electronic notice is insufficient (such as in termination of a tenancy). The exceptions are where confusion sets in.

There are many exceptions, and most of them are identified by acronyms and references to other code sections. Some of the more typical exceptions include wills, codicils, and testamentary trusts. In the business realm, many of the documents and records governed by the Uniform Commercial Code (UCC) are excepted from the UETA, primarily as they relate to sophisticated financial transactions.

Real estate contracts, although they fall within one of the articles the UCC listed as an exclusion to the UETA, are permitted to be conducted electronically and are enforceable by electronic signature. Similarly, Article 2 of the UCC related to the sale of goods, falls within the UETA and transactions subject to that Article may be conducted electronically.

In practice, the majority of day-to-day contracts among small businesses may be made and signed electronically. One of the most familiar implementations of electronic signatures are the ubiquitous online “Terms and Conditions,” which so many software providers require.

Although clicking “I Accept” in response to innumerable pages of small print is a prerequisite to using the software, and I will admit to having accepted terms and conditions without reading them, that mouse-click creates a binding agreement.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column was revised for LinkedIn, and originally ran in the Napa Valley Register on July 21, 2015. You can read it on the Register's website here: http://tinyurl.com/pu9h72n

Should I Create an LLC for Real Property?

"I own a personal residence and a rental property. I was told to put the rental property into an LLC to protect my personal residence from the liability of the rental property. Is this a good idea?”

This is probably good advice. There are benefits and drawbacks to LLCs (limited-liability companies), but if you are planning to put your rental property into a limited-liability entity to protect your other personal assets, an LLC is usually the best choice. There are other entities that offer limited liability, such as C-corporations and S-corporations, but the tax consequences of putting real estate into a corporate entity like those can be disastrous.

When you contribute real property into an LLC, the liabilities associated with that real property and its business activities are cut off from the personal assets of the owners (called “members”) of the LLC. People who have multiple properties or other assets (for example, investment accounts or ownership of a business) can benefit greatly from separating their rental properties from their other assets by use of LLCs.

Of course, the property within the LLC is still subject to the liabilities of the LLC. If there is a lawsuit related to the property held in the LLC, the property itself can still be subject to any judgment associated with that lawsuit.

While the principles of liability protection by an LLC are appealing, they aren’t without limitations. Individuals can always be held responsible for their own acts of negligence, so keeping property in an LLC is does not always protect the members from their own bad or negligent actions. Additionally, much of the financial protection that LLCs offer can be accomplished through insurance.

Not only will lenders require minimum insurance coverage, but in the event of a lawsuit or claim, it is better to have cash paid out of an insurance policy than be forced to sell the property to pay for money damages.

A problem with relying solely on insurance as a protection from liabilities is that insurance policies have limits in the amount of damages they cover, and exceptions and limitations on the types of damages that are covered. Best practices call for property owners to both hold the property in an LLC, and to carry adequate insurance.

There are other drawbacks to an LLC. One of those drawbacks is the annual minimum Franchise Tax that the state of California assesses against LLCs and other corporate entities, which is currently $800 per year. For some, the Franchise Tax may make the LLC not worth the cost. Additionally, many lenders won’t lend to an LLC directly and at minimum will require LLC members to personally guarantee the debt.

Alex Myers is an attorney with Myers & Associates in Napa, and can be reached at alex@myers-associates.com or at 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice you should contact an attorney.

This column originally ran in the Napa Valley Register on March 3rd, 2015. You can read it on the Register's website here: http://napavalleyregister.com/business/should-i-create-llc-for-rental-property/article_21e4c0ce-5cf3-5875-a9e8-7e3477beea82.html