What Constitutes a Valid Electronic Signature in California?

This issue was discussed in the recent decision in Park v. NMSI, Inc., where at the request of plaintiffs Julie Park and Danny Chung, the trial court issued prejudgment right to attach orders (RTAO) in the aggregate amount of $7,192,607.16 against their former employer, NMSI, Inc.

Appealing the orders NMSI contended Park and Chung failed to establish the probable validity of their claims because, contrary to the allegations in their first amended complaint, the agreements underlying their breach of contract causes of action had been modified through an exchange of emails with electronic signatures, as well as by the parties’ subsequent conduct.

The court of appeal rejected these contentions, and affirmed the trial court's ruling.

NMSI is a residential mortgage lender licensed in 26 states.  NMSI funded loans exceeding $5.5 billion in 2020 and $5.6 billion in 2021.

A real property loan generally involves two documents, a promissory note and a security instrument. The security instrument secures the promissory note. This instrument entitles the lender to reach some asset of the debtor if the note is not paid.

In California, the security instrument is most commonly a deed of trust (with the debtor and creditor known as trustor and beneficiary and a neutral third party known as trustee). The security instrument may also be a mortgage (with mortgagor and mortgagee, as participants). In either case, the creditor is said to have a lien on the property given as security, which is also referred to as collateral.

Park and Chung were both employed in NMSI’s Brea office. Chung was the company’s chief marketing officer; Park was the executive vice president.

In January 2019 Chung and Park entered into branch manager/sales manager employment agreements with NMSI (2019 agreements).

Pursuant to their 2019 agreements, Park and Chung were both responsible for the operation of the branch, including hiring and paying operating expenses. In consideration Park and Chung were jointly entitled to 75 percent of the net revenue generated by loans originated by their branch office provided the net revenue of the office was greater than $90,000.

The 2019 agreements were fully integrated and provided they could be modified only by the written agreement of the parties.

In September 2019 Jae Chong, NMSI’s chief executive officer, first proposed a change to the compensation structure in the 2019 agreements.

According to Chong, Chung orally agreed to the terms of the modifications, which were then confirmed in an email Chong sent Chung on October 22, 2019. 

Beginning in January 2020 NMSI paid Park and Chung according to the October 2019 sliding scale model.

Chung promptly notified NMSI’s accounting department that neither he nor Park had agreed to modify their compensation structure.

Nevertheless, the reduced compensation continued; and, as Park and Chung alleged in their lawsuit, NMSI reduced their compensation even further by refusing to share revenues generated by loan servicing and the sales of servicing rights.

Later, Park and Chung were advised that NMSI was terminating their employment.

Park, Chung, Koh and Kim sued NMSI and Chong and filed a verified amended complaint on January 7, 2022, alleging causes of action for breach of contract, failure to pay wages, breach of fiduciary duty, accounting and violation of California’s unfair competition law.

Park filed ex parte applications for writ of attachment. Park’s application included a declaration describing NMSI’s breach of the 2019 revenue sharing agreements and asserted that she and Chung were owed past compensation totaling $9,624,329.39.

They argued that NMSI breached Plaintiffs’ branch manager agreements by failing to apply the proper compensation formula to the net revenues generated in 2020 and 2021, as well as by failing to pay any share of other revenues that were excluded from the profit and loss statements.

The trial court found Park and Chung had established the probable validity of their breach of contract claims and issued right to attach orders and authorized writs of attachment on behalf of Park and Chung for $3,596,303.58 each (a combined total of $7,192,607.16).

The court concluded (using the probable validity standard) the 2019 agreements had not been modified as argued by NSMI, finding that Chung did not insert an electronic signature or other symbol showing intent to sign a modified agreement by his email”.

In addition, Chung did not have authority to enter into any modification agreement on behalf of Park. The court also found the 2019 agreements had not been modified by the subsequent conduct of Park and Chung.

NMSI contended the trial court misinterpreted the law regarding electronic signatures when finding the email exchange between Chong and Chung did not effect a modification of the 2019 agreements.

According to NMSI, Chung’s email which included his full name, title, address, two phone numbers, email address, and webpage URL, was all that was needed to satisfy the electronic signature requirement of the Uniform Electronic Transactions Act.

Under the UETA an electronic signature has the same legal effect as a handwritten signature. (Civil Code, § 1633.7, subd. (a).)

A signature may not be denied legal effect or enforceability solely because it is in electronic form.

But to be effective, an electronic signature must be executed or adopted by a person with the intent to sign the electronic record.

Thus, although Chung’s name was at the bottom of his October 23, 2019, email, more was required to establish he electronically signed the email with the intent to modify his (let alone Park’s) revenue sharing agreement.

Attributing the name on an e-mail to a particular person and determining that the printed name is the act of this person is a necessary prerequisite but is insufficient, by itself, to establish that it is an electronic signature.

NMSI’s contention the UETA does not require evidence of an intent to sign unless the authenticity of an electronic signature has been called into question—and that the trial court, therefore, erred in finding no modification of the 2019 agreement had occurred—finds support in neither statutory language nor pertinent case law.

The UETA only applies to a transaction between parties each of which has agreed to conduct the transaction by electronic means. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct.

Based on the evidence it received regarding the October 2019 emails, the trial court found that Chung did not insert an electronic signature or other symbol showing intent to sign a modified agreement by his email because the body of the emails appears to document a discussion or thoughts about a revised compensation structure.

In the October 23 email, Chung asked a follow-up question to Chong, which suggests that the parties were still discussing potential terms of a modification, not that they were executing a final modified agreement.

There similarly was no merit to NMSI’s argument challenging the trial court’s probable validity finding directed to NMSI’s contention the 2019 agreements were modified by the subsequent conduct of Park and Chung.

A written contract that expressly precludes oral modification may nonetheless be modified by an oral agreement to the extent that the oral agreement is executed by the parties. (Civ. Code, § 1698, subd. (b).)

Where, as here, a written agreement prohibits oral modifications, an oral modification nevertheless is enforceable to the extent it has been executed by the parties.

Moreover, even if not modified by an executed oral agreement, the parties may, by their words or conduct, waive contractual rights.

The parties may, by their conduct, waive a no oral modification provision where evidence shows that was their intent.

The pivotal issue in a claim of waiver of contractual rights is the intention of the party who allegedly relinquished the known legal right.

Waiver is ordinarily a question of fact unless there are no disputed facts and only one reasonable inference may be drawn.

Substantial evidence supported the trial court’s finding that the November 3, 2020 email does not show that both Chung and Park personally supervised the calculations of the Brea branch profit and loss figures which reflected the modified profit- sharing model, which they then sent to and confirmed with NMSI’s accounting team.

Substantial evidence also supported the further finding that the email did not confirm the modified revenue sharing agreement because it failed to include the attachment with the cover email, so it cannot be determined from the November 2020 email what Plaintiffs were confirming.

LESSONS:

1.         Under the UETA an electronic signature has the same legal effect as a handwritten signature. (Civ. Code, § 1633.7, subd. (a). )

2.         A signature may not be denied legal effect or enforceability solely because it is in electronic form.

3.         But to be effective, an electronic signature must be executed or adopted by a person with the intent to sign the electronic record.

4.         The pivotal issue in a claim of waiver of contractual rights is the intention of the party who allegedly relinquished the known legal right.