• Revised UCC Article 9 and Contracts For Deed
  • May 7, 2003 | Author: Mary S. Ranum
  • Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
  • Revised Article 9 of the Uniform Commercial Code (RA9) became effective in Minnesota on July 1, 2001. Among the many significant changes to the law of secured transactions is a change in the law governing the creation of a security interest in a seller's interest in a contract for deed. The change will also impact contract purchasers and parties who purchase sellers' interests in contracts for deed.

    Perfection of Security Interests

    Prior to July 1, 2001, the customary practice for perfecting a security interest in a seller's interest in a contract for deed was to file a mortgage or assignment in the real estate records. Under RA9, it is now clear that the seller's right to receive payments under the contract for deed falls within the definition of an "account." Thus, a security interest in the account (the stream of payments under a contract for deed) must be perfected in accordance with RA9 by filing a UCC financing statement. The financing statement must be filed in the jurisdiction where the debtor (the contract seller) is located, not in the jurisdiction where the collateral is located (in this case where the real estate is located). After June 30, 2002 (the expiration of the transition period) a party searching for security interests in a seller's interest in a contract for deed must search in the UCC records of the debtor's (seller's) location, not in the Minnesota real estate records. Searches prior to June 30, 2002 must be conducted both in the UCC records as above and the real estate records where the property is located.

    For a secured party to have a security interest in all of the seller's real estate interests related to the property that is being sold on a contract for deed, rather than just the stream of payments, it will continue to be necessary to file a mortgage on the seller's fee interest in the real property. Without the mortgage, the secured party will have no collateral for the debt if the contract for deed is cancelled.

    Transfer Statements

    The changes that result from RA9 present some vexing problems that the Minnesota legislature has attempted to address through amendments to RA9 specifically dealing with contracts for deed. Under RA9, if there is a default by the contract for deed seller in its secured debt, the secured party may collect payments due under the contract for deed pursuant to its rights as an Article 9 secured party. When the purchaser under the contract for deed pays the contract in full and is entitled to a deed, the secured party who has been receiving the payments will not have fee title to the property and therefore will not be able to give a deed to the purchaser. Since the record fee owner is no longer receiving payments, it may be a difficult to obtain a deed.

    The legislative amendments adopted to address these issues require that, upon default by the contract for deed seller, a secured party holding an Article 9 security interest in a seller's interest in a contract for deed file a "transfer statement for a contract for deed." This has the effect of conveying fee title to the underlying real estate to the secured party. This is a surprising change to prior Minnesota real estate law because it is the only statutorily authorized situation where fee title to a parcel of real estate can be transferred by a document other than a deed signed by the current fee owner.

    A transfer statement contains a statement by the secured party that the contract seller has defaulted in connection with the secured obligation, that the secured party has commenced collecting the payments under the contract for deed, and by reason of exercising that remedy, has acquired the rights of the seller in the contract. The secured party is required to file the transfer statement "promptly" after it begins to collect payments under the contract for deed. Once the transfer statement is filed, the secured party then has the right to cancel the contract for deed in accordance with Minnesota law if the contract purchaser defaults. Further, after the filing of the transfer statement, the secured party has the obligation to deliver a deed to the contract purchaser in accordance with the terms of the contract at the time that the contract for deed is paid in full.

    Sale of Contract for Deed

    RA9 applies not only to the creation of a security interest in an account but also to the sale of an account. As a result, when a party purchases outright a seller's interest in a contract for deed, RA9 requires the filing of a financing statement in connection with that purchase. Under RA9, it is clear that in order to perfect an outright ownership of the right to receive the contract payments, the purchaser of those rights must file a financing statement and file appropriate continuation statements during the life of the contract for deed, in addition to filing a deed and/or assignment on the real estate records.

    Transition Period

    The requirement to perfect a security interest in a seller's interest in a contract for deed in accordance with RA9 applies not only to security interests created after July 1, 2001 but to those created prior to July 1, 2001. There is a one-year transition period expiring on June 30, 2002 during which a secured party who was perfected prior to July 1, 2001 must come into compliance with RA9 or lose the perfection of the security interest.

    The significant changes that result from RA9 as it relates to contracts for deed need to be understood and complied with in order to assure that a security interest or, in fact, a purchase of a seller's interest in a contract for deed is properly perfected.