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Effective July 1, 2001, Minnesota and virtually every other state will have adopted revisions to Article 9 of the Uniform Commercial Code (UCC), generally known as Revised Article 9.1 Generally, the changes represented by Revised Article 9 are primarily of concern to those involved with non-real estate secured transactions. However, there is an important (and until recently overlooked) aspect of Revised Article 9 that will have a significant impact on real estate law and practice. The changes brought about by Revised Article 9 will affect the practice of taking a security interest in a seller's interest in a contract for deed and will even affect contract purchasers under such contracts for deed and investors who purchase contracts. As a result, real estate lawyers will need to be aware of the new developments in what is usually considered "personal property law."

The most significant issue regarding a security interest in a seller's interest under a contract for deed is (a) whether the secured interest is to be treated as a personal property interest to be perfected (and enforced) as other personal property security interests are to be perfected (with a UCC financing statement) or (b) whether such security interest is a real estate security to be perfected (and enforced) as other real estate security interests. Prior to the enactment of Revised Article 9 of the Uniform Commercial Code, the law in Minnesota was not absolutely clear. However, In re Schuster,2 a decision of the 8th Circuit Court of Appeals applying Minnesota law, held that a security interest in a seller's interest under a contract for deed must be perfected in the real estate records, not the UCC records, and recording in the real estate records alone was sufficient. The Schuster court reasoned that, since the seller's interest under a contract for deed represented fee title, persons searching for security interests in the seller's interest would naturally search real estate records.

What does the uniform Revised Article 9, effective July 1, 2001, say about security interests in a seller's interest under a contract for deed? Minnesota Statutes Section 336.9-102(a)(2) (2000) defines an "account" to include "a right to payment of a monetary obligation ... (i) for property that has been or is to be sold ... ." Thus, under Revised Article 9, a purchaser's obligation to make payments under a contract for deed is deemed an "account" and security consisting of a seller's right to payments under a contract for deed is to be created, perfected, and enforced under the provisions of Revised Article 9. This clearly reverses the result in the In re Schuster case. In addition, contrary to the rule under old Article 9 that financing statements are to be filed where the collateral is located, under Revised Article 9 financing statement filings are made in the state of incorporation/formation of a debtor that is a corporation, limited liability company, or other entity, and the state of residence of an individual debtor.3

All this will require that lenders seeking to perfect a security interest in the stream of payments under a contract for deed take a security interest and file a financing statement in the office of the secretary of state in the state of the debtor's residence or incorporation/organization. Similarly, contrary to the reasoning of In re Schuster, persons searching for prior security interests of a seller under a contract for deed must search for financing statements in the UCC records, not in the Minnesota real estate records, and, in particular, in the UCC records of the state of debtor's residence or incorporation, not necessarily in Minnesota.

Even aside from the fact that questions of priority of security interests in contracts will not be determined by Minnesota real estate records, Revised Article 9, in its uniform formulation, would create serious problems in Minnesota contract for deed practice,. Unlike a mortgage, which is merely a lien in favor of the mortgagee, in Minnesota a seller's interest under a contract for deed normally constitutes fee title to the real estate, a sacrosanct interest that normally can only be transferred by a real estate deed. Under a typical transaction as envisioned by uniform Revised Article 9, the financing statement evidencing the security interest on the seller's right to receive payments under a contract for deed will be filed in the UCC records of the secretary of state in the state where the debtor resides or is incorporated. If there is a default in the secured debt, the secured party will collect payments due under the contract for deed. When the purchaser under the contract for deed completes paying off the contract for deed, the purchaser will be entitled to a deed. However, the secured party who has realized on the seller's right to payments under the contract for deed will have obtained only an assignment of that right to payments, not any real estate rights. While an assignment may be sufficient to transfer the seller's interest under the contract for deed, it does not transfer the fee title, which may only be accomplished by a deed.4 Moreover, a pledge of the seller's interest in a contract for deed may result in the long-term separation of the right to payments from the fee (the holder of which is the party from whom the deed must be obtained). If the record fee owner is no longer getting payments (and particularly if the original seller has not been getting payments for some time), it may be difficult to obtain the deed from the seller when the contract is paid off.

Larry M. Wertheim is a shareholder with the law firm of Kennedy & Graven, Chartered He is certified as a real property law specialist by the Minnesota State Bar Association and is active in real estate matters.

"In Minnesota, a seller's interest under a contract for deed normally constitutes fee title to the real estate, a sacrosanct interest that normally can only be transferred by a real estate deed."

Because of these concerns raised by the unique nature of a seller's interest under a contract for deed, certain non-uniform amendments to Revised Article 9 dealing with contracts for deed were adopted by the Minnesota Legislature. The Minnesota approach was to accept that security interests in a seller's interest in Minnesota contracts for deed are now to be governed by Revised Article 9, but to make certain non-uniform Minnesota modifications so as to avoid some of the aforementioned problems for contract purchasers.

Most importantly, Revised Article 9 now deals with the problem of transferring fee title from the seller/debtor to the secured party by validating a Revised Article 9 "transfer statement" as the means whereby the interest of seller under the contract for deed and fee title is transferred to the secured party in the real estate records. In particular, the Minnesota legislation created a new concept called a "transfer statement for a contract for deed."5 The "transfer statement for a contract for deed" is defined as a document that (i) is a transfer statement made in compliance with Minnesota Statutes Section 336.9-619(a), and (ii) "transfers a seller's interest in an executory contract for the sale of real estate or of an interest in real estate that entitles the purchaser to possession of the real estate."

As a result, a "transfer statement for a contract for deed" is a record, authenticated by a secured party, stating that the seller has defaulted in connection with an obligation secured by the contract payments, the secured party has commenced collecting payments due under the contract, and that, by reason of such exercise, the secured party has acquired the rights of the seller in the contract. In addition, the transfer statement for a contract for deed also (a) must identify the name and mailing address of the secured party, the debtor, and the transferee, the names of the parties, the date, and the recording information regarding the contract for deed, (b) must contain a statutory acknowledgment, and (c) must recite the legal description of the real property subject to the contract.6 All of this allows the transfer statement for a contract for deed to be recorded or filed (and indexed) with the real estate records for the underlying property being sold on the contract for deed.

The point of memorializing this transfer in the real estate records is the most significant change of all -- the transfer statement for a contract for deed conveys fee title to the underlying real estate. Despite the fact that the "transfer statement for a contract for deed" will, consistent with the normal UCC practice, be signed (and acknowledged) by only the secured party, the statute specifically provides that it will have the legal effect of both an assignment and a deed from the seller to the secured party.7 Since a transfer statement for a contract for deed has the effect of a deed transferring fee title from the original seller to the secured party, the secured party will now be in the chain of real estate title and the contract for deed purchaser will be able to obtain marketable title to the real estate from the secured party/transferee.

This represents a very significant change from prior Minnesota real estate conveyancing law and practice. It is the only situation, aside from court order, where fee title can be transferred by a means other than a deed signed by the grantor (or his or her representative). Thus, acceptance of a "transfer statement for a contract for deed" as the complete equivalent to a deed (and assignment of the contract for deed) means a significant conceptual change for Minnesota lawyers.
New provisions were also added by the Minnesota legislation to provide for recording of a transfer statement for a contract for deed in the real estate records in the county where the affected land is located.8 In addition, other chapters were amended to permit the memorial of a transfer statement to be filed on a certificate of title and to provide that upon completion of a proceeding subsequent, a new certificate can be issued to the transferee.9

The legislation also provides that once the contract for deed is canceled, a transfer statement for a contract for deed cannot thereafter be used to transfer the seller's interest and any such transfer statement is not effective as a conveyance.10 Conversely, a secured party is permitted to exercise rights to non-judicially cancel the contract for deed once the secured party has recorded a transfer statement for a contract for deed in the real estate records.11 The Minnesota legislation also provides that if a secured party exercises the right of the seller to collect payments under the contract for deed, the secured party must deliver to the contract purchaser a deed to the real property "in accordance with the terms of the contract."12

It should be noted that under the Minnesota legislation, the security interest on a contract for deed does not create an interest in the underlying real property.13 As a result, even if a security interest was previously granted in the seller's interest under a contract for deed, once the contract for deed has been extinguished, either by deed from the seller to the purchaser or by cancellation of the purchaser's interest, no one need be concerned about any residual real estate interest of the secured party.

Finally, once a secured party commences to collect contract for deed payments from the contract purchaser, the secured party must "promptly" file an instrument transferring the contract for deed seller's interest of record to the secured party by means of a transfer statement for a contract for deed.14 Thus, where a seller grants a security interest in the contract for deed and the seller subsequently defaults in its obligations to the secured party and the secured party commences collecting contract for deed payments from the purchaser, the Minnesota statute requires that "promptly after beginning to" collect such payments, the secured party must record a transfer statement for a contract for deed. As a result, the secured party will thereby be in a position to provide the requisite deed to the contract for deed purchaser from the record owner in the chain of title. In theory, this will also void any long-term separation of the right to payments from the real estate interest that might otherwise prejudice the contract purchaser.

The Minnesota legislation will address the immediate problem raised by Revised Article 9 as applied to seller's interests in contracts for deed, will provide a way for contract purchasers to be protected, and will allow contract for deed sellers to finance their debt using the payment stream on a contact for deed. Still, there are a number of problems that appear to be inherent in Revised Article 9 and are here with Minnesota lawyers to stay.

Still Need Belt and Suspenders. A Revised Article 9 filing will grant a security interest only in the stream of payments due from the purchaser under the contract for deed and in the seller's lien to secure those payments. It will not, however, constitute a mortgage or security interest in the underlying real estate interest held by the seller under the contract for deed.15 As a result, if the contract for deed purchaser's interest is canceled under Minnesota Statutes Section 559.21, the secured party who files only a Revised Article 9 financing statement against a seller under a contract for deed will lose all its security. Therefore, in order for a lender to be fully secured by a seller's interest in a contract for deed, the lender must take not only a Revised Article 9 security interest perfected by a financing statement filed with the correct secretary of state, but also a real estate mortgage filed in the real estate records against the real property which is the subject of the contract for deed.

Buyer-Investors Beware. Revised Article 9 does not distinguish between a pledge and an outright sale of an account. As a result, sales of accounts, in addition to pledges of accounts, are within the scope of Revised Article 9.16 Thus, there is a zinger built into Revised Article 9 that requires even an outright purchaser of a Revised Article 9 account to file a financing statement.

Prior to Revised Article 9, where a transaction involved an outright purchase, not a loan, of the seller's interest, an investor-buyer of a seller's interest in a contract for deed would take a deed and assignment, and file that document (or documents) in the real estate records.17 However, since the payments due under the contract for deed are an "account" under Revised Article 9, in order to perfect his or her outright ownership of the right to the contract payments, a purchaser of a seller's interest in a contract for deed must file a deed and assignment in the real estate records and must also file a financing statement with the secretary of state of the appropriate state. In addition, since the initial financing statements expire after five years, the buyer-investor must file continuation statements with the secretary of state every five years thereafter for the life of the contract for deed. Otherwise, the original seller would still be in a position to pledge that account to a secured party, and if that secured party filed a financing statement with the appropriate secretary of state, the secured party would be entitled to the payment stream ahead of the person who merely recorded in the real estate records the deed and assignment.

Limited Grandfathering. The general rule that a person acquiring a seller's interest under a contract for deed (either outright or for security purposes) must perfect their interest in the stream of payments by doing a UCC filing applies to pre-July 1, 2001 sales or pledges of seller's interests in contracts for deed. There is only limited grandfathering protection for pre-July 1, 2001 sales of contracts for deed. If a security interest was attached and perfected prior to July 1, 2001, under the law that applied to it before Revised Article 9 applied, then it remains perfected for one year and thereafter the security interest no longer attaches or is perfected.18 Thus, if a party who acquired outright a seller's interest in a contract for deed prior to July 1, 2001, filed a deed and assignment in the real estate records, that party will be protected for one year after Revised Article 9 takes effect. Thereafter, as of July 1, 2002, even pre-July 1, 2001 acquisitions of seller's interest in contracts for deed will have to be perfected by filing UCC financing statements with periodic continuation statements thereafter.

Rights Governed by Revised Article 9. The rights between a secured party and seller as to who is entitled to receive the contract for deed payments are wholly governed by Revised Article 9. Under Revised Article 9, once there is a default in the underlying security agreement, a secured party has free rein to require a contract purchaser to make all payments to the secured party, instead of the seller/debtor, simply by notice to the contract purchaser.19 This is a change in Minnesota law.

Moreover, with the requirement that, after the secured party commences collecting contract payments, the secured party must "promptly" execute and file a transfer statement for a contract for deed transferring the fee interest to the secured party, the secured party will effectuate a virtually immediate foreclosure of the interest of the contract seller/debtor, but without any public notice, a sale, or a right of redemption. While this is normal practice under the UCC, it is a very significant change from the customary requirement for foreclosure of real estate interests. Sellers pledging their interest in contracts for deed should be made aware of their much more limited UCC-rights of redemption.

By making a seller's interest in a contract for deed a more financeable form of collateral that will be granted, perfected, and enforced under the Uniform Commercial Code, one can hope that Revised Article 9 will have the effect of encouraging sellers to sell by contract for deed. Lenders may be more willing to lend to such sellers since (a) lenders can perfect a security interest in the payment stream by a simple financing statement, rather than the more complicated mortgage (and also possibly avoid payment of mortgage registry tax), (b) lenders will have a new ability to collect contract payment whenever their own debtor/seller goes into default simply by serving notice on the contract purchaser, and (c) lenders can avoid the cumbersome and expensive process of foreclosing a real estate mortgage. In addition, the non-uniform Minnesota amendments adopted to Revised Article 9 should help avoid trouble for innocent contract for deed purchasers in getting a deed where, due to the seller's default in its third-party debt, the secured party exercises remedies under the contract for deed. Finally, because many sellers are willing to sell on a contract for deed only if they are able to sell their interest to an investor, it is hoped that investor-buyers of seller's interests under a contract for deed will not be dissuaded from buying contracts by reason of the need to file financing statements under Revised Article 9.

"Revised Article 9 now deals with the problem of transferring fee title from the seller/debtor to the secured party by validating a Revised Article 9 'transfer statement' as the means whereby the interest of seller under the contract for deed and fee title is transferred to the secured party in the real estate records."

1 Minn. Laws 2000, ch. 399, art 1. For a good introduction to the broader impact of Revised Article 9, see Gene H. Hennig, "Changes in the Wind: Revised UCC Article 9," Bench & Bar (Sept. 2000).
2 784 F.2d 883 (8th Cir. 1986) (applying Minnesota law).
3 Minn. Stat. ¤ 336.9-301(1), (2000) effective July 1, 2001.
4 Minnesota Title Standards, Standard No. 76 (Rev. 1994).
5 Minn. Laws 2001, ch. 195, Art. 1, Sec. 18, 20, and 21, to be codified as Minn. Stat. ¤¤ 507.236, 508.491, and 508A.491.
6 Minn. Laws 2001, ch. 195, Art. 1, Sec. 17, amending Minn. Stat. ¤ 336.9-619(a) (2000), effective July 1, 2001.
7 Minn. Laws 2001, ch. 195, Art. 1, Sec. 18, to be codified as Minn. Stat. ¤ 507.236, subd. 3.
8 Minn. Laws 2001, ch. 195, Art. 1, Sec. 18, to be codified as Minn., Stat. ¤ 507.236, subd. 2.
9 Minn. Laws 2001, ch. 195, Art. 1, Sec. 20, to be codified as Minn. Stat. ¤ 508.491, subds. 2, 3) and Minn. Laws 2001, ch. 195, Art. 1, Sec 21, to be codified as Minn. Stat. ¤ 508A.491, subd. 2, 3.
10 Minn. Laws 2001, ch. 195, Art. 1, Sec. 17, amending Minn. Stat. ¤ 336.9-619(a) (2000)).
11 Minn. Laws 2001, ch. 195, Art. 1, Sec. 15, amending Minn. Stat. ¤ 336.9-607(a) (2000)).
12 Minn. Laws 2001, ch. 195, Art. 1, Sec. 15, amending Minn. Stat. ¤ 336.9-607(a) (2000)).
13 Minn. Laws 2001, ch. 195, Art. 1, Sec. 6, amending Minn. Stat. ¤ 336.9-203(g) (2000)).
14 Minn. Laws 2001, ch. 195, Art. 1, Sec. 15, amending Minn. Stat. ¤ 336.9-607(f) (2000).
15 Minn. Laws 2001, ch. 195, Art. 1, Sec. 6, amending Minn. Stat. ¤ 336.9-203(g) (2000).
16 Minn. Stat. ¤ 336.9-109(a)(3) (2000), effective July 1, 2001.
17 Minnesota Title Standards, Standard No. 76 (Rev. 1994).
18 Minn. Stat. ¤ 336.9-703(b) (2000) effective July 1, 2001.
19 Minn. Stat. ¤ 336.9-607(a)(1) (2000) effective July 1, 2001.