Revised UCC Article 9 and Contracts for Deed
By: MARY S. RANUM
Fall 2001
Revised Article 9 of the Uniform Commercial Code became effective in Minnesota on July 1, 2001. Among the many significant changes to the law of secured transactions is one governing the creation of a security interest in a seller's interest in a contract for deed. This change will also affect contract purchasers and parties who purchase seller's interests in contracts for deed.
Perfection of Security Interests. Before July 1, 2001, the customary way to perfect 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 Revised Article 9, 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) now must be perfected by filing a UCC financing statement.
File the financing statement in the jurisdiction where the debtor (contract seller) is located, not where the collateral (in this case, real estate) is located. For organized entities such as corporations and limited liability companies, the financing statement is filed with the Secretary of State of the debtor's state of organization. For an individual debtor, it is filed with the Secretary of State of the debtor's residence. After June 30, 2002 (when the transition period expires), 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 before June 30, 2002 must be conducted in both locations.
For a secured party to have a security interest in all of the seller's interest in the real estate that is being sold on a contract for deed, it will still be necessary to file a mortgage on the seller's 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 Revised Article 9 present some vexing problems with contracts for deeds that the Minnesota Legislature has attempted to address through amendments. Under the Revised Article 9, the secured party will collect payments due under the contract for deed pursuant to its rights as an Article 9 secured party if the contract for deed seller defaults in its secured debt. 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.
Under the legislative amendments, the secured party holding an Article 9 security interest in a seller's interest in a contract for deed must, upon default by the contract for deed seller, 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 title to a parcel of real estate can be transferred by a document other than a deed signed by the current 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 begun 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 can cancel the contract for deed in accordance with Minnesota law if the contract purchaser defaults. The secured party also is obligated 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. Revised Article 9 applies not only to the creation of a security interest in an account but also to the sale of an account. A party purchasing outright a seller's interest in a contract for deed must now file a financing statement in connection with that purchase. This is a surprising result, but it is clear under the Revised Article 9 that to perfect an outright ownership of the right to receive the contract payments, the purchaser of those rights must file a financing statement and 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 Revised Article 9 applies to security interests created both after and 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 before July 1, 2001 must come into compliance with Revised Article 9 or lose the perfection of the security interest.
The significant changes resulting from Revised Article 9 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.