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     Seller's Interest in Contracts for Deed

     A seller's right to receive payment under a contract for deed is subject to Revised Article 9 - the seller's right is considered an account under N.D.C.C. § 41-09-02(1)(b)(1)(a). Accordingly, a security interest in the seller's right is perfected by filing a financing statement. N.D.C.C. § 41-09-30(1) This is a major change; prior to the new statute, under North Dakota law a seller's interest in an installment land contract has typically been considered real estate, with the relationship between vendor and vendee in a sale of land by contract for deed analogous to that of mortgagor and mortgagee.
     Not only should a secured party perfect its security interest in a seller's right to receive payment by filing a financing statement, a secured party should record a mortgage on the seller's interest in the real estate. That way, if the purchaser defaults, the seller may cancel the contract, the UCC collateral will vanish, and the seller will have legal and equitable title to the real estate. A mortgage maintains the secured party's lien in the event the UCC collateral is gone.
     The requirement of filing a financing statement applies not only to lenders, but also to anyone who purchases the seller's interest in the contract. These purchasers also must file a financing statement and continue the filing for the duration of the contact in order to have priority over the seller's creditors and a trustee in bankruptcy.

     Summary: The bank claimed that N.D.C.C. § 47-16-03 (which basically sets out under what conditions a farm lease must be filed to reserve title in the landlord to crops in excess of the rental share of the lessor) applied only to crop-share agreements, and did not give the landlord priority in the crop proceeds because the statue only gave a landlord an automatic lien in crops up to the rental share of a crop-share agreement. The landlord argued that § 47-16-03 applied to any lease that reserved an interest in the tenant's crops, and the reservation could be in a cash-rent lease, a crop-share lease, or a combination of those leases. The supreme court found that the lessor's cash-rent lease did not give her priority over the bank's interest in the crop proceeds because the legislative intent was that § 47-16-03 applied only to crop-share agreements and not to cash-rent leases, and the lease did not require rental payments based on a share of the crops and so it was not a crop-share agreement.
     In this case, handled by Richard Olson and Troy Eichkoff of Olson & Burns, the North Dakota Supreme Court's recent ruling was an important one for lenders. The law is now established that the landowner need not file a crop-share agreement in order to obtain a lien on the crops, but where it is a cash rent leases, the lease must be recorded to have priority against a perfected crop mortgage.
     In April 1994, Orvik leased farmland to Cherneys for five years. The "FARM LEASE-CASH RENT" agreement required Cherneys to pay Orvik cash rent in the amount of $15,134 before April 1 of each year and $15,134 before November 1 of each year. The lease gave Orvik "a lien against all crops (growing and harvested), crop proceeds and products . . . until such time as [each year's] final annual cash rent payment" was made. Orvik did not file the lease in the register of deeds' office. The Bank loaned money to Cherneys, and in July 1997, it filed a crop mortgage on Cherneys' 1997 crop.

Cherneys harvested the 1997 crop, but their farming operation experienced financial difficulties, and they defaulted on approximately $100,000 of their obligation to the Bank and $20,968 of their 1997 rent payment to Orvik. In January 1998, Orvik filed a U.C.C. financing statement, claiming an interest in the Cherneys' 1997 crop proceeds.
     In its claim against Orvik, the Bank alleged its recorded interest in the 1997 crop proceeds had priority over her interest in the crops. Orvik counterclaimed against the Bank, claiming she was entitled to a portion of the 1997 crop proceeds sufficient to pay the balance due on the Cherneys' 1997 cash rent payment to her.
The substantive issue raised in this appeal involved the interpretation of N.D.C.C. § 47-16-03, which provides:

     "When a lease of a farm contains a provision reserving title in the lessor to any part of the crops in excess of the rental share of the lessor until the stated conditions of the lease have been com-plied with by the lessee, such lease must be filed in the office of the recorder in the county in which the land described therein is located prior to July first in the year in which the crops are raised to render such reservation of title effective as to subsequent purchasers or encumbrancers of any part of the grain over and above the lessor's rental share produced upon the land. The failure to file such lease or contract in accordance with this section constitutes a waiver by the lessor of all rights reserved by that person over and above that person's rental share in such crops as against any subsequent purchaser or encumbrancer of the lessee."

     The Bank argued that N.D.C.C. § 47-16-03 applies only to crop-share agreements and does not give Orvik priority in the 1997 crop proceeds because the statute only gives a landlord an automatic lien in crops up to the rental share of a crop-share agreement. The Bank claimed the "rental share" of Orvik's cash rent lease was zero, and her claim to the 1997 crop proceeds was in excess of that rental share and required her to file the lease before July 1, 1997, to take priority over the Bank's crop mortgage. Orvik argued N.D.C.C. § 47-16-03 applies to any lease that reserves an interest in the tenant's crops, and the reservation can be in a cash-rent lease, a crop-share lease, or a combination of those leases. Orvik claimed that she had priority over the Bank's subsequent crop mortgage because she claimed a lien in the 1997 crop proceeds only up to the balance due on the 1997 rent.
     The court interpreted N.D.C.C. § 47-16-03 that it applies only to crop-share agreements and not to cash rent leases. Although Orvik's lease gave her a "lien" against Cherneys' crops until each year's final cash rent payment was made, the lease required Cherneys to pay Orvik cash rent in the amount of $15,134 before April 1 and $15,134 before November 1. The lease did not require rental payments based on a share of the crops and was not a crop-share agreement. The Court held the trial court therefore erred in concluding N.D.C.C. § 47-16-03 applied to Orvik's cash rent lease to give her priority over the Bank's interest in the 1997 crop proceeds.