Daily Development for Tuesday, January 27, 2004 
by: Patrick A. Randolph, Jr. 
Elmer F. Pierson Professor of Law 
UMKC School of Law 
Of Counsel: Blackwell Sanders Peper Martin 
Kansas City, Missouri 
dirt@umkc.edu 
MORTGAGES; DUE ON SALE; RESTRAINTS ON TRANSFER; 
INSTALLMENT LAND CONTRACTS:: Mortgaging of the interest 
of a installment contract purchaser is a "transfer of [the] property" within 
the meaning of a due on transfer clause in the contract. 
Bank Midwest, Minnesota, Iowa N.A. v. Lipetzky, 2004 Minn. LEXIS 
4 (Minn. 1/15/04) 
The court takes pains to tell us that this particular contract for deed 
involved the transfer of a family farm from one generation to the next, 
and that the contract price was for less than half the appraised value. 
Unfortunately, the court never makes anything of these facts, and its 
holding certainly is not limited to that special situation. 
The caption above says it all. The contract's anti-transfer clause stated: 
"Buyer [sic] agrees they cannot sell, transfer or assign this property 
without written permission or consent of seller." 
The contract also prohibited prepayment of any kind for seven years. 
After five years, the buyers entered into several mortgages of their 
interest to secure substantial loans. In addition, in connection with the 
last mortgaging, the borrowers also assigned their interest in the contract 
for deed as "additional security." 
Originally, there seemed to be some judicial interpretations that even if 
the mortgages didn't violate the clause, the assignment for security did. 
Ultimately, in the final iteration of the case, however, the trial court 
concluded that the simple mortgage of the interest violated the clause. 
[The editor fails to see why there should be any distinction.] The court of 
appeals disagreed, holding that the grant of a mortgage is not a "transfer." 
The rationale of the appeals court was based upon the Minnesota statute 
establishing the lien theory of mortgages in that state, which declares that 
a mortgage is not a "conveyance." 
The Minnesota Supreme Court reversed the Court of Appeals and 
reinstated the trial court opinion. In the last line of the decision, the court 
states that, since the "anti-transfer" clause applies, the "mortgage is 
invalid." We are not told enough about the trial court decision to know 
whether the court really means what it says - that the mortgage itself is 
invalid and the buyer's interest intact, or whether the court simply is 
stating that the seller had the remedy to declare the buyer's contract 
interest under the contract forfeit, and the mortgage fell with the interest 
to which it was attached. 
Comment 1: The court does say that the Minnesota authority is clear that 
"no transfer" clauses in these contracts are enforceable and that they are 
analogous to a "no assignment" clause in a lease. In the leasing situation, 
it would be possible for a landlord to enjoin the tenant from assigning its 
interest in the lease and still hold the tenant liable for the balance of the 
term. See Friedman on Leases, Fourth Ed. 333 at n. 44 and cases cited 
(PLI 1997). But it is clear that the simple fact of an anti-assignment 
clause in a lease does not render any assignment in violation of the clause 
"invalid." Id. at Sec. 7.304d. 
Comment 2: According to Nelson and Whtiman's superb hornbook on 
Real Estate Finance Law (4th Ed.- West, 2001) at p. 329, the authority 
concerning the enforceability of anti-transfer clauses in installment land 
contracts generally favors the buyer's interests. Although such clauses 
are upheld in many cases, they are construed narrowly. Notably, Nelson 
and Whitman cite Murray First Thrift & Loan Co. v. Stevenson, 534 P. 
2d 909, 911, for the proposition that a transfer by a vendee to a lender as 
security for a loan is not within the meaning of a "no transfer" clause.) 
Nelson and Whitman also argue strenuously that such clauses ought not 
to be enforced when the buyer cannot escape their force by prepaying the 
installment land contract. 
The buyer's attorneys apparently made Nelson and Whitman's argument 
concerning the "combination anti-assignment, anti-prepayment" clause to 
the Minnesota court, but it concluded that this was not an appropriate 
case in which to analyze the argument because there was no evidence 
that the buyers had attempted to prepay. 
Comment 3: The usual view of the analogous due on sale clause is that a 
mortgage is not the transfer of an interest triggering the senior lender's 
rights. In fact, many lenders specifically include an additional "anti- 
encumbrance" clause specifically to cover this gap. It should be noted, 
however, that the authors and regulators dealing with federal preemption 
of due on sale clause regulation felt constrained to provide, in their 
exceptions to the broad authorization of the enforcement of such clauses, 
to state that a junior encumbrance cannot be used to trigger a due on sale 
clause when the mortgage involves owner occupied residential property. 
Such a provision would not be necessary, of course, if one didn't read the 
clause to apply to junior encumbrances to begin with. 
Comment 4: Although the federal preemptive legislation probably does 
apply to acceleration on transfer clauses appearing in installment land 
contracts, Nelson and Whitman argue that it is likely that the only 
remedy permitted by the preemptive authority would be foreclosure, and 
not forfeiture of the buyer's interest. Id. at 340. Further, they note that a 
strict "anti-transfer" clause, which does not provide for acceleration 
rights, but simply prohibits transfer, probably is not within the 
preemptive protection of the federal law. Id. at 342-344.