Calling the sale of apartment houses 'suspicious,' a judge in Minneapolis won't dismiss tenants' lawsuit

A Hennepin County district judge said Friday that a company controlled by landlords Stephen Frenz and Spiros Zorbalas may have committed fraud when it sold off nearly 30 apartment buildings last summer on contracts for deed.

In a ruling with implications for more than 1,000 tenants in 500 apartment units, Judge Kevin Burke said the sale looked "suspicious." He refused to dismiss a lawsuit brought by tenant lawyers who seek to have the court void the contract-for-deed sales, which mean that Frenz and Zorbalas retain legal title to the property until the full purchase price is paid.

"We are disappointed for the buyers of the properties because they would like to close on the purchases," said Bradley Kletscher, an attorney representing some of the Frenz and Zorbalas holdings. "As it currently stands we are continuing with the litigation. It is one stop in a long litigation process."

He said Burke noted that contract-for-deed sales could also be legitimate transactions, "so he made comments on both sides of the fence."

Because of properties that were in disrepair, Zorbalas in 2011 was banned from renting apartments in Minneapolis for five years. Many of his tenants are low income.

In 2012, Frenz bought the properties from Zorbalas. But in 2016 it was discovered that Zorbalas still had a major financial stake.

The Minneapolis regulatory services division began proceedings against Frenz, and in December, the City Council banned Frenz from renting apartments for five years.

After the suit was filed, many of the apartment buildings were sold on contracts for deed.

The fact that the buildings were sold "so rapidly … after Vasaly certified the … class action lawsuit under a contract for deed is suspicious," Burke wrote in his ruling. "If (and the record is not clear about this) those contracts for deed have very low down payments — which effectively is a fraudulent transfer, [the tenants] may have a strong case."

Michael Cockson, a pro bono attorney representing the tenants, said one of the properties, at 316 Oak Grove St., was sold on a contract for deed for $12 million, but "the buyers made a down payment of $2,000, which comes to .02 percent."

Burke also refused to void formal legal notices that inform the public there is existing litigation that may affect title to the property. The notices could make it difficult for the new owners to resell the apartment buildings.

The city of Minneapolis, which refuses to grant rental licenses to 23 contract-for-deed owners, is asking a housing court referee to appoint an administrator to run the apartment buildings and collect rents.