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bryan Kennedey

Okay, I do see your pro-business stand point. But to say that they are doing them "a favor" is a bit of a white-wash. I agree it is a business. These real-estate investors and yes I know people who do this also are not getting a warm glow from the good they are doing. They are excited about the money and only the money. I'm not saying that's bad but to paint their acts as a public service is not correct and clouds the moral debate. I won't be able to read the specific complaint but I am going to err on the side of our public defender and assume he actually protecting the interests of individual citizens. But then again I am kinda "pie in the sky" like that. Maybe I am wrong.

Alexis

Hey, money gives us all a warm glow, no matter what you do for a living.

The fact of the matter is, these people are living in Friederichs' houses for free. You stop making car payments, the bank takes your car away. You eat all your food at a restaurant, you have to pay the check. But you stop paying on your contract-for-deed in Minnesota and there are no consequences?

I'm very interested to see how Hatch's office responds. Knowing this business as well as I do, I just can't see how it's doing anything but damage.

And what's the "moral debate" here? By signing on the dotted line of a mortgage, you're not only promising to pay it off, you're also agreeing that if you don't pay it off, you lose your house. Are we supposed to make exceptions for people who claim that they didn't understand that when they signed it? If so, then doesn't that mean ACORN isn't doing their job as an advocacy group?

Bexley

How is he protecting the rights of individual citizens? The banks are going to foreclose, and the tenants (squatters, actually) will lose their homes. Freidrichs will lose his money. The only one who will benefit is Hatch.

Not2Sure

The problem is as I'm sure you know Alexis that contract-for-deeds are not at all mortgages or auto loans. Default on your auto loan or your mortgage and your equity goes against your outstanding debt amount and the lender has to assume the balance. That's the risk the lender assumes in order to profit by collecting interest. Not so with contract for deed. What is missing from your description is that the investor "saving the day" with a contract for deed is using a legal instrument designed specifically to shove 100% of the risk onto the buyer (in this case the distressed former homeowner).

With a contract-for-deed the buyer normally gets absolutely zero legal stake in the property until the final payment is made. The buyer takes possession of the property but not the title usually until the entire note is paid. With a mortgage the buyer takes possession of the property and the title with a lien against it for the note amount.

Sign a contract for deed, make your very last payment 1 day late and your entire "equity" you've spent years paying is gone. You have no claim at all on the title. There is also no "cooling-off" period like there is with traditional mortgages. Change your mind one day after signing when someone explains how you have been suckered and you lose any earnest money/deposit required by the seller, period.

With a mortgage, there is a judicial foreclosure where the buyer retains some portion of title when they default. Buyer pays a price to be sure when they default but it isn't losing all the equity they have paid. The contract for deed on the other hand is cancelled outright, seller retains full ownership of the property. No remedy at all. The distressed homeowner has just lost everything he has paid. End of story.

What does the buyer get in return for accepting all this risk? Lower interest rates maybe from the investor? Not a chance. Many dubious contract-for-deed investors structure the deals hiding much higher than market interest rates but structure it so that the installments that the buyer is paying are lower than the payments when they were earlier at risk of defaulting so it seems rosy. Hey, you won't have to default on your mortagage, your credit rating will be saved! There are lots of ways to sell it, and the truth-in-lending rules don't really apply to contract for deed instruments so people can really be victimized if they don't know what's going on. Alot and I mean alot of fraud is going on.

Contract-for-deed holders are not angels. There are many, many instances of contract-for-deed investors who look for violations or even fabricate them in hope that the buyer has failed to keep good records. When the buyer defaults on the contract, the seller gets the home back, keeps all payments, and the buyer is left with nothing.

What generally happens is that the buyer is quite happily paying for years and then decides to sell the property. When the value of the property has not appreciated enough to cover the high interest debt owed or has actually fallen in value only then do they discover that all the money paid against the promissory note is gone. At that point, the homeowner is 100% trapped into the high interest rate of the contract for deed. They have no options.

Contract-for-deed investors are unlicensed and generally outside the jurisidiction of state authorities. The State of Texas recognized how pervasive the fraudulent and predatory practices were and passed the Deceptive Trade Act in 2001 as well as revamping the Texas Property Code forcing contract for deed lenders to do just as much full disclosure as traditional mortage lenders.

Deeds for trust involving a neutral third-party trustee is a viable alternative to a contract-for-deed that resolves at least some of the concerns regarding predatory tactics.

Is something rotten in this specific case given the current state of Minnesota law? AG would have to work pretty hard to show fraud in any contract dispute and the suit would have to come from the buyer not the AG.

I'm not offering any opinion at all. I'll be a wimp. The plaintiff seems to know full well what reputation contract for deed investors are rightly getting and seems to have gone to great lengths to say he is a good person of good character in that memorandum. There isn't any documenation of these alleged conversations between the buyer and the AG ofice. Who knows.

I don't think you can push this off on Hatch though, this isn't his style From the memorandum even the plaintiff points out that the AG staff seems to be offering differing positions. Hatch's MO isn't to rely on subordinates to decide strategy in his soapbox causes.

Also, Mr. Friedrichs seems to think deadlines should only apply when it doesn't affect his own legal fees. He is no hero. In that case it is alleged that he let a client's patent application lapse because the client hadn't paid him his legal fees. As soon as the fee got paid he turned around and sued for an extension claiming his office didn't get the notice.

I have no sympathy for a lawyer who seems to have been suckered by a shady middle-man who hunts out distressed properties (who probably collected his finder's fee in cash upfront) into overextending himself and is now getting plastered by a loose reading of the law. But I'm biased. I hate lawyers.

I tend to blame predatory lending in the subprime market for putting people in this situation of being overburdned in the first place and not dumb homeowners overbuying, but we both know that there are plenty of examples on both sides and no real overall answer. The legislature needs to step up like they did in Texas and make it harder for people to be able to claim they were duped or the victims of fraud just like they do in the mortgage marketplace.

Wow, long post. I'm not entirely disinterested I guess.

Dr.X

A contract for deed is ownership. The only difference between a contract for deed (CD) and outright fee ownership is not that substantial. Contrary to the above post, the purchaser or buyer of a property on a CD has equitable title (this is the same as ownership) while the fee owner, the seller, has legal title. If I purchase a property on a CD, I can sell it, assign, liens can attach to my interest, I can rent it, I can even secure a loan against my CD interest. If you buy a home on a CD you are the owner. A CD is very much alike the states that use the legal system of Deeds of Trust. The bank owns the property and the owner has a deed in trust. If I own a home worth $300,000 and I bought it on a CD for $200,000, I have $100,000 in equity. That is my equity. Any proposition to the contrary is simply wrong.

There is clearly risk involved. If I sell a $200,000 property on a contract for deed, my risk is $200,000. If I sell that same home via a deed and then seller finance the buyer for $200,000, my risk is $200,000. The real difference between a CD and a mortgage is that a CD may be cancelled for default of payment terms in 60 days versus a mortgage which must be foreclosed over a 6 or 12 month period in Minnesota. The law allows CD’s a shorter period to recapture the collateral for very specific policy reasons that should be obvious. CD’s encourage the buying of selling of property amongst parties that otherwise would not likely be transacting business. But for the shorter cancellation period of a CD, individuals like Fredrichs, would rarely engage in seller financing.

CD’s are used typically in situations where the buyer’s credit is too poor or too non-established to justify obtaining a mortgage from a lender. Additionally, Federal and State regulations (i.e. TILA, HOEPA, REG. Z, ETC.) limit the amount of profit a lender can earn on a transaction involving a mortgage. Incredibility, the very naïve Attorney General’s Office sought in 2004 to extrapolate the above Federal rules to CD’s in the state of Minnesota. This was a horrible idea and thankfully, it was shot down in the legislature (in part due to the sensible lobbying efforts of real estate investors like Fredrichs). If these rules applied to both mortgages and CD’s, almost no rational or sane person would ever sell a property on a CD. In fact, the legal significance of the distinctions between CD’s and mortgages would cease to exist. The first time home buyer market and the poor or non-established credit market of buyer’s would be out of luck. They would have to wait until they could obtain bank financing. Therefore, wisely, the law treats CD’s and mortgages differently. However, this does not mean that selling a property on a CD is not without risk. Look at Fredrich’s now. That’s risk! Legal risk. Economic risk. There is very obviously risk. In fact, the people Fredrich’s deal with are so risky a proposition, banks will not even considering writing most of them refinance mortgages when they were in foreclosure, which is why they were even dealing with Fredrichs.

Fredrichs is a business man. Hatch is a political man. These two are meeting because of politics. This entire issue only even arose because the Governor’s campaign treasurer, an unfortunate person, I will call R.E., was sued by Hatch. Hatch saw a political opportunity and took it.

As for foreclosure reconveyances. I always hated them. Not because they are bad in nature, but because no matter how your structure the transactions, someone is always unhappy. If Fredrichs did these transactions for no profit, people would still complain. The only people at fault here are the fee owners that were unable or unwilling to sell their properties. However, keep in mind, many had no equity or negative equity before meeting Fredrichs. In fact, most of the foreclosure reconveyances I have seen, the parties seeking help had NO EQUITY. (i.e. 3 mortgages with a total of $180,000 and a property with a FMV of $150,000). The deals worked because the 2nd and 3rd mortgages dropped off title because they did not redeem from the 1st mortgage foreclosing. Then the investor redeemed as a creditor (i.e. the investor had a nominal $1,000 4th place mortgage). The investor ends up owning the property and then resells it on a CD. But for the investor doing so, the owner would have received nothing of value, as they pulled the value out with their what seems like an annual rush to refinance.

Don’t make Fredrichs out to be the bad guy he is not. Hatch is not a bad guy, he is just a political guy. I know for a fact that the AG’s office has engaged in conduct that is at best oppressive, coercive, and probably very much over the line in terms of the law and certainly ethics. That said, who cares. Let the Federal Court sort this one out. I just wanted to sort out the above post.

Kevin from Minneapolis

Right, on! You go girl!

Fat Jim

Mike Hatch. Governor. That is a bad idea. Just like: Jesse the Body. Governor. Bad idea.

How about a new rule. No more lawyers as Governors. They are a cancer. It spreads until the host (tax payers) can no longer function.

My favorite Hatch story is how he went down to Chicago and got his two daughters off from punching a cop and kicking out his squad car window. I cannot even get out of a speeding ticket. How did he do that? Power is nice. People who abuse it are not. Hatch is just such a person.

Vote NO on Hatch!

Matt

1) Your argument would be more compelling if you disclosed the conflict. For example, "Friederichs is my client/boyfriend/etc."

2) The law is replete with examples of abuses in the context of contract-for-deed. Also, the law is pretty clear about what you have to do to avoid invalidity. Friederichs must be doing something wrong, or Hatch wouldn't care. The are lots of contract-for-deed deals that aren't invalid. Friederichs is doing something new. Hatch thinks it's wrong. This is the way the law works.

The AG defends people who can't afford to defend themselves. I think Hatch is a good public servant. I think everything is going according to plan.

Except for the pundits who are biased and inject blantantly one-sided talk points to normaly disinterested readers. Wink wink, nudge nudge.

Alexis

1) I've never met Friederichs, I have no idea who he is, outside of the person named in these documents. My conflict is pretty clearly stated above, in several points.

2) Can you be so sure that Hatch wouldn't care unless there was something illegal about the way Friederichs was operating? What about all of the other legitimate investors that say they've been harrassed by the AG's office since July?

These people can defend themselves. They're just being irresponsible and looking to get bailed out. If you don't understand how a mortgage or CD works, then don't sign it.

So what's "the plan"? What is the AG's office is doing? No one knows and they're not talking.

Dr.X

Something everyone needs to consider: The MN Attorney General's office DOES NOT AND CANNOT AS A MATTER OF LAW REPRESENT A SINGLE PRIVATE CITIZEN IN THE CAPACITY OF AN ATTORNEY. The MN AG office represents the interests of the state of Minnesota and occassionally the public. They represent public interest or commonly referred to as public purpose. If someone is violating state law, the AG has the authority to seek redress only if there is a broad public purpose. What is the broad public purpose behind spending tons of state resources to keep a handful of non-paying CD vendees in properties they are not paying on? There are private attorney's for such matters. It should be obvious. Its simply to generate cheap headlines. If Hatch is luckly, someone will take a picture of him and a poor aggrieved CD vendees (of which 50% were represented by their own attorneys in the case of the Fredrich's CD's). This campaign against real estate investments in the area of distressed properties is so bogus, yet so complicated that the truth will never really come to the surface. That is just life. However, I assure you, its a shit-load more complicated than the blanket statement, "everything is going as planned". Thats the problem.

Not2Sure

I really doubt these people are living in Friedrich's houses for free. He has clear injunctive relief under the law both against them and the mortgage holders that may be foreclosing on him if what he alleges is true.

DrX I think we are misunderstanding each other to my more general comments. I may have been lazy with my language though. I was referring to the growth in equity from increased valuation.

If I'm condescending here please don't take offense, I don't mean to be. I think contracts for deed are inherently useful instruments of commerce but they are being used now too often in predatory residential situations:

Let's say I am the stressed homeowner and you are the investor "friend" with free cash. Because I have credit problems and am at the end of my rope after being fired for surfing for porn at work, am about to lose my home and I can not get a regular refinance. You offer a contract for deed on a property worth $90,000 at above market interest rates. I give you my last $10,000 cash to secure it and off we go.

After a few years of regular payments during which time I, being the handyman that I am and trying to impress a beautiful blogger who lives nearby, jettison my porn fetish, get a new job, and with all my newfound free time have built a heated garage, added a deck with a view with a fully stocked bar and a sauna to get her through the winter. I have reduced the principal to $60,000 via regular payments but lose my job after a coworker surfs for porn at my pc in my absence and I default. You immediately decide to declare the contract for deed cancelled because you are more of an investor than friend after all.

You are now entitled under the language of the statute that makes "time of the essence", while I am off somewhere begging the forgiveness of the beautiful blogger who just calls the police on me, to declare the contract terminated, to retake possession of the premises, and to retain all my prior payments as liquidated damages. In the meantime because of my improvements the property value has nearly doubled, all yours.

To the extent that the forfeiture provision is effective, the contract for deed enables you to avoid entirely any equity of redemption that would allow me the opportunity to try and use the $110,000 equity, the foreclosure process, and other traditional protections afforded to debtors under the law of mortgages. Congratulatons on your investment.

It gets even worse. I have seen contracts for deed recently that have clauses that disallow early repayment altogether. These are usually held by people seeking stable retirement income that absolutely don't want early payment. You being the smart investor that you are have also inserted an acceleration clause found quite often in traditional mortgages that means you just have to file once to get the balance owed instead of filing to collect again and again at the regular interval every time I default in the future.

Forfeiture clauses operate under two legal theories "forfeiture as rescission" and "forfeiture as contract termination". In the first, when the contract is terminated you and I go back to being the way we were before we signed the contract whereas the latter implies that contract unwinds and you are entitled to all liquidity as loss damages. The prevailing legal theory of course is the latter, but what about the conscience of the law? For defaulting on a payment of a thousand dollars once I am losing what, $135,000? Example is probably overly dramatic.

Some states like I mentioned above including Texas and Iowa have enacted legislation to temper the harshness of forfeiture already though. In other jurisdictions including Minnesota, the courts are moving in my view properly to recognize these sorts of situations as equitable mortgages that afford the buyer some protection.

I refer you to Fraser v. Fraser, 2005 WL 1950201 (in my notes, citation might not be right). This was decided last summer, August I believe.

If memory serves in that case a husband and wife sought the help of his father to finance the purchase of a property that had IRS liens against it. The husband was an accountant and he got a few thousand dollars credit against the property helping the owner with his tax problems. The couple then conveyed the deed to the father (a licensed real-estate broker btw) who issued a contract for deed for a signficant portion of the value to them and the deal was complete.

Lo and behold the happy couple later divorced. As part of the divorce settlement the wife got possession of the property and the son had to make the contract for deed payments.

Wait for it...

Son and, no longer, loving ex-husband immediately defaults and Father immediately declares forfeiture of the contract. Not clear if Dad let son personally evict ex-wife.

On the third and final appeal the Court of Appeals affirmed:

"Contracts for deed represent an exception to the usual rule finding protecting the equity of redemption and requiring characterization of real estate secured financing schemes as equitable mortgages. The contract for deed device permits, in effect, forfeiture of a buyer’s equity of redemption essentially because it is a seller financing device in which the buyer never obtains title and thus does not “forfeit” it when the contact is cancelled for nonpayment. Here, it was clear that this was neither what the parties intended nor carried out. They knew that [husband and wife] were obtaining title to the property before [father] and that [father] was 'financing' this acquisition. This stamped the deal with the character of an equitable mortgage, regardless of the other self serving pronouncements that [father] intended only to operate through a contract for deed and regardless of Minnesota authority that states that an absolute deed will not be an equitable mortgage unless it is clear that both parties to the deed so intend."

As I read it, the court found that the transaction was an equitable mortgage, regardless of whether the father understood it to be one, because it fit the character of a mortgage, rather than the character of a contract-for-deed.

Is this directly relevant to te case Alexis points out? Dunno, I don't have enough details to judge, but probably not. I am also in no way a lawyer although I pretended to be one in a bar once. Failed horribly and lost out to a guy pretending to be a doctor.

What is the assistant AG doing here? Investigating fraud, wrongdoing, or coercion? No idea, and really what I said about Mr Friedrichs in a previous post was probably not appropriate. If he reads this comment I apologize. He was probably just doing his job in that case as an evil intellectual property rights lawyer.

I have been near the receiving end of a prior Mr. Hatch crusade on behalf of what he thinks is the public interest though and this just doesn't feel like one. I could be wrong. Alexis may be on to something and time will tell.

Either way, I'm just pointing out that contract-for-deed as it is often being used now is not as cut and dried in this state's judiciary as some would have you believe. And I do feel that it is being abused way too often and it's going to get worse if the "bubble" ever materializes.

That and I'm avoiding work. Also, Hatch didn't get his daughters off scot-free. They were charged and found innocent in a bench trial that lasted 3 or 4 days and apparently hinged on the judge believing that the altercation was somehow related as payback for one of the daughter's previous runins at the club with management during a "panty" night where she reported a bouncer or manager I think for sexually harassing one of the waitresses.

The phone call recording where the cop calling one of the girls a "bitch" and slapping her around in the background didn't help the Chi-cops out much nor did they keep their story straight or get a single corroborating witness from a very crowded bar. Definitely had some gawker.com potential.

What I want to know is why does no Mpls bar have a panty night?

Alexis

What do you mean by "fully stocked bar"? I mean, is there single malt? Maybe a can of pistachios?

TaxHikeTim

Yea, the little guy is always the small business owner. Screw the people trying to make their house payment on a minimum wage job while they get kicked off their health insurance and gas prices soar while oil companies get filthy rich and their spouse is over in Iraq fighting a war with no end and their heating costs go through the roof and the bus fare doubles in five years and their property taxes go up by 12% and their college tuition goes up by 30% in three years and then they can't file for bankruptcy ‘cause the people in congress have made that damn near impossible these days...

Yea, the little guy is the small business owner.

Matt

I tried to read the complaint. It's pro se. By a 69 year old patent attorney. Who has recently helped clients obtain such important patents as "quilting machine" and "lint trap". The DJ complaint has a lot of babble. It's got a ton of grammar errors in it.

Anyway, apparently the AG's office is getting ready to sue this guy because, in his self-proclaimed benevolence, twelve different times he's bought a house, charged a $10k "investment price" in doing so, and sold it back to the previous owners for 3-4% more in interest. No word in the provided documents on whether the CD contracts are valid (of course). My guess is they're not, and that's why the AG is getting ready to slap him.

"Dotted line" my arse. There are laws that sophisticated people, especially attorneys, need to obey in executing contracts. These laws protect consumers who can't afford to go to law school before they buy.

Anyway, the guy seems to be a struggler. Confined to several months of bed rest after discharging your partner? Could there be any more drama? Child porn in another attorney's patent practice? How is this relevant? Why is this man in so much trouble all the time?

This does not pass my stink test.

To me, this contest is some pro se whacko in Eden Prairie, doing CDs (which are notoriously hard to do fairly) pitted against the AGs office, which is repeatedly scrutinized under the public eye, and packed with extremely talented attorneys, MH among them.

I'll pick the AG as my winner, thank you very much.

And look... this guy, Friederichs, is claiming that his CD is in arrears since February 2005 or something like that, and he's trying to evict the tennants. I know nothing about real estate law in Minnesota, but I do know that you can't evict somone for at least twelve months after they go into arrears. So already we see this guy trying to undo state law with a CD. If I understand this correctly (and I may not, because I couldn't stand to finish reading the incredibly poorly written brief) this is NOT LEGAL PEEPS!

My guess is the CDs are replete with illegal terms, clauses, and same (as our litigant is fond of saying - perhaps to convince us that he did receive some sort of legal education).

Why is it so hard to believe this guy is an A1 shyster?

Hatch: go get 'em, dog.

Matt

Not2Sure: you are the woman. Er, person. Whatever is preferred.

I also feel compelled to say this is not legal advice, I'm not a lawyer, and I don't know anything about anything. Certainly don't know as much as the not2sure character.

But I do know that CDs are abused all the time. Don't know about the twelve-month rule - it's something a drudged out of memory. It's just an example of how the CD shysters try to act illegally.

Matt

One more disclaimer:

When I say "you are the woman" it's me trying to buck the idea of equating being cool with saying "you are the man" ie you are cool if you are a man. It's not sarcasm.

Lewis

Golly. I've read more coherent franchisee v. franchisor complaints. This is the kinda thing that legal reporters (me being a former one) both loved and hated. A chance to poke around at the upper echelon of state government? Neat-o! Oh...wait. The complaint...it's kind of...soft...Damn! The first flag was the irrelevant background material: "Look! I'm a nice guy! Really!" Post-it notes on a door? Hello, certified letter? Is there something to it, maybe. There's probably a legal government reporter (not me, thank the Lord) picking their way through the crap as we speak. If there's something to it, we'll hear about it, either through a story or a statement form the AG's office. And if there isn't, Tom Lydon on Channel 9 will report a story anyway. On Hatch: At times brutish? Yes. Stupid? No. People complaining about the "harassment" from the AG's office? Happens no matter who running the office, Democrat of Republican. What I found is that many complaints about harassment from the office were really complaints about actually having to follow the law.

tricky

Well, Now that the court has DENIED Mr. Friederichs TRO, what have you got to say? Maybe you'll download that order and put it on your site.

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