Apartment mogul Stephen Frenz sells off his apartment buildings, but lawsuit seeks to block him

Facing legal pressure by a coalition of tenants and the city of Minneapolis, embattled landlord Stephen Frenz said this week in court that he has sold all of his apartment buildings.

The sale, which could include more than 40 apartment buildings, has touched off another major legal confrontation.

Tenant lawyers with Faegre Baker Daniels asked the Hennepin County District Court in a new lawsuit filed this week to either void the sale of 17 of the properties, place them in receivership or put them under control of the court.

The lawyers indicated they will try to block the sale of other properties as they get more information about the transactions. The lawsuit alleges Frenz is committing fraud by transferring his properties to avoid paying tens of million dollars from an earlier class-action suit.

"We're concerned that the sales [of the properties] are designed to deprive tenants of the damages they are due," said Michael Cockson, a Faegre lawyer.

Frenz has more than 60 apartment buildings, but 17 have been recently wrested from him by lenders who have begun foreclosure proceedings against him. That left him with approximately 45 properties, all of which may have been sold, based on Frenz's testimony.

Frenz refused to respond to questions about the sale on Thursday. His attorney, Douglass Turner, declined to comment.

In the hearing, Frenz tried to reverse a recommendation by the city's regulatory services decision to revoke his rental licenses on all his properties.

City officials have accused Frenz of secretly sharing ownership of his rental properties with landlord Spiros Zorbalas, who was banned by the council in 2011 from holding rental licenses for five years. The ban was initiated after the city revoked licenses on three of his apartment buildings.

Frenz told the city that he bought the buildings from Zorbalas and that Zorbalas no longer had a financial interest. But records, first revealed in a housing court case last year, disclosed that Zorbalas and Frenz created new corporate entities that have ownership of the buildings. In some of them, Zorbalas had 80 percent ownership.

"This represents an unprecedented and elaborate fraud against the city," said Lindsey Middlecamp, an assistant city attorney, in opening remarks.

Turner called the allegations "repeated misrepresentations by the city," and accusing it "of a continuation of a smear campaign" against Frenz.

Turner argued that Frenz had complete power over operation of the buildings, free of control by Zorbalas, and Zorbalas' ownership interest in the properties was irrelevant. Frenz said the lines of control are spelled out in an operating agreement between Frenz and Zorbalas that Turner has declined to make public.

However, in a court memorandum, Judge Mary Vasaly indicated Zorbalas retained significant financial controls.

Seventeen of Frenz's current buildings recently went into receivership after financial lenders concluded Frenz failed to disclose to them that Zorbalas remained an owner.

The first class-action lawsuit alleges that his tenants, who number more than 1,000, faced a history of neglect under Frenz, including vermin, pest infested apartments and a lack of repairs.

In the latest class-action suit, the same lawyers allege that Frenz's corporate entities and the companies that bought his buildings have violated state law by transferring the ownership of the properties to defraud tenants who sued him. The suit argues it is a way for Frenz to avoid paying damages if he loses the first-class action suit. Earlier, Cockson indicated the payout to the tenants, much of it in the form of rent reimbursement, could total $20 million.

The hearing adjourned Thursday without testimony from Zorbalas, who flew to Florida — where he now lives and owns rental properties — because of Hurricane Irma. The hearing resumes Tuesday. Zorbalas is expected to testify by Skype or via telephone.

After testimony concludes, hearing officer Danielle Mercurio has 30 days to issue a decision on whether to uphold the revocation orders, which will be forwarded to the City Council for final action.