Straw Buyer Sells on Contract For Deed

Fraser v. Fraser et. al. (August 16, 2005)

Recent MN Court of Appeals Decision

            Periodically, Title Mark sends out updates on new laws or court decisions, which may affect you.  Below is an edited version on a recent court decision.  We hope you find it informative.

            The Minnesota Court of Appeals ruled on a case where the parties used a "straw" buyer, who then sold on a contract for deed to the actual buyer.  The court said this was an equitable mortgage.  The "contract" seller had to bring a lawsuit to foreclose its lien.  Click here for Fraser v. Fraser et al Court Case.

Pertinent Facts
            A Husband and Wife wanted to purchase a house but were unable to receive conventional financing.  As a result, the Husband's Father obtained financing and purchased the house the Husband and Wife wanted.  Immediately, Father sold the house to Husband and Wife on a Contract for Deed.

            Husband and Wife went through a divorce and the payments were not made.  After various judicial proceedings, the District Court concluded that (1) Father had an equitable mortgage and (2) Cancellation of the Contract for Deed was void.

Ruling and Result
            The Court of Appeals agreed with the District Court, upholding Wife's assertion that Father had an equitable mortgage.  This result allowed Wife to have her current equity in the house to enter a redemption period, as opposed to a contract for deed cancellation and total loss with no remedy.

            In plain English, only a true owner of real estate can be a seller under Minnesota contract for deed law.  In determining whether the Doctrine of Equitable Mortgage exists, the courts will look at not only the instruments used (i.e. Purchase Agreement, Contract for Deed, etc.) but also the intentions of the party(s) involved.

PRACTICE POINTERS

1.  A contract for deed is only available for seller financing for a real seller, one who has owned the property for a period of time.  

2.   If you ignore the above, the "new" seller will have to bring an expensive legal action to foreclose their lien.

3.  If there is a "straw" seller, like a parent, use the statutory mortgage forms.

In close, we hope this information is helpful to your real estate practice.  Please contact Brad Solheim at 952-442-7776 or bsolheim@titlemark.com  with any questions that you may have regarding this information.