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Distenfield takes stand in bankruptcy

By   /   Monday, February 1st, 2010  /   Comments Off

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Ira and Linda Distenfield asked the American people to trust them with their legal documents.

In the late 1990s and early 2000s, they built We the People, their discount legal filing business, into a nationwide chain of more than 1,000 stores. They garnered the endorsement of Rudy Giuliani and inked a deal to sell their company for $14 million.

Later, the Distenfields bought a PRstore, a retail shop aimed at helping small businesses market themselves in the best light. The Distenfields believed in the idea enough to become salespeople for the franchise.

“It’s great to be in the business of creating success stories,” Linda Distenfield says in a television pitch for PRstore franchises in Southern California.

But the Distenfields’ story moved to U.S. Bankruptcy Court, where Ira Distenfield wept on the stand on Jan. 20 as he told how the millions of dollars he was supposed to earn from the sale of We the People evaporated in a haze of litigation.

Along the way, the Distenfields racked up more than a dozen lawsuits, more than $5 million in debts and jail time for Ira Distenfield for deceiving a state judge. Creditors are trying to stop the Distenfields from erasing $1 million of their debts.

The Distenfields took up a quest to save Americans’ money on lawyers’ fees, but some of their biggest bankruptcy creditors are attorneys asking the bankruptcy court to order the couple to pay. One of them won $115,000 plus interest at the Jan. 20 hearing.

“Why lose time and money doing something other than business?” the announcer says in a television pitch for the Distenfields’ Santa Barbara PRstore, which is changing its name to Marketing Express.

The Distenfields have spent hundreds of thousands of dollars on things other than business. This is how it happened.

Born of a bankruptcy

Ira Distenfield said a 1989 bankruptcy inspired him and his wife to buy We the People. The company offered to fill out uncontested legal forms such as living trusts and bankruptcy filings for far less than a lawyer might charge.

“It was our own bankruptcy that caused us to say we’d like to be able to help others in a more affordable way,” Ira Distenfield told the Business Times. “We did thousands and thousands of bankruptcies for people, and we never charged more than $199.”

Much later, a New York judge barred We the People from doing much more in bankruptcies than typing up forms after it was accused of “unfair and deceptive tactics” that put customers’ assets at risk. In the Distenfields’ first bankruptcy, a judge declined to erase the couple’s debts and ordered them to make payments.

But until 2005, We the People appeared a smashing success. After 15 years, the Distenfields had stores in more than 30 states. Former New York Mayor Rudy Giuliani came aboard as a consultant.

“We the People helps individuals navigate the complex and often daunting legal system while providing access to valuable clerical preparation and filing services that many individuals could otherwise not afford,” Giuliani said in a 2003 press release.

In 2005, the Distenfields signed a $14 million deal to sell We the People to Pennsylvania-based Dollar Financial Group. During its year of research on the franchise, Dollar reduced its offer from $27 million to $17 million to a final $14 million.

The deal soon disintegrated. Dollar fired the Distenfields and sued them, alleging they had double-sold We the People franchise rights in seven states. A Pennsylvania judge said Dollar was “likely to succeed on the merits of its claims” and froze $2 million in Dollar stock promised to the couple.

In the end, the Distenfields only netted $1.3 million from the sale of their business, according to a non-binding arbitration settlement in Santa Barbara County. Ira Distenfield said the botched deal and the flurry of lawsuits afterward — he listed more than a dozen, several alleging fraud, when he filed for bankruptcy in January 2009 — came about because he chose to sell We the People to “the wrong people.”

“We feel very bad for our franchisees and our customers that the legacy of We the People was unable to continue,” Distenfield said.

Dollar wouldn’t comment on litigation. Its We the People operations face lawsuits or legal actions in New York, California, Missouri and Utah. It said in public filings that “it is the company’s opinion that many of the [We the People] related litigation matters relate to actions undertaken by the Distenfields.”

A new venture

As they continued to fight over We the People in court, the Distenfields had bought a PRstore franchise. Ira Distenfield was a franchise sales broker.

Last year, the California Department of Corporations accused Ira Distenfield of telling franchisees they could generate $50,000 in monthly revenues after six months, even though the franchise offering documents made no official earnings claims. He settled and was fined $5,000, a sum a Department of Corporations spokesman said Ira Distenfield paid.

“Purely from a business economic standpoint, it was a lot less expensive to pay a $5,000 fine than to have me or anyone else go through a one-day trial,” said Gerry Wilson, an attorney who lives in Nebraska and represented Distenfield in the case.

Back to bankruptcy

Meanwhile, legal bills in the We the People fights stacked up. The Distenfields filed for Chapter 7 bankruptcy — a liquidation, rather than reorganization — in January 2009. They listed $515,000 in assets and $5.3 million in debts.

Last spring, creditors came forward to ask the bankruptcy court to order the payment of more than $1 million the Distenfields owe instead of discharging the debts. Two of the suits were brought by We the People franchisees who had sued the Distenfields for fraud, settled the cases, but then alleged the settlements weren’t paid. Another two were brought by lawyers who said the Distenfields didn’t pay legal bills.

Los Angeles attorney Richard Lubetzky wanted $115,000 plus interest for his legal work. Lubetzky had pursued Ira Distenfield in state court, alleging he was entitled to a portion of $460,000 in proceeds from the sale of Dollar stock.

Lubetzky claimed he had a right to the money. A Los Angeles County Superior Court judge sentenced Ira Distenfield to jail for contempt of court for hiding the transaction from Lubetzky.

Ira Distenfield served two and a half days in March 2009. “It was the L.A. County jail. It was the twin towers. It was not a fun experience,” Ira Distenfield said.

In a bankruptcy court trial Jan. 20, Judge Robin Riblet ruled the Distenfields couldn’t escape their debt to Lubetzky. But she did not award Lubetzky the attorneys’ fees or $500,000 in punitive damages he sought.

“[Ira Distenfield] was between a rock and a hard place,” Riblet said during the hearing. “It was fraudulent in the beginning,” she added.

Riblet didn’t find fraud in Ira Distenfield’s depositing money from the Dollar Financial stock sale into his personal bank account or transferring a $3.4 million Hope Ranch house owned by We the People into his family trust. Ira Distenfield said the stock sale proceeds went toward legal bills and that he personally paid off the mortgage on the house before it was transferred.

Both issues are also brought up in a pending complaint filed by Cappello and Noel, a Santa Barbara law firm that represented the Distenfields against Dollar. That firm didn’t return calls for this story.

After the trial, Lubetzky said that without his ability to collect punitive damages or attorney’s fees, “it’s a victory, but it’s a hollow victory.”

“Every point was that discussed today, we won,” Ira Distenfield said, adding that his side had conceded that Lubetzky’s bill would have to be paid.

John Sullivan represents a group of former We the People franchisees who settled for $150,000 with the Distenfields after suing them for fraud. “We just want our judgments declared non-dischargeable,” Sullivan told the Business Times. “We’re happy to see that [Lubetzky’s] debt was declared non-dischargeable. That gives us hope.”

Relaying the message

The Distenfields are still running their Santa Barbara PRstore, though Ira Distenfield said its name is changing to better reflect the menu of marketing services it offers. He said one of the keys to his and his wife’s success at We the People and later as PRstore owners is their ability to get their message across to the public, which they’ve done on national television and in local spots in Southern California.

“What we’ve done for the last five years is to help small businesses increase their business through the public understanding what they do,” Ira Distenfield said. “We communicate their message to the public in a way that allows their business to grow.”

Ira Distenfield’s courtroom adversaries concede that the Santa Barbara man is a formidable pitchman.

“Ira is a loveable rogue,” said John Fallat, who settled a fraud suit against Ira Distenfield for $220,000. “He could sell ice to an Eskimo.”

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