Ira Distenfield, the Santa Barbara man who built up and sold legal services franchise We the People, is facing state charges that he misled investors in his newest venture, PRstore.

On June 1, the California Department of Corporations issued a cease and refrain order against Distenfield and PRstore’s parent company.

The order charged the company with giving potential franchisees false information about how much they could expect to earn each month from a PRstore, selling a franchise without an effective registration to do so and failing to disclose lawsuits Distenfield faced. It fines the firm and Distenfield $17,500, but Distenfield has filed an appeal.

The Department of Corporations order is the latest in a series of headaches for Distenfield, who filed for personal bankruptcy in January after a years-long legal fight over the payout from the sale of We the People to a Pennsylvania firm. Creditors, including Santa Barbara attorney Barry Cappello, say he hid assets from a stock sale and structured the transfer of ownership of a house on Marina Drive in Santa Barbara in a way that stiffed them.

After building up We the People, which handled routine legal document filings such as incorporations at prices lower than law firms, to more than 100 stores in 30 states, Distenfield sold the company for $12 million and $2 million in stock in 2005 to publicly traded Dollar Financial Group, according to court filings.

But that price had dropped from Dollar’s original offer of $27 million, and the Pennsylvania company froze up on its payout after a $1.3 million down payment to Distenfield. It later alleged in lawsuits that the franchise was worth less than what it agreed to pay because some states rejected some of the legal documents it filed.

We the People is still in business – it even has a Santa Barbara location – but the current franchisees have no connection to Distenfield or his legal troubles.

Meanwhile, Distenfield moved on to a new franchising venture, PRstore. The firm offers walk-in public relations services such as press release writing and logo design.

Distenfield has a minority stake in 20 stores in California, including his own franchise in Santa Barbara. In January, Distenfield filed for a personal Chapter 7 bankruptcy with $515,000 in assets and more than $5 million in debts, telling the Business Times his legal bills in the We the People battle had overwhelmed him but that he didn’t expect any affect on the PRstore venture.

But the California Department of Corporations complaint, although apparently flawed in at least one respect, provides the PRstore with its own legal problems.

In an allegation that will get a second look from state officials, the complaint alleges PRstore’s parent sold a franchise in California in June 2007 without being registered to do so in the state. But a letter on file with the Department of Corporations from March 2007 says the firm’s registration was effective.

Mark Leyes, a spokesman for the Department of Corporations, said the registration appears to be valid. “That (allegation) certainly could be reviewed, given the circumstances,” he said.

But Leyes said another allegation, that Distenfield and PRstore’s parent company misled potential franchisees about earnings on the stores “is far more serious and looks more valid.”

The complaint alleges that in 2006, Distenfield told two franchisees that his PRstore in Santa Barbara generated between $75,000 and $80,000 a month and that he made a profit of more than $300,000 by October of that year. The complaint also alleges that Daniel Fragen, CEO of PRstores’ parent company, told a franchisee the stores would generate as much as $30,000 a month.

But Gerald Wilson, a Nebraska attorney representing Distenfield, said those communications were with people who were not prospects but had already signed on with PRstore. “It’s absolutely true that Fragen received an inquiry from somebody about the average earnings of a store and that he responded,” Wilson said, adding, “I’m not aware of any law in any state that restricts the communication between franchisee and franchisor.”

Wilson said it’s also true that Distenfield talked to prospective franchise buyers about his store. But Wilson added that Distenfield also is a franchisee, and prospects often talk to current franchisees about their businesses.

State regulators also charged Distenfield with failing to disclose litigation to potential franchise buyers. But Wilson said all of that litigation had either involved settlements in which Distenfield admitted no liability or were everyday matters such as collections.

Meanwhile, in Distenfield’s personal Chapter 7 proceeding, Cappello & Noel, a Santa Barbara-based law firm that claims it’s owed $130,000 for work on the We the People’s litigation against Dollar Financial, is alleging that Distenfield hasn’t adequately explained where $459,000 he got from a stock sale went and that he transferred and sold a house in an effort to stiff his creditors. The firm also said in court filings that Distenfield is drawing hundreds of thousands of dollars from one of his corporate entities but isn’t reporting that to the court.

Distenfield said that the house on Marina Drive was owned by We the People. When the company was sold in 2005, Distenfield transferred the house into a living trust. Last year, he sold it and paid off his mortgages and creditors who were entitled to the proceeds, he said.

But Cappello & Noel alleges that the house was the only valuable asset We the People still had and that it was shuffled out of the corporation to avoid making it fair game for creditors. Distenfield disputes that, saying the house was transferred before any of the lawsuits that generated Cappello & Noel’s bills were filed.

• This story was originally published in the Aug. 21 print edition of the Business Times.

• To read the California Department of Corporations’ cease and refrain
order against PRstores and Ira Distenfield, click here.

• To read the California Department of Corporations’ registration renewal
for PRstores to offer franchises for sale in California, click here.

• To read Cappello & Noel’s complaint against Ira Distenfield in
Distenfield’s Chapter 7 proceedings, click here.

• To read Ira Distenfield’s bankruptcy court response to Cappello &
Noel’s complaint, click here.

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Letter to the editor: Ira Distenfield responds

I feel obligated to respond to Stephen Nellis’ article “State order targets PRstore sales pitch” that headlined the Aug. 21 edition of the Pacific Coast Business Times. There are some significant errors and omissions that leave an uninformed reader with a distorted view of the situation.

First, the lead paragraph in the article, which sets the tone for the entire piece, seriously misstates, indeed fabricates, both the substance of the order issued by the Department of Corporations and the extent of my involvement in PRstore. I am not “facing state charges that (I) misled investors”.

The order issued by the Department of Corporations is concerned only with the extent of disclosure that was made to prospective PRstore franchisees. The order is not concerned with, and does not mention, investors in PRstore corporate. PRstore was started by Mike Butler, Kathy Butler, and Dan Fragen in March 2002. My wife and I became franchisees in November 2005; I became a sales agent in December 2005, and we became minority owners of PRstore corporate in 2006. To characterize PRstore as my “newest venture” implies that I have operation control of the company, a supposition that is far removed from reality. It was my lack of control and significant influence, over the business of PRstore, that has prompted us to start a similar concept under a private brand.

Second, the proposed order does not charge me, as a minority partner of the Company nor PRstore corporate (based in Charlotte, N.C.) with “giving potential franchisees false information about how much they could expect to earn each month from a PRstore franchise.” The proposed order charges the company with giving prospective franchisees financial performance information that was not included in the company’s franchise disclosure document. Any information that was given to a prospective franchisee reflected the true and accurate financial performance of a specifically identified store. That has never been questioned or disputed.

Third, the company has not filed “an appeal of the proposed order” as stated in Mr. Nellis’ article. The company has requested a hearing by the Office of Administrative Hearings so that the Company may have an initial opportunity to refute and explain the allegations. The Department of Corporations issued the proposed order after its internal investigation based on complaints it received from some former PRstore franchisees. During the course of its investigation, the department did not advise the Company that it was the subject of a review and did not offer the company an opportunity to explain or respond to the claims being investigated. That process is reserved for an administrative hearing which has yet to occur. Based on the proposed order, the company can accept a sanction to “cease and refrain” from giving forth any performance numbers of a franchise store and pay a $17,500 fine, or explain why those sanctions are not appropriate. The Department of Corporations has scheduled that hearing for late October 2009.

Fourth, contrary to the assertions of our former attorney, Barry Cappello, we did not transfer our house on Marina Drive “in an effort to stiff (my) creditors.” When Dollar Financial Group purchased the assets of We The People, they did not want that piece of real property so the house was transferred to our living trust on the advice of our attorney. At the time of the transfer, We The People did not have delinquent creditors nor judgments from on-going litigation.

As someone who has a reputation for fairness in reporting, I wanted to immediately express my concerns to you.

— Ira Distenfield
Santa Barbara

• This letter appeared in the Aug. 28 issue.