Plaintiffs Shop Hit With New Ethics Suit

Scott Graham

2013-02-21 06:00:46 PM

SAN FRANCISCO — Upping the ante in their fight over class action ethics, two Bay Area attorneys have sued one of the state's largest plaintiff shops, alleging that it's a vehicle for hiding assets from their $20 million fraud suit.

Mark Chavez and Richard Zitrin allege that after they brought a fraud suit against Initiative Legal Group last summer, the firm began shifting its most valuable asset — pending contingency fee cases — to a new firm called Capstone Law APC.

Since October, 48 attorneys from Initiative Legal Group, or ILG as it's known, have moved to Capstone, which is housed in the same Century City business complex as ILG. Many of those attorneys have since appeared under Capstone's name in litigation that originated with ILG — but without filing substitution, association or even change-of-address forms, the attorneys allege.

"Throughout this process and by these means, defendants fraudulently transferred ILG's assets, including ILG's interest in dozens of civil actions ... to Capstone," states the complaint signed by Chavez, of Chavez & Gertler. Maxon v. Capstone Law, CGC-13-528884, was filed Thursday in San Francisco Superior Court.

The litigation all stems from wage-and-hour claims Initiative Legal Group first brought against Wells Fargo in 2006. It began as a class action, but the firm later signed up 600 individual mortgage consultants for a mass action. Chavez and Zitrin, of Carlson, Calladine & Peterson, alleged that ILG sold out those 600 clients by negotiating a secret $6 million settlement with Wells Fargo, keeping $5.5 million for itself in attorney fees. "Your clients withheld material information," S.F. Superior Court Judge Harold Kahn told a lawyer for ILG at a September hearing. "They violated their ethical obligations of disclosure and fair dealing. Did I miss something?"

Kahn entered a temporary restraining order freezing the $5.5 million and putting it in an escrow account. ILG is appealing that ruling, though it hasn't filed an opening brief yet.

Around the same time, Chavez, Zitrin and David C. Anderson of Anderson Law brought a putative class action against ILG and several of its principals for fraud, saying some of the 600 clients had claims worth more than $100,000 but received only a $750 payout. ILG tried to head off the claims last August by offering all 600 clients an additional $1,000 if they agreed to sign a waiver not to sue the firm.

Chavez alleges in Thursday's complaint that, four days after sending out the $1,000 checks, ILG partner Rebecca Labat Crosby incorporated Capstone Law. Capstone has since added 56 attorneys, 48 of them from ILG, and brought at least 27 ILG cases with them. "Throughout the fall of 2012, as attorneys moved from ILG to Capstone, defendants worked in concert to transfer to Capstone dozens of active cases in which ILG held a contingent attorneys' fee interest," the complaint states. "The interest in these litigation matters ... is ILG's most valuable asset, and without it, ILG will be unable to satisfy plaintiff and the clients' claims."

Crosby, meanwhile, has continued to act for both entities, filing a Sept. 27 declaration in a federal case in which she represented herself as a partner at ILG, the complaint alleges.

Capstone, meanwhile, has not updated its corporate filing with the State Bar — nor has it updated Crosby's personal guarantee of $100,000 for errors and omissions. With 57 attorneys, the firm is required to raise that guarantee to $5 million, the complaint alleges.

Zitrin and Chavez also say in their complaint that Capstone, Crosby and ILG principals Marc Primo, G. Arthur Meneses and Monica Balderrama violated the Uniform Fraudulent Transfer Act and other laws. It seeks a receivership for Capstone and contends that all ILG attorneys who moved cases to Capstone should be jointly and severally liable for damages.

Natalie Vance, an attorney who represented ILG before Kahn and on appeal, declined to comment, saying she does not represent Capstone.

Editor's note: Zitrin is a contributing writer for The Recorder.