Lawyers Prosper : Twisted Trail of Litigation Run Amok

In a dreary subterranean archive near the Los Angeles County Hall of Records, 60 crates of documents testify to litigation run amok.

They are part of a case known as Willow Ridge, which has generated more paper than any other in the history of Los Angeles Superior Court. The records would stand eight stories high if piled in one place. And they don’t include hundreds of thousands of documents interred in a separate storage warehouse, or transcripts of as many as 1,000 depositions.

Now in its 11th year of life, Willow Ridge was once described in court papers as “a litigation monster that is feeding on itself.” It is a legal perpetual motion machine, an endless trail of paper leading nowhere. Like a case from a Dickens novel, it has enriched lawyers and defendants instead of the injured parties.

$35 Million Lost

The case began as an effort by 1,500 investors to recover nearly $35 million they lost in a swindle. They have not received a dime, and dozens of them have died waiting for their money.

But insurance companies have paid out more than $105 million--enough to have paid each claim three times.

Of this amount:

--More than $70 million has gone to defense lawyers for legal fees and expenses.

--Another $30 million in settlements has gone to defendants and cross-defendants, the people accused of wrongdoing.

--A convicted swindler who served a prison term for his role in the fraud and now lives in Europe, for about two years received $50,000 a month in insurance money, through his attorneys, to be a consultant in his own defense.

Although the investors’ claims were settled in 1985, they haven’t been paid, and the case has lingered on, paying millions more dollars in legal defense fees.

“It’s just an attorney’s world that we’re trying to deal in,” said Bob Mosher, an investor from Northridge. “The poor damn investor doesn’t have a chance.”

The litigation has languished in obscurity, producing no tearful courtroom confessions, no moving appeals for justice--no trial, in fact--and virtually no press coverage. But Willow Ridge was born of a scandal that made headlines coast to coast.

The scandal was the collapse of a house of cards built by a Los Angeles tax lawyer and financial adviser named Barry S. Marlin.

The charismatic, jet-setting Marlin was convicted of fraud and spent two years at the Terminal Island federal prison. When he was sentenced, prosecutors said he had authored the biggest Ponzi scheme in U.S. history. (In a Ponzi scheme, named for an early practitioner, investors are paid with funds from new investors, not real earnings, until the inevitable collapse.)

Marlin built his empire from 1969 to 1975 on the savings of investors who were won by his charm, awed by his brains and convinced of his Midas touch. Many of his clients were United Airlines pilots, often small-town boys who were green to investing. The jet age had come, they were making upwards of $40,000 a year (the equivalent of $120,000 today), and paying almost as much in taxes as they had once earned. With careers that could end with the skip of a heartbeat, they were especially eager to secure their futures.

Marlin arranged for them to buy hotels, shopping malls and apartment buildings. To help them invest, he even got them bank loans with no money down and only their salaries as security.

News of Marlin’s genius spread through the airline fraternity, bringing hundreds of customers to his door. One of the biggest cheerleaders was McKinley Cohagen, an ex-pilot from Westlake Village who thought of Marlin as a friend. A garrulous preacher’s son from a little town in Ohio, Cohagen persuaded friends and relatives to invest and says he lost more than $150,000 himself. “I figure it cost me $40,000 every time my wife cooked for him,” Cohagen said recently.

Fraud Indictment

Many of the investments went where they were supposed to, and in the early years some of Marlin’s clients did well. But in 1977 he was indicted for fraud and other crimes by federal grand juries in Los Angeles and Chicago and by state authorities in Washington.

Court records said that millions of dollars had been secretly diverted to other ventures or used by Marlin to solve the crisis of the hour. Some investors had put their money in a shopping center that was never built. Others had received forged confirmations that their funds had gone into banks in London and the Grand Cayman Islands, only to learn later their deposits did not exist.

For years Marlin had concealed his failures--and kept the money flowing in--by paying quarterly “returns” on failing or non-existent ventures.

He went to Terminal Island in 1978 after pleading guilty in Los Angeles to 6 of 24 criminal counts.

THE PILOTS GO TO COURT

Marlin’s downfall might have pleased his embittered clients, but it did not bring their money back.

To that end more than two dozen lawsuits were filed against Marlin and his ex-associates and companies. Eighteen of these suits, filed in 1978, together became known as the Willow Ridge litigation. The suits were filed by a bankruptcy trustee on behalf of 18 of Marlin’s limited partnerships and joint ventures. Marlin had a fondness for British-sounding names. The case took its name from Willow Ridge Ltd., one of the partnerships.

The principal defendants were Marlin and his one-time law and business partner, Leonard M. Ross.

Ross became a major figure in the Willow Ridge case. He is worth a few words on his own.

A handsome man of 44, Ross is a Beverly Hills attorney-investor and a multimillionaire, thanks at least in part to this case. His business interests include Santa Barbara Savings & Loan, in which he and his wife own the biggest block of stock. His mansion in Beverly Hills was once a gift from William Randolph Hearst to film star Marion Davies. Later it was a set for “The Godfather.” Ross once had it on the market for $25 million.

Even his bitterest detractors describe Ross as a brilliant man. He was something of a legend at UCLA law school, where he graduated No. 1 in the class of 1968.

The following year he and Marlin became partners. Ross found properties and structured deals while Marlin stroked the investors. But the pair parted bitterly, perhaps violently, in 1971, five years before Marlin’s empire collapsed.

Ross was not indicted and most of the deals that went bad were set up by Marlin after he was gone. But the pilots sued Ross anyway. As a litigation target he had great appeal. Marlin was ostensibly broke and certifiably in prison. Ross was prosperous and well-insured. Moreover, after the breakup Marlin had accused Ross of terrorizing him into paying him millions of dollars in investors’ money, thus bleeding the businesses and causing them to fail.

In a sworn declaration in Willow Ridge, Marlin charged that Ross, his older brother Al Ross and two armed thugs had abducted him in May, 1971, held him for 24 hours in Ross’ Hollywood apartment and forced him to turn over investor assets, sign a multimillion-dollar promissory note and give up personal bank accounts and jewelry.

The document says: “When I requested an opportunity to discuss the matter and review the documents I was threatened (by one of the thugs and was told) that if I did not immediately sign the documents without reading them he would blow my head off, drink my blood and break both my arms and legs. . . .”

Ross denies the allegations. “Mr. Marlin bought certain interests from me,” he said in an interview. His lawyer called Marlin a “pathological liar” who concocted this “palpably ridiculous” story to divert attention from his crimes.

The FBI and federal Organized Crime Strike Force took the story seriously enough to take it and the Ross brothers before a grand jury. No charges against either Ross came of it. But Bobby Clark, one of Ross’ gun-toting associates, was later convicted of perjury for denying to the grand jury that he had a pistol and that “Al Ross had a firearm in his possession.”

This history assured Leonard Ross a place in the Willow Ridge litigation.

A DEFENDANT STRIKES IT RICH

Charges of fraud were the heart of the suits. Then a change in strategy, designed to win the investors more money, produced a windfall for almost everyone else.

The explanation involves the body of state law that tells insurance companies how they must defend policyholders in lawsuits.

Over the years, Marlin, Ross and their companies had bought dozens of liability insurance policies covering property damage, personal injuries and legal malpractice. Naturally they wanted the insurers to pay the legal bills and any damages proved in court. But insurers balked, on the grounds that they had not insured against fraud. They would defend against claims of property damage or personal injury, but not against claims that the policyholders were crooks.

In a counter-strategy the pilots’ attorneys amended the suits to claim property damage. The legal theory was that investor-owned properties had been allowed to deteriorate through neglect. The plan was to engage the insurers’ deep pockets.

This was a fateful step. The pilots had unlocked the insurance company vaults--but to the other side. For the stratagem gave defendants the right to hire their own lawyers, who were then free to devise a legal strategy that would be bankrolled by insurers.

It happened this way.

The insurance companies, now faced with claims for property damage, could no longer simply refuse to defend the case. As is common in such situations, some agreed to pay legal fees but not damages for fraud.

Possible Conflict of Interest

This raised the possibility of a conflict of interest. In theory, the insurance company lawyers might defend the property damage claims more stoutly than the fraud claims, leaving the clients holding the bag if fraud were proved. Thus, under state insurance law, the insurers lost the right to pick lawyers for their policyholders and direct the strategy. In practice they surrendered all rights but the right to pay the bills.

And there were soon plenty of bills, a first wave in behalf of Ross.

He retained two law firms at insurance company expense. One was a leviathan multi-city firm, defunct since last year, called Finley, Kumble, Wagner, Heine, Underberg, Myerson and Casey. The other was a small firm headed by a lawyer named Lynn Boyd Stites.

Stites, 44, is a shrewd litigator with a knack for driving insurers up the wall. He once sued a neighbor for calling him a name, touching off almost nine years of litigation with an insurance firm.

Attorney Doreen Wolf, who worked for Stites in 1979 and 1980 during his early years with Ross, once gave a deposition in which she described a fantasy of Stites’.

“Mr. Stites would walk in the office and state that he had a goal, and that was to bill the insurance carriers for some astronomical amount of money,” she testified. “I think it was a million dollars a month.”

With Stites’ help, what began as a legal nightmare for Ross ended in an enormous gain.

Insurers eventually paid Ross’ lawyers nearly $18 million. Yet in a series of lawsuits beginning in the early 1980s Ross claimed their efforts were lacking and accused them of acting in bad faith.

Some had flatly refused to defend him. Others, he said, had dawdled or disputed his lawyers’ bills. In the process, some had accused him of committing the same misdeeds the investors had.

On Ross’ behalf Stites sued the insurers and struck it rich. Ultimately Ross won bad-faith settlements and judgments from about 15 insurance carriers worth in the neighborhood of $20 million.

Then, in 1984, as the bad-faith money began rolling in, Ross fired Stites in a quarrel reminiscent of his blowup with Marlin a dozen years before.

Stites claimed Ross owed him a percentage of the millions Stites had wrestled from the insurers. Ross said he owed nothing, since his insurers had already paid Stites more than $5 million in fees and costs. In a public blood-letting each accused the other in lawsuits of being a crook.

In the course of their battle, Stites accused Ross of threatening him and his family. Ross in turn accused his ex-lawyer of creating a “Stites Network” of lawyers to systematically manipulate cases to generate vast insurance billings.

Support for that allegation has appeared in a case in San Diego. There, Stites and other lawyers are among the attorneys being investigated by federal authorities for possible insurance fraud in Willow Ridge and other cases in Los Angeles, Orange and San Diego counties. In court papers, prosecutors say the lawyers also perpetrated a fraud on the courts by pretending to be “independent attorneys” when they actually had “interlocking financial and professional interests.” Stites declined requests for an interview.

CASE SETTLED, THE BEEF GOES ON

A second wave of bills began to roll in around 1985.

By then, shortly after the Ross-Stites blowup and after seven years of unspectacular progress, the Willow Ridge case appeared near an end. Insurers had put up $1.3 million to settle claims against a bank that handled Marlin’s accounts and $8 million more to dismiss everyone else, including Marlin and Ross.

Such a settlement would end an ordinary case. The investors, after all, had agreed to take a lump sum to give up their claims.

But there was nothing ordinary about Willow Ridge. Creative lawyering breathed new life into it. Ross retired to the sidelines a rich man, while other defendants began to file grievances of their own.

Their attorneys generated enormous new defense costs with a firestorm of ross-claims. A cross-claim is a kind of secondary lawsuit, in which a defendant claims he himself was wronged by the plaintiffs, co-defendants or parties not originally in the case.

In Willow Ridge, a defendant would seek millions of dollars in damages from his co-defendants or ex-associates. Once dragged into the case, some of these cross-defendants filed their own cross-claims, increasing the lawyers’ defense work at an exponential rate.

Cross-claims complained of emotional distress, financial loss and ruined reputations due to wrongs from as long as a decade earlier. The claims of emotional distress (supposedly manifested in bodily injuries covered by insurance) were gaffing hooks that hauled the insurance companies in.

Because refusal to pay damages for fraud had deprived them of the right to pick defense lawyers, the insurers’ role was simply to pay the bills in mounting dismay.

Although Stites had been sacked by Ross and supposedly was out of the case, at least five of the lawyers litigating these cross-claims were his former partners or employees, or entered the case with his help.

Marlin, out of prison and living in Europe, filed a cross-claim in 1985. He accused about 40 corporations and individuals, including some obscure ex-employees, of cheating him in various ways, such as by failing to pay debts and destroying records that would have helped clear his name.

Marlin’s attorney is also a friend and personal attorney of Stites, a Woodland Hills lawyer named Alan Arnold. He is quadriplegic and an engaging man of “awesome” intelligence, as one insurance company lawyer put it.

From December, 1984, when he became Marlin’s lawyer, to October, 1987, Arnold’s law office was paid about $8.8 million in fees and costs, according to insurance sources. The total has since increased by an unknown amount.

Another lawyer billed almost as much to defend a Marlin company that barely exists.

The moribund First Kensington Corp., once Marlin’s flagship company, had its corporate charter suspended from 1977 through 1985 for non-payment of state franchise taxes. It has no assets, no payroll and has conducted no business in more than a decade.

$7 Million in Fees

This did not stop First Kensington from having a lawyer, Lewis M. Koss of Calabasas, provide it a stalwart defense. From the fall of 1984 until the fall of 1987, Koss got more than $7 million in fees and costs.

When Koss was asked why a shell company like First Kensington even needed a defense, he responded that the firm will become “a very significant entity, once Barry pulls himself up by his bootstraps.”

Koss and Arnold acknowledged in interviews that for about two years starting in 1986 they paid Marlin $50,000 a month as a defense consultant for himself and First Kensington.

Arnold said Marlin has analyzed mountains of documents and evidence, eliminating the need for more lawyers and paralegals. “Barry has saved us lots of money and therefore saved the insurance companies lots of money by doing it this way,” Arnold said.

One of those brought into the case by a cross-claim was Leonard Radomile, a San Diego lawyer who worked for Marlin in the mid-’70s. Radomile hired a defense lawyer recommended by the Stites firm, Marc I. Kent, 40, of Studio City. Kent also filed a cross-claim for Radomile against other people.

Over 14 months in 1985 and 1986, Kent billed insurers more than $2.1 million to defend Radomile.

Dazed by the thrashing they had taken from Ross, insurers had been paying the lawyers’ bills with hardly a peep. With Kent they dug in their heels. After paying him about $1.2 million they took the billing dispute to binding arbitration. The arbitrator, a retired judge, ruled that Kent had already been paid $250,000 too much.

Kent declined requests for an interview.

In 1987 Radomile secretly began informing federal investigators about the actions of Kent, Stites and other lawyers in Willow Ridge and other cases. Federal authorities in San Diego and Kent’s lawyer recently confirmed that Kent has agreed to plead guilty to two counts of mail fraud.

HOW THE BILLS PILED UP

Neither the amounts nor the supposed justification for the lawyers’ bills are on the public record, but it is clear the attorneys were extremely busy. The main action was not in courtrooms, since the case never went to trial, but in pretrial discovery.

Millions of dollars in fees and costs were consumed by depositions, the formal pretrial proceedings at which attorneys examine witnesses under oath. A single deposition can cost thousands of dollars in attorney fees, travel expenses and the cost of preparing transcripts.

Taking depositions is a customary cost of lawsuits. But insiders say many of those in Willow Ridge have been, to put it mildly, long on cost and short on information.

Befuddled investors across the country were deposed by the hundreds. Some defendants were deposed over and over again.

Theoretically these depositions were meant to determine who in Marlin’s organization had dealt with or misled investors. But most investors had little or no useful information, some lawyers said.

“Once you’ve attended a few of them, you know that these investors really don’t know anything,” said a former lawyer for a Willow Ridge defendant. These depositions were “to make money for the law firms, that’s purely what it is.”

Many depositions were assigned to junior associates or young contract lawyers. They spent so much time in hotels and airports they were nicknamed “road warriors” and “depo dogs,” several of them said. Typically they were paid $15 or $20 an hour. Following common practice in the legal business their time was billed to insurers at several times that rate.

The experience sent a number of the road warriors in search of other jobs. “I wasn’t, as an attorney, going to attend depositions in faraway places to take useless testimony,” said one who now works for a large Los Angeles firm. Some of the depositions were “complete hoaxes,” another said. “They were just useless, absolutely useless, and the whole thing that makes it smell like a scam is that it’s all billable.” She said the prevailing attitude was, “If we don’t send somebody to this deposition, we’re losing hours that we can be billing for.”

In an interview, Arnold said deposing investors a second time is entirely proper. He pointed out that in the first few years of the case Marlin had no lawyer, and other attorneys sought “to pin the entire blame for the collapse of the empire on Barry Marlin personally.”

Investors, Arnold said, were essentially asked: “Isn’t Barry Marlin a big crook? Don’t you believe your entire life has been ruined by Barry Marlin?” Arnold added, “I was going to depose people from Barry Marlin’s point of view and defuse some of the terrible . . . stuff.”

The depositions produced fat transcripts and fat bills, one reason being that the reporting service that produced many of them charged the unusually high rate of $2.25 per page. It was run by a woman in her 20s named Suzanne Rubin. In 1985, at Stites’ request, Rubin began supervising billing for the Arnold and Koss law offices, according to a charge filed against her in San Diego. In February, Rubin pleaded guilty to mail fraud for mailing a fraudulent Willow Ridge bill to an insurance company on Koss’ behalf.

PAYOUTS TO STOP THE BLEEDING

Many insurers helped bankroll Willow Ridge, but some were especially hard hit.

In a court paper filed in 1987, New Hampshire Insurance Co. said it had spent more than $30 million in the case. Gulf Insurance Co. declined to give a figure; an industry source estimated its Willow Ridge costs at about $20 million.

Allstate Insurance Co. reportedly has spent about $15 million since it began paying Willow Ridge bills in 1986. An official said the firm was “amazed” by the Willow Ridge bills but could do little about them.

“It appears there were individuals involved . . . who were not receptive to ending the litigation,” said Kate Moretti, senior claims examiner at Allstate headquarters in Northbrook, Ill.

In a move to stop the bleeding, the insurance carriers in 1987 began settling Willow Ridge cross-claims. The settlements are not matters of public record. But according to insurance industry sources at least three ex-associates of Marlin who had filed cross-claims got more than $1 million each, and a number of others got lesser amounts.

Altogether the insurance companies have paid $7.5 million to settle cross-claims. According to several sources, they have reserved nearly $2 million more to heal the purported wounds of Barry Marlin and his shell First Kensington Corp.

“At some point in time, the point of the litigation is to put an end to the attorneys’ fees, and that’s what you see here,” an insurance company lawyer said.

LAST IN LINE: INVESTORS

Once Marlin is paid, the case should be over. The investors’ roughly $8 million in settlement funds has been deposited in the bankruptcy court, along with proceeds from the sale of properties. Altogether, about $26 million awaits distribution, most of what the investors lost.

But things aren’t that simple.

To begin with, part of the 1985 settlement went to Ross as a result of still another of his claims.

At first he contended most of the $8 million was his. The basis of his claim was a failed agreement between him and the bankruptcy trustee representing the investors. In return for a share of Ross’ bad-faith settlements, the trustee was to give Ross part of the insurance funds paid on behalf of Willow Ridge defendants. The deal collapsed amid bitter finger-pointing. Ross threatened to tie up the settlement unless he got his share.

Seen as Bitter Irony

In what seemed to investors the bitterest of ironies, the bankruptcy trustee paid Ross $1.25 million of the $8 million to settle his claim.

It remains for the bankruptcy court to approve a formula to adjudicate individual claims. More lawyers’ bills and other costs will erode the total. Distribution of the money will not begin before 1990. When the money is finally paid, the average person, or his heirs, will be lucky to get 70 cents for each inflation-ravaged dollar invested 20 years earlier.

For many investors the delay and gargantuan legal costs are a source of enormous frustration.

Bob Mosher, a retired pilot who lost $50,000, reflected sadly: “The insurance companies, if they were going to pay anybody, should have paid off the investors and walked away from this thing. I guess that’s being naive.”

Others have got by on lower expectations. Rose Eberle, an Illinois widow who invested on the advice of her pilot son, said she never expected to recover her money. She explained matter-of-factly, “It goes all to the lawyers now.”

A LEGAL PERPETUAL MOTION MACHINE Investors sue Barry Marlin and various Marlin associates and companies to recover money lost in investment scheme. Insurers of Marlin companies agree to pay for defense of some claims but not claims for fraud. Defendants then permitted under state insurance law to choose their own attorneys, who bill insurers for fees and costs. Insurers pay to settle investor claims against Marlin and other defendants. Lawyers for several defendants file cross-claims against co-defendants and other parties not yet in the case. Cross-claimants allege they were damaged in various ways by the cross-defendants. Each cross-claim multiplies the defense work required of lawyers, who bill insurers for their fees and costs. Various cross-defendants, who were not sued in original case but were brought in on cross-claims, file their won cross-claims against the original defendants and other parties not yet in the suit. Each lawyer who files cross-claim increases defense work required of other lawyers, who bill insurers for their fees and costs. Insurance companies pay settlements to cross-claimants to dismiss their actions against the cross-defendants. $26 MILLION FOR DEFRAUDED INVESTORS About $8 million in settlement funds About $18 million in proceeds from sale of properties MORE THAN $100 MILLION FOR DEFENDANTS AND LAWYERS $30 million in settlements to defendants and cross-defendants More than $70 million to defense lawyer fees and expenses