Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_06-cv-02648/USCOURTS-casd-3_06-cv-02648-13/pdf.json

Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 26:7401 IRS: Tax Liability

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1 06CV2648

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA,

Plaintiff,

v.

KENDELL LANG, et al.,

Defendants.

 

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No. 06-CV-2648-JM(WVG)

REPORT AND RECOMMENDATION

AFTER EVIDENTIARY HEARING

In the final stage of this long-running case, the Court must

determine the priority of claims to funds from the judicial sale of

a foreclosed residential property. At the parties’ request, and

after Judge Miller’s referral, I convened an evidentiary hearing on

the sole issue whether National Property Trust’s (“NPT”) Deed of

Trust (“Deed”) is a valid and enforceable security interest on the

auctioned home. The outcome of this issue will determine whether

NPT’s lien will be satisfied first and consume all of the available

funds or whether NPT’s lien will be set aside and the other

claimants’ liens satisfied. To invalidate NPT’s interest, the

United States of America (“USA”) argues that the loan transaction

from which the Deed arose violates California law and is void as a

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result. I recommend the finding that the USA did not meet its

burden to show that Kendell Lang and NPT devised a scheme to shield

the auctioned property, or the proceeds of its sale, from future

creditors. As a result, I further recommend that NPT’s Deed be

found a valid security interest. I ultimately recommend that the

funds held in the Court’s account first satisfy NPT’s senior

interest, followed by satisfaction of the interests held by the USA,

Franchise Tax Board (“FTB”), and White Memorial Medical Center

(“White Memorial”), which I collectively refer to as the “Lien

Claimants.”

I. BACKGROUND

In 2006, the USA and FTB held multiple valid liens against

Lang’s house (“the Lone Jack Road property”) for years of unpaid

state and federal taxes. In addition, White Memorial held a valid

lien for a judgment it won against Lang in California state court.

The USA initiated this action on December 4, 2006, to reduce to

judgment multiple tax assessments against Defendants Kendell Lang

and his now-deceased wife, Patricia Lang, and to foreclose on the

Lone Jack Road property.

On April 7, 2008, the USA filed a motion for summary

judgment. (Doc. No. 64.) On July 25, 2008, the Court granted the

USA’s motion, reduced the assessments to judgment, and foreclosed

the liens against the Lone Jack Road property. (Doc. No. 77.) The

Court also entered an Order for Judicial Sale. (Doc. No. 78.)

On November 4, 2009, the Lone Jack Road property was sold at

auction, (Doc. No. 94), and the Court confirmed the sale on December

9, 2009, (Doc. No. 95). After expenses were paid, the sale yielded

$780,599.73, which remains in the Court’s registry. (Doc. No. 95.)

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1 NPT’s interest arises by operation of a purported loan agreement for $335,000,

(“the Note”), which is secured by the Deed. The Note was executed by NPT, with

Dennis Cotto as the sole shareholder, and Cascade Professional Trust, with Lang

as the trustee.

3 06CV2648

All parties, except NPT, agree on the priority of their liens and

resulting claims to this money. The only disputed claim is NPT’s

interest.1/

On March 19, 2010, the USA filed a motion to reopen discovery

in light of newly discovered information, hoping that additional

discovery would assist the parties resolve the dispute over NPT’s

claim. (Doc. No. 96.) After discovery resumed, Lang was deposed at

least one additional time. Lang’s second deposition testimony was

starkly different than his first testimony, which confirmed the

validity of the Note and Deed. However, Lang changed his testimony

to reveal that the Note was actually part of a scheme to shield the

Lone Jack Road property from future creditors. He further testified

that the supposed loan money was his own money, transferred to NPT

and back to him to give the appearance of a loan.

Once the additional discovery period closed, the parties

requested a settlement conference to attempt to resolve the NPT

claim issue. (Doc. No. 132.) In the end, the parties were unable

to resolve the dispute, and the Court set this matter for evidentiary hearing at their request. (Doc. No. 141.)

On August 18, 2011, all parties save NPT filed a “Stipulation

re Priority of Lien,” by which they stipulated to the priority of

each others’ claims and the amount of each claim as of June 7, 2011.

(Doc. No. 142.) As of June 7, 2011, the aggregate of the Lien

Claimants’ claims stood at $671,962.60. (Id.) NPT claims the

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28 2 All page number references to documents on the Court’s docket refer to the

CM/ECF re-numbered pages, not the document’s native pagination.

4 06CV2648

principal and interest on its Note amounts to $1,454,722.29.

(Hearing Transcript, Doc. No. 151 at 147:14-24.)2/

II. RECOMMENDED CONCLUSIONS OF LAW

A. California Contract Law Controls

The United States avers, and the parties agree, that

California contract law governs interpretation of the Note, which at

its core is simply a contract. California law provides two bases to

invalidate the Note.

First, as a matter of public policy, “[a]ll contracts which

have for their object, directly or indirectly, to exempt anyone from

responsibility for his own fraud, or willful injury to the person or

property of another, or violation of law, whether willful or

negligent, are against the policy of the law.” Cal. Civ. Code

§ 1668. Failure to pay federal taxes is a violation of law. 26

U.S.C. § 7203. Therefore, if a contract is created to assist a

person to avoid his obligation to pay taxes, that contract is void

for violation of California public policy.

Second, California’s Uniform Fraudulent Transfer Act

invalidates the Note and Deed if the Lien Claimants can show that

using Lang’s house as security for the Note was intended to help

Lang avoid his obligations to creditors. The Act provides:

A transfer made or obligation incurred by a debtor is

fraudulent as to a creditor, whether the creditor’s claim

arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or

incurred the obligation as follows:

(1) With actual intent to hinder, delay, or defraud

any creditor of the debtor.

(2) Without receiving a reasonably equivalent value

in exchange for the transfer or obligation, and the

debtor either:

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(A) Was engaged or was about to engage in a

business or a transaction for which the remaining

assets of the debtor were unreasonably small in

relation to the business or transaction.

(B) Intended to incur, or believed or reasonably

should have believed that he or she would incur,

debts beyond his or her ability to pay as they

became due.

Cal. Civ. Code § 3439.04(a).

B. Under California Law, the Lien Claimants Bear the Burden of

Proof

The Lien Claimants bear the burden of proving that Cotto and

Lang created the Note and Deed with actual intent to shield Lang’s

assets from future creditors. See Annod Corp. v. Hamilton &

Samuels, 123 Cal. Rptr. 2d 924, 928 (Cal. Ct. App. 2002); Whitehouse

v. Six Corp., 48 Cal. Rptr. 2d 600, 604 (Cal. Ct. App. 1995). The

Lien Claimants and NPT agree.

The standard of proof for actual intent under Section 3439.04

is by a preponderance of the evidence. In re Serrato, 214 B.R. 219,

229 (N.D. Cal. 1997) (citing cases); Liodas v. Sahadi, 562 P.2d 316,

324 (Cal. 1977). The Lien Claimants accordingly must persuade the

“trier of fact . . . . ‘that the existence of a fact is more

probable than its nonexistence.’” Concrete Pipe & Prods. v. Constr.

Laborers Pension Trust, 508 U.S. 602, 622 (1993) (quoting In re

Winship, 397 U.S. 358, 371–72 (1970) (Harlan, J., concurring).

C. Statements Made Against the Declarant’s Penal Interest Are

Judged on a Case by Case Basis and in Context

The concept of a statement against one’s penal interest

appears in the law in several contexts and is applied in nuanced

ways based on the context. Courts often deem such statements

reliable because they are either accompanied by surrounding indicia

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of reliability or directly implicate the declarant in criminal

activity, which itself is an indicia of reliability.

For example, in the context of extradition hearings, the

Ninth Circuit has “held that the self-incriminating statements of

accomplices are sufficient to establish probable cause . . . .”

Zanazanian v. United States, 729 F.2d 624, 627 (9th Cir. 1984)

(citing Curreri v. Vice, 77 F.2d 130, 132 (9th Cir. 1935)). The

accomplices’s statement is considered reliable because the accomplice directly implicates himself in the crime while simultaneously

providing information against the person to be extradited. See,

e.g., In re Extradition of Santos, 2011 U.S. Dist. LEXIS 62672, *32-

*33 (C.D. Cal. June 13, 2011) (“Two witnesses, Rosas and Hurtado,

gave detailed statements inculpating themselves and Munoz in the

planning and execution of the kidnapping. The properly authenticated statements of Rosas and Hurtado are competent evidence and

contain indicia of reliability.”) The reliability of a statement in

this context is premised on the notion that “‘people do not lightly

admit a crime and place critical evidence in the hands of the police

in the form of their own admissions.’” United States v. Dozier, 844

F.2d 701, 707 (9th Cir. 1988) (quoting United States v. Harris, 403

U.S. 573, 583 (1971)).

In the context of search warrants based on informants’

statements, such statements alone are not necessarily automatically

deemed reliable without additional indicia of reliability. See,

e.g., United States v. Myers, 2006 U.S. Dist. LEXIS 25245, *7 (D.

Haw. Jan. 12, 2006) (“Because the informant made statements against

his or her penal interest, the informant had previously provided

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reliable information in police investigations, and independent

investigation corroborated some of the informant’s statements, the

court concludes that Judge Keller had a reasonable basis for deeming

the informant’s statements reliable.”) (emphasis added); United

States v. Scott, 2004 U.S. Dist. LEXIS 29753, *40-*41 (D. Nev. Jan.

23, 2004) (“The government has not directed this court to a case,

and this court was unable to find a case, where an informant’s

statements against penal interest alone--in the absence of any

reputation for reliability, independent verification, or personal

basis of knowledge--were sufficient to support a finding of probable

cause.”) (emphasis in original). In this context, extrinsic indicia

of reliability are required to substantiate the informant’s

statement.

Finally, in the context of admitting an otherwise hearsay

statement under Federal Rule of Evidence 804, a statement against

penal interest must be “supported by corroborating circumstances

that clearly indicate its trustworthiness” before it is admissible

as non-hearsay testimony. Fed. R. Evid. 804(b)(3)(B). Again, such

a statement is not ipso facto reliable and requires more before it

is admissible.

The common theme in any of these contexts is that a statement

against penal interest is not deemed reliable on its face. Indeed,

if circumstances surrounding the statement militate against the

statement’s reliability, a statement is not deemed reliable or

admissible. See, e.g., United States v. Beydler, 120 F.3d 985 (9th

Cir. 1997) (holding the district court abused its discretion when it

admitted a statement under Rule 804 when surrounding circumstances

vitiated the statement’s reliability). Ultimately, “[w]hether a

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statement is in fact against interest must be determined from the

circumstances of each case,” Williamson v. United States, 512 U.S.

594, 601 (1994), and “can only be determined by viewing it in

context,” id. at 603.

III. RECOMMENDED FINDINGS OF FACT

The primary factual dispute here is the validity of the Note

and Deed. The resolution of this issue will cleanly determine the

priority of all liens in this case. The Lien Claimants heavily rely

on Lang’s second deposition testimony, in which he contradicted his

first testimony and testified that he and Cotto drafted the Note

with the intent to thwart Lang’s future creditors. However, Cotto

maintains, as he has throughout this case, that the Note was a bona

fide loan secured by the Deed. If Cotto’s version of facts

prevails, NPT would be first in line for satisfaction of its lien,

and NPT’s claim would entirely consume the available funds and leave

nothing for the Lien Claimants. Ultimately, I recommend the finding

that the Lien Claimants failed to demonstrate that Cotto and Lang

executed the Note with the intent to defraud future creditors, and

thus both the Note and Deed are valid. To do so, I will necessarily

evaluate the credibility of Lang and Cotto, who were the only

witnesses presented at the hearing and who presented two diametrically opposed testimonies. Of the two men, Cotto is more credible.

A. Recommended Finding of Fact: Lang’s Changed Testimony Was

Not Credible on the Basis that It Was Against His Penal

Interest

The USA strenuously argues that Lang’s second deposition

testimony was credible because it contradicted his first deposition

testimony and was against his penal interest as a result. The basis

for Lang’s potential criminal liability is his indirect exposure to

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a perjury prosecution as a result of this contradictory testimony--

not any affirmative admission to criminal conduct. However, the

mere fact that a statement may indirectly expose one to prosecution

is not by itself dispositive when other surrounding circumstances

discredit the declarant’s credibility. Although it is abundantly

clear that Lang perjured himself during one of his depositions, the

question remains which version of “Lang’s truth” is the actual

truth. It is just as likely that Lang’s testimony at his first

deposition was truthful and his testimony at the second deposition

was not. Although the USA argues for the veracity of Lang’s second

testimony, the surrounding circumstances strongly discredit Lang’s

credibility, and I cannot recommend that his second testimony be

found reliable simply because it abstractly exposed him to a perjury

prosecution.

1. Background

At his first deposition in 2007, Lang testified under oath

that the Note was a valid loan for $335,000 from NPT to Lang, and he

used the money to purchase the Lone Jack Road property. Lang’s

testimony substantially matched and corroborated Cotto’s testimony,

as both men testified to the authenticity and validity of the Note

and Deed. Then, at Lang’s second deposition in mid-2010, he

dramatically changed his story. He testified that the Note and Deed

were the result of a scheme to shield the Lone Jack Road property

from Lang’s future creditors.

At the evidentiary hearing, Lang testified that the scheme to

avoid future creditors was originally Cotto’s idea. (Doc. No. 151

at 15:4-17.) Cotto approached Lang and suggested forming a trust

for the purpose of “wealth preservation and protection” of Lang’s

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28 3 I do not accept the notion that Lang’s second testimony was the truth simply

because it was different than his first testimony. The second testimony just as

easily could be total fabrication and the first could be truth.

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assets. (Id. at ll. 7-8.) Moreover, the “loan” itself was a sham,

as Lang transferred $335,000 of his own money to Cotto, who then

transferred the funds back to Lang as a “loan” for the purported

purchase of the Lone Jack Road property. (Id. at 16:7-17.) Lang

paid Cotto $70,000 for his role in the scheme. (Id. at 15:20-22.)

Also around the time they executed the Note, Lang and Cotto

supposedly executed a reconveyance of the Lone Jack Road property

back to Lang to “wipe out the lien” at a later date. (Id. at 21:14-

20.) Lang wanted Cotto to sign the reconveyance in advance so

getting Cotto’s signature would not become a problem in the future.

(Id. at 21:24-22:2.)

2. Lang’s Second Deposition Testimony Is Not Reliable

The USA urges that Lang’s second deposition testimony was

against his penal interest and is trustworthy as a result. I

recommend against such a finding for several reasons.

First, the Lien Claimants’ position is premised on Lang

indirectly exposing himself to criminal liability by changing his

testimony. They reason that (1) Lang’s second testimony was

completely inconsistent with his first testimony, (2) Lang presumably must have lied under oath in his first testimony,3/

 (3) and Lang

is therefore subject to a perjury prosecution for lying during his

first testimony. However, unlike in the more convincing case where

an accomplice’s testimony implicates himself and a defendant at

trial or other proceeding, Lang never affirmatively admitted to any

activity that potentially subjected him to criminal liability. Cf.

United States v. Dozier, 844 F.2d 701, 707 (9th Cir. 1988) (“Mejia

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28 4 That being said, although I identify this possible motive, I assign only

nominal weight to it.

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said Dozier hired him, housed him and paid him to tend the [marijuana] garden. These facts incriminated Mejia at the same time that

they spread the blame to Dozier.”); Zanazanian v. United States, 729

F.2d 624, 627 (9th Cir. 1984) (accomplice’s statements about his own

participation in narcotics activities); United States v. Myers, 2006

U.S. Dist. LEXIS 25245, *9 (D. Haw. Jan. 12, 2006) (“The informant’s

statement that he or she had previously purchased and consumed

cocaine and marijuana was made against the informant’s penal

interest.”).

Here, even if true, the scheme Lang describes does not appear

criminal in nature, and the USA has not cited any criminal statute

this scheme potentially violated. Rather, by operation of civil

statute, such a scheme merely voids the original Note. Thus, the

USA’s position is premised entirely on Lang indirectly exposing

himself to criminal liability by changing his testimony. However,

the USA’s reliance on indirect, abstract exposure to criminal

liability is less convincing than when a witness, informant, or codefendant affirmatively implicates himself in criminal activity.

Second, as discussed more fully below, even assuming Lang’s

second testimony subjected him to criminal liability, he had a

rather substantial financial motive to change his original testimony

and risk a perjury prosecution. After all, he stood to gain the

benefit of being relieved of substantial non-dischargeable tax

obligations to two separate taxing authorities, not to mention a

substantial debt to White Memorial. The possibility that he might

risk criminal liability for such a substantial financial benefit

weakens the USA’s argument for Lang’s veracity.4/

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5 I find no evidence on the docket that Cotto has ever represented Lang in this

case. Cotto himself has had retained counsel for some time now. Cotto denied

acting as Lang’s attorney in this case or at any point in their relationship.

(Id. at 145:12-15.)

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Third, Lang staunchly defended his changed testimony and

asserted he did not lie at either deposition. He stated that his

first deposition was truthful because he testified to what he

believed to be the truth at the time. (Id. at 34:1-19, 36:2-8,

47:1-9, 48:22-49:9.) Apparently, Cotto, who Lang claims was his

attorney at the time,5/ advised him not to testify that the Note was

structured to avoid creditors. (Id. at 34:8-16, 36:2-8, 68:10-17.)

Lang insisted that he was telling the truth and was not deceiving

anyone at his first deposition because he was relying on Cotto’s

advice. (Id. at 34:12-16, 35:10-13, 36:2-8, 68:14-17.) He changed

his testimony after he supposedly discovered that Cotto’s advice was

incorrect and was based on Cotto’s own self interest. (Id. at

23:18-20, 35:10-13, 36:5-8.) Thus, if, as Lang insists, he told the

truth at both depositions, he did not perjure himself, he cannot be

criminally liable, and none of his statements were against his penal

interest.

Finally, as discussed directly below, even assuming arguendo

that Lang’s testimony somehow exposed him to criminal liability,

additional circumstances surrounding Lang’s deposition indicate that

his second deposition testimony is not trustworthy.

a. Attempt to Blackmail Cotto

Lang’s testimony is unreliable partly based on events that

occurred between his first and second depositions. Both Lang and 

Cotto testified that Lang enlisted a friend, James Maddux, to

approach Cotto, offer him money, and urge him to transfer control of

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6

 Lang testified inconsistently on this point. Early in the hearing, Lang

testified on direct examination that he had contacted Cotto first to ask him to

notarize the reconveyance he had supposedly signed years before, but Cotto

apparently refused to do so without a $150,000 payment from Lang. (Id. at 24:17-

25:7.) This was the purported basis for Lang’s belief that Cotto would not

cooperate. However, when I later questioned Lang, he admitted that he had not

talked to Cotto for 12 or 15 years and had not contacted Cotto before sending

Maddux after him. (Id. at 78:4-79:17.) He admitted he simply “assumed” and

speculated that Cotto would demand more money. (Id. at 79:8-9.) When asked why

he automatically assumed this, Lang mentioned nothing about his earlier testimony

that he had actually contacted Cotto, or the $150,000 demand, and skirted my

repeated questions on this point by simply stating that he would rather deal with

Maddux than Cotto. (Id. at ll. 12-17.) Lang’s inconsistent and evasive testimony

did not credibly explain why Lang did not contact Cotto before sending Maddux

after him.

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NPT to Maddux. (Id. at 44:22-45:14.) These events essentially

amount to an attempt to extort Cotto.

As background, just prior to having Maddux contact Cotto,

Lang had arranged for the sale of the Lone Jack Road property for

$1,150,000, and the transaction had proceeded to escrow. (Id. at

24:10-16.) The sale proceeds would have satisfied Lang’s debt to

the IRS, FTB, White Memorial, and would have left several hundred

thousand dollars for himself. (Id. at 24:2-5, 77:1-6.) However,

because NPT’s Deed encumbered the property, it had to be cleared for

escrow to close. To clear NPT’s lien, Lang presented the reconveyance Cotto supposedly signed in 1993 to escrow, but the reconveyance

could not be recorded because it had not been notarized. (Id. at

24:20-24.)

Without first attempting to contact Cotto himself after

nearly 15 years without contact, Lang had Maddux approach Cotto

first.6/ (Id. at 78:4-80:21.) Lang testified that the purpose of

the transfer of control to Maddux was to have Maddux release NPT’s

lien on the Lone Jack Road property so Lang could close escrow.

(Id. at 75:14-17 (Maddux “was supposed to take control of the trust

and allow [Lang] to close the sale on the home.”); see also id. at

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28 7 This testimony is uncontroverted. Lang was present in the courtroom during

this portion of the hearing. The USA did not recall Lang to deny Cotto’s

testimony and Lang himself did not cross-examine Cotto on this conversation.

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45:11-14, 76:17-77:6.) According to Cotto, Maddux offered him

$75,000 and stated that if Cotto did not cooperate, Cotto “wouldn’t

get a penny of the money [he] was owed.” (Id. at 118:20-24.) After

Cotto refused, Lang himself contacted Cotto and “said if [Cotto]

didn’t sell the note, that [Cotto] shouldn’t expect to recover [on

the] loan.”7/ (Id. at 144:24-145:2-3.) These events occurred after

Lang’s first deposition, when Lang’s and Cotto’s stories matched,

but before Lang’s second deposition, when Lang changed his testimony

such that the end result would be the satisfaction of the debt he

owed to the IRS, FTB, and White Memorial.

Lang’s testimony does not support his assertion that a scheme

existed to defraud future creditors. If, as Lang testified, the

original plan was for Cotto to cooperate and erase the lien created

by the Deed whenever Lang asked, none of Lang’s testimony credibly

explains his actions afer the first deposition. Although Lang and

Cotto had lost touch for many years, Lang automatically assumed

Cotto would not “cooperate” and would demand more money to release

NPT’s lien on the house. (Id. at 79:3-11, 80:13-17.) However, it

is unclear why Lang automatically assumed Cotto would demand money

to transfer the Note or release NPT’s lien. (See generally id. at

75:1-80:1 (Court’s examination of Lang).) Although Lang and Cotto

had lost touch and had not spoken for years, neither man testified

that this was the result of a falling out, fight, or disagreement.

By all accounts, they had been close business associates, if not

friends, and that relationship had not fallen apart despite the lack

of contact. No reasonable explanation exists for Lang’s assumption

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that Cotto would not “cooperate” and would demand money in contravention of his supposed promise in 1993 to release the lien when

asked.

Moreover, having Maddux contact Cotto to pressure him is

fully consistent with the Note being a valid loan. After all, Lang

would have known that the original $335,000 loan had been accumulating compound interest at a rate of at least 8% since 1993 and had

substantially grown in size. As a result, Lang would have known

that the money he owed on the NPT Note would have consumed all, or

nearly all, of the $1,150,000 sale price and would have left him and

his creditors with little, if anything. Lang tellingly admitted

that he was “basically out of money” at this time and “had no

ability other than the equity in the house to do anything,” (id. at

79:25-80:1), including paying non-dischargeable tax liabilities.

Thus, the only obstacle to Lang’s path to freedom from the tax

liens, and extra money in his own pocket, was the money he owed on

the NPT Note. To try to remove that obstacle, he employed Maddux to

pressure Cotto to transfer control of NPT. Maddux would then

release the valid NPT lien and allow escrow to close. The testimony

certainly supports this scenario, and it is much more plausible than

Lang’s explanation for sending Maddux after Cotto without ever

contacting Cotto himself.

The foregoing supports the validity of the Note and Deed and

casts doubt on the veracity and reliability of Lang’s second

deposition testimony.

b. Deed Recorded Against Cotto’s House

Another major factor that weighs against the reliability of

Lang’s second deposition is Cotto’s unopposed testimony about a

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28 8 The amount of the lien was $335,000, which is the original amount of the Note.

(Id. at ll. 11-12.)

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forged deed of trust that was recorded against Cotto’s house shortly

after Maddux and Lang contacted him to pressure him.

Cotto testified that after Maddux contacted him, Cotto

received a strange email that appeared to have been written by Cotto

himself. The purported email from Cotto essentially expressed his

supposed fear about what Lang might do and stated that Cotto was

going to sign his own house over to Maddux by recording a deed of

trust on the property with Maddux as the beneficiary. (Id. at

121:14-122:13.) This email greatly concerned Cotto, who investigated and discovered that a forged deed with Maddux as the beneficiary had in fact been recorded against Cotto’s house.8/ (Id. at

122:9-13.) After further investigation, Cotto demanded that Maddux

remove the lien, and Maddux complied in short order. (Id. at

128:10-17.)

Cotto further testified that Lang then called him a second

time and essentially stated that “the next time, it wasn’t just

going to be [Cotto’s] home, that . . . if [Cotto] didn’t sell [Lang]

the loan, [Cotto] wasn’t going to make a penny.” (Id. at 144:7-10.)

Cotto’s account above is uncontroverted, as the Lien

Claimants neither presented counter evidence nor cross-examined

Cotto on this testimony. Moreover, Lang himself was present in the

courtroom, heard Cotto level these accusations against him, had the

opportunity to cross-examine him, but failed to ask a single

question on the subject. (See id. at 209:8-211:17 (Lang Cross

Examination).) As a result, Cotto’s unopposed account casts further

doubt on the reliability of Lang’s evidentiary hearing and second

deposition testimonies. The above lends strong support to the 

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9 At the hearing, Lang admitted that he knew in 1994 that notarization was a

prerequisite to record a document like the reconveyance. (Id. at 38:21-39:7,

39:21-40:2.)

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conclusion that Lang’s first deposition testimony, not the second

testimony, is credible.

c. The Validity of the Reconveyance is Doubtful

Yet another factor that militates against Lang’s credibility

is the doubtful authenticity of the purported reconveyance he

produced late in this case. While Lang claims Cotto contemporaneously executed the reconveyance and the Deed, his inconsistent

testimony casts serious doubt on whether Cotto ever signed the

reconveyance at all.

Despite knowing that a reconveyance could not be recorded

without first being notarized, Lang failed to have the reconveyance

notarized in 1994, when Cotto purportedly signed it.9/ Lang

testified that he required Cotto’s signature in 1994 so he “wouldn’t

have to get [Cotto’s] signature in the future,” (id. at 22:1-2), but

did not require the notarization, the most crucial step, because

they “weren’t in front of a notary, and [Lang] didn’t think it would

be required at the time. [Lang] didn’t think it would be an issue

later to get it,” (id. at 67:13-17). But if Lang did not think “it

would be an issue” to have Cotto notarize the document in the

future, would it also not have been an issue to secure Cotto’s

signature in the future? If Lang truly wanted to avoid having to

secure Cotto’s cooperation in the future, he would have had Cotto

notarize the reconveyance when he supposedly signed it in 1994.

Without notarization, Cotto’s signature was meaningless, the

document could not be recorded, and Lang would have to ask Cotto for

his signature again in the future. Lang’s testimony not only casts

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serious doubt on the authenticity of the reconveyance, it casts

doubt on Lang’s credibility in general.

d. Lang’s Strong Financial Motive to Change His

Testimony

The final factor that weighs against Lang’s credibility is

his strong financial motive to change his testimony, as he stood to

gain substantially if he changed his testimony and prevailed.

If NPT’s lien is valid, Lang’s creditors will not be paid and

he will still owe nearly $700,000, most of which is the most onerous

type of debt possible: unpaid tax liability owed to the California

and United States governments. Moreover, as a result of this

action, Lang has already lost his house, and it all would have been

for naught if he cannot satisfy these debts with the auction

proceeds. The continuing tax liabilities will be an extremely heavy

burden on him into the future--unless, of course, NPT’s lien somehow

is invalidated. Lang’s motive is more than merely monetary. The

possibility of having oppressive tax burdens erased is a significant

psychological motive that provides a possible explanation for his

changed and inconsistent testimony.

To be sure, Cotto also has a motive to lie. Assuming that

Cotto’s testimony is fabricated and he indeed orchestrated a scheme

to defraud Lang’s future creditors, Cotto would essentially obtain

a windfall of several hundred thousand dollars. However, the

possibility that such a motive actually exists here is diminished

when one considers that Cotto’s story has remained consistent

throughout this case and actually matched Lang’s version of events

before Lang changed his story. Moreover, unlike with Lang,

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surrounding circumstances do not discredit Cotto. Of the two men,

Lang has a more compelling financial motive.

3. Recommended Finding of Fact

Based on the foregoing, I recommend the finding that Lang’s

second deposition testimony was not against his penal interest. I

base this recommendation on Lang’s own insistence that he did not

lie in either deposition, the fact that his testimony did not

directly implicate him in any criminal activity, and the circumstances surrounding his testimony. Those circumstances include (1)

Cotto’s uncontroverted testimony about Lang and Maddux attempting to

blackmail him through Maddux, (2) Cotto’s uncontroverted testimony

that a forged deed was recorded against his house and about Lang’s

threats before and after the deed recordation, (3) the doubtful

authenticity of the reconveyance Lang produced after years of

litigation, and (4) Lang’s strong motive to change his testimony and

invalidate NPT’s lien.

Once the Court discounts Lang’s second deposition, the Court

is left with Cotto and Lang’s original, matching testimonies on the

authenticity of the Note and Deed. As a result, because, the valid

Deed was recorded before the Lien Claimants’ interests vested, it

gives NPT’s lien priority over all other liens asserted in this

case.

B. Cotto Provided Credible Explanations

In their attempt to discredit Cotto and invalidate the Note,

the Lien Claimants argue that several purported inconsistencies

support their theory that the NPT Note was in fact a fraudulent

scheme. On balance, however, Cotto was able to provide reasonable

explanations for the inconsistencies. Because the Lien Claimants

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10 Of course this argument also cuts against the authenticity of the loan

agreement Lang produced because he produced it in late 2010, approximately four

years after litigation commenced.

11 RETA, or Real Estate Technical Advisors, was the real estate consulting

business Cotto operated in the early 1990s. RETA received substantial contracts

through Lang and Lang’s employer, KPMG.

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did not present any evidence that could impeach Cotto’s credibility,

I recommend that (1) Cotto’s explanations be found credible, (2) the

Lien Claimants’ purported inconsistencies do not support the finding

that the Note was a scheme to defraud Lang’s future creditors, and

(3) Cotto’s version of the Note be found to be the authentic

version.

1. Cotto’s Explanation for Finding Documents At the

Eleventh Hour

Cotto and Lang both provided different executed versions of

a loan agreement that each claims is the authentic Note. The Lien

Claimants first argue that the loan agreement Cotto produced is

suspect because he produced it after nearly 5 years of litigation

and only two weeks before the evidentiary hearing that would

determine whether NPT would receive hundreds of thousands of

dollars.10/ On balance, Cotto’s explanation for the late production

appears plausible.

At the hearing, Cotto explained that he had a “great deal” of

difficulty finding the loan agreement despite diligently looking for

it. (Doc. No. 151 at 104:4-22, 185:12-186:8 (detailing Cotto’s

extensive efforts to find documents), 196:8-197:10 (same).) He

eventually found the loan agreement he produced in a box that was

among 200 or so boxes in his basement. (Id. at 104:23-105:12.)

Although the loan agreement was associated with NPT, he found the

document in a RETA11/ box. (Id. at 105:9-12.) Cotto explained that

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these boxes contained archived documents from his various business

ventures over the years and were packed by his now-deceased former

secretary, who was very familiar with Lang but was not very familiar

with NPT. (Id. at ll. 15-22.)

Cotto testified that he began looking through the RETA boxes

after I questioned him about his net worth at the settlement

conference. (Id. at 105:2-8, 163:17-25.) He felt he needed to

reconstruct his net worth and began going through his old contracts.

(Id. at 105:2-8, 163:17-25.) He found the NPT loan agreement among

the RETA contracts. Cotto surmised that his secretary saw that the

loan agreement involved Lang, associated Lang’s name with RETA, and

misfiled the loan agreement in a RETA box. (Id. at 105:15-22.) As

a result, Cotto was unable to find the NPT loan agreement in the NPT

boxes, where he originally looked to find the NPT loan agreement.

Given that the Lien Claimants presented no reason to believe that

Cotto was not being truthful, his explanation for the delayed

production of the Note is credible.

2. Cotto Did Not Form NPT To Defraud Lang’s Creditors

White Memorial also argues that “the circumstances surrounding the loan were suspect” partly because (1) NPT did not transact

any business other than the Note, and (2) NPT was created solely for

that purpose. However, Cotto provided uncontroverted testimony that

NPT was not created solely for the purpose of being party to the

Note.

First, Cotto testified that he formed NPT to serve as the

broker of record for a large real estate investment fund that Lang

was establishing. (Id. at 94:15-19.) According to Cotto, Lang’s

investment fund did not succeed, but it was a “brilliant idea” that

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had the potential to generate ten to fifteen million dollars in

commissions. (See id. at 94:19-25, 95:15-22.) Cotto testified that

he initially formed NPT to participate in Lang’s investment fund.

(Id. at 95:8-9.)

Second, Cotto formed NPT to avoid any appearance of conflict

of interest. He did not want RETA named as Lang’s broker of record

because RETA was actively engaged in business with Lang’s employer,

KPMG. (Id. at 95:6-8 (“So [Lang] was still with KPMG, and I was

trying to avoid any conflicts. So I set up a separate entity to do

that business with this [real estate investment] fund.”); see also

id. at 162:17-163:3.)

Cotto’s testimony stands unopposed, as the Lien Claimants did

not present any evidence or testimony to contradict Cotto’s

testimony that Lang’s real estate investment fund existed or that

Lang intended to name NPT as a broker of record. As a result, White

Memorial’s argument is baseless, as NPT was not established solely

for the purpose of being a party to the Note.

3. Cotto’s Failure to Collect Loan Payments

White Memorial also places great weight on the fact that NPT

did not collect a single loan payment from Lang and did not seek to

foreclose on its security interest in the Lone Jack Road property.

Ultimately, while it is curious that Cotto would take such a

lackadaisical approach to such an arguably large amount of money,

his failure to collect on the loan is not unreasonable given (1) his

original purpose in making the loan and (2) the fact that the Deed

secured his interest.

Cotto testified that he did not pay much attention to the

loan because his interest lay in securing more business for RETA

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28 12 As Cotto explained, as the head of both RETA and NPT, Cotto simply transferred

the money from RETA to NPT, and NPT in turn loaned the money to Lang. (Id. at

103:2-8, 165:21-166:1.)

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from Lang and KPMG. He testified that Lang broached the subject of

the loan on a car ride, during which Lang expressed the desire to

purchase a nice house and asked Cotto for the loan. (Id. at 92:15-

93:4.) Cotto explained that it was understood that if he loaned

Lang the money, Lang would steer more business to RETA, and Cotto

would benefit as a result. (Id. at 92:25-93:1, 94:4-6.) Indeed,

RETA received more business and made more than $2 million in

commissions after he made the loan. (Id. at 108:5-21.) This was

Cotto’s primary purpose in agreeing to the loan arrangement, and the

loan itself was secondary. (See id. at 94:4-6.)

Moreover, Cotto was not worried about the original loan

principle because the loan money originated from RETA,12/ and the

more than $2 million in commissions RETA earned as a result of the

increased business more than covered the loan principal. (Id. at

108:5-9.)

Cotto also was not worried about collecting on the loan

because it was accruing compound interest at a high rate and it was

all secured by the Deed. (Id. at 106:22-107:14, 115:18-116:1,

116:14-18.) Cotto explained that the real estate market was strong

and he believed that the appreciation on the Lone Jack Road property

would cover the principal and interest. (Id. at 115:18-116:1.)

Cotto’s unopposed testimony establishes that the loan itself

was not of great interest to him when he made it, Cotto’s stated

purpose for the loan was fulfilled when RETA received more business,

and Cotto was not worried about losing the principal or interest

because the Deed protected both. Indeed, NPT’s very existence in

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this litigation validates Cotto’s confidence that the Deed would

protect his interest. Ultimately, I do not place much weight on the

fact that Cotto did not collect any loan payments or attempt to

foreclose.

IV. CONCLUSION

Based on the foregoing, I recommend that the Court find that

Lang’s testimony regarding Cotto’s supposed scheme to defraud Lang’s

future creditors is not credible. I further recommend that Cotto’s

testimony be found credible. As a result, I recommend that the

Court find that NPT’s Note and Deed are valid, enforceable instruments that encumbered, and created an enforceable security interest

in, the Lone Jack Road property. As a result, I ultimately

recommend that the funds in the Court’s registry first be used to 

satisfy the outstanding debt due NPT.

IT IS ORDERED that no later than November 21, 2011, any party

to this action may file written objections with the Court and serve

a copy on all parties. The document should be captioned “Objections

to Report and Recommendation.”

IT IS FURTHER ORDERED that any reply to the objections shall

be filed with the Court and served on all parties no later than

December 12, 2011. The parties are advised that failure to file

objections within the specified time may waive the right to raise

those objections on appeal of the Court’s order. Martinez v. Ylst,

951 F.2d 1153, 1156 (9th Cir. 1991).

DATED: November 7, 2011

 Hon. William V. Gallo

 U.S. Magistrate Judge

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