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United States of America v. Irving Cohen

February 27, 2012


The opinion of the court was delivered by: Richard Mills, U.S. District Judge:

E-FILED 3:08-cv-03282-RM-BGC # 213 Page 1 of 53

Tuesday, 28 February, 2012 10:16:13 AM

Clerk, U.S. District Court, ILCD


The Court now considers the Plaintiff's Motion in limine to admit evidence regarding Defendant Irving Cohen's alleged tax shelter penalties [d/e 161]; the Plaintiff's Motion in limine to exclude expert testimony by Paul Presney, Jr. [d/e 162]; Defendant The Windsor Organization, Inc.'s first Motion in limine [d/e 175]; Defendant Windsor's second Motion in limine [d/e 185]; and Defendant Windsor's third Motion in limine [d/e 204].

I. Motion to Exclude the Expert Testimony of Paul Presney, Jr. Plaintiff United States has moved to exclude the proposed expert testimony of Paul Presney, Jr., who Defendant The Windsor Organization, Inc. (Windsor II) has disclosed as an expert on Illinois property law. The Plaintiff claims that Presney's proposed expert testimony usurps the Court's role of resolving questions of law. Moreover, Presney divines the "intent" of Defendants Irving Cohen, Windsor, and 3-B Stores solely from his review of contracts, deeds, and other recorded instruments. The Plaintiff further asserts that Presney's method for interpreting the May 3, 2005, Release of Second Mortgage and Assignment of Rents is unreliable and inconsistent with the well-established tenets of the parol evidence rule.

Windsor II claims that Presney's proposed testimony does not interpret the law and is based on admissible evidence. Moreover, the proposed testimony is the product of reliable methods and principles applied to the facts of this case.


Rule 702 of the Federal Rules of Evidence provides:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:

(a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) the testimony is based on sufficient facts or data; (c) the testimony is the product of reliable principles and methods; and

(d) the expert has reliably applied the principles and methods to the facts of the case.

Fed. R. Evid. 702. Testimony which interprets the law is subject to exclusion. See United States v. Lupton, 620 F.3d 790, 799 (7th Cir. 2010). "[T]he meaning of statutes, regulations, and contract terms is 'a subject for the court, not for testimonial experts. The only legal expert in a federal courtroom is the judge.'" Id. at 799-800 (quoting United States v. Caputo, 517 F.3d 935, 942 (7th Cir. 2008)). The Plaintiff contends that Presney's testimony should be excluded because it interprets the law.

The Plaintiff asserts that the first two paragraphs of Presney's Rule 26(a)(2)(B) Report consist of interpretations of Illinois property law without reference to any facts. The Plaintiff requests that the interpretations be excluded because the task of interpreting Illinois title law is a function reserved for the Court.

Windsor II claims while Presney is an expert in title insurance, his opinion does not interpret the law. Windsor II states that instead of interpreting a contract, Presney's opinion pertains to the effect Windsor Income Properties' (Windsor I) recorded and asserted interest in the Property has upon the title of the Property to persons--including Windsor II, Windsor I and the United States--with actual knowledge of such interests. As a proffered expert in title insurance and record searches, Presney opines that insomuch any confusion exists, the title should be cleared. Moreover, he says that his opinion is based on the information he has learned outside of the recorded title records by review of the Nevada Secretary of State's corporate records for the two separate entities--Windsor I and Windsor II--and the Purchase Agreement between Windsor II and 3-B Stores, Inc., all information of which the Plaintiff is aware.


Next, the Plaintiff alleges that Presney's proposed testimony about the Release of Second Mortgage should be excluded as parol evidence because the Release is an unambiguous document. The Plaintiff alleges that on December 10, 1981, Windsor I and Cohen executed a "Second Mortgage and Assignment of Rents" ("the Second Mortgage"), which secured two "Junior Notes" in the amount of $1,525,500.00 and $2,560,000.00, respectively, against the Property. The Second Mortgage was recorded as Document No. 890224 with the Clerk of Sangamon County. According to Cohen and Windsor II, when Cohen transferred the property, Windsor I took the property subject to the Second Mortgage.

The Plaintiff contends, however, that on April 31, 2005, Windsor II and 3-B Stores entered into a real estate purchase agreement whereby Windsor II purchased 3-B Stores' interest in the Springfield property. As part of that transaction, Cohen signed three documents on May 3, 2005. On behalf of Windsor II, Cohen signed: (1) a "Mortgage and Security Agreement;" (2) an "Assignment of Rents and Leases;" and (3) a "Release of Second Mortgage and Assignment of Rents" ("the Release").

The Plaintiff claims Windsor II wants Presney to testify that -- in this purportedly expert opinion -- the Release was executed mistakenly. His Rule 26(a)(2)(B) Report provides in part, "Based on facts now disclosed to me when coupled with the inconsistency between the Real Estate Sale Agreement (which expressly states that the current mortgage at the time of the Agreement would be subordinated to 3-B Stores, Inc.'s first mortgage), it appears that the Release of Second Mortgage and Assignment of Rents dated May 3, 2005, and recorded with the Sangamon County Recorder's Office as document no. 2005-R-19835, was issued in error." See Rule 26(a)(2)(B) Report of Paul Presney, Jr., at 3.

Citing In re Krueger, 192 F.3d 733, 736 (7th Cir. 1999), the Plaintiff asserts that Illinois law governs the meaning of the Release. "Where a [release] is clear and explicit, a court must enforce the agreement as written." See Rakowski v. Lucente, 104 Ill.2d 317, 323 (1984). If the Court determines that the release of a mortgage is ambiguous, then "parol evidence is admissible to explain and ascertain what the parties intended." Farm Credit Bank of St. Louis v. Whitlock, 144 Ill.2d 440, 447 (1991) ("The intention of the parties to contract must be determined from the instrument itself, and construction of the instrument where no ambiguity exists is a matter of law"). Pursuant to the "four corners" rule, an ambiguity exists only if the language within the document is subject to more than one interpretation. See Air Safety, Inc. v. Teachers Realty Corp., 185 Ill.2d 457, 462-63 (1999).

The Plaintiff contends that the Release is unambiguous. It identifies the Second Mortgage and Assignment of Rents by name, date, and document number and provides:

RELEASE OF SECOND MORTGAGE AND ASSIGNMENT OF RENTS Know all men by these presents, that THE WINDSOR ORGANIZATION, INC. a corporation organized and doing business under the laws of the State of Nevada, of the County of Sangamon and State of Illinois, does hereby certify that a certain Mortgage and Assignment of Rents bearing date the 10th day of December, A.D. 1981, made and executed by AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, AS TRUSTEE UNDER TRUST AGREEMENT DATED AUGUST 20, 1981 AND KNOWN AS TRUST NO. 53586, and recorded in the Recorder's Office of Sangamon County, Illinois, as Document No. 890224, is hereby released, relative to the following described property.

The Plaintiff contends that the introduction of parol evidence to construe this unambiguous release, including Presney's expert testimony, is barred under Illinois law.

Windsor II claims that the document entitled "Release of Second Mortgage and Assignment of Rents" is a "release deed," which "is a written instrument which surrenders full title to a piece of property upon payment or performance of specified conditions." Black's Law Dictionary, 446 (8th ed. 2004). It further alleges that the specific conditions under which this Release was to be recorded is set forth in the Purchase Agreement between Windsor II and 3-B Stores. Moreover, the extrinsic evidence to the Purchase Agreement is the Mortgage Release.

Windsor II further asserts that Plaintiff's reliance upon Farm Credit to argue that the Mortgage Release recorded with the Sangamon County Recorder's Office is a contract to be construed is misplaced. That case involved a transfer of land to a bank in order to avoid foreclosure, pursuant to a release agreement known as a "Deed in Lieu of Foreclosure and Mutual Release of Liability." See Farm Credit, 144 Ill.2d at 444. Windsor II claims that the controlling contract in this case is the Purchase Agreement containing the subornation clause, not the Release of Mortgage recorded in Sangamon County.

Windsor II further asserts that, even if the recorded Release constitutes a contract as the Plaintiff alleges, the Court must enforce a release in a settlement as written. The primary objective "is to give effect to the intent of the parties." See Gallagher v. Lenart, 226 Ill.2d 208, 232 (2007). Gallagher, on which the Plaintiff relies, cites Farm Credit for the proposition that a release is a contract. Id. at 233 (citation omitted).

Windsor II states it will present evidence that it was the intent of it and 3-B Stores, the parties to the Purchase Agreement, that the mortgage existing on the Property at the time of the sale of Lots 1-10 from 3-B Stores to Windsor II be subordinate to 3-B Stores' first mortgage. Windsor II contends that such intent is evidenced in the language of the Purchase Agreement. Presney opines that if such was the intent of the parties, then any error that occurred at closing on May 9, 2005, should be corrected as to persons with actual knowledge, specifically Windsor I and Windsor II, but also the Plaintiff who was aware of the interest of Windsor I in no later than May of 2010, when it deposed Irving Cohen, because the Plaintiff is not a purchaser who would be acting in reliance on the Release as it is aware that there is a claim that the outstanding Windsor I mortgage was released in error. Windsor II asserts it is Presney's opinion as a title insurer and examiner that persons with actual knowledge of the Windsor I mortgage must take subject to that claim or cause the correction and modification of the Release pursuant to the intent of Windsor I, Windsor II, and 3-B Stores in 2005. Specifically, the Plaintiff has had actual knowledge of the claims against the Property, prior to any requested attachment of its lien thereto.


Next, the Plaintiff asserts that Presney's proposed expert testimony violates Rule 702 because it is not "the product of reliable principles and methods . . . applied to the facts of the case." This is because an expert cannot apply "any reliable principles and methods" to read the minds of the parties. Moreover, the objective manifestations of intent will be as apparent to the Court as they are to any expert. Therefore, the Plaintiff contends that the proposed expert testimony should be barred. See e.g., CMI-Trading, Inc. v. Quantum Air, Inc., 98 F.3d 887, 890 (6th Cir. 1996) ("The intent of the parties is an issue within the competence of the jury and expert opinion testimony will not assist the jury, within the meaning of Federal Rule of Evidence 702, in determining the factual issue of intent.").

The Plaintiff claims that Presney has simply examined the two documents--the April 31, 2005 Real Estate Sale Agreement and the May 3, 2005 Release of Second Mortgage--and concludes that the latter is in error. According to the Plaintiff, Presney relies on no "reliable principles and methods" upon which to base his conclusion. The Plaintiff contends that, based on a plain reading of the words contained in the Release, it is more likely that the Release was intended to supersede the earlier Sale Agreement.

"Rule 702 requires the district court to perform a "gatekeeping" function before admitting expert scientific testimony in order to ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable." Happel v. Walmart Stores, Inc., 602 F.3d 820, 824 (7th Cir. 2010) (internal quotations and citation omitted). The Plaintiff asserts that because Presney fails to explain why his interpretation of the contracts is correct and does not support his conclusion with "reliable principles and methods," the testimony should be excluded.

Finally, the Plaintiff claims that Presney's proposed testimony is inadmissible under Rule 702 on the basis that it does nothing more than construe the legal significance of documents. The Plaintiff notes Presney states that paragraphs three through six of his written report are "[b]ased on information provided to me and my review of certain public records." Presney did not conduct any additional research or undertake any special analysis that makes his testimony helpful. In addition to Presney's interpretation of the Real Estate Sales Agreement and Release of Second Mortgage, the Plaintiff asserts his proposed testimony includes (1) his opinion as to the legal significance of what Presney asserts is a lack of Illinois land record documentation about the dissolution of Windsor I and the creation of Windsor II; and (2) his interpretation of the remaining records provided to him.

The Plaintiff contends that the opinions expressed in paragraphs three though eight and ten though eleven of Presney's Report solely construe the legal significance of documents and should thus be excluded.

Windsor II alleges that Presney's opinion testimony is admissible because he has a "reliable basis in the knowledge and experience" of a title examiner/insurer. Moreover, a title examiner would typically review the applicable real estate law, title records and similar information related to the subject information when rendering an opinion regarding title.

Windsor II further claims Presney's opinion is not a subjective belief or unsupported speculation. Rather, it is based on the contents of the Purchase Agreement, review of title records, and review of Nevada Secretary of State corporate records of Windsor I and II, in addition to his knowledge, training and experience as a title examiner. Windsor II notes Presney was provided with information outside of the searchable chain of title that Windsor I does claim an interest in the Property. Thus, Windsor II claims there are questions regarding the equitable interests which it and Windsor I have in the Property which should be resolved, and he is qualified as an expert.


Because this is a bench trial, there is no concern about a jury hearing evidence that is inadmissible. Accordingly, although it has some concerns about the admissibility of Presney's proposed expert testimony, the Court will defer ruling on the Plaintiff's motion in limine until after he testifies.

Although the Plaintiff objects to the first two paragraphs of Presney's Rule 26(a)(2)(B) Report as doing nothing more than interpreting Illinois property law without reference to any facts, it appears to the Court that the information may have been included simply to set out certain alleged general principles as background information so that the reader is familiar with terms that are used in the Report.

However, the Court is inclined to conclude that the parol evidence rule bars Presney's testimony about the Release. A release is a contract. See Farm Credit, 144 Ill.2d at 447. There does not appear to be any ambiguity in the Release of Second Mortgage and Assignment of Rents. Unless there is some ambiguity, any extrinsic evidence construing the document--such as Presney's proposed testimony--is not permitted. See Gallagher, 226 Ill.2d at 233.

It is also not apparent whether Presney's proposed testimony is the product of reliable principles and methods applied to the facts. Although Presney may have extensive knowledge regarding title insurance, he still must base his opinion on reliable principles and methods. It cannot simply be based on speculation as to the intent of contracting parties.

Based on the foregoing, the Court will consider the Plaintiff's motion in limine following Presney's testimony.

II. Motion as to Admissibility of Evidence of Tax Shelter Penalties The Plaintiff has filed a motion in limine regarding the admissibility of evidence pertaining to Irving Cohen's alleged tax shelter penalties. The Plaintiff states this is important background evidence to its claims. Thus, the Plaintiff moves preliminarily for an order permitting the use of evidence regarding Cohen's tax shelter penalties and the "scheme that gave rise to those penalties."


In its Complaint, the Plaintiff seeks a determination that Defendant,

The Windsor Organization, Inc. (Windsor II), "is holding certain property as the nominee of Irving Cohen, and to foreclose federal tax liens upon the subject property." See Compl. ¶ 1. The case was brought pursuant to 28 U.S.C. §§ 1340 and 1345 (relating to the Court's jurisdiction over actions brought by the United States as Plaintiff under the Internal Revenue Code) and 26 U.S.C. §§ 7401 and 7403 (relating to the authorization for civil actions to collect tax penalties and the action to enforce a lien on property to collect payment for tax penalties). See Compl. ¶ 3. In its Complaint, the Plaintiff alleges that it assessed penalties against Cohen in 1986 and it obtained a judgment against Cohen related to the Internal Revenue Code § 6700 penalties (26 U.S.C. § 6700). See Compl. ¶¶ 9-12. The Plaintiff makes certain allegations pertaining to the Asset Protection Group, Inc. See Compl. ¶¶ 14-20. The Plaintiff further asserts that The Windsor Organization, Inc., a Nevada corporation incorporated in 1981 (Windsor I), "has served as Irving Cohen's nominee, since at least 1981" and that "Windsor I acquired the Property ...

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