153

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1 CASE NUMBER: BC 239810
2 CASE NAME: GAGGERO V. YURA
3 LOS ANGELES, CA TUESDAY, JUNE 28, 2005
4 DEPARTMENT 25 HON. MARY ANN MURPHY, JUDGE
5 REPORTER: PAULA B. RENTERIA, CSR NO. 9374
6 TIME: A.M. SESSION
7 APPEARANCES: (AS HERETOFORE NOTED.)
8
9 THE COURT: Good morning. Where were we?
10 MR. BEZEK: We were with Mr. Gaggero.
11 THE COURT: On direct.
12 MR. BEZEK: On direct. Your Honor, before --
13 THE COURT: How about those tax regs? Did somebody
14 bring those tax regs?
15 MR. BEZEK: Yes, ma'am -- I mean, yes, Your Honor.
16 THE COURT: Did everyone read chapter 8 overnight?
17 MR. BEZEK: Some of us don't have a long memory. I'm
18 sorry.
19 May he sit here, Your Honor, while we take care of
20 our administrative issues?
21 THE COURT: Sure. No problem. He's a party. He can
22 sit at counsel table anytime.
23 MR. BEZEK: First of all, I would like to mark, as we
24 discussed yesterday, the original exhibit from
25 Mr. Gaggero's handwritten notes.
26 THE COURT: The defense wanted to mark that.

27 MR. BEZEK: Right.
28 THE COURT: It doesn't matter to me. Just give it a

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1 number.
2 MR. BEZEK: I'm not sure what the next is in order, but
3 I will --
4 THE COURT: Let's give it a number on the record.
5 Do we know what next in order is?
6 THE CLERK: It's for the defendant's?
7 MR. ROSEN: For the defendant's, 596 would be the next
8 in order.
9 THE COURT: 596. Do you have a copy for everyone?
10 MR. BEZEK: I do, Your Honor.
11 THE COURT: You can give my copy to Roger; he'll give
12 that to me. Thank you.
13
14 (Marked for identification,
15 Exhibit No. 596.)
16
17 THE COURT: All right. Next item.
18 MR. BEZEK: You had asked that we provide to you the
19 regulation, the tax code. Do you want to mark this, Your
20 Honor, or just provide it to you?
21 THE COURT: No, you can provide it to me. That won't
22 be an exhibit. That's just the foreign authority.
23 MR. BEZEK: I'm handing to Roger and Your Honor the
24 regulation on reverse exchanges, providing a copy to
25 counsel.
26 The next thing, Your Honor --

27 THE COURT: Hold on.
28 MR. BEZEK: I'm sorry.

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1 THE COURT: This is printed from the Internet. This
2 isn't any code -- what is this? What regulation is this?
3 MR. BEZEK: This is regulation --
4 THE COURT: Is this an IRS -- what is this? I'm not
5 recognizing this format.
6 MR. BEZEK: This is an IRS code section -- as I
7 understand it, Your Honor, this came from Kellogg &
8 Anderson, the accountant that we worked with on these tax
9 issues. And it's my understanding that this is code
10 section 1031, and it's the revenue procedure -- if you look
11 up at the top, it says, after revised procedure --
12 THE COURT: Okay. I -- okay. What particular section
13 governs the -- what term did you use?
14 THE WITNESS: A forward accommodator is used in a
15 reverse exchange.
16 THE COURT: Okay. Where is the specific section on the
17 reverse exchange in here, counsel? Counsel?
18 MR. BEZEK: Your Honor, I couldn't answer that
19 question. I don't know.
20 THE COURT: That's what I want from you. I'm going to
21 return this document to you. I want to know the exact,
22 specific section.
23 You're the lawyer. You're supposed to be telling
24 me what the section is on the reverse exchange. I want it
25 bracketed. Tell me what the code section is, what the reg
26 is. That's what I want. Okay?

27 MR. BEZEK: All right. We'll do that.
28 THE COURT: It's either the code, the reg, or both.

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1 Don't just hand me four pages and tell me to figure it out.
2 That's your job.
3 Next item.
4 MR. BEZEK: You had asked that we provide to you
5 authority on the issue of good faith and fair dealing.
6 THE COURT: Okay. Well, generally I was -- I think
7 what I asked you is, is there a particular case in which
8 there was a sole discretion provision in a contract in a
9 good faith -- implied covenant of good faith situation.
10 I'm very familiar with the good faith -- implied
11 covenant of good faith and fair dealing, but that was my
12 specific question. Is that what you have?
13 MR. BEZEK: Yes, Your Honor.
14 THE COURT: Okay. What case is it?
15 MR. BEZEK: Third Story Music versus Waits, W-A-I-T-S,
16 41 Cal.App.4th 789 (sic), a 1995 case, review denied 1996.
17 THE COURT: Do you have a jump cite on that?
18 MR. BEZEK: I'm not sure what you mean by "a jump
19 cite," Your Honor.
20 THE COURT: Pinpoint cite, the point in the case where
21 they're talking about it.
22 MR. BEZEK: I'm sorry. I don't.
23 THE COURT: What case is it in 1995 -- court?
24 MR. BEZEK: In my summary, it doesn't show exactly
25 which division it came out of.
26 THE COURT: Let me pull it.

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1 MR. BEZEK: Oh, Your Honor, by the way, may I --
2 THE COURT: Hold on. Hold on. I just want to take a
3 look at this case. Did you say 41 Cal.App.4th?
5 THE COURT: 789?
6 MR. BEZEK: 798.
7 THE COURT: Okay. 798, second district, 1995. Okay.
8 MR. BEZEK: Your Honor, I would like to introduce you
9 to my associate, Justin Karczag.
10 MR. KARCZAG: Good morning, Your Honor.
11 THE COURT: Good morning.
12 Let me take a look at this case. I can read this
13 at the break. Thank you.
14 MR. BEZEK: You're welcome, Your Honor.
15 THE COURT: Anything else?
16 MR. BEZEK: I believe I've now complied with the
17 court's request from yesterday except that we will
18 highlight this reg.
19 THE COURT: Yeah. Let's make sure that you're familiar
20 with it, because you're the one that's going to have to
21 argue this, right? So you might want to get up to speed on
22 this, too.
23 MR. BEZEK: Fair enough, Your Honor.
24 THE COURT: Okay.
25 You may take the witness stand.
26 Unless you're going to make him do that

27 (indicating). Unless you're going to make your client
28 argue it. He's smiling.

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1 MR. BEZEK: Do I have that choice, Your Honor?
2 THE COURT: Good morning.
3 THE WITNESS: Good morning.
4 THE COURT: You're still under oath. You understand
5 that?
6 THE WITNESS: Yes.
7 THE COURT: Great. You may proceed.
8
9 STEPHEN MICHAEL GAGGERO,
10 THE PLAINTIFF, CALLED AS A WITNESS ON HIS OWN BEHALF,
11 HAVING BEEN PREVIOUSLY SWORN, RESUMED THE STAND AND
12 TESTIFIED FURTHER AS FOLLOWS:
13
14 DIRECT EXAMINATION (RESUMED)
15 BY MR. BEZEK:
16 Q Good morning, Mr. Gaggero.
17 A Good morning.
18 Q Before we get started today, I want to work on a
19 little definitional issue that I created yesterday, and I
20 want to make sure we're clear as we go forward.
21 Yesterday you described for the court the estate
22 plan that was designed by Mr. Praske. You generally
23 remember that?
24 A Yes.
25 Q As we go forward with your questioning today and
26 throughout the trial, do you have any problem definitionly

27 with me referring to that estate plan that was created by
28 Mr. Praske as the estate plan?

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1 A No.
2 Q Okay. So as we go forward, if I ask you questions
3 about: Did you do work for the estate plan, were you a
4 manager of the estate plan, of the assets --
5 THE COURT: You know what? That doesn't make any
6 sense, an estate plan. I don't know what you're talking
7 about. Are you talking about trusts? If you're talking
8 about trusts, why not just say "trusts."
9 Q BY MR. BEZEK: Let me ask you this --
10 THE COURT: I would like these questions and answers to
11 be as precise as possible so I know what you're talking
12 about. When you say "estate plan," do I have to guess
13 every time, is he talking about trusts?
14 Is there any reason we can't use the exact terms
15 as to what these instruments are? Why can't we do that?
16 MR. BEZEK: I can give you an answer to that, Your
17 Honor, if you -- the problem is that the estate plan that
18 we've been referring to is comprised of a trust, a couple
19 of foundations, and then there's a number of limited
20 liability companies and partnerships that ultimately funded
21 that plan.
22 So how we refer to the plan, which is
23 multifaceted, so to speak, is difficult because it's a
24 trust -- involves a trust and involves foundations.
25 THE COURT: Well, who's buying and selling the
26 property?

27 MR. BEZEK: Well, it's the estate --
28 THE COURT: Let's hear from the witness.

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1 MR. BEZEK: All right. Let's see if we can't cover
2 that and get this clear. And maybe it will help if we talk
3 about procedurally how these -- how the estate plan was
4 funded, how the estate was funded.
5 Q When you funded it originally, did you move assets
6 that belonged to you directly into the estate plan or into
7 this vehicle, or did you --
8 THE COURT: Why don't you let him testify -- he seems
9 to be really familiar -- and ask open-ending, nonleading
10 questions. Let's try it that way, since you're supposed to
11 ask nonleading questions.
12 Q BY MR. BEZEK: Mr. Gaggero, what procedure did you
13 follow when you had your personal assets and you were using
14 those to fund the estate plan that was designed by
15 Mr. Praske? Let's talk about the procedure that's
16 followed.
17 THE COURT: Okay.
18 THE WITNESS: Initially I took assets and put them into
19 limited liability companies, limited partnerships,
20 corporations. And I -- and at some point in time, I met
21 Mr. Praske in that process, and I can't tell you exactly
22 when. He'll be able to have the dates and tell you exactly
23 when.
24 And then I continued to transfer properties into
25 limited liabilities that Mr. Praske would set up. First
26 these other corporations and limited liability companies

27 were set up by other attorneys I had, and then Mr. Praske
28 started setting them up and I would transfer properties

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1 into those various companies.
2 And then Mr. Praske would change the ownership,
3 stock membership, limited partnership, and general
4 partnership ownership interests in those companies to trust
5 or foundation ownerships.
6 Q BY MR. BEZEK: All right. And is that how the
7 estate plan that was designed by Mr. Praske was then
8 funded, through that process, ultimately?
9 A Yes.
10 Q Can you tell us generally what is -- what
11 comprises the estate plan that was created by attorney
12 Praske?
13 A I'm not exactly sure what there is completely
14 right now without looking at a list, because there was a
15 lot I have to remember about that.
16 Q I'm sorry. I misled you with the question. Bad
17 question.
18 When it was originally created by Mr. Praske back
19 in the '97-'98 time frame, what types of receiving vehicles
20 comprised the estate plan?
21 A Limited liability companies, limited partnerships,
22 general partnerships, corporations, trusts, and a
23 foundation.
24 Q Okay. That resulting estate plan, with all of the
25 things that you just identified comprising that plan, can
26 we put a definitional term on that so that, as we go

27 forward, we can refer to that estate plan that was created
28 and funded by Mr. Praske in a shorthand way?

162
1 MR. ROSEN: I'm going to object to --
2 THE COURT: Sustained.
3 Q BY MR. BEZEK: All right. With regards to the 938
4 property, back in August of '98, when the original -- when
5 you were originally negotiating on behalf of the -- let me
6 see how I want to phrase that.
7 Was one of the options you were considering when
8 you were talking with Mr. Harris about the purchase of
9 938 -- was one of the options that you were considering
10 purchasing the property in your own name temporarily?
11 A Yes.
12 THE COURT: Can you pull that mike up.
13 THE WITNESS: Yes. It's a little -- the screw needs to
14 be tightened.
15 THE COURT: It's an L.A. County facility. The screw
16 needs to be tightened. I'm not going to make any further
17 comment. Maybe we'll try to get someone to do that. Maybe
18 I'll bring a screw- -- well --
19 THE WITNESS: You can't get them?
20 THE COURT: I can. I'm sorry. We'll try to get that
21 fixed.
22 Q BY MR. BEZEK: Had you had discussions with
23 Mr. Praske about where the money would come from in the
24 event you were to take title in the sale of the 938
25 property?
26 A It would come from one of the --

27 THE COURT: That was a "yes" or "no" answer.
28 THE WITNESS: Oh. Yes. I'm sorry. Yes.

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1 Q BY MR. BEZEK: What did you --
2 A I jumped ahead there. Sorry.
3 Q What did you say to Mr. Praske?
4 A I don't remember specifically what I said to
5 Mr. Praske or specifically what he said to me, but I know
6 that we discussed the situation. I know that --
7 THE COURT: Give me a second. Sorry.
8 Q BY MR. BEZEK: Did Mr. Praske commit funds in the
9 event that you were the vehicle through which title would
10 be taken in the sale of the property?
11 MR. ROSEN: Your Honor, I'm going to object --
12 THE COURT: Sustained. Praske in what role? Commit
13 funds from where?
14 Is that what the objection is?
15 MR. ROSEN: That's a better one. But my objection was
16 also going to be hearsay to the extent he made a
17 commitment, other than to the extent it's going to his
18 state of mind. If Praske made some sort of oral commitment
19 to him of funds, that's hearsay, and Mr. Praske can come in
20 and testify to that.
21 THE COURT: What's the exception to the hearsay rule?
22 MR. BEZEK: It's not being offered for state of mind;
23 therefore, it's not hearsay, and it's compliant with
24 showing why Mr. Gaggero did what he did.
25 THE COURT: Is Mr. Praske going to testify in this
26 case?

28 THE COURT: We're continuing to be very vague in our

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1 questions, and that's sort of going to be working to your
2 disadvantage. If you can't say where this money is coming
3 from and everything is so vague, that's going to be a
4 problem in this case.
5 Let's talk about that hearsay objection. The
6 foundation would be that the recipient or hearer of the
7 statement learned certain information by hearing or reading
8 it and believed such information to be true and acted in
9 conformity.
10 That's what you have to establish. And I still
11 don't know what capacity Praske is in and where this money
12 is coming from. That's not defined in the question.
13 Q BY MR. BEZEK: Did you have conversations with
14 Mr. Praske in Mr. Praske's role as the trustee and
15 representative of the estate plan that we've just discussed
16 that was funded by Mr. Praske?
17 THE COURT: Trustee of the trusts in the estate plan?
18 MR. BEZEK: As trustee of the estate plan that was
19 funded by -- let me ask the question this way.
20 Q In what capacity did you have conversations with
21 Mr. Praske? What was his capacity at the time?
22 A He was the trustee of the trust that was the
23 general partner of the limited partnerships. He was the
24 managing -- he was the trustee of the trusts that was the
25 managing member of the limited liability companies, or some
26 of them, or he was the trustee of the trusts or of the

27 foundation that had the majority membership interest.
28 He was the trustee of the trusts or the foundation

165
1 that owned the shares to the corporations. He was the
2 trustee of the trusts that held the limited partnership
3 interests or the ownership interests of the limited
4 partnerships. He was the trustee or managing member or
5 majority membership owner or limited liability -- or
6 limited partnership with the 100 percent ownership of all
7 of those various entities, i.e., limited liability
8 companies, limited partnerships, or trusts that formed
9 general partnerships.
10 So, to summarize, Mr. Praske had control over the
11 ownership entities of each of the entities that they were a
12 part of.
13 Said differently, so there's no confusion -- I
14 know it's confusing. It's difficult for me to say --
15 THE COURT: It's not confusing.
16 So what you're trying to say is Praske had control
17 over all of the entities in the estate plan that he
18 created? Is that what you're trying to say?
19 THE WITNESS: Yes.
20 THE COURT: Okay.
21 Q BY MR. BEZEK: At the same time, were you
22 designated by Mr. Praske to manage the assets?
23 A Yes.
24 THE COURT: Of what?
25 MR. BEZEK: The assets of these entities that he just
26 identified that were used to fund the -- or create the

27 estate plan created by Mr. Praske.
28 THE WITNESS: Yes.

166
1 Q BY MR. BEZEK: What was your role -- what were
2 your duties in performing that role?
3 THE COURT: Well, what was your title? Did you have a
4 title?
5 THE WITNESS: I was the asset manager. I managed the
6 asset portfolio.
7 THE COURT: Of all of the above?
8 THE WITNESS: Of all of the assets -- go all the way
9 downstream to the two trusts and the foundation and
10 everything above that, I was the asset manager of that and
11 that portfolio. I guess that's a good word for it.
12 Q BY MR. BEZEK: In that capacity, did you have
13 occasion to talk to Mr. Praske in his capacity, as you've
14 just defined it, about 938?
15 A Yes.
16 Q What was it you discussed with him regarding 938
17 in the pre-August 1998 time frame?
18 A I discussed with him the structure of the purchase
19 and sale agreement and how we would fund it in the future,
20 depending upon when Mr. Harris determined he wanted to
21 close escrow.
22 Q Why was that important, to determine the closing
23 date, as part of these conversations with Mr. Praske?
24 A Because we couldn't determine --
25 THE COURT: "We" meaning?
26 THE WITNESS: Mr. Praske and I -- or I'll use "I." I

27 couldn't determine which of the entities, or if it would be
28 just cash itself coming from the parent trusts and

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1 foundation, would be the funding entity or trust or
2 foundation for the ultimate acquisition until I knew at
3 least the month and the year that Mr. Harris was going to
4 decide to close escrow on these.
5 Because the most prudent way to purchase this
6 property would be to purchase it with an exchange, a tax
7 deferred 1031 exchange, so that we bought it with dollars
8 that were not after-tax dollars, but with deferred dollars.
9 And the only way I could determine which of the
10 entities, or if I would have to have the money from the
11 mother trust or foundation given straight to myself or to
12 Stephanie Boren to purchase it, the only way I could
13 determine which of these entities was the most appropriate
14 was to know their status at the same time we had a closing
15 date.
16 For example, if Mr. Harris gave me 30-day notice
17 to close in July of 1999, I would know at that point in
18 time that I would look at the portfolio and say: Which of
19 these entities have a piece of property that is either
20 under contract to sell, is in escrow to be sold, has closed
21 escrow already, and is within the 45-day identification
22 period, which of those would be my first choice.
23 So, for example, if Malibu Broad Beach LP had just
24 sold a piece of property and -- or it was in escrow, let's
25 say, pending and at the same time Mr. Harris gave me notice
26 that he now wanted to close escrow 30 days from this

27 certain date, then I would know that the ideal candidate to
28 buy 938 would be Malibu Broad Beach LP because they were in

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1 escrow and escrow was going to close within, let's say,
2 30 days.
3 If Mr. Harris gave me a 30-day time limit to close
4 escrow, then I would know that I could exchange the funds
5 from Malibu Broad Beach LP into 938 on a tax-deferred
6 basis.
7 If, however, nothing in the portfolio was either
8 under contract or in escrow or had sold and the money was
9 sitting with an accommodator, let's say, then I would have
10 to cause the trust or one of the corporations in the trust
11 to loan the money to Stephanie Boren to purchase the
12 property, she would buy it.
13 And then, let's say three months from now, someone
14 made an offer on one of the properties owned by one of the
15 entities in the portfolio, then I would take that property
16 in that entity when it sold, and I would buy from Stephanie
17 Boren the asset with tax-deferred dollars.
18 So that is the plan that was set up with
19 Mr. Fainsbert and Mr. Harris at the very outset, because
20 Mr. Harris didn't want to be pressured into picking an
21 escrow date and then be pressured into finding a
22 replacement property with the proceeds from the sale.
23 He wanted to have complete control over what
24 month, what day, what year that property sold so that he
25 could do what's called a direct exchange, which meant that
26 when he closed escrow on 938, within the same escrow he

27 would buy another property.
28 It's the safest way to do a 1031 exchange.

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1 There's no deferral on it.
2 And that's what he wanted to do, with no pressure
3 in shopping for his replacement property. He wanted to
4 take his time and really look at the market.
5 That put me in a position that I would have to --
6 I would have only 30 days within which to sell something
7 and buy his unless I used Stephanie as a warehouser, where
8 we would let her buy the property, we would loan her the
9 money, she would warehouse it, essentially, and we would
10 buy it from her in the future when one of the entities
11 owning one of the properties in the portfolio sold, then
12 that would work.
13 THE COURT: And it would only work up until the day
14 that they imposed the 45-day limit on the forward
15 accommodator rules?
16 THE WITNESS: Exactly.
17 THE COURT: And when did they do that?
18 THE WITNESS: They did that September 15 of 2000.
19 THE COURT: After that, you can't do that?
20 THE WITNESS: Exactly right. Before September 15, the
21 property was transferred to me, and then the money would
22 have just been given to me to buy.
23 THE COURT: Thank you.
24 Q BY MR. BEZEK: All right. Now, did you ever get a
25 closing date from Mr. Harris before he died?
26 A No.

27 Q We talked yesterday about the funding of the
28 estate, the estate plan that was created by Mr. Praske,

170
1 what you referred to as the mother trusts and foundations.
2 Once --
3 THE COURT: Mother trust and foundation singular?
4 THE WITNESS: Singular foundation, two trusts.
5 THE COURT: Right.
6 THE WITNESS: That's correct.
7 Q BY MR. BEZEK: From the time that it was -- do you
8 remember when the funding was completed, approximately?
9 THE COURT: What funding?
10 Q BY MR. BEZEK: The funding of the estate plan that
11 had been created by Mr. Praske, the mother trusts and
12 foundation.
13 A It was in 1998, early or middle 1998, I think.
14 Q Once you began managing the assets for the mother
15 trusts and foundation, did you purchase additional
16 properties on behalf of the mother trusts and foundation?
17 A Yes.
18 Q From that point, when you began that process in
19 1998-'99, whenever you began -- do you remember
20 approximately in '98 when you began that?
21 A We'll call it mid-1998 for an estimate.
22 Q From that point forward to today's date, do you
23 know how much property was purchased on behalf of the
24 mother trusts and foundation?
25 A Yes.
26 Q Can you tell us how much, please.

27 A $31 million worth of property.
28 THE COURT: How much of that was 1031's?

171
1 THE WITNESS: 13 million was a 1031, and I believe
2 about a $3-1/2 million was a 1031, and I can check and give
3 you -- that's all I can remember right now.
4 THE COURT: All right. So you'll get back to me with
5 that figure?
6 THE WITNESS: Yes.
7 THE COURT: Now, in chapter 8, if you read that last
8 night -- and I hope you did -- you will notice that in a
9 court trial I'm supposed to be saving my questions until
10 the end of both sides' examinations. However, because
11 we're dealing with some complicated issues here, I'm going
12 to ask the questions as they come up.
13 If anybody has a problem with that, I would
14 encourage you to object, and I'll save my questions until
15 the end. But so far I'm not getting any feeling that
16 anybody is having an issue, because I want to ask him at
17 the time.
18 MR. BEZEK: Your Honor, I'm aware of the rule. I have
19 not objected because I encourage the questions.
20 THE COURT: Don't hesitate to object if you feel that
21 it's strategically not good for the way you want to present
22 your case, because this is fairly complicated, and I want
23 to make sure -- my goal is to understand everything as I go
24 along.
25 I'm not the type of judge that sits on the bench
26 and doesn't -- I want to make sure I'm with the curve in

27 this case, the learning curve. Not behind it. Okay?
28 That's my purpose.

172
1 MR. BEZEK: Thank you, Your Honor.
2 Q Now, you told us a moment ago that you purchased
3 $31 million worth of property on behalf of the mother
4 trusts and foundation during the time frame that we
5 identified. Do you recall that?
6 A Yes.
7 Q Did you ever have a single time when there was a
8 property under contract that the property was not or could
9 not be funded from the assets of the mother trusts and
10 foundation?
11 A No.
12 Q This might not be a very fair question to you, but
13 do you recall what the largest single purchase price was
14 during this time frame for a piece of property? If you
15 don't remember, it's okay. I just --
16 A It was around 7 million.
17 Q And the purchase price on the 938 originally,
18 originally --
19 THE COURT: Can you just -- didn't you just say there
20 was a $13 million transaction that was a 1031? Wouldn't
21 that have been larger than the 7 million?
22 THE WITNESS: I sold 13 million, and I bought a series
23 of small properties.
24 THE COURT: It was a sale?
25 THE WITNESS: Yeah. I had to reinvest 13 million, but
26 it was a series of properties.

27 THE COURT: Thank you.
28 Q BY MR. BEZEK: When you first began negotiating

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