Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca4-07-01202/USCOURTS-ca4-07-01202-0/pdf.json

Nature of Suit Code: 245
Nature of Suit: Real Property Product Liability
Cause of Action: 

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PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

SOUTH CAROLINA DEPARTMENT OF 

DISABILITIES AND SPECIAL NEEDS;

SOUTH CAROLINA STATE BUDGET AND

CONTROL BOARD AND CONTROL

BOARD-INSURANCE RESERVE FUND,  No. 07-1190 Plaintiffs-Appellees,

v.

HOOVER UNIVERSAL, INCORPORATED,

Defendant-Appellant. 

SOUTH CAROLINA DEPARTMENT OF 

MENTAL HEALTH; SOUTH CAROLINA

STATE BUDGET AND CONTROL

BOARD AND CONTROL BOARDINSURANCE RESERVE FUND,  No. 07-1202 Plaintiffs-Appellees,

v.

HOOVER UNIVERSAL, INCORPORATED,

Defendant-Appellant. 

Appeals from the United States District Court

for the District of South Carolina, at Greenville.

Joseph F. Anderson, Jr., Chief District Judge.

(6:04-cv-01219-JFA; 3:03-cv-04118-JFA)

Argued: May 15, 2008

Decided: July 30, 2008

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Before NIEMEYER and DUNCAN, Circuit Judges,

and Claude M. HILTON, Senior United States District Judge for

the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge Niemeyer wrote the opinion,

in which Judge Duncan and Senior Judge Hilton joined. 

COUNSEL

ARGUED: Richard K. Wray, REED SMITH, LLP, Chicago, Illinois,

for Appellant. Andrew Frederick Lindemann, DAVIDSON, MORRISON & LINDEMANN, PA, Columbia, South Carolina, for Appellees. ON BRIEF: Casey L. Westover, REED SMITH, LLP, Chicago,

Illinois; William Toal, George C. Johnson, JOHNSON, TOAL &

BATTISTE, PA, Columbia, South Carolina, for Appellant. 

OPINION

NIEMEYER, Circuit Judge: 

The South Carolina Department of Mental Health, the South Carolina Department of Disabilities and Special Needs, and the South Carolina State Budget and Control Board-Insurance Reserve Fund

commenced these product liability actions against Hoover Universal,

Inc., invoking diversity jurisdiction and alleging damages resulting

from Hoover’s sale to the plaintiffs of defective trusses and sheathing,

which were incorporated into public buildings constructed in the

1970s. Relying mainly on South Carolina’s statute of repose and statutes of limitations, the district court entered summary judgments in

favor of Hoover. 

While appeals were pending in this court, the plaintiffs filed a

motion to vacate the judgments in the district court under Federal

Rule of Civil Procedure 60(b), asserting that under 28 U.S.C.

§ 1332(a)(1), they were not "citizens" for diversity purposes and

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therefore the district court never had subject matter jurisdiction. After

we granted a limited remand for consideration of the jurisdiction

issue, the district court granted the plaintiffs’ motion. We now affirm,

albeit reluctantly in view of the plaintiffs’ original invocation of

diversity jurisdiction and their late recognition of the lack of subject

matter jurisdiction.

I

The South Carolina Department of Mental Health and the South

Carolina Department of Disabilities and Special Needs constructed 23

buildings during the 1970s, using roof trusses and sheathing treated

with a fire-retardant chemical sold by the predecessor of Hoover Universal, Inc., a Michigan corporation. After the roof of a building

unexpectedly collapsed, a survey was conducted in 2001 of all stateinsured buildings using the trusses. From the survey, these Departments discovered that the trusses and sheathing used in their buildings

were suffering from delamination and deterioration, allegedly caused

by the fire-retardant chemical, and the wood therefore was losing

structural strength. Experts also explained that the roof framing systems that included the trusses would become worse and therefore

needed replacement. As a result, these Departments had to replace the

roofing and roof framing systems, incurring costs and damages

exceeding seven million dollars. 

The large majority of the losses were initially paid by the Office

of the Insurance Reserve Fund, a division of the South Carolina State

Budget and Control Board, which insured the property of both the

Department of Mental Health and the Department of Disabilities and

Special Needs. The two Departments, as well as the Budget and Control Board-Insurance Reserve Fund, as subrogee, then commenced

these two actions against Hoover in federal court under South Carolina statutory and common law, invoking diversity jurisdiction conferred by 28 U.S.C. § 1332(a)(1). 

On Hoover’s motions for summary judgment, the district court dismissed the actions, concluding they were barred mainly by South Carolina’s statute of repose and various statutes of limitations. From

these judgments, entered on March 8, 2006, the plaintiffs appealed.

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While the appeals were pending, the plaintiffs filed a motion in the

district court to vacate the judgments for lack of subject matter jurisdiction. Even though it was the plaintiffs who had commenced these

actions in federal court by invoking diversity jurisdiction, they now

argued for the first time that "as arms of the state of South Carolina,

the Plaintiffs [were] not ‘citizens’ for purposes of diversity jurisdiction," as required by 28 U.S.C. § 1332(a)(1). Following the procedure

outlined in Fobian v. Storage Technology Corp., 164 F.3d 887, 891

(4th Cir. 1999), the district court entered an order notifying the parties

that it was inclined to grant the motion to vacate the judgments, and

we remanded the cases for the limited purpose of having the district

court consider the motion. 

The district court granted the motion to vacate both judgments,

finding that the plaintiffs were alter egos of the State of South Carolina and therefore were not "citizens" for purposes of diversity jurisdiction. From the district court’s judgments dated February 21, 2007,

dismissing the cases for lack of subject matter jurisdiction, Hoover

appealed, contending that the district court erred in concluding that

the plaintiffs were alter egos of the State, because the plaintiffs,

although created by state law, functioned sufficiently independently

of the State to be considered "citizens" for diversity purposes. 

II

An undoubtedly inequitable hardship results from allowing the

plaintiffs to prosecute actions in federal court and, after they lose on

motions for summary judgment, granting their motions to vacate the

judgments because of a lack of subject matter jurisdiction. As Hoover

laments, "Plaintiffs have presented the federal courts with a procedural morass of their own making, and should not be rewarded at this

late stage of the proceedings with a ‘do over’ in state court." In most

situations, this argument would be persuasive. But subject matter

jurisdiction goes to the very power of the court to act, and regardless

of the waste resulting from having completed proceedings later

vacated by a late-discovered jurisdictional defect, an order or judgment entered by a court without subject matter jurisdiction is a nullity.

In these cases, the plaintiffs invoked diversity jurisdiction under 28

U.S.C. § 1332(a)(1), which confers jurisdiction on a federal court

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over actions between "citizens of different States" where the amount

in controversy exceeds $75,000. To satisfy the diversity requirement,

the plaintiffs alleged (by implication) that Hoover was a citizen of

Michigan and that the plaintiffs were citizens of South Carolina. The

complaint actually alleged, "the parties are diverse; therefore, jurisdiction in this Court is appropriate." 

It is well established that for purposes of diversity jurisdiction, a

State is not a "citizen." See Moor v. County of Alameda, 411 U.S.

693, 717 (1973). Moreover, a public entity created under state law,

which is "the arm or alter ego of the State," is likewise not a citizen

for purposes of diversity jurisdiction. Id. (internal quotation marks

omitted) (emphasis omitted); see also Maryland Stadium Auth. v.

Ellerbe Becket Inc., 407 F.3d 255, 260 (4th Cir. 2005). But an entity

created by the State which functions independently of the State with

authority to sue and be sued, such as an independent authority or a

political subdivision of the State, can be a "citizen" for purposes of

diversity jurisdiction. Moor, 411 U.S. at 717-18; Maryland Stadium

Auth., 407 F.3d at 260. 

The line separating a State-created entity functioning independently of the State from a State-created entity functioning as an arm

of the State or its alter ego is determined by the particular legal and

factual circumstances of the entity itself. To define that line, we have

articulated a nonexclusive list of four factors to be considered: (1)

whether any judgment against the entity as defendant will be paid by

the State or whether any recovery by the entity as plaintiff will inure

to the benefit of the State; (2) the degree of autonomy exercised by

the entity, including such circumstances as who appoints the entity’s

directors or officers, who funds the entity, and whether the State

retains a veto over the entity’s actions; (3) whether the entity is

involved with state concerns as distinct from non-state concerns,

including local concerns; and (4) how the entity is treated under state

law, such as whether the entity’s relationship with "the State [is] sufficiently close to make the entity an arm of the State." See Maryland

Stadium Auth., 407 F.3d at 261-62 (alteration in original) (drawing

factors from Lake Country Estates, Inc. v. Tahoe Reg’l Planning

Agency, 440 U.S. 391 (1979) and Ram Ditta v. Maryland Nat’l Capital Park & Planning Comm’n, 822 F.2d 456 (4th Cir. 1987), and

SOUTH CAROLINA DEPT v. HOOVER UNIVERSAL 5

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quoting Cash v. Granville County Bd. of Educ., 242 F.3d 219, 224

(4th Cir. 2001)). 

Hoover contends that neither the Budget and Control BoardInsurance Reserve Fund nor the two Departments are alter egos of

South Carolina. It asserts:

The IRF [Budget and Control Board-Insurance Reserve

Fund] is a proprietary insurance operation that funds itself

through the sale of insurance to, and the collection of premiums from, its insureds — property owners that include both

state and local governmental entities. Similar to any other

insurance company, any subrogation recovery by the IRF in

this case would be retained by the IRF in a trust fund. In

analogous cases involving state-created trust funds, this

Court and others have found that the entity in question is not

the alter ego of the state, and therefore is a citizen for diversity purposes. 

While Hoover acknowledges that the question with respect to the two

state Departments is "closer," it makes a bifurcated argument as to

them. It contends first that it should have been allowed discovery by

the district court to enable it to determine whether, in fact, the two

state Departments are alter egos of the State. Alternatively, it maintains that even if the two Departments are alter egos of the State, the

district court should have exercised its authority 

to sever [the Budget and Control Board-Insurance Reserve

Fund’s] claims against Hoover Universal by dismissing [the

Department of Mental Health] and [the Department of Disabilities and Special Needs] from the lawsuits. This procedure, according to the United States Supreme Court, protects

considerations of finality, efficiency and economy, and is

the best solution to the procedural quagmire that Plaintiffs

have created. 

The plaintiffs contend that they are created as and function as arms

of the State of South Carolina and therefore are not citizens for purposes of diversity jurisdiction. They rely on the district court’s analysis in this case, applying the four-factor test outlined in Maryland

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Stadium Authority. Alternatively, they contend that Hoover’s suggestion that the case be severed cannot be accommodated because all

three agencies are indispensable parties. 

A

We begin by considering the status of the Budget and Control

Board-Insurance Reserve Fund. 

The Budget and Control Board, which is comprised of the Governor, the State Treasurer, the Comptroller General, the Chairman of the

Senate Finance Committee, and the Chairman of the Ways and Means

Committee of the House of Representatives, see S.C. Code Ann. § 1-

11-10, "is an executive body dealing primarily with the fiscal affairs

of the State government" and "[is] a vital part of the machinery of the

government of [South Carolina]," State ex rel. McLeod v. Edwards,

236 S.E.2d 406-07, 409 (S.C. 1977). Through the Board’s Office of

Insurance Services, the Board "is authorized to provide insurance for

the State, its departments, agencies, institutions, commissions, boards,

and the personnel employed by the State in its departments, agencies,

institutions, commissions, and boards so as to protect the State against

tort liability and to protect these personnel against tort liability arising

in the course of their employment." S.C. Code Ann. § 1-11-140(A).

Through its Office of Insurance Services, the Board is also authorized

to provide insurance on public buildings and their contents. Id. § 1-

11-140(F). 

South Carolina requires that "[a]ll insurance on public buildings

and on the contents thereof of the State and of all institutions supported in whole or in part by the State shall be carried by the State

Budget and Control Board." S.C. Code Ann. § 10-7-10. The Board is

required to charge premiums not greater than that which "would be

charged by reliable old line insurance companies for carrying this

insurance." Id. § 10-7-90. The premiums paid by state agencies to the

Board are required to be held by the Board in a separate account designated as insurance reserve funds: "All funds paid over to the State

Budget and Control Board as premiums on policies of insurance . . .

provided for herein, shall be held by the Board as insurance reserve

funds for the purpose of paying all losses for which it is liable and

the expenses necessary to the proper conduct of such insurance of

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public property by the Board and shall be invested by it as are other

funds in its hands." Id. § 10-7-130. 

The insurance reserve funds set aside to pay losses with respect to

public buildings are subject to examination by the Director of the

South Carolina Department of Insurance "to determine whether the

funds are being administered in accordance with sound insurance

practices and in the best interest of the State." S.C. Code Ann. § 38-

13-190(2). 

Thus, the "Insurance Reserve Fund" is not an entity, but rather an

account that holds funds designated to pay losses under insurance

issued by the Budget and Control Board. That account, however, is

administered separately by an office of the Budget and Control Board

referred to by the Board as the "Office of the Insurance Reserve

Fund." That Office describes itself as functioning as:

a governmental insurance operation with the mission to provide insurance specifically designed to meet the needs of

governmental entities at the lowest possible cost. The Insurance Reserve Fund operates like an insurance company, by

issuing policies, collecting premiums (based on actuarially

calculated rates), and paying claims from the accumulated

premiums in accordance with the terms and conditions of

the insurance policies it has issued. 

To determine whether that Office, which is a division of the Budget

and Control Board, functions as an arm or alter ego of the State, we

apply the four Maryland Stadium Authority factors. 

With regard to the first factor — whether any recovery by the

plaintiffs will inure to the benefit of the State — Hoover claims that

the circumstances weigh in favor of finding the Office’s autonomy

and independence from the State. Hoover directs our attention to

South Carolina Code § 10-7-130, which states that "all money

received . . . from any other source connected with the insurance of

public property . . . shall be held by the Board as insurance reserve

funds," arguing that any recovery by the Board in this case would stay

in the insurance funds of the Board and would not be paid to the

State’s treasury. The argument, however, celebrates form over sub8 SOUTH CAROLINA DEPT v. HOOVER UNIVERSAL

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stance and fails to address the broader question of whether the recovery retained by the Board as part of the insurance reserve funds would

"inure to the benefit of the state." Maryland Stadium Auth., 407 F.3d

at 262. The broader inquiry does not focus on whether funds are

retained in a particular account of the State or in the general fund of

the State treasury, but rather whether recovery here would inure to the

benefit of the State. When so considered, we conclude that any recovery here would in fact inure to the benefit of South Carolina. 

The Budget and Control Board is required to maintain insurance

reserve funds equal to five percent of the total insurance coverage in

effect, which are held and invested by the State Treasurer. S.C. Code

Ann. §§ 10-7-130, 10-7-140. When the insurance reserve fund

exceeds five percent, the Board is required to reduce premium rates

to "an amount which will be sufficient to maintain the insurance fund

at five per cent of the total insurance in force." Id. § 10-7-140. Thus,

if the Board prevails in this action, the recovered funds will be added

to the insurance reserve funds. If the funds are already at five percent,

then the State will directly benefit in the form of reduced premiums

on property insurance that state agencies are required by law to obtain

from the Board. Id. § 10-7-70. If, on the other hand, the funds are

below five percent at the time the Board receives a recovery, the State

would still benefit because the funds would be brought closer to the

statutory five percent threshold, which triggers a premium reduction.

But any recovery in this case would inure to the benefit of South

Carolina in a more direct manner, as well. South Carolina treats the

insurance reserve funds as nothing more than a specific account of the

funds held within the state treasury, and those funds are invested by

the State Treasurer and subject to the direct legislative control of the

General Assembly. In 2002, for example, the General Assembly redirected accrued interest from "accounts held by agencies of state government" to the general fund of the State during a period of state

fiscal difficulty, including $22,937,800 from the insurance reserve

funds. See Act of June 17, 2002, No. 289, Part IB § 72.97, available

at http://www.scstatehouse.net/sess114_2001-2002/appropriations

2002/tap1b.htm#s72 (general appropriations act for fiscal year beginning July 1, 2002). In addition, the Appropriations Act required the

Budget and Control Board to suspend required payments of annual

premiums by state agencies into the insurance reserve funds, and,

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instead, to collect the same amount and remit it to the general fund.

Id. Part IB § 72.98. The State’s exercise of direct control and dominion over the funds managed by the Budget and Control Board’s

Office of the Insurance Reserve Fund makes clear the State’s control

over any funds that might be recovered by the plaintiffs in this case.

We conclude that these circumstances under the first factor affirmatively indicate the conclusion that the Office of the Insurance Reserve

Fund functions as an arm or alter ego of the State. 

The second and fourth factors — focusing on the autonomy of the

public entity and how the entity is treated under state law — are

closely related in this case. To make its argument under these factors,

Hoover again focuses narrowly on the "Insurance Reserve Fund," as

if it were an entity, and the role it plays in enabling the Budget and

Control Board to provide insurance to public entities. The "Insurance

Reserve Fund," however, is not an entity of any kind under South

Carolina law. It is true that the Office managing the insurance reserve

funds is an entity functioning as a division of the State Budget and

Control Board. But under state law, it is nonetheless the Board itself

that is statutorily authorized to offer insurance and maintain insurance

reserve funds. See S.C. Code Ann. § 1-11-140(A) ("The State Budget

and Control Board . . . is authorized to provide insurance for the

State" (emphasis added)); id. § 10-7-10 ("All insurance on public

buildings and on the contents thereof of the State . . . shall be carried

by the State Budget and Control Board" (emphasis added)); id. § 10-

7-130 ("[A]ll money received . . . from any other source connected

with the insurance of public property . . . shall be held by the Board

as insurance reserve funds" (emphasis added)); id. § 10-7-140 ("When

the insurance reserve fund provided for in § 10-7-130 reaches the sum

of five per cent of the total insurance in force, then annually thereafter

the State Budget and Control Board shall proportionately decrease the

premium of insurance" (emphasis added)); id. § 38-13-180

("‘[I]nsurance reserve fund’ or ‘funds’ means the insurance reserve

funds administered by . . . the State Budget and Control Board to provide liability and property insurance" (emphasis added)). It is true that

the various divisions of the Budget and Control Board are administratively separate for carrying out their separate functions, but they are,

nonetheless, fully accountable to and guided by the Budget and Control Board, indicating a lack of the significant autonomy that is relevant in this context. 

10 SOUTH CAROLINA DEPT v. HOOVER UNIVERSAL

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Moreover, the Budget and Control Board’s members are all state

officials — the Governor, the State Treasurer, the Comptroller General, the Chairman of the Senate Finance Committee, and the Chairman of the House Ways and Means Committee. See S.C. Code Ann.

§ 1-11-10. Thus, just as the fact that all of the University of Maryland’s governing decisionmakers were appointed by the Governor

was a "key indicator of state control" in Maryland Stadium Authority,

407 F.3d at 264, so too is the fact here that all of the Budget and Control Board’s members are state officials. There can be no doubt that

in this way the State, through its top officials, retains ultimate veto

power over the actions of the Board and its Office of the Insurance

Reserve Fund. 

It is not surprising therefore that state law provides that the Office

of the Insurance Reserve Fund is also accountable to state inspectors.

See S.C. Code Ann. § 38-13-190 (providing that the Director of the

State Department of Insurance "shall examine the affairs of the insurance reserve funds" at least every three years and report to the Budget

and Control Board, the Speaker of the House of Representatives, and

the President of the Senate whether the funds are being administered,

inter alia, "in the best interest of the State"). 

Also relevant to these factors (two and four) is the origin of the

funds contained in the insurance reserve funds account. Although a

significant portion of the premiums paid to the Board comes from

municipalities, nearly every state agency is required by law to purchase property insurance from the Board. S.C. Code Ann. §§ 10-7-10,

10-7-70. Thus, through its yearly appropriations to state agencies,

which in turn are required by law to remit premiums to the Board,

South Carolina provides significant funding for the Board’s insurance

reserve funds. When state funding of this sort is considered in connection with the State’s exercise of direct control over those funds, it can

readily be concluded that the Office managing the insurance reserve

funds does not have significant autonomy apart from the State. 

Finally, with respect to the third factor — whether the entity is

involved with statewide, as opposed to local or other non-state concerns — the circumstances again support the conclusion that the

Office of the Insurance Reserve Fund is an arm of South Carolina.

First, we note that the Budget and Control Board, of which the Office

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of the Insurance Reserve Fund is but a division, unquestionably is

involved primarily with matters of statewide concern. See, e.g., S.C.

Code Ann. § 1-11-55(2) (designating Board as "the single central broker for the leasing of real property for [state] governmental bodies"

statewide); id. § 1-11-58 (authorizing Board to manage surplus property of state agencies); id. § 1-11-220 (authorizing Board to manage

state automotive fleet). Hoover, however, focuses more narrowly on

the fact that the Budget and Control Board’s Office of the Insurance

Reserve Fund provides insurance to numerous South Carolina municipalities, counties, and school districts, thereby involving itself in matters of local concern. See S.C. Code Ann. § 1-11-140(B). But even as

the Board provides insurance to municipalities, counties, and school

districts, it does so on a statewide basis in that it provides all municipalities, counties, and school districts in the State who wish public

insurance with insurance "in the same manner provided for the procurement of this insurance for the State, its entities, and its employees." Id. (tort insurance); see also id. §§ 10-7-10 to 10-7-40

(providing that property insurance on state, county, and school buildings shall be carried by the Board, and that municipalities may, but

are not mandated to, purchase insurance from the Board). More significant to the analysis here, the Board’s insurance activities are not

limited to local areas and entities, and the benefits of the Office’s

activities will not inure only to the residents of a local area. Cf. Ram

Ditta, 822 F.2d at 459 (holding that circumstances weigh against finding alter ego status when the entity "has no involvement . . . beyond

the borders of these two counties" and "the majority of benefits resulting from its operation . . . will inure only to the residents of those

counties" (emphasis added)). 

At bottom, when considering all of the factors, we conclude that

the Office of the Insurance Reserve Fund is an arm or alter ego of the

State of South Carolina and not an autonomous, independent state

agency that enjoys citizenship for purposes of satisfying diversity

jurisdiction. 

B

With respect to the two other plaintiffs, the Department of Mental

Health and the Department of Disabilities and Special Needs, the

issue of whether they are arms of the State requires less discussion.

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Both were created as state agencies and are operated by state employees in furtherance of a state-wide mission. See S.C. Code Ann. §§ 1-

3-10, 1-30-10(A), 44-9-10, 44-9-30, 44-20-210, 44-20-240. Both are

funded by the State and are financially accountable to the State. And

most importantly, see Maryland Stadium Auth., 407 F.3d at 261-63,

any recovery by these two agencies in this case would be returned to

the State’s general fund. See S.C. Code Ann. § 2-65-40(B)(5)(a)

(requiring new revenues, such as litigation recoveries, to be remitted

to State general fund). No discovery, as Hoover claims it should have

received, could change their status, and we agree with the district

court that both agencies are integral arms of the State. See also S.C.

Dep’t of Mental Health v. Beazer E., Inc., No. 3-06-2718-CMC, 2006

WL 3703270, at *2-3 (D.S.C. Dec. 13, 2006) (applying the four factors and finding that the Department of Mental Health is the alter ego

of South Carolina). 

Because none of the plaintiffs is a "citizen" for purposes of diversity jurisdiction under 28 U.S.C. § 1332(a)(1), we affirm the district

court’s order vacating its earlier judgment and dismissing this case for

lack of subject matter jurisdiction.

AFFIRMED

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