Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-11-18067/USCOURTS-ca9-11-18067-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

YOLANDA E. QUIHUIS and

ROBERT QUIHUIS, a married

couple,

Plaintiffs-Appellants,

v.

STATE FARM MUTUAL

AUTOMOBILE INSURANCE

COMPANY, a foreign corporation,

Defendant-Appellee.

No. 11-18067

D.C. No.

4:10-cv-00376-RCC

ORDER

CERTIFYING

QUESTION TO

THE ARIZONA

SUPREME COURT

Filed April 4, 2014

Before: Richard C. Tallman and Sandra S. Ikuta, Circuit

Judges, and Andrew P. Gordon, District Judge.*

Order

* The Honorable Andrew P. Gordon, District Judge for the U.S. District

Court for the District of Nevada, sitting by designation.

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2 QUIHUIS V. STATE FARM

SUMMARY**

Certification to Arizona Supreme Court

The panel certified the following question to the Arizona

Supreme Court:

Whether a default judgment against insureddefendants that was entered pursuant to a

Damron agreement that stipulated facts

determinative of both liability and coverage

has (1) collateral estoppel effect and precludes

litigation of that issue in a subsequent

coverage action against the insurer, as held in

Associated Aviation Underwriters v. Wood, 98

P.3d 572 (Ariz. Ct. App. 2004), or (2) no

preclusive or binding effect, as suggested in

United Servs. Automobile Ass’n v. Morris,

741 P.2d 246 (Ariz. 1987).

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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QUIHUIS V. STATE FARM 3

ORDER

We respectfully request that the Supreme Court of

Arizona exercise its discretion to decide the certified question

set forth in Part II of this order.

I. COUNSEL

Pursuant to Arizona Supreme Court Rule 27(a)(3)(C), the

names and addresses of the counsel appearing in the matter

are:

For Plaintiffs-Appellants:

Jeffrey A. Imig

Haralsan, Miller, Pitt, Feldmen & McAnally, PLC

One South Church Ave., Suite 900

Tucson, AZ 85701

Tel.: 520-792-3836

For Defendant-Appellee:

David M. Bell, Howard L. Andari

David M. Bell & Associates, PLLC

1850 E. Thunderbird Rd.

Phoenix, AZ 85022

Tel.: 602-354-0050

II. QUESTION CERTIFIED

Pursuant to Arizona Supreme Court Rule 27, a panel of

the United States Court of Appeals for the Ninth Circuit,

before which this appeal is pending, requests that the

Supreme Court of Arizona answer the question presented

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4 QUIHUIS V. STATE FARM

below. This court will accept the Arizona Supreme Court’s

decision on this question. Our phrasing of the question is not

intended to restrict the Arizona Supreme Court’s

consideration of the case or formulation of the question. See

Broad v. Mannesmann Anlagenbau AG, 196 F.3d 1075, 1076

(9th Cir. 1999). The question certified is as follows:

Whether a default judgment against insureddefendants that was entered pursuant to a

Damron1agreement that stipulated facts

determinative of both liability and coverage

has (1) collateral estoppel effect and precludes

litigation of that issue in a subsequent

coverage action against the insurer, as held in

Associated Aviation Underwriters v. Wood,

98 P.3d 572 (Ariz. Ct. App. 2004), or (2) no

preclusive or binding effect, as suggested in

United Services Automobile Association v.

Morris, 741 P.2d 246 (Ariz. 1987).

1 A Damron agreement refers to a settlement agreement between an

insured and an injured party in circumstances where the insurer has

declined to defend a suit against the insured. In such an agreement, the

insured agrees to liability for the underlying incident and assigns all rights

against the insurance company to the injured party. The injured party, in

turn, agrees to relieve the insured of all liability and recover only against

the insurance company. See Damron v. Sledge, 460 P.2d 997 (Ariz.

1969). When the insurer defends a suit against the insured under a

reservation of right, such agreements are sometimes referred to as Morris

agreements. See United Servs. Auto. Ass’n v. Morris, 741 P.2d 246, 252

(Ariz. 1987). For simplicity, we will refer to any agreement of this sort as

a Damron agreement.

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QUIHUIS V. STATE FARM 5

III. RELEVANT FACTUAL AND PROCEDURAL

BACKGROUND

Norma Bojorquez (“Norma”) and Carol Cox (“Carol”)

were coworkers in Nogales, Arizona. Norma sought a car for

her daughter, Iliana Bojorquez (“Iliana”), and expressed

interest in Carol’s 1994 Jeep Cherokee (the “Jeep”). By

January 9, 2008, Carol and Norma had executed a written

sales agreement for the Jeep which called for eight monthly

installments totaling $3,000. Carol gave Norma the only set

of keys to the Jeep, and Norma drove the car home. Norma

gave the keys to Iliana so that Iliana could drive the Jeep at

her pleasure. Carol did not transfer the Jeep’s title certificate

to Norma because she thought it necessary to retain the title

certificate as collateral until Norma paid off the Jeep. The

Coxes never retook possession of the Jeep.

The Coxes maintained insurance coverage on the Jeep

through a policy with State Farm (the “Policy”). The Policy

provided liability coverage for bodily injury caused by

accident resulting from the use of cars owned by the Coxes,

including the Jeep. The Policy covered the Coxes and

permissive users of their cars if the use was within the scope

of their consent. The Policy also imposed a duty to defend on

State Farm. The Coxes did not cancel the policy until

January 29, 2008.

On January 22, 2008, Iliana was driving the Jeep when it

collided with a car driven by Yolanda Quihuis. In Arizona

state court, Yolanda Quihuis and her husband, Robert

Quihuis, sued Iliana for negligence and the Coxes for

negligent entrustment. The negligent entrustment claim

relied on the Coxes’ alleged ownership of the Jeep at the time

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6 QUIHUIS V. STATE FARM

of the accident.2 State Farm refused to defend the Coxes

because the Jeep’s ownership had transferred to Norma

before the accident.

On October 29, 2009, the Coxes, the Bojorquezes, the

Quihuises, and Dairyland Insurance entered into a Damron

agreement entitled “Assignment of Rights, Agreement Not to

Execute.”

3

In pertinent part, they stipulated that the Coxes

owned the Jeep at the time of the accident, that Iliana was

incompetent to drive a motor vehicle and her negligence

caused the accident, and that the Coxes should have known

that Iliana was incompetent to drive and therefore should not

have entrusted the Jeep to her. The Coxes and Bojorquezes

agreed to damages in the amount of $275,000. The Coxes

assigned their rights under the Policy to the Quihuises, who

agreed not to execute upon a judgment against the Coxes or

the Bojorquezes. The parties also agreed to request a default

judgment to terminate the case. On December 31, 2009, the

state court entered default judgment in the amount of

$350,000—$325,000 for Yolanda’s injuries and $25,000 for

Robert Quihuis’ loss of consortium.4

2 Under Arizona law, “where one who owns a dangerous

instrumentality, such as an automobile, and loans it to another who, to the

knowledge of the owner, is incompetent to drive such a vehicle, the owner

is guilty of negligen[t] [entrustment] if the driver negligently injures

another.” Powell v. Langford, 119 P.2d 230, 232 (Ariz. 1941).

3 Dairyland Insurance was a party to the Damron agreement, as

Dairyland provided coverage for Iliana’s injuries through a policy with

Iliana’s parents. Dairyland is not a party to this case, however.

4 The discrepancy between the $275,000 in the Damron agreement and

the $350,000 judgment amount is unexplained but irrelevant for this

appeal.

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QUIHUIS V. STATE FARM 7

The Quihuises, standing in the Coxes’ shoes, then brought

a declaratory judgment action against State Farm in Arizona

state court for indemnification and failure to defend. State

Farm removed the case to the United States District Court for

the District of Arizona.

In November 2011, the district court granted State Farm’s

motion for summary judgment. Applying Arizona law, the

district court held that the default judgment did not preclude

State Farm from litigating the question of whether the Coxes

owned the Jeep at the time of the accident for two reasons. 

First, a conflict of interest existed between the Coxes and

State Farm, which denied preclusive effect to the issues in the

default judgment. Specifically, the court held it was in State

Farm’s interest to prove that the Bojorquezes owned the Jeep

at the time of the accident, while the Coxes were best served

to admit ownership in order to obtain an agreement from the

Bojorquezes not to execute any judgment against them. 

Second, the court held that only issues determinative of

liability and damages are preclusive in this context; issues

relating to coverage are open for relitigation. Consequently,

State Farm could litigate the question of coverage, and the

court held that the undisputed facts established that the

Bojorquezes owned the Jeep at the time of the accident as a

matter of law.

The Quihuises timely appealed, contending there was no

conflict of interest between the Coxes and State Farm, and

that Arizona case law establishes that an insurer may not

litigate an issue determinative of coverage if that issue is also

determinative of liability and was stipulated to as part of a

Damron agreement that resulted in entry of a default

judgment. They also contended that ownership of the Jeep

was a genuine issue of material fact.

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8 QUIHUIS V. STATE FARM

Because we agree with the district court that the

undisputed facts establish the Coxes were not the owners of

the Jeep at the time of the accident, the outcome of this

appeal depends on the scope of the default judgment’s

preclusive effect. More specifically, the issue is whether the

stipulation (and the subsequent default judgment) between the

Coxes and Bojorquezes that the Coxes owned the Jeep

prevents State Farm from contesting coverage under the

Policy on the basis that the Coxes did not own the Jeep. We

disagree with the Quihuises that Arizona case law

conclusively decides the preclusion issue.

IV. EXPLANATION OF OUR REQUEST

Arizona cases are unclear on the answer to the specific

question at issue here, namely whether an insurer who

declines to defend its insured can be estopped from raising a

coverage defense in a subsequent action based on a default

judgment entered pursuant to a Damron agreement that

included a stipulation between the third-party plaintiffs and

the insured. Basic principles of collateral estoppel, see

Chaney Bldg. Co. v. City of Tucson, 716 P.2d 28, 30 (Ariz.

1986), and the principles of indemnity law set forth by the

Arizona Supreme Court in Morris, 741 P.2d at 253, indicate

that an insurer may generally raise a coverage defense

notwithstanding the stipulation. On the other hand, the

collateral estoppel principles adopted by the Arizona Court of

Appeals in Wood, indicate that an insurer is estopped from

raising a coverage defense where “the ‘coverage’ issues [the

insurer] seeks to litigate hinge on facts and law bearing

directly on the insureds’ liability, and those issues were

completely subsumed in the consent judgment [albeit not

actually litigated or determined by a trier of fact] in the

underlying tort actions.” 98 P.3d at 585.

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QUIHUIS V. STATE FARM 9

In Morris, the Arizona Supreme Court analyzed the

preclusive effect of a settlement between an insured and a tort

plaintiff. 741 P.2d at 253. The plaintiff was a burglar who

had been shot by an occupant of a home he was burglarizing. 

Id. at 248. The burglar pleaded two theories of liability:

negligence and intentional tort. Id. at 253. The homeowner’s

insurance policy covered negligent, but not intentional, acts. 

Id. at 248. Before trial, the homeowner entered a settlement

agreement with the burglar, in which they stipulated that the

shooter’s actions “were either negligent or intentional.” Id.

at 253. The insurance company then sought to litigate the

issue of whether the harm was intentional and thus outside of

its duty to indemnify. Id. at 253–54. The Arizona Supreme

Court stated that the insurance company could litigate this

issue because the settlement stipulation left the coverage

issue “clearly unresolved.” Id. at 253. Morris then stated

that:

[The burglar] presumably did not demand that

[the defendants] stipulate that their acts were

negligent and thus covered because he knew

that any stipulation of facts essential to

establishing coverage would be worthless. 

See [Farmers Ins. Co. of Ariz. v. Vagnozzi,

675 P.2d 703, 708 (Ariz. 1983)] (insurers are

not even bound by litigated issues as to which

there was a conflict of interest). . . . An

insured’s settlement agreement should not be

used to obtain coverage that the insured did

not purchase.

Id.

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10 QUIHUIS V. STATE FARM

This statement indicates that the Arizona Supreme Court

has adopted the principle of insurance and indemnity law that

an insurer cannot be bound by “any stipulation of facts

essential to establishing coverage.” Id. In enunciating this

rule, Morris relied on a leading treatise of insurance law. See

id.(citing 7C Appleman, Insurance Law and Practice § 4690,

at 235 (1979)). The section of Appleman cited by the

Arizona Supreme Court observed that “[a]lthough the insured

can make such settlements as his interests require, such a

settlement is not conclusive upon the insurer which still has

a right to be heard on the question of policy coverage or the

possibility of fraud.” Appleman, supra, § 4690, at 235. 

Morris noted the inherent conflict of interest in Damron

agreements: “[t]o relieve himself of personal exposure, the

insured may be persuaded to enter into almost any type of

agreement or stipulation by which the claimant hopes to bind

the insurer by judgment and findings of fact.” Morris,

741 P.2d at 252–53. Accordingly, Morris concluded that

“any stipulation of facts essential to establishing coverage

would be worthless.” Id. at 253. Because the parties in

Morris did not stipulate whether the insured’s acts were

negligent or intentional, however, this statement might be

considered dicta. Nevertheless, Morris recited a basic tenet

of indemnity law: an insured cannot manufacture coverage by

making admissions in a settlement agreement, given the

conflict between the insured and insurer that arises once the

insurer refuses to defend. 741 P.2d at 251, 253. To hold

otherwise would allow an insured “to obtain coverage that the

insured did not purchase.” Id. at 253.

Morris did not cast doubt on principles of collateral

estoppel, which may preclude an insurer who refuses to

defend a suit tendered by an insured from contesting issues

that were actually litigated in the underlying action. 

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QUIHUIS V. STATE FARM 11

Restatement (Second) of Judgments § 58, adopted by the

Arizona Supreme Court in Vagnozzi, provides that when an

insured is sued by an injured party, “a judgment for the

injured person” estops an indemnitor who had notice and an

opportunity to assume the defense of the claim from

“disputing the existence and extent of the indemnitee’s

liability to the injured person” and “from relitigating those

issues determined in the action against the indemnitee as to

which there was no conflict of interest between the

indemnitor and the indemnitee.” 675 P.2d at 708. A conflict

“exists when the injured person’s claim against the [insured]

is such that it could be sustained on different grounds, one of

which is within the [insurer’s] obligation to indemnify and

another of which is not.” Id.

These principles are consistent with Arizona’s collateral

estoppel principles. As explained by the court in Chaney,

“[u]nder the doctrine of res judicata, a judgment ‘on the

merits’ in a prior suit involving the same parties or their

privies bars a second suit based on the same cause of action,”

while “[c]ollateral estoppel or issue preclusion is applicable

when the issue or fact to be litigated was actually litigated in

a previous suit, a final judgment was entered, and the party

against whom the doctrine is to be invoked had a full

opportunity to litigate the matter and actually did litigate it,

provided such issue or fact was essential to the prior

judgment.” 716 P.2d at 30. Thus, where the underlying suit

is litigated to judgment, the insurer can be bound by those

factual determinations because of its privity with the insured. 

See Vagnozzi, 675 P.2d at 706. However, “in the case of a

judgment entered by confession, consent or default, none of

the issues is actually litigated,” and collateral estoppel does

not apply. Chaney, 716 P.2d at 30.

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12 QUIHUIS V. STATE FARM

The Arizona Court of Appeals’ holding in Wood can be

read to either fill a gap left unresolved by the Arizona

Supreme Court in Morris or to conflict with Morris’s

admonition that settlement agreements should not be used to

manufacture coverage that the insured did not purchase,

Morris, 741 P.2d at 253, and Chaney’s principle that default

judgments are not accorded collateral estoppel effect,

716 P.2d at 30. In Wood, the Arizona Court of Appeals

applied the collateral estoppel rule enunciated in Vagnozzi to

the settlement agreement context. Wood involved a mass-tort

litigation in which a number of plaintiffs sued the City of

Tucson and its Airport Authority for environmental harms. 

98 P.3d at 578–79. The City eventually entered into a

Damron agreement with plaintiffs. Id. at 579. In the

agreement, the City stipulated that it was liable for $35

million in damages for contamination in the groundwater, and

stipulated as to the facts necessary to establish its tort

liability. Those facts were also determinative of coverage. In

exchange, the plaintiffs agreed not to execute on the City and

to pursue the insurance company instead. Id. The insurance

companies argued in a separate declaratory judgment action

that under principles of insurance and indemnity law, the

facts contained in the stipulation were not binding on them as

to coverage. Id. at 580, 581–82.

Wood rejected that argument and invoked collateral

estoppel to preclude the insurers from relitigating facts

necessary to both liability and coverage. Id. at 584–85. In so

doing, the Arizona Court of Appeals relied on Vagnozzi and

principles of collateral estoppel, even though the factual

stipulations in the Damron agreement were not “actually

litigated” as that term is used in the collateral estoppel

context. Wood understood Morristo permit the “suspension”

of the “‘actually litigated’ element of collateral estoppel.” 

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QUIHUIS V. STATE FARM 13

Wood, 98 P.3d at 589. Wood concluded that even though

stipulations in a settlement are not “actually litigated” as

required by Arizona collateral estoppel principles, in the

unique context of Damron agreements, a consent judgment’s

implicit adoption of stipulations in a settlement between an

insured and a plaintiff collaterally estops the insurer from

contesting coverage where the facts essential to liability and

coverage overlap. Id. at 585, 588–89.

Although Morris recognized the conflict of interest

inherent in Damron agreements, 741 P.2d at 252–53, Wood

held that the only conflict of interest that defeats the

application of collateral estoppel in this context is where “the

injured person’s claim against the [insured] is such that it

could be sustained on different grounds, one of which is

within the [insurer’s] obligation to indemnify and another of

which is not,” 98 P.3d at 586 (quoting Restatement (Second)

of Judgments § 58(2)). Absent this specific conflict,

collateral estoppel will apply and prevent the insurer from

litigating any factual issue that would have been essential to

liability in the underlying case, even if that issue is also

essential to coverage. Wood, 98 P.3d at 585.

Wood’s ruling on the collateral estoppel effect of

stipulated admissions appears to conflict with the statement

in Morris that “any stipulation of facts essential to

establishing coverage would be worthless” and “[a]n

insured’s settlement agreement should not be used to obtain

coverage that the insured did not purchase.” 741 P.2d at 253. 

Recognizing thisinconsistency, Wood distinguished scenarios

in which “the unresolved coverage issue . . . [is] related to the

nature or characterization of the insureds’ conduct and not to

other issues of fault, causation or damages,” from those

where litigating coverage inherently requires the relitigation

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14 QUIHUIS V. STATE FARM

of issues necessary to liability. Wood, 98 P.3d at 584–85. 

Thus, where coverage issues “hinge on facts and law bearing

directly on the insureds’ liability, and those issues were

completely subsumed in the consent judgment,” those issues

have preclusive effect. Id. at 585.

Our dilemma here is that the outcome of the case before

us depends on whether we follow Morris’s statements

regarding Damron agreements and general principles of

collateral estoppel, or instead look to Wood’s more narrow

holding. On the one hand, Morris observed that an insured’s

stipulations in a settlement agreement regarding facts

essential to coverage should not bind insurance companies. 

741 P.2d at 253. If we follow Morris, State Farm would not

be bound by the stipulation that the Coxes owned the Jeep at

the time of the accident, and the Jeep’s ownership could be

litigated.

Wood, on the other hand, appears to accord collateral

estoppel effect to the stipulation in the Damron

agreement—that the Coxes owned the Jeep at the time of the

accident—even though that issue was never litigated. The

issue of the Jeep’s ownership was an essential element of

both the Quihuises’ negligent entrustment claim against the

Coxes and the question of coverage. Because the Quihuises

claimed only that the Coxes were negligent, and did not

advance a claim of intentional wrongdoing, the Coxes did not

have a conflict of interest with their insurer of the type set

forth in Vagnozzi and the Restatement § 58(2). Therefore, if

we were to apply Wood, we would have to conclude that State

Farm is bound by the stipulation that the Coxes owned the

Jeep.

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QUIHUIS V. STATE FARM 15

We are unsure whether Wood should be interpreted

narrowly and confined to its facts in light of Morris and

general Arizona collateral estoppel law, or whether it

established a rule of general applicability for situations where

there is overlap of factual issues determinative of both

liability and coverage. We are unaware of any statutes or

cases that resolve this tension between Morris and Wood.

Based on the uncertainty of Arizona law in this area, we

believe it is appropriate to defer to the Arizona Supreme

Court on this important issue of state law: whether a default

judgment entered pursuant to a settlement agreement that

included the stipulation of a factual issue that is determinative

of both liability and coverage in a tort liability action has a

collateral estoppel effect, precluding litigation of that issue in

a subsequent coverage action. Ariz. Rev. Stat. § 12-1861.

This legal issue is “determinative of the cause” in this

appeal because State Farm’s ability to assert transfer of

ownership as a coverage defense depends on whether the

factual issue of the Jeep’s ownership may be litigated. Id. If

State Farm is precluded from asserting that the Bojorquezes

owned the car at the time of the accident, the Quihuises will

win their appeal because State Farm did not raise any other

coverage defenses before the trial court. See Kimes v. Stone,

84 F.3d 1121, 1126 (9th Cir. 1996) (with narrow exceptions,

new issues may not be raised on appeal). If the default

judgment is not preclusive as to the Jeep’s ownership, State

Farm will prevail because the district court correctly

determined both that there is no genuine dispute of fact as to

the Jeep’s ownership at the time of the accident and that the

Coxes owned the Jeep as a matter of law. Fed. R. Civ. P.

56(a).

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16 QUIHUIS V. STATE FARM

If clarified definitivelyby the Arizona Supreme Court, the

answer to this unsettled question of law presented by the

Quihuises’ appeal will have far-reaching effects on

automobile insurers and policyholders in Arizona. We are

reluctant to create uncertainty in this area of state law by

answering this question ourselves in the first instance.

V. ACCOMPANYING MATERIALS

If the Arizona Supreme Court accepts review of the

certified question, the Quihuises and State Farm may file

briefs in accord with Arizona Supreme Court Rule 27(d).

The Clerk of Court is herebyordered to transmit forthwith

to the Arizona Supreme Court, under official seal of the

United States Court of Appeals for the Ninth Circuit, a copy

of this order and all briefs and excerpts of record pursuant to

Arizona Revised Statute § 12-1861 and Arizona Supreme

Court Rule 27(a).

Further proceedings in this court are stayed pending the

Arizona Supreme Court’s decision whether it will accept

review and, if so, receipt of the answer to the certified

question. The case is withdrawn from submission until

further order from this court. The panel will resume control

and jurisdiction upon receipt of an answer to the certified

question or upon the Arizona Supreme Court’s decision to

decline to answer the certified question. When the Arizona

Supreme Court decides whether or not to accept the certified

question, the parties shall file a joint status report informing

this court of the decision. If the Arizona Supreme Court

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QUIHUIS V. STATE FARM 17

accepts the certified question, the parties shall file a joint

status report informing this court when the Arizona Supreme

Court issues its answer.

It is so ORDERED.

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