Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_06-cv-01493/USCOURTS-caed-1_06-cv-01493-1/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1446 Breach of Contract- Insurance

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1

IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF CALIFORNIA

JASVIRO MUNDI, as successor )

in interest to Harnam Singh )

Mundi, )

)

)

)

)

Plaintiff, )

)

vs. )

)

)

UNION SECURITY LIFE INSURANCE )

COMPANY, et al., )

)

)

Defendant. )

)

)

No. CV-F-06-1493 OWW/TAG

ORDER DENYING DEFENDANT'S

MOTION TO COMPEL ARBITRATION

(Doc. 22)

Before the Court is Defendant Union Security Life Insurance

Company's (USLIC) motion to compel arbitration and to stay all

proceedings in this case during the pendency of arbitration.

A. BACKGROUND.

1. ALLEGATIONS IN PLAINTIFF’S COMPLAINT.

Plaintiff, Jasviro Mundi, as successor in interest to Harnam

Singh Mundi, filed a Complaint for Breach of Contract and Breach

of the Implied Covenant of Good Faith and Fair Dealing on

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September 11, 2006 in the Fresno County Superior Court. The

action was removed to this Court based on diversity of

citizenship on October 4, 2006.

The Complaint alleges that Plaintiff is the widow of Harnam

Singh Mundi. The First Cause of Action for breach of contract

alleges in pertinent part:

7. On or about May 26, 2004, Decedent

obtained a home equity line of credit with

Wells Fargo Bank, N.A. ... The line of credit

was secured by the family home of Decedent

and Mrs. Mundi, the plaintiff ... At that

time, Decedent was also offered life

insurance designed to pay off his line of

credit up to a maximum amount of $50,000.00 

Decedent purchased that insurance.

8. On or about May 26, 2004, in

consideration of the payment of an [sic]

monthly premium made by Decedent, defendant,

by its duly authorized agents, executed and

delivered to plaintiff in Fresno ..., its

policy of insurance ... wherein defendant

insured plaintiff's life in the sum of up to

$50,000.00 from May 26, 2004.

9. The term was extended on a monthly basis

by payment of the monthly premiums, and at

all times herein mentioned, the policy was,

and is, in full force and effect.

10. The policy, among other things, provides

that upon Decedent's death, a benefit would

be paid in the amount outstanding on

Decedent's Home Equity Line of Credit up to a

maximum benefit of $50,000.00.

...

13. On September 12, 2005, Decedent was

murdered.

14. On that date the amount outstanding on

his line of credit with Wells Fargo exceeded

$50,000.00. The amount of credit outstanding

still exceeds $50,000.00.

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15. On September 27, 2005, Plaintiff

initiated a claim with Defendant on the

policy and requested that the policy make

payment on the line of credit. Defendant

failed and refused, and continues to fail and

refuse to make payment on the policy, in

whole or in part.

The Second Cause of Action for breach of the implied covenant of

good faith and fair dealing alleges in pertinent part:

18. Defendants breached the implied covenant

... in connection with the insurance policy

by unreasonably failing to pay under the

policy without proper cause. Defendants

failed to properly and adequately investigate

plaintiff’s claim and unreasonably denied

Plaintiff’s claim based on a [sic]

unjustified and invalid position that

Decedent had materially and knowingly

misrepresented his health on the application

and that said alleged misrepresentation

entitled Defendants to rescind the policy. 

In addition, Decedent was effectively not

asked the application question that defendant

seeks to rely upon. Decedent, whose grasp of

the English language was poor, at best (which

defendant’s agents knew), obviously did not

and could not appreciate the question in the

manner asserted by Defendants, nor would an

ordinary lay person, English speaker or not,

understand the question in the manner

asserted by Defendants. Further, Defendants

actually set up an impossible situation for

Decedent insofar as Defendants asked

fundamentally personal and private questions

as part of a loan transaction where his

business partner was both present and given

access to the questions without any provision

for privacy whatsoever.

19. Defendants represented and Decedent

believed that he had appropriately answered

all questions necessary and disclosed all

issues necessary to validly obtain and

receive benefits under the insurance policy

in the event of his death. Defendants’

above-stated representations were false and

fraudulent in that defendant never intended

to pay out Decedent’s valid claims under the

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policy and Defendant did not investigate or

inquire about Decedent’s health condition at

all or in a manner which Decedent could have

reasonably expected to understand. At the

time defendant entered into the insurance

contract with Decedent, defendant knew and

willfully concealed the above facts, all for

the purpose of defrauding and deceiving

plaintiff [sic] and inducing him to purchase

the policy.

20. Decedent, at the time the representation

was made, believed it to be true and, in

reliance on it, was induced to, and did,

enter into the insurance contract with

defendant; had Decedent known the true facts,

he would not have purchased the policy. 

21. At all times herein material, defendant

knew that Decedent’s death was insured under

the policy and that the beneficiary should

have been paid under the policy.

22. Notwithstanding defendant’s knowledge of

its obligation, Defendant failed and refused

to pay under the policy despite Plaintiff’s

demand that it do so.

23. For the sole purposes [sic] of

compelling plaintiff to fail to pursue

payment under the policy or, if she persisted

in seeking payment, to incur substantial

detriment, delay, and additional expenditures

in pursuing enforcement of his [sic] claim,

all during which time defendant would retain

use of the money, defendant, in breach of its

covenant of good faith and fair dealing,

intentionally, maliciously, and oppressively

refused and failed to pay the insured amount

of the balance due on the line of credit. 

24. As a direct and proximate cause of

defendant’s wrongful conduct as herein

alleged, plaintiff was compelled to incur

costs, make payments on the Wells Fargo loan

in an amount according to proof, and to

retain an attorney to collect under the

policy.

2. ARBITRATION AGREEMENT.

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An “EquityLine with FlexAbility (SM) Agreement and

Disclosure Statement” (hereafter referred to as the EquityLine

Agreement) was entered into by Wells Fargo Bank, Gurdip S. Gill,

and Harnum S. Mundi on May 26, 2004. Section 25 of the

EquityLine Agreement provided:

SECTION 25: ARBITRATION

RESOLVING DISPUTES - ARBITRATION

... [I]f the Bank and I are not able to

resolve our differences informally, I agree

that any dispute between me and the Bank,

regardless of when it arises or arose, will

be settled using the following procedures.

I UNDERSTAND AND AGREE THAT THE BANK AND I

ARE WAIVING THE RIGHT TO JURY TRIAL BEFORE A

JUDGE IN A PUBLIC COURT ....

DISPUTES

A dispute is any unresolved disagreement

between the Bank and me that relates in any

way to accounts, loans, services or

agreements subject to this Arbitration

provision. It includes any claims or

controversy of any kind, which arise out of

or are in any way related to these accounts,

loans, services or agreements. It includes

claims based on broken promises or contracts,

tort (injury caused by negligent or

intentional conduct), breach of fiduciary

duty or other wrongful actions. It also

includes statutory, common law and equitable

claim. [sic] A dispute also includes any

disagreement about the meaning of this

Arbitration Section and whether a

disagreement is a ‘dispute’ subject to

binding arbitration as provided for in this

Arbitration Section. No dispute may be

joined in an arbitration with a dispute of

any other person or arbitrated on a class

action basis. Furthermore, I agree that any

arbitration I have with the Bank shall not be

considered with any other arbitration and

shall not be arbitrated on behalf of others

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with the consent of both me and the Bank.

B. MOTION TO COMPEL ARBITRATION.

USLIC moves to compel arbitration of Plaintiff’s claims

against it in this action pursuant to the arbitration provisions

in the EquityLine Agreement between Wells Fargo, Gill and

Decedent. USLIC contends that Plaintiff’s allegations “are made

against USLIC, an insurer that provided group coverage to Wells

insuring credit account debts on its loans through individual

certificates of life coverage” and, therefore, Plaintiff should

be compelled to submit all of her claims to arbitration. USLIC

refers to a copy of “Wells Credit Insurance Borrower Disclosure

and Authorization” as being attached as Exhibit A to its motion. 

However, no such exhibit is attached.

Plaintiff is signatory to the EquityLine Agreement as a coborrower. USLIC acknowledges that it is not a signatory to the

EquityLine Agreement, but contends that it may enforce its

arbitration provisions because Plaintiff must rely on the

EquityLine Agreement in order to assert her claims against USLIC.

“Although arbitration is a contractual right that is

generally predicated on an express decision to waive the right to

trial in a judicial forum, this court has held that the lack of a

written arbitration agreement is not an impediment to

arbitration.” Sunkist Soft Drinks, Inc. v. Sunkist Growers,

Inc., 10 F.3d 753, 756-757 (11 Cir.1993). As explained in th

Cromer v. Micor, Inc., 436 F.3d 1098, 1101 (9 Cir.2006): th

... Equitable estoppel ‘precludes a party

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from claiming the benefit of a contract while

simultaneously attempting to avoid the

burdens that contract imposes.’ ... In the

arbitration context, this principle has

generated two lines of cases.

Under the first of these lines,

nonsignatories have been held to arbitration

clauses where the nonsignatory ‘knowingly

exploits the agreement containing the

arbitration clause despite having never

signed the agreement.’ ... Under the second

line of cases, signatories have been required

to arbitrate claims brought by nonsignatories

‘at the nonsignatory’s insistence because of

the close relationship between the entities

involved.’ 

In MS Dealer Service Corp. v. Franklin, 177 F.3d 942, 947

(11 Cir.1999), the Eleventh Circuit held: th

[E]quitable estoppel applies when the

signatory to a written agreement containing

an arbitration clause ‘must rely on the terms

of the written agreement in asserting [its]

claims against the nonsignatory ... When each

of a signatory’s claims against a

nonsignatory ‘makes reference to’ or

‘presumes the existence of’ the written

agreement, the signatory’s claims ‘arise[]

out of and relate[] directly to the [written

agreement,’ and arbitration is appropriate.

USLIC argues that the arbitration provisions of the

EquityLine Agreement should be enforced under these principles

because the substantive allegations of the Complaint rely on the

existence of the line of credit, e.g., Paragraphs 7,8, 14-16, 18,

23-24, and because the alleged failure to pay the line of credit

debt is the basis for the claim of liability. USLIC contends:

Here, Plaintiff’s claims are inextricably

bound to the credit line, from the inception

of the insurance through the processing of

the claim for benefits. The group policy was

issued to the signatory company, Wells. 

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Plaintiff acknowledges the intertwining of

the insurance contract with the contract for

the line of credit. See Compl., ¶ 7 (‘at the

same time’ Mr. Mundi obtained the line of

credit, he ‘was also offered life insurance

designed to pay off his line of

credit’)(emphasis added). Plaintiff alleges

that USLIC failed and refused to make a

payment on the certificate of insurance in

the amount of Plaintiff’s decedent’s line of

credit. Compl, ¶¶ 15-16. The amount of the

policy benefits is determined that the terms

of the credit line. The sole reason for the

credit life insurance is to pay credit line

debt in the event of death. 

These facts, USLIC argue, clearly meet the applicable federal

standard and establish that Plaintiff’s claims are intertwined

with the EquityLine Agreement.

Plaintiff acknowledges that the insurance policy states that

the amount of coverage is based on the amount outstanding on the

line of credit at the time a claim arises. However, Plaintiff

does not concede that USLIC’s obligation arises out of and is

related to the EquityLine Agreement between Decedent and Wells

Fargo:

In the instant action, there can be no real

claim that the terms of the Wells Fargo

Agreement must be relied upon to assert

Plaintiff’s claims. There is a difference

between relying on the existence of an

agreement and looking to its terms to resolve

a dispute over what duties are owed. In the

instant action, the relevance of the Wells

Fargo Agreement is simply its existence -

i.e. to establish that a line of credit

existed and what the amount owing was as of

the date of the decedent’s death. 

Plaintiff contends that, in each of the cases where a signatory

has been compelled to arbitrate with a non-signatory, the actual

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terms of the agreement containing the arbitration clause were at

issue.

In Boucher v. Alliance Title Company, Inc., 127 Cal.App.4th

262 (2005), Plaintiff entered into a written employment agreement

with Financial by which Plaintiff was entitled to a specified

incentive compensation. The employment agreement could not be

modified, waived or discharged except in a writing signed by

plaintiff and Financial. Financial transferred all of its

Southern California operations and assets to Defendant, alleged

to be a wholly separate and distinct corporate entity. Plaintiff

alleged that he was notified that he would be working for

Defendant and that he was obligated to allow unilateral

modifications by Defendant to the employment agreement, including

a modified and lesser incentive compensation package. Defendant

refused to honor Plaintiff’s employment agreement with Financial

and Plaintiff refused to enter into a new agreement with

Defendant. Thereafter, Plaintiff was terminated. Plaintiff then

sued Financial and Defendant, alleging numerous causes of action

arising out of the dispute. Financial and Defendant moved to

compel arbitration, relying on the arbitration provision in the

employment agreement between Plaintiff and Financial. The trial

court compelled arbitration as to Financial but denied

arbitration as to Defendant. In reversing, the Court of Appeals

held in pertinent part:

To summarize, under both federal and

California decisional authority, a

nonsignatory defendant may invoke an

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arbitration clause to compel a signatory

plaintiff to arbitrate its claims when the

causes of action against the nonsignatory are

‘intimately founded in and intertwined’ with

the underlying contractual obligations ... By

relying on contract terms in a claim against

a nonsignatory defendant, even if not

exclusively, a plaintiff may be equitably

estopped from repudiating the arbitration

clause contained in that agreement ... The

focus is on the nature of the claims asserted

by the plaintiff against the nonsignatory

defendant ... That the claims are cast in

tort rather than contract does not avoid the

arbitration clause ... The fundamental point

is that a party may not make use of a

contract containing an arbitration clause and

then attempt to avoid that duty to arbitrate

by defining the forum in which the dispute

will be resolved ....

Plaintiff’s claims against defendant rely on,

make reference to, and presume the existence

of the June 5, 2003, employment agreement

with Financial. In his first four of six

causes of action, plaintiff alleges:

defendant failed to pay him accrued wages,

including incentive compensation, due under

the terms of the June 5, 2003, employment

agreement and the Labor Code; defendant’s

failure to pay plaintiff accrued wages and

incentive compensation due under the June 5,

2003, employment agreement entitled him to

penalties under the Labor Code; defendant

breached the June 5, 2003, employment

contract causing plaintiff damages in the

form of lost earnings and other employment

benefits due under that agreement; defendant

breached the covenant of good faith and fair

dealing implied in the June 5, 2003,

employment agreement; and the failure to pay

wages due, requiring plaintiff to reject the

June 5, 2003, employment contract, and asking

plaintiff to disclose confidential

information in violation of that contract,

amounted to unlawful, unfair, or fraudulent

business acts. Each of the foregoing causes

of action is brought against both defendant

and Financial. Each of the foregoing claims

makes reference to and relies on the June 5,

2003, employment agreement. In addition,

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plaintiff alleges defendant intentionally or

negligently disrupted plaintiff’s performance

of the June 5, 2003, employment agreement. 

Further, plaintiff claims that defendant, by

breaching the June 5, 2003, contract,

intentionally interfered with his prospective

economically advantageous relationships with

clients. These claims all make reference to

and presume the existence of the validity of

the June 5, 2003, employment contract. In

addition, Financial and defendant were both

owned, at least in part, by the same entity,

Mercury. Under these circumstances,

plaintiff’s claims against defendant are

intimately founded in and intertwined with

the June 5, 2003, employment agreement;

therefore, he is equitably estopped from

avoiding arbitration of his causes of action

against defendant.

124 Cal.App.4th at 271-273.

In Grigson v. Creative Artists Agency, LLC, 210 F.3d 524

(5 Cir.), cert. denied, 531 U.S. 1013 (2000), movie producers th

and the trustee for the movie brought suit against an actor and

his agent, alleging that defendants had tortiously interfered

with a distribution agreement by pressuring the distributor to

limit the release of the movie. The Eleventh Circuit upheld the

district court’s granting of a motion to compel arbitration,

holding in pertinent part:

The district court did not abuse its

discretion by concluding ‘that Plaintiffs’

claims are so intertwined with and dependent

upon the Distribution Agreement that the

arbitration agreement within the Distribution

Agreement should be given effect’. This

conclusion is compelled by comparing the

complaint (the operative facts for purposes

of the motion to compel arbitration) with the

distribution agreement (an exhibit to the

complaint). This is quickly and amply

demonstrated with but a few examples.

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The distribution agreement is not the only

contract for which tortious interference is

claimed. Creative Artists is also charged

with such interference with McConaughey’s

actor’s contract for the movie (another

exhibit to the complaint); he is charged with

breach of that contract. Among other things,

he was required by that actor’s contract to

allow use of ‘his name and photographs ...

for commercial and advertising purposes.’

The complaint uses that specific requirement

in the actor’s contract in describing how,

for the theatrical release (as defined in the

distribution agreement) mandated by the

distribution agreement, TriStar

had planned to distribute Chainsaw

movie posters prominently featuring

the likeness and name of

McConaughey and, in fact, had

printed posters reflecting this

plan. Creative Artists, acting for

McConaughey, contacted Columbia

Tristar and successfully pressured

it to retreat from its plan for the

posters on the grounds that

McConaughey’s fame should not be

exploited in such a manner in

connection with the Chainsaw movie.

This is but part of the charged interference. 

In addition, the complaint alleges that the

theatrical release was delayed initially to

take advantage of Zellweger’s post-movie

success in another movie, also released by

TriStar; that the plan changed to take

advantage of both actors’ success; that

Creative Artists, on behalf of McConaughey, ‘

pressured’ TriStar to not make a major

release of the movie and, instead, to make

only a limited one, to Appellants’ great

financial detriment; and that, because of

Defendants’ actions, ‘TriStar failed to

exercise its good faith judgment in

promoting, exploiting, and distributing’ the

movie ....

As is obvious from the foregoing, and as the

district court concluded, these allegations

and claims are intertwined with, and

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dependent upon, the distribution agreement. 

In addition to Appellants relying on the

terms of the agreement in asserting their

claims, TriStar and Defendants are charged

with interdependent and concerted misconduct.

The distribution agreement, in describing the

movie, lists Zellweger and two others as

‘starring’ in it; McConaughey is not so

listed. All rights to the movie are given to

TriStar; and, subject to it making a required

minimum expenditure in connection with the

theatrical release, TriStar has ‘absolute

discretion concerning the exploitation of the

[movie] in any and all media.’ ...

In that provision, which obviously lies at

the heart of this action, Appellants

agree[d] that the good faith

judgment of [TriStar] regarding any

matter affecting the exploitation

of the [movie] shall be binding and

conclusive upon [Appellants]

([TriStar] shall make the

determination, within its sole

discretion, whether or not to

release the [movie] in a given

media and/or in a given territory).

... ‘Territory’ includes, with some

exceptions, ‘[t]he entire universe’, while

‘media’ includes, but is not limited to,

movie theaters.

And, as noted, the distribution agreement’s

arbitration clause pertains, inter alia, to

the ‘interpretation of [the distribution]

agreement, ... the performance by the Parties

of their respective obligations [there]under,

and ... all other causes of action (whether

sounding in contract, or in tort) arising out

of or relating to this Agreement.’ ...

In short, the scope of the distribution, the

‘discretion’, both ‘absolute’ and ‘sole’,

vested in TriStar, and its ‘good faith

judgment’ are at the center of this dispute. 

Among other things, TriStar is charged with,

as a result of the claimed interference

(‘pressure’), not using its ‘good faith

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judgment’. Although not sued (an obvious

attempt to make an end-run around the

arbitration clause ...), TriStar nevertheless

will be involved extensively - in this

dispute, including whether it performed

properly under the distribution agreement.

As stated, the foregoing are but a few

examples of the intertwining of the claims

with the distribution agreement, including

the claimed concerted actions by Defendants

(non-signatories), with TriStar, a signatory. 

How possible damages might be computed, in

the light of the detailed ‘accounting’

provisions of the agreement, is but another

example.

210 F.3d at 528-530.

In re Currency Conversion Fee Antitrust Litigation, 265

F.Supp.2d 385 (S.D.N.Y.2003) involved class actions brought by

credit card holders challenging alleged foreign currency

conversion policies by credit card networks and their member

banks. The District Court held that the cardholders were

estopped from avoiding arbitration with non-signatories of the

cardholder agreements:

There are several principled grounds for

finding estoppel in this action. First, the

alleged wrongs by Bank One and BOA Corp. are

‘intimately founded in and intertwined with’

the underlying agreement between First USA

and BOA and their respective cardholders. 

Bank One and BOA Corp. are being sued for

their respective subsidiaries’ TILA

violations and conspiracy to fix the prices

of currency conversion fees. Both of these

claims are derivative in nature in that the

alleged wrongdoers are First USA and BOA, and

not Bank One and BOA Corp. Further,

plaintiffs’ claim against Bank One and BOA

Corp. arise from the cardholder agreements. 

Specifically, it as plaintiffs’ credit cards,

which are the subject matter of the

cardholder agreements, that were allegedly

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unlawfully charged fixed conversion fees. 

Also, the documents provided in connection

with plaintiffs’ credit card accounts were

allegedly violative of the disclosure

obligations in TILA. Effectively, the claims

against Bank One and BOA Corp. are the same

as those lodged against First USA and BOA,

respectively. As such, they arise under the

‘subject matter’ of the agreement ....

Plaintiffs insist that they are not suing the

parent companies merely based on their

subsidiaries’ actions, but that they also

allege that the parent companies were active

participants in the conspiracy. This

contention, however, does not change the

outcome of the analysis. Any participation

by Bank One and BOA Corp. in the alleged

conspiracy necessarily revolves around their

respective subsidiaries’ issuance of credit

cards. Those credit cards and their

respective accounts are at the heart of the

underlying contract containing the

arbitration agreement. Therefore, this Court

finds that even the allegations that seek to

hold Bank One and BOA Corp. liable for their

own conduct arise under the ‘subject matter’

of the underlying agreement between

plaintiffs and First USA and BOA.

Moreover, there is a close relationship

between First USA and Bank One, and between

BOA and BOA Corp. Bank One is the parent

corporation of its wholly-owned subsidiary

First USA, and BOA Corp. is the parent

corporation of its wholly-owned subsidiary

BOA. This more than satisfies the ‘close

relationship’ factor. ....

265 F.Supp.2d at 402-403.

In Choctaw Generation Ltd. v. American Home Assur., 271 F.3d

403 (2 Cir.2001), Bechtel was building a power-generation nd

facility for Choctaw. Completion of the facility was delayed. 

Bechtel claimed the delay was due to force majeure, Choctaw

disagreed and claimed liquidated damages in an ongoing

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arbitration proceeding with Bechtel pursuant to the arbitration

clause of the construction contract. To obtain payment of the

liquidated damages pending the outcome of the arbitration,

Choctaw drew down in full a $33 million letter of credit that the

construction contract required Bechtel to post. In the case

before the Second Circuit, Choctaw demanded that American Home,

as surety, replenish the letter of credit as necessary until the

full $81 million is drawn down to fund that accruing liquidated

damages. When the surety refused Choctaw’s demand, Choctaw

commenced an action in federal court for an injunction to compel

serial replenishment of the letter of credit. The Second Circuit

held that Choctaw’s dispute with the surety was subject to

arbitration pursuant to the arbitration clause in the

construction contract:

The controversy between Choctaw and American

Home under the Bond could hardly be more

closely bound to the dispute now in

arbitration between Choctaw and Bechtel under

the Construction Contract. The surety

contract incorporates by reference the

underlying Construction Contract. And the

present dispute concerns the duty to

replenish a letter of credit maintained under

the Construction Contract, and requires a

ruling as to whether that duty is independent

of certain others in the context of the

Construction Contract as a whole. 

...

[T]he controversy presented on this appeal is

linked textually to the Construction

Contract, and its merits are bound up with

the dispute now being arbitrated between

Choctaw and Bechtel. ....

271 F.3d at 406-407.

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In MS Dealer Service Corp. v. Franklin, supra, 177 F.3d 942,

an auto buyer, Franklin, brought a state court action against an

auto dealership, Jim Burke Motors, and a service corporation, MS

Dealer Service Corp., alleging that they conspired in a

fraudulent scheme to defraud the buyer by charging an excessive

amount for a service contract. MS Dealer filed a petition in

federal court to compel Franklin to arbitrate her claims pursuant

to the arbitration clause in the buyer order executed by Franklin

and Jim Burke Motors. In ruling that Franklin was compelled to

arbitrate her claims against MS Dealer, the Eleventh Circuit

ruled:

... Each of Franklin’s claims against MS

Dealer makes reference to and presumes the

existence of the $990.00 charge contained in

the Retail Installment Contract, which was

incorporated by reference into the Buyers

Order. Although Franklin does not allege

that the service contract has been violated

or breached in any way, each of her fraud and

conspiracy claims depends entirely upon her

contractual obligation to pay $990.00 for the

service contract.

177 F.3d at 947-948. 

In Letizia v. Prudential Bache Securities, Inc., 802 F.2d

1185 (9 Cir.1986), an investor brought an action Prudential th

Bache and its employees, alleging fraud and violation of federal

securities laws. The District Court granted a motion to compel

arbitration brought by defendants. On appeal, Letizia argued

that, even if Prudential Bache may submit the dispute to

arbitration pursuant to the arbitration provision in the Customer

Agreement, the individual defendants, who were not signatories to

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the Customer Agreement, may not. The Ninth Circuit disagreed,

holding:

... All of the individual defendants’

allegedly wrongful acts related to their

handling of Letizia’s securities account. 

Bache has clearly indicated its intention to

protect its employees through its Customer

Agreement. We conclude that the arbitration

clause is applicable to Kwee and Selbst.

802 F.2d at 1188.

Plaintiff argues that, contrary to the cases described

above, the causes of action against USLIC are not intimately

related to and founded upon the EquityLine Agreement with Wells

Fargo: “[T]he terms of that agreement have nothing to do with the

rights, duties or obligations sued upon. The only connection to

Wells Fargo Agreement is the amount outstanding on the line of

credit was to provide the valuation of the payout due on the

insurance policy.” 

USLIC replies that Plaintiff’s position does not accurately

reflect the intertwined nature of the USLIC insurance and the

EquityLine Agreement:

Plaintiff alleges that USLIC breached duties

or obligations that arise out of and relate

directly to her decedent’s loan agreement -

the duty to pay back the money loaned. 

Without having entered into the Wells

agreement, Plaintiff’s decedent would not

have enrolled in the credit insurance program

underwritten by USLIC. Plaintiff alleges

that USLIC failed to timely and properly make

a payment in the amount of the outstanding

balance on the loan that she was required to

pay under the Wells agreement. Plaintiff,

therefore, must rely on the existence and

terms of the Wells agreement (and her

obligations thereunder) in order to assert

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USLIC also refers to an unreported decision from the Central 1

District of California, Capolongo v. Assurant Solutions, No. CV-04-

8385 R (Ssx). Attached to the reply brief is a copy of Judge

Real’s Order granting a motion to compel arbitration. The Order is

contains no factual background or analysis and is of no use to the

resolution of this motion.

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her claims. She must rely not only on its

mere existence, but on specific terms of the

agreement with respect to the amount of the

loan and its repayment. Plaintiff cannot

simultaneously rely on the existence of the

Wells agreement for the purposes of asserting

her claims while denying the application of

certain terms therein (the arbitration

provision).

USLIC cites Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen

GMBH, 206 F.3d 411, 418 (4 Cir.2000)(“In the arbitration th

context, the doctrine [of equitable estoppel] recognizes that a

party may be estopped from asserting that the lack of his

signature on a written contract precludes enforcement of the

contract’s arbitration clause when he has consistently maintained

that other provisions of the same contract should be enforced to

benefit him.”)

USLIC further asserts that the Fourth Circuit addressed a

situation similar to that presented in this case, citing American

Bankers Ins. Group v. Long, 453 F.3d 623 (4 Cir.2006). th 1

In American Bankers Ins. Group, the Longs sued ABIG on

claims relating to a promissory note purchased by the Longs. The

Longs’ complaint alleged that TLP sold automobile insurance

policies underwritten by ABIG to the general public and that

because ABIG did not have enough funds to pay claims on the

policies, it persuaded TLP to offer approximately $18 million of

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worthless promissory notes to the public to fund the insurance. 

The Longs alleged that, as part of its fraudulent scheme, ABIG,

knowing that TLP would be unable to pay the promissory notes,

structured them so that ABIG was in the position of first

priority in the event of default. The Longs alleged that they

purchased a promissory note from TLP. The promissory noted was

appended to and its terms ‘incorporated ... by reference” into a

Subscription Agreement. The Subscription Agreement contained an

arbitration clause providing “that any dispute, controversy or

claim arising out of or in connection with, or relating to, any

subscription of the Note, or any breach or alleged breach hereof,

including allegations of violations of federal or state

securities law” shall be subject to arbitration. The Longs and

TLP were signatories to the Subscription Agreement; ABIG was not. 

453 F.3d at 625. The district court denied ABIG’s motion to

compel arbitration, holding that the Longs were not equitably

estopped from asserting that ABIG was not a signatory to the

arbitration clause because their causes of action in the

complaint were based on theories of liability other than breach

of the obligations on the promissory note. Id. at 626. In

reversing the district court, the Fourth Circuit held in

pertinent part:

ABIG ... contends that even if the ‘rely on’

and ‘direct benefit’ tests are identical for

purposes of this case, estoppel is proper

here because the Longs’ individual claims

essentially allege that the duties created by

the Notes were breached. The Longs argue

that estoppel is not proper because they do

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not assert a claim for breach of the Note.

In support of their counter-argument, the

Longs point to R.J. Griffin. There, a

builder had entered into a contract

containing an arbitration clause with the

landowner to build condominiums ... After

the landowner sold the individual units, the

new unit owners complained that the units

leaked water, and they sued the builder in

state court for negligence and breach of the

implied warranty of good workmanship ... The

builder filed a petition to compel

arbitration of the owners’ lawsuit, asserting

that the owners should be equitably estopped

that the arbitration clause did not apply to

them because their state-court claims

depended on the existence of a contract

containing the arbitration clause ... On

appeal of the district court’s denial of the

petition, we rejected this argument,

concluding that the owners’ underlying suit

did not seek a ‘direct benefit’ from the

contract ..., because their negligence and

warranty causes of action were not based on

any breach of the contract, but were instead

based on duties created by state tort law ...

The Longs argue that, like the owners in R.J.

Griffin, their underlying complaint does not

allege that ABIG breached a duty created by

the Note.

We disagree. The Longs’ underlying complaint

is different from the owners’ complaint in

R.J. Griffin in a significant way. In R.J.

Griffin, the duties that the builder owned

the owners (and allegedly breached by the

faulty construction of the condominiums) were

created entirely by state tort law; if the

builder and landowner had never entered into

the building contract, the builder still

could have been liable in tort to the owners

... Here, by contrast, if TLP had never

issued the Note, the Longs would have had no

basis for recovery against ABIG. Each of the

Longs’ individual claims - interference with

contract, securities fraud and negligence,

civil conspiracy, unjust enrichment and

rescission, and violation of SCUTPA - are

dependent upon their allegation that ABIG

breached a duty created ‘solely by [the

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Note]’ ..., for without the alleged breach of

the Note, the Longs would have had no cause

to complain. And although each of the Longs’

individual claims is phrased in tort, the

Longs ‘may [not] use artful pleading to avoid

arbitration,’ because, at root, those claims

attempt ‘to hold [ABIG] to the terms of [the

Note.’ ....

Id. at 629-630.

USLIC asserts that, as in American Bankers Ins. Group, “but

for the loan documents containing the arbitration clause, there

would be no agreement with USLIC; thus, the two are inextricably

bound and USLIC may compel arbitration.”

Plaintiff further opposes this motion on the ground that the

insurance policy does not contain an arbitration provision. The

terms of the arbitration provision in the EquityLine Agreement

limit arbitration to disputes between Wells Fargo and the

borrower and explicitly precludes the use by third parties of the

arbitration provision. 

USLIC replies that principals or agents of a party to an

arbitration agreement may be bound on ordinary agency or contract

principles. See Letizia v. Prudential Bache Securities, Inc.,

supra, 802 F.2d at 1187 (“Other circuits have held consistently

that nonsignatories of arbitration agreements may be bound by the

agreement under ordinary contract and agency principles.”);

Thomson-CSF, S.A. v. American Arbitration Ass’n, 64 F.3d 773, 777

(2 Cir.1995)(“Traditional principles of agency law may bind a nd

nonsignatory to an arbitration agreement.”). USLIC argues:

Because the USLIC contract of insurance is

inextricably bound with the terms of the

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Wells agreement, for purposes of the

agreement, the ‘Bank’ and USLIC should be

treated the same under the law for purposes

of enforcing the arbitration provision, or

any provisions, that relate to the servicing

of the loan ... The USLIC coverage clearly

relates to servicing of the loan inasmuch as

the benefits paid, if any, are to be applied

to the balance of the loan.

Plaintiff further argues that the insurance contract itself

precludes incorporation of the EquityLine Agreement’s arbitration

provision. Plaintiff refers to the Certificate of Insurance

Schedule attached as an exhibit to Plaintiff’s Declaration in

opposition to the motion to compel arbitration:

The Group Policy, the Application for the

Group Policy, and the attached Application of

Borrower are the complete contract of

insurance.

This provision, Plaintiff contends, precludes by its terms any

incorporation of the terms of the EquityLine Agreement:

Defendant’s reasoning would allow it to

incorporate a provision explicitly excluded,

and, in addition, compel arbitration under a

contract it drafted when no such arbitration

could be compelled against it.

This is a close question. Although USLIC’s contention that

Plaintiff’s claims depend on the EquityLine Agreement because the

insurance was purchased to secure repayment of the line of credit

and the amount of the outstanding must be determined by reference

to the line of credit, Plaintiff’s claims do not otherwise

involve any of the terms and conditions of the EquityLine or any

breach of those terms. In addition, the arbitration provision in

the EquityLine Agreement specifically excludes arbitration of

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claims of third parties. USLIC’s contention that it was an agent

of Wells Fargo in issuing the insurance policy is unsupported by

evidence. USLIC did not offer any evidence that it is a

designated agent for Wells Fargo. In any event, Plaintiff’s

claims against USLIC relate to a dispute between Plaintiff and

USLIC over performance of the terms of the insurance policy, not

to a dispute between Plaintiff, Wells Fargo, and USLIC. Wells

Fargo has no dog in this hunt. USLIC has not demonstrated that

degree of relatedness or intertwining that allows a non-signatory

to compel arbitration against a signatory of an agreement

containing an arbitration provision.

Plaintiff argues that California consumer protection laws

also preclude arbitration in this case.

Plaintiff refers to California Insurance Code § 10207(a)

that “[t]he policy, the application of the employer and the

individual applications, if any, of the employees constitute the

entire contract of insurance”, and to California Insurance Code §

10113 that “[e]very policy of life ... insurance issued ...

within this State ... shall contain and be deemed to constitute

the entire contract between the parties and nothing shall be

incorporated therein by reference to any ... other writings of

either of the parties thereto or any other person, unless the

same are indorsed upon or attached to the policy ....” 

Plaintiff argues that Sections 10207(a) and 10113 are

fundamentally consumer protection statutes in that they exist to

help assure that the consumer is aware of their position with

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California Health and Safety Code § 1363.1 provides: 2

Any health care service plan that includes

terms that require binding arbitration to

settle disputes and that restrict, or provide

for a waiver of, the right to a jury trial

shall include, in clear and understandable

language, a disclosure that meets all of the

following conditions:

(a) The disclosure shall clearly state whether

the plan uses binding arbitration to settle

disputes, including specifically whether the

25

respect to the insurance company. Relying on Standard Sec. Life

Ins. Co. of New York v. West, 267 F.3d 821 (8 Cir.2001) and th

Smith v. PacifiCare Behavioral Health of California, Inc., 93

Cal.App.4th 139, cert. denied, 537 U.S. 818 (2002), Plaintiff

contends that these statutes are not preempted by the Federal

Arbitration Act. 

The McCarran-Ferguson Act, 15 U.S.C. § 1011, et seq.,

prevents inadvertent federal preemption of a state statute

regulating the insurance industry. 15 U.S.C. § 1012(b) provides

in pertinent part:

No Act of Congress shall be construed to

invalidate, impair, or supersede any law

enacted by any State for the purpose of

regulating the business of insurance ...

unless such Act specifically relates to the

business of insurance ....

Smith v. PacifiCare Behavioral Health involved a contention

by individuals insured by a health care service plan that the

arbitration clause in the plan failed to comply with the

statutory disclosure requirements of California Health and Safety

Code § 1363.1. The Court of Appeal held that the arbitration 2

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plan uses binding arbitration to settle claims

of medical malpractice.

(b) The disclosure shall appear as a separate

article in the agreement issued to the

employer group or individual subscriber and

shall be prominently displayed on the

enrollment form signed 

by each subscriber or enrollee.

(c) The disclosure shall clearly state whether

the subscriber or enrollee is waiving his or

her right to a jury trial for medical

malpractice, other disputes relating to the

delivery of service under the plan, or both,

and shall be substantially expressed in the

wording provided in subdivision (a) of Section

1295 of the Code of Civil Procedure.

(d) In any contract or enrollment agreement

for a health care service plan, the disclosure

required by this section shall be displayed

immediately before the signature line provided

for the representative of the group

contracting with a health care service plan

and immediately before the signature line

provided for the individual enrolling in the

health care service plan.

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clause was not enforceable because it did not comply with Section

1363.1. Further, although the Federal Arbitration Act has been

held to preempt Section 1363.1, the McCarran-Ferguson Act

overrode the FAA and abrogated its preemptive effect. 

Application of the FAA would have the effect of invalidating,

impairing, and superseding the operation of Health and Safety

Code § 1363.1, and the FAA does not specifically relate to the

business of insurance. Since health service plans are engaged in

the business of insurance, and since Health and Safety Code §

1363.1, was a statute enacted for the purpose of regulating the

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If Sections 10207(a) and 10113 were found to apply, USLIC 3

argues that the Federal Arbitration Act would preempt them because

these provisions single out arbitration clauses, rather than

seeking to regulate contracts generally. USLIC Doctor’s Associates,

Inc. v. Casarotto, 517 U.S. 681, 686-687 (1996). Casarotto does

not support USLIC’s position. The arbitration provision at issue

in Casarotto was in a franchise agreement, not an insurance

contract. In Standard Life Ins. Co. of New York v. West, supra,

the Eighth Circuit held that an arbitration provision in a

disability insurance policy was inverse-preempted under the

McCarran-Ferguson Act by a provision of the Missouri Arbitration

Act prohibiting arbitration clauses in insurance contracts.

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business of insurance, the McCarran-Ferguson Act precluded

application of the FAA.

However, as USLIC contends, California Insurance Code §§

10207(a) and 10113 relate to the regulation of health insurance,

not life insurance. Further, USLIC seeks to compel arbitration

pursuant to the arbitration provision of the EquityLine

Agreement, not pursuant to any arbitration provision in the

insurance policy itself.3

Plaintiff further argues that the California Insurance Code

requires additional disclosures be made in connection with an

arbitration provision in a disability policy, referring to

California Insurance Code § 10123.19(a):

(a) Any disability insurance policy that

includes terms that require binding

arbitration to settle disputes and that

restrict, or provide for a waiver of the

right to a jury trial shall include, in clear

and understandable language, a disclosure

that meets all of the following conditions:

(1) The disclosure shall clearly state

whether the plan uses binding arbitration to

settle disputes, including specifically

whether the plan uses binding arbitration to

settle claims of medical malpractice.

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(2) The disclosure shall appear as a separate

article in the agreement issued to the

employer group or individual subscriber and

shall be prominently displayed on the

enrollment form signed by each subscriber or

enrollee.

(3) In any disability insurance policy, the

disclosure required by this section shall be

displayed immediately before the signature

line provided for the representative of the

group contracting with a disability insurer

and immediately before the signature line

provided for the individual enrolling in the

policy.

Although Plaintiff acknowledges that separate disability

insurance was not purchased by Mr. Mundi, the “agreement form”

contains numerous references to disability coverage. Therefore,

Plaintiff contends, the requirements of Section 10123.19 should

apply and were not satisfied with regard to the policy sold to

Mr. Mundi. Plaintiff further refers to the definition of

disability insurance set forth in California Insurance Code §

106(a)(“Disability insurance includes insurance appertaining to

injury, disability or death resulting to the insured from

accidents, and appertaining to disablements resulting to the

insured from sickness”). Therefore, Plaintiff argues, the death

benefit coverage extended to Mr. Mundi under the USLIC policy can

reasonably be construed to fit both the definition of life

insurance and the definition of disability insurance.

However, the arbitration provision at issue is not contained

in a Certificate of Insurance but, rather, the EquityLine

Agreement between Plaintiff and Wells Fargo. The policy that was

issued to Plaintiff is not disability insurance as defined by

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California Insurance Code § 779.2 provides in pertinent part: 4

All life insurance and all disability

insurance sold in connection with loans or

other credit transactions shall be subject to

the provisions of this article, except (a)

such insurance sold in connection with a loan

or other credit transaction of more than ten

years during, and (b) such insurance where its

issuance is an isolated transaction on the

part of the insurer not related to an

agreement or a plan or regular course of

conduct for insuring debtors of the creditor.

Nothing in this article shall be construed to

relieve any person from compliance with any

other applicable law of this state, including,

but not limited to, Article 6.5 (commencing

with Section 790), nor shall anything in this

article be construed so as to alter, amend, or

otherwise affect existing case law.

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Insurance Code § 106. As USLIC asserts, the policy is “credit

life insurance” under California Insurance Code § 779.2, because

the line of credit was for a period of ten years. See Section 4 4

of the EquityLine Agreement: “My account has a Draw Period of 10

years from the date of this Agreement.” Plaintiff did not

purchase disability insurance from USLIC. Finally, Insurance

Code § 10123.19 does not relate to life insurance specifically,

or even to credit disability insurance generally. Rather,

Section 10123.19 applies to hospital and medical expense

insurance for disability under a group plan:

The intent that this code section apply only

to that discrete type of health insurance is

clearly evidenced by the fact that it

provides the disclosure for jury trial waiver

must include ‘whether the plan uses binding

arbitration to settle claims of medical

malpractice.’ Inclusion of the medical

malpractice language does not logically fit

in a section applicable to life insurance.

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Plaintiff further argues that California consumer protection

law defeats USLIC’s position in another respect. Plaintiff cites

Davis v. Blue Cross of Northern California, 25 Cal.3d 418, 430-

431 (1979):

These statutes reflect the Legislature’s

recognition that an important component of

any insurance arbitration procedure is the

requirement that insureds be given timely and

meaningful notice of the procedure so that

they can realistically resort to arbitration

if they decide to do so ....

The trial court in the instant case found

that Blue Cross knew that in many instances

its insureds would not be aware of the

arbitration clause and that, despite this

knowledge, Blue Cross deliberately decided

not to inform its insureds of the arbitration

procedure. In this context, the practical

effect of the insurer’s practice was to

transform its arbitration clause into a

unilateral provision, establishing a

procedure to which the insurer could require

its insureds to resort when Blue Cross deemed

it advisable, but one that would not

generally provide a speedy, economic or

readily accessible remedy for the bulk of

Blue Cross’ uninformed insureds.

We think the trial court was fully justified

in finding that Blue Cross had breached its

duty of good faith and fair dealing in

adopting such a course of conduct. Blue

Cross clearly was not giving its insureds’

interests ‘as much consideration ... as ...

its own’ in failing to advise them of their

rights to demand arbitration of any

disagreement with the insurer. Having

rejected plaintiffs’ claims without so much

as calling to their attention their potential

remedy of arbitration and having thereby

compelled plaintiffs to resort to litigation,

Blue Cross is now hardly in a position to

reverse itself and to invoke the arbitration

process which it left to repose in

plaintiffs’ dark ignorance.

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In her declaration submitted in opposition to this motion to

compel arbitration, Plaintiff avers in pertinent part:

3. Following my husband’s death, I made a

claim on the insurance policy with [USLIC]

following their procedures.

...

5. [USLIC] did not bring up the issue of

arbitration with me in any way until after

this lawsuit was filed.

Because USLIC failed to advise Plaintiff of its position that

arbitration was mandatory at the time USLIC denied Plaintiff’s

claim, USLIC, pursuant to Davis, waived any claim to arbitration.

USLIC replies that this case is factually distinguishable

from Davis. In Davis, the arbitration provision was contained in

the Blue Cross policy and Blue Cross clearly had knowledge of its

existence. Here, USLIC contends, the arbitration provision was

not contained in the insurance policy, but in the EquityLine

Agreement. This is nonsensical. If USLIC seeks to rely on an

arbitration agreement, it has a duty to know about it and to

advise its insured. 

Secondly, USLIC distinguishes Davis because Plaintiff did

not seek to appeal the denial of her claim prior to filing this

action. In Davis, the trial court found that, even after

learning that its insureds did not agree with the determinations

as to benefits available under the policy, Blue Cross failed to

bring the arbitration procedure to its insureds’ attention;

instead Blue Cross simply reiterated its rejection of the

insureds’ claims. See Davis, supra, 25 Cal.3d at 426. Here,

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USLIC contends, Plaintiff did not challenge its denial of her

claim for benefits prior to filing this action. When this action

was filed, USLIC asserts it timely raised the arbitration

provision in the EquityLine Agreement. 

USLIC’s attempts to distinguish Davis are not persuasive. 

Because USLIC intended to rely on an arbitration provision in a

contract separate from the insurance policy, USLIC should have

brought that intention to Plaintiff’s attention before Plaintiff

filed this action. 

CONCLUSION

For the reasons stated above, USLIC’s motion to compel

arbitration is DENIED.

IT IS SO ORDERED.

Dated: May 29, 2007 /s/ Oliver W. Wanger 

668554 UNITED STATES DISTRICT JUDGE

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