Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-04-02019/USCOURTS-ca8-04-02019-0/pdf.json

Nature of Suit Code: 360
Nature of Suit: Other Personal Injury
Cause of Action: 

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United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 04-2019

___________

Michael Grassmueck, Bankruptcy *

Trustee for the estates of W.J. Hoyt *

Sons Management Co., Ltd. and *

W.J. Hoyt Sons Ranches, MLP, *

*

Appellant, *

* Appeal from the United States

v. * District Court for the 

* District of Nebraska.

The American Shorthorn Association, *

a Nebraska corporation; Dr. Roger E. *

Hunsley, an individual, *

*

Appellees. *

__________

Submitted: December 17, 2004

Filed: March 31, 2005

___________

Before WOLLMAN, MAGILL, and COLLOTON, Circuit Judges.

___________

COLLOTON, Circuit Judge. 

Michael Grassmueck, a bankruptcy trustee, appeals from a grant of summary

judgment in favor of the American Shorthorn Association (“ASA”) and Dr. Roger

Hunsley, the ASA’s executive secretary and treasurer. Grassmueck is the bankruptcy

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1

Grassmueck is the third trustee appointed for this estate, and we refer to him

and his predecessors as “the Trustee.”

2

The Honorable Laurie Smith Camp, United States District Judge for the

District of Nebraska.

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trustee1

 for the estate of W.J. Hoyt Sons Management Co., Ltd., W.J. Hoyt Sons

Ranches, MLP, and numerous related entities. He brought this negligence action

against the ASA and Dr. Hunsley. The district court2

 ruled that the Trustee’s claims

were barred by the equitable doctrine of in pari delicto and by the statute of

limitations. We affirm on the first ground, and need not address the second.

I.

This lawsuit arises out of a complex scheme of investments that are alleged to

have been administered in a fraudulent manner. Walter J. Hoyt III (“Hoyt”) was the

primary figure in a partnership with his brothers called “Hoyt & Sons Ranches.” The

family partnership raised cattle located for the most part in Nevada, Oregon, and

California. It also actively sought investors in its cattle-raising operations until its

dissolution in the late 1980s, when it was succeeded in relevant part by two other

Hoyt-owned entities, W.J. Hoyt Sons Management Co., Ltd., and W.J. Hoyt Sons

Ranches, MLP (together with Hoyt & Sons Ranches, the “Hoyt Entities”).

The investments marketed by the Hoyt Entities were structured so that

investors would become partners in one or more investment partnerships. These

partnerships purchased cattle from the Hoyt Entities. The investment partnerships

paid for the cattle by assuming notes owed to the Hoyt Entities in a face value amount

equal to the price of the cattle. Investors became partners by assuming portions of

these notes. Investors were to pay only interest on the investment partnership notes

for five years, while claiming depreciation deductions on the cattle for tax purposes.

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The Hoyt Entities represented that the cattle sold in this manner to the investment

partnerships were purebred shorthorn cattle. The Hoyt Entities attracted large

amounts of investment, allegedly in excess of $100,000,000, from thousands of

investors over a decade. 

There were several problems with the investments represented by the

partnerships. The IRS did not agree that the cattle depreciation deductions claimed

by investors were valid. See Bales v. Comm’r, 58 T.C.M. (CCH) 431 (1989). The

Hoyt Entities did not own as many cattle as they sold, and the cattle were not worth

as much as the investors paid for them.

The Hoyt Entities entered Chapter 7 bankruptcy proceedings on February 24,

1997. The Trustee filed a Complaint for Substantive Consolidation against the

investment partnerships in September 1998, and the bankruptcy court granted the

consolidation in November 1998. The bases alleged for consolidation were that the

investment partnership assets and funds were intermingled with those of the Hoyt

Entities, and that the investment partnerships and the Hoyt Entities were dominated

by the same management. (J.A. at 821, 840-41). The investment partnerships,

moreover, shared locations and employees with the Hoyt Entities and suffered from

inadequate record-keeping. (Id. at 839).

According to the Trustee, the investment partnerships lacked independent

substance: partners were moved repeatedly “from one partnership to another without

the partner's knowledge,” sometimes even “into partnerships that had previously been

terminated.” (Id. at 842). Investors who purchased cattle in an individual capacity

were erroneously placed into investment partnerships. (Id.). As a result of

inadequate documentation, ownership of the notes assumed by the investment

partnerships was “[u]ncertain.” (Id. at 821, 844).

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The Trustee sued the ASA and Dr. Hunsley on November 3, 2000, alleging that

they had breached their duties of care to the investment partnerships. The ASA,

according to the Trustee, disregarded its protocols for certifying and registering

shorthorn cattle as purebred, thus resulting in the certification and registration of

cattle that were not purebred. Dr. Hunsley, as an officer of the ASA, was involved

in the alleged negligent certification and registration procedures. He also acted as an

expert witness for the Hoyt Entities in Tax Court proceedings. The Trustee alleges

that the ASA’s involvement “gave an aura of legitimacy to the entire Hoyt scheme,”

and that the ASA aided “the Hoyts by failing to exercise reasonable care in the

performance of their registration and certification obligations to the detriment of the

. . . [p]artnerships.” (Id. at 755).

II.

A Chapter 7 bankruptcy trustee is required to “collect and reduce to money the

property of the estate for which the trustee serves.” 11 U.S.C. § 704(1). The property

of the estate created by the commencement of Chapter 7 proceedings consists of the

items delineated in 11 U.S.C. § 541, which include “all legal or equitable interests of

the debtor in property as of the commencement of the case” not expressly excluded.

11 U.S.C. § 541(a)(1). The estate, therefore, encompasses “causes of action

belonging to the debtor at the time the case is commenced.” 5 Collier on Bankruptcy

¶ 541.08, at 541-44 (15th ed. rev. 2004).

A trustee’s ability to assert causes of action on behalf of the bankrupt estate

is subject to any equitable or legal defenses that could have been raised against the

debtor. 5 Collier on Bankrutpcy, supra, ¶ 541.08, at 541-46. In particular, the

equitable defense of in pari delicto is available in an action by a bankruptcy trustee

against another party if the defense could have been raised against the debtor. See

Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340,

355-56, 358 (3d Cir. 2001); 5 Collier on Bankruptcy, supra, ¶ 541.08, at 541-46 n.11.

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3

Hoyt Entities pastured cattle in California, Nevada, and Oregon, and some of

the investment partnerships were formed in California and Nevada. Nebraska is the

residence of Dr. Hunsley and the principal place of business of the ASA.

4

California and Oregon have adopted the 1997 version of the UPA in relevant

part, while Nebraska and Nevada retain some of the language of the 1914 UPA. As

discussed infra at 9, the 1997 revisions to the UPA effected no substantive change to

the provisions of the UPA at issue here, so the variations between the versions are

not relevant to our analysis. Unless otherwise noted, we refer to the 1997 version of

the UPA.

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The doctrine of in pari delicto is the “principle that a plaintiff who has participated

in wrongdoing may not recover damages resulting from the wrongdoing.” Black’s

Law Dictionary 806 (8th ed. 2004). 

Whether in pari delicto may be asserted by a third party against a wrongdoer’s

partner turns on the relationship between the partners, which is a question of state

law. In re Newman, 875 F.2d 668, 670 (8th Cir. 1989). The district court deemed it

unnecessary to resolve which state law applies to this dispute, and we observe that all

States whose laws might govern this action3

 have adopted the Uniform Partnership

Act (“UPA”) in relevant part. Cal. Corp. Code §§ 16100-16962; Neb. Rev. Stat.

§§ 67-401to -467; Nev. Rev. Stat. §§ 87.010-.560; Or. Rev. Stat. §§ 67.005-.815.4

There are no court decisions in these States dealing directly with the doctrine of in

pari delicto and the imputation of wrongdoing by a general partner to a partnership

under facts similar to this case, but the parties do not contend that any variation

among the laws of the various States would affect our analysis. The case is governed

by a uniform statute and principles of common law that are likely to be uniform in

each of the jurisdictions.

Summary judgment is appropriate if, viewing the facts in the light most

favorable to the non-moving party, there is no genuine issue of material fact to be

resolved. Fed. R. Civ. P. 56(e). We review a grant of summary judgment de novo.

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5

The sole actor doctrine is also known in this context as the “sole

representative” or “alter ego” doctrine. See Young v. Deloitte & Touche, LLP, No.

-6-

Dillon v. Brown County, 380 F.3d 360, 362-63 (8th Cir. 2004). The parties agree that

if Hoyt’s fraud can be charged to the cattle partnerships, the doctrine of in pari delicto

will bar this negligence action against the ASA and Dr. Hunsley. The material facts

underlying this issue are undisputed, so the case may be resolved by summary

judgment. See Zurad v. Lehman Bros. Kuhn Loeb, Inc., 757 F.2d 129, 133 (7th Cir.

1985) (describing the applicability of in pari delicto as “a legal question”). 

The district court held that Hoyt’s fraud was chargeable to the investment

partnerships. The court acknowledged that, under the UPA, the normal rule imputing

knowledge from one partner to the partnership does not apply when the partner in

question is acting fraudulently. This is known as the “adverse interest exception” to

the imputation rules. The refusal to impute knowledge to the principal of an agent

who is acting adversely to the principal is an acknowledgment that the usual legal

fiction of complete agent-principal communication is unjustified where the agent is

acting adversely. Martin Marietta Corp. v. Gould, Inc., 70 F.3d 768, 773 (4th Cir.

1995). Section 102(f) of the UPA, which expresses this adverse interest exception,

reads as follows: 

A partner’s knowledge, notice, or receipt of notification of a fact relating

to the partnership is effective immediately as knowledge by, notice to,

or receipt of a notification by the partnership, except in the case of a

fraud on the partnership committed by or with the consent of that

partner.

Id. (emphasis added). 

The district court concluded that the adverse interest exception was qualified

in these circumstances by the “sole actor” doctrine.5

 The sole actor doctrine provides

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040807BLS, 2004 WL 2341344, at *9 (Mass. Super. Ct. Sept. 20, 2004) (noting that

where an agent “is the sole representative in the transaction, and is in effect the alter

ego, notice to him is imputable to the principal”) (internal quotations and alterations

omitted); William Meade Fletcher, 3 Fletcher Cyclopedia of the Law of Private

Corporations § 827 (1931) (“[t]his qualification of the [adverse interest] exception

[is] known as the “sole actor,” or the “sole representative” doctrine”).

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that “where the principal and agent are one and the same,” the agent’s knowledge is

imputed to the principal despite the fact that the agent is acting adversely to the

principal. Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822, 827 (2d

Cir. 1997). Where the principal and agent are alter egos, there is no reason to apply

an adverse interest exception to the normal rules imputing the agent’s knowledge to

the principal, because “the party that should have been informed [of the fraudulent

conduct] was the agent itself albeit in its capacity as principal.” Id. In this case, the

district court reasoned that the investment partnerships were mere alter egos of Hoyt

during the period in which he defrauded investors, and that Hoyt’s knowledge was

properly imputed to the partnerships. (Add. at 14). 

The Trustee advances two primary arguments why the district court was wrong.

First, he argues that the sole actor doctrine should not have been applied because it

contravenes the plain language of section 102(f) of the UPA, and because it is not

established in the law of any of the States whose law might govern this dispute.

Second, the Trustee maintains that even if the doctrine applies, Hoyt was not a sole

actor with respect to the investment partnerships.

A.

We disagree with the Trustee’s first contention. It is true that the plain

language of the UPA codifies the adverse interest exception and does not expressly

mention the sole actor doctrine. Section 104 of the UPA, however, provides that “the

principles of law and equity” are to “supplement” the UPA “[u]nless displaced by

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Section 104 is, in part, a revised version of section 4(3) of the 1914 UPA,

which mandated that “[t]he law of agency shall apply under this act.” UPA § 4(3)

(1914); seeKansallis Fin. Ltd. v. Fern, 659 N.E.2d 731, 736 (Mass. 1996) (approving

reference to the Restatement (Second) of Agency in applying the UPA “[b]ecause the

[UPA] specifically provides that the law of agency applies”). According to the

commentary accompanying the current version of the UPA, section 104’s general

statement that “the principles of law and equity supplement” the UPA is intended to

combine several rules contained in section 4 of the 1914 UPA, including section 4(3).

The comment after section 104 states that “[n]o substantive change from . . . the

[1914] UPA . . . is intended.” 

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particular provisions.” UPA § 104(a). These principles of law and equity include

“the law of agency,” as well as the law relative to fraud and “other common law

validating and invalidating causes.” UPA § 104 cmt.6

 The sole actor doctrine is an

established principle of agency law, see 3 Am. Jur. 2d, Agency § 281 (2004), and it

therefore applies under the UPA unless displaced by a particular provision. 

Section 102(f), the UPA’s codification of the adverse interest exception, does

not displace the sole actor doctrine. The 1914 version of the UPA was clear that

supplemental principles of agency law were to govern the scope of imputation. In

commentary to the section entitled “Knowledge and Notice,” the 1914 UPA explained

that “how far notice to an agent is notice to a principal” is “wholly a question of the

law of agency,” and “is not a question within the scope of a partnership act.”

UPA § 4 cmt. (1914). We think it is evident that the same holds true for imputation

of knowledge. Subsequent revisions of the UPA were not intended to effect any

substantive change from section 4 of the 1914 UPA. UPA § 104 cmt. The UPA’s

provision that the scope of imputation should be determined by agency law, therefore,

suggests strongly that section 102(f) was not intended to displace any agency law

exceptions to the adverse interest rule.

Application of the sole actor doctrine to the UPA’s adverse interest rule is also

consistent with established rules of statutory interpretation. Statutory codifications

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7

The sole actor doctrine has been applied frequently in the corporate context,

even where a state statutory scheme governs many aspects of the relationship between

corporate employees and corporations. E.g., In re Mediators, 105 F.3d at 827.

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of common law rules are often subject to implicit exceptions that were recognized at

common law. See Sabbath v. United States, 391 U.S. 585, 591 n.8 (1968) (stating

that “there is little reason why” common law exceptions to announcement and entry

rules would not also apply to the statutory embodiment of those rules, “since they

existed at common law, of which the statute is a codification”); Hatley v. Stafford,

588 P.2d 603, 605 n.1 (Or. 1978) (implying common law exceptions to the statutory

parol evidence rule where the statute was “a codification of the common law parol

evidence rule”); People v. Maddox, 294 P.2d 6, 9 (Cal. 1956) (holding that a statutory

codification of the common law “may reasonably be interpreted as limited by . . .

common law rules” even though the common law rules are not mentioned in the

statute); Cram v. Chicago, B & Q R.R. Co., 122 N.W. 31, 33 (Neb. 1909) (“It is also

a truism that: When statutes are made there are some things which are exempted and

foreprized out of the provisions thereof, by the law of reason, though not expressly

mentioned. Thus, things for necessity’s sake, or to prevent a failure of justice, are

excepted out of statutes.”) (internal quotation omitted). Section 102(f) is, in relevant

part, a codification of the common law adverse interest rule, see Restatement

(Second) Agency § 282 (1958), to which the sole actor doctrine was a common law

exception. None of the common law exceptions to the adverse interest rule are

mentioned in section 102(f), and there is no indication that the drafters of the UPA’s

general “Knowledge and Notice” provision wished to eliminate them. We therefore

believe that the adverse interest rule in statutory form remains subject to the sole actor

doctrine, as it did at common law.7

The Trustee’s argument that the district court erred by applying the sole actor

exception because none of the States involved has embraced the doctrine is similarly

unpersuasive. While it may be true that the sole actor exception is not wellAppellate Case: 04-2019 Page: 9 Date Filed: 03/31/2005 Entry ID: 1885856 
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Cases applying the sole actor doctrine to impute an agent’s fraud to his

principal are numerous. See, e.g., Curtis, Collins & Holbrook Co. v. United States,

262 U.S. 215, 222 (1923); Schneider v. Thompson, 58 F.2d 94, 99 (8th Cir. 1932);

Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Investcorp S.A., 80 F.

Supp.2d 129, 138 (S.D.N.Y. 1999) (applying Texas law); Puget Sound Nat’l Bank v.

St. Paul Fire & Marine Ins. Co., 645 P.2d 1122, 1127 (Wash. Ct. App. 1982). 

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developed in the law of the States that potentially governs this action, that does not

mean that the courts of those States would decline to apply the exception if faced with

these facts. If the path that a state court would follow when presented with a novel

question is unclear, then we may decide the issue by predicting what the state court

would do. Karas v. Am. Family Ins. Co., 33 F.3d 995, 999-1000 (8th Cir. 1994).

In formulating our prediction, the approach taken by other jurisdictions is

relevant. The sole actor doctrine is an agency law principle well-established at

common law. See Munroe v. Harriman, 85 F.2d 493, 496 (2d Cir. 1936) (“[T]here

is substantial authority in support of the ‘sole actor’ doctrine.”).8

 Principles of agency

law, moreover, are incorporated into the UPA in all of the relevant States. See Neb.

Stat. § 67-304(3); Cal. Corp. Code § 16104; Or. Rev. Stat. § 67.020; Nev. Rev. Stat.

§ 87.040. 

California and Oregon have applied the sole actor doctrine. Nat’l Bank of San

Mateo v. Whitney, 180 P. 845, 848-49 (Cal. Dist. Ct. App. 1919); Saratoga Inv. Co.

v. Kern, 148 P. 1125, 1127-28 (Or. 1915). There is no indication that Nebraska or

Nevada would apply the established principles of agency law any differently. See

Rose v. Gisi, 298 N.W. 333, 337 (Neb. 1941) (citing the Restatement (Second) of

Agency and Massachusetts case law for a “generally accepted rule” regarding

principal liability); Hunter Mining Labs., Inc. v. Mgmt. Assistance, Inc., 763 P.2d

350, 352 (Nev. 1988) (citing the Restatement (Second) of Agency and Maryland,

Illinois, Virginia, Florida, and California case law regarding the scope of control

required to establish an agency relationship); see also Allard v. Arthur Anderson &

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Co., 924 F. Supp. 488, 495 (S.D.N.Y. 1996) (refusing to apply adverse interest

exception to the imputation of knowledge where the agent acts both for himself and

for his principal because “there is no reason to believe that a Michigan court would

depart from the New York and Restatement rule” to the same effect). Accordingly,

we believe that under the law of any of the jurisdictions that might govern this action,

the sole actor doctrine would apply as an exception to the adverse interest rule stated

in Section 102(f) of the UPA.

B.

The Trustee’s second argument, that Hoyt was not a sole actor with respect to

the investment partnerships, also fails. As discussed above, a sole actor relationship

is found when “the principal and agent are one and the same.” In re Mediators, Inc.,

105 F.3d at 827. Here, the investment partnerships lacked independent identities.

The Trustee conceded in connection with his motion for summary judgment that the

investment partnerships “were entities of convenience and not separate business

units.” (J.A. at 835). He also acknowledged that “[t]he Hoyt cattle investment

operation was run by Walter J. Hoyt III as a unified business,” and that “[a]ll entities

were used as instrumentalities by Walter J. Hoyt III in an attempt to gain tax

advantages for himself and his investors.” (Id. at 845). The Trustee admitted in

interrogatory answers, moreover, that “there is no way to identify any of the

individual ‘[investment] [p]artnerships.’ Instead, there was a single entity which

commingled all assets and liabilities of the so-called individual partnerships.” (Id.

at 739).

Hoyt’s actions here were indistinguishable from those of the investment

partnerships. Hoyt was made general partner of all of the investment partnerships,

thereby assuming the role of principal as well as an agent. See Goehring v. Superior

Court, 73 Cal. Rptr. 2d 105, 112 (Cal. Dist. Ct. App. 1998) (“[g]eneral partners are

both agents and principals of the partnership”). The Trustee contends that Hoyt was

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not “‘one and the same’ with the partnerships” because “each partnership was made

up of a number of general partners.” (Appellant’s Brief at 28). The Trustee has

stated in the district court, however, that “[t]he investor partners played no part in the

management of their . . . [p]artnerships or the other Hoyt [E]ntities.” (J.A. at 840).

In addition, Hoyt received a power of attorney from each investor, thus enabling him

to act on the investor’s behalf with respect to the investment partnerships, and giving

Hoyt singular domination over the partnerships. (Id.). Indeed, according to the

Trustee’s own allegations, Hoyt dominated both the investment partnerships and the

Hoyt Entities. (J.A. at 821). No similar facts are alleged with respect to the investors.

The Trustee argues that Hoyt was not the “sole representative” of the

investment partnerships because a Hoyt Entity employee, Marketing Director Donna

Schnitker, also dealt with the ASA. The ASA and Hunsley do not dispute the

allegation that Schnitker dealt with the ASA on behalf of Hoyt. This is not a material

fact, however, because the sole actor doctrine does not require that the agent whose

knowledge is to be imputed literally act alone; the doctrine still applies if the “sole

actor” uses subordinates in perpetrating a fraud. See Munroe, 85 F.2d at 496

(imputing bank president’s knowledge of fraud to the bank under the sole actor rule

despite the involvement of other bank employees). The central inquiry in the sole

actor context is whether the agent committing fraud is also the principal that should

have been informed. In re Mediators, Inc., 105 F.3d at 827. There is no allegation

here that Schnitker was a partner in or a principal of the investment partnerships. In

fact, the only evidence in the record indicates that Schnitker “had nothing to do with

the investor partnerships,” (J.A. at 726, 731), and worked only as an employee of one

of the Hoyt Entities. (Id. at 708-11).

The Trustee argues finally that the sole actor doctrine cannot be asserted by the

ASA because it was “not acting in good faith.” (Appellant’s Br. at 29). It is true that

the sole actor exception “may not be invoked where third persons use the agent to

further their own frauds upon the principal.” Bland v. Allstate Ins. Co., 944 S.W.2d

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372, 376 (Tenn. App. 1996) (internal quotation omitted). The Trustee does not

allege, however, that the ASA or Dr. Hunsley used Hoyt to further their own frauds

upon the investors. The amended complaint expressly disclaims any fraud on the part

of the ASA or Dr. Hunsley, and restricts its allegations to mere negligence. (J.A. at

755) (the “ASA and Hunsley . . . did not themselves have fraudulent intent”). 

* * *

The undisputed facts show that the investment partnerships established by Hoyt

were not independent entities, but existed in form only and were indistinguishable

from Hoyt. As a result, the sole actor doctrine applies, and Hoyt’s fraud is imputed

to the investment partnerships. Because the partnerships are deemed to have

participated in Hoyt’s wrongdoing, the Trustee is barred by the doctrine of in pari

delicto from pursuing this negligence action against the ASA and Dr. Hunsley.

Accordingly, we affirm the judgment of the district court.

______________________________

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