Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-09-02072/USCOURTS-ca8-09-02072-0/pdf.json

Parties Involved:
Jack Cregan
Appellant
John Dubinsky
Appellant
Mermart
Appellee
David Rasch
Appellant
Eldon Schoenberg
Appellant
Alvin Siteman
Appellant
William Stern
Appellant

Document Text:

1

The Honorable John A. Jarvey, United States District Judge for the Southern

District of Iowa, sitting by designation.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 09-2072

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John Dubinsky, et al.,

Plaintiffs-Appellants,

v.

Mermart, LLC,

Defendant-Appellee.

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Appeal from the United States

District Court for the Eastern

District of Missouri.

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Submitted: January 12, 2010

 Filed: February 10, 2010

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Before GRUENDER and SHEPHERD, Circuit Judges, and JARVEY,1

 District Judge.

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JARVEY, District Judge.

John Dubinsky, William Stern, Alvin Siteman, Eldon Schoenberg, David

Rasch, and Jack Cregan (“Subordinate Bondholders”) invested in a refinancing

venture for a real estate development. They sued the developer of the project,

Mermart, L.L.C. (“Mermart”), alleging breach of contract and demanding equitable

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The Honorable Carol E. Jackson, United States District Judge for the Eastern

District of Missouri.

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accounting for failure to pay interest under the financing documents, as well as

alleging unjust enrichment, negligence, and fraudulent misrepresentation based on

alleged representations that the project was free from environmental hazards. The

district court2

 dismissed the contract claims, finding that the Subordinate Bondholders

failed to obtain written consent of UMB Bank, N.A. (“UMB Bank”), the Senior

Mortgagee, as required by the financing documents. The district court also dismissed

the negligence, unjust enrichment, and fraudulent misrepresentation claims because

the economic loss doctrine precluded recovery. For the following reasons, we affirm.

I. BACKGROUND

In 2001, Mermart commenced a $47.3 million redevelopment of the historic

Merchandise Mart Building in downtown St. Louis to convert the property into a

mixed-use apartment and retail building. During the renovation, Mermart retained a

third-party contractor to remove lead based paint found in the building. The

renovation was complete in 2003 when the Missouri Department of Natural Resources

issued a certificate of occupancy. In preparation for a later refinancing, Mermart hired

Consulting Solutions, Inc. to conduct an independent environmental assessment

report. This report, dated April 6, 2005, revealed the continued presence of lead paint

and suggested that further remediation was necessary. 

On Dec. 1, 2005, Mermart executed a Subordinate Trust Indenture

(“Indenture”) with itself as the borrower, the Industrial Development Authority of the

City of St. Louis (“IDA”) as issuers of the Series B subordinate bonds (“Series B

bonds”), and UMB Bank as the Trustee. Together with the Indenture, Mermart also

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The other refinancing documents include: a Subordination Agreement; a

Subordinate Loan Agreement; a Subordinate Multifamily Note; a Subordinate

Multifamily Deed of Trust, Assignment of Rents, and Security Agreement; and an

Assignment of Subordinate Security Instrument.

4

UMB Bank served numerous roles in this transaction. For example, UMB

Bank was a backer of the redevelopment venture in the guise of Senior Mortgagee,

along with Freddie Mac. UMB Bank was also the trustee for senior bondholders,

while concurrently the trustee to any subordinate interests, including the Subordinate

Bondholders.

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completed a series of associated refinancing documents3

 (collectively, “Financing

Documents”) on the same day. The Financing Documents specified that UMB Bank

would act as the Trustee for the Subordinate Bondholders and as the Trustee for the

Senior Mortgagees, UMB Bank4

 and the Federal Home Loan Mortgage Corporation

(“Freddie Mac”). The Subordinate Bondholders then purchased the Series B bonds

from the IDA. The Series B bonds bore a fixed annual interest rate of 10 percent from

January 15, 2006 to June 15, 2036, at which time the entire principal amount of $1.1

million was also due.

 

Beginning in 2007, as units became available, Mermart began to remediate the

continued presence of the lead paint. Mermart characterized the cost of removal as

an “upgrade” expense, rather than a capital expense. This allowed Mermart to deduct

the removal costs from the funds available to the Subordinate Net Loan Operating

Income (“SLNOI”), used to make the interest payments to the Subordinate

Bondholders. On April 28, 2008, the Subordinate Bondholders notified UMB Bank

that Mermart had committed an Event of Default under the Financing Documents by

Mermart’s failure to make the contractual interest payments. The Trustee, UMB

Bank, responded to the Subordinate Bondholders on August 26, 2008 and declined to

take legal action against Mermart.

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The Subordinate Bondholders, who own 51 percent of the bonds issued,

thereafter brought this action seeking damages for breach of contract, equitable

accounting, negligence, unjust enrichment, and fraud. Mermart filed a motion to

dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), seeking

dismissal because the Subordinate Bondholders failed to obtain the written consent

of the Senior Mortgagee prior to bringing suit. Mermart asserted that the fraudulent

misrepresentation claim was not pled with particularity, or, in the alternative, that the

negligence, unjust enrichment, and fraudulent misrepresentation claims were

precluded by the economic loss doctrine. 

The district court granted Mermart’s motion to dismiss in its entirety. At issue

was whether section 707 of the Indenture controlled, which imposed no restrictions

on bringing suit, or whether sections 4(b) and 5(c) of the Subordination Agreement

required written consent of the Senior Mortgagee before filing suit. Dubinsky, et al.

v. Mermart, L.L.C., 2009 WL 1011503, at *3 (E.D. Mo. Apr. 15, 2009). The court

agreed with the latter interpretation, finding that the Subordinate Bondholders “were

required under the financing documents to obtain the written consent of the Senior

Mortgagee [UMB Bank] . . . [and] the action was filed without satisfying the

applicable prerequisites contained within the financing documents.” Id. at *4. The

court added that “upon a finding that plaintiffs were restricted by the Subordination

Agreement, the claims for an equitable accounting and breach of contract should be

dismissed.” Id.

Next, the court found separate and independent grounds for dismissal of the

negligence, unjust enrichment, and fraudulent misrepresentation claims. The court

held that the negligence claim was an issue “based on” the Financing Documents and

was “precluded by the Subordination Agreement,” again, because the Subordinate

Bondholders did not first seek written consent to file a claim, and also because the

negligence claim was precluded by the economic loss doctrine. Id. at *5. The unjust

enrichment claim failed for similar reasons. Id. at *6. Lastly, the court held that the

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fraudulent misrepresentation claims failed because the alleged fraudulent

misrepresentations did not “pertain to any matter outside of or collateral to the

contracts.” Id. at *7. 

The Subordinate Bondholders appeal. 

II. DISCUSSION

We review de novo a motion to dismiss for failure to state a claim under Rule

12(b)(6). Ashley County, Ark. v. Pfizer, Inc., 552 F.3d 659, 665 (8th Cir. 2009). To

survive a motion to dismiss, a claim must have “facial plausibility when the plaintiff

pleads a factual content that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 129 S.Ct. 1937,

1949 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955,

167 L.Ed.2d 929 (2007)). We must take all facts alleged in the complaint as true, but

“threadbare” assertions of a cause of action are insufficient. Charles Brooks Co. v.

Ga. Pac., L.L.C., 552 F.3d 718, 721 (8th Cir. 2009). 

At the outset, we must determine whether the Subordination Agreement

required the Subordinate Bondholders to obtain the written consent of the Senior

Mortgagee before bringing the enforcement action. The Subordinate Bondholders

argue that this condition precedent to bringing enforcement actions under sections

4(b) and 5(c) of the Subordination Agreement applies only to the Subordinate

Mortgagees and not to the Subordinate Bondholders. They argue that section 707(a)

of the Indenture—which does not require written consent—details the procedure

applicable to them for enforcement actions. 

Mermart urges an interpretation that treats the Financing Documents as an

interconnected set of contracts. Pursuant to this interpretation, Mermart would have

us find that section 210 of the Indenture controls the Subordinate Bondholders’ right

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The indebtedness evidenced by the Bonds is and shall be subordinate in right

of payment to the prior payment in full of all the indebtedness under the Senior Bonds,

the Senior Agreement and the other Senior Loan Documents, to the extent and in the

manner provided in the Subordination Agreement. . . . The rights and remedies of the

(continued...)

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to bring suit, because the Subordination Agreement is the controlling document if

there are any “conflicts or inconsistency” among the Financing Documents. To

further buttress this argument, Mermart urges us to find that the terms “Subordinate

Mortgagee” and “Subordinate Bondholder,” as used in the Financing Documents, are

in effect interchangeable with no discernable differences in meaning or the parties the

terms represent. 

Pursuant to Missouri law, a court must enforce a contract “as written and

according to the plain meaning of the words in the contract when the contract is clear

and unambiguous.” Contract Freighters, Inc. v. Hunt Transp., Inc., 245 F.3d 660, 663

(8th Cir. 2001) (quoting Farmland Indus., Inc. v. Frazier-Parrott Commodities, 111

F.3d 588, 590 (8th Cir. 1997)). When faced with conflicting or ambiguous specific

and general provisions in a contract, a court should enforce the more specific of the

terms. Five Star Quality Care-MO, L.L.C. v. Lawson, 283 S.W.3d 811, 815 (Mo. Ct.

App. 2009). The terms of a contract should be read as a whole to determine the intent

of the parties, TAP Pharm. Prods., Inc. v. St. Bd. of Pharmacy, 238 S.W.3d 140, 143

(Mo. 2007), and “[t]he test for ambiguity is whether the disputed language is

reasonably susceptible of more than one meaning when the words are given their plain

meaning as understood by an average person.” Rabius v. Brandon, 257 S.W.3d 641,

645 (Mo. Ct. App. 2008) (quoting Lacey v. St. Bd. of Registration for the Healing

Arts, 131 S.W.3d 831, 839 (Mo. Ct. App. 2004)). 

In this case, the Indenture and Subordination Agreement limit the rights and

remedies available to the Subordinate Bondholders. For example, the Indenture states

in section 2105

 that the bonds are subordinate to all senior financing instruments, and

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(...continued)

holders and subsequent holders of Bonds under this Indenture are subject to the

restrictions and limitations set forth in the Subordination Agreement.

Indenture, § 210. The Subordinate Loan Agreement also says that the “Indenture and

this Loan Agreement are and shall be subject and subordinate in all respects . . . to the

terms and conditions of the Subordination Agreement.” Subordinate Loan

Agreement, § 3.09.

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An Event of Default is defined as a failure to make

payment of any interest on the Bonds shall not be made when the same

becomes due and payable, provided sufficient Subordinate Loan

Available NOI has been deposited in the Bond Fund; . . . Notice of an

Even of Default hereunder shall be promptly provided by the Trustee to

the Senior Bonds Trustee, . . . .

Indenture, § 701(a).

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 Section 703 provides for “Enforcement of Remedies” and section 707 restricts

actions of individual bondholders.

Upon the happening and continuance of any Event of Default hereunder,

but subject to the terms of the Subordination Agreement, then and in

every such case the Trustee may proceed, and upon the written request

of . . . the holders of not less than 51% in aggregate principal amount of

the Bonds then Outstanding hereunder and receipt by the Trustee of

(continued...)

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that the bonds are subordinate to the “extent and manner” provided for in the

Subordination Agreement and all “rights and remedies . . . are subject to the

restrictions and limitations [therein] set forth.” Indenture, § 210. Yet sections 701,

703(a), and 707(a) then set forth the procedure in which an event of default may be

remedied. Section 7016

 defines an Event of Default as a failure to pay any interest due

on the bonds, provided there is a sufficient amount of money in the SLNOI. § 701(a).

The Subordinate Bondholders may remedy7

 such default by submitting a written

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(...continued)

indemnity satisfactory to it for its fees and expenses . . . shall, subject to

the provisions of the Subordination Agreement proceed . . . to protect

and enforce its rights and the rights of the Bondholders . . . .

Indenture, § 703(a).

No Bondholder shall have any right to institute any suit . . . unless (i)

such Bondholder previously shall have given the Trustee written notice

of the Event of Default on account of which such suit, action or

proceeding is to be instituted; (ii) the holders of not less than 51% of the

Bonds then Outstanding shall have made written request of the Trustee

. . . and shall have afforded the Trustee a reasonable opportunity either

to proceed to exercise the powers hereinabove granted . . . , and (iii)

there shall have been offered to the Trustee reasonable security and

indemnity against the costs . . . , and the Trustee shall have refused or

neglected to comply with such request within a reasonable time; . . . .

Indenture, § 707(a).

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Without the prior written consent of the Senior Mortgagee in each instance, the

Subordinate Mortgagee shall not . . . (v) appear in, defend or bring any action to

protect the Subordinate Mortgagee’s interest in the Mortgaged Property, or (vi) take

any action concerning environmental matters affecting the Mortgaged Property.

Subordination Agreement, § 4(b).

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request to the Trustee to sue, with at least 51 percent of the bondholders joining,

provided the bondholders provide satisfactory indemnity for expenses and fees.

Indenture, §§ 703(a), 707(a). 

The Indenture cannot be interpreted in isolation because it cross-references the

Subordination Agreement and refers to that instrument as controlling. For example,

section 4(b)8

 of the Subordination Agreement states that the Subordinate Mortgagee

shall not bring action against or take any action concerning environmental matters,

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The Subordinate Mortgagee may not proceed with an Enforcement Action until

the Subordinate Mortgagee has given the Senior Mortgagee an “Enforcement Action

Notice,” and “the Senior Mortgagee has delivered to the Subordinate Mortgagee the

Senior Mortgagee’s written consent to such Enforcement Action by the Subordinate

Mortgagee.” Subordination Agreement, § 5(c).

10It even provides that such permission can be withheld arbitrarily. “The

Subordinate Mortgagee acknowledges that the Senior Mortgagee may grant or refuse

consent [with] . . . sole and absolute discretion, and that such discretion may be

exercised in an arbitrary manner.” Subordination Agreement, § 5(c).

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unless it has the prior written consent of the Senior Mortgagee. Section 5(c)9

 then

states that the Subordinate Mortgagee may not commence an action until there has

been notice of the intent to commence a legal suit and the Senior Mortgagee gives

written consent. These terms are not “susceptible of more than one meaning,” but

rather supplement the enforcement procedure in the Indenture. Rabius, 257 S.W.3d

at 645. Furthermore, this section states that the Senior Mortgagee has the “sole and

absolute discretion” to decide whether to grant permission to sue,10 which is a fair and

reasonable limitation among sophisticated parties because the senior debtholders

granted consent to allow subordinate debtholders. We interpret the Financing

Documents as a whole and find that sections 4(b) and 5(c) of the Subordination

Agreement provide that the Senior Mortgagee must give written consent to sue. See

TAP Pharm. Prods., Inc., 238 S.W.3d at 143. Thus, these sections supplement the

procedure set forth in section 707 of the Indenture; after the Subordinate Bondholders

provide written notice to sue and satisfactory indemnity, sections 4(b) and 5(c) of the

Subordination Agreement then impose limitations on the Subordinate Bondholders’

unilateral ability to proceed with a lawsuit.

 

The Subordinate Bondholders assert that the maxim of expressio unius est

exclusio alterius applies, meaning that the expression of one thing is to the exclusion

of another. Am. Life Ins. Co. v. Barrett, 847 S.W.2d 125, 133 (Mo. Ct. App. 1993).

In this case, the Subordinate Bondholders assert, therefore, that the omission of the

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11The Preamble to the Subordination Agreement states,

THIS SUBORDINATION AGREEMENT (this “Agreement”) is entered

into as of the 1st day of December, 2005, by and between (i) . . .

(“Freddie Mac”) (ii) UMB BANK, N.A., a national banking

association, as trustee (the “Bond Trustee”) and together with Freddie

Mac, the “Senior Mortgagee”), (iii) UMB BANK, N.A., a national

banking association, as trustee for the Series B Bonds (as hereinafter

defined) (the “Subordinate Mortgagee”).

Subordination Agreement, pmbl. (emphasis in original). The Definitions section also

defines “Subordinate Mortgagee” as the “person or entity named as such in the first

paragraph of this Agreement and any other person or entity who becomes the legal

holder of the Subordinate Note after the date of this Agreement.” Id. at 1(n). 

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term “Subordinate Bondholders” from the Subordination Agreement was intentional

and that any sections not explicitly referring to “Subordinate Bondholders”—for

example, those referring to “Subordinate Mortgagees”— should not apply to them.

We note that the Subordination Agreement refers to the bondholders as “Subordinate

Mortgagees,” with this term defined as the “legal holder of the Subordinate Note” or

the Series B bonds.11 Courts should reject the interpretation of a contract that leads

to “unreasonable results when probable or reasonable construction can be adopted.”

Stonebrook Estates, L.L.C. v. Greene County, 275 S.W.3d 353, 355 (Mo. Ct. App.

2008) (quoting Blackburn v. Habitat Dev. Co., 57 S.W.3d 378, 386 (Mo. Ct. App.

2001)). 

If we find that the Senior Mortgagee must give written consent to suit, then the

Subordinate Bondholders claim that section 707(a) of the Indenture is rendered

meaningless, and “[a] construction that attributes a reasonable meaning to all the

provisions of the agreement is preferred to one that leaves some of the provisions

without function or sense.” Dunn Indus. Group, Inc. v. City of Sugar Creek, 112

S.W.3d 421, 428 (Mo. 2003) (citing City of Harrisonville v. Public Water Supply

Dist. No. 9 of Cass County, 49 S.W.3d 225, 231 (Mo. Ct. App. 2001)). We find that

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such an interpretation does not render section 707(a) meaningless. Sections 703 and

707(a) establish the procedure for the Subordinate Bondholders to bring notice of an

event of default to UMB Bank, and this right of the Subordinate Bondholders is not

abridged in any way by the Subordination Agreement. Instead, when read together,

the Subordination Agreement limits the power of the Subordinate Trustee/Mortgagee

to bring suit against the Senior Mortgagee because it requires that the Senior

Mortgagee must give written consent to be sued. This unequivocal consent

requirement serves to protect the superior interests of the senior bondholders in the

property over the subordinate interests. 

Thus, we conclude that the Subordination Agreement required the Subordinate

Bondholders to obtain the written consent of the Senior Mortgagee before bringing

the enforcement action. The district court properly dismissed the breach of contract

and accounting claims.

The Subordinate Bondholders have raised for the first time on appeal the

argument that the written consent to suit is unconscionable as applied. We decline to

address this argument as it was not raised in the lower court. “Absent exceptional

circumstances we will not consider arguments raised for the first time on appeal.”

McBurney v. Stew Hansen’s Dodge City, Inc., 398 F.3d 998, 1002 (8th Cir. 2005).

See also Cole v. Int’l Union, United Auto., Aerospace & Agr. Implement Workers of

Am., 533 F.3d 932, 936 (8th Cir. 2008); Data Mfg., Inc. v. United Parcel Serv., Inc.,

557 F.3d 849, 854–55 (8th Cir. 2009). We find no exceptional circumstances here.

 

The Subordinate Bondholders next assert that separate and independent state

claims for relief lie in tort, including the claims of negligence, unjust enrichment, and

fraudulent misrepresentation. Mermart counters that the these claims are barred by

the written permission to suit requirement and, alternatively, because the negligence

and unjust enrichment claims arise solely under the Financing Documents and are

purely economic losses. The economic loss doctrine bars “recovery of purely

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pecuniary losses in tort where the injury results from a breach of a contractual duty.”

Zoltek Corp. v. Structural Polymer Group, Ltd., 2008 WL 4921611, at *3 (E.D. Mo.

2008), aff’d on other grounds, No. 08-3928, 2010 WL 273957 (8th Cir. Jan. 26,

2010). 

We begin by addressing the negligence and unjust enrichment claims. The

district court dismissed the negligence claim as it “is precluded by the Subordination

Agreement because plaintiff did not obtain the consent of the Senior Mortgagee prior

to filing a claim based on the financing documents.” Dubinsky, 2009 WL 1011503,

at *5. We agree with the district court that the negligence claim is an enforcement

action under the Subordination Agreement. Id. Similarly, we find that, like the

negligence claim, the failure to make interest payments due to the characterization of

the lead paint remediation as an “upgrade expense,” is a matter that arises out of the

Financing Documents. The Subordinate Bondholders assert that Mermart’s

miscalculation of the cost of lead based paint removal deprived them of interest

payments, thereby unjustly enriching Mermart. Yet the district court was correct in

concluding that the Subordinate Bondholders’ “unjust enrichment claim seeks

recovery for events arising solely out of the financing documents” and that all alleged

instances of representations “concerning the presence or absence of lead based paint

is contained exclusively within the contracts themselves.” Id. at *5–6. Thus, we need

not reach the issue of the economic loss doctrine. We affirm the dismissal of the

negligence and unjust enrichment claims because the Subordinate Bondholders did not

obtain written permission to sue. 

Finally, the Subordinate Bondholders argue that Mermart made fraudulent

misrepresentations pertaining to the absence of lead-based paint. Mermart counters

that any such alleged statements are also covered solely by contractual duties. “A

fraud claim is permitted only if it arises from acts that are separate and distinct from

the contract.” O’Neal v. Stifel, Nicolaus & Co., Inc., 996 S.W.2d 700, 702 (Mo. Ct.

App. 1999) (citing Bernoudy v. Dura-Bond Concrete Restoration, Inc., 828 F.2d 1316,

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1318 (8th Cir. 1987)). Mermart represented that it “shall not cause or permit . . . any

violation or noncompliance” with environmental hazards, including lead-based paint.

Subordinate Multifamily Deed of Trust, § 18(a)(v). Here, we find that the claimed

fraudulent misrepresentation is also a matter that arises out of the Financing

Documents. Again, we affirm the dismissal of this claim because the Subordinate

Bondholders did not first obtain the written permission from the Senior Mortgagee to

sue. 

III. CONCLUSION

Because we conclude that the district court did not err in granting the motion

to dismiss, we affirm. 

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