Court Opinion

ID: 2658183
Source: CourtListenerOpinion
Date Created: 2014-03-28 00:02:42.77511+00
Date Added: 2024-06-11T12:34:34.212145
License: Public Domain

IN THE
               ARIZONA COURT OF APPEALS
                                DIVISION ONE

   TM2008 INVESTMENTS, INC., an Arizona corporation; BONNIE
 VANZANT; JAMES VANZANT, Plaintiffs/Counterdefendants/Appellants,

                                      v.

           PROCON CAPITAL CORP., an Arizona corporation,
                 Defendant/Counterclaimant/Appellee.

                            No. 1 CA-CV 12-0648
                             FILED 3-27-2014

           Appeal from the Superior Court in Maricopa County
           Nos. CV2010-009340, CV2010-009350 (Consolidated)
               The Honorable Arthur T. Anderson, Judge

                     REVERSED AND REMANDED

                                 COUNSEL

Sanders & Parks, P.C., Phoenix
By G. Gregory Eagleburger
Counsel for Plaintiffs/Counterdefendants/Appellants

David C. Larkin, P.C., Tempe
By David C. Larkin
Counsel for Defendant/Counterclaimant/Appellee
                        TM2008 et al. v. PROCON
                          Decision of the Court

                                OPINION

Judge Lawrence F. Winthrop delivered the decision of the Court, in which
Presiding Judge Patricia A. Orozco and Judge Kenton D. Jones joined.

W I N T H R O P, Judge:

¶1             TM2008 Investments, Incorporated, Bonnie Vanzant, and
James Vanzant appeal a judgment against them following a jury trial.
Appellants identify a number of arguments on appeal, principally that the
trial court erred by finding that they necessarily owed fiduciary duties to
ProCon Capital Corporation, a fellow member of Doveland
Developments, an Arizona limited liability company (“LLC”), and
therefore had no liability based on an alleged breach of such duty. For the
following reasons, we reverse and remand for a new trial.

                FACTS AND PROCEDURAL HISTORY

¶2           In 2007, Bonnie Vanzant and her ex-husband, John
Greenbank, owned twenty-two-and-a-half acres of land in Show Low
through Silverdove Properties, LLC. The Silverdove land was adjacent to
a proposed 54 acre residential development, Eagle Mountain Estates, a
project owned and controlled by Steve Tackett. With the goal of
developing the land into a cohesive residential community while sharing
the costs of marketing, amenities, and off-site construction, Greenbank
and Tackett had entered an agreement in 2006 to merge the Silverdove
property with Eagle Mountain Estates. Tackett’s Eagle Mountain Estates,
LLC, then began work on Silverdove’s infrastructure.

¶3           In December 2007, Steve Tackett and Bonnie Vanzant
formed Doveland Developments, LLC, for the purpose of developing the
Silverdove property. Steve Tackett signed the agreement on behalf of
ProCon Capital Corporation, a company formed to take over the interest
of Eagle Mountain Estates. On January 1, 2008, Bonnie Vanzant signed
Doveland Developments’ operating agreement on behalf of TM2008
Investments, a company formed to replace her interest in Doveland
Developments. These entities are the only members of Doveland
Developments.

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¶4           In March 2008, Silverdove Properties, LLC, and Doveland
Developments, LLC, entered a vacant land purchase agreement.
According to this agreement, Doveland Developments would develop the
Silverdove property and pay Silverdove a total of $1,890,000; Silverdove
would receive payment as Doveland Developments sold the improved
lots. The parties also memorialized this agreement by signing a
promissory note secured by deed of trust with final payment due on May
1, 2013.

¶5             To further finance the development of Silverdove, Doveland
Developments obtained a construction loan from Biltmore Bank. The loan
was to be disbursed in stages as Doveland Developments and its
contractors completed phases of development and the City of Show Low
certified that construction. Biltmore Bank also required Bonnie Vanzant
and Steve Tackett to personally guarantee the loan. Vanzant and Tackett
then signed an indemnification agreement between one another in the
event of default.

¶6               During 2008, Doveland Developments obtained three draws
on the loan as it proceeded with the construction of infrastructure. Other
corporations owned by Tackett primarily handled the construction and
marketing efforts. By January 2009, however, Biltmore Bank had issued
its first letter of default, alleging that Doveland Developments had failed
to fulfill the terms in the construction loan that required a minimum level
of construction. In a second letter of default issued in February 2009,
Biltmore Bank also alleged that Doveland Developments was in default
because Tackett had provided incorrect information regarding a previous
bankruptcy on another credit application for another company.

¶7             Faced with notices of default, the members of Doveland
Developments disagreed as to the appropriate course of action. Tackett
took the position that the project could be saved, while the Vanzants
wanted to avoid getting deeper into debt. Tackett suggested working
with Biltmore Bank to re-establish the loan and continue construction. In
the alternative, Tackett suggested encouraging the City of Show Low to
pressure the bank to provide enough funds to complete the off-site
construction, while the parties sought outside financing for the remaining
construction. Tackett also continued negotiations with a third-party
interested in the lots, producing a proposed letter of intent from the third-
party to purchase up to six lots each year for three years.

¶8           Meanwhile, the Vanzants sought to extricate themselves
from the project before accumulating more debt. The Vanzants refused to

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challenge Biltmore Bank on the default, and instead paid the bank not
only the amount necessary to cure the default, but the entire sum
advanced by the bank to date. Similarly, the Vanzants decided against
pressuring the City of Show Low to enforce a disputed assurance letter
from Biltmore Bank. The Vanzants also rejected the proposed third-party
letter of intent, stating the deal was not sufficiently developed to be
profitable. In the confusion surrounding whether ProCon Capital had
been administratively dissolved for failing to submit an annual report, the
Vanzants attempted to deed the Doveland Developments property back to
Silverdove Properties.

¶9             As the project unraveled, litigation ensued. Bonnie Vanzant
filed suit against Tackett, pursuant to the loan indemnification agreement,
to recover half of the money she paid on the construction loan. TM2008
Investments then filed a petition for dissolution and liquidation of
Doveland Developments, citing the inability to conduct business in light
of the members’ substantial disagreements.            ProCon Capital filed
counterclaims against TM2008 Investments for breach of the implied
covenant of good faith and fair dealing (count 1) and breach of contract
(count 3), and against TM2008 Investments and the Vanzants personally
for breach of fiduciary duty (count 2).1 In its counterclaims, ProCon
Capital sought to recover investment and construction-related expenses as
unjust enrichment, plus its share of the potential profit for the project.

¶10           Following consolidation of the suits, the trial court granted
Bonnie Vanzant’s motion for summary judgment on the indemnification
claim. The trial court denied TM2008 Investments’ motion for summary
judgment on the counterclaims. Just prior to trial, ProCon Capital
voluntarily dismissed with prejudice counts 1 and 3. After an eight-day
jury trial on the claim for breach of fiduciary duty, the jury returned a
verdict in favor of ProCon Capital and against TM2008 Investments and
the Vanzants personally for a total of $1,039,754.

1      ProCon Capital also sought declaratory and injunctive relief
regarding TM2008 Investments’ attempt to deed the property back to
Silverdove Properties.        The trial court later determined that this
counterclaim was moot because TM2008 Investments agreed the
document was null and void, and this claim is not a subject of this appeal
except as it relates to the alleged breach of fiduciary duty.

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¶11           TM2008 Investments and the Vanzants filed post-trial
motions for judgment as a matter of law and a new trial that the trial court
denied. The court also awarded ProCon Capital its attorneys’ fees in the
amount of $93,422. TM2008 Investments and the Vanzants filed a timely
notice of appeal. We have appellate jurisdiction pursuant to the Arizona
Constitution, Article 6, Section 9 and Arizona Revised Statutes (“A.R.S.”)
§ 12-2101(A)(1) (West 2014). 2

                                ANALYSIS

¶12           TM2008 Investments and the Vanzants (collectively
“Appellants”) argue that the trial court erred by imputing common law
fiduciary duties to the members of Doveland Developments. Appellants
also argue that the jury determined damages based on improper evidence.
We review the existence of a fiduciary duty de novo. Maxfield v. Martin,
217 Ariz. 312, 314, ¶ 12, 173 P.3d 476, 478 (App. 2007) (citation omitted).
We review the trial court’s decision to admit evidence for an abuse of
discretion or legal error and resulting prejudice. Belliard v. Becker, 216
Ariz. 356, 358, ¶ 13, 166 P.3d 911, 913 (App. 2007) (citation omitted).

      I.     Doveland Developments and the Existence of a Fiduciary Duty

¶13           Limited liability companies are statutorily-created entities,
designed primarily to provide the personal liability protection found in a
corporate structure, while allowing the LLC members the state and federal
tax benefits generally provided in a partnership setting.

¶14           Arizona enacted its Limited Liability Company Act in 1992.
See 1992 Ariz. Legis. Serv. Ch. 113 (S.B. 1084) (“the LLC Act”); A.R.S. § 29-
601, et seq. Unlike other statutorily-blessed business arrangements, 3 the
LLC Act does not refer to any baseline fiduciary duties that members of an

2      We cite the current Westlaw version of the applicable statutes and
rules because no revisions material to this decision have since occurred.

3       See, e.g., A.R.S. § 10-830(A) (establishing fiduciary duties for
director of corporation); A.R.S. § 10-842(A) (establishing fiduciary duties
for officer of corporation with discretionary authority); A.R.S. § 29-1034(A)
(“The only fiduciary duties a partner owes to the partnership and the
other partners are the duty of loyalty and the duty of care set forth in
subsections B and C.”).

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LLC owe to the LLC or to one another. Appellants contend that, absent
clear statutory language to the contrary, members of an LLC, like
shareholders in a corporation, do not owe the entity or one another a
fiduciary duty. ProCon Capital argues that, of necessity, LLC members
must owe one another a fiduciary duty, either because members are like
shareholders in a closely-held corporation, see Mims v. Valley Nat. Bank, 14
Ariz. App. 190, 192-93, 481 P.2d 876, 878-79 (1971), or partners in a
partnership, Hurst v. Hurst, 1 Ariz. App. 603, 607, 405 P.2d 913, 917 (1965).
Faced with these diametrically-opposed arguments, the trial court
concluded that the “appellate courts will likely find . . . a fiduciary duty
owed by a member of an LLC such as Doveland to another member.”

¶15            We decline in this case to mechanically apply fiduciary duty
principles from the law of closely-held corporations or partnerships to a
limited liability company created under Arizona law. The legislature did
not explicitly outline any such duties for members of an LLC; instead, the
LLC Act allows the members of an LLC to not only create an operating
agreement, but also delineate in that agreement the duties members owe
one another. See A.R.S. § 29-682(B) (“An operating agreement governs
relations among the members and the managers . . . and may contain any
provision that is not contrary to law and that relates to . . . duties or
powers of its members . . . .”). 4 The members of Doveland Developments
created a written operating agreement (the “Agreement”) which does, as
discussed below, outline reciprocal duties the members would owe each
other. Therefore, the trial court erred by imputing, without reference to
the Agreement, a fiduciary duty on the members of Doveland

4       For a similar principle in the common law, see Restatement (Third)
of Agency § 8.06(1) (2006) (permitting the principal to consent to
“[c]onduct by an agent that would otherwise constitute a breach of duty”).
But see Restatement (Third) of Agency § 8.06(1) cmt. b (2006). At oral
argument, ProCon Capital suggested that interpreting the LLC Act to
permit members of an LLC to establish the existence and scope of duties
would lead to operating agreements that condone “cheating and stealing”
under the guise of contract law. As the plain text of the LLC Act makes
clear, however, the operating agreement “may contain any provision that
is not contrary to law.” A.R.S. § 29-682(B). Because cheating and stealing
would clearly be contrary to law, ProCon Capital’s public policy concerns
are unfounded.

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                        TM2008 et al. v. PROCON
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Developments to each other based solely on principles applicable to
closely-held corporations and/or partnerships. 5

             A.     Duty and the Operating Agreement

¶16           We reject as a preliminary matter Appellants’ contention
that Article II, Section A of the Agreement necessarily precludes
application of closely-held corporation or general partnership principles
concerning fiduciary duties to members of this LLC. Article II, Section A
reads: “The Members acknowledge this Company shall be operated in a
manner consistent with its treatment as a partnership for federal and
Arizona income tax purposes. . . . [H]owever, it is acknowledged under
Arizona law that the entity is a limited liability company and specifically
not a general partnership.” This section of the Agreement merely restates
one of the twin aims of forming an LLC: Doveland Developments will be
taxed as a partnership. See, e.g., Ronold P. Platner, A New Alternative—the
Arizona Limited Liability Company, Ariz. Att’y, Jan. 1993, at 23 (“The LLC
resembles the traditional corporation on owner liability issues but is
treated like a partnership for federal and Arizona income tax purposes.
This means the owners of an LLC can enjoy the benefits of the ‘corporate
shield’ plus the tax benefits of partnerships.” (footnote omitted)). In
short, the cited language of the Agreement does not preclude the court
from determining whether and to what extent the Agreement establishes
that members owe each other a fiduciary duty.

5       ProCon Capital urges us to consider the legislative history of the
LLC Act for the proposition that members of an LLC have the same
obligations (i.e., fiduciary duties) as officers of a corporation. See Ariz.
State Sen. Final Revised Fact Sheet for S.B. 1084 (limited liability company
act), at 7 (noting amendments adopted by senate committee “[c]larif[y]
that members, managers, employees, officers, or agents of limited liability
companies have the same liability as similar corporate officers and
directors”) (emphasis added). However, this reference to “same liability”
in the legislative history sheds no light on the more specific fiduciary duty
members of an LLC might owe to each other. Absent clear reference to
fiduciary duties, and given the text of the LLC Act, a more considered
reading of the legislative history suggests “same liability” refers to the
limitation on liability owed to third parties. See also Minutes of Comm. on
Commerce and Labor, S. 40, 2d Sess., at 4 (Ariz. 1992) (statement of
analyst Patrice Kraus) (summarizing that the LLC Act “provides that
members of a limited liability company generally are not personally liable
for the debts and obligations of the company.”).

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                        TM2008 et al. v. PROCON
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¶17            Article V, Section A of the Agreement provides that “[t]he
Members shall direct, manage, and control the business of the Company
to the best of the Members’ ability and[] subject only to those restrictions
set forth in the Act or this Agreement.” (Emphasis added). In Article V,
Section F, the Agreement states:

      It is agreed any Member shall not be liable to the Company
      or any other Member for any damages or the like relating to
      any vote, decision, action, inaction or the like taken on
      behalf of the Company in accordance with these provisions
      and other provisions of this Agreement if such is done in
      good faith and with reasonable business judgment including
      the duty to make management decisions with the care of an
      ordinarily prudent person in a like position and similar
      circumstances and in a manner believed to be in the best
      interests of the Company. (Emphasis added).

This provision unquestionably establishes, pursuant to A.R.S. § 29-682(B),
the existence and scope of the duties owed by and between TM2008
Investments and ProCon Capital as members of Doveland Developments.
We need not reach the issue of whether these duties are “fiduciary” in
nature; that label may evoke different concepts and applications in
different settings. We do note, however, that in this Agreement: (1) the
obligation to act in good faith explicitly acknowledges what is generally
implied at law in any contractual relationship; (2) the obligation to utilize
reasonable business judgment and to act as an ordinarily prudent person
in making decisions seems to establish an applicable standard of care; and
(3) the obligation to act in a manner believed to be in the best interests of
the Company appears consistent with the general concept of a duty of
loyalty to the business entity, here Doveland Developments.

             B.     The Operating Agreement and the Jury Instructions

¶18           Appellants argue that the jury instructions misstated the
nature of the duty owed by the members of Doveland Developments to
each other. “We review jury instructions as a whole to determine whether
the jury has been given the proper rule of law to apply when coming to a
decision.” Dawson v. Withycombe, 216 Ariz. 84, 105, ¶ 63, 163 P.3d 1034,
1055 (App. 2007) (citation omitted). “A jury verdict will not be overturned
because of the jury instructions that were given unless there is a
substantial doubt as to whether or not the jury was properly guided in its
deliberations.” Durnin v. Karber Air Conditioning Co., 161 Ariz. 416, 419,
778 P.2d 1312, 1315 (App. 1989).

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                        TM2008 et al. v. PROCON
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¶19          In relevant part, the jury was instructed on duty as follows:

      Defendant, TM2008 Investments, Inc., and Plaintiff, Procon
      Capital Corporation, were Members in Doveland
      [Developments], L.L.C.

      Members in an L.L.C. owe a special duty to one another,
      which is called a fiduciary duty. This duty requires
      Members to deal in utmost good faith with one another and
      fully disclose to one another all material facts relating to the
      L.L.C.‘s affairs within their knowledge.

      Plaintiff, Procon Capital Corporation, claims that Defendant,
      TM2008 Investments, Inc., breached this fiduciary duty. To
      establish this claim, Plaintiff must prove:

             1. TM2008 Investment breached this duty;

             2. TM2008 Investments’ breach was a cause of Procon
             Capital Corporation’s damages; and

             3. Procon Capital Corporation’s damages.

¶20           As previously noted, the trial court concluded in summary
judgment proceedings that a fiduciary duty between the members existed,
not based upon the parties’ written Agreement, but rather based upon
comparison with other business forms and the common law. Article V,
Section F of the Agreement, however, establishes the duties owed and the
liability yardstick by which the claims and defenses of this case are
measured. By failing to advise the jury of the parameters specifically
outlined in Article V, Section F of the Agreement, the trial court did not
inform or guide the jury concerning the nature and extent of the duties
TM2008 Investments owed ProCon Capital. We therefore reverse the
verdict and judgment in favor of ProCon Capital and remand for a new
trial. 6

6      We note the mandatory alternative dispute resolution provisions
set forth in the Agreement at Article XIV, but do not in this decision
determine whether, on remand, the claims in this case are subject to
mediation and/or binding arbitration.

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       II.    Damages

¶21           Appellants argue that recovery predicated on unjust
enrichment is not available to ProCon Capital because “TM2008
[Investments] did not and does not now own the [improved] land and
therefore cannot legally or practically be ‘enriched’ by such
‘enhancement.’ The only party enriched was Doveland [Developments]
. . . .” Appellants also argue that ProCon Capital improperly introduced
and relied on evidence of the construction and other project-related debt
owed by Doveland Development to legally distinct entities owned by
Steve Tackett.

              A.     Unjust Enrichment

¶22           At oral argument, ProCon Capital asserted that unjust
enrichment is available because the Vanzants will ultimately gain control
of the land through the note and deed of trust between Doveland
Developments and Silverdove Properties, LLC, leading the Vanzants to be
unjustly enriched. For the following reasons, we conclude that a claim of
unjust enrichment is not yet ripe for adjudication at this stage in the
judicial process.

¶23            Flooring Systems, Inc. v. Radisson Grp., Inc., 160 Ariz. 224, 772
P.2d 578 (1989), illustrates why unjust enrichment is not yet applicable at
this stage of the proceedings. Flooring Systems was a subcontractor that
performed flooring work in a Radisson hotel on a contract with a separate
general contractor. Id. at 225, 772 P.2d at 579. When the general
contractor refused to pay Flooring Systems, Radisson refused to pay the
general contractor the remainder of the balance, but also refused to pay
Flooring Systems for the work performed. Id. at 225-26, 772 P.2d at 579-80.

¶24           Flooring Systems then sued Radisson and Radisson’s agent
on a theory of unjust enrichment. Id. The trial court granted the
defendants’ motions for summary judgment after the defendants argued
that they could not be held liable because they contracted with the general
contractor, not Flooring Systems. Id. at 226, 772 P.2d at 580. This
argument rested on a line of cases based on the Restatement of Restitution
§ 110 (1937), which states:

       § 110 Restitution from Beneficiary of a Contract with Third
       Person Who Has Failed to Perform.

       A person who has conferred a benefit upon another as the
       performance of a contract with a third person is not entitled

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       to restitution from the other merely because of the failure of
       performance by the third person.

See Flooring Systems, Inc., 160 Ariz. at 226, 772 P.2d at 280; see also Stratton
v. Inspiration Consol. Copper Co., 140 Ariz. 528, 683 P.2d 327 (App. 1984);
Advance Leasing & Crane Co. v. Del E. Webb Corp., 117 Ariz. 451, 573 P.2d
525 (App. 1977).

¶25           On appeal, however, the supreme court rejected that
defense, relying on the principle that:

       In determining whether it would be unjust to allow the
       retention of benefits without compensation, a court need not
       find that the defendant intended to compensate the plaintiff
       for the services rendered or that the plaintiff intended that
       the defendant be the party to make compensation. This is
       because the duty to compensate for unjust enrichment is an
       obligation implied by law without reference to the intention
       of the parties. What is important is that it be shown that it
       was not intended or expected that the services be rendered
       or the benefit conferred gratuitously, and that the benefit
       was not conferred officiously.

Flooring Systems, Inc., 160 Ariz. at 227, 772 P.2d 578, 581 (citations and
quotations omitted).

¶26          Viewing our case through this lens, the arguments of both
sides come into focus: TM2008 argues that the principle from the
Restatement of Restitution § 110 governs the situation; conversely, ProCon
Capital argues that Flooring Systems, Inc. should apply.

¶27           Comparing this case to Flooring Systems, Inc., we conclude
that any claim of unjust enrichment here is not ripe for adjudication until
the liquidation of Doveland Developments occurs. This conclusion allows
the liquidation process to settle the debts owed by Doveland
Developments after liquidation and affords the parties in any potential
post-liquidation suit the opportunity to advocate for the application of the
proper rule at that time.

              B.     Evidence of Damages

¶28          Appellants contend that the trial court erred by admitting
evidence of debts owed by Doveland Developments to legally distinct
entities owned by Steve Tackett. The trial court admitted the disputed

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evidence because it was relevant to establish a breach of the fiduciary duty
owed by Appellants and the infrastructure value added to the Silverdove
property. The trial court did not abuse its discretion in admitting the
evidence on the issue of breach of duty; however, the court did err in
allowing the jury to utilize this evidence to calculate any damage award in
favor of Appellants against ProCon Capital. The debts owed by Doveland
Developments to separate legal entities that are not parties to this suit are
more appropriately directed to the liquidation proceedings for Doveland
Developments.

      III.   Attorneys’ Fees

¶29           Appellants appeal the trial court’s award of attorneys’ fees.
Because we have reversed the judgment, we also reverse the award of
attorneys’ fees.

¶30          ProCon Capital requests attorneys’ fees on appeal pursuant
to Arizona Rule of Appellate Procedure 21 and A.R.S. § 12-341.01(A).
However, § 12-341.01(A) requires that a party be successful to be entitled
to an award of attorneys’ fees. Because ProCon Capital is not yet
successful, we deny its request.

¶31           Appellants request attorneys’ fees on appeal pursuant to
A.R.S. § 12-2101, Arizona Rule of Civil Appellate Procedure 21(a) and (c)
and the Operating Agreement. Section 12-2101 is a jurisdictional statute,
and neither that statute nor Rule 21, ARCAP, provides a substantive basis
for an award of attorneys’ fees. The Agreement does authorize payment
of “attorney fees incurred because of [a] breach”; however, Appellants
have not pursued any breach of contract claim in this action. 7 We
therefore deny their request.

¶32           We take no position with regard to the basis for or propriety
of an attorneys’ fees award for either party following the resolution of the
underlying merits of this case. Accordingly, we reserve the question of
attorneys’ fees without prejudice to the sound discretion of the trial court.

7     Appellants have explicitly argued in their briefing to this court that
an attorneys’ fee award based on a claim of breach of fiduciary duty
sounding in tort, as the claim was prosecuted below, is improper.

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                           CONCLUSION

¶33           We reverse and remand the case for a new trial consistent
with this decision.

                                :MJT

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