Court Opinion

ID: 4192924
Source: CourtListenerOpinion
Date Created: 2017-08-03 17:03:21.623493+00
Date Added: 2024-06-11T14:40:24.054244
License: Public Domain

FILED
                                                                FEB 27 2015
 1                          NOT FOR PUBLICATION
                                                            SUSAN M. SPRAUL, CLERK
                                                              U.S. BKCY. APP. PANEL
 2                                                            OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )       BAP No.      CC-14-1340-KuDKi
                                   )
 6   RICHARD JAY BLASKEY,          )       Bk. No.      11-21187
                                   )
 7                  Debtor.        )       Adv. No.     11-01462
     ______________________________)
 8                                 )
     BARTON PROPERTIES, INC.;      )
 9   STEPHEN SELINGER,             )
                                   )
10                  Appellants,    )
                                   )
11   v.                            )       MEMORANDUM*
                                   )
12   RICHARD JAY BLASKEY,          )
                                   )
13                  Appellee.      )
     ______________________________)
14
                    Argued and Submitted on February 19, 2015
15                          at Los Angeles, California
16                          Filed – February 27, 2015
17             Appeal from the United States Bankruptcy Court
                   for the Central District of California
18
          Honorable Erithe A. Smith, Bankruptcy Judge, Presiding
19
20   Appearances:      Anthony A. Patel argued for appellants Barton
                       Properties, Inc. and Stephen Selinger.**
21
22   Before: KURTZ, DUNN and KIRSCHER, Bankruptcy Judges.
23
24
          *
           This disposition is not appropriate for publication.
25   Although it may be cited for whatever persuasive value it may
26   have (see Fed. R. App. P. 32.1), it has no precedential value.
     See 9th Cir. BAP Rule 8024-1.
27
          **
           Appellee Richard Jay Blaskey did not actively participate
28   in this appeal.
 1                               INTRODUCTION
 2        Plaintiffs Barton Properties, Inc. and Stephen Selinger
 3   obtained a judgment against their former attorney Richard Jay
 4   Blaskey for roughly $1 million.    After Blaskey filed bankruptcy,
 5   the plaintiffs commenced an adversary proceeding seeking to have
 6   the judgment debt declared nondischargeable under 11 U.S.C.
 7   §§ 523(a)(2)(A), (4) and (6).1    After trial, the bankruptcy court
 8   entered judgment against the plaintiffs, holding that the
 9   plaintiffs had not met their burden of proof to establish that
10   the damages they incurred resulted from nondischargeable conduct.
11        The bankruptcy court correctly identified a preponderance of
12   the evidence as the applicable burden of proof standard but also
13   indicated that, in the nondischargeability context, this standard
14   of proof was subject to a special gloss or spin that required the
15   court to view the evidence “in the light most favorably” to
16   Blaskey.   We disagree.   The preponderance of the evidence
17   standard must be applied in nondischargeability proceedings the
18   same as it would be applied in any other type of proceedings.
19        If the court had applied the preponderance of the evidence
20   standard correctly, it might have ruled differently on
21   plaintiffs’ §§ 523(a)(2)(A) and (6) claims.    We must VACATE the
22   bankruptcy court’s ruling on these claims and REMAND so it can
23   apply the preponderance of the evidence standard correctly.
24        On the other hand, on this record, no reasonable trier of
25
26        1
           Unless specified otherwise, all chapter and section
27   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
     all "Rule" references are to the Federal Rules of Bankruptcy
28   Procedure, Rules 1001-9037.

                                       2
 1   fact could have found either embezzlement or fiduciary
 2   defalcation within the meaning of § 523(a)(4) even if the
 3   preponderance of the evidence standard had been applied
 4   correctly.    Therefore, the court’s incorrect application of the
 5   preponderance of the evidence standard was harmless error with
 6   respect to the plaintiffs’ § 523(a)(4) claim.    We AFFIRM the
 7   bankruptcy court’s ruling on that claim on this basis.
 8                                    FACTS
 9        The plaintiffs retained Blaskey in 2004.    Among other legal
10   matters, the parties agreed that Blaskey would represent them in
11   three unrelated lawsuits, which the plaintiffs refer to as the
12   underlying actions.    The underlying actions included one lawsuit
13   brought by Luba and Vladmir Tomalveska against Barton Properties
14   (LASC Case No. SC085977) and two lawsuits brought by Barton
15   Properties, one against the City of Los Angeles and the other
16   against Geosystems, Inc. (LASC Case Nos. BC311407 and BC312631).
17        In 2007, the plaintiffs discovered that Blaskey had been
18   derelict in representing them in the underlying actions to such
19   an extent that the state court presiding over the underlying
20   actions had entered adverse orders and judgments against Barton
21   Properties.   As a result, in 2008, Barton Properties sued Blaskey
22   in state court for legal malpractice, breach of contract, fraud
23   and breach of fiduciary duty.    The state court ultimately entered
24   a default judgment against Blaskey in 2010.
25        Blaskey commenced his bankruptcy case in August 2011, and
26   the plaintiffs filed their nondischargeability adversary
27   proceeding shortly thereafter.    The plaintiffs alleged three
28   distinct clams for relief, one under § 523(a)(2)(A), another

                                        3
 1   under § 523(a)(4) and another under § 523(a)(6).
 2        The court held the trial on the plaintiffs’ three claims in
 3   March 2014.   The plaintiffs offered into evidence only a handful
 4   of exhibits and presented the testimony of only one witness:
 5   Selinger, who at all relevant times was the president of Barton
 6   Properties.   Selinger testified that, in 2006, Blaskey led him to
 7   believe that Blaskey was taking care of all of the litigation and
 8   settlement tasks that needed taking care of in the underlying
 9   actions and that, if he (Selinger) had known the truth – that
10   Blaskey was derelict in his duties – Barton Properties would not
11   have paid Blaskey’s 2006 invoices for legal fees to the tune of
12   roughly $50,000.   Selinger also testified that, if Blaskey had
13   not lied to him about the performance of his duties, he would
14   have hired new counsel, who might have had opportunities to
15   prevent or have set aside some or all of the adverse orders and
16   judgments entered in the underlying actions.
17        Notably, however, Selinger’s testimony contained virtually
18   no specifics about what Blaskey reported to him about the status
19   of the underlying actions, when Blaskey made particular reports,
20   when Barton Properties made payments to Blaskey and how much was
21   paid in each instance.   Furthermore, Selinger offered no
22   specifics regarding the remedial opportunities available at the
23   time but later lost because Barton Properties was relying on
24   Blaskey’s misstatements.
25        The plaintiffs offered two distinct types of evidence to
26   demonstrate the amount of damages they suffered.   First, there
27   was Selinger’s testimony.   Selinger gave a generalized account of
28   damages, broken down by underlying action.   According to

                                      4
 1   Selinger, as a result of Blaskey’s conduct, Barton Properties
 2   suffered roughly $470,000 in damages in the Geosystems action,
 3   roughly $60,000 in the Tomalveska action and $450,000 in the City
 4   of Los Angeles action.   For the most part, Selinger did not offer
 5   specific details concretely demonstrating how Blaskey’s
 6   nondischargeable conduct caused Barton Properties’ damages in the
 7   underlying actions.
 8        The second type of evidence the plaintiffs offered at trial
 9   to establish their damages was documentary.   Specifically, the
10   plaintiffs offered as exhibits the complaint filed and the
11   $1 million default judgment entered in their state court action
12   against Blaskey.   The plaintiffs in essence asserted that issue
13   preclusion applied and that these two documents established their
14   damages of $1 million.   But plaintiffs’ issue preclusion argument
15   went further.   According to plaintiffs, the state court judgment
16   not only conclusively established Blaskey’s liability for
17   $1 million but also conclusively established that Blaskey’s
18   $1 million judgment debt was nondischargeable – that Blaskey was
19   precluded from arguing in the adversary proceeding that the
20   $1 million in damages resulted from anything other than
21   nondischargeable conduct.
22        After the conclusion of the trial, the bankruptcy court
23   announced its findings of fact and conclusions of law at a
24   hearing held in May 2014.   As a threshold matter, the bankruptcy
25   court rejected the plaintiffs’ assertion that they were entitled
26   to issue preclusion based on the state court judgment.    The
27   bankruptcy court pointed out that issue preclusion was not
28   available unless the issues in question were the subject of

                                      5
 1   explicit findings by the state court or, alternately, implicit
 2   findings on those issues were essential to support the state
 3   court’s judgment.
 4        The bankruptcy court further pointed out that the state
 5   court judgment was not supported by any explicit findings and
 6   that it was impossible to tell on which causes of action the
 7   plaintiffs had prevailed.    As the bankruptcy court explained, the
 8   state court judgment did not specify whether the $1 million in
 9   damages were awarded based on breach of contract, fraud, legal
10   malpractice, breach of fiduciary duty, or some combination
11   thereof.    All of these causes of action were set forth in the
12   state court complaint but none were referenced in the state court
13   judgment.    Consequently, the bankruptcy court held, it could not
14   apply issue preclusion to determine the dischargeability of
15   Blaskey’s $1 million judgment debt because the plaintiffs had not
16   satisfied the “necessarily decided” element for issue preclusion.
17        The court next addressed the trial record and whether the
18   plaintiffs had made a sufficient showing that the $1 million
19   judgment debt, or any portion thereof, should be declared
20   nondischargeable under §523(a)(2)(A).    The court found that the
21   plaintiffs had not established by a preponderance of the evidence
22   that their damages resulted from fraudulent conduct.    According
23   to the court, there was either no evidence or insufficient
24   evidence connecting any particular misrepresentations Blaskey
25   made either to the $50,000 in legal fees the plaintiffs paid
26   Blaskey or to the roughly $1 million in damages the plaintiffs
27   apparently suffered in the underlying actions.
28        The court further explained that the plaintiffs’ evidentiary

                                       6
 1   deficiencies were exacerbated by the lack of any documentation to
 2   support the amounts Blaskey billed them or the amounts the
 3   plaintiffs actually paid.    The court also pointed out that the
 4   plaintiffs’ lack of specificity regarding when representations
 5   were made, precisely what was said, when they paid Blaskey, and
 6   how much they paid Blaskey all worked against them proving their
 7   nondischargeability claims by a preponderance of the evidence.
 8        As for the plaintiffs’ § 523(a)(4) claim, the bankruptcy
 9   court found there was no evidence of any express or technical
10   trust as to any of the monies the plaintiffs paid to Blaskey and
11   there was insufficient evidence of a defalcation within the
12   meaning of the statute.2    And as for the plaintiffs’ §523(a)(6)
13   claim, the bankruptcy court found there was insufficient evidence
14   that Blaskey subjectively intended to injure the plaintiffs.
15        During its ruling, the bankruptcy court stated multiple
16   times that the plaintiffs bore the burden of proof to establish
17   all of the nondischargeability elements by a preponderance of the
18   evidence.   However, the bankruptcy court also made a couple of
19   statements indicating that the preponderance of the evidence
20   standard has a special meaning or gloss in nondischargeability
21   litigation.   For instance, the bankruptcy court stated:
22        What is relevant is that the evidence support the
          claims by a preponderance of the evidence and I must
23        apply the standard that I’m required to apply by the
          U.S. Supreme Court and, that is, that I am required to
24
25        2
           The record reflects that, in 2004, the plaintiffs paid a
26   retainer to Blaskey in an amount somewhere between $2,000 and
     $5,000. Concerning the retainer, the bankruptcy court ruled that
27   there was no evidence indicating that the retainer could be
     declared nondischargeable under § 523(a)(4) or on any other
28   grounds.

                                       7
 1        view the evidence strictly against the creditor and
          liberally in favor of the debtor. That is the
 2        standard.
 3   Hr’g Tr. (May 6, 2014) at 17:16-21 (emphasis added).       The
 4   bankruptcy court further stated that it was required to view the
 5   evidence “in the light most favorably to the defendant and
 6   strictly against the plaintiff.”       Hr’g Tr. (May 6, 2014) at
 7   21:9-11 (emphasis added).
 8        On June 20, 2014, the bankruptcy court entered judgment in
 9   favor of Blaskey and against the plaintiffs.       The plaintiffs
10   timely appealed.
11                               JURISDICTION
12        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
13   §§ 1334 and 157(b)(2)(I).   We have jurisdiction under 28 U.S.C.
14   § 158.
15                                  ISSUES
16        Did the bankruptcy court err when it ruled that issue
17   preclusion did not apply to the plaintiffs’ state court judgment?
18        Did the bankruptcy court err in its application of the
19   preponderance of the evidence standard?
20        Did the bankruptcy court err when it ruled that the
21   plaintiffs had not satisfied their burden of proof at trial?
22                            STANDARDS OF REVIEW
23        We review de novo the bankruptcy court’s determination as to
24   whether issue preclusion is available.       Honkanen v. Hopper
25   (In re Honkanen), 446 B.R. 373, 378 (9th Cir. BAP 2011).
26        We also review de novo questions concerning what standard of
27   proof must be applied.   W. Wire Works, Inc. v. Lawler
28   (In re Lawler), 141 B.R. 425, 428 (9th Cir. BAP 1992).

                                        8
 1          We review under the clearly erroneous standard the
 2   bankruptcy court’s factual findings.         In re Honkanen, 446 B.R. at
 3   378.
 4          We can affirm on any ground supported by the record.
 5   Thompson v. Paul, 547 F.3d 1055, 1058–59 (9th Cir. 2008).
 6                                DISCUSSION
 7          When the bankruptcy court declares a debt nondischargeable
 8   under § 523(a), the debtor continues to bear part of the
 9   financial burden that drove the debtor to file bankruptcy in the
10   first place; § 523(a) thus stands in tension with the fundamental
11   bankruptcy goal of providing debtors with a fresh start.           Willms
12   v. Sanderson, 723 F.3d 1094, 1099-1100 (9th Cir. 2013).           For this
13   reason, § 523(a) is narrowly construed against the objecting
14   creditor and in favor of the debtor.         Snoke v. Riso
15   (In re Riso), 978 F.2d 1151, 1154 (9th Cir. 1992).           Similarly,
16   this is why the Supreme Court has stated that exceptions to
17   discharge “should be confined to those plainly expressed.”
18   Bullock v. BankChampaign, N.A., 133 S. Ct. 1754, 1760-61 (2013).
19          The bankruptcy court here indicated that the policy in
20   nondischargeability litigation favoring discharge of the debtor
21   extended beyond the construction of § 523(a) to the determination
22   of factual issues.    We disagree.       This notion is inconsistent
23   with Grogan v. Garner, 498 U.S. 279, 291 (1991), which held that
24   the “ordinary” preponderance of the evidence standard applied to
25   claims for relief under § 523(a).         Id.   While Grogan did not
26   elaborate on the metes and bounds of the ordinary preponderance
27   of the evidence standard, it is well established that this
28   standard requires a party bearing the burden of proof to

                                          9
 1   establish that each element of its claim or defense “more likely
 2   than not” exists.   See, e.g., Guglielmino v. McKee Foods Corp.,
 3   506 F.3d 696, 699, 701 (9th Cir. 2007); Metro. Stevedore Co. v.
 4   Rambo, 521 U.S. 121, 137 n.9 (1997).
 5        In relevant part, Grogan explained that its holding would
 6   permit virtually any state court fraud judgment to be declared
 7   nondischargeable under § 523(a)(2)(A) via the application of
 8   issue preclusion regardless of whether the state court in the
 9   prior action applied the preponderance of the evidence standard
10   or the more demanding clear and convincing evidence standard.
11   Grogan, 498 U.S. at 290; see also id. at 283-85.
12        It is impossible to reconcile Grogan with the bankruptcy
13   court’s position here that there is a special, higher gloss on
14   the preponderance of the evidence standard in nondischargeability
15   litigation.   If that were the case, prior state court fraud
16   judgments based on the ordinary preponderance of the evidence
17   standard no longer would be readily subject to
18   nondischargeability in subsequent bankruptcy cases as
19   contemplated by the Supreme Court in Grogan.
20        Even so, our determination that the bankruptcy court
21   incorrectly applied the preponderance of the evidence standard
22   does not end our analysis.   To the extent the plaintiffs did not
23   present any evidence in support of one or more of the elements
24   for nondischargeability, they could not possibly have prevailed
25   after trial regardless of how the bankruptcy court applied the
26   preponderance of the evidence standard.
27        But before we look at the underlying elements for the
28   plaintiffs’ nondischargeability claims and the evidence

                                     10
 1   presented, we first note that the bankruptcy court correctly
 2   declined to apply issue preclusion to the plaintiffs’ state court
 3   judgment.   While issue preclusion can and does apply in
 4   nondischargeability proceedings, Grogan, 498 U.S. at 284-85 n.11,
 5   a litigant seeking to offer a California state court judgment as
 6   preclusive on one or more issues must establish all of the
 7   elements that California courts require before giving the
 8   judgment issue preclusive effect.    See Cal–Micro, Inc. v.
 9   Cantrell (In re Cantrell), 329 F.3d 1119, 1123 (9th Cir. 2003).
10   When the litigant seeks to invoke issue preclusion with respect
11   to a California default judgment, he or she must show, among
12   other things, that the state court in the prior proceeding made
13   an express finding on the issues in question or, alternately,
14   that implicit findings on those issues were essential to the
15   court’s judgment.   See In re Cantrell, 329 F.3d at 1124-25 (9th
16   Cir. 2003); Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1248
17   (9th Cir. 2001).
18        Here, the bankruptcy court correctly determined that there
19   was no express finding of fraud or other nondischargeable conduct
20   in the state court judgment against Blaskey.    Nor was an implicit
21   finding of fraud or other nondischargeable conduct essential to
22   the judgment, inasmuch as the state court did not specify which
23   of the several causes of action stated in the plaintiffs’
24   complaint served as the basis for the judgment.    While some of
25   those causes of action may have necessitated a finding of
26
27
28

                                     11
 1   nondischargeable conduct, others would not have.3
 2        Having correctly determined that issue preclusion did not
 3   apply, the bankruptcy court focused on the evidence presented at
 4   trial and whether the plaintiffs had met their burden of proof.
 5   As set forth above, the court erred because it applied a standard
 6   of proof more demanding than the ordinary preponderance of the
 7   evidence standard.   Nonetheless, to the extent the plaintiffs
 8   failed to present any evidence in support of one or more
 9   essential elements of their claims, we can affirm based on this
10   absence of evidence.   Under those circumstances,   the court as
11   the trier of fact could not have found in favor of the plaintiffs
12   regardless of what standard of proof applied.   See Ellsworth v.
13   Lifescape Medical Assocs., P.C. (In re Ellsworth), 455 B.R. 904,
14   919 (9th Cir. BAP 2011) (holding that any error regarding the
15   bankruptcy court’s application of the burden of proof was
16   harmless when the factual issue in question only could have been
17   resolved one way in light of the evidence presented); see also
18   Van Zandt v. Mbunda (In re Mbunda), 484 B.R. 344, 355 (9th Cir.
19   BAP 2012) (holding that the Panel must ignore harmless error).
20        With respect to the plaintiffs’ §§ 523(a)(2)(A) and (6)
21   claims for relief, we have reviewed the trial record, and we have
22
23
          3
           The plaintiffs argued that the bankruptcy court should have
24   applied at least partial issue preclusion by apportioning their
     damages between those that arose from dischargeable conduct and
25   those that arose from nondischargeable conduct. This argument is
26   meritless. The state court judgment did not make any such
     apportionment, and any attempt by the bankruptcy court to apply
27   partial issue preclusion by doing so would have been inconsistent
     with In re Cantrell and In re Harmon and the California issue
28   preclusion cases on which those two decisions are based.

                                     12
 1   considered all of the elements necessary to establish claims for
 2   relief under §§ 523(a)(2)(A) and (6).    To support their
 3   § 523(a)(2)(A) claim, the plaintiffs needed to show:
 4        (1) misrepresentation, fraudulent omission or deceptive
          conduct by the debtor; (2) knowledge of the falsity or
 5        deceptiveness of his statement or conduct; (3) an
          intent to deceive; (4) justifiable reliance by the
 6        creditor on the debtor's statement or conduct; and
          (5) damage to the creditor proximately caused by its
 7        reliance on the debtor's statement or conduct.
 8   Ghomeshi v. Sabban (In re Sabban), 384 B.R. 1, 5 (9th Cir. BAP
 9   2008), aff'd, 600 F.3d 1219, 1222 (9th Cir. 2010).
10        To support their § 523(a)(6) claim, the plaintiffs needed to
11   show that the injury they incurred was both willful and
12   malicious.   Barboza v. New Form, Inc. (In re Barboza), 545 F.3d
13   702, 706 (9th Cir. 2008).   Under § 523(a)(6), a debtor has acted
14   willfully only if he acted with the subjective intent to cause
15   harm or with the subjective knowledge that harm was substantially
16   certain to occur from his actions.    Carrillo v. Su (In re Su),
17   290 F.3d 1140, 1144-45 (9th Cir. 2002).    And a malicious injury
18   requires: “(1) a wrongful act, (2) done intentionally, (3) which
19   necessarily causes injury, and (4) is done without just cause or
20   excuse.”   In re Barboza, 545 F.3d at 706.
21        While we agree with the bankruptcy court that the evidence
22   presented at trial was quite thin, we cannot say that no
23   reasonable trier of fact could have found for the plaintiffs on
24   each of the elements necessary to establish nondischargeability
25   under §§ 523(a)(2)(A) and (a)(6) if the ordinary preponderance of
26   evidence standard had been applied.    Put another way, if the
27   bankruptcy court had applied the preponderance of the evidence
28   standard correctly, it might have made different findings

                                     13
 1   regarding whether plaintiffs’ damages were incurred as a result
 2   of conduct within the scope of either or both § 523(a)(2)(A) and
 3   (a)(6).
 4        We are not saying that, on remand, the bankruptcy court must
 5   make different findings.   We express no opinion on what findings
 6   the bankruptcy court ultimately should make on remand.     Instead,
 7   we are merely saying that, before we can review the bankruptcy
 8   court’s findings, we need to ensure that the bankruptcy court
 9   applied the ordinary preponderance of the evidence standard.
10        The plaintiffs’ § 523(a)(4) claim is a different matter.     In
11   conjunction with their § 523(a)(4) claim for relief, the
12   plaintiffs asserted that Blaskey committed defalcation while
13   acting in a fiduciary capacity.    However, the only type of
14   fiduciary covered within the scope of § 523(a)(4) is the trustee
15   of an express trust or a technical trust imposed before and
16   without reference to any alleged wrongdoing by the debtor.
17   In re Honkanen, 446 B.R. at 378-79.    In California, unless an
18   attorney holds funds in his or her client trust account on behalf
19   of a client, the attorney is not a fiduciary within the meaning
20   of § 523(a)(4).   See Banks v. Gill Distrib. Ctrs., Inc.
21   (In re Banks), 263 F.3d 862, 870-71 (9th Cir. 2001).    Here, the
22   plaintiffs presented no evidence indicating that any of the funds
23   they paid to Blaskey were held in trust in Blaskey’s client trust
24   account.
25        Alternately, the plaintiffs asserted that Blaskey committed
26   nondischargeable embezzlement, which also is covered by
27   § 523(a)(4).   For purposes of the nondischargeability statute, a
28   claim based on embezzlement requires proof of:

                                       14
 1        (1) property rightfully in the possession of a
          nonowner; (2) nonowner's appropriation of the property
 2        to a use other than which it was entrusted, and
          (3) circumstances indicating fraud.
 3
 4   Transam. Comm’l Fin. Corp. v. Littleton (In re Littleton),
 5   942 F.2d 551, 555 (9th Cir. 1991).   Here, the plaintiffs
 6   presented no evidence indicating that they intended to retain
 7   ownership of the funds they paid to Blaskey or that he used the
 8   funds for a purpose other than that which the plaintiffs intended
 9   the funds to be used.
10        In short, the plaintiffs did not present any evidence in
11   support of essential elements of their § 523(a)(4) claim, and we
12   can affirm the bankruptcy court’s ruling in favor of Blaskey on
13   the § 523(a)(4) claim on that basis.
14                              CONCLUSION
15        For the reasons set forth above, we AFFIRM the bankruptcy
16   court’s ruling on the plaintiffs’ § 523(a)(4) claim.   However,
17   we VACATE the bankruptcy court’s ruling on the plaintiffs’
18   §§ 523(a)(2)(A) and (6) claims, and we REMAND this matter for
19   further proceedings consistent with this memorandum decision.
20
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22
23
24
25
26
27
28

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