Court Opinion

ID: 9395531
Source: CourtListenerOpinion
Date Created: 2023-05-18 14:01:52.626326+00
Date Added: 2024-06-11T17:19:09.264846
License: Public Domain

UNITED STATES DISTRICT COURT
                             FOR THE DISTRICT OF COLUMBIA

 UNITED STATES ex rel. BID SOLVE,
 INC.,

                        Plaintiff/Relator,
                                                     Case No. 1:19-cv-1861-TNM
                        v.

 CWS MARKETING GROUP, INC., et al.,

                        Defendants.

                          MEMORANDUM OPINION AND ORDER

       Two companies, Bid Solve and CWS Marketing Group, bid on a government contract

reserved for small businesses. Bid Solve lost and cried foul. It claims that CWS understated its

size and was not actually a small business. Bid Solve took its case to an agency and lost. Now it

sues here under the False Claims Act, 31 U.S.C. § 3729. CWS and its owner move for summary

judgment and Bid Solve moves for partial summary judgment. CWS made some

misrepresentations, so the Court grants partial summary judgment to Bid Solve. But there

remains a genuine issue of material fact as to whether CWS and its owners knew that those

statements were false. So the Court denies their motion for summary judgment.

                                              I.

       CWS Marketing Group is a government contractor that helps agencies sell seized

property. Bid Solve Resps. to Defs. Stat. of Mat. Facts (SUMF) ¶¶ 30, 33, ECF No. 53-1. To

get those contracts, CWS bids on them. See, e.g., id. ¶ 43. Over the years, CWS has helped sell

more than $1.5 billion in seized assets. Id. ¶ 31.
       This case spawns from one disputed contract. Back in 2017, the IRS solicited bids for a

contract to help it sell seized property. Id. ¶ 39. There was one important limit: only companies

considered a “small business” could bid. Id. ¶ 41. And to be a small business, companies must

have averaged under $7.5 million in annual “receipts” over the past three years. Id.; see also 13

C.F.R. § 121.104 (defining “receipts” and specifying a three-year average).

       CWS submitted a bid for that contract, certifying that it had average annual receipts of

$5.5 million. SUMF ¶¶ 43, 51. As part of its bid, CWS also certified that it was a small

business. Id. ¶ 44. But CWS had competition. Another company, Bid Solve, also bid for the

contract. Id. ¶ 71. And it too certified that it was a small business. Id. ¶ 73. Ultimately, the IRS

awarded CWS the contract. Id. ¶ 79.

       But Bid Solve was not finished. Just one day later, it challenged CWS’s bid with the

Small Business Administration. Id. ¶ 80. There, it claimed that CWS was not a small business

because it had average annual receipts over $7.5 million. Id. ¶ 81. And thus, CWS did not

qualify for the contract. The agency asked for more evidence, investigated Bid Solve’s claims,

and eventually sided with CWS. See id. ¶¶ 152, 155. In the agency’s view, CWS was indeed a

small business. Id. ¶ 152. Bid Solve then appealed. But its appeal was dismissed when it never

properly served the agency. Id. ¶¶ 166–68.

       Next, Bid Solve filed this False Claims Act case against CWS, and its owners, C.

William Stearman, and Jennifer Stearman. See generally Compl., ECF No. 1. The Court

dismissed some counts and Bid Solve amended its Complaint. See United States ex rel. Bid

Solve, Inc. v. CWS Mktg. Grp., Inc., 567 F. Supp. 3d 59, 64 (D.D.C. 2021); Am. Compl., ECF

No. 45. Now, Bid Solves sues only CWS and C. William Stearman for fraudulent inducement

under the FCA. See Am. Compl. ¶¶ 66–68 (citing 31 U.S.C. § 3729(a)(1)(B)).

                                                 2
       Bid Solve’s theory goes like this: The Defendants said that CWS was a small business

because its average “receipts” were below $7.5 million. But the Defendants misreported CWS’s

receipts by improperly subtracting certain expenses. When correctly calculated, CWS had

average receipts over $7.5 million and thus was not small. See Bid Solve Opp’n at 20, ECF No.

53. So the Defendants lied about CWS’s receipts when claiming that CWS was a small business.

And those lies induced the agency to award CWS the contract.

       The Defendants move for summary judgment. They argue that they win on two key

elements of Bid Solve’s claim—falsity and knowledge. See Defs. Mem. in Supp. of Mot. for

Summ. J. (Defs. MSJ) at 10, ECF No. 52. In their view, CWS’s receipts were below $7.5

million. And even if they got that wrong, they at least had good reason for thinking so. See id.

at 1–3. Bid Solve moves for partial summary judgment, claiming that it wins on falsity. Bid

Solve Mem. in Supp. of Cross-Mot. for Summ. J. (Bid Solve MSJ) at 1, ECF No. 54-1.

                                                II.

       To win summary judgment, a party must show that “there is no genuine dispute as to any

material fact.” Fed. R. Civ. P. 56(a). A dispute is genuine “if the evidence is such that a

reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 248 (1986). And a fact is material if it could change the case’s outcome. See

id. The Court “view[s] the evidence in the light most favorable to the nonmoving party and

draw[s] all reasonable inferences in its favor.” Mastro v. Potomac Elec. Power Co., 447 F.3d

843, 850 (D.C. Cir. 2006).

       The moving party must “identify[ ] those portions of the [record] which it believes

demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S.

                                                 3
317, 323 (1986) (cleaned up). Then, the opposing party must point to “specific facts showing

that there is a genuine issue for trial.” Id. at 324 (cleaned up).

                                                  III.

       There is no genuine dispute about whether some of Defendants’ statements were false.

So the Court grants partial summary judgment to Bid Solve about those. But whether

Defendants knew that those statements were false is another matter. Because that issue remains

disputed, the Court denies Defendants’ motion for summary judgment. Their knowledge must

be decided by a jury.

                                                  A.

       In Bid Solve’s view, Defendants misreported that CWS was a small business. Recall that

to qualify as a small business CWS needed to have average annual “receipts” under $7.5 million

over the last three years. So did Defendants misstate CWS’s average annual “receipts” as being

below $7.5 million? And were Defendants thus wrong to certify that CWS was a small

business? The answer to both questions hinges on 13 C.F.R. § 121.104(a) (2016), the regulation

that governs how companies must calculate “receipts.”

                                                  1.

       Section 104(a) defines receipts as “all revenue in whatever form . . . reduced by returns

and allowances.” Bid Solve argues that CWS’s receipts were much higher than it reported. It

says that Defendants improperly subtracted “flowthrough income” from CWS’s revenue when

certifying that it was a small business. Bid Solve Opp’n at 1. Defendants disagree. In their

view, receipts must be calculated based on the numbers reported in CWS’s tax returns. Because

they faithfully did that, they cannot have lied. See Defs. MSJ at 1.

                                                   4
       Defendants misread the regulation: They were not allowed to rely solely on CWS’s tax

returns. And because of that, they should have never subtracted “flowthrough income” from

CWS’s total revenue. So CWS’s average receipts exceeded $7.5 million and Defendants

wrongly certified that CWS was a small business.

       First, consider Section 104(a)’s text:

       (a) Receipts means all revenue in whatever form received or accrued from whatever
       source, including from the sales of products or services, interest, dividends, rents,
       royalties, fees, or commissions, reduced by returns and allowances. Generally, receipts
       are considered “total income” . . . plus “cost of goods sold” as these terms are defined and
       reported on Internal Revenue Service (IRS) tax return forms . . . . Receipts do not
       include net capital gains or losses; taxes collected for and remitted to a taxing authority if
       included in gross or total income, such as sales or other taxes collected from customers
       and excluding taxes levied on the concern or its employees; proceeds from transactions
       between a concern and its domestic or foreign affiliates; and amounts collected for
       another by a travel agent, real estate agent, advertising agent, conference management
       service provider, freight forwarder or customs broker. For size determination purposes,
       the only exclusions from receipts are those specifically provided for in this paragraph.
       All other items, such as subcontractor costs, reimbursements for purchases a contractor
       makes at a customer’s request, investment income, and employee-based costs such as
       payroll taxes, may not be excluded from receipts.
               (1) The Federal income tax return and any amendments filed with the IRS on or
               before the date of self-certification must be used to determine the size status of a
               concern. SBA will not use tax returns or amendments filed with the IRS after the
               initiation of a size determination.
               (2) When a concern has not filed a Federal income tax return with the IRS for a
               fiscal year which must be included in the period of measurement, SBA will
               calculate the concern’s annual receipts for that year using any other available
               information, such as the concern’s regular books of account, audited financial
               statements, or information contained in an affidavit by a person with personal
               knowledge of the facts.

       Section 104(a) is best read as follows: The first sentence gives the baseline definition of

receipts. Receipts are “all revenue . . . reduced by returns and allowances.” 13 C.F.R.

§ 121.104(a). The provision’s third and fourth sentences clarify that only the listed items may be

subtracted from the baseline receipts total. See id. (“For size determination purposes, the only

exclusions from receipts are those specifically provided for in this paragraph.”). The fifth

sentence specifies some items that cannot be subtracted from receipts, including

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“reimbursements for purchases a contractor makes at a customer’s request.” Id. And, as the

second sentence suggests, calculating receipts will often be as simple as adding “total income” to

“cost of goods sold,” using a company’s “tax return forms.” Id. Finally, sub-provision (a)(1)

states that when looking to tax returns, a company must use only those returns that they have

already filed. See id. § 121.104(a)(1).

       Thus, § 104(a) provides a clear formula: receipts are “all revenue . . . reduced by returns

and allowances,” and “the only exclusions from receipts are those specifically” listed in § 104(a).

Tax returns may be used to calculate receipts, but they cannot override § 104(a)’s basic rules.

       Defendants disagree, proposing a different reading. They urge that a subsection—

§ 104(a)(1)—required them to use only CWS’s tax returns when calculating its receipts. Defs.

MSJ at 1. That provision states that “The Federal income tax return and any amendments filed

with the IRS on or before the date of self-certification must be used to determine” whether a

business is small. 13 C.F.R. § 121.104(a)(1). Plus, they add, the provision points to tax returns

elsewhere too. Id. § 121.104(a) (“Generally, receipts are considered ‘total income’ . . . plus ‘cost

of goods sold’ as these terms are reported on “tax returns.”). In other words, if they plugged in

numbers from CWS’s tax returns, then they are in the clear, no matter if that calculation flouts

other parts of the regulation.

       This reading helps Defendants. If they are right about how receipts are calculated, then

CWS qualified as a small business because its average receipts were about $4.1 million. See

Defs. Resps. to Bid Solve Stat. of Mat. Facts (DSUMF) ¶ 14, ECF No. 57-2. 1

1
   True, Defendants admit that they overreported CWS’s receipts number in the bid, instead
listing $5.5 million. See DSUMF ¶ 4. But that helps Bid Solve little. If Defendants just
overreported CWS’s receipts, then Bid Solve likely has no claim because Bid Solve also needs
to show “causation and materiality.” United States ex rel. Cimino v. Int’l Bus. Machines Corp., 3
F.4th 412, 421 (D.C. Cir. 2021). Thus, Bid Solve would need to show “the IRS would not have

                                                 6
       But there is a glaring problem with Defendants’ reading: It requires the Court to ignore

swaths of the regulation. This case illustrates the point. The regulation says that “the only

exclusions from receipts are those specifically” listed. 13 C.F.R. § 121.104(a). In other words,

if an item is not listed in the provision, a company may not subtract it from “all revenue . . .

reduced by returns and allowances.” Id. And the regulation gives examples of things that may

not be excluded from receipts, including “reimbursements for purchases a contractor makes at a

customer’s request.” Id.

       Yet here, Defendants excluded one of those prohibited items by removing “flowthrough

income.” They say that is okay because the regulation directed them to use tax returns when

calculating receipts. Defs. MSJ at 1. But therein lies the problem. To agree with them is to

simply ignore the prohibitions that they flouted: they subtracted an item not specifically listed as

subtractable (violating the fourth sentence) and by doing that subtracted an item the regulation

says is not subtractable (violating the fifth sentence). See 13 C.F.R. § 121.104(a).

       Despite Defendants’ protests, the regulation’s statement that tax returns “must be used,”

does not change the best reading. There is another plausible way to read it—that sub-provision

merely speaks to timing. When a company does look to its tax returns to calculate receipts, it

must use those returns “filed with the IRS on or before the date of” its bid. Id. Indeed, as the

next sentence explains, “SBA will not use tax returns . . . filed with the IRS after the initiation of

a size determination.” Id.

       After all, “[s]tatutory construction . . . is a holistic endeavor.” United Sav. Ass’n of Texas

v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371 (1988). And thus, “[a] provision

entered the agreement but for” the overreporting and that the overreporting “was capable of
influencing the government’s decision to enter into [the] contract.” Id. at 421–23. That is
unlikely.

                                                  7
that may seem ambiguous in isolation is often clarified . . . because only one of the permissible

meanings produces a substantive effect that is compatible with the rest of the law.” Id. That is

the case here. Defendants’ reading is not compatible with the rest of the law. Indeed, it ignores

it.

       The Court’s reading also fits with related provisions. For example, 13 C.F.R.

§ 121.1009(b) says that when making a size determination, the SBA will mostly rely on the

information a bidder provided but “may use other information and may make requests for

additional information.” So the agency is not limited to tax returns. More, the Administration

“will give greater weight to specific, signed, factual evidence than to general, unsupported

allegations or opinions.” 13 C.F.R. § 121.1009(d). Thus, the agency may consider “allegations

or opinions,” another knock against Defendants’ “only tax returns” theory.

       None of Defendants’ counterarguments help them. For one, they argue that the

regulation’s amendment history supports their reading. But, if anything, that history hurts their

case. They note that the version in effect at the time of their bid had been amended to add the

first sentence (the basic definition of receipts) and the word “generally” at the beginning of the

sentence that points to using tax returns. Defs. MSJ 14–15. Yet by doing this, the regulation

moved further away from being tax-return based. Defendants also cite a non-binding case about

size determinations. Id. at 15–17. But it is not persuasive. Nor is their reference to a policy

statement in the Federal Register. Id. at 16–17. That statement describes the purpose of

decades’ old amendments and offers no response to the problems with Defendants’ proposed

reading.

       Defendants also offer a declaration from a size specialist at the SBA. See id. at 17 (citing

Decl. of Helen Goza, ECF No. 52-27). That Declaration mostly supports their view of the

                                                 8
provision. For example, the specialist suggests that tax returns trump other information and that

she is limited to reviewing tax returns when making size determinations. See Goza Decl. ¶¶ 19–

21 (“[E]ven if tax returns are not properly prepared . . . the regulations at 13 C.F.R. Part 121

provide that the Federal income tax returns and any amendments filed with the IRS . . . must be

used to determine the size status of a concern.”). And Defendants suggest that the Court ought to

defer to her view. Defs. MSJ at 17 n.4.

       The Court is unconvinced. As the Supreme Court has emphasized, such deference to an

agency’s view of its own regulation is proper only where the “regulatory interpretation” is “the

agency’s “authoritative or official position.” Kisor v. Wilkie, 139 S. Ct. 2400, 2416 (2019)

(cleaned up). Plus, the regulation at issue must be “genuinely ambiguous.” Id. at 2415. Neither

requirement is met here.

       First, Helen Gaza’s declaration does not appear to be the SBA’s “authoritative or official

position.” Id. at 2416 (cleaned up). She is an “SBA size specialist,” not a high-ranking

administrator. Goza Decl. ¶ 4. And thus her declaration cannot be said to “emanate from those

actors, using those vehicles, understood to make authoritative policy in the relevant context.”

Kisor, 139 S. Ct. at 2416. More, she never claims that she is giving the SBA’s official position

or that she has been authorized to do so. Cf. Am. Tunaboat Ass’n v. Ross, 391 F. Supp. 3d 98,

114–15 (D.D.C. 2019) (deferring to agency interpretation where assistant agency administrator

and regional administrator approved agency position that plausibly interpreted ambiguous

agency regulations).

       Second, § 104(a) is unambiguous. It is not “genuinely susceptible to multiple reasonable

meanings.” Kisor, 139 S. Ct. at 2419. Neither Defendants nor the agency have proposed a

plausible alternative; their reading requires the Court to ignore half the provision. And that

                                                  9
precludes deference as well. Id. at 2414 (“First and foremost, a court should not afford . . .

deference unless the regulation is genuinely ambiguous.”).

       Finally, Defendants urge that their certifications cannot be false because CWS’s tax

returns were (at the very least) reasonably prepared. See Defs. MSJ at 10. But that does not

matter. Tax returns may be used to calculate receipts, but they cannot be used to skirt § 104(a)’s

clear guidance. Even if the CWS’s tax returns were prepared correctly, Defendants still needed

to calculate receipts using § 104(a)’s basic formula: receipts are “all revenue . . . reduced by

returns and allowances,” and “the only exclusions from receipts are those specifically” listed in

§ 104(a).

                                                 2.

       With a proper gloss of § 104 established, consider how it applies here. CWS’s receipts

number was the three-year average of “all revenue . . . reduced by returns and allowances.” 13

C.F.R. § 121.104(a). By CWS’s own books, its average gross receipts were either $8.8 or $9.3

million, depending on whether that was calculated on an accrual or cash basis. See DSUMF

¶ 14. So to get below $7.5 million, some items had to be subtracted from that total. And that

had to be done in accordance with § 104(a)’s requirement that only listed items could be

excluded.

       As Defendants admit, they get there only by removing what they call “flowthrough

income.” See DSUMF ¶ 15. Thus, unless they were allowed to remove that flowthrough

income, they calculated receipts wrong and CWS was not a small business. So was that allowed

by § 104(a)?

       Defendants describe “flowthrough income” as “reimbursements for expenses incurred on

behalf of and for the benefit of customers.” Defs. MSJ at 6. Yet § 104(a) directs that such

                                                 10
money may not be excluded: “reimbursements for purchases a contractor makes at a customer’s

request . . . may not be excluded from receipts.” Nor do Defendants even try to argue that

“flowthrough income” is one of the listed items that may be removed. And thus even if

Defendants could subtract “flowthrough income” on CWS’s tax returns, they could not do so

when calculating CWS’s receipts.

       So CWS’s receipts exceeded $7.5 million. And because of that, CWS was not a small

business.

       Thus, the Court denies Defendants’ motion for summary judgment on this issue and

grants partial summary judgment to Bid Solve. In particular, the Court finds that Defendants’

following statements were false:

   1. In the April 6, 2017, SAM submission of CWS, the statement that the amount of its
      “Annual Receipts (in accordance with 13 CFR 121)” was $5,500,000;

   2. In CWS’s April 12, 2017, proposal, submitted to Treasury in response to Solicitation No.
      A17021, and signed on behalf of CWS by C. William Stearman, the statement that CWS
      was a “small” business, and the certification that CWS’s SAM record was accurate;

   3. In its August 25, 2017, submission to Treasury, signed by Stearman, the statement that
      CWS was “a small business under NAICS 561790”;

   4. In its September 27, 2017, submission to Treasury, signed by Stearman, the statement
      that CWS was “a small business under NAICS 561790”;

   5. In its March 9, 2018, submission to SBA in response to Bid Solve’s size protest, the
      statements in the letter signed by Stearman that CWS was “small” and had average
      annual receipts below $7.5 million; and

   6. In its March 9, 2018, submission to SBA, the statements in the SBA Form 355, certified
      by Stearman, concerning the amounts of CWS’s gross receipts, including the statement
      that its gross receipts for the period 2014-2016 were only $12,438,876.20.

       Indeed, the first statement is wrong even under Defendants’ own reading of § 104(a). See

DSUMF ¶ 4 (The Defendants admit they “over-reported [CWS’s] annual receipts . . . as being”

$5.5 million.). And all the other statements are false because CWS’s annual receipts exceeded

                                               11
$7.5 million, and thus it was not a small business. See id. ¶¶ 14–15 (listing average gross

receipts as exceeding $7.5 million and admitting that the smaller average calculated from CWS’s

tax returns came from removing “flowthrough income”).

                                                  B.

       Next, consider knowledge. “To be liable under the FCA, [defendants] must have made

the false claims knowingly.” U.S. ex rel. Purcell v. MWI Corp., 807 F.3d 281, 287 (D.C. Cir.

2015). A defendant “acts knowingly under the FCA by (1) having actual knowledge, (2) acting

in deliberate ignorance, or (3) acting in reckless disregard.” Id. (cleaned up). Defendants say

that they are entitled to summary judgment on this issue because there is no genuine dispute of

material fact about it. Again, the Court disagrees.

       A reasonable jury could find that Defendants knew that the size and receipts statements

were false. For one, § 104(a) specifically says not to subtract “reimbursements for purchases a

contractor makes at a customer’s request” from revenue when calculating receipts. Yet

Defendants did exactly that. And try as they might to explain it away, § 104(a) remains clear.

       Plus, CWS appears to have simply conjured a random receipts number for its bid. Even

under their own reading of § 104(a), CWS’s reported $5.5 million in receipts was off by more

than a million dollars. See DSUMF ¶ 4. Defendants missed by a country mile. And that type of

carelessness suggests (at least) a reckless indifference to the truth.

       Then there are Stearman’s emails with a CWS consultant. In one, sent after Bid Solve

cried foul to the agency, he wrote “I think we are fine but makes me nervous.” SUMF ¶ 252.

Later that day, the consultant told Defendants that “flow-through income includes all of the items

we were afraid they did and that should not be excluded from the ‘annual receipts’ calculation.”

Id. ¶ 259 (emphasis added). These emails could reasonably suggest that Defendants were

                                                  12
worried that they had misreported CWS’s receipts and thus provide another piece of evidence

from which a reasonable jury could find knowledge.

       Defendants offer four retorts. First, they say “there is no evidence . . . that CWS or any

employee or owner subjectively knew or understood that [CWS’s] size certifications were false.”

Defs. MSJ at 23. Not so. As mentioned above, there is evidence from which a reasonable jury

could infer that Defendants knew the certifications were false. They may reasonably quibble

with that evidence’s weight, but it is not the Court’s job to break out the scale at summary

judgment. See Reeves v. Sanderson Plumbing Prod., Inc., 530 U.S. 133, 150–51 (2000).

       Second, Defendants claim that there is a lot of evidence “showing that CWS’[s] actions

in certifying its size . . . were at all times reasonable given what it knew at the time.” Defs. MSJ

at 23. That may be so. But this would not make summary judgment appropriate. On summary

judgment, the Court must “give credence to the evidence favoring the nonmovant.” Reeves, 530

U.S. at 151. And that evidence, as explained above, makes this issue one for a jury.

       Defendants’ third argument fails for the same reason. They say that they are entitled to

summary judgment because they gave “accurate, complete financial information” to the SBA

when that agency was investigating CWS. Defs. MSJ at 23–24. Again, that helps their case and

might persuade a jury. But it does not make this issue undisputed.

       Finally, Defendants say that they made all the challenged statements based on a good-

faith reading of § 104(a) and the tax code. See Defs. MSJ at 33–41. As the D.C. Circuit has

held, if a legal obligation is ambiguous, and Defendants’ reading of it was “objectively

reasonable,” then they win on knowledge. MWI, 807 F.3d at 288. But this doctrine does not

save Defendants now.

                                                 13
        For one, § 104(a) is unambiguous. It specifically barred them from removing

flowthrough income. And its statement about using tax returns must be read to refer merely to

timing; if tax returns are used, they must have been submitted to the IRS before the bid is

entered. Nor is Defendants’ reading of that regulation “objectively reasonable.” Id. They would

have the Court ignore half the provision. More, their reading would reward tax fraud. A

company could file bogus returns and then rely on those to claim that it is a small business. And

a rejected competitor would be out of luck, even if it could prove that the winning company had

lied on its returns.

        Defendants also claim that CWS prepared its tax returns reasonably. But on the right

reading of § 104(a), this does not save them because they were not allowed to rely solely on

those tax returns. Instead, they needed to follow § 104(a)’s direction not to remove flowthrough

income. So even if the tax returns were reasonably accurate, Defendants’ certifications about

CWS’s receipts and small business status were not. And thus, MWI’s safe harbor provides no

escape at summary judgment.

                                               IV.

        Because of all this, it is hereby

        ORDERED that Bid Solve’s [54] Cross Motion for Partial Summary Judgment is

        GRANTED, and it is

        ORDERED that Defendants’ [52] Motion for Summary Judgment is DENIED.

        SO ORDERED.                                                         2023.05.18
                                                                            09:26:41 -04'00'
Dated: May 18, 2023                                  TREVOR N. McFADDEN, U.S.D.J.

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