Daniels v. State Farm Mut. Auto. Ins. Co.

This opinion was
JF IN CLIRKt
.1 OTPICE
Jiled for record

E COURT,
(1 arXTE OF VWkSHWOTOH

Q47g JUL 0 3 Susan L.. C
Carlson
Supreme Court Clerk

cm^jusTi^ I

IN THE SUPREME COURT OF THE STATE OF WASHINGTON

LAZURI DANIELS,individually, and
on behalf of all those similarly situated, No. 96185-9

Petitioner,

V. En Banc

STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY,

Respondent.
Filed JUL 0 3 2019

JOHNSON,J.—This case concerns whether a first-party insurer, upon

obtaining a partial recovery in a subrogation action, is required to reimburse its

fault-free insureds for the full amount of their deductibles before any portion of the

subrogation proceeds can be allocated to the insurer. Lazuri Daniels brought claims

and sought class action status in a lawsuit against State Farm Mutual Automobile

Insurance Company arguing that by failing to fully reimburse its insureds for their
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

deductibles after recovering in a subrogation action, State Farm violates both

Washington law and its own insurance policy. The trial court dismissed the claims

under CR 12(b)(6), and the Court of Appeals affirmed the dismissal. We reverse

and remand to the trial court for further proceedings.

FACTS

On July 25, 2015, Daniels was involved in a three-vehicle wreck near

Federal Way, Washington. At the time of the wreck, Daniels was insured by State

Farm with a policy that included a $500 deductible. Daniels's vehicle was at the

center of the wreck; the driver of the car that hit her from behind was insured by

GEICO, and the driver in front of her was insured by Liberty Mutual. State Farm

paid the portion of the repair costs that exceeded Daniels's deductible. State Farm

then sought recovery of its payment from GEICO, which agreed that its insured

was 70 percent at fault and reimbursed State Farm for that portion of the total cost

of the repairs. From these proceeds. State Farm reimbursed Daniels for 70 percent

of her deductible.^

Daniels brought a lawsuit and sought class action status against State Farm

alleging that, under both its own policy and Washington law. State Farm is entitled

'Because this case was dismissed under CR 12(b)(6), the record had yet to be developed
by the parties. As a result, the record does not indicate to whom GEICO attributed the remaining
30 percent fault or how the 70 percent fault was determined.
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

to recoup its money only after its insureds are fully compensated for their losses,

including the full deductible, and that by allocating subrogation recoveries to itself

before it has returned its insureds' full deductibles. State Farm violates this

requirement. Daniels asserted claims for breach of contract, bad faith, and

conversion. State Farm filed a motion to dismiss under CR 12(b)(6),^ relying on

Averill v. Farmers Insurance Co. of Washington, 155 Wn. App. 106, 229 P.3d 830

(2010), where the Court of Appeals held that the made whole doctrine does not

extend to this type of subrogation action, as well as WAG 284-30-393, which

requires subrogated insurers to return deductibles "less applicable comparable

fault." Finally, State Farm argued that nothing in its policy language required it to

return the full amount of deductibles before allocating to itself the proceeds of a

direct subrogation action.

The trial court granted State Farm's motion to dismiss, and the Court of

Appeals affirmed. Daniels v. State Farm Mut. Auto. Ins. Co., 4 Wn. App. 2d 268,

421 P.3d 996 (2018). Daniels petitioned this court, and we granted review.^

Daniels v. State Farm Mut. Auto. Ins. Co., 192 Wn.2d 1001, 430 P.3d 261 (2018).

^ CR 12(b)(6) allows a party to file a motion to dismiss a case for "failure to state a claim
upon which relief can be granted."

^ Amicus briefs were filed by the Washington State Insurance Commissioner, the
Washington State Association for Justice Foundation, and American Property Casualty Insurance
Association and National Association of Mutual Insurance Companies.
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

ISSUES

1. Whether Washington's made whole doctrine requires that insurers allocate
subrogation proceeds to the full reimbursement of its insureds' deductibles
prior to allocating any portion of the proceeds to itself.

2. Whether, in the absence of an acknowledgement that an insured bears
comparative fault, WAC 284-30-393 requires an insurer to recover and
return its insured's full deductible.

3. Whether State Farm's policy language required that it allocate subrogation
proceeds to the full reimbursement of its insureds' deductibles prior to
allocating any portion ofthe proceeds to itself.

ANALYSIS

"Subrogation is the right that one party has against a third party following

the payment, in whole or in part, of a legal obligation that ought to have been met

by such third party." 2 Allan D. WiNDT,Insurance Claims and Disputes §

10:5, at 10-23 (6th ed. 2013). Its common law foundation applies as an "equitable

doctrine the essential purpose of which is to provide for a proper allocation of

payment responsibility." Mahler v. Szucs, 135 Wn.2d 398,411, 957 P.2d 632

(1998). In the insurance context, the "doctrine of subrogation enables an insurer

that has paid an insured's loss pursuant to a policy ... to recoup the payment from

the party responsible for the loss." Elaine M. Rinaldi, Apportionment ofRecovery

between Insured and Insurer in a Subrogation Case, 29 Tort & iNS. L.J. 803, 803
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

(1994). The right to pursue such a claim against the at-fault party is often included

in insurance policies, as it was in this case.

Generally two means exist through which a subrogated insurer can recover

from a responsible third party:(1)the insured brings a claim against the third party

and the insurer seeks reimbursement from the insured's recovery, or(2)the insurer

can "stand in the shoes" of its insured and pursue a claim against the responsible

party directly. In either situation, "[t]he potential for conflict of interest abounds."

Mahler, 135 Wn.2d at 414. This is because if the insured still has uncompensated

injuries, both the insurer and insured will generally be looking to recover from the

same third party, and that party's own insurance and assets are not always

sufficient to cover both claims. In such circumstances, there is a high potential for

conflict between insureds who wish to be compensated for the full extent of the

damages they have suffered, and first-party insurers who expect to be reimbursed

for amounts they have advanced to the insured.

Daniels argues that insureds' right to be fully compensated for their losses,

including full reimbursement for deductibles, takes priority over an insurer's

interest in recouping its payments through a direct subrogation action. Daniels

asserted in her complaint that State Farm's conduct violates both its own policy as

well as Washington law. Three separate legal theories are presented for requiring
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

State Farm to return its insureds' full deductibles prior to allocating to itself any

portion of subrogation proceeds. These include (a)the common law made whole

doctrine,(b) Washington insurance regulations, and (c) State Farm's own policy

language. The trial court dismissed all of Daniels's claims under CR 12(b)(6) and

the Court of Appeals, in a divided opinion, affirmed. Daniels, 4 Wn. App. 2d at

278. Judge Becker dissented, asserting that Averill was wrongly decided and

should be disavowed, and concluding that all three of Daniels's theories should

survive a motion to dismiss under CR 12(b)(6).

Whether a case is properly dismissed under CR 12(b)(6) is a question of law

that we review de novo. San Juan County v. No New Gas Tax, 160 Wn.2d 141,

164, 157 P.3d 831 (2007). Such a dismissal is appropriate where "there is not only

an absence of facts set out in the complaint to support a claim of relief, but there is

no hypothetical set offacts that could conceivably be raised by the complaint to

support a legally sufficient claim." Worthington v. WestNET, 182 Wn.2d 500, 505,

341 P.3d 995 (2015)(citing No New Gas Tax, 160 Wn.2d at 164). Given this high

standard, CR 12(b)(6) motions should be granted '"sparingly and with care'"

where "plaintiffs allegations show on the face ofthe complaint an insuperable bar

to relief." No New Gas Tax, 160 Wn.2d at 164 (quoting Tenore v. AT&T Wireless

Servs., 136 Wn.2d 322, 330, 962 P.2d 104(1998)). Here, dismissal under CR
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

12(b)(6) was proper only if there is no set of facts that could conceivably be drawn

from the complaint to support any one of the three legal theories involved. We

begin our analysis with Daniels's claims under the common law made whole

doctrine.

The Made Whole Doctrine

In addressing conflicts between subrogated insurers and injured insureds, we

have generally established priority for the interests ofthe insureds through the

made whole doctrine. In Thiringer v. American Motors Insurance Co., we

articulated this doctrine as a general rule that

while an insurer is entitled to be reimbursed to the extent that its
insured recovers payment for the same loss from a tort-feasor
responsible for the damage, it can recover only the excess which the
insured has received from the wrongdoer, remaining after the insured
is fully compensated for his loss.

91 Wn.2d 215, 219, 588 P.2d 191 (1978). In other words, an insurer can obtain

reimbursement from an insured who has been more than fully compensated for

their injuries and has actually received excess compensation from having received

payments from both the first-party insurer and a third party. In these circumstances

an insurer can seek reimbursement from its insured, as the insured is not entitled to

a double recovery. But an insurer generally cannot obtain a recovery if its insured

has uncompensated damages. We held that this rule "embodies a policy deemed
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

socially desirable in this state," as it prioritizes the indemnification of victims of

automobile accidents, Thiringer, 91 Wn.2d at 220, and, in doing so, helps to reduce

the potential conflicts between insurers and insureds.

As correctly recognized in Judge Becker's dissent below, the approach we

took in Thiringer aligns with Professor Robert Keeton's "Fourth Rule" for

allocating proceeds of a recovery from a third-party tortfeasor. "Out of the

recovery from the third party the insured is to be reimbursed first, for the loss not

covered by insurance, and the insurer is entitled to any remaining balance, up to a

sum sufficient to reimburse the insurer fully, the insured being entitled to anything

beyond that." Robert E. Keeton,Basic Text on Insurance Law § 3.10(c)(2), at

161 (1971).

The issue before us is how, under the circumstances of this case, the made

whole doctrine applies. Daniels argues that we should prioritize an insured's

recovery in any type of subrogation scenario, including where the insurer pursues a

direct subrogation action against a responsible third party. Under this broad view

of the doctrine, an insurer like State Farm would have to ensure that its subrogation

recovery is first allocated to any uncompensated portion of its insured's loss before

the insurer allocates any proceeds to itself. State Farm, on the other hand, asserts

that the doctrine is specifically confined to situations where the insurer seeks to be
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

reimbursed from the insured's own recovery from a third party and does not apply

in situations where an insurer pursues a direct subrogation action to recoup its

payments. Under this view, the insurer would be able to allocate the proceeds

recovered in the subrogation action to itself before its insured has been fully

compensated for their loss. The trial court agreed with State Farm and held that

under Averill, the made whole doctrine does not provide Daniels a claim for relief.

Averill was decided by the Court of Appeals with similar facts as the case

before us. Two drivers were involved in a wreck and the drivers' insurers

determined the two were equally at fault. After Farmers Insurance Company of

Washington received a 50 percent recovery and reimbursed Averill for half of her

deductible, she sued the insurer, claiming that among other things, the common

law made whole doctrine required a full return of her deductible before Farmers

could allocate any proceeds to itself. The Court of Appeals rejected this argument,

holding that the made whole doctrine limits an insurer's recovery only when it

seeks reimbursement from its insured and does not extend to situations where the

insurer pursues its subrogation claim directly. The court went on to hold that this

result is consistent with the purpose of deductibles, which represent "the amount of

risk retained by the insured," and that to allow Averill to recover her deductible
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

would change the contract to one without a deductible, which the court was "not at

liberty" to do. Averill, 155 Wn. App. at 114. We disagree.

The analysis in Averill runs counter to the principles our cases have

established addressing the made whole doctrine. We have not confined this

doctrine to situations involving reimbursement from the insured; on the contrary,

we have expressly stated that it extends further. As Judge Becker correctly

recognized in her dissent below, in Sherry v. Financial Indemnity Co. we

established a broader view that the made whole doctrine applies whenever an

insurer seeks "an offset, subrogation, or reimbursement for PIP [personal injury

protection] benefits already paid." 160 Wn.2d 611, 618, 160 P.3d 31 (2007)

(emphasis added). Furthermore, an analysis of Thiringer and Sherry reveals that

we have not limited the doctrine in the manner asserted by the Averill court.

In Thiringer, the insured was injured in a car wreck and sought payment

from his insurer after the at-fault driver was unable to compensate him for his full

general and special damages. His insurer denied his claim, arguing that the

recovery from the at-fault driver was sufficient to cover his insured special

damages and the recovery should be allocated to those damages first, rather than to

his uninsured general damages. We rejected that argument and held that Thiringer

had "a right to expect that the payments promised under this coverage will be

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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

available to him," and established a rule that insureds such as Thiringer are

"entitled to be made whole." Thiringer, 91 Wn.2d at 220. This meant that he could

first allocate the payments from the at-fault party to his general damages and then

seek recovery from his own insurer for his special damages.

The important point here is that the insurer in Thiringer was not seeking to

be reimbursed from a recovery; instead, it was seeking to avoid payment in the first

place by controlling how the recovery from the third party was allocated. We held

that the made whole doctrine applied and allowed the insured to allocate his

proceeds in a manner that would bring him the closest to being made whole. Given

that Thiringer did not involve a claim for reimbursement, any argument that it

limited the made whole doctrine to such claims fails.

In Sherry, we expanded on this reasoning. Sherry involved a pedestrian who

was struck by a car driven by an uninsured motorist. The pedestrian was insured by

Financial Indemnity Company(FIC) under both an underinsured motorist(UIM)

policy and a PIP policy. FIC paid for medical benefits and lost wages under the

PIP policy, then claimed an offset when it paid UIM benefits, seeking to reduce its

UIM payment to account for the PIP payments it had already made, as well as to

account for comparative fault ofthe insured. We held that FIC could not claim an

offset until its insured had been fully compensated for his damages, as he had a

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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

right to be made whole, and that fiill compensation in this context referred to

compensation for the insured's full actual damages with no reduction based on

comparative fault. Sherry, 160 Wn.2d at 625.

Sherry involved no claim for reimbursement; there was no third party from

which FIC could be reimbursed because it was FIC that was paying under both

policies. Instead of seeking reimbursement, the insurer was seeking to minimize its

payments through an offset, and we held that it could not do so when its insured

had yet to be made whole. Neither Thiringer nor Sherry involved claims for

reimbursement by the insurer, so there appears to be no support for the assertion in

Averill that the made whole doctrine is so confined.

We also disagree with the Averill court's reasoning that allowing an insured

to recover their deductible from a subrogation recovery would change the

insurance contract to one without a deductible. The court reasoned that the

deductible was the amount Averill contracted to be out of pocket before her

insurance would be triggered, but its analysis did not fully explain how this creates

a conflict with application ofthe made whole doctrine to subrogation claims. The

idea would appear to be that an insured's premium is, among other things, based

on the amount of risk the insured retains in the form of a deductible. Thus, by

receiving back her deductible without any change to her premium, Averill would

12
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

receive a windfall. She would have a lower premium that was based, in part, on her

having to pay a deductible, yet application of the made whole doctrine would

relieve her of being out-of-pocket for that deductible. Once again, we disagree.

The focus on deductibles as contracted-for risk is only one way of viewing

deductibles; they also act to "eliminate insurance coverage for losses that are small

enough that they are better borne by the insured . . . because the administrative

expenses for an insurer are substantial in relation to the amount of such losses."

Robert E. Keeton & Alan I. Widiss,Insurance Law § 3.10, at240 (1988).

Thus, an insured pays a higher premium for a lower deductible to make up for the

increased administrative costs that come with the insurer having to cover smaller

claims. Requiring that an insurer reimburse insureds for deductibles as part of the

made whole doctrine does not interfere with this purpose and does not rewrite the

policy to one with no deductible. Where insureds sustain a loss that does not

exceed the amount of their deductible, they will still receive no benefits under the

policy.

The analysis in Averill is in conflict with the policy underlying the made

whole doctrine, and to the extent the Court of Appeals held the made whole

doctrine is confined to reimbursement claims, we overrule it. Under Thiringer and

Sherry, no distinction exists based on who brings a claim against a responsible

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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

third party. Since the claim seeks recovery of the insured's losses, that the insurer

brings the subrogation claim makes no difference in the application of the made

whole doctrine—^the principles of the doctrine apply equally and the result is the

same. Whether in the context of a reimbursement request, offset, or direct

subrogation action, a fault-free insured must be made whole for their entire loss

before an insurer may offset or recover its own payments. Stated another way, the

proceeds of any recovery from a third-party tortfeasor, whether in a subrogation

action or otherwise, must be allocated in such a way as to first make the insured

whole. Daniels's complaint asserted that State Farm fails to abide by this

requirement, which states a valid claim supported by the common law made whole

doctrine and survives a CR 12(b)(6) motion to dismiss.

Insurance Regulations

We turn next to Daniels's assertion that State Farm violates Washington's

insurance regulations. We interpret regulations under the same rules used in

statutory construction. Mader v. Health Care Auth, 149 Wn.2d 458, 472, 70 P.3d

931 (2003). In doing so, we seek "to ascertain and give effect to its underlying

policy and intent." Cannon v. Dep't ofLicensing, 147 Wn.2d 41, 56, 50 P.3d 627

(2002). If a regulation is clear on its face, then its meaning should be derived from

the plain language; however, if the regulation is subject to two or more reasonable

14
Daniels v. State Farm Miit. Auto. Ins. Co., No. 96185-9

interpretations, we will resort to principles of statutory construction, legislative

history, and relevant case law to assist in resolving the ambiguity. We construe an

ambiguous rule or regulation to effectuate the intent of the agency. Cannon, 147

Wn.2d at 57.

The regulation at issue here is WAC 284-30-393, the relevant portion of

which reads,"The insurer must include the insured's deductible, if any, in its

subrogation demands. Any recoveries must be allocated first to the insured for any

deductible(s) incurred in the loss, less applicable comparable fault." The parties

agree that this requires an insurer to seek recovery of its insured's deductible as

part of any subrogation claim against a third party and that the insurer must return

some portion ofthe deductible to the insured. The dispute between the parties is

over the meaning ofthe final four words,"less applicable comparable fault."

Daniels argues that "applicable comparable fault" refers to fault that is

attributable to the insured. Under this interpretation, the disputed portion of the

regulation is confined to circumstances where there is a determination that the

insured is partially at fault. State Farm, on the other hand, contends there is nothing

in the language that limits "applicable comparable fault" to fault that has been

attributed to the insured. It would have us interpret the regulation such that the

15
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

insurer need reimburse its insured only for a portion of the deductible equal to the

fault of the party from which it has recovered.

In its amicus brief, the Office of the Insurance Commissioner(QIC)points

us to a final cost benefit analysis issued during the rule making process to amend

WAG 284-30-393 to its current form. This analysis explains that the party who

petitioned for the amendment, Farmers Insurance, specifically asked that the rule

be amended so "insurers may deduct the amount of an insured's comparative fault

from reimbursement for their deductible." Clerk's Paper's(CP)at 33 (emphasis

added). The QIC's analysis then goes on to state repeatedly that the amendment is

meant to do just that, to allow reductions to the reimbursement of deductibles

based on the insured's fault. See CP at 36 (stating that the amendment will provide

"greater clarity in resolving claims . . . where the policyholder is partially at fault"

(emphasis added)).

We interpret the regulation in the manner intended by the agency, and in

doing so, it is evident that Daniels raised a valid claim regarding violation of the

WAC. Accepting the facts alleged in her complaint as true, there appears to have

been no assertion that Daniels herself bore any fault for the wreck, yet State Farm

withheld 30 percent of her deductible. Daniels also alleges that this conduct is

consistent with State Farm's dealings with its other insureds. Such assertions

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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

support the claim that State Farm violates WAC 284-30-393 with regard to the

asserted class.

Policy Language

Daniels's final argument, and the one focused on most by the Court of

Appeals, concerns State Farm's own policy language. The relevant language is in

the "General Terms" section ofthe policy and states:

If we are obligated under this policy to make payment to or for a
party who has a legal right to collect from another, then the right of
recovery of such party passes to us. .. .

Our right to recover our payments applies only after the insured has
been fully compensated for the bodily injury, property damage or
loss.^^^

CP at 80. Daniels argues that the first section creates a basic subrogation right,

allowing State Farm to seek repayment from a responsible party after it has made a

payment to its insured. She then argues that the second section controls the

allocation of proceeds from a successful subrogation claim and requires that the

insured be made whole for any remaining loss before State Farm can repay itself

for its insurance payments.

^ Daniels additionally argues that absent y4ver///, WAC 284-30-393 must fully incorporate
the made whole doctrine. We need not address this argument given the inapplicability of the
WAC in the context of fault-free insureds.

^ The bolded and italicized words in the policy are defined in a separate portion of the
policy not included in the record.

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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

Daniels points out that the second section uses the word "our" when

discussing the payments to which State Farm gains the right to recover, while the

first section does not contain this limiting word. Thus, Daniels argues, the first

section must be read as granting State Farm a very general right of recovery,

allowing it to stand in the shoes of its insured to pursue any and all funds owed by

a third party. If State Farm is successful in such an action, the second section

would then stand as the limit on what funds State Farm can allocate to itself.

Daniels argues that State Farm's "right to recover [its] payments" from the

subrogation proceeds "applies only after the insured has been fully compensated

for the .. . loss," and that the "loss" includes any portion covered by a deductible.

The trial court rejected this interpretation, holding that Daniels was "fully

compensated for her property loss claimed under her collision coverage when she

accepted payment from State Farm," at which time her claim passed to State Farm.

CP at 69-70. The Court of Appeals majority agreed and appeared to read both

sections of the policy as controlling when State Farm's right to pursue recovery

was triggered, not how proceeds would be allocated. We disagree.

We interpret language in an insurance policy as a matter of law and review

dQnovo. Kut Suen Luiv. Essex Ins. Co., 185 Wn.2d 703, 710, 375 P.3d 596

(2016). We seek to give such policies a "practical and reasonable" interpretation.

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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

rather than a "strained or forced construction" or one that leads to an absurd

conclusion. Morgan v. Prudential Ins. Co. ofAm., 86 Wn.2d 432, 434, 545 P.2d

1193 (1976).

We are presented with two different interpretations of State Farm's policy

language; however, the presence oftwo possible interpretations does not make the

language ambiguous unless both interpretations are reasonable. Here, there can be

only one reasonable interpretation, which is one that aligns with the common law

made whole doctrine. The interpretation State Farm urges, and which was adopted

by the courts below, does not align with that doctrine; therefore we reject it. We

accept Daniels's assertion that the second section of the policy language prohibits

State Farm from allocating subrogation proceeds to itself until its insured is fully

compensated for their loss, which includes full reimbursement for the insured's

deductible. This interpretation is consistent, as it must be, with the made whole

doctrine and the basic principles of subrogation, which emphasize the loss suffered

by the insured. Under this interpretation, Daniels has asserted a valid claim that

State Farm violates the policy.

CONCLUSION

Daniels's complaint asserted valid claims for relief under the common law,

under Washington insurance regulations, and under State Farm's own policy

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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9

language. As such, dismissal under CR 12(b)(6) was improper. We reverse and

remand to the trial court for further proceedings.

WE CONCUR:

CJOA\Z£. (/

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