No. 86-591
IN THE SUPREME COURT OF THE STATE OF MONTANA
MERIDIAN MINERALS COMPANY,
VS.
NICOR MINERALS, INC., and NICOR MINERAL VENTURES, INC.,
~efendants/Respondents,
and COSTAIN HOLDINGS, INC.,
~ntervenor/Respondent.
APPEAL FROM: District Court of the Eighteenth Judicial District,
In and for the County of Gallatin
The Honorable Joseph B. Gary, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
GOUGH, SHANAHAN, JOHNSON & WATERMAN; Ronald Waterman,
Helena, Montana.
For Respondent:
GARLINGTON, LOHN & ROBINSON; Gary Graham,
Missoula, Montana,
GOETZ, MADDEN & DUNN; James H. Goetz,
Bozeman, Montana,
MAYER, BROWN & PLATT; Thomas P. Johnson,
Denver, Colorado.
Submitted: June 8, 1987
Decided: September 3 , 1987
SEP 3 - 1987
Filed:
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Clerk
Mr. Justice John C. Sheehy delivered the Opinion of the
Court.
Meridian Minerals Company (Meridian) appeals an adverse
declaratory judgment entered in the District Court,
Eighteenth Judicial District, Gallatin County. Meridian
brought suit against Nicor Minerals, Inc. (Minerals) and
Nicor Mineral Ventures (Ventures) for a declaration that the
proposed transaction by Minerals to merge Ventures into a
subsidiary of Costain Holdings, Inc. (Costain) triggered
preemptive right and resignation provisions of a venture
agreement between Meridian and Ventures. Costain intervened
in the action, which was tried without a jury. The District
Court entered judgment in favor of Minerals, Ventures and
Costain. Meridian appeals from that judgment. We affirm.
In early 1984, Meridian, a wholly-owned subsidiary of
Burlington Northern (BN), and Ventures, a wholly-owned
subsidiary of Minerals (in turn a subsidiary for Nicor, Inc.,
a holding corporation for Northern Illinois Gas Company)
entered into a venture agreement to develop a talc mine in
Madison County, Montana. Although BN owned the talc site, it
leased the mineral interest to Ventures and authorized
Meridian to explore and develop the property with Ventures on
BN's behalf. Meridian and Ventures were the only parties to
the agreement, each with a 50% interest in the venture.
In spring, 1985, Minerals began negotiations to merge
its subsidiary, Ventures, with a subsidiary of Costain.
Meridian learned of the deal and filed for a declaratory
judgment from the District Court protecting what Meridian
thought to be its preemptive right under the terms of the
venture agreement. At issue here is the District Court's
interpretation of that right.
The agreement negotiators used a Rocky Mountain Mineral
Law Foundation model form for their mining venture agreement.
The form language of the agreement gave each participant a
preemptive right to purchase the other participant's interest
in the agreement, before the other participant could transfer
those interests to a third party. A clause was added by
Meridian to the preemptive right provision form language
which specifically brought within the limitations a transfer
of protected interests effected by transfers of stock.
There were two other sections of this agreement central
to this case. One, the agreement specifically excluded from
the preemptive right a corporate merger of a participant.
Second, it designated Ventures as the operator, but provided
that a transfer by Ventures of its interest in the agreement
would be deemed an offer to resign as operator.
The actual language of the contract foll.ows:
ARTICLE XV
Transfer of Interest
15.1 General. A Participant shall have the right
to transfer, grant, assiqn, encumber, pledse or
- -
otherwise commit or dispose of (transfer) to any
third party all or any part of its interest in or
to this Agreement, its Participating Interest, or
the Assets.
15.2 Limitations on Free Transferability. The
transfer riqht of a Partici~ant in Section 15.1.
~ -- -
-
expressly including a tranifer of an interest
effected b~ a transfer of stock, shall-be subject
to the folrowinq terms'- and conditions: (New
language emphasized. )
(i) Such transfer shall be subject to a preemptive
right in the other Participant as provided in
Section 15.3.
15.3 Preemptive Right. Except as otherwise
provided in Section 15.4, if a Participant desires
to transfer all or any part of its interest in this
Agreement, any Participating Interest, or the
Assets, the other Participant(s1 shall have a
preemptive right to acquire such interests as
provided in this Section 15.3.
15.4 Exceptions to Preemptive Right. Section 15.3
shall not apply t o t h e following transfers:
(a) Transfer by a Participant of all or any
part of its interest in this Agreement, any
Participating Interest, or the Assets to an
Affiliate;
(b) Incorporation of a Participant, or
corporate merger, consolidation, amalgamation or
reorganization of a Participant by which the
surviving entity shall possess substantially all of
the stock, or all of the property rights and
interests, and be subject to substantially all of
the liabilities and obligations of that
Participant; and (Emphasis ours.)
(c) The grant by a Participant of a security
interest in any interest in this Agreement, any
Participating Interest, or the Assets by mortgage,
deed of trust, pledge, lien or other encumbrance.
8.4. Resignation; Deemed Offer to Resign. The
Operator may resiqn upon two monthr~riornotice to
the ~ a n a ~ e i e n titte tee, in which -case, if there
is only one other Participant, such Participant may
elect to become the new Operator by notice to the
Management Committee within 30 days after the
notice of resignation. If upon such resignation
there are more than two Participants, the new
Operator will be selected by the Management
Committee, with only the nonmanaging Participants
entitled to vote. If any - - following shall
of the
occur, the Operator ~ T a l l deemed - -
be to have offered
to resign, which offer shall be accepted by the
-
other Participant(s) by notice to the Operator, if
at all, within ninety days following such deemed
offer:
(h) the Participant acting as Operator
transfers its interests in the venture and in the
properties to a third pa.rty that is not an
Affiliate. (Emphasis ours.)
In spring, 1985, Nicor, Inc. decided to divest itself of
its mineral interests, including the talc operation. The
following October, Meridian found out about the proposed
divestiture and wrote Ventures asserting the applicability of
the Section 15.3 preemptive right. The president of Ventures
responded that any contemplated transfer was not within the
scope of the preemptive right because the right was
restricted only to "participants," and the transfer
contemplated by Nicor, Inc., and Minerals was a transfer of
shares by Minerals, not Ventures, and was therefore not
restricted by the Ventures agreement.
Meridian's response was to file an action for
declaratory judgment in the District Court. Meridian's
argument was that insofar as the talc operation was
concerned, the proposed merger was within the scope of the
Section 15.3 Preemptive Right and Section 8.4 Deemed
Resignation provisions.
In February, 1986, Minerals went one step further with
the proposed merger, through a letter of intent with Costain.
Under the terms of this letter the parties agreed that
Minerals would surrender its shares in Ventures to Costain
for cash or other consideration and that Ventures would be
the surviving corporation to the merger. The parties further
agreed that Ventures would retain all of its pre-merger
assets and liabilities and would be bound by all of its
pre-merger contracts. Ventures only change after the merger
would be that its stock would be owned by Costain, not
Minerals. The negotiations for the merger were exclusively
between Costain and Minerals. Ventures did not participate
in these negotiations, nor was its director/president
informed of the plans to merge until after the decision was
made by Nicor, Inc. and Minerals.
After Minerals and Costain entered into the February,
1986, letter of intent, Meridian amended its complaint to
specifically address that transaction and sought further
declaration that the Costain merger would constitute a deemed
offer by Ventures to resign as operator (under Section 8.4).
The Meridian suit was brought against Minerals and Ventures.
Costain has intervened on Minerals' and Ventures' behalf.
Minerals, Ventures and Costain contend that the Costain
merger did not trigger either the preemptive right or deemed
resignation clauses of the Ventures agreement on the claim
that the merger was a divesture by Minerals of its interest
in Ventures. The clauses were not enforceable, they argue,
simply because Minerals was not a "participant" to the
Ventures agreement. They also assert their right to avoid
the preemptive right provision under the exception in the
venture agreement providing that a corporate merger would not
trigger Meridian's preemptive rights.
Meridian's position is that their specific addition of
the qualifying phrase "expressly including a transfer of an
interest effected by a transfer of stock," was meant to
prevent avoidance of the preemptive right by use of stock
maneuvers. It further asserts that the qualifying phrase of
Section 15.2 was also meant to modify the Section 15.4 merger
exception, so the preemptive right merger exception would not
apply to mergers transferring ownership of either party's
interest to an unaffiliated third party. In either case,
Meridian asserts that this Court should not, in equity, allow
the Nicor parties to use the merger form of the transaction
as a device for avoiding the preemptive right. Finally,
Meridian contends that the merger transaction constituted a
deemed offer by Ventures to resign as operator under Section
8.4.
Issues raised on appeal are:
1. Was the District Court correct in determining that
Minerals and Ventures were separate and distinct corporate
identities and that Minerals was not bound by the preemptive
right provision of the venture agreement between Ventures and
Meridian?
2. Was the District Court correct in refusing to find
that the qualifying language added to the preemptive portion
of the venture agreement applied to the merger transaction
between Minerals and Costain, as Meridian argued?
3. Was the District Court correct in holding that the
proposed merger negotiated between Minerals and Costain
properly fell within the merger exception of the venture
agreement?
4. Was the District Court correct in finding that the
merger did not trigger the deemed offer to resign as operator
clause of the venture agreement?
Trial was held on July 10 and 11, 1986. On October 2,
1986, after extensive post-trial briefing and oral arguments
by counsel, the District Court entered its Findings of Fact,
Conclusions of Law and Memorandum, denying the relief sought
by Meridian.
The District Court first held that Minerals was not a
"participant" under the venture agreement and thus the
Costain merger did not trigger either the preemptive right or
the deemed resignation clauses. The court found that under
the express terms of the venture agreement only Meridian and
Ventures were "participants"; Minerals was not. Further the
District Court found:
5. That from the following evidence the Court
finds that Minerals and Ventures are separate and
independent corporations;
A. Ventures makes its own corporate
decisions including budgets, venture
agreements, and personnel matters.
B. Ventures complies with all statutory
requirements for corporate operations
including Articles of Incorporation and
By-Laws.
C. Minerals and Ventures both have separate
bank accounts.
D. Ventures does not accept responsibility
for Minerals' debts.
E. The business records are separate.
F. The activities of the corporations are
different and Ventures engages in exploration
and development while Minerals is an
investment company.
G. Ventures' principle offices are in
Colorado and Minerals' are in Illinois.
H. Neither corporation has publicly
represented that they are one and the same.
I. The Boards of Directors are not
identical.
J. The presidents are different.
K. Corporate funds have not been co-mingled
nor has credit been used interchangeably to
obtain Loans.
The District Court held:
4. That insufficient evidence was presented
to this Court to conclude there was such a
commonality of interests between the parent and
subsidiary such that the parent Minerals can be
considered the same as Ventures, thus allowing the
Court to pierce the corporate veil and designate
Minerals to be a participant in the Venture
Agreement between Meridian and Ventures.
5. That because Minerals was not a
participant with Meridian, their negotiation with
Costain does not trigger the preemptive clause to
which Ventures and Meridian originally agreed.
The District Court noted that the foregoing findings and
conclusions, alone, were sufficient to defeat Meridian's
claims. Nonetheless, the District Court additionally held
that the Costain merger was within the "corporate merger"
exception to the preemptive right clause. The District Court
found :
17. That the transaction between Costain and
Minerals would leave Ventures in the same condition
as present except that Costain rather than Minerals
would be the owner of the stock.
18. That after the proposed transaction Ventures
would continue to possess the same property rights
and interests as present, and continue to be
subject to all present liabilities and obligations.
19. That Ventures' assets are more extensive than
the Venture Agreement with Meridian, and included
considerable other assets such as mining claims,
other mineral rights, and operations, and that all
of these assets will remain in Ventures, which fact
is important to conclude that a true merger was
affected, and not a sale of the Talc Agreement.
20. That the contemplated transaction contains the
elements of a legal merger, and as such fits within
the exception to the preemptive rights defined in
15.4.
The District Court held:
6. That the Venture Agreement between Ventures and
Meridian is clear and unambiguous, and introduction
of par01 evidence did not modify the unambiguous
term "merger" in the joint venture agreement.
7. That the Court finds no wrongful purpose behind
the contemplated merger since the original
Agreement specifically stated that a merger was an
exception to the preemptive clause, which was
bilaterally available to both parent corporations.
8. That while the contemplated transaction
involved the transfer of stock ownership in return
for consideration, the survival of the entity with
all its assets and liabilities indicates it can
nevertheless meet the elements of a merger, as
opposed to a sale, and fit within the parameters of
the Venture Agreement exception.
9. That because Ventures will maintain its
interest in the Agreement, and maintain its assets
and liabilities, this contemplated transfer would
not involve the Section 15.3 elements of "interest"
in the Agreement, "Participating Interest," or
"Assets."
10. That the evidence presented by the Plaintiff
does not prove a "deemed offer to resign" as
Operator, under Article 8.4.
Pursuant to its Findings of Fact and Conclusions of Law
and Memorandum, the District Court entered judgment denying
the relief requested by Meridian and granting the defendants'
request for a declaration that the Costain merger would not
fall within the preemptive right or deemed resignation
clauses of the Venture Agreement.
Meridian's principal contention is that Minerals should
not, in equity, be permitted to rely on the "legal fiction"
of its subsidiary, Ventures' separate existence to avoid the
contractually obligatory preemptive right. Meridian urges
this Court to reexamine the facts and exercise its equitable
powers to pierce the corporate veil between Minerals and
Ventures. Meridian asserts that the District Court's failure
to recognize the corporate fiction permits Ventures to take
unfair advantage of Mineral's insulation from the venture
agreement. In support of its assertion that Minerals and
Ventures are abusing their corporate privileges, Meridian
argues that: 1) Three officers of Nicor, Inc. control the
Board of Directors of both Minerals and Ventures; 2) That
Minerals and Ventures share common board members, with the
exception of one person; 3) That they share six common
officers; 4 ) That Ventures' operating funds are provided by
Minerals, whose funds are in turn covered by Nicor,
Inc. ; 5) That when in need of funds, Minerals and Ventures
merely issue stock to their parent corporation; 6 ) That
Ventures and Minerals have expenditure limits which cannot be
exceeded without consent of the parent corporation; 7 ) That
Minerals has no operating assets, no separate offices and no
separate employees from Nicor, Inc.; 8) That meetings of the
boards for Minerals and Ventures were customarily one after
another, and in one instance, simultaneously; 9) That
Minerals and Ventures were subject to uniform operating
procedures imposed by Nicor, Inc.; and, 10) That Minerals
had knowledge of the preemptive right burden on the talc
interest. In light of these facts, Meridian asserts,
separate corporate identities should not be maintained. (We
note, in passing, that points numbered 7 and 9 pertain to the
relationship between Nicor, Inc. and its subsidiaries,
Minerals and Ventures. At issue here is the relationship
only between Minerals and Ventures.)
Meridian contends that the District Court operated under
the misunderstanding that, in order to justify disregard of
the corporate entity, the evidence must show that Minerals
and Ventures were one and the same. Meridian further argues
that the District Court's findings (set out in the fact
section of this opinion) merely reflect matters which can be
arranged to create the appearance of separateness without
infringing on the control of a subsidiary by a parent.
Hence, it asserts, those facts should be given little weight
in determining the applicability c?f the equitable identity
theory. Meridian cites S 3-2-204(5), MCA, as the standard of
review supporting its position that equity regards the
totality of the circumstances, and will permit piercing of
the veil without imposition of strict checklists:
In equity cases and in matters and proceedings of
an equitable nature, the supreme court shall review
all questions of fact arising upon the evidence
presented in the record, whether the same be
presented by specifications of particulars in which
the evidence is alleged to be insufficient or not,
and determine the same, as well as questions of
law, unless for good cause a new trial or the
taking of further evidence in the court below be
ordered. Nothing herein shall be construed to
abridge in any manner the powers of the supreme
court in other cases.
While 3-2-204 (5), MCA, provides the applicable
standard of review, it does not, as Meridian advocates,
entitle Meridian to a - -
de novo review of the evidence. This
Court's function in reviewing findings of fact in a civil
action tried by a district court without a jury is not to
substitute its judgment in place of the trier of facts but
rather it is confined to determining whether the findings of
fact are clearly erroneous. Rule 52(a), M.R.Civ.P. Although
conflicts may exist in the evidence presented, it is the duty
and function of the trial judge to resolve such conflicts.
His findings will not be disturbed on appeal where they are
based on substantial though conflicting evidence. Olson v.
Westfork Properties, Inc. (19761, 171 Mont. 154, 557 P.2d
821; Bender v. Bender (1965), 144 Mont. 470, 397 P.2d 957.
Further, there is a presumption when this Court reviews
the evidence, that the trial court's judgment is correct, and
that any conflicting evidence must be resolved in favor of
the ruling:
Although this is an equity case and this court is
bound to review all questions of law and fact
raised on appeal,. .. nevertheless we are guided
in our review by certain presumptions and rules of
law. First, in entering upon a review of the
evidence on appeal, this court indulges the
presumption that the judgment of the trial court is
correct, and will draw every legitimate inference
therefrom to support the presumption. (Citation
omitted.) Second, it is the trial court's office
to resolve inconsistencies in the testimony, and
where the evidence, fully considered, furnishes
reasonable grounds for different conclusions, the
findings of the trial court will not be disturbed.
Havre Irrigation v. Majerus (1957), 132 Mont. 410, 414, 318
P.2d 1076, 1078.
Not only must conflicting evidence be resolved in favor
of the District Court's ruling, but Meridian must shoulder
the burden of proving that the evidence preponderates against
the finding. Thomas v. Ball (1923), 66 Mont. 161, 213 P.
597. Hence, to pierce the corporate veil Meridian is
obligated to prove that Minerals and Ventures had no separate
identity - that the corporate form was used as subterfuge
and
to defeat a public convenience, justify a wrong or to
perpetrate a fraud.
Central to addressing the issue of whether there are
separate identities is the fact that Minerals was not a
participant to the venture agreement. As defined by the
agreement, a "participant" meant the people or entities that
from time to time had "participating interests." A
"participating interest" meant the percentage interest
representing the operating ownership interest of a
participant in the assets and other rights and obligations
under the agreement. The agreement stated that the
"participants" were Meridian and Ventures, each holding a
participating interest of 50%. Clearly, under these
definitions neither Nicor, Inc. nor Minerals were
participants bound by the contract.
There is no precise formula used to determine if a
corporation is the alter-ego of its shareholder. However, in
Comment, Piercing the Corporate - -in Montana (1983), 44
Veil
Mont.L.Rev. 91, 95-97, the author identified the fourteen
factors which this Court has relied on in past decisions:
1. Whether the shareholder owns all or most of the
corporation's stock.
2. Whether the shareholder is a director and/or
the president of the corporation.
3. Whether the shareholder makes all corporate
decisions without consulting the other directors or
officers.
4. Whether the shareholder, officers and/or
directors fa-il to comply with the statutory
requirements regarding operation of the
corporation.
5. Whether the shareholder's personal funds are
commingled with the corporation's funds.
6. Whether the shareholder's personal credit and
corporation's credit are used interchangeably to
obtain personal and corporate loans.
7. Whether the shareholder's personal business
records are not kept separate from corporation's
business records.
8. Whether the shareholder and corporation engage
in the same type of business.
9. Whether the shareholder and corporation have
the same address which is the address of
shareholder's personal residence.
10. Whether the shareholder admits to third parties
that the shareholder and the corporation are one
and the same.
11. Whether the corporation's profits and earnings
are distributed through means other than dividends.
12. Whether the corporation is undercapitalized.
13. Whether the parent and subsidiary have the same
name.
14. Whether the parent and subsidiary have the same
directors and officers.
The District Court did not strictly adhere to this
formula but nonetheless made eleven specific findings of fact
which supported its ultimate finding that Minerals and
Ventures were separate and distinct corporations. These
findings are listed in the statement of facts portion of this
Opinion.
The trial court examined the evidence listed by Meridian
and concluded that the evidence did not establish a
commonality of interests between Minerals and Ventures
sufficient to justify disregard of their corporate
separateness. This Court is bound to uphold the trial court
where its findings are not clearly erroneous. Rule 52(a),
M.R.Civ.P.
Second, Meridian's argument fails because it claims that
because Minerals was the sole shareholder of Ventures, it
exercised complete control over Ventures.
Under Montana law, control over a corporation by a
single shareholder is not, by itself, enough to warrant
piercing the corporate veil. State ex rel. Monarch ~ i r s t
Ins. Co. v. Holmes (1942), 113 Mont. 303, 308-309, 124 P.2d
994, 996.
A mere showing that one corporation is owned by
another, or that the two share interlocking
officers or directors is insufficient to support a
finding of alter ego.
Bonanza Hotel Gift Shop, Inc. v. Bonanza No. 2 (Nev. 1979),
596 P.2d 227, 229.
Before the corporate cloak will be disregarded "it
must appear not only that the corporation is
controlled and influenced by one or a few persons,
but, in addition, it is necessary to demonstrate
that the corporate cloak is utilized as a
subterfuge to defeat public convenience, to justify
wrong, or to perpetrate fraud."
State ex rel. Monarch Fire Insurance Co. v. Holmes (19421,
113 Mont. at 308, 124 P.2d at 996. See also ECA
Environmental Management Services, Inc. v. Toenyes (~ont.
1984), 679 P.2d 213, 41 St.Rep. 388.
0 rganization of one company by another, or
[ ]
ownership of all stock of one company by another,
or common officers and directors, or all these
elements combined, are not sufficient to defeat
separate corporate entity.
Gillis v. Jenkins Petroleum Process Co. (9th Cir. 1936), 84
F.2d 74, 79.
We also note that Meridian failed to assert at trial
that the corporate form had been used for some subterfuge.
In the entire trial, the only "wrongful" conduct asserted by
Meridian was that Minerals fashioned the Costain transaction
as a merger in order to avoid the preemptive right clause.
As the District Court did not find this conduct wrongful,
Meridian failed to prove the second of the necessary elements
justifying piercing the veil.
Meridian's second assertion is that the District Court
failed to construe properly the qualifying phrase "expressly
including a transfer of an interest effected by a transfer of
stock" in the venture agreement. Meridian asserts that this
phrase means only one thing: that no interest in the venture
agreement could be transferred to a third party, in avoidance
of the preemptive right, by conveying to a third party the
stock of the corporation which owned the interest. Meridian
argued, using par01 evidence, that the language was intended
to apply the preemptive right provision to transfers by
parent corporations. They argue that this intent should have
been obvious given the circumstance where both of the
signatory corporations were wholly-owned subsidiaries of
corporate parents. They assert that the model form's
preemptive right provided little security because it was
easily circumvented by passing the transfer of one
corporation up the line. Their solution for this problem was
to add a qualifying phrase which did not specify - was
who
bound, but what was covered: any transfer, even one
accomplished through a transfer of stock.
Minerals and Costain respond, and we agree, that
Meridian's argument attempts to create ambiguity where none
exists. The unambiguous language of Section 15.3 requires a
transfer by a "participant" to trigger the preemptive rights
provision. Further, the unambiguous language of other
sections of the agreement, Sections 1.17, 1.18 and 6.1
provide that the only "participants" to the agreement were
Ventures and Meridian. Meridian's witnesses admitted that
Section 15.3 explicitly applied only to transfers of stock by
participants. Thus, the agreement cannot be construed as
expressing a contractual intent to expand the preemptive
right to transfers by Venture's corporate parent.
As its third issue, Meridian asserts that the only
reason Minerals fashioned the Costain transaction as a merger
was to avoid the preemptive rights clause. Hence, it argues,
the merger was a sham and should be disregarded in equity.
Our conclusion is that Minerals was not a participant to the
venture agreement and our holding is that the findings of
sufficient corporate separateness are not clearly erroneous.
We uphold the District Court's refusal to pierce the
corporate veil which negates the need for this Court to
address the issues relating to the merger.
The venture agreement designated Ventures as operator,
the entity responsible for the venture. Section 8.4 of the
agreement recites circumstances under which the operator is
deemed to have resigned. Section 8.4 (h) provides that a
participant resigns when "the participant acting as an
operator transfers its interests in the venture and in the
properties to a third party that is not an affiliate."
Meridian contends that the Minerals-Costain merger was a
transfer under Section 8.4 and that the District Court should
have found that Ventures was deemed to have resigned as
operator.
Meridian's argument fails for the simple reason that
neither Costain nor Minerals were participants acting as
operator. Ventures was the only participant acting as an
operator and it did not transfer its interests in the venture
or in the properties. Hence, the plain language of the
deemed offer provision was inapplicable under the
circumstances.
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,
Affirmed. f-7
Justice
We Concur: R
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chief Justice dv