F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
SEP 4 2003
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
In Re:
DAVID OGLE MIDKIFF and
ANITA JOYCE MIDKIFF,
Debtors.
DAVID OGLE MIDKIFF and No. 02- 8004
ANITA JOYCE MIDKIFF,
Appellants,
v.
MARK R. STEWART,
Chapter 13 Trustee,
Appellee.
APPEAL FROM THE UNITED STATES BANKRUPTCY APPELLATE
PANEL FOR THE TENTH CIRCUIT
(BAP No. WY-01-032)
Georg Jensen, Esq., Cheyenne, Wyoming, for Appellants.
James R. Belcher, Holland and Hart, LLP, Cheyenne, Wyoming, for Appellee.
Before HENRY, HOLLOWAY, and MURPHY , Circuit Judges.
HENRY , Circuit Judge.
In this case, we face the familiar choice between finality and accuracy. We
choose accuracy, and we therefore hold that Rule 9024 of the Federal Rules of
Bankruptcy Procedure may be used to provide relief from a bankruptcy discharge
order. Exercising jurisdiction under 28 U.S.C. § 158(d), we thus AFFIRM the
decisions of the Bankruptcy Court and of the Bankruptcy Appellate Panel
vacating a discharge order and allowing a trustee to collect and disburse an
income tax refund under the terms of a bankruptcy plan.
I. BACKGROUND
The appellants, Dale Ogle Midkiff and Anita Joyce Midkiff (the Midkiffs),
filed for relief under Chapter 13 of the Bankruptcy Code on January 8, 1998. The
Midkiffs’ bankruptcy plan required payments for at least thirty-six months, up to
a maximum of forty-one months. The plan included a provision that income tax
refunds to which the Midkiffs would be entitled during the first thirty-six months
of the plan were to be deemed “disposable income” and submitted to the Trustee. 1
Aple’s Supp. App. at 7 ¶ 1.C. (Second Amended Chapter 13 Plan, filed Apr. 6,
1998).
1
The original Trustee of the plan was Sharon A. Dunivent. Her
motion to designate Mark R. Stewart as substitute appellee was granted on
February 8, 2002.
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On March 6, 2001, thirty-four months into the plan, in response to a request
from the Midkiffs to prepay their remaining obligations, the Trustee sent a letter
informing them that $285.92 was needed to complete the plan. The Trustee soon
received the Midkiffs’ final payment, and on April 4, 2001, the Trustee filed her
Certificate of Completion. On April 20, 2001, the Trustee filed her “Final
Account and Petition for Final Decree.” On April 24, 2001, the Bankruptcy Court
entered the Debtors’ Discharge.
Also on April 24, however, the Trustee filed a “Revocation of Trustee’s
Certificate of Completion,” noting that the Trustee had received the Midkiffs’
2000 federal tax refund “[a]fter filing the [C]ertificate [of Completion] but before
the discharge had been granted.” Aple’s Supp. App. at 1 (Revocation of Trustee’s
Certificate of Completion, dated Apr. 24, 2001). Shortly thereafter, the Trustee
filed in the Bankruptcy Court a “Chapter 13 Trustee’s Request to Vacate Order
Discharging Debtor,” Aple’s Supp. App. at 2 (filed May 2, 2001). She stated that
on April 24, after she had filed her Certificate of Completion, she had received a
check from the United States Treasury (dated April 20, 2001) in the amount of
$4974.00 for the Midkiffs’s 2000 federal tax refund, which was “disposable
income” under the plan. Id. at 3-4. The Trustee asserted that the Discharge
Order, which the Bankruptcy Court had entered at the request of the Trustee, was
entered by mistake, because the Trustee had been “surprised by newly discovered
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evidence.” Id. at 5. This, the Trustee concluded, justified vacating the Discharge
Order under Rule 9024 of the Federal Rules of Bankruptcy Procedure, which
provides for relief from final orders under conditions including mistake, surprise,
and newly discovered evidence.
After a telephonic hearing, the Bankruptcy Court found that the tax refund
resulted from the Midkiffs’ income during the relevant three-year period and that,
according to the plan, the tax refund was disposable income and must be applied
to the plan payments. The Bankruptcy Court then granted the Trustee’s request to
vacate the Discharge Order to allow the Trustee to collect and disburse the
income tax refund in accordance with the plan. The Bankruptcy Appellate Panel
(BAP) affirmed. In re Midkiff, 271 B.R. 383, 388 (B.A.P. 10th Cir. 2002).
II. DISCUSSION
The parties agree that there are no factual disputes in this case. “In our
review of BAP decisions, we independently review the bankruptcy court decision.
Where . . . [t]here are no factual disputes and the issues on appeal pertain to the
proper application of bankruptcy statutes and the interpretation of case law, our
review is de novo.” In re Tuttle, 291 F.3d 1238, 1240 (10th Cir. 2002) (internal
quotation marks and citation omitted).
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We first consider the threshold question of whether the Bankruptcy Court’s
decision to vacate the Discharge Order is permitted. We then proceed to
determine whether the Midkiffs’ plan requires that the funds at issue be turned
over to the Trustee for disbursement.
A. Vacating the Discharge Order
The Federal Rules of Bankruptcy Procedure allow for relief from final
orders on the same terms as the Federal Rules of Civil Procedure. “Rule 60
F.R.Civ.P. applies in cases under the [Bankruptcy] Code.” Fed. R. Bankr. P. 9024
(also listing exceptions not pertinent to this case). Rule 60 provides relief from
final orders under various circumstances. See Fed. R. Civ. P. 60(b) (“On motion
and upon such terms as are just, the court may relieve a party . . . from a final
judgment, order, or proceeding [due to] mistake, inadvertence, surprise, . . .
excusable neglect[, or] newly discovered evidence.”)
The Bankruptcy Code also, however, specifies that discharges may only be
revoked when there has been unknown fraud, and only upon notice and hearing:
On request of a party in interest before one year after a
discharge under this section is granted, and after notice
and a hearing, the court may revoke such discharge only
if-- (1) such discharge was obtained by the debtor
through fraud; and (2) the requesting party did not know
of such fraud until after such discharge was granted.
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11 U.S.C. § 1328(e) (emphasis added). The hearing must be an adversary
proceeding. Fed. R. Bankr. P. 7001(4) (“[A] proceeding to object to or revoke a
discharge [is an adversary proceeding].”)
The BAP nevertheless held that Rule 9024 allowed the Bankruptcy Court to
vacate the Discharge Order without proof of fraud. Midkiff, 383 B.R. at 386. In
reaching that conclusion, the BAP relied substantially on In re Cisneros, 994 F.2d
1462 (9th Cir. 1993).
Writing for the Ninth Circuit, Judge O’Scannlain concluded in Cisneros:
“A Chapter 13 debtor’s right to have his discharge revoked only for fraud (and
not on general equitable grounds or for some reason that would justify revocation
of a Chapter 7 discharge) is in no way infringed when a court vacates an order of
discharge entered by mistake.” Id. at 1466. Cisneros involved a debtor who,
unlike the Midkiffs, had not yet made all scheduled payments under the plan.
Even so, there is “no reason to believe that Congress intended § 1328(e) to
prevent the bankruptcy court from correcting its own mistakes.” Id. The
Cisneros court went on to explain that the word “only” in § 1328(e) could be
explained by Congress’s intent to exclude certain Chapter 7 proceedings from
being imported into the Chapter 13 context. Id.
Following Cisneros, the BAP held that in spite of § 1328(e)’s restrictions
on revoking discharges, the Bankruptcy Court retained authority to vacate the
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Midkiffs’ discharge to allow the Trustee to collect and disburse the tax refund.
The BAP reasoned that the Trustee’s lack of knowledge of the incoming tax
refund was “the kind of mistake contemplated by Rule 60(b)” and that “the
Bankruptcy Court did not err in vacating the Debtors’ discharge pursuant to Fed.
R. Bankr. P. 9024.” Midkiff, 271 B.R. at 386.
In challenging that conclusion in this appeal, the Midkiffs again argue that
the § 1328(e) restrictions limit the Trustee’s authority to vacate a discharge under
Rule 9024. They also contend that, even if Rule 9024 does authorize the vacating
of discharges on grounds other than those specified in § 1328(e), the Trustee’s
lack of knowledge of the Midkiffs’ tax refund is not the kind of “mistake”
contemplated by Rule 9024. Neither argument is persuasive.
1. The Relationship between § 1328(e) and Rule 9024
We are mindful that “[t]he bankruptcy court is, after all, a court of equity,
and it strikes us as anomalous in this context to say that the Debtors have a right
to retain that which they had no right to receive in the first place.” Cisneros, 994
F.2d at 1466.
Moreover, as the Trustee argues on appeal, the statute specifies that “the
court may revoke such discharge only” under certain conditions, 11 U.S.C. §
1328(e) (emphasis added), whereas the court here did not “revoke” the discharge
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at all. Rather, it “ordered that the Court’s Discharge Of Debt After Completion of
Chapter 13 Plan, dated April 24, 2001 is vacated to the extent, and for the sole
purpose, of allowing the Trustee to collect and disburse the tax refund in
accordance with the Debtors’ Chapter 13 plan.” Aplts’ App. at 6-7 (Order
Granting Trustee’s Request to Vacate Order Discharging Debtor for Limited
Purpose of Collecting and Disbursing Federal Income Tax Refund, filed May 10,
2001) (emphasis added).
The Order was not titled a “revocation,” and the Bankruptcy Court
specifically indicated that the purpose of the order was limited and specific. If
the Bankruptcy Court had wanted to “revoke” the discharge, it presumably knew
how to use that word, which appears prominently in the Bankruptcy Code.
Indeed, revocation involves far more than temporarily setting aside a discharge.
“[R]evocation of discharge . . . has the same effect as a denial of discharge. ‘The
revocation of a discharge makes the discharge a nullity . . .’ The result then in
either revocation or denial of discharge is obviously that the bankrupt does not
receive a discharge.” In re Hairston, 3 B.R. 436, 438 (Bankr. N.M. 1980)
(quoting 1A Collier on Bankruptcy, § 15.14, at 1514 (14th ed. 1978)). When a
discharge is revoked, “[t]he debtor is not released from personal liability for any
pre-petition obligation, regardless of whether the obligation is described as non-
dischargeable by statute or not. In addition, the permanent injunction embodied
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in the order of discharge never becomes applicable, or is revoked as part of the
order of discharge.” Rosemary Williams, Annotation, Creditor’s Right to Have
Bankruptcy Discharge of Individual Debtor Revoked, Vacated, and Set Aside, 138
A.L.R. Fed. 253, 288 (1997) (footnotes omitted). By contrast, a Rule 60(b)
motion “does not affect the finality of a judgment or suspend its operation.” Fed.
R. Civ. P. 60(b). Thus, when a court grants relief under Rule 60(b), the discharge
is not “revoked” but is simply altered to provide limited relief as appropriate
under the circumstances.
It is true that the words “revoke” and “vacate” have sometimes been used
interchangeably. See, e.g., In re Fesq, 153 F.3d 113, 115 (3d Cir. 1998) (“[This]
appeal poses the fundamental question whether a final order confirming a debtor’s
Chapter 13 plan can be vacated without a showing of fraud, an issue that the
parties have contested in terms of what grounds are available under law for
revocation of such confirmation orders.”) Importantly, however, it was the
parties themselves in Fesq who chose to contest the vacating of an order on the
basis of the legal standards governing revocations. At best, therefore, that
characterization constitutes the “law of the case,” not a legal holding that equates
revocation with vacation.
The decision in Fesq, in fact, provides further support for the distinction
between the revocation and the vacation of discharge orders. In that case, the
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Third Circuit considered a request by a creditor to revoke a confirmation order
(governed by the provisions of 11 U.S.C. § 1330, which are analogous to § 1328’s
rules governing discharges). The creditor in Fesq wished to file objections to the
confirmed plan, on the basis that a “computer glitch” at his lawyer’s firm had
prevented him from timely filing objections prior to the filing of the confirmation
order. Id. at 114. The creditor argued that he was entitled to relief under Rule
9024. Arguing in favor of finality, id. at 119, the Fesq court chose not to allow
relief from the confirmation order.
The Third Circuit’s refusal to grant relief under Rule 60(b) is thus a
reflection of its desire to prevent a creditor from forcing a confirmed plan to be
re-written without bringing an adversarial action and without asserting fraud. We
are faced with no such request for substantive changes in the Midkiffs’ plan. The
Trustee here acted as soon as she received the new evidence and requested only
that the Bankruptcy Court recognize that the tax refund was covered by the plan.
No changes were made to the plan, because none were requested. The Midkiffs
were merely prevented from receiving an undeserved windfall. 2
2
We note that, even with such a potentially persuasive basis for
preferring finality over accuracy, Fesq was not decided unanimously. The
dissenting judge there noted that because “mistakes are made, and justice
miscarries . . . every jurisdiction of which I am aware makes some provision for
relief from a judgment,” 153 F.3d at 120 (Stapleton, J., dissenting), and
concluded that the logic from Cisneros should be applied to allow courts to
(continued...)
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Our decision in In re Gledhill, 76 F.3d 1070 (10th Cir. 1996) provides
further support in an analogous setting. There, we held that Fed. R. Bankr. P.
7001(7) (specifying that “a proceeding to obtain an injunction or other equitable
relief” is an adversary proceeding) does not preclude the use of Rule 60(b) to
obtain relief by motion.
Rule 7001 lists ten classes of actions which require the
initiation of an adversary proceeding. The list does not
include requests for relief under Rule 60(b). . . .
Consequently, the plain language of Rule 9024 allows a
party to request Rule 60(b) relief from a bankruptcy
court order granting relief from stay by filing a motion.
Id. at 1078. 3
2
(...continued)
correct mistaken confirmation orders. Id. at 123. We need not decide whether
our decision today should apply to confirmation orders. We do, however, observe
that if Fesq was a close call, then the question here is even easier to resolve in
favor of accuracy.
3
The dissent in Gledhill does not contest the legitimacy of that
conclusion but argues instead that the Bankruptcy Court had not actually provided
relief under Rule 60(b). Rather, it had provided injunctive relief. Id. at 1086
(Kelly, J., dissenting) (“In its brief, [the appellant] asserts that the Trustee’s
requested relief constituted injunctive relief, not Rule 60(b) relief, and should not
have [been] made by motion but through the filing of an adversary proceeding in
accordance with Fed. R. Bankr. P. 7001(7).”) (quotation marks omitted.)
The disagreement on the Gledhill panel, therefore, was not over whether
Rule 60(b) could be used to provide relief, but rather whether the Bankruptcy
Court in that case had truly granted Rule 60(b) relief at all. We face no such
difficulty here. The relief granted by the Bankruptcy Court was limited to
correcting a “mistake” based on “new evidence” that “surprised” the Trustee and
the court, all of which are mentioned specifically in Rule 60(b). See Fed. R. Civ.
P. 60(b)(1)-(2).
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2. Mistake under Rule 9024
The Midkiffs further argue that even if Rule 9024 does authorize the
vacating of discharge orders, the Trustee failed to establish that her lack of
knowledge of the tax refund constituted the kind of mistake warranting relief
under Rule 9024. They contend that the burden was on the Trustee to investigate
any future tax refunds that might have been due the Midkiffs, making the
“mistake” not one to be forgiven.
The Midkiffs cite no authority for this assertion. We again find ourselves
in agreement with the Cisneros court:
We acknowledge that the problems that have arisen in
this case are ultimately attributable to the failure of the
Trustee to learn that the IRS had filed a proof of claim.
For present purposes, however, this is immaterial. The
order of discharge was entered by the bankruptcy court
under a misapprehension as to the facts of the case. Had
the court been apprised of the actual facts, it would
never have entered the order.
994 F.2d at 1467.
Moreover, the Midkiffs were best situated to know about the impending tax
refund, because they had filed their tax return and knew that a refund was
forthcoming. The party best situated to provide relevant information usually
bears the burden of doing so. For example, in federal tax disputes, even after the
recent adoption of the burden-shifting rules, taxpayers are still required to
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“maintain[] all records required under this title and [to cooperate] with reasonable
requests . . . for witnesses, information, documents, meetings, and interviews.”
26 U.S.C. § 7491(a)(2)(B) (Taxpayer Bill of Rights 3, July 22, 1998). Expecting
bankruptcy trustees to maintain information pipelines to the IRS regarding the
possibility of impending tax refunds is wholly unreasonable.
We continue, of course, to expect that trustees will carefully administer the
plans under their authority. See esp. 11 U.S.C. § 704(4) (“The trustee shall . . .
investigate the financial affairs of the debtor”); 11 U.S.C. § 1302(b)(4) (“The
trustee shall . . . assist the debtor in performance under the plan”). Nevertheless,
debtors retain their duty to inform their trustees of relevant developments in their
financial situations, including tax refunds due for periods governed by their plans.
See 11 U.S.C. § 521 (“The debtor shall . . . cooperate with the trustee as
necessary to enable the trustee to perform the trustee’s duties under this title,
[and] surrender to the trustee . . . any recorded information, including books,
documents, records, and papers, relating to property of the estate.”) We
emphasize that “a debtor who voluntarily submits him or herself to the
jurisdiction of the bankruptcy court to obtain the benefit of a discharge of debts,
must fulfill certain duties to insure that estate assets are administered in
accordance with applicable law.” In re Beach, 281 B.R. 917, 921 (B.A.P. 10th
Cir. 2002).
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3. Hiding Income Through Excessive Tax Withholding
As an important matter of public policy, the BAP in this case also pointed
out that adopting the Midkiffs’ proposed rule would allow debtors to manipulate
their tax returns to hide income. That is, by withholding excessive amounts of
money from their paychecks in the final year of a bankruptcy plan and then
receiving the excess as a tax refund after the plan is discharged, unscrupulous
debtors could effectively cheat their creditors. Midkiff, 271 B.R. at 388.
Indeed, the Trustee here asserts that the Midkiffs were engaged in just that
kind of chicanery: They requested a payoff amount from the Trustee in early
March 2001; the Trustee sent a plan payoff letter dated March 6, 2001; the
Trustee received the check for full prepayment six days later; and two days after
that, on March 14, the Midkiffs signed and mailed their 2000 tax return to the
IRS. This, the Trustee argues, strongly suggests that the Midkiffs were trying to
close the plan before the 2000 tax refund was received, thus allowing them to
keep the money.
While the timing of the Midkiffs’ actions does offer grounds for suspicion,
we need not express an opinion on the Midkiffs’ motives in this case. Whether
the Midkiffs were carrying out a nefarious plan or were entirely oblivious to the
import of their actions, the Bankruptcy Court’s response was appropriate. The
rule that we adopt, moreover, will prevent future ill-motivated debtors from
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engaging in such a scheme. Even if that is not what the Midkiffs intended to do
here, therefore, our decision today sets the most appropriate rule going forward.
Where equity, efficiency, and the law all point in the same direction, we are
comfortable in following that path.
B. Ownership of the Tax Refund Under the Plan
Having resolved the threshold question in favor of the Trustee, we must
now consider the Midkiffs’ additional argument. They contend that under 11
U.S.C. § 1325(b)(1)(B), the Trustee was not entitled to the tax refund.
A court may not approve a plan unless “the plan provides that all of the
debtor’s projected disposable income to be received in the three-year period
beginning on the date that the first payment is due under the plan will be applied
to make payments under the plan.” 11 U.S.C. § 1325(b)(1)(B) (emphasis added).
The Midkiffs contend that because the tax refund in question was not “projected”
at the time the plan was approved, and because they did not actually “receive” the
tax refund within the three-year period, the Trustee is not entitled to it. We are
not persuaded by these arguments.
The Midkiffs fail to note that § 1325(b)(1), which leads into subsection
(b)(1)(B), makes it clear that the ensuing statutory requirements are conditional:
“If the trustee or the holder of an allowed unsecured claim objects to the
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confirmation of the plan, then the court may not approve the plan unless, as of the
effective date of the plan--.” There is no indication before us that any relevant
party objected to the confirmation of the plan, which means that the ensuing
conditions are not relevant here. 4
Moreover, even if § 1325(b)(1) were relevant to our analysis, it merely
provides a minimum set of provisions that any bankruptcy plan must contain. The
Midkiffs’ plan set standards higher than the minimum, and we must enforce those
higher standards.
The Midkiffs’ argument is thus ultimately defeated by the language of the
plan, which expressly addressed the matter of tax refunds and stated: “For
purposes of determining disposable income, tax refunds to which the debtor(s) is
entitled during the first 36 months of the plan are deemed disposable income
4
Even assuming that § 1325(b)(1)(B) is binding, however, we still would
have no reason to reverse the courts below. The Midkiffs argue that the only tax
refunds owed to the plan were those “projected” at the time the plan was
approved. Midkiff Br. at 7-10. They seem to suggest that only those tax refunds
that were known in an exact amount at the time of the plan’s filing would be
included in disposable income. That is, if it was impossible to “project” in May
1998 that there would be a tax refund of $4974.00 due for the year 2000, then the
refund is not included in disposable income. We are unconvinced. In this
context, the most sensible meaning of the phrase “projected disposable income”
would include income that the debtors are likely to earn, taking account of any tax
liabilities and refunds. See Schusterman v. United States, 63 F.3d 986, 989 (10th
Cir. 1995) (“In statutory interpretation we look to the plain language of the statute
and give effect to its meaning.”). The plain meaning of “projected disposable
income” includes tax refunds, because refunded tax payments are at the disposal
of the taxpayer.
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unless otherwise ordered by the court and will be submitted to the chapter 13
trustee.” Aple’s Supp. App. at 7 (emphasis added); see also Midkiff, 271 B.R. at
384 (citing the plan). The order confirming the plan echoed that language: “For
purposes of determining disposable income, income tax refunds to which the
debtors are entitled during the first 36 months of the plan are deemed disposable
income, unless otherwise ordered by the court, and will be submitted to the
chapter 13 trustee, subject to any setoff rights of the Internal Revenue Service.”
Aple’s Supp. App. at 11 (Order Filed May 6, 1998) (emphasis added).
The tax refund at issue was based on the calendar year 2000. As the BAP
concluded, the Midkiffs “were entitled to the tax refund at the end of [that] tax
year--December 31, 2000, which was during the first 36 months of the plan.”
Midkiff, 271 B.R. at 388; see also, In re Glenn, 207 B.R. 418, 420 (E.D. Pa. 1997)
(noting that “the vast majority of courts to consider this issue have held that a
taxpayer’s interest in a tax refund arises at the end of the taxable year”). Thus,
under the terms of the plan, the tax refund constitutes “disposable income” to
which the Midkiffs were “entitled” and which the Midkiffs were obligated to
submit to the Trustee.
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III. CONCLUSION
Bankruptcy Rule 9024 allows the Bankruptcy Court to provide relief from a
final judgment or order. We hold that 11 U.S.C. § 1328(e) does not prevent the
Bankruptcy Court from providing relief under Rule 9024. We also affirm the
lower courts’ rulings that the Midkiffs’ plan specifically included as “disposable
income” the tax refund for calendar year 2000. Therefore, it was not error for the
Bankruptcy Court to vacate the discharge order to allow the Trustee to distribute
the tax refund under the plan.
Accordingly, we AFFIRM the holdings of the Bankruptcy Court and the
Bankruptcy Appellate Panel.
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