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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: August 16, 2018

Court Sanctions Litigant for Frivolous Litigation, Including Awarding Attorneys’ Fees for Defending Frivolous Claims

On August 1, 2018, Justice Ramos of the New York County Commercial Division issued a decision in Citigroup Global Markets, Inc. v. Fiorilla, 2018 NY Slip Op. 31919(U), sanctioning a litigant for frivolous litigation, including awarding attorneys’ fees for defending against the frivolous claims, explaining:

Uniform Rule 130-1.1 vests this Court with discretion to award both attorneys’ fees, costs and sanctions as a result of frivolous conduct. Conduct is frivolous if (1) it is completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law; (2) it is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another; or (3) it asserts material factual statements that are false.

Courts also consider whether the conduct was continued when it became apparent, or should have been apparent, that the conduct was frivolous, or when such conduct was brought to the attention of the parties or to counsel. Simply because an argument fails to persuade the court does not necessitate a finding of frivolous conduct.

Throughout this litigation, Fiorilla has pursued a relentless campaign to circumvent this Court’s final judgment by attempting to re-litigate already decided matters. He has prolonged this litigation and compelled CGMI to expend significant resources, both in New York and in France. Both the French proceedings and the OSC were frivolous and completely without merit. Thus, the record establishes that Fiorilla’s outrageous conduct merits the imposition of sanctions, and an award of reasonable attorneys fees.

Fiorilla’s frivolous conduct included making inaccurate and incomplete factcal assertions in the French proceedings. To obtain ex parte recognition of the Award in France, Fiorilla submitted a copy of the Award, and omitted the critical fact that this Court had already vacated the Award and entered a final judgment, which was affirmed on appeal. Fiorilla even used the already vacated Award to attempt to seize CGMI’s assets in France.

Fiorilla’s subsequent OSC to vacate the Award was also frivolous. This is not a simply a circumstance where an argument failed to persuade the Court. Rather, Fiorilla and his counsel rehashed arguments in duplicative proceedings that had already been deemed to lack legal merit by this Court and on appeal. Fiorilla cited no new arguments or evidence in support that warranted
reconsideration. Mr. Fiorilla. persisted in this conduct despite repeated warnings by this Court and the First Department.

The Court wholly rejects Fiorilla’s assertion that his conduct was not in bad faith. Fiorilla’s opposition to the motion largely ignores the factual record and repeated admonishments, both by this Court and by the First Department pertaining to his conduct.

(Internal quotations and citations omitted).

Part of being a good litigator is thinking of winning arguments other lawyers miss. However, as this decision shows, courts have little patience for lawyers who cross the line from creative to making frivolous arguments. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding whether an argument has crossed the line from creative to sanctionable.

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Posted: August 15, 2018

Court Rules That Expert Testimony in Legal Malpractice Action is Unnecessary Given Issues in Dispute

On August 1, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Red Zone LLC v. Cadwalader, Wickersham & Taft LLP, 2018 NY Slip Op. 31888(U), precluding a defendant from presenting an expert witness in a legal malpractice action on the ground that it was unnecessary given the issues in dispute, explaining:

In Motion Sequence Numbers 010-014, 016 and 018-023, plaintiff seeks to preclude Cadwalader, Wickersham & Taft LLP (“CWT”) from presenting expert testimony as to whether it departed from the standard of care required of an attorney and/or that the malpractice did not cause Red Zone LLC’s (“Red Zone”) alleged inquiry. CWT insists it is entitled to present such evidence through expert testimony. It acknowledges that both Justice Schweitzer and the Appellate Division held that expert testimony was not necessary. The Court of Appeals did not address this issue but “(v)iewing the evidence in the light most favorable to defendant as the non-movant,” that court concluded that “material triable questions of fact exist regarding whether defendant failed to exercise the ordinary reasonable skill and knowledge commonly possessed by members of the legal profession.”

At this point in the case there are only two versions of the facts concerning the events of August 16 and 17, 2005 that may have resulted in injury to Red Zone, neither of which involve matters outside the ken of the typical juror. If the jury adopts the facts as alleged by plaintiff, the failure of CWT to memorialize the parties’ agreement is prima facie proof of professional malpractice. If the jury finds that on August 17, 2005, either the parties recognized there was no meeting of the minds and negotiated the Supplement or that Snyder and UBS agreed to change the handshake agreement of August 16, 2005 and despite Block’s warning, agreed simply to clarify that the fee would be limited to $2 million if Red Zone won only three of seven Board seats, a finding of no professional malpractice should follow. Again, none of this requires specialized knowledge.

For these reasons, and consistent with the findings of Justice Schweitzer and the First Department, no expert testimony is needed.

(Internal citations omitted).

An issue that arises in almost all complex commercial litigation is the use of experts to explain evidence that is unfamiliar to a typical juror (or judge). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the admission of expert evidence.

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Posted: August 14, 2018

Opportunity to Comment on Proposed Changes to Commercial Division Rules

The Office of Court Administration has asked for public comment on a proposed change to the Commercial Division rules relating to the selection of mediators. The new rule would add the following sentence to Commercial Division Rule 3: “Counsel are encouraged to work together to select a mediator that is mutually acceptable, and may wish to consult any list of approved neutrals in the county where the case is pending.”

E-mail comments on this proposal to rulecomments@nycourts.gov by September 28, 2018.

Posted: August 13, 2018

Article 77 Proceeding Excludes Beneficiaries of Trusts That Hold Interests in Trusts That are the Subject of the Proceeding

On August 7, 2018, Justice Friedman of the New York County Commercial Division issued a decision in Matter of Wells Fargo Bank, N.A., 2018 NY Slip Op. 31883(U), holding that beneficiaries of trusts that held interests in trusts that were the subject of an Article 77 proceeding did not have standing to appear in the proceeding, explaining:

Article 77 provides, with exceptions not here relevant, that a special proceeding may be brought to determine a matter relating to any express trust. Permissible uses of Article 77 are broadly construed to cover any matter of interest to trustees, beneficiaries or adverse claimants concerning the trust. Such proceedings are used by trustees to obtain instruction as to whether a future course of conduct is proper, and by trustees (and beneficiaries) to obtain interpretations of the meaning of trust documents. Article 77 limits the parties who may properly participate to persons interested, within the meaning of the statute. CPLR 7703 thus expressly provides: The provisions as to joinder and representation of persons interested in estates as provided in the surrogate’s court procedure act shall govern joinder and representation of persons interested in express trusts. SCPA § 103(39) defines the term “Person interested” as any person entitled or allegedly entitled to share as beneficiary in the estate or the trustee in bankruptcy or receiver of such person. A creditor, shall not be deemed a person interested. SPCA § 103(8) defines Beneficiary as any person entitled to any part or all of an estate.

In determining an intent to confer a beneficial interest in a trust, a court must look to the trust agreement. It is well settled that the trust instrument is to be construed as written and the settlor’s intention determined solely from the unambiguous language of the instrument itself.

The court accordingly looks to the terms of the governing agreements of the Settlement Trusts to determine intent to confer a beneficial interest in the Trusts. As described by the challenging Respondents, the agreements that govern RMBS trusts typically provide that certificates evidence the entire beneficial ownership interest in the Trust Fund. They further typically require the Trustee to act for the benefit of the certificateholders.

The Challenged Respondents do not dispute that these terms are typical of RMBS PSAs, and they do not identify any additional terms of the governing agreements of the Settlement Trusts that contemplate beneficiaries other than certificateholders or insurers. Instead, they claim that their ownership of interests in, and rights with respect to, CDO, re-REMIC, or NIM trusts afford them beneficiary status in the Settlement Trusts. The structures through which the Challenged Respondents claim an interest differ. However, the governing agreements for each, whether a CDO, re-REMIC, or NIM trust, contain provisions, like those for the Settlement Trusts, which transfer all right, title, and interest in the underlying assets held by the structure to its Trustee.

. . .

As the Challenging Respondents correctly argue, each of the Challenged Respondents in effect urges the court to conclude that it is entitled to distributions from the Settlement Trusts because: 1) each is entitled to distributions from the structure in which it is invested; and 2) that structure is entitled to distributions from the Settlement Trust. As the Challenging Respondents also correctly argue, it is the trustees of the structures in which the Challenged Respondents are investors that hold the certificates in the Settlement Trusts and attendant rights to distributions from those Trusts, although they do so for the benefit of the investors in those structures. The rights and entitlements of the Challenged Respondents to distributions from the structures in which they are investors are accordingly separate and distinct from the rights and entitlements of the trustees of those structures to distributions from the Settlement Trusts. The Challenged Respondents’ economic interests in the Settlement Trusts are thus, at best, indirect.

A principal authority on which the Challenged Respondents rely, Matter of Cowles (22 AD2d 365, 370 [1st Dept 1965], affd no opinion 17 NY2d 567 [1966]), does not alter this conclusion. This case does not support the Challenged Respondents’ claim to beneficiary status based on their indirect interests in the Settlement Trusts, and stands merely for the proposition that contingent remaindermen with a remote and uncertain interest in a trust may be proper, although not necessary, parties to a trust proceeding. The challenged parties in Cowles had a direct-albeit, contingent-interest in the estate that was the subject of the proceeding. In the event of the occurrence of specified conditions, they would take as beneficiaries of the estate. Here, there are no conditions under which the Challenged Respondents will acquire a direct interest in the Settlement Trusts. They will only acquire funds from the Settlement Trusts indirectly, through distributions of those funds to the trustees of the separate investment structures in which the Challenged Respondents hold interests. The Challenged Respondents’ eventual receipt of funds may be more certain or likely than that of the Cowles contingent remaindermen. But their status is not analogous, as the Challenged Respondents’ interest is not direct.

(Internal quotations and citations omitted).

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees. If you or a client are RMBS investors and have questions regarding potential claims against a trustee; a trustee instruction proceeding, such as the Article 77 proceeding that is the subject of this decision; or how to influence the trustee’s prosecution of a put back action, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.

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Posted: August 12, 2018

Fraud Claim Dismissed as Duplicative of Contract Claim: No Separate Damages Alleged

On August 6, 2018, Justice Masley of the New York County Commercial Division issued a decision in TJ PRP LLC v. Rag & Bone Holdings LLC, 2018 NY Slip Op. 31880(U), dismissing a fraud claim as duplicative of a contract claim, explaining:

A fraud claim that arises from the same facts as an accompanying contract claim, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreements is subject to dismissal as redundant of the contract claim. Where a fraud claim is supported by allegations that the defendants misrepresented their intentions with respect to the manner in which their contractual duties would be performed, it is appropriately dismissed as duplicative of the breach of contract claim because the fraud is premised on the same facts as those that compose the contract claim, the obligations allegedly breached are not collateral to those imposed by the contract, and the damages sought are identical to those recoverable under the contract cause of action.

Here, TJ PRP alleges in support of its first cause of action for breach of the Operating Agreement against RBH that RBH failed to maintain RBF’s books and records, and failed to provide TJ PRP with financial statements that comported with GAAP and the Operating Agreement’s provisions. TJ PRP further alleges that RBH engaged in inappropriate related-company transactions on unfair terms and without the requisite approval under the Operating Agreement; improperly altered RBF’s annual budget without Price’s consent, and engaged in other various business decisions in violation of the Operating Agreement.

TJ PRP alleges, in support of its fourth cause of action for fraud against RBH and RBI, that RBI violated the Management Agreement, and RBH violated the Operating Agreement, by failing to prepare financial statements for RBF in accordance with GAAP. TJ PRP further alleges that RBH and RBI fraudulently concealed their self-dealing and other misconduct, and fraudulently concealed, and intentionally led TJ PRP to believe, that the financial statements for [RBF] had been prepared in accordance with GAAP and the Operating Agreement, resulting in unspecified damages.

According to paragraph 6 of the amended complaint, RBH misappropriated, converted, and commingled millions of dollars of RBF funds, and caused RBI fraudulently to represent for many years to RBF and TJ PRP that RBF’s financial statements complied with GAAP and the Operating Agreement. TJ PRP also alleges that RBI pre-paid itself exorbitant fees.

Even if the fraud cause of action is sufficiently pleaded, the claim must be dismissed against RBH as duplicative of the claim for breach of the Operating Agreement. The factual allegations that form the breach of the Operating Agreement claim are the same as those which comprise the fraud claim; specifically, the alleged failure of RBF, through its managing member, RBH, and its management services provider, RBI, to maintain separate books of account, and to maintain financial and accounting records for RBF and minority member TJ PRP, in accordance with GAAP.

Though TJ PRP alleges that the improper accounting practices of RBI and RBH concealed RBH’s misappropriation of RBF funds, commingling of assets, self-dealing, and other assorted violations of the Operating Agreement to the detriment of TJ PRP, each of those acts, representations, and/or omissions-accepted for the purposes of this motion as true-demonstrate that RBH violated its obligations under the Operating Agreement. TJ PRP’s allegations that RBH and RBI concealed RBH’s misdeeds and breaches of the Operating Agreement by maintaining and disseminating deceptive accounting and financial records does not create a fraud claim that is distinct from the breach of contract claim; the accounting practices and financial documents were, themselves, breaches of the Operating Agreement, and TJ PRP identifies no damages that resulted from the alleged fraud that are distinct from the damages it would recover under the breach of contract claim.

A repackaged breach of contract claim does not create a sustainable cause of action sounding in fraud. TJ PRP’s arguments to the contrary are unavailing, and its reliance on Wyle Inc. v ITT Corp. (130 AD3d 438 [1st Dept 2015)) is misplaced. While a fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim, Wyle concerned a plaintiffs’ claim that they were fraudulently induced to purchase a company by defendants’ failure to disclose all ongoing government audits-the existence of which would negatively impact the company’s value-in violation of a warranty in the sale agreement to disclose all audits. The allegations in this action do not involve fraudulent inducement; here, TJ PRP alleges that RBH’s malfeasance and violations of the Operating Agreement were hidden by RBH’s and RBl’s failure to maintain and prepare accounting records and financial documents in compliance with the provisions in the Operating Agreement.

Notably, TJ PRP does not allege that it sustained any extra-contractual damages as a result of the purported fraud; the damages arising from the alleged fraud are precisely those that TJ PRP would be entitled to recover if it prevails on its breach of the Operating Agreement claim. When a fraud claim would only entitle the plaintiff to the very same damages that are recoverable on its breach of contract claim, the claim should be dismissed as duplicative. Moreover, the factual allegations comprising the fraud claim are identical to those forming the breach of contract claim. Accordingly, the fraud claim against RBH is dismissed as duplicative of the breach of the Operating Agreement claim.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements such as the rule discussed here that a fraud claim cannot be based on a breach of contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a fraud-based claim.

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Posted: August 11, 2018

Court Reviews Law Governing Contract Interpretation on Summary Judgment

On August 6, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Cast Iron Co., LLC v. Cast Iron Corp., 2018 NY Slip Op. 31881(U), discussing contract interpretation on a summary judgment motion:

Contracts are construed in accord with the parties’ intent, the best evidence of which is the language of the contract itself, read as a whole. Thus: a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. A contract is unambiguous if the language it uses has a definite and precise meaning, unattended by danger of misconception in the purport of the agreement itself, and concerning which there is no reasonable basis for a difference of opinion. Moreover, provisions in a contract are not ambiguous merely because the parties interpret them differently. Extrinsic or parol evidence-evidence outside the four corners of the document-is admissible only if a court finds an ambiguity in the contract.

As a general rule, if the court finds that a contract is ambiguous, it cannot be construed as a matter of law on a motion for summary judgment. An exception, exists, however, when the documentary evidence submitted on summary judgment resolves the ambiguity. Conversely, if the extrinsic evidence in the record is insufficient to resolve the ambiguity, the parties’ intent must be determined at trial.

(Internal quotations and citations omitted). The court went on to hold that the contract did not unambiguously support the movant’s position and denied the motion for summary judgment.

Under New York law, the starting point of contract interpretation is the words of the contract. As this decision shows, sometimes those words, without context, may be insufficient to establish what the parties intended. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: August 10, 2018

Common Interest Privilege Barred Disclosure of Documents

On August 9, 2018, the First Department issued a decision in 21st Century Diamond, LLC v. Allfield Trading, LLC, 2018 NY Slip Op. 05732, holding that the common interest privileged barred disclosure of documents exchanged pursuant to a common interest agreement, explaining:

The record supports the contention of third-party defendants and Sterling that they entered into a common-interest agreement out of a reasonable concern that third-party plaintiffs might decide to add Sterling as a third-party defendant. Hence, the common-interest doctrine applies to protect otherwise privileged communications between these parties from disclosure.

(Internal quotations and citations omitted).

An issue that arises in almost all complex commercial litigation is identifying evidence that should be withheld from production in evidence because it is subject to the attorney-client or other privilege. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the attorney-client, common interest, work product or other privileges or exemptions from production of evidence.

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Posted: August 9, 2018

Alleged Incompetent Project Management Does Not Excuse Enforcement of No Damages for Delay Clause

On August 2, 2018, Justice Friedman of the New York County Commercial Division issued a decision in Primiano Electric Co. v. HTS-NY, LLC, 2018 NY Slip Op. 31859(U), holding that alleged incompetent project management does not excuse enforcement of a construction contract’s no damages for delay clause, explaining:

As held by the Court of Appeals, a no-damages-for-delay clause excusing a contractee from liability to a contractor for damages resulting from delays in the performance of the work is generally valid and enforceable. Exceptions to the enforceability of such provisions include (1) delays caused by the contractee’s bad faith or its willful, malicious, or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that theY. constitute an intentional abandonment of the contract by the contractee, and (4) delays resulting from the contractee’s breach of a fundamental obligation of the contract.” A party seeking to invoke any of the exceptions to the general rule that no damages for delay clauses are enforceable bears a heavy burden.

Plaintiff has not met that burden here. Plaintiff’s principal complaint is that the project was badly mismanaged by Dolner who, with Hyatt’s full knowledge, intentionally failed and refused to provide PEC, or any of Dolner’s other subcontractors on the project, with construction schedules. Dolner’s documented failure to properly coordinate the scheduling and sequencing of the work among its 20 plus subcontractors resulted in severe delays that greatly extended the duration of the project.

. . .

Plaintiff does not meaningfully dispute the force of the governing legal authorities, but attempts to distinguish them on the ground that the Subcontract, as well as the Change Order Agreement, recite that time is of the essence. This argument also fails. Provisions barring delay damages have been upheld despite the existence of a time of the essence clause, a time of the essence clause was also present in the subcontracts in both of the cases from which plaintiff speculates it might have been absent. Read in context, the time of the essence clause in the Subcontract protects defendants from possible delays, and does not nullify the express clause precluding an award of damages to plaintiff as a consequence of delays.

The court is also unpersuaded by plaintiffs argument that the nearly seven-month delay in completing the Subcontract work (i.e., the delay between the May 8, 2010 Subcontract completion date in the Change Order Agreement and the actual November 29, 2010 completion) was not, and could not reasonably be, contemplated by PEC at the time the Change Order was negotiated. It is true that the length of a delay is relevant to the issue of whether an exception to the general rule enforcing no damages for delay clauses applies. However, the length of the delay does not transform a delay caused by an event specifically contemplated by the no damages for delay clause into something uncontemplated. Accordingly, damages attributed to delays significantly longer than the seven months complained of here have been found not to be barred by a no-damages-for-delay provision where the cause of the delay was anticipated by the parties.

(Internal quotations and citations omitted).

One of the reasons parties often choose to have their contracts governed by New York law is that courts generally enforce agreements as written, including the “no damages for delay” clause discussed in this decision. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: August 8, 2018

Court Rejects Impossibility Defense Based on Change in Taxi Medallion Market

On July 30, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Capital One Equip. v. Deus, 2018 NY Slip Op 31819(U), rejecting an impossibility defense to a breach of contract claim based on a change in the market for taxi medallions, explaining:

Defendants rely on Restatement (First) of Contracts § 454 to argue that performance is impossible when there is extreme and unreasonable difficulty, expense, injury, or loss. According to the Restatement, impossibility is synonymous with impracticability. Defendants claim the change in economic circumstances has made the defendants’ repayment of the loan impossible. However, New York courts have held differently. In Sassower v. Blumenfeld, performance of a contract is not excused where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy. Impossibility cannot rely upon the amounts lost, the nature of lost investments, or the actual state of current finances and assets. Financial loss as a whole cannot be the sole reason to claim in possibility. Economic hardship alone cannot excuse performance; the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.

Defendants base the defense of impossibility upon the idea that, due to the economic change on the medallion and taxi industry of New York by ride sharing applications like Uber and Lyft, there is an impossible hurdle for the defendants to overcome, making the repayment of the loan impossible. Since the defendants rely upon an argument of economic impracticability of repaying the loan, the standard for impossibility is not met.

(Internal quotations and citations omitted).

It is easy to sympathize with people like the defendant who got caught up in a drastic change to the transportation market, but one of the reasons parties often choose to have their contracts governed by New York law is that courts generally enforce agreements as written, even if changes in economic circumstances turn what was a good bargain into a bad one. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: August 7, 2018

Court Dismisses Third-Party Claim Seeking a Declaratory Judgment

On July 30, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Kai Chan v. Lipiner, 2018 NY Slip Op. 31817(U), dismissing a third-party claim seeking a declaratory judgment, explaining:

I also grant the Chan Family’s motion to dismiss the third-party complaint. CPLR 1007 permits third-party practice only against a person not a party who is or may be liable to that defendant for all or part of the plaintiffs claim against that defendant. Here, Thor’s third-party complaint seeks a declaratory judgment to eject and evict the Chan Family from the Building, which is improper under CPLR 1007.

(Internal quotations and citations omitted).

This decision is about a defendant bringing claims against a third-party. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have against another party when you are a defendant in a lawsuit.

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