Rodney v. Piper Capital Management, Inc. , 71 F.3d 298 ( 1995 )


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  •                                  ___________
    No. 95-1925
    ___________
    In Re: Piper Funds, Inc.,             *
    Institutional Government              *
    Income Portfolio Litigation.          *
    *
    --------------------------------
    Richard J. Rodney, Jr., et al.,       *
    *
    Plaintiffs - Appellees,          *
    *
    v.                               *
    *
    Piper Capital Management, Inc.;       *
    Piper Funds, Inc. Institutional       *   Appeal from the United States
    Government Income Portfolio;          *   District Court for the
    Piper Jaffray, Inc.; Piper            *   District of Minnesota.
    Jaffray Companies Inc.;               *
    William H. Ellis; Edward J.           *
    Kohler,                               *
    *
    Defendants - Appellees,          *
    *
    Park Nicollet Medical                 *
    Foundation,                           *
    *
    Objector - Appellant.            *
    ___________
    Submitted:     October 19, 1995
    Filed:   December 4, 1995
    ___________
    Before RICHARD S. ARNOLD, Chief Judge, WHITE,* Associate Justice (Ret.),
    and LOKEN, Circuit Judge.
    ___________
    LOKEN, Circuit Judge.
    Park Nicollet Medical Foundation, an unwilling member of a settlement
    class in this securities fraud class action, wishes to arbitrate its claim
    against investment adviser Piper Capital
    *
    The HONORABLE BYRON R. WHITE, Associate Justice (Ret.) of the
    Supreme Court of the United States, sitting by designation.
    Management Incorporated.1     Park Nicollet appeals district court orders
    enjoining arbitration until the court permits Park Nicollet to opt out of
    the class, and denying its motion to stay the class action pending
    arbitration.     Concluding   that    these     orders   deny     Park   Nicollet   its
    contractual right to arbitrate in violation of the Federal Arbitration Act,
    9 U.S.C. §§ 1-16 ("FAA"), we reverse.
    I. Factual Background.
    Park Nicollet is a non-profit medical foundation based in Minnesota.
    In 1991, Park Nicollet hired Piper to manage over $2,500,000 of Park
    Nicollet's   endowment   fund.       Park    Nicollet    signed    Piper's   standard
    Investment Management Agreement, in which the parties agreed that "all
    controversies . . . shall be determined by arbitration to the fullest
    extent provided by law," in accordance with the rules then in effect of the
    National Association of Securities Dealers ("NASD").
    Piper invested a substantial portion of Park Nicollet's funds in
    Piper's Institutional Government Income Portfolio mutual fund (the "Fund").
    In early 1994, shares in the Fund lost over twenty percent of their value,
    largely because the Fund was heavily invested in "derivative" fixed income
    securities that were particularly hard-hit by rising interest rates.                Ten
    class action lawsuits were promptly filed on behalf of some 7,000 investors
    who had purchased shares of the Fund between July 1, 1991, and May 9, 1994.
    The class plaintiffs alleged numerous claims under federal and state
    securities laws, plus common law claims of misrepresentation and breach of
    fiduciary    duty.   The    Judicial        Panel   on   Multidistrict     Litigation
    consolidated these cases and transferred them to the District of Minnesota.
    1
    Piper Capital Management is one of several affiliated
    companies named as defendants in the class action.     The parent
    company is Piper Jaffray Companies Inc. Like the parties, we will
    refer to the class action defendants as "Piper."
    -2-
    In January 1995, Park Nicollet filed a fifty-page Statement of Claim
    with the NASD, requesting an arbitration award of over $4,500,000.         Because
    this claim overlapped claims asserted by the class action plaintiffs, Park
    Nicollet stated, in accordance with § 12(d)(2) of the NASD Code of
    Arbitration   Procedure   ("NASD   Code"),   that   "it   is    electing   not   to
    participate in the as yet uncertified class actions."          In early February,
    Piper and attorneys for the plaintiff class tentatively settled the class
    actions for approximately $70 million.       On March 2, 1995, Park Nicollet
    advised the district court by letter that it has "1) chosen to have its
    dispute with Piper resolved in arbitration, 2) decided not to participate
    in the putative class actions, and 3) irrevocably opted out of the putative
    class actions."
    The next day, at the request of the class action parties, the
    district court entered an order conditionally certifying a settlement
    class, and enjoining arbitration by any class member until after the court
    distributes a class notice and then rules on requests to opt out of the
    class (the "March 3 Order").2      Park Nicollet moved to vacate the March 3
    Order, and to stay the class actions pending arbitration pursuant to § 3
    of the FAA.   The district court denied that motion in an April 3, 1995,
    Memorandum and Order (the "April 3 Order").     Concluding that the FAA does
    not bar an injunction where the party seeking arbitration is a member of
    a conditionally certified class, the court denied Park Nicollet's motion
    to vacate on the ground that Piper and the class
    2
    The district court based its injunction on the All Writs Act,
    28 U.S.C. § 1651, which has been invoked by federal class action
    courts to enjoin persons not within the court's jurisdiction from
    frustrating a court order or court-supervised settlement. See,
    e.g., In re Baldwin-United Corp., 
    770 F.2d 328
    , 335-38 (2d Cir.
    1985). We agree with the district court that it has the power,
    under Fed. R. Civ. P. 23 augmented by the All Writs Act, to control
    conduct by absent class members that affects management or
    disposition of the class action. However, exercise of this power
    must be "agreeable to the usages and principles of law," § 1651(a),
    which in this case include the FAA as well as Rule 23.
    -3-
    plaintiffs had "carefully negotiated a settlement in this case before any
    forum had addressed the merits, and [an arbitration] ruling on an issue
    such   as   whether   or   not    Piper   made   fraudulent   representations   could
    jeopardize that proposed agreement."             Park Nicollet appeals these two
    orders.
    II. Two Threshold Issues.
    Piper contends that we lack jurisdiction because Park Nicollet has
    appealed non-final orders, and that Park Nicollet lacks standing to
    challenge those orders.          We disagree.
    A. Appealability.
    In Gulfstream Aerospace Corp. v. Mayacamas Corp., 
    485 U.S. 271
    , 287-
    88 (1988), the Supreme Court held that an order refusing to stay litigation
    pending the outcome of another proceeding, such as an arbitration, is not
    automatically appealable as a collateral order or an injunction.           Congress
    responded by enacting Section 16 of the FAA,3 which makes appealable "an
    interlocutory order granting . . . an injunction against an arbitration,"
    § 16(a)(2), and also an order "refusing a stay of any action under section
    3 of [the FAA]," § 16(a)(1)(A).
    The district court's March 3 Order enjoined Park Nicollet from
    proceeding with its arbitration against Piper.           The court's April 3 Order
    denied Park Nicollet's motion to stay the class action pending arbitration.
    Both orders are appealable under § 16(a)(2) and § 16(a)(1)(A).            We reject
    Piper's contention that the orders should be non-appealable because they
    did not decide arbitrability
    3
    See Judicial Improvements and Access to Justice Act, Pub. L.
    No. 100-702, § 1019, 102 Stat. 4642, 4670 (1988). The new section
    was later renumbered as § 16 in the Judicial Improvements Act of
    1990, Pub. L. No. 101-650, § 325(a), 104 Stat. 5089, 5120 (1990).
    -4-
    and were not "anti-arbitration."      The plain language of the statute is
    controlling.
    B. Standing.
    Piper argues that Park Nicollet lacks standing to challenge the
    district court's orders because it did not seek leave to intervene in the
    class action.    Piper relies on Croyden Associates v. Alleco, Inc., 
    969 F.2d 675
    (8th Cir. 1992), cert. denied, 
    113 S. Ct. 1251
    (1993), where we held
    that an unnamed class member must intervene before appealing the approval
    of a class settlement in which it will participate.       This case is very
    different.     Park Nicollet is not attacking the adequacy of the proposed
    settlement.     Rather, it appeals injunctive orders interfering with its
    contractual right to reject the class action remedy and arbitrate.
    Section 3 of the FAA provides for a stay of litigation pending
    arbitration "on application of one of the parties."        The term "party"
    includes a party to the arbitration agreement.      See Dickstein v. duPont,
    
    443 F.2d 783
    , 785 (1st Cir. 1971).      Section 16 allows an appeal from an
    order refusing a § 3 stay.   To give proper effect to § 16, the party denied
    the § 3 stay, here Park Nicollet, must have standing to appeal.
    A nonparty normally has standing to appeal when it is adversely
    affected by an injunction.     See Thompson v. Freeman, 
    648 F.2d 1144
    , 1147
    n.5 (8th Cir. 1981); Hazeltine Research, Inc. v. Zenith Radio Corp., 
    388 F.2d 25
    , 28-30 (7th Cir. 1967), aff'd, 
    395 U.S. 100
    , 110 (1969).   Equitable
    considerations clearly warrant giving standing to appeal to a nonparty that
    has been "haled . . . into district court despite [its] objections."
    S.E.C. v. Wencke, 
    783 F.2d 829
    , 834 (9th Cir.), cert. denied, 
    479 U.S. 818
    (1986).   For these reasons, we conclude Park Nicollet has standing to
    appeal.
    -5-
    III. The Merits.
    A. The Legal Setting.
    Arbitration has long been a preferred remedy in the securities
    industry.4        The FAA, enacted in 1925, made the industry's pre-dispute
    arbitration agreements enforceable in federal court.           However, in Wilko v.
    Swan, 
    346 U.S. 427
    (1953), the Supreme Court held that investor-customers
    could not be compelled to arbitrate claims under the Securities Act of
    1933.    Until 1987, most lower federal courts held that investors likewise
    could not be compelled to arbitrate claims of securities fraud under the
    Securities Exchange Act of 1934, despite Supreme Court warnings that this
    was an open issue.       See Dean Witter Reynolds Inc. v. Byrd, 
    470 U.S. 213
    ,
    224 (1985) (White, J., concurring).
    In Shearson/American Express, Inc. v. McMahon, 
    482 U.S. 220
    (1987),
    the Court held that pre-dispute agreements to arbitrate Exchange Act claims
    are     enforceable    under     the   FAA,   and   in   Rodriguez   de   Quijas    v.
    Shearson/American Express, Inc., 
    490 U.S. 477
    (1989), the Court overruled
    Wilko and held that agreements to arbitrate 1933 Act claims are enforceable
    as    well.       These recent decisions mean that the Park Nicollet/Piper
    agreement     to    arbitrate   all    claims,   including   securities   law   claims
    encompassed by this class action, is enforceable under the FAA.                 That is
    an important cornerstone for the issues raised in this appeal.
    The class action remedy is frequently invoked by those with claims
    under the federal securities laws, and it is a useful procedure for
    remedying similar claims of numerous small investors.
    4
    For example, the New York Stock Exchange ("NYSE")
    constitution has called for arbitration of disputes between members
    and their customers since 1872.      See Constantine N. Katsoris,
    Foreword: New York Stock Exchange, Inc. Symposium on Arbitration in
    the Securities Industry, 63 Fordham L. Rev. 1501 (1995).
    -6-
    McMahon created two significant uncertainties for class actions involving
    members of the securities industry and their investor-customers.                   The first
    question was whether an entire securities law class action could be
    submitted to arbitration, an issue the Supreme Court did not reach in
    Southland Corp. v. Keating, 
    465 U.S. 1
    (1984).                     See Gammaro v. Thorp
    Consumer Discount Co., 
    828 F. Supp. 673
    (D. Minn. 1993), appeal dismissed,
    
    15 F.3d 93
    (8th Cir. 1994).           The second was whether securities industry
    defendants or their customer claimants could compel arbitration of pending
    class action claims, a tactic that class action plaintiffs have usually,
    but as this case illustrates, not always, opposed.
    The 1975 amendments to the Exchange Act gave the Securities and
    Exchange    Commission      "expansive   power     to    ensure    the   adequacy     of   the
    arbitration procedures employed by" self-regulatory organizations like the
    NASD, "including the power to mandate the adoption of any rules it deems
    necessary    to    ensure    that    arbitration    procedures        adequately    protect
    statutory rights."        
    McMahon, 482 U.S. at 233-34
    .            In 1988, SEC Chairman
    David    Ruder    urged   these     organizations       to   modify   and   clarify    their
    arbitration procedures relating to class actions.                 See S.E.C. Release No.
    34-30882 (July 1, 1992), 57 Fed. Reg. 30519, 30520 (July 9, 1992).                     After
    four years of work, the NASD promulgated § 12(d) of the NASD Code, which
    addressed the above two issues:
    (d) Class Action Claims
    (1) A claim submitted as a class action shall not be eligible
    for arbitration under this Code at the Association.
    (2) Any claim filed by a member or members of a putative or
    certified class action is also ineligible for arbitration at
    the Association . . . . However, such claims shall be eligible
    for arbitration . . . pursuant to the parties' contractual
    agreement, if any, if a claimant demonstrates that it has
    elected not to participate in the putative or certified class
    action or,
    -7-
    if applicable, has complied with any conditions for withdrawing
    from the class prescribed by the court.
    (Emphasis added.)5     The SEC approved § 12(d) pursuant to its approval
    authority under § 19(b)(1) of the Exchange Act, 15 U.S.C. § 78s(b)(1).         See
    S.E.C. Release No. 34-31371 (Oct 28, 1992), 57 Fed. Reg. 52659 (Nov. 4,
    1992).
    Park Nicollet's contract with Piper incorporated § 12(d) of the NASD
    Code by reference.6    Park Nicollet included with its arbitration claim a
    declaration "that it has elected not to participate" in the class action,
    as § 12(d)(2) requires.        Thus, the principal issue on this appeal is
    whether the district court violated the FAA as construed in McMahon when
    it enjoined Park Nicollet from proceeding with an arbitration to which it
    is contractually entitled under § 12(d) of the NASD Code.
    B. The Order Enjoining Arbitration.
    Many    cases   have    enforced   agreements   to   arbitrate   by   staying
    contemporaneous litigation, a type of stay expressly authorized by § 3 of
    the FAA, 9 U.S.C. § 3.      See, e.g., Morgan v. Smith Barney, Harris Upham &
    Co., 
    729 F.2d 1163
    (8th Cir. 1984).       On the other hand, the FAA does not
    authorize a district court to enjoin arbitration; instead, § 16(a)(2) makes
    immediately appealable "an interlocutory order granting . . . an injunction
    against an arbitration that is subject to this title."       Consistent with the
    5
    The other industry self-regulatory organizations adopted
    identical amendments to their rules governing member-customer and
    other arbitrations. See, e.g., NYSE Rule 600(d).
    6
    Section 12(d) applies because Piper agreed to be bound by the
    arbitration rules in effect at the time Park Nicollet commenced
    arbitration. See Nielsen v. Piper, Jaffray & Hopwood, Inc., 
    66 F.3d 145
    , 148-49 (7th Cir. 1995).
    -8-
    national policy favoring arbitration, there are very few reported cases in
    which a federal court has enjoined arbitration.
    Piper and the class plaintiffs rely on In re Y & A Group Sec. Litig.,
    
    38 F.3d 380
    , 383 (8th Cir. 1994), in which we affirmed an injunction
    barring arbitration of a dispute settled in a prior class action.                        The
    injunction in Y & A protected the res judicata effect of that prior
    judgment.     Because the claimant sought an arbitration award precluded by
    the    judgment,      the    injunction   was   like    an    order   refusing   to   compel
    arbitration because a dispute is not arbitrable.                Here, on the other hand,
    the district court agreed that Park Nicollet has a right to arbitrate but
    enjoined it from pursuing that remedy.                  Neither the district court nor
    appellees cite any case granting an injunction of this type.
    The district court gave one reason for issuing its injunction --
    because an arbitrator's "ruling on an issue such as whether or not Piper
    made     fraudulent         representations     could    jeopardize"      the    "carefully
    negotiated" class action settlement.            For a number of reasons, we conclude
    that this is an insufficient basis upon which to limit Park Nicollet's
    rights under the FAA.
    First, McMahon confirmed that Park Nicollet has a contractual right
    to immediate submission of its securities law claims to arbitration.                    Park
    Nicollet submitted its claim under class action provisions of the NASD Code
    that have been approved by the SEC under the federal securities laws.                    The
    district    court's     injunction     significantly         frustrated   Park   Nicollet's
    contractual rights, as protected by the FAA.                 "Belated enforcement of the
    arbitration clause, though a less substantial interference than a refusal
    to     enforce   it    at     all,   nonetheless       significantly      disappoints    the
    expectations of the parties and frustrates the clear purpose of their
    agreement."      Dean 
    Witter, 470 U.S. at 225
    (1985) (White, J., concurring).
    See also Prima Paint Corp. v. Flood & Conklin Mfg. Co., 
    388 U.S. 395
    , 404
    (1967) ("arbitration procedure, when
    -9-
    selected by the parties to a contract, [must] be speedy and not subject to
    delay and obstruction in the courts").
    Second, prior cases make clear that Park Nicollet's contractual and
    statutory right to arbitrate may not be sacrificed on the altar of
    efficient class action management.               As the Supreme Court said in Dean
    
    Witter, 470 U.S. at 220
    , "[the FAA] was motivated, first and foremost, by
    a congressional desire to enforce agreements into which parties had
    entered, and we must not . . . allow the fortuitous impact of the Act on
    efficient dispute resolution to overshadow the underlying motivation."                See
    also C. Itoh & Co. v. Jordan Int'l Co., 
    552 F.2d 1228
    , 1231 (7th Cir.
    1977).
    Third,      we    do   not   accept   the   class   action   parties'   conclusory
    assertion that immediate arbitration by Park Nicollet (and perhaps others)
    will frustrate their class action settlement.             For example, in In re First
    Commodity Corp. Customer Accounts Litig., 
    119 F.R.D. 301
    , 305-06 (D. Mass.
    1987),   cited    by    the   district     court   as    the   only   reported   decision
    acknowledging the power to stay arbitration by objecting class members
    pending approval of a settlement, the court declined to stay arbitration,
    and the defendants promptly waived that condition of the settlement.
    Moreover, even when the settling parties contemplate that class members
    with a substantial dollar volume of claims may opt out in favor of
    arbitration, their settlement agreement can conditionally take that into
    account; indeed, it may even assist the settlement process to have
    arbitration opt outs identified before the final hearing on settlement
    approval.   Finally, the class action court should not be concerned if the
    settlement fund is ultimately reduced because many claimants elect to
    arbitrate; plaintiffs' class attorneys should not share in amounts paid to
    settle the claims of class members who choose arbitration.
    -10-
    For the foregoing reasons, we conclude that the district court
    violated the FAA and abused its discretion when it enjoined Park Nicollet
    from arbitrating its claim.
    C. The Order Refusing Park Nicollet's Request To Opt Out.
    Park Nicollet also asked the district court to exclude Park Nicollet
    from the class or, alternatively, to stay the class action litigation.
    Reflecting due process principles, Fed. R. Civ. P. 23(c)(2) requires that
    a putative member of a Rule 23(b)(3) class action be given the opportunity
    to opt out and not be bound by the judgment.              Eisen v. Carlisle &
    Jacquelin, 
    417 U.S. 156
    , 173-76 (1974).7         Therefore, a district court's
    class notice must advise each class member that "the court will exclude the
    member from the class if the member so requests by a specified date."      Rule
    23(c)(2)(A).        In this case, the class notice is part of the lengthy
    settlement approval process, and the district court refused Park Nicollet's
    request for early opt out.       Thus, the unique question presented is whether
    an unwilling class member's right to arbitrate may be held hostage in this
    manner to the class action settlement process.
    We have no quarrel with the usual practice of not allowing class
    members to opt out until after the formal Rule 23(c)(2) notice to the
    class.       That practice is administratively efficient, and it helps the court
    ensure that class members make informed
    7
    The due process aspect of opting out was more explicitly
    discussed in Phillips Petroleum Co. v. Shutts, 
    472 U.S. 797
    (1985),
    which we appear to have read more narrowly in White v. National
    Football League, 
    41 F.3d 402
    , 407 (8th Cir. 1994), cert. denied,
    
    115 S. Ct. 2569
    (1995), than three Justices read it in Ticor Title
    Ins. Co. v. Brown, 
    114 S. Ct. 1359
    , 1363 (1994) (O'Connor, J.,
    dissenting). The Supreme Court has been asked again to clarify
    this issue in Martin v. Drummond Co., Nos. 1930066-70, 
    1995 WL 396879
    (Ala. July 7, 1995), petition for cert. filed, 
    64 U.S.L.W. 3287
    (Oct. 17, 1995) (No. 95-548). In any event, Rule 23(c)(2)
    clearly provides Park Nicollet a right to opt out in this case.
    -11-
    decisions whether to opt out.       However, the usual practice is not
    appropriate in this case.   Although the court supervising a class action
    has wide discretion to control a class action, including the opt-out
    process, that discretion must be exercised consistent with the policies and
    principles of the FAA when a class member with an immediate right to
    arbitrate its claim seeks to opt out.
    In this case, by its March 2, 1995, letter to the district court,
    Park Nicollet made an unrefuted showing that it (i) was represented by
    separate counsel; (ii) had a contractual right to arbitrate any claim
    encompassed by the class action; (iii) had submitted a claim to the NASD
    along with a declaration under § 12(d)(2) of the NASD Code that it elected
    not to participate in the class action; and (iv) now elected irrevocably
    to opt out of the class action.   In our view, proper regard for the FAA
    required that the court promptly take one of three actions:    it could stay
    the class action while Park Nicollet's claim is arbitrated; it could deny
    the request to opt out (for example, because Park Nicollet's arbitration
    claim is not arbitrable or its request to opt out was too late); or it
    could grant the request to opt out, in which case Park Nicollet's motion
    to stay the class action becomes moot.    The district court did not stay the
    class action, and it is conceded that Park Nicollet is entitled to opt out.
    In these circumstances, the court abused its discretion in refusing to
    enter an order excluding Park Nicollet from the class.
    IV. Conclusion.
    For the foregoing reasons, we issue the following order:        (1) The
    district court's March 3 Order and April 3 Order are reversed insofar as
    (and only insofar as) they affect Park Nicollet Medical Foundation.      (2)
    Piper Capital Management Incorporated and Piper Jaffray Inc. are ordered
    to arbitrate Park Nicollet's Statement of Claim to the NASD, without
    further delay, in accordance with the
    -12-
    Investment Management Agreement and applicable NASD rules.       (3) Park
    Nicollet's request for exclusion from the class is granted.      (4) Park
    Nicollet's motion to stay the class action litigation is denied as moot.
    (5) Our mandate shall issue forthwith.
    A true copy.
    Attest:
    CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
    -13-
    

Document Info

Docket Number: 95-1925

Citation Numbers: 71 F.3d 298

Judges: Arnold, White, Loken

Filed Date: 12/4/1995

Precedential Status: Precedential

Modified Date: 11/5/2024

Authorities (17)

fed-sec-l-rep-p-98429-in-re-y-a-group-securities-litigation-don , 38 F.3d 380 ( 1994 )

Gammaro v. Thorp Consumer Discount Co. , 828 F. Supp. 673 ( 1993 )

Merritt Dickstein v. Edmond Dupont, as They Are Partners of ... , 443 F.2d 783 ( 1971 )

bankr-l-rep-p-74710-croyden-associates-a-florida-partnership , 969 F.2d 675 ( 1992 )

mabel-l-thompson-vennestine-groves-shirley-r-grimmett-deborah-gittens , 61 A.L.R. Fed. 475 ( 1981 )

Wilko v. Swan , 74 S. Ct. 182 ( 1953 )

C. Itoh & Co. (America) Inc., a New York Corporation v. The ... , 552 F.2d 1228 ( 1977 )

joseph-j-gammaro-v-thorp-consumer-discount-company-doing-business-as-itt , 15 F.3d 93 ( 1994 )

Fed. Sec. L. Rep. P 98,870 Melvin C. Nielsen and Peter C. ... , 66 F.3d 145 ( 1995 )

James E. Morgan v. Smith Barney, Harris Upham & Co. , 729 F.2d 1163 ( 1984 )

in-re-baldwin-united-corporation-single-premium-deferred-annuities , 770 F.2d 328 ( 1985 )

Shearson/American Express Inc. v. McMahon , 107 S. Ct. 2332 ( 1987 )

Ticor Title Insurance v. Brown , 114 S. Ct. 1359 ( 1994 )

Dean Witter Reynolds Inc. v. Byrd , 105 S. Ct. 1238 ( 1985 )

Securities and Exchange Commission v. Walter Wencke, ... , 783 F.2d 829 ( 1986 )

Zenith Radio Corp. v. Hazeltine Research, Inc. , 89 S. Ct. 1562 ( 1969 )

Rodriguez De Quijas v. Shearson/American Express, Inc. , 109 S. Ct. 1917 ( 1989 )

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