RICHARD W. TULLY, JR. VS. PETER MIRZ (L-5951-16, BERGEN COUNTY AND STATEWIDE) ( 2018 )


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  •                  NOT FOR PUBLICATION WITHOUT THE
    APPROVAL OF THE APPELLATE DIVISION
    SUPERIOR COURT OF NEW JERSEY
    APPELLATE DIVISION
    DOCKET NO. A-0241-17T1
    APPROVED FOR PUBLICATION
    RICHARD W. TULLY, JR.,
    November 29, 2018
    Plaintiff-Appellant,
    APPELLATE DIVISION
    v.
    PETER MIRZ,
    Defendant-Respondent.
    ___________________________
    Submitted October 16, 2018 – Decided November 29, 2018
    Before Judges Fisher, Hoffman and Geiger.
    On appeal from Superior Court of New Jersey, Law
    Division, Bergen County, Docket No. L-5951-16.
    Philip E. Mazur, attorney for appellant.
    The Weinstein Group, PC, attorneys for respondent
    (Lloyd J. Weinstein, on the brief).
    The opinion of the court was delivered by
    GEIGER, J.A.D.
    Plaintiff Richard W. Tully, Jr. and defendant Peter Mirz were the sole
    shareholders of a closely-held corporation they jointly started known as Interstate
    Fire Protection, Inc. (IFP). Plaintiff and defendant, who are brothers-in-law, did
    not initially sign a written agreement stating how profits and losses would be
    shared, though for the first five years of the business they took an equal salary.
    When IFP began experiencing financial difficulties, plaintiff contributed
    significant funds to pay its expenses. Eventually, IFP defaulted on a loan from TD
    Bank, N.A., and judgment was entered against it in the State of New York.
    After the parties were unable to reach an agreement concerning their
    respective contributions to IFP's debts, plaintiff filed suit to recover fifty-percent of
    the "substantial contributions" he and his other company made to IFP to cover its
    shortfalls. Plaintiff appeals from an August 28, 2017 order dismissing his
    complaint against defendant without prejudice following a one-day bench trial.
    For the following reasons, we affirm in part and reverse and remand in part.
    In 2005, plaintiff and defendant formed IFP, a fire protection contractor
    serving primarily commercial customers, as a partnership. Two years later
    they incorporated the business in New York.             Each party made an initial
    $35,000 investment in IFP, and were paid equal salaries during IFP's first five
    years.
    The parties did not initially enter into a written agreement as to how IFP
    losses would be shared individually. However, they eventually entered into a
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    2
    Shareholders-Partners Agreement (Agreement) on January 15, 2009. 1 Under
    the Agreement, plaintiff and defendant are equally responsible for IFP's
    liabilities, "unless the losses are occasioned by the willful neglect or default,
    and not the mere mistake or error, of any of the parties."
    Plaintiff had substantial prior experience in the construction industry and
    had previously formed Interstate Mechanical Services, Inc. (IMS), which
    provided HVAC-related mechanical contracting services to its clients.
    Plaintiff brought his name, reputation, and client contacts to IFP.            He
    continued to own and operate IMS in conjunction with IFP. Defendant had no
    role in IMS.
    Defendant worked in the fire protection field prior to forming IFP, and
    was licensed to perform that trade, but had no prior experience owning a
    business. Defendant was responsible for running IFP's day-to-day operations.
    In 2008, IFP received a $250,000 line of credit from TD Bank. The line
    of credit was later increased to $750,000.      However, financial difficulties
    eventually led the parties to reduce IFP's line of credit to $450,000 in 2011.
    Plaintiff, defendant, and IMS each guaranteed repayment of the line of credit
    when it was initially opened and each time it was modified.
    1
    Defendant disputes he signed the agreement and claims his signature was
    forged.
    A-0241-17T1
    3
    IFP's financial difficulties led it to default on its obligation to TD Bank.
    Plaintiff alleges IFP's financial difficulties were caused by defendant's
    mismanagement and willful neglect, including failure to estimate projects
    properly and failure to properly mobilize and coordinate IFP's forces.         On
    January 7, 2015, TD Bank filed a collection action against IFP, IMS, plaintiff,
    and defendant in the Supreme Court of New York, and in April 2016, secured
    a judgment in the amount of $530,687.40 plus statutory interest (IFP
    judgment).
    Although the IFP judgment held the debtors jointly and severally liable,
    plaintiff and IMS entered into a settlement agreement with TD Bank, which
    discharged them from the obligation in exchange for payment of $300,000.
    Plaintiff and IMS performed and were formally released on October 20, 2016.
    Defendant and IFP remained liable to TD Bank for the remaining balance of
    $226,469.40.   TD Bank receives payment from defendant through a wage
    garnishment.
    Plaintiff alleges he and IMS extended loans to IFP, or made payments on
    its behalf, for which they expected to be repaid by IFP. Although payment has
    been demanded, it has not been remitted.
    Plaintiff also alleges that in 2012, defendant sold the assets of IFP to
    Pace Plumbing Corp. without fully disclosing the terms of the sale to plaintiff,
    A-0241-17T1
    4
    or by misrepresenting the terms of the sale. These claims were withdrawn by
    plaintiff during the bench trial.
    Plaintiff also alleges defendant misappropriated IFP funds by falsifying
    the time sheets of former IFP employee James Gould in an alleged kickback
    scheme wherein Gould was paid for overtime he did not perform, with the
    unearned income being applied to the debt defendant owed Gould on a
    personal loan from 2010. Plaintiff further alleges defendant converted IFP
    funds through Gould's bank account in 2012.         Finally, plaintiff alleges
    defendant misused IFP funds for personal expenses, such as excessive
    payments for company vehicles that were used personally by defendant.
    Plaintiff filed a six-count Chancery action against defendant alleging:
    breach of fiduciary trust (count I); breach of contract (count II);
    mismanagement (count III); breach of the covenant of good faith and fair
    dealing (count IV); conversion (count V); and fraud (count VI).      Plaintiff
    demanded judgment against defendant: (1) compelling repayment to IFP of
    monies wrongfully converted by defendant or compelling defendant to repay to
    plaintiff his proportionate share; (2) compelling repayment of loans made to
    IFP or payments made on its behalf or compelling defendant to repay to
    plaintiff his proportionate share; (3) compelling defendant to comply with all
    obligations imposed by the Agreement, including the obligation to pay one-
    A-0241-17T1
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    half of IFP's liabilities and debts; (4) for compensatory, consequential, and
    incidental damages; and (5) for interest, attorney's fees, and costs.
    Defendant moved to dismiss the complaint for failure to state a claim
    upon which relief can be granted pursuant to Rule 4:6-2(e), or for violation of
    the single controversy doctrine pursuant to Rule 4:30A. The Chancery judge
    denied the motion, noting:
    While many of the claims could be characterized as
    derivative, the court is empowered in a closely held
    company case to treat an action raising derivative
    claims as a direct action. Brown v. Brown, 
    323 N.J. Super. 30
    , 36-38 (App. Div. 1999). That is sufficient
    to survive a motion to dismiss.
    The case was subsequently transferred to the Law Division. By leave
    granted, plaintiff filed an amended complaint alleging the same causes of
    action and seeking the same relief. 2 Defendant moved to dismiss the amended
    complaint pursuant to Rules 4:6-2(e) and 4:30A. The Law Division judge
    denied the motion, noting the motion was based on the same arguments raised
    by defendant in the prior motion to dismiss. The motion judge reasoned:
    The plaintiff has correctly noted that the law of
    the case doctrine requires this [c]ourt to abide by
    Judge Contillo's decision.
    2
    The amended complaint differed from the original complaint by adding the
    following additional language to paragraph four: "In the alternative and/or in
    addition, the parties agreed verbally, and/or by their conduct reached an
    implied agreement, to pay equally on behalf of [IFP] its debts and liabilities."
    A-0241-17T1
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    Judge Contillo did not reach the merits of the
    defendant's motion to dismiss based upon the Entire
    Controversy Doctrine and [Rule] 4:30A. He noted
    that insufficient information had been supplied. That
    notation leaves this court free to consider that
    argument.
    This court finds itself in the same position. This
    court has not been supplied with copies of the
    pleadings in the N.Y. State litigation. This court has
    no certification establishing a basis for first-hand
    knowledge as to what is involved in the disputes being
    litigated in N.Y. State Court.
    ....
    This court has no detail as to the claims
    involved in the New York State litigation. It is the
    moving party's obligation to supply that information to
    this court.
    Defendant then filed an answer with affirmative defenses and a four-
    count counterclaim, alleging fraud (count one), breach of fiduciary duty (count
    two), conversion (count three), and unjust enrichment (count four).
    Following the completion of discovery, the case proceeded to a one-day
    bench trial. The trial judge issued a written opinion and order dismissing the
    amended complaint without prejudice for lack of standing, concluding "this
    action was improperly brought as a direct action against [d]efendant rather
    than a derivative claim on behalf of IFP." Recognizing the well-established
    rule "that standing is a firm requirement for all actions brought before a court,
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    7
    even if the issue is not addressed by [d]efendant," the judge engaged in the
    following analysis:
    In the instant action, IFP was a closely held
    organization and therefore subject to the [c]ourt's
    discretion on whether or not the claims made against
    [d]efendant should be considered direct [or]
    derivative. Because the interests of IFP's creditors
    would be materially prejudiced by allowing [p]laintiff
    to directly recover from [d]efendant, this [c]ourt is
    precluded from treating this matter as a direct action
    and must hold that [p]laintiff has no standing to bring
    this action against [d]efendant.
    Plaintiff seeks to recover funds directly from
    [d]efendant, as an individual, despite the fact that the
    injury he claims appears to be suffered by IFP. The
    funds supposedly mismanaged, converted and
    siphoned by the [d]efendant were clearly IFP company
    funds. Thus, the allege[d] injury sustained by the
    [d]efendant's actions effected the company as a whole
    and did not represent a "special injury" to [p]laintiff as
    an individual.     Additionally, most of the funds
    advanced by [IMS] to IFP were carried as loans from
    [IMS] to IFP on [IMS's] records. Accordingly, it is
    [IMS] that needs to file a complaint based on the
    breach of the loan agreements.
    Although this [c]ourt does have the discretion to
    treat [p]laintiff's claim as a direct action since IFP was
    a closely held corporation, the fact that IFP has
    creditors who are still seeking recovery from IFP
    funds precludes [p]laintiff's recovery as an individual.
    Allowing [p]laintiff to personally recover funds that
    were assets of the corporation could affect the
    recovery of the existing judgment creditor, TD Bank,
    and potential future judgment creditor, Ideal Supply
    Co.
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    8
    This appeal followed. Plaintiff argues:
    POINT I
    THE COURT ERRONEOUSLY FOUND THAT ALL
    OF [PLAINTIFF]'S CLAIMS ARE DERIVATIVE
    CLAIMS EVEN THOUGH [PLAINTIFF] WAS
    DAMAGED DIRECTLY BY DEFENDANT'S
    MISCONDUCT,     INCLUDING   DEFENDANT'S
    BREACH OF THE PARTIES' AGREEMENT.
    POINT II
    EVEN IF THE CLAIMS ARE DERIVATIVE,
    THERE IS NO REASONABLE BASIS FOR
    IMPOSING THE PROCEDURAL BURDENS THAT
    APPLY TO A DERIVATIVE ACTION WHERE
    BOTH SHAREHOLDERS ARE PARTIES AND THE
    DERIVATIVE CLAIMS PROCEDURES DO NOT
    SERVE ANY REASONABLE PURPOSE.
    POINT III
    THE TRIAL COURT SHOULD HAVE ALLOWED
    THE CLAIMS TO PROCEED INDIVIDUALLY
    UNDER THE LAW OF THE CASE DOCTRINE.
    The issue of standing is a matter of law that we review de novo. People
    for Open Gov't v. Roberts, 
    397 N.J. Super. 502
    , 508 (App. Div. 2008).           "A
    trial court's interpretation of the law and the legal consequences that flow from
    established facts are not entitled to any special deference." Manalapan Realty
    v. Twp. Comm. of Manalapan, 
    140 N.J. 366
    , 378 (1995).
    "Our courts have traditionally taken a generous view of standing in most
    contexts." In re State Contract A71188, 
    422 N.J. Super. 275
    , 289 (App. Div.
    A-0241-17T1
    9
    2011) (citations omitted); see Rule 4:26-1 (requiring plaintiffs to be "real party
    in interest").   To have standing to bring a claim, "a party must present a
    sufficient stake in the outcome of the litigation, a real adverseness with respect
    to the subject matter, and a substantial likelihood that the party will suffer
    harm in the event of an unfavorable decision." In re Camden County, 
    170 N.J. 439
    , 449 (2002).
    Plaintiff first contends the trial court erred by finding all of his claims
    were derivative of IFP rather than direct. Plaintiff further contends, even if the
    claims are derivative, the trial court should have allowed them to proceed
    directly because of the closely-held nature of IFP. The trial court relied on the
    determination that all of plaintiff's claims were derivative to conclude plaintiff
    was without standing to proceed.
    "A corporation is regarded as an entity separate and distinct from its
    shareholders." Strasenburgh v. Straubmuller, 
    146 N.J. 527
    , 549 (1996) (citing
    Dep't of Labor v. Berlanti, 
    196 N.J. Super. 122
     (App. Div. 1984)). "[R]egard
    for the corporate personality demands that suits to redress corporate injuries
    which secondarily harm all shareholders alike are brought only by the
    corporation." 
    Ibid.
     (quoting Note, Distinguishing Between Direct and
    Derivative Shareholders' Suits, 
    110 U. Pa. L. Rev. 1147
    , 1148 (1962)). New
    Jersey follows the American rule, which provides shareholders who suffer an
    A-0241-17T1
    10
    injury "may not recover for the injury to [their] stock alone, but must seek
    recovery derivatively [on] behalf of the corporation." 
    Id.
     at 550 (citing Cowin
    v. Bresler, 
    741 F.2d 410
    , 414 (D.C. Cir. 1984)). "Only upon proof of fraud or
    injustice will the corporate veil be pierced to impose liability on the corporate
    principals." Berlanti, 
    196 N.J. Super. at
    127 (citing Lyon v. Barrett, 
    89 N.J. 294
    , 300 (1982)).
    The purpose of a derivative suit is to provide shareholders, or a
    representative shareholder, with "a means to protect the interests of the
    corporation from the misfeasance and malfeasance of 'faithless directors and
    managers.'"   Strasenburgh, 
    146 N.J. at 548-49
     (quoting Kamen v. Kemper
    Financial Servs., Inc., 
    500 U.S. 90
    , 95 (1991)). By contrast, a direct action is
    one in which liability is based upon an injury or violation of a duty owed to a
    particular shareholder. Brown v. Brown, 
    323 N.J. Super. 30
    , 36 (App. Div.
    1999) (citation omitted).     "To determine whether a complaint states a
    derivative or an individual cause of action, courts examine the nature of the
    wrongs alleged in the body of the complaint, not the plaintiff's designation or
    stated intention." Strasenburgh, 
    146 N.J. at
    551 (citing Lipton v. News Int'l,
    PLC, 
    514 A.2d 1075
    , 1078 (Del. 1986)).
    A shareholder may maintain a direct action against a corporation or its
    directors if the shareholder suffers a "'special injury.'" 
    Ibid.
     (citing Elster v.
    A-0241-17T1
    11
    American Airlines, Inc., 
    100 A.2d 219
     (Del. Ch. 1953)). "A special injury
    exists 'where there is a wrong suffered by [the] plaintiff that was not suffered
    by all stockholders generally or where the wrong involves a contractual right
    of the stockholders, such as the right to vote.'" Id. at 550 (quoting In re Tri-
    Star Pictures, Inc., 
    634 A.2d 319
    , 330 (Del. 1993)).
    In the context of a closely-held corporation, courts have discretion to
    construe a derivative cause of action as a direct claim if doing so "will not (i)
    unfairly expose the corporation or the defendants to a multiplicity of actions,
    (ii) materially prejudice the interests of creditors of the corporation, or (iii)
    interfere with a fair distribution of the recovery among all interested persons."
    Principles of Corporate Governance: Analysis and Recommendations, § 7.01
    (d) (Am. Law Inst. (1992)).        See also Brown, 
    323 N.J. Super. at 39
    ("adopt[ing] the approach of the ALI's § 7.01(d)").
    The factors enumerated in § 7.01(d) follow the holding in Watson v.
    Button, 
    235 F.2d 235
     (9th Cir. 1956), "which found the usual policy reasons
    requiring an action that principally alleges an injury to the corporation to be
    treated as a derivative action are not always applicable to the closely held
    corporation." Principles, § 7.01 cmt. e. In Watson, a multiplicity of actions
    could not have resulted because there were only two shareholders; each
    shareholder had agreed to be individually liable for corporate debts; and an
    A-0241-17T1
    12
    individual recovery would not have prejudiced the rights of any other
    shareholders. 
    235 F.2d at 237
    .
    The main consequence of construing an action as direct is to relieve the
    plaintiff of the procedural requirements that attend a derivative suit.        For
    example, in a derivative suit, a would-be plaintiff is required to issue demand
    upon the corporation to take action and to then allow ninety days to elapse,
    unless notified the demand was rejected by the corporation, prior to
    commencing a derivative suit.      N.J.S.A. 14A:3-6.3.     In this case, plaintiff
    would be required to issue demand on defendant, which would almost certainly
    be futile.   Further frustrating the procedural purpose of a derivative suit,
    defendant asserted counterclaims against plaintiff, and "the general rule is to
    prohibit counterclaims in a derivative action." Principles, § 7.01 cmt. e (citing
    Welch, Shareholder Individual and Derivative Actions: Underlying Rationales
    & the Closely Held Corporation, 
    9 J. Corp. L. 147
    , 190-91 (1984)).
    Some of the wrongs alleged by plaintiff are direct claims. For example,
    at its core, plaintiff's claim is founded on defendant's failure to contribute his
    fair share (fifty percent) to the debts and liabilities of IFP, in breach of an
    alleged agreement between the parties and the covenant of good faith and fair
    A-0241-17T1
    13
    dealing. (counts II and IV).3 Plaintiff, unlike IFP, is a party to the Agreement
    and, therefore, has standing for this claim as an interested party. See Sean
    Wood v. Hegarty Grp., Inc., 
    422 N.J. Super. 500
    , 519 (App. Div. 2011)
    (finding corporation lacked standing to pursue counterclaim for lost profits on
    alleged breach of contract when evidence demonstrated principal of the
    corporation had been the real party in interest on the contract).
    However, plaintiff's other claims weigh more in favor of a derivative
    action on behalf of IFP. For example, the mismanagement claim (count III) is
    grounded in the assertion that defendant failed to manage IFP in a
    commercially reasonable manner. Additionally, the conversion claim (count
    V) and fraud claim (count VI) allege defendant "exercised wrongful dominion
    and control over the assets of [IFP]" and engaged in a fraudulent kickback
    scheme. These claims are derivative in nature because they concern IFP's
    assets and operations rather than plaintiff as an individual. Plaintiff partially
    withdrew his claims of mismanagement (count III) and fraud (count VI) at trial
    3
    See Principles, § 7.01 cmt. c (explaining decisions in both Delaware and
    New York have held an action may be treated as direct in circumstances in
    which there was a special dual relationship between plaintiff and defendant,
    such as a contractual relationship, or in which the latter acted with deliberate
    intent to harm the former) (citing the holding in Elster, 
    100 A.2d 219
    ).
    A-0241-17T1
    14
    to the extent they pertain to the agreement to sell IFP's assets to Pace Plumbing
    Corp.
    These claims are captured by the breach of fiduciary duty claim (count
    I), which we "generally regard[] as derivative claims unless the injury to
    shares is distinct." Strasenburgh, 
    146 N.J. at 552
     (citation omitted). However,
    "[i]f the breach of duty causes a 'special injury,' shareholders may sue
    directly." 
    Ibid.
    Returning to the factors enumerated in Principles, § 7.01(d) and adopted
    by Brown, other shareholder interests would not be harmed if these claims
    proceed because plaintiff and defendant are the only shareholders . Thus, this
    court need only consider whether, as the trial court held, the rights of IFP's
    creditors would potentially be materially prejudiced if plaintiff's derivative
    claims are allowed to proceed as a direct action.
    As previously discussed, TD Bank has reduced its claims against
    defendant and IFP to judgment and collects on a wage garnishment against
    defendant. On this record we are unable to determine if allowing plaintiff's
    derivative claims to proceed will prejudice TD Bank, Ideal Supply, or any
    other creditor of IFP. Therefore, the trial court properly declined to construe
    plaintiff's derivative claims as a direct action. We affirm the dismissal without
    prejudice of plaintiff's derivative claims, which include his breach of fiduciary
    A-0241-17T1
    15
    duty claim (count I) and the mismanagement, conversion, and fraud claims
    (counts III, V, and VI, respectively).
    That said, the discretion granted by Brown and § 7.01(d) does not run
    both ways. Plaintiff's essential claim is for breach of contract, to which he and
    defendant are the sole parties. We discern no principle of law that prevents
    plaintiff from bringing this direct action against defendant. Accordingly, we
    reverse the dismissal of plaintiff's direct claims based on breach of contract
    (count II) and breach of the covenant of good faith and fair dealing (count IV) ,
    and remand those claims to the trial court for a decision on the merits.
    Tully also argues the trial court should have allowed his derivative
    claims to proceed pursuant to the law of the case doctrine based on the prior
    motion rulings. We are unpersuaded by this argument.
    The law of the case doctrine provides "that a legal decision made in a
    particular matter 'should be respected by all other lower or equal courts during
    the pendency of that case.'" Lombardi v. Masso, 
    207 N.J. 517
    , 538 (2011)
    (quoting Lanzet v. Greenberg, 
    126 N.J. 168
    , 192 (1991)). "A hallmark of the
    law of the case doctrine is its discretionary nature. . . ."      
    Ibid.
     (citations
    omitted).   "It is a non-binding rule intended to 'prevent relitigation of a
    previously resolved issue.'" 
    Ibid.
     (quoting In re Estate of Stockdale, 
    196 N.J. 275
    , 311 (2008) (citing Pressler, Current N.J. Court Rules, cmt. 4 on R. 1:36-3
    A-0241-17T1
    16
    (2008))). The "doctrine is only triggered when one court is faced with a ruling
    on the merits by a different and co-equal court on an identical issue." Id. at
    539.
    Our courts treat the denial of a motion to dismiss as interlocutory.
    Parker v. City of Trenton, 
    382 N.J. Super. 454
    , 457 (App. Div. 2006); see also
    GMAC v. Pittella, 
    205 N.J. 572
    , 577 n.2 (2011) (citing Parker, 
    382 N.J. Super. at 458
    ).
    The denial of defendant's motions to dismiss did not constitute a ruling
    on the merits of whether plaintiff's claims were derivative or direct. Nor did
    those rulings adjudicate whether the court should exercise its discretion to treat
    the action raising derivative claims as a direct action under Brown.          The
    rulings were not dispositive. Rather, the rulings merely decided that Tully's
    claims were "sufficient to survive a motion to dismiss."
    The trial judge based his decision upon the evidence adduced at trial
    following discovery, not the facts as alleged in the amended complaint. The
    testimonial evidence presented at trial was not available when either of the
    motions to dismiss were decided.       The law of the case doctrine does not
    require a trial judge to follow a prior motion ruling by a different judge if
    presented with "substantially different evidence."         Pressler & Verniero,
    Current N.J. Court Rules, cmt. 4 on R. 1:36-3 (2019) (citing State v. K.P.S.,
    A-0241-17T1
    17
    
    221 N.J. 266
    , 276 (2015)); cf. State v. Cullen, 
    424 N.J. Super. 566
    , 579-80
    (App. Div. 2012) (holding a judge deciding a motion for summary judgment
    based upon evidence developed during discovery is not bound to adhere to the
    preliminary assessment of the facts as alleged in the complaint made by a
    different judge when deciding an earlier Rule 4:6-2(e) motion). The trial judge
    was not bound to follow the motion judges' preliminary assessments of the
    facts or rulings.
    In sum, we hold plaintiff had standing to bring his breach of contract
    (count II) and breach of the covenant of good faith and fair dealing (count IV)
    claims. We reverse the dismissal of counts II and IV and remand those claims
    to the trial court for a decision on the merits. We affirm the dismissal without
    prejudice of plaintiff's remaining derivative claims (counts I, III, V, and VI).
    Affirmed in part and reversed and remanded in part for proceedings
    consistent with this opinion. We do not retain jurisdiction.
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    18