ESP Resources, Inc., F/K/A Pantera Petroleum, Inc. v. BWC Management, Inc. ( 2016 )

Opinion issued March 3, 2016
In The
Court of Appeals
For The
First District of Texas
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NO. 01-15-00680-CV
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ESP RESOURCES, INC. F/K/A PANTERA PETROLEUM, INC., Appellant
V.
BWC MANAGEMENT, INC., Appellee
On Appeal from the 113th District Court
Harris County, Texas
Trial Court Case No. 2013-25068
MEMORANDUM OPINION
BWC Management, Inc. sued ESP Resources, Inc. for amounts owed under
three promissory notes. A jury rendered a verdict in favor of BWC Management,
and the trial court entered judgment on the verdict. On appeal, ESP Resources
contends that (1) the trial court erred in admitting hearsay evidence and in excluding
other relevant evidence, and (2) the evidence is legally and factually insufficient to
support the jury’s verdict. Finding no reversible error, we affirm.
BACKGROUND
BWC Management alleged that ESP Resources was liable under three
promissory notes, executed by Chris Metcalfe, CEO of ESP Resource’s corporate
predecessor, Pantera Petroleum.1 The parties’ principal dispute at trial concerned
whether BWC Management had funded the loan amounts stated in the promissory
notes.
Jenny Crichton, the sole shareholder and president of BWC Management, and
David Dugas, the current chief executive officer and president of ESP Resources
testified as witnesses. The trial court admitted as evidence: (1) the three promissory
notes; (2) Swiss bank confirmation forms showing the transfer of funds from BWC
Management; (3) ESP Resources’ filings with the United States Securities and
Exchange Commission indicating notes payable; (4) audit correspondence relating
to ESP Resources; and (5) the audit-related records of one of its accounting firms.
Crichton testified that she and ESP Resources’ former president, Chris
Metcalfe, negotiated the terms stated in the three promissory notes. During her
1
The parties do not dispute the corporate history, suggest that any distinction
between Pantera Petroleum and ESP Resources affects the outcome, or
contend that ESP Resources is not liable as the successor in interest to Pantera
Petroleum.
2
testimony, she discussed each of the three notes, which the trial court had admitted
by stipulation of the parties. She confirmed that the notes bore Metcalfe’s signature,
and were executed in September 2007, July 2008, and August 2008. Crichton
testified that she in turn borrowed the funds from another entity, FTS Financial
Investments, to lend to ESP Resources. She also testified that she confirmed with
Metcalfe and FTS Financial Investments that the sums stated in the notes were
provided to ESP Resources, that ESP Resources had not paid BWC Management
when the payments became due, and that BWC Management in turn had not repaid
FTS Financial Investments as a result.
When asked for documentation corroborating that the funds at issue had been
provided to ESP Resources, Crichton referred to two Swiss bank forms, represented
to be confirmations of the transfer from FTS Financial Investments to ESP
Resources of the sums associated with the second and third notes. ESP Resources
objected to the forms as hearsay and asserted that BWC Management had not laid
an adequate foundation for their admission. The trial court admitted the bank forms
into evidence.
Crichton also testified that ESP Resources was a publicly traded company and
that the annual report it filed with the Securities and Exchange Commission for the
2012 fiscal year confirmed that ESP Resources had received the funds stated in all
three notes by including them as long-term debt owed by the company. Like the
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promissory notes, the annual report previously had been admitted into evidence by
stipulation. She further testified that ESP Resources had written BWC Management
in connection with an audit conducted by an accounting firm, in which it confirmed
that the two companies’ records were in agreement as to the amount owed on the
notes. This February 2012 letter stated virtually the same amount due under the three
notes and bore Dugas’s signature. The trial court admitted the audit letter into
evidence without objection.
On cross-examination, ESP Resources contended that it had sold an equity
interest to FTS Financial Investments and that BWC Management did not play an
intermediary role in these transactions. Defense counsel questioned Crichton about
a February 2008 report that ESP Resources filed with the Securities and Exchange
Commission disclosing an agreement for ESP Resources to sell stock in the company
to FTS Financial Investments. Crichton agreed that if the transaction involved equity
financing through the sale of stock in the company, ESP Resources would not be
required to repay any sums that FTS Financial Investments transferred to it. She also
conceded that FTS Financial Investments transferred the sums at issue directly to
ESP Resources, and that BWC Management did not have a written agreement with
FTS Financial Investments regarding the loans or FTS Financial Investment’s
alleged right to repayment from BWC Management. Instead, she testified, the
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agreement between BWC Management and FTS Financial Investments was an oral
one.
ESP Resources also sought to cross-examine Crichton about the relationship
between Metcalfe and Crichton’s ex-husband, Bob Vukovich, and their alleged
involvement in a stock price-fixing scheme. BWC Management had secured a
pretrial ruling requiring the defense to raise the subject of price-fixing with the court
before putting on evidence about it or a related lawsuit brought against Metcalfe by
the Securities and Exchange Commission. Defense counsel raised this issue with the
court during Crichton’s cross-examination, arguing that evidence of price-fixing was
admissible to show that the loans at issue were a fraud, designed to inflate ESP
Resources’ stated liabilities in furtherance of the stock price-fixing scheme. The trial
court limited cross-examination to questions concerning Metcalfe’s and Vukovich’s
respective roles in securing financing for the company and directed defense counsel
not to raise the issue of price-fixing.
During his testimony, Dugas agreed that Metcalfe was the chief executive
officer of ESP Resources during the period in which the promissory notes were
executed and that Dugas did not assume this role until August 2010. Dugas was
aware of the notes before becoming chief executive officer. He agreed that
documentation filed with the Securities and Exchange Commission listed the sums
stated in these notes as company debts and that the company’s filings continued to
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do so even after he became its chief executive officer. He acknowledged the
authenticity of the audit-related February 2012 correspondence between ESP
Resources and BWC Management regarding the amount the former owed the latter
on the notes and that it bore his signature, and he testified that he personally had not
issued stock to FTS Financial Investments. Dugas agreed that ESP Resources has
not made any payment on the notes.
Counsel for BWC Management questioned Dugas about documents obtained
from an accounting firm retained by ESP Resources, BDO Canada. These
documents were accompanied by a business-records affidavit executed by a
custodian of records for BDO Canada. ESP Resources objected to their admissibility
on the ground that the records were hearsay and lacked an adequate foundation, but
the trial court overruled these objections. Dugas then testified that BDO Canada
conducted an audit necessary to make annual filings required by the Securities and
Exchange Commission in the 2007–2008 timeframe, and that BDO Canada’s audit-
related records included information relating to the sums that BWC Management
ostensibly loaned to ESP Resources, including copies of the promissory notes.
Dugas conceded that, as a result of the audit, ESP Resources identified the sums
stated in the notes as company debts, including in its 2008 and 2012 annual reports
filed with the Securities and Exchange Commission. Dugas signed the latter report
in his capacity as the company’s chief executive officer.
6
Dugas testified that BWC Management did not fund the promissory notes, but
did not dispute that ESP Resources had received the sums at issue. Instead, he
suggested that the funds ESP Resources received from FTS Financial Investments
were for the purchase of company stock and, therefore, did not require repayment.
He pointed to a February 2008 report filed with the Securities and Exchange
Commission describing an equity financing agreement between ESP Resources and
FTS Financial Investments. And he testified that aspects of BDO Canada’s audit-
related records suggested that FTS Financial Investments had purchased equity in
ESP Resources rather than lending it money. On cross-examination, however, Dugas
conceded that portions of BDO Canada’s audit-related records referred to each of
the sums stated in the promissory notes and characterized these sums as loans, but
noted that some of these comments were handwritten.
During its deliberations, the jury asked for clarification regarding whether the
handwritten notes contained in BDO Canada’s audit-related records were “legally
valid.” The trial court informed the jury—without objection from the parties—that
it had the evidence and could give it whatever weight it deemed appropriate. The
jury subsequently found that ESP Resources owed BWC Management the sums
stated in the three promissory notes. The trial court entered judgment on the verdict.
DISCUSSION
I. Admission of Evidence
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ESP Resources challenges the trial court’s rulings admitting the Swiss bank
records and the Canadian audit records. First, ESP Resources maintains that the trial
court should have excluded the two Swiss bank confirmation forms showing transfer
of sums associated with the second and third promissory notes as hearsay and not
adequately authenticated. See TEX. R. EVID. 802, 901(a). ESP Resources notes that
the forms are statements made by an absent third party—the Swiss bank—and were
offered to document that the transfer of funds occurred. It contends that Crichton, as
the president and sole shareholder of BWC Management, was not in a position to
authenticate the forms, as they were created by a foreign bank and document a
transaction between two other entities, ESP Resources and FTS Financial
Investments.
Second, ESP Resources contends that the trial court should have excluded the
audit records obtained from BDO Canada as hearsay and not authenticated. See TEX.
R. EVID. 802, 901(a). Though these records are accompanied by an affidavit from a
custodian of records for BDO Canada attesting that they are its business records,
ESP Resources maintains that the proof also must show that ESP Resources adopted
these documents as its own records to satisfy the business-records exception to the
hearsay rule and contends that the handwritten notes in these audit records are
hearsay within hearsay. See TEX. R. EVID. 803(6), 805.
8
BWC Management responds that the Swiss bank forms are admissible as its
own business records, because Crichton testified that the forms served as written
confirmation to her that the sums associated with the second and third promissory
notes had been funded. See TEX. R. EVID. 803(6). It likewise maintains that BDO
Canada’s audit records were accompanied by a business records affidavit and that
the records, including the handwritten notes within them, are therefore admissible
under the business-records exception to the hearsay rule. See TEX. R. EVID. 803(6),
902(10). Accordingly, it maintains that the trial court did not error in admitting these
exhibits, and because other evidence established the funding of the loans, any error
in the admission of the records was harmless.
A. Standard of Review
Decisions about the admission of evidence are within a trial court’s discretion.
Levine v. Steve Scharn Custom Homes, Inc., 448 S.W.3d 637, 656 (Tex. App.—
Houston [1st Dist.] 2014, pet. denied). It abuses this discretion when its evidentiary
rulings are unreasonable, arbitrary, or indifferent to any guiding rules or principles.
Badall v. Durgapersad, 454 S.W.3d 626, 641 (Tex. App.—Houston [1st Dist.] 2014,
pet. denied).
A party seeking reversal based on the erroneous admission of evidence must
establish that the error probably resulted in an improper judgment. H2O Sols., Ltd.
v. PM Realty Grp., LP, 438 S.W.3d 606, 621 (Tex. App.—Houston [1st Dist.] 2014,
9
pet. denied). In general, this requires the complaining party to show that the
judgment turns on the erroneously admitted evidence. Id. Thus, we ordinarily will
not reverse a trial court’s judgment on the basis of erroneously admitted evidence if
it was cumulative and not controlling on a material dispositive issue. Lone Starr
Multi-Theatres, Ltd. v. Max Interests, Ltd., 365 S.W.3d 688, 702 (Tex. App.—
Houston [1st Dist.] 2011, no pet.).
B. Applicable Law
Hearsay—a statement other than one made by a declarant while testifying at
trial that is offered for its truth—is generally inadmissible. TEX. R. EVID. 801–02.
But this general rule is subject to exceptions, including one for business records.
TEX. R. EVID. 803(6). The business-records exception covers records kept in the
course of a regularly conducted business activity, so long as the records were made
at or near the time, based on personal knowledge, recording a regular practice of that
activity, and the party opposing the evidence does not show that the document is
otherwise untrustworthy. Id.
When a party seeks to introduce a document created by one business as the
records of another company under the business-records exception, it also must show
that the document in question was incorporated and kept in the course of the business
of the second company, that the second company usually relies on the accuracy of
the document’s contents, and that the circumstances otherwise indicate that the
10
document is trustworthy. Simien v. Unifund CCR Partners, 321 S.W.3d 235, 240–
41 (Tex. App.—Houston [1st Dist.] 2010, no pet.).
Even when a document is admissible under an exception to the hearsay rule,
portions of its contents nonetheless may remain hearsay. See TEX. R. EVID. 805; see
also Texas Worker’s Comp. Comm’n v. Wausau Underwriters Ins., 127 S.W.3d 50,
61 (Tex. App.—Houston [1st Dist.] 2003, pet. denied) (“Even though a document is
admissible pursuant to a hearsay exception, further objections to hearsay contained
within the document must be examined separately.”). Handwritten notes, however,
may be admissible under the business-records exception. Barnhart v. Morales, 459
S.W.3d 733, 743–44 (Tex. App.—Houston [14th Dist.] 2015, no pet.) (holding that
trial court did not abuse its discretion in admitting hospital’s typewritten records
containing handwritten notes).
The proponent of a document also must authenticate it by providing proof that
the document is what the proponent claims it is. TEX. R. EVID. 901(a). One can
satisfy this foundational requirement in a variety of ways, including via
circumstantial evidence. E.g., United Rentals, Inc. v. Smith, 445 S.W.3d 808, 813
(Tex. App.—El Paso 2014, no pet.). Documents accompanied by an adequate
business-records affidavit are self-authenticating and do not require any further
proof of their authenticity. TEX. R. EVID. 902(10); H20 Sols., 438 S.W.3d at 622.
11
C. Analysis
The Swiss bank forms showing transfer of funds from FTS Financial
Investments to ESP Resources are inadmissible hearsay. No witness testified on
behalf of the bank at trial, the forms were not accompanied by a business-records
affidavit, and BWC Management introduced this evidence for the purpose of proving
that ESP Resources had received the sums stated in the forms from a third party.
This renders them hearsay. See TEX. R. EVID. 801. Neither Crichton nor Dugas
testified to the foundation necessary to meet the business records hearsay exception
to demonstrate their admissibility, and no other indicia of trustworthiness of the
records was established at trial. See TEX. R. EVID. 802.
Nevertheless, admission of the forms did not result in an improper judgment.
Dugas did not deny that ESP Resources had received the sums reflected in the
confirmations. Instead, ESP Resources contends that FTS Financial Investments,
rather than BWC Management, either loaned these sums to ESP Resources or
received stock in return. In other words, ESP Resources does not contend that it did
not receive these funds; it contends that it did not receive them in connection with
the funding of the promissory notes. Because ESP Resources does not deny receipt
of the funds, which is all the Swiss bank forms purport to show, the judgment cannot
have turned on this particular evidence.
12
It was within the trial court’s discretion to admit BDO Canada’s audit-related
records. These documents were accompanied by an unchallenged affidavit made by
a custodian of records for BDO Canada. The custodian’s affidavit establishes their
authenticity and the applicability of the business-records exception to the hearsay
rule. TEX. R. EVID. 803(6), 902(10). The handwritten notes contained within the
records does not alter this conclusion. As our sister court concluded in Barnhart,
handwritten notes contained within documents that are accompanied by a properly
executed business-records affidavit may fall within the scope of the business-records
exception to the hearsay rule. 459 S.W.3d at 743–44.
Citing Simien, ESP Resources contends that the custodian’s affidavit alone
does not establish the applicability of the business-records exception, because the
records are those of a third party. See 321 S.W.3d at 240–45. But Simien is
inapposite. BDO Canada’s records were offered into evidence as that company’s
own documents made in connection with an audit of ESP Resources. Although BDO
Canada’s audit records include copies of the promissory notes, ESP Resources
stipulated to the admissibility of the promissory notes, and the custodian verified
that BDO Canada possessed them in connection with its audit work. Having done
so, ESP Resources cannot complain that the inclusion of copies of these notes
amongst the audit records runs afoul of Simien’s requirements for third-party
documents retained by another business as its own records. See id.
13
We hold that the trial court’s admission of the complained-of evidence is not
reversible error. See H2O Sols., 438 S.W.3d at 621; Lone Starr, 365 S.W.3d at 702.
II. Exclusion of Evidence
ESP Resources maintains that the trial court erred in excluding evidence about
the Securities and Exchange Commission’s lawsuit and judgment against Metcalfe
and the role that Crichton’s ex-husband, Vukovich, played in this price-fixing
scheme. It contends that this evidence is probative of its defense that the promissory
notes were a fraudulent scheme engaged in by Metcalfe and Vukovich and that it
bears upon the credibility of the parties who facilitated the supposed loan
transactions. BWC Management responds that ESP Resources has not preserved its
complaint about the exclusion of this price-fixing evidence for review, and in any
event, it was properly excluded at irrelevant.
A. Standard of Review
A trial court’s decision to exclude evidence rests within its sound discretion
and is subject to the same standard of review that governs its admission of evidence.
See, e.g., Scottsdale Ins. Co. v. Nat’l Emergency Servs., Inc., 175 S.W.3d 284, 297
(Tex. App.—Houston [1st Dist.] 2004, pet. denied). To preserve a complaint about
the trial court’s exclusion of evidence, “the complaining party must demonstrate the
substance of the excluded evidence through an offer of proof or bill of exception
unless the substance of the evidence is apparent from the context.” Compton v.
14
Pfannenstiel, 428 S.W.3d 881, 885 (Tex. App.—Houston [1st Dist.] 2014, no pet.);
see also Wade v. Comm’n for Lawyer Discipline, 961 S.W.2d 366, 374 (Tex. App.—
Houston [1st Dist.] 1997, no writ) (per curiam) (holding that error was not preserved
because the complaining party “made no offer of proof to identify for the trial court
the content of the documents or testimony he now complains were excluded”);
Walker v. Kleiman, 896 S.W.2d 413, 417 (Tex. App.—Houston [1st Dist.] 1995, no
writ) (same). The purpose of this requirement is to ensure that the evidence in
question is articulated with the specificity necessary to permit the appellate court to
assess its admissibility. Lone Starr, 365 S.W.3d at 703.
B. Analysis
ESP Resources twice sought to introduce evidence about the Securities and
Exchange Commission’s investigation of an alleged price-fixing scheme concerning
ESP Resources’ stock and a judgment that the Commission obtained against
Metcalfe and Vukovich regarding price-fixing. During his cross-examination of
Crichton, counsel attempted to question her about Metcalfe’s and Vukovich’s
alleged price-fixing activities, arguing to the court that the loans stated in the
promissory notes were a fraud committed in furtherance of these activities. Counsel
also sought to elicit testimony on this subject from Dugas, and in particular, that
Metcalfe had resigned as chief executive officer of ESP Resources as a result of the
15
accusation that he was manipulating its stock price and that the Securities and
Exchange Commission obtained a judgment against Metcalfe.
The trial court excluded this evidence on both occasions. ESP Resources,
however, neither made an offer of proof nor filed a formal bill of exception regarding
the evidence that the trial court excluded. Consequently, the record on appeal does
not include any pleadings filed in the lawsuit brought by the Securities and Exchange
Commission or the judgment it obtained against Metcalfe and Vukovich. The nature
of the allegations made by the Securities and Exchange Commission and the content
of the judgment are unknown. In addition, the facts to which Crichton and Dugas
would have testified—as opposed to the general subject matter on which they would
have been questioned by counsel—do not appear anywhere in the record. Without
these particulars, it is impossible to assess whether or to what degree the price-fixing
scheme was relevant to the execution of the promissory notes and whether any
probative value may have been substantially outweighed by the danger of unfair
prejudice. See TEX. R. EVID. 401, 403. Nor is it possible without these details to
assess whether this proffered evidence would have amounted to impermissible proof
of other wrongs to show conduct in conformity or been admissible for another
purpose. See TEX. R. EVID. 404(b).
Because there is no offer of proof on the record or a formal bill of exception,
we cannot determine the substance and admissibility of the excluded evidence on
16
appeal. We therefore hold that this issue is not preserved for our review. Wade, 961
S.W.2d at 374; Walker, 896 S.W.2d at 417.
III. Legal and Factual Sufficiency
ESP Resources next maintains that the admissible evidence is legally and
factually insufficient to support the jury’s verdict. In particular, it contends that the
proof shows that a third party, FTS Financial Investments, either made the loan or
purchased an equity interest in ESP Resources, and no documentary proof connects
FTS Financial Investments’ funding to BWC Management’s promissory notes. In
essence, ESP Resources contends that there is no proof that ESP Resources received
money from BWC Management.
A. Standard of Review
To show that the evidence is legally insufficient, a party that did not bear the
burden of proof at trial must establish that there is no evidence to support the
contested finding. Heritage Hous. Dev., Inc. v. Carr, 199 S.W.3d 560, 565 (Tex.
App.—Houston [1st Dist.] 2006, no pet.). We will sustain a legal insufficiency
challenge if there is a total lack of proof or the proof is no more than a scintilla, rules
of law or evidence bar us from giving weight to the only supporting proof, or the
proof conclusively establishes the opposite of the finding. Id. But the evidence also
must be viewed in the light most favorable to the verdict. Id. The ultimate question
17
is whether the proof, viewed in that light, would permit reasonable, fair jurors to
render the challenged verdict. Id.
When reviewing the evidence for factual sufficiency, we consider all of the
proof that supports and contradicts a particular finding and set aside the verdict only
if the finding is so contrary to the overwhelming weight of the proof that it is clearly
wrong and unjust. Indian Beach Prop. Owners’ Ass’n v. Linden, 222 S.W.3d 682,
693 (Tex. App.—Houston [1st Dist.] 2007, no pet.). The jury is the sole judge of the
witnesses’ credibility and the weight their testimony merits. Id. It may choose to
believe one witness over another and resolve inconsistencies in the testimony. Id.;
Dyer v. Cotton, 333 S.W.3d 703, 709 (Tex. App.—Houston [1st Dist.] 2010, no pet.).
B. Analysis
1. Legal Sufficiency
ESP Resources stipulated to the admissibility of the promissory notes. These
notes reflect the amounts that ESP Resources owes to BWC Management and are
signed by Metcalfe, who was the chief executive officer of ESP Resources’
predecessor when the notes were executed. BWC Management’s sole shareholder
and president, Crichton, testified that she negotiated this transaction with Metcalfe
and borrowed these sums from FTS Financial Investments, which transferred them
directly to ESP Resources. Crichton also testified that she confirmed with Metcalfe
and FTS Financial Investments that ESP Resources received the funds loaned. ESP
18
Resources’ filings with the Securities and Exchange Commission reported these
sums as debts. And ESP Resources also had written BWC Management to confirm
that the two companies’ records agreed regarding the amount of these debts. This
correspondence was signed by its current chief operating officer, Dugas, who
conceded its authenticity.
While the defense sought to undermine this evidence and put on contrary
proof, we cannot conclude on this record that no evidence supports the jury’s
findings in favor of BWC Management. Even disregarding the proof that ESP
Resources contends should not have been admitted, the record contains legally
sufficient proof of its liability for the amounts owed in the promissory notes. We
hold that the evidence is sufficient to permit reasonable, fair-minded jurors to reach
the verdict under review. Heritage Hous., 199 S.W.3d at 565.
2. Factual Sufficiency
A review of the factual sufficiency of the proof requires us to consider not
only the proof supporting the verdict, but also that which does not. Indian Beach,
222 S.W.3d at 693. Crichton conceded that BWC Management lacked
documentation between BWC Management and ESP Resources other than the
promissory notes themselves and the February 2012 audit-related correspondence
signed by Dugas. ESP Resources filed with the Securities and Exchange
Commission a form that shows that FTS Financial Investments agreed to purchase
19
an equity interest in ESP Resources; Dugas suggested that the funds received were
to purchase this equity interest. And Crichton agreed that, if this was so, ESP
Resources would have no obligation to repay these sums.
Notwithstanding this controverting evidence, we conclude that that the proof
is factually sufficient to support the jury’s findings. In large part, the jury was
required to decide which of the two witnesses it found more credible on the issue of
the funding of the notes, Crichton or Dugas. This credibility determination is within
the jury’s sole province. See Indian Beach, 222 S.W.3d at 693; Dyer, 333 S.W.3d at
709. The documentary evidence that was admitted tilts in favor of BWC
Management’s claims, including the notes themselves and ESP Resources’ own
documents—its 2008 and 2012 annual reports filed with the Securities and Exchange
Commission and its February 2012 audit-related correspondence to BWC
Management. Based on this evidence, the jury reasonably could have rejected the
equity-purchase defense. Accordingly, we hold that the evidence is factually
sufficient to support the judgment. Indian Beach, 222 S.W.3d at 693.
CONCLUSION
We hold that the record fails to show reversible error in the admission or
exclusion of evidence, and that the evidence adduced at trial was legally and
factually sufficient to support the jury’s verdict. We therefore affirm the judgment
of the trial court.
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Jane Bland
Justice
Panel consists of Justices Bland, Brown, and Lloyd.
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