in Re: State Farm Automobile Insurance Company

COURT OF APPEALS
EIGHTH DISTRICT OF TEXAS
EL PASO, TEXAS
§
§
08-12-00176-CV
IN RE: STATE FARM MUTUAL §
AUTOMOBILE INSURANCE AN ORIGINIAL PROCEEDING
COMPANY, §
IN MANDAMUS
§
§
OPINION
In this original proceeding, State Farm Mutual Automobile Insurance Company seeks
mandamus relief from the trial court’s order denying its motion to sever Rosa and Alfonso Durans’
breach of contract claim from their extra-contractual claims and abate the extra-contractual claims
pending resolution of the breach of contract claim. For the reasons stated below, we deny
mandamus relief with respect to the portion of the trial court’s order denying abatement, but
conditionally grant mandamus relief with respect to the portion of the trial court’s order denying
severance.
FACTUAL AND PROCEDURAL BACKGROUND
In the underlying action, Rosa Duran was injured when struck by an underinsured motorist
while walking through the parking lot of a shopping center. In settling her claim with the
underinsured motorist, Rosa accepted from the motorist the full amount of liability insurance the
motorist had in force at the time of the accident – $25,000. Asserting that the $25,000 she
recovered was insufficient compensation, Rosa made a claim on two separate State Farm policies,
one issued to her husband Alfonso Duran and the other to her daughter Cecilia Duran. State Farm
offered Rosa $7,500 to settle both claims.
Dissatisfied, the Durans sued State Farm for breach of the insurance policy, violations of
Section 17.46 of the Deceptive Trade Practices Act and the prompt payment provisions of Chapter
542 of the Insurance Code, and violations of the common-law duty of good faith and fair dealing.
The Durans sought $50,000 in damages – $25,000 from each policy – for Rosa’s injuries and for
Alfonso’s claims of loss of consortium and of household services. Arguing that severance of the
Durans’ extra-contractual claims from their contract claim and abatement of the extra-contractual
claims pending resolution of the contract claim was necessary to avoid the prejudice it would
suffer in defending both claims in a single trial, State Farm moved to sever and abate. The trial
court denied State Farm’s motion.
MANDAMUS
To obtain mandamus relief from the order denying its motion to sever and abate, State
Farm must meet two requirements. State Farm must show that the trial court clearly abused its
discretion and that the benefits of mandamus outweigh the detriments to the extent that an
appellate remedy is inadequate. In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 135-36 (Tex.
2004)(orig. proceeding).
A trial court abuses its discretion if it reaches a decision so arbitrary and unreasonable as to
constitute a clear and prejudicial error of law. In re Cerberus Capital Mgmt., L.P., 164 S.W.3d
379, 382 (Tex. 2005)(orig. proceeding). When reviewing the trial court’s decision for an abuse of
discretion, we may not substitute our judgment for that of the trial court with respect to resolution
of factual issues or matters committed to the trial court’s discretion. See Walker v. Packer, 827
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S.W.2d 833, 839 (Tex. 1992); see also Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238,
242 (Tex. 1985). However, we are much less deferential when reviewing the trial court’s
determination of the legal principles controlling its ruling. See Walker, 827 S.W.2d at 840. A
trial court has no discretion in determining what the law is or applying the law to the facts, even
when the law is unsettled. Prudential, 148 S.W.3d at 135. A clear failure by the trial court to
analyze or apply the law correctly will constitute an abuse of discretion. Walker, 827 S.W.2d at
840.
Absent extraordinary circumstances, mandamus will not issue unless the relator lacks an
adequate remedy by appeal. In re Van Waters & Rogers, Inc., 145 S.W.3d 203, 210-11 (Tex.
2004)(orig. proceeding). Whether a clear abuse of discretion can be adequately remedied by
appeal depends on a careful analysis of costs and benefits of interlocutory review. In re McAllen
Med. Ctr., Inc., 275 S.W.3d 458, 464 (Tex. 2008)(orig. proceeding). Because it depends heavily
on circumstances, such a cost-benefit analysis must be guided by principles rather than by simple
rules that treat cases as categories. See id. In addition, we must consider whether mandamus
will spare the litigants and the public “the time and money utterly wasted enduring eventual
reversal of improperly conducted proceedings.” In re Team Rocket, L.P., 256 S.W.3d 257, 262
(Tex. 2008)(orig. proceeding), quoting Prudential, 148 S.W.3d at 136.
MOTION TO SEVER AND ABATE
State Farm argues that because it offered to settle the Durans’ entire contract claim, the trial
court should have severed the Durans’ extra-contractual claims from their contract claim and
abated the Durans’ extra-contractual claims pending resolution of the contract claim, and, by
failing to do so, abused its discretion. State Farm further contends that, without severance and
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abatement, it has no adequate remedy by appeal because it “stands to lose substantial rights by
being required to prepare for extra contractual claims that may be rendered moot, and may have
not even yet accrued.”
Standard of Review
We review an order denying the severance of extra-contractual claims from contract claims
and abatement of extra-contractual claims pending resolution of contract claims for an abuse of
discretion. Liberty Nat’l Fire Ins. Co. v. Akin, 927 S.W.2d 627, 629 (Tex. 1996).
SEVERANCE
1. Applicable Law
A trial court abuses its discretion if it fails to order a severance “[w]hen all of the facts and
circumstances of the case unquestionably require a separate trial to prevent manifest injustice, and
there is no fact or circumstance supporting or tending to support a contrary conclusion, and the
legal rights of the parties will not be prejudiced thereby, there is no room for the exercise of
discretion.” Womack v. Berry, 156 Tex. 44, 291 S.W.2d 677, 683 (1956)(orig. proceeding).
Prejudice is not presumed simply because contract claims and extra-contractual claims are joined
in the same action; accordingly, severance is not always mandatory. Allstate Ins. Co. v. Hunter,
865 S.W.2d 189, 193-94 (Tex.App.--Corpus Christi 1993, orig. proceeding); Progressive County
Mut. Ins. Co. v. Parks, 856 S.W.2d 776, 778 (Tex.App.--El Paso 1993, orig. proceeding).
However, when an insurer moves to sever an insured’s extra-contractual claims from a contract
claim following its offer to settle the insured’s entire contract claim, the trial court must sever the
insured’s extra-contractual claims from the contract claim because evidence of a settlement offer
creates prejudice. Akin, 927 S.W.2d at 630; Tex. Farmers Ins. Co. v. Cooper, 916 S.W.2d 698,
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701, 702 (Tex.App.--El Paso 1996, orig. proceeding)(holding that severance of contract claim
from extra-contractual claims is necessary when evidence of a settlement offer is relevant to the
extra-contractual claim).
Absent severance, an insurer is presented with a “Catch-22” in that its decision to admit or
exclude evidence of a settlement offer jeopardizes the successful defense of the other claim. For
instance, in defending against a contract claim, the insurer will insist on exercising its right to
exclude evidence of a settlement offer to negate liability. See Akin, 927 S.W.2d at 630; see also
TEX.R.EVID. 408. Conversely, in defending against extra-contractual claims, an insurer will
insist on exercising its right to admit evidence of a settlement offer to negate liability. See Akin,
927 S.W.2d at 630. Thus, by having to defend against these two types of claims simultaneously
and before the same jury absent severance, an insurer is prejudiced to such an extent that a fair trial
is unlikely. Id. Under such a scenario, the trial court has no choice but to sever in order to
protect the fairness of the proceedings and the interests of the parties. See State Farm Mut. Auto.
Ins. Co. v. Wilborn, 835 S.W.2d 260, 262 (Tex.App.--Houston [14th Dist.] 1992, orig.
proceeding).
Discussion
1. Abuse of Discretion
State Farm asserts that the trial court’s order denying severance is contrary to the principles
of law set forth above. We agree.
As established above, severance is required when an insurer offers to settle the entire
contract claim so as to avoid the unfair and prejudicial dilemma an insurer faces in simultaneously
defending against a contract claim and extra-contractual claims. Akin, 927 S.W.2d at 630;
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Cooper, 916 S.W.2d at 701, 702. Here, State Farm asserted in its motion and reply, and provided
proof to the trial court in the form of letters and affidavits from its claims representative, that it was
offering to settle in full each of Rosa’s “claim[s] for Underinsured Bodily Injured benefits” and
“all damages Rosa … claim[ed].”1 Because State Farm offered to settle in full Rosa’s contract
claims and the resulting damages therefrom, severance is required to avoid the unfair and
prejudicial dilemma State Farm would face in simultaneously defending against the Durans’
contract claim and their extra-contractual claims. See Akin, 927 S.W.2d at 630; Cooper, 916
S.W.2d at 701, 702.
The Durans respond that severance is improper because their claims brought pursuant to
Chapter 542 of the Insurance Code are not separate causes of action subject to severance, but are
instead a single cause of action combining an insurer’s contractual and statutory liability. In
support of their argument, the Durans refer to Lusk v. Puryear, 896 S.W.2d 377, 379
(Tex.App.--Amarillo 1995, orig. proceeding). However, the Durans’ reliance on Lusk is
misplaced.
In Lusk, the insured alleged that, by failing to pay benefits timely, the insurer breached the
insurance contract and violated the prompt payment provisions of Article 21.55 of the Insurance
Code.2 Lusk, 896 S.W.2d at 380. The court held that severance and abatement were improper.
Id. In so holding, the court reasoned that because damages for untimely payment authorized by
Article 21.55 were recoverable for the insurer’s failure to pay a claim for which it would be liable
under the contract, the insurer’s entire liability, both contractually and statutorily, “was put in issue
as one cause of action.” Lusk, 896 S.W.2d at 380.
1
The claims representative executed two affidavits. One was attached to State Farm’s amended motion to sever and
abate. The other, expanded and revised, was attached to State Farm’s reply to the Durans’ response to its motion.
2
Article 21.55 is the statutory predecessor to Chapter 542.
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But this situation is not present here. First, because the claims asserted in this case are
different and broader than those brought in Lusk, they are distinct claims. In Lusk, there was no
underlying coverage dispute; rather, the insured alleged that the insurer breached its insurance
contract solely by failing to pay benefits timely. Here, the Durans alleged in their petition that
State Farm violated Chapter 542 not only by failing to pay their claim promptly, but also by
engaging in various acts constituting unfair claim settlement practices, and, furthermore, that State
Farm breached its contract by failing to compensate them adequately for their loss. Second,
unlike the insurer in Lusk, State Farm offered to settle the Durans’ contract claim, a fact so
significant that it renders Lusk inapplicable and mandates resolution of this case pursuant to the
authorities cited above.
The Durans also contend that State Farm’s settlement offer is so insufficient that it does not
entitle State Farm to severance. First, the Durans argue that State Farm is not entitled to
severance because by failing to offer to settle their Chapter 542 prompt payment claims and
Alfonso’s loss of consortium claims, States Farm did not offer to settle “the entire dispute.”
Contrary to the Durans’ assertion, however, determining whether a coverage claim must be
severed from a bad faith claim does not hinge on an insurer’s offer to settle the “entire dispute,” but
rather on an insurer’s offer to settle the contract claim. See Akin, 927 S.W.2d at 630 (“In the
absence of a settlement offer on the entire contract claim, or other compelling circumstances,
severance is not required.”)[Emphasis added]; In re Republic Lloyds, 104 S.W.3d 354, 358
(Tex.App.--Houston [14th Dist.] 2003, orig. proceeding)(“Thus, pursuant to Akin, a severance is
required when the insurer has made a settlement offer on the entire breach of contract claim.”)
[Emphasis added].
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Second, citing to In re Republics Lloyds, the Durans argue that State Farm failed to prove
that it was entitled to severance because the affidavits and letters from its claims representative do
not affirmatively establish that it made an offer to settle the entire contract claim. In In re
Republics Lloyds, the court held that the insurer’s reliance on the insured’s proof of loss statement
and the check purportedly tendered to them for the amount set out in the statement did not
conclusively establish that the insurers offered to settle the entire breach of contract claim. 104
S.W.3d at 359-60. In so holding, the court concluded, in significant part, that the insurers did not
meet their evidentiary burden because the check neither contained any release language nor
indicated that it was payment in full and because no cover letter accompanied the check to
establish that the check was tendered, and, if so, in response to the insured’s claims. Id. at 359.
Here, in contrast, State Farm met its evidentiary burden by providing the trial court with letters and
affidavits from its claims representative that conclusively proved that State Farm offered to settle
each of Rosa’s contractual claims and the resulting damages therefrom.3
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The Durans posit that because State Farm failed to present and offer the second and revised affidavit from its claims
representative at the hearing on the motion and instead attached it to a reply submitted after the hearing, it has failed to
preserve for appeal its claim that the revised affidavit proves that its “offers were in ‘settlement of all damages.’” In
support, the Durans cite to In re Farmers Tex. County Mut. Ins. Co., No. 07-11-00396-CV, 2011 WL 4916303
(Tex.App.--Amarillo Oct. 17, 2011, orig. proceeding). However, In re Farmers is distinguishable.
There, the insurer filed a plea in abatement requesting the trial court abate all extra-contractual claims until
after resolution of the underinsured motorist claim. 2011 WL 4916303, at *1. After holding a hearing on the plea in
abatement, the trial court denied the plea on the record. Id. One month later, the insurer notified the trial court in a
letter that it had made a settlement offer to conclude the entire contract claim. Id. Notably, the letter did not request
the trial court reconsider its denial of the plea in light of its settlement offer. Id., at *1-2. The court held that the
insurer was not entitled to mandamus relief on the ground that it raised on appeal – abatement was necessary after a
settlement offer – because this was not the ground it had raised at trial – abatement was necessary after resolution of
the underinsured motorist claim. Id., at *2. In other words, the insurer failed to preserve its claim on appeal.
Here, unlike the trial court in In re Farmers, the trial court never ruled on the motion to sever and abate at the
conclusion of the hearing on the motion; rather, it denied the motion approximately six weeks after considering
additional briefing from the parties. It was in this additional briefing that State Farm included the affidavit about
which the Durans complain on appeal and which the trial court presumably considered in denying the motion. Thus,
unlike the insurer in In re Farmers, State Farm is not relying upon new evidence it never introduced at trial in support
of an argument on appeal that does not comport with its argument at trial. Rather, on appeal, State Farm relies upon
the same ground it raised at trial arguing why severance and abatement were necessary – because it made a settlement
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Because we agree with State Farm that severance of the Durans’ contract claim from their
extra-contractual claims is necessary based on the existence of an offer to settle the entire contract
claim, we hold that the trial court abused its discretion in denying State Farm’s motion to sever.
2. Inadequate Remedy
It is undisputed that because an order denying severance is not a final judgment, it is not
appealable. Beckham Group, P.C. v. Snyder, 315 S.W.3d 244, 245 (Tex.App.--Dallas 2010, no
pet.). Mandamus is therefore the appropriate avenue by which a party may seek review of a trial
court’s order denying severance. In re Liu, 290 S.W.3d 515, 518 (Tex.App.--Texarkana 2009,
orig. proceeding).
In this case, mandamus relief is appropriate because its benefits outweigh its detriments.
As established above, State Farm has a substantial right to have its liability decided without any
mention of a settlement offer. See, e.g., Akin, 927 S.W.2d at 630; Cooper, 916 S.W.2d at 701,
702; Willborn, 835 S.W.2d at 262. Severance of the Durans’ contract claims from their
extra-contractual claims is necessary to preserve that right, and an appeal is insufficient to protect
State Farm’s right. If State Farm obtains judgment on a favorable jury verdict, it cannot appeal.
If the Durans obtain a judgment against State Farm on an unfavorable jury verdict, State Farm
could not obtain reversal for the incorrect denial of severance unless the court of appeals concludes
that the trial court’s error “probably caused the rendition of an improper judgment . . . .”
TEX.R.APP.P. 44.1(a)(1). There is no guarantee that State Farm can do so. Even if State Farm
were to obtain a reversal, its substantial right will have been lost, in part, because only by a second
trial will the right be available to it. Accordingly, we hold that State Farm has no adequate
remedy by appeal.
offer. Accordingly, State Farm has preserved its claim on appeal.
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ABATEMENT
Applicable Law
No rule of law mandates that a trial court abate extra-contractual claims when it orders
severance of such claims from a contract claim. See Akin, 927 S.W.2d at 631 (“Regardless of
which party prevails on the contract claim, we disagree than an abatement of the bad faith claim
until all appeals of the contract claim are exhausted is required.”); Cooper, 916 S.W.2d at 702
(“Even where settlement evidence requires separation of contract and bad faith claims, we see no
need to create an ironclad rule mandating abatement at any given time.”). Rather, in determining
whether extra-contractual claims should be abated until a contract claim becomes final, the trial
court should abate if abatement will: (1) promote justice; (2) avoid prejudice; and (3) promote
judicial economy. Cooper, 916 S.W.2d at 701. “It is and remains movant’s burden to
shown [sic] specifically how it will be prejudiced if abatement is not ordered, and to show concrete
evidence of how defending against plaintiff’s contract claims clashes with defending against
plaintiff’s bad faith claims.” Id.
Discussion
State Farm asserts that because “the law currently applicable to uninsured/underinsured
insurance claims . . . was not in existence . . . when [this Court] decided Cooper[,] the trial court
clearly abused its discretion by failing to abate the Durans’ extra-contractual causes of action.”
According to State Farm, In re United Fire Lloyds, 327 S.W.3d 250 (Tex.App.--San Antonio 2010,
orig. proceeding), a case adopting the reasoning of Brainard v. Trinity Universal Ins. Co., 216
S.W.3d 809 (Tex. 2006), reflects the law currently applicable in determining when abatement of
an uninsured/underinsured claim from related bad faith claims is required. Relying upon In re
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United Fire Lloyds, State Farm contends that, as a matter of law, it “should not be required to put
forth the effort and expense of conducting discovery, preparing for a trial, and conducting voir dire
on bad faith claims that could be rendered moot by the portion of the trial relating to
uninsured/underinsured benefits.” We disagree. State Farm’s reliance upon In re United Fire
Lloyds is misplaced. There, the court noted that in Brainard the Texas Supreme Court had
observed that an uninsured/underinsured insurer does not have to pay benefits until the insured
establishes the liability of the other motorist. In re United Fire Lloyds, 327 S.W.3d at 255.
Utilizing this observation, the court concluded that because the insured in its case had not
established the liability of the other motorist, abatement of the extra-contractual claims was
required so as not to burden the insurer with defending against such claims. Id. at 256.
Brainard, however, does not address when abatement of extra-contractual claims in an
uninsured/underinsured case is required. Rather, Brainard address whether an insured can
recover attorney’s fees from his or her uninsured/underinsured insurer if the insured fails to
establish the underinsured motorist’s fault and the amount of damages. Brainard, 216 S.W.3d at
818. In contrast, Akin, which has not been overruled, addresses squarely the issue of abatement in
the context of an uninsured/underinsured case and holds that abatement of a bad faith claim until
all appeals of a contract claim are exhausted is not required as a matter of law. See Akin, 927
S.W.2d at 631. Our decision in Cooper that abatement is not required, as a matter of law, even
where settlement evidence requires separation of contract and extra-contractual claims is in line
with Akin. See Cooper, 916 S.W.2d at 701. Accordingly, we conclude that In re United Fire
Lloyds does not govern the outcome of this case and therefore decline to follow its reasoning.
Even if In re United Fire Lloyds were applicable, it is nonetheless distinguishable. There,
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the insurer was under no contractual duty to pay uninsured/underinsured benefits because the
plaintiff had not established the negligence and underinsured status of the other motorist. See 327
S.W.3d at 256. Here, in their petition, the Durans allege that, with State Farm’s permission, Rosa
accepted from the underinsured motorist the full amount of liability insurance the motorist had in
force for the accident. This is a position the Durans maintained in their response to State Farm’s
motion to sever and abate, and which State Farm has never refuted, either in its pleadings to the
trial court or in its briefs to this Court. Indeed, as evidenced by its own admission in the motion to
sever and abate that State Farm offered to settle Rosa’s underinsured motorist claims, State Farm
acknowledged that it had a contractual duty to pay underinsured benefits to the Durans. Thus, as
established by the unequivocal assertions of fact in the Durans’ pleadings and by the
acknowledgement in State Farm’s pleadings, there is no dispute that the Durans reached a policy
limits settlement with the underinsured motorist, thereby proving the negligence and underinsured
status of the motorist. See Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d 887, 905 (Tex.
2000)(holding that plaintiff’s admissions in her pleadings that defendant owned and operated a
nursing home were unequivocal assertions of fact constituting judicial admissions that the
defendant was a nursing home provider).
Accordingly, notwithstanding State Farm’s assertion to the contrary, Cooper governs the
outcome of this case. Pursuant to Cooper, State Farm bore the burden to provide a mandamus
record establishing that: (1) defending against the Durans’ contract claim clashes with defending
against the extra-contractual claims; and (2) abating the extra-contractual claims promotes justice,
avoids prejudice, and promotes judicial economy. See Cooper, 916 S.W.2d at 701. State Farm
failed to carry its burden.
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The mandamus record does not support State Farm’s conclusion that it “should not be
required to put forth the effort and expense of conducting discovery, preparing for a trial, and
conducting voir dire on bad faith claims that could be rendered moot by the portion of the trial
relating to uninsured/underinsured benefits.” The record contains nothing but the petition, the
motion to sever and abate, the replies and responses in support and opposition to the motion, and
the order. It does not contain evidence, documentary or testimonial, establishing specifically how
the trial court’s failure to abate prejudices State Farm and promotes justice. For example, no
evidence exists to demonstrate that if the case were not abated, State Farm would be hampered in
its ability to conduct full, complete discovery and to marshal witnesses and documents. See
Cooper, 916 S.W.2d at 702. Likewise, there is no evidence in the record that establishes the
amount that State Farm would have to expend in preparing for simultaneous trials in the absence of
abatement. Id. Moreover, State Farm fails to address how abatement in this case promotes
judicial economy. For example, nowhere in its brief or in its trial pleadings does State Farm
discuss why abatement of the Durans’ bad faith claims, and a corresponding stay of discovery,
would not result in duplicative discovery when the coverage claim becomes final. Id. Likewise,
State Farm fails to discuss in its brief or trial pleadings why pretrial proceedings and discovery that
may affect both the Durans’ coverage and bad faith claims could not be efficaciously handled. Id.
In sum, there is nothing in the mandamus record that establishes that State Farm would be
prejudiced in defending against the Durans’ contract claim while defending against their
extra-contractual claims and that abatement would promote justice, avoid prejudice, and promote
judicial economy. Accordingly, abatement of the Durans’ bad faith claims is not required.
Under these circumstances, we hold that the trial court did not abuse its discretion in refusing to
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abate the Durans’ extra-contractual claims.
CONCLUSION
For the reasons set forth above, we conclude that State Farm has not shown that the trial
court abused its discretion in denying the abatement of the Durans’ extra-contractual claims
pending the determination of their contract claim, and State Farm is therefore not entitled to
mandamus relief. Accordingly, we deny the petition for writ of mandamus with respect to the
portion of the trial court’s order denying abatement. However, we conclude that State Farm has
satisfied both prerequisites to mandamus relief with respect to the portion of the trial court’s order
denying severance. Accordingly, we conditionally grant State Farm’s petition for writ of
mandamus and direct the trial court to vacate its order denying State Farm’s motion for severance
and issue an order severing the Durans’ contract claim from their extra-contractual claims.
Mandamus will issue only if the trial court fails to vacate the portion of its order denying severance
within ten days of this opinion.
August 8, 2012
CHRISTOPHER ANTCLIFF, Justice
Before McClure, C.J., Rivera, and Antcliff, JJ.
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