SMS Fin., LLC v. CBC Fin. Corp.

This opinion is subject to revision before final
publication in the Pacific Reporter
2017 UT 90IN THE
SUPREME COURT OF THE STATE OF UTAH
SMS FINANCIAL, LLC,
Appellant,
v.
CBC FINANCIAL CORPORATION and BARTON MAYBIE,
Defendants,
and
CALL CENTER BUILDING, LLC, †
Appellee.
No. 20150916
Filed December 27, 2017
On Direct Appeal
Third District, West Jordan
The Honorable James Gardner
No. 136400004
Attorneys:
Zachary E. Peterson, Salt Lake City, for appellant
David M. Bennion, Salt Lake City, for appellee
JUSTICE HIMONAS authored the opinion of the Court, in which CHIEF
JUSTICE DURRANT, ASSOCIATE CHIEF JUSTICE LEE, JUSTICE PEARCE, and
JUDGE HYDE joined.
Having recused herself, JUSTICE DURHAM did not participate
herein; DISTRICT COURT JUDGE NOEL HYDE sat.
_____________________________________________________________
†Call Center Building, LLC was an intervenor in the district court
below and is the sole appellee before this court. CBC Financial
Corporation and Barton Maybie have not joined this appeal.
SMS FINANCIAL v. CBC FINANCIAL
Opinion of the Court
JUSTICE HIMONAS, opinion of the Court:
INTRODUCTION
¶1 Does the doctrine of equitable conversion operate to protect
a buyer of real property’s interests in the land from a seller’s
creditors from the time the buyer’s contract is capable of specific
enforcement? In a well-reasoned decision, the district court
determined that the Real Estate Purchase Contract (REPC) at issue
was an executory real estate contract and, as such, it was “subject to
the equitable conversion doctrine.” Thus, the district court
concluded that the seller’s creditor was unable to attach a judgment
lien to land that the seller had already entered into a REPC to sell.
SMS Financial, LLC appeals this judgment, arguing that equitable
conversion doesn’t apply to noninstallment land sales contracts, or,
alternatively, that unfulfilled conditions in the REPC prevented it
from being specifically enforceable at the time SMS recorded its
judgment.
¶2 SMS’s arguments are unpersuasive. We agree with the
district court’s analysis, hold that the doctrine of equitable
conversion operates to protect a buyer’s interest in the land from the
time a land sales contract is capable of being specifically enforced by
the buyer and, therefore, affirm the district court’s decision.
BACKGROUND
¶3 In October 2012, SMS Financial obtained a judgment against
CBC Financial Corporation in a Nevada state court. At that time,
CBC owned a piece of real property located in Salt Lake County.
SMS domesticated its judgment in Utah’s Third District Court on
January 16, 2013, but it didn’t record an abstract of judgment with
the Salt Lake County Recorder’s Office, as required by Utah Code
section 78B-5-202, until March 4, 2013.
¶4 Meanwhile, between the time SMS domesticated its
judgment and recorded it, CBC entered into a REPC on February 15,
2013, to sell the Salt Lake County property to Kevin Gates or assigns
for $1,500,000. Mr. Gates put down $10,000 in earnest money on
February 19, 2013. Mr. Gates subsequently assigned his rights under
the REPC to Call Center Buildings, LLC on March 19, 2013.
¶5 On March 21 and 26, 2013, Gates or Call Center received title
commitments for the property that identified SMS’s judgment lien
on the property. Despite this, the sale under the REPC successfully
closed, and CBC conveyed the property to Call Center by a special
warranty deed on March 27, 2013. It wasn’t until May 12, 2015 that
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SMS filed for a writ of execution on its lien against the property. Call
Center intervened in the action to protect its right to the property.
The district court denied SMS’s writ of execution, concluding that
the doctrine of equitable conversion applied and that CBC didn’t
have a property interest at the time SMS recorded its abstract of
judgment, preventing the lien from attaching to the property. SMS
appeals this determination. We have jurisdiction pursuant to Utah
Code section 78A-3-102(3)(j).
STANDARD OF REVIEW
¶6 “We review a grant of equitable relief for an abuse of
discretion.” Mack v. Utah State Dep’t of Commerce, Div. of Sec., 2009 UT
47, ¶ 22, 221 P.3d 194. But “[w]e review the underlying legal
questions . . . for correctness.” Id.ANALYSIS
¶7 This court has long applied the doctrine of equitable
conversion to executory contracts for the sale of land. See, e.g., Allred
v. Allred, 393 P.2d 791, 792 (Utah 1964) (“As a general rule an
enforceable executory contract of sale has the effect of converting the
interest of the vendor of real property to personalty.”). Our prior
cases have only applied the doctrine of equitable conversion to
seller-financed installment contracts for the sale of land. See, e.g.,
Cannefax v. Clement, 818 P.2d 546, 546–47 (Utah 1991); Estate of
Willson v. State Tax Comm’n, 499 P.2d 1298, 1299 (Utah 1972); Allred,
393 P.2d at 792. And SMS urges us to limit the application of
equitable conversion to installment contracts. Alternatively, SMS
argues that the REPC wasn’t specifically enforceable when it
recorded its judgment against CBC, precluding the application of
equitable conversion in this case. However, the only conditions that
hadn’t been satisfied wouldn’t preclude the buyer from seeking
specific performance. In opposition, Call Center argues that the
principles behind equitable conversion warrant its application when
a land sale contract becomes capable of specific enforcement.
¶8 While the court of appeals has previously held that
equitable conversion applies to noninstallment land sale contracts,
Lach v. Deseret Bank, 746 P.2d 802, 804, 806 (Utah Ct. App. 1987),
we’ve yet to decide that issue. We take this opportunity to express
our general agreement with the court of appeals on this issue and to
hold that the doctrine of equitable conversion operates to protect a
buyer’s interests in land when a land sale contract becomes capable
of specific enforcement by the buyer, including where buyer-friendly
conditions have yet to be satisfied.
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SMS FINANCIAL v. CBC FINANCIAL
Opinion of the Court
I. THE DOCTRINE OF EQUITABLE CONVERSION OPERATES TO
PROTECT A BUYER’S INTERESTS IN THE LAND FROM A
SELLER’S CREDITORS WHEN AN EXECUTORY CONTRACT FOR
THE SALE OF LAND BECOMES CAPABLE OF SPECIFIC
ENFORCEMENT BY THE BUYER
¶9 The doctrine of equitable conversion “emanates from the
maxim that equity treats that as being done which should be done.”
Noor v. Centreville Bank, 996 A.2d 928, 932 (Md. Ct. Spec. App. 2010)
(citation omitted) (internal quotation marks omitted). “[T]he doctrine
of equitable conversion applies to transform a [seller’s] interest in a
land sale contract from a real property interest into a personal
property interest.” Cannefax v. Clement, 818 P.2d 546, 548 (Utah 1991).
Similarly, “[t]he [buyer] is said to convert the monetary interest that
he has in the property to an interest in real estate so that he may
invoke the powers of an equity court to compel specific performance
of the real estate contract.” Butler v. Wilkinson, 740 P.2d 1244, 1255 n.5
(Utah 1987).
¶10 However, this isn’t to say that it would be appropriate to
apply the doctrine of equitable conversion in every case. The
doctrine should be applied when it “serves to carry out the apparent
intent” of the parties. Allred v. Allred, 393 P.2d 791, 792 (Utah 1964);
see also Cannefax, 818 P.2d at 549 n.1 (“The parties clearly intended to
convey unencumbered title to the land. They certainly did not intend
that after they entered into the contract and after payments were
made, the vendor’s judgment creditors could obtain and execute on
the vendee’s property to the extent the contract was executory.”)
Conversely, it would be inappropriate to apply the doctrine to “alter
[a] contract,” Cannnefax, 818 P.2d at 548 (citing Reynolds v. Van
Wagoner, 592 P.2d 593, 594 (Utah 1979)), to thwart the express
contractual desire of the parties to reserve equitable title in the seller
until the deed was delivered or where a contract explicitly excludes
specific performance as a remedy. See Noor, 996 A.2d at 935–36
(refusing to apply equitable conversion where the contract
“reserv[ed] equitable title in [the seller] until delivery of the deed”);
Benedict v. United States, 881 F. Supp. 1532, 1548–49 (D. Utah 1995)
(“Whatever the partnerships had, it was not an equitably converted
property interest . . . as the purchase agreement limited their
remedies to exclude specific performance.”).
¶11 Thus, we disavow today any language in our case law that
could be read to require the application of the doctrine “at the
moment the contract is created” in circumstances where the contract
wouldn’t be immediately specifically enforceable. Lach v. Deseret
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Bank, 746 P.2d 802, 805 (Utah Ct. App. 1987). Instead, we conclude
that the doctrine operates to protect a buyer’s interests from a seller’s
creditors as soon as the contract becomes capable of specific
enforcement by the buyer—in other words, at the time the buyer
could sue the seller for specific enforcement of the contract if the
seller fails to perform. See Estate of Willson v. State Tax Comm’n, 499
P.2d 1298, 1300 (Utah 1972) (noting that “the real estate is, as to the
vendor, regarded as converted into personalty from the time of the
execution of the contract” in a case where the vendor could have
sued for specific performance from the moment of signing).
¶12 This specific enforcement limitation is supported by both
case law on equitable conversion and the intent of the parties. Our
cases have long tied, albeit indirectly, the application of equitable
conversion to the availability of specific performance. See, e.g.,
Cannefax, 818 P.2d at 549 (“[A] vendor who breaches a land sale
contract in an attempt to retain the property will be subject to either
damages or a decree for specific performance.”); Butler v. Wilkinson,
740 P.2d 1244, 1255 (Utah 1987) (“The doctrine [of equitable
conversion] gives a vendee the right to obtain a decree of specific
performance from a court of equity.”); Estate of Willson, 499 P.2d at
1300 (noting that the sellers “could have sued for specific
performance in the event the buyers refused to perform their part of
the contract”); Allred, 393 P.2d at 792 (noting that “there appears no
good reason why the doctrine of ‘equitable conversion’ should not
be applied” where the vendors “could have sued for specific
performance in the event the vendees . . . refused to perform their
part of the agreement”); Lach, 746 P.2d at 805 (Equitable conversion
applies to “an enforceable executory contract of sale [upon which an
action for specific performance could be brought] . . . .” (first
alteration in original) (quoting Estate of Willson, 499 P.2d at 1300)).
But we don’t require an actual breach of the contract by the seller for
equitable conversion to apply—it’s sufficient that the transfer of title
is solely dependent upon events outside of the seller’s hands,
entitling the buyer to specific performance if the seller fails to
perform. See Cannefax, 818 P.2d at 549–50 (“Even though the vendor
may retain title to the property, that title is effectively held for the
benefit of the vendee, to whom it will pass if the contract is carried
out.”); Estate of Willson, 499 P.2d at 1300 (“As a general rule an
enforceable executory contract of sale has the effect of converting the
interest of the vendor of real property to personalty.” (citation
omitted)).
¶13 Other courts have directly considered this issue and
determined that, based on a “well-recognized caveat” to equitable
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SMS FINANCIAL v. CBC FINANCIAL
Opinion of the Court
conversion, “which also emanates from the underlying equity
maxim, . . . for equitable conversion to apply, there must, in fact, be a
clear duty on the part of the seller to convey the property, a duty
enforceable by an action for specific performance.” Noor, 996 A.2d at
933 (“[E]quitable conversion would not take effect until that
condition or contingency [on a seller’s duty to convey] is resolved to
the point that the duty can be specifically enforced.”); see also
Benedict, 881 F. Supp. at 1548 (noting that equitable conversion “is
firmly linked to the specific enforceability of the contract”) (citation
omitted)); Francini v. Town of Farmington, 557 F. Supp. 151, 155
(D. Conn. 1982) (“[B]efore one can claim equitable title, one must be
in a position that a court of equity could, in exercising its jurisdiction
over the parties, convey legal title.”); Steele v. Rosenfeld, LLC, 936 So.
2d 488, 493 (Ala. 2005) (“[E]quitable conversion is applicable only
when there is a specifically enforceable contract between the parties, and
the changes in the rights, duties, powers, and liabilities of the parties
that result from the making of the contract are consequences of the
equitable right to specific performance . . . .” (citation omitted));
Ocean Ave. LLC v. Cty. of L.A., 173 Cal. Rptr. 3d 445, 452 (Cal. Ct.
App. 2014) (linking equitable conversion to specific performance);
Southport Congregational Church—United Church of Christ v. Hadley,
128 A.3d 478, 485 (Conn. 2016) (“[T]he contract must be enforceable
for equitable conversion to apply . . . .”); DOBBS, LAW OF REMEDIES
§ 4.3(8) (2d ed. 1993) (“[T]he equitable conversion doctrine holds that
when parties enter into a sales contract that is subject to specific
performance, the equity court will regard the seller as a kind of
trustee. He holds legal title, but only for the purpose of performing
the contract by conveying to the buyer.”).
¶14 The “capable of specific enforcement” requirement also
reflects the parties’ intent. It cannot be said that the parties intended
for equitable title to pass to the buyer if the buyer couldn’t
specifically enforce the contract. See, e.g., Southport Congregational
Church, 128 A.3d at 485 (“[T]he contract must be enforceable for
equitable conversion to apply; otherwise, it cannot be said that the
parties intended for title to pass to the buyer at execution.”). “[A]nd
equity can hardly regard that as presently done which the parties to
a contract have agreed shall be done only in the future.” Anderson v.
Yaworski, 181 A. 205, 207 (Conn. 1935).
¶15 The fact that a buyer may have contractual damage
remedies or the ability to cancel the contract does not necessarily
negate the possibility of equitable conversion, especially where real
property is at interest. Specific performance, as with any equitable
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remedy, is only appropriate where “damages are inadequate and . . .
equitable relief will result in more perfect and complete justice.”
Thurston v. Box Elder Cty., 892 P.2d 1034, 1040 (Utah 1995). But
“[r]ealty has always been held to be unique,” Eckard v. Smith, 527
P.2d 660, 661 (Utah 1974), and in the case of the sale of land, “the
inadequacy of the legal remedy is well settled,” Cummings v. Nielson,
129 P. 619, 624 (Utah 1912) (citation omitted). Further, to limit Call
Center to its contractual remedies of rescinding the agreement and
receiving a return of its earnest money deposit would be to subvert
the contracting parties’ express intent to permit Call Center to seek
specific performance. See Kelley v. Leucadia Fin. Corp., 846 P.2d 1238,
1242 (Utah 1992). And if Call Center’s sole remedy was to rescind the
agreement, CBC would be able to breach the contract with
impunity. 1 Id.¶16 SMS argues that our result today would allow a judgment
debtor to enter into an escrow agreement and leave it open
indefinitely, thus effectively defeating a judgment creditor’s lien
rights. But, as we’ve previously noted, “[t]he need to enforce
judgments is not so great that a lien must attach to property in the
process of being transferred and to which [a seller’s] rights are
contractually limited.” Cannefax, 818 P.2d at 550. And, there are three
reasons we don’t share SMS’s concern that our holding will create a
loophole around judgment liens.
¶17 First, we’re only concluding that equitable conversion
operates to protect the buyer’s interests in the land from a seller’s
creditors when a buyer ultimately closes on a land sale contract.
“When we speak of conversion we are not describing a condition of
the property for all purposes with respect to everybody but are
giving a name to a situation resulting from the application of
equitable doctrines to a state of facts between certain parties.” First
Sec. Bank of Idaho, Nat’l Ass’n v. Rogers, 429 P.2d 386, 389 (Idaho 1967)
(quoting Roscoe Pound, The Progress of the Law 1918–1919, 33 HARV.
L. REV. 813, 831 (1920)). We do not decide what rights in the
property, if any, a seller may retain to which a judgment creditor
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1 This is not, of course, to say, that the parties couldn’t
contractually limit the buyer’s remedy to rescinding the agreement
or exclude specific performance as a remedy. See Kelley v. Leucadia
Fin. Corp., 846 P.2d 1238, 1242–43 (Utah 1992). But, we’ll not create
such restrictions for the parties when they’ve not done so for
themselves. Id.7
SMS FINANCIAL v. CBC FINANCIAL
Opinion of the Court
may attach. Nor do we decide what rights in the property, if any, a
buyer has to which a buyer’s judgment creditor could attach. 2 We’re
also not faced with facts like those in Ocean Avenue, where the buyer
ultimately failed to close on the property, and we don’t decide
whether equitable conversion would apply in such a scenario. 173
Cal. Rptr. 3d at 452.
¶18 Second, courts need not apply equitable conversion in cases
where a contract is “a sham” or the parties “were in cahoots.” In re
Hodes, 402 F.3d 1005, 1014 (10th Cir. 2005). “Utah courts have long
recognized that ‘he who seeks equity must do equity.’” Hill v. Estate
of Allred, 2009 UT 28, ¶ 22, 216 P.3d 929 (citation omitted).
¶19 Finally, a judgment creditor isn’t without other remedies. If
the parties entered the land sales contract with the intent of
defrauding the seller’s creditors, the creditors have rights under
Utah’s Uniform Voidable Transactions Act. UTAH CODE §§ 25-6-101
through -502. Additionally, nothing in this opinion “prevent[s] the
judgment creditor from reaching the [seller’s] interest in the
property,” such as by garnishing the purchase price or “by executing
on the [seller’s] interest in the contract.” Cannefax, 818 P.2d at 550.
¶20 While not material to our decision, we note that, ironically,
the rule SMS asks us to reach would place its interests above the
buyer and previous judgment creditors who settled their interests
and would produce an inequitable result. “[A] judgment lien has no
greater dignity in property law than the nature of the property
interest to which it attaches.” Butler, 740 P.2d at 1257. Had SMS
recorded its judgment lien before CBC entered into the REPC, SMS’s
_____________________________________________________________
2 In Butler v. Wilkinson, we determined that a vendee had an
equity interest in the “appreciated value of the property over the
contract purchase price as long as his or her interest has not been
forfeited” to which a buyer’s creditor could attach a lien. 740 P.2d
1244, 1256 (Utah 1987). And we noted that a vendee “rescind[ing] the
contract under which his equitable interest arises does not . . .
extinguish creditors’ judgment liens that attached during the
vendee’s ownership of the equitable interest.” Id. at 1257–58. We’re
not presented with a judgment lien attached by the buyer’s creditors
in this case. Thus, we don’t decide if a buyer has an equity interest in
the property to which a buyer’s creditor could attach, especially in
circumstances where the buyer ultimately fails to close on the
contract.
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lien would have been junior to four other liens—liens which were
still unsatisfied by over $3,000,000 even after applying the entire
REPC purchase price. There’s no scenario in which SMS would have
been able to realistically recover any money through a lien on the
property. CBC and Call Center dealt with the four other lien holders,
successfully negotiating away those encumbrances with the
purchase price of the REPC. Call Center could in good faith rely on
the holding in Lach to determine that SMS had no interest in the
property which needed to be addressed when negotiating away the
current encumbrances. SMS asks us to allow it to attach to Call
Center’s interest in the land, now free from the other more senior
encumbrances which would have effectively prevented its recovery.
That is anything but an equitable result.
¶21 Based upon the equitable considerations, and the policies
and maxim underlying the doctrine of equitable conversion, we
conclude that the doctrine of equitable conversion operates to protect
a buyer’s interests in the land from the seller’s creditors from the
time the land sales contract becomes capable of specific enforcement
by the buyer. This decision is in keeping with this court’s prior
decisions, courts across the country, and the intent of the parties.
II. UNFULFILLED BUYER-FRIENDLY CONDITIONS DO NOT
PRECLUDE THE OPERATION OF THE DOCTRINE OF
EQUITABLE CONVERSION
¶22 Equitable conversion recognizes that, once a contract is
specifically enforceable by the buyer, “title is effectively held for the
benefit of the [buyer], to whom it will pass if the contract is carried
out.” Cannefax v. Clement, 818 P.2d 546, 550 (Utah 1991) (emphasis
added); see also Estate of Willson v. State Tax Comm’n, 499 P.2d 1298,
1300 (Utah 1972) (noting that equitable conversion applies “pending
the completion of an enforceable executory contract for the sale of
real estate”); In re Hodes, 402 F.3d 1005, 1012 (10th Cir. 2005) (The
“equitable conversion doctrine . . . is anticipatory; it gets a jump on
reality by imagining the conversion . . . in advance. The seller is
obliged in equity to convey [the realty at issue] in exchange for the
price, so he is treated as if he already had.” (alterations in original)
(quoting DOBBS, LAW OF REMEDIES § 4.3(8) (2d ed. 1993))). This is not
thwarted if the ultimate transfer of legal title is dependent upon “an
event which is completely out of the hands of the [seller].” Cannefax,
818 P.2d at 549; see also Estate of Willson, 499 P.2d at 1300 (noting
equitable conversion applied to a seller’s interest where “the transfer
of legal title and record title [was] dependent only upon the acts and
conduct of the buyer”). In reality, equitable title is merely “a right
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SMS FINANCIAL v. CBC FINANCIAL
Opinion of the Court
possessed by a person to have the legal title to property transferred
to him upon the performance of specified conditions.” Citizens Nat’l
Bank of Kirksville, Mo. v. Comm’r, 122 F.2d 1011, 1014 (8th Cir. 1941)
(citation omitted).
¶23 SMS argues that equitable conversion would be
inappropriate in this case because yet-to-be fulfilled conditions in the
REPC precluded Call Center from seeking specific performance.
Specifically, SMS points to unfulfilled terms in the REPC at the time
the judgment lien was filed that required that the parties do the
following: CBC to provide seller disclosures; Call Center to complete
buyer undertakings and additional due diligence; Call Center to
approve the seller disclosures, buyer undertakings, and additional
due diligence; Call Center to conduct a final walk-through; and CBC
to convey title free of encumbrances. But contractual conditions can
be waived by the benefitted party and do not prevent specific
performance. Eliason v. Watts, 615 P.2d 427, 430 (Utah 1980). With the
exception of the buyer undertakings and the duty to convey title, the
conditions SMS raises were expressly for the benefit of, or waivable
by, Call Center. Although alleged buyer undertakings in the REPC
were “for the benefit of both the Buyer and the Seller,” none of the
optional buyer undertaking checkboxes were selected on the REPC.
And the requirement to convey clear title wasn’t a condition to
CBC’s performance, but a covenant for which CBC could be sued for
failure to perform. See Mind & Motion Utah Invs., LLC v. Celtic Bank
Corp., 2016 UT 6, ¶ 19, 367 P.3d 994; see also Kelley v. Leucadia Fin.
Corp., 846 P.2d 1238, 1242 (Utah 1992) (“Specific performance with an
abatement in the purchase price has long been recognized as an
appropriate remedy when a seller refuses to convey.”).
¶24 SMS also contends that Call Center wasn’t entitled to
specific performance when SMS recorded its judgment lien because
Call Center hadn’t yet tendered the purchase price. This isn’t the law
in Utah. “It is well-settled that a party who purchases property
under an executory real estate contract obtains a recognizable
interest in the property before the contract is paid in full.” Pioneer
Builders Co. of Nev. v. K D A Corp., 2012 UT 74, ¶ 81, 292 P.3d 672.
And while a party must be prepared to tender performance in order
to be entitled to specific performance, see Kelley, 846 P.2d at 1243,
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we’ve been presented with no evidence that Call Center wasn’t
prepared to complete performance. 3
CONCLUSION
¶25 We hold that CBC’s performance wasn’t subject to any
conditions that would preclude Call Center from seeking specific
performance. Call Center could, at its option, seek to enforce the
REPC through an action for specific performance. Thus, Call
Center’s interests are protected by the doctrine of equitable
conversion from SMS’s judgment lien.
¶26 Based on the principles and maxim underlying the doctrine
of equitable conversion, we hold the doctrine of equitable conversion
operates to protect the buyer’s interests in the property from the
seller’s creditors once the contract for the sale of land becomes
capable of specific enforcement by the buyer. The decision of the
district court is affirmed.
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Call Center did tender complete performance on March 28, 2013
3
when Call Center closed on the property.
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