throbber
Case 2:16-cv-01790-SDW-LDW Document 143 Filed 02/22/21 Page 1 of 12 PageID: 2013
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`NOT FOR PUBLICATION
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`UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF NEW JERSEY
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`COFUND II LLC,
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`Plaintiff,
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`v.
`HITACHI CAPITAL AMERICA CORP.,
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`Defendant.
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`Case No. 16-cv-1790 (SDW) (LDW)
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`TRIAL OPINION
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` February 22, 2021
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`WIGENTON, District Judge.
`This Court held a bench trial for three days in this matter regarding Plaintiff CoFund II
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`LLC’s (“Plaintiff” or “CoFund”) breach of contract claim against Defendant Hitachi Capital
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`America Corp. (“Defendant”). This Court has jurisdiction pursuant to 28 U.S.C § 1332 and venue
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`is proper pursuant to 28 U.S.C. § 1391. Based on the testimony and evidence presented at trial,
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`this Trial Opinion constitutes this Court’s findings of fact and conclusions of law pursuant to
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`Federal Rule of Civil Procedure (“Rule”) 52(a). For the reasons stated below, this Court finds that
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`Defendant is liable to Plaintiff for breach of contract.
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`I.
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`PROCEDURAL HISTORY
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`Plaintiff brought this action on March 31, 2016, claiming that Defendant is liable for breach
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`of contract (Count I), breach of fiduciary duty (Count II), tortious interference (Count III),
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`conversion (Count IV), and unjust enrichment (Count V). (D.E. 1.) On November 7, 2016, this
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`Court denied Defendant’s Motion to Dismiss or Stay this action in favor of non-party Forest
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`Capital, LLC’s (“Forest”) earlier-filed bankruptcy proceeding in the United States Bankruptcy
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`Court for the District of Maryland. (See D.E. 11, 20, 21.) Following Defendant’s Motion for
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`Summary Judgment, this Court dismissed Counts II – V. (See D.E. 83, 90, 91.) This Court held
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`a virtual bench trial on Count I on November 10–12, 2020, and the parties subsequently submitted
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`post-trial briefs with proposed findings of fact and conclusions of law. (D.E. 130–32, 138, 139.)
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`II.
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`FINDINGS OF FACT
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`This Court, writing primarily for the parties, makes the following findings of fact:
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`A.
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`The Governing Contracts
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`Plaintiff entered into a Master Participation Agreement (“MPA,” Exs. P-1 and D-3)1 with
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`Forest on January 12, 2012. Under the agreement, Plaintiff purchased participations in factoring2
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`transactions that Forest made with its clients. (See MPA § 2.) The amounts of Plaintiff’s
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`participations for particular factoring transactions (i.e., its “pro rata” interests in those transactions)
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`are set forth in 24 separate Participation Offer and Acceptance Forms that were signed by Plaintiff
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`and Forest between January 2012 and September 2015. (Exs. P-3 to P-26; see Ex. P-27 at CoFund-
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`2653 – CoFund-2667 (tracking Plaintiff’s monthly outstanding participation amounts, advances,
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`and repayments, for each Forest client from January 2012 to December 2015).)
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`In return for purchasing participations in the factoring transactions, Forest granted Plaintiff
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`a first-priority security interest in the collateral relating to each factoring transaction to the extent
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`of Plaintiff’s pro rata interest in those transactions. (MPA § 5.) However, Plaintiff’s interest in
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`any factoring transaction was limited to 50% of the total funds employed in the client account,
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`1 References to trial exhibits are to P-1, et seq., for Plaintiff’s exhibits and to D-1, et seq., for Defendant’s exhibits.
`References to trial transcripts identify the witness, volume (“TI”, “T2”, or “T3”), and page: line.
`2 A factoring transaction is one in which a business sells its accounts receivable (i.e., invoices) to a third party in order
`to generate cash. (See Dahm, T2, 246:13–24.)
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`2
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`regardless of Plaintiff’s initial investment. (MPA § 3(a); see Dahm, T2, 261:6 – 262:11.)3 Forest
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`was required to hold any funds in excess of Plaintiff’s 50% interest in reserve for Plaintiff to use
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`in future participations. (MPA §§ 3(b) and 3(d); see Dahm, T2, 262:12–15.) Plaintiff perfected
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`its security interest in the MPA-defined collateral on January 23, 2012, by filing a UCC financing
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`statement with the Maryland State Department of Assessments and Taxation. (Ex. P-2.)
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`On December 5, 2014, Defendant entered into its own agreement with Forest to lend money
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`to Forest. (Ex. D-1 (Loan and Security Agreement or “LSA”).) Under the LSA, Forest granted
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`Defendant a security interest in a broad swath of collateral, as defined by that agreement, but also
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`gave notice that the collateral may be subject to “Permitted Encumbrances,” which the agreement
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`identified as Plaintiff’s UCC financing statement filed on January 23, 2012. (LSA §§ 1.26 and
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`7.7; LSA Ex. A.) On December 16, 2014, Defendant filed its own UCC financing statement with
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`the Maryland State Department of Assessments and Taxation to perfect its security interests in “all
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`assets of Forest now owned or hereafter acquired.” (Ex. D-2 (capitalization omitted).)
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`Plaintiff and Defendant executed an Intercreditor Agreement (Ex. D-4) on December 19,
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`2014, to determine the priorities of their security interests in the collateral covered by their
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`respective agreements with Forest. Under the agreement, the parties agreed, inter alia, that:
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`The lien or security interest of any kind that [Plaintiff] may now have or hold in the
`future with respect to the CoFund Priority Collateral shall be superior to any lien
`or security interest that [Defendant] may now have or hereafter acquire in the
`CoFund Priority Collateral . . . .
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`(Intercreditor Agreement § 2.B.) The agreement defined “CoFund Priority Collateral” as “only
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`those amounts received by [Forest] which represent CoFund’s Pro Rata interest in a Transaction
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`3 Specifically, MPA § 3(a) states that “[CoFund’s] Investment in a Transaction as of any Settlement Date shall not
`exceed fifty percent (50%) of the aggregate principal amount of Advances to the Client then outstanding (Participant’s
`‘Maximum Permitted Investment’).” The MPA further defines “Settlement Date” as “the last business day of each
`month.” MPA § 1.
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`3
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`as well as CoFund’s Pro Rata interest in the tangible and intangible assets and property securing
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`the obligations relating to each Transaction.” (Intercreditor Agreement § 1.A.)4
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`The Intercreditor Agreement also provided, in relevant part:
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`If . . . any party receives Collateral (including Proceeds) with respect to which it is
`an Inferior Creditor and there is unpaid [Forest] indebtedness due to the Superior
`Creditor with respect to such Collateral, the Inferior Creditor receiving such
`Collateral shall be deemed to have received such Collateral (including Proceeds)
`for the use and benefit of the Superior Creditor and shall hold it in trust and shall
`immediately turn it over to the Superior Creditor to be applied upon the
`indebtedness of [Forest]. . . .
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`[Defendant] shall hold all funds representing CoFund Priority Collateral in trust for
`[Plaintiff].
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`(Id. § 4.D.)
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`Subsequently, on December 29, 2014, Forest, Defendant, and non-party Manufacturers and
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`Traders Trust Company (“M&T”) entered into a Blocked Account Agreement (“BAA”). (Ex. P-
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`30.)5 Under the terms of the LSA and BAA, Forest and/or Forest’s clients deposited all moneys
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`that Forest’s clients paid/owed to Forest into a blocked M&T account. (LSA § 8.11(a).)6 Also
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`under the terms of the BAA, Defendant had “sole dominion and control” of the blocked account
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`and Forest was unable to withdraw any moneys from the blocked account to pay Plaintiff. (BAA
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`§ 4(b).) Rather, M&T “transfer[red]. . . all available funds on deposit in the Blocked Account to
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`4 Similarly, the Intercreditor Agreement stated that “[t]he lien or security interest of any kind that [Defendant] may
`now have or hold in the future with respect to the Hitachi Priority Collateral shall be superior to any lien or security
`interest that [Plaintiff] may now have or hereafter acquire in Hitachi Priority Collateral.” (Intercreditor Agreement
`§ 2.A.) Hitachi Priority Collateral consisted of all of Forest’s property except CoFund Priority Collateral.
`(Intercreditor Agreement § 1.B.)
`5 The BAA was executed pursuant to the LSA. (See BAA at 1 (“WHEREAS, pursuant to that certain Loan Agreement,
`to be entered into on or about December 5, 2014 . . . .”).)
`6 LSA § 8.11(a) specifies that Defendant’s “dominion of funds,” comprising “all payments due [to Forest]” from “all
`Customers,” is a requirement of the loan provided in the LSA. (LSA § 8.11(a) (“The loan shall be on dominion of
`funds. . . . . [Forest] shall have no right to withdraw any funds from [the blocked account], all of [Forest’s] funds
`therein belong to [Defendant].”).) The BAA implements this provision by requiring that “the Blocked Account shall
`be under the sole dominion and control of [Defendant].” (BAA § 4(b).)
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`4
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`the account of [Defendant].” (BAA § 4(a).) This was corroborated by Defendant’s sole witness,
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`Toby Dahm, a Senior Vice President at Defendant during the relevant time period. (See Dahm,
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`T2, 272:4–7 (“[B]asically all of Forest Capital’s inbound cash came into a . . . blocked account.
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`That blocked account then [wa]s swept to Hitachi to pay down its line of credit.”).)
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`By this process, Plaintiff contends, Defendant received Cofund Priority Collateral that
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`Plaintiff is entitled to under the MPA. Defendant has not turned over these funds to Plaintiff,
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`allegedly in breach of the Intercreditor Agreement, which requires Defendant to “hold all funds
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`representing CoFund Priority Collateral in trust for [Plaintiff].” (Intercreditor Agreement § 4.D.)
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`B.
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`Forest’s Default and Bankruptcy
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`By letter on December 24, 2015, Plaintiff notified Forest and Defendant that Forest was in
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`default under the MPA with respect to its obligations to Plaintiff. (Ex. P-38.) On December 29,
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`2015, certain Israel-based junior creditors of Forest sent a letter to Forest’s then outside counsel,
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`copied to Plaintiff and Defendant, noting their own dispute with Forest and the need to reach a
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`“settlement agreement between all creditors, including the [junior creditors], which will adhere to
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`the different parties’ rights and references vis-à-vis Forest Capital and its available assets.” (Ex.
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`D-44 at 1; see Dahm, T2, 286:1 – 288:1.) The same junior creditors sent another letter in February
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`2016 reiterating their position. (Ex. D-45 at 1; see Dahm, T2, 305:4–17.)
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`Plaintiff also sent a letter to Defendant on March 21, 2016, requesting an immediate
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`accounting of all collateral Defendant had received from Forest since December 9, 2014, and the
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`immediate turnover of CoFund Priority Collateral. (Ex. P-58.) During this time, Defendant
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`maintained a collateral reserve in Plaintiff’s favor to protect any interest Plaintiff may have. (See
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`Dahm, T2, 306:20 – 307:7.) Mr. Dahm testified that, after Defendant collected out on its loan to
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`Forest, it released the blocked account along with its collateral reserve for Plaintiff back to Forest.
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`5
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`(Dahm, T2, 311:22 – 312:18.) At the time, this collateral reserve amounted to nearly $2 million.
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`(Ex. P-67 at 1.)
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`On March 24, 2016, certain junior creditors commenced bankruptcy proceedings against
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`Forest. In re Forest Capital, LLC, Case No. 16-13850 (D. Md. Bankr.); (see Ex. D-11 at 8).
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`Plaintiff was a party to that case. (See Goldmeier, T1, 97:6–18.) Plaintiff sued Defendant in this
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`Court shortly thereafter, on March 31, 2016. (D.E. 1.) The bankruptcy court approved the sale of
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`substantially all of Forest’s assets on May 31, 2016, including accounts in which Plaintiff had
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`funded participations. (Exs. D-9, D-10, D-11 at 8–11; Goldmeier, T1, 100:17 – 101:18.) Forest
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`commenced an adversary case on July 7, 2016, to determine the existence, validity, and priority of
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`various creditors’ rights to the assets of the bankruptcy estate. Forest Capital, LLC v. Hitachi Cap.
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`Am. Corp., Adv. No. 16-326 (D. Md. Bankr.); (see Ex. D-11 at 9). The adversary case settled on
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`March 15, 2019, with Plaintiff and Defendant both receiving proceeds. (See Ex. D-11 at 12.)
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`III. CONCLUSIONS OF LAW
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`A.
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`Defendant Breached the Intercreditor Agreement7
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`As this Court held in its summary judgment opinion, the Intercreditor Agreement is
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`governed by Michigan law. (See D.E. 90 at 6, 6 n.7.) “Under Michigan law, the elements of a
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`breach of contract claim are the following: (1) a contract existed between the parties, (2) the terms
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`of the contract required performance of certain actions, (3) a party breached the contract, and (4)
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`7 Defendant asks this Court to revisit its November 17, 2017, decision denying Defendant’s motion to dismiss, arguing
`that Plaintiff’s losses were caused by Forest and resolved in Forest’s bankruptcy case. (D.E. 139 at 14–15 ¶¶ 1–6.)
`However, as this Court explained in its original decision, and affirms now, the losses that Plaintiff alleges in this action
`were caused by Defendant’s breach of the Intercreditor Agreement, an issue which was not addressed in the
`bankruptcy proceeding. (See D.E. 20 at 5–6.) As this Court further explained in its decision denying Defendant’s
`motion for summary judgment on Count I, Plaintiff’s claim is that Defendant violated an express provision of the
`Intercreditor Agreement, not that Forest failed to make a payment. (See D.E. 90 at 7–8.) To the extent that Forest’s
`failure to make a payment to Plaintiff is the underlying harm that Plaintiff suffered, for the reasons discussed below,
`such harm only occurred because (1) under the BAA and LSA, Defendant required Forest to deliver funds due to
`Plaintiff to Defendant instead, and (2) Defendant allegedly breached the Intercreditor Agreement with respect to the
`use of those funds. This Court will therefore analyze the merits of Plaintiff’s claim.
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`6
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`the breach caused the other party injury.” Green Leaf Nursery, Inc. v. Kmart Corp., 485 F. Supp.
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`2d 815, 818 (E.D. Mich. 2007) (citation omitted). Here, Plaintiff claims that Defendant, the
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`Inferior Creditor with respect to CoFund Priority Collateral, violated § 4 of the Intercreditor
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`Agreement when it received funds pursuant to the LSA and BAA but did not turn over those funds
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`to Plaintiff.
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`The Intercreditor Agreement was a valid and enforceable contract under Michigan law.
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`Whereas Defendant had a security interest against Forest’s assets under the LSA, Plaintiff did not
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`loan money to Forest; rather, Plaintiff purchased from Forest a participation interest (i.e., an
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`ownership interest) in certain transactions that Forest made with its clients. As consideration for
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`the purchase, Plaintiff received, not a lien on Forest’s assets, but a participation that included “a
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`Pro Rata interest in the underlying Collateral and Financing Documents.” (See MPA §§ 1 and 2.)
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`Under the terms of the Intercreditor Agreement, moreover, Defendant was required to
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`“hold all funds representing CoFund Priority Collateral in trust for [Plaintiff].” (Intercreditor
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`Agreement § 4.) Pursuant to the BAA that Defendant, Forest, and M&T entered into shortly after
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`the Intercreditor Agreement was executed, Defendant was entitled to take, and took, “sole
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`dominion and control” over all funds attributable to the repayment of loans made by Forest to its
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`clients, including those loans which were owned in part by Plaintiff through its participations. (See
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`BAA § 4(b); Dahm, T2, 272:4–7.) The portion of those funds representing repayment of Plaintiff’s
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`participations belonged to Plaintiff, and Defendant had a duty to hold those funds in trust.
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`Defendant’s actions breached the Intercreditor Agreement in multiple respects. First,
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`Defendant “[e]nforce[d]” and “realize[d] [] its security interest in” the Cofund Priority Collateral
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`that had been collected and deposited into the blocked account at M&T, despite being an Inferior
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`Creditor for such collateral, in violation of § 4.A. Second, Defendant interfered with Plaintiff’s
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`7
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`participation interests by collecting Cofund Priority Collateral in the blocked account and not
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`“promptly release[ing]” it to Plaintiff, in violation of § 4.B. Third, Defendant “notif[ied] persons”
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`within its organization to “remit” the Cofund Priority Collateral to itself, in violation of § 4.C.
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`Fourth, Defendant received, and had full control over, 100% of the moneys paid by (or on
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`behalf of) Forest’s clients with respect to obligations owed by those clients to Forest. The moneys,
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`all of which were deposited into the blocked account, included (1) repayment of moneys that had
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`been advanced by Plaintiff for its participation interests, and (2) repayment of moneys that had
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`been advanced by Defendant under its LSA. To the extent that moneys deposited into the blocked
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`account represented repayment of the moneys that had been advanced by Plaintiff for its
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`participation interests, Plaintiff was the Superior Creditor and Defendant was the Inferior Creditor.
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`However, contrary to its obligations under § 4.D of the Intercreditor Agreement, Defendant did
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`not “receive[] such Collateral (including Proceeds) for the use and benefit” of Plaintiff, did not
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`“hold it in trust” for Plaintiff, and did not “immediately turn it over” to Plaintiff, to be applied upon
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`Forest’s indebtedness to Plaintiff.
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`B.
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`Defendant Did Not Prove Impossibility or Impracticability of Performance
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`In the alternative, Defendant argues that it is excused from performance under the
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`Intercreditor Agreement because performance was impossible or impracticable. Michigan courts
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`have applied the affirmative defenses of impossibility and impracticability interchangeably. See
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`Hemlock Semiconductor Operations, LLC v. SolarWorld Indus. Sachsen GmbH, 867 F.3d 692,
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`702 (6th Cir. 2017). The defense of impossibility provides that “‘when, due to circumstances
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`beyond the control of the parties the performance of a contract is rendered impossible, the party
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`failing to perform is exonerated.” Bissell v. L. W. Edison Co., 156 N.W.2d 623, 626 (Mich. Ct.
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`App. 1967) (citation omitted). Although absolute impossibility is not required, there must be a
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`8
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`showing of “impracticability because of extreme and unreasonable difficulty, expense, injury or
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`loss involved.” Id. (citation omitted).
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`Defendant contends that it was “impossible” for it to account to Plaintiff because it could
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`not determine what portion of the funds in the blocked account represented amounts attributable
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`to Plaintiff’s participations. (D.E. 139 at 23 ¶¶ 26–31.) Defendant argues that the parties relied
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`on Forest to identify the balance of CoFund Priority Collateral, but Forest did a terrible job of this,
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`making it impossible to track and understand what constituted Plaintiff’s collateral. (Id.)
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`Furthermore, there were other creditors making claims against the same funds as Plaintiff, and
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`Defendant was unable to disaggregate the priorities of the claims. (Id.; see Exs. D-44 and D-45.)
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`The accounting difficulty was exacerbated because Plaintiff failed to provide adequate information
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`and “lost track of where they were.” (Dahm, T2, 290:12 – 291:15.)
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`However, Defendant did not prove these assertions at trial. That the Israel-based junior
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`creditors claimed an interest in the funds in the blocked account did not render payment of the
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`amounts due to Plaintiff impossible or impracticable. From the beginning, the amounts in the
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`blocked account attributable to Plaintiff’s participations were Plaintiff’s property—not Forest’s—
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`which Defendant was holding in trust. Other creditors could not have had any interest in those
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`moneys. If there was a legitimate concern on the part of Defendant that other creditors might claim
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`some interest in the funds held in trust for Plaintiff, the appropriate action would have been to hold
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`the funds (and, if necessary, to interplead them), instead of disregarding its obligations as a trustee
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`under the Intercreditor Agreement and paying the moneys to itself.
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`Moreover, Defendant did not raise the issue of impossibility or impracticability of
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`performance at any time before the commencement of this lawsuit. (Goldmeier, T1, 91:14 – 93:3.)
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`In fact, as late as February 11, 2016, Mr. Dahm e-mailed Forest regarding his “methodology to
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`provide some protection against the claims that CoFund is asserting,” claiming to “maintain a
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`cushion” of “just under $1 million.” (Ex. P-57.) Meanwhile, Defendant had no difficulty reducing
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`its multimillion-dollar loan with Forest to zero between January and March 2016, while at the
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`same time withholding all money from Plaintiff. This Court therefore finds that Defendant’s
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`performance under the Intercreditor Agreement was neither impossible nor impracticable.
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`C.
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`Plaintiff is Entitled to Damages
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`1. Mr. Cohen Was Qualified to Testify
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`As an initial matter on the issue of damages, Defendant argues that Daniel Cohen’s
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`testimony must be stricken because his opinion did not meet the more demanding requirements of
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`Rule 26(a)(2)(B). Rule 26(a)(2) provides for two separate types of disclosure of expert opinions.
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`If the expert was “one retained or specially employed to provide expert testimony in the case or
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`one whose duties as the party’s employee regularly involve giving expert testimony,” then the
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`party must comply with the extensive disclosure requirements set forth in Rule 26(a)(2)(B).8 Fed.
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`R. Civ. P. 26(a)(2)(B). If the expert was not so retained or employed, Rule 26(a)(2)(C) only
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`requires the party to disclose “the subject matter on which the witness is expected to present
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`evidence” and “a summary of the facts and opinions to which the witness is expected to testify.”
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`Fed. R. Civ. P. 26(a)(2)(C).
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`
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`8 These requirements include:
`(i) a complete statement of all opinions the witness will express and the basis and reasons for them;
`(ii) the facts or data considered by the witness in forming them;
`(iii) any exhibits that will be used to summarize or support them;
`(iv) the witness's qualifications, including a list of all publications authored in the previous 10 years;
`(v) a list of all other cases in which, during the previous 4 years, the witness testified as an expert at
`trial or by deposition; and
`(vi) a statement of the compensation to be paid for the study and testimony in the case.
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`Fed. R. Civ. P. 26(a)(2)(B).
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`10
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`Here, Mr. Cohen is a managing member of Plaintiff and was not retained or specially
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`employed by Plaintiff to provide expert testimony in the case, nor do his duties as a managing
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`member of Plaintiff regularly involve giving expert testimony. Although Mr. Cohen’s testimony
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`partially relied on documents produced in this case, it is clear that “his opinion testimony ar[ose]
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`not from his enlistment as an expert but, rather, from his ground-level involvement in the events
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`giving rise to the litigation.” Downey v. Bob’s Disc. Furniture Holdings, Inc., 633 F.3d 1, 6 (1st
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`Cir. 2011) (citing Fielden v. CSX Transp., Inc., 482 F.3d 866, 869 (6th Cir. 2007)). Thus, although
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`Mr. Cohen prepared a written report, his report was not required to contain all of the elements set
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`forth in Rule 26(a)(2)(B), and his testimony will not be excluded.
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`2.
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`Calculation of Damages
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`Mr. Cohen testified that, in the first three months of 2016, Defendant “collected a little bit
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`over $9.1 million” from the blocked account at M&T Bank. (Cohen, T2, 193:1–16). Of this
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`collected amount, he testified, $1,553,613 represented monies on viable accounts on which
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`Plaintiff was owed $2,119,959 in unpaid participation interest at the end of 2015. (Cohen, T1,
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`137:16 – 141:12; Cohen, T2, 192:23 – 194:20; Ex. P-67.) Plaintiff argues that it is entitled to this
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`$1,553,613 in damages plus interest. (D.E. 138 at 47 ¶¶ 89–90.)
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`Defendant contends, based on Mr. Dahm’s testimony, that any recovery must be limited
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`by (1) the 50% limitation in the MPA; (2) the limitation to Plaintiff’s “pro rata” contribution under
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`the MPA as stated in the Participation Offer and Acceptance Forms; (3) excluding funding for
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`non-factoring transactions such as “security deposits” or “mobilization” loans; (4) excluding
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`accounts that were “improperly collateralized” in September 2015; and (5) excluding proceeds
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`Plaintiff received for identical accounts that were in the Forest bankruptcy. (D.E. 138 at 10–13
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`11
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`¶¶ 48–60.) Applying these limitations and exclusions, Defendant contends that Plaintiff is entitled
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`at most to $606,209 in principal damages. (Id. at 11 ¶ 48.)
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`The parties’ proposed findings of fact and conclusions of law on the issue of calculating
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`damages are, at times, unclear, convoluted, or inadequately explained. This Court will therefore
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`request that the parties submit supplemental briefs prior to its final determination of damages.
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`Each party’s supplemental brief should be no more than ten (10) pages double-spaced, clearly and
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`concisely setting forth the bases of its proposed damages calculation, including the legal and
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`factual support for its proposed inclusions, exclusions, and limitations, based on the record at trial.
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`IV. CONCLUSION
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`For the reasons set forth above, this Court finds in favor of Plaintiff regarding liability for
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`its breach of contract claim. The parties shall have fifteen (15) days to submit supplemental briefs
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`on the issue of damages only, as set forth above. An appropriate order follows.
`
`s/ Susan D. Wigenton_______
`SUSAN D. WIGENTON
`UNITED STATES DISTRICT JUDGE
`
`
`Orig:
`cc:
`
`
`
`
`
`
`Clerk
`Hon. Leda D. Wettre, U.S.M.J.
`Parties
`
`
`
`12
`
`

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