Murray v McIlroy
[2016] NZHC 2877
•30 November 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-001338
CIV-2016-404-002256 [2016] NZHC 2877
BETWEEN ANDREW SPENCER MURRAY
Plaintiff
AND
LEWIS ROBERT MCILROY Defendant
Hearing: 15 November 2016 Appearances:
David Beard for the Plaintiff
James LaHatte for the DefendantJudgment:
30 November 2016
JUDGMENT OF MOORE J
This judgment was delivered by me on 30 November 2016 at 3:30 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
Date:
MURRAY v MCILROY [2016] NZHC 2877 [30 November 2016]
Introduction and background
[1] The plaintiff, Mr Murray, is a real estate agent. In early 2013 he had completed his branch manager’s examinations but needed to pass a number of further papers in order to obtain his real estate agent’s licence. He had been working as a salesman at a local branch of a national agency.
[2] However, he decided to set up his own business as a real estate agent and for this purpose set up a company known as The Apartments Specialists (2013) Limited (“the company”). The new business would focus on the marketing, sale and lease of apartments in the Auckland market.
[3] However, before he was lawfully entitled to practice on his own he was required, through the operation of the Real Estate Agents Act 2008 (“the Act), to engage a licensed agent to supervise him and administer the trust account pending completion of his qualifications. Once qualified the Act would permit him to undertake these tasks himself without the statutory requirement of supervision or oversight of a fully licensed agent.
[4] For the purposes of selecting a suitable licensed agent Mr Murray met and interviewed a number of prospective agents including the defendant, Mr McIlroy. He decided to engage Mr McIlroy because he lived locally, appeared to have an extensive knowledge and experience of apartments and had previously operated two LJ Hooker branch offices.
[5] The agreement reached between Mr Murray and Mr McIlroy was that in exchange for Mr McIlroy’s services Mr Murray would pay him 10 per cent of the gross of all sales made by the business. The agreement was concluded on or around
23 May 2013. It was sealed with a handshake and never reduced to writing. Mr Murray states that he intended Mr McIlroy would continue in this role until at least when Mr Murray had completed his qualifications and was able to operate to the business on his own.
[6] It appears the arrangement initially worked well and amicably. Mr McIlroy managed the trust account and the paying of commissions to the company and other
contractors. Mr Murray effectively ran the balance of the business. Apparently the new business grew very well and was highly profitable.
[7] However in July 2015, at a meeting convened to discuss the issue, Mr Murray raised with Mr McIlroy the question of reducing his percentage. It seems this suggestion was driven by Mr Murray’s concern that Mr McIlroy’s actual contribution to the business was limited and would be more appropriately reflected by a five per cent commission on sales.
[8] Mr McIlroy’s reaction is captured in an email he sent to Mr Murray on
24 July 2015 following the meeting. In that correspondence, Mr McIlroy observed that he had spent days agonising over the meeting and expressed his disappointment at what he described as “… a long and successful partnership” appearing to come to an end. He noted that if Mr Murray had a licensee who could “do the job cheaper … and [Mr Murray] could trust him 100% it’s your call”. He added that he believed the
10 per cent commission was more than fair given what he described as the “risk and exposure” for him. He then developed the reasons for why he believed the 10 per cent commission was fair concluding that he saw himself not only as a very important part of Mr Murray’s team but also as one whose role should continue.
[9] Mr Murray’s response was that while he did not want to employ another licensee Mr McIlroy’s fee had become the business’ greatest cost noting that the next year’s business would easily attract $2 million in commissions of which the
$200,000 payment to Mr McIlroy was an excessive cost. He concluded by noting that while he had a great deal of respect for Mr McIlroy they needed to consider how long Mr McIlroy would remain in his role.
[10] It was after these events that Mr Murray discovered that Mr McIlroy had failed to account for the commissions on 26 sales between August 2014 and May
2016 totalling $274,540.81. Instead of these commissions being paid into an account operated by the company or Mr Murray they were paid to Mr McIlroy.
[11] It appears that Mr McIlroy accepted he had underpaid the commission
Mr Murray was entitled to. The parties attempted to negotiate a settlement and a
number of meetings took place with Mr McIlroy and Mr Murray’s lawyer, Mr Beard. Mr McIlroy did not have his own legal representative. By mid-2016 the parties were still some distance from concluding a settlement. Mr Beard sent Mr McIlroy a letter of demand which was followed by a meeting at which Mr Murray indicated he would be prepared to settle for $200,000. Throughout this time the correspondence records that Mr Beard repeatedly recommended to Mr McIlroy he obtain legal advice.
[12] No doubt reflecting the lack of progress in settlement discussions on 1 June
2016 Mr Beard sent Mr McIlroy draft electronic copies of the proceedings including the statement of claim. It would appear that further negotiations continued but proved fruitless.
[13] On 15 June 2016 the present proceedings were filed and served. These alleged breach of contract and breach of fiduciary duty/breach of constructive trust. They were served on Mr McIlroy the following day and contained the standard notice that a statement of defence was required to be filed within 25 working days.
[14] After being served Mr McIlroy elected not to instruct a lawyer. He says he decided on this course because he has very limited assets and, at the age of 67, his principal income is government superannuation. He has no income from any other sources. He also claims he experienced difficulties identifying a lawyer with experience in civil litigation and insolvency.
[15] The period in which a statement of defence needed to be filed expired on
20 July 2016, being 25 working days after service. On this date, Mr Beard emailed Mr McIlroy advising that his firm “does not litigate by stealth and deception”, adding “I am now writing to you out of respect and courtesy in my role as a legal practitioner and as an officer of the Court to expressly remind you of the 25 working day period within which you may file and serve a statement of defence upon my client.” He stated that after the 25 working day period expired Mr Murray reserved the right to seek judgment without further notice.
[16] It is unfortunate that this communication was not made earlier. It is also unfortunate the correspondence did not explicitly reveal the date by which the statement of defence was required to be filed. While I do not doubt it was written with the best of intention, its timing and tone may well have conveyed to Mr McIlroy that the period for filing his defence had not yet expired. Certainly the correspondence did not alert Mr McIlroy that the 25 day working period expired the very same day. In this way, Mr Beard’s correspondence may well have contributed to Mr McIlroy’s misunderstanding of the time limits.
[17] According to Mr McIlroy he attended the Registry on 22 July 2016 to make enquires but was told by an unidentified member of staff that he had until 16 August
2016 to file his statement of defence.
[18] By coincidence on that same day, because no statement of defence filed to date, an application was made for judgment by default in favour of Mr Murray in the amount of $274,540.81 together with costs and disbursements totalling $9,902.02. It seems that there was some uncertainty over whether the Deputy Registrar had the jurisdiction to grant judgment by default in these circumstances, and as a result this was not formally granted until 3 August 2016. It was, however, backdated to 22 July
2016. Execution of the judgment was stayed until 9 September 2016
[19] Mr McIlroy did eventually present a document which purported to be a statement of defence. This document is dated 12 August 2016 although it is unclear whether Mr McIlroy did in fact attempt to file it on this date. He also purported to counterclaim in the sum of $1.5 million for:
“… the emotional and financial stress this course of action from the plaintiff has caused me and the loss of income for the next eight years when I intended to retire at the age of 75.”
[20] He says the Registry refused to accept the documents for filing. In fact, it seems that the Registry only accepted the documents on a provisional basis pending proper consideration by a Judge of the High Court.
[21] It is not surprising that the Registry took this course of action. Quite apart from the fact that judgment by default had already been entered by the time
Mr McIlroy attempted to file these documents, his purported statement of defence did not answer the plaintiff’s claims and instead contained a general and discursive narrative of Mr McIlroy’s complaints and version of events. It did record that Mr Murray and Mr McIlroy verbally agreed that Mr McIlroy would be Mr Murray’s licensed real estate agent. In recognition of his services Mr McIlroy would be paid a fee of 10 per cent of the total commission. Mr McIlroy claimed the agreement was to remain in force for as long as Mr Murray wished. Mr McIlroy lamented Mr Murray’s decision to dispense with his services, which he claimed had contributed to Mr Murray’s business thriving as it had. He thus denied the plaintiff’s claim.
[22] I note that Heath J ultimately directed that the documents be rejected for filing in a Minute dated 25 August 2016.
[23] On 12 September 2016 Mr McIlroy was served with a bankruptcy notice for the amount of the judgment and costs.
[24] It appears that Mr McIlroy’s response was that the most he could offer by way of settlement was $40,000 and that his circumstances were so straightened that he and his wife were then residing with their daughter. Mr McIlroy is also reported to have said that if the offer was not accepted by Mr Murray it would be applied to meet legal fees or would be spent at the casino in an attempt to double it.
[25] On or about 23 September 2016 Mr McIlroy instructed Mr LaHatte to act for him. Mr LaHatte advised Mr Beard that an application to set aside the judgment and the bankruptcy notice would be made. This correspondence advised that Mr McIlroy’s offer of settlement would not exceed $40,000.
[26] On 28 October 2016 Mr Murray brought an ex parte application for a freezing order apparently relying on Mr McIlroy’s threat to dissipate any funds which might be available to settle his debt and furthermore that Mr McIlroy had failed or refused to provide disclosure of all his bank accounts, particularly the account or accounts into which the commissions had been wrongly paid.
Applications
[27] Before this Court is Mr McIlroy’s application to set aside the judgment by default and Mr Murray’s application for a freezing order.
[28] I shall deal with each of these applications in turn.
Application to set aside judgment
Legal principles
[29] Rule 15.10 of the High Court Rules provides for the power of the Court to set aside or vary a judgment obtained by default. Rule 15.10 states:
“Any judgment obtained by default under rule 15.7, 15.8, or 15.9 may be set aside or varied by the court on such terms as it thinks just, if it appears to the court that there has been, or may have been, a miscarriage of justice.”
[30] It is common ground that the judgment is one to which r 15.10 applies. The question for the Court is whether there has been or may have been a miscarriage of justice. This phrase, in the context of an application to set aside, was described by Jeffries J in KVR MacKinder Limited v Fine Art Productions Limited as requiring the Court to examine whether a possible miscarriage of justice would occur if the
judgment was allowed to stand.1
[31] The Court’s discretion is unrestricted and the test against which an application is to be considered is whether it is just in all the circumstances to set aside the judgment.2 It is common ground between the parties that the relevant factors include, but are not restricted to, the following considerations:
(a) the party’s failure to appear was excusable;
(b) there is a substantial ground of defence;
1 KVR MacKinder Limited v Fine Art Productions Limited HC Wellington A37/84, 17 April 1986 at [4].
2 Russell v Cox [1983] NZLR 654 (CA) at 659; Norwich Winterthur Insurance (NZ) Ltd v Erikson
CA 370/91, 2 October 1992; Nottingham v Registered Securities Limited (In liq) (1998) 12
PRNZ 625 (CA) (recently applied in Smith v Penney [2013] NZHC 2988 at [37]).
(c) irreparable injury to the party that obtained the judgment would result if the judgment was set aside.
[32] I now turn to consider each of these factors.
(a) Was Mr McIlroy’s failure to appear excusable?
[33] Mr LaHatte submits that Mr McIlroy did attempt to file a document which was rejected by the Registry. He then experienced some difficulties in engaging a lawyer to act for him, particularly a suitably qualified lawyer with experience in High Court litigation and insolvency. He submits that Mr McIlroy, having engaged counsel, has now dealt with the matter promptly. A draft statement of defence has been provided which makes a preliminary assessment of the respective strengths of the cases.
[34] I do not agree. This is not a case where judgment by default was obtained irregularly or without proper notice.
[35] Mr McIlroy knew from at least July 2015 that Mr Murray was contemplating reducing his commission. He also knew from early this year that Mr Murray would be claiming that he had wrongly applied commission payments to himself. It seems Mr McIlroy does not dispute that he did this.
[36] Settlement discussions took place between Mr Beard and Mr McIlroy and in the context of those discussions a draft statement of claim was given to Mr McIlroy on 1 June 2016.
[37] The proceedings were formally filed and served on Mr McIlroy on 15 June
2016. These documents disclosed he was to file any statement of defence no later than 25 days after service, namely by 20 July 2016. Although I accept that Mr Beard’s letter of the same date may well have had the effect of wrongly leading Mr McIlroy to believe he had further time, I find it noteworthy that it was not until
22 July 2016 that he attended this Court’s Registry where he said he was advised by an unidentified member of staff that he had until 16 August 2016 to file his defence. There is no corroborative evidence of that fact nor does it seem any attempt has been
made by Mr McIlroy to identify the person he claims gave him this patently erroneous advice. This is a factor which I am entitled to take into account given that Mr McIlroy carries the onus of satisfying me there has been an irregularity in obtaining judgment.
[38] Judgment by default was sought on 22 July 2016, the same day Mr McIlroy claims he attended the Registry and yet his application to set the judgment aside was not filed for nearly three months afterwards.
[39] None of these factors supports Mr McIlroy’s claim that his failure was excusable. Neither am I satisfied Mr McIlroy has discharged the onus on him of establishing an irregularity in obtaining judgment.
(b) Does Mr McIlroy have a substantial ground of defence?
[40] The applicable principles are those contained in Patterson v Wellington Free
Kindergarten Assn Inc. There the Court of Appeal said:3
“[W]e are not concerned at this stage to determine merit, either in law or on the facts, of any matter which could be raised by way of defence. We must take the statement of claim as it was pleaded. A person seeking to set a judgment aside ex debito justitiae cannot contradict the allegation set out in the statement of claim: Nattrass v Rail Tractors Ltd [1928] NZLR 620.”
[41] The draft statement of defence and counterclaim pleads that the nature of the agreement was a partnership to continue until Mr McIlroy had reached the age of 75 years and that the amount claimed is incorrect. He also pleads that the nature of the partnership was partly oral and partly written but did not contain a date for termination or provisions for the winding up of the partnership. By way of remedy he seeks the appointment of an independent accountant to value the goodwill of the partnership and the value of any money which may be owed between the parties. He also seeks damages for the unlawful breach of the partnership agreement.
[42] Mr LaHatte, for Mr McIlroy, submits that there is a substantial ground of defence. He says that the nature of the relationship was a partnership, albeit an
unequal one. He submits that the only effective means by which to test that fact is
3 Patterson v Wellington Free Kindergarten Assn Inc [1966] NZLR 975 at 982.
by way of oral evidence and cross-examination at trial. Furthermore, he submits that although Mr McIlroy did not initially defend the proceeding the fact that he intended to do so is an indication of the fact that he did not accept Mr Murray’s assertion the relationship between the two men was a contractual or fiduciary one.
[43] While, of course, it is difficult for a Court to make an assessment of the strength of a defence at this nascent stage of the proceedings, the evidence before me is overwhelmingly against the defence as pleaded in Mr McIlroy’s statement of defence. There is little or no evidential support for the proposition that the commercial arrangement between Mr Murray and Mr McIlroy was a partnership, even if an unequal partnership. The suggestion it was makes no commercial sense. The purpose of Mr Murray engaging Mr McIlroy was to permit him to lawfully carry on business as a real estate agent. He could only meet the requirements of the Act if a licensed real estate agent was present to supervise his activities and administer the trust account. This was only ever going to be a temporary arrangement until Mr Murray completed his real estate qualifications. From that point Mr McIlroy’s role would be rendered redundant. It is inconceivable that the cumbersome and unwieldy mechanism of a partnership was created to regulate the obligations on the parties. A simple, contractual relationship such as that pleaded is the most obvious mechanism.
[44] Furthermore, Mr McIlroy’s claim that the partnership would endure until he reached the age of 75 is untenable. Not only is it entirely inconsistent with Mr McIlroy’s correspondence with Mr Murray but, again, it is a claim which is at odds with the purpose of Mr McIlroy’s engagement which was always going to be temporary.
[45] For these reasons I am far from satisfied that Mr McIlroy has shown a substantial ground of defence.
(c) Would irreparable injury to Mr Murray result if the judgment was set aside?
[46] He also submits that Mr Murray has not pointed to any evidence of prejudice in the event the judgment was set aside. In support of this submission he observes that Mr Beard advised Mr McIlroy to apply for his own bankruptcy thus revealing it
must have been clear to Mr Murray there was a strong risk the proceeding would not result in satisfaction of any judgment. Indeed, he submits that Mr Murray was on notice from before the proceeding was filed and judgment obtained and that there was a very substantial risk that even if he obtained judgment he would not be paid because Mr McIlroy had admitted to Mr Beard he had limited assets.
[47] Mr LaHatte accepts that quantum is not in issue. What is in issue is the nature of the commercial relationship between the parties.
[48] Furthermore, Mr LaHatte advises that Mr McIlroy owes the Inland Revenue Department (“IRD”) approximately $45,000 being arrears of income tax. He observes that in the event IRD was to take steps to recover and enforce the debt there will be no remaining funds for which to partially satisfy the debt owed to Mr Murray.
[49] I am not satisfied that Mr Murray would suffer irreparable harm if Mr McIlroy’s application was granted. This is because I am satisfied Mr McIlroy’s circumstances are such that Mr Murray’s prospects of recovering even a modest fraction of the amount owed is unlikely. This is all the more evident if IRD was to pursue its debt.
[50] However, this is only one of the considerations I should take into account and given the other factors discussed above, carries relatively little weight in support of Mr McIlroy’s application.
Conclusion
[51] For the reasons more fully discussed above I am not satisfied that it is just in all the circumstances to set aside the judgment. There has been no miscarriage of justice in obtaining judgment and the judgment should therefore stand.
Application for freezing order
[52] Mr Murray applies for a freezing order on the following grounds:
(a) he has established a good arguable case supported by sufficient evidence;
(b)on 27 October 2016 counsel for Mr McIlroy wrote to the solicitor for Mr Murray detailing a list of identifiable assets for which the freezing order may apply; and
(c) Mr McIlroy has confirmed in his affidavit sworn on 13 October 2016 that he has threatened to dissipate the assets at the casino.
[53] The freezing order is made in respect of nominated assets. These were identified in Mr McIlroy’s letter on 27 October 2016. The details are as follows:
(a) all cash bank accounts ($10,000); (b) Nissan Navara ($33,000);
(c) personal effects ($5,000); (d) furniture ($5,000); and
(e) any other assets in the possession or control of Mr McIlroy which have not been disclosed.
[54] Mr Beard also submits that the Court should be wary of Mr McIlroy’s claim that the assets disclosed are a true and accurate reflection of his assets. In support of this submission he says that only one bank account has been disclosed. An examination of that statement reveals no deposits which can be reconciled with the commission payments which it is known Mr McIlroy deposited. He thus submits there must be another account or accounts which have not been disclosed.
[55] Mr McIlroy opposes the application on the grounds:
(a) the application is an abuse of process by reason of certain procedural irregularities and should not have been brought on a without notice
basis because Mr Murray was aware Mr McIlroy had limited assets and was legally represented;
(b)the application relies on discussions between Mr McIlroy and Mr Beard and contains substantial elements of hearsay and speculation;
(c) the application is oppressive because the assets are equally owned by Mr McIlroy’s wife and the orders sought make no provision for Mr McIlroy’s ordinary living expenses and is oppressive by reason of the modesty of the assets;
(d) Mr Murray has not filed an undertaking as to damages; and
(e) Mr McIlroy is willing to give an undertaking not to dispose of any assets pending determination of the application to set aside judgment and/or any subsequent trial if so ordered.
Legal principles
[56] Rule 32.2 of the High Court Rules provides for the making of a freezing order. It provides as follows:
“32.2 Freezing order
(1) The court may make an order (a freezing order), on or without notice to a respondent in accordance with this Part.
(2) A freezing order may restrain a respondent from removing any assets located in or outside New Zealand or from disposing of, dealing with, or diminishing the value of, those assets.
(3) An applicant for a freezing order without notice to a respondent must fully and frankly disclose to the court all material facts, including—
(a) any possible defences known to the applicant; and
(b) information casting doubt on the applicant’s ability to discharge the obligation created by the undertaking as to damages.
(4) An application for a freezing order must be made by interlocutory application under Part 7 or originating application under Part 19, which Parts apply subject to this Part.
(5) An applicant for a freezing order must file a signed undertaking that the applicant will comply with any order for the payment of damages to compensate the respondent for any damage sustained in consequence of the freezing order.”
[57] There are three requirements for the making of a freezing order. These are: (a) a good, arguable case on the substantive claim;
(b) assets to which the order can apply; and
(c) a real risk that the respondent will dissipate or dispose of those assets. [58] Additionally, the Court of Appeal has stressed the importance of preserving
the flexibility of the remedy and the need to consider the overall justice of the case, balancing the need to protect the applicant so as to ensure any judgment is not rendered nugatory against any prejudicial hardship to the respondent or third party.4
[59] I now turn to consider each of those matters in turn.
(a) Does Mr Murray have a good arguable case?
[60] I have already discussed this question in relation to the assessment of Mr McIlroy’s defence. It follows I am satisfied Mr Murray has a good arguable case. The allegations are capable of tenable argument and are supported by sufficient evidence.5
(b) Does Mr McIlroy hold assets to which the order can apply?
[61] These assets are listed above. They are plainly identifiable assets to which a freezing order may attach.
4 Shaw v Narain [1992] 2 NZLR 554 at 548.
5 Dotcom v 20th Century Fox Film Corp [2014] NZCA 509 at [18] and [31]; Hannay v Mount
[2011] NZCA 530 at [20]-[22]; Wing Hung Printing Ltd v Saito Offshore Pty Ltd [2010] NZCA
2002, [2011] NZLR 754.
(c) Has Mr Murray shown a real risk of dissipation?
[62] This requirement is central to the freezing order jurisdiction. It has been observed that it is an abuse of the Court’s process to seek an order where there is no real risk.6
[63] The real risk of dissipation must be supported by solid grounds justifying the belief. It has been said that the circumstances must be identified from which “a prudent, sensible commercial [person] can properly infer a danger of default”, a test which is “not unduly exacting”.7 Furthermore, meeting ordinary living expenses, legal expenses relating to the freezing order and transactions in the ordinary course of business will not constitute dissipation of the assets.8
[64] Taking into account these principles I am not satisfied that Mr Murray has demonstrated or shown a real risk of dissipation. My reasons follow.
[65] Mr McIlroy does not dispute Mr Murray’s claims that he would spend the last of his assets at the casino in an attempt to win enough to settle the claims. He says these statements were made in “… just in the heat of [his] emotions …”. They were uttered in the context of settlement discussions. In my view this is perfectly understandable. It is plain from the various affidavits filed by the parties that these conversations were fraught and emotional. On the evidence, Mr Murray’s legal representatives were pursuing Mr McIlroy for a very substantial sum. Mr McIlroy’s accumulated assets had a value substantially below that being claimed. I am satisfied that in this context the words were uttered without any intention of carrying out the threat.
[66] These comments were conveyed to Mr Murray by a third party who has not made an affidavit. The basis for the comments has not been disclosed and the
comments themselves are plainly hearsay. I give them no weight.
6 Tranquil Holdings Ltd v Hudson (1987) 2 PRNZ 551 (HC) at 552.
7 Raukaur Moana Fisheries Limited v The Ship Irena Zharkikh [2001] 2 NZLR 801.
8 High Court Rules, r 32.6(3).
[67] Mr McIlroy’s present financial position is parlous to say the least. He owns no home. He and his wife are presently residing with their daughter. I was advised from the bar that the Nissan Navara has been damaged in a collision and Mr McIlroy has insufficient funds to repair it. Furthermore, Mr McIlroy’s wife has a half share interest in the assets listed.
[68] On the question of whether there is another account I have received no evidence on this issue and I am not prepared on that limited basis to make the orders sought.
[69] Mr Beard also submitted that Mr Murray learned from a third party that
Mr McIlroy may have had a gambling problem.
Conclusion
[70] I am not satisfied there is an immediate or real risk of dissipation. I am satisfied that the remarks relied on by Mr Murray could not be described as representing a real risk of dissipation.
[71] Furthermore, I am not satisfied that making the orders sought would leave Mr McIlroy or his wife with sufficient resources to meet their ordinary living expenses, let alone pay for their legal expenses. To make the order sought would be oppressive. The balance between the need to ensure Mr Murray’s interests are not rendered nugatory is heavily outweighed by the prejudicial hardship to Mr McIlroy and his wife in the event these orders were made.
[72] For these reasons I am not satisfied that sufficient grounds exist for making the freezing order sought.
Result
[73] The application to set aside the default judgment is dismissed. [74] The application for freezing orders is dismissed.
[75] Given this result I am inclined to the view that costs should lie where they fall. If counsel wish to pursue the question of costs they are to file memoranda no
later than 20 working days after the date of this judgment.
Moore J
Solicitors:
Mr Beard, Auckland
Mr LaHatte, Wellington
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