Third Circuit: Warning Debtor that Discharge of Debt May Be Reported to IRS Can Violate the FDCPA

By Stephen J. Shapiro

The Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt.”  In Schultz v. Midland Credit Management, Inc., the Third Circuit held that language debt collectors occasionally include in form dunning letters – a notice that the debt collector may be required to report certain discharges of debt to the IRS – can violate the FDCPA in certain circumstances. The Schultz case illustrates the risk debt collectors take when they utilize form collection letters without regard to the particularized facts of a debt.

In Shultz, the plaintiffs defaulted on several debts, each in amounts less than $600.  The debt collector to which the creditor outsourced the debts sent several dunning letters to the plaintiffs offering to accept less than the amount plaintiffs owed to resolve the debt.  Treasury Department regulations require debt collectors to report discharges of debts to the IRS under certain circumstances, but only where the debt discharged exceeds $600.  Each letter that the debt collector sent to the plaintiffs stated:  “We will report forgiveness of debt as required by IRS regulations.  Reporting is not required every time a debt is cancelled or settled, and might not be required in your case.”

The plaintiffs brought a putative class action against the debt collector alleging that, because their debts were less than $600 each, the debt collector’s statement that it might be required to report any debt discharge to the IRS was false and misleading as to the plaintiffs’ debts.  The district court granted the debt collector’s motion to dismiss, holding that the debt collector’s statement that it might be required to report debt discharges to the IRS in some cases, was not misleading.

On appeal, the Third Circuit reversed the trial court and remanded the case for further proceedings.  The Court first observed that a debt collector violates the FDCPA when it makes a “threat to take any action that cannot legally be taken or that is not intended to be taken.”  15 U.S.C. § 1692e(5).  The Court held that the language in the letters could lead a debtor to fear that “the discharge of any portion of their debt, regardless of amount discharged, may be reportable” to the IRS.   Because the language “references an event that would never occur” with respect to the plaintiffs, the Court concluded that the language was misleading and that the plaintiffs had pled a viable claim for violation of the FDCPA.

The Court recognized that many debt collectors use form letters to contact debtors, but cautioned that “convenience does not excuse a potential violation of the FDCPA.”  In light of the Third Circuit’s opinion, debt collectors should consider revising their form letters to specify that IRS regulations do not require them to report discharges of debts less than $600.

 

 

Call Me by Your Name – Or Risk an FDCPA Claim, Says Third Circuit

By Stephen J Shapiro

What’s in a name? For debt collectors, the answer potentially is years of litigation according to the Third Circuit’s recent opinion in Levins v. Healthcare Revenue Recovery Group LLC.

In Levins, Healthcare Revenue Recovery Group LLC (HRRG), a debt collector, attempted to collect a debt from the plaintiff debtors. HRRG, which had registered to do business in New Jersey under the name “ARS Account Resolution Services,” identified itself as “ARS” in several voicemail messages that it left for plaintiffs. Plaintiffs brought a putative class action alleging that HRRG violated the “true name” provision of the Fair Debt Collection Practices Act (FDCPA), which prohibits debt collectors from using “the name of any business, company or organization other than the true name of the debt collector’s business, company, or organization.” 15 U.S.C. § 1692e(14). The district court granted HRRG’s motion to dismiss the claim.

On appeal, the Third Circuit reversed the dismissal. The Court, adopting the Federal Trade Commission’s interpretation of the “true name” provision, held that the provision “permit[s] a debt collector to ‘use its full business name, the name under which it usually transacts business, or a commonly-used acronym[,]’ as long as ‘it consistently uses the same name when dealing with a particular consumer.’” The plaintiffs in the Levins case alleged that the acronym “ARS” is associated with hundreds of businesses, including an unrelated debt collector, and, therefore, was not an acronym commonly associated with HRRG. Given those allegations, the Court explained that “[n]othing in the information properly before us [on review of an appeal from an order granting a motion to dismiss] indicates that ‘ARS’ is HRRG’s full business name, the name under which it usually transacts business, or its commonly used acronym.” Therefore, the Court held that plaintiffs stated a plausible claim for violation of the FDCPA’s “true name” provision and remanded the case for further proceedings. The Court noted that HRRG’s challenge to plaintiffs’ allegation that “ARS” was not an acronym that HRRG commonly used would have to wait until summary judgment or trial.

The Third Circuit did, however, affirm the trial court’s rejection of two additional legal theories that plaintiffs asserted. First, the Court rejected plaintiffs’ argument that HRRG violated a provision of the FDCPA that prohibits debt collectors from failing to make a “meaningful disclosure of the caller’s identity” when they call debtors. 15 U.S.C. § 1692d(6). The Court held that “‘meaningful disclosure of the caller’s identity’ is not restricted to providing the name of the debt collector.” Rather, a debt collector that discloses during a call that it is a debt collector has made a “meaningful disclosure” of its identity under the FDCPA. Second, the Court held that, because HRRG’s messages adequately warned that it would use any information collected from the debtors to collect a debt, HRRG did not, as plaintiffs alleged, violate a section of the FDCPA that prohibits “the use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer.” 15 U.S.C. § 1692d(10).

In light of the Third Circuit’s holding in Levins, debt collectors should consider using a name registered with a government agency or bureau when they communicate with debtors. Doing so will enable debt collectors to provide the courts with a public record, which the courts may consider on a motion to dismiss, to establish that they used their full business name or “transacting as” name to contact the debtor. Using any name other than an “official” name evidenced by a government record carries risk because it opens the door for debtors to allege that the name the debt collector used was a not a “true name,” which allegation the courts will be required to accept as true on a motion to dismiss.

 

The Third Circuit Holds that Highway Tolls are Not “Debts” Under the FDCPA

By Stephen J Shapiro

Drivers who use New Jersey’s toll roads can pat themselves on the back because the tolls they pay help fund a public benefit. But, as the Third Circuit recently held, that fact also means that tolls are not “debts” under the Fair Debt Collection Practices Act (“FDCPA”) and, therefore, debt collectors seeking to collect unpaid tolls need not comply with the FDCPA’s regulations governing debt collection.

In St. Pierre v. Retrieval-Masters Creditors Bureau, Inc., the plaintiff signed up for an E-ZPass account, which he used to pay tolls he incurred while travelling on toll roads in New Jersey. When the plaintiff’s E-ZPass account fell into arrears, E-ZPass assigned the debt to a private debt collection agency. The agency sent the plaintiff a letter demanding payment of the debt. The plaintiff’s E-ZPass account number and a “quick response” code was visible through a window in the envelope containing the collection letter.

The plaintiff brought a putative class action against the agency, alleging that it violated a provision of the FDCPA that prohibits debt collectors from including on an envelope containing a collection letter “any language or symbol, other than the debt collector’s address . . . .” 15 U.S.C. § 1692f(8). However, the prohibitions in the FDCPA only apply to the collection of a “debt,” which the Act defines as an “obligation . . . of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes.” 15 U.S.C. § 1692a(5). The district court concluded that a highway toll is not a “debt” within the meaning of the FDCPA. Therefore, the district court held that the FDCPA’s prohibitions did not apply to the agency’s collection efforts and dismissed the plaintiff’s complaint.

The Third Circuit affirmed the dismissal. After reviewing previous decisions analyzing the issue, the Third Circuit announced a three-part test for determining whether an obligation is a “debt” under the FDCPA:

First, ascertain “whether the underlying obligation ‘aris[es] out of a transaction,’ – that is, a consensual exchange involving an affirmative ‘request,’ and ‘the rendition of a service or purchase of property or other item of value, such as a contract—or whether, instead, it arises by virtue of a legal status—that is, an involuntary obligation attendant to the fact of having a specific legal status . . . .”

Second, if the obligation arises out of a transaction, “identify what ‘money, property, insurance, or services . . . [] are the subject of the transaction, i.e., what it is that is being rendered in exchange for the monetary payment.”

Third, “consider the characteristics of that ‘money, property, insurance, or services’ to ascertain whether they are ‘primarily for personal, family, or household purposes.’”

Applying this test to the facts before it, the Court first held that the obligation to pay tolls does arise out of a “transaction” because a driver can voluntarily choose whether to incur the obligation: “[Plaintiff] would have no obligation to pay highway tolls had he chosen to use alternative routes or to keep his car parked . . . .” The Court next observed that the purpose of tolls is to “‘compensate the state for the cost, maintenance and repair of its highways,’” and that, in exchange for tolls, “all drivers benefit from ‘safer, faster, and more convenient travel in and through the State.’” As such, the Court explained that “what [plaintiff] receives in exchange for the payment of highway tolls is not the private benefit of a ‘personal, family, or household’ service or good but the very public benefit of highway maintenance and repair.”

Having concluded that tolls are not “primarily for personal, family, or household purposes,” the Court held that tolls are not “debts” within the meaning of the FDCPA: “[T]he FDCPA is not implicated where, as here, the bulk, if not all of the services rendered, are made ‘without reference to peculiar benefits to particular individuals or property.’”

In light of the Third Circuit’s decision, debt collectors may want to consider factoring into their operational practices and pricing models the reduced risk of facing FDCPA claims when collecting obligations that debtors did not voluntarily choose to incur or obligations that primarily benefit the public over individual debtors.

 

The Third Circuit Holds that the FDCPA Applies to Debt Collectors that Are Collecting Debts They Own

By Stephen J Shapiro

The Fair Debt Collection Practices Act (“FDCPA”) regulates the conduct of debt collectors.  The Act defines a “debt collector” as (a) any entity whose “principal purpose . . . is the collection of any debts” (the “principal purpose” definition), or (b) any entity that “regularly collects or attempts to collect . . . debts owed or due . . . another” (the “regularly collects” definition).  15 U.S.C. § 1692a(6).  In a recent precedential opinion, the Third Circuit held that an entity whose principal purpose is the collection of debts is a debt collector even if it owns the debt it is collecting and, therefore, is not collecting a debt owed another.  In other words, an entity that meets the “principal purpose” definition is a debt collector even if it does not also meet the “regularly collects” definition.

In Tepper v. Amos Financial, LLC, a creditor sold a loan on which its borrower had defaulted to Amos Financial, whose sole business involved purchasing and attempting to collect debts originated by others.  The debtor sued Amos alleging that, during its efforts to collect the debt, Amos violated the FDCPA by making false representations about the debt in both its written and oral communications with the debtor.  After a bench trial, the district court held that Amos was a “debt collector” within the meaning of the FDCPA and that it actions violated the Act.

On appeal, Amos challenged the district court’s conclusion that it is a debt collector.  Amos argued that, because it owned the debt it was attempting to collect, it was not collecting a debt “owed or due . . . another” and, therefore, was not a debt collector.  The Third Circuit rejected this argument because in the “principal purpose” definition the phrase “‘[a]ny debts’ does not distinguish to whom the debt is owed” and the phrase “‘debts owed or due . . . another’ . . . limits only the ‘regularly collects’ definition.”  Because there was no dispute that Amos’ principal purpose was the collection of debts, the Court held that Amos was a debt collector under the “principal purpose” definition even if it would not also qualify as a debt collector under the “regularly collects” definition: “[A]n entity whose principal purpose of business is the collection of any debts is a debt collector regardless whether the entity owns the debts it collects.”

Amos also attempted to rely on the fact that the FDCPA does not apply to “creditors,” which the Act defines as entities “to whom [the] debt is owed.”  Amos argued that, because it owned the debt at issue, it was a “creditor” and not subject to the Act.  The Third Circuit rejected this argument as well, holding that “an entity that satisfies both [the definition of debt collector and creditor] is within the Act’s reach.”

The Court also noted that the Supreme Court recently rejected the test the Third Circuit previously applied when analyzing whether an entity that purchased a debt was a debt collector.  Specifically, in Pollice v. National Tax Funding, L.P., the Third Circuit, adopting what is referred to as the “default test,” held that “an assignee of an obligation is not a ‘debt collector’ if the obligation is not in default at the time of the assignment; conversely, an assignee may be deemed a ‘debt collector’ if the obligation is already in default when it is assigned.”  The Third Circuit explained that in 2017 the Supreme Court repealed the “default test” in Henson v. Santander Consumer USA Inc.

In light of the Third Circuit’s ruling, debt collectors should remain vigilant about complying with the FDCPA, whether they are attempting to collect debts that they own or debts owned by others.

 

The Third Circuit holds that the discovery rule does not apply to the FDCPA’s one-year statute of limitations, but that the doctrine of equitable tolling might apply.

By Stephen J. Shapiro

In a precedential decision diverging from holdings in the Fourth and Ninth Circuits, the United States Court of Appeals for the Third Circuit, sitting en banc, held that the one-year statute of limitations in the FDCPA runs from the date the alleged violation occurs, not from the date a claimant discovers the violation. The Court noted, though, that the FDCPA’s statute of limitations may be equitably tolled under the proper circumstances.

In Rotkiske v. Klemm, a collection agency filed a lawsuit against a debtor in 2009 to collect an unpaid credit card debt. When the debtor did not respond to the lawsuit, the collection agency obtained a default judgment against him. The debtor claimed that he did not learn about the lawsuit or the judgment until September 2014 when he applied for a mortgage. Nine months later, in June 2015, the debtor brought a claim against the collection agency alleging that its actions in filing the lawsuit violated the Fair Debt Collection Practices Act (FDCPA).

The FDCPA contains a one-year statute of limitations: “An action to enforce any liability created by this subchapter may be brought in any appropriate United States district court . . . within one year from the date on which the violation occurs.” 15 U.S.C. § 1692k(d). Because the debtor filed his claim more than six years after the alleged violation, the collection agency moved to dismiss the suit on the grounds that it was time barred. Rejecting the debtor’s argument that the FDCPA’s statute of limitations begins to run when the debtor discovers the alleged violation, the district court granted the motion to dismiss.

On appeal, the Third Circuit affirmed the dismissal. The Court held that the language “within one year from the date on which the violation occurs” in the FDCPA’s statute of limitations made clear that Congress intended the limitations period to begin running on the date of the alleged violation, not on the date of discovery of the alleged violation.

The debtor argued that the discovery rule should apply to FDCPA claims because Congress did not expressly state in the act that the discovery rule did not apply. The Court flatly rejected this argument, holding that “Congress’s explicit choice of an occurrence rule implicitly excludes a discovery rule.” The debtor also argued that application of the occurrence rule would thwart the purpose of the FDCPA because the Act is designed to protect consumers from fraudulent debt collection practices that creditors may conceal from debtors. The Court disagreed with the premise that the Act is designed to protect consumers against concealed fraudulent practices, noting that many of the actions the FDCPA proscribes (for instance, repetitive contacts by telephone or mail) “will be apparent to consumers the moment they occur.”

The Court also backed away from its dicta in Oshiver v. Levin, Fishbein, Sedran & Berman. In that Title VII case from 1994, the Third Circuit mentioned in passing the “general rule” that limitations periods in federal statutes begin to run on the date a plaintiff discovers his or her injury. The Court noted, however, that more recent United States Supreme Court decisions, such as TRW Inc. v. Andrews, suggest that the previously-cited “general rule” is not correct and that the discovery rule may not be implied into federal statutes.

The Court also refused to follow decisions from the Fourth Circuit and Ninth Circuit in which those courts held that the FDCPA’s statute of limitations contains an implied discovery rule. The Third Circuit noted that neither court analyzed the “date on which the violation occurs” language in the FDCPA’s statute of limitations, and that the Ninth Circuit relied upon the defunct “general rule” that federal limitations period run from the date of discovery. The Court also noted that the Fourth Circuit appeared to have applied the doctrine of equitable tolling rather than the discovery rule.

Finally, after pointing out that the debtor did not pursue the issue of equitable tolling on appeal, the Court explained that “our holding today does nothing to undermine the doctrine of equitable tolling for civil suits alleging an FDCPA violation” and that “our opinion should not be read to foreclose the possibility that equitable tolling might apply to FDCPA violations that involve fraudulent, misleading, or self-concealing conduct.”

Although not addressed in the Court’s opinion in Rotkiske, the Third Circuit previously has explained that “even in situations in which equitable tolling initially applies, a party must file suit within a reasonable period of time after realizing that such a suit has become necessary.” Walker v. Frank, 56 Fed. Appx. 577, 582 (3d Cir. 2003). It is possible, then, that the debtor in Rotkiske chose not to invoke the equitable tolling doctrine on appeal because he would have had difficulty arguing that his nine month delay in filing his lawsuit after he discovered the alleged FDCPA violation was “a reasonable period of time.”

In sum, debtors who wish to pursue FDCPA claims in the Third Circuit must do so within one year of the date the alleged violation occurred, or within a reasonable period of time after discovering the violation.

 

SCOTUS Clarifies Who is a Debt Collector Under FDCPA

By Stephen A. Fogdall

The Fair Debt Collection Practices Act (FDCPA) prohibits a “debt collector” from using any “false, deceptive, or misleading representation or means in connection with the collection of any debt,” as well as any “unfair or unconscionable means to collect or attempt to collect any debt.”  15 U.S.C. §§ 1692e, 1692f.  The critical predicate for liability under these provisions is that the party allegedly engaged in the improper conduct is, in fact, a “debt collector.”  It is well-settled that a party seeking to collect for its own account a debt it itself originated is not a “debt collector,” while an independent party in the business of collecting debts owned by others is a “debt collector.”   However, over the past ten years a circuit split arose regarding whether a party that buys debts originated by someone else, after those debts have gone into default, and then seeks to collect those debts for its own account is a “debt collector.”  The Third and Seventh Circuits concluded that such parties are debt collectors under the FDCPA, while the Fourth and Eleventh Circuits concluded that they are not.  The U.S. Supreme Court recently weighed in in Henson v. Santander Consumer USA Inc..  In a unanimous decision authored by Associate Justice Gorsuch (his first), the Court concluded that at least one part of the FDCPA’s definition of a “debt collector” excludes such parties.

The FDCPA broadly defines a “debt collector” as “any person” who (1) “uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts” (sometimes referred to as the FDCPA’s “first definition” of a “debt collector”)  or (2) “who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another” (sometimes referred to as the “second definition” of a “debt collector”).  15 U.S.C. § 1692(a)(6).  The statute then lists six exclusions, one of which is relevant to the Henson decision.  Specifically, this exclusion provides that the term “debt collector” “does not include” “any person collecting or attempting to collect any debt owed or due . . . another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.”  15 U.S.C. § 1692a(6)(F)(iii).  This exclusion is discussed further below.

The Court in Henson addressed the second definition, the portion that applies to those who “regularly collect . . . debts owed or due . . . another.”  The Court specifically declined to address the first definition, the portion that applies to persons “in any business the principal purpose of which is to the collection of any debts,” stating that “the parties haven’t much litigated” this portion and it was outside the scope of the grant of certiorari.

Addressing the second definition, the Court fairly easily concluded that it excludes those who, like the respondent in Henson, purchase debts (even, importantly, after the debts have already gone into default) and seek to collect those debts for their own account.  Because the second definition by its terms refers to the collection of debts owed to “another,” it follows, the Court held, that the definition does not include those who collect debts for themselves.

The petitioners’ primary argument against this conclusion was that the second definition uses the word “owed” in the past tense.  Thus, according to the petitioners, a subsequent purchaser of a debt that was at one time “owed” to “another,” namely, the originating lender, would qualify as a “debt collector.”  The Court rejected this argument, noting that the word “owed” could easily be understood in the present tense, and, in any event, construing it in the past tense would be difficult to square with the nearby word “due” (“owed or due . . . another”), which indisputably is used in the present tense.

The Court then addressed the exclusion, alluded to above, removing from the definition “any person collecting or attempting to collect any debt owed or due . . . another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.”  15 U.S.C. § 1692a(6)(F)(iii).  The Court rejected the petitioners’ suggestion that by excluding a person collecting a debt that “was not in default at the time it was obtained by such person,” the definition of “debt collector” impliedly included a person collecting a debt that was in default “at the time it was obtained by such person” (which allegedly was the case with the debts at issue here).

The Court concluded, first, that the term “obtained” in this exclusion does not mean “purchased,” but rather having taken “possession” of a debt “for servicing and collection.”  Second, the Court concluded that since the exclusion removes persons from the scope of the term “debt collector” who would otherwise fall within it, the exclusion does even not apply unless the person at issue does indeed satisfy the initial definition.  In other words, a person must, as a threshold, “attempt to collect debts owed another” in order for the logically secondary question to arise as to whether that person is within the terms of the exclusion.  The Court observed that the “petitioners’ argument simply does not fully confront this plain and implacable textual prerequisite.”

Although it is now clear that a party seeking to collect a debt for its own account (even when it acquired the debt after it had already gone into default) cannot be a “debt collector” under the second of the two definitions in the FDCPA, by declining to address the first definition, the Court in Henson left open the possibility that a party collecting  for its own account might still qualify as a debt collector if it is “in any business the principal purpose of which is the collection of any debts.”  15 U.S.C. § 1692a(6).  Indeed, the Eleventh Circuit, after concluding, like the Supreme Court in Henson, that the second definition excludes parties collecting debts for their own accounts, expressly acknowledged that such a party might nevertheless be a debt collector under the first definition if its “‘principal purpose’ is the collection of ‘any debts.’”  Davidson v. Capital One Bank (USA), N.A., 797 F.3d 1309, 1316 n.8 (11th Cir. 2015).

There are comparatively few decisions analyzing the first definition, but that presumably will change in the wake of Henson, as plaintiffs, and their lawyers, seek to make use of this still potentially open path to attempt to establish that a debt owner is a “debt collector.”  Parties that purchase and collect debts for their own accounts should pay close attention as this issue evolves.  This blog will track and report on significant developments.

Third Circuit holds that only “material” representations by a debt collector are actionable under the FDCPA

By Stephen J. Shapiro

Joining a national trend, the United States Court of Appeals for the Third Circuit recently held that a plaintiff must allege more than just a misleading representation to prevail on a claim under the Fair Debt Collections Practices Act (FDCPA). Rather, a plaintiff must allege that the representation at issue was “material” in the sense that it would impact the decision-making process of the least sophisticated debtor.

In Jensen v. Pressler & Pressler, the attorneys for a debt collector, after obtaining a default judgment in a New Jersey state court against a debtor who failed to pay her credit card debt, served the debtor with a subpoena in aid of collection.  Under the New Jersey rules, an attorney may issue a subpoena in the name of the clerk of the New Jersey Superior Court. When the attorneys prepared the subpoena, though, they mistakenly used the name of a person who was not – and never had been – a clerk of the Superior Court.

The debtor brought a putative class action in the United States District Court for the District of New Jersey alleging that the debt collector and its attorneys violated provisions of the FDCPA that prohibit those collecting debts from (a) using false, deceptive, or misleading representations to collect debts from a consumer, and (b) falsely representing that a document used to collect a debt is “authorized, issued or approved by any court …” The district court granted summary judgment in favor of the debt collector and its attorneys on the ground that the misidentification of the clerk was not a material false statement.

On appeal, the Third Circuit affirmed, joining the Fourth, Sixth, Seventh, and Ninth Circuits in holding that only material representations are actionable under the FDCPA.  The Court began by noting that the “least sophisticated debtor” standard governs claims under the FDCPA.  Under that standard, Courts “focus on whether a debt collector’s statement in a communication to a debtor would deceive or mislead the least sophisticated debtor.”  Whether the statement at issue is literally true or false is not determinative.  Rather, “debt collection communications must be assessed from the perspective of the least sophisticated consumer regardless of whether a communication is alleged to be false, misleading, or deceptive.”  Therefore, the Court held, “a false statement is only actionable under the FDCPA if it has the potential to affect the decision-making process of the least sophisticated debtor; in other words, it must be material when viewed through the least sophisticated debtor’s eyes.”

Applying the materiality standard to the facts before it, the Court held that the misidentification of the clerk in the subpoena “could not possibly have affected the least sophisticated debtor’s ‘ability to make intelligent decisions.’”  As for the debtor’s alternate argument – that, by misidentifying the clerk, the defendants violated the FDCPA by falsely representing that the subpoena was authorized by a court – the Third Circuit held that, because attorneys in New Jersey are authorized to act as agents of the clerk when issuing subpoenas, the subpoena was validly issued regardless of the misidentification of the clerk.

* Joshua Won, Temple University School of Law Class of 2017, assisted with the preparation of this post.

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