The Kansas City Southern Railway Company et al v. Sny Island Levee Drainage District
Filing
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OPINION (See Written Opinion): The Motion of Plaintiffs The Kansas City Southern Railway Company and Norfolk Southern Railway Company for a Temporary Restraining Order [d/e 4 ] is DENIED AS MOOT. The Motion of Plaintiffs The Kansas City Southern Railway Company and Norfolk Southern Railway Company for a Preliminary Injunction [d/e 5 ) is DENIED. Entered by Judge Richard Mills on 5/24/2013. (VM, ilcd)
E-FILED
Friday, 24 May, 2013 02:22:52 PM
Clerk, U.S. District Court, ILCD
IN THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
THE KANSAS CITY SOUTHERN
RAILWAY COMPANY and
NORFOLK SOUTHERN RAILWAY
COMPANY,
Plaintiffs,
v.
SNY ISLAND LEVEE DRAINAGE
DISTRICT, a political subdivision of
the State of Illinois,
Defendant.
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NO. 13-3144
OPINION
RICHARD MILLS, U.S. District Judge:
On May 17, 2013, Plaintiffs The Kansas City Southern Railway
Company and Norfolk Southern Railway Company filed a Complaint for
Injunctive Relief [d/e 1] and Motions for Preliminary Injunction [d/e 4] and
a Temporary Restraining Order [d/e 5]. On May 20, 2013, Defendant Sny
Island Levee Drainage District filed Affidavits and Exhibits in Opposition
to the Plaintiffs’ Motion [d/e 12], in addition to a Memorandum in
Opposition to the Motion [d/e 13]. On May 20, 2013, the Court held a
Hearing on the Plaintiffs’ Motion for Injunctive Relief.
Because notice was provided and both parties have now been heard,
the Court considers the Plaintiffs’ Motion for a Temporary Restraining
Order to be moot. Their Motion for a Preliminary Injunction is properly
before the Court.
I. BACKGROUND
A. Introduction
Plaintiffs Kansas City Southern Railway Company (“Kansas City
Southern”) and Norfolk Southern Railway Company (“Norfolk Southern”)
(or collectively, “the Plaintiffs”) filed a Complaint for injunctive relief. The
Defendant is Sny Island Levee Drainage District (“Sny” or “the District”),
a political division of the State of Illinois organized under the laws of the
State of Illinois to construct, maintain, and repair a system of levees and
drains located in Adams, Pike and Calhoun counties. Sny is an Illinois
municipal corporation for a special and limited purpose and is vested with
the power to tax land owners within Sny’s boundaries to fund its operations
and to sue and be sued.
2
Kansas City Southern and Norfolk Southern seek relief based on what
they allege is an assessment by Sny that discriminates against railroads.
Section 11501 of the Railroad Revitalization and Regulatory Reform Act
of 1976 (4-R Act), see 49 U.S.C. § 11501, was enacted by Congress to end
the discriminatory taxation of railroads by state and local governments.
Section 11501(c) of the 4-R Act confers jurisdiction upon federal district
courts to grant equitable relief such as that which is requested here.
According to the Complaint, the total amount of land within Sny’s
boundaries is approximately 113,396 acres. Kansas City Southern and
Norfolk Southern operate portions of their railroads over land located
within Sny’s boundaries that consists of 212.32 acres for Kansas City
Southern and 145.17 acres for Norfolk Southern. On April 5, 2011,
pursuant to Illinois statute, Sny petitioned the Circuit Court for Pike
County, Illinois, for authority to levy a one-time “additional assessment”
against all lands in the district. On December 5, 2011, the Circuit Court
entered an order approving an additional assessment in the amount of
$5,853,162.00. The Plaintiffs allege the order was a legislative act because
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it looked to the future and changed existing conditions by making a new
rule to be applied thereafter to all lands within the District’s boundaries.
On December 12, 2012, Sny filed with the Pike County Circuit Court
an assessment roll to spread the $5,853,162.00 additional assessment on
lands located within Sny’s boundaries based on “benefit” to the land from
the District’s improvements.
The Plaintiffs are required to file any
objections they have to the assessment roll with the Pike County Circuit
Court on or before June 4, 2013, after which the Pike County Circuit Court
will hear evidence and determine the amount to be assessed against Kansas
City Southern and Norfolk Southern. The Plaintiffs state they are seeking
emergency relief because the money becomes due once the circuit court
approves the assessment. It cannot be refunded. Sny claims that Plaintiffs
are seeking a stay of a pending judicial proceeding in circuit court before
that court has considered the issues.
B. Tax amount based on the additional assessment
Based on the assessment roll for the additional assessment, Kansas
City Southern will be taxed $103,612.52 (or $91,084.59 if prepaid in one
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installment, instead of five annual installments) for the additional
assessment. Norfolk Southern will be taxed $117,139.71 (or $102,976.18
if prepaid in one installment) for the additional assessment.
In the Complaint, the Plaintiffs allege that Sny’s use of a benefits
methodology to spread assessments will impose a disproportionate share of
the additional assessment on Kansas City Southern and Norfolk Southern.
If the assessments were spread on a per acre basis adjusted by elevation,
Kansas City Southern and Norfolk Southern would pay, respectively,
0.225% and 0.143% of the total district-wide assessment and all other
properties within Sny’s boundaries would pay 99.632% of the total districtwide assessment.
Based on the assessment roll for the additional
assessment, Kansas City Southern and Norfolk Southern will be required
to pay, respectively, 1.77% and 2.00% of the total district-wide assessment
and all other properties within Sny’s boundaries will pay 96.23% of the
total district-wide assessment.
According to the Complaint, if Sny had used the methodology it
historically has used to assess lands in the district, Kansas City Southern’s
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portion of the additional assessment would be $13,169.61 and Norfolk
Southern’s portion would be $8,370.02. The Plaintiffs allege the additional
assessment discriminates against them in that it treats the Railroads
different than “other industrial and commercial properties” in the district.
According to the Plaintiffs’ experts, the average amount of flood
damage to other industrial and commercial properties if Sny’s levees were
not present is $550,566. The average amount of flood damage to Kansas
City Southern’s property in the district if Sny’s levees were not present is
$24,264.29. The average amount of flood damage to Norfolk Southern’s
property in the district if Sny’s levees were not present is $55,110.76.
According to the damage estimates of Nicholas Pinter, Ph.D., a
geologist, and David Brookings, P.E., an engineer with 40 years of
experience in railroad engineering and maintenance-of-way, the assessmentto-benefit ratio for the additional assessment is 0.236 for Kansas City
Southern, 0.410 for Norfolk Southern, 0.360 for the two railroads
combined, and 0.053 for other commercial and industrial properties. Mr.
Brookings estimated the damages to the railroads.
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Using software
developed by the Federal Emergency Management Agency, Dr. Pinter
estimated damages to what he claims are 17 other commercial and
industrial properties.1 Once the damage estimates were converted into
annualized “benefit” amounts, Donna Beck Smith, C.P.A., a forensic
accountant, compiled the data and compared it to the assessments levied
against each property.
The Plaintiffs allege that based on a comparison of assessment-tobenefit ratios, Sny’s assessment roll for the additional assessment would
result in the railroads being assessed at a rate 52.5 times higher than other
commercial and industrial properties. Kansas City Southern would be
assessed at a rate more than 80 times higher, while Norfolk Southern would
be assessed at a rate more than 40 times higher than other commercial and
industrial properties.
The Complaint alleges that if the Plaintiffs were taxed at the same
assessment-to-benefit ratio as the other commercial and industrial
The Plaintiffs state that they expect to locate additional
information regarding a number of other commercial and industrial
properties within the District through discovery.
1
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properties, then Kansas City Southern’s assessment would be $1,290.62
and Norfolk Southern’s assessment would be $2,931.34.
Sny has submitted the Declaration of Michael H. Reed, who has been
its superintendent and treasurer for over 18 years. Mr. Reed states that the
District’s levees and drainage systems protect an alluvial plain that
encompasses some of the most productive farm land in the world. Mr.
Reed further states that Dr. Pinter’s classification of some of the 17
properties as commercial and industrial or within the District is not
accurate. Some of the properties are only partially in the District or are not
in the District. Other properties are partially residential and partially
commercial. Another property is agricultural and partly recreational. Other
properties consist of a farm, small portions of which are recreational.
Another property is a residence.
Additionally, Mr. Reed states that Dr. Pinter’s affidavit omits
commercial and industrial properties in the District that benefit from Sny’s
works and improvements. These include several properties that receive
significant benefits, such as the pipelines and utilities in the district.
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Sny has also submitted the Declaration of Michael D. Klingner, P.E,
who is the President and CEO of Klingner & Associates, P.C., an
engineering, architectural, environmental and site development firm. Mr.
Klingner is in charge of the department within the firm that specializes in
water resources. That department represents approximately 30 levee and
drainage districts in Illinois, Missouri and Iowa and the firm is the engineer
of record in 25 of those districts. Mr. Klingner states that his firm has over
time represented over 50 levee and drainage districts in the Upper
Mississippi and Missouri River Basins on all aspects of water resources
engineering.
Klingner and Associates has worked as an engineering
consultant to Sny since 1905 and is currently its engineering firm of record.
In 2011, Sny requested that Klingner & Associates determine the
total benefits to property within the District from the District’s works and
improvements. Mr. Klingner states that there are two distinct types of
benefits provided by the District: (1) the benefit associated with protection
by levees against river flooding; and (2) the benefit associated with
protection by drainage against interior flooding.
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According to Mr. Klingner, the project requested by Sny took 13
months to complete. Mr. Klingner worked with two other professionals
from his firm: James W. Powell, P.E., a hydrologic/hydraulic engineer; and
Gavin H. Risley, a Certified Flood Plain Manager. A report, entitled Sny
Island Levee Drainage District Assessment of Interior Drainage & Levee
Protection Benefits, was prepared and signed by Mr. Klingner and Mr.
Powell as professional engineers. That report was submitted as an exhibit
at the Hearing.
C. 4-R Act and relief requested
Section 11501 states in pertinent part:
(b)
The following acts unreasonably burden and discriminate
against interstate commerce, and a State, subdivision of a
State, or authority acting for a State or Subdivision of a
State may not do any of them
***
(4)
Impose another tax that discriminates against a rail
carrier providing transportation subject to the
jurisdiction of the Board [Surface Transportation
Board] under this part.
The Plaintiffs allege that because the additional assessment is a general levy
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against all lands within Sny’s boundaries designed to cover Sny’s general
options, the general assessment is “another tax” within the meaning of §
11501(b)(4) and may not lawfully discriminate against the railroad. The
Plaintiffs further assert that this disparity in the assessment-to-benefit ratio
between railroad properties and “other industrial and commercial
properties” demonstrates that the Sny’s additional assessment discriminates
against railroad properties in violation of § 11501(b)(4).
Kansas City Southern and Norfolk Southern request injunctive relief
prohibiting the collection of the alleged discriminatory portion of the
additional assessment pursuant to the statute. The Plaintiffs contend they
will suffer immediate and irreparable harm if Sny is not enjoined from
assessing and collecting the discriminatory portion of the additional
assessment against Kansas City Southern and Norfolk Southern because
the assessment becomes a lien upon the lands assessed once the Pike
County Circuit Court enters an order approving the assessment roll. The
assessment will become due and payable within 30 days of the entry of the
order.
Kansas City Southern and Norfolk Southern would have no
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adequate remedy at law because although § 11501 guarantees a federal
forum for claims of tax discrimination, it does not permit federal district
courts to grant refunds of taxes which have been paid.
Sny contends that any delay due to the Plaintiffs’ request for
injunctive relief may cause the District to suffer significant damages. The
Pike County Circuit Court approved the additional assessment to pay
obligations incurred by the District for certain repair and operation costs.
Mr. Reed states that the District is paying a significant annual amount on
an outstanding loan from Mercantile Bank, including interest totaling
$149,317.02 in 2013. The interest payment will be made from Sny’s
“annual maintenance” income or from increasing the District’s debt. As a
result, the available funds Sny has to provide for the annual operation and
upkeep of the drainage district will be reduced.
Mr. Reed states that the District is planning to issue bonds to replace
the existing Mercantile loan, which will be payable from the collection of
the additional assessment over a five-year period. The issuance of the
bonds will significantly reduce the interest that Sny is paying on the
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outstanding debt, which will save the District a significant amount in
interest payments. Moreover, the District intends to replenish its reserve
funds with a portion of the proceeds of the bonds to be issued in
conjunction with the additional assessment. Sny’s reserve funds have been
depleted due to circumstances outside of its control. Until the bonds are
issued, the District will have no reserve funds to cover emergency situations
or significant operating expenses. Mr. Reed states that the new funds have
taken on new urgency in recent months because of excessive rainfall, which
has resulted in increased seepage from the river and flood threats from the
high river stages.
Sny contends that the Plaintiffs’ litigation challenging the proposed
assessments against their properties means that final approval of the entire
assessment roll for the additional assessment will be delayed. That may
serve to delay the District’s issuance of the bonds.
The District is
concerned that it may not be able to obtain the appropriate orders from the
Pike County Circuit Court and/or obtain the required approval from bond
counsel to issue the bonds with the Plaintiffs’ objections pending.
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Accordingly, Sny asserts that Plaintiffs’ request for injunctive relief will
threaten significant damages to the District if it is unable to reduce interest
costs to replenish the reserve funds that enable it to protect the property
owners within the District in the event of emergency situations or other
extraordinary expenses.
The Plaintiffs’ objection concerns Sny’s methodology for determining
benefits within the District. The benefits are the basis of determining the
additional assessment amount for each of the benefitted properties. Sny
contends that because this is a factual determination governed by state law,
the initial determination should be made in the Circuit Court of Pike
County.
II. DISCUSSION
A. Legal standard
The 4-R Act prohibits a State or a subdivision of a State from
imposing a tax that discriminates against a railroad. See 49 U.S.C. §
11501(b)(4). Section 11501(c) provides in pertinent part:
[A] district court of the United States has jurisdiction . . . to
prevent a violation of subsection (b) of this section. Relief may
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be granted under this subsection only if the ratio of assessed
value to true market value of rail transportation property
exceeds by at least 5 percent of the ratio of assessed value to
true market value of other commercial and industrial property
in the same assessment jurisdiction. The burden of proof in
determining assessed value to true market value is governed by
State law.
49 U.S.C. § 11501(c).
The parties dispute the proper standard for granting injunctive relief.
Under the common law, a party seeking a preliminary injunction “must
show that it is reasonably likely to succeed on the merits, it is suffering
irreparable harm that outweighs any harm that the nonmoving party will
suffer if the injunction is granted, there is no adequate remedy at law, and
an injunction would not harm the public interest.” Christian Legal Soc’y v.
Walker, 453 F.3d 853, 859 (7th Cir. 2006). In a prior lawsuit brought by
the Plaintiff Railroads, Judge Scott applied the common law standard. See
Kansas City Southern R. Co. v. Borrowman, No. 09-3094, 2009 WL 2603113,
at *7 (C.D. Ill. 2009).
Kansas City Southern and Norfolk Southern note that other courts
have held that railroads seeking injunctive relief under the 4-R Act do not
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have to meet that standard. “[A] railroad seeking statutorily authorized
injunctive relief from alleged tax discrimination under the 4-R Act is not
governed by these equitable criteria.” Consolidated Rail Corp. v. Town of Hyde
Park, 47 F.3d 473, 479 (2d Cir. 1995). In such circumstances, “a railroad
need only demonstrate that there is ‘reasonable cause’ to believe that a
violation of the 4-R Act has occurred or is about to occur.” Id. (quoting
CSX Transp. v. Tennessee State Bd. of Equalization, 964 F.2d 548, 551 (6th
Cir. 1992)).2 A mere “possibility” of a violation of the 4-R Act is not
sufficient. See CSX Transp., 964 F.2d at 555. The Sixth Circuit went on
to explain:
If the standard could be met merely by presenting an
affidavit from an expert claiming, based on any methodology,
that a state’s taxation scheme discriminated against railroads,
then the decision of whether to issue an injunction would, in
most instances, be taken out of the hands of the district court.
. . . The district court must make a preliminary determination,
In the previous lawsuit, Sny argued that the lesser “reasonable
cause” standard applied in determining whether a preliminary injunction
should issue. See Kansas City Southern R. Co. v. Borrowman, No. 09-3094,
Doc. No. 22, at 7. Here, Sny suggests that the common law standard
should apply because the Court previously used that standard, see id.,
Doc. No. 27, at 17, while contending that Plaintiffs cannot meet their
burden under either standard.
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based on the evidence that has been submitted by the plaintiff
and the responses made at that point, whether there is
reasonable cause to believe that the Act has been violated.
Id.
Based on the current record and, for the reasons that follow, the
Court concludes that Plaintiffs have not shown they are entitled to
injunctive relief under either the common law or the “reasonable cause”
standard.
B. Anti-Injunction Act and Court’s authority to issue injunction
Sny contends that the issuance of an injunction would violate the
Anti-Injunction Act. The Court does not agree. The Anti-Injunction Act
provides:
A court of the United States may not grant an injunction to
stay proceedings in a State court except as expressly authorized
by Act of Congress, or where necessary in aid of its jurisdiction,
or to protect or effectuate its judgments.
28 U.S.C. § 2283. The Anti-Injunction Act does not apply to proceedings
that are legislative in nature. The approval of a rate by the Pike County
Circuit Court establishes a rule for the future, and thus is legislative and not
judicial. See Prentis v. Atl. Coast Line Co., 211 U.S. 210, 216 (1908) (“The
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establishment of a rate is the making of a rule for the future, and therefore
is an act legislative, not judicial, in kind.”). In a prior case involving the
same parties, the Seventh Circuit left open the question of whether the
proceedings under the Illinois Drainage Code were judicial in nature,
though it suggested that the state circuit court was acting in a legislative
capacity. See Kansas City Southern Railway Co., et al. v. Koeller, 653 F.3d
496, 504 (7th Cir. 2012) (“Because the court was approving a fee, we might
be inclined to agree [it was acting in a legislative capacity.”]).
Accordingly, the Court concludes that the Anti-Injunction Act does
not prevent it from granting the equitable relief requested by the Plaintiffs.
C. Whether Plaintiffs are entitled to preliminary injunction
In determining whether the District’s tax discriminates against
railroads, Kansas City Southern and Norfolk Southern are to be compared
to other “commercial and industrial properties.” See Koeller, 653 F.3d at
508-09. Therefore, Kansas City Southern and Norfolk Southern must be
treated the same as any other commercial and industrial property owners
within Sny’s boundaries. If a benefit basis is employed, then it must be
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applied to the entire scheme on a consistent basis.
This includes
agricultural properties and other commercial and industrial properties, in
addition to railroad properties. See id. at 512.
The merits of this dispute come down to a battle of the experts
regarding the methodology for the assessment. The District’s methodology
is discussed in the report prepared by Mr. Klingner and his colleagues. Mr.
Klingner determined the annual benefits that all properties receive as a
result of the District’s works and improvements. The types of benefits were
separated into levee protection benefits and interior drainage benefits, with
the latter being assessed only to agricultural properties. According to the
report, Mr. Klingner employed a uniform methodology for all types of
properties, including commercial and industrial properties, in determining
annual benefits to each property. Mr. Klingner then directed the allocation
of the additional assessment among the benefitted property in the District
in proportion to the benefit to those properties. Based on this process, Sny
contends there is no discrimination in levying the special assessment. All
commercial and industrial properties will pay the exact same percentage of
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their annual benefit, approximately 25%.
The Plaintiffs maintain that the additional assessment means that the
railroads will have to pay significantly higher assessments than other
commercial and industrial properties. Sny contends that it is not apparent
how the Plaintiffs’ experts arrived at their conclusions. However, they
contend that Dr. Pinter’s estimated damages from a 100-year flood to
Norfolk Southern are much lower than the actual costs testified to by
Norfolk Southern’s own witness in the prior case. Sny further asserts that
the Plaintiffs’ estimates of damages as to other commercial properties are
much higher than those arrived at by Mr. Klingner. Additionally, according
to Mr. Reed, many of the properties used in Dr. Pinter’s analysis are either
not in the District or do not qualify as commercial and industrial. Finally,
some of the commercial and industrial properties located in the District are
not included in his study.
At most, the Plaintiffs have established the possibility of a violation
of the 4-R Act. The Court concludes that Plaintiffs have not demonstrated
a reasonable likelihood of success on the merits or reasonable cause that a
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violation of the 4-R Act is about to occur. Accordingly, there is not enough
to justify the entry of a preliminary injunction under either the common
law or “reasonable cause” standard. Based on the record before the Court,
it is at least as likely that the additional assessments against Kansas City
Southern and Norfolk Southern are not discriminatory. If the conclusions
of Dr. Pinter and the Plaintiffs’ experts stood unchallenged, then the Court
might have a legitimate basis for finding the additional assessments are
discriminatory and that equitable relief might be appropriate. However, the
District’s report prepared by Mr. Klingner and his colleagues challenges Dr.
Pinter’s methodology and opinion that the additional assessments are
discriminatory against the Plaintiffs.
The District has raised questions about the methodology used by Dr.
Pinter. Even under the less stringent standard, a plaintiff cannot establish
that an injunction is appropriate “by presenting am affidavit from an expert
claiming, based on any methodology, that a state’s taxation discriminated
against railroads.” See CSX Transp., 964 F.2d at 555.
Based on all of the evidence that has been submitted, the Court
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concludes there is a legitimate dispute as to whether the assessment is
discriminatory. Accordingly, the Plaintiffs have not demonstrated that they
are entitled to a preliminary injunction.
The Court further concludes that the entry of an injunction would be
particularly inappropriate here when the Plaintiffs already have a potential
remedy in the Pike County Circuit Court. Kansas City Southern and
Norfolk Southern can bring a similar challenge in Pike County Circuit
Court by filing objections to the assessment roll and presenting evidence at
a hearing. See 70 ILCS 605/5-8. The Plaintiffs may contend before that
court that they are being discriminated against under the 4-R Act. See 49
U.S.C. § 11501(c).
Based on the foregoing, the Court concludes that equitable relief is
not warranted.3
Ergo, the Motion of Plaintiffs The Kansas City Southern Railway
Company and Norfolk Southern Railway Company for a Temporary
The District has offered several other reasons why it believes the
Plaintiffs are not entitled to equitable relief. The Court need not address
those arguments.
3
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Restraining Order [d/e 4] is DENIED AS MOOT. The Motion of Plaintiffs
The Kansas City Southern Railway Company and Norfolk Southern
Railway Company for a Preliminary Injunction [d/e 5] is DENIED.
ENTER: May 24, 2013
FOR THE COURT:
s/Richard Mills
Richard Mills
United States District Judge
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