AES-Apex Employer Services, Inc. et al v. Rotondo et al
Filing
135
ORDER AND OPINION (1) SUSTAINING IN PART AND OVERRULING IN PART OBJECTIONS TO THE REPORT AND RECOMMENDATION, (2) ADOPTING IN PART AND REJECTING IN PART THE REPORT AND RECOMMENDATION, (3) GRANTING THE IRS MOTION FOR SUMMARY JUDGMENT, (4) DENYING AKOUR I INVESTMENTS, LLCS MOTION FOR PARTIAL SUMMARY JUDGMENT, (4) GRANTING IN PART AND DENYING IN PART PLAINTIFFS MOTION TO INTERPLEAD FUNDS, FOR DISMISSAL, AND FOR COSTS AND ATTORNEY FEES, AND (5) DISMISSING AKOURI INVESTMENTS LLCs CROSS-CLAIM Signed by District Judge Robert H. Cleland. (LWag)
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
AES-APEX EMPLOYER SERVICES, INC. and
AES-APEX EMPLOYER SOLUTIONS, INC.,
Plaintiffs,
v.
Case No. 13-14519
DINO ROTONDO, RICHARD MARK, and
UNITED STATES DEPARTMENT OF
TREASURY – INTERNAL REVENUE SERVICE,
Defendants,
and
AKOURI INVESTMENTS, LLC,
Intervenor.
/
ORDER AND OPINION (1) SUSTAINING IN PART AND OVERRULING IN PART
OBJECTIONS TO THE REPORT AND RECOMMENDATION, (2) ADOPTING IN PART
AND REJECTING IN PART THE REPORT AND RECOMMENDATION, (3)
GRANTING THE IRS’ MOTION FOR SUMMARY JUDGMENT, (4) DENYING AKOURI
INVESTMENTS, LLC’S MOTION FOR PARTIAL SUMMARY JUDGMENT, (4)
GRANTING IN PART AND DENYING IN PART PLAINTIFFS’ MOTION TO
INTERPLEAD FUNDS, FOR DISMISSAL, AND FOR COSTS AND ATTORNEY FEES,
AND (5) DISMISSING AKOURI INVESTMENTS LLC’s CROSS-CLAIM
Plaintiffs AES-Apex Employer Services, Inc. and AES-Apex Employer Solutions,
Inc. (collectively “Plaintiffs”) filed a complaint in state court seeking to interplead funds
and for declaratory judgment against Defendants Dino Rotondo, Richard Mark, and the
IRS. The action was removed to this court. (Dkt. # 1). Akouri Investments, LLC
(“Akouri”) filed a motion to intervene, which the court granted (Dkt. # 32), and Akouri
filed an intervenor complaint against Plaintiffs and Rotondo. (Dkt. # 33.) In sum, this
action was brought to determine who is entitled to receive certain consulting fees that
Plaintiffs would, barring the issues raised herein, pay to Rotondo and whether Plaintiffs
are entitled to attorneys’ fees in relation to this interpleader action.
Pending motions were referred to the Magistrate Judge who issued a Report and
Recommendation (“R&R”) (Dkt. # 83). The court however, finding some of the
objections to that R&R at least facially valid, vacated the R&R and returned the matter
to the Magistrate Judge for reconsideration. (Dkt. # 101.) Before the court now is the
revised R&R (Dkt. # 110) advising the court to grant Defendant IRS’ motion for
summary judgment (Dkt. # 44), deny Intervenor Akouri’s motion for partial summary
judgment (Dkt. # 45), grant in part and deny in part Plaintiffs’ motion to interplead funds
and for costs and attorneys’ fees (Dkt. # 46), and dismiss Akouri’s cross-claim (Dkt. #
33). Plaintiffs, the IRS, and Akouri have filed objections to the R&R (Dkt. ## 113, 114,
115) and those parties have responded and replied to each other’s objections. Rotondo
and Mark have not filed objections nor have they responded to any other parties’
objections. After reviewing the R&R and the parties’ briefs, the court concludes that a
hearing is unnecessary. See E.D. Mich. LR 7.1(f)(2). For the reasons stated below and
in the revised R& R, the court will sustain a number of Plaintiffs’ and the IRS’ objections,
adopt the revised R&R on all other matters, and overrule the remaining objections.
I. STANDARD
Timely Objections and De Novo Review
The filing of timely objections to an R. & R. requires the court to “make a de novo
determination of those portions of the report or specified findings or recommendations
to which objection is made.” 28 U.S.C. § 636(b)(1); see also United States v. Raddatz,
447 U.S. 667 (1980); United States v. Walters, 638 F.2d 947 (6th Cir. 1981). This de
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novo review requires the court to re-examine all of the relevant evidence previously
reviewed by the magistrate judge in order to determine whether the recommendation
should be accepted, rejected, or modified in whole or in part. 28 U.S.C. § 636(b)(1).
“The filing of objections provides the district court with the opportunity to consider
the specific contentions of the parties and to correct any errors immediately,” Walters,
638 F.2d at 950, enabling the court “to focus attention on those issues—factual and
legal—that are at the heart of the parties’ dispute,” Thomas v. Arn, 474 U.S. 140, 147
(1985). As a result, “‘[o]nly those specific objections to the magistrate’s report made to
the district court will be preserved for appellate review; making some objections but
failing to raise others will not preserve all the objections a party may have.’”
McClanahan v. Comm’r of Soc. Sec., 474 F.3d 830, 837 (6th Cir. 2006) (quoting Smith
v. Detroit Fed’n of Teachers Local 231, 829 F.2d 1370, 1373 (6th Cir. 1987)).
II. DISCUSSION
Three parties, Plaintiffs, Akouri, and the IRS, have filed objections to the
revised R&R. The court will take each in turn.
A. Plaintiffs’ Objections 1, 2 and 3
Plaintiffs’ first objection is tripartite, reasserting each of the three objections filed
as to the original R&R. The court will refer to these as Objections 1.1, 1.2, and 1.3.
Plaintiffs’ Objections 2 and 3 are nearly identical to Objection 1.1 and 1.3, respectively,
and thus they will be dealt with together. Additionally, the IRS’ single objection to the
revised R&R is identical to Plaintiffs’ Objection 3, and also will be considered together
with that objection.
1. Plaintiffs’ Objections 1.1 and 2
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The first subpart of Plaintiffs Objection 1 argues that the Magistrate Judge was
wrong in “finding that neither the Asset Purchase Agreements, nor the Consulting
Agreements entitle the AES Plaintiffs to ‘offset’ and/or ‘deduct’ reasonable costs,
expenses and attorney fees.” (Dkt. # 113, Pg. ID 3692.) For some reason that is not
clear to the court, Plaintiffs assert nearly an identical objection in their Objection #2, as
such, both are considered together.
The Asset Purchase Agreement contains an indemnification clause that
determines when and how Plaintiffs might recover certain costs and attorneys’ fees from
the Directional Entities (the sellers) and Rotondo (the guarantor of the agreement). That
indemnification agreement reads in whole:
6. Indemnification
6.1 Each Seller and Guarantor covenant and agree that, regardless of any
investigation at any time made by or on behalf of Purchaser or of any
information Purchaser may have in respect thereof, the Sellers and
Guarantors will jointly and severally indemnify and hold harmless
Purchaser from, for and against any loss, damage, liability or deficiency
(including without limitation, reasonable attorneys’ fees and other costs
and expenses incident to any suit, action, investigation or other
proceeding) arising out of or resulting from, and will pay Purchaser on
demand the full amount of any sum which Purchaser may pay or become
obligated to pay on account of, (i) any false representation or the breach
of any warranty made by any Seller and/or any of Sellers’ Affiliate(s) under
this Agreement, and Related Agreement, or any closing documents; (ii)
any federal, state, local or other tax of any nature existing prior to the date
of Closing and owed by any Seller and/or any of Sellers’ Affiliate(s); (iii)
any failure of any Seller and/or Sellers’ Affiliates to perform or observe any
term, provision, covenant, agreement or condition under the Letter of
Intent, this Agreement, any Related Agreement, or any closing documents
or to be performed or observed by any Seller and/or Sellers’ Affiliates; (iv)
any claim, litigation or other action of any nature arising out of any act
performed, transaction entered into or state of facts suffered to exist by
any Seller and/or Sellers’ Affiliate(s) prior to the date of Closing; and (v)
without limiting the generality of the foregoing, any claim of any employee
of any Seller and/or Sellers’ Affiliate(s), or of any other person, arising out
of or relating to any employee stock option, bonus retirement, profit
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sharing, pension or other similar plan of any Seller and/or Sellers’
Affiliate(s) or the operation or termination of any such plan. In addition, all
Sellers and Guarantor will jointly and severally indemnify and hold
harmless Purchaser from, for and against and costs and expenses
(including actual attorney’s fees) which Purchaser incurs to enforce the
indemnification obligations of the Sellers and Guarantor hereunder.
Purchaser shall have a right to offset such losses, damages, liabilities,
deficiencies, costs, expenses and attorneys’ fees against any sum owed
by Purchaser or Purchaser’s affiliates to the Seller and/or any Guarantor.
For the purposes of this Agreement, an “Affiliate” of a party shall mean
any person or entity controlled by or under common control with such
party or the party’s principal.
(Dkt. # 50-2, Pg. ID 901.)
In interpreting this agreement, the Magistrate Judge held that the indemnity
agreement is, “at best, extremely ambiguous” and that “the Court is not persuaded that
the instant interpleader action necessarily “arises out of” or “results from” the March
2013 asset purchase agreements (as opposed to rights established under federal
and/or state law regarding interpleader actions).” (Dkt. #110, Pg. ID 3648.) The court
agrees with Plaintiffs that this holding is in error.
First, as to the parenthetical in the quoted holding above, the court believes this
misconstrues the nature of any action before a federal court. All actions could be said to
arise out of both some set of facts (a transaction or some occurrence) and some federal
and/or state law that gives plaintiff a cause of actions and bestows jurisdiction upon this
court. It creates a false dichotomy to say that an action arises out of either facts or law;
federal actions are creatures of laws applied to facts, and thus “arise out of” both. It is
true that law regarding interpleader actions makes this suit in this form possible, but it is
also the case that the Asset Purchase Agreement established the consulting-fee
payment scheme from which this action arises.
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The Asset Purchase Agreement states, condensed and in relevant part, that
Rotondo and the Directional Entities will indemnify Plaintiffs
against any loss, damage, liability or deficiency (including without
limitation, reasonable attorneys’ fees and other costs and expenses
incident to any suit, action, investigation or other proceeding) arising out of
or resulting from . . . any claim, litigation, or other action of any nature
arising out of any act performed, transaction entered into or state of facts
suffered to exist by any Seller and/or Sellers’ Affiliate(s) prior to the date of
Closing.
(Dkt. # 50-2, Pg. ID 901.)
The Magistrate Judge appears to be concerned that this action is one to
interplead funds initiated by Plaintiffs, as opposed to some more traditional cause of
action relating to a breach of contract or some similar situation. But, the agreement
does not limit the sort of action from which Plaintiffs might claim attorneys’ fees. In fact
the agreement specifies that “any claim, litigation, or other action of any nature” might
form the basis of a claim under this agreement.
Further, this action is related to a “state of facts suffered to exist by” Rotondo.
Unpaid tax liabilities and the resulting IRS lien, in conjunction with complications related
to the alleged superiority of Akouri’s claim to assets owned by Apex Admin and/or the
Directional Entities, has complicated the Plaintiffs’ once-simple task of paying consulting
fees to Rotondo. This state of facts placed the Plaintiffs in a precarious position, and
motivated the initiation of this action. The action therefore arises out of and is related to
the Asset Purchase Agreement and the state of facts with reference to Rotondo’s tax
liability. The Plaintiffs are entitled to attorneys’ fees from Rotondo and the Directional
Entities.
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This determination, however, does not fully dispose of Plaintiffs’ Objection. The
above analysis settles the “what” (what are Plaintiffs entitled to) but not the “how” (how
may Plaintiffs collect attorneys’ fees). They also claim that the agreement allows them
to deduct attorneys’ fees from the consulting fee owed to Rotondo. In the revised R&R,
the Magistrate Judge also held that the latter part of the indemnification agreement,
which addresses Plaintiffs’ right to offset losses (like attorneys’ fees) incurred “to
enforce indemnification obligations of [Rotondo],” does not give Plaintiffs the right to
make such deductions because this action was not to enforce the indemnification
obligations of Rotondo. (Dkt. # 110, Pg. ID 3649 n.12.) The Magistrate Judge referred to
this clause as the Offset Provision. The court agrees with the Magistrate Judge that the
Offset Provision does not entitle Plaintiffs, at this time, to automatically deduct attorneys’
fees from the consulting fees owed to Rotondo.
The indemnification clause sets up a mechanism for the collection of attorneys’
fees arising out of litigation related to the Asset Purchase Agreement. The clause states
that Rotondo “will pay Purchaser on demand the full amount of any sum which
Purchaser may pay or become obligated to pay.” (Dkt. # 50-2, Pg. ID 901.) Thus, at the
conclusion of this litigation, Plaintiffs will be able to make a demand on Rotondo for their
attorneys’ fees in this matter and Rotondo will have the opportunity to satisfy the
demand. The Offset Provision only operates with respect to costs and fees incurred to
enforce the indemnification provision, for example, if Rotondo refuses to satisfy the
demand and Plaintiffs incur costs attempting to collect fees, then any subsequent costs
incurred in that effort, after a demand is made and rejected or goes unsatisfied, may be
deducted from the fees owed to Rotondo in the future.
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Accordingly, Plaintiffs Objection 1.1 and 2 are sustained in part and overruled in
part. Under the Asset Purchase Agreement, Plaintiffs are entitled to attorneys’ fees
arising from this litigation, but they may not deduct those fees as an offset against the
consulting fees owed to Rotondo.1
2. Plaintiffs’ Objection 1.2
As to the second subpart of their first objection, Plaintiffs also point out that in the
revised R&R, the Magistrate Judge “does not make a determination of the AES
Plaintiffs’ request for dismissal from the present matter.” This objection appears to be
correct. Though in the first R&R the Magistrate Judge included a section F.1.b. entitled
“The AES Plaintiffs Should Not Be Dismissed from the Action,” that part appears to be
excised from the revised R&R, but not replaced with any language specifically
recommending dismissal of Plaintiffs after funds have been inpleaded.
Plaintiffs suggest, in their Objection, that “[i]t can be deduced, based on [the
Magistrate Judge’s] recommendation that Akouri’s cross-claim against AES Plaintiffs be
dismissed and that the IRS’s Motion for Summary Judgment be granted, that [the
Magistrate Judge] is also recommending that the AES Plaintiffs be dismissed.” (Dkt. #
113, Pg. ID 3693.) However, the Magistrate Judge’s concluding “Recommendation”
section clearly states that Plaintiffs’ request for dismissal should be denied and that
Plaintiffs should be required to provide an accounting of the Consulting Fees accrued to
date.
1
The court notes that this means that the full value of the consulting fees are
owed to Rotondo (and, in turn, to the IRS by way of its tax lien). The Offset Provision
has not yet been triggered and Plaintiffs will have to seek attorneys’ fees by way of the
demand process explained above, and then later may be entitled to offset collection
costs from future consulting fees owed to Rotondo.
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Generally, discharge should be readily granted unless there are counterclaims or
crossclaims against the stakeholder or there are serious charges that the plaintiffstakeholder commenced the action in bad faith. See Sun Life Assurance Co. v.
Thomas, 735 F. Supp. 730, 732-33 (W.D. Mich. 1990); see also William Penn Life Ins.
Co. of New York v. Viscuso, 569 F. Supp. 2d 355, 361 (S.D.N.Y. 2008); Underwriters
Group, Inc. v. Clear Creek Indep. Sch. Dist., No. G-05-334, 2006 WL 1852254, at *5
(S.D. Tex. June 30, 2006). Here, the Magistrate Judge recommended dismissal of
Akouri’s cross-claims (a recommendation the court will accept), and while Plaintiffs
arguably played a roll in creating some of the problems at issues here (by ignoring
Akouri’s refusal to subordinate its security interest in Apex Admin), there are no
allegations that this action was commenced in bad faith. However, the Magistrate Judge
also recommend (and no party appears to have objected to the recommendation) that
Plaintiffs be required to provide an accounting of the Consulting Fees to be inpleaded in
order to ensure that the attorneys’ fees requested (and denied) in this case have not
been improperly withheld by Plaintiffs. (Dkt. # 110, Pg. ID 3645 n.10.) Upon completion
of that accounting and once the full amount of Consulting Fees have been inpleaded,
Plaintiffs may then be entitled to dismissal, but they are not yet. This Objection is
overruled.
3. Plaintiffs’ Objections 1.3 and 3 and IRS’ Objection 1
In the third subpart of their first Objection and in Objection 3, Plaintiffs object to
the revised R&R’s conclusion that Akouri has created a question of fact regarding the
ownership of the customer accounts at the time Plaintiffs purchased them. The IRS also
lodges this objection, and no other. If Apex Admin owned the accounts, then Akouri
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would have a claim to the consulting fees, but if the Directional Entities owned the
accounts, Akouri has no such claim. (See R&R 30.) Plaintiffs and the IRS disagree with
the Magistrate Judge’s conclusion because they say that Akouri offers only conjecture
as to the ownership of the Customer Accounts and has produced no evidence that Apex
Admin owned the customer accounts at issue. Plaintiffs however have advanced
probative evidence tending to prove that the Customer Accounts were in fact owned by
the Directional Entities.
The court sustains these objections and concludes that the Magistrate Judge
incorrectly concluded that there was a genuine issue of material fact as to the
ownership of the Customer Accounts. Akouri points only to the absence of (or more
accurately, Plaintiffs failure to produce) the Customer Account contracts, arguing that
they are the only documents that can resolve this question. The Magistrate Judge and
Akouri thought Plaintiffs’ failure to produce such documents was enough to create a
dispute of fact. The R&R analyzes the evidence offered by Plaintiffs attempting to prove
that the contracts were owned by the Directional Entities, and, while finding some of it
probative, concludes that it is not conclusive. (R&R 31-33). But then the R&R does not
identify any evidence offered by Akouri to refute Plaintiffs’ probative evidence on the
issue. To survive summary judgment, the non-movant “must do more than simply show
that there is some metaphysical doubt as to the material facts.” Matsushita v. Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
While it is well understood that the absence of a record may tend “to prove that
the matter did not occur or exist,” see Federal Rule of Evidence 803(7), the absence of
the Customer Account contracts appears to stem from Akouri’s failure to obtain them
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during discovery, which concluded before the pending motions were filed. The R&R
notes that Akouri tried to obtain the contracts from Plaintiffs, “including via the filing of a
motion to compel,” but was unsuccessful. However the referenced motion to compel
was filed in the state court, not in this case, and Akouri never sought discovery relief
from this court nor indicated that it was not getting its due in discovery from the other
parties. Further, Plaintiffs clarified in an email dated July 22, 2015 that they were not
given the original contracts when they purchased the accounts. (Dkt. # 89, Pg. ID 2910.)
This establishes that Plaintiffs could not produce the contracts, but it does not establish
that they did not exist in the hands of other Defendants (like Rotondo) or third parties
that could have been subpoenaed. Thus the absence of the contracts at this point is
probative only of Akouri’s failure to obtain them during discovery (which has concluded)
and Akouri has offered nothing but some metaphysical doubt as to the ownership of the
Customer Account contracts.
The objection is sustained, and the court holds that Akouri has not created a
genuine issue of material fact as to the ownership of the Customer Account contracts.2
B. Plaintiffs’ Objection 4
Plaintiffs’ fourth objection states an agreement with the revised R&R’s conclusion
that Akouri’s cross-claim should be dismissed, but argues that dismissal should be on
2
Further, it is unclear whether this court could even make an alternative finding,
if it was so inclined. The issue appears to have been litigated by the parties in the
parallel state court action and the state court concluded that Plaintiffs “purchased
certain assets of AS Holdings, AS South, Pinnacle HR, and Apex HR (the “Directional
Entities”).” (Dkt. # 63-2, Pg. ID 1883.) The “certain assets” referred to are the Customer
Accounts. To the extent the issue of ownership of the Customer Accounts was already
litigated (or could have been litigated) and decided in the state courts, this court would
be precluded from making a contrary finding under the doctrines of issue and claim
preclusion.
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the merits with prejudice, instead of based on the court’s discretion not to exercise
supplemental jurisdiction over the single remaining state-law claim. Plaintiffs argue that
the parallel state court litigation on this issue precludes Akouri’s claims here under claim
or issue preclusion principles, and so dismissal with prejudice is appropriate. However,
as the question of whether to reach the merits of a state law claim (or not) once all
federal claims have been resolved is within the discretion of the court, the court agrees
with the Magistrate Judge that dismissal under 28 U.S.C. § 1367(c)(3) is appropriate
here: there are no federal claims left; it is not clear that Michigan courts would preclude
this action; the preclusion issue turns on whether Michigan courts—as a matter of
Michigan law—would give preclusive effect to the earlier ruling; and the parties continue
to litigate the general matter in state court. The objection is overruled.
C. Plaintiffs’ Objection 5
Plaintiffs’ final objection amounts to a quibble with the Magistrate Judge’s
recitation of the facts, complaining that the facts “imply that [Akouri] had an interest in
the assets purchased by the AES Plaintiffs.” If any such implication is present, it is
resolved by this court’s decision that there is no genuine dispute over the ownership of
the Customer Accounts. The objection is overruled.
D. Akouri’s Objection 1
Akouri’s sole objection is that the Magistrate Judge was incorrect to recommend
granting summary judgment to the IRS because Akouri has a senior perfected security
interest in the assets of Apex Admin and there is a genuine dispute of material fact as to
whether the Customer Accounts are owned by Apex Admin or the Directional Entities.
This objection is no longer valid as the court has determined that there is no genuine
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dispute as to the ownership of the Customer Accounts. The objection is therefore
overruled.
IV. CONCLUSION
Accordingly, IT IS ORDERED that Plaintiffs’ Objections 1.1, 1.3, 2, and 3 (Dkt. #
113) and the IRS’s Objection 1 (Dkt. # 115) are SUSTAINED consistent with this
opinion. Plaintiffs’ Objections 1.2, 4 and 5, and Akouri’s Objection 1 (Dkt. # 114) are
OVERRULED. The Magistrate Judge’s Report and Recommendation is ADOPTED
CONSISTENT WITH THIS OPINION AND INCORPORATED BY REFERENCE.
IT IS FURTHER ORDERED that Defendant IRS’ Motion for Summary Judgment
(Dkt. # 44) is GRANTED, Intervenor Akouri’s Motion for Partial Summary Judgment
(Dkt. # 45) is DENIED, Plaintiffs’ Motion to Interplead Funds, for Dismissal, and for
Costs and Attorneys’ Fees (Dkt. # 46) is GRANTED IN PART AND DENIED IN PART
consistent with this opinion. The court will not grant Plaintiffs’ request for dismissal and
will instead direct Plaintiffs to PROVIDE AN ACCOUNTING of the Consulting Fees
accrued to date. Akouri’s Cross-Claim is DISMISSED (Dkt. # 33).
S/Robert H. Cleland
ROBERT H. CLELAND
UNITED STATES DISTRICT JUDGE
Dated: September 23, 2016
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I hereby certify that a copy of the foregoing document was mailed to counsel of record
on this date, September 23, 2016, by electronic and/or ordinary mail.
S/Lisa Wagner
Case Manager and Deputy Clerk
(313) 234-5522
C:\Users\wagner\AppData\Local\Temp\notes43CD49\13-14519.AES-APEX.accepting_rejecting_RR.smq.wpd
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