Schave v. CentraCare Health System et al
Filing
32
ORDER. IT IS HEREBY ORDERED: 1. Defendants' motion to dismiss Plaintiff's complaint 8 is GRANTED IN PART AND DENIED IN PART as addressed herein. 2. Plaintiff Angi Schave's alternative request for leave to amend the complaint is DENIED. (Written Opinion) Signed by Judge Wilhelmina M. Wright on 1/27/2023. (RJE)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Angi Schave,
Case No. 22-cv-1555 (WMW/LIB)
Plaintiff,
ORDER
v.
CentraCare Health System, The Board of
Directors of CentraCare Health System,
and John Does 1 to 40,
Defendants.
Before the Court is Defendants’ motion to dismiss Plaintiff’s complaint for lack of
subject-matter jurisdiction, Fed. R. Civ. P. 12(b)(1), and failure to state a claim on which
relief can be granted, Fed. R. Civ. P. 12(b)(6). (Dkt. 8.) For the reasons addressed below,
Defendants’ motion is granted in part and denied in part.
BACKGROUND
Plaintiff Angi Schave is a Minnesota resident who participated in two retirement
benefits plans, a 403(b) plan and a 401(k) plan (collectively, the Plans), sponsored by
Defendant CentraCare Health System (CentraCare), which provides health care to people
living in central Minnesota. Defendant Board of Directors of CentraCare Health System
(Board) acts on behalf of CentraCare to determine the appropriateness of the Plans’
investment offerings and monitor investment performance. Defendants John Does 1–40
are unnamed members of the Board and additional officers, employees or contractors of
CentraCare who serve as fiduciaries of the Plans.
CentraCare operates the Plans to provide retirement income benefits to its
employees. The Plans are “defined contribution” or “individual account” plans as defined
by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §1002(34).
Consequently, retirement benefits provided by the Plans are based solely on the amounts
allocated to each individual’s account. Employees of CentraCare who are 21 years of age
or older are eligible to participate in the Plans after their first year of employment. Schave
and other participants in the Plans have individual accounts into which they may contribute
a portion of their salary. CentraCare contributes to participants’ retirement savings by
matching a portion of participants’ contributions.
Defendants are responsible for
determining the appropriateness of the Plans’ investment offerings and monitoring
investment performance.
Schave commenced this action on June 13, 2022, alleging that, in the preceding six
years (Class Period), Defendants breached their fiduciary duties when selecting and
maintaining investments under the Plans.
During the Class Period, Schave alleges,
Defendants wasted the assets of the Plans and failed to prudently monitor the Plans’ funds
in several ways. Specifically, Schave alleges that Defendants failed to invest in less
expensive share classes available to the Plans, invested in funds that charged excessive
management fees, and failed to replace high-cost and underperforming funds with nearly
identical lower cost and higher performing alternatives. As a result of these alleged
breaches of fiduciary duties, Schave maintains, Defendants are liable under ERISA, 29
U.S.C. §§ 1105(a), 1109(a) and 1132(a)(2).
2
Defendants move to dismiss Schave’s
complaint for lack of subject-matter jurisdiction and failure to state a claim on which relief
can be granted. See Fed. R. Civ. P. 12(b)(6).
ANALYSIS
I.
Subject-Matter Jurisdiction
Defendants argue that Schave lacks Article III standing to the extent that she asserts
claims arising from investments in which she did not invest during the class period.
If a federal district court determines at any time that it lacks subject-matter
jurisdiction, the court must dismiss the action. Fed. R. Civ. P. 12(h)(3). Article III of the
United States Constitution limits federal jurisdiction to actual cases or controversies. U.S.
Const. art. III, § 2, cl. 1; Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992); Hargis
v. Access Capital Funding, LLC, 674 F.3d 783, 790 (8th Cir. 2012). As a jurisdictional
prerequisite, standing must be established before reaching the merits of a lawsuit. City of
Clarkson Valley v. Mineta, 495 F.3d 567, 569 (8th Cir. 2007). To satisfy the requirements
of standing, a plaintiff must (1) have suffered an injury in fact, (2) establish a causal
relationship between the defendant’s conduct and the alleged injury, and (3) show that the
injury would be redressed by a favorable decision. Lujan, 504 U.S. at 560–61.
A defendant may challenge a plaintiff’s complaint for lack of subject-matter
jurisdiction either on its face or on the factual truthfulness of its averments. See Fed. R.
Civ. P. 12(b)(1); Titus v. Sullivan, 4 F.3d 590, 593 (8th Cir. 1993). In a facial challenge,
as presented here, the nonmoving party “receives the same protections as it would
defending against a motion brought under Rule 12(b)(6).” Osborn v. United States, 918
F.2d 724, 729 n.6 (8th Cir. 1990). Under Rule 12(b)(6), a complaint must allege sufficient
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facts that, when accepted as true, state a facially plausible claim to relief. Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009). When determining whether the complaint states such a claim,
a district court accepts as true all factual allegations in the complaint and draws all
reasonable inferences in the plaintiff’s favor. Blankenship v. USA Truck, Inc., 601 F.3d
852, 853 (8th Cir. 2010). A district court also may consider exhibits attached to the
complaint and documents that are necessarily embraced by the complaint. Mattes v. ABC
Plastics, Inc., 323 F.3d 695, 697 n.4 (8th Cir. 2003).
Defendants argue that Schave lacks standing to challenge investment options in
which she was not enrolled because she does not have a particularized and concrete injury
pertaining to those investment options. But the United States Court of Appeals for the
Eighth Circuit has held that an ERISA plaintiff has standing to challenge an entire
retirement plan, even if the plaintiff did not enroll in all of the challenged investment
options. See Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 593 (8th Cir. 2009). In
Braden, the court concluded that the plaintiff had adequately alleged that his retirement
account suffered because of the defendants’ alleged breach of their fiduciary duties. Id. at
592. Consequently, the plaintiff could proceed “on behalf of the plan or other participants”
even though the relief sought “sweeps beyond [plaintiff’s] own injury.” Id. at 593; see also
Parmer v. Land O’Lakes, Inc., 518 F. Supp. 3d 1293, 1301 (D. Minn. 2021); Larson v.
Allina Health Sys., 350 F. Supp. 3d 780, 792 (D. Minn. 2018). Under the reasoning in
Braden, Schave has Article III standing to pursue the claims in this case.
Defendants seek to avoid this result by relying on Thole v. U.S. Bank N.A., in which
the Supreme Court of the United States held that the plaintiffs lacked standing to challenge
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a defined-benefit retirement plan. 140 S. Ct. 1615, 1619 (2020). But the Supreme Court,
in Thole, observed that “[o]f decisive importance to this case, the plaintiff’s retirement plan
is a defined-benefit plan, not a defined-contribution plan.”
Id. at 1618.
Whereas
participants in a defined-benefit plan will receive fixed payments each month that do not
fluctuate with the plan’s value or investment decisions, participants in a definedcontribution plan receive payments “tied to the value of their accounts, and the benefits can
turn on the plan fiduciaries’ particular investment decisions.” Id. Here, Schave challenges
decisions pertaining to defined-contribution plans.
Thole, therefore, is inapposite.
Consistent with Braden, Schave has Article III standing to challenge the investment options
under the Plans in this case.1
Accordingly, the Defendants’ motion to dismiss for lack of subject-matter
jurisdiction is denied.
II.
Adequacy of the Complaint
Defendants also move to dismiss Schave’s complaint for failure to state a claim on
which relief can be granted. See Fed. R. Civ. P. 12(b)(6).
1
In a supplemental letter filed with the Court, Defendants direct the Court to the
recent decision in Fritton v. Taylor Corporation, No. 22-cv-0415 (ECT/TNL), 2022 WL
17584416 (D. Minn. Dec. 12, 2022) to support their standing argument. In Fritton, the
Court found that the plaintiffs could not establish standing because plaintiffs failed to make
even basic allegations that they invested in one or more of the investment options that are
the subject of their claim. Id. at *4. Here, in contrast, Schave’s personal account
statements—which the Court may properly consider when assessing a motion to dismiss—
provide the necessary details to establish standing, such as what investment options Schave
invested in. See Parmer, 518 F. Supp. 3d at 1301 (reviewing participants’ account
statements on a motion to dismiss). Fritton, therefore, does not alter the Court’s standing
analysis.
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A complaint must contain “a short and plain statement of the claim showing that the
pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). A plaintiff need not prove her case at
the pleading stage, nor do the pleadings require detailed factual allegations to survive a
motion to dismiss. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); L.L. Nelson
Enters., Inc. v. County of St. Louis, 673 F.3d 799, 805 (8th Cir. 2012) (observing that
“specific facts are not necessary” and pleadings “need only give the [opposing party] fair
notice of what the claim is and the grounds upon which it rests” (internal quotation marks
omitted)). To survive a motion to dismiss, a complaint must allege sufficient facts to state
a facially plausible claim to relief. Iqbal, 556 U.S. at 678. Factual allegations that raise
only a speculative right to relief are insufficient. Twombly, 550 U.S. at 555. A district
court accepts as true all of the plaintiff’s factual allegations and views them in the light
most favorable to the plaintiff. Stodghill v. Wellston Sch. Dist., 512 F.3d 472, 476 (8th Cir.
2008). But legal conclusions couched as factual allegations are not accepted as true.
Twombly, 550 U.S. at 555. And mere “labels and conclusions” or a “formulaic recitation
of the elements of a cause of action” fail to state a claim for relief. Id.
Under ERISA, “a fiduciary with respect to a plan who breaches any of the
responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be
personally liable to make good to such plan any losses to the plan resulting from each such
breach,” together with other enumerated relief.
29 U.S.C. § 1109(a).
In some
circumstances, a fiduciary also must be held liable for a co-fiduciary’s breach of fiduciary
duty. 29 U.S.C. § 1105(a). ERISA authorizes a plan participant to bring a civil action for
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appropriate relief based on an alleged breach fiduciary duties under Section 1109. 29
U.S.C. § 1132(a)(2).
To state a claim for breach of fiduciary duty under ERISA, “a plaintiff must make
a prima facie showing that the defendant acted as a fiduciary, breached its fiduciary duties,
and thereby caused a loss to the Plan.” Braden, 588 F.3d at 594. ERISA imposes on
fiduciaries “twin duties of loyalty and prudence.” Id. at 595. Fiduciaries must act “solely
in the interest of plan participants and beneficiaries” and carry out their duties “with the
care, skill, prudence, and diligence under the circumstances then prevailing that a prudent
[person] acting in a like capacity and familiar with such matters would use in the conduct
of an enterprise of a like character and with like aims.”
Id. (quoting 29 U.S.C.
§ 1104(a)(1)). When evaluating whether a fiduciary acted prudently, courts “focus on the
process by which [the fiduciary] makes its decisions rather than the results of those
decisions.” Id. “A prudently made decision is not actionable, in other words, even if it
leads to a bad outcome.” Davis v. Wash. Univ. in St. Louis, 960 F.3d 478, 482 (8th Cir.
2020) (citing Braden, 588 F.3d at 595).
“ERISA plaintiffs claiming a breach of fiduciary duty have a challenging pleading
burden because of their different levels of knowledge regarding what investment choices a
plan fiduciary made as compared to how a plan fiduciary made those choices.” Meiners v.
Wells Fargo & Co., 898 F.3d 820, 822 (8th Cir. 2018). Typically, ERISA plaintiffs “lack
extensive information regarding the fiduciary’s methods and actual knowledge because
those details tend to be in the sole possession of that fiduciary.” Id. (internal quotation
marks and brackets omitted). Consequently, ERISA plaintiffs must “use the data about the
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selected funds and some circumstantial allegations about methods to show that a prudent
fiduciary in like circumstances would have acted differently.” Id. (internal quotation marks
omitted). “The critical inquiry, then, is whether the missing factual allegations are facts
about the funds themselves, which ERISA plaintiffs can research, or facts about the
fiduciary’s internal processes, which ERISA plaintiffs generally lack.” Id. at 822–23.
Schave’s complaint identifies several distinct alleged breaches of Defendants’
fiduciary duties. Defendants argue that Schave fails to state a plausible claim as to each
alleged breach. Each alleged breach is addressed in turn.
A.
Failure to Select a Lower Cost Share Class
The complaint first alleges that several of the Plans’ funds were invested in a more
expensive “R5” share class instead of a less expensive “R6” institutional share class that
was available.
In Davis and Braden, the United States Court of Appeals for the Eighth Circuit
addressed similar allegations and held that the ERISA plaintiffs had plausibly alleged
breaches of fiduciary duties. Davis, 960 F.3d at 483; Braden, 588 F.3d at 595. The
complaint in Davis alleged that lower-cost institutional shares were offered for some
investments and more expensive retail shares were offered for other investments, and that
the minimum investment requirements for institutional shares were routinely waived. 960
F.3d at 483. The Eighth Circuit held that these allegations supported two reasonable
inferences: first, that the defendant failed to negotiate aggressively enough to access the
institutional share class, and second, that the defendant failed to pay close attention to the
availability of lower-cost alternatives. Id. In Braden, the complaint similarly alleged that
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the retirement plans were large enough to “have the ability to obtain institutional class
shares” but, despite this ability, the plans included funds that offer “only retail class shares,
which charge significantly higher fees than institutional shares for the same return on
investment.” 588 F.3d at 595. The Eighth Circuit concluded that these allegations were
sufficient to support an inference of a “flawed” process even though the complaint did not
directly address how the plan made its decisions. Id. at 596.
Here, Schave alleges that “more expensive share classes are targeted at smaller
investors with less bargaining power, while lower cost shares are targeted at institutional
investors with more assets.” There allegedly “is no difference between share classes other
than cost—the funds hold identical investments and have the same manager.” Although
the Plans at issue here allegedly qualified for a less expensive “R6” institutional share class,
Defendants instead chose a higher-cost “R5” share class without receiving any additional
benefits for plan participants. These allegations are materially analogous to the allegations
in Davis and Braden and, therefore, support a plausible inference that Defendants breached
their fiduciary duties under ERISA.
Defendants argue that, although the Plans’ funds were invested in a more expensive
“R5” share class, “the Plans effectively paid less for the R5 shares than they would have
for the R6 shares” because the Plans negotiated rebates that offset the cost difference.2 But
an ERISA plaintiff is not required to “rule out every possible lawful explanation for the
2
On a motion to dismiss in an ERISA case, a district court may consider relevant
plan documents that are embraced by the pleadings. Davis, 960 F.3d at 484 n.3; Meiners,
898 F.3d at 823.
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conduct” alleged in the complaint because imposing such a requirement “would invert the
principle that the complaint is construed most favorably to the nonmoving party.” Braden,
588 F.3d at 597 (internal quotation marks omitted). When an ERISA plaintiff’s allegations
support a plausible inference of mismanagement, dismissal is not warranted merely
because the defendant has identified an alternative plausible inference. Davis, 960 F.3d at
483–84 (observing that a “well-pleaded complaint may proceed even if it strikes a savvy
judge that actual proof of those facts is improbable, and that recovery is very remote and
unlikely” (internal quotation marks omitted)).
Indeed, courts in this District and elsewhere have rejected similar arguments at the
pleading stage. See, e.g., Forman v. TriHealth, Inc., 40 F.4th 443, 450 (6th Cir. 2022)
(“Perhaps the plan has revenue-sharing arrangements in place that make the retail shares
less expensive or that benefit plan participants on the whole. But at the pleading stage, it
is too early to make these judgment calls.”); Parmer, 518 F. Supp. 3d at 1305 (rejecting
argument that defendants “were prudent in keeping [more expensive] class shares because
they were able to secure lower overall fees for participants by applying a portion of the
expense ratio to administrative fees”).
A “contract between defendants and their
recordkeepers—to which plaintiffs are not privy—cannot be used to defeat plaintiffs’
claims at this stage.” Parmer, 518 F. Supp. 3d at 1307 (citing Braden, 588 F.3d at 598).
As such, Defendants’ argument is unavailing.
Accordingly, Defendants’ motion to dismiss Schave’s breach-of-fiduciary-duty
claim predicated on Defendants’ alleged failure to select a lower cost share class is denied.
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B.
Excessive Management Fees
The complaint next alleges that Defendants invested in funds that charged excessive
management fees as compared to alternative funds identified by Schave.
In an ERISA case involving an investment-by-investment challenge, “a complaint
cannot simply make a bare allegation that costs are too high, or returns are too low.” Davis,
960 F.3d at 484. Instead, the complaint “must provide a sound basis for comparison—a
meaningful benchmark.” Id. (quoting Meiners, 898 F.2d at 822). “Comparing apples and
oranges is not a way to show that one is better or worse than the other.” Id. at 485. The
Eighth Circuit has “been clear that the key to stating a plausible excessive-fees claim is to
make a like-for-like comparison” by identifying “similar plans offering the same services
for less.” Matousek v. MidAmerican Energy Co., 51 F.4th 274, 279 (8th Cir. 2022).
Here, the complaint compares the fees charged by fifteen funds in the Plans to the
fees charged by alternative index funds. But the complaint acknowledges—and the fund
prospectuses confirm—that the Plans invested in actively managed funds, whereas the
alternative funds identified by Schave are passively managed funds. A comparison
between passively managed funds and actively managed funds generally is not meaningful
because such funds have different investment strategies that involve “different aims,
different risks, and different potential rewards.” Davis, 960 F.3d at 485; accord Parmer,
518 F. Supp. 3d at 1306. Indeed, courts have recognized that it is “[l]ittle surprise” that
“actively managed funds, which require considerable judgment and expertise, charge more
than passively managed funds, which require little judgment and expertise.” Forman, 40
F.4th at 446 (internal quotation marks omitted).
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Schave acknowledges that courts have rejected comparisons between actively
managed funds and passively managed funds. She seeks to distinguish those cases,
however, arguing that the “critical difference in this case is that, when an actively managed
fund measures its own fees or performance against index funds or other passive investment
vehicles, an actively managed fund by its own terms has selected a passive fund for its
comparator.” But Schave’s complaint does not allege facts supporting this purported
“critical difference.” And even if she alleged such facts, an investment fund’s choice of
comparators has no apparent relevance to whether a plaintiff’s choice of comparators
satisfies the legal requirements for stating a plausible claim to relief.
For these reasons, Defendants’ motion to dismiss Schave’s breach-of-fiduciary-duty
claim is granted to the extent that it is predicated on Defendants’ alleged selection of funds
that charged excessive management fees.
C.
Investment Performance
The complaint also alleges that Defendants failed to replace high-cost and
underperforming funds with “nearly identical” lower cost, higher performing alternatives.
As addressed above, the “key to nudging an inference of imprudence from possible
to plausible is providing a sound basis for comparison—a meaningful benchmark—not just
alleging that costs are too high, or returns are too low.” Matousek, 51 F.4th at 278 (internal
quotation marks omitted). Fiduciaries “normally have a continuing duty of some kind to
monitor investments and remove imprudent ones.” Id. at 280 (quoting Hughes v. Nw.
Univ., 142 S. Ct. 737, 741 (2022). “Nudging the complaint past the plausibility threshold
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depends on the totality of the specific allegations,” because “there is no one-size-fits-all
approach.” Id. at 281 (internal quotation marks omitted).
Schave’s complaint compares the performance of 17 funds in the Plans to the
performance of alternative index funds on a 5-year performance annualized basis as of
December 31, 2021. When an ERISA plaintiff rests his or her allegations on such rawperformance comparisons, the complaint must allege sufficient detail to demonstrate that
the alleged alternative funds provide a meaningful benchmark. Matousek, 51 F.4th at 280.
If “the composition of the peer groups remains a mystery” because “there is no explanation
of what types of funds are in each group, much less the criteria used to sort them,” a court
has “no way of knowing whether the peer-group funds provide a sound basis for
comparison.” Id. at 281 (internal quotation marks omitted). As such, a complaint should
allege whether the alternative funds “hold similar securities, have similar strategies, and
reflect a similar risk profile.” Id. And a fiduciary’s “choice of a particular fund is not
flawed merely because of the existence of one fund that ended up performing better.”
Meiners, 898 F.3d at 823 n.3.
Here, although Schave’s complaint broadly alleges that there were “hundreds of
superior performing less expensive alternatives,” the complaint identifies only one alleged
comparator for each challenged fund for a 5-year period. The complaint offers no
comparisons to other alternatives or other time periods. And the complaint does not appear
to allege any facts pertaining to the composition of the alternative funds. For example,
there are no allegations about whether the alternative funds hold similar securities, employ
similar strategies or carry similar risks. To the contrary, as addressed above, Schave’s
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alleged alternatives are passively managed funds that, in contrast to actively managed
funds, have different investment strategies that involve “different aims, different risks, and
different potential rewards.” Davis, 960 F.3d at 485; accord Parmer, 518 F. Supp. 3d at
1306. As such, the allegations are insufficient “to connect the dots in a way that creates an
inference of imprudence.” Matousek, 51 F.4th at 282 (quoting Davis, 960 F.3d at 486).
For these reasons, Defendants’ motion to dismiss Schave’s breach-of-fiduciary-duty
claim is granted to the extent that it is predicated on Defendants’ alleged failure to replace
high-cost and underperforming funds with “nearly identical” lower cost, higher performing
alternatives.
D.
Revenue Sharing
The complaint also contains allegations about revenue-sharing payments to service
providers, under a heading titled “Improper Revenue Sharing.” But the majority of these
allegations merely describe “revenue sharing” in general, without alleging anything
specific regarding Defendants’ conduct. Schave’s only case-specific allegation pertaining
to this issue is that “[a]ll of the JP Morgan SmartRetirement funds and a handful of other
funds in the Plans share revenue with Fidelity.” This allegation fails “to connect the dots
in a way that creates an inference of imprudence.” Matousek, 51 F.4th at 282 (quoting
Davis, 960 F.3d at 486). As such, Defendants’ motion to dismiss Schave’s breach-offiduciary-duty claim is granted to the extent that it is predicated on allegedly improper
revenue-sharing payments.
For all the foregoing reasons, Defendants’ motion to dismiss is granted in part and
denied in part. Defendants’ motion to dismiss Schave’s breach-of-fiduciary-duty claim
14
predicated on Defendants’ alleged failure to select a lower cost share class based on
standing or failure to state a claim is denied. But Defendants’ motion to dismiss is granted
in all other respects.
III.
Alternative Request for Leave to Amend
In her response brief, Schave requests, in the alternative, leave to amend her
complaint. “Although litigants are freely given leave to amend, they still have to follow
the proper procedures.” Id. (internal quotation marks, citations and brackets omitted).
Schave has not filed a motion for leave to amend her complaint, nor has she followed the
other procedures required to obtain leave to amend. See D. Minn. L.R. 15.1(b) (describing
requirements for motion to amend a pleading). And “district courts are under no obligation
to invite a motion for leave to amend if the plaintiff does not file one.” Matousek, 51 F.4th
at 283 (internal quotation marks omitted). For these reasons, Schave’s improper request
for leave to amend is denied.
ORDER
Based on the foregoing analysis and all the files, records and proceedings herein, IT
IS HEREBY ORDERED:
1.
Defendants’ motion to dismiss Plaintiff’s complaint, (Dkt. 8), is GRANTED
IN PART AND DENIED IN PART as addressed herein.
2.
Plaintiff Angi Schave’s alternative request for leave to amend the complaint
is DENIED.
Dated: January 27, 2023
s/Wilhelmina M. Wright
Wilhelmina M. Wright
United States District Judge
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