Kulig v. Midland Funding, L.L.C. et al
Filing
37
MEMORANDUM AND ORDER denying 35 Motion for Leave to File Document; denying 16 Motion to Compel Arbitration. For the reasons stated above, defendants' motion to compel arbitration and stay plaintiffs complaint (Dkt. No. 16) is denied. Plainti ffs motion for leave to file sur-reply (Dkt. No. 35) is denied as moot, as neither it nor the content of Defendants, Memorandum in Opposition to Plaintiffs Motion for Leave to File Sur-Reply were relied upon in the disposition of the instant motion. Defendants are directed to file an answer to plaintiffs complaint within fourteen (14) days. SO ORDERED.(Signed by Judge P. Kevin Castel on 11/13/2013) (ama)
USDSSDNY
DOCUMENT
ELECTRONICALLY FILED
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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DOC#: __--------~
13 -/3
DATE FILED:
11-
CAROL KULIG,
13 Civ. 4715 (PKC)
Plaintiff,
-against-
MEMORANDUM
AND ORDER
MIDLAND FUNDING, LLC, MIDLAND CREDIT
MANAGEMENT, INC. ENCORE CAPITAL GROUP,
INC. formerly MCM CAPITAL GROUP, INC.,
AMANDA PEREZ,
Defendants.
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CASTEL, District Judge:
Plaintiff Carol Kulig, a credit card holder, asserts claims on behalf of herself and
others similarly situated against Midland Funding, LLC, Midland Credit Management, Inc.,
Encore Capital Group, Inc., and Amanda Perez (collectively, "Midland"). Plaintiff brought a
putative class action under the Fair Debt Collection Practices Act ("FDCPA") and celtain New
York statutes. Pursuant to the telms of an agreement defendants claim applies to Ms. Kulig's
account, defendants have moved to compel the arbitration of her claims. For the reasons set
forth below, defendants' motion is denied.
1. BACKGROUND
Midland Funding ("MF") is a Delaware cOlporation in the business of taking title
to charged off debts and filing suit to collect on them. (Compl.
'15)
Midland Credit Management
("MCM") is the servicer for MF and is responsible for taking affirmative steps to collect on debts
purchased by MF. (Compl.
~
13) These steps include sending letters, making collection phone
calls, and filing collection lawsuits in the name ofMF. Id. Both MF and MCM are whollyowned subsidiaries of Encore Capital Group, Inc. ("Encore"), a public company listed on the
NASDAQ stock exchange. (Compl. 16-17) Together, MF, MCM, and Encore operate as a joint
venture to purchase and collect on putative debts fi·om consumers. (Compl. ,,25 (quoting Encore
Form 8K, March 6, 2013, Ex. 99.1)) Amanda Perez is an attorney employed by MCM who
serves as an "in-house counsel" for MF. (Compl. Ex. E)
Kulig's lawsuit stems from Midland's efforts to collect on a credit card debt that
she allegedly owed to Chase Bank USA, NA ("Chase"). (Compl.
~~
44-70) At some point prior
to 2006, Kulig opened a credit card account with Chase. (Dkt. No. 17-3; Dkt. No. 33-1 at 3).
Kulig used the account to make purchases and to obtain cash advances prior to April 2006, and
made payments on the outstanding account balance until March 2007. (Dkt. No. 17-3) Pursuant
to a Bill of Sale dated June 2009, the account was sold and assigned by Chase to MF. (Dkt. No.
17-1; Dkt. No. 32-2) On August 1,2012, MF brought suit in New York Civil Court seeking to
collect on Kulig's credit card debt. (Compl. Ex. E) In January 2013, Kulig retained counsel and
ultimately obtained a discontinuance with prejudice of the collections suit, on grounds that the
suit was time-barred under New York law. (Compl. "66)
Subsequently, Kulig brought claims against Midland under the FDCPA, 15
U.S.C. § 1692 et. seq., the New York General Business Law § 349 et. seq., and the New York
JudicialY Law § 487 et. seq. (Dkt. No.1) Kulig seeks certification of a class of similarly
situated plaintiffs, alleging that Midland systematically filed and litigated time-baned lawsuits
against hundreds of individuals in New York State in violation of state and federal law. (Compl.
at 1) On August 19, 2013, Midland sent Kulig's counsel a fOlmal demand to elect individual
arbitration of the claims in the Complaint. (Dkt. No. 18-1) Midland claims the right to so elect
2
based on the terms of a form contract (the "Cardmember Agreement") that they claim governs
the relationship between the parties in the instant suit. Id. Kulig did not respond to Midland's
demand. (Dkt. No. 18 at ~ 4) On September 5, 2013, Midland filed a motion to compel
arbitration. (Dkt. No. 16)
II. STANDARD FOR COMPELLING ARBITRATION
Midland asserts that section 3 ofthe Federal Arbitration Act ("FAA") mandates
that this action be stayed and that the parties be compelled to arbitrate their claims. 9 U.S.C. § 3.
On a motion to compel arbitration, "the COUlt applies a standard similar to that applicable for a
motion for summary judgment." Bensadoun v. Jobe-Riat, 316 F.3d 171, 175 (2d Cir. 2003).
Thus, "[i]fundisputed facts in the record require[] the issue of arbitrability to be resolved against
the Plaintiff as a matter of law," then a district comt must compel arbitration. Id. On the other
hand, "[i]fthere is an issue of fact as to the making of the agreement for arbitration, then a trial is
necessary." Id. (citing 9 U.S.c. § 4). Such "a trial is warranted only if there exists one or more
genuine issues of material fact regarding whether the patties have entered into such an
agreement." Schnabel v. Trilegiant Com., 697 F.3d 110, 118 (2d Cir. 2012) (citing Opals on Ice
Lingerie v. Bodylines Inc., 320 F.3d 362, 369 (2d Cir. 2002))
In this Circuit, courts apply a conjunctive two-part test to determine arbitrability
of claims, asking: "( 1) whether the patties have entered into a valid agreement to arbitrate, and, if
so, (2) whether the dispute at issue comes within the scope of the arbitration agreement." In re
Am. Express Fin. Advisors Sec. Litig., 672 F.3d 113, 128 (2d Cir. 2011). A party resisting
arbitration on grounds that the at'bitration agreement is invalid under a defense to contract
formation, or that the arbitration contract does not encompass the claims at issue, bears the
3
burden of proving such a defense. See Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 92
(2000). However, "[a)rbitration is strictly a matter of consent," and thus courts should order
arbitration of a dispute only when satisfied that the actual formation of the parties' arbitration
agreement is not in issue. Granite Rock Co. v. Int'l Bhd. ofthe Teamsters, 130 S.Ct. 2847,
2857-58 (2010). "Granite Rock confirms this Circuit's well-established precedent that where a
pmty challenges the very existence of the contract containing an arbitration clause, a court
cannot compel arbitration without first resolving the issue of the contract's existence." Dedon
GmbH v. Janus et cie, 411 Fed. Appx. 361, 363 (2d Cir. 2011). "Unless the patties clearly and
unmistakably provide othetwise, the question of whether the parties agreed to arbitrate is to be
decided by the cOUlt, not the arbitrator." Bensadoun, 316 F.3d at 175 (citation and quotations
omitted). It is the COUIt's duty to interpret and construe an arbitration provision, but only where a
contract is "validly formed" and "legally enforceable." Granite Rock at 2859-60.
III. DISCUSSION
A.
Acceptance of the Arbitration Provision
Kulig argues that there is no evidence that she agreed to arbitrate her claims.
"Whether or not the pmties have agreed to arbitrate is a question of state contract law."
Schnabel, 697 F.3d at 119.
On its motion to compel, Midland has submitted a document it claims is "the
sample Cardmember Agreement applicable to [Kulig's) Account." (Dkt. No. 17 at ~ 13; Dkt.
No. 17-4) Kulig argues that this Cardmember Agreement cannot govern her account because the
agreement postdates her last use of the account. Though the Cardmember Agreement is not
dated, the final page ofthe document submitted by Midland cites interest rates calculated based
4
on the Prime Rate as of March 22, 2007. (Dkt. No. 17-4 at 6; see also id. at 2 ("we calculate the
APR by adding a margin to the Prime Rate published in The Wall Street Journal two business
days before the Closing Date shown on your billing statement. ")) Midland has submitted Chase
statements relating to Kulig's account, which indicate that her last purchases on the account were
made prior to April 2006 and that her final payment on the account balance was made on March
19,2007. (Dkt. No. 17-3). Kulig argues that in no sense did she "use" the account after March
19,2007, and therefore she cannot be held to have assented to the telms of a later-dated
agreement.
Midland did not claim to be in possession of an earlier-dated contract with Ms.
Kulig. Instead, Midland argues that the contract it produced amended some earlier Cardmember
Agreement, which it implies Kulig must have accepted by opening the account and using her
card. Midland contends that because the Cardmember Agreement calls for the application of
Delaware law to this dispute, the fact that Kulig made no use of the account following the change
in terms is irrelevant. According to Midland, a provision of Delaware law allows banks to
unilaterally amend the terms of agreements governing revolving credit plans. 5 Del. C. § 952(a).
Midland assumes that Delaware law applies to Kulig's claims, presumably based
on the choice of law provision in the very Cardmember Agreement containing the arbitration
provision. (Def. Reply Mem. at 4; Dkt. No. 17-4) Contrary to Midland's assumption, Delaware
law does not necessarily apply to the issue of contract formation. "The validity of a contractual
choice-of-law clause is a threshold question that must be decided not under the law specified in
the clause, but under the relevant forum's choice-of-law rules governing the effectiveness of such
clauses." Fin. One Pub. Co. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325, 332 (2d Cir.
2005). This is so because "[aJpplying the choice-of-law clause to resolve the contract formation
5
issue would presume the applicability of a provision before its adoption by the paJ1ies has been
established." Schnabel, 697 F.3d 110, 119 (2d Cir. 2012).
In addressing choice of law rules in a federal question case, the Court should
invoke federal common law choice of law analysis only where "significant federal policy, calling
for the imposition of a federal conflicts rule, exists." In re Gaston & Snow, 243 F.3d 599, 607
(2d Cir. 2001). Because this issue of contract formation does not implicate a significant federal
policy and "hinge[s] upon state law," New York choice of law rules govern this dispute. rd. at
605.
In New York, the first question to resolve in determining whether to undertake a
choice oflaw analysis is whether there is an actual conflict oflaws. Curley v. AMR Corp., 153
F.3d 5, 12 (2d Cir. 1998) (citing Matter of Allstate Ins. Co. and Stolarz, 81 N.Y.2d 219, 223
(1993)). "Laws are in conflict '[w]here the applicable law from each jurisdiction provides
different substantive rules.'" Int'l Bus. Machines Corp. v. LibertyMut. Ins. Co., 363 F.3d 137,
143 (2d Cir. 2004) (citing Curley, 153 F.3d at 12). Delaware law provides a statutory procedure
governing contract formation with respect to provisions added by amendment; this procedure
allows for unilateral amendment of an existing contract provided certain notice requirements are
satisfied. 5 Del. C. § 952. In contrast, New York law includes no such provision; contract
formation and amendment is instead governed by common law principles. Thus, an actual
conflict exists between the laws of Delaware and New York, and a choice of law analysis is
necessary.
New York rules apply a "center of gravity" analysis when deciding which state's
law to apply to determine the validity of a contract's formation. See Jimenez v. Monadock
Constr., Inc., 109 A.D.3d 514, 516 (2d Dep't 2013); see also Aldelman v. Pan Am World
6
Airways, 169 F.3d 99, 103 (2d Cir. 1999) ("Under New York's choice-of-Iaw rules, the
interpretation and validity of a contract is govemed by the law of the jurisdiction which is the
'center of gravity' of the transaction."). The most significant factors in resolving a choice oflaw
dispute are (1) the place of contracting; (2) the place of negotiation; (3) the place of performance;
(4) the location of the subject matter ofthe contract; and (5) the domiciles of the contracting
parties. See Eguis Corp. v. Mack-Cali Realty Corp., 6 A.D.3d 264, 266 (1st Dep't 2005) (citing
Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., 84 N.Y.2d 309, 317 (1994».
Applying the foregoing factors, the place of contracting is unclear from the
record. The place of negotiation is also unclear; in any event, because this inquiry concems a
form contract applicable to a consumer credit card account, this factor carries little weight given
the likely absence of any negotiation. As for the place of performance and location of the
contract's subject matter, Kulig opened her account, used her credit card to obtain cash advances,
and made payments on her outstanding balance in the state of New York. (Dkt. No. 17-3)
Because the statements provided by Midland do not cover the period during which actual
purchases were made, it is unclear whether the purchases were made in New York. Id. Ms.
Kulig is a resident of New York. (Compl.'l 3) Chase Bank NA, USA, the counterparty to the
contract, is a Delaware corporation. (Dkt. No. 17-3, 17-4) Although the record as it stands
indicates that New York law likely applies to the issue of contract formation, the Court needs not
resolve this issue because the same result would follow under the law of either state.
1. Delaware Contract Law
A Delaware statutory provision conceming the amendment of agreements
governing revolving credit plans allows banks to unilaterally amend such agreements, provided
that celiain notice requirements are met. 5 Del. C. § 952. That statute provides in part:
7
Unless the agreement goveming a revolving credit plan otherwise provides, a
bank may at any time and fi'om time to time amend such agreement in any
respect, whether or not the amendment or the subject of the amendment was
originally contemplated or addressed by the parties or is integral to the
relationship between the parties. Without limiting the foregoing, such amendment
may change telms by the addition of new telms or by the deletion or modification
of existing terms, whether relating to plan benefits or features ... arbitration or
other altemative dispute resolution mechanisms, or other matters of any kind
whatsoever .... Any notice of an amendment sent by the bank may be included
in the same envelope with a periodic statement or as part of the periodic statement
or in other materials sent to the borrower.
rd. at 952(a). This broad right to amend is subject to some limitations. In order to effect a
unilateral amendment pursuant to the statute, the issuer bank must notify the cardholder of his or
her right to opt out by sending written notice of the bOlTower's rejection of the amendment to the
bank at a provided address. rd. at 952(b )(1 )-(2). The statute requires that the borrower be given
a minimum of fifteen days to give notice of rejection to the bank, and also provides that use of
the account after the fifteen-day period constitutes acceptance even if the borrower has provided
notice of rejection. Id.
Although the introductory clauses of sections 952(b)(I) and (2) refer to
amendments increasing the rates of periodic interest, Delaware courts applying this statute have
applied the more detailed notice requirements therein to contract amendments adding or
modifying arbitration provisions. See Edelist v. MBNA Am. Bank, 790 A.2d 1249, 1257-59
(Del. Super. 2001); Pick v. Discover Fin. Servs., Inc., 2001 WL 1180278, at *4 (D. Del. 2001);
Kurz v. Chase Manhattan Bank USA. N.A., 319 F.Supp. 2d 457, 463 (S.D.N.Y. 2004) (citing
Edelist).
Thus, while section 952 does provide credit card issuers with a broad right to
amend their contracts with debtors, the right is not unlimited; rather, it is qualified by a
requirement of compliance with notice requirements. Here, Midland has provided no evidence
8
that any notice of an amendment containing the arbitration clause at issue was mailed to Kulig at
any point. Further, Midland concedes that none of the eighteen account statements they provided
includes any such notice. (Def. Reply Mem. at 6) Cases upholding the existence of a validly
executed amendment under section 952 include affirmative evidence in the record indicating that
the requisite notice, which includes an opportunity to opt-out, was sent to the cardholder. See,
~,
Edelist, 790 A.2d at 1258 (quoting the language of a notice of amendment and opt-out
provision, which an MBNA affiant stated was sent to plaintiff on a specific date); Kurz, 319 F.
Supp. 2d at 464 (citing the affidavit of a Chase employee describing Chase's system tracking
communications to customers and avelTing that the system indicated that a fOlm notice adding an
arbitration provision was mailed to plaintiff on a specific date); Pick, 2001 WL 1180278, at * 1
(quoting a specific, dated notice of amendment adding an arbitration clause which an affiant at
Discover Bank stated was sent to plaintiff on a specific date and fUlther citing Discover's
extensive quality control procedures for ensuring that specifically-numbered amendments are
delivered to cardholders); Grasso v. First USA Bank, 713 A.2d 304, 306-07 (Del. Super. 1998)
(quoting a notice of amendment attached as an exhibit to the affidavit of a First USA Bank vice
president); Marsh v. First USA Bank. N.A., 103 F.Supp.2d 909,917-19 (N.D. Tex. 2000) (bank
established by affidavits, deposition testimony, and documents that it provided detailed notice to
credit cardholders that it was amending its cardholder agreement to add an arbitration clause).
Against this legal background, Midland has produced neither the language or date of any notice
of amendment pertaining to an arbitration clause, nor any evidence that sllch notice was mailed
to Kulig at any point. Merely submitting a generic sample agreement that postdates an
accountholder's last active use of an account does not demonstrate compliance with the notice
requirements under Delaware law.
9
Midland fUlther argues that Chase has used an arbitration provision identical to
the one found in the Cardmember Agreement since 2005, thus urging the COUlt to assume that
the same provision was part of some contract that Kulig assented to when she used her account
prior to March 2007. In support of this contention, Midland cites a single case quoting an
identical arbitration clause in a 2005 Chase Cardmember Agreement. Krutchik v. Chase Bank
USA, N.A., 531 F. Supp. 2d 1359, 1362-63 (S.D. Fla. 2008). The contract terms applicable to a
different debtor and a creditor, neither of whom are before this COUlt, do not control the issue of
the terms agreed upon by Ms. Kulig, particularly because Midland cites no evidence (aside from
this single case) for its contention that all Chase credit card accounts opened since 2005 have
been governed by the same arbitration clause at issue here.
Thus, even if Delaware law were to be applied, Midland nevertheless would have
failed to come forward with evidence which, if believed, would show that Ms. Kulig agreed to
the arbitration provision.
2. New York Contract Law
Unlike Delaware law, New York law does not provide banks with a statutory right
to unilaterally amend revolving credit agreements. In New York, "[ fJundamental to the
establishment of a contract modification is proof of each element requisite to the formulation of a
contract, including mutual assent to its terms." Beacon Terminal Corp. v. Chemprene, Inc., 75
A,D.2d 350, 354 (2d Dep't 1980). "No one will be held to have surrendered or modified any of
his contract rights unless he is shown to have assented thereto in a manner that satisfies the
requirements of a valid contract." Louis Dreyfus Negoce S.A, v. Blystad Shipping & Trading
Inc., 252 F.3d 218, 228 (2d Cir. 2001) (quoting Corbin on Contracts § 1293 (1962)). "The
manifestation of expression of assent necessary to form a contract may be by word, act, or
10
conduct which evinces the intention of the parties to contract." Maffea v. Ippolito, 247 A.D.2d
366,367 (2d Dep't 1998).
Although the use of a credit card constitutes acceptance of an offer of credit, see
Feder v. Fortunoff, 114 A.D.2d 399 (2d Dep't 1985), merely continuing to owe money on a
credit card account cannot reasonably be understood to be an "objective manifestation of intent"
that binds the parties to a change in terms. See Zheng v. City of New York, 93 A.D.3d 510, 511
(1st Dep't 2012). An outstanding balance on a credit card, without more, is simply a debt
attributable to past uses of the card rather than a use in and of itself.
Midland relies on Herrington v. Union Planters Bank, N.A., 113 F. Supp. 2d
1026, 1031 (S.D. Miss. 2000) to argue that Kulig's keeping the account open and maintaining a
debt amount to a "use" of the account sufficient to constitute acceptance of the proffered
Cardmember Agreement. First, in Hen'ington, the court explicitly stated that the consumer was
mailed a letter along with a copy of the revised agreement containing the arbitration provision.
rd. at 1028. The court rejected plaintiffs' argument that they never assented to the change in
tenns not merely because they maintained their accounts, but because they did so after it was
"undisputed that the plaintiffs were given notice ... that their accounts were being revised to
include an arbitration clause." Id. at 1031. Moreover, the account at issue in Herrington was a
deposit account, not a revolving credit account. To maintain a deposit account with a bank is to
"use" such an account to store one's assets in a federally insured safe house, to earn interest on
the assets, and to have access to the assets tluough the bank's network. This contrasts with an
unpaid balance on a credit card account, which, without more, is merely a debt attributable to
past uses ofthe account.
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Midland has failed to come fOlward with evidence which, if believed,
demonstrates that Ms. Kulig manifested her assent to the terms of the March 22, 2009
Cardmember Agreement, including the arbitration provision. Thus, under both the common law
principles of New York contract law and the applicable statutory provision of Delaware law,
Midland has failed to create a genuine issue of material fact as to whether a valid agreement to
arbitrate was fOlmed.
B. Scope of Denial
Midland has conditionally requested that if the Court declines to compel
arbitration of Kulig's claims, the Court refrain £i'om denying its motion to compel arbitration and
instead order fmiher discovery on issues stiII in dispute. To support this request, Midland relies
on Bensadoun, 316 F.3d at 175 ("If there is an issue offact as to the making of the agreement for
arbitration, then a trial is necessary."). Under the FAA, "[i]fthe making of the arbitration
agreement [ ... ] be in issue, the court shall proceed summaJily to the trial thereof." 9 U.S.C. §
4." However, such "a trial is wan'anted only if there exists one or more genuine issues of
material fact regarding whether the parties have entered into such an agreement." Schnabel v.
Trilegiant Com., 697 F.3d 110, 118 (2d Cir. 2012) (citing Opals on Ice Lingerie v. Bodylines
Inc., 320 F.3d 362, 369 (2d Cir. 2002)). Moreover, in Bensadoun the Second Circuit remanded
the case not to hold a mini-trial on arbitrability but rather to determine substantive issues
underlying the case prior to reaching a final decision on arbitrability. 316 F.3d at 178. This
contrasts with the instant motion, where plaintiff's substantive claims are not at issue but the
issue of validity of contract formation has been before the Court from the outset of the motion.
12
The record in this case indicates only that, at an unknown point prior to 2006,
Kulig opened a credit card account with Chase, and that a "sample" Chase "Cardmember
Agreement" published on or after March 22, 2009 included an arbitration clause. The sole link
between that agreement and Kulig's account is a declaration by Patrick Minford, a Midland
employee, stating that "[t]he business records transferred by Chase in June 2009 also included a
copy of the sample Cardmember Agreement applicable to [Kulig's] Account." (Dkt. No. 17 at ~
13) There is no indication that Minford's knowledge on this point had any basis beyond his
reading of the document, and nothing in his declaration or the four attached exhibits indicates
otherwise.
In the course of briefing, Midland sought and obtained an affidavit from an
authorized Chase representative indicating that Kulig had an account with Chase and that the
account was sold and transferred to MF on June 11, 2009. (Dkt. No. 32-2) Moreover, at a
September 26, 2013 pre-trial conference, the patties agreed before the Court to engage in limited
discovery concerning arbitration-related issues; Midland did in fact obtain and file a set of
discovery responses from Kulig. (Dkt. No. 33) Thus, despite having multiple meaningful
opportunities to obtain evidence indicating the contractual tenus actually applicable to Kulig's
account, Midland failed to produce any evidence on this issue. Given this context, the Court
declines Midland's request to order more extensive discovery on this issue.
"The patty seeking to stay the case in favor of arbitration bears an initial burden
of demonstrating that an agreement to arbitrate was made." Hines v. Overstock.com, Inc., 380 F.
App'x 22, 24 (2d Cir. 2010) (citing Almacenes Fernandez, S.A. v. Golodetz, 148 F.2d 625,628
(2d Cir.1945». Midland has failed to meet their burden in this case. Thus, their motion to
compel arbitration must be denied.
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CONCLUSION
For the reasons stated above, defendants' motion to compel arbitration and stay
plaintiffs complaint (Dkt. No. 16) is denied. Plaintiffs motion for leave to file sur-reply (Dkt.
No. 35) is denied as moot, as neither it nor the content of Defendants , Memorandum in
Opposition to Plaintiffs Motion for Leave to File Sur-Reply were relied upon in the disposition
of the instant motion. Defendants are directed to file an answer to plaintiffs complaint within
fomteen (14) days.
SO ORDERED.
P. evm Castel
United States District Judge
Dated: New York, New York
November 13, 2013
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