Three Gold Resources, LLC et al v. Energex Power, Inc.
Filing
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OPINION AND ORDER - Three Gold and Shetler are entitled to default judgment against Energex only on their breach of contract claim. All their other claims are DISMISSED WITH PREJUDICE. The Court also finds that appointment of a receiver is necessary. The Court grants in part and denies in part 29 Three Gold and Shetlers Motion for Default Judgment and to Appoint Receiver; denies as moot 23 Three Gold and Shetlers first Motion to Appoint Receiver. The Court will issue a separate order appo inting the receiver and setting the terms of the receivership. Three Gold and Shetler are ORDERED to file with this Court proposed terms of the receivership within 14 days of this Opinion and Order. Signed by Judge Edmund A. Sargus on 1/28/2025. (cmw)(This document has been sent by regular mail to the party(ies) listed in the NEF that did not receive electronic notification.)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
THREE GOLD RESOURCES, LLC,
et al.,
Plaintiffs,
Case No. 2:23-cv-3495
Judge Edmund A. Sargus, Jr.
Magistrate Judge Chelsey M. Vascura
v.
ENERGEX POWER, INC.,
Defendant.
OPINION AND ORDER
This matter is before the Court on Plaintiffs Three Gold Resources, LLC, and Shetler
Family Foundation, Inc.’s Motion to Appoint Receiver (ECF No. 23) and Motion for Default
Judgment and to Appoint a Receiver (Mot., ECF No. 29). Defendant Energex Power, Inc. has
failed to comply with a Court order requiring it to obtain counsel and has not participated in
proceedings before this Court. Accordingly, the Clerk entered default against it. (ECF No. 26.)
For the reasons stated below in this Opinion and Order, the Court GRANTS IN PART
and DENIES IN PART the Motion for Default Judgment and to Appoint Receiver. (ECF No.
29.) Three Gold and Shetler’s first Motion to Appoint Receiver is DENIED AS MOOT. (ECF
No. 23.) Default judgment is entered against Energex on Three Gold and Shetler’s core breach of
contract claim, but their other four claims are dismissed with prejudice. Additionally, the Court
finds that the appointment of a receiver is necessary to protect the assets at issue. The Court will
issue an order appointing a receiver and setting the terms of receivership at a later date.
BACKGROUND
Energex owns and operates over 2,700 oil and gas wells and hundreds of miles of pipeline
gathering systems in Ohio and Pennsylvania. (Compl., ECF No. 3, ¶¶ 4–5.) Energex obtained those
oil and gas interests from Diversified Oil & Gas, LLC, and associated companies. (Id., ¶ 17.)
Before Energex obtained its interests from Diversified, Three Gold and Shetler obtained from
Diversified gross overriding royalty interests (“ORRIs”) “in certain oil, gas, and mineral leases
and certain production payments on the fee oil, gas, and mineral interests in the production rights,
rights in production, wells, and hydrocarbons related to certain interests of Energex in oil and/or
gas wells in Ohio and Pennsylvania.” (Id., ¶¶ 10–13; see ECF Nos. 1-1 to 1-29.) Three Gold owns
a 12% ORRI, and Shetler owns a 1% ORRI. (Compl., ¶¶ 10, 12.) Three Gold and Shetler assert
that Diversified’s obligation to pay them “the gross ORRI extended to and was binding upon
Diversified’s successors and assigns, including Energex.” (Id., ¶ 19.)
Under recorded agreements, Energex made ORRI payments to Three Gold and Shetler, but
those payments stopped as of November 2022. (Id., ¶ 20; Mot., PageID 2630.) Three Gold and
Shetler claim that Energex provided them with revenue ACH remittance statements that
undervalued the amount of actual production from the wells and the price of the product to
intentionally underpay Three Gold and Shetler their respective ORRI shares. (Compl., ¶¶ 20–21.)
They also assert that Energex reported production information to the Ohio Department of Natural
Resources and the Pennsylvania Department of Environmental Protection that differed from what
Energex reported on the ACH statements. (Id., ¶¶ 21–23; Mot., PageID 2630.)
In August 2023, Energex representatives informed Three Gold and Shetler that Energex
does not have the funds to pay them royalty amounts due in the past or the future. (Compl., ¶¶ 24–
25.) Energex informed Three Gold and Shetler that it intended to continue operating the oil and
gas wells at issue. (Id., ¶ 26.) Three Gold and Shetler claim that the wells are at risk of being
depleted by Energex without providing compensation to Three Gold or Shetler and that, if
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depletion occurs, there will be no adequate remedy at law available to Three Gold or Shetler. (Id.,
¶¶ 28–29.) Norman Shetler, president of Shetler and the sole member of Three Gold, declares that
a representative of EOS Energy, LLC, informed him near the end of 2023 that Energex was trying
to sell its interests in oil and gas wells. (Shetler Decl., ECF No. 23-1, ¶ 10.)
Gold and Shetler sued Energex in the Guernsey County Court of Common Pleas in August
2023. (See Compl.) They claimed fraud, breach of contract, breach of implied warranties, theft,
and conversion and asked for compensatory damages, punitive damages, pre- and post-judgment
interest, attorney’s fees and costs, and the appointment of a receiver to enforce their contracts. (Id.,
PageID 1296.) Energex, then represented by counsel, removed the case to this Court in October
2023. (ECF No. 1.) In June 2024, Three Gold and Shetler moved the Court to appoint a receiver.
(ECF No. 23.)
In May 2024, Energex’s counsel moved to withdraw. (ECF No. 18.) This Court granted
that motion and ordered Energex to retain new counsel within 30 days. (ECF No. 19.) After
Energex failed to do so, this Court ordered Energex to show cause why the Clerk should not enter
default for its failure to comply with the Court’s order. (ECF No. 22.) Energex did not respond,
and the Court ordered the Clerk to enter default against Energex under Federal Rule of Civil
Procedure 55(a). (ECF No. 25.) The Clerk entered default on July 12, 2024. (ECF No. 26.)
The Court then ordered Three Gold and Shetler to show cause why this action should not
be dismissed for want of prosecution unless it moved for default judgment. (ECF No. 27.) Plaintiffs
filed for default judgment and renewed their motion to appoint a receiver. (ECF No. 29.) The facts
and arguments raised in the original motion to appoint receiver are also raised in the motion for
default judgment.
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LEGAL STANDARD
Rule 55 of the Federal Rules of Civil Procedure governs defaults and default judgments.
Fed. R. Civ. P. 55. The first step is to obtain an entry of default by the clerk, which is appropriate
“[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or
otherwise defend, and that failure is shown by affidavit, or otherwise.” Fed. R. Civ. P. 55(a). Upon
the clerk’s entry of default, “the complaint’s factual allegations regarding liability are taken as
true, while allegations regarding the amount of damages must be proven.” Hoover v. 4 Seasons
Motors Inc., No. 2:21-cv-4177, 2022 WL 2870175, at *2 (S.D. Ohio July 21, 2022) (quoting
United States v. Parker-Billingsley, No. 3:14-cv-307, 2015 WL 4539843, at *1 (S.D. Ohio Feb.
10, 2015) (Newman, J.)).
If the plaintiff’s claims are not for “a sum certain or a sum that can be made certain by
computation,” the plaintiff must then apply to the Court for a default judgment. Fed. R. Civ. P.
55(b). “Thus, while liability may be shown by well-pleaded allegations, the district court must
conduct an inquiry in order to ascertain the amount of damages with reasonable certainty.” DT
Fashion LLC v. Cline, No. 2:16-cv-1117, 2018 WL 542268, at *2 (S.D. Ohio Jan. 24, 2018)
(cleaned up) (quoting Parker-Billingsley, 2015 WL 4539843, at *1). A court may determine
damages without holding an evidentiary hearing if the damages are “capable of ascertainment from
definite figures contained in the documentary evidence or in detailed affidavits.” ParkerBillingsley at *1 (citation omitted).
ANALYSIS
Three Gold and Shetler have obtained an entry of default, and the claims are not for a sum
certain. (ECF No. 26.) Thus, the Court accepts as true the allegations in the Complaint and will
analyze whether the factual allegations establish liability under each of Plaintiff’s claims. The
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Court will then turn to whether a receiver should be appointed.
I.
Default Judgment Analysis
The Court has jurisdiction over this matter under 28 U.S.C. § 1332 because there is
complete diversity between the parties and the controversy involves more than $75,000. The action
was properly removed from an Ohio state court pursuant to 28 U.S.C. §§ 1441 and 1446. All of
Three Gold and Shetler’s claims are brought under Ohio law. See Erie R. Co. v. Tompkins, 304
U.S. 64, 78 (1938) (“Except in matters governed by the Federal Constitution or by acts of
Congress, the law to be applied in any case is the law of the state.”).
a. Breach of Contract
“Under Ohio law, the elements of a breach of contract claim are: (1) the existence of a
contract; (2) performance by the plaintiff; (3) breach by the defendant; and (4) damage or loss to
the plaintiff as a result of the breach.” V & M Star Steel v. Centimark Corp., 678 F.3d 459, 465
(6th Cir. 2012).
As alleged, Three Gold and Shetler obtained their royalty interests through a series of
assignments from Diversified. Diversified later assigned all its relevant interests to Energex, and
“the gross ORRI extended to and was binding upon Diversified’s successors and assigns, including
Energex.” (Compl., ¶¶ 19, 46.) Three Gold and Shetler claim they performed all their obligations
required under the relevant agreements. (Id., ¶ 47.) They contend Energex has refused to perform
by underpaying and not paying royalty amounts owed to them, and that they were damaged as a
result. (Id., ¶¶ 20–21, 48–49; Mot., PageID 2630.) Accordingly, Three Gold and Shetler have
pleaded all of the required elements for breach of contract, and they are entitled to default judgment
on that claim.
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b. Fraud
Three Gold and Shetler allege that Energex intentionally misrepresented the quantity and
price of the oil and gas produced and the payments owed to Three Gold and Shetler under their
ORRIs. (Compl., ¶¶ 20, 33, 35.) To support that claim, they allege that Energex reported different
production information to state officials in Ohio and Pennsylvania. (Id., ¶¶ 21–23.) They allege
that Energex representatives knew about the false representations and acted with the intent to
deceive Three Gold and Shetler. (Id., ¶ 34.)
Under Ohio law, “the existence of a contract action generally excludes the opportunity to
present the same case as a tort claim.” Pham Constr. & Co., LLC v. Tran, 236 N.E.3d 849, 857
(Ohio Ct. App. 2024). In other words, “[a] tort claim based upon the same actions as those upon
which a claim of contract breach is based will exist independently of the contract action only if the
breaching party also breaches a duty owed separately from that created by the contract, that is, a
duty owed even if no contract existed.” Textron Fin. Corp. v. Nationwide Mut. Ins., 684 N.E.2d
1261, 1270 (Ohio Ct. App. 1996); see also Prater v. Three-C Body Shop, Inc., No. 01AP-950,
2002 WL 479827, at *4 (Ohio Ct. App. 2002) (“A breach of contract claim does not create a tort
claim.”)
Three Gold and Shetler’s lawsuit is a breach of contract action. Their breach of contract
claim is premised, in part, on the allegation that Energex underpaid them and falsely reported lower
production numbers to them than those reported to government regulators. (Compl., ¶¶ 20–21, 48–
49.) Three Gold and Shetler raise the same basic facts as the basis for their common law fraud
claim. (Compl., ¶¶ 33–34.) As alleged, Energex’s “duty to fully and accurately disclose” the
correct information to Three Gold and Shetler arose only from their contracts with Diversified,
which were assigned to Energex. (Compl., ¶ 32.) And Three Gold and Shetler have not identified
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a duty Energex owed to them that exists separate from their contracts. Accordingly, under Ohio
law, their common law fraud tort claim is not actionable because it depends only on the facts that
underlie Energex’s breach of contract. Three Gold and Shetler’s fraud claim is DISMISSED
WITH PREJUDICE.
c. Breach of Implied Warranties
Three Gold and Shetler assert that Energex owed to them implied duties “to drill,” “to
operate diligently and prudently,” and “of reasonable development after discovery.” (Compl.,
¶¶ 51–53.) They argue Energex breached these implied duties and that it will continue to do so.
(Id., ¶¶ 55–59.)
Under Ohio law, “[o]il and gas leases are ordinarily subject to an implied covenant to
reasonably develop the land.” Jacobs v. Dye Oil, LLC, 147 N.E.3d 52, 71–72 (Ohio Ct. App. 2019)
(citing Alford v. Collins-McGregor Operating Co., 95 N.E.3d 382, 386 (Ohio 2018)). This implied
covenant is also described as “a duty to operate with reasonable diligence.” Ionno v. Glen-Gery
Corp., 443 N.E.2d 504, 506 (Ohio 1983). A covenant to reasonably develop is implied in oil and
gas leases absent an express provision to the contrary. Id. at 506–07; Alford at 386.
Three Gold and Shetler essentially assert that an implied covenant of reasonable
development applies to their royalty interests; all three of the implied duties and “warranties” they
proclaim fall under that implied covenant. But, per this Court’s review, the Ohio Supreme Court
has not decided whether an implied covenant to reasonably develop applies to parties who hold
only royalty interests, such as Three Gold and Shetler, in addition to lessors of the land itself. Even
so, the Ohio Supreme Court has applied the implied covenant where a lessor was entitled to royalty
payments based on the amount of oil produced from the land. See Alford at 387 (citing Ionno).
This Court determines that the Ohio Supreme Court would likely apply the implied covenant of
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reasonable development to contracts where, as here, the party asserting the existence of the duty
holds only royalty interests in the production of oil and gas. See Ziegler v. IBP Hog Mkt., Inc., 249
F.3d 509, 517 (6th Cir. 2001) (holding that in diversity cases, absent state supreme court authority
on the matter, the court’s task is to “ascertain from all available data . . . what the state’s highest
court would decide if faced with the issue.”); see also ANR W. Coal Dev. Co. v. Basin Elec. Power
Co-op., 276 F.3d 957, 964–66 (8th Cir. 2002) (applying an implied covenant of reasonable
development “in favor of an overriding-royalty owner whose interest is created in a mineral lease”
under North Dakota law).
When the implied covenant of reasonable development applies, the lessee has a duty to
“‘drill and operate such number of oil wells on the lands as would be ordinarily required for the
production of oil contained in such lands, and afford ordinary protection to the lines.’” Alford, 95
N.E.3d at 386 (quoting Harris v. Ohio Oil Co., 48 N.E. 502 (Ohio 1897), paragraph one of the
syllabus.) Three Gold and Shetler assert that Energex has underpaid some royalty payments and
failed to make other royalty payments. (Compl., ¶¶ 20–24.) They also state that Energex operates
2,700 oil and gas wells and hundreds of miles of pipeline and assert that the oil and gas wells in
question are finite natural resources capable of depletion. (Id., ¶¶ 4–5, 27–28.) But Three Gold and
Shetler do not assert that the number of wells or the amount of oil and gas produced is less than
what is “ordinarily required.” See Alford at 386. Accordingly, the Complaint fails to state a cause
of action for breach of implied covenant of reasonable development. Three Gold and Shetler’s
claim for breach of implied warranties is DISMISSED WITH PREJUDICE.
d. Civil Remedy for Theft
Three Gold and Shetler bring a claim for a civil damages remedy for a criminal act under
Ohio Revised Code § 2307.60. That provision states: “Anyone injured in person or property by a
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criminal act has, and may recover full damages in, a civil action unless specifically excepted by
law.” Ohio Rev. Code § 2307.60(A)(1). Three Gold and Shetler claim that Energex committed a
criminal theft offense under Ohio Revised Code § 2913.02(A), alleging that the company stole
money from them willfully and maliciously by asserting control over the ORRI payments
belonging to them. (Compl., ¶¶ 64–68.)
Ohio courts have held that a civil tort claim under Ohio Revised Code § 2307.60 cannot be
based on an alleged criminal theft offense premised upon a breach of contract. Powell v. CBRE,
Inc., No. 1:22-CV-496, 2024 WL 5041023, at *7 (S.D. Ohio Dec. 9, 2024) (Hopkins, J.) (citing
STE Invs., LLC v. Macprep, Ltd., 2022 WL 3011012, at *5 (Ohio Ct. App. 2022); Wildcat Drilling,
LLC v. Discovery Oil and Gas, LLC, 121 N.E.3d 65, 72 (Ohio Ct. App. 2018), rev’d and remanded
on other grounds, 173 N.E.3d 1156 (Ohio 2020)). “This is consistent with the general law in Ohio
that ‘the existence of a contract action generally excludes the opportunity to present the same case
as a tort claim.’” Powell at * 7 (quoting Pham, 236 N.E.3d at 857).
Three Gold and Shetler do not identify any independent duty Energex owed to them under
their civil remedy for theft claim. Because no civil remedy for theft exists under Ohio law when
the alleged theft is based on a breach of contract, Three Gold and Shetler’s civil remedy for theft
claim is DISMISSED WITH PREJUDICE.
e. Conversion
In Ohio, “[a] conversion claim ‘is recognized as any exercise of dominion or control
wrongfully exerted over the personal property of another in denial of or under a claim inconsistent
with his rights.’” Gorsha v. Clark, No. 2:18-cv-508, 2022 WL 278973, at *3 (S.D. Ohio Jan. 31,
2022) (Graham, J.) (quoting Ohio Tel. Equip. & Sales, Inc. v. Hadler Realty Co., 493 N.E.2d 289,
292 (1985)). Conversion is a tort claim, just like Three Gold and Shetler’s fraud and civil remedy
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for theft claims. See Washington Marine, LLC v. Kunz, No. 1:24-CV-505, 2024 WL 4767770, at
*2 (S.D. Ohio Nov. 13, 2024) (Dlott, J.).
Three Gold and Shetler allege that Energex wrongfully retained and took money owed to
them under their royalty interests in Energex’s oil and gas wells, thus interfering with Three Gold
and Shetler’s rights of ownership. (Compl., ¶¶ 72–78.) These allegations are bound up with their
breach of contract claim, and Three Gold and Shetler do not “plead breach of duty or damages
separate from the breach of contract.” Washington Marine at *2. “A conversion claim cannot be
based upon property rights that arise entirely from contractual rights.” Highman v. Gulfport Energy
Corp., No. 2:20-CV-1056, 2020 WL 6204344, at *4 (S.D. Ohio Oct. 22, 2020) (Morrison, J.).
Accordingly, Three Gold and Shetler’s conversion claim fails as a matter of law, and it is
DISMISSED WITH PREJUDICE.
In sum, this Court determines that Three Gold and Shetler are entitled to default judgment
against Energex only on their breach of contract claim. All their other claims are DISMISSED
WITH PREJUDICE. The Court GRANTS IN PART and DENIES IN PART Three Gold and
Shetler’s Motion for Default Judgment. (ECF No. 29.)
II.
Plaintiffs’ Motion to Appoint Receiver
“A district court enjoys broad equitable powers to appoint a receiver over assets disputed
in litigation before the court.” Liberte Cap. Grp., LLC v. Capwill, 462 F.3d 543, 551 (6th Cir.
2006); see also Fed. R. Civ. P. 66. Nonetheless, “[a] receivership is an ‘extraordinary remedy’ that
a court should employ with the ‘utmost caution’ and grant ‘only in cases of clear necessity to
protect plaintiff’s interests in the property.’” Pension Ben. Guar. Corp. v. Evans Tempcon, Inc.,
630 F. App’x 410, 414 (6th Cir. 2015) (quoting 12 Fed. Prac. & Proc. Civ. § 2983 (3d ed.)).
Receivers are appointed “to safeguard the disputed assets, administer the property as suitable, and
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to assist the district court in achieving a final, equitable distribution of the assets if necessary.”
Liberte at 551. In considering a motion to appoint a receiver, the Sixth Circuit directs district courts
to weigh:
whether the property at issue is in imminent danger of being lost, concealed,
injured, diminished in value, or squandered, whether the defendant engaged in
fraudulent conduct, the inadequacy of the available legal remedies, the lack of less
drastic equitable remedies, and the likelihood that the appointment will do more
good than harm.
Pension Ben. at 414 (citations omitted).
Three Gold and Shetler contend that Energex is mismanaging the oil and gas wells in which
they have royalty interests and that those past and future interests are in imminent danger of being
lost and forever squandered. (Mot., PageID 2633.) Energex has underpaid past royalties, refused
to pay past and future royalty interests, and represented that it needs the royalty money to meet
their own payroll needs. (Id., PageID 2630–31.) Additionally, an Energex representative informed
Three Gold and Shetler that Energex intends to file for bankruptcy, but no timeframe or additional
details were provided. (Id., PageID 2631.) Further, Three Gold and Shetler allege that Energex
now lacks access to critical software concerning well production and royalty calculations, possibly
because it failed to pay the software vendor. (Id., PageID 2634.) Given these facts, accepted as
true, Energex faces severe financial challenges that place Three Gold and Shetler’s past and future
property interests at great risk. Energex’s insolvency and the risk that production will collapse
strongly favor appointment of a receiver.
Further, as alleged, Energex has engaged in fraudulent conduct. Energex undervalued the
royalty interests it paid to Three Gold and Shetler by reporting lower production quantity and
prices to them than it reported to government agencies in Ohio and Pennsylvania. (Id.) The goal
of this scheme was to pay Three Gold and Shetler less than they were owed. (Id.) This factor
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supports appointing a receiver to prevent future fraud.
Three Gold and Shetler also argue that alternative legal remedies are inadequate to protect
their interests. (Id., PageID 2635.) They assert that Energex has concealed all records of the true
amounts of royalties owed to them based on true production amounts and prices. (Id.) Further,
Three Gold and Shetler claim Energex has failed to report oil and gas production information to
the Ohio Department of Natural Resources for the year 2023, indicating that the company
continues to mismanage its records. (Id.) Ultimately, Three Gold and Shetler assert that a receiver
would do more good than harm because a receiver can protect and preserve the asserts that have
not already been dissipated, which is in the interest of all parties and Energex’s other creditors.
(Id.; see ECF 23-2 ($25,400.11 arbitration award against Energex).) Although Three Gold and
Shetler request an alternative remedy of a hearing to determine the amount of damages, they
contend that a receiver is best positioned to conduct the necessary accounting.
The Court finds that a receiver is necessary to protect Three Gold and Shetler’s interests,
to prevent future fraud, to ensure Energex’s compliance with regulatory and contractual
requirements, and to assist the Court in an equitable distribution of assets. Without an appointment,
Energex is positioned to fall further into insolvency, which could lead to a collapse of its oil and
gas production and further jeopardize the interests of Three Gold, Shetler, and Energex’s
creditor(s). These factors, along with Energex’s failure to comply with this Court’s orders and to
participate in proceedings before this Court, demonstrate that a receiver is necessary to protect the
interests of all Parties.
CONCLUSION
Three Gold and Shetler are entitled to default judgment against Energex only on their
breach of contract claim. All their other claims are DISMISSED WITH PREJUDICE. The Court
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also finds that appointment of a receiver is necessary. The Court GRANTS IN PART and
DENIES IN PART Three Gold and Shetler’s Motion for Default Judgment and to Appoint
Receiver. (ECF No. 29.) Three Gold and Shetler’s first Motion to Appoint Receiver is DENIED
AS MOOT. (ECF No. 23.)
The Court will issue a separate order appointing the receiver and setting the terms of the
receivership. Three Gold and Shetler are ORDERED to file with this Court proposed terms of the
receivership within 14 days of this Opinion and Order.
The Clerk is DIRECTED to enter judgment and terminate this case on the Court’s docket.
IT IS SO ORDERED.
1/28/2025
_____________________
DATE
s/Edmund A. Sargus, Jr.
________________________________
EDMUND A. SARGUS, JR.
UNITED STATES DISTRICT JUDGE
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