Liability Limits: Good Legal Advice, Bad Professional Practice

In my day job, I am a provider of professional services; in my other roles, I also frequently am a consumer of professional services.  As a consumer, I have noticed a disturbing trend in agreements for professional services.  More and more professionals are inserting standard clauses in their agreements with consumers prospectively limiting their liability for negligence and other mistakes or misconduct.

These limitations take various forms, but recently the trend seems to be to limit the professional’s potential liability to no more than the total fee they were paid by the consumer.  Assuming it is consistent with one’s professional obligations and is enforceable, these clauses allow a professional to commit negligence or other misconduct, potentially cause substantial damage to the consumer, but yet have no liability or financial obligation, other than to return the fee paid. That’s hardly a formula for fostering careful, diligent, and skillful professionals.

Certain professions restrict liability limitation clauses but permit them under certain circumstances. For example, lawyers are prohibited from entering into any agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement, pursuant to NC Rule of Professional Conduct 1.8(h)(1).  Such a clause or agreement is considered a conflict of interest with the client.  This restriction effectively prevents the use of such clauses in form or standard contracts and agreements with lawyers but permits it when warranted and with appropriate safeguards.  Although there certainly are circumstances where such liability limitation clauses are appropriate, they should not be a routine contract clause in my view.  Restrictions, such as the one contained in the NC Rules of Professional Conduct for attorneys, prevent their widespread use in form agreements.

Unfortunately, the regulations and ethics rules for most professionals in North Carolina do not prohibit or even restrict such liability limitation clauses.  Most professionals essentially are allowed to eliminate all such liability through a contractual provision without restrictions.  Hopefully, more profession regulators will recognize that placing at least some restrictions on these types of clauses will help limit their use to circumstances where justified and with appropriate protections, not merely as part of a form contract that most consumers never bother to read before signing away important legal rights.

As a lawyer, I realize that most of these clauses are inserted upon the advice of attorneys.  Although it may be good technical, legal advice to a professional, it is misguided, bad business, and unprofessional in my opinion.   As a consumer of services, the message that such clauses send me is that the professional is not confident in his or her abilities and doesn’t want to be responsible for any mistakes or misconduct.  I have consistently refused to sign agreements or contracts containing these liability limitation provisions and instead seek out professionals who do not use them or are willing to delete them.

I encourage you as a consumer to do the same thing and, as professional, not to include such provisions in your agreements from a business and professionalism standpoint.  I want to deal with professionals who are competent, confident, careful, and diligent but also willing to accept responsibility for any mistakes that may be made.  I believe that is what most consumers want in dealing with professionals.  Liability limitation clauses send the wrong message and create misguided incentives.   Sometimes good technical legal advice is bad for business and for your profession and professionalism. Any good professional should stand behind his or her work, not hide behind a liability limitation clause.

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Money Gone Missing: When a Third Party Steals Trust Funds

Under Rule 5.3, a lawyer has an obligation to properly supervise nonlawyer assistants who have access to the trust account. Thus, if that nonlawyer assistant embezzles entrusted client funds, the lawyer has a professional responsibility to replace the funds. What about when the loss occurs through fraud by an unaffiliated third party?

Does a lawyer have a professional responsibility to replace funds stolen from his trust account by an unaffiliated third party where the bank honored counterfeit checks presented by the third party?

Formal Ethics Opinion, 2015 FEO 5, was adopted in October 2015 and provides:

…when funds are stolen from a lawyer’s trust account by a third party who is not employed or supervised by the lawyer, and the lawyer was managing the trust account in compliance with the Rules of Professional Conduct, the lawyer is not professionally responsible for replacing the funds stolen from the account.

The Opinion advises that lawyers must still investigate the matter, take steps to prevent further loss to entrusted funds, and make every effort to remedy the situation including: “…researching the law to determine if Bank is liable; communication with Bank to discuss Bank’s liability; asking Bank to determine if there is insurance to cover the loss; considering whether it is appropriate to close the trust account and transfer the funds to a new trust account; and working with law enforcement to recover the funds.”

Note that the Opinion requires that the lawyer “was managing the trust account in compliance with the Rules of Professional Conduct” before he is relieved of the duty to replace the stolen funds.  While the trust accounting rules may not be burdensome, they are specific.  One area where we see lawyers consistently missing the mark is by failing to reconcile the trust accounts quarterly and by failing to send a written accounting of funds to clients, annually and upon final disbursement.  The opinion also clarifies that “substantial compliance” would be sufficient to relieve the lawyer of the duty to reimburse the account, so it is likely that a mere technical violation of the Rules, such as failure to keep proper-sized cancelled check images, would not trigger the reimbursement requirement.

RPC 191

Compare this Opinion with RPC 191 which requires a lawyer to reimburse his trust account for any losses caused by disbursing before funds are irrevocably credited where the lawyer disburses against provisionally credited funds. In that case, if third party fraud prevented the funds from being irrevocably credited and the attorney disburses prior to that point, the attorney must reimburse the client funds.

Does a lawyer have a duty to replace stolen funds from the lawyer’s trust account when the theft occurs as a result of an unaffiliated third party gaining illegal access to lawyer’s computer and transferring the trust account balance to the third party’s account?

It depends upon whether reasonable security measures were in place.  2015 FEO 6 provides that the lawyer is not professionally obligated to replace the stolen funds as long as he has “taken reasonable care to minimize the risks to client funds by implementing reasonable security measures in compliance with the requirements of Rule 1.15.” 2011 FEO 7 provides some of those affirmative duties including:

  • educating himself regularly on the risks of online banking;
  • actively maintaining end-user security;
  • using encryption and security software;
  • hiring an IT professional to advise the lawyer and firm employees; and
  • insuring all staff members receive training and follow the security measures adopted by the law firm.

Under the above two circumstances, may a lawyer deposit his own funds into the trust account while pursuing other remedies?

As a general rule, there is a prohibition on commingling funds:  Lawyers should not deposit personal funds into the lawyer’s trust or fiduciary accounts.  There are, however, various exceptions to the rule which permit a lawyer to deposit personal funds into a trust account including funds sufficient to open or maintain an account and others which allow the lawyer to fulfill his duty to safeguard entrusted funds.

Although it is not required for a lawyer to deposit his own funds into the trust account under the circumstances described in 2015 FEO 6, the opinion permits a lawyer to do so.  A lawyer may replace the stolen funds with his own, until the funds may otherwise be recovered from the bank, insurance, or elsewhere. The opinion provides that if the lawyer decides to deposit his own funds, the lawyer must make sure the trust account reflects the:

  • source of the funds;
  • reason for the deposit;
  • date of the deposit; and
  • client name for which the funds were deposited.

In short, under these circumstances involving an unaffiliated third party, a lawyer may not have a professional responsibility to reimburse the stolen funds. However, the lawyer (1) may still have a legal responsibility to do so; and (2) must take certain steps which include reporting the theft to the NC State Bar’s Trust Accounting Compliance Counsel.

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Think Twice Before Using a Liquidated Damages Clause

NC courts generally give broad deference to parties entering into a contractual relationship to negotiate the terms of the contract, including legal remedies against each other.  One type of remedy which may be included is a liquidated damages clause.  Such a provision provides a pre-determined amount that a breaching party will owe the non-breaching party in the event of a breach.  This contractual provision has both positives and negatives.  On the one hand, it will typically be cheaper to negotiate the liquidated damages clause on the front end, as opposed to resolving the issues of damages in subsequent litigation. On the other hand, issues of the provision’s enforceability can, of course, be litigated and get very expensive.  Further, agreed upon damages at the time the contract was executed may prove insufficient at the time of a breach.

Can an attorney include a liquidated damages clause in a fee agreement with a client?  There does not appear to be any North Carolina ethics opinions or rules that expressly prohibit it.  Using such a provision, however, seems to force commercialism into the arrangement and ignores the heart of the attorney-client relationship — a relationship based on duty and trust.  Including such a provision also seems to be at odds with the fact that a client may terminate the services of an attorney at any time and for any reason.   Moreover, from a practical standpoint, clients may not appreciate these clauses, and wonder why an attorney would include the provision in a fee agreement. This provision may send the wrong message and a client may decide to go elsewhere.

Listed below are a few other considerations (but certainly not all) that weigh against using these provisions:

  • A liquidated damages clause in a fee agreement may not result in a clearly excessive attorney fee.
  • Contract provisions, to be ethical, must also be lawful.  I have not found any NC law which would indicate that such a provision in a NC fee agreement would be unlawful or against public policy.  However, this is a relatively new area. In service or consumer contracts, as opposed to employment contracts, there is not much law on whether a service provider may include this kind of language in their contracts.  You will need to keep up-to-date on this emerging area.
  • Liquidated damages provisions will generally be construed against the attorney, to the extent there is any question about interpretation.  The attorney is in a position of trust, and the attorney and the client do not have equal bargaining power. The courts will likely find the client was not given meaningful opportunity to negotiate the terms of the contract.
  • It is also important that you are certain that the client is specifically aware of this contractual provision, so that you would be able to state that the client knowingly forfeited this right if ever challenged on the provision.
  • Finally, a liquidated damages clause cannot amount to a penalty, and it is hard to see how a liquidated damages clause in your ordinary attorney fee contract could be anything else. The NC Supreme Court notes, “It is well established that a sum specified in the contract as the measure of recovery in the event of a breach will be enforced if the court determines it to be a provision for liquidated damages, but not enforced if it is determined to be a penalty.”  Brenner v. Little Red School House, Ltd., 302 N.C. 207,214, 274 S.E.2d 206, 211 (1981).

All this is to say, it is better not to treat your client fee contract like an ordinary commercial transaction.  While you can adequately protect yourself in the event of a breach by having a written fee contract, keep in mind that your fee contract is the first step in setting the tone of your relationship with your client.   It shouldn’t start out by being an adversarial one.

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They Mean Business

Bar applicants are under a lot of stress on the day of the bar examination.  That may be the understatement of the year.  In addition to trying to retain the enormous amount of information necessary to pass the bar exam, there are the additional worries of simply getting to the exam: Will there be traffic? Do I have the right directions?  Where will I park?  Do I have my admissions ticket with me?  Adding to that stress is the four-page Examination Regulations and Code of Conduct that must be initialed and signed before taking the bar exam.  This document contains a list of everything you can and cannot bring into the exam room, how you must conduct yourself during the exam, and where you can and cannot be at any given time.  The document asks the applicants to affirm that they have read and understand it, but no doubt, many do not read it carefully or simply forget the requirements and prohibitions. They have enough to worry about.

That four-page document can be critical, however, and knowing the rules may be the difference between obtaining your license and not.  Each time the bar exam is given, someone inevitably, albeit unintentionally, violates the rules listed in the document and must explain their conduct to the Board of Law Examiners before their bar examination results are released to them.  Keep in mind that in the vast majority of cases, these are not people trying to cheat.  They may have accidentally brought something into the exam room with them that they didn’t think twice about, such as a wallet, a watch, or eyeglasses case, or maybe they put on a jacket during the break that had pockets and simply forgot it was prohibited.  Applicants need to understand that the requirements listed in the Examination Regulations and Code of Conduct are strictly enforced.  It does not matter if a violation is unintentional.  If an applicant brings anything into the exam room that is forbidden, they risk having their exam results withheld for a period of time or, if there is not a good explanation for their conduct, permanently.  No doubt, it’s a bit harsh.  So if you know someone planning to take the Bar Exam, offer your condolences, and then remind them to carefully review the Examination Regulations and Code of Conduct, because you can bet the individuals proctoring the exam will, and they mean business!

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The Stressed Out Lawyer

I am a natural born fretter. I tend to envision all the ways things could go wrong, and I tell myself it’s so I’ll be prepared when they (inevitably) do.  My sister-in-law often tells me to quit planning the wreckage of my future.  I know I need to find my zen zone, and try to deal with the stress that I inflict upon myself.  But if you’re like me, you know it is easier said than done.

The need to manage stress or the failure to do so seems to be the hallmark of the legal profession.  Apparently, the legal professional is number one — number one, that is, for the incidents of depression, out of 105 different professions. (1)   A fair number of the lawyers that I counsel suffer from depression, anxiety, and/or substance abuse.  I have wondered whether there is something about the legal profession that causes mental health issues, or is the type of person who is drawn to the law likely to be someone with characteristics that put them at risk?

According to Psychologist Martin Seligman, those traits which epitomize a good lawyer, may also translate into an unhappy person.  “[T]he legal profession is unique in that it is the only profession where pessimists–those who see problems as the norm and not the exception–out-perform optimists….[T]he legal profession calls for caution, skepticism, and anticipation that things will go wrong.”  (2) Combine that with the fact that lawyers as a group are particularly adverse to seeking help for mental health issues, and you have a recipe for disaster.

Given my personality, I have chosen the perfect profession for myself, so I should count that in the win column.  At the same time, if I allow the stress and worry to take too large a role in my life, I am at risk.  I attended a recent Lawyers Mutual presentation that tackled issues of stress and anxiety and how to cope with these factors in your life.  One takeaway from the program is that you need to schedule time to decompress.  Really.  Plan time away from your work, just like you would an appointment.  It doesn’t have to be as significant as a vacation.  Just think about how you can escape for a bit and find your happy place.  It could be getting outside, exercising, reading a good book, meditation, going to a concert, a change of scenery, spending time with family (or away from family), or anything else that makes you smile.

Schedule that time for yourself each and every day.  When you take better care of your mental health, you are in a better frame of mind – to make decisions, to get work done efficiently and to interact effectively.  In short, you’ll be a better lawyer.


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Just Say No

For a while there, it looked as if the State Bar was going to require all law firms using any kind of personal mobile technology to adopt a BYOD (Bring Your Own Device) policy. Ethics Committee members and others, however, expressed concern that a Formal Ethics Opinion would serve to micromanage lawyers.  Furthermore, because technology was changing so rapidly, any ethics opinion, trying to direct how attorneys should protect mobile devices containing client confidential information, could become obsolete in a short time frame. Besides, lawyers already have a duty to stay abreast of changes in technology as part of Rule 1.1 (Competence). So, at its January 2016 meeting, the Ethics Committee instead voted to publish an article, in lieu of an ethics opinion, providing guidance to attorneys on how protect client confidential information on mobile devices by adopting such a policy.

One thing I learned from sitting in on the Ethics Committee meetings, was that the “apps” or applications that you download (think Facebook, LinkedIn, etc.) can access your contacts if you let them.  There are some applications that specifically ask if you will allow them to access your contacts, but there are others that may not.  That’s a bit scary.  If you are like me, you may have your client contact information on your smartphone.  I had not previously given much thought to my applications, although my M.O. is to say no to everything: can we access your location? – NO; can we access your contacts? – NO; can we access your pictures? – HECK NO.

Stay tuned for this ethics article in your State Bar Journal that will provide lots of insight and advice on protecting your mobile device and your client’s information. In the meantime, when in doubt, just say NO.

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Mistakes Just Happen: Professionalism Takes Work

Regardless of how conscientious you strive to be, eventually everyone makes mistakes. Fortunately, inadvertent or unintentional mistakes generally are not matters for which professionals are disciplined or held liable in most circumstances, absent some intent, malice or a pattern of errors.  Nonetheless, when mistakes do inevitably happen, it’s important to take a few simple steps to handle them correctly and professionally.  First, fess up and admit your mistake, preferably without qualification, hedging or excuse.  Second, take the initiative to do whatever you can to fix the problem or at least minimize any adverse effects.  Don’t wait for somebody to ask you to remedy it.  If you’re dealing with reasonable people, taking these simple steps often diffuses the situation and minimizes any potential negative effects to you and others.  In contrast, failing to take these commonsense steps, or acting to the contrary and unprofessionally, likely will exacerbate a potentially bad situation.

Because mistakes inevitably occur, we all eventually will be on the receiving end of such situations involving the mistakes of others.  It is equally essential to handle those situations professionally, even if it’s not the most expedient option or typically your first instinct.  For example, it is almost always a bad idea to respond through electronic communications to perceived misconduct by another person or professional.  The many shortcomings of digital exchanges rarely can adequately handle the sensitive nature and the nuances involved in such situations.  Rather, e-mails and texts regularly inflame and exacerbate such situations and cause people to make incorrect assumptions and jump to conclusions.

Ideally, confronting such situations should be done in person, or at least by phone.  These more traditional options allow for a much more interactive, interpersonal exchange and permit both sides to perceive essential nonverbal communications.  In short, when faced with such a situation, ask for a meeting or pick up the phone to discuss it, rather than sending a nasty email message without time to reflect.   It is equally important not to make assumptions or jump to conclusions without providing the other side the opportunity to explain and also to give the other side the benefit of the doubt, especially if you have developed a good working professional relationship.  Finally, don’t try to take strategic advantage of another’s mistake for short term potential gain.  Professionalism typically takes more work, but it is almost always worth it in the long run.  Next time the mistake may be yours.

I was reminded recently of these important principles.  Fortunately, both sides followed these basic but important steps and acted very professionally.  As a result, a potentially bad situation was quickly resolved, which then resulted in corrective action to quickly fix the mistake and the professionals were able to continue their good working relationship and focus on advancing their client’s interests.  The situation reminded me of the words of wisdom from a seasoned professional:  “Clients don’t hire us to pick a fight but to solve their problems.”  I just hope that the next time I am reminded of these important professionalism principles, it is as a result of someone else’s mistake.

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To Withdraw or Not to Withdraw

So you may recall that in a previous blog, we addressed the issue of whether you must disclose a mistake or error in judgment to a client, and if so, what must you say.  In this blog, the question is whether, having made an error, must you withdraw from representation, assuming the client wants you to continue?  The answer is, it depends.  If the continued representation would result in a conflict of interest, you must withdraw.  There are many instances where your interest in rectifying the mistake (and avoiding personal liability) is consistent with the client’s interest in having the problem fixed.  If you believe that you can mitigate the damage to the client, you may be in the best position to do so, and therefore, may try to do so if you can.  In those instances where your interests are aligned with those of your client, you would not be required to withdraw from the representation.  If, however, your desire to avoid liability could be in conflict with client’s best interests, or if there is nothing that can be done by you to rectify the error, you must withdraw from the representation.

The ethics opinion, 2015 FEO 4, gives examples of the kinds of mistakes that can and perhaps should be rectified by the lawyer making the mistake.  “[A]n error made in a title search may be readily repaired or a motion in limine may prevent the use of privileged communications that were improperly produced in discovery. It is often in the best interest of both the lawyer and the client for the lawyer to attempt such repair.”  The opinion goes on to say, “when an error is such that the client’s objective can no longer be achieved, as when a claim can no longer be filed because the statute of limitations has passed, the lawyer must disclose the error to the client and terminate the representation.”

No matter what the circumstances surrounding the error, we always recommend that you consult your liability carrier before deciding whether to proceed with or to terminate the representation.

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Space for Rent: Ethical Considerations for Office Sharing

Starting a law firm partnership is a good way to share responsibilities and expenses, but you also share liability for your partners’ conduct and potential malpractice.  Office sharing with other lawyers can be a good alternative, allowing for the shared expense of rent, equipment, and in some cases, support staff, but without the liability of a partnership if set up correctly. However, before you rent that space, consider some of the potential ethical problems related to the office sharing arrangement:

Advertising and Other Communications

A lawyer sharing office space with other lawyers must take steps so that their clients and the public are not misled as to the relationship between the lawyers.

  • To help reduce the risk any misunderstandings with clients, your engagement letter can clarify that no partnership exists between the lawyers in the shared space and that only the lawyer who signs the engagement letter will be responsible for the client’s matter.
  • Rule 7.5 of the NC Rules of Professional Conduct prohibits lawyers from utilizing a false or misleading name. Thus, lawyers may not imply they are practicing under a partnership, when that is not accurate, in any communication including building signage, advertising and marketing.
  • Lawyers in an office sharing situation generally may share a receptionist under certain conditions, but the receptionist cannot imply a partnership where there is none. S/he must answer the phone generically. CPR 265 provides, “While it might be less confusing to have separate telephone lines for each attorney, to have the telephone answered by the words ‘Law Offices’ does not connect the names of [a]ttorneys…in such a way as to suggest the existence of a partnership which does not in fact exist.”  In that context, where three lawyers, A, B, and C share an office but do not have a partnership agreement, the receptionist could not answer the phone, “Law Offices of A, B, and C”.

Conflicts of Interest

CPR 274 provides, “It is conceivable that two or more attorneys may maintain an office sharing arrangement and represent conflicting interests if the confidentiality of each attorney’s practice is maintained both in appearance and fact.  This confidentiality assumes that each attorney maintains a separate, independent practice.  Generally speaking, the sharing of a common library or copying equipment by attorneys representing conflicting interests is acceptable, but the sharing of a common telephone number or personnel by attorneys representing conflicting interests is not acceptable.” Further, it may be difficult to convince adverse parties there is no conflict where the two attorneys share space. Given that, lawyers in an office share likely want to consider conducting conflict checks between the two firms and avoid engaging in adverse representation altogether.

Shared Fees

Any fees shared between lawyers sharing office space must comply with Rule 1.5(e) of the Rules of Professional Conduct. Rule 1.5(e) provides that the division of a fee between lawyers who are not in the same firm may only be made if the total fee is reasonable, the division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation, and the client agrees in writing to the arrangement. The Comment to the Rule provides, “Joint responsibility for the representation entails financial and ethical responsibility for the representation as if the lawyers were associated in a partnership.”

Client Confidentiality

While lawyers in a firm must also protect client confidentiality and secure client files, an office sharing arrangement presents a unique situation.

  • Client files and other confidential information must not be accessible by other attorneys and their staff sharing the space. Files should be locked where the other lawyer and his/her staff would not have access to it. Your electronic files and data, whether stored onsite or in the cloud, will also need to be separate and secure from other lawyers sharing the space.
  • Lawyers may share common spaces, such as conference rooms, but the design must protect client confidentiality so that conversations cannot be overheard.
  • One of the great things about sharing space with another attorney, as opposed to a solo office, is having someone to share ideas with. Just make sure you use hypotheticals and leave out identifying information to protect the confidentiality of your clients.
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The First Call

We all know that first impressions matter.  This is true not only with in-person meetings but also with initial telephone calls.  There are several important factors that you should keep in mind when speaking to a potential client for the first time.  First, people want you to listen.  Even if you do not decide to take a client’s case, giving them the courtesy of allowing them to explain their issue and frustrations is incredibly important.  This does not mean you have to spend hours on the telephone with a potential client on an initial call.  It does mean you need to ensure not to make the person feel like you are rushed and do not have time to hear their concerns.  Before you return a call to a potential client, make sure you allow adequate time to listen, ask questions, and actively engage in the conversation.  Your time is valuable but so is the time of the people that call you for help.  “One of the greatest gifts you can give to anyone is the gift of attention.” – Jim Rohn

Second, do your best to ensure that you are understood.  For example, if you are quoting someone a fee for an initial consultation, make sure they understand exactly what they will be paying for – i.e. an hour of your time?  Two hours?  Review of documentation?  You do not want the client to be surprised.  Even if you put the agreement in writing before the consultation, if the client misunderstood the quote on the initial call, they will likely not be pleased to see a higher or different amount in writing.

Third, follow up on your promises.  If you tell a potential client that you are unable to help, but you will contact them with the names of a few people who may be able to assist, make sure you do get back to them.  If you are unable to provide the information you thought you could provide, you need to relay that information as well.

Fourth, make every effort possible to never come across as superior to the person who has contacted you.  Of course you likely know more about the topic the potential client is contacting you about or they would not be calling you.  However, this is not always the case.  Even if a potential client contradicts you, and you know you are correct, try to explain that in your experience, the situation resulted in a different outcome.  “People don’t care how much you know until they know how much you care.” – Theodore Roosevelt.

Following these simple steps should become second nature in any profession.  The first contact with a potential client matters!  We expect this level of professionalism and courtesy from others; therefore, it should also be what we provide.

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