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Professional negligence/title rectification/mortgage fraud update - January 2017

Professional negligence/title rectification/mortgage fraud update - January 2017

  • United Kingdom
  • Financial institutions - Secured recoveries

16-01-2017

Case law updates: 2016 in review

P&P Property Limited v (1) Owen White & Catlin LLP (2) Crownvent Limited t/a Winkworth [2016] EWHC 2276 (Ch)

Summary

The Claimant purchased a property from a Mr Harper. The First Defendant solicitors acted for Mr Harper the purported vendor (but subsequently discovered to be an imposter) and the second Defendant was the Estate Agent.

Exchange of contracts took place on 6 December 2013 with completion on 12 December 2013 under the Law Society Code for Completion by Post (2011) (“the Code”). Post completion, the Claimant instructed builders to commence stripping out works. On 17 January 2014, the “actual” Mr Harper turned up at the property and demanded to know what the builders were doing. This culminated in the police being called and the fraud being detected.

The Claimant claimed against the solicitors as follows:

  • for breach of warranty of authority (on the basis that they had represented that they were acting for the actual Mr Harper, and not someone who merely claimed to be him);
  • for breach of duty of care;
  • breach of undertaking (that the solicitors would have the Vendor’s authority to receive the purchase monies on completion and would complete the purchase in respect of such monies); and
  • breach of trust on the basis that in the absence of genuine completion they paid away the completion monies to an imposter in breach of trust.

The Claimant also claimed breach of warranty of authority and breach of trust in respect of the estate agent’s actions in the transaction.

Held

Breach of Warranty of Authority

The Court found that “the checks that Solicitors are required to undertake are designed to reduce the risk of fraud and cannot reasonably be thought to eliminate it”. It found that the basic representation is that the Solicitor as agent has authority to act for another. However a solicitor as agent does not represent that his principal will perform the contract, or is solvent, or make any other representations as to his principal’s attributes or characteristics. It held that to decide otherwise would be incompatible with the provisions of the Code. Neither the solicitors or estate agents were held to be in breach of warranty of authority.

Breach of Duty of Care

This strand of the claim was also rejected by the Court on the basis that it was on all fours with the allegation of breach of warranty of authority. On the basis that no express representation was made in respect of the identity of the actual Mr Harper it followed that there was no breach of duty. Instead, the Claimant was owed a duty of care by its own solicitors who could have asked the solicitors for an undertaking that the money would only be released by them to the vendor on confirmation that they had carried out proper client due diligence. The Claimant’s solicitors did not do so.

Breach of Trust

The Court considered this in the context of Paragraph 10 of the Code. It held that the practical effect of this provision was that the solicitors did not hold the money on trust to the order of the purchaser’s solicitor but instead it was permitted to use the completion monies in accordance with the rights and obligations of the Code. The Court referred to Paragraph 3 of the Code and the fact that a vendor’s solicitor is not required to investigate or take responsibility for the vendor’s contractual obligations. It therefore held that it would be wrong to construe the Code so as to give rise to a breach of trust and/or as a result a guarantee of title.

Breach of Undertaking

This claim failed because the Code specifically highlights where an undertaking is intended to be given by using the word “undertakes” in bold. This word is noticeably absent from Paragraph 10 of the Code.

It is understood the decision is being appealed.

Comment

This claim was brought by the duped purchasers against the vendor’s solicitors and not their own conveyancing solicitors. Did the purchasers pursue the wrong Defendant? In reaching his decision, the Court referred to the evidence of the Claimant’s solicitor that he relied on “the Vendor’s solicitors having done all of the correct due diligence required by them to establish the identity of their client as being the true owner”. The Judge inferred from this that the Claimant’s solicitor had not understood that a warranty had been given.

Would the result for the purchasers have been different if they had instead pursued a simple negligence claim against their own solicitors for failing to seek either (1) an undertaking that the Vendor’s solicitors would only release monies to the vendor on confirmation that they had carried out due diligence; or (2) an express warranty regarding the identity of the vendor? Possibly but we question whether a conveyancer acting for a vendor would agree to provide such an undertaking or warranty.

The decision demonstrates the trend for narrowing the scope of the warranties given by professionals in conveyancing transactions to the extent that the Solicitor is simply saying that they act for a client who says that he is the owner rather than the actual owner.

The Judge distinguished this case from the earlier judgment in Purrunsing (where both the purchaser’s and vendor’s solicitors were liable in breach of trust) because the transaction in that case operated under the Law Society’s 1998 code (rather than the 2011 code) which has different wording and is open to wider interpretation.

The bottom line is that frauds are becoming increasingly sophisticated and harder to detect. However, it seems that the Solicitors failed to spot a number of “red flags” such as the high value property with no legal charge, and an impatient vendor based overseas. Lenders may wish to instruct their solicitors, particularly in high value conveyancing transactions involving overseas vendors, unencumbered property and rapid completions, to double check the right of the vendor to sell and to obtain warranties from the vendor’s Solicitor. However, following this decision we think that conveyancers acting for vendors will be extremely wary of providing any such warranties. It may be prudent for Lenders to instruct their solicitors to conduct their own due diligence to verify that the purported vendor is the actual owner of the property in these very fact specific circumstances.

Bacciotini v Gotelee and Goldsmith (A Firm) [2016] EWCA Civ 170

Summary

In May 2007, the Claimants instructed the Defendants, to act for them in the purchase of a residential property for £600,000. The purchase completed on 27 May 2007. However, the Defendants failed to advise the Claimants that the property was actually subject to a planning restriction which restricted its residential use. This fact was only discovered in May 2008 and after the Claimants had moved into the property. In November 2009, the Claimants successfully applied to the local council to have the restriction removed and in doing so, incurred costs of £250.

In March 2013, the Claimants issued a negligence claim against the Defendants. The Claimants claimed that they had suffered a loss on 27 May 2007 when they had completed the purchase of the property for £600,000 with the restriction and that for the purposes of assessing the loss sustained on 27 May 2007, it was irrelevant that they had subsequently successfully removed the planning restriction in November 2009. The Claimants claimed that had they been properly advised by the Defendants they would not have purchased the property at all on May 2007 and would have walked away from the transaction. In the alternative, they argued that had they been advised of the restriction they would have purchased the property for its market value (with the restriction) which they alleged to be £300,000 coupled with the associated reductions in stamp duty and mortgage interest. The Claimants therefore claimed the difference in value between the property with and without the restriction as at the date of the acquisition of the property in May 2007, which they calculated as a diminution in value in the sum of £300,000 plus interest.

The Defendant admitted liability for the breach but denied that any loss had been suffered other than the costs of £250 incurred by the Claimant when removing the restriction.

At first instance, the trial Judge found that the prospects of lifting the restriction both in and after 2007 were “very high”. He was not persuaded that the Claimants would have either purchased the property at a price reflecting its actual value or would have withdrawn from the sale. He thought that one or other of the parties would have applied for the restriction to have been lifted on the basis that it was “a simple, cheap and obvious step to take”. The trial judge found that the act of applying to remove the restriction was directly caused by the negligence of the Defendant. He was not persuaded by the Claimants’ arguments in respect of quantum. Instead, he preferred the Defendants’ expert evidence and found that the alleged diminution in value of the property was below £100,000; but that this had in any event been eradicated by mitigation when the Claimants successfully applied to have the restriction lifted.

Held

The Claimants’ principal ground of appeal was that the Trial Judge should have awarded them £100,000 (with interest) representing the difference in value of the property with and without the restriction as at May 2007 when the transaction completed. They argued because their claim was a capital loss claim, the date of loss was therefore fixed as at the date of the purchase of the property on 27 May 2007. The Claimants argued that their claim was analogous to the case of Philips v Ward [1956] 1 WLR 471 where damages were awarded to reflect the difference between the value of a property as it should have been described and as it was described as at the time of its acquisition. The Claimants argued that the prospects of success of lifting the restriction in the future were included in the assessment of the diminution in value at the time of the purchase, and that the Claimants were therefore entitled to the difference in value as at the date of the purchase of the property, which the trial judge had placed at £100,000. They also argued that the application to remove the restriction in 2009 was a collateral and independent decision that the Claimants made for their own benefit, and had no causal connection to the original breach of duty in 2007.

Perhaps unsurprisingly, the Court of Appeal was not persuaded by the Claimants’ arguments and upheld the first instance decision. It found that, based on the facts of the case, the date that the planning restriction was removed was immaterial. The fact that the planning restriction was removed meant that the Claimants had not actually suffered loss.

In reaching this decision, the Court of Appeal rejected the argument that in a capital loss case such as this, where the breach occurs as at the date of completion of the transaction, that the date of loss was also “fixed” as at the date of completion of the transaction i.e. the date of purchase by the Claimants. Instead, it found that case law actually demonstrated that the date of loss was not to be “applied invariably or mechanically” and that the assessment of damages should be carried out “realistically and not mechanistically”. The date of acquisition was therefore a “convenient starting point: no less, but equally no more”. In fact, the Court of Appeal criticised the use of the fixed date of the acquisition of the property for the calculation of damages because it precluded “consideration of subsequent events” and issues such as mitigation and avoidance of loss which would always take place after the date of breach. It also found that there was sufficient causal connection between the steps taken in mitigation to remove the restriction and the breach itself, so that it should be taken in consideration when assessing damages. Failure to do so would lead to the Claimants being overcompensated.

The Court of Appeal described the case as an illustration of the ordinary principles of mitigation and found that the Claimants were under a duty to take steps to seek to remove the restriction. It also found that although the principles of mitigation applied, the same conclusion could be reached by saying that the measure of loss was the cost to the Claimants of removing the defect, which was £250.

Comment

The case is a useful reminder for lenders that there is no hard and fast rule for assessing damages. It is important to remember that the date the breach actually occurred is little more than a helpful starting point and the Court will not ignore subsequent events when assessing damages.

The case also demonstrates the Court of Appeal’s view that the duty to mitigate is an ongoing duty without a cut-off point. On the facts of this case (which involved a breach that that was very simple to remedy), it was immaterial that the breach had not been remedied until two years after the date of the transaction. Ultimately the Claimants ended up with what they should have had and did not suffer any loss beyond the £250 incurred in the application fees for removal of the restriction.

The case also highlights the need for lenders to obtain robust expert evidence in a negligence claim regarding diminution in value. The trial judge was not persuaded by the Claimants’ expert evidence and relied on the Defendants’ evidence when assessing the notional diminution in value of £100,000.

LSREF III WIGHT LTD v Gateley LLP [2016] EWCA CIV 359

Summary

In 2007 the Claimant instructed the Defendant to prepare a report on title on a lease which had been offered by one of the Claimant’s Borrowers as security for a loan. The Borrowers defaulted and when the Claimant enforced the security in 2012 it discovered that the lease contained an insolvency forfeiture clause back to the Borrowers’ landlord which significantly impacted on the value of the Claimant’s security.

In January 2013, the Defendant admitted liability for negligence and breach of its retainer. The Claimant issued proceedings in August 2013. However, in August 2014, the landlord indicated that he would be prepared to agree to a variation of the lease and the removal of the insolvency forfeiture provision in exchange for a payment in the sum of £150,000. The Defendant offered to pay the landlord £150,000 for the variation but the Claimant declined the Defendant’s offer and instead, proceeded to litigate the matter.

At first instance, the trial Judge had to consider two issues: 1) whether any damages had been caused by the Defendant’s negligence and 2) whether the Claimant had failed to mitigate its loss.

The trial Judge found that the damages should be assessed from the date of the transaction in September 2007 and awarded the Claimant damages of £240,000 plus interest. The award was calculated on the diminution in value of the lease as security with and without the forfeiture clause. The trial Judge also found that the Claimant had not failed to mitigate its loss by not accepting the variation of the lease on the basis that obtaining the variation would have been “too complicated, uncertain and risky an exercise” for the Claimant.

On the day that judgment was awarded in favour of the Claimant, the Claimant contacted the landlord and opened up negotiations, which culminated in the Claimant paying £150,000 in respect of the variation of the lease. The Variation was agreed and the property was subsequently sold by the Claimant at auction although this sale had not completed at the time of the appeal.

Held

The Defendant appealed the first instance decision on two grounds: 1) the trial Judge was wrong to assess loss as at the date of the transaction. This was an uncrystallised loss case (as the property which was the subject of the lease had not been sold in possession by the Claimant) so loss should have been assessed as at the trial date and; 2) the Claimant had failed to mitigate its loss by not seeking a variation of the lease in August 2014.

The Court of Appeal held that the trial judge had been wrong to assess loss as at the date of the breach in September 2007 when the negligent advice was received and the transaction completed. Instead, the appropriate date for calculating damages was the trial date. In his judgment Lord Justice Briggs found that just because a Lender could show that it had suffered some immediate loss as at the date of the transaction, it did not mean that would prove to be its “real transactional loss”.

In reaching his conclusion, Lord Justice Briggs considered existing case law and the two stage approach adopted by the Courts when assessing damages in transactional loss cases. The first step in the calculation process is the “basic comparison test” of comparing the lender’s original outlay plus its costs of funding since lending, with the amount recovered or recoverable by the enforcement of its security rights. The second test is the “estimation of the deficiency in security”. The Court found that common sense dictated, particularly in an uncrystallised loss case, that these tests did not need to be calculated as at the date of the original transaction. If loss was calculated as at the date of the transaction, the Court would actually have to ignore relevant facts which could assist the Court with calculating the Lender’s transactional loss. Lord Justice Briggs found that “where the transactional loss of someone who has lent money on negligent advice remains uncrystallised at the date of trial, it will be a rare case in which a quantification of that loss would be better calculated by reference to any earlier date than the trial date”.

In respect of mitigation, the Court of Appeal also reversed the trial Judge’s decision. The Court found that when considering whether there had been an unreasonable failure to mitigate, it was necessary to conduct an objective test which amounted to more than just “fact finding”. It was clear that the damage to the Claimant was an unusual provision in a lease, which could be remedied in exchange for the sum of £150,000 paid to the landlord. This offered a “complete cure for the breach”. The Court of Appeal considered evidence adduced at the trial that the payment of £150,000 for the variation would have improved the value of the Lender’s security by up to £500,000. The Court of Appeal found that the “offer was there, the benefit was double or treble the outlay”, plus the Claimant also had the funds (offered via the Defendant) and negotiating a variation on a lease was not outside the Claimant’s ordinary course of business as a lender.

The Court of Appeal substituted the trial Judge’s award of damages of £240,000 for the sum of £157,100 representing the price and legal costs of the variation of the lease.

Comment

The Court of Appeal’s judgment in this case, and its consideration of existing case law reinforces the fact that there is nothing set in stone that damages should be calculated as at the date of the breach. This is because loss may not have actually been suffered at this point and as such the Court is not prepared to turn a blind eye to subsequent events. The rationale behind this approach is that a degree of uncertainty is better than the unfairness of ignoring all subsequent events. This is particularly relevant in un-crystallised transactional loss cases where the loss may actually narrow over time.

The fact that the Judge at first instance essentially got the date for the assessment of loss wrong is an example of the complexities with this particular principle of law, particularly in the context of an uncrystallised loss case. Indeed, the trial Judge actually hedged his bets somewhat in his judgment by helpfully calculating what he thought the diminution in value was up to trial. This suggests a tacit acceptance of the uncertainty around the law and the fact that his first instance judgment was almost certainly going to be appealed.

Lenders should take note of the objective approach adopted by the Court with regard to mitigation and the weight that it attached to the fact that the Claimant was an experienced investor and that the negotiation for the variation of the lease would not have been outside the ordinary course of its business. This suggests that Courts may take a less sympathetic approach to lenders than they would to a lay person in the same position when considering mitigation. The case highlights that the best option is often for lenders to consider title rectification to try to remedy a defect in the first instance, rather than proceeding straight to litigation.

Purrunsing v A’Court & Co [2016] EWHC 789 (Ch)

Background

The claim arose out of the purported sale of a property by a fraudster assuming the identity of Mr Dawson, the true registered proprietor of the property. In 2012 “Mr Dawson” (the fraudster) retained the Defendant solicitors (“AC”) to act on his behalf in relation to the sale of the property. “Mr Dawson” instructed AC that the property was vacant, had been gifted to him and that a speedy completion would be required.

“Mr Dawson” told AC that he was living in Maidenhead and produced utility bills and a bank statement addressed to the Maidenhead address and a passport. The passport was a forgery but it was not suggested that AC should have detected that. AC applied for Office Copy Entries for the property which showed the registered proprietor was Mr Dawson of the property address and of an address in Cambridge. None of the identity documents bore the address of either the property or the Cambridge address.

Mr Crompton

“Mr Dawson” agreed to sell the property to Mr Crompton on condition that the sale completed within 7 days. “Mr Dawson” returned the property information forms to AC and, in response to a question whether any building work had been carried out while in his ownership, answered "no".

The solicitors acting for Mr Crompton obtained a Local Authority Search and noted entries relating to building works and sought a statutory declaration in respect of a right of way (which had been built over). AC forwarded this onto “Mr Dawson” asking for the planning documents and warning that any application to the local authority (for the documents) would result in delay. AC also sought instructions in relation to the statutory declaration, warning that this too would cause delay.

“Mr Dawson” questioned whether the requests were delaying tactics. AC told “Mr Dawson” that the requests were reasonable. The deadline was extended by two days. “Mr Dawson” instructed AC to prepare the statutory declaration and advised AC that he did not have the building documentation. At this stage it was apparent that “Mr Dawson” was content to supply the statutory declaration, that AC should get the documentation from the local authority, and that completion may take place within the, now, nine day deadline.

There followed an e-mail from Mr Crompton’s solicitors: “please confirm that you have verified your client's identity to meet with Money Laundering Regulations? Further, our client has asked for confirmation of the Hospital that your client works at in Abu Dhabi?” AC responded: "We have had produced to us evidence of our client's address in the UK and seen his UK passport”. The request, for evidence of employment, was sent to “Mr Dawson”. “Mr Dawson” responded to AC: “Please inform the buyers solicitors I no longer wish to proceed with the sale”.

The Judge summarised the position – all prior requests for information had been attended to, the revised completion date was still five or six days away, the request for details as to where “Mr Dawson” worked could have been supplied without difficulty by return of e-mail well ahead of replies to requisitions and of the production of the statutory declaration. However, evidence of “Mr Dawson's” employment would have been false and, if investigated, the fraud would have been discovered.

Mr Purrunsing

Less than two weeks after the sale to Mr Crompton had been aborted, Mr Purrunsing agreed to purchase the property. Mr Purrunsing retained House Owners Conveyancers Limited (HOC).

HOC sent a letter to AC: “Please confirm you are familiar with the sellers and will verify they are the sellers and check ID to support same". AC responded: “we have no documents whatsoever relating to this property” and “prior to being approached to act on the sale we have no personal knowledge of Mr Dawson, but we confirm that we have met him in person and have seen his passport (and retain a copy of the photo page) together with utility bills etc showing his UK address as notified to us”.

HOC had asked AC to confirm that it was familiar with the seller. AC answered that it was not. HOC asked AC to verify a link between the property and the individual purporting to sell. The answer, from AC, was ambiguous because it did not state that the address given was either that of the property or the Cambridge address. HOC did not tell Mr Purrunsing about the ambiguous nature of AC’s answer to the enquiries.

The matter proceeded to purported completion. The purchase money passed from HOC to AC and subsequently to a bank in Dubai. The fraud was discovered (during the attempt to register the sale). None of the money was recovered.

Money Laundering and Client Identification

The Money Laundering Regulations 2007 ("MLR") apply to all independent legal professionals (such as AC and HOC). Reg.7(1) imposes an obligation to apply "customer due diligence" when establishing a business relationship or carrying out an occasional transaction. Customer due diligence is defined by Reg.5(a) as "… identifying the customer and verifying the customer's identity on the basis of documents, data or information obtained from a reliable and independent source …" and by Reg.5(c) as "obtaining information on the purpose and intended nature of the business relationship".

These requirements, in the context of conveyancing, are considered in the Law Society's Conveyancing Handbook ("the Handbook") and the Law Society's Property and Registration Fraud Practice Note ("the Note”). The Handbook warns practitioners that the MLR "… require solicitors to take a risk-based approach to client due diligence including the obligation to obtain satisfactory evidence of their client's identity …". A risk-based approach requires consideration of the circumstances of the transaction. What will be appropriate in relation to a sale by an owner-occupier of a modestly priced property subject to a charge may not be appropriate in relation to the sale of a high value unencumbered property being sold by a proprietor whose address is not that of the property.

The Note warns that identity documents may not conclusively prove that the person is who they purport to be or that such person is the registered proprietor of the property.

Paragraph 3.1.1 of the Note, summarising Reg.5(c) of the MLR, states that customer due diligence "… means more than just finding out that they want to sell a property. It also encompasses looking at all the information in the retainer and assessing whether it is consistent with a lawful transaction. This may include considering whether the client is actually the owner of the property they want to sell" (emphasis added). The Note warns of a rising incidence of "… fraudsters targeting the properties of … individuals …" by identity fraud. The Note identifies as vulnerable (1) unoccupied properties and (2) high value properties without a legal charge.

The Note advises that registered proprietors of vulnerable properties should "… keep any addresses they have registered for service at Land Registry up to date". The address given by “Mr Dawson” was not an address registered for service at the Land Registry and was something that ought to have put AC on enquiry.

Section 61 Trustee Act 1925

Section 61 imposes a two stage test: (1) whether the trustee acted honestly and reasonably (the threshold question); (2) whether in all the circumstances the trustee ought fairly to be relieved of liability.

No question of dishonesty arose. Therefore the threshold question was whether the solicitors acted reasonably. The test is high because of “equity's high expectation of a trustee discharging fiduciary obligations”. While conduct which is irrelevant or immaterial to loss is generally to be disregarded, a departure from best or reasonable practice which increases the risk of loss will not be reasonable.

There is no “lesser standard of reasonableness” to be applied to a seller’s solicitor than to a purchaser's solicitor. The seller’s solicitor holds the purchase money, from receipt until completion, on trust for the purchaser. Payment without completion is in breach of trust and “there is no obvious justification for interpreting s.61 more leniently in respect of such a breach … by a vendor's solicitor than would be the case in relation to such a breach by a purchaser's solicitor”.

Held

The Claim against HOC

It was alleged that HOC failed to advise Mr Purrunsing of the ambiguous response to enquiries and thereby failed to provide information necessary to enable an informed decision to be made as to whether to proceed.

As a result of the enquiries HOC was aware that (i) AC had no documents relating to the property (save for those already received); (ii) AC had no personal knowledge of “Mr Dawson”, and (iii) AC could not confirm a link between the vendor and the property. HOC could not reasonably have been satisfied that the vendor was entitled to sell the property. HOC did not act reasonably and could not obtain relief from liability.

The Claim against AC

AC also did not act reasonably and could not rely on section 61 to obtain relief from liability. It was the responsibility of AC to carry out risk-based due diligence and, in reality, AC made no serious attempt to do so.

It was argued that AC complied with the MLR, particularly the obligation of "obtaining information on the purpose and intended nature of the business relationship" (Reg. 5(c)), because, in conveyancing, the relationship between solicitor and vendor "… was to sell a house …". However, this was not accepted and Paragraph 3.1.1 of the Note makes it clear that “[Reg.5(c)] means more than just finding out that they want to sell a property …".

A solicitor is required to look at all of the information and assess whether it is consistent with the transaction being lawful. That exercise "… may include considering whether the client is actually the owner of the property they want to sell". In this case it was found that AC, carrying out due diligence and adopting a risk-based approach, ought to have considered whether “Mr Dawson” was the owner of the property in order to assess whether the transaction was lawful.

Finally, given the strict obligation on AC not to deal with trust assets in breach of trust, if liability was to be avoided it had to be shown that any departure from best or reasonable practice did not increase the risk of loss. AC’s failure to carry out its MLR obligations, in accordance with reasonable practice in the circumstances, increased and even caused the loss.

Contribution

Contribution is fixed by the Civil Liability (Contribution) Act 1978 as being “such [sums] as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question” (section 2(1)). It was found that “having regard to relative causal potency as well as comparative blameworthiness… HOC and AC must each bear equal responsibility for the loss.”

Comment

The decision creates a precedent for joint responsibility of seller and purchaser’s conveyancers for breach of trust. It is also a useful reminder that a seller’s solicitor is a trustee of purchase money prior to completion and is liable to parties independent of any contractual relationship or tortious duty of care.

The case also summarises the obligation on a solicitor to undertake customer due diligence when carrying out a conveyance and provides a summary of section 61 and the threshold test of reasonableness.

Finally, the case emphasises the importance of professionals being alert to the prospect of fraud and alive to any warning signs. If so, as the case shows, this type of fraud can be combatted.

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