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MCLE Article and Self-Assessment Test #85

Who's the Client

Last year's court decisions on lawyer conflicts of interest have handed attorneys an array of sometimes conflicting rules

By Robert L. Kehr

Robert L. Kehr is a principal with Kehr, Schiff & Crane, LLP, in Los Angeles, where his practice includes business and real estate transactions and advice and expert testimony on legal ethics. He is a former chair and continuing member of the Los Angeles County Bar Association Committee on Professional Responsibility and Ethics and the current chair of the State Bar Committee on Professional Responsibility and Conduct.

The ethical issues that are most central to attorneys and their practices involve conflicts of interest. While the primary purpose of the California Rules of Professional Conduct1 is attorney discipline, the rules that address conflicts also are used routinely in 1) motions to disqualify attorneys in litigation, 2) claims by attorneys for the collection of fees, and 3) professional liability claims against attorneys. These three applications of the conflict rules in the Rules of Professional Conduct can lead to major financial and professional consequences for attorneys. They also present significant client protection issues and can have an adverse impact on the public perception of the legal profession.

In 1999, the California courts issued wide-ranging decisions on the ethical obligations of attorneys,2 and the number of decisions addressing the issue of conflicts is unusually large. As the law of conflicts evolves, practitioners need to pay special attention to the fact that the rules governing conflicts involve subtleties that can lead to unexpected problems. Moreover, some of last year's decisions contain reasoning that is inconsistent with prior rulings as well as conclusions that are questionable. Conflicts among cases ruling on conflicts will need to be resolved. For effective risk management, all attorneys—whether their practices are private, public, or corporate—should be sensitive to all potential conflict implications.

Occasionally, attorneys in one segment or another of the bar will attempt to explain why the Rules of Professional Conduct should be applied differently—or even not at all—to them. Despite these efforts, courts have been consistent in holding that the rules apply to all California lawyers. For insurance defense attorneys who think otherwise, the court in State Farm v. Federal Insurance3 clarified that they too are not exempt from the Rules of Professional Conduct and their practices are governed by a standard conflicts analysis.

In State Farm, a law firm filed a declaratory relief and subrogation action against Federal Insurance at a time when the firm represented insureds of Federal Insurance in another lawsuit. Federal Insurance filed a disqualification motion—which was not heard until after the other lawsuit was settled—but the motion was denied. The appellate court, however, reversed the denial on appeal.

The court of appeal cited well-established authority for the proposition that in the absence of a conflict of interest between insurer and insured that would preclude an attorney from representing them both, an attorney has a dual attorney-client relationship with the insurer and the insured.4 Based on the principles governing an attorney's relationship with an insurer that—without asserting a reservation of rights— has retained the attorney to defend the insured, the court held that Federal Insurance was the firm's client for the purpose of the disqualification motion.5 The court then proceeded to make three additional—and controversial—points.

First, the court applied the per se rule of disqualification used in representations adverse to a current client, rather than the substantial relationship test used in representations adverse to a former client. The per se rule of disqualification generally prevents an attorney from undertaking a representation adverse to a current client because of the duty of loyalty; if the attorney-client relationship has ended, the duty of loyalty generally does not apply, but the duty of confidentiality prevents the attorney from undertaking a representation that is substantially related to the prior representation of the client. The State Farm court applied the per se test even though the other case settled within 90 days of the filing of the current action and before the disqualification motion was heard.6

In reaching this result, the court utilized a test for the disqualification of attorneys who knowingly undertake a representation adverse to a current client. This test equates the dropping of a current client—even if it is prompt and orderly7—with the so-called hot potato tactic criticized in Truck Insurance Exchange v. Fireman's Fund Insurance Company.8 The court cited no authority for its application of the per se test in this situation and seemed not to recognize that different policy considerations might apply to the abandonment of a client to take on another and potentially more lucrative representation.

Second, the court applied the per se test of disqualification without finding that the attorneys involved knew of the concurrent representation of Federal Insurance. The court apparently skipped this step in the belief that each attorney in a firm is charged with the responsibility to perform a conflict check upon the acceptance of a new client.9 In fact, the Rules of Professional Conduct express no such affirmative duty. The rules deal with the consequences of having a conflict, not with the process for avoiding conflicts, and there is no rule that permits a disciplinary action against an attorney who performed an inadequate conflict check or who performed none at all.

Third, the law firm argued that disqualification should not be ordered because Federal Insurance had known of the firm's adverse representation of State Farm for two years, dating from when the coverage dispute between the two companies first arose. The court rejected this argument, noting that Federal Insurance had no means for making a disqualification motion until the current action was filed. The law firm further argued that Federal Insurance had retained the firm at a time when it knew of the firm's adverse representation of State Farm and thus had given implied consent to the adverse concurrent representations. The court rejected the application of implied consent to representations adverse to a current client, explaining that the use of the per se rule "places all of the burden of disclosure and consent on the attorney, where it belongs."10

In reaching this unconvincing conclusion, the State Farm court failed to recognize three potentially significant points:

  • The disclosure and consent requirements for representations adverse to current and former clients are the same and are found in the same rule—Rule 3-310(E) of the Rules of Professional Conduct—and there is no basis in the text of Rule 3-310(E) for distinguishing between them or applying a more demanding standard to current representations.          
  • Federal Insurance was represented at all relevant times by independent counsel, so there is no reason to believe that Federal Insurance was prejudiced by the failure of the law firm to make the disclosure required by Rule 3-310(A)(2) of the Rules of Professional Conduct.11         
  • The court's holding creates the risk that for tactical advantage a client will, without complaint, allow its attorney to represent an adversary before litigation and then seek disqualification once litigation is commenced.12

It has long been the law in California that if one attorney in a firm has a conflict of interest that prevents that attorney from accepting a representation, then all of the principals and associates in the firm are disqualified as well.13 In People ex rel. Department of Corporations v. Speedee Oil Change Systems, Inc.—a decision of wide applicability—the California Supreme Court now has extended this rule of vicarious disqualification to attorneys who are of counsel to a firm.14 While there are some inconsistencies in Speedee Oil that make its future application unclear, law firms now should include all attorneys who are of counsel—without regard to their actual relationship to the firm—in their conflict checking procedures to ensure appropriate risk management.

Morrison Knudson Corporation v. Hancock, Rother & Bunshoft, LLP,15 is another 1999 decision with widespread significance. In Morrison, the First Appellate District examined the applicability of conflict principles in the context of a corporate parent and its subsidiary. Previously, in Brooklyn Navy Yard Cogeneration Partners v. Superior Court (The Parsons Corporation),16 the Fourth Appellate District had found that for conflict purposes, there is no general "unity of interests"17 between a parent corporation and its subsidiary that would make the parent a client simply because its subsidiary is. The Brooklyn Navy Yard court further noted that the parent could become a client based on alter ego principles. While acknowledging that the facts in the case could have supported a conclusion that there was a direct attorney-client relationship with the parent, the court did not discuss this aspect in further detail because it was not part of the order that was under appeal.18

The Morrison court extended the Brooklyn Navy Yard analysis to a substantially different factual setting and identified two factors that, taken together, led the court to disqualify a firm from a representation adverse to a corporate relative of its former client. Either of these factors might have served as the basis for the disqualification order. Unfortunately, the Morrison court misreads and then unnecessarily criticizes Brooklyn Navy Yard. By doing so, Morrison threatens to inject confusion into the conflicts law applicable to parent and subsidiary corporations.

In Morrison, the Contra Costa Water District hired Morrison Knudson and its wholly owned subsidiary for different, and distinct, aspects of a large construction project. When questions arose about the performance of the subsidiary, the district retained a law firm for advice—a firm that previously had represented Morrison but had never represented the subsidiary. The firm also represented the primary insurance carrier for Morrison, and in that capacity "received detailed confidential communications from Morrison's defense counsel concerning the progress of cases and Morrison's potential liability."19 Relying on William H. Raley Company v. Superior Court,20 a 1983 case, and State Bar Opinion 1981-63 for support, the Morrison court concluded that an attorney's receipt of confidential information from a nonclient can lead to the disqualification of the attorney. Despite these authorities, however, the court's conclusion is debatable.

In Raley, a law firm represented a plaintiff against a defendant corporation. A testamentary trust owned the stock of the corporation, and a bank was the trustee. An attorney in the firm representing the plaintiff was a director of the bank and also sat on the trust investment committee of the bank. The court disqualified the firm not simply because the defendant corporation had an expectation of confidentiality with the firm but because the firm owed fiduciary duties to the defendant corporation that were in conflict with the duties the firm owed to the plaintiff. By contrast, the Morrison court allows for the disqualification of the firm because of Morrison Knudson's expectation that its communications with its carrier and the carrier's counsel would be confidential—even though that expectation surely was a result of the carrier's duties to Morrison, not because the attorneys for the carrier themselves owed any duties to Morrison. The court fails to recognize the possibility that the attorneys for the carrier could become adverse to Morrison in litigation between Morrison and its carrier.21

Having concluded that Morrison had the right to seek the firm's disqualification, the court next examined whether it should use the per se rule of disqualification that applies to current representations or the substantial relationship test that applies to former representations. It selected the latter, with the explanation that the situation is more analogous to a successive representation than to a concurrent one.22 The court examined a number of facts and concluded that there was a substantial relationship between the firm's current representation of the district, on the one hand, and the firm's current representation of Morrison's insurance carrier along with its prior representation of Morrison, on the other.

The balance of the Morrison opinion addresses the fact that the firm represented Morrison and its carrier, not Morrison's subsidiary. Based on State Bar Opinion 1989-113 and the cases following it, the Morrison court found that there was a unity of interests between Morrison and its subsidiary as a result of the intertwining of the two in the area of operations, on the executive level, and with regard to house counsel. Thus the firm owed its duties to the subsidiary as well as to Morrison, and it was disqualified from representing the district, which was the adversary of the subsidiary. The court did not suggest that there is a natural intertwining of the interests of a parent and subsidiary. Instead, it reached that conclusion based on a detailed analysis of the facts presented.

One of last year's cases provides a reminder that the courts are well aware of the possibility that a party could attempt to misuse a disqualification motion as a ploy to

disrupt the proceedings and ensure additional expenses for the opponent if the motion is granted.23 In Strasbourger Pearson Tulcin Wolff, Inc. v. Wiz Technology, Inc.,24 Wiz attempted to disqualify the law firm that had represented its underwriter in an earlier public offering. Attorneys from the underwriter's law firm had met with Wiz personnel as part of the underwriting and had obtained material and presumably nonpublic information in the course of those meetings. The trial court granted the motion based on findings that the firm had represented Wiz and had obtained confidential information from it during the representation.

But the fact that Wiz had paid the fees for the underwriter's law firm in the prior matter was not itself a sufficient basis for finding the existence of an attorney-client relationship, according to the appellate court. The Strasbourger court held that the payment of attorney's fees by Wiz was only one factor in finding the existence of an attorney-client relationship; the "totality of the circumstances" must be examined as well.25 Moreover, the court concluded that no attorney-client relationship existed between Wiz and the underwriter's law firm. Significantly, the court decided that "mere exposure to the confidences of an adversary does not, standing alone, warrant disqualification."26

Strasbourger establishes a test that would narrow the scope of disqualification motions significantly. Under Strasbourger, disqualification motions under Rule 3-310(E) can be made only by a client or a former client. This holding is hard to defend, and it is in conflict with Raley, Morrison, Brooklyn Navy Yard, and the State Bar opinions cited by these cases. If Strasbourger is followed, its rule would apply to a variety of business transactions and litigation arrangements (including formal and informal joint defense agreements) in which sensitive information is shared because of a temporary community of interests. Practitioners should give careful consideration to the possibility that a fellow attorney in these circumstances might one day be an adversary in a related matter who is not subject to disqualification.

Two other cases last year—Federal Home Loan Mortgage Corporation v. La Conchita Ranch Company,27 and Gilbert v. National Corporation for Housing Partnerships28—addressed whether a party who was neither a client nor a former client of the attorney for the party's opponent could move to disqualify the attorney. Both cases held that the party could seek disqualification. Thus Strasbourger is the sole case standing for the proposition that only a current or former client can seek the disqualification of an attorney.

In Federal Home Loan Mortgage,29 a party filed a cross-complaint against multiple cross-defendants. The trial court found the cross-complaint had no chance of success and held that such a meritless claim could not create a conflict that would disqualify attorneys representing the cross-defendants. The court of appeal agreed. It is hard to argue with the conclusion that a sham cross-complaint does not create a conflict for attorneys representing multiple cross-defendants, but the appellate court's reasoning was not sensitive to an important distinction in the law of conflicts. In addition to finding no conflict because of the sham cross-complaint, the court relied on Rule 3-310(C)(2) of the Rules of Professional Conduct as support for stating that the two clients in any event could have consented to the continued joint representation. The court is correct that Rule 3-310(C)(2) permits an attorney to represent multiple clients in a matter in which the clients' interests actually (and not just potentially) conflict if the attorney has the clients' informed written consent. But is that consent always available to the attorney?

According to the official Discussion to Rule 3-310, "There are some matters in which the conflicts are such that written consent may not suffice for non-disciplinary purposes." These are matters in which the attorney would be put in the position of arguing both sides of an issue for opposing clients in a single matter.30 By relying on an inaccurately broad reading of Rule 3-310(C)(2), the court implies that if client consent had not been available to the attorney, it would have been possible for the opponent to obtain the disqualification of the cross-defendant's attorney.

Disqualification normally is based on the moving party's right to protect expectations of loyalty or confidentiality—neither of which would apply when the moving party is not the attorney's current or former client. In Federal Home Loan Mortgage, the moving party explained that the alleged conflict would interfere with possible settlement negotiations. The court did not respond that this was none of the moving party's business; instead, the court found that the moving party had made no effort to show any possibility of a settlement that the alleged conflict would endanger. This finding by the court implies that such a showing is proper and, further, if it had been made, the cross-complainant could have disqualified its opponents' attorney.

In Gilbert,31 the defendant successfully moved for the disqualification of the plaintiff's attorney, and the disqualification was affirmed on appeal. The affirmance was not on the basis of any duty owed by the plaintiff's attorney to the defendant, who was not the attorney's current or former client, but because of duties owed by the attorney to other clients in a separate proceeding. Those clients were not parties to the current action. The attorney had negotiated a confidential settlement resolving the separate proceeding and then sought to use information covered by a confidentiality provision, including the testimony of at least one of the other clients, in the current litigation.32 While the attorney apparently was not a party to the confidentiality agreement, the appellate court concluded that the attorney had a conflict between two competing duties: the attorney's duty to advance his current client's interests (which prevented the attorney from curtailing his representation of the current client) and the attorney's duty of loyalty to his other clients (which prevented the attorney from harming them by violating the confidentiality agreement, as might happen if they gave testimony in the current matter or the attorney used information from the earlier matter).

Because the clients in the previous matter had not consented to the conflicting representations pursuant to Rule 3-310(C)(2) and appeared to have no appreciation of the potential consequences of the situation, the court of appeal concluded that disqualification was proper to protect the integrity of the judicial process.33 The court seemingly was not troubled by the fact that the moving party was neither a current or former client of the attorney and did not even mention this as a factor in the decision.

The court's reason for treating the other clients as current clients is unclear. The opinion noted that the earlier proceeding was completed, the settlement agreement signed, and the settlement amount paid before the mailing of the demand that preceded the current matter. Nevertheless, the court might have reached the same result based on the duty of loyalty, which prevents an attorney from using information obtained in the former representation to the detriment of a former client or from acting against a former client with regard to the subject of the former representation.34

Collection of Fees

The court of appeal's opinion in Pringle v. LaChapelle35 brings a welcome tone of common sense to the issue of when an attorney's conflict of interest will prevent the collection of fees. In Pringle, an attorney was hired to represent a corporation, the corporation's CEO, and another individual in defense of a claim of harassment. Under Rule 3-310(C)(1) of the Rules of Professional Conduct, the fact that the claim involved the representation of multiple clients with potentially conflicting interests by one attorney in a single matter required the attorney to obtain the informed written consent of each client under Rule 3-310(A)(2). Rule 3-310(A)(1) mandates that the attorney disclose the relevant circumstances and the actual and reasonably foreseeable consequences to the clients before securing their consent. Under Rule 3-600(E), if the joint representation involves an organization and one of its constituents, such as a corporate officer, the written consent must be given by an officer or other constituent who is not represented in the action.

The attorney fulfilled the disclosure requirement and obtained the informed written consent of the corporation and both individuals. Unfortunately for the attorney, the CEO gave the corporation's consent, and thus the requirement in Rule 3-360(E) was not met. When the attorney sued for fees, the CEO argued that fees were not available to the attorney because of her failure to obtain proper written consent. Nevertheless, an award in her favor was affirmed on appeal.

The court of appeal accurately stated that Rules 3-310 and 3-600 do not provide for the loss of the right to collect fees, and Rule 1-100(A) states that the Rules of Professional Conduct are not intended to create civil liability. The court next proceeded to read existing California case law as providing for a loss of fees only for a serious violation of an attorney's responsibilities.36 The serious violation did not appear when the attorney had come so close to complying with Rule 3-600, and the collection action was against the individual who had signed the consent, both individually and for the corporation.

Professional Liability

Just as ethical responsibilities can provide the basis for claims of lawyer liability, they also can protect lawyers. The court in Saunders v. Weissburg & Aronson37 addressed the ethical duty of undivided loyalty—a concept that includes the duty to faithfully represent the interest of the client (and no one else) and the duty to act in a manner unaffected by any consideration extraneous to the attorney-client relationship.

In Saunders, the Weissburg firm represented a group of hospitals as plaintiffs, and Saunders was cocounsel representing some of the hospitals. Saunders was paid both a contingency fee and an hourly fee at the conclusion of the litigation. Saunders then sued Weissburg on a variety of theories, alleging that Weissburg had manipulated the course of the litigation in order to reduce Saunders's contingency fee.

A considerable number of cases, in a variety of circumstances, together stand for the proposition that the courts will not recognize duties between successor counsel that interfere with the duty of undivided loyalty to the client on the part of any of the attorneys. For example, a contingency attorney cannot sue successor counsel on the theory that the malpractice of the successor negligently reduced the prior counsel's share of the amount that was eventually recovered.38

While there is a substantial body of case law addressing the duty of undivided loyalty and successor counsel, only one California case, Pollack v. Lytle, has considered the application of the duty to concurrent counsel.39 The Pollack court allowed malpractice indemnification between concurrent counsel, and it did so in language that broadly rejects the application of the undivided loyalty analysis to claims between cocounsel.40

The Saunders court might have distinguished the Pollack case. After all, it is clear that Weissburg had a duty to settle in the best interests of its clients rather than in the best interests of its cocounsel. It is less obvious that the duty of undivided loyalty should preclude a fair apportioning between cocounsel of their liabilities to their mutual client. Instead of distinguishing Pollack, the Saunders court rejected the reasoning in Pollack in its entirety and concluded that concurrent and subsequent counsel should be treated identically with respect to the duty of undivided loyalty.41 Thus a conflict remains in California law over the duties that cocounsel owe to one another.

The recent conflict cases that grapple with the issue of who is entitled to enforce an attorney's duties serve as a reminder that at the core of conflict analysis is the identification of the client and the consistent treatment of nonclients. Most lawyer duties are owed to the client, so each lawyer always must be certain about who the client is among the universe of parties and nonparties involved in current and prior matters.42 Without a clear focus on the client as the person to whom the attorney's duties are owed, the attorney has little chance of fulfilling all the duties that are mandated under the many conflict rules.

Attorneys also must accord the appropriate status to nonclients and consistently treat them as nonclients, most especially since a court may find that an attorney-client relationship exists between an attorney and a    nonclient based on the nonclient's objectively reasonable expectations of client status.43 If an attorney's conduct is ambiguous, it could give rise to a reasonable belief that the attorney has undertaken duties to parties the attorney does not view as clients. This reasonable belief in turn can lead to the imposition of duties that the attorney did not ever contemplate.

Some of last year's disqualification cases provide examples of how an attorney's duties can be enforced by nonclients. In the realm of conflicts, the starting point for every attorney should be a clear understanding of who is the client and who is not, followed by conduct that is consistent with that distinction.        

1 See Cal. Rules of Professional Conduct Rule 1-110(A).

2 See Ellen R. Peck & H. Jay Ford III, 1999 Ethics Roundup, Los Angeles Lawyer, May 2000, at 33 (discussing developments in legal ethics, particularly in the area of legal malpractice but also including attorney misconduct, sanctions, discipline, liens, confidentiality, and the inadvertent disclosure of privileged documents).

3 State Farm v. Federal Ins., 72 Cal. App. 4th 1422, 1430 (1999).

4 Id. at 1429.

5 Id. at 1430.

6 See Flatt v. Superior Court, 9 Cal. 4th 275, 283-85 (1994). The duty of loyalty does have some life after the termination of the attorney-client relationship. See text accompanying note 34, infra.

7 State Farm, 72 Cal App. 4th at 1431.

8 Truck Ins. Exch. v. Fireman's Fund Ins. Co., 6 Cal. App. 4th 1050 (1992).

9 Id. at 1432.

10 Id. at 1435.

11 See Cornish v. Superior Court, 209 Cal. App. 3d 467 (1989), for the potential effect of independent counsel.

12 The court in White v. Superior Court, 98 Cal. App. 3d 51, 55-56 (1979), among others, warns against precisely this problem.

13 Henriksen v. Great Am. Sav. & Loan, 11 Cal. App. 4th 109, 114 (1992) ("As a general rule in California, where an attorney is disqualified from representation, the entire law firm is vicariously disqualified as well.").

14 People ex rel. Dep't of Corps. v. Speedee Oil Change Sys., Inc., 20 Cal. 4th 1135 (1999).

15 Morrison Knudson Corp. v. Hancock, Rother & Bunshoft, LLP, 69 Cal. App. 4th 223 (1999).

16 Brooklyn Navy Yard Cogeneration Partners v. Superior Court (The Parsons Corp.), 60 Cal. App. 4th 248 (1997).

17 Id. at 253.

18 For a fuller discussion of Brooklyn Navy Yard, see Ellen R. Peck & Robert L. Kehr, Ruling on the Rules, Los Angeles Lawyer, June 1998, at 37.

19 Morrison, 60 Cal. App. 4th at 227.

20 William H. Raley Co. v. Superior Court, 149 Cal. App. 3d 1042 (1983).

21 This is not to suggest that the carrier's attorneys could not become adverse to the insured if they never had an attorney-client relationship with the insured.

22 Morrison, 60 Cal. App. 4th at 230-31.

23 See White v. Superior Court, 98 Cal. App. 3d 51, 55-56 (1979).

24 Strasbourger Pearson Tulcin Wolff, Inc. v. Wiz Technology, Inc., 69 Cal. App. 4th 1399 (1999).

25 Id. at 1404.

26 Id. at 1410.

27 Federal Home Loan Mortgage Corp. v. La Conchita Ranch Co., 68 Cal. App. 4th 856 (1998).

28 Gilbert v. National Corp. for Housing Partnerships, 71 Cal. App. 4th 1240 (1999), reh'g denied, May 24, 1999.

29 Federal Home Loan Mortgage Corp., 68 Cal. App. 4th 856.

30 See Woods v. Superior Court, 149 Cal. App. 3d 931 (1983); Klemm v. Superior Court, 75 Cal. App. 3d 893 (1977); Ishmael v. Millington, 241 Cal. App. 2d 520 (1966).

31 Gilbert, 71 Cal. App. 4th 1240.

32 Id. at 1246.

33 Id. at 1240, 1256.

34 Wutchumna Water Co. v. Bailey, 216 Cal. 564, 572 (1932).

35 Pringle v. LaChapelle, 73 Cal. App. 4th 1000 (1999).

36 See Clark v. Millsap, 197 Cal. 765 (1926).

37 Saunders v. Weissburg & Aronson, 74 Cal. App. 4th 869, 873-74 (1999).

38 Mason v. Levy & Van Bourg, 77 Cal. App. 3d 60 (1978).

39 Pollack v. Lytle, 120 Cal. App. 3d 931 (1981).

40 Id. at 940-43.

41 Saunders, 74 Cal. App. 4th 869, 873-74.

42 See, e.g., Cal. Rules of Professional Conduct Rule 3-300 (governing business transactions with a client), Rule 3-500 (requiring that the client be kept "reasonably informed about significant developments"); Bus. & Prof. Code §6068(e) (requiring the attorney "at every peril to himself or herself to preserve the secrets" of the client); and Wutchumna Water Co. v. Bailey, 216 Cal. 564 (1932) and Yorn v. Superior Court, 90 Cal. App. 3d 669 (1979) (recognizing the duty of undivided loyalty to the client).

43 See Responsible Citizens v. Superior Court, 16 Cal. App. 4th 1717, 1733 (1993); Hecht v. Superior Court, 192 Cal. App. 3d 560, 565 (1987).


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