Federal AJ and DPJ Lien Issues,
Chapter 34
Judith A. Gray
I. INTRODUCTION
Schedule C of the Commitment for Title Insurance promulgated by the Texas State
Board of Insurance, contains information regarding conditions that must be satisfied
before the forthcoming policy is issued, and the consequences of an inability to satisfy
those conditions.
A Commitment for title Insurance is a legal contract between the insured and the title
company. The Commitment is not an opinion or report of title. It is a contract to issue
the insured a policy subject to the Commitment’s terms and requirements.
Before issuing a Commitment for Title Insurance or a Title Insurance Policy, the title
insurance company determines whether the title is insurable. Part of that determination
involves the title company’s decision to insure the title except for certain risks that will
not be covered by the Policy. Some of these risks are listed in Schedule B of the
Commitment as “Exceptions.” Other risks are stated in the Policy as Exclusions. These
risks will not be covered by the Policy.
Another part of the determination involves whether the promise to insure is conditioned
upon certain requirements being met. Among those items is the requirement to
remove any liens and encumbrances from Schedule C of the Commitment prior to closing.
Schedule C of the Commitment lists the requirements that must be satisfied or the
title company will refuse to cover them. The Policy will not cover loss, costs, attorney’s
fees, and expenses resulting from the requirements shown on Schedule C that will appear
as Exceptions in Schedule B of the Policy unless these conditions are disposed of to the
title company’s satisfaction before the date the Policy is issued.
When the Policy is issued, the coverage will be limited by the Policy’s Exceptions,
Exclusions and Conditions defined as:
EXCEPTIONS are title risks that a Policy generally covers but does not cover in
a particular instance. Exceptions are shown on Schedule B or discussed on
Schedule C of the Commitment. They an also be added if the insured does not
comply with the Conditions section of the Commitment. When the Policy is
issued, all Exceptions will be on Schedule B of the Policy.
EXCLUSIONS are title risks that a Policy generally does not cover. Exclusions
are contained in the Policy but not shown or discussed in the Commitment.
CONDITIONS are additional provisions that qualif y or limit your coverage.
Conditions include your responsibilities and those of the Company. They are contained
in the Policy but not shown
or discussed in the Commitment.
The Policy Conditions are not the
same as the Commitment
Conditions.
In most circumstances, an attorney
representing the purchaser of a property
will focus his or her attentions on those
items revealed in Schedule B of the
Commitment because these items represent
the exceptions to coverage that the
title company will provide. The Policy,
when issued, will not insure against those
items listed as the exceptions to coverage
shown in Schedule B of the Commitment.
The attorney for the purchaser generally is
not as concerned with those issues
revealed on Schedule C of the
Commitment as with the exceptions.
Consequently, the purchaser’s attorney will
commonly provide a closing instruction
letter to the title company to remove all
requirements shown in Schedule C prior
to closing of the transaction and proceed
to close, confident that the title company
will take care of any issues revealed in
Schedule C. This, however, is often not
possible no matter how anxious the title
company is to close the transaction. This
paper discusses three problematic liens
that often appear in Schedule C of the
Commitment—Federal Tax Liens, Federal
Abstracts of Judgment, and Federal
Criminal Liens.
II. FEDERAL TAX LIENS
A. General Overview
Under 26 USC §6321, in the United
States Tax Code, a Federal Tax Lien is created
in favor of the Internal Revenue
Service of the United States against all
property owned by a taxpayer for federal
taxes that the IRS has determined are due
and owing, but not paid by the property
owner. The statute reads as follows:
If any person liable to pay any tax neglects
or refuses to pay the same after
demand, the amount (including any interest,
additional amount, addition to tax, or
assessable penalty, together with any costs
that may accrue in addition thereto) shall
be a lien in favor of the United States upon
all property and rights to property,
whether real or personal, belonging to
such person.
The tax lien additionally attaches to the
equitable interest of a potential purchaser
of the taxpayer’s real property pursuant to
a contract for deed or installment land
contract. The Federal Tax Lien arises from
the time the taxes are assessed, not when
the Federal Tax Lien is recorded in the
Official Public Records of Real Property in
the county or counties where the debtor
owns real property.
B. Duration
The U.S. Tax Code reference to the tax
lien, 26 USC Section 6322, states that
unless another date is specifically fixed by
law, the lien imposed by Section 6321 arises
at the time the assessment is made and
shall continue until the liability for the
amount so assessed (or a judgment against
the taxpayer arising out of such liability) is
satisfied or becomes unenforceable by reason
of lapse of time.
The date that the tax is “assessed” and
the tax lien attaches can be vital when
attempting to determine whether the lien
has priority over other liens, such as
mechanic’s liens, attached to the property.
Prior to the current revision of the Tax
Code, the period of duration for a Federal
Tax Lien was six years and 30 days. As of
November 5, 1990, the lien was made
effective for 10 years and 30 days after the
date of assessment of the taxes owed.
Consequently, the 10 year and 30 day-period
applies to taxes assessed after
November 5, 1990, as well as to those tax
liens assessed prior to that date if the then
applicable limitations period did not
expire as of November 5, 1990. If the
Federal Tax Lien is properly refiled before
the expiration of 10 years and 30 days, the
Federal Tax Lien is effective against the
debtor’s property for an additional 10 year
and 30 day-period.
C.Priority
The details and priority issues discussed
in the U.S. Tax Code, 26 USC
Section 6323, are extensive and apply differently
to specific situations, time limitations,
the classifications of other liens
attached to the property, etc. Generally,
however, as to real property issues and the
State of Texas, the priority of the Federal
Tax Lien in relation to other liens is based
upon the recording date of the Federal Tax
Lien notice that is required to be filed of
record in the Official Public Records of
Real Property of the county in Texas where
the real property owned by the taxpayer is
located.
If a Federal Tax Lien is properly
recorded against a taxpayer and that taxpayer
subsequently acquires real or personal
property, the purchase money mortgage
against the taxpayer’s ownership
interest in the real property is superior to
the previously-recorded Federal Tax Lien
to the extent State law, such as Texas law,
recognizes the superiority of the purchase
money mortgage. See Slodov v. United
States, 436 U.S. 238 (1978). Fortunately, in
Texas Real Property and Tax law, a lien to
collateralize real property for funds used
to purchase that real property does have
superiority over the previously-recorded
Federal Tax Lien. This fact is vital if a
deed of trust lien or a vendor’s lien is filed
on property collateralizing a loan to purchase
the property. In reality, however, in
the current day of title policies and title
searches, the recorded Federal Tax Lien in
the name of the individual obtaining the
loan would be evident to the lender, and
the lender would refuse to complete the
loan until the tax lien was removed.
D. Judicial Foreclosure
Extinguishment
A legally-conducted judicial foreclosure
of a lien on Texas real property pursuant
to State law extinguishes a Federal Tax
Lien in favor of the United States if that
tax lien was filed subsequent to the foreclosed
lien or if the tax lien was in an inferior
position due to the fact that it was a
purchase money lien or any other reason
permitted by the U.S. Internal Revenue
Code 26 USC Section 6323. The requirement
necessary to extinguish the tax lien,
however, is that the United States must
procedurally be made a party to the lawsuit
seeking the foreclosure if the Federal
Tax Lien is filed of record prior to the
commencement of the judicial foreclosure
proceeding. In accordance with the
statute 26 USC §7425(a)(1), failure to
properly include the United States as a
party to the judicial foreclosure proceeding
will result in the foreclosure transfer of
the property being made subject to the
Federal Tax Lien.
E. Nonjudicial Foreclosure
Extinguishment
A properly conducted nonjudicial foreclosure
of a purchase money lien or a lien
in a senior priority position, pursuant to
local State law, extinguishes an inferior
Federal Tax Lien in favor of the United
States. The United States, in 26 USC
§7425, through notice to the Internal
Revenue Service, must be provided at least
25 days written notice of the pending nonjudicial
foreclosure sale if the Federal Tax
Lien is filed of record in the county of the
property’s location at least 30 days prior to
the nonjudicial sale. The preceding
Internal Revenue Code section also provides
that the notice must be in accordance
with the regulations prescribed by
the Secretary of the Internal Revenue
Service, such as the requirement that the
notice be given in writing to the United
States by registered or certified mail, or by
personal service. Failure to provide the
United States with proper written notice of
the nonjudicial foreclosure proceeding will
result in the foreclosure transfer of the
property being made subject to the Federal
Tax Lien. A subsequent effort by a lender
to correct the lender’s failure to properly
provide timely notice to the United States
by conducting a second nonjudicial foreclosure
sale generally is ineffective. See
Southern Bank of Lauderdale County v.
IRS, 770 F. 2d 1001 (11th Cir. 1985), reh.
den., en banc, 779 F. 2d 60, and cert. den.,
476 U.S. 1169.
F. Right Of Redemption
Following a judicial or nonjudicial
foreclosure of a lien having priority status,
the United States has the statutory right to
redeem the foreclosed real property within
120 days of the date of the foreclosure sale
under 26 USC §7425(d)(1). If the United
States elects to exercise its right to redeem
the foreclosed real property, the owner of
the real property cannot pay the amount
of tax due and compel the U.S. to relinquish
its right of redemption. See
Olympic Federal Savings & Loan
Association v. Regan, 648 F.2d 1218 (9th
Cir. 1981). Thus, unless the U.S. specifically
waives its right to redeem the property
prior to the expiration of the 120-day period,
the threat of such a redemption
remains with the property. Title
Companies, although faced with a growing
desire to waive the 120 day right of
redemption, honor the redemption period
and do not commonly insure coverage
until the redemption period expires.
III. FEDERAL ABSTRACT OF JUDGMENT
A.General Overview
The “Federal Debt Collection
Procedures Act of 1990” creates a procedure
whereas the United States can collect
debts adjudicated against parties in the
civil court system. In the Judicial and
Judiciary Procedures Title of the United
States Code, 28 USC §3201(a), a judgment
in a federal civil action in favor of the
United States creates a lien on all real
property owned by the particular judgment
debtor upon filing a certified copy of
an abstract of that judgment in the Official
Public Records of Real Property of the
county in which the real property is located.
The establishment and creation of this
lien is similar to that of a Federal Tax Lien
notice, however, the lien is affixed to the
real property when the abstract is recorded,
rather than when the debt or tax is
“assessed.”
B. Duration
A Federal Abstract of Judgment is
effective for a period of 20 years. The AJ
may be renewed for an additional period
of 20 years upon the recordation of a new
notice as a renewal before the expiration
of the original 20-year period. The
Federal Court, additionally, must approve
the renewal of such lien, but 28 USC
Section 3201(c) is silent as to the method
by which the United States must seek to
obtain approval of the renewal.
C.Priority
The priority of the Federal Abstract of
Judgment in relation to other liens is
based solely upon the recording date of
the certified copy of the judgment abstract
in the county real property records.
However, according to subsection (b) of
28 USC Section 3201, the Federal Abstract
of Judgment “shall have priority over any
other lien or encumbrance which is perfected
later in time.” Any lien recorded
before the Federal Abstract of Judgment is
recorded would have a superior priority
over the subsequently-filed AJ, but, the
aforementioned wording of subsection (b)
of the statute may indicate that the Federal
AJ could be handled as superior to a subsequently
created purchase money mortgage.
This would be contrary to the rule
in Texas, and some other states, that recognizes
a later-recorded purchase money
lien as superior to any lien recorded previous
to the purchase money mortgage.
Consequently, regardless of the recognized
law in Texas, the United States appears to
take the stance that upon its recordation, a
Federal Abstract of Judgment is superior
to a subsequent purchase money mortgage.
Following suit, most title companies
are assuming that the Federal AJ of record
is superior in priority over a purchase
money lien that is created after the
Abstract of Judgment. With this stance in
mind, few mortgage companies or lenders
will loan money using real property collateral
upon which is recorded a valid, effective
Federal Abstract of Judgment.
D. Judicial Foreclosure
Extinguishment
In the process of a judicial foreclosure
of a lien senior in priority to a Federal
Abstract of Judgment, if the U.S. was
properly made a party to the judicial foreclosure
lawsuit pursuant to local State procedural
law, the inferior Federal Abstract
of Judgment and its encumbrances are
extinguished.
E. Nonjudicial Foreclosure
Extinguishment
A reading of 28 USC Section 2410 indicates
that a proper nonjudicial foreclosure
of a senior lien pursuant to local State procedural
law extinguishes an inferior
Federal Abstract of Judgment for the benefit
and in favor of the United States, as
long as the United States was provided
proper written notice in accordance with
local State law. However, in the United
States v. Brosnan, 363 U.S. 237 (1960), it
was decided that Section 2410 of the
Federal Judicial and Judiciary Procedures
Title of the United States Code did not
apply to any local State nonjudicial foreclosure
procedures which permit the
extinguishment of inferior federal liens
without notice to the United States.
F. Redemption
Following a judicial foreclosure of a
senior lien that extinguishes an inferior
Federal Abstract of Judgment, the United
States may redeem the real property at any
time within one year of the date of the
foreclosure sale of the property in accordance
with 28 USC § 2410. To the contrary,
following a nonjudicial foreclosure
of a senior lien that would appear to extinguish
an inferior Federal Abstract of
Judgment, in view of the decision in
Brosnan, the United States does not have a
right of redemption under Section 2410
except if the redemption period is granted
to the United States by local state procedural
laws. It would appear, however, that
at least in some jurisdictions such as Texas,
the United States will take the same position
being asserted as to the Federal
Criminal Lien discussed below that: an
inferior Federal Abstract of Judgment may
only be extinguished pursuant to a judicial
foreclosure sale in which the United States
has been made a party, in accordance with
28 USC §2410; and, the United States has a
one year right of redemption following the
judicial foreclosure sale, in accordance
with 28 USC §2410.
G.Current Underwriting Issues
The present underwriting position of
the majority of the title companies in
Texas is: an inferior Federal Abstract of
Judgment may be extinguished by either a
proper judicial or nonjudicial foreclosure
sale in accordance with local State law;
and, the Company will assume the United
States has a one year right of redemption
under 28 USC §2410.
Many in the real estate field have questioned
whether there is any compelling
need to change the title companies’ current
position that a Federal Abstract of
Judgment will be superior to a subsequently
created purchase money mortgage.
The question is whether the Federal
Abstract of Judgment is, in fact, superior
to a subsequently created purchase money
mortgage in States such as Texas that recognize
the priority of a purchase money
mortgage.
Arguably, the Federal Abstract of
Judgment cannot attach to real property
until such time as title passes to the judgment
debtor. A purchase money lien,
therefore, is not “perfected later in time,”
as title passes to the judgment debtor subject
to the purchase money lien simultaneously.
See for example Diversified
Mortgage Investors v. Blaylock General
Contractors, Inc., 576 S.W. 2d 794 at 804
(Tex. 1978), where the court held a purchase
money mortgage was superior to a
mechanic’s lien, even though the inception
date of the mechanic’s lien was prior to the
recording date of the purchase money
mortgage. In so ruling, the court in
Diversified cited with approval the following
holding in Irving Lumber Company v. Alltex Mortgage, 468 S.W. 2d 341 (Tex.
1971):
(W)here a purchase money deed of
trust was executed contemporaneously
with the vesting of title in the
mortgagor, then the purchase
money deed of trust lien would have
priority over a mechanic’s lien since
the title of the mortgagor was burdened
instantly with the purchase
money deed of trust lien before the
mechanic’s lien attached to the
mortgagor’s title.
In view of the Brosnan case, some
question the non-applicability of 28 USC
§2410 to a nonjudicial foreclosure of a senior
lien that would extinguish an inferior
Federal Abstract of Judgment. And, as
with the Federal Tax Lien and the Federal
Criminal Lien discussed below, there may
be a growing trend to waive the right of
redemption in regard to the Federal AJ.
Some title companies are considering this
waiver theory, but not many.
IV. FEDERAL LIEN SECURING THE
PAYMENT OF A CRIMINAL FINE
AND/OR RESTITUTION
A. General Overview
A fine and/or restitution imposed
under Title 18, Crimes and Criminal
Procedure, of the United States Code,
Section 3571, against a criminal defendant
found guilty or liable in a federal case is
secured by a Federal Criminal Lien in
favor of the United States against all property
owned by the defendant as if the liability
of the person fined was a liability for
a tax assessed under the Internal Revenue
Code. Under Section 3571, the Code provides
that the United States may enforce a
Federal Criminal Lien in accordance with
the practices and procedures for the
enforcement of a civil judgment under
Federal law or State law. Therefore, it
would appear that, procedurally, the
United States has the option of enforcing a
Federal Criminal Lien by utilizing the
administrative levy procedures applicable
to the Federal Tax Lien, or by utilizing the
judicial levy procedures found in the U.S.
court system.
B. Duration
The Federal Criminal Lien is effective
for a period of 20 years, regardless of
the crime or the criminal penalty, or until
the liability is satisfied, remitted, set aside,
or is terminated. The liability to pay the
criminal fine terminates on the later of 20
years from the entry of the judgment or 20
years after the release from imprisonment
of the person fined. The lien also terminates
by law upon the death of the party
penalized, which may be of little satisfaction
to the debtor owning the real property,
benefiting only subsequent owners.
Although the statute provides that the
Federal Criminal Lien is to be treated in a
similar procedural manner as the previously-
discussed Federal Tax Lien, the
statute provide for a 20-year limitations
period rather than the 10 year and 30-day
limitations period for a Federal Tax Lien.
C. Priority
Rather than being created when the
action is committed (or the fine
“assessed”) a Federal Criminal Lien arises
only upon the entry of the judgment, but
the priority of the lien in relation to other
liens on a single property is based upon
the recording date of the notice of lien in
the Official Public Records of Real
Property in the county in which the property
is located. Generally, a purchase
money mortgage is superior to a previously
recorded Federal Criminal Lien against
the purchaser to the extent Texas law provides
the superiority of a purchase money
mortgage over other liens.
D. Judicial Foreclosure
Extinguishment
The statute creating the Federal
Criminal Lien indicates that it is to be
treated as if it is a Federal Tax Lien. Under
the Internal Revenue Code scenario, it
would appear the same rules noted above
that are applicable to a Federal Tax Lien
should apply to the Federal Criminal Lien.
Proper judicial foreclosure procedures of a
senior lien pursuant to State law extinguishes
an inferior Federal Criminal Lien
in favor of the United States, as long as the
United States was properly made a party to
the foreclosure lawsuit.
E. Nonjudicial Foreclosure
Extinguishment
For clarity, 18 USC 3613 further states
that a proper nonjudicial foreclosure of a
lien considered to be senior in priority
pursuant to local State law extinguishes an
inferior Federal Criminal Lien in favor of
the United States, as long as the United
States was properly provided with at least
25 days written note of the nonjudicial
foreclosure sale, in compliance with similar
requirements for Federal Tax Liens.
However, in a recent opinion provided by
the Department of Justice regarding a
Federal Criminal Lien, and despite the
reading of Section 3613 of Title 18 of the
U.S. Code, the United States in certain
jurisdictions, one of those jurisdictions
being Texas, has asserted that an inferior
Federal Criminal Lien may only be extinguished
pursuant to a judicial foreclosure
sale in which the United States has been
made a party, in accordance with 28 USC
§2410.
F. Redemption
Following a properly-conducted judicial
or nonjudicial foreclosure of a lien in
senior position to a Federal Criminal Lien,
18 USC 3613 states that the United States
may redeem the real property within 120
days of the date of the sale. However, contrary
to this interpretation, in a similar
Department of Justice letter, it was stated
that the United States has a one year right
of redemption following the judicial foreclosure
sale under 28 USC §2410 of the
Federal Judiciary rules.
G. Current Underwriting Issues
At present, most underwriters of title
companies take the position that an inferior
Federal Criminal Lien may be extinguished
by either a proper judicial or nonjudicial
foreclosure sale in the same manner
as the Federal Tax Lien; but, the title
companies assume that the United States
has a one year right of redemption under
Section 2410 of the Judiciary and Judicial
Proceeding Title 28. It would appear the
United State’s argument as to the applicability
of 28 USC §2410 to the Federal
Criminal Lien is suspect but the question
to title companies remains whether a judicial
foreclosure of a senior lien is required
to extinguish an inferior Federal Criminal
Lien and what is the correct right of
redemption as to the Federal Criminal
Lien- one year or 120 days.
Title companies believe that the lien
provisions related to the Federal Tax Lien
apply to the Federal Criminal Lien, not the
provisions of 28 USC §2410. A reasonable
reading of the statute indicates that except
as otherwise provided in the statute, the
Federal Criminal Lien is to be treated as if
it was a Federal Tax Lien. In the earlier
version of 28 USC Section 2410, the statute
incorporates specific Internal Revenue
Code provisions related to the lien.
However, in the current version of the
statute, the entire Internal Revenue Service
Code is incorporated by reference into that
section.
Case law would appear to confirm that
the plain reading of the statute and the
legislative history of the statute establish
the Federal Criminal Lien is to be treated
as if it was a Federal Tax Lien. See United
States v. Rice, 196 F. Supp. 2d 1196 (U.S.
Dist. Ct, N. D.Okla. 2002); United States v.
Tyson, 242 F. Supp. 2d 469 (U.S. Dist. Ct.,
E. D. Michigan, S. Div. 2003).
Statute 28 USC §2410(c) specifically
provides that the one year right of
redemption does not apply to a Federal
Tax Lien. The 120-day right of redemption
applies. Since the Federal Criminal
Lien is to be treated as a Federal Tax Lien,
it would appear there is a 120-day right of
redemption in favor of the United States as
to the Federal Criminal Lien.
Statute 28 USC §2410 also provides an
alternative course of action. It provides a
mechanism for which the United States
will agree to waive sovereign immunity in
the event of a judicial proceeding. It does
not require a judicial foreclosure of a senior
lien, and most title companies believe
that it was not intended to preclude other
State foreclosure remedies, such as the
remedies of Texas, to use a nonjudicial
foreclosure sale to extinguish an inferior
federal lien. See United States v. Brosnan,
363 U.S. 237 (1960) (where the Supreme
Court held 28 USC §2410 did not prohibit
the extinguishment of inferior federal tax
liens pursuant to the nonjudicial foreclosure
of a senior lien under California law
with no notice to the United States).
The U.S. Department of Justice continues
to cite Brosnan as authority for the
proposition that State nonjudicial foreclosure
procedures may extinguish inferior
federal liens without the service of process
on the United States required by 28 USC
§2410. An explanation of this authority
can be found in Section 4-4.541,
Department of Justice, of the U.S.
Attorney’s Manual. Therefore, it would
appear an inferior Federal Criminal Lien
may be extinguished by the nonjudicial
foreclosure of a senior lien in accordance
with local State law.
Read literally, 18 USC §3613 provides
that the Federal Criminal Lien is to be
treated as if it was a Federal Tax Lien.
Under the early version of the statute, subsection
(c) incorporated specific provisions
of the Internal Revenue Code, but
stated all references in the Internal
Revenue Code provisions to the
“Secretary” shall be construed to mean
“Attorney General.” Accordingly, under
the earlier version of the statute, notice or
service of process would be provided to
the United States Attorney General’s Office
prior to the foreclosure of a senior lien.
When the statute was amended in 1996,
this reference to “Attorney General” was
deleted implying that notice and/or service
of process could be provided to the
Internal Revenue Service and the U.S.
Department of Justice Office that filed the
Federal Criminal Lien since the statute
indicates the lien is to be treated as if it
was a Federal Tax Lien.
As with the Federal Tax Lien, there
may be a growing trend to waive the right
of redemption regarding to the Federal
Criminal Lien. Some Texas title companies
are considering waiving this right of
redemption but it depends upon the specific
circumstances and whether or not the
redemption period is considered to be 120
days or one year.
Many thanks to Mr. Stanley E. Keeton,
Vice President and Regional Counsel for
Alamo Title Insurance and Fidelity
National Title Insurance Company for his
contribution of information to this Article.
Judy Gray received her Bachelor of
Science degree in Business from Columbia
College and her paralegal certificate from
Denver Paralegal Institute, where she was
recruited by the oldest law firm in San
Antonio. Judy worked in real estate at the
law firm for fifteen years during which time
she earned her Master of Arts degree in
Business, graduating Magna Cum Laude
from Webster University.
In 1998 Judy entered St. Mary’s
University Law School where she achieved
acceptance to the Dean’s List, the St. Mary’s
Law Journal, Phi Delta Phi, and the John Harlon Honor Society. She graduated Cum
Laude in 2000, passed the Texas State Bar,
and returned to the practice of real estate,
banking and water law.
Ms. Gray is an adjunct professor at the
University of Phoenix-San Antonio
Campus, and is a certified instructor for the
Texas Real Estate Commission. She currently
serves on two City Tax Increment
Financing Boards and the Board of Directors
of CREW-San Antonio. She is active with
the San Antonio Bar Foundation and
taught several real estate and water law
seminar courses for the State Bar of Texas.
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