A Checklist for Financial Elder Abuse and Undue Influence – Angelina Alhadi v. Commissioner of Internal Revenue

Alhadi is a United States Tax Court decision rendered in April 2016 (T.C. Memo. 2016-74) in which the petitioner, Angelina Alhadi, was found to have acquired over $1 million from her employer through undue influence and financial elder abuse over the two-year period she worked for him. Towards the end of his life Dr. Marsh had amassed an estate valued at over $3 million.  Following a diagnosis of dementia, loss of hearing, and vision problems and in general being unable to care for himself, he needed the assistance of a caregiver. His closest relative lived too far away to offer assistance or even to visit him on a regular basis to evaluate his living conditions.

Financial Elder Abuse and Undue Influence

Dr. Marsh’s situation provided the perfect opportunity for the caregiver he hired, Mrs. Alhadi, to take advantage of him by overcharging him for the care given and services she purported to give him. The money wrongfully acquired was used to make the down payment on a $1 million home in Gilroy, pay her mortgage payments, remodel the home, construct a swimming pool, purchase furniture, do landscaping and pay off her husband’s interest in their home in Hollister as part of their divorce settlement.  Mrs. Alhadi’s demands of Dr. Marsh were unending – among other things she wanted to be named in his will, wanted a separate trust for her benefit, and money for her and her family to take a cruise. Mrs. Alhadi prevented relatives from making contact with Dr. Marsh and she kept mail requiring his attention from him.  She not only isolated him from his family and the outside world but she also preyed on his loneliness by professing her love and affection for him.  She sought to appeal to his generous but forgetful nature by reminding him that she struggled financially and could not adequately support her family even though she charged Dr. Marsh twice the going rate paid for in home care services.

When the Santa Clara County Adult Protective Services was alerted to Dr. Marsh’s situation through his financial advisor, they found the living conditions Dr. Marsh was forced to live in to be deplorable.  Food was found rotting in the refrigerator and the apartment was filthy, among other things.  The advisor’s suspicion had been raised by the frequency with which large amounts of money were being withdrawn from his account and the fact that Mrs. Alhadi’s directives and cajoling could be heard in the background of telephone conversations he had with Dr. Marsh.

Conclusion

The tax court noted that this case against the caregiver was clearly a “lopsided” case because she presented no evidence or witnesses on her behalf to contradict the government’s evidence for unpaid taxes and filing fraudulent returns.  The Court applied California law to make the determination of financial elder abuse and undue influence (California Civil Code §1575 and California Welfare and Institutions Code §15610.70).  All the elements of undue influence were found to exist in the Alhadi case – Mrs. Alhadi used the authority she had to gain an unfair advantage, she exploited the fact Dr. Marsh suffered from dementia and she took a grossly oppressive and unfair advantage of the needs and vulnerability of Dr. Marsh by isolating him from the outside world.  The circumstances were clearly inequitable.  The tax court ruled that the $1 million plus in money Mrs. Alhadi garnered from Dr. Marsh was taxable to her as an independent contractor and that the returns she filed for the two years under consideration were fraudulent.

 

 


 

Chiles and Prochnow, LLP offers a free one hour consultation for cases involving questions about probate and estate litigation, trust administration and elder financial abuse in the following cities and surrounding areas: Palo Alto, Redwood City, Hillsborough, San Francisco, and San Jose

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JR Marketing, LLC v. Hartford Casualty Insurance Company

JR Marketing, LLC v. Hartford Casualty Insurance Company (A133750 decided by the First Appellate District; certified for publication on June 11, 2013) is ostensibly a dispute over attorney’s fees but is in fact an analysis of what happens when an insurer denies coverage for a claim that is later determined to be covered. 

Hartford issued commercial general liability policies to Noble Locks Enterprises, Inc. and JR Marketing.  While the policies were in effect several individuals brought suit in the Superior Court of Marin County against the insureds for intentional misrepresentation, breach of fiduciary duty, unfair competition, restraint of trade, defamation, interference with business relationships, conversion, accounting, mismanagement and conspiracy.  The suit was tendered to Hartford for defense by JR Marketing and Noble Locks.  Two other actions were brought against JR Marketing and Noble Locks in courts outside California and were also tendered to Hartford for defense and indemnity. 

In the Marin matter, Hartford refused to defend or indemnify on the grounds that the acts complained of appeared to have occurred before coverage incepted.  JR Marketing, Noble Locks and others filed a coverage lawsuit against Hartford.  As a result of that action Hartford agreed to defend the underlying claims under reservation of rights; but Hartford refused to pay defense costs incurred before the coverage action was filed or to provide Cumis counsel.  The insureds then brought a motion for summary adjudication as to whether Hartford owed them a duty to defend including a duty to provide Cumis counsel dating back to the initial tender of the claim to Hartford. 

The trial court found that there was a duty to defend and that the insureds were entitled to independent Cumis counsel.  Subsequent motions directed Hartford to pay outstanding invoices and “all future, reasonable and necessary defense costs within 30 days of receipt.”  The trial court held that because Hartford had breached its defense obligations and the duty to provide Cumis counsel, it was barred from relying on Civil Code §2860 that limits the amounts an insurer has to pay for independent Cumis counsel because that section “is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” See CC §2860 (c).  The trial court reasoned that allowing an insurer to initially refuse to defend or provide Cumis counsel and then allow the insurer to unilaterally take advantage of the rate limitation of CC §2860 would encourage insurers to reject their Cumis obligations as long as they felt safe in the notion that they could invoke the benefit of the statute at any time.  

Hartford received bills for defense costs totaling over $50 million which were subsequently paid.   Hartford complained in a cross action (which is the subject of the instant opinion) that the insured’s counsel’s charges not only covered the Marin County matter but other matters as well.  Hartford sought reimbursement of “overpayments” made pursuant to the order based on a theory of unjust enrichment and sought an accounting and rescission. The response of the insureds and its law firm, Squire Sanders, was to demur.  The trial court sustained the demurrer in favor of Squire Sanders but allowed the reimbursement and rescission causes of action as to the insureds to go forward.  As a result, Squire Sanders was dismissed from the lawsuit and that dismissal was the subject of the appeal. 

The question on appeal was whether Hartford had a quasi-contractual right rooted in common law to maintain a direct action against Squire Sanders as independent counsel for certain cross defendants for reimbursement of excessive or otherwise improperly invoiced defense fees and costs.  The court determined that it did not.  Normally the court stated an insurer has an established right to control litigation that it is defending.  When, however, a conflict of interest exists between the insurer and insured, that right disappears.  The independent counsel (hereinafter “Cumis counsel”) has limited duties to the insurer to provide non privileged information but the Cumis counsel represents the insured alone.  There is therefore no attorney client relationship between the Cumis counsel and the insurer.  The balance that is provided in these situations is CC §2860 which protects the insurer from excessive charges.  To take advantage of §2860 the insurer must meet its duty to defend and accept tender of the insured’s defense subject to reservation of rights.  This case holds that an insurer who refuses to accept the defense under reservation loses its protection under CC §2860.  An insurer’s right to seek reimbursement of overpayment was recognized by the California Supreme Court in Buss v. Superior Court (1997) 16 Cal.4th 35.  Hartford argued that under Buss and similar cases, it had a right to seek reimbursement against the attorneys under both contractual and quasi-contractual theories.  Because the insurer does not have a duty to defend the insured for claims that were not even potentially covered, the insurer therefore has a right of reimbursement that is implied in law as quasi-contractual whether or not it was one that was implied in fact or in the policy itself.  In essence Hartford was arguing that this was an unjust enrichment claim and the right exists against the person who was unjustly enriched, i.e., the Cumis counsel, in favor of the person who suffered a loss thereby, i.e., Hartford.  The Court of Appeal concluded Hartford’s argument was incomplete because it ignored the fact that a benefit received by one person does not by itself constitute a sufficient basis to require restitution.  There must also be a showing that by allowing the person who has benefitted to retain the benefit would be “unjust”.  Here the Court concluded that important public policies such as the one exemplified by CC §2860 would be frustrated by allowing Hartford to sue Squire Sanders directly for reimbursement. 

By failing to accept the defense under reservation and agreeing to the appointment of Cumis counsel, Hartford was penalized by the Court.  Hartford lost the protection of CC §2860 for fees and costs which in this case were significant.  This is a very severe penalty for an insurer who failed to defend for a relatively limited period of time (approximately 6 months).  However the insurer is not without remedies – it can pursue claims against its insured if it can establish that its fees were not covered by the insurance policy or if the insured agreed to pay the law firm more than was reasonable for the services performed.  Whether this turns out to be an alternative for Hartford to pursue is another story.

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The Parole Evidence Rule

The parole evidence rule is an important rule of both evidence and substantive law.  It provides that the terms of a writing intended to be a final agreement may not be contradicted by any prior agreement or contemporaneous oral communications.  The rule is codified in California Code of Civil Procedure §1856.   A significant exception to the rule [CCP §1856 (f)] provides that where the validity of the agreement is in dispute the rule does not exclude evidence relevant to that issue.  The code specifically provides that the rule does not exclude other evidence concerning the circumstances under which the agreement was made, to explain an ambiguity, to interpret the terms of the agreement or to establish illegality or fraud.  [See CCP §1856 (g)]. 

         In Bank of America National Trust and Savings Association v. Pendergrass, (1935) 4 Cal.2d 258, the Supreme Court held the fraud exception to the Parole Evidence Rule described above would permit the admission of parole evidence only if it tended to prove some fraud in the inducement to enter into the contract or some other fact independent of the contract terms.  Thus parole evidence of an oral promise made contemporaneously with the execution of the agreement that contradicted the written terms of the agreement was inadmissible even for the purpose of contesting the validity of the contract itself.

            In Riverisland Cold Storage v. Fresno-Madera Production Credit  Association, (2013) 55 Cal.4th 1169, the California Supreme Court revisited that issue and concluded that the Pendergrass rule is contrary to the language of the statute, is difficult to apply, conflicts with the Restatement, most treatises and most sister state jurisdictions.  Furthermore the Court was concerned that, although intended to prevent fraud, the rule established in Pendergrass may provide a shield for fraudulent conduct.  As a result, in Riverisland the Court reversed its 78 year old holding in Pendergrass and allowed the admission of parole evidence to demonstrate fraud by a lender. 

            In Riverisland, plaintiffs had restructured their debt with Fresno-Madeira Production Credit Association with a new ­­­­­agreement  by which the credit association promised it would take no enforcement action until July 1, 2007 if the plaintiff made specified payments.  Plaintiffs did not make the required payments and the credit association recorded a notice of default.  Plaintiffs eventually repaid the loan and the association dismissed the foreclosure proceedings.  Plaintiffs then filed a law suit against the association seeking damages for fraud and negligent misrepresentation including causes of action for rescission and reformation of the restructuring agreement.  Plaintiffs alleged that a vice president of the association met with them two weeks before the agreement was signed and told them the association would extend the loan for two years in exchange for additional collateral consisting of two ranches.  They were assured that the term was for two years and that the ranches were only additional security.  The contract that they signed however only contemplated 3 months of forbearance by the association and identified 8 parcels as the additional collateral.  Plaintiffs claimed that they did not read the agreement but signed it anyway. The credit association moved for summary judgment contending that because the parole evidence rule barred evidence of any representations contradicting the terms of the written agreement, the plaintiffs’ claim could not proceed.  Plaintiffs argued that misrepresentations were admissible under the fraud exception but the trial court, relying on Pendergrass, granted summary judgment for the defendant.

           The Court of Appeal reversed reasoning that Pendergrass was limited to promissory fraud and that false statements about the content of the agreement itself were beyond the scope of the Pendergrass rule.  The Supreme Court granted review.  After examining the way the statute had been applied in Pendergrass, the criticisms made and the way sister state courts have interpreted the parole evidence rule, the Supreme Court determined that its decision in Pendergrass was wrong.  It concluded that the Pendergrass was a poorly reasoned opinion and a misapplication of the statute and was inconsistent with the law at the time it was decided.  Stating that Pendergrass was an aberrant decision, the Supreme Court decided that it was no longer valid law and upheld the Court of Appeal’s decision to reverse the grant of summary judgment to the credit association.

           Draftsmanship is not by itself going to resolve the issue of whether parole evidence will be admitted.  Nevertheless, fraud is still a difficult issue to prove, even with the admission of parole evidence.  Parole evidence may be admitted at least initially to allow the Court to determine if fraud is a legitimate issue for the Trier of Fact to consider.  Fraud is still a difficult claim to prove.  As the Supreme Court noted, it “entails more than proof of an unkept promise or mere failure of performance …. promissory fraud, like all forms of fraud, requires a showing of justifiable reliance on the defendant’s misrepresentation.”  This holding is going to make the issue of “possible fraud” a significant one in many contractual disputes. 

           One door left open in the Riverisland decision is the holding in Rosenthal v. Great Western Financial Securities Corp.,  (1996) 14 Cal.4th 1494.  There the Court concluded that the negligent failure to acquaint oneself with the contents of a written agreement precludes a finding that the contract is void for fraud in the execution.  It is not clear what the application of Rosenthal will be with the new Riverisland approach under the parole evidence rule – an issue which will be addressed in the future as the courts attempt to deal with the new rule as it now exists.

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Vargas v. SAI Monrovia, BMW, Inc.

Vargas v. SAI Monrovia, BMW, Inc.  (2nd Appellate Dist. B237257) 

In September of 2008 Jorge Vargas and Guadalupe Carcamo (“Plaintiffs”) went to SAI Monrovia BMW, doing business as BMW Mini of Monrovia, to buy a Mini Cooper S.  They looked at a 2008 model on the lot and completed a credit application to obtain financing.  In violation of California law they were not given a copy of the signed credit application.  Vargas took the car for a test drive and after the test drive plaintiffs told the salesman (Roger) that they were interested in purchasing the car.  Roger told them that if they were interested in keeping their monthly car payment below $500 they would have to make a down payment of $1,500 and that the loan would have to be for a period of 6 years.  He told them to return the next day to complete the paper work since the finance office was closed.  They returned the next day, spoke to the manager and agreed to purchase an extended warranty for another $1,845.00.  They were given a retail installment sales contract that was a two sided, preprinted document 8 ½” wide and 26” long.  Plaintiffs signed on the front side at 12 places but there were no places on the back side for them to sign.  A provision entitled “Arbitration Clause” was the last provision in the sales contract located on the back side of the first page.  There was no indication that the buyers had signed any provisions on the back side of the contract.  The seller did however have a signature block on the back side of the first page.  There were a number of charges that appeared on the back side of the first page, including $8.75 for California tire fees and $28.00 for “optional DMV electronic filing fee”.

            The disclosures also violated several provisions of California law including the fact that there was no information about what the monthly payments would be without the service contract.  There was an overcharge for the tire fee and the buyers should have been advised that the charges associated with the DMV filing fee were optional.  Because of the problems he experienced with the car, Vargas returned the car several times but the problems were not corrected.  The buyers even contacted BMW North America to complain about the seller not fixing the car, but nothing was done. 

            In the subsequent lawsuit filed plaintiffs alleged various violations of California law and also sought to have their claim treated as a class action against the dealer and BMW of North America.  They sought injunctive relief against BMW and the dealer as well.  JP Morgan Chase Bank, to whom the contract had been assigned, was also named as a defendant.  All three defendants moved to compel arbitration under the arbitration agreement.  The arbitration agreement provided that the buyers waived their right to proceed with a class action lawsuit and bound them to resolve the dispute through arbitration with a single arbitrator.  The arbitration agreement also provided that the dealer would advance the buyer’s filing fees, or other case management fees (up to a maximum of $2,500) which sums were to be reimbursed at the end of the proceeding at the arbitrator’s discretion.  The arbitration clause also overruled the arbitration organization’s rules to the extent they were inconsistent with the provisions of the arbitration agreement.  The agreement provided that the arbitrator’s award would be final and binding on the parties with three exceptions. If the arbitrator’s award for a party was $0, if the ruling was against any party in excess of $100,000 or if any injunctive relief was imposed, then the aggrieved party could request a new arbitration panel of three arbitrators.  Notwithstanding the above, the dealer was entitled to exercise self-help remedies including repossession and was also entitled to seek remedies in small claims court disputes and other claims within that court’s jurisdiction.  Plaintiffs moved to have the arbitration agreement disregarded on the grounds that it was both procedurally and substantively unconscionable and should not therefore be enforced.  They also noted they were entitled to a class action under the provisions of the California Consumer Legal Remedies Act (CLRA) (Civil Code §§1750 – 1784).  The trial court granted the motion to compel arbitration and the motion to strike the class action allegation in the complaint. The plaintiffs appealed.

            Unconscionability is a ground under California state law for a court to refuse to enforce an arbitration provision.  Defendants had argued that the US Supreme Court decision of ATT Mobility LLC v.  Concepcion (2011) 563 US ________ precludes a court from relying on unconscionability as a ground for invalidating an arbitration provision.  The Court of Appeal disagreed.  It found that the California Supreme Court upheld unconscionability as a ground for refusing to enforce an agreement in a decision decided one year after Concepcion in Pinnacle Museum Tower Association v. Pinnacle Market Development (2012) 55 Cal.4th 223.  The Court of Appeals concluded that the doctrine of unconscionability had not been eliminated by Concepcion as a defense to the enforcement of arbitration agreements subject to the Federal Arbitration Act (“FAA”).  According to the California Court of Appeal, Concepcion ruled that a state may not rely on categorical rules that prohibit the arbitration of a particular type of claim.  The Court of Appeal also found that California’s principles of unconscionability do not constitute a categorical rule invalidating arbitration agreements.  This was to be distinguished from the rule in Discover Bank v. Superior Court (2005) 36 Cal.4th 148 where the Supreme Court had imposed a categorical rule against class action waivers in consumer contracts.  That approach is inconsistent with the FAA.

             As noted, there are two types of unconscionability – procedural and substantive.  Procedural unconscionability typically requires oppression or surprise usually at the time of contract formation.  It often occurs when a contract contains provisions hidden in a printed form that are not the result of negotiation and meaningful choice.  In Gutierrez v. Auto West, Inc.  (2003) 114 Cal.App.4th 77, the Court of Appeal concluded that an arbitration provision in a contract almost identical to the one in the Vargas matter was procedurally unconscionable because the contract was adhesive.  The agreement was presented to the plaintiffs for signature on a take it or leave it basis and they were given no opportunity to negotiate any of the preprinted terms of the lease and the arbitration provision was inconspicuous (printed in 8 point type on the opposite side of the signature page of the agreement). The Court concluded this was sufficient for the arbitration clause to be deemed procedurally unconscionable.  The evidence before the Court indicated that the plaintiffs had followed the instructions of the finance manager at the dealer to sign at specific places and that he did not turn the contract over which would have revealed the arbitration provision. The Court determined that the dealer controlled the presentation and the signing of the document thus denying the plaintiffs an opportunity to review the entire contract.  Moreover, the fact that the plaintiffs had not read the entire contract does not eliminate the issue of enforceability.  The Court found the agreement oppressive by its terms. Plaintiffs were presented with a sales contract on a take it or leave it basis with preprinted terms that were not negotiable.  The arbitration provision was unnoticeable to buyers because it was printed on the reverse of a two-sided page that was not signed by the buyers.  Concluding that there was a high degree of procedural unconscionability, the Court found that under the rule of Pinnacle, supra, the plaintiffs had to make a relatively lower showing of substantive unconscionability.  It should be noted that the Court found the level of substantive unconscionability to be very high. 

            Substantive unconscionability occurs when the focus of the provision is overly harsh or one sided and if it appears that the disputed provision falls outside of the reasonable expectations of the drafting party or is unduly oppressive.  The Court concluded that the four clauses in the arbitration provision were substantively unconscionable: (1.) the provision that afforded the right of appeal if the award exceeded $100,000; (2.) the provision affording a right to appeal if the award granted injunctive relief; (3.) the provision requiring the appealing party to pay in advance the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs; (4.) the exemption of rights of repossession and self help from arbitration afforded to the dealer while requiring the request for injunctive relief to be submitted to arbitration by the buyers.  The Court examined how these provisions were particularly unfair to a buyer (as distinguished from a dealer) and how one-sided the arbitration provisions were and as a result determined that the arbitration provisions were substantively unconscionable. Having found that there were substantive unconscionable provisions in the arbitration clause, the Court concluded the arbitration clause was permeated by unconscionability and could not be cured by severance, restriction or reformation.  As a result, the Court of Appeal reversed the trial court’s decision in its entirety and remanded the case for further proceedings.

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Effects of DOMA and Prop 8 Rulings on Probate Disputes Involving Same-Sex Partners

Both the Defense of Marriage Act (DOMA) and Proposition 8 defined marriage as between one man and one woman. The result of the federal DOMA provision was to deny same-sex spouses the federal rights that are granted to opposite-sex couples. Proposition 8 banned same-sex marriages in California.

In June 2013, the U.S. Supreme Court ruled in United States v. Windsor, Executor of the Estate of Spyer, et al. and Hollingsworth, et al. v. Perry, et al. that the definitions in DOMA and Prop 8 were unconstitutional. These two decisions have an impact on certain types of estate disputes previously faced by the surviving partner in a same-sex marriage, for example:

  • IRS tax disputes — The plaintiff in Windsor was denied the estate tax spousal exemption after the death of her same-sex spouse. This unjust result was reversed with the overturn of the DOMA definition. 
  • Social Security and other federal benefits denials — Same-sex spouses are now entitled to the same survivors benefits from the Social Security Administration, Veterans Benefits Administration and other federal programs as opposite-sex couples. 
  • California property matters — After Prop 8 was struck down, the California Supreme Court allowed same-sex marriages to immediately resume. Thus, property owned by same-sex spouses in California is distributed according to probate rules. Also, registered domestic partners are treated like married spouses for purposes of real property, family and estate laws. 
  • Out-of-state property matters — Unfortunately, property owned in a state that does not recognize same-sex unions is subject to a DOMA provision that remains intact, which permits states to not recognize same-sex marriage. In those states, a spouse’s right to the estate’s property could be successfully challenged if the couple failed to title it properly.

Even government officials may not be fully aware of the impact the fast-changing laws have on the rights of same-sex couples. For this reason, consider retaining an estate litigation attorney in Palo Alto to protect your interests during probate disputes.

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Who Inherits When There Is No Will?

When people die without leaving a will, they are said to have died “intestate.” A common myth is that the estate goes to the state when no will exists. This happens only when there are no living relatives of the deceased person, which is very rare. Nonetheless, the laws of intestate distribution of assets may not lead to the results that the deceased person would have desired.

The intestate laws are contained in the California Probate Code, which divides the decedent’s property in this manner:

  • If married, with no other close relatives — Spouse receives entire estate
  • If married, with children — Spouse inherits all community property and one-half to one-third of the separate property — depending on the number of children or grandchildren — with the children or grandchildren receiving the remainder of the separate property
  • If married, with parents or siblings still alive  — Spouse gets all community property and one-half of the separate property, with the parents or siblings receiving the rest of the separate property
  • If unmarried with children, but no parents or siblings — Children receive entire estate
  • If parents only — Parents inherit the whole estate
  • If siblings only — Siblings inherit everything

In some cases, more distant relatives — such as nieces, nephews and grandchildren — are entitled to the share what would have gone to their deceased parents. For intestate purposes, a domestic partner has the same rights as a spouse.

Intestate rules can be confusing and may require the assistance of a qualified Palo Alto estate litigation lawyer.

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Taking Action Against Elder Abuse in California

Elder abuse can involve violence, psychological trauma, isolation, abandonment, confinement, neglect and theft. These acts are criminal if perpetrated against a person of any age, but if the victim is 65 years or older, the penalties are stiffer.

Abuse may be at the hands of a stranger, a significant other, a relative or a professional, such as a nurse, accountant or member of the clergy. When an offender is in a position of trust, the abuse may be more difficult to detect because the senior may be unwilling to report a family member or be afraid to denounce a caregiver. In addition, a victim may really believe in a fraudulent church, charity or friend to which she or he has donated money and is often more susceptible to investment and prize-winning scams.

After learning of your loved one’s abuse, your first reaction is likely one of shock, especially if you trusted the person or organization responsible for the abuse. However, you are not alone. These resources can help you take the appropriate actions to protect your loved one from further harm:

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