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And since Dawn kills Teddy in this version, Peggy is an eye witness that has to be disposed of.
At least that's how I would explain it.
Same here. Actually Teddy Jr was the only one who died in my playthrough and seemed like a positive outcome.
In order to save Peggy you need to interact with the birthday card in her desktop and I think purposely stall Dawn/Marie conversation rerouting the conversation with minor topics before asking the relevant questions, i.e. asking about how she felt, about Eugene Sharpe, etc
That gives the cops enough time to arrive on the scene and save Peg.