Robert Packard, et al v. OCA Inc, et al

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PUBLISHED OPINION FILED. [09-41004 Affirmed] Judge: EBC , Judge: LHS , Judge: CH. Mandate pull date is 11/16/2010 [09-41004]

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Robert Packard, et al v. se: 09-41004 Ca OCA Inc, et al Document: 00511275255 Page: 1 Date Filed: 10/26/2010 Doc. 0 IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED October 26, 2010 N o . 09-41004 Lyle W. Cayce Clerk R O B E R T PACKARD, D.M.D., M.S.; PACKARD ORTHODONTICS PA, doing b u s in e s s as Apple Orthodontix, P la in t iffs - Appellees v. O C A INC, formerly known as Orthodontic Centers of America, Inc.; O R T H O D O N T I C CENTERS OF TEXAS, INC., D e fe n d a n t s - Appellants A p p e a l from the United States District Court fo r the Eastern District of Texas B e fo r e CLEMENT, SOUTHWICK, and HAYNES, Circuit Judges. E D I T H BROWN CLEMENT, Circuit Judge: A p p e lla n t s OCA, Inc. and Orthodontic Centers of Texas, Inc. (collectively, " O C A " ) appeal the district court's grant of summary judgment in favor of Robert P a c k a r d , D.M.D., M.S. and Packard Orthodontics, P.A., doing business as Apple O r t h o d o n t ix (collectively, "Packard") on its counterclaims for unjust enrichment a n d money had and received. The district court ruled, as a matter of Texas law, O C A could not pursue its equitable counterclaims to recover benefits conferred p u r s u a n t to the illegal contract. We AFFIRM. Dockets.Justia.com Case: 09-41004 Document: 00511275255 Page: 2 Date Filed: 10/26/2010 No. 09-41004 F A C T S AND PROCEEDINGS T h is appeal arises out of an illegal business relationship between a c o r p o r a t io n from Delaware and a dentist from Texas. The facts underlying this r e la t io n s h ip are complicated, but largely undisputed. D r . Packard, his former partner, and their professional corporation e n te r e d into a long-term service agreement with Apple Orthodontix, Inc. (" A p p le " ). Apple provided "practice management services" to orthodontic p r a c t ic e s in seventeen states before filing for bankruptcy in 2000. With the b a n k r u p t c y court's blessing, Apple sold some of its assets, including the P a c k a r d ­ A p p le contract, to OCA. Shortly thereafter, Packard and OCA entered in t o several agreements. OCA paid to Packard almost five million dollars in e x c h a n g e for, among other things and relevant here, the entry into a long-term m a n a g e m e n t services agreement that superseded the Packard­Apple contract. T h is new agreement, the Business Services Agreement ("BSA"), included a t w e n t y -fiv e year term for which OCA would provide Packard with business and a d m in is t r a t iv e support and services.1 The BSA also called for OCA to develop up t o seven new offices with Packard, with OCA agreeing to advance Packard the m o n e y needed to develop the new offices. F iv e years into the BSA, Packard terminated the BSA and sued for a d e c la r a to r y judgment that the Packard­OCA agreements were illegal, and t h e r e fo r e void. OCA counterclaimed for breach of contract, conversion, unjust These services included employment, scheduling, and training of non-licensed office staff; provision and maintenance of the offices, telephones, utilities, furniture, fixtures, and equipment; bookkeeping and accounting services; billing and collection services; administration and disbursement of funds; installation of computer hardware and software, and training staff; ordering and management of supplies and inventory; preparation of statistical data and analyses of operations; legal services for routine operations; consulting advice on efficiency and productivity, marketing, office locations and set-ups, and staff salaries, benefits, and performance and incentive plans, as requested; marketing and advertising services; and all other business services reasonably required for routine business operations. 1 2 Case: 09-41004 Document: 00511275255 Page: 3 Date Filed: 10/26/2010 No. 09-41004 e n r ic h m e n t , promissory estoppel, money had and received, account stated, d e c la r a to r y judgments that the contracts were legal, breach of warranty and in d e m n it y , and attorney's fees. OCA introduced evidence that it had paid P a c k a r d approximately $4,992,674.00 in up-front affiliation payments and a d v a n c e s , and argued that--taking into account the sums Packard paid OCA d u r in g the five years of the BSA--Packard retained a net benefit of a p p r o x im a t e ly $2,279,275.00. Packard moved for summary judgment as to the ille g a lit y of contract. The district court then stayed the proceedings pending the outcome of a r e la t e d appeal to this court that required us to pass on the legality of OCA's s t a n d a r d contracts. In December 2008, this court declared OCA's standard c o n t r a c ts illegal under Texas law, concluding that the agreements allowed OCA t o engage in the unlicensed practice of dentistry. In re OCA, Inc., 552 F.3d 413, 4 2 4 (5th Cir. 2008) (holding "the subject matter of the [BSA] runs afoul of [Texas O c c u p a t io n s Code] section 251.003(a)(4)'s prohibition of unlicensed persons from o w n in g , operating, or maintaining a premises at which those persons also e m p lo y or engage another person to practice dentistry."). The district court then lift e d its stay of the proceedings in this case. O C A conceded the illegality of the agreements, leaving its equitable c o u n t e r c la im s as the only remaining issues for resolution. Packard moved for s u m m a r y judgment as to the counterclaims, and the district court referred the m a t t e r to a magistrate judge for preparation of a report and recommendation (" R & R " ). The magistrate judge reasoned that, under Texas law, the general rule is that a court will not assist parties to an illegal contract. Recognizing several n a r r o w exceptions to the general rule, the magistrate judge concluded that no e v id e n c e supported the application of any exceptions, and recommended that 3 Case: 09-41004 Document: 00511275255 Page: 4 Date Filed: 10/26/2010 No. 09-41004 s u m m a r y judgment be granted in favor of Packard on OCA's counterclaims.2 The d is t r ic t court adopted the amended report and recommendation over OCA's o b je c t io n s . OCA timely appealed as to its counterclaims for unjust enrichment a n d money had and received. OCA does not appeal the district court's grant of s u m m a r y judgment on the illegality of the contract or the remaining c o u n te r c la im s . D IS C U S S IO N A. Standard of Review " W e review a grant of summary judgment de novo and apply the same le g a l standard as the district court." Maverick Recording Co. v. Harper, 598 F.3d 1 9 3 , 195 (5th Cir. 2010). Summary judgment should be rendered if the record d e m o n s t r a t e s that "there is no genuine issue as to any material fact and that the m o v a n t is entitled to judgment as a matter of law." FED R. CIV. P. 56(c). "For the p u r p o s e s of a summary judgment determination, all fact questions are viewed in the light most favorable to the nonmovant." Aucoin v. Haney, 306 F.3d 268, 2 7 1 (5th Cir. 2002). B e c a u s e this court's jurisdiction is predicated on the federal diversity s t a t u t e , Texas substantive law governs this dispute. Gasperini v. Ctr. for H u m a n itie s , Inc., 518 U.S. 415, 427 (1996). In determining questions of Texas l a w , this court looks to the decisions of the Texas Supreme Court, which are In its briefing, OCA highlights a "procedural irregularity" that occurred prior to the district court's decision. The magistrate judge initially issued a R&R recommending that the district court grant Packard's motion, but apparently relied on a clearly erroneous reading of the record in so doing. OCA highlighted the magistrate judge's error in its objections to the R&R to the district court. Before the district court ruled on OCA's objections, the magistrate judge withdrew, sua sponte, his initial R&R and submitted an amended R&R that reached the same conclusion without relying on the erroneous facts. OCA exercised its right to raise objections to the amended R&R, and those objections were considered and ultimately overruled by the district court. OCA's argument--or observation--as to the "procedural irregularity" does not affect this court's jurisdiction and OCA does not assert that it was deprived of due process as a result of the substitution. 2 4 Case: 09-41004 Document: 00511275255 Page: 5 Date Filed: 10/26/2010 No. 09-41004 b in d in g . United Teacher Assocs. Ins. Co. v. Union Labor Life Ins. Co., 414 F.3d 5 5 8 , 565 (5th Cir. 2005). The decisions of Texas intermediate appellate courts m a y provide guidance, but are not controlling. Id. If the Texas Supreme Court h a s not ruled on the controlling legal question in this appeal, this court "must d e t e r m in e , to the best of its ability, what the highest court of the state would do." Id. at 566. B. I lle g a l Contracts Under Texas Law T h e general rule under Texas law is that "no accounting or recovery of p r o fit s can be had by one party to an illegal transaction against another." Lewis v . Davis, 199 S.W.2d 146, 150 (Tex. 1947) (quotations omitted); see also Beer v. L a n d m a n , 31 S.W. 805, 806 (Tex. 1895) ("[N]either a court of law nor a court of e q u it y will aid either [party to an illegal transaction] to recover or reinvest h im s e lf with any title or interest which he, in consideration of such unlawful c o n t r a c t, has vested in the other, but will leave them in the same condition as t o vested interests as they, by their own acts, have placed themselves."). This r u le springs from a judicial "unwillingness to afford the matter an initial e x a m in a t io n [which] flows from the failure of the illegal contract to confer upon t h e parties rights to be examined and determined by a court . . . and from a r e fu s a l to aid a plaintiff who stands in pari delicto with the defendant." Burks v . State, 795 S.W.2d 913, 914 (Tex. App.­Amarillo 1990, pet. ref'd) (citing Ewell v . Daggs, 108 U.S. 143, 147­50 (1883)). T e x a s law recognizes limited exceptions to the general prohibition. First, " [a ] test, sometimes used in determining whether a demand connected with an ille g a l transaction can be enforced, is whether the plaintiff requires any aid from t h e illegal transaction to establish his case." Lewis, 199 S.W.2d at 151. Second, a n illegal contract will not preclude recovery if the parties are not in pari delicto. G r a h a m v. Dean, 188 S.W.2d 372, 373 (Tex. 1945) ("The rule that a court will not e n te r ta in a suit growing out of an illegal transaction is not always applicable 5 Case: 09-41004 Document: 00511275255 Page: 6 Date Filed: 10/26/2010 No. 09-41004 w h e r e the parties are not in pari delicto."). Finally, "even where the parties are in pari delicto relief will sometimes be granted if public policy demands it." Lewis, 1 9 9 S.W.2d at 151. In reaching that decision, the question "often involved" is " w h e t e h e r (sic) the policy against assisting a wrongdoer outweighs the policy a g a in s t permitting unjust enrichment of one party at the expense of the other. The solution of the question depends upon the peculiar facts and the equities of t h e case, and the answer usually given is that which it is thought will better s e r v e public policy." Id. I t is undisputed that the Packard­OCA contract is illegal, see In re OCA, 552 F.3d at 424, and therefore triggers the general prohibition against recovery. W e turn then to whether OCA should be afforded relief according to one of the a fo r e m e n t io n e d exceptions. 1. W h e th e r OCA Can Establish a Right to Recover Independent of the Illegal T r a n s a c tio n T e x a s law distinguishes between a party who must rely on an illegal c o n t r a c t to establish his right to recover and a party that merely needs to in c id e n ta lly refer to an illegal contract to explain the transaction, allowing the la t t e r to recover. See, e.g., Beer, 31 S.W. at 807 ("The plaintiff can not recover w h e n it is necessary for him to prove, as a part of his cause of action, his own ille g a l contract, or other illegal transaction; but if he can show a complete cause o f action without being obliged to prove his own illegal act, although such illegal a c t may incidentally appear, and may be important even as explanatory of other fa c t s in the case, he may recover."). We hold that OCA cannot invoke this e x c e p t io n because the calculation of any recovery would require proof as to each p a r ty 's satisfaction of the illegal agreement over a period of several years--thus r e q u ir in g far more than the incidental reference permitted under Texas law. A brief review of Texas cases allowing parties to an illegal contract to r e c o v e r under this exception is instructive. Norman v. B. V. Christie & Co. 6 Case: 09-41004 Document: 00511275255 Page: 7 Date Filed: 10/26/2010 No. 09-41004 in v o lv e d two contracts--a contract between two venturers, B.V. Christie (C h r is t ie ) and Norman, and a contract between Christie and a Water District. 363 S.W.2d 175, 176 (Tex. Civ. App.--Houston 1962, writ ref'd n.r.e.). Under the C h r is t ie ­ D is t r ic t contract, Christie purchased bonds from the District at a d is c o u n t and later resold them. Id. This contract was later held to be illegal; the D is t r ic t sued Christie and won a judgment against him. Id. Christie then sued N o r m a n , seeking contribution based on the Texas rule that "one partner paying a firm debt has a right to contribution from the other members of the p a r tn e r s h ip ." Id. at 176­77. Norman defended the suit by arguing the general r u le of Texas law that courts deny relief to parties to illegal contracts and should le a v e the parties where they found them. Id. at 177. The court allowed Christie t o recover in contribution against Norman, holding that proof of the illegal C h r is t ie ­ D is t r ic t contract was not required for Christie to establish its cause of a c t io n based on the legal Christie­Norman contract. Id. at 178.3 O C A finds support for its position in City of Denton v. Municipal A d m in is tr a tiv e Services, Inc., 59 S.W.3d 764, 770 (Tex. App.--Fort Worth 2001). I n City of Denton, the city engaged MAS, an auditing firm, to conduct an audit o f the city's contract with a telephone company. Id. at 766­67. Under the a r r a n g e m e n t, MAS was paid fifty percent of underpayments by the telephone c o m p a n y discovered by the audit and recovered by the city. Id. On appeal, the c o u r t found the contract "illegal," and therefore void, because it had been entered in t o in violation of a state statute that "regulate[d] how municipalities are to c o n t r a c t for various types of professional services." Id. at 767. As a result, City of D e n to n held "because the trial court should have held the contract void, it should In Morrison v. City of Fort Worth, an illegal contract between a firefighter and the city of Fort Worth did not bar a fireman's widow from recovering wages due her deceased husband. 155 S.W.2d 908, 909­10 (Tex. 1941). The "illegal contract constitute[d] no bar to the plaintiff's cause of action" in Morrison because the plaintiff sought "recovery under a mandatory State statute," not the illegal contract. Id. (emphasis added). 3 7 Case: 09-41004 Document: 00511275255 Page: 8 Date Filed: 10/26/2010 No. 09-41004 h a v e entered judgment for a refund of the fees paid by Denton to MAS." Id. at 7 7 0 . By "restoring the parties to their precontractual positions," City of Denton p e r m it t e d the City a rescissory recovery. See BLACK'S LAW DICTIONARY 1420 (9th e d . 2009). We find City of Denton unpersuasive, as did the district court, because it "appears to be an anomaly."4 Packard v. OCA, Inc., No. 4:05CV273, 2009 WL 3 1 7 2 1 0 6 , at *3 (E.D. Tex. Sept. 29, 2009). Texas courts have allowed parties to recover monies paid pursuant to ille g a l contracts where the illegal act has not been consummated. Compare Lewy v . Crawford, 23 S.W. 1041, 1042 (Tex. Civ. App. 1893) (allowing party to an ille g a l gaming contract to recover from the third-party stakeholder 5 holding the w a g e r s , even after the "happening of the contingency upon which the wager is s u s p e n d e d ," so long "as the money is in the hands of the stakeholder") with Beer, 3 1 S.W. at 806 (refusing to allow party to an illegal contract to "recover or r e in v e s t himself with any title or interest which he, in consideration of such u n la w fu l contract, has vested in the other"); see also Principles Governing R e c o v e r y by Parties to Illegal Contracts, 26 HARV. L. REV. 738, 739 (1912) ("At le a s t if the illegality is not of a serious nature, either party may rescind while the ille g a l act is still unperformed.") (emphasis added). Where only payment has been made, but no other performance under the ille g a l contract has been rendered, the plaintiff can establish his right to recover w it h o u t relying on the illegal contract--the court need not examine the contract, it s terms, or the value of any services performed under the contract. In Lewy, for "[T]he general rule [is] that where a party sues to recover money paid under a void instrument, he cannot seek rescission, but must recover in Quantum valebant for money had and received." Country Cupboard, Inc. v. Texstar Corp., 570 S.W.2d 70, 74 (Tex. Civ. App.­ Dallas 1978) (emphasis added). Although City of Denton cites Country Cupboard, by allowing the City a rescissory remedy, it misapplies the rule of that case. In this context, a stakeholder is "[o]ne who holds the money or valuables bet by others in a wager." BLACK'S LAW DICTIONARY 1535 (9th ed. 2009). 5 4 8 Case: 09-41004 Document: 00511275255 Page: 9 Date Filed: 10/26/2010 No. 09-41004 e x a m p le , a group of men illegally wagered on the outcome of a gubernatorial e le c t io n in violation of a Texas penal statute, placing their wagers with Lewy, a s t a k e h o ld e r . Lewy, 23 S.W. at 1041. After the election, one of the gamblers, C r a w fo r d , notified Lewy to not pay his bet over to another gambler, but instead d ir e c t e d Lewy to return his wager to him. Id. Lewy refused to return the money t o Crawford, but at the time of suit had "never paid the money over to any one, b u t still had it." Id. The court in Lewy recognized the general rule against p e r m it t in g parties to an illegal contract to invoke the aid of the courts, and noted " [t ]h e terms of the bet, or who was winner or loser, can cut no figure in the d e c is io n of this case." Id. Where the stakeholder still retained the illegal bet, h o w e v e r , the court allowed Crawford to disaffirm his illegal act and have the m o n e y returned to him. Id. at 1042. Critical was the fact that Crawford "does not r e ly on the illegal contract to establish his right to the money, but he says that a p p e lla n t Lewy has his money on deposit, and he wants it." Id. at 1044. The court d is t in g u is h e d , however, a case where the wagered money has been paid from the s t a k e h o ld e r to the winner, stating that in such cases "it can not be recovered from s t a k e h o ld e r or winner." Id. at 1043 (quotations omitted). In these situations, w h e r e the illegal act has been consummated, the loser is forced to rely on the ille g a l contract to establish his right to recover. A court can no longer treat the lo s e r 's wager as a "deposit" and allow him to repudiate the contract and recover t h e deposit--the money has vested in the winner by virtue of the illegal contract a n d the loser is forced to rely upon the illegal contract to establish why the w in n e r has money belonging to him.6 See, e.g., Beer, 31 S.W. at 806. The reason courts allow a plaintiff to recover what he has paid under an illegal contract before any other act occurs is "that the plaintiff's claim is not to enforce, but to repudiate, an illegal agreement . . . In such case, there is a locus penitentiae; the wrong is not consummated, and the contract may be rescinded by either party." Bernard v. Taylor, 23 Ore. 416, 422 (1893); see also Taylor v. Bowers, [1875-76] 1 Q.B.D. 295 ("Under these circumstances . . . . [t]he action is not founded upon the illegal agreement, nor brought to enforce it, but, on the contrary, the plaintiff has repudiated the [illegal] agreement, and his action is founded on 6 9 Case: 09-41004 Document: 00511275255 Page: 10 Date Filed: 10/26/2010 No. 09-41004 I n this appeal, OCA asserts that it paid almost five million dollars in a f f i li a t io n payments and advances to Packard, and that Packard retained over $ 2 .2 million after taking into account the sums paid under the contract. Packard c o n t e n d s that it paid over six million dollars to OCA during the life of the illegal c o n t r a c t.7 It is undisputed that OCA paid the five million dollars in affiliation p a y m e n t s and advances to Packard in consideration for, among other things, the e n tr y into the management services contract that this court held to be illegal in I n re OCA. OCA has made no showing that any portion of its payments to P a c k a r d were for any purpose other than entry into the illegal contract. Indeed, t h e Affiliation and Stock Purchase Agreement ("ASPA") between the parties is s p e c ific a lly conditioned on, among other requirements, the parties' entry into the " O C A /P a c k a r d Service Agreement." The parties' dispute as to the amounts paid b y Packard to OCA during the life of the illegal contract highlights the im p o s s ib ilit y of OCA proving its cause of action without relying on the illegal c o n t r a c t . A factual determination of the disputed amounts paid under the c o n t r a c t would necessarily require the district court to determine which p a y m e n t s were valid under the illegal contract and which were not--by e x a m in in g every transaction made under the illegal agreement. In essence, the d is t r ic t court would be required to legitimize certain transactions as "valid" under t h e illegal contract, and thus creditable as an offset of the affiliation payments m a d e by OCA to Packard. This the court cannot do.8 There is simply no way for that repudiation."). In light of our disposition of this case, the dispute over the precise amounts paid by each party is irrelevant. We acknowledge that a case where one party repudiates an illegal contract immediately upon the commencement of performance presents a different and more troubling application of this rule. That would be different case and might produce a different result. Here, however, OCA enjoyed the benefits of its affiliation payment for several years and nothing in the record suggests Packard knowingly drew OCA into an illegal contract with the purpose of securing a windfall. As a result, we need not address that more difficult question. 8 7 10 Case: 09-41004 Document: 00511275255 Page: 11 Date Filed: 10/26/2010 No. 09-41004 O C A to establish its right to recover independent of the illegal contract. This case is not remotely like Norman v. B.V. Christie or Morrison v. City of Fort Worth. T h is is not a case where OCA's "demand is in some way connected with an illegal t r a n s a c t io n " and where OCA "requires no aid from the illegal transaction to e s t a b lis h his case." Morrison ,155 S.W.2d at 910. We agree with the district court that, under these facts, any recovery by O C A would be intertwined with the illegal contract and hold that the first e x c e p t io n to the general prohibition against recovery by parties to an illegal c o n t r a c t is inapplicable in this case. 2. W h e th e r the Parties are In Pari Delicto " T e x a s courts recognize that where parties to an illegal contract are not in p a r i delicto, the party least culpable may recover." Villanueva v. Gonzalez, 123 S .W .3 d 461, 467 (Tex. App.--San Antonio 2003). The district court concluded that " t h e r e is no summary judgment evidence here to show that OCA was any less c u lp a b le than Packard." Packard, 2009 WL 3172106, at *4. We agree. I n Bateman Eichler, Hill Richards, Inc. v. Berner, the Supreme Court a d d r e s s e d the contours of the in pari delicto doctrine. 472 U.S. 299, 310 (1985); see also Rogers v. McDorman, 521 F.3d 381, 390 (5th Cir. 2008) ("Bateman E ic h le r went beyond merely establishing when in pari delicto is available; the C o u r t also addressed the defense's substantive content."). The Court explained t h a t the in pari delicto doctrine applies to bar a private action for damages in the s e c u r it ie s context "only where (1) as a direct result of his own actions, the p la in t iff bears at least substantially equal responsibility for the violations he s e e k s to redress, and (2) preclusion of suit would not significantly interfere with t h e effective enforcement of the securities laws and protection of the investing p u b lic ." Bateman Eichler, 472 U.S. at 310­11. C o u r t s have traditionally applied the in pari delicto doctrine to allow p la in t iffs who engaged in illegal acts to recover when: 11 Case: 09-41004 Document: 00511275255 Page: 12 Date Filed: 10/26/2010 No. 09-41004 O n e party may act under circumstances of oppression, imposition, h a r d s h ip , undue influence, or great inequality of condition or age; so t h a t his guilt may be far less in degree than that of his associate in t h e offence. 1 JOSEPH STORY, COMMENTARIES ON EQUITY JURISPRUDENCE 300 (1886). Texas c o u r ts have applied the exception "where one party is unaware of the true facts a n d believes the contract is lawful, the general rule that an illegal contract is u n e n fo r c e a b le does not apply." Int'l Bank of Comm. v. Int'l Energy Dev. Corp., 981 S .W .2 d 38, 52 (Tex. App.--Corpus Christi 1998). T h e relevant issue is whether there is any genuine issue of material fact a s to whether OCA and Packard do not bear "substantially equal responsibility" fo r the illegal contract, such that they are not in pari delicto. Specifically, the c r it ic a l issue is the relative culpability of the parties as to the illegal contract. O C A sets forth two arguments in support of its claim that it is not in pari delicto w it h Packard: (1) that OCA subjectively believed that the contract was legal; and (2 ) that Packard, as a licensed dentist, had a heightened obligation under the T e x a s Administrative Code to prevent the unlicensed practice of dentistry. As to OCA's first argument, the district court properly noted that "there h a s been no showing, and none is alleged, that Packard had knowledge of p e c u lia r facts not known to OCA. Both parties were aware of the facts s u r r o u n d in g the entering of the contract." Packard, 2009 WL 3172106, at *3. W h ile "[r]elief from the effect of an illegal contract has been given in some cases t o a party induced to enter the contract by means of fraud or undue influence," S h e r r a r d v. After Hours, Inc., 464 S.W.2d 87, 90 (Tex. 1971), even assuming, a r g u e n d o , that Packard knew of the illegality of the contract prior to entry and O C A did not, OCA does not allege that Packard concealed that knowledge from it or induced it into entering into the contract. Indeed, it appears from the record t h a t both parties were sophisticated entities that entered into an illegal 12 Case: 09-41004 Document: 00511275255 Page: 13 Date Filed: 10/26/2010 No. 09-41004 a g r e e m e n t that inured to each of their benefit. Moreover, "[s]ince every man is p r e s u m e d to know the law, [OCA] had no right to assume that the contract [with P a c k a r d ] was legal." Recent Cases, 11 TEX. L. REV. 114, 128 (1932) (citing Nystel v . Gully, 257 S.W. 286 (Tex. Civ. App. 1921)). A s to Packard's alleged violation of the Texas Administrative Code section r e q u ir in g dentists to prevent the unauthorized practice of dentistry, OCA argues t h a t "the Packard Contract would have never been consummated if Packard had s im p ly followed the proscriptions [the code] mandated." 9 We find this argument u n p e r s u a s iv e . First, this argument is vitiated by OCA's own conduct in c o n n e c t io n with the illegal contract, which arguably constitutes a felony under T e x a s law. See TEX. OCC. CODE ANN. § 256.001 ("A person may not practice or o ffe r to practice dentistry or dental surgery or represent that the person practices d e n tis t r y unless the person holds a license issued by the board."); TEX. OCC. CODE A NN. § 264.151(a) ("A person commits an offense if the person violates Section 9 In relevant part, the administrative code states: A licensed dentist shall conduct his practice on the highest plane of honesty, integrity, and fair dealing. In order to safeguard the dental health and welfare of the public and the dentist-patient relationship and fix professional responsibility for dental services, no dentist or any other licensee or certificate holder of the Board shall: ... (4) permit or allow himself, his practice of dentistry, his professional identification, or his services to be used or made use of, directly or indirectly, or in any manner whatsoever, so as to create or tend to create the opportunity for the unauthorized or unlawful practice of dentistry by any person, firm, or corporation or for the practice of dentistry in violation of any provision of the Texas Dental Practice Act or any rule, regulation, or order of the Board; 22 TEX. ADMIN. CODE § 108.1 (2010). 13 Case: 09-41004 Document: 00511275255 Page: 14 Date Filed: 10/26/2010 No. 09-41004 2 5 6 .0 0 1 . An offense under this subsection is a felony of the third degree. Each day o f a violation is a separate offense."). N e x t , "[w]here the contract is illegal because of statutory prohibition, the p la in t iff is not in pari delicto if the statute is for his protection." Recent Cases, 11 T EX. L. REV. at 129 (emphasis added). The prefatory language contained in the T e x a s Administrative Code section OCA relies upon makes clear that the statute is designed to protect the public from the illegal practice of dentistry, not c o r p o r a t io n s who engage in the illegal practice of dentistry. See 22 TEX. ADMIN. C ODE § 108.1 ("In order to safeguard the dental health and welfare of the public a n d the dentist-patient relationship and fix professional responsibility for dental s e r v ic e s , no dentist or any other licensee or certificate holder of the Board s h a ll . . . ."). Cf. Am. Nat'l Ins. Co. v. Tabor, 230 S.W. 397, 399­400 (1921) (in s u r e d allowed to recover as not in pari delicto with insurer upon contract that w a s illegal due to violation of a statute designed to protect insured). In Plumlee v. Paddock, Plumlee, an owner of an ambulance company, e n te r e d into an illegal referral contract with a law firm. 832 S.W.2d 757, 758 (T e x . App.--Fort Worth 1992). Plumlee sought equitable relief on the illegal c o n t r a c t and argued that the law firm partners' violation of a heightened duty to p r e v e n t the unauthorized practice of law, applicable to them and not him under T e x a s ' rules of professional conduct for attorneys, warranted such relief. Id. at 7 5 9 ­ 6 0 . The court rejected Plumlee's argument and denied him equitable relief, i n part because the "principal reasons" for the provision were "to prevent s o lic it a t io n by lay persons of clients for lawyers and to avoid encouraging or a s s is t in g nonlawyers in the practice of law." Id. at 60. As did the court in P lu m le e , we "fail to see how [OCA] believes this court can afford him relief" based u p o n this argument, id., which would allow a wrongdoer who engaged in the ille g a l practice of dentistry to invoke the protections of a statute specifically 14 Case: 09-41004 Document: 00511275255 Page: 15 Date Filed: 10/26/2010 No. 09-41004 d e s ig n e d to protect the public from that illegal practice. This is nonsensical and w o u ld directly contradict the purpose of the statute. A s a matter of law, OCA and Packard bear "substantially equal r e s p o n s ib ilit y " for the illegal contract and are therefore in pari delicto. We hold t h a t the second exception to the general prohibition against recovery by parties t o an illegal contract is inapplicable in this case. 3. W h e th e r Public Policy Demands Relief for OCA " [E ]v e n where the parties are in pari delicto relief will sometimes be g r a n t e d if public policy demands it." Lewis, 199 S.W.2d at 151. Determining w h e t h e r "the policy against assisting a wrongdoer outweighs the policy against p e r m it t in g unjust enrichment . . . depends upon the peculiar facts and the e q u it ie s of the case, and the answer usually given is that which it is thought will b e tt e r serve public policy." Id. "[I]t is not the purpose of this rule of law to benefit o r punish either of the parties . . . ." Norman, 363 S.W.2d at 178. " I t is true that as between parties in pari delicto relief will be granted if p u b lic policy demands it. In such cases the guilt of the respective parties is not c o n s id e r e d by the court, which looks only to the higher right of the public; the g u ilt y party to whom relief is granted being only the instrument by which the p u b lic is served. The relief is granted to discourage such transactions by others." W r ig h t v. Wight & Wight, 229 S.W. 881, 882 (Tex. Civ. App. 1921). The focus of t h e public policy exception to the rule general prohibiting recovery by parties to ille g a l contracts is properly on the public's interest, not the parties'. We therefore l o o k to whether the "higher right of the public" will be best served by allowing O C A to recover and ask whether such relief would "discourage such transactions b y others." Id. OCA asserts that three factors weigh in favor of allowing it relief based u p o n the public policy exception: (1) Packard's heightened duty under the Texas A d m in is tr a t iv e Code; (2) Packard's status as a wrongdoer; and (3) the fact OCA 15 Case: 09-41004 Document: 00511275255 Page: 16 Date Filed: 10/26/2010 No. 09-41004 a c q u ir e d its interest in the Packard contract pursuant to an order of the b a n k r u p t c y court. We find these reasons unpersuasive. The "higher public right" at the center of this case is the public's interest in the prevention of the unlicensed practice of dentistry. Indeed, the very reason t h is contract was deemed illegal is because its terms allowed OCA to engage in t h e illegal practice of dentistry. In re OCA, 552 F.3d at 423­24. OCA fails to e x p la in how the public interest of preventing the unlicensed practice of dentistry is best served by allowing it, a corporation that engaged in the unlicensed p r a c t ic e of dentistry, to recover monies it paid in order to do so. We have p r e v io u s ly disposed of OCA's argument as to Packard's heightened duty under t h e Texas Administrative Code. That Packard is also a fellow wrongdoer and may h a v e violated his duties as a dentist during the course of the OCA­Packard r e la t io n s h ip is of no consequence to determining whether the public's interest w o u ld be furthered in allowing OCA to recover. Nor is OCA's argument as to the b a n k r u p t c y court's alleged approval of the contract persuasive. The record r e fle c t s that OCA acquired an interest in the Apple­Packard contract pursuant t o the bankruptcy court's June 1, 2000 order. The BSA found illegal by this court in In re OCA was entered into by the parties on September 29, 2000. The BSA is altogether separate from the bankruptcy proceedings, having been entered into p o s t -b a n k r u p t c y for the purposes of superseding the Apple­Packard contract. E v e n assuming, arguendo, that OCA is correct that "the Bankruptcy Judge b e lie v e d the contract to be legal," the bankruptcy court could only have opined on t h e Apple­Packard contract before it, and not the OCA­Packard that was not e n te r e d into for another five months. A llo w in g OCA to recover might provide a disincentive for dentists to enter in t o these types of affiliation agreements, thereby "discouraging such t r a n s a c t io n s by others." Wright, 229 S.W. at 882. But the risk of "such t r a n s a c t io n s by others" has already been significantly diminished by In re OCA, 16 Case: 09-41004 Document: 00511275255 Page: 17 Date Filed: 10/26/2010 No. 09-41004 w h ic h declared these types of affiliation arrangements to be illegal under Texas la w . Underscoring this point is OCA's repeated insistence that it believed the P a c k a r d ­ O C A contract to be legal when it entered into the agreement. After In r e OCA, there is little risk that future sophisticated parties like Packard and O C A will harbor allegedly erroneous subjective beliefs as to the legality of a f filia t io n agreements between dentists and corporations. Furthermore, any d is in c e n tiv e to future dentists must be counterbalanced against the increased in c e n t iv e s to future corporations if OCA is allowed to recover. A corporation like O C A would be far more likely to enter into potentially illegal agreements if it c o u ld be confident that courts would "aid [it] to recover or reinvest [it] with any t it le or interest which [it], in consideration of such unlawful contract, has vested" in its business partner. Beer, 31 S.W. at 806. We cannot say that allowing OCA t o recover would discourage future transactions by others. F in a lly , the public policy exception to the general prohibition requires us t o determine whether the policy against assisting a wrongdoer outweighs the p o lic y against permitting unjust enrichment. We note that the "wrong" here is t h e unlicensed practice of dentistry. Under the "peculiar facts and equities of the c a s e ," we find a situation in which one of two parties, in pari delicto and s u b s ta n t ia lly equally guilty of the wrong, has allegedly been unjustly enriched a t the expense of the other. We hold that allowing that party, OCA, to recover fr o m Packard would not serve the "higher public right" by discouraging future ille g a l arrangements like the one before us. Therefore, we cannot say that "public p o lic y demands [OCA's recovery]." Lewis, 199 S.W.2d at 151. We agree with the d is t r ic t court that this exception is inapplicable. We are cognizant that this h o ld in g may permit Packard to be unjustly enriched at OCA's expense,1 0 but hold t h a t the policy against permitting unjust enrichment does not outweigh the policy Although we are not entirely certain, given the unresolved dispute as to the amounts paid by Packard to OCA during the life of the illegal contract. 10 17 Case: 09-41004 Document: 00511275255 Page: 18 Date Filed: 10/26/2010 No. 09-41004 a g a in s t courts assisting a wrongdoer based upon the peculiar facts and equities o f this case. C O N C L U S IO N T h e judgment of the district court is AFFIRMED. 18

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