Packard v. Oca Inc.

• Decision Date: 26 October 2010
• Docket Number: No. 09-41004.,09-41004.
• Citation: 624 F.3d 726
• Parties: Robert PACKARD, D.M.D., M.S.; Packard Orthodontics, P.A., doing business as Apple Orthodontix, Plaintiffs-Appellees, v. OCA, INC., formerly known as Orthodontic Centers of America, Inc.; Orthodontic Centers of Texas, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

624 F.3d 726

Robert PACKARD, D.M.D., M.S.; Packard Orthodontics, P.A., doing business as Apple Orthodontix, Plaintiffs-Appellees,

v.OCA, INC., formerly known as Orthodontic Centers of America, Inc.; Orthodontic Centers of Texas, Inc., Defendants-Appellants.

No. 09-41004.

United States Court of Appeals,Fifth Circuit.

Oct. 26, 2010.

Sean Joseph McCaffity, Rochelle McCullough, L.L.P., Dallas, TX, Brian Anthony Colao (argued), Dykema Gossett P.L.L.C., Dallas, TX, for Plaintiffs-Appellees.

Robert Clary (argued), Owens, Clary & Aiken, L.L.P., Dallas, TX, for Defendants-Appellants.

Appeal from the United States District Court for the Eastern District of Texas.

Before CLEMENT, SOUTHWICK and HAYNES, Circuit Judges.

EDITH BROWN CLEMENT, Circuit Judge:

Appellants OCA, Inc. and Orthodontic Centers of Texas, Inc. (collectively, “OCA”) appeal the district court's grant of summary judgment in favor of Robert Packard, D.M.D., M.S. and Packard Orthodontics, P.A., doing business as Apple Orthodontix (collectively, “Packard”) on its counterclaims for unjust enrichment and money had and received. The district court ruled, as a matter of Texas law, OCA could not pursue its equitable counterclaims to recover benefits conferred pursuant to the illegal contract. We AFFIRM.

FACTS AND PROCEEDINGS

This appeal arises out of an illegal business relationship between a corporation from Delaware and a dentist from Texas. The facts underlying this relationship are complicated, but largely undisputed.

Dr. Packard, his former partner, and their professional corporation entered into a long-term service agreement with Apple Orthodontix, Inc. (“Apple”). Apple provided “practice management services” to orthodontic practices in seventeen states before filing for bankruptcy in 2000. With the bankruptcy court's blessing, Apple sold some of its assets, including the Packard-Apple contract, to OCA. Shortly thereafter, Packard and OCA entered into several agreements. OCA paid to Packard almost five million dollars in exchange for, among other things and relevant here, the entry into a long-term management services agreement that superseded the Packard-Apple contract. This new agreement, the Business Services Agreement (“BSA”), included a twenty-five year term for which OCA would provide Packard with business and administrative support and services. ¹ The BSA also called for OCA to develop up to seven new offices with Packard, with OCA agreeing to advance Packard the money needed to develop the new offices.

Five years into the BSA, Packard terminated the BSA and sued for a declaratory judgment that the Packard-OCA agreements were illegal, and therefore void. OCA counterclaimed for breach of contract, conversion, unjust enrichment, promissory estoppel, money had and received, account stated, declaratory judgments that the contracts were legal, breach of warranty and indemnity, and attorney's fees. OCA introduced evidence that it had paid Packard approximately $4,992,674.00 in up-front affiliation payments and advances, and argued that-taking into account the sums Packard paid OCA during the five years of the BSA-Packard retained a net benefit of approximately $2,279,275.00. Packard moved for summary judgment as to the illegality of contract.

The district court then stayed the proceedings pending the outcome of a related appeal to this court that required us to pass on the legality of OCA's standard contracts. In December 2008, this court declared OCA's standard contracts illegal under Texas law, concluding that the agreements allowed OCA to engage in the unlicensed practice of dentistry. In re OCA, Inc., 552 F.3d 413, 424 (5th Cir.2008) (holding “the subject matter of the [BSA] runs afoul of [Texas Occupations Code] section 251.003(a)(4)'s prohibition of unlicensed persons from owning, operating, or maintaining a premises at which those persons also employ or engage another person to practice dentistry.”). The district court then lifted its stay of the proceedings in this case.

OCA conceded the illegality of the agreements, leaving its equitable counterclaims as the only remaining issues for resolution. Packard moved for summary judgment as to the counterclaims, and the district court referred the matter 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 narrow exceptions to the general rule, the magistrate judge concluded that no evidence supported the application of any exceptions, and recommended that summary judgment be granted in favor of Packard on OCA's counterclaims. ² The district court adopted the amended report and recommendation over OCA's objections. OCA timely appealed as to its counterclaims for unjust enrichment and money had and received. OCA does not appeal the district court's grant of summary judgment on the illegality of the contract or the remaining counterclaims.

DISCUSSION

A. Standard of Review

“We review a grant of summary judgment de novo and apply the same legal standard as the district court.” Maverick Recording Co. v. Harper, 598 F.3d 193, 195 (5th Cir.2010). Summary judgment should be rendered if the record demonstrates that “there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed R. Civ. P. 56(c). “For the purposes 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, 271 (5th Cir.2002).

Because this court's jurisdiction is predicated on the federal diversity statute, Texas substantive law governs this dispute. Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996). In determining questions of Texas law, this court looks to the decisions of the Texas Supreme Court, which are binding. United Teacher Assocs. Ins. Co. v. Union Labor Life Ins. Co., 414 F.3d 558, 565 (5th Cir.2005). The decisions of Texas intermediate appellate courts may provide guidance, but are not controlling. Id. If the Texas Supreme Court has not ruled on the controlling legal question in this appeal, this court “must determine, to the best of its ability, what the highest court of the state would do.” Id. at 566.

B. Illegal Contracts Under Texas Law

The general rule under Texas law is that “no accounting or recovery of profits can be had by one party to an illegal transaction against another.” Lewis v. Davis, 145 Tex. 468, 199 S.W.2d 146, 150 (1947) (quotations omitted); see also Beer v. Landman, 88 Tex. 450, 31 S.W. 805, 806 (1895) ( “[N]either a court of law nor a court of equity will aid either [party to an illegal transaction] to recover or reinvest himself with any title or interest which he, in consideration of such unlawful contract, has vested in the other, but will leave them in the same condition as to vested interests as they, by their own acts, have placed themselves.”). This rule springs from a judicial “unwillingness to afford the matter an initial examination [which] flows from the failure of the illegal contract to confer upon the parties rights to be examined and determined by a court ... and from a refusal 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, 147-50, 2 S.Ct. 408, 27 L.Ed. 682 (1883)).

Texas law recognizes limited exceptions to the general prohibition. First, “[a] test, sometimes used in determining whether a demand connected with an illegal transaction can be enforced, is whether the plaintiff requires any aid from the illegal transaction to establish his case.” Lewis, 199 S.W.2d at 151. Second, an illegal contract will not preclude recovery if the parties are not in pari delicto. Graham v. Dean, 144 Tex. 61, 188 S.W.2d 372, 373 (1945) (“The rule that a court will not entertain a suit growing out of an illegal transaction is not always applicable where 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, 199 S.W.2d at 151. In reaching that decision, the question “often involved” is “wheteher (sic) the policy against assisting a wrongdoer outweighs the policy against 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 the case, and the answer usually given is that which it is thought will better serve public policy.” Id.

It is undisputed that the Packard-OCA contract is illegal, see In re OCA, 552 F.3d at 424, and therefore triggers the general prohibition against recovery. We turn then to whether OCA should be afforded relief according to one of the aforementioned exceptions.

1. Whether OCA Can Establish a Right to Recover Independent of the Illegal Transaction

Texas law distinguishes between a party who must rely on an illegal contract to establish his right to recover and a party that merely needs to incidentally refer to an illegal contract to explain the transaction, allowing the latter to recover. See, e.g., Beer, 31 S.W. at 807 (“The plaintiff can not recover when it is necessary for him to prove, as a part of his cause of action, his own illegal contract, or other illegal transaction; but if he can show a complete cause of action without being obliged to prove his own illegal act, although such illegal act may incidentally appear, and may be important even as explanatory of other facts in the case, he may recover.”). We hold that OCA cannot invoke this exception because the calculation of any recovery would require proof as to each party's satisfaction of the illegal agreement over a period of several years-thus requiring far more than the incidental reference permitted under Texas law.

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