Flynn Bros., Inc. v. First Medical Associates

• Decision Date: 31 July 1986
• Docket Number: No. 05-85-00586-CV,05-85-00586-CV
• Citation: 715 S.W.2d 782
• Parties: FLYNN BROTHERS, INC., et al., Appellants, v. FIRST MEDICAL ASSOCIATES, et al., Appellees.
• Court: Texas Court of Appeals

Page 782

715 S.W.2d 782

FLYNN BROTHERS, INC., et al., Appellants, v. FIRST MEDICAL ASSOCIATES, et al., Appellees.

No. 05-85-00586-CV.

Court of Appeals of Texas Dallas.

July 31, 1986.

Rehearing Denied Sept. 10, 1986.

Larry D. Flynn, Dallas, for appellants.

Robert E. Wilbur, William V. Counts, Jr., Dallas, for appellees.

Before AKIN, HOWELL and HOLLINGSWORTH, JJ.

HOLLINGSWORTH, Justice.

Appellants, Flynn Brothers, Inc., David Flynn, and Bennie Flynn (collectively referred to as FBI) appeal from a take-nothing judgment in both their countersuit for breach of contract and tortious interference with business relations against appellees First Medical Associates (FMA) and Frank J. Adcock, III, M.D. and their third-party action for fraud, breach of fiduciary duties, and wrongful interference with business relations against appellee W. Phillip Keene M.D. Appellants bring forward 35 points of error in which they assert that the trial court erred in: (1) failing to render judgment against FMA for breach of contract, breach of partnership agreement, breach of fiduciary duty, and tortious interference with business relations; (2) failing to render judgment against Dr. Keene for fraud, breach of fiduciary duty, and wrongful interference with business relations; (3) granting FMA's application for injunctive relief against FBI; (4) finding that FMA was entitled to an accounting from FBI; and (5) failing to timely file findings of fact and conclusions of law. Because we hold that the contracts sued upon are illegal and unenforceable, we affirm the trial court's judgment.

In the summer of 1981, the Flynn brothers became aware that St. Paul Hospital of Dallas was interested in contracting with an outside party to staff its emergency department. Upon learning this, David Flynn contacted his friend, Dr. Adcock, who at this time was an emergency physician in Tennessee. He proposed that they form a company to bid on and, if acquired, operate the St. Paul contract. The Flynns proposed forming a partnership with Dr. Adcock in which profits and losses would be split 80% to the Flynns and 20% percent to Dr. Adcock. The partnership agreement was not reduced to writing.

In the fall of 1981, the St. Paul contract was awarded to the Flynns and Dr. Adcock. After this contract was obtained, the parties became aware that it was invalid under article 4495b ¹ ("Texas Medical Practices Act") because the Flynn brothers were not licensed to practice medicine. In an effort to meet the strictures of the Texas Medical Practices Act, Dr. Adcock formed a professional corporation, FMA, which became the contracting party with St. Paul. The Flynns formed a corporation, FBI, which entered into an exclusive management agreement under which FBI administered the St. Paul contract. The parties further agreed that FBI was the exclusive management agent of FMA and that Dr. Adcock could not sell his interest in FMA to the detriment of FBI or contract with any party other than FBI for the management of FMA. In exchange for management services, FBI was to receive 66.67% of FMA's net profits. In addition to the St. Paul contract, FBI also solicited a contract on behalf of FMA to staff the emergency department of Hopkins County Memorial Hospital.

All revenues from these accounts were sent directly to FBI offices to be deposited into the FMA checking account maintained by FBI. Throughout this relationship, commingling of funds in the FMA and FBI accounts was commonplace. FBI also pledged the contract rights and other assets of FMA to secure a pre-existing FBI debt at First National Bank of Irving. Furthermore, money from FMA's account was from time to time transferred to Bennie Flynn's personal account at the bank.

In July 1983, Dr. Adcock wished to sell his interest in FMA to Dr. Keene and from July 1983 until January 1984 FBI negotiated with Dr. Keene concerning the transfer of Dr. Adcock's interest in FMA to Dr. Keene. An agreement could not be reached and in January 1984 the parties ceased negotiations. FBI then informed Dr. Adcock that another doctor had been found to purchase his interest in FMA, but Dr. Adcock refused to sell his interest to this doctor.

On January 10, 1984, one day after Dr. Adcock had telephoned the administrator of St. Paul and discussed with her the problems at FBI, St. Paul sent a letter to FBI and FMA saying it considered FMA to be in breach of contract with St. Paul. Under the terms of the contract, St. Paul was to give FMA written notice of any specific breaches of the contract, and FMA had 30 days to cure the breaches.

On January 18, 1984, FMA gave FBI written notice of termination of the contract with FBI effective that day. The next day FMA filed suit against FBI alleging breach of contract, breach of fiduciary duty, and tortious interference of contract. FBI counterclaimed alleging breach of contract, fraud, breach of fiduciary duty, and tortious interference of contract. Trial was to the court, and at the close of evidence the trial judge rendered a take-nothing judgment against both FBI and FMA and Adcock on their claims but granted FMA injunctive relief and an accounting from FBI.

Our threshold question is whether the agreements made by the parties were illegal and, if so, whether this point has been adequately preserved on appeal. Addressing the second part of the question first, rule 94 of the Texas Rules of Civil Procedure provides that illegality is an affirmative defense to be pleaded by the party claiming such defense. Failure to plead illegality of a contract ordinarily constitutes a waiver of the defense. Kirby v. Cruce, 688 S.W.2d 161, 168-69 (Tex.App.--Dallas 1985, writ ref'd n.r.e.); Lawler v. Aramco, Inc., 447 S.W.2d 189, 193 (Tex.Civ.App.--Houston [1st Dist.] 1969, writ ref'd n.r.e.). Where the illegality of the contract appears on the face of the contract or the illegality appears from the evidence necessary to prove the contract, an affirmative pleading of illegality is unnecessary and the question of illegality can be raised at any stage of the proceeding, or may be raised by the appellate court sua sponte. Lewkowicz v. El Paso Apparel Corp., 625 S.W.2d 301, 303 (Tex.1981); After Hours, Inc. v. Sherrard, 456 S.W.2d 227, 228 (Tex.Civ.App.--Austin 1970), rev'd on other grounds, 464 S.W.2d 87 (Tex.1971).

FMA pleaded illegality as an affirmative defense at trial with respect to the management contract but has not raised this issue on appeal. FMA did not plead illegality at...