Packard v. OCA, Inc.

Case: 09-41004 Document: 00511275255 Page: 1 Date Filed: 10/26/2010

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit

FILED
October 26, 2010

No. 09-41004 Lyle W. Cayce
Clerk

ROBERT PACKARD, D.M.D., M.S.; PACKARD ORTHODONTICS PA, 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

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.
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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management services agreement that superseded the Packard–Apple contract.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

1
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.

2
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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

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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.” F ED R. C IV. 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 (1996). In determining questions of Texas
law, this court looks to the decisions of the Texas Supreme Court, which are

2
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.

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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, 199 S.W.2d 146, 150 (Tex. 1947) (quotations omitted); see also Beer v.
Landman, 31 S.W. 805, 806 (Tex. 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 (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, 188 S.W.2d 372, 373 (Tex. 1945) (“The rule that a court will not
entertain a suit growing out of an illegal transaction is not always applicable

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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.
A brief review of Texas cases allowing parties to an illegal contract to
recover under this exception is instructive. Norman v. B. V. Christie & Co.

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involved two contracts—a contract between two venturers, B.V. Christie
(Christie) 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
Christie–District contract, Christie purchased bonds from the District at a
discount and later resold them. Id. This contract was later held to be illegal; the
District sued Christie and won a judgment against him. Id. Christie then sued
Norman, 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
partnership.” Id. at 176–77. Norman defended the suit by arguing the general
rule of Texas law that courts deny relief to parties to illegal contracts and should
leave the parties where they found them. Id. at 177. The court allowed Christie
to recover in contribution against Norman, holding that proof of the illegal
Christie–District contract was not required for Christie to establish its cause of
action based on the legal Christie–Norman contract. Id. at 178.3
OCA finds support for its position in City of Denton v. Municipal
Administrative Services, Inc., 59 S.W.3d 764, 770 (Tex. App.—Fort Worth 2001).
In City of Denton, the city engaged MAS, an auditing firm, to conduct an audit
of the city’s contract with a telephone company. Id. at 766–67. Under the
arrangement, MAS was paid fifty percent of underpayments by the telephone
company discovered by the audit and recovered by the city. Id. On appeal, the
court found the contract “illegal,” and therefore void, because it had been entered
into in violation of a state statute that “regulate[d] how municipalities are to
contract for various types of professional services.” Id. at 767. As a result, City of
Denton held “because the trial court should have held the contract void, it should

3
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, 909–10 (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).

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have entered judgment for a refund of the fees paid by Denton to MAS.” Id. at
770. By “restoring the parties to their precontractual positions,” City of Denton
permitted the City a rescissory recovery. See B LACK’S L AW D ICTIONARY 1420 (9th
ed. 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
3172106, at *3 (E.D. Tex. Sept. 29, 2009).
Texas courts have allowed parties to recover monies paid pursuant to
illegal 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
illegal gaming contract to recover from the third-party stakeholder 5 holding the
wagers, even after the “happening of the contingency upon which the wager is
suspended,” so long “as the money is in the hands of the stakeholder”) with Beer,
31 S.W. at 806 (refusing to allow party to an illegal contract to “recover or
reinvest himself with any title or interest which he, in consideration of such
unlawful contract, has vested in the other”); see also Principles Governing
Recovery by Parties to Illegal Contracts, 26 H ARV. L. R EV. 738, 739 (1912) (“At
least if the illegality is not of a serious nature, either party may rescind while the
illegal act is still unperformed.”) (emphasis added).
Where only payment has been made, but no other performance under the
illegal contract has been rendered, the plaintiff can establish his right to recover
without relying on the illegal contract—the court need not examine the contract,
its terms, or the value of any services performed under the contract. In Lewy, for

4
“[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.
5
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).

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example, a group of men illegally wagered on the outcome of a gubernatorial
election in violation of a Texas penal statute, placing their wagers with Lewy, a
stakeholder. Lewy, 23 S.W. at 1041. After the election, one of the gamblers,
Crawford, notified Lewy to not pay his bet over to another gambler, but instead
directed Lewy to return his wager to him. Id. Lewy refused to return the money
to Crawford, but at the time of suit had “never paid the money over to any one,
but still had it.” Id. The court in Lewy recognized the general rule against
permitting parties to an illegal contract to invoke the aid of the courts, and noted
“[t]he terms of the bet, or who was winner or loser, can cut no figure in the
decision of this case.” Id. Where the stakeholder still retained the illegal bet,
however, the court allowed Crawford to disaffirm his illegal act and have the
money returned to him. Id. at 1042. Critical was the fact that Crawford “does not
rely on the illegal contract to establish his right to the money, but he says that
appellant Lewy has his money on deposit, and he wants it.” Id. at 1044. The court
distinguished, however, a case where the wagered money has been paid from the
stakeholder to the winner, stating that in such cases “it can not be recovered from
stakeholder or winner.” Id. at 1043 (quotations omitted). In these situations,
where the illegal act has been consummated, the loser is forced to rely on the
illegal contract to establish his right to recover. A court can no longer treat the
loser’s wager as a “deposit” and allow him to repudiate the contract and recover
the deposit—the money has vested in the winner by virtue of the illegal contract
and the loser is forced to rely upon the illegal contract to establish why the
winner has money belonging to him.6 See, e.g., Beer, 31 S.W. at 806.

6
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

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In this appeal, OCA asserts that it paid almost five million dollars in
affiliation payments and advances to Packard, and that Packard retained over
$2.2 million after taking into account the sums paid under the contract. Packard
contends that it paid over six million dollars to OCA during the life of the illegal
contract.7 It is undisputed that OCA paid the five million dollars in affiliation
payments and advances to Packard in consideration for, among other things, the
entry into the management services contract that this court held to be illegal in
In re OCA. OCA has made no showing that any portion of its payments to
Packard were for any purpose other than entry into the illegal contract. Indeed,
the Affiliation and Stock Purchase Agreement (“ASPA”) between the parties is
specifically conditioned on, among other requirements, the parties’ entry into the
“OCA/Packard Service Agreement.” The parties’ dispute as to the amounts paid
by Packard to OCA during the life of the illegal contract highlights the
impossibility of OCA proving its cause of action without relying on the illegal
contract. A factual determination of the disputed amounts paid under the
contract would necessarily require the district court to determine which
payments were valid under the illegal contract and which were not—by
examining every transaction made under the illegal agreement. In essence, the
district court would be required to legitimize certain transactions as “valid” under
the illegal contract, and thus creditable as an offset of the affiliation payments
made by OCA to Packard. This the court cannot do.8 There is simply no way for

that repudiation.”).
7
In light of our disposition of this case, the dispute over the precise amounts paid by
each party is irrelevant.
8
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.

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OCA 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.
This is not a case where OCA’s “demand is in some way connected with an illegal
transaction” and where OCA “requires no aid from the illegal transaction to
establish his case.” Morrison ,155 S.W.2d at 910.
We agree with the district court that, under these facts, any recovery by
OCA would be intertwined with the illegal contract and hold that the first
exception to the general prohibition against recovery by parties to an illegal
contract is inapplicable in this case.
2. Whether the Parties are In Pari Delicto
“Texas courts recognize that where parties to an illegal contract are not in
pari delicto, the party least culpable may recover.” Villanueva v. Gonzalez, 123
S.W.3d 461, 467 (Tex. App.—San Antonio 2003). The district court concluded that
“there is no summary judgment evidence here to show that OCA was any less
culpable than Packard.” Packard, 2009 WL 3172106, at *4. We agree.
In Bateman Eichler, Hill Richards, Inc. v. Berner, the Supreme Court
addressed 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
Eichler went beyond merely establishing when in pari delicto is available; the
Court also addressed the defense’s substantive content.”). The Court explained
that the in pari delicto doctrine applies to bar a private action for damages in the
securities context “only where (1) as a direct result of his own actions, the
plaintiff bears at least substantially equal responsibility for the violations he
seeks to redress, and (2) preclusion of suit would not significantly interfere with
the effective enforcement of the securities laws and protection of the investing
public.” Bateman Eichler, 472 U.S. at 310–11.
Courts have traditionally applied the in pari delicto doctrine to allow
plaintiffs who engaged in illegal acts to recover when:

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One party may act under circumstances of oppression, imposition,
hardship, undue influence, or great inequality of condition or age; so
that his guilt may be far less in degree than that of his associate in
the offence.

1 J OSEPH S TORY , C OMMENTARIES ON E QUITY J URISPRUDENCE 300 (1886). Texas
courts have applied the exception “where one party is unaware of the true facts
and believes the contract is lawful, the general rule that an illegal contract is
unenforceable does not apply.” Int’l Bank of Comm. v. Int’l Energy Dev. Corp., 981
S.W.2d 38, 52 (Tex. App.—Corpus Christi 1998).
The relevant issue is whether there is any genuine issue of material fact
as to whether OCA and Packard do not bear “substantially equal responsibility”
for the illegal contract, such that they are not in pari delicto. Specifically, the
critical issue is the relative culpability of the parties as to the illegal contract.
OCA sets forth two arguments in support of its claim that it is not in pari delicto
with 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
Texas Administrative Code to prevent the unlicensed practice of dentistry.
As to OCA’s first argument, the district court properly noted that “there
has been no showing, and none is alleged, that Packard had knowledge of
peculiar facts not known to OCA. Both parties were aware of the facts
surrounding the entering of the contract.” Packard, 2009 WL 3172106, at *3.
While “[r]elief from the effect of an illegal contract has been given in some cases
to a party induced to enter the contract by means of fraud or undue influence,”
Sherrard v. After Hours, Inc., 464 S.W.2d 87, 90 (Tex. 1971), even assuming,
arguendo, that Packard knew of the illegality of the contract prior to entry and
OCA 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
that both parties were sophisticated entities that entered into an illegal

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agreement that inured to each of their benefit. Moreover, “[s]ince every man is
presumed to know the law, [OCA] had no right to assume that the contract [with
Packard] was legal.” Recent Cases, 11 T EX. L. R EV. 114, 128 (1932) (citing Nystel
v. Gully, 257 S.W. 286 (Tex. Civ. App. 1921)).
As to Packard’s alleged violation of the Texas Administrative Code section
requiring dentists to prevent the unauthorized practice of dentistry, OCA argues
that “the Packard Contract would have never been consummated if Packard had
simply followed the proscriptions [the code] mandated.” 9 We find this argument
unpersuasive. First, this argument is vitiated by OCA’s own conduct in
connection with the illegal contract, which arguably constitutes a felony under
Texas law. See T EX. O CC. C ODE A NN. § 256.001 (“A person may not practice or
offer to practice dentistry or dental surgery or represent that the person practices
dentistry unless the person holds a license issued by the board.”); T EX. O CC. C ODE
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 . ADM IN . CODE § 108.1 (2010).

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256.001. An offense under this subsection is a felony of the third degree. Each day
of a violation is a separate offense.”).
Next, “[w]here the contract is illegal because of statutory prohibition, the
plaintiff is not in pari delicto if the statute is for his protection.” Recent Cases, 11
T EX. L. R EV. at 129 (emphasis added). The prefatory language contained in the
Texas Administrative Code section OCA relies upon makes clear that the statute
is designed to protect the public from the illegal practice of dentistry, not
corporations who engage in the illegal practice of dentistry. See 22 T EX. A DMIN.
C ODE § 108.1 (“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 . . . .”). Cf. Am. Nat’l Ins. Co. v. Tabor, 230 S.W. 397, 399–400 (1921)
(insured allowed to recover as not in pari delicto with insurer upon contract that
was illegal due to violation of a statute designed to protect insured).
In Plumlee v. Paddock, Plumlee, an owner of an ambulance company,
entered into an illegal referral contract with a law firm. 832 S.W.2d 757, 758
(Tex. App.—Fort Worth 1992). Plumlee sought equitable relief on the illegal
contract and argued that the law firm partners’ violation of a heightened duty to
prevent the unauthorized practice of law, applicable to them and not him under
Texas’ rules of professional conduct for attorneys, warranted such relief. Id. at
759–60. The court rejected Plumlee’s argument and denied him equitable relief,
in part because the “principal reasons” for the provision were “to prevent
solicitation by lay persons of clients for lawyers and to avoid encouraging or
assisting nonlawyers in the practice of law.” Id. at 60. As did the court in
Plumlee, we “fail to see how [OCA] believes this court can afford him relief” based
upon this argument, id., which would allow a wrongdoer who engaged in the
illegal practice of dentistry to invoke the protections of a statute specifically

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designed to protect the public from that illegal practice. This is nonsensical and
would directly contradict the purpose of the statute.
As a matter of law, OCA and Packard bear “substantially equal
responsibility” for the illegal contract and are therefore in pari delicto. We hold
that the second exception to the general prohibition against recovery by parties
to an illegal contract is inapplicable in this case.
3. Whether Public Policy Demands Relief for OCA
“[E]ven where the parties are in pari delicto relief will sometimes be
granted if public policy demands it.” Lewis, 199 S.W.2d at 151. Determining
whether “the policy against assisting a wrongdoer outweighs the policy against
permitting unjust enrichment . . . 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. “[I]t is not the purpose of this rule of law to benefit
or punish either of the parties . . . .” Norman, 363 S.W.2d at 178.
“It is true that as between parties in pari delicto relief will be granted if
public policy demands it. In such cases the guilt of the respective parties is not
considered by the court, which looks only to the higher right of the public; the
guilty party to whom relief is granted being only the instrument by which the
public is served. The relief is granted to discourage such transactions by others.”
Wright v. Wight & Wight, 229 S.W. 881, 882 (Tex. Civ. App. 1921). The focus of
the public policy exception to the rule general prohibiting recovery by parties to
illegal contracts is properly on the public’s interest, not the parties’. We therefore
look to whether the “higher right of the public” will be best served by allowing
OCA to recover and ask whether such relief would “discourage such transactions
by others.” Id.
OCA asserts that three factors weigh in favor of allowing it relief based
upon the public policy exception: (1) Packard’s heightened duty under the Texas
Administrative Code; (2) Packard’s status as a wrongdoer; and (3) the fact OCA

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No. 09-41004

acquired its interest in the Packard contract pursuant to an order of the
bankruptcy 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
this contract was deemed illegal is because its terms allowed OCA to engage in
the illegal practice of dentistry. In re OCA, 552 F.3d at 423–24. OCA fails to
explain how the public interest of preventing the unlicensed practice of dentistry
is best served by allowing it, a corporation that engaged in the unlicensed
practice of dentistry, to recover monies it paid in order to do so. We have
previously disposed of OCA’s argument as to Packard’s heightened duty under
the Texas Administrative Code. That Packard is also a fellow wrongdoer and may
have violated his duties as a dentist during the course of the OCA–Packard
relationship is of no consequence to determining whether the public’s interest
would be furthered in allowing OCA to recover. Nor is OCA’s argument as to the
bankruptcy court’s alleged approval of the contract persuasive. The record
reflects that OCA acquired an interest in the Apple–Packard contract pursuant
to 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
post-bankruptcy for the purposes of superseding the Apple–Packard contract.
Even assuming, arguendo, that OCA is correct that “the Bankruptcy Judge
believed the contract to be legal,” the bankruptcy court could only have opined on
the Apple–Packard contract before it, and not the OCA–Packard that was not
entered into for another five months.
Allowing OCA to recover might provide a disincentive for dentists to enter
into these types of affiliation agreements, thereby “discouraging such
transactions by others.” Wright, 229 S.W. at 882. But the risk of “such
transactions by others” has already been significantly diminished by In re OCA,

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No. 09-41004

which declared these types of affiliation arrangements to be illegal under Texas
law. Underscoring this point is OCA’s repeated insistence that it believed the
Packard–OCA contract to be legal when it entered into the agreement. After In
re OCA, there is little risk that future sophisticated parties like Packard and
OCA will harbor allegedly erroneous subjective beliefs as to the legality of
affiliation agreements between dentists and corporations. Furthermore, any
disincentive to future dentists must be counterbalanced against the increased
incentives to future corporations if OCA is allowed to recover. A corporation like
OCA would be far more likely to enter into potentially illegal agreements if it
could be confident that courts would “aid [it] to recover or reinvest [it] with any
title 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
to recover would discourage future transactions by others.
Finally, the public policy exception to the general prohibition requires us
to determine whether the policy against assisting a wrongdoer outweighs the
policy against permitting unjust enrichment. We note that the “wrong” here is
the unlicensed practice of dentistry. Under the “peculiar facts and equities of the
case,” we find a situation in which one of two parties, in pari delicto and
substantially equally guilty of the wrong, has allegedly been unjustly enriched
at the expense of the other. We hold that allowing that party, OCA, to recover
from Packard would not serve the “higher public right” by discouraging future
illegal arrangements like the one before us. Therefore, we cannot say that “public
policy demands [OCA’s recovery].” Lewis, 199 S.W.2d at 151. We agree with the
district court that this exception is inapplicable. We are cognizant that this
holding may permit Packard to be unjustly enriched at OCA’s expense,10 but hold
that the policy against permitting unjust enrichment does not outweigh the policy

10
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.

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No. 09-41004

against courts assisting a wrongdoer based upon the peculiar facts and equities
of this case.
CONCLUSION
The judgment of the district court is AFFIRMED.

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