Opinion ID: 178029
Heading Depth: 3
Heading Rank: 2

Heading: Whether the Parties are In Pari Delicto

Text: 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 . 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, 105 S.Ct. 2622, 86 L.Ed.2d 215 (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, 105 S.Ct. 2622. Courts have traditionally applied the in pari delicto doctrine to allow plaintiffs who engaged in illegal acts to recover when: 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 JOSEPH STORY, COMMENTARIES ON EQUITY JURISPRUDENCE 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 . 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 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 TEX. L.REV. 114, 128 (1932) (citing Nystel v. Gully, 257 S.W. 286 (Tex.Civ.App.1923)). 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 TEX. OCC. CODE ANN. § 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.); TEX. OCC. CODE ANN. § 264.151(a) (A person commits an offense if the person violates Section 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 TEX. L.REV. 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 TEX. ADMIN. CODE § 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, 111 Tex. 155, 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 760. 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 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.