Opinion ID: 178029
Heading Depth: 3
Heading Rank: 1

Heading: Whether OCA Can Establish a Right to Recover Independent of the Illegal Transaction

Text: 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. 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 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 BLACK'S LAW DICTIONARY 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  (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, 5 Tex.Civ.App. 293, 23 S.W. 1041, 1042 (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 HARV. L.REV. 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 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. 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 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.