Court Opinion

ID: 26605
Source: CourtListenerOpinion
Date Created: 2010-04-25 08:56:33+00
Date Added: 2024-06-11T12:07:00.603953
License: Public Domain

Revised March 8, 2002

                  UNITED STATES COURT OF APPEALS
                       For the Fifth Circuit

                             No. 00-11025

              NATIONWIDE MUTUAL INSURANCE COMPANY,

                                                   Plaintiff-Appellant,

                                VERSUS

             UNAUTHORIZED PRACTICE OF LAW COMMITTEE,

                                                    Defendant-Appellee.

          Appeal from the United States District Court
               for the Northern District of Texas

                           February 20, 2002
Before GARWOOD, DeMOSS, and DENNIS, Circuit Judges.

DENNIS, Circuit Judge:

     Nationwide   Mutual    Insurance    Company   (“Nationwide”)   sued

Texas’s Unauthorized Practice of Law Committee (the “UPLC”) in

federal district court. Nationwide sought a declaration that Texas

law does not prohibit it from employing salaried staff attorneys to

represent its insureds in policy-related cases.        Nationwide also

sought a declaration that the Texas State Bar Act, as interpreted

                                   1
by the UPLC, violates the federal constitution.                Because it found

the State Bar Act’s unauthorized practice of law provisions to be

sufficiently unclear, the district court abstained from exercising

its jurisdiction under the Pullman1 doctrine.                   Nationwide has

appealed and requests that we certify the state law issue to the

Supreme Court of Texas.     We affirm the district court’s abstention

ruling but remand with instructions to dismiss without prejudice.

We also deny Nationwide’s motion to certify a question to the

Supreme Court of Texas.

                  I.    Facts and Procedural History

      Nationwide employs staff attorneys to represent its insureds

in policy-related lawsuits.            Like traditional outside counsel,

Nationwide’s staff counsel are duly licensed attorneys who conduct

discovery, draft and file court documents, and physically appear in

court.     The key difference is that staff counsel are salaried

employees of Nationwide; they are not independent attorneys paid on

a per case basis.

      Before filing this lawsuit, Nationwide learned that the UPLC

had sued    Allstate    Insurance      Company     in   a   Texas   state   court,

alleging that Allstate’s employment of staff attorneys constitutes

the   unauthorized     practice   of    law   by    a   corporation.2       Other

  1
      Railroad Comm’n v. Pullman Co., 312 U.S. 496, 501-02 (1941).
  2
    See Unauthorized Practice of Law Comm. v. Collins, No. 98-8269
(298th Dist. Ct., Dallas County, Tex.) (the “Allstate Litigation”).

                                        2
insurance companies have intervened in the Allstate litigation.

Nationwide, however, chose not to intervene.                     Once it learned that

the UPLC was investigating its use of staff attorneys, Nationwide

filed this declaratory judgment action in federal court.

          In its complaint, Nationwide seeks a declaration that there is

no       disciplinary     rule,    ethical        opinion,   or   caselaw       in   Texas

prohibiting an insurance company from using staff attorneys to

defend its insureds.            Nationwide also seeks a declaration that the

unauthorized-practice-of-law section of the Texas State Bar Act, as

interpreted       by    the     UPLC,   violates       the   federal   Constitution.

Specifically, Nationwide alleges that the section (1) violates due

process because it bears no rational relationship to the objective

of ensuring quality, ethical representation; (2) violates due

process because it is unconstitutionally vague; (3) violates the

First Amendment; (4) impairs Nationwide’s contractual obligations

to       its   insureds    in     violation       of   Article    I,   §   10    of    the

Constitution; and (5) is therefore actionable under 42 U.S.C. §

1983.

          The UPLC moved to dismiss Nationwide’s suit under Rules

12(b)(1), (2), and (6) of the Federal Rules of Civil Procedure.

The UPLC offered several reasons for dismissal, including (1) that

there is no constitutional right to practice law, (2) that the suit

should be dismissed under the Younger3 abstention doctrine due to

     3
         Younger v. Harris, 401 U.S. 37 (1971).

                                              3
the pending Allstate litigation, and (3) that Texas law prohibits

a    corporation,   other   than    a    “professional    corporation,”   from

practicing law.

       The district court granted the UPLC’s motion to dismiss after

hearing arguments from both sides.               Rather than invoking the

Younger doctrine, however, the district court dismissed the suit

under the Pullman doctrine so that the state courts could resolve

whether Texas law actually prohibits an insurer from employing

staff attorneys on behalf of its insureds.               The court noted that

the resolution of this state law issue could make it unnecessary to

determine    whether    the   State       Bar   Act   violates   the   federal

Constitution.       Finally, the court reminded Nationwide of its

opportunity to intervene in the Allstate litigation.              Nationwide

appeals the district court’s dismissal and moves this court to

certify the state law question to the Supreme Court of Texas.

                              II.       Discussion

A.    Standard of Review

       The parties disagree on the proper standard of review for this

case.    Nationwide argues that we review abstention decisions de

novo, while the UPLC insists that we review abstention decisions

only for abuse of discretion.           There is some truth to each of these

propositions.       Despite the confusion that once existed in this

                                          4
Circuit,4 it is now clear that we apply a two-tiered standard of

review in abstention cases.   Although we review a district court’s

abstention ruling for abuse of discretion, we review de novo

whether the requirements of a particular abstention doctrine are

satisfied.5   We recently articulated this two-tiered standard of

review in Webb v. B.C. Rogers Poultry, Inc.:

      We review an abstention for abuse of discretion. The
      exercise of discretion must fit within the narrow and
      specific limits prescribed by the particular abstention
      doctrine involved. A court necessarily abuses its
      discretion when it abstains outside of the doctrine’s
      strictures.6

Thus, we review the district court’s decision to abstain for abuse

of discretion, provided that the elements of Pullman abstention are

present.

B. Pullman Abstention

      The Supreme Court explained in Hawaii Housing Authority v.

Midkiff that under the Pullman doctrine, a federal court should

  4
    See Brooks v. Walker County Hosp. Dist., 688 F.2d 334, 336 n.4
(5th Cir. 1982) (discussing an apparent inconsistency in the
standard of review in Fifth Circuit abstention cases).
  5
    See, e.g., Webb v. B.C. Rogers Poultry, Inc., 174 F.3d 697, 701
(5th Cir. 1999); Lipscomb v. Columbus Mun. Separate Sch. Dist., 145
F.3d 238, 242 (5th Cir. 1998); Munich Amer. Reinsurance Co. v.
Crawford, 141 F.3d 585, 589 (5th Cir. 1998); Sierra Club v. City of
San Antonio, 112 F.3d 789, 793 (5th Cir. 1997); Clark v.
Fitzgibbons, 105 F.3d 1049, 1051 (1997); Alexander v. Ieyoub, 52
F.3d 554, 557 (5th Cir. 1995); Louisiana Debating & Literary Ass’n
v. City of New Orleans, 42 F.3d 1483, 1489 (5th Cir. 1995); Wilson
v. Valley Elec. Membership Corp., 8 F.3d 311, 313 (5th Cir. 1993).
  6
    174 F.3d 697, 701 (5th Cir. 1999) (internal citations and
quotation omitted).

                                 5
abstain    from     exercising      its     jurisdiction       “when    difficult    and

unsettled    questions      of   state       law     must    be    resolved   before   a

substantial federal constitutional question can be decided.”7                        “By

abstaining     in    such     cases,        federal     courts      will   avoid    both

unnecessary       adjudication        of    federal      questions      and   ‘needless

friction with state policies . . . .’”8                           In other words, for

Pullman abstention to be appropriate in this case, it must involve

(1) a federal constitutional challenge to                    state action and (2) an

unclear issue of state law that, if resolved, would make it

unnecessary for us to rule on the federal constitutional question.

       The first prong is clearly satisfied.                      The UPLC is a state

agency,9    and     any   attempt     by     it    to   prohibit      Nationwide    from

employing staff attorneys would be state action.10                      Nationwide has

raised several arguments under which the UPLC’s reading of the

State Bar Act would violate Nationwide’s constitutional rights.

Although     we     express      no        opinion      on    whether      Nationwide’s

  7
    467 U.S. 229, 236 (1984) (quoting Pullman, 312 U.S. at 500);
accord City of Houston v. Hill, 482 U.S. 451, 476 (1987) (Scalia,
J., concurring); Lipscomb, 145 F.3d at 242; Louisiana Debating &
Literary Ass’n, 42 F.3d at 1491; see also 17A Charles Alan Wright
et al., Federal Practice and Procedure § 4242, at 30 (2d ed. 1988).
  8
       Midkiff, 467 U.S. at 236.
  9
    Green v. State Bar of Texas, 27 F.3d 1083, 1087-88 (5th Cir.
1994) (noting that “[t]he UPLC is a state agency”); see also Tex.
Gov't Code Ann. §§ 81.103 – 81.104 (Vernon 1998) (empowering the
Supreme Court of Texas to appoint the nine committee members of the
UPLC to police against the unauthorized practice of law in Texas).
  10
       See Green, 27 F.3d at 1087-88.

                                             6
constitutional arguments will ultimately prevail, they appear to at

least deserve consideration.               The UPLC has not demonstrated that

all of Nationwide’s claims clearly mandate dismissal.

           To satisfy the second prong, there must be an uncertain issue

of state law that is “fairly susceptible” to an interpretation that

would          render   it   unnecessary    for    us   to    decide    the     federal

constitutional questions in a case.11                Thus, for abstention to be

proper in this case, the State Bar Act must be fairly susceptible

to        an   interpretation    that    would    permit     Nationwide    to   employ

salaried attorneys to represent its insureds in coverage-related

cases.          We believe that it is.

           Subchapter G of the State Bar Act, published in the Texas

Government Code §§ 81.101 – 81.106 (Vernon 1998), regulates the

practice of law in Texas.               Nothing in the Act itself expressly

forbids         insurance    companies     from    employing    staff     counsel   to

represent its insureds. Section 81.101(a) provides a nonexhaustive

list of activities constituting the “practice of law,” including

drafting and filing court documents, appearing before a judge, and

giving legal advice out of court.                But the Act does not define the

“unauthorized practice of law”; § 81.102(a) merely states that “a

person may not practice law in this state unless the person is a

     11
     Baran v. Port of Beaumont Navigation Dist., 57 F.3d 436, 442
(5th Cir. 1995) (citing Harman v. Forssenius, 380 U.S. 528, 534-35
(1965)); accord Hill, 482 U.S. at 468; Louisiana Debating &
Literary Ass’n, 42 F.3d at 1492; Word of Faith World Outreach Ctr.
Church, Inc. v. Morales, 986 F.2d 962, 967 (5th Cir. 1993).

                                            7
member of the state bar.”12        Nationwide’s staff attorneys are duly

licensed members of the state bar, just like attorneys in private

practice.      Furthermore, the word “person,” as used in § 81.102(a),

presumptively      includes    corporations.         The   Texas   Code   of

Construction Act, which applies to the State Bar Act,13 instructs

courts    to   read   the   word   “person”   as   including   corporations,

partnerships, and other legal entities.14

       Moreover, we find no Texas cases that address whether §

81.102(a) prohibits an insurance company from employing staff

attorneys to defend its insureds. The UPLC argues that the Supreme

Court of Texas definitively held in Hexter Title & Abstract Co. v.

Grievance Committee15 that corporations may never employ attorneys

  12
     Chapter 83 of the Texas Government Code provides an additional
nonexhaustive list of activities qualifying as the unauthorized
practice of law. See Tex. Gov’t Code Ann. §§ 83.001–83.006 (Vernon
1998) (prohibiting the drafting of conveyances, deeds, notes, and
mortgages by persons who are not licensed attorneys or real estate
brokers). None of those activities, however, is relevant to this
case. Section 38.123 of the Texas Penal Code criminalizes certain
unauthorized practices of law, but it does not clarify the question
of whether an insurance company may employ staff attorneys to
represent its insureds.
  13
     Tex. Gov’t Code Ann. § 1.002 (Vernon 1988) (“The Code
Construction Act (Chapter 311 of this code) applies to the
construction of each provision in this code, except as otherwise
expressly provided by this code.”).
  14
     Id. § 311.005(2) (stating that unless the statute in which the
word is used requires a different meaning, “‘Person’ includes
corporation, organization, government or governmental subdivision
or agency, business trust, estate, trust, partnership, association,
and any other legal entity”).
  15
       179 S.W.2d 946 (Tex. 1944).

                                       8
to represent third parties; we disagree.           First, the court based

its ruling in Hexter Title on a now repealed Texas penal statute16

that expressly forbade corporations from practicing law on behalf

of third persons; the court did not examine or apply § 81.102(a).17

Second, Hexter Title is factually distinguishable from the present

case. Hexter Title involved a title company, “incorporated for the

purpose of making abstracts of title to land and liens thereon,”

that    employed     lawyers   to   draft   conveyances   and   other   legal

documents for its clients.18        The court held that the “preparation

of the conveyances and other instruments covered by the injunction

in nowise relates to [the business of making titles].”19                Since

Hexter Title had no present interest in the legal documents that it

was drafting, it could not perform that service.          On the contrary,

Nationwide, as an insurer, has a direct financial interest in

policy-related cases involving its insureds.              Thus, under the

court’s reasoning in Hexter Title, there might be reason to treat

insurance companies differently from title companies with respect

  16
     Unauthorized Practice Act, 43d Leg., R.S., ch. 238, 1933 Tex.
Gen. Laws 835, 835- 38, repealed by Act of June 1, 1949, ch. 301,
§ 1, 1949 Tex. Gen. Laws 548.
  17
     Hexter Title, 179 S.W.2d at 951; see also J. R. Phillips Inv.
Co. v. Road Dist. No. 18, 172 S.W.2d 707, 712 (Tex. Civ. App.–Waco
1943, writ ref’d) (citing the same penal statute for the
proposition that it is unlawful for corporations to practice law).
  18
       Id. at 952.
  19
       Id.

                                       9
to the employment of duly licensed staff counsel.20

       In Scruggs v. Houston Legal Foundation,21 a Texas appellate

court applied a more liberal approach toward allowing corporations

to employ licensed attorneys to represent third parties.              Scruggs

held    that    a   charitable,   nonprofit     corporation   could   employ

attorneys to represent indigents accused of committing crimes.22

The court focused on the fact that the Legal Foundation did not

attempt to control or exploit the manner in which the attorneys in

its    employ    represent   their   indigent     clients.     Because   the

Foundation’s practices were not demeaning to the profession, there

was not proof that it was engaged in the unauthorized practice of

  20
      Id.  There is abundant caselaw in Texas regulating title
companies’ attempts to draft legal documents for third parties. At
least   three   other  Texas   appellate   court   decisions   have
characterized this practice as the unauthorized practice of law.
See San Antonio Bar Ass’n v. Guardian Abstract & Title Co., 291
S.W.2d 697, 701 (Tex. 1956); Amarillo Abstract & Title Co. v.
Unauthorized Practice of Law Comm., 332 S.W.2d 349, 350-51 (Tex.
Civ. App.–Amarillo 1960, writ ref’d n.r.e.) (holding that there was
a fact question regarding whether the title company was engaged in
the practice of law);Stewart Abstract Co. v. Judicial Comm’n, 131
S.W.2d 686, 690 (Tex. Civ. App.–Beaumont 1939, no writ). There now
exists a statute which specifically prohibits title companies from
drafting legal documents for third parties. See Tex. Gov’t Code
Ann. § 83.001.    The Texas judiciary and legislature have not,
however, addressed the issue of insurance companies employing staff
attorneys to represent their insureds.      Because of differences
between a title company’s interest in drafting a conveyance for a
third party and an insurer’s interest in a case involving one of
its insureds’ policies, we do not believe that those cases
necessarily control the present issue.
  21
     475 S.W.2d 604 (Tex. Civ. App.–Houston [1st Dist.] 1972, writ
ref’d).
  22
       Id. at 607.

                                     10
law simply because it employed lawyers to represent third parties.23

Although     the   Texas   legislature         has   since   enacted   legislation

prohibiting non-profit legal service corporations from employing

staff counsel to represent third parties,24 the Scruggs opinion

demonstrates       a   willingness   by    Texas      courts   to   allow    certain

corporate staff counsel arrangements, rather than a predisposition

to outlaw the practice entirely.

       Finally, it is unclear what effect Texas’s ultra vires statute

has on an insurer’s right to employ staff attorneys.                   Article 2.01

of the Texas Business Corporation Act provides that corporations

may not organize for the purpose of transacting business that

“cannot lawfully be engaged in without first obtaining a license .

. . to engage in such activity” if “a license cannot lawfully be

granted to a corporation.”25          While the statute may suggest that

Nationwide’s staff attorneys cannot practice law unless Nationwide

itself can obtain a bar license, no Texas court has interpreted

this statute to prohibit insurance companies from employing staff

counsel.     And as stated above, it is unclear whether § 81.02(a) of

the State Bar Act prohibits insurance companies from “practicing

law”    by   employing     duly   licenced      attorneys,     because      the   word

“person” as used in the statute includes corporations.

  23
       Id. at 606-07.
  24
       See Tex. Ins. Code Ann. art. 23.12 (Vernon 1981).
  25
       Tex. Bus. Corp. Act Ann. art. 2.01, § B(2) (Vernon 1980).

                                          11
          In light of these conflicting authorities and in the absence

of caselaw interpreting § 81.102(a) in this context, we believe

that the law is fairly susceptible to a reading that would permit

Nationwide to employ staff counsel on behalf of its insureds.

While the Texas courts certainly may decide that Nationwide’s staff

attorneys are engaged in the unauthorized practice of law, we

believe that the law is uncertain enough on this issue that we

should abstain from ruling on its federal constitutionality. Thus,

given that the strictures of the Pullman doctrine were satisfied

and in light of Texas’s interest in policing its state bar, the

district court did not abuse its discretion in applying Pullman

abstention to this case.

C.        Dismissal

          Although the district court did not err in applying Pullman

abstention, it did err in dismissing Nationwide’s claims with

prejudice.26          Ordinarily,   a   district   court   ordering   Pullman

abstention should “retain jurisdiction but . . . stay the federal

suit pending determination of the state-law questions in state

court.”27       The Supreme Court, however, has recognized a limited

     26
     The district judge technically did not specify whether he was
dismissing the case with or without prejudice, however, “a
dismissal is presumed to be with prejudice unless the order
explicitly states otherwise.” Fernandez-Montes v. Allied Pilots
Ass’n, 987 F.2d 278, 284 n.8 (5th Cir. 1993). Furthermore, the
UPLC’s motion, which the district court granted, requested that
Nationwide’s claims be dismissed with prejudice.
     27
     Harris County Comm’rs Court v. Moore, 420 U.S. 77, 88 n.14
(1975).

                                        12
exception to this rule for cases from Texas, whereby the district

court dismisses the case without prejudice rather than retaining

jurisdiction.28       Federal courts created this exception because the

Texas Supreme Court held in United Services Life Insurance Co. v.

Delaney29 that it cannot grant declaratory relief if a federal court

retains jurisdiction over the case.30         According to the Supreme

Court of Texas, such a ruling would be an advisory opinion.31        But

as the Supreme Court noted in Harris County Commissioners Court v.

Moore, our practice of dismissing Pullman abstention cases from

Texas is not designed to foreclose recovery permanently:

          We have adopted the unusual course of dismissing in this
          case solely in order to avoid the possibility that some
          state-law remedies might otherwise be foreclosed to
          appellees on their return to state court. Obviously, the
          dismissal must not be used as a means to defeat the
          appellees’ federal claims if and when they return to
          federal court.32

The district court therefore erred in dismissing Nationwide’s

claims with prejudice.          On remand, the district court should

dismiss this case without prejudice so as to preserve Nationwide’s

state and federal claims.

D.        Certification to the Supreme Court of Texas

     28
          Id. at 88 n.14, 88-89.
     29
          396 S.W.2d 855 (Tex. 1965).
     30
     Moore, 420 U.S. at 88 n.14; Barrett v. Atl. Richfield Co., 444
F.2d 38, 46 (5th Cir. 1971); see also 17A Wright, § 4243, at 66.
     31
          Delaney, 396 S.W.2d at 863-64.
     32
          Moore, 420 U.S. at 88 n.14 (emphasis added).

                                     13
       In addition to appealing the district court’s abstention

ruling, Nationwide has filed a motion with this court to certify

the following question to the Supreme Court of Texas: “Whether,

under Texas state law, the State Bar Act prohibits an insurance

company    from   employing    duly   licensed   staff   legal   counsel   to

represent the interests of its insureds when the insurance company

has a contractual duty to defend and indemnify the insured?” Under

Rule 58 of the Texas Rules of Appellate Procedure, “[t]he Supreme

Court of Texas may answer questions of law certified to it by any

federal appellate court if the certifying court is presented with

determinative questions of Texas law having no controlling Supreme

Court precedent.”

       The decision to certify a question of state law lies within

the sound discretion of this court.33            While we acknowledge the

efficiencies generated by certification,34 we decline the invitation

to certify the question in this instance.            The UPLC and several

insurance    companies   are    currently   litigating    this   state     law

question in two Texas district courts. We believe that the Supreme

Court of Texas would be better suited to answer this question with

  33
       Lehman Bros. v. Schein, 416 U.S. 386, 391 (1974).
  34
     See, e.g., Arizonans for Official English v. Arizona, 520 U.S.
43, 76 (1997) (“Certification procedure . . . allows a federal
court faced with a novel state-law question to put the question
directly to the State’s highest court, reducing the delay, cutting
the cost, and increasing the assurance of gaining an authoritative
response.”); Schein, 416 U.S. at 391 (stating that certification
“does, of course, in the long run save time, energy, and resources
and helps build a cooperative judicial federalism”).

                                      14
the   benefit   of   records    generated     in   state    court    by   several

insurance companies than it would be by receiving a certified

question from one insurer with a relatively limited record on

appeal.    We therefore deny Nationwide’s motion to certify its

question to the Supreme Court of Texas.

                               III.   Conclusion

      The district court did not abuse its discretion in applying

Pullman abstention in this case.            We believe that the Texas State

Bar Act is fairly susceptible to a reading that would make it

unnecessary for us to rule on the federal constitutionality of its

unauthorized practice of law provisions. The district court erred,

however, when it dismissed Nationwide’s claims with prejudice.                 We

therefore AFFIRM the district court’s application of the Pullman

doctrine, but REVERSE its decision to dismiss Nationwide’s claims

with prejudice.       The   district     court’s    order    of   dismissal    is

VACATED, and the case is REMANDED with instructions to dismiss

Nationwide’s    claims   without      prejudice.     Finally,       Nationwide’s

certification motion is DENIED.

                                       15