In re OCA, Inc.
- Reporters:
- , , ,
- Before:
- Garwood, Clement, Elrod
GARWOOD, Circuit Judge:
Debtors-appellants OCA, Inc., formerly doing business as Orthodontic Centers of America, Inc.; OrthAlliance New Image, Inc.; Orthodontic Centers of Texas, Inc.; PedoAlliance, Inc.; and OrthAlliance, Inc. (collectively “OCA“) directly appeal the January 17, 2007 interlocutory order of the bankruptcy court granting partial summary judgment and holding that the Business Services Agreements or Management Agreements (collectively the “BSAs“) that OCA entered with a number of orthodontists and their professional corporations (collectively the “Orthodontists“)1 were illegal under Texas law. We affirm.
FACTS AND PROCEEDINGS BELOW
This case arises out of a dispute over various BSAs, which OCA had entered into with Orthodontists in the state of Texas.2 According to the terms of the BSAs, OCA purchased or leased office space and purchased equipment for each office. OCA was also responsible for billing patients, filing insurance claims, hiring nondental personnel, setting dress codes, and managing a bank account through which the dental practice‘s funds flowed. The Orthodontists were not authorized to withdraw funds from the operating account, so OCA periodically transferred money from these accounts to pay the Orthodontists their compensation. In exchange, the Orthodontists agreed to work a minimum number of hours each week at the practice and not to perform orthodontic work outside that office. The Orthodontist would receive an hourly rate for seeing patients, and OCA would receive an hourly management fee in addition to being reimbursed for its overhead. Profits were then split according to the respective ownership interests of OCA and the Orthodontists. The BSAs were to be in force for long periods of time, some up to forty years, and their terms severely restricted the Orthodontists’ ability to terminate or assign them.
The Orthodontists entered this case at various points in the litigation stream. Appellee orthodontist Buck initially brought suit against Orthalliance, Inc. in
Appellee orthodontist Izzard terminated his BSA in April 2005, before OCA filed for bankruptcy. Appellees orthodontists Wells, Doan, Dillingham, Crosby, Jordan, and Woodworth were still performing under their respective BSAs when OCA filed for bankruptcy.
After filing for chapter 11 protection, OCA, as debtor in possession, commenced adversary proceedings in the bankruptcy court against Hodgkins and Izzard seeking a declaration that their BSAs were not void for illegality under Texas law. Appellees orthodontists Doan, Crosby, Wells, and Dillingham brought adversary proceedings seeking to have their BSAs declared void for illegality. In a contested proceeding, appellee orthodontist Woodworth filed a motion for summary judgment, which sought to have his BSA declared void for illegality. The bankruptcy court held a joint hearing to determine the legality of all of the Texas BSAs on January 10, 2007. At this hearing, the bankruptcy court announced from the bench that it was granting the Orthodontists’ motions for partial summary judgment and holding that the BSAs were void for illegality under Texas law based on several prior Texas federal district court rulings in similar cases. The bankruptcy court entered its Order Granting Partial Summary Judgment on January 17, 2007.
On January 19, 2007, OCA moved to have the bankruptcy court certify its interlocutory judgment for direct appeal under
OCA directly appealed to this court the bankruptcy court‘s January 17, 2007 interlocutory order pursuant to
On March 7, 2007, the bankruptcy court certified that this case met the requirements for direct appeal because it involved a question of law on which there was no controlling decision by the Fifth Circuit or the Supreme Court, it involved a matter of public importance, and a direct appeal would materially advance the progress of the case. A panel from this court granted OCA‘s petition for leave to appeal under section 158(d). The only question is whether
The text of the statute grants the courts of appeals “jurisdiction of appeals described in the first sentence of subsection (a).”
Since this is an appeal from an interlocutory order from the bankruptcy court regarding a question of law on which there is no controlling precedent, we will treat this appeal essentially as we treat certified questions from district courts. See
DISCUSSION
The Texas Occupations Code prohibits a person from practicing dentistry without a
I. Standard of Review; Applicable Law
When directly reviewing an order from a bankruptcy court, findings of fact are reviewed for clear error and conclusions of law are reviewed de novo.
II. Are Corporations “Persons” for Purposes of Section 251.003(a)(4)?
Legislation governing the operations of dentists is codified in the Texas Occupations Code (the “Code“). When the Code was recodified in 1999, the legislature added section 1.002, which provides that the “Government Code (Code Construction Act), applies to the construction of each provision in this code except as otherwise expressly provided by this code.”
Section 251.003(a) does not contain its own definition of “person,” but nevertheless, OCA argues that the term should not be read to include corporations. The basis of its argument is that the recodification of the Code was not meant to enact substantive change in the law and the prior version of section 251.003(a)(4) did not itself expressly include corporations in its definition of person. See
The previous version of section 251.003(a)(4) provided that anyone who engaged in the following conduct was engaged in dentistry:
“(4) Any one who owns, maintains or operates any office or place of business where he employs or engages under any
kind of contract whatsoever, any other person or persons to practice dentistry as above defined shall be deemed to be practicing dentistry himself, and shall himself be required to be duly licensed to practice dentistry as hereinabove defined and shall be subject to all of the other provisions of this Chapter, even though the person or persons so employed or engaged by him shall be duly licensed to practice dentistry as hereinabove defined.” Tex.Rev.Civ. Stat. art. 4551a(4) (1935) (emphasis added) (“Article 4551a(4)“).
OCA argues that the references to he, himself, and him limit the definition of “person” to natural persons.
OCA also notes that Article 4551a(4) was passed in 1935 along with an identical criminal statute, Tex. Penal Code art. 754a(4) (1935) (“Article 754a(4)“), which only applied to natural persons. OCA argues that the doctrine of in pari materia requires the civil statute and the penal statute to be read in harmony because they were adopted by the same legislature regarding the same subject matter. See Garrett v. Mercantile Nat‘l Bank at Dallas, 140 Tex. 394, 168 S.W.2d 636, 637 (1943); Braun v. State, 40 Tex.Crim. 236, 49 S.W. 620, 622-23 (1899). Consequently, the civil statute should be read to only apply to natural persons because the criminal statute‘s application was limited to natural persons.
One problem with this argument is that when these statutes were passed Texas did not subject corporations to criminal liability. See Robert W. Hamilton, Corporate Criminal Liability in Texas, 47 TEX. L.REV. 60, 60 (1968) (noting that Texas did not subject corporations to criminal prosecutions at that time); see also Linda C. Anderson, Corporate Criminal Liability for Specific Intent Crimes and Offenses of Criminal Negligence—The Direction of Texas Law, 15 ST. MARY‘S L.J. 231, 233 (1984) (stating that the Texas Penal Code was revised in 1974, and that revision incorporated many of Professor Hamilton‘s suggestions and imposed criminal liability on corporations). Since Texas did not subject corporations to criminal prosecution before 1974, the fact that Article 754a(4) did not apply to corporations tells us little about whether Article 4551(a)(4), a civil statute, was meant to apply to corporations.8
That still leaves OCA‘s argument that the previous iteration of
Assuming arguendo that OCA‘s argument is correct, we would have to determine how to apply recodified section
This construction is supported by another subsection of the statute and a revisor‘s note. Following the definition of what constitutes practicing dentistry, the statute specifically excludes a number of persons from that definition.9
Since the plain language of the Code unambiguously includes corporations in its definition of “person,” that language must be given effect even if the previous version of
Under Texas law, a contract is illegal, and thus void, if the contract obligates the parties to perform an action that is forbidden by the law of the place where the action is to occur. Miller v. Long-Bell Lumber Co., 148 Tex. 160, 222 S.W.2d 244, 246 (1949). Contracts are presumptively legal, so the party challenging the contract carries the burden of proving illegality. Franklin v. Jackson, 847 S.W.2d 306, 310 (Tex.App.—El Paso 1992, writ denied). “When two constructions of a contract are possible, preference will be given to that which does not result in violation of law.” Lewis v. Davis, 145 Tex. 468, 199 S.W.2d 146, 149 (1947).
The bankruptcy court, relying on decisions from various federal district courts for the Northern, Eastern, and Western districts of Texas interpreting similar BSAs, granted partial summary judgment in favor of the Orthodontists and held that the BSAs were illegal under
OCA does not directly dispute that the terms of the BSAs enable it to practice dentistry under
IV. Severance
OCA next argues that the bankruptcy court erred by holding that the BSAs were void for illegality because they contained severability and modification clauses, so the bankruptcy court should have severed or modified the illegal portions of the BSAs in order to cure any defects instead of voiding them for illegality. To support its argument, OCA cites a case in which this court held that an indemnity agreement was not void for illegality merely because one provision of the agreement was illegal. Transamerica Ins. Co. v. Avenell, 66 F.3d 715, 721-22 (5th Cir.1995). The Orthodontists respond by arguing that reformation is not applicable in this situation because the portion of the contract that is illegal is the main or essential purpose of the agreement, not merely an incidental promise. See Williams v. Williams, 569 S.W.2d 867, 871 (Tex.1978).
We first note that in the proceedings below, OCA did not raise this severability argument in its motion for partial summary judgment. It only raised this contention orally at the hearing to determine whether the BSAs were facially illegal, and at that time, OCA‘s position was that, if the bankruptcy court held that the BSAs were illegal, it should then hold an additional hearing, before certifying the issue for appeal, to consider whether provisions could be severed to cure the illegality. In response, the bankruptcy court stated that it would not hold a “reformation hearing until some higher court decides whether they‘re illegal or not.” OCA acquiesced to that decision, and never filed a motion to hold a reformation hearing. It is only on appeal that OCA argued that Texas law requires a court to consider severability before voiding a contract for illegality. However, this court generally does not consider arguments first raised on appeal. See Kinash v. Callahan, 129 F.3d 736, 739 n. 10 (5th Cir.1997).
Furthermore, while Texas law does allow a severability clause to save a contract that contains illegal provisions, the existence of a severability clause does not guarantee that a contract will always thus be saved from illegality. Williams makes it clear that severability is only
As written, the BSAs create an interlocking set of obligations that required OCA to exercise considerable control over the Orthodontists’ practices. For instance, OCA conducted the financial and marketing activity of the practices, and it maintained the facilities, equipment, and support personnel required to operate the practices. The BSAs also stipulated how much each Orthodontist was required to work, and greatly restricted their ability to perform services outside of the BSAs. In exchange for these services, OCA charged a fee that was tied to the profits of the practices. The BSAs provided little to no ability for the Orthodontists to oversee any of OCAs decisions related to their practice. Ultimately, the Orthodontists were essentially only left with control over diagnosing and treating their patients. Accordingly, the subject matter of the agreement runs afoul of
OCA has never attempted to identify any specific provisions of the BSAs that could be severed to make the BSAs compliant with
As a result, we decline to reverse the judgment of the bankruptcy court on the basis of OCA‘s argument that provisions of the BSAs could be severed to cure the illegality.
V. Assignment
Finally, OCA contends that the bankruptcy court should not have held that the BSAs were void for illegality because the BSAs grant OCA the power to assign its obligations, without the consent of the Orthodontists, if the assignee is a controlled affiliate of OCA. The Orthodontists counter that OCA never raised this argument in the bankruptcy court, so it is waived.
A thorough review of the record confirms that OCA did not raise the issue of assignment in the bankruptcy court. At oral argument, OCA also admitted that it had not raised the assignment issue below. Since this issue was not properly presented to the bankruptcy court, it cannot be raised now for the first time on appeal. See Kinash, 129 F.3d at 739 n. 10.
Additionally, it is unclear whether Texas corporate law would allow OCA to assign its obligations to one of its controlled affiliates in order to avoid the requirements of
OCA cites an Illinois case in which a court rejected a claim that a contract was void for illegality because the contract had been assigned and the assignment cured the illegality. Heller Equity Capital Corp. v. Clem Envtl. Corp., 232 Ill.App.3d 173, 173 Ill.Dec. 396, 596 N.E.2d 1275, 1280 (1992). Heller is distinguishable, however, because in that case the curing assignment had already occurred. Heller, 173 Ill.Dec. 396, 596 N.E.2d at 1280. Here OCA has not alleged that it has even attempted to have any of its obligations under the BSA actually assigned to one of its affiliates.13
OCA also cites Texas cases, which stand for the general proposition that a contract that could have been performed in a legal manner should not be voided because it was performed in an illegal manner. See Lewis, 199 S.W.2d at 149; Signal Peak Enters. of Tex., Inc. v. Bettina Invs., Inc., 138 S.W.3d 915, 921 (Tex.App.—Dallas 2004, pet. struck). Lewis and Signal Peak are also not on point because both of those cases dealt with contracts that were not facially illegal, meaning there was a way for the parties to legally fulfill their obligations under the express terms of the contract. In this case, the bankruptcy court correctly held that the BSAs, as written, cannot be performed legally by the current parties.
Without knowing which obligations would be assigned to which affiliates, it is impossible for this court to determine whether the assigned BSA could be performed legally. For this reason and because OCA failed to raise this argument below, we decline to reverse the judgment of the bankruptcy court on this ground.
CONCLUSION
For the foregoing reasons, the judgment of the bankruptcy court is
AFFIRMED.
Notes
Section 251.003(a)(9) provides that
“a person practices dentistry if the person:...
(9) controls, influences, attempts to control or influence, or otherwise interferes with the exercise of a dentist‘s independent professional judgment regarding the diagnosis or treatment of a dental disease, disorder, or physical condition;. ...”
Section 251.003(a)(9) is modified by § 251.003(b) which provides:
“(b) The practice of dentistry under Subsection (a)(9) does not:
(1) require an entity to pay for services that are not provided for in an agreement; or
(2) exempt a dentist who is a member of a hospital staff from following hospital bylaws, medical staff bylaws, or established policies approved by the governing board and the medical and dental staff of the hospital.”
Section 254.0011 provides:
(a) The board may adopt rules relating to the practice of dentistry as described by Section 251.003(a)(9) to prohibit a dentist from engaging in contracts that allow a person who is not a dentist to influence or interfere with the exercise of the dentist‘s independent professional judgment.
(b) Rules adopted by the board under this subtitle may not preclude a dentist‘s right to contract with a management service organization. Rules affecting contracts for provision of management services apply the same to dentists contracting with management service organizations and to dentists otherwise contracting for management services.