Texas Catastrophe Property Insurance Association v. Dan Morales, Individually and in His Official Capacity as Attorney General of the State of Texas

975 F.2d 1178

• Court: Court of Appeals for the Fifth Circuit
• Decided: November 30, 1992
• Docket: 91-8593
• Status: Published

Opinions

DUHÉ, Circuit Judge:

This appeal requires us to decide whether the district court abused its discretion when it issued a preliminary injunction preventing the Attorney General for the State of Texas from fulfilling his statutory duty to provide the sole legal representation for the Texas Catastrophe Property Insurance Association (CATPOOL), an entity comprised of private insurers that writes insurance policies covering risks as prescribed by the State of Texas. We find no abuse of discretion and accordingly affirm the preliminary injunction.

I.

CATPOOL was created by the Texas Legislature in 1971. 1971 Tex.Gen.Laws 843 (codified as amended at Tex.Ins.Code Ann. art. 21.49 (West 1981 & Supp.1992)). CATPOOL is a sort of assigned risk pool; all of the property insurers in Texas are required to belong to the pool as a condition of doing business in the state. Tex. Ins.Code Ann. art. 21.49 § 4(a) (West 1981). The pool must write “windstorm, hail and fire insurance” in designated parts of the state. Id. § 1. CATPOOL writes its own policies and pays its own claims, which are funded first from premiums, then from assessments against the member companies. In short, CATPOOL is directly funded by the private monies of private citizens and corporations — not by the funds of the public treasury. If the losses exceed a certain amount, the companies that fund CAT-POOL are entitled to limited tax credits from the state. The parties do not dispute these facts.

According to the statute that created it, CATPOOL is run according to a plan of operation adopted in a rulemaking procedure by the State Board of Insurance with the advice of the CATPOOL board of directors. Id. § 5(c) (West Supp.1992). Representatives of the member insurance companies comprise a majority of the board of directors. The directors are “responsible and accountable” to the State Insurance Board. Id. § 5(g). Since its creation, CAT-POOL has employed its own private legal counsel.

A recent amendment to the statute, however, requires CATPOOL to rely exclusively on the Texas Attorney General for legal representation, and the constitutionality of that amendment is the subject of this suit. By an act effective September 1, 1991, the Legislature proclaimed: “The association [CATPOOL] is a state agency for purposes of employing or authorizing legal representation and shall be represented by the attorney general in the manner provided by general law for representation of any other state agency by the attorney general.” 1991 Tex.Gen.Laws 1077 (codified at Tex. Ins.Code Ann. art. 21.49, § 12A (West Supp.1992)).

On September 3, CATPOOL and some of its member insurance companies filed this action under 42 U.S.C. § 1983, claiming that the amendment requiring CATPOOL to be represented by the attorney general deprived it of rights guaranteed by the federal constitution. In particular, CAT-POOL prayed the district court to enjoin enforcement of the amendment on the ground that the new law stripped the association of its constitutional right to counsel. After a hearing, the district court agreed with CATPOOL and issued the preliminary injunction. The attorney general appeals.

II.

There are four requirements for a preliminary injunction: “(1) a substantial likelihood of success on the merits; (2) a substantial threat that the movant will suffer irreparable injury if the injunction is not issued; (3) that threatened injury to the movant outweighs any damage the injunction might cause to the opponent; and (4) that the injunction will not disserve the public interest.” Apple Barrel Prods. v. Beard, 730 F.2d 384, 386 (5th Cir.1984). These four requisites are mixed questions of law and fact. Although we broadly review the district court’s legal conclusions, its findings of fact will not be disturbed unless they are clearly erroneous.

We will not reverse unless the appellant shows that the district court abused its discretion. Id.

The attorney general has not disputed the district court’s holdings on the issues of irreparable harm, the public interest, and relative lack of harm to the attorney general. Having reviewed the district court’s opinion, we believe that the court soundly exercised its discretion when it held for the Plaintiffs on those three issues, and we focus the remainder of our opinion on the question that the parties have asked us to resolve: whether there is a substantial likelihood that the Plaintiffs will prevail on the merits of their claim.

III.

The central question in this § 1983 suit is whether any federally guaranteed right of CATPOOL has been violated. The attorney general, apparently not disputing that a right to retained counsel in civil matters generally exists, argues that CAT-POOL is a state agency and therefore has no constitutional rights to assert against the state which created it, and which could destroy it if the Legislature decided to do so. We conclude that there is a constitutionally guaranteed right to retain hired counsel in civil matters, that the right in this case is grounded in the Fourteenth Amendment due process clause, and that CATPOOL holds such a right.

A.

Nowhere does the Constitution specifically say that a state cannot deprive persons of counsel in civil trials,² but a number of cases address the question. See, e.g., McCuin v. Texas Power & Light Co., 714 F.2d 1255, 1262-65 (5th Cir.1983); Mosley v. St. Louis Sw. Ry., 634 F.2d 942, 945-46 (5th Cir. Unit A Jan. 1981), cert. denied, 452 U.S. 906, 101 S.Ct. 3032, 69 L.Ed.2d 407 (1981); Potashnick v. Port City Constr. Co., 609 F.2d 1101, 1117 (5th Cir.), cert. denied, 449 U.S. 820, 101 S.Ct. 78, 66 L.Ed.2d 22 (1980); accord Gray v. New England Tel. & Tel. Co., 792 F.2d 251, 257 (1st Cir.1986). This Court has construed Supreme Court precedent to find “a constitutional right to retain hired counsel.” Id. at 1118 (construing Powell v. Alabama, 287 U.S. 45, 69, 53 S.Ct. 55, 64, 77 L.Ed. 158 (1932)). But see Kentucky W. Va. Gas Co. v. Pennsylvania Public Utility Comm’n, 837 F.2d 600, 618 (3d Cir.) (“The Supreme Court has not recognized a constitutional right to counsel in a civil case_”), cert. denied, 488 U.S. 941, 109 S.Ct. 365, 102 L.Ed.2d 355 (1988). As the Supreme Court stated,

If in any case, civil or criminal, a state or federal court were arbitrarily to refuse to hear a party by counsel, employed by and appearing for him, it reasonably may not be doubted that such a refusal would be a denial of a hearing, and, therefore, of due process in the constitutional sense.

Powell, 287 U.S. at 69, 53 S.Ct. at 64. The Powell Court, which directly reviewed a state conviction, was speaking of the Fourteenth Amendment due process clause,³ while Potashnick applied the Fifth Amendment due process clause to a deprivation caused by a federal court. Potashnick, 609 F.2d at 1117. Because the deprivation in the instant case is caused by a state, the Fourteenth Amendment due process clause is the appropriate amendment on which to base this due process claim.⁴

The right to counsel in civil matters “includes the right to choose the lawyer who will provide that representation.” McCuin, 714 F.2d at 1257. While this right is “one of constitutional dimensions and should be freely exercised without impingement,” ⁵ the right is not absolute. McCuin, 714 F.2d at 1262. If the state can show “compelling reasons,” then a party’s right to choose its own counsel may be overridden. We can find no intimation in the record of the case at bar, though, that the State of Texas has met the extraordinary burden of showing that it is compelled to deprive CATPOOL its fundamental right⁶ to choose its own counsel.

The district court specifically found that the reasons proffered by the attorney general in support of this statute are not compelling in the constitutional sense. Before this Court, the attorney general has argued that the state’s interests are “important,” ⁷ but for purposes of constitutional analysis, “important” reasons do not suffice where the Constitution requires “compelling” ones. We do not mean to say that the attorney general cannot, as a matter of law, satisfy this burden when it comes time for him to oppose a permanent injunction. For the present, we are only concerned with a substantial likelihood of success on the merits, and we do not believe that the district court abused its discretion when it found that CATPOOL is likely to prevail on this point.

B.

Having concluded that there is a constitutional right to retained counsel in civil cases, and that this right may not be impinged without compelling reasons, we must ask whether CATPOOL holds this right. A state agency has no constitutional rights to assert against the state of which it is a part. Board of Levee Comm’rs of the Orleans Levee Board v. Huls, 852 F.2d 140, 143 (5th Cir.1988). The attorney general has founded much of his case upon this principle, but the principle cannot uphold the elaborate argument that he has tried to build upon it.

The principle that a state agency has no constitutional rights to assert against the state that created it is predicated on the concept that state agencies generally, if not always, are parts of the state itself. The parties have expended many pages on the question of whether CATPOOL is a “state agency.” The more appropriate question is whether CATPOOL is part of the state.

For if CATPOOL be a part of the state, it cannot make any constitutional claims against the state; the agency and the state would be one and the same thing.

State government, as it may be conceived for our present purposes, is a great compendium of powers. It may make laws governing a vast array of activities, as is evidenced by the shelves filled with state statutes on myriad subjects. Sometimes, for the sake of convenience, a state will squeeze off some of this power to a political subdivision that it has created, such as a municipality or a levee board. Then that smaller state entity — that “political subdivision” ⁸ or “auxiliary]”⁹ or “arm[ ]” ¹⁰ of the state — takes charge of the function assigned to it and exercises the power delegated to it.

Thus a levee board may expropriate land and develop a levee system, using the power of expropriation and development that was delegated by the state when the state created the levee board. The expropriated land belongs to the state because the levee board that took it is part of the state. Huis, 852 F.2d at 143. If the state then decides that the land should no longer be in the charge of the levee board but should be transferred to the park service, no constitutional claim arises. It is the state’s land, and the state can move the land from one part of itself to another. A federal court would not entertain a suit by the levee board against the state, for “[t]o allow [such a] suit would be to allow the state to sue the state over state land.” Id.

Similarly, a private company that holds rights granted by a state may assert a contract clause¹¹ claim if the state impinges upon that contract. If the same company conveys its rights to a municipality, however, and the state then impinges on the municipality’s rights, no federal court will entertain the suit. City of Trenton v. New Jersey, 262 U.S. 182, 43 S.Ct. 534, 67 L.Ed. 937 (1923). As Chief Justice Marshall first stated the principle that a part of the state may not sue the state under the federal constitution:

If the act of incorporation be a grant of political power, if it create a civil institution to be employed in the administration of the government, or if the funds ... be public property, or if the state ..., as a government, be alone interested in its transactions, the subject is one in which the legislature of the state may act according to its own judgment, unrestrained by any limitation of its power imposed by the constitution of the United States.

Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 629-30, 4 L.Ed. 629 (1819).

The relevant inquiry, then, is one of identity: the material question is whether CAT-POOL is a part of the state. The district court held that CATPOOL is not a part of the state, and we agree. If CATPOOL makes a profit, that money does not go to the state. Although some profits are used to purchase reinsurance, the member companies may receive distributions from profits. Tex.Ins.Code Ann. art. 21.49, § 5(b) (West Supp.1992). If losses exceed premiums, the member companies are assessed, not the public treasury. See id. When CATPOOL loses, the bank accounts of its members are depleted, not the public treasury. The fact that losses are subsidized in part through the allowance of tax credits does not eliminate the risk to the private entities’ capital. When CATPOOL wins, the bank accounts of its members may be augmented, not the public treasury. Hypothetically, if CATPOOL’s lawyer is incompetent or disloyal, the members, who are private companies, lose money, not the public treasury.

That the state holds, and exercises, the coercive power to force private insurers doing business in Texas to cover certain risks¹² does not mean that the money coming out of the companies’ bank accounts is state money. It is private money directed to pay private claims. Indeed, the amount of money paid on individual claims depends on its attorneys’ successfully advancing their positions. The act creating CAT-POOL is not “a grant of political power,” as in the case of a municipality or other political subdivision; CATPOOL is not “employed in the administration of the government”; ¹³ and the funds that will be used if counsel is incompetent or disloyal come from the accounts of private companies, where that money could remain if it were protected by counsel. In short, the State of Texas is not alone interested in the assets of CATPOOL. See Dartmouth College, 17 U.S. (4 Wheat.) at 629-30. Rather, the member companies are vitally interested in protecting their private monies, and the State of Texas cannot deprive those companies of the rights guaranteed them by the Constitution of the United States to protect their private property.

We hasten to recognize that a state has extremely broad powers to legislate for the welfare of those in the state. The State of Texas indeed has the power to create a state agency that is truly a part of the state — like the State Insurance Board — and fund that agency by burdensome taxes against insurers doing business in Texas. It could require that agency to rely solely on the services of the attorney general. Because private money is at risk through CATPOOL, the legislature has not created such an agency in CATPOOL. The state can deprive itself of any constitutional rights, as it deems wise, but it cannot prevent private insurers from protecting their own money with retained counsel of their choice.

We conclude that CATPOOL holds the right to counsel, as explained above. See supra section III.A. The recent amendment to the CATPOOL statute has deprived CATPOOL and its member insurers of that right, and the district court was correct to hold that the Plaintiffs have a substantial likelihood of success on the merits.

IV.

The attorney general has also challenged the standing of the Plaintiffs. Article III of the Constitution requires a plaintiff

to “show that he personally has suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant,” Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 99, 99 S.Ct. 1601, 1608, 60 L.Ed.2d 66 (1979), and that the injury “fairly can be traced to the challenged action” and “is likely to be redressed by a favorable decision,” Simon v. Eastern Kentucky Welfare Rights Org., 426 U.S. 26, 38, 41, 96 S.Ct. 1917, 1924, 1925, 48 L.Ed.2d 450 (1976).

Valley Forge Christian College v. Americans United for Separation of Church & State, Inc., 454 U.S. 464, 472, 102 S.Ct. 752, 758, 70 L.Ed.2d 700 (1982). As should be apparent from the preceding discussion,¹⁴ CATPOOL and its member insurers stand to lose a constitutionally guaranteed right if section 12A is enforced. If the adjudicating court issues the injunction that the Plaintiffs seek, the State of Texas will be unable to enforce the new amendment and the Plaintiffs’ injury will be relieved. The Plaintiffs have shown standing.

We are puzzled by the attorney general’s argument that CATPOOL itself (as distinct from its member companies) has no standing because it did not adequately comply with the Texas Open Meetings Act. See Tex.Ins.Code Ann. art. 21.49, § 5(k) (West Supp.1992) (requiring notice of meetings to be given according to Tex.Rev.Civ.Stat. Ann. art. 6252-17 (West Supp.1992)). Standing is determined according to the criteria set out in the previous paragraph, and CATPOOL has met those standards. The attorney general may have some cause of action under state law if he is correct in arguing that CATPOOL inadequately complied with its notice obligations, but we discern no standing issue.

V.

For the foregoing reasons, the judgment of the district court is

AFFIRMED.

2 . Cf. U.S. Const, amend. VI ("In all criminal prosecutions, the accused shall enjoy the right ... to have the assistance of counsel for his defence.”) (emphasis added).

3 . Powell, 287 U.S. at 50, 53 S.Ct. at 57.

4 . The district court based its decision on the Fifth Amendment, but that error is harmless.

5 . Mosley, 634 F.2d at 946.

6 . McCuin, 714 F.2d at 1262.

7 . E.g., Appellant’s Br. at 23-24.

8 . City of Trenton v. New Jersey, 262 U.S. 182, 185, 43 S.Ct. 534, 536, 67 L.Ed. 937 (1923).

9 . Town of Mount Pleasant v. Beckwith, 100 U.S. 514, 524, 25 L.Ed. 699 (1880).

10 . City of Pawhuska v. Pawhuska Oil & Gas Co., 250 U.S. 394, 398, 39 S.Ct. 526, 528, 63 L.Ed. 1054 (1919).

11 . U.S. Const, art. I, § 10.

12 . This power is not disputed in this suit, and we assume that the state does hold such a power for purposes of this decision. We express no opinion on the validity of such a power.

13 . The attorney general argues that CATPOOL "serves as an integral part of the State [Insurance] Board's administrative process for claims.” Appellant’s Reply Br. at 6. Administration and processing of claims, even when done pursuant to the State Insurance Board’s process, hardly makes this an agency involved "in the administration of the government.”

14 .See supra Part III.