IN THE SUPREME COURT OF TEXAS
════════════
No. 04-0138
Unauthorized Practice of Law
Committee, Petitioner,
v.
American Home Assurance
Company, Inc. and
The Travelers Indemnity
Company, Respondents
════════════════════════════════════════════════════
On Petition for Review from the
Court of Appeals for the Eleventh District of
Texas
Argued September
28, 2005
Justice Johnson, joined by Justice Green, dissenting.
Many matters addressed by briefs of the parties and amici
involve ethical and potential liability considerations of insurers and their
staff counsel when staff counsel defend insureds. As
the Court points out, those considerations do not determine what is or is not
the unauthorized practice of law. The Court details several such issues, some
easily-identified and some not-so-easily-identified, that are imbedded in the
relationships when an insurer selects defense counsel for and controls the
defense of its insured. Many, if not the majority, of the issues exist
regardless of whether defense counsel is an employee of the insurer (“staff
attorney” or “staff counsel”) or independent counsel. Certainly the issues may
be more complex when staff counsel represents an insured than when independent
counsel does. Nevertheless, it seems to me that the issue before the Court
narrows down to statutory construction: Is an insurance corporation’s defense of
its insureds by the use of staff attorneys the
practice of law as defined in the State Bar Act. See Tex. Gov’t Code § 81.101(a). The Court holds
that under certain circumstances it is not. I disagree.
I agree that corporate insurance companies are not permitted to practice
law in Texas.
___ S.W.3d ___; see Tex. Bus.
Corp. Act
art. 2.01(B)(2) (providing that a corporation may not be
organized under the Act if any one of its purposes is to engage in an activity
that requires a license and such a license cannot be granted to a corporation). Former Penal Code article 430a specifically prohibited corporations from
practicing law, but that article was repealed in 1949. There does not seem to
have been a great deal of discussion about whether its repeal was a legislative
signal that corporations were free to either practice law or defend insureds with staff attorneys. As the Court notes, the
legislative record does not indicate that it was. See ___ S.W.3d ___.
The
Legislature specifically authorized the practice of law by entities other than
natural persons over thirty-five years ago. Beginning in January 1970, certain
types of corporations were statutorily authorized to render professional legal
services. Tex. Rev.
Civ. Stat. art. 1528e § 3(d). The corporate form was limited to
professional legal corporations organized for the sole and specific purpose of
rendering legal services. See id. “Professional Legal Services” were
defined as
any type
of personal service rendered by attorneys-at-law which requires as a condition
precedent to the rendering of such service within this state, the obtaining of a
license, permit, certificate of registration, or other legal authorization and
which prior to the passage of this Act and by reason of law could not be
performed within this state by a corporation.
Id. at §
3(c). Insurance companies are not professional legal corporations. And
because actual or beneficial ownership of professional legal corporations
remains statutorily limited to licensed attorneys, insurance companies cannot
own or operate Texas professional legal corporations. See
id. If they could, the case now before the Court almost certainly would not
be here. It is here because corporate insurers cannot be licensed to practice
law, but they want the economic benefit of staff attorneys practicing law by
defending insureds who are not corporate affiliates,
subsidiaries, employees, officers, or agents. Seeking an economic benefit is not
bad. In this instance, however, the benefit sought is not one that can be
obtained by a corporation without running afoul of Texas’ statutory
definition of practicing law.
In Hexter Title & Abstract Co. v. Grievance
Committee, 179 S.W.2d 946 (Tex. 1944), this Court considered whether a
corporation was practicing law when attorney employees of the corporation
prepared documents related to defects in title and offered them to third
persons. Although the corporation had no connection with the transactions, the
corporation hoped to issue policies of title insurance as a result of providing
the documents. As background, the Court referenced the State Bar Act and two of
its relevant purposes: “It will be noted that one of the purposes of the . . .
act was to subject all members of the Bar to the provisions of the act, and
another purpose was to prohibit those not members of the State Bar from
practicing law.” Id. at 948 (discussing Act of April 6,
1939, 46th Leg., R.S., ch. 1, §§ 2, 3, 1939 Tex. Gen.
Laws 64-66, repealed by Act of April 30, 1987, 70th Leg., R.S., ch. 148, § 3.01, 1987 Tex. Gen. Laws 534, 593 (former Tex. Rev. Civ. Stat. 320a-1)). The Court then
addressed the question of whether the corporation was practicing law “within the
meaning of the Statutes of this State?” Id. at 949. The controlling statute was former Penal Code
article 430a which we quoted in relevant part:
Section 1. It shall be unlawful for any corporation or any
person, firm, or association of persons, except natural persons who are members
of the bar regularly admitted and licensed to practice law.
Sec. 2. For the purpose of this Act, the practice of law is
defined as follows: Whoever * * * (b) For a consideration, reward or pecuniary
benefit, present or anticipated, direct, or indirect, advises or counsels
another as to secular law, or draws a paper, document or instrument affecting or
relating to secular rights; * * * or (d) For a consideration, direct or
indirect, gives an opinion as to the validity of the title to real or personal
property, * * * is practicing law. Nothing in this section shall be construed to
prohibit any person, firm, association or corporation, out of court, from
attending to and caring for his or its own business, * * * nor from preparing
abstracts of title, certifying, guaranteeing or insuring titles to property,
real or personal, or an interest therein, or a lien or encumbrance thereon, * *
*.
Sec. 3. It shall be unlawful for any corporation to practice
law as defined by this Act or to appear as an attorney for any person other
than itself in any court in this State, or before any judicial body or any
board or commission of the State of Texas; or hold itself out to the public or
advertise as being entitled to practice law; and no corporation shall prepare
corporate charters or amendments thereto, or other legal documents not relating
to its authorized business, or draw wills; or hold itself out in any manner
directly or indirectly as being entitled to do any of the foregoing acts; * *
*.
Id. at 951
(emphasis added). We held that the title and abstract company was practicing law
even if the documents were prepared by licensed attorneys and even if non-lawyer
corporate executives did not direct how the documents were to be prepared:
The fact
that the corporation has several licensed lawyers in its employment to prepare
the instruments in question does not alter the case. According to the agreed
statement of facts the executive officers of the corporation direct the kind of
instruments to be drawn and what should be put in them. But even in the
absence of such direction by the executives the result would be the same.
The attorney in preparing such papers does so as the agent of the corporation by
whom he is employed. His first obligation of loyalty is to the corporation.
His acts are the acts of the corporation, and even though the corporation
acts through an attorney, it is nevertheless practicing law.
Id. at 953-54
(emphasis added).
Fairly
reading former article 430a, section 2 addressed out-of-court activities and
section 3 addressed in-court activities. Section 3 specifically prohibited
corporations from appearing “as an attorney for any person other than itself in
any court in this State.” Id. at
951. As the Court has noted, article 430a specifically provided that an
insurer was not precluded from defending its insureds
by lawyers of its own selection. Id. But what the statute did not
say was that a corporation could, itself, defend its insureds in court.
More than
twenty years after Hexter was decided, another
case presented the issue of whether a nonprofit corporation was practicing law
by using employee attorneys to represent indigents. Touchy v. Houston Legal Found., 432 S.W.2d 690 (Tex. 1968). Hugo A.
Touchy, three other practicing attorneys, and an organization composed of
attorneys (collectively, “Touchy”) brought suit against the Houston Legal
Foundation, a charitable corporation. Touchy sought to enjoin the Foundation
from engaging in (1) practices which allegedly violated the Texas Canons of
Ethics, (2) the unauthorized practice of law, and (3) practices which were
demeaning to the legal profession and economically harmful to the plaintiffs.
Id. at
691. As to the unauthorized practice of law claim, Touchy asserted that
the Foundation was practicing law without authorization by directly representing
clients by signing pleadings, motions, and other documents filed in court.
Id. at
693. The State Bar Act then provided that all
persons licensed to practice law were members of the
State Bar and all persons not members were “‘prohibited from practicing law in
this State.’” Id. at 695 (quoting Act of April 6, 1939, 46th Leg., R.S.,
ch. 1, §§ 2, 3, 1939 Tex. Gen. Laws 64-66, repealed
by Act of April 30, 1987, 70th Leg., R.S., ch.
148, § 3.01, 1987 Tex. Gen. Laws 534, 593 (former Tex. Rev. Civ. Stat. 320a-1)).
The
Foundation responded by filing a plea in abatement challenging Touchy’s standing to bring suit and a motion for summary
judgment urging that Touchy did not have standing and that, as a matter of law,
the Foundation was neither practicing law nor engaging in conduct demeaning to
the profession. Id. at
691. The trial court granted both the plea in abatement and the motion
for summary judgment, then dismissed the suit.
Id. The
court of appeals affirmed. Id. This Court held that by sustaining
the plea in abatement, the trial court held that Touchy did not have standing to
maintain the suit and could not have reached the merits. Id. at
693. The Court held that Touchy had standing, reversed the lower court
judgments and remanded for further proceedings. In remanding, the Court set out
the manner in which the unauthorized practice of law claim was to be tried:
The trial
of the cause is to be governed by the following specific instructions: The
petitioners will have the burden of pleading and proving that the Foundation is
engaged in the unlawful practice of law by directly representing clients as an
attorney, by signing pleadings in its name, or by appearing for such clients
through its employees, in presenting pleadings, motions, orders and other
documents filed in the several courts of this State. Without pleadings and
proof establishing that the activities of the Foundation constitute the practice
of law, cases such as San Antonio Bar Association v. Guardian Abstract &
Title Co., 291 S.W.2d 697 (1956) and Hexter Title & Abstract Co. v. Grievance
Committee, 179 S.W.2d 946 (1944), will have no application. In each of those
cases, the title companies were corporations for profit. Charges were made and
fees were received for legal services rendered to clients of the companies by
employee attorneys of the companies. In Hexter,
this Court pointed out that the facts showed that the employee attorney’s first
loyalty was to the corporation for which he worked rather than to his client; on
occasions, superior officials in the corporation, some being lay officials,
instructed the employee attorney as to what kind of instrument to prepare and as
to the phrasing of the instrument.
If, on the trial of the case, it is
established by competent evidence that the Foundation is truly a legal aid
society which acts merely as a conduit or intermediary to bring the attorney and
client together and does not purport to control or exploit the manner in which
the attorney represents his indigent client, the operations and activities of
the Foundation should not be held to be in violation of Article 320a-1, Vernon’s
Annotated Civil Statutes, which provides that ‘all persons not members of the
State Bar are hereby prohibited from practicing law in this State.’
Id. at 694-95
(emphasis added). Two points made by the Court are notable in regard to the
pending matter. First, the Court recognized that actions of the attorneys
employed by the Foundation were those of the corporation and that Touchy had the
burden to prove “the Foundation is engaged in the unlawful practice of law by
directly representing clients as an attorney, by signing pleadings in its name,
or by appearing for such clients through its employees, in presenting
pleadings, motions, orders and other documents filed in the several courts of
this State.” Id. at 694 (emphasis added). Second,
the Court distinguished for-profit corporations where employees provided legal
services that resulted in economic benefit to the corporation from nonprofit
corporations where neither the attorney nor the corporation benefitted. Even as
to the nonprofit Foundation, the Court did not indicate that if the attorneys
employed by the corporation filed pleadings and documents in court that the
corporation was not practicing law. The Court simply stated that if the
Foundation truly functioned as a legal aid society which acted only as a conduit
or intermediary (1) to bring the attorney and client together and (2) which did
not purport to control or “exploit” the manner in which the attorney represented
the indigent client, the Foundation “should not be held to be in violation of
Article 320a-1, Vernon’s Annotated Civil Statutes, which provides that ‘all
persons not members of the State Bar are hereby prohibited from practicing law
in this State.’” Id.
The State Bar
Act (the Act) presently addresses the question of when a person is practicing
law. See Tex. Gov’t Code ch. 81. In Hexter, we placed our decision “largely upon the
statutes” then in place, and did not rely on our inherent or implied powers.
Hexter, 179 S.W.2d at
954. The Court need take no different approach in this case because the
Act directly addresses the issue. The relevant provisions of the Act are
not substantively different from provisions of former Penal Code article 430a
which this Court addressed in Hexter, or the
instructions as to how to try the unauthorized practice of law claim in
Touchy. The Act now provides that for purposes of its provisions,
the
“practice of law” means the preparation of a pleading or other document incident
to an action or special proceeding or the management of the action or proceeding
on behalf of a client before a judge in court as well as a service
rendered out of court, including the giving of advice or the rendering of any
service requiring the use of legal skill or knowledge, such as preparing a will,
contract, or other instrument, the legal effect of which under the facts and
conclusions involved must be carefully determined.
Tex. Gov’t Code § 81.101 (emphasis
added). In construing the Act, we ascertain and give effect to the Legislature’s
intent as expressed by the plain and common meaning of the statute’s words,
State v. Shumake, 199 S.W.3d 279, 284 (Tex.
2006), unless a contrary intention is apparent from the context, Taylor v.
Firemen’s and Policemen’s Civil Service Commission of the City of Lubbock,
616 S.W.2d 187, 189 (Tex. 1981), or unless such a construction leads to absurd
results. Univ. of Tex.
S.W. Med. Ctr. v. Loutzenhiser, 140 S.W.3d 351,
356 (Tex.
2004).
Former
article 430a section 3 precluded a corporation from practicing law or appearing
in court “as an attorney for any person other than itself” whereas the current
Act effectively incorporates the prohibition on appearing in court for another
by including the phrase “on behalf of a client” in the definition of “practice
of law.” Tex. Gov’t
Code § 81.101(a). The
Act also provides that a person may not practice law in Texas unless the person is a member of the state bar and
that the state bar is composed of those persons licensed to practice law in
Texas.
Id. §§
81.051, .102(a). The restrictions are essentially the same as those in
former Penal Code article 430a, section 1, which formed the basis for Hexter, and in the State Bar Act, which formed the
basis for Touchy. The current Act does not make special reference to
insurers and the practice of law as did former article 430a. The context of the
definition’s statement that the practice of law includes “the management of the
action or proceeding on behalf of a client before a judge in court” does not
indicate that the words do not mean what they clearly say: management of a court
proceeding on behalf of another person is the practice of law. See Shumake, 199 S.W.3d at 284;
Taylor, 616 S.W.2d at 189.
In
determining whether an insurer practices law by having its staff attorney
represent an insured in a lawsuit, the logical place to begin is with the
premise that a corporation cannot act by itself. See
Touchy, 432 S.W.2d at 694; Hexter, 179 S.W.2d at 954. Corporations are legal
entities that function through actions of people. See In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 762 (Tex. 2006) (noting that corporations must act through
human agents); Holloway v. Skinner, 898 S.W.2d 793, 795 (Tex. 1995)
(“Corporations, by their very nature, cannot function without human agents.”).
The parties
agree that staff attorneys are employed for the purpose of defending insureds at a lower cost than could be achieved if the
insurer hired independent counsel. The attorney-client relationship between a
staff attorney and an insured comes into being and continues only because of the
staff attorney’s employment by the insurer. Staff attorneys defending insureds thus are employees performing tasks they were
employed to perform and defending persons they are assigned to defend by their
employer who benefits financially by the staff attorneys’ practice of law. The
actions of staff attorneys in so defending insureds
undeniably are actions of the corporation. See In re Vesta, 192 S.W.3d at 762; Holloway, 898 S.W.2d at
796; Touchy, 432 S.W.2d at 694; Hexter,
179 S.W.2d at 954.
When a
corporation’s employee attorneys prepare documents for and otherwise represent
the corporation itself, the corporation is not practicing law as defined by the
plain language of section 81.101(a) of the Act. The attorney employees’ actions
in such instances are actions of the corporation—it is representing itself.
See In re Vesta, 192 S.W.3d at 762 (“‘As a general rule, the actions of a corporate agent on
behalf of the corporation are deemed the corporation’s acts.’” (quoting Holloway, 898 S.W.2d at 795)). There is
no “client” involved as to such corporate actions other than the attorney-client
relationship between the corporation’s employee attorneys and their corporate
employer. This means that an insurer representing itself through actions of a
staff attorney is not practicing law because the insurer is not preparing
pleadings or documents or managing a lawsuit on behalf of a client. But it is
different when the insurer’s staff attorneys represent insureds in lawsuits. Hexter, 179 S.W.2d at 953-54 (“The attorney in
preparing such papers does so as the agent of the corporation by whom he is
employed. . . . His acts are the acts of the corporation, and even though the
corporation acts through an attorney, it is nevertheless practicing law.”).
Insureds are not corporate employees or officers who
are being defended for actions they took on behalf of the corporation so that
their defense is in actuality a defense of the corporation. Insureds are, quite simply, legal entities completely
separate from the insurance corporation who must be defended because of acts or
omissions not considered to be those of the insurer. So the insurance
corporation is not representing itself when it represents its insureds.
There is no
contention that insurers are precluded from having staff counsel represent the
insurers’ own interests in court. It is not unusual for multiple attorneys, each
representing different interests, to be present at a proceeding involving an
insured. For example, an insured driver involved in an automobile accident might
hire a lawyer who then files suit against the driver of the other vehicle. The
other driver might assert a counterclaim, or a passenger might join in the same
suit and sue the insured. The liability insurer of the original plaintiff will
usually hire a separate attorney to defend the claims against the insured and to
possibly represent the insurer’s subrogation interest, if any. Or if a claim
against the insured involves exposure in excess of primary policy limits and an
excess policy is in place, an attorney for the excess carrier may become
involved. Or an insurer might have an attorney actually file suit on a
subrogation claim. If an insurer wants to have staff counsel represent its own
interests, it may do so, but if staff counsel represents the insured then the
insurer is also representing a client in court proceedings and is practicing
law. See Touchy, 432 S.W.2d at 694-95; Hexter, 179 S.W.2d at 953-54.
Interpreting
the State Bar Act to preclude staff attorneys from defending insureds does not yield an absurd result. See Loutzenhiser, 140 S.W.3d at
356. Both authority to control as well as
responsibility for controlling corporate actions ultimately lie with the
corporation’s board of directors, and no claim is made by American Home that its
board membership is limited to licensed attorneys. A corporate board’s first
duties are to the corporation, not customers of the corporation. See Holloway, 898 S.W.2d at 795 (noting that it is the duty
of corporate officers to protect the interests of the corporation). As
part of its duties a board establishes policies, gives overall guidance to the
corporation, and hires corporate managers to see that corporate policies and
guidance are followed in fulfilling corporate purposes. The board may delegate
its authority or right to control the corporation’s actions by control of its
employees, but the board ultimately remains responsible for corporate
actions.
Corporate
purposes can be varied, but it cannot seriously be contended that a for-profit
corporation does not have making profits and enhancing shareholder value as its
primary goals. Good management practices dictate that
corporate managers and employees who perform well and increase profits will be
rewarded while managers and employees who do not perform well or meet
performance goals will usually experience negative employment actions. American
Home and amici urge that staff attorneys’ decisions
and conduct in representing insureds have not induced
and will not induce negative corporate personnel actions, and there is no reason
to doubt the sincerity of their position. But human experience teaches that in
the corporate business community, which is the community inhabited by insurance
companies, when profit margins are the focus of the entity and are challenged by
factors such as adverse loss ratios, downturns in general economic conditions,
or premium price wars, then cost-cutting measures must be, and are, instituted.
If such measures are not instituted, every person associated with the
corporation feels repercussions, including shareholders whose stock price begins
to fall, the board of directors that is responsible to the shareholders,
management, and each employee of the corporation whose employment depends on the
financial success of the business and their individual contribution to that
success. In such circumstances, it defies reason to believe that staff attorneys
will be immune from cost-cutting of some nature, even if they are immune at all
other times. Cost cutting as to staff attorneys, whenever it occurs, may be in
the form of being pressured to handle more lawsuits per lawyer, postponing or
refraining from engaging experts, limiting referrals of suits to outside counsel
even if retaining the suit is ethically questionable, etc. But corporate cost cutting will come
sometime, whether by one of the named insurers in this case, by one or some of
amici, or by other corporate insurers. And cost
cutting may occur because of financial pressures on the corporation or simply
because it is part of the nature of business managers and insurance claims
departments to strive for better performance by reducing claims payments and
expenses. Most likely the cost-cutting pressures will come from management who
are not all attorneys with an understanding of and commitment to the same
ethical duties to clients that staff attorneys have, who are not required to
make decisions within the context of professional ethics rules, but who
nevertheless are in the corporate chain of authority above the staff attorneys.
Therein lies the main difference between an insurance
corporation and a professional legal corporation. Ultimate control of a
professional legal corporation is with attorneys subject to the professional,
ethical, and disciplinary rules of conduct. A professional legal corporation
also has profit as a goal and seeks to maximize the difference between fee
income and expenses. But the professional legal corporation has shareholders who
are licensed attorneys subject to and limited by professional, ethical, and
disciplinary rules. See ___ S.W.3d ___ (“To ensure the quality and
integrity of the bar, the Court requires continuing education and imposes strict
disciplinary rules, enforced through the grievance process.”). When insurance
company policies and procedures are formulated and enforced, non-attorney board
members, managers, and shareholders are not ethically constrained as are lawyers
who are subject to professional discipline. See Touchy, 432 S.W.2d at 694.
This record
does not evidence directors and managers of the insurers having made anything
but ethical business decisions in fulfilling their duties to the corporation.
But ethical duties imposed on licensed attorneys as to their clients are
different than business ethics of the commercial marketplace. The “practice of
law” definition in the State Bar Act does not contain profit or loss
considerations. Tex. Gov’t Code §
81.101. The definition, as relevant here, references only
actions taken on behalf of a client, not economic factors. It does not contain
an exception allowing corporate insurers to defend insureds whose interests are “congruent” to those of the
insurer so the insurer can minimize defense costs and economically benefit its
non-attorney management and shareholders. Id.
In sum, the
Act does not preclude insurers from representing their own interests in lawsuits
if they choose to do so. But under the State Bar Act, a corporate insurer cannot
represent a client in a lawsuit. Because acts of staff attorneys are acts of the
insurer, when staff attorneys defend insureds in
lawsuits the insurer violates the Act, is practicing law without a license, and
is engaging in the unauthorized practice of law. I would reverse the judgment of
the court of appeals and affirm the judgment of the trial court.
________________________________________
Phil Johnson
Justice
OPINION DELIVERED: March
28, 2008