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Captive Counsel Case

No. 04-0138

IN THE SUPREME COURT OF TEXAS
AUSTIN, TEXAS

UNAUTHORIZED PRACTICE OF LAW COMMITTEE,

Petitioner,

v.

AMERICAN HOME ASSURANCE COMPANY, INC. and
THE TRAVELERS INDEMNITY COMPANY,

Respondents.

On Appeal from the Court of Appeals for the
Eleventh District of Texas at Eastland, Texas,
No. 11-02-00212-CV,
Trial Court Cause No. DV-99-08673-C


PETITIONER'S BRIEF ON THE MERITS

Mark A. Ticer
State Bar No. 20018900
Law Office of Mark A. Ticer
3300 Oak Lawn Avenue
Suite 700
Dallas, Texas 75219
214-219-4220 (Telephone)
214-219-4218 (Telecopier)
David E. Keltner
State Bar No. 11249500
Jose, Henry, Brantley
& Keltner, L.L.P.
675 N. Henderson
Fort Worth, Texas 76107
817-877-3303 (Telephone)
817-338-9109 (Telecopier)

Attorneys for Petitioner
IDENTITY OF PARTIES AND COUNSEL

Petitioner:

The Unauthorized Practice of Law Committee

Petitioner's Trial/Appellate Counsel:

Appellate:

David E. Keltner
State Bar No. 11249500
Jose, Henry, Brantley
& Keltner, L.L.P.
675 N. Henderson
Fort Worth, Texas 76107
817-877-3303--Telephone
817-338-9109--Telecopier
Trial and Appellate:

Mark A. Ticer
State Bar No. 20018900
Law Office of Mark A. Ticer
3300 Oak Lawn Avenue
Suite 700
Dallas, Texas 75219
214-219-4220 --Telephone
214-219-4218--Telecopier

Respondents:

American Home Assurance Company, Inc. and The Travelers Indemnity Company

Respondents' Trial/Appellate Counsel:

Counsel for American Home Assurance Company, Inc.:

Appellate:

Thomas C. Wright
State Bar No. 22059400
Lucy Haroutunian
State Bar No. 24007321
Wright, Brown & Close, L.L.P.
Three Riverway, Suite 1660
Houston, Texas 77056
713-572-4321--Telephone
713-572-4320--Telecopier
Trial:

Jim E. Cowles
State Bar No. 04931000
R. Michael Northrup
State Bar No. 15103250
Cowles & Thompson, P.C.
901 Main Street, Suite 4000
Dallas, Texas 75202
214-672-2000--Telephone
214-672-2020--Telecopier

Counsel for The Travelers Indemnity Company:

Appellate:

William V. Dorsaneo, III
State Bar No. 06012000
Suellen Ratliff
State Bar No. 24034645
Gibson, Dunn & Crutcher, L.L.P.
2100 McKinney Avenue, Suite 1100
Dallas, Texas 75201
214-698-3100--Telephone
214-698-3400--Telecopier
Trial:

Thomas T. Rogers
State Bar No. 17186700
Jackson Walker, L.L.P.
100 Congress Avenue, Suite 1100
Austin, Texas 78701
512-236-2000--Telephone
512-236-2002--Telecopier


Appellate:

William T. Barker
Sonnenschein, Nath & Rosenthal
8000 Sears Tower
Chicago, IL 60606
312-876-8140--Telephone
312-876-7934--Telecopier

TABLE OF CONTENTS

Page

IDENTITY OF PARTIES AND COUNSEL ii

TABLE OF CONTENTS...... iv

TABLE OF AUTHORITIES. vi

STATEMENT OF THE CASE....... x

STATEMENT OF JURISDICTION xii

ISSUES PRESENTED.. xv

INTRODUCTION 1

STATEMENT OF FACTS..... 2

  1. AHAC Facts........... 2
  2. Travelers' Facts........... 5
  3. The Insurance Companies' Use of Staff Counsel is Not Limited to Defending Standard Auto and Homeowners' Claims........... 6

SUMMARY OF ARGUMENT....... 6

ARGUMENT AND AUTHORITIES.. 8

  1. The Insurance Companies' Use of Lawyer-Employees to Render Legal Services to Third-Parties Is the Unauthorized Practice of Law.. 8
  1. Corporations May Not Practice Law in Texas........... 9
  2. Hexter Prevents a Corporation from Using its Lawyer-Employees to Render Legal Services to Third-Parties........... 13
  1. Hexter prevents divided loyalties........... 13
  2. Shared financial interests in the legal work was not the turning point of Hexter........... 15
  3. Control and divided loyalties are the real issues........... 20
  • The Difference Between Outside Lawyers and Lawyer-Employees........... 23
  • This Court Should Grant UPLC's Petition for Review to Correct the Eastland Court of Appeals' Holding That Insurance Defense Counsel Has Two Clients... 26
  1. Texas Follows the ‘One Client Model.’........... 26
  • There is No National Trend Favoring Use of Staff Counsel.. 31
  • Misleading Firm Names Fail to Adequately Disclose the Lawyer's Relationship with the Insurance Company and Potential Problems from That Relationship..... 37

CONCLUSION AND PRAYER 41

CERTIFICATE OF SERVICE 43

TABLE OF AUTHORITIES

Cases Page

American Ins. Ass'n v. Kentucky Bar Ass'n,
917 S.W.2d 568 (Ky. 1996) 33-35, 39

American Physicians Ins. Exchange v. Garcia,
876 S.W.2d 842 (Tex. 1994) xii, 27

Bradt v. West,
892 S.W.2d 56 (Tex. App.'Houston [1st Dist.] 1994, writ denied).......... xii, 27

Brown v. UPLC,
742 S.W.2d 34, 41 (Tex. App.'Dallas 1987, writ denied).... 11

Cincinnati Ins. Co. v. Wills,
717 N.E.2d 151 (Ind. 1999) 32, 33, 35, 38

Coscia v. Cunningham,
299 S.E.2d 880 (Ga. 1983) 32, 33

Crain v. UPLC,
11 S.W.3d 328 (Tex. App.'Houston [1st. Dist.] 1999,
pet. denied, cert. denied, 32 U.S. 1067, 121 S.Ct. 2218, 150 L.Ed.2d 211............ 2, 11

Darensburg v. Tobey,
887 S.W.2d 84 (Tex. App.'Dallas 1994, writ denied).... 20

Employers Cas. Co. v. Tilley,
496 S.W.2d 552 (Tex. 1973) xii, 29, 30

Farmers Tex. County Mut. Ins. Co. v. Griffin,
955 S.W.2d 81 (Tex. 1998)...... 10

Gafcon, Inc. v. Ponsor & Assocs.,
120 Cal. Rptr. 2d 392 (Cal. App. 2002) 32

Gardner v. North Carolina State Bar,
341 S.E.2d 517 (N.C. 1986)...... 33

Greene v. Thiet,
846 S.W.2d 26 (Tex. App.'San Antonio 1992, writ denied).... 39

Hexter Title & Abstract Co. v. Grievance Committee,
142 Tex. 506, 179 S.W.2d 946 (Tex. 1944) 13-16, 20, 35

In re Allstate Ins. Co.,
722 S.W.2d 947 (Mo. 1987)...... 33

In re Nolo Press/Folk Law, Inc.,
991 S.W.2d 768 (Tex. 1999).. 2, 11

In re Rules Governing the Conduct of Attorneys in Florida,
220 So. 2d 6 (Fla. 1969) 33

In re Weiss, Healey & Rea,
536 A.2d 266 (N.J. 1988).......... 32, 35

In re Youngblood,
895 S.W.2d 322 (Tenn. 1995) 35, 38, 39

Johnson v. Brewer & Pritchard, P.C.,
73 S.W.3d 193 (Tex. 2002) 22-23

Joplin v. Denver-Chicago Trucking Co.,
329 F.2d 396 (8th Cir. 1964)...... 32

King v. Guiliani,
No. CV 92-0290370-S, 1993 WL 284462 (Conn. 1993)................. 33

Kittay v. Allstate Ins. Co.,
397 N.E.2d 200 (Ill. 1979)...... 33

National Medical Enterprises, Inc. v. Godbey,
924 S.W.2d 123 (Tex. 1996)...... 25

Nationwide Mutual Ins. Co. v. UPLC,
283 F.3d 650 (5th Cir. 2002) 18, 19

Newspapers, Inc. v. Love,
380 S.W.2d 582 (Tex. 1964)...... 20

San Antonio Bar Ass'n v. Guardian Abstract and Title Co.,
156 Tex. 7, 291 S.W.2d 697 (1956)................. 24

State Farm Mut. Auto. Ins. Co. v. Traver,
980 S.W.2d 625 (Tex. 1998) xii, 11, 23, 24, 27, 29

Stewart Abstract Co. v. Judicial Comm'n of Jefferson County,
131 S.W.2d 686 (Tex. Civ. App.'Beaumont 1939, no writ)........ 15

UPLC v. Cortez,
692 S.W.2d 47 (Tex. 1985)...... 11

Utilities Ins. Co. v. Montgomery,
134 Tex. 640, 138 S.W.2d 1062 (1940).......... 17, 18

Constitutions, Statutes and Rules

Tex. Bus. Corp. Act Ann. art. 2.01B(2) (Vernon 2003). xiii, 9

Tex. Civ. Stat. Ann. art. 4590i §6.05 (Vernon Supp. 2004)................. 39

Tex. Comm. on Professional Ethics, Op. 532 (2000)................. 28

Tex. Disciplinary R. Prof. Conduct 1.06(b)(2) and (c) and 1.07......... 40

Tex. Disciplinary R. Prof. Conduct 7.01(a); 7.02(b); and 7.02 cmt. 1 (1998) 37, 39

Tex. Gov't Code Ann. § 22.001(a)(2) (Vernon 2004)...... xii

Tex. Gov't Code Ann. § 81.052(b-c, e-f) (Vernon 1998)........ 9

Tex. Gov't Code Ann. § 81.101 (Vernon Supp. 2004-05)... xiii, 10, 11

Tex. Penal Code Ann. § 1.07(a)(3) (Vernon Supp. 2004-05)........... 12

Tex. Penal Code Ann. § 38.123 (Vernon 2003)...... 12

Tex. Prof'l Corp. Act. Ann. art. 1528e § 15 (Vernon Supp. 2004) 9

Tex. R. Prof. Resp. 5.049(d)(3)................. 21

Other Authorities

Charles Silver,
Does Insurance Defense Counsel Represent the Company or the Insured?,
72 Tex. L. Rev. 1583 (1994)..... 29

Hearing Before Tex. S.B. 1653 and Tex. S.B. 1654
Before the Senate Bus. and Commerce Comm.
,
77th Leg., Tape 1, p. 3 (Tex. April 19, 2001) (statements of Louis Muldrow) 28

Matthew 6:24........... 1

Michael D. Morrison & James R. Old, Jr.,
Economics, Exigencies and Ethics: Whose Choice? Emerging Trends and
Issues in Texas Insurance Defense Practice,
53 Baylor L. Rev. 349 (2001) 19, 27, 31

Supreme Court of Ohio,
Bd. of Comm'rs on Grievances & Discipline
, Op. 95-14 (1995)..... 39

STATEMENT OF THE CASE

Nature of the Case: American Home Assurance Company, Inc. ('AHAC') and Travelers Indemnity Company ('Travelers') (together the 'insurance companies') instituted this pre-emptive declaratory judgment action against the Unauthorized Practice of Law Committee ('UPLC'). The insurance companies sought a declaration that their use of lawyer-employees to render legal services to third parties is not the unauthorized practice of law.

The UPLC counterclaimed for declaratory and injunctive relief that the insurance companies' use of lawyer-employees, which were directed and controlled by the companies to render legal services to third-parties is the unauthorized practice of law.

Trial Court: Judge Gary Hall, 68th Judicial District Court, Dallas County, Texas.

Trial Court's Disposition: Judge Hall rendered summary judgment in favor of the UPLC. He ruled the insurance companies' use of lawyer-employees, controlled and directed by the insurance companies, to defend third-parties is the unauthorized practice of law. [App. 1]. He suspended enforcement of the judgment pending appeal, on the condition that the insurance companies refer all conflict of interest issues to outside counsel. [Id.].

Neither the insurance companies nor UPLC offered evidence of attorneys fees. As a result, Judge Hall declined to grant fees to any party. [Id.].

Parties in Court of Appeals: Appellants: AHAC and Travelers; Appellee: UPLC.

Court of Appeals: Eleventh District Court of Appeals: Justice McCall (author of opinion), Chief Justice Arnot and Justice Wright.

Court of Appeals' Opinion: Reported at 121 S.W.3d 831. [See App. 2].

Court of Appeals' Disposition: The summary judgment in favor of UPLC was reversed and the insurance companies' summary judgment motion was granted. The court then remanded the case for consideration of attorneys fees.

Concession on Petition: In response to the UPLC's Petition, which raised the impropriety of the remand for attorneys fees when no party sought or presented evidence of attorneys fees, the insurance companies withdrew their request for attorneys fees.

STATEMENT OF JURISDICTION

There are multiple grounds for this Court's exercise of jurisdiction. Over the years, the role of lawyers representing insureds, under third-party liability policies, has been a subject of great debate. Here, the debate involves the insurance companies' use of captive counsel. While it is an issue upon which reasonable minds can differ, it is also an issue on which definitive standards and guidance is needed.

Texas Government Code § 22.001(a)(2): This Court has jurisdiction over this case because the court of appeals' opinion conflicts with prior decisions of this Court and other courts of appeal on questions of law material to this case. Tex. Gov't Code Ann. § 22.001(a)(2) (Vernon 2004).

This Court has long-held that an insurance defense attorney owes a duty of 'unqualified loyalty' to the insured. State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 628 (Tex. 1998); Employers Cas. Co. v. Tilley, 496 S.W.2d 552, 558 (Tex. 1973). Texas courts have interpreted this duty of unqualified loyalty to mean 'there is no attorney client relationship between an insurer and an attorney hired by the insurer . . .' Bradt v. West, 892 S.W.2d 56, 77 (Tex. App.'Houston [1st Dist.] 1994, writ denied); also see American Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842, 844 n.6 (Tex. 1994) ('Although [the lawyer] was paid by [the insurance company], he was [the policyholder's], not [the insurance company's] attorney.').

Contrary to these holdings, the Eastland court ruled that insurance defense counsel always has two-clients' the insured and the insurance company. [App. 2, UPLC, 121 S.W.3d at 838]. The court of appeals explained that this Court's 'unqualified loyalty' holding in Traver was only 'dicta' and 'reality and common sense dictate that the insurance company is also a client.' Id. If allowed to stand, this interpretation would be a sea-change in the law and drastically alter the relationships and duties of the insurer, insured and lawyer set forth in prior holdings.

Texas Government Code § 22.001(a)(3): This Court has jurisdiction because the case involves the construction and application of Tex. Bus. Corp. Act Ann. art. 2.01B(2) (Vernon 2003) and Tex. Gov't Code Ann. § 81.101 (Vernon Supp. 2004-05). [App. 3, 4]. Together the statutes prohibit the unauthorized practice of law by corporations. The court of appeals misapplied these statutes' carving out an exception for insurance companies not recognized by statute or common law.
Texas Government Code §22.001(a)(6): Finally, this Court has jurisdiction because the court of appeals has committed error on an issue of law vitally important to the jurisprudence of this State.

The issue of whether the insurance companies' use of captive counsel constitutes the unauthorized practice of law is ripe for review. Both the insured citizens of Texas and the insurance companies doing business in the State deserve resolution of this important issue.

This debate has already been resolved by the highest courts of other jurisdictions. Those courts have reached varied results based on common law, ethical rules and statutes. This Court should grant review, end the lawsuits and debate, and resolve these issues once and for all.

ISSUES PRESENTED

  1. Are insurance companies allowed to render legal services to third-parties through captive law firms they establish, own, operate, advertise, control and direct, or is this the unauthorized practice of law?
  2. When a lawyer is paid by an insurance company to defend an insured in a third-party insurance claim' does the lawyer have an attorney-client relationship with the insurance company?
    In other words, was this Court correct in its ruling in Tilley, Garcia and Traver in holding that Texas is a 'one-client' state, or was the Eastland Court of Appeals correct in holding that those rulings were 'dicta' and indulge in 'fiction?'
  3. Is the insurance companies' use of firm names, which disguise the fact the law firms are established, owned, operated, directed and controlled by insurance companies, appropriate or should the insurance companies fully disclose that their captive lawyers are employees of the insurance companies?
  4. Should lawyer-employees of insurance companies which render legal services to insureds be required to fully disclose their employment relationship with the insurance company and the potential conflicts of interest and divided loyalties inherent in their employment and representation?
  5. Is it appropriate for the court of appeals to order the payment of attorneys fees to the insurance companies, pursuant to the Declaratory Judgment Act, from the UPLC when: (a) they offered no proof of such fees in the trial court; (b) the trial court, in its discretion, refused to award attorneys fees to any party; and (c) the issue of attorneys fees was not briefed or argued in the court of appeals? (Conceded by the insurance companies).