Careful What You Ask For: Avoiding Loopholes and Unintended Consequences in the Recovery of Attorney Fees

Texas follows the so-called “American Rule” for attorney’s fees, under which each party is responsible for its own attorney’s fees unless the recovery is specifically provided for by either contract or statute.

Section 38.001 of the Texas Civil Practice and Remedies Code (§ 38.001) provides for the recovery of attorney’s fees for various claims, including breach-of-contract claims. In construction disputes, it is therefore quite common for parties to seek attorney’s fees pursuant to § 38.001. Under the current language of § 38.001, “a person may recover reasonable attorney’s fees from an individual or corporation,” apart from the amount of the claim itself and associated costs. See TEX. CIV. PRAC. & REM. CODE ANN. § 38.001 (West 1985) (emphasis added).

Several Texas courts of appeals have held that a “person”—the entity that may recover attorney’s fees under § 38.001—includes a “corporation, organization, government or governmental subdivision or agency, business trust, estate, trust, partnership, association, and any other legal entity.” Fleming & Assocs., L.L.P. v. Barton, 425 S.W.3d 560, 575 (Tex. App.—Houston [14th Dist.] 2014, pet. denied) (quoting TEX. GOV’T CODE ANN. § 311.005(2) (West 1989)). This definition is fairly straightforward, but defining “individual or corporation”—or those from whom attorney’s fees may be recovered—has proven to be a more complex analysis, owing to the statutory language at issue.

Chapter 38 of the Texas Civil Practice and Remedies Code does not define “individual” or “corporation.” Due to the omission, several Texas courts have sought to give these terms their ordinary meaning, ultimately holding that limited partnerships (LPs), limited liability partnerships (LLPs), and limited liability companies (LLCs) are not encompassed by either term. See Alta Mesa Holdings, L.P. v. Ives, 488 S.W.3d 438, 453–54 (Tex. App.—Houston [14th Dist.] 2016, pet. denied)¹. The practical effect of these holdings is that Chapter 38 may not authorize the recovery of attorney’s fees against LPs, LLPs, or LLCs. If not otherwise provided for by contract, this result would significantly disadvantage corporations in contractual disputes against such entities.

In the 84th Regular Session (2015), Representative Jessica Farrar filed House Bill 230 to address this § 38.001 “loophole.” House Bill 230 sought to amend § 38.001 to broaden the entities from which a “person” may recover attorney’s fees. The proposed, amended statute would have read, in part, as follows: “[A] person may recover reasonable attorney’s fees from an individual, corporation, or other legal entity” (emphasis added). However, the proposed amendment made clear that “other legal entity” was not to be construed as including the state, state agencies or institutions, or political subdivisions of the state. The effect of this amendment would have been to allow a “person” to recover attorney’s fees against legal entities in breach-of-contract and other claims contemplated under § 38.001, regardless of whether formed as corporations, LPs, LLPs, LLCs, etc.

The 85th Regular Session (2017) is now in session, and Representative Farrar recently brought House Bill 744, which is virtually identical to House Bill 230; however, its passage remains uncertain. If House Bill 744 is passed into law, it would apply to attorney’s-fee awards in legal actions commenced on or after September 1, 2017. Parties should consult with their attorneys about the legal effect of filing suit before or after this effective date, assuming the bill passes.

Unless and until House Bill 744 passes into law, parties should take care to draft specific language mandating the recovery of attorney’s fees into their contracts with LPs, LLPs, or LLCs, thus preserving the ability to recover against these types of entities in the interim. Otherwise, some Texas courts have precluded recovery of attorney’s fees under § 38.001 against LPs, LLPs, or LLCs on contract claims.

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¹ In a 2015 opinion, the Northern District of Texas also addressed the ability to recover attorney’s fees against an LLC under § 38.001. The Supreme Court of Texas has not yet addressed this § 38.001 “loophole”; however, the Northern District of Texas predicted that the Texas Supreme Court would follow the state-appellate courts and disallow such a recovery. See Hoffman v. L & M Arts, No. 3:10–CV–0953–D, 2015 WL 1000838, at *4–10 (N.D. Tex. Mar. 6, 2015); see also Solid Sys. CAD Servs. v. Total Risc Tech., Ltd., No. 4:12–CV–03176, 2016 WL 5942935, at *3 (S.D. Tex. Oct. 13, 2016).