For litigators and those who find themselves in litigation, particularly small and not-so-small businesses, this legislation is designed to fill a gap in perhaps the most frequently used statutory basis for recovering one’s attorneys’ fees in Texas civil litigation. Before February, 2014, the accepted short-hand in breach of contract cases was to the effect that, if you sue for and win a breach of contract action, you are entitled to recover attorneys’ fees. The statute that appears bound for revision by HB 2457 is section 38.001 of the Texas Civil Practice and Remedies Code.

As it currently reads, section 38.001 provides, in part:

A person may recover reasonable attorney’s fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for [any one of eight types of claims, including] (8) an oral or written contract.

Tex. Civ. Prac. & Rem. Code § 38.001. The phrase, “… from an individual or corporation” is the subject of HB 2457.

Many litigators will recall, that phrase—more appropriately, Justice Sharon McCally’s 2014 reading and application of that phrase—caused rumblings throughout the civil litigation bar. See Fleming & Associates, L.L.P. v. Barton, 425 S.W.3d 560 (Tex. App.—Houston [14th Dist.] 2014, pet. denied).

In the Fleming case, two law firms were parties to a referral agreement for handling Fen-Phen pharmaceutical cases. The dispute was whether litigation expenses could be charged to the referring firm. The plaintiffs, “Barton,” sued Fleming & Associates, L.L.P. for breach of the contract claiming it should not have withheld over $2 million from Barton’s share of the fees. Barton won that claim and, it was awarded $790,000.00 as its attorneys’ fees under 38.001.

On appeal, the two million dollar damage award stuck. However, the attorneys’ fees were determined not to be recoverable because, “under the plain language of section 38.001(8), a person may not recover attorney’s fees against a partnership.” Fleming & Associates, L.L.P., 425 S.W.3d at 576. In a laudable exercise of statutory construction, the  Fourteenth Court of Appeals agreed with Fleming & Associates’ argument that as a Texas Limited Liability Partnership, it was not “an individual or [a] corporation” subject to payment of fees under section 38.001.

Since the Fleming & Associates decision, no Texas appellate court has disagreed. Indeed, in 2016, the Fourteenth court was faced with the “closer call” “whether an LLC [limited liability corporation] is within the scope of the term ‘“corporation’” as used in section 38.001. Alta Mesa Holdings, L.P. v. Ives, 488 S.W.3d 438, 453 (Tex. App.—Houston [14th Dist.] 2016, pet. denied). The court noted that corporations and LLC’s are “governed by separate titles within the Business Organizations Code,” citing, e.g., Tex. Bus. Orgs. Code §§ 20.001–23.110 (Title 2, governing corporations) and §§ 101.001–.621 (Title 3, governing LLCs). Addressing the appellees’ argument that “LLCs are treated the same as corporations for certain purposes,” the court said, this “reinforce[s] that these are distinct entities; if they were not, there would be no reason to specifically state when they should be treated the same.”  Id., at 454. Thus, just like a limited liability partnership is outside the current language of section 38.001, so, too, is a limited liability corporation. Id., at 455.

A clear response to these recent cases, Representative Meyer’s House Bill 2457, voted out of committee in early May, proposes changes to section 38.001. Where the current language is, “individual or corporation,” the amended statute would read, “individual or a corporation or other organization.” See proposed HB 2457.The proposed revisions also inserts a definitional provision: “In this section, ‘organization’ has the meaning assigned by Section 1.002, Business Organization Code.” See id. The definition of “organization” found there is:

(62)  “Organization” means a corporation, limited or general partnership, limited liability company, business trust, real estate investment trust, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or other organization, regardless of whether the organization is for-profit, nonprofit, domestic, or foreign.

Tex. Bus. Orgs. Code § 1.002 (62).

HB 2457 still must finish winding its way through the Legislature, get to the Governor’s desk, and be signed. If all that occurs, the amended section 38.001 will take effect on September 1 of this year. Until then, it appears well settled that neither an LLP nor an LLC—nor any other corporate structure that is not “an individual or corporation”—is liable for attorneys’ fees under Chapter 38 of the Civil Practice and Remedies Code.

No information in this article is intended to constitute legal advice. For specific legal advice, please contact an attorney.

If you have any questions or would like more information about recovery of attorney’s fees or the potential remedies for breach of contract, please contact Michael Conner at 713.220.9162 or mconner@hirschwest.com.