Texas Fixes Statutory Language Affecting Attorneys’ Fees Recovery Under Chapter 38
Texas courts were denying parties in breach-of-contract actions the right to recover statutory attorneys’ fees from LLCs and partnerships under Texas Civil Practice and Remedies Code Chapter 38, even though parties could recover fees from “corporations.” Last month, Governor Greg Abbott signed into law an amendment to Chapter 38 ensuring that the right to recover attorneys’ fees in breach-of-contract claims is once again available regardless of whether the breaching party is an LLC, a partnership, or a corporation.
Background - Chapter 38: Statutory Recovery of Attorneys’ Fees for Successful Breach-of-Contract Plaintiffs
Texas follows the “American Rule” regarding attorneys’ fees recovery, meaning the default is that each party pays its own attorneys’ fees in litigation. To shift the responsibility to pay these fees, parties must rely on either a contract provision or a statute. Fortunately, Texas has long provided a statutory right to recover attorneys’ fees in breach-of-contract cases under Chapter 38. Section 38.001 states that “[a] person may recover reasonable attorneys’ fees from an individual or corporation . . . if the claim is for . . . an oral or written contract.” An award of attorneys’ fees is intended to compensate the prevailing party by making that party whole and constitutes a completely separate claim for damages. Rohrmoos Venture v. UTSW DVA Healthcare, LLP.
Recent Case Law Denies Recovery from LLCs and LPs
For years, courts applying Chapter 38 allowed successful breach-of-contract plaintiffs to recover attorneys’ fees from business entities other than “corporations.” See Bohatch v. Butler & Binion; RM Crowe Prop. Servs. Co., L.P. v. Strategic Energy, L.L.C. By 2014, however, a contrary interpretation began to solidify as courts read Section 38.001 to exclude recovery against any entity not an “individual or corporation” based on the plain language of the statute. See Alta Mesa Holdings, L.P. v. Ives; Fleming & Associates, L.L.P. v. Barton; Choice! Power, L.P. v. Feeley; First Cash, Ltd. v. JQ-Parkdale, LLC. This interpretation meant that a successful breach-of-contract plaintiff could recover attorneys’ fees under Chapter 38 if the defendant was “Sunshine, Inc.,” for example, but not if the defendant was “Sunshine, LLC” or “Sunshine, LP.”
Texas Legislature Amendment to Chapter 38
The Texas Legislature introduced bills in three prior legislative sessions to clarify that recovery against LLCs and partnerships was permitted under Chapter 38. House Bill 370 (2019); House Bill 744 (2017); House Bill 230 (2015). All of these previous bills failed.
On May 31, 2021, the Texas Legislature passed House Bill 1578 — signed into law by Governor Abbott on June 15, 2021 — to finally close this loophole. As amended, Section 38.001(b) will allow successful plaintiffs to recover attorneys’ fees against an “individual or organization.” The statute incorporates the definition of “organization” under Texas Business Organizations Code Section 1.002(62), which includes corporations, partnerships, LLCs, associations, and other entities. To address concerns about collecting against government entities, the amendment excludes recovery from quasi-governmental entities that perform a function by state law, as well as religious organizations, charitable organizations, and charitable trusts. The amendment will apply to lawsuits filed September 1, 2021, and later.
Don’t Rely on Chapter 38
While House Bill 1578 is an improvement to Chapter 38, we continue to recommend that clients consider including attorneys’ fees provisions in their contracts. Clients may be able to rely on Chapter 38 more assuredly in the future, but the statute remains limited in scope. For example, only a party that successfully pursues a breach-of-contract claim and recovers damages can recover attorneys’ fees under Chapter 38; a party who successfully defends a breach-of-contract claim cannot. By including attorneys’ fees provisions in the contract, parties can define what it means to be a prevailing party, limit recovery of attorneys’ fees proportional to plaintiff’s recovery on the claim as a whole, and include recovery of fees for the successful defense of the breach-of-contract claim.
Danielle Kinchen also contributed to this article.