Texas Legislature Passes Bill Creating Specialized Business Trial Courts: 12 Things You Need To Know Now
On May 25, 2023, the Texas Legislature passed HB 19, legislation that creates specialized business courts. The bill now will make its way to the Governor’s desk for consideration. Here is what you need to know now:
1. The Governor will likely sign HB 19 when it is presented to him for consideration. Upon receipt of HB 19, Texas Governor Greg Abbott can either sign it, veto it, or allow it to pass into law without his signature. Tex. Const. art. 4 § 14. Early in the legislative session, Governor Abbott remarked that “[w]e want to create specialized courts with expertise to deal with business litigation.” Jason Whitely, In Arlington, Texas Gov. Abbott argues state needs separate courts to handle business disputes, WFAA (Feb, 22, 2023, 3:34 PM). Governor Abbott was not referring specifically to HB 19; however, the designation of this legislation with a bill number below 20 indicates it is a “priority” bill for the Speaker of the House (who reserves the first 20 house bill numbers just for that purpose). The Speaker will work closely with the Governor on priority legislation. Thus, HB 19 will very likely be signed into law by Governor Abbott.
2. HB 19 will take effect on September 1, 2023, but will apply only to actions commenced on or after September 1, 2024. Section 9 of HB 19 sets out that the “Act takes effect September 1, 2023.” H.B. 19 § 9, 88th Leg. Reg. Sess. (Tex. 2023). However, Section 8 of the bill clarifies that “[t]he changes in law made by this Act apply to civil actions commenced on or after September 1, 2024,” and Section 5 provides that “[e]xcept as otherwise provided by this Act, the business court is created September 1, 2024.” Id. at § 8 and 5. This one year period will allow for certain preliminary steps to be completed, including: (1) the appointment and senate confirmation of judges (proposed Texas Government Code Section 25A.009(a) and (b)); (2) the adoption of rules of civil procedure regarding removal and remand of cases, and the assignment of cases to the business court judges (proposed Section 25A.020(a)); (3) the adoption of rules of practice and procedure consistent with the Texas Rules of Civil Procedure and the Texas Rules of Evidence (proposed Section 25A.020(b)); and (4) the adoption of rules for the issuance of written opinions by the business court (proposed Section 25A.016), and for court clerks handling removals (proposed Section 25A.006(g)). H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A).
3. Five divisions of the court will be created effective September 1, 2024, with the fate of an additional six divisions to be deferred until the 2025 Legislative Session. HB19 creates one statewide business court judicial district, with eleven Business Court Divisions (which are geographically aligned with the 11 Judicial Administrative Regions in the state). H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.003(a)-(m)). The five divisions containing the major urban areas in and around Dallas (1st), Austin (3rd), San Antonio (4th), Fort Worth (8th), and Houston (11th) will be created effective as of September 1, 2024. Id.; (proposed Tex. Gov’t Code § 25A.003(c), (e)-(f), (j), and (m)); H.B. 19 § 5, 88th Leg. Reg. Sess. (Tex. 2023). The remaining six divisions, which cover the more rural areas of the state, will only be created if funded by the Legislature during the 2025 legislative session; otherwise, “[t]he division is abolished on September 1, 2026, unless reauthorized by the legislature and funded through additional legislative appropriations.” Id.; (proposed Tex. Gov’t Code § 25A.003(d), (g)-(i), (k)-(l)).
4. Business court judges will be appointed by the Governor with the advice and consent of the Senate, for a fixed term, and subject to certain qualifications. The Governor will appoint up to 16 business court judges, who will be subject to senate confirmation. H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.009(a)). Each of the judges will be assigned to one of the up to eleven Business Court Divisions (depending on how many beyond the first five are actually created by the Legislature next legislative session). Id.; (proposed Tex. Gov’t Code § 25A.003(b)-(m)). Judges will serve for two years beginning on September 1 of every even numbered year (beginning on September 1, 2024) and may be reappointed. Id.; (proposed Tex. Gov’t Code § 25A.003(b)-(c)). A qualified retired or former judge or justice may be assigned as a visiting judge by the chief justice of the Texas Supreme Court, and is subject to objection, disqualification, or recusal in the same manner as other visiting judges. Id.; (proposed Tex. Gov’t Code § 25A.014(a)).
In order to be qualified for office, a business court judge must:
-be at least 35 years of age;
-be a United States citizen;
-have been a resident of a county within the division of the business court to which the judge is appointed for at least five years before appointment; and
-be a licensed attorney in this state who has 10 or more years of experience in any combination of the following: (a) practicing complex civil business litigation; (b) practicing business transactional law; or (c) serving as a judge of a court in this state with civil jurisdiction.
H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.008(a))..
Additionally, a business court judge may not have had their license to practice law revoked, suspended, or subject to a probated suspension. Id.; (proposed Tex. Gov’t Code § 25A.008(b)).
5. HB 19 contains tiers of jurisdiction for the business courts created, based on the type of action, the amount in controversy, and whether a publicly-traded company is involved.
A. The courts created under HB 19 will have civil jurisdiction concurrent with district courts for the following “internal governance” actions, if the amount in controversy exceeds $5 million (excluding interest, statutory damages, exemplary damages, penalties, attorney’s fees, and court costs):
-a derivative action proceeding (defined as “a civil action brought in the right of a domestic or foreign corporation, a domestic or foreign limited liability company, or a domestic or foreign limited partnership, to the extent provided by the Business Organizations Code).” H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.001(2));
-an action regarding the governance, governing documents, or internal affairs of an organization;
-an action in which a claim under a state or federal securities or trade regulation law is asserted against an organization; certain controlling or managing persons in their official capacity; underwriters of the organization’s securities; or the organization’s auditor;
-an action by an organization, or an owner: a) brought against an owner or certain controlling or managing persons, and b) which alleges an act or omission by the person in their capacity as an owner or controlling or managing person;
-an action alleging that an owner or certain controlling or managing person breached a duty owed to an organization or an owner by reason of the person’s status as an owner or certain controlling or managing person, including the breach of a duty of loyalty or good faith;
-an action seeking to hold an owner or governing person of an organization liable for an obligation of the organization, other than on account of a written contract signed by the person to be held liable in a capacity other than as an owner or governing person; and
-an action arising out of the Business Organizations Code.
H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.004(b)(1)-(7)).
B. The courts created under HB 19 will have civil jurisdiction concurrent with district courts in those actions listed in Section A above, regardless of the amount in controversy if a party to the action is a publicly traded company. H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.004(c)).
C. The courts created under HB 19 will have civil jurisdiction concurrent with district courts for the following actions, if the amount in controversy exceeds $10 million (excluding interest, statutory damages, exemplary damages, penalties, attorney’s fees, and court costs):
-an action arising out of a qualified transaction (defined as “a transaction, other than a transaction involving a loan or an advance of money or credit by a bank, credit union, or savings and loan institution, under which a party: (A) pays or receives, or is obligated to pay or is entitled to receive, consideration with an aggregate value of at least $10 million; or (B) lends, advances, borrows, receives, is obligated to lend or advance, or is entitled to borrow or receive money or credit with an aggregate value of at least $10 million” H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.001(14)); );
-an action that arises out of a contract or commercial transaction in which the parties to the contract or transaction agreed in the contract or a subsequent agreement that the business court has jurisdiction of the action, except an action that arises out of an insurance contract; and
-an action that arises out of a violation of the Finance Code or Business & Commerce Code by an organization or an officer or governing person acting on behalf of an organization other than a bank, credit union, or savings and loan association, subject to certain jurisdictional exclusions contained in proposed Government Code Section 25A.004(g) (discussed in Item 6 of this client alert).
H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.004(d)).
6. The courts created under HB 19 will have the authority to hear maters seeking injunctive or declaratory relief, - and to provide injunctive, mandamus, garnishment, and other relief - on matters over which the courts have statutory jurisdiction. HB 19 provides that “[t]he business court has civil jurisdiction concurrent with district courts in an action seeking injunctive relief or a declaratory judgment under Chapter 37, Civil Practice and Remedies Code, involving a dispute based on a claim within the court’s jurisdiction under Subsection (b), (c), or (d)” (discussed in Item 4 of this client alert). H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.004(e)). The bill also provides that for the matters over which the courts have statutory jurisdiction, “business court[s have] the powers provided to district courts by Chapter 24, including the power to: (1) issue writs of injunction, mandamus, sequestration, attachment, garnishment, and supersedeas; and (2) grant any relief that may be granted by a district court. Id.; (proposed Tex. Gov’t Code § 25A.004(a)).
7. Subject to certain exceptions, the courts created under HB 19 have supplemental jurisdiction, but only if agreed to by the parties and the judge. HB 19 provides that “[e]xcept as provided by Subsection (h), the business court has supplemental jurisdiction over any other claim related to a case or controversy within the court’s jurisdiction that forms part of the same case or controversy.” H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.004(f)). The exceptions in Section (h) are: “(1) a claim arising under Chapter 74, Civil Practice and Remedies Code [pertaining to medical liability]; (2) a claim in which a party seeks recovery of monetary damages for bodily injury or death; or (3) a claim of legal malpractice.” Id.; (proposed Tex. Gov’t Code § 25A.004(h)). Note however that, “a claim within the business court’s supplemental jurisdiction may proceed in the business court only on the agreement of all parties to the claim and a judge of the division of the court before which the action is pending.” Id. Absent that agreement, “the claim [covered by the supplemental jurisdiction of the business court] may proceed in a court of original jurisdiction concurrently with any related claims proceeding in the business court.” Id.
8. Absent supplemental jurisdiction, HB 19 expressly carves out jurisdiction for certain claims. Unless a claim falls within a court’s supplemental jurisdiction, the business courts created under HB 19 expressly do not have jurisdiction over:
-a civil action: (A) brought by or against a governmental entity; or (B) to foreclose on a lien on real or personal property;
-a claim arising out of: (A) Subchapter E, Chapter 15, and Chapter 17, Business & Commerce Code [pertaining to covenants not to compete, antitrust, and deceptive trade practices]; (B) the Estates Code; (C) the Family Code; (D) the Insurance Code; or (E) Chapter 53 and Title 9, Property Code [pertaining to mechanic's, contractor's, or materialman's liens, and to trusts];
-a claim arising out of the production or sale of a farm product, as that term is defined by Section 9.102, Business & Commerce Code;
-a claim related to a consumer transaction, as that term is defined by Section 601.001, Business & Commerce Code, to which a consumer in this state is a party, arising out of a violation of federal or state law; or
-a claim related to the duties and obligations under an insurance policy.
H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.004(g)(1)-(5)).
9. Actions may be originally filed in a business court or removed from the court in which they were originally filed. For originally filed actions, HB 19 provides that “[t]he party filing the action must plead facts to establish venue in a county in a division of the business court.” H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.00(a)). For removed actions, absent agreement of all parties to the action, a notice of removal must be filed: “(1) not later than the 30th day after the date the party requesting removal of the action discovered, or reasonably should have discovered, facts establishing the business court’s jurisdiction over the action; or (2) if an application for temporary injunction is pending on the date the party requesting removal of the action discovered, or reasonably should have discovered, facts establishing the business court’s jurisdiction over the action, not later than the 30th day after the date the application is granted, denied, or denied as a matter of law.” Id.; (proposed Tex. Gov’t Code § 25A.006(f)).
Removal of a case to the business court is not subject to the statutes or rules governing the due order of pleading, nor does removal of a case waive a defect in venue or constitute an appearance to determine personal jurisdiction. Id.; (proposed Tex. Gov’t Code § 25A.006(i)-(j)). However, notices of removal are subject to the “reasonable inquiry” requirements of Section 10.001 of the Civil Practice & Remedies Code. Id.; (proposed Tex. Gov’t Code § 25A.006(h)). Further, upon a request by the judge before whom an action is pending, a matter may be transferred by the presiding judge for the court’s administrative region, after notice to the parties and a hearing. Id.; (proposed Tex. Gov’t Code § 25A.006(k)).
10. Business court cases may be tried to a jury, subject to certain venue provisions. Parties to actions in the business courts created by HB 19 have a right to a trial by jury, when required by the constitution. H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.015(a)). Unless venue is fixed in a written contract, or otherwise agreed to by the parties and the court: (1) a jury trial in a case filed initially in the business court shall be held in any county in which the case could have been filed under Section 15.002, Civil Practice and Remedies Code, as chosen by the plaintiff; and (2) a jury trial in a case removed to the business court shall be held in the county in which the action was originally filed. Id.; (proposed Tex. Gov’t Code § 25A.015(b), (e)).
11. Business court cases will likely be appealed to a newly-created Fifteenth Court of Appeals. HB 19 provides that “Notwithstanding any other law and except as provided by Subsection (b) and in instances when the supreme court has concurrent or exclusive jurisdiction, the Fifteenth Court of Appeals has exclusive jurisdiction over an appeal from an order or judgment of the business court or an original proceeding related to an action or order of the business court.” H.B. 19, 88th Leg. Reg. Sess. (Tex. 2023) (proposed Tex. Gov’t Code § 25A.007(a)). Subsection (b) pertains to a contingency in the event the Legislature does not create a Fifteenth Court of Appeals. Id. at subsection (b). The Texas Legislature took up a new Fifteenth Court of Appeals in SB 1045, which passed and was sent to the Governor on May 23, 2023. If SB 1045 is signed into law and funds are appropriated, the Fifteenth Court will be located in Austin, but will be composed of judges initially appointed by the Governor, who then stand for election. More information about SB1045 can be found here.
12. HB 19 might face legal challenge. Opponents of HB 19 have questioned whether the attempt by the Legislature to organize the business courts as a statutory court with one statewide district and several divisions passes constitutional muster. See e.g. Janet Elliott, Backlash to Business Court Bill Unites Litigators from Both Sides of the Docket, The Tex. Lawbook (Apr, 20, 2023), https://texaslawbook.net/backlash-to-business-court-bill-unites-litigators-from-both-sides-of-the-docket/. The constitutional arguments in opposition were raised throughout the legislative process, and the Legislature made several amendments to the bill in response. Notably, HB19 vests exclusive and original jurisdiction with the Texas Supreme Court, “over a challenge to the constitutionality of this Act or any part of this Act . . .” and may issue injunctive or declaratory relief in connection with the challenge. It remains to be seen whether HB 19 is challenged in court, and if so, whether it delays or even wipes out altogether the creation of business courts in Texas.