Does your client have a pending claim against a partnership or an LLC? Do you think Chapter 38 of the Texas Civil Practice & Remedies Code provides an avenue for your client to recover attorney’s fees? If you do, think again!
Whether attorney’s fees are recoverable under Chapter 38 depends, in part, on the type of entity that has been sued. Section 38.001 provides that a “person” may recover attorney’s fees from an “individual or corporation” in connection with certain enumerated claims. Tex. Civ. Prac. & Rem. Code § 38.001 (emphasis added). While the term “person” is broadly defined, there is no applicable statutory definition for the terms “individual” or “corporation.” Tex. Gov’t Code § 311.005(2); see Fleming & Associates, L.L.P. v. Barton, 425 S.W.3d 560, 575 (Tex. App.—Houston [14th Dist.] 2014, pet. denied).
Courts have construed the term “individual” to mean a natural person. See Base-Seal, Inc. v. Jefferson County, 901 S.W.2d 783, 786-88 (Tex. App.—Beaumont 1995, writ denied) (holding the term “individual” means a natural person and that a county, as a political subdivision, is neither an “individual” nor a “corporation”). However, the meaning of the term “corporation” has been contested in appellate courts throughout the state over the past several years, as litigants have argued over whether the term “corporation” includes other business entities, such as partnerships and LLCs.
In 2014, the Houston 14th Court of Appeals held that a plaintiff may not recover attorney’s fees against a partnership under § 38.001. See Fleming & Associates, 425 S.W.3d at 576. In 2016, the Houston First Court of Appeals similarly held that § 38.001 does not provide for attorney’s fees against limited partnerships, noting that courts have interpreted the word “corporation” to mean a corporation specifically, not a generic term for any type of business. See Choice! Power, L.P. v. Feeley, 501 S.W.3d 199, 213-14 (Tex. App.—Houston [1st Dist.] 2016, no pet.).
There is no logic to the law” excluding other entities from liability for attorney’s fees under § 38.001, “but that is exactly what Texas has done.”
The question of whether the term “corporation” encompasses limited liability companies (LLCs), however, is a “closer call,” considering that legal dictionaries sometimes treat “corporation” and “company” as synonyms. See Alta Mesa Holdings, L.P. v. Ives, 488 S.W.3d 438, 453 (Tex. App.—Houston [14th Dist.] 2016, pet. denied). Nonetheless, appellate courts in San Antonio, Houston, Dallas, and Corpus Christi-Edinburg have held that § 38.001 does not provide for recovery of attorney’s fees against LLCs. See First Cash, Ltd. v. JQ-Parkdale, LLC, 538 S.W.3d 189, 198 n.4, 200 (Tex. App.—Corpus Christi 2018, no pet.); 8305 Broadway Inc. v. J & J Martindale Ventures, LLC, No. 04-16- 00447-CV, 2017 WL 2791322, at *5 (Tex. App.—San Antonio June 28, 2017, no pet.) (mem. op.); CBIF Ltd. P’ship v. TGI Friday’s Inc., 05-15-00157-CV, 2017 WL 1455407, at *25 (Tex. App.—Dallas Apr. 21, 2017, pet. denied) (mem. op.); Alta Mesa Holdings, 488 S.W.3d at 455. For example, the court in Alta Mesa Holdings noted that LLCs and corporations are governed by separate titles within the Business Organizations Code. Alta Mesa Holdings, 488 S.W.3d at 454.
Moreover, the court in First Cash reasoned that the use of the broadly defined term “person” a mere six words prior to the phrase “individual or corporation” demonstrates that “[t]he Legislature clearly knew how to make attorney’s fees available to all legal entities, but intentionally chose not to make them available from all legal entities.” First Cash, 538 S.W.3d at 199 (emphasis in original).
This narrow construction of the term “corporation” in § 38.001 arguably conflicts with the statute’s mandate that it “be liberally construed to promote its underlying purpose,” which the Texas Supreme Court has instructed is to “encourage contracting parties to pay their just debts and discourage … vexatious, time-consuming and unnecessary litigation.” Ventling v. Johnson, 466 S.W.3d 143, 155 (Tex. 2015). If anything, excluding other business entities from liability for attorney’s fees under § 38.001 gives those entities an advantage over corporations in litigation. If a corporation and an LLC sue and countersue each other for breach of contract, the LLC would be entitled to attorney’s fees under § 38.001 if it prevails, whereas the corporation would not be so entitled if it prevails.
As one federal court has commented, “[t] here is no logic to the law” excluding other entities from liability for attorney’s fees under § 38.001, “but that is exactly what Texas has done.” Taylors Int’l Servs., Inc. v. Cuero Oilfield Hous., LLC, No. A-16-CA-512-SS, 2016 WL 8674349, at *1 (W.D. Tex. Oct. 31, 2016) (order). Accordingly, until the legislature amends § 38.001, when evaluating potential exposure and recovery in lawsuits involving the types of claims enumerated in § 38.001, attorneys must remember that the only business entity from which a plaintiff can recover attorney’s fees under § 38.001 is an actual corporation. Santos Vargas