Texas' Atty Fee Statute — Elevating Form Over Substance?

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Texas follows the American Rule, which provides that litigants may recover attorneys' fees only if specifically provided for by contract or statute.[1] One such statute — Section 38.001 of the Texas Civil Practice Remedies Code — allows a “person [to] recover reasonable attorneys' fees from an individual or corporation ... if the claim is for ... an oral or written contract.[2]

This relatively concise statutory provision is cited as a basis for the recovery of attorneys' fees in virtually every breach of contract action asserted under Texas law. However, the statute’s brevity raises several questions regarding its scope and application, including who qualifies as an “individual or corporation” against whom such a fee award may be entered.

For example, is a noncorporate entity, such as a partnership or limited liability company, an “individual or corporation” subject to liability for attorneys' fees under Section 38.001? In a matter of first impression,[3] the Fourteenth District Court of Appeals tackled this issue head-on in Fleming & Associates LLP v. Barton,[4] holding that Section 38.001 does not authorize the recovery of attorneys' fees against a partnership, because a “partnership is neither an individual nor a corporation.”[5]

Fleming & Associates LLP v. Barton

The dispute in Fleming & Associates arose out of a referral agreement between lawyers involved in the fen-phen pharmaceutical litigation.[6] The plaintiffs — the Barton Law Firm and related entities ("Barton") — claimed the defendant — Fleming & Associates LLP — breached the parties’ contract by withholding approximately $2.3 million in disputed litigation expenses from the amount F&A paid to Barton under the referral agreement.[7]

Barton also sought attorneys' fees under Section 38.001.[8] The trial court granted Barton judgment on its breach of contract claim and, pursuant to Section 38.001, awarded Barton the reasonable and necessary attorneys' fees incurred in pursuing the contract claim.[9]

F&A appealed the judgment, asserting (among other points of alleged error) that the trial court erred by awarding Barton attorneys' fees under Section 38.001. In challenging the trial court’s fee award, F&A did not dispute that each of the Barton entities was a “person” authorized to recover attorneys' fees under Section 38.001. This is not surprising.

As used in Section 38.001, the term “person” includes any “corporation, organization, governmental subdivision or agency, business trust, estate, trust, partnership, association, and ... other legal entity.”[10] All of the Barton entities fell under this broad definition of “person[s]” entitled to recover attorneys' fees under Section 38.001.[11]

Instead, F&A challenged the trial court’s fee award on the basis that F&A, a limited liability partnership, was neither an “individual” nor a “corporation” and, therefore, beyond the reach of Section 38.001’s fee-shifting provisions.[12] The Fourteenth District Court of Appeals agreed with F&A and “modif[ied] the trial court’s judgment to remove all portions awarding attorneys' fees ... to Barton.”[13]

In so holding, the court of appeals noted that the terms “individual” and “corporation” are not defined in Section 38.001 or the state’s Code Construction Act and, therefore, must be given their ordinary meanings.[14] Because F&A was a limited partnership,[15] and neither the parties’ briefing nor the court of appeals’ independent research revealed a definition of “individual” or “corporation” that included any type of partnership,[16] the court of appeals concluded that Section 38.001’s “plain language” provided no authority for an award of attorneys' fees against F&A.[17]

In reaching its holding, the court of appeals also put great weight on the legislative history of Section 38.001. Whereas Section 38.001 allows a successful contract claimant to recover attorneys' fees from only an “individual or corporation,” the statute’s predecessor authorized such recovery from any “person or corporation”[18] — a significantly broader group of entities.[19] As the court of appeals explained:

When the drafters codified the predecessor statute into ... Section 38.001, they were aware of the Code Construction Act's definition of “person,” yet they chose to change this word in the section describing against whom attorneys' fee claims may be made. The Legislature chose to substitute the more narrow word “individual” for the much broader word “person.” 

The natural and logical explanation is that the [L]egislature, knowing that the Code Construction Act defined “person” to include “partnerships,” among others, thereby intended to exclude those who by definition are not “individuals” or “corporations.” It excluded “partnerships.”[20]

To read the term “partnership” back into Section 38.001, explained the court of appeals, “‘would defy the ordinary expectation of the legislative act.’”[21] And, while Texas statute mandates that Section 38.001 “‘be liberally construed to promote its underlying purposes,’”[22] the court of appeals found it “difficult to conceive that an underlying purpose [of Section 38.001] is to find liability for [attorneys'] fees against an entity excluded by a statutory amendment.”[23] 

The court thus sustained F&A’s challenge to the underlying award of attorneys' fees and “modif[ied] the trial court’s judgment to remove all portions awarding attorneys' fees ... to Barton.”[24]

Recovering Attorneys' Fees in the Wake of Fleming & Associates

It is difficult to identify a compelling policy-based reason for subjecting an individual or corporation to greater contract liability than a partnership or other noncorporate entity. However, barring additional guidance from the Texas Supreme Court or legislative amendment, the holding in Fleming & Associates suggests that Section 38.001 provides no avenue for the successful contract claimant to recover attorneys' fees from a partnership.

Moreover, although not specifically addressed by the Fleming & Associates court, its holding — which hinged on the plain language and legislative history of Section 38.001 — suggests Section 38.001 likewise offers no authority for the recovery of attorneys' fees against a limited liability company or other noncorporate entity.[25]

Accordingly, until the Texas Supreme Court or Texas Legislature weighs in on the matter, contracting parties who wish to ensure that noncorporate entities may be held liable for attorneys' fees in the event of breach should include appropriate fee-shifting provisions in their contracts.

As Fleming & Associates makes clear, Section 38.001 — standing alone — may provide no solace for the claimant who prevails on a breach of contract claim against a partnership, limited liability company or other noncorporate entity.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See, e.g., Epps v. Fowler, 351 S.W.3d 862, 865 (Tex. 2011); Gulf States Utils. Co. v. Low, 79 S.W.3d 561, 567 (Tex. 2002).

[2] TEX. CIV. PRAC. REM. CODE ANN. § 38.001(8).

[3] A survey of Texas appellate cases reveals several matters involving fee awards against partnerships and other noncorporate entities. See, e.g., Midland W. Bldg. LLC v. First Serv. Air Conditioning Contractors Inc., 300 S.W.3d 738, 739 (Tex. 2009); Bohatch v. Butler & Binion, 905 S.W.2d 597, 604 (Tex. App. – Houston [Fourteenth Dist.] 1995), aff’d, 977 S.W.2d 543 (Tex. 1998); MNC Spring Shadows LP v. Kearney LLC, No. 14-14-01180-CV, 2011 WL 4794949, at *6 (Tex. App. – Houston [14th Dist.] Oct. 11, 2011, no pet.); RM Crowe Prop. Servs. Co. LP v. Strategic Energy LLC, 348 S.W.3d 444, 453 (Tex. App. – Dallas 2011, no pet.); Rasa Floors LP v. Spring Village Partners Ltd., No. 01-08-00918-CV, 2010 WL 4676978, at *6 (Tex. App. – Houston [1st Dist.] Nov. 18, 2010, no pet.); Orix Capital Mkts. LLC v. La Villita Motor Inns, J.V., 329 S.W.3d 30, 48 (Tex. App. – San Antonio 2010, pet. denied); Apache Corp. v. Dynergy Midstream Servs. Ltd. P'ship., 214 S.W.3d 554, 565-66 (Tex. App. – Houston [14th Dist.] 2006), aff'd in part, rev'd on other grounds in part, 294 S.W.3d 164 (Tex. 2009); Carlyle Real Estate Ltd. P‘ship-X v. Leibman, 782 S.W.2d 230, 233 (Tex. App. – Houston [1st Dist.] 1989, no writ); Carr v. Austin Forty, 744 S.W.2d 267, 272 (Tex. App. – Austin 1987, writ denied). None of these cases addressed, however, the specific issue of whether non-corporate entities qualify as “individual[s]” or “corporation[s]” against whom an award of attorneys' fees may be entered under section 38.001. See Fleming & Assocs. LLP v. Barton, --- S.W. 3d ---, No. 14-12-00582-CV, 2014 WL 783772, at *14 n.17 (Tex. App. – Houston [Fourteenth Dist.] February 27, 2014, no pet. h.).

[4] Fleming & Assocs. LLP v. Barton, --- S.W. 3d ---No. 14-12-00582-CV, 2014 WL 783772 (Tex. App. – Houston [Fourteenth Dist.] Feb. 27, 2014, no pet. h.).

[5] Fleming & Assocs., 2014 WL 783772, at *1.

[6] See id.

[7] See id. at *2-*3.

[8] See id. at *3.

[9] See id. at *5.

[10] TEX. GOV'T CODE ANN. § 311.005(2). Chapter 38 of the Texas Civil Practice and Remedies Code does not include any definitions, but Section 1.002 of the Texas Civil Practice and Remedies Code provides that the state’s Code Construction Act generally applies to the construction of each provision in the Texas Civil Practice and Remedies Code. See TEX. CIV. PRAC. & REM.CODE ANN. § 1.002. The Code Construction Act, in turn, defines the term “person” to include a “corporation, organization, government or governmental subdivision or agency, business trust, estate, trust, partnership, association, and any other legal entity.” TEX. GOV'T CODE ANN. § 311.005(2).

[11] See Fleming & Assocs., 2014 WL 783772, at *13.

[12] See id. at *1.

[13] Id. at *16.

[14] See id. at *13.

[15] See id.

[16] Fleming & Assocs., 2014 WL 783772, at *14.

[17] See id. at *13.

[18] See id. at *14.

[19] As noted above, the Texas’ Code Construction Act broadly defines the term “person” to include a “partnership, association, and any other legal entity.” TEX. GOV'T CODE ANN. § 311.005(2).

[20] Fleming & Assocs., 2014 WL 783772, at *14 n.16 (citing Ganz v. Lyons P’ship, L.P., 173 F.3d 173, 176 (N.D. Tex. 1997)) (internal citations omitted) (quotations in original). [21] Id. (quoting Ganz, 173 F.3d at 176).

[22] Id. at *14. n.18 (quoting Tex. Civ. Prac. Rem. Code Ann. § 38.005).

[23] Id.

[24] Id. at *16.

[25] Like a partnership, a limited liability company does not fall squarely within the plain and ordinary meaning of the terms “individual” and “corporation.” Moreover, by replacing the broadly defined term “person” with the more restrictive term “individual” in codifying Section 38.001, the Legislature ostensibly excluded noncorporate “organization[s], ... association[s], and ... other legal entit[ies]” from the list of litigants against whom attorneys' fees may be awarded under the statute. TEX. GOV'T CODE ANN. § 311.005(2).

Texas Law360 - April 23, 2014

 

Topics:  Attorney's Fees, Pharmaceutical, Referral Fees

Published In: Civil Remedies Updates, General Business Updates, Insurance Updates, Professional Practice Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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