A recent decision from the Texas Court of Appeals in Houston closes the door to the recovery of attorney's fees from limited liability companies under Chapter 38 of the Texas Civil Practice and Remedies Code, one of the few statutes authorizing the recovery of attorney's fees in litigation disputes.
This holding will have a significant impact on plaintiffs and defendants currently in litigation, or contemplating litigation, in Texas. Indeed, the prospect of recovering attorney's fees for plaintiffs, and the potential liability for the opposing side's attorney's fees for defendants, has played a central role in the decision-making process about whether, and how, to litigate breach of contract claims in Texas. Those considerations must now change if the dispute involves an LLC, partnership, association or legal entity that is not a corporation.
Like many other states, Texas follows the "American Rule" by "prohibiting fee awards unless specifically provided by contract or statute." 1 Section 38.001 of the Texas Civil Practice and Remedies Code provides that 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 ... an oral or written contract."2 This statute has long served as the primary basis for recovering attorney's fees in breach of contract disputes.3
The Houston Court of Appeals, in Alta Mesa Holdings, L.P. v. Ives, held that the plaintiffs could not recover attorney's fees against a limited liability company (LLC) under § 38.001 because an LLC is not an "individual or corporation" under § 38.001.4 In reaching this conclusion, the court rejected the plaintiffs' argument that LLCs and corporations often receive the same treatment under both Texas law and Delaware law (the state of the LLC's formation). Although the court acknowledged the often-synonymous nature of the words "company" and "corporation," it nevertheless held that, under Texas law, "the legal entities identified by the terms 'corporation' and 'limited liability company' are distinct entities with some but not all of the same features." 5
The court's holding in Alta Mesa followed the reasoning of its own recent decision and a 1997 Texas federal court decision holding that attorney's fees could not be recovered against other legal entities that were not "corporations" under § 38.001. 6 The plaintiffs in Alta Mesa have filed a motion to extend the deadline to file a petition for review with the Texas Supreme Court.
This holding, if upheld on appeal, will have a significant impact on both plaintiffs and defendants currently in litigation, or contemplating litigation, in Texas.
Although there are other, more narrow statutory grounds that may still be asserted to recover attorney's fees under Texas law, parties in breach of contract disputes in Texas must be aware of this sizeable shift in the law that will undeniably alter their dispute-resolution strategies.
1 MBM Fin. v. Woodlands Operating Co., 292 S.W.3d 660, 669 (Tex. 2009).
2 Tex. Civ. Prac. & Rem. Code § 38.001(8).
3 This statute was passed by the Texas Legislature in 1985.
4 --- S.W.3d ----, 2016 WL 1534007, at *11-13 (Tex. App.–Houston [14th Dist.], motion for extension of time to file petition granted, May 24, 2016)
5 Id. at *12.
6 Fleming & Associates, L.L.P. v. Barton, 425 S.W.3d 560, 574-76 (Tex. App.—Houston [14th Dist.] 2014, pet. denied) (plaintiff could not recover attorney's fees from limited liability partnership); Ganz v. Lyons P'ship, L.P., 173 F.R.D. 173, 176 (N.D. Tex. 1997) (holding that § 38.001(8) did not authorize recovery of attorney's fees against limited partnership).
