If you’ve ever found yourself analyzing a party’s potential exposure in a breach of contract action, you may have come across a quirk of Texas law: While Texas has historically allowed fee-shifting in contract actions against corporations, it generally does not permit recovery of attorneys’ fees against limited liability companies, limited partnerships and other entities that are not organized as corporations.
The perceived inequity, inconsistency and illogic of this rule has become troubling in recent years – after all, no one likes having to explain to a client that a meritorious breach of contract action may not make economic sense because attorneys’ fees won’t be included in the final recovery.
This relic of Texas law will soon be history. After three failed prior attempts, the Texas Legislature has finally accepted the invitation of state and federal courts across Texas to ‘fix’ Texas Civil Practice & Remedies Code § 38.001. Beginning Sept. 1, successful plaintiffs in breach of contract actions will be able to recover attorneys’ fees from the defendant, regardless of whether that defendant is an individual, corporation, limited liability company, limited liability partnership, government or some other type of entity. Practitioners and parties alike should take note of the effective date of the new statute, considering that cases filed before Sept. 1 (the effective date), will be governed by the old law, potentially limiting the right to recover attorneys’ fees in contract actions against partnerships, LPs, LLPs or LLCs.
The oddity in Texas law that necessitated the recent amendment dates back to the recodification of § 38.001 in 1985. The predecessor act, article 2226 of the Texas Revised Statutes, provided that reasonable attorneys’ fees could be recovered by plaintiffs in successful contract claims “against a person or corporation.” However, the Code Construction Act of 1985 expanded the definition of “person” to include (among other things) a government entity. So, in order to avoid expanding the law to permit fee-shifting against cities, the legislature eliminated the right to recover attorneys’ fees from another “person” from § 38.001 entirely, instead only allowing recovery of fees from an “individual or corporation.” This probably seemed like a relatively uncontroversial change at the time – limited liability companies would not exist in Texas until 1991, so corporations remained the (or at least a) dominant company form. As a consequence, however, the definition of “person” in the Code Construction Act – which included a variety of types of entities, not just natural persons and corporations – did not apply to § 38.001.
For almost 30 years following its recodification, almost no courts considered whether § 38.001 permitted an award of attorneys’ fees against business entities other than corporations. In 2014, however, the 14th Houston Court of Appeals in Fleming & Associates, L.L.P. v. Barton held that both the literal interpretation of § 38.001 and its legislative history restricted the scope of the fee-shifting statute to just cover individuals and corporations, not partnerships or limited liability partnerships.
An avalanche of similar decisions almost immediately followed suit, with Texas and federal courts alike uniformly concluding that the plaintiff in a contract action could not recover fees against noncorporate entities such as LLCs. In Taylors Int’l Services, Inc. v. Cuero Oilfield Hous., LLC, Judge Sam Sparks of the Western District of Texas said of the now-defunct law: “There is no logic to the law eliminating attorney’s fees that would be owed by individuals and corporations, but that is exactly what Texas has done.”
Some members of the Texas legislature were eager to fix what they saw as either an inconsistency or an oversight in Texas law, but for years their efforts proved futile. In the 2015 legislative session, commenced less than a year after the 14th Court of Appeals’ seminal decision on the issue, a bill that would have amended the statute to eliminate this distinction died in committee in the Senate. Substantively identical amendments were introduced in each of the next two legislative sessions; they failed both times. With the Texas Supreme Court not having addressed the issue, many wondered whether the 87th legislative session in January 2021 would just bring more of the same.
The nail-biting has now come to an end. On May 19, the Texas Senate and Texas House approved S.B. 808, an amendment that eliminated the restriction that fees may be recovered from only an individual or corporation by rewriting that portion of the statute. Beginning Sept. 1, the successful party in a breach of contract action will be able to recover reasonable attorneys’ fees from “another person,” a term defined in the Code Construction Act to include a “corporation, organization, government or governmental subdivision or agency, business trust, estate, trust, partnership, association, and any other legal entity.”
The knee-jerk reaction of legislators and practitioners alike may be to breath a long sigh of relief, for perhaps they no longer must counsel clients about this odd aspect of Texas law. But is the new § 38.001 clear and settled? One wonders if that is how it felt in 1985. As the legal landscape rapidly evolves, who knows what decisions the next 25 years will bring.
But in the meantime, any party thinking about filing a breach of contract action prior to September 2021 may wish to hold off if it can, as the new law “applies only to an award of attorneys’ fees in an action commenced on or after the effective date [Sept. 1].” For the same reason, parties negotiating tolling provisions may want to consider how to handle the coming change in law.
For companies who must seriously consider filing under the prior version of the § 38.001 for limitations or other reasons, the Texas legislature offers no reprieve from the case law limiting the prior statute to only permit recovery of fees against an “individual or corporation.” Actions commenced before Sept. 1, will be “governed by the law applicable to the award immediately before the effective date of this Act.”
Where could fee-shifting in breach of contract cases go from here? Given that it took more than 35 years to amend § 38.001 and that the Texas legislature only meets once every two years, “nowhere” is probably a good guess. But some unlikely scenarios will undoubtedly continue to tantalize eager practitioners. As originally introduced, S.B. 808 would have permitted two-way fee shifting in breach of contract cases, and support could grow to level the playing field between plaintiffs and defendants. So, while the two-way fee-shifting language did not survive this legislative session, whether these proposals will gain traction in future years is something only time will tell.
Nick Brown is a senior associate in Baker Botts’ Houston office. He has handled disputes involving enforcement and defense of trade secrets, M&A litigation and post-closing arbitration, insurance and indemnity disputes and breach of contract and fraud matters.
Kevin Jacobs is based in Houston and is the firmwide chair of litigation at Baker Botts. His trial practice focuses on commercial disputes and arbitrations for clients in the energy, chemicals, transportation, and life sciences industries.