September 26, 2018  | By Bekah Harger

Attorney Ty Sheaks
McCathern Partner Ty Sheaks

McCathern partner, Ty M. Sheaks, recently published an article in the Dallas Bar Association’s October issue of Headnotes. The article, titled “Continued Limitations to Recovery of Attorney’s Fees”addresses the continued misconceptions and limitations practitioners may face while trying to collect attorney’s fees in Texas for non-corporate entities.

The October issue of Headnotes focused on Antitrust & Trade Regulation and Business Litigation. This issue was mailed to more than 17,000 Dallas-area lawyers. The entire issue can be found on the Dallas Bar Association’s website here along with the original article posted here.

Continued Limitations to Recovery of Attorney’s Fees

Wed, 09/26/2018 – 10:32 — admin25

by Ty M. Sheaks

Since its enactment in 1985, Section 38.001 of the Texas Civil Practice & Remedies Code continues to be a source of misunderstanding by most practitioners. Section 38.001 allows a “person [to] recover reasonable attorney’s fees from an individual or corporation.” Despite the clear limitation to recovery from an “individual” or “corporation,” most practitioners rely on Section 38.001 to recover attorney’s fees from a variety of other non-corporate entities. The confusion for most practitioners likely stems from Section 38.001’s use of “person” to define whom can recover fees and ignoring the limitation of recovery from only an “individual” or “corporation.”

Section 38.001 was enacted in 1985 to re-codify Article 2226 of the Texas Revised Civil Statutes. Article 2226 provided that “any person, corporation, partnership, or other legal entity” may seek attorney’s fees from such “person or corporation.” Section 38.001 was revised to omit “corporation, partnership, or other legal entity” from the description of a claimant because the Code Construction Act includes those entities in the definition of “person.” However, Section 38.001 was also revised to omit “person” in reference to an opposing party. By doing so, Texas courts have routinely held the legislature changed the terminology to retain a more restrictive meaning.

Part of the continued confusion in application of this limitation likely stems from the fact it was not until 1997 that a Texas court even addressed this issue. In Ganz v. Lyons Partnership, L.P., the Northern District of Texas held a limited partnership was not subject to an award of attorney’s fees under Section 38.001. According to Ganz, the legislature intended to exclude the prevailing party from recovering attorney’s fees from any entity other than an “individual” or “corporations,” because by definition individuals are humans and corporations are business entities formed under the Texas Corporations statute.

Even after Ganz, it was not until 2014 that a Texas court of appeals addressed the applicability of Section 38.001 to non-corporate entities. In Fleming & Assocs. LLP v. Barton, the 14th Court of Appeals held Section 38.001 did not apply to a limited liability partnership. Since Fleming, many state and federal courts across Texas have unanimously adopted this rule and extended it to other non-corporate entities, including limited liability companies (LLC), limited liability partnerships (LLP) and limited partnerships (LP). See Hoffman v. L&M Arts LLC, (N.D. Tex. Mar. 6, 2015) (limited liability company is not an individual or corporation for purposes of § 38.001); Choice! Power, LP v. Feeley(Tex. App.—Houston [1st Dist.] 2016, no pet.) (§ 38.001 does not permit recovery against limited partnership). As recent as March 2018, in Sky Group, LLC v. Vega Street 1, LLC the Fifth Court of Appeals-Dallas reconfirmed its position that a trial court cannot order LLPs, LLCs or LPs to pay attorney’s fees under the plain language of Section 38.001.

In each of the two most recent legislative sessions bills were presented for consideration by the Texas Legislature to amend Section 38.001 to clarify and expand the application to non-corporate entities. For example, H.B. 744 proposed amending Section 38.001 to allow recovery of attorney’s fees from an “individual, corporation, or other legal entity.” However, none of the proposed bills have made it out of committee.

Until the Texas Supreme Court or Texas Legislature weighs in to change or clarify Section 38.001, recovery of attorney’s fees under Section 38.001 appears to be limited to “individuals” and “corporations” only. Good news for practitioners defending claims for other non-corporate entities, but bad news for practitioners seeking recovery.

Because of the continued limitations on recovery of attorney’s fees under Section 38.001, the best course of action for practitioners representing contracting parties who wish to ensure that non-corporate entities may be held liable for attorney’s fees under a breach of contract claim should be sure to include appropriate fee-shifting provisions in their contracts (or invoices, etc.).